A new vision for agriculture
momagri, movement for a world agricultural organization, is a think tank chaired by Pierre Pagesse.
It brings together, managers from the agricultural world and important people from external perspectives,
such as health, development, strategy and defense. Its objective is to promote regulation
of agricultural markets by creating new evaluation tools, such as economic models and indicators,
and by drawing up proposals for an agricultural and international food policy.

The momagri model




The NAR model:
an asset for the regulation of agriculture and international negotiations



International negotiations are based on simulations produced by economic models. These models, of which the World Bank model is the most widely used, are intellectual constructions that are “replicas” of reality which make it possible to summarize and quantify the different effects of a given economic policy.

It has become standard practice to believe that the simulations produced by these economic models are the Gospel and experts have become the messiahs. But these models are often incomplete, simplistic and even totally divorced from reality. This is why, for several years now, and once again during the breakdown of the Doha Round, the media has reported with great conviction that gridlock in the WTO negotiations would be extremely harmful for poor countries.

In fact, and we have been demonstrating this for months, the World bank model, and its successor the Carnegie model, are imperfect and lead to this idea that total liberalization of agricultural markets would produce a collective gain of more than 350 billion dollars over the next ten years (or less than 0.8% of world GDP!), and that two thirds would go to developing countries. This amount has recently been reviewed by economists who have ended up with lower results of around 25 billion dollars for developing countries, which is equivalent to one dollar per capita over ten years!

However, these results are obtained using simplistic hypotheses and an approach that is divorced from reality. And, anyway, it is not with such a paltry sum that these countries will be able to rid themselves of poverty and even more so because the margin of error of these models is greater than 5% of world GDP.
In fact, these models:

>consider that fluctuations in demand are totally elastic in relation to prices…that is to say, we would eat twice as much food if agricultural prices were cut by half.

>do not take into account the preferential agreements that are vital for the LDCs. Thus, they overestimate the benefits of the abolition of customs duties and totally neglect the effect of competition on the most fragile economies.

>consider that agriculture is totally independent from its environment and do not take into account transport costs, phytosanitary and environmental constraints or exchange rates.

>are built on the notion of a “representative consumer” (i.e. all the inhabitants of a country are identical in their tastes and incomes) and are therefore incapable of measuring the effect of the liberalization of exchanges on poverty in a given region. However, it is quite possible that the distribution of potential gains produced by liberalization, if indeed there are any, will be organized to the detriment of the poorest citizens.

>are based on the principle that supply adjusts automatically to demand, which does not reflect at all the volatility of prices and the impact of speculation.

In a nutshell, these models, which are the foundation of all the technical and political decisions made within the WTO, and by extension in the different countries of the world, skew the perspectives for the future.

This is why we have decided to build a forecasting model dedicated to agriculture that is more realistic and more credible, the NAR model (New Agricultural Regulations), while respecting a commitment to truth and transparency that is much more demanding. WOAgri’s team of economists has been working for several months on the construction of this model. Unlike traditional models, it takes into account the specificities of agriculture and, to represent these faithfully, is based on innovative construction principles that use the most recent developments in the economic theory and, most notably, the game theory. It will therefore be an asset for negotiations, not only for Europe, but for all the countries of the world and, by using an “open source” approach, similar to Linux in computing, it will be totally transparent. Experts worldwide, in developed as well as developing countries, will be able to participate in its improvement under the supervision of a scientific committee.



Seven criteria for an equitable international agricultural model

The NAR model is based on a modular architecture, i.e. it is made up of a central economic module around which gravitate seven satellite modules that correspond to the seven criteria that any balanced international agricultural model must respect, but which none of the current models take into account. A “Politics-Economics-Finance” module will be used to take into account political data, exchange rates and all exchange barriers as well as exports and imports.
The seven criteria that will enable the NAR model to take into account the specificities of agriculture are:

Criterion 1: Reliance on foreign countries


We must remember the consequences of unbridled freedom of international exchanges in the past: the oil crises of the 1970s, some of the effects of which are still visible today, have lead countries with the power to do so to develop energy resources in order to protect themselves as much as possible from the threat of an embargo or a cartel. This strategy can be applied to agriculture. In fact, this is one of the reasons why agriculture is one of the most protected economic activities in the world. Indeed, can we run the risk of being cut off from supplies due to a natural or geopolitical disaster?
Therefore this first criterion will enable us to evaluate the potentially negative effects of an excessive dependence on foreign food supplies.

Criterion 2: Taking into account climatic and market risks

If international commerce is a source of wealth, the notion of profit from exchange does not imply in any way that all parties benefit and in an identical way. Yet by using the artifice of the “representative consumer” (all consumers are identical in their tastes and incomes), traditional economic models present an ideal vision of reality where the wealth produced by a liberalization of agricultural exchanges is distributed evenly among all the consumers in the world. It is essential to “break” this line of reasoning which is the main factor behind the idyllic vision of an improvement in well-being worldwide thanks to the liberalization of exchanges when currently more than 800 million people are suffering from famine.
This second criterion will take into account the fact that production and agricultural exchanges take place in a world full of risks that must be apprehended in order to reflect the extreme volatility of prices.

