Global Development: Views from the Center

Zoellick’s speech was indeed full of innovative initiatives that captured how a global institution such as the Bank should be agile enough to address current pressing global problems. The ‘New Deal for Global Food Policy’ and the call to end the Doha impasse all made the connection with today’s current economic problems - high food prices being one of them. Zoellick noted that “a fairer and more open global trading system for agriculture will give more opportunities – and confidence- to African and other developing country farmers to expand production.” Bill Cline (of CGD and Peterson), in his analysis of trade policy on global poverty concluded that, “a rise of world agricultural prices by 10 percent as the consequence of agricultural trade liberalization would reduce the incidence of poverty by 201.5 million persons, or by about 8 percent.”

However, these estimates average out the benefits and costs to the poor and across countries. Equally important is understanding the impact on the losers of agricultural liberalization - the net buyers of food - who are often the poor (and some times the poorest of the poor) or near- poor. If liberalization pushes prices of staples up further, this worsens the situation for poor net food buyers. Hoekman and Olarreaga, eds. (Global Trade an Poor Nations, World Bank, 2006), one of the more detailed and thorough study to date, show by how much. In all of the countries (with the exception of Bolivia) analyzed in this book, the Doha effects of what the authors call the "business-as-usual" (i.e., most likely) Doha scenario on the real income of the poor is negative. In Ethiopia the fall in income for the poor is estimated at -0.4 percent; in Zambia the average effect is negative for the country as a whole (estimated at -.4 percent) and it is higher for the three poorest deciles: -.6, -.48 and -.85 percent, respectively; in Cambodia, the country as a whole and the poorest deciles would see their real incomes fall, and even under a Doha-plus (what the authors call the "ambitious scenario") in which gains from liberalization are positive for the country as a whole, the average real income of the net rice buyers would fall by 1.1 percent with higher declines for the first three deciles; in Vietnam "...Rural households gain by 0.1 percent on average, whereas urban households lose by 1.5 percent. The greatest losses are for the poorest 40 percent of urban households." (p. 158); "... .Nicaragua could expect an aggregate loss equivalent to 0.6 percent of household per capita spending, with the poorer households losing more" (p. 220). In general, the negative effects are primarily the result of the increase in the cost of living due to the increase in the price of staples. This translates into a more expensive consumption basket for the poor and hence a loss of purchasing power.

While the just described orders of magnitude may seem small, they are negative nonetheless and affect people many of whom are living on less than a dollar a day. Granted that, according to the authors, under a more ambitious liberalization scenario and if countries undertake complementary actions to improve supply capacity, reduce transport costs from remote areas, increase farm productivity, liberalize further, and improve the investment climate, most of the negative effects would vanish. But all of these are big "if's" and, in addition, their positive impact will only be felt in the medium to long-run. In the meantime, as poor countries and the poor throughout the world are already grappling with high commodity prices, discussions about agriculture liberalization cannot ignore the thousands of poor net food buyers who are likely to be losers with a further increase of food prices. Otherwise the Doha-round will not live up to its name.

Nora Lustig, Shapiro Visiting Professor of International Affairs, George Washington University, nlustig@gwu.edu.

Nora, your point is well taken. Prices have risen sharply, and most countries have reduced import tariffs, raised export taxes, and some banned exports and fixed consumer prices using subsidies to millers to make up the difference between high border prices and low controlled domestic prices. Doha would raise international prices, but not by much for food (World Development Report estimates are about 5-6% which pales compared to recent price increases). Doha is important mainly for cotton (20-25%) which is vital for West African farmers.

The key issue to discuss the Cline argument is whether poor people are net buyers or net sellers of food. This is typically very poorly quantified. The urban poor and rural landless are evidently on the buyer side, hence negatively affected by the price hike and further negatively affected by Doha (net of course of a positive growth and employment effect that needs to be taken into account, including coming from other sectors of the economy). What is generally overlooked is that the majority of poor small land holders are, in fact, net buyers of food, and hence also negatively affected. We did a careful characterization of this for a number of countries in the WDR. This is especially true for LAC.

Hence, it is important to carefully assess who are the poor, and on what side of the market they are. The difficulty, however, is to go beyond a static incidence analysis when discussing what Doha may do. A worthwhile subject to pursue. Is there room for global action, beyond what countries can do for themselves with instruments such as safety nets in the short run and supply response in the longer run? It seems that there is room for coordination in policy responses as countries are hurting each others in restricting trade. And there could be room for an emergency fund to help with cash those most in distress beyond what the WFP is doing with food.