Food and Agricultural Trade Policy Council
Centre for Trade and Sustainable Development (ICTSD)
Thank you very much for inviting me to this event.
I am very happy to be here and look forward to benefiting from interaction
with this distinguished audience. I want to talk about some important
aspects in the context of the international trade system and agriculture
price volatility. One fact that is clear to me is that this is a very
complex issue. In fact, I realized this very early in my life.
I come from a farming family in the Gangetic plain of India. The concept of
agriculture price volatility was introduced to me initially through the
worry lines on the foreheads of my elders. I also learnt early that there
was a link between the volume of production and price of the agricultural
output in the market. Since the family largely provided its food from its
own produce, we felt safer when the production output was large, even if the
price was lower. Nonetheless, we felt elated when the prices were higher. In
sharp contrast, the landless agriculture workers and consumers in the city
were devastated. For me, early lessons included that it was not volatility
per se but the effect of volatility which should be a major focus, and that
any price change could be a source of joy to some and sorrow to others. This
showed the importance of balancing different effects and stabilising
volatility. I also saw the varying degrees of vulnerability amongst small
and larger farmers. The dangers of a “Double V”, i.e. volatility and
vulnerability, were high for most of the rural population.
Thus, the importance of having a higher output and stability of income was
abundantly clear to even the children in my village. So, as some of us would
say, “The issue is so clear that even a child knows the importance of
both higher agricultural output and stability of income and prices”. This
meant increasing productivity and addressing the variability of both
yield and prices of agriculture.
I grew up to be an economist with a focus on development and international
trade, and the issue of agriculture price volatility has been with me ever
since, in some form or other. Among the various additional insights that I
have gained include that international trade is crucial for agriculture
growth and improving opportunities for all nations. Especially for
developing countries and net food importers, international markets are
their economic lifeblood, their passport to greater development and better
With additional important insights over time, I realized that:
World prices and price variability are
influenced both by domestic agriculture policy, and by other factors such
as input costs, including fertiliser (i.e. oil prices), or changes in
supply and demand (e.g. due to droughts, biofuel production, rapid growth,
Many of these factors are outside the scope of
agriculture policy and some are even beyond the control of policy makers,
Since volatility of agriculture prices occurs
for a variety of reasons, completely stabilising agricultural prices is
not possible. In fact, some price volatility may even be desirable so as
to indicate market signals.
In general, price spikes are a consequence of
unusually low levels of aggregate stocks or due to major policy shifts.
It is therefore necessary to develop improved
buffer stock practices, and to understand the implications of major policy
Appropriate market signals are an important part
of any regulatory regime to create efficiency.
Some existing major policy interventions in
agriculture not only produce extensive adverse incentives, they are also
seen by many as inherently unfair. For example, while subsidised exporters
may be insulated from the vagaries of international agriculture markets,
unsubsidised exporters are exposed to the highs and lows of price swings.
These distortions make it difficult to
adequately address the two types of policies needed with respect to
agriculture price volatility. One is to mitigate price volatility. The
other, to address the effects of the price volatility.
To improve the situation, we require a
combination of policies, both domestic policies and those dealing with the
international trade market.
Policy regimes which improve stability and
predictability include a stable and predictable international trade
The WTO system is the multilateral trade system
providing stability and predictability in international trade. In addition
to its disciplines, this system provides a forum for:
greater transparency and information on
sharing concerns and perspectives on appropriate
working on reducing major distortions in global
markets so that appropriate incentive mechanisms are in place;
keeping markets open and thus enhancing
opportunities, together with the possibility of flexible response in
specified, justified situations; and
Aid for Trade, i.e. assistance to promote
supply-side capabilities for poorer countries to better integrate in the
international trading system and benefit from additional opportunities.
Subsequent to the food price crisis of 2008, some
experts are of the view that we have now entered a new era of more unstable
food prices on international markets. The food crisis has also underlined a
need to contain the volatility of food prices. The crisis also focused the
attention of many nations on increasing their domestic agricultural
At the time of high prices in 2008, a number of countries resorted inter
alia to trade policies, though with an interesting dichotomy with respect to
their imports and exports of food items. For imported food items, nations
reduced tariffs and applied trade facilitation measures to reduce domestic
prices. These nations therefore relied on international markets to help them
deal with the effects of the price rise. A majority of the countries
resorting to trade policy measures were in this category of implementing
market-opening policies. In contrast, a number of nations exporting certain
food items restricted their exports to keep their domestic prices low for
consumers. These trade restrictions caused global prices to rise even more,
leading to widespread alarm and concern, and even increased tensions.
Many have noted that trade policy restraints are very blunt instruments for
dealing with volatility, especially in the modern era of myriad financial
instruments for risk management by food buyers and sellers. Furthermore,
beggar-thy-neighbour policies diminish the international public good
contribution of trade openness. In contrast, some analysts examining
agriculture price volatility have argued that to keep domestic prices
stable, nations should be able to raise import tariffs and impose
other restraints when required. However, the suggestion for exporting
nations is different, namely that they should be more disciplined and not
impose export restraints. Before we move further and take a closer look
at these suggestions, one point seems to be clear. Exporters of agriculture
products are NOT being advised to impose trade barriers. On the contrary.
They are being advised to have greater disciplines with respect to their
Thus, the advice is for importers of the food products to increase tariffs
in order to stabilise agriculture price volatility. To me, this is a very
partial assessment of the situation. Let me explain by taking a closer look
at specific situations faced by nations.
We have seen that for food imports, countries reduce tariffs on imports when
agriculture prices rise in the international market. This action keeps
domestic prices more stable and makes food more affordable. It would not
make sense to increase tariffs in such a situation.
Let us now consider the situation when food prices are falling. Basically
any advice to raise import tariffs in this situation to achieve greater
price stability in a food-importing country is an advice to increase the
price of its import requirements.
There is something which makes me uneasy about this policy suggestion. And
this is not because I have seen how the hungry behave politically when they
see deliberate policy steps to limit their access to food. It is much more
because of the extensive acute poverty in many countries. As Amartya Sen has
explained in his work on poverty and famines, an increase in food price
means for the poor a substantive loss of entitlements to food. It
makes a difference between life and death, between malnutrition and being
healthy. We saw this phenomenon on a global scale in recent times when the
food crisis of 2008 led to the number of persons being affected by
malnutrition crossing 1 billion.
The argument for raising tariffs is to encourage domestic farmers. I feel
that two alternative major initiatives would be much more meaningful. One is
to focus on removing or substantially reducing the policy-induced
distortions that prevail in agricultural markets, and thus correct the
incentive structure and create a more level playing field. This will also
enhance the incentives to unsubsidized domestic producers.
The other important initiative is to increase production through a major
increase in agriculture investment. The potential for increasing
productivity is immense, especially for smaller farmers. This needs
co-ordinated effort at both the national and international level.
The huge scope of this work is evident, for example, in the document
produced by the Alliance for a Green Revolution in Africa, on the “Strategy
for an African Green Revolution”. If you examine this document for the
perspectives on trade per se, the relevant views do not agree with the
suggestion to increase import restraints. The views seem to emphasise the
opposite, and I quote, “Targeted government investment in infrastructure,
and policy reform that eases cross-border trade, would likewise expand
markets. ... As an organization active in countries across sub-Saharan
Africa, AGRA [Alliance for a Green Revolution in Africa] is particularly
well placed to encourage regional initiatives such as ... Advocating for
improved regional trade agreements to remove trade barriers and build
Let us now consider another possible reason for suggesting higher import
tariffs. It may be to help certain nations, normally developed nations, to
operate their supply management policies. This suggestion, however,
overlooks political economy issues arising in the context of interactions
among nations. It is noteworthy that many of these countries are more
capable of assessing and dealing with the implications of price volatility.
Certain developed countries in these groups are presently the subject of
strong requests to reduce existing major distortions in their agricultural
regime. Suggestions to introduce another form of distortion in the
international market in this situation is potentially short-sighted.
An important point often overlooked in practice is that the presence of
these distortions in some nations encourage other nations to also introduce
their own distortions. Developing countries which find it difficult to
provide subsidies are under pressure to resort to the distortions that are
easily available to them, namely tariffs. Such actions do not result in any
levelling of the field. In fact they are not advisable. For food importers,
imposing tariffs on food items would be like shooting themselves in their
stomach to feed their ego. Similarly, import tariffs on raw materials would
introduce non-competitiveness in value-added activities. Moreover, as
Professor Lerner showed us long ago, import tariffs are also equivalent to
taxes on exports.
Further, policy analysts deal with second-round effects differently for
agriculture price volatility in comparison to the analysis used for
suggesting trade measures. For agriculture price volatility and its effects,
even elementary analysis in Economics 101, such as the cobweb theorem,
usually takes account of developments over more than one period of time.
However, for suggesting imposition of trade barriers, the analysis quickly
becomes oriented towards a single period analysis, without much
consideration of the subsequent effects of such policies. Apart from other
effects, such actions would give rise to negative reactions and increase
tensions in today's world with its changed political economy and power
balances, rapid communications, heightened sensitivity to international
policies taken to limit economic opportunities, and a major focus on whether
or not policies of larger nations are fair. This would be counterproductive
in several crucial areas where co-operative efforts from the international
community are required, including food crisis, energy crisis, financial
crisis, climate change, and of course the functioning and improvements in
the international trade system.
Even if you do agree with me in the criticism of agriculture trade
restrictions and distortions, you may be thinking that someone like me is
expected to make such a point. Allow me to quote Mr Jacques Diouf, Director
General of the FAO. Regarding international trade he has stated that we must
“devise agricultural development policies, rules and mechanisms that can
forge an international trade system that is not only free but also
equitable”. He elaborated further that, “We must correct the present system
that generates world food insecurity on account of international market
distortions resulting from agricultural subsidies, customs tariffs and
technical barriers to trade, but also from a skewed distribution of
resources from official development assistance.” His reference to customs
tariffs here is as a barrier to trade which needs to be reduced, not as a
policy which should raise further barriers.
Success with development initiatives contributes to improve the capacity to
deal with the effects of agriculture price variability. We need an
international trade system and international efforts to adequately address
these concerns. An indication of the type of international trade system
required is given by Target 2 of Goal 8 of the Millennium Development Goals
or MDGs, which states as follows: “Develop further an open, rule-based,
predictable, non-discriminatory trading and financial system”. These are the
same conditions as used to describe the WTO system. We can thus see the
relevance of the WTO system. The focus is not to devise a new system but to
improve the existing one for better achieving the relevant objectives.
Negotiations in the Doha Round are precisely an effort to do this.
Similar to a system to address development concerns, we need an
international trade system which helps mitigate agriculture price
volatility. This would be a system which maintains stability and
predictability in the international market.
Would it not be ideal if for agriculture price volatility we require an
international trade system which is similar to that required for addressing
If we consider the various analyses of the 2008 agriculture price rise, an
important conclusion is that no new international regulatory mechanisms are
required in the area of international trade. The basic structure of the
existing mechanism is thus adequate, i.e. that contained in the WTO. This
does not mean that improvements in certain areas are not required. They
certainly are needed, and as I mentioned just now, WTO members are making
such efforts through the Doha Round negotiations.
Therefore, to address price volatility too, we need an open, rule-based,
predictable and non-discriminatory trading system. This is the system which
is encompassed in the WTO regime.
The WTO system provides greater transparency, enhances stability and
predictability of the regime in both domestic and international markets;
allows flexibility for addressing national concerns relating to farmers and
consumers; embodies flexibility to establish relevant market mechanisms, to
make disciplined public policy response to mitigate risks, and provide
insurance to farmers or poor consumers. Moreover, it has permanent fora to
make co-operative efforts, settle disputes amicably, and better manage the
international market interactions.
