Rising Prices Reinforce Need for Food Security Policies

by Martin Khor from Institute of Science in Society 15 July 2008 The new key to food security is self-sufficiency, not trade, and policies are needed to expand local food production and invigorate the agricultural sector particularly in developing countries Desperate measures to cope with soaring food prices revive debate over food security In response to rising world food prices, some food-importing developing countries have lowered their tariffs to mitigate the high prices of imports. At the World Trade Organisation (WTO), agricultural exporters are questioning the need for the instruments of special products (SP) and special safeguard mechanism (SSM) designed to protect food security, livelihood, and rural development against trade. But the G33 group of developing countries and its members say that their case for SP and SSM has grown even stronger, as the food crisis is due to inadequate production in many developing countries, forcing them to increase their dependence on imports that has now become so costly. Although importing countries can cut tariffs to reduce prices now, in the longer term their farmers will need local markets and incentives for them to revive agriculture production. The current crisis has also revived the debate over food security. In recent years, international financial institutions have promoted the view that cheaper imports make local food production no longer a matter of necessity, and many developing countries reduced food production on the advice of those agencies. The rise in food prices in the past two years has increased the cost of imports and inflated food prices in local markets. This was exacerbated by shortages experienced in countries placing import orders, for rice, for example, only to find supplies cut by export restrictions. The ensuing street protests in many countries have added a considerable sense of urgency to the worsening situation. Suddenly, the paradigm of food security has shifted back to the traditional concept of greater self-sufficiency instead of relying on cheaper imports. In the immediate period, emergency food supplies have to be shipped to affected countries, but the long-term solution must include increased local food production. This raises the question of barriers to local food production and how to overcome those barriers. Barriers to local food production for self-sufficiency The current food crisis has been precipitated by a number of factors including climate extremes, such as the drought that has drastically cut wheat harvests in Australia, the rising cost of inputs, especially oil and oil-based products (fuel, chemical fertilizers and pesticides) and above all, the switch of land use from the production of food to bio-fuels. However, a more important contributing factor is the decline in agriculture in many developing countries that has been happening over the past decades, in most cases, due to the structural adjustment policies of the IMF and World Bank. The countries were asked or advised to dismantle marketing boards and guaranteed prices for farmers' products; to phase out or eliminate subsidies and support for fertilizer, machines, agricultural infrastructure; and to reduce tariffs of food products to very low levels. Many countries that were net exporters or self-sufficient in numerous food crops experienced a decline in local production and a rise in imports that had become cheaper because of the reduced tariff. In addition, some imports are from developed countries that heavily subsidize their food products. Consequently, the local farmers were subjected to unfair competition, and in many cases, failed to survive. How Ghana’s agriculture was destroyed by the World Bank and the IMF Ghana is a case in point. From the 1960s through to the 1980s its policies to promote self-sufficiency in food had involved the government actively encouraging the agricultural sector through marketing, credit and subsidies for inputs. This had facilitated an expansion of food production for example, in rice, tomato, and poultry. But from the mid-1980s onwards and especially in the 1990s under World Bank and International Monetary Fund (IMF) conditionalities - programmes for economic and political reform attached to the provision of funds - the policies for self-sufficiency were reversed. The subsidy for fertilizer was eliminated, and its price rose very significantly. The marketing role of the state was phased out. The system of minimum guaranteed prices for rice and wheat was abolished, as were many state agricultural trading enterprises and the seed agency responsible for producing and distributing seeds to farmers, and subsidized credit also ended. Simultaneously, applied tariffs for most agricultural imports were reduced significantly to the present 20 percent. That, on top of the dismantling of state support, left local farmers unable to compete with imports artificially cheapened by high subsidies, especially in rice, tomato and poultry. Rice output in the 1970s could meet all local needs, but by 2002, imports made up 64 percent of domestic supply. Rice output in the Northern region fell from an annual average of 56 000 tonnes (in 1978-80 to only 27 000 tonnes for the whole country in 1983. In 2003, the US exported 111 000 tonnes of rice to Ghana. In the same year, the US government gave $1.3 billion in subsidies for rice. A government study found that 57 percent of US rice farms would not have covered their cost if they did not receive subsidies. In 2000-2003, the average costs of production and milling of US white rice was $415 per tonne, but it was exported for just $274 per tonne, a price 34 percent below its costs. Tomato was a thriving sector, especially in the Upper East region. As part of a privatization programme, tomato-canning factories were sold off and closed, while tariffs were reduced. This enabled the heavily subsidized EU tomato industry to penetrate Ghana, and displace the livelihoods of tomato farmers and industry employees. Tomato paste imported in Ghana rose from 3 200 tonnes in 1994 to 24 077 tonnes in 2002. Local tomato production has stagnated since 1995, while tomato-based products from Europe made inroads into African markets. In 2004, EU aid for processed tomato products was 298 million euros, and there are many more millions of euros in indirect aid (export refunds, operational funds for producer organisations, etc). Ghana’s poultry sector started to grow in the late 1950s, reaching its prime in the late 1980s and declined steeply in the 1990s. The decline was due to the withdrawal of government support and the reduction of tariffs. Poultry imports rose by 144 percent between 1993 and 2003, and a significant share of this were heavily subsidized poultry from Europe. In 2002, 15 European countries exported 9 010 million tonnes of poultry meat for Euro 928 million, at an average of Euro 809 per tonne. It is estimated that the total subsidy on exported poultry (including export refunds, subsidies for cereals fed to the poultry, etc) was Euro 254 per tonne. Between 1996 and 2002, EU frozen chicken exports to West