Agricultural Trade, Policy Reforms, and Global Food Security

Kym Anderson

• Publisher: Palgrave Macmillan
• Year: 2016
• ISBN:
  9781137469250
• Topic: Business
• Subtopic: Business internazionale
• Index: Business

This book explores the potential for policy reform as a short-term, low-cost way to sustainably enhance global food security. It argues that reforming policies that distort food prices and trade will promote the openness needed to maximize global food availability and reduce fluctuations in international food prices. Beginning with an examination of historical trends in markets and policies, Anderson assesses the prospects for further reforms, and projects how they may develop over the next fifteen years. He pays particular attention to domestic policy changes made possible by the information technology revolution, which will complement global change to deal directly with farmer and consumer concerns.

© The Author(s) 2016

Kym AndersonAgricultural Trade, Policy Reforms, and Global Food SecurityPalgrave Studies in Agricultural Economics and Food Policy10.1057/978-1-137-46925-0_1

Begin Abstract

1. Introduction and Summary

Kym Anderson^{1, 2}

(1)

Department of Economics, University of Adelaide, Adelaide, South Australia, Australia

(2)

Arndt-Corden Department of Economics, Australian National University, Canberra, ACT, Australia

End Abstract

During the first decade of this century, real international prices of food and fossil fuels more than doubled—having followed a flat trend for two decades. This was especially shocking for food because its real price had halved over the twentieth century as farm productivity growth outstripped global demand growth (Fig. 1.1). Were these high prices to be a temporary aberration, or the new normal? Observers arguing the latter pointed to the rapid growth of China and other emerging economies. Industrialization in those countries is also seen as adding substantially to this century’s global carbon emissions and climate change problems. That, in turn, has triggered demands for alternative energy sources to be encouraged in place of fossil fuels. One policy response in the United States and European Union (US and EU)—subsidies and mandates to encourage the use of biofuels—added to the recent food price increases though raising the demand for grains, sugar and oilseeds for ethanol and biodiesel production.

Fig. 1.1

Real international prices of food and fossil fuel, 1900–2014. (a) Real food and fossil fuel prices (2010 = 100, based on real 2005 US dollars). (b) Real food prices, 1900–2000 (1997–99 = 100).^{a a}The deflator is the price of manufactures imported by developing countries. Source: Data from Pfaffenzeller et al. (2007) and World Bank (2016)

By early 2016, real food prices in international markets had come back to just one-fifth above the flat trend level in 1985–2005. Part of that decline is due to the prices of petroleum and other fossil fuels falling to less than half their peak levels during 2008–13. At these lower fuel price levels, the only additional demand for farm products by biofuel manufacturers is that due to the mandated increases in the minimum use of biofuels in the US and EU.

This does not mean the new link created in the previous decade between food and fuel prices has been removed, however. On the contrary, with much-expanded global biofuel production capacity in place in 2015 than in 2005, ¹ the demand for products such as maize, canola, palm oil, and sugar will rise when the consumer price of fossil fuel rises above a threshold level. That price rise could be temporary because of political instability in the Middle East or elsewhere. Or it could be permanent as a result of higher taxes being imposed on carbon emissions to mitigate local pollution and global climate change. The threshold level is determined by the cost of biofuel production and the extent of the mandated minimum share of fuel consumption that must be biofuels (de Gorter et al. 2015).

Meanwhile, climate changes, due to increases in carbon dioxide and other greenhouse gas emissions, are threatening to disrupt food production across the globe. Some higher latitude regions may be able to produce more, but the current consensus is that, as temperatures rise and rainfall patterns change, global food production will be reduced and be subject to more extreme-weather events (IPCC 2014). It would be reduced even further if greenhouse gas emissions from agricultural production were to be taxed in some way and if some cropland was to be taken out of food production and planted with trees for sequestering carbon.

Considering climate change effects and the biofuels policies that are partly a response to them together, it seems likely that both the average level of international food prices and their volatility around the trend may be greater in coming decades than in the twentieth century. That combination therefore presents a challenge to three key aspects of global food security: food availability, economic accessibility of poor households to those available supplies, and food market stability. This set of challenges is on top of the continuing challenge of meeting the world’s demand for food as the global population grows (to perhaps 9 billion by 2050), as per capita incomes rise, and, in particular, as more families in middle-income countries diversify their diet by expanding their per capita consumption of animal products and other non-staple foods as they move to cities. Meanwhile, on the supply side, natural resource constraints will limit crop and animal production growth in numerous locations.

If the global food production is to keep up with the growth in food demand, the productivity of resources employed in agriculture needs to increase. That can happen by investing more in public agricultural research or by removing barriers to transgenic research and development (R&D) by the private sector. But that is not an instant fix because of the considerable lag before R&D’s impact is seen in higher output; and it is only possible where governments can obtain a political mandate to do so.

