Search

Reforms in recent decades have sharply reduced the distortions affecting agriculture in developing countries, particularly by cuts to agricultural export taxes and by some reductions in government assistance to agriculture in high-income countries, but international trade in farm products continues to be far more distorted than trade in nonfarm goods. This paper summarizes a series of empirical studies that focus on the effects of the remaining distortions to world merchandise trade for poverty and inequality, especially in developing countries. To obtain different insights into the various impacts, two global studies are undertaken using the World Bank's Linkage model, one multi-country study uses the Global Trade Analysis Project (GTAP) model, and ten country case studies are also included, each using a national economy-wide model. The Linkage model results suggest that liberalization will reduce international inequality, largely by boosting farm incomes and raising real wages for unskilled workers in developing countries, and will reduce the number of poor people worldwide by 3 percent. The analysis based on the GTAP model for a sample of 15 countries, and the ten stand-alone national case studies, all point to larger reductions in poverty, especially if only the non-poor are subjected to increased income taxation to compensate for the loss of trade tax revenue.

This paper analyzes the economic effects of agricultural price and merchandise trade policies around the world as of 2004 on global markets, net farm incomes, and national and regional economic welfare and poverty, using the global economy wide Linkage model, new estimates of agricultural price distortions for developing countries, and poverty elasticity's approach. It addresses two questions: to what extent are policies as of 2004 still reducing rewards from farming in developing countries and thereby adding to inequality across countries in farm household incomes? Are they depressing value added more in primary agriculture than in the rest of the economy of developing countries, and earnings of unskilled workers more than of owners of other factors of production, thereby potentially contributing to inequality and poverty within developing countries (given that farm incomes are well below non-farm incomes in most developing countries and that agriculture there is intensive in the use of unskilled labor)? Results are presented for the key countries and regions of the world and for the world as a whole. They reveal that, by moving to free markets, income inequality between countries will be reduced at least slightly, all but one-sixth of the gains to developing countries will come from agricultural policy reform, unskilled workers in developing countries the majority of whom work on farms will benefit most from reform, net farm incomes in developing countries will rise by 6 percent compared with 2 percent for non-agricultural value added, and the number of people surviving on less than US$1 a day will drop 3 percent globally.

This paper summarizes a new database that sheds light on the impact of trade-related policy developments over the past half century on distortions to agricultural incentives and thus also to consumer prices for food in 75 countries spanning the per capita income spectrum. Price support policies of advanced economies hurt not only domestic consumers and exporters of other products but also foreign producers and traders of farm products, and they reduce national and global economic welfare. On the other hand, the governments of many developing countries have directly taxed their farmers over the past half-century, both directly (e.g., export taxes) and also indirectly via overvaluing their currency and restricting imports of manufactures. Thus the price incentives facing farmers in many developing countries have been depressed by both own-country and other countries' agricultural price and international trade policies. The authors summarize these and realted stylized facts that can be drawn from a new World Bank database that is worthy of the attention of political economy theorists, historians and econometricians. These indicators can be helpful in addressing such questions as the following: where is there still a policy bias against agricultural production? To what extent has there been overshooting in the sense that some developing-country food producers are now being protected from import competition along the lines of the examples of earlier-industrializing Europe and Japan? What are the political economy forces behind the more-successful reformers, and how do they compare with those in less-successful countries where major distortions in agricultural incentives remain? And what explains the pattern of distortions across not only countries but also industries and in the choice of support or tax instruments within the agricultural sector of each country?

This chapter begins with a brief summary of the long history of national distortions to agricultural markets. It then outlines the methodology used to generate annual indicators of the extent of government interventions in markets, details of which are provided in Anderson and appendix A. A description of the economies under study and their economic growth and structural changes over recent decades is then briefly presented as a preface to the main section of the chapter, in which the nominal rates of assistance and consumer tax equivalents (NRA and CTE) estimates are summarized across regions and over the decades since the 1950s. These estimates are discussed in far more detail in the regional chapters that follow. A summary is also provided of an additional set of indicators of agricultural price distortions presented in chapter eleven that are based on the trade restrictiveness index first developed by Anderson and Neary (2005). In chapter twelve the focus shifts from countries to commodities, and all the various distortion indicators are used to provide a sense of how distorted are each of the key farm commodity markets globally. Then chapter thirteen uses the study's NRA and CTE estimates to provide a new set of results from a global economy-wide model that attempts to quantify the impacts on global markets, net farm incomes and welfare of the reforms since the early 1980s and of the policies still in place as of 2004. The chapter concludes by drawing on the lessons learned to speculate on the prospects for further reducing the disarray in world agricultural markets.