Africa rose eight-fold, due mainly to import liberalization, practically wiping out the half million chicken farmers in Ghana. In 1992, domestic farmers supplied 95 percent of Ghana’s market, but this share fell to 11 percent in 2001. In 2003, Ghana’s parliament raised the poultry tariff from 20 to 40 percent. This was still much below the bound rate (allowed by the World Trade Organisation) of 99 percent. However, the IMF objected to this move and the new approved tariff was not implemented. The IMF representative in Ghana told Christian Aid that it pointed out to the government the raising of tariff was not a good idea, and the government reflected on it and agreed. Many farmers groups and NGOs in Ghana have protested to the government. WTO completes the debacle Some developments in the trade negotiating arena are also a source of concern. The Doha negotiations at the World Trade Organisation (WTO) are mandated to substantially reduce domestic support in developed countries. But to date, that has not materialised. Another source of concern is the new US Farm Bill. According to several analyses, including those oif the US administration, the Bill will continue the present system of subsidies, and will even expand support in some ways for several commodities. For example, the Bill guarantees that 85 percent of the domestic market for sugar will be met by local production. The Bill also allows a farm family with an income of up to $1.5 million to obtain subsidies, compared to the limit of $200 000 per farmer proposed by the Bush administration. The Bill thus ‘locks in’ the US system and its levels of subsidies for the next 5 years, and also constrains what the US negotiators can offer in the WTO Doha negotiations. A major loophole in the WTO agriculture agreement is that countries are obliged to reduce their bound levels of domestic support that are deemed ‘trade distorting’ but there are no constraints on the amount of subsidies deemed non-distorting or minimally distorting, which are placed in the so-called Green Box. Recent studies have shown, however, that many of the Green Box subsidies are also trade-distorting. The Doha negotiations are unlikely to place new effective disciplines on the Green Box. Therefore, the major subsidizing countries can change the type of domestic subsidies they give, while reducing the "trade-distorting subsidies" and continue to provide similar levels of farm subsidies. Meanwhile, the developing countries are being asked to reduce their agricultural tariffs further. The Chair's proposal at the Doha talks is for a maximum 36 percent tariff cut for developing countries, and 24 percent for small vulnerable economies. This is sizable, and compares with the 24 percent cut in the previous Uruguay Round. Most developing countries are advocating that the instruments of SP and SSM be set up as part of the WTO talks to promote food security and farmers’ livelihoods and rural development. SP would exempt important food products from tariff cuts or at least allow for more lenient cuts. SSM would enable a developing country to impose an additional duty on top of the bound rates in situations of reduced import price or increased import volume, in order to protect the local farmers. However, there is considerable opposition from some exporting countries to having these instruments that can work in an effective way. Free trade agreements reduce tariffs even further In the bilateral or regional free trade agreements involving developed and developing countries, the developing countries are asked to reduce or eliminate their tariffs by even more. For example, in the Economic Partnership Agreements between ACP countries and the EU, the ACP (group of African, Caribbean and Pacific less developed countries) are asked to eliminate their tariffs on 80 percent of their tariff lines over different time periods, among which are agricultural products. Key policies and measures for food security The economic and trade policies followed by many developing countries, often at the advice of international financial institutions, or as part of multilateral and bilateral trade agreements, have contributed to the stunting of the agriculture sector in developing countries. In order to increase food production in developing countries for food security, a number of policies and measures need to be implemented. Developing countries must be allowed to provide adequate support to their agriculture sector and to have a realistic tariff policy to advance their agriculture, especially as developed countries’ subsidies are continuing at a high level. The developed countries should quickly reduce their actual levels of subsidy. The agriculture policy paradigm in developing countries must be allowed to change. Countries should have the policy space to expand public expenditure on agriculture. Governments in developing countries must be allowed to provide and expand support to the agriculture sector. Developing countries should place high priority on expanding local food production. Accompanying measures and policies should thus be put in place. The countries should be allowed to calibrate their agricultural tariffs in such a way as to ensure that the local products can be competitive and the farmers’ livelihoods and incomes are sustained, and national food security assured. The proposals of developing countries (led by the G33) on special products and special safeguard mechanism at the WTO should be supported. Effective instruments that can meet the aims should be established. The policies of the World Bank, IMF and regional development banks should be reviewed and revised as soon as possible, so that they do not continue to be barriers to food security and agricultural development in developing countries. The actual levels (and not just the bound levels) of agricultural domestic subsidies in developed countries should be effectively and substantially reduced. There should also be new and effective disciplines on the Green Box subsidies to ensure that this category does not remain an ‘escape clause’ that allows distorting subsidies detrimental to developing countries. There should be a review of many of the FTAs between developed and developing countries, including the Economic Partnership Agreements between the EU and ACP countries. In light of the food crisis and the changing paradigm on food security, developing countries that have signed or are in the process of negotiating FTAs should ensure that the FTAs provide enough policy space to allow sufficiently high tariffs on agricultural imports to safeguard the principles of food security, farmers' livelihoods and rural development. Developed countries should also not make demands that adversely affect food production in developing countries. Martin Khor is Director of the Third World Network, and this article is a revised and edited version of part of a paper on food crisis and climate change presented at a round-table at the FAO Summit on Food Security in Rome on 4 June 2008. For further details see Khor M. The impact of trade liberalization on agriculture in developing countries: the experience of Ghana. TWN, Penang, 2008.