Criterion 3: The effects on poverty

If international commerce is a source of wealth, the notion of profit from exchange does not imply in any way that all parties benefit and in an identical way. Yet by using the artifice of the “representative consumer” (all consumers are identical in their tastes and incomes), traditional economic models present an ideal vision of reality where the wealth produced by a liberalization of agricultural exchanges is distributed evenly among all the consumers in the world. It is essential to “break” this line of reasoning which is the main factor behind the idyllic vision of an improvement in well-being worldwide thanks to the liberalization of exchanges when currently more than 800 million people are suffering from famine.
This third criterion will take into account the objective of wiping out poverty worldwide and will measure the effects in this area of the liberalization of international exchanges on different categories of consumers.

Criterion 4: Growth and effects on future generations


Developing countries are characterized by large agricultural populations. And the development of inequalities caused by the poverty of the poorest individuals could have consequences on growth. Indeed, poverty is a source of human suffering and reduced investment in training, just like the fragile health of populations, prevents the economies of developing countries from getting off the ground. If we take into account the effects of inequalities on the liberalization of international agricultural trade, we should examine the way they interact with the long term choices of different players.
This fourth criterion will measure the long term effects on poverty and future generations (notably the education and health of the population) of a liberalization of agricultural exchanges.

Criterion 5: Taking innovation and intellectual property into account

To use a caricature, the current WTO negotiations aim, on the one hand, to dismantle all trade barriers and on the other hand to erect minimal agreements on intellectual property.
But there is a great risk that, by ignoring the impact of innovation on international agricultural exchanges, the negotiations could lead to anti-competitive situations of a new kind that would be devastating for the developing countries. Indeed, it is highly likely that the negotiations will evolve in a way that is no longer compatible with the maximization of social well-being worldwide and more specifically in the poorest countries. And the risk is also great that the transfer of innovations from the Northern to the Southern hemispheres be reduced at the same time as the creation of innovations in the South and their transfer towards the North.
This fifth criterion will evaluate the impact of the liberalization of international agricultural exchanges on the capacity for innovation in the food industry and the efficient sharing of this technology.

Criterion 6: The link between the environment and market stability

The estimation of the environmental consequences of decisions remains a relatively recent phenomenon and is heterogeneous from one country to another. Thus, some countries apply stricter production rules than others concerning the environment. For example, agricultural production is more and more restricted within the European Union but much less in Brazil, which makes this country more competitive to the detriment of the environment.
This sixth criterion will take into account the environmental dimension of international exchanges, all the more so in that this dimension occupies an increasingly important place in international negotiations.

Criterion 7: Sustainable growth and the future of the planet

In the area of sustainable development there are the identifiable direct effects of pollution or deforestation (soil erosion and reduced productivity) and therefore local effects (Cf. criterion 6), but there are also global effects that are characterized by climatic changes, biodiversity, desertification, and management of water resources (each of these phenomena having an impact on the others).
This seventh criterion will integrate the risks linked to global changes and will therefore reinforce the conclusions of criterion 6 in favor of the integration of sustainable development in a more complete economic model.


The NAR model will be based on the following structure:



Thanks to these seven criteria the NAR model will be more responsive, upgradeable, transparent and credible than the agricultural models traditionally used up until now.


Innovative construction principles make the NAR model
a real decision-making tool




The construction principles are the core of the strategy of a model. They consist in economic hypotheses and theories that economists use to remain as close to reality as possible.

As we have seen earlier, traditional economic models ignore the specificities of agriculture and consider that the economy as a whole is in an “ideal” situation. To do this the economists who built these models used construction principles that enabled them to represent this ideal situation: the theory of pure and perfect competition, and Ricardo’s theory of comparative advantages.

But when one considers, as WOAgri does, that agriculture is specific and strategic and that numerous imperfections prevent the proper functioning of markets, these two theories become meaningless.

WOAgri’s economists have therefore defined innovative construction principles that enable the NAR model to represent the specificities of the world of agriculture that we have detailed previously and making the NRA model very original compared to standard agricultural models.

They have decided to use three premises:

>Supply does not adjust instantly according to demand.

>Demand is not very elastic in relation to prices.

>The agricultural sector interacts directly with the environment (energy, health, environment, innovation, poverty …).

And therefore, using the construction principles they have defined, they respond to the demands of the resulting seven criteria, which constitutes a real innovative break with the traditional construction of economic models.
Here are a few of the most fundamental principles

- The NAR model is a “Cournot-Walras”1 general equilibrium model »

The NAR model has a “demand” module and a “supply” module where:
> Consumption (NAR model demand module) is characterized by a perfect market structure (all consumers have the same information and cannot influence price levels).
> Production (NAR model supply module) is, on the other hand, characterized by an imperfect market structure. There are indeed continuous imbalances caused by interactions between different producers that influence agricultural markets and increase the volatility of prices. The game theory aspect is introduced in the NAR model through this hypothesis.

