Abstract
In the wake of recent food price spikes, plus growing demands for food in emerging Asia and for biofuels in Europe and the United States, governments are re-examining their strategies for dealing with both short-term and long-term food security concerns. This paper argues that long-run trends in real agricultural prices have policy implications for food security that are at least as important as those related to short-lived spikes around trend prices. The paper therefore summarizes recent projections of markets to 2030 under various scenarios, and then reviews evidence on how trade policy restrictions typically are altered to insulate domestic markets from short-run fluctuations in international prices around their long-run trends. That provides a firm empirical basis for re-examining the effectiveness and efficiency of various policy options for ensuring food security in Asia and elsewhere. Those options include boosting agricultural productivity growth rates to deal with long-run concerns, and using more-appropriate domestic policy measures rather than trade policies to cope with price volatility.
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Notes
Fuglie (2008) provides an alternative set of estimates suggesting it is a slowdown of agricultural investment rather than productivity growth that is the main cause. This difference in results between the two studies has yet to be reconciled.
Throughout, we have in mind the UN Food and Agriculture Organization’s definition of food security, which is the state “when all people, at all times, have physical, social and economic access to sufficient, safe and nutritious food which meets their dietary needs and food preferences for an active and healthy life” (FAO 2003). More precisely, food security refers to not only availability but also economic access to and effective utilization of that food (Pinstrup-Andersen 2009; Barrett 2010). As access to food (and health care) for any poor household largely depends on its (and perhaps also its extended family’s) income and assets, pro-poor economic growth is a key to expanding effective per capita food consumption and thereby reducing food insecurity (Naylor and Dean 2012).
There is much uncertainty in macroeconomic projections over this kind of timeframe (and even the current size of the Chinese economy is under serious question—see Feenstra et al. 2011). Garnaut (2011) discusses the uncertain nature of GDP, population and energy projections, and Eichengreen et al. (2011) examine prospects for growth in China in particular.
We chose that calibration because it is consistent with the World Bank projections over the next four decades (see van der Mensbrugghe and Roson 2010). An alternative in which agricultural prices fall, as projected in GTAP-based projection studies in the late 20th century (e.g., Anderson et al. 1997), is considered unlikely over the next two decades given the slowdown in agricultural R&D investment since 1990 and its consequent delayed slowing of farm productivity growth (Alston et al. 2010). It is even less likely for farm products if fossil fuel prices and biofuel mandates in the US, EU and elsewhere are maintained over the next decade. Timilsina et al. (2010) project that by 2020 international prices will be higher in the presence vs the absence of those biofuel mandates for sugar (10 %), corn (4 %), oilseeds (3 %), and wheat and coarse grains (2.2 %), while petroleum product prices will be 1.4 % lower.
The extent to which productivity growth rates are higher in each primary sector than in other sectors is the same for high-income and developing countries, and is the same for all crop and livestock industries within each country’s farm sector. Since overall TFP growth is higher for developing than high-income, this means we are assuming agricultural TFP growth is higher for developing than high-income countries on average (consistent with the estimate by Ludena et al. (2007, Table 2) that agricultural TFP annual growth during 1981–2000 averaged 1.3 % globally and only 0.9 % for high-income countries).
As can be inferred from the first two columns of Table 1, some of the increased imports of farm products by developing countries would come from Australasia, Western Europe and North America (where food consumption is increasing only very slowly compared with farm output growth). Further disaggregation of the results reveals that some of those imports would come also from such large food-exporting developing countries as Brazil and South Africa, both of whose self sufficiency rises by around one-fifth.
This might come about through, for example, greater recognition on the part of government leaders in those countries of the extremely high marginal social rate of return from further agricultural R&D in developing countries (Alston et al. 2009). Indeed Asian countries, especially China, have been investing far more in agricultural R&D per dollar of output than other countries in the past two decades (Pardey et al. 2012). Recent revisions of marginal rates of return suggest earlier numbers were exaggerated, but even the latest estimates suggest very high benefit/cost ratios (Alston et al. 2011; Rao et al. 2012).
Those welfare benefits are nearly half what they would be if all countries of the world were to remove their barriers to goods trade. Such an extreme reform would generate estimated welfare gains of $384 billion per year globally by 2030, made up of $150 billion for high-income countries, $134 billion for Developing Asia, and $101 billion for other developing countries (Anderson and Strutt 2012b, Table 16).
Those are very much lower-bound estimates, not only because the comparative static GTAP model does not include services policy reform but also because it excludes the dynamic gains from trade liberalization. Recent reviews by Tarr (2012a,b) suggest the consumption gains could be several times larger if a more-comprehensive model were to be available.
The nominal rates of assistance to agriculture (NRA) is defined as the percentage by which government policies have raised gross returns to farmers above what they would be without the government’s intervention (or lowered them, if NRA < 0). See Anderson et al. (2008).
Such a trend is already evident for China: its agricultural NRA rose from −3 to 21 % between 1999 and 2010 (Anderson and Nelgen 2013). This has been sufficient to maintain self sufficiency in all key farm products except soybean (whose tariff is bound in the WTO at 3 % and which mostly goes into livestock feed and so helps maintain apparent self sufficiency in meat and milk). In India, its agricultural NRA rose from 8 to 25 % between 1999 and 2006, before dropping back as export restrictions were introduced to reduce the rise in domestic food prices (Anderson and Nelgen 2013). In Indonesia, its agricultural NRA rose from −3 to 27 % between 1999 and 2010 (Anderson and Nelgen 2013), and in November 2012 a new Food Law was introduced in Indonesia to make food self-sufficiency an even stronger policy goal.
Their findings are as expected from political economy theory and past experience, so they use them to project NRAs for 2030. The projected NRAs are then subjected to the following two tests for each developing country. First, if a product was in 2004 and is projected to still be a net export product for a country in 2030, then its 2030 NRA is assumed to be the lesser of its 2004 NRA or zero. That is, it is assumed all export taxes will be phased out by 2030, and that no new export subsidies will be introduced. And second, if the product is projected to be an import-competing product in 2030, then its 2030 NRA is assumed to be the lesser of the equation’s projected NRA or the country’s WTO-bound tariff rate.
Recent empirical studies report numerous cases where trade restrictions have added to or would add to poverty. See, for example, Warr (2005), Hertel and Winters (2006), and Anderson et al. (2011). The more poor households are net buyers of staple foods, however, the more a grain price spike is likely to add to poverty (Anderson et al. 2013).
Variable trade restrictions can also affect long-term investments and hence economic growth rates. Drawing on a broad range of developing country case studies, Bevan et al. (1990) and Collier et al. (1999) suggest that faster economic growth would result from allowing producers access to high prices in those rare occasions when they spike, rather than taxing it away. According to the evidence in their case studies, this is because governments are more prone than farm households to squander the windfall either in poor public investments or in extra consumption. An alternative view is that there are high costs of domestic price variability that reduce economic growth. See, e.g., Williamson (2012) on commodity terms of trade volatility generally and Myers (2006) more specifically on food prices.
Conversely, in the case of opposite changes to trade measures aimed at protecting farmers from a spike downwards in international prices, it is consumers who are inadvertently harmed by such trade policy responses, and all surplus producers are helped—and in proportion to their marketed output—rather than just the poorest, thereby adding to farm income inequality.
A change in NRA may not require any policy action on the part of the government, but rather be part of the original policy design. For example, the use of specific rather than ad valorem rates of trade taxation or trade subsidization automatically ensures some insulation of the domestic market from international price changes, as does the use of quantitative restrictions on trade such as fixed import or export quotas or bans. Explicit formulae for varying the import or export duty according to international price movements also may be part of the policy regime. And in some cases explicit provisions for restricting or relaxing trade barriers in price spike periods also are part of a policy’s legislation—even though the use of that provision may lie dormant in all but extreme periods. In what follows such possibilities will be treated no differently than any formal change of policy: both show up as a change in the NRA.
Both prices are deflated by the United States’ GDP deflator and deviations are measured around log-linear trends and expressed as a percentage.
This is consistent with a stochastic dynamic simulation exercise for India’s grain markets which showed that unilateral liberalization of trade could lead to greater domestic price stability even though it would make world prices more volatile (Srinivasan and Jha 2001). It is also consistent with the findings of a more-recent study that assessed the contributions that parastatals have made to food security in the six most populous economies of South and Southeast Asia, which found them wanting (Shahidur et al. 2008).
It assumes that output cannot respond in the short run, that inventory levels are so low that stock adjustments have limited effect (as is typically the case in a price spike period—see Wright 2011), and that the national elasticities of final demand for the product in question are the same across countries. It also ignores cross-elasticities between products.
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The authors are grateful for helpful referee comments and for interactions also with Johanna Croser and Ernesto Valenzuela. Anderson, Nelgen and Strutt also acknowledge funding support from the Asian Development Bank, the Australian Research Council, the Rural Industries Research and Development Corporation, and the World Bank. Views expressed are the authors’ alone.
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Anderson, K., Jha, S., Nelgen, S. et al. Re-examining policies for food security in Asia. Food Sec. 5, 195–215 (2013). https://doi.org/10.1007/s12571-012-0237-5
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DOI: https://doi.org/10.1007/s12571-012-0237-5
Keywords
- Food price volatility
- Long-term food price trends
- Asian economic growth and structural changes
- Per capita food consumption