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Editorial |
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Agricultural policies: the history of a changing trend
By Bastien Gibert,
Expert of momagri |
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There is no eternal truth in international finance or in agricultural policy.
Jeffrey A. Frankel, Harpel Chair at Harvard University recently wrote “in international monetary economics our exam questions remain the same. Only the answers change…"1. If in theory, as in practice, the facts prove him right, it is still not the case in the agricultural domain. Gripped by a major structural crisis, the causes of which are to be found in the very foundations of international agricultural governance, it seems as if international decision-makers fail to realize that the concepts that once had unanimous backing, are now outdated.
Out: Long live market liberalization!
Since the end of the 1970s and the implementation of the Washington Consensus by international institutions, market liberalization has been considered THE trade policy to implement first and foremost in order to increase market effectiveness in developed and developing countries. Since the creation of the WTO in 1995 and the inclusion of the agricultural dossier in ongoing negotiations, agricultural trade liberalization continues to be promoted, because the profits for the international community would be high. In 2005, some studies calculated the global annual earnings at over 850 billion dollars.
But the financial and food crises have since changed the deal, and they have clearly shown that agricultural markets are not self-regulated, and that therefore, leaving the markets to regulate themselves is not the solution, neither at the economic nor at the strategic level. Economically, this is mainly due to particular market structures and exposure to specific market risks, which has increased because of growing financialization, thus making trade liberalization a catalyst of the intrinsic volatility of agricultural prices. Strategically, and as Olivier de Schutter, UN Special Rapporteur on the Right to Food, highlights, because unregulated liberalization of agricultural trade will not guarantee international food security, especially for emerging net importing countries. The recent failure of the July 2008 ministerial meeting, which was in part due to India’s failure to concede on the special safeguard mechanism, is a perfect example. And the few studies that have included these specifics in evaluating the earnings gained by agricultural trade liberalization have shown that they are in fact very weak (Carnegie Endowment for International Peace) or even negative (momagri).
In: Long live market regulation!
Long considered incompatible with the sacrosanct principle of natural market efficiency, there is now an increasing number of supporters for the implementation of regulated free trade for agricultural markets. The underlying idea is clearly a pragmatic one: considering the market as a means of trade organization and not as an end in itself, supporters of this doctrine are seeking to improve market performance by implementing regulation measures while the markets are shaky or are on the verge of becoming so. It is important to underline that regulation, as it must be envisaged today, must not be inevitably synonymous with regulation or government intervention. For the most part, the measures should be incentives or proposed by international organizations, to avoid all forms of rampant and counterproductive protectionism
Out: Prices will stabilize at a high level tomorrow.
Until quite recently, most experts and international decision-makers agreed that the volatility of agricultural prices was not a cyclical phenomenon, and that liberalization of agricultural trade would play a stabilizing role and tend to push prices up2. The reasons forwarded were based on belief in the self-regulating capacity of the agricultural markets and the application of the law of large numbers, thus enabling the risks, particularly the climatic ones, to be pooled on a large scale. It is on this hypothesis that many WTO decisions, and orientation reports, like the CAP Health Check, are based and continue to be today.
However, the historical price analysis contradicts this optimistic vision and the recent price hyper-volatility illustrates that the sole analysis of the fundamentals of the agricultural market is not only incomplete, but also incorrect to fully represent the complex reality of price change.
In: Price change is volatile and uncertain.
If demographic growth is an undeniable fact that works in favor of price increase, the supply analysis is more complex than it seems, because agricultural producers are changing in an uncertain world. In fact, they are subjected to specific risks in the sense that they cannot accurately anticipate what quantities they will get, or what the quality will be like, and even less, the price at which they will be able to sell their produce. This, without taking into account the fact that agriculture covers many dimensions- the food trade as well as the trade of non-comestibles, such as biofuels and the non-marketable dimension, such as the environment- and whose effects on price formation are real and complex. To this we add net demand and supply by investors on the futures market, and who modify the prices on the physical or financial markets. Even though it displeases the majority, the agricultural markets are not governed by an intangible golden rule as we know in physics, which would allow prices to stabilize at a high price tomorrow. The world would surely be a lot simpler and less chaotic, but the facts are there to reminds us: the one thing of which we can be sure, is in fact, that uncertainty reigns. It is therefore, important to implement regulation policies that are adapted to this reality, rather than to make the daring gamble that the free game of market forces will be the ultimate antidote to the crises and to price hyper-volatility. Not only is it daring given the current context, but it is also as dangerous because of what it implies.
Out: Doha, the universal miracle remedy.
The Doha Round is a round of negotiations instituted by the WTO in Qatar in 2001. It aims to establish a liberalized and fair international trade system within a multilateral framework in order to meet the future challenges related to agriculture, services, industry, and intellectual property rights. It is also called the “Development Round” to show to all the countries in the world that it aims to resolve the trade problems encountered by developing countries, which had not been tackled during preceding negotiations. Agriculture is considered the key dossier in the negotiations because of the “delay” of the agricultural markets in terms of liberalization in relation to the large industrial or financial markets.
But since 2001 the round of negotiations have been dragging on because of various reasons related to both the developed as well as developing countries. In addition, following the example of the UN Special Rapporteur on the Right to Food, Olivier de Schutter, an increasing number of voices are now questioning the very legitimacy of the Doha Round to meet the needs of developing countries in terms of food security, or the global gains to be expected from it, as was highlighted in a recent study by momagri. These two symptomatic examples clearly illustrate that the hopes of Member states that the Doha Round will be concluded in its current state is now a thing of the past.
In: Doha, a dangerous agreement for the future of the world.
It is clear that international trade plays a central role in growth and poverty reduction. But it is also certain that trade liberalization is not a panacea, contrary to what had long been the affirmed popular global economic belief. A certain number of empirical studies have proven this, showing that forced liberalization policies carried out in a certain number of developing countries in the name of structural adjustment policies did not result in the foreseen gains. These are also the results produced by the momagri model: unregulated liberalization of agricultural trade would translate into a significant increase in price volatility (from 1 to 3) and a substantial decrease (of between -30 to -60%) in producers’ net revenues, particularly in emerging importing countries and least advanced countries. We are therefore, far from the Doha benefits for developing countries. Great prudence is therefore urged regarding the conclusion of negotiations in the Doha round on the current bases, because the recent crises have proven that the economic hypotheses on which the economic development of the last two decades were based, are uncertain.
Trends change, but the king is still naked! After the financial crisis, let’s not make the same mistake again by entrusting world food balance to the markets, which are not self-regulating. We are at a time where no concrete solutions have emerged, and the needs remain real and urgent. It is in this breadth that momagri has been working since 2005. It is also preparing a vast forthcoming publication on this subject.
1 Finance & Development, September 2009, “What’s in and out in global money”
2 See Agricultural Outlook 2009-2018, OCDE-FAO
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Advocating for
agricultural market
regulation and global
food governance | |
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