Do changes in agricultural markets require new principles for formulating future agricultural trade and domestic policies?

As noted, there have been some significant changes in trading patterns and the trade policy landscape since the 2000s. Notably, prices have risen, prompting some countries to make use of a range of policy measures that had not been used much in the past, such as export restrictions. Further, many countries have continued to decrease or restructure their support programmes in line with the commitments made under previous WTO agreements.

Exploring the policy landscape also suggests that the motivations behind some countries’ market interventions in agriculture have changed. Underlying the increase in producer support is often a policy objective of increasing production to promote food security and to achieve self-sufficiency targets. However, the instruments at play are very similar to those used in the past by OECD countries. For example, concerns over food security are prompting some governments to implement domestic market price support and stability programmes, often with the help of public stockholding programmes. Similarly, programmes targeted at improving rural incomes and production often make use of interventions aimed at lowering the costs of inputs.

Box 1.3. Principles for agricultural policy design from past OECD analysis

Past OECD analysis has explored ways in which governments can develop policies that can deliver the gains from a market-orientated and trade-exposed agricultural sector while also addressing domestic policy objectives. Central to good agricultural policy making is the explicit definition of measurable policy objectives. With clear objectives, governments are better placed to address objectives and intended beneficiaries directly, thereby avoiding distortions to markets and trade. Specific instruments can be designed to address market failures at their source, and remaining income issues should be resolved with measures targeted to farm households that have persistent income problems. OECD analysis has highlighted the role of decoupling support; targeting and tailoring support programmes to the source of market failures and accounting for the multifunctional character of agriculture; and addressing those negatively affected by reforms through accompanying policy measures or compensation.

Decoupling support from production provides a means to achieve objectives while minimising markets distortions. Payments made directly to farm households elicit a significantly lower production response and result in higher farm incomes compared with policies that seek to do this indirectly by inflating producer prices through trade barriers or market price support schemes. These policies can provide a path for governments to follow to move away from market price support and payments based on output and input use.

Any decoupled payment to producers must be both targeted and tailored to the policy objectives of governments. Income support (or poverty alleviation) payments should be targeted at poor households. Similarly, payments for the production of environmental goods and services should only accrue to those who produce them and not to all producers. And while governments may be tempted to combine payments (e.g. income support and environmental payments) to save on transaction costs, it represents a blunt way to achieve any one objective and risks being ineffective. Agriculture has multifunctional characteristics and can provide, in addition to food, feed and fibre, several non-commodity outputs such as rural community well-being or environmental amenities. In the absence of truly joint production, it is best to stimulate provision of non-commodity outputs through directly targeted measures, rather than broad-based forms of production or price support.

Policy reforms following the principles above, while increasing overall returns to society from agriculture, will adversely affect some. To help those made worse off, and to lessen the political costs of reform, targeted transitional measures are warranted.

The OECD has also investigated policies designed to help manage the risks faced by farmers. This work has highlighted the differences between the types of risks faced and the respective role of government in addressing them. Namely, some level of fluctuations in output or price represent normal risks and should be managed by producers. On the other extreme, there are catastrophic risks from extreme, uncertain and infrequent events that create damage beyond the capacity of farmers or the market to cope. Governments should deal with only such catastrophic risks. The last type of risk, termed marketable risk, lies in between (such as hail damage). Such risk can often be dealt with through market instruments such as insurance, and when such instruments are not available governments should be concerned with creating the institutional environment that allows the market to provide such services.

Source: Tangermann (2014).

The countries that are becoming increasingly active in their domestic agricultural markets also have a different agricultural demographic compared with most OECD countries. Their agricultural sectors are often characterised by a large number of mostly poor producers who face a number of challenges, including relatively low levels of productivity and a lack of access to well-functioning markets.

Of issue then is whether or not these differences would suggest that the previously used domestic support policies that were found to be both ineffective and inefficient in OECD countries would be more efficient and more effective in developing countries?

For OECD countries, past analysis has suggested that good agricultural policy making centres on the key principle of addressing objectives and intended beneficiaries directly, thereby avoiding distortions to markets and trade. Specific instruments should be designed in response to market failures, and remaining income issues should be resolved with measures targeted to farm households that have persistent income problems (Box 1.3). These principles are well supported on theoretical and equity grounds, but have also proven sensible in practice. Undistorted markets (including corrections to ensure that unpriced elements are taken into account) allow resources to flow to their most efficient use, maximising the returns achievable from the agricultural sector and the broader economy. Such policies ensure agricultural incomes and production are both at high and sustainable levels. On practical grounds, avoiding negative international spillovers from domestic policies can create a more respectful and stable international trading environment.

The principle of addressing objectives directly through correcting for market failures and addressing barriers is valid whatever the level of prices prevailing on international markets. Creating distortions, on the other hand, is costly to the economy, at low and at high prices. Avoiding distortions as far as possible therefore remains a critical principle in formulating current policy advice. Further, with the emergence of new major agricultural producers, there is renewed importance in avoiding the pitfalls of past policy paths. Where distortionary policies are used by countries with limited fiscal resources and a large number of rural poor households, developing policies that provide for a more effective and efficient response to targeted market failures are perhaps more important. The ineffective nature of many distortionary policies in addressing policy objectives and the efficiency costs imposed potentially carry a higher opportunity cost as they direct government attention and limited resources away from policies that can, in the long run, overcome the challenges faced by their domestic producers.

 
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