Despite reforms over the past quarter-century, world agricultural markets remain highly distorted by government policies. Traditional indicators of those price distortions such as the nominal rate of assistance and consumer tax equivalent provide measures of the degree of intervention, but they can be misleading as indicators of the true effects of those policies. By drawing on recent theoretical literature that provides indicators of the trade- and welfare-reducing effects of price and trade policies, this paper develops more-satisfactory indexes for capturing distortions to agricultural incentives. It then exploits the agricultural distortion database recently compiled by the World Bank to generate estimates of them for both developing and high-income countries over the past half century, based on a sample of 75 countries that together account for all but one-tenth of the world's population, gross domestic product (GDP) and agricultural production. While they are still only partial equilibrium measures, they provide a much better approximation of the true trade and welfare effects of sectoral policies without needing a formal model of global markets or even price elasticity estimates.

This study on Latin America is based on a sample of eight countries, comprising the big four economies of Argentina, Brazil, Chile, and Mexico; Colombia and Ecuador, two of the poorest South American tropical countries; the Dominican Republic, the largest Caribbean economy; and Nicaragua, the poorest country in Central America. Together, in 2000-04, these countries accounted for 78 percent of the region's population, 80 percent of the region's agricultural value added, and 84 percent of the total gross domestic product (GDP) of Latin America. The key characteristics of these economies-which account for only 4.5 percent of worldwide Gross Domestic Product (GDP), but 7.7 percent of agricultural value added and more than 10 percent of agricultural and food exports. The table reveals the considerable diversity within the region in terms of stages of development, relative resource endowments, comparative advantages and, hence, trade specialization, and the incidence of poverty and income inequality. This means that these countries represent a rich sample for comparative study. Nicaragua's per capita income is only one-seventh the global average, while the incomes of Colombia and Ecuador are one-third of this average. By contrast, the per capita incomes of Argentina and Chile average just one-eighth below and that of Mexico is one eighth above the global average. Only Argentina, Brazil, and Nicaragua are well above the global average in endowments of agricultural land per capita; the Dominican Republic and Ecuador are well below this average; and Chile, Colombia, and Mexico are a little less than one-third above the average.

This chapter deals with the distortions to price incentives for agriculture that result from the trade, exchange rate and domestic policies in place in the four main South Asian countries, by summarizing and comparing the findings and themes of the more-detailed case studies on India, Pakistan, Bangladesh and Sri Lanka. Attention is paid most to India, which accounts for around four fifths of South Asia's population, Gross Domestic Product (GDP) and agricultural GDP. The principal focus is on the level of and trends in distortions for agriculture as a whole, and how these have changed over time relative to those for non-agricultural traded sectors in these countries. Previous studies have established that in India, Pakistan and Sri Lanka, policies strongly favored manufacturing over the principal agricultural crops, although the extent of anti agricultural bias diminished considerably between the 1970s to 1995. The new country studies extend the earlier estimates up to 2005 and back to 1965, and provide long term estimates of distortions to relative agricultural incentives in Bangladesh for the first time. As well, these new studies broaden the coverage of previous research by including estimates for the fresh fruit and vegetables sector in India, and the dairying sectors in India and Pakistan. In South Asia both of these sectors account for large shares of the rural economy as measured by their contributions to GDP.

This chapter begins with a brief summary of economic growth and structural changes in the region since the 1950s and of agricultural and other economic policy developments as they affected the farm sector at the time of and in various stages after independence from colonial powers. The chapter then summarizes estimates of the nominal rate of assistance (NRA) and the relative rate of assistance (RRA) to farmers delivered by national farm and nonfarm policies over the past several decades, as well as the impact of these policies on the consumer prices of farm products, using the project's methodology (Anderson et al. 2008). The final sections point to what the author have learned and draw out implications of the findings, including for poverty and inequality and for possible future directions of policies affecting agricultural incentives in Africa.

The purpose of this paper is to provide an overview of the literature on the political economy of policy instrument choice and relate it to the experiences in agriculture. The paper is therefore organized as follows. The second section provides a ranking of policies as to their transfer efficiency and determines the standard of evaluation, given that no policy is perfect in achieving its goals. The third section explores why political competition does not ensure that an efficient policy instrument is chosen. The following two sections explain the two key theories: enforcement and commitment problems in section four, and information and agency problems in section five. Section six presents the important Grossman-Helpman model of inefficient policy choice that falls outside these two general theories. Section seven describes how policy instrument choice in agriculture is often a discrete outcome in response to a crisis and therefore becomes path dependent, resulting in a status quo bias. Section eight describes how trade agreements can affect policy instrument choice. The final section gives some guidance as to the outstanding issues.

This paper outlines the methodological issues associated with the task of measuring that actual delivered direct protection or taxation to individual agricultural industries, as well as the direct protection or anti-protection to non-agricultural sectors. It begins with a guide to what elements in principle could be measured. There are two key purposes of the distortion estimates being generated by this project are: 1) to provide a long annual time series of indicators showing the extent to which price incentives faced by farmers and food consumers have been distorted directly and indirectly by own-government policies in all major developing, transition and high-income countries, and hence for the world as a whole; and 2) to attribute the price distortion estimates for each farm product to specific border or domestic policy measures, so they can serve as inputs into various types of partial and general equilibrium economic models for estimating the effects of those various policies on such things as national and international agricultural markets, farm value added, income inequality, poverty, and national, regional and global welfare.