Agricultural market liberalisation remains important, including for food security

While a number of countries have continued to liberalise their agricultural markets by decreasing levels of trade-distorting producer support and increasing levels of international competition through reducing barriers to market access, further liberalisation remains important.

Higher international prices for many agricultural products have in part been responsible for the shift in focus of agricultural support policies. They have also helped some governments move away from export subsidies. However, without any international agreement that will lock in existing reforms, and continue the trend to lower levels of protection, there remains a risk that if price trends were to reverse, there could be a shift back towards protectionism.

The risks of no further multilateral agreement on agriculture could be significant. Bouet and Laborde (2009) suggest that without an agreement, a shift towards protectionism by countries increasing tariffs to bound rates would be costly in both trade and welfare terms. These costs could be significantly mitigated through the signing of an agreement.

Agricultural trade and open markets are also an important requirement for countries to achieve key objectives such as improving food security and encouraging rural development to reduce poverty (OECD 2013; Box 1.4). The use of market insulating policies are likely to be counterproductive to these desired objectives in the longer term by increasing domestic prices paid for food by consumers while providing no extra incentive for improved productivity for producers, thereby ultimately having little impact on producer incomes. Further, for large agricultural producers, recent World Bank research suggests that the imposition of export restrictions to lower domestic prices in the face of sustained increases in world prices will be net costly, and particularly so for poor rural households (Jacoby, 2013).

In the longer term, policies that lead to rising incomes of poorer households, such as those targeted at promoting productivity, which can include education and training, innovation, infrastructure policies, and domestic competition-based reform, among others, are of critical importance. It is particularly important that government policies do not unnecessarily hinder the ability of producers to alter the production mix and expand output in the face of sustained price increases. This process is crucial to the flow on income effects from price increases that help deliver much of the improvement in incomes of poor households. Such policy prescriptions are generally accepted by most.

But such policies take time to have effects and poor households within countries may still be threatened by sudden price movements. Governments should rightly act to help alleviate some of the effects of price increases as they can increase poverty levels and lead to social unrest, as seen by the riots in some countries in response to the 2007-08 rapid price increases.

Redistribution policies can help cushion some of the impacts of such price movements and importantly avoid many of the unintended impacts that stem from other less targeted policy interventions. Indeed, such policies are becoming increasingly important in their own right with the distribution of the gains from economic growth in many developing countries becoming less equal over time.

Key features of the future outlook for agricultural markets also suggest that trade and agricultural market liberalisation are likely to play an increasingly important role in maintaining access to food, limiting price pressures and improving food security more generally. Both climate change and population growth, coupled with increased prosperity, will play an increasingly important role in food supply and demand, and therefore influence food security.

Box 1.4. Trade and food security

Food security is a multi-dimensional concept. People will only be food secure when sufficient food is available, they have access to it, and it is well utilised. A fourth requirement is the stability of those three dimensions over time. Trade openness can help a country improve food security across each of these four dimensions.

On availability, trade allows for products to flow from surplus to deficit areas. Longer-term trends in agricultural markets show increasing volumes of trade (export shares of production for most products have increased). Openness to trade also increases the diversity of products on offer to consumers, opening up the potential for a more varied diet.

On accessibility, trade allows for production to occur where it is of lowest cost to do so. This increases productivity and lowers prices compared to what they may otherwise be. International food prices have fallen in real terms over the longer run, making food more affordable to poorer households.

On utilisation, open markets are generally beneficial for economic growth, which if a country's institutional settings are correct, promotes development and reductions in poverty. As countries develop, they also invest more heavily in health systems, sanitation and clean water, education, and other social infrastructure. These investments, coupled with higher incomes, contribute positively to food utilisation.

On stability, open markets generally improve the stability of supply, for the simple reason that the risks associated with own food production exceed those of pooled production on international markets. For the same reason, open markets can provide a means to hedge against the volatility in price movements caused by changes in domestic production. Further, trade openness provides a solid ground for continued economic growth and good domestic policy setting, thereby helping provide a platform for stability in the provision of services that aid in the utilisation of food.

Source: OECD (2014b).

Climate change will alter production patterns and variability on both a domestic and international scale. For individual countries, it is likely that food production will become more variable, with changes also possible in terms of land use and the variety of products produced domestically. Trade openness allows countries to secure supplies from a wider range of producers, who are likely to face different climate risks than those of domestic producers.

Across the world, populations will continue to grow and become richer. This will both increase the demand for food and create shifts in relative food demands with a likely greater demand for proteins and more processed products. Trade openness provides a number of advantages in helping countries better adjust to these developments. It provides for a greater diversity of products to be available and accessible for consumers - helping consumers meet their full range of nutritional needs. It also allows for the benefits from changing patterns of specialisation to be realised and provides access to global and regional agro-food value chains. With income growth, there has been increased demand for more processed products, which means for many commodities, the value chain involved in getting the product from the farm gate to the final consumer is being extended. Participation in value chains is facilitated by low barriers to trade and improved regulatory coherence that allow products at various states of transformation to flow across borders: in other words, imports play an important role in creating a competitive export sector. It is a mistake to believe that imposing barriers on inputs into value chains, for example by restricting the export of raw materials, will help spur competitive value-adding within the domestic economy, thereby allowing producers to “capture” the value created in upstream processing. Such policies only increase the final price paid by consumers, with little influence on producer returns and domestic food security.

In respect of both climate change and population growth, trade openness will allow production to be centred in areas of comparative advantage. This helps place downward pressure on world prices, which is particularly important for accessibility when demand is rising, when a country’s domestic production is becoming more variable, and when climate change may lead to permanent (and unknown) shifts in comparative advantage.

With greater participation in global and regional markets, based around comparative advantages, the opportunities for economic growth are maximised. If domestic policy settings are robust, this provides for the best opportunities for income growth amongst the poor, reducing poverty and therefore having the greatest impact on improving food security domestically.

 
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