Agricultural Policy, Food Prices and Poverty

Presentation to the School of International Development, University of East Anglia

23 September 2009

Alan MatthewsProfessor of European Agricultural Policy

Trinity College DublinIreland

Email: alan.matthews@tcd.ie

Outline

• What would a development-friendly EU agricultural policy look like?– The CAP in transition– Consequences of the food price spike 2007-

08 for our traditional understanding of EU agricultural policy impacts

– Implications for EU agricultural policy in the context of improving global food security

Section 1.The CAP in transition

The CAP and developing countries- traditional views

• Support to EU agriculture encourages overproduction, dumping of surpluses, depresses world prices to detriment of developing country farmers– Food aid the extreme example

• Tariff escalation discourages value added production

• Stabilising prices for EU farmers destabilised prices for the rest of the world

• Market restrictions have discouraged developing countries from pursuing agriculture-led growth strategies

Agricultural policy an example of policy incoherence?

• Oxfam– The Great EU sugar scam: how Europe's sugar

regime is devastating livelihoods in the developing world (2002)

– Milking the CAP: How Europe's dairy regime is devastating livelihoods in the developing world (2002)

– Stop the Dumping! How EU agricultural subsidies are damaging livelihoods in the developing world (2002)

– Dumping on the World: how EU sugar policies hurt poor countries (2004)

• Confirmed by developing country negotiating positions in the Doha Round

Impact of trade liberalisation on world markets – three country model

Pus PeuPw

ESus ESeu

ESt

IMrow

Pw

P’w

Defences of CAP

• EU is the single largest importer of agri-food products from developing countries, open for business

• Agricultural preferences reduce tariff barriers to many developing countries as well as privileging access to EU prices for some preferred countries, e.g. sugar, bananas

• Many of the low-income developing countries are net food importers, so would be damaged by CAP reform (Panagariya)

• Evidence that OECD policies have influenced developing country agricultural policies is limited

Has OECD agric protection influenced developing countries ag policies?

Source: World Bank Agricultural Distortions project

A new agenda

• The CAP has changed, new policy instruments• Developing countries now less homogeneous• Food safety standards• Technical barriers to trade (labelling,

sustainability criteria) • Supply chain issues (supermarkets)• Consumer preferences (attitudes to GMOs, food

miles, ethical purchasing)• Are low food prices bad for developing

countries?

The CAP is changing….• Support prices for EU farmers have been reduced in

successive reforms…• … replaced by direct payments• …and greater emphasis on environmental and rural

development payments• Expenditure on export subsidies has been falling

– In EU jargon, from market price support to direct payments– In WTO language, from amber and blue box to green box

support

• The EU becoming a net importer of an increasing number of commodities

EU notifications of domestic support to the WTO

Changing EU farm support

Tariffs applied by →

EU25 US Asia developed

Cairns developed

Applied to ↓

EU25 - 5.8 22.2 15.7

US 16.2 - 28.9 5.1

Mediterranean 7.3 4.0 14.1 3.7

Sub Saharan Africa

6.7 3.0 12.0 0.7

Cairns developing 18.3 3.8 24.0 5.9

China 13.5 5.1 21.7 8.7

South Asia 14.4 1.8 33.7 1.8

Rest of World 15.1 2.1 17.4 2.6

Average 16.7 4.7 22.5 10.8

EU agricultural tariff barriers

Summary

• «Fortress Europe»– Very high bound tariffs on key commodities– But very large set of preferences– As a result, protection is very uneven across

countries willing to export to the EU– Tariffs, including tariff escalation, are not a

serious problem for LDCs or ACP countries (but non tariff issues)

– They are a problem for Asian and South American and transition countries

Section 2.The food price spike 2007-08 and

hunger

Food prices and poverty- a new orthodoxy?

“Rising food prices are a major concern because high food prices bring significant and immediate setbacks for poverty reduction, social stability, inflation and a rules-based trading system…. If food becomes permanently more expensive, long-term economic growth in the poorest countries could slow down.”- Nora Lustig, Thought for Food: The Challenges of Coping with Soaring Food Prices, Center for Global Development Working Paper No 155, 2008

The food price paradox• Senauer and Sur (2001)

– A 20% increase in food prices in 2025 relative to a baseline will lead to an increase of 440 million in the number of undernourished

“Declining food prices have a powerful income effect for the poor, for whom food spending usually accounts for at least 50% and as much as 80% of total expenditures.