The WTO system provides the flexibility to implement the necessary policies,
including those arising from the various analyses of recent agriculture
price volatility. These studies emphasise a number of initiatives,
including: developing better buffer stocks mechanisms, and improving the
availability of information and response time in the market to enhance the
efficiency of markets. These would also address to some extent the
speculative activities in agriculture markets. Likewise, the importance of
putting in place new international regulatory mechanisms for the financial
sector is seen as a very high priority. Another noteworthy point is an
explicit recognition that trade finance is a different type of financial
instrument and needs to be both encouraged and be less strictly regulated
than finance in general. Better availability of trade finance would make it
easier to conduct agriculture trade to fill the gaps in supply and demand.
Trade finance needs less rigid regulation because repayment of trade finance
is quicker and more certain in comparison to other types of finance. For
this reason, the WTO too has been highlighting the importance of
facilitating the provision of trade finance, and has worked with other
international institutions to make this possible.
All these policy initiatives are possible within the WTO regime. Moreover,
we need some additional reforms which are possible only under a multilateral
trading system, i.e. the WTO.
Since agriculture markets tend to be thin, major distortions in agriculture
can lead to production and trade effects which in turn would lead to greater
price volatility. Reduction or elimination of these distortions can help
reduce the unevenness in world production and partly mitigate geographical
risk in food supplies. The Doha Round agriculture negotiations focus inter
alia on reduction in major domestic support, elimination of export
subsidies, and improved market access opportunities through larger market
access and reduction in tariff escalation. In addition to encouraging more
efficient production of agriculture and facilitating access to international
agriculture markets, this should help to reduce price volatility. The WTO
framework thus provides the possibility of reducing the major distortions in
agriculture and improving the disciplines required for greater
predictability and stability. With such improved disciplines and more level
playing field, together with investment to increase productivity in regions
where production is presently adversely affected by these distortions, we
would over time have stronger markets and domestic abilities. These efforts
would contribute to more predictable trade flows and a reduction in
agriculture price volatility.
Since special concern has been expressed about export restraints, I want to
give a quick comment on this issue. Some WTO members have put forward a
proposal in the Doha negotiations for strengthened disciplines on export
prohibitions and restrictions. Taking account of the discussion in the
Comprehensive Framework of Action developed by the UN Secretary General's
High Level Task Force on Food Security, we could emphasise four distinct
points with respect to these export restraints. One, food aid should be
exempt from any export restraint. Two, countries should be encouraged to
consider alternatives which make export restraints their last rather than
first option. Three, the importance of following WTO procedures of
transparency and prior consultations. Four, the possibility of improving the
disciplines through Doha Round negotiations.
A successful Doha Round will result in a number of additional opportunities
not only in agriculture, but also for industrial products and services. We
have seen that factors beyond agriculture per se are also relevant for
agriculture price volatility. These additional opportunities will help
improve overall efficiency and income-earning opportunities and allow policy
makers to better address the effects of price volatility.
An important requisite for addressing price volatility is for nations to
address it together in a co-operative way, with better awareness of each
other's sensitivities and of the multiple links between various areas and
initiatives. The existing WTO Committees and Councils provide very useful
fora for such efforts. This fora was used to great effect in the recent
financial crisis to diminish fears on account of the potential for
widespread use of protectionist measures. These fora are similarly available
for other trade-related concerns. They also provide the possibilities of
discussing and better informing WTO members on emerging concerns which may
be relevant for dealing with agriculture price volatility through the
international trade system.
Thus in the context of price volatility and other relevant objectives, we
have a well-established and robust international trade system in the WTO.
This can be improved further through a successful result in the Doha Round.
We should both keep this system strong, and make concerted efforts to bring
the Doha Round negotiations to a successful conclusion.
Thank you very much.
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