- Price volatility, which is one of the specificities of agriculture, is included in the NAR model

Contrary to traditional models that consider the prices of agricultural products to be linear, because supply adjusts perfectly to demand, the NAR model considers agricultural prices to be highly volatile and that this intense volatility is in many ways responsible for the structural difficulties encountered by most agricultures throughout the world. This is why many States have “cold feet” when it come to liberalizing agriculture and this reality cannot be eliminated from economic models with a simple stroke of the pen as it is the main factor needing to be dealt with.
The three factors chosen to translate the volatility of agricultural prices are: the risks and structures of the market, errors in anticipation on the part of producers and climatic factors.

- Farmers evolve in an unstable world that affects their production behavior and explains in part the volatility of agricultural prices

The world in which farmers decide how much land to devote to each crop, and then the level of production, is a world with an uncertain future, even without climatic and geopolitical incidents. Since their decisions are based on a large amount of shared information it is only normal that there are fluctuations in quantity followed by fluctuations in prices, all the more so in that demand for agricultural products varies little in function of prices, on the contrary.
It is for this reason that we have decided to use Cumulative Prospect Theory (CPT) to translate the behavior of farmers faced with risks. It enables us to model and study behavior characterized by “over-optimism” during good periods and “over-pessimism” during difficult periods. It has five advantages for modeling the agricultural sector:
> It was originally created for the agricultural sector but has never been applied.
> It faithfully represents the behavior of farmers
> It explains why production levels decline when anticipations are incorrect (because the bonus associated with the maintenance of constant revenues increases).
> It explains, in part, the intense volatility of prices.
> It is recognized by the academic community. It is based on the work of Maurice Allais (1988 Nobel Prize) and Daniel Kahneman (2002 Nobel Prize).

- Government support systems influence the competitiveness of a product

This is a fundamental principle because it allows us to translate the often decisive influence that a State can exert on the competitiveness of a product and even a sector, for example:
> The importance of internal support that promotes competitiveness for exports.
> The effect of indirect support for infrastructures.
> And all the systems of support that create distortions in the functioning of markets.

- Two types of consumers are taken into account: “rich consumers” and poor consumers” (“Poverty” module)

Contrary to standard models that presuppose the existence of a representative consumer, the NAR model will divide consumers into two groups: poor consumers and rich consumers. It can thus evaluate the effect of the liberalization of international exchanges on poverty and therefore determine who will be the potential winners and losers.
This initial segmentation will be detailed later on.

- The coexistence of two types of agriculture: traditional and modern

Just as they presuppose that all consumers are alike, standard models estimate that agriculture throughout the world is the same. Yet, there are profound differences between agricultural practices from one region to another which explains in part the divides in terms of productivity and competitiveness between the North and the South.
Indeed, scale economies can differ according to the country and are notably behind the distinction between modern and traditional agriculture (because the rate of land use is different just like the degree of investment of capital in farms and the investments in infrastructure on the part of the State). The NAR model therefore takes into account, on an international scale, the coexistence of these two types of agriculture.

- The capacity for innovation and the different existing regulations concerning intellectual property are taken into account (“Innovation” module)

Innovation and technical progress are a decisive influence on the effects of the liberalization of international agricultural exchanges. And we have to admit that these effects are different from one region to another because the capacity to innovate and regulations concerning intellectual property are different, and discriminatory for the developing countries that often have no intellectual property laws and are therefore dependent on foreign innovations.
We have decided for this reason that the NAR model will take into account, for each region modeled, the capacities for innovation (public, private, local and foreign) and the different existing regulations for intellectual property.

Modeling has been under way for several months and the construction principles are now sufficiently numerous to start equations for the NAR model which consists in using mathematical equations to translate the behavior of the different economic players involved (producers, consumers, States) and the workings of the agricultural market as well as the different markets that interact with agriculture.
The five modules that make up the first version of the NAR model (the central economic module surrounded by the “Poverty”, “Innovation”, “Risks” and “Reliance on foreign countries” modules) will be modeled by the end of the year.

We will proceed during the first semester of 2007 with calibration and tests of the model in order to be able, starting in mid-2007, to provide our first estimates in the form of figures.

And, in addition to being a decision-making tool that was lacking until today, the NAR model will be one of the three pillars of the future world governance of agriculture along with the international evaluation and grading agency (CF. the article entitled “The NAR agency”) and the principles of governance (Cf. the article entitled “Proposal for the principles of governance of a future World Organization for Agriculture”)

1 The term “Cournot-Walras” comes from the names of two economists that created models for general equilibrium under perfect competition (Léon Walras) and developed modeling under imperfect competition (Augustin Cournot).

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momagri model
Paris, 24 October 2014