The WTO has just published an article written by economists from the World Bank, which questions the effect of trade openness in all sectors on price volatility
1. The authors conclude that although trade openness undeniably increases price volatility - which can have a negative impact on production and growth of countries - the best way to counteract the effects is to increase export diversification, because markets are independent and aggregate volatility is "self-correcting”.
2
This is why, according to the authors, a country should maximize liberalized trade, including removing all market barriers and regulatory policies to promote domestic economic growth and reduce their vulnerability to volatile markets. Not a surprising conclusion from the WTO, whose mandate is to conclude the Doha Round, but one which proves yet again, that the institution in Geneva is growing a little more isolated from the international community, at a time when regulation is promoted as an essential component to sound market functioning.
By focusing on the impact of trade liberalization on price volatility, the WTO is now asking the right questions… but continues to provide the wrong answers. Indeed, without going into in-depth economic demonstrations, it is currently unthinkable to consider, as the WTO does, that :
1. "Shocks are not correlated on different markets”: we saw this particularly with the financial crisis; all markets are now correlated, so that as a result, experts are now talking about "systemic" risk. This is especially true for agricultural markets which are becoming increasingly more financialized.
2. "Aggregate volatility self-corrects" this is not only contradicted by the previous point, but it is now recognized that there can be no systemic risk pooling in a global market. For exogenous or climatic risks, open borders reduce the observed volatility. It is indeed unlikely that a major climatic hazard would simultaneously affect all the countries in the world. This however is not the case for endogenous or market risks, as recent history has taught us. The 1929 crisis and the recent subprime crisis were characterized by an immediate and global occurrence resulting in almost total collapse. Also, the liberalization of markets subject to endogenous or market risks would not be accompanied by a reduction in volatility, quite the contrary. This incidentally was also one of the conclusions of the workshop organized by momagri which united international experts in June 2009 on price volatility in agricultural commodities.
This is why most decision makers today agree that it is necessary to regulate markets, rather than “laissez-faire”, for economic, political and strategic reasons.
This is especially true for agricultural and food sectors, which are characterized by a natural volatility. Agriculture is the linchpin for development in virtually every country in the world and global food security directly depends on it; are we only to measure the risks to which the international community is exposed, by leaving this key sector to the mercy of unregulated international trade? Without a safety net against price volatility, the vast majority of the world's farmers are "an endangered species”, which jeopardizes their country’s food security, but also for many developing countries, with populations dependant on agriculture, it also jeopardizes economic development and political stability.
The conclusions of the WTO’s article, which go against the current consensus on the need to regulate, are further evidence of the inadequacy of the system of international governance. It comes as no surprise that the WTO concludes on the need to liberalize international trade, because this is its mission assigned by mandate. Not only has the global economy evolved, as has our understanding of market functioning, including agricultural markets, but certain political and strategic imperatives can no longer be neglected. Also, regulated market liberalization appears to be the best way to save liberalism and multilateralism, as it specifically addresses the shortcomings that prevent them functioning correctly by themselves.
This is especially true for agricultural and food markets. That is why momagri advocates an overhaul of international agricultural governance through the creation of a worldwide organization for agriculture. This organization would be responsible for defining the regulatory framework within which market forces can be expressed without undermining food security and the sustainability of the world’s agriculture and unifying the strategies pursued by different international institutions.
An international organization for agriculture would not be just another international institution, but a platform which would unite, on a temporary basis, all the existing and relevant competencies available in most international organizations which deal with agricultural issues but with disparate and uncoordinated methods. This organization would function as does the WTO for trade, the FAO for food security, the World Bank for development or the IMF for financial matters.
1 OMC, “Managing Openness and Volatility: The Role of Export Diversification”, Mona Haddad: Sector manager, International Trade Department, The World Bank, Jamus Jerome Lim: Economist, Development Prospects Group, The World Bank, Christian Saborowski: Economist, Middle East and North Africa Region, The World Bank. http://www.wto.org/french/res_f/publications_f/wtr10_4june10_f.htm
2 Following the result of the model developed by Haddad, Lim, and Saborowski (2010).