An international panel set up to review whether economically-developed countries are keeping their promises to Africa said this week that progress in talks on a new global trade deal could help combat the current rise in food prices. Peter Draper explains how the two are linked.
The causes of rising food prices are reasonably well-established. The consequences are daily becoming more apparent, especially in Africa. What is less well-understood is the implications a successful conclusion to the World Trade Organization's Doha Round of negotiations on a new trade deal might have for African agriculture and consumers of food.
The basic cause of rising food prices is a growing mismatch between supply of food and demand for it. Rising energy prices feeding through energy-intensive supply-chains; diversion of grains to biofuels production in response to concerns over global warming; drought in key producing countries (and the prospect of future "climate shocks"); and declining productivity in food production (accompanied by decreasing stocks) are the main factors inhibiting supply. Demand is rising in tandem with population growth in Asia particularly, within which rapidly growing urban middle classes in China and India are consuming more grain-fed meat products.
The consequence has been a sudden and sustained rapid rise in prices of key grain products. The ongoing decline of the U.S. dollar has exacerbated this situation. Poor, especially urban, consumers worldwide are caught in a rapidly escalating inflationary spiral encompassing food and transport prices, with second-round price spirals beginning to take hold in a range of countries and central banks powerless to reverse the trend. Stagflation (cost-push inflation combined with stagnant economic growth and rising unemployment), long thought banished to the 1970s, is now back on the radar.
Unfortunately the drivers will remain in place for the foreseeable future meaning that food price increases may be with us for some time – until demand and supply move back into a sustainable balance. Whilst there are tentative indications this may be happening already, the question is whether this would be at higher price levels than the norms of the early part of this millennium. Since it is very difficult, and inadvisable, to manipulate demand the key is to increase supply. This entails a host of measures, including but not limited to trade policy. Most notable is the need for a "New Green Revolution" – promoting dramatically increased yields. Consequently the World Bank and others are gearing up for major investments in agriculture in poor countries, and especially in Africa.
What role do trade instruments play in this broader puzzle? And what impact could a Doha deal have?
In the short-term trade taxes are the most effective trade instruments. A number of countries have unilaterally reduced or eliminated tariffs on imported food products in order to minimise price increases. Assuming domestic producers are not displaced by subsidised imports this is a critical policy tool. Unfortunately a number of major exporters have imposed export taxes in order to keep supplies available domestically. This is a terrible response: it discourages domestic producers from producing more, and it withdraws product from global markets thus raising prices further. Somehow the use of this instrument needs to be disciplined, although I am not optimistic it will be.
Regarding Doha, start with subsidies. These keep prices artificially low. Two broad kinds are typically paid by developed country governments: domestic support (price supports; production payments; environmental payments; etc.); and export subsidies. In the Doha round the former will be capped and generally rendered "less trade distorting" whereas the latter are slated for elimination by 2013. In both cases if subsidies are removed prices for the products concerned will rise.
What about quotas? Those countries lucky enough to have quotas giving them preferential access into developed country markets can, in principle, restrict supply and raise prices. Expanding those quotas may therefore have a damping effect on prices through introducing new competitors. As tariffs are reduced the potential for greater competition in those markets will increase further. Hence the end result could be substantial price reductions.
Much depends on the products concerned and the interplay between quota expansion, tariff reduction and subsidy removal. Subsidy reductions would be good for African farmers and in principle should encourage more commercial production for export markets – as currently high food prices are now doing. Offsetting this, tariff reductions and quota expansions may not suit some African farmers: they benefit from preferential access into European markets especially; reduced tariffs and expanded quotas mean the margin of preference will diminish. Overall, the major beneficiaries from such reforms, at least in the short to medium term, are likely to be major agricultural exporters in North America, Latin America, Southeast Asia, and Australasia.
In the medium to long-term, as African farmers' litany of constraints are addressed and hopefully removed, and assuming climate change adaptation is adequately managed, they too should benefit.
There is growing international interest in Africa's obvious comparative advantage in the international trading system: land abundance. The longer the food crisis endures, the greater the pressure on African governments (at least those in control of fertile lands) to release land to commercial producers, domestic and foreign, for food and biofuels production. This will pose substantial political challenges regarding land control and ownership, and in time will usher in sweeping changes to the stewardship of land across the continent. Given the centrality of land and urbanization to African politics, in the context of generally weak institutional states this could mean a rocky ride ahead – or major opportunities, depending on one's perspective.
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What implications does this analysis hold? Major changes are afoot in the management of land and agricultural production; African states need to prioritise this sector in partnership with donors in order to build capacities to meet the challenges ahead. And whilst reform of the global agricultural trading regime is long overdue and pressing, it should not be conducted in a big-bang fashion. A product-specific approach may be appropriate – for example remove cotton subsidies whilst reducing those on wheat. Each country needs its own assessment of the political possibilities and the balance of interests at play here. Hopefully such processes are well under way.
Peter Draper, trade research fellow at the South African Institute of International Affairs, is one of a team at the institute who contribute a regular column on trade to AllAfrica.
Useful Resources:
Food and Agriculture Organization, food price index
