Ernesto Valenzuela

Measuring Distortions to Agricultural Incentives, Revisited

Notwithstanding the tariffication component of the Uruguay Round Agreement on Agriculture, import tariffs on farm products continue to provide an incomplete indication of the extent to which agricultural producer and consumer incentives are distorted in national markets. Especially in developing countries, non-agricultural policies indirectly impact agricultural and food markets. Empirical analysis aimed at monitoring distortions to agricultural incentives thus need to examine both agricultural and non-agricultural policy measures including import or export taxes, subsidies and quantitative restrictions, plus domestic taxes or subsidies on farm outputs or inputs and consumer subsidies for food staples. This paper addresses the practical methodological issues that need to be faced when attempting to undertake such a measurement task in developing countries. The approach is illustrated in two ways: by presenting estimates of nominal and relative rates of assistance to farmers in China for the period 1981 to 2005; and by summarizing estimates from an economy-wide computable general equilibrium model of the effects on agricultural versus non-agricultural markets of the projects measured distortions globally as of 2004.

The relative importance of global agricultural subsidies and market access

The claim by global trade modelers that the potential contribution to global economic welfare of removing agricultural subsidies is less than one-tenth of that from removing agricultural tariffs puzzles many observers. To help explain that result, the authors first compare the OECD and model-based estimates of the extent of the producer distortions (leaving aside consumer distortions), and show that 75 percent of total support is provided by market access barriers when account is taken of all forms of support to farmers and to agricultural processors globally, and only 19 percent to domestic farm subsidies. Then the authors provide a back-of-the-envelope (BOTE) calculation of the welfare cost of those distortions. Assuming unitary supply and demand elasticities, that BOTE analysis suggests 86 percent of the welfare cost is due to tariffs and only 6 percent to domestic farm subsidies. When the higher costs associated with the greater variability of trade measures relative to domestic support are accounted for, the BOTE estimate of the latters share falls to 4 percent. This is close to the 5 percent generated by the most commonly used global model (GTAP) and reported in the papers final section.

Methodology for Measuring Distortions to Agricultural Incentives

This is a product of a research project on Distortions to Agricultural Incentives, under the leadership of Kym Anderson of the World Bank’s Development Research Group (www.worldbank.org/agdistortions). The authors are grateful for invaluable comments are due to many project participants including Ibrahim Elbadawi, Bruce Gardner, Esteban Jara, Tim Josling, Will Masters, Alan Matthews, Peter Lloyd, Johan Swinnen, Alberto Valdes and Alex Winter-Nelson, and for funding from World Bank Trust Funds provided by the governments of Ireland, Japan, the Netherlands (BNPP) and the United Kingdom (DfID).

Assessing Global Computable General Equilibrium Model Validity Using Agricultural Price Volatility

Computable General Equilibrium (CGE) models are commonly used for global agricultural market analysis. Concerns are sometimes raised, however, about the quality of their output since key parameters may not be econometrically estimated and little emphasis is generally given to model assessment. This article addresses the latter issue by developing an approach to validating CGE models based on the ability to reproduce observed price volatility in agricultural markets. We show how patterns in the deviations between model predictions and validation criteria can be used to identify the weak points of a model and guide development of improved specifications with firmer empirical foundations.

The World Trade Organization's Doha Cotton Initiative: A Tale of Two Issues

Four West African nations have demanded that the World Trade Organizations Doha Development Agenda include a Cotton Initiative that involves two issues: cutting cotton subsidies and tariffs, and assisting farm productivity growth in Africa. The authors provide estimates of the potential economic impacts of (1) complete or partial removal of cotton subsidies and import tariffs globally, and (2) cotton productivity growth through the adoption of genetically modified (GM) cotton varieties. They use the latest version of the GTAP database and model. Their results confirm that-unlike for other agricultural subsidies and tariffs-for cotton it is subsidy reductions rather than tariff cuts that would make by far the largest impact. For Sub-Saharan Africa the potential gains are huge relative to the effects on that region of reforming other merchandise trade policies. And they could be more than doubled if that reform provided the cash for farmers to take advantage of the biotechnology revolution and adopt GM cotton varieties. But those potential gains, and the affordability of switching to costly GM seed, depend crucially on the extent to which high-income countries are willing to lower domestic support to their cotton farmers.

Recent and Prospective Adoption of Genetically Modified Cotton: A Global Computable General Equilibrium Analysis of Economic Impacts

This article provides estimates of the economic impact of initial adoption of genetically modified (GM) cotton and of its potential impacts beyond the few countries where it is currently common. Use is made of the latest version of the GTAP database and model. Our results suggest that if other developing countries—especially in sub‐Saharan Africa—were to follow the lead of China, South Africa, and most recently India, adoption of GM cotton varieties could provide even larger proportionate gains to farmer and national welfare than in those early‐adopting countries. Furthermore, those estimated gains are shown to exceed—and reinforce—those from a successful campaign under the WTO’s Doha Development Agenda to reduce/remove cotton subsidies and import tariffs globally.

General equilibrium effects of price distortions on global markets, farm incomes and welfare

Earnings from farming in many developing countries have been depressed by a pro-urban bias in own-country policies as well as by Governments of richer countries favoring their farmers with import barriers and subsidies. Both sets of policies, which reduce national and global economic welfare and contribute to global inequality and poverty, have been undergoing reform since the 1980s. Using the linkage model of the global economy and modifications to the pre-release of version 7 of the Global Trade Analysis Project (GTAP) protection database for 2004, this paper seeks to compare the effect of those reforms to date with those that would come from removing remaining agricultural and trade policies. Two sets of results are thus presented: one showing the effects of policy reforms between 1980-84 and 2004, the other showing what the removal of remaining distortions as of 2004 could be. Both sets of results indicate improvements in the real value of agricultural output and exports, the real returns to farm land and unskilled labor, and real net farm incomes in most developing country regions despite the adverse effect on the international terms of trade for some developing countries that are net food importers or are enjoying preferential access to agricultural markets of high-income countries. Landowners in those high-income countries still offering their farmers price supports could readily afford to compensate them from the benefits of removing remaining agricultural protectionism.

Agricultural Distortion Patterns Since the 1950s: What Needs Explaining?

Among the most important influences on the long-run economic growth and distribution of global welfare are trade-related policy developments in individual countries and their combined effect on other countries via the terms of trade in international markets. Some of the policy developments of the past half century have happened quite suddenly and been transformational. They include the end of colonization around 1960, the creation of the Common Agricultural Policy in Europe in 1962, the floating of exchange rates and associated liberalization, deregulation, privatization, and democratization in the mid-1980s in many countries, and the opening of China in 1979, Vietnam in 1986, and Eastern Europe following the fall of the Berlin Wall in 1989 and the demise of the Soviet Union in 1991. Less newsworthy and hence less noticed are the influences of policies that change only gradually in the course of economic development as comparative advantages evolve. This chapter is focused on summarizing a new database that sheds light on the combined impact of both types of trade-related policy developments over the past half century on distortions to agricultural incentives and thