Does freer farm trade help poor?

What one might call the Kedgley Question.

Or in the Economists case, the Doha Dilemma. This post refers to an article in the print edition of the Economist for 29 May 2008.

Illustration by Jac Depczyk

THE global food crisis has shone a harsh spotlight on the consequences of government meddling in agriculture. Poor people go hungry, in part, because Americans pay their farmers to divert crops from food to fuel. But in at least two areas, the crisis has emboldened those who are sceptical of free markets in food.

The first is “food security”. Politicians in rich and poor countries have seized on recent price spikes as proof that free farm trade is a risky business and self-sufficiency a worthy goal. The second area concerns the poor. For years reformers have advocated freer trade on the grounds that market distortions, particularly the rich world’s subsidies, depress prices and hurt rural areas in poor countries, where three-quarters of the world’s indigent live. The Doha round of trade talks is dubbed the “development round” in large part because of its focus on farms. But now high food prices are being blamed for hurting the poor (the topic of a big United Nations summit in Rome starting on June 3rd).

As the Economist says:-

The argument for self-sufficiency is easiest to counter. Anyone who believes autarky is the route to food security should look at starving North Korea. In world markets trade barriers, not the lack of them, have exacerbated the mess. The commodities that have seen the biggest price spikes are those which tend to be traded least. Only 6% of global rice production, for instance, flows across borders.

Thus:-

The notion that free trade precludes food security is plainly wrong-headed.

Adam’s emphasis. Thus Jim Anderton is to be commended in his comments about the proposals by the Greens.

Further, all the political parties need to take the time and effort to understand what is going on in this area, rather than propose politically attractive populist solution in a kneejerk re-action to consumer concerns.

The second question is the more difficult, and the article spends considerable effort on discussing the inter-meshing of trade, food prices and poverty reduction. The article is worth reading in full.

It highlights some interesting effects of different types of reform. Research from the World Bank is cited on what might happen if trade was truly free. in part is would appear that some negative impact may result from the lavish nature of existing subsidies. The suggestion is that reducing tariffs is beneficial to consumers, whilst subsidy reduction may cause prices to rise.

Again this would tend to suggest that the Kedgley Question is the wrong question. It is not trade that is the problem, but the fact that globally in rich and poor countries a system of subsidies has arisen in addition to tariff barriers.

But as always things are not simple, the research quoted tends to indicate:-

that high food prices, on average, transfer income from richer to poorer households. And prices are not the only route through which poverty is affected. Higher farm income boosts demand for rural labour, increasing wages for landless peasants and others who buy rather than grow their food. Several studies show this income effect can outweigh the initial price effect. Finally, the farm sector itself can grow. Decades of underinvestment in agriculture have left many poor countries reliant on imports: over time that can change.

This moves us towards considering the need for significant improvements in governance, research and development and in order to feed the growing world population re-consideration of attitudes towards GM crops.

It should be obvious in addition that a reliance on organic foods is not going to provide the answer nor will plots for each family when we are talking over the next few decades of some 3 billion extra mouths to feed; plus the depletion of many fossil aquifers through inappropriate depletion.

The Economist article records that World Bank research suggests, of the countries covered by the study, that:-

Fully free trade in farm goods would reduce poverty in 13 countries while raising it in two.

Yet recently the World Bank has according to the article been taking what appears to be a somewhat contradictory track, based on another study. On analysis this may not be the case as apparently the countries considered were not the same in both sets of studies.

even if higher prices for staples exacerbate poverty in some countries, at least in the short term, the effect may be outweighed by increased demand for other farm exports, such as processed goods, as rich countries cut tariffs.

The article concludes:-

These subtleties suggest two conclusions. First, the bank, and others, should beware sweeping generalisations about the impact of food prices on the poor. Second, the nature of trade reform matters.

Removing rich-country subsidies on staple goods, the focus of much debate in the Doha round, may be less useful in the fight against poverty than cutting tariffs would be.

The food-price crisis has not hurt the case for freer farm trade. But it has shown how important it is to get it right.

Indeed – so it would be much better to examine the issue by regard to the factors affecting different countries and to understand the impact change is likely to have.

Interestingly, tariff reduction appears more likely to help the poor.

This conclusion might conceivably enable a new avenue of approach to be taken on agriculture with regard to the conclusion of the Doha Round? This is conjecture on Adam’s part and he would be interested to know how that stacks up from an economic standpoint.

It does appear though that the answer to the Kedgley Question is that free trade, appropriately structured is likely to be beneficial to the poor in respect of food security. Thus undermining the position taken by the NZ Greens amongst others.