• Historical evidence– Economic growth often stimulated by an agricultural productivity

break-through which was associated with lower food prices– The huge drop in poverty in China initiated by reforms which led to

higher food prices• World Bank and others

– Successful conclusion to the agricultural negotiations in the Doha Round has potential to lift tens of millions out of poverty by raising world market prices

• Are low food prices pro-poor?

High food prices – good or bad for the poor?

• OECD country agricultural trade liberalisation traditionally seen as pro-poor– Based on gains to unskilled labour in CGE models– 75% of the poor live in rural areas

• Recent price spike represents multiple impacts of a Doha Round agreement on agriculture

• So do developing countries feel better off?....

Household food security impacts – short run

• Impacts for specific countries will depend on– The extent and nature of price transmission

(influenced both by government policies in developing countries and market structures)

– The structure of poverty in individual countries

• Impacts operate through food prices and household incomes

• Higher prices will benefit net food sellers, but hurt net food buyers

• Which are the poor – net buyers or sellers?

The poor are net food purchasers

• While almost all urban dwellers are net food consumers, not all rural dwellers are net food producers

• In only two countries in recent sample does the share of net selling households even in rural areas exceed 50 per cent

• Net food sellers will typically be those farmers with more land

• Even in rural areas, the greater share of the poor are net food buyers

Barrett Food Policy (2008)- East and Southern Africa

• A large share of smallholders – commonly the majority – are net buyers of the food crops they produce– Households are not autarchic, but sellers and buyers at different

times of the year or of a proportion of their supplies/needs

• Most small farmers in the region are hurt, not helped, by policies that increase local prices for staple foodgrains

• “.. policymakers and many development researchers continue to discuss development policy for rural Africa as if all farmers were net sellers of the crops they produce and thus stood to benefit from increased prices. The evidence against that popular belief is by now overwhelming.”

Poverty impacts of higher food prices - methodological caveats

• Household survey estimate of income generally lower than expenditure

• Use of headcount indicator means $1 change in real purchasing power can move household in or out of poverty– Dessus et al. (2008) show that 88% of the increase in urban

poverty depth due to the global increase in food prices is from poor households becoming poorer and only 12% from households falling into poverty.

• Nature of clustering around the poverty line can lead to non-linear relationship between the rate of price increase and the change in poverty– Ivanic and Martin (2008) show that, in rural Peru, the impact of a

20% price rise on the poverty headcount is five times greater than that of a 10% rise

Poverty impacts of higher food prices – short

run

Single staple food, 10 percent price increase assumed

No behavioural responses

Poorest quintiles the worst affected in both urban and rural areas

Even in some countries where rural households gain on average, poorest quintiles lose

Lower bound estimates take both producer and consumer impacts into account

Upper bound estimates only take into account consumer impacts, justified by imperfect price transmission and higher price of fertiliser

Household poverty impacts – longer run

• What happens when substitution and behavioural responses are taken into account?

• Could positive labour market effects (increased demand for labour) overcome the negative impact of higher food prices on the purchasing power of the rural poor?– YES (Ravillion 1990 study for rice in Bangladesh)

• Can farm productivity increase in response to increase in price of food staples?

• How important are the multiplier effects of increased farm incomes for rural businesses?

• Methodology of choice is Computable General Equilibrium analysis but constrained by severe methodological and data issues in linking macro-micro models

Recent evidence• Christiaensen and Demery (2007), using PE approach,

conclude that policies leading to higher food prices are likely to increase poverty, even after factoring in countervailing wage and productivity effects.

