The latest jockeying, before serious talks begin next month on agriculture in the WTO trade negotiations, has the Indonesian-led Group of Thirty-Three (which has grown to 42 countries, over one quarter of the 148 members of the WTO) again calling for keeping high tariffs on farm products to protect small farmers in developing countries. While it is easy to see why government leaders would want to protect the most limited resource farmers, there is nothing in the economic policy experiences of the last 60 years that indicates such protection is a positive economic policy goal.
The sentiment was perhaps best stated by Kenya’s Trade & Industry Minister Mukhisa Kituyi in a report on Bloomberg.com, “For a country like mine, pati 80 percent of the people live in rural areas, we are not going to sacrifice 80 percent of the population for the success of the negotiations.” The Indian Commerce Minister Kamal Nath told reporters, “Agriculture to different countries means different things. In the U.S. the farmer is a corporation, in India a farmer is subsistence, where he learns less than $1 per day.” About 60 percent of India’s population receives some farm income.
What was said about Kenya and India is true of many developing countries. According to Dr. Robert L. Thompson, Gardner Professor of Agricultural Policy at the University of Illinois and former Director of Rural Development with the World Bank, three billion people, almost half of the world’s population, live on two dollars a day or less. Of these, 1.25 billion live on less than $1 per day, with 70 percent of them living in rural areas and depending on farming, forests and fishing for most of their income. Hunger in these areas is due mostly to poverty. Broad economic growth that reduces poverty would also reduce hunger. Most of the projected three billion increase in population in the world over the next 50 years is expected to occur in developing countries.
The current WTO negotiations are called the Doha Development Round with the specific intent of bringing developing countries into the mainstream of economic growth. That will not occur if developing countries keep 60-80 percent of their populations insulated from world markets. Such a position is neither politically nor economically defensible.
If Kenya could achieve a policy that would keep the 80 percent of the population in rural areas existing on $1-2 per day while people in urban areas had increases in incomes due to international trade, there would be substantial political instability because of the uneven economic growth. India had a change of government in 2004 partly because the urban areas had more rapid economic growth than the rural areas. China has reduced taxes and increased subsidies to farmers to help offset the differences in incomes in rural and urban areas that have developed in recent years.
If domestic markets are to grow more rapidly in developing countries, rural people have to be part of the growth in demand because they are often the largest portion of the population. That demand can only come with increases in incomes. Rising incomes in rural areas will only happen when productivity increases through the adoption of modern production practices. Rural areas must become part of mainstream economies, not isolated backwaters.
Dr. Thompson considers migration from rural to urban areas as natural and essential. No country has solved the problem of rural poverty within agriculture alone. The number of farmers must fall and the area cultivated must increase to produce cash market crops and escape poverty. Agriculture is often underperforming and hurting both rural and urban areas.
More open international trade alone is not the magic potion that makes economic improvement occur. Without secure property rights, the sanctity of contracts, reasonable government regulations, sound tax policy and less public and private corruption, a more open trade policy will do little good. Domestic policy reforms are needed rather than isolating rural areas from world markets. Dr. Thompson also notes that 40 percent of developing country exports go to other developing countries, and the import barriers for those products are higher than the import barriers of developed countries.
The issue of import tariffs in developing countries is especially sensitive in the negotiations because it is directly tied to reductions in farm program payments to farmers in developed countries. From the beginning of the current negotiations agricultural issues have centered on market access, export subsidies and reductions in domestic support payments. U.S. government has made clear that domestic supports will only be reduced when export subsidies, mainly in the EU, are eliminated and increased market access, i.e. lower tariff rates, is negotiated in all markets.
Developing countries are partly correct in arguing that developed countries should reduce domestic supports to minimize the impact those subsidies may have on world market prices. Developing countries could gain some market sales that now go to subsidized products from developed countries. But, a focus on policy changes in developed countries alone would leave untouched even more important trade policy changes in developing countries.
Developing countries would be shooting themselves in the foot if they support policies that isolate their poorest people from world markets or scuttle the trade talks on the mistaken belief that they have nothing to gain from broader economic growth. Rural development has to be part of the trade agenda within the context of more open markets in agricultural and non-agricultural products.