This book focuses on the potential for a more immediate and low-cost way to enhance global food security sustainably, namely, by reforming policies that are distorting food prices and trade. That this will work is not in doubt, since it has been implemented partially to great effect in various places and periods, particularly over the past three decades. But much more can be gained by encouraging policy reform in places yet to start, and by cheering the process to completion in places where reform is still on-going.

Numerous messages come out of the analyses in the chapters that follow, but key ones are summarized here as each chapter’s contribution to the book is explained.

How Trade Boosts Food Security

Chapter 2 begins by defining food security, which refers to the condition in which all people, at all times, have physical, social, and economic access to sufficient, safe, and nutritious food to meet their dietary needs and food preferences for an active and healthy life. Improving food security requires improving the three inter-related elements of food availability, access, and utilization, as well as reducing market instability.

How much access households have to available food supplies depends heavily on their income, assets, remittances, or other entitlements. How well household heads utilize the foods that are accessible to them depends on their knowledge and willingness to ensure a healthy and nutritious diet for all members of their household. That, in turn, depends on the level of education in the household, particularly of adult females, which again is closely related to the household’s income and wealth. Thus, food insecurity is a consumption issue that is closely related to household poverty.

Any initiative whose net effect is to raise real incomes may also enhance food security. Openness of each national economy to international trade and investment is one such initiative, because it optimizes the use of resources devoted to producing the world’s food, maximizes real incomes globally, and minimizes fluctuations in international food prices and quantities traded. It thus contributes to three components of food security: availability, access, and market stability.

There is overwhelming conceptual and empirical support for the claim that opening to trade can raise the level and growth of national income. It should therefore be considered among the food policy options of national governments, as it can thereby reduce poverty, hunger, and under-nutrition, boost diet diversity, food quality, and food safety, and thus enhance national and global food security. These gains derive not just from the standard static welfare gains from removing trade-distorting policies that enable nations to consume more in general, hence, also more food. Even more important is the fact that openness to trade also can raise an economy’s growth rate.

Empirical evidence clearly shows that people respond positively to getting incentives right in product, input, and factor markets, and removing trade barriers can be an important part of that process. In particular, economies that commit to fewer market interventions tend to attract more investment funds and tend to be more innovative because of greater trade in intellectual capital and greater competition, which spur innovation and productivity growth. And if domestic policy reforms include improving the government’s capacity to redistribute income and wealth more efficiently and in ways that better match society’s wishes, concerns about the inevitable initial distributional consequences of trade liberalization also would be lessened.

The Long History of Food Globalization

Chapter 3 points out that long-distance agricultural trade has contributed to global economic growth and poverty reduction for millennia. But only in recent centuries has it has done so via international trade in outputs of major foods. Its predominant contribution in earlier periods was through trade in crop seeds or cuttings, breeding animals, and farm production technologies. A few high-valued unprocessed products began to be exported to Europe from the seventeenth century (spices, sugar, tea, coffee, cocoa), but it took until the industrial revolution and the steam engine before large-scale intercontinental trade in foods began. Refrigeration from the late nineteenth century, and air freight services more recently, have allowed fresh perishable products to be traded over long distances too, thereby extending their seasonal availability and adding to diet diversity and nutritional quality.

The Western Asia region was the origin of most of today’s major foods apart from rice. They include wheat, barley, and wine grapes as well as domestic cattle, ducks, goats, honey bees, horses, pigs, and sheep. However, some foods that originated in the Americas became globally significant, namely maize, cassava, groundnuts, beans, and sweet and white potatoes. There are also a couple that originated from Africa (sorghum and millet) and a few from East Asia (most notably rice and bananas), along with sugar from New Guinea.

The migration of people, plants, and animals was not without some human and ecological devastation. However, those negative contributions from trade in domesticated plants and animals and their products were minor relative to the enormous contribution agricultural trade made to the world’s food supplies: the complementarity between knowledge of local growing conditions on the one hand and new crops and animals and associated technical knowhow on the other led to very substantial growth in global food output. That, in turn, supported growth in the world’s population, which increased about 120 % in 1500–1800, compared with only 18 % in the previous three centuries.

Since 1800, the ever-lowering cost of international commerce gradually allowed trade in farm outputs in raw or processed form to be added to long-distance trade in farm inputs. That has led to the prices of farm and other products converging across countries and indeed continents, and hence to relative factor prices also converging.

One would expect this integration, along with unprecedented growth in per capita incomes, to also lead to an expanding variety of foods being available. Yet, just a dozen basic foods account today for three-quarters of both the calories and proteins consumed by the world’s population. They are three grains (wheat, rice, and maize), four meats (beef, mutton/lamb, pork, and poultry), two edible oils (from soybean and oil palm), and potatoes, milk, and sugar. Those dozen basic farm products could not have become so dominant in the world without international trade in agricultural inputs/technologies or their products, given the small number of regions of the world from which those key species originated. Certainly, fresh fruits and vegetables along with a plethora of processed foods supplement our diets and provide important micronutrients today, but only a small number of them dominate (bananas, apples, oranges, and other citrus) and have become ubiquitous, again thanks to international trade.

Which countries are expected to dominate in food trade? One of the best-known facts about growing economies is that their farm sector’s shares of GDP and employment tend to fall, although less so for countries with a relative abundance of farm land. According to comparative advantage theory, we should expect agricultural trade to occur between relatively lightly populated economies that are well-endowed with agricultural land (relative to labor, capital, and minerals) and those that are densely populated with little agricultural land per worker and lots of industrial capital or minerals.

But sectoral policies also affect trade. In those industrializing economies whose growth has been accompanied by increases in protection from agricultural imports, self-sufficiency in farm products falls less. Likewise, global farm trade is dampened if poor agrarian economies protect their emerging manufacturers from import competition or tax their farm exports or over-value their currency, each of which discourages farm production and encourages domestic food consumption. Other things equal, reforms to such trade-restricting policies cause an agricultural trade growth spurt and result in a higher share of global farm production being traded across national borders. Their impact on the international terms of trade would depend on which of those two sets of reforms dominate in any period. Real prices of agricultural products in international markets would rise as a result of agricultural protection rates being cut, but they fall if and when farm export restrictions are lowered.

Agricultural trade grew as rapidly as trade in non-farm products in the first globalization wave to World War I, but it has grown more slowly than trade in other products since then, in large part because of policy developments. In the nineteenth century, rich countries opened their markets to trade in farm products and took advantage of agricultural development opportunities in their colonies. In the period between World Wars I and II, many countries withdrew from trading, especially in farm products. Then, after World War II, agricultural protectionism grew in industrial economies, while newly independent developing countries taxed their exports of farm products. Those policies continued through to the 1980s, before both country groups began to reform them.

Notwithstanding that history of economically wasteful market-distorting policies, the per capita supply of food available for human consumption globally has been steadily increasing for many decades. It grew especially rapidly for cereals between 1960 and the mid-1980s, thanks to the dissemination of dwarf wheat and rice varieties in Asia and the continuing expansion and improvement of hybrid maize plantings. In the subsequent three decades, the per capita supply of other foods has grown rapidly too.

Not unrelated has been a steady reduction in the number of under-nourished people in the world, of more than 220 million (19 %) since 1990. The largest concentrations of under-nourished people now are in South Asia at 280 million, or 16 % of its population, and in Sub-Saharan Africa, where the prevalence is 23 % (220 million). International trade, and especially market opening though trade policy reforms, can expand aggregate food availability so as to reduce far more that number of under-nourished people—and the number living in extreme poverty.

The Evolution of Agricultural Trade Patterns Since the 1960s

Chapter 4 lays out key developments in global agricultural trade, ‘revealed’ comparative advantage, and net trade specialization in farm products over the past five decades. Those developments are broadly consistent with expectations from trade theory, even though trade patterns have been distorted by anti-trade policies.

There is concentration in both the commodity and country shares of global exports of farm products. As of 2014, less than ten items made up half of that trade in agricultural products, and two-thirds of the world’s exports of farm products are accounted for by just a dozen agricultural-trading economies (treating the EU28 as a single economy). These large food-trading economies range from being very heavily food import- or export-dependent to being close to self-sufficient, but most of the top 20 food-trading nations engage in substantial two-way farm trade as people look to diversify their diets and consume more exotic foods as part of their quest for variety and nutrition. Nonetheless, there is a negative correlation across countries between their agricultural comparative advantage and both per capita income and population density.

Over the past half-century, the share of farm products in national exports has been declining not only for most groups of countries but also for the world as a whole. A persistent decline in comparative advantage in agriculture is evident only for Japan and upper middle-income countries. For the high-income group as a whole, and especially for Western Europe, their comparative advantage in farm products has risen rather than fallen.

One reason for not observing the trends in national farm trade patterns that theory suggests for high-income and low-income countries is the anti-trade bias...

Table of contents

• Cover
• Frontmatter
• 1. Introduction and Summary
• 2. How Trade Can Boost Food Security
• 3. The Long History of Food Globalization
• 4. The Evolution of Food Trade Patterns Since 1960
• 5. Market-Distorting Policies: Long-Run Trends and Short-Run Insulation
• 6. Estimating Trade, Welfare, and Poverty Effects of Trade Policy Reforms
• 7. The Interface Between Trade and Technology Policies
• 8. International Food Price Spikes and Temporary Trade Policy Responses
• 9. Political Economy of Trade Policy Trends and Aberrations
• 10. Prospective Effects of (or Requiem for?) WTO’s Doha Development Agenda
• 11. Projecting International Trade to 2030
• 12. Policy Implications and Prospects for Boosting Global Food Security
• Backmatter