• Ivanic and Martin (2008)– Study first-order welfare impacts (including wage effects) in ten

countries for range of commodities– Overall impact of higher food prices on poverty is generally

adverse– Extrapolating (heroically!) from the average percentage point

increase in poverty rates in the sample, they conclude that the actual increase in food prices 2005-early 2008 may have led to increase in global poverty of 105 million

• Polaski et al (2008), using CGE approach for India, find higher rice prices benefit most poor households, with labour markets playing a largely positive role in transmitting price effects

More on the characteristics of net food buyers and sellers

• Aksoy and Isik-Dikmelik (2008)– Based on household surveys for nine countries,

agrees there are more poor net food buyers than sellers

– But suggests that half these households are marginal net food sellers, thus price increases will have small impacts on their welfare

– Notes that the average incomes are net food buyers are higher than the average incomes of net food sellers, so higher food prices transfer income from rich buyers to poorer sellers and thus are ‘pro-poor’.

– Note that policies of low food prices in developing countries (e.g. through rural taxation) penalised agriculture to the detriment of overall economic growth

Strong gender dimension to poverty impacts

• Female-headed households typically fare worse than male-headed households– Even though female-headed housholds are

not disproportionately represented among the poor

– Female-headed households tend to spend a greater proportion of their income on food

– In rural areas, they generally have less access to land and don’t depend as much on staple sales

Source: FAO 2008

Source: Lustig 2008

Source: Lustig 2008

Should we reverse view on benefits of agricultural trade liberalisation for DCs?

• Characteristics of the recent price spike– Speed of shock – demand responds more

quickly than supply– Food price shock accompanied by energy

price shock, so benefits mitigated– Benefits are concentrated, while losers are

many– Nonetheless, further evidence on the mixed

consequences of OECD agricultural trade liberalisation

The structural shift in the ‘farm problem’ paradigm

• The farm problem : agricultural supply capacity growing faster than demand

• Always an empirical stylised fact• Recent price spikes due to demand outrunning supply,

but…• Productivity growth will respond to higher prices and the

treadmill would resume…– Despite land, water constraints and climate change

• …except that the link between food and energy markets now creates a new paradigm on the demand side

• Given expectations of rising real energy prices, food prices will follow

Implications of the structural shift

• An end to Prebisch-Singer?– Rising real prices for commodities, including

agricultural commodities– Also, falling real prices for manufactures– However, mechanism is the link with energy

prices, which has ambiguous implications for agricultural supply response

• Implications for developing countries will depend on their resource endowments of land, natural resources, labour and capital

Food prices and development

• The dilemma– Declining real food prices are a huge boost to living

standards– But for many low-income countries the poverty

multiplier from agriculture-led growth far higher than for other growth strategies (minerals, industry)

– Energising the economic viability of rural areas through shift in terms of trade towards agriculture has significant potential to reduce poverty and hunger over time

Section 3.What implications for CAP reform

Stylised view of attitudes to EU policy interventions

World prices

1980s-mid-2000s Post food price spike

CAP response to the food crisis

• The EU response in 2007-08 exacerbated price volatility on world markets

• Calls for the CAP to help assure global food security by stimulating EU production– But if prices high, why do we need more

incentives?– Is food availability the real issue?

CAP response to the food crisis

• Food vs fuel – an old debate– During the 1970s – should we stop eating meat to

make more grain available for poor people?– During the 2000s – should we stop driving cars to

make more grain available for poor people

• There are lots of good reasons why it might be good to eat less meat or drive less often, but would it actually contribute to reduced hunger?

• Better way for EU to contribute would be to increase spending on raising agricultural productivity

Implications for CAP reform

• Growing sense that EU agricultural trade liberalisation may not make as substantial a contribution to development as previously thought– Empirical magnitude smaller in aggregate (reforms,

preferences, supply controls)– Much debate on the status of decoupled payments,

but likely to be reduced by budget pressures after 2013

– Ag policy effects offset by other EU policies, e.g. biofuels, environmental restrictions, possible climate change mitigation (livestock)

What I am not saying…

• That further CAP reform is undesirable– Policy still lacks targeting on legitimate

objectives and contributes to world trade distortions

• That EU biofuels policy makes sense– Inordinate cost of achieving GHG mitigation

targets through switch to biofuels

Development impact of further EU agricultural policy reform

• Effects will be highly differentiated by commodity, by policy instrument and by region

• The development case for change is limited to a few specific commodities (fruits and veg, cotton) and non-CAP issues are increasingly more important.

• For low-income countries, overcoming supply constraints more important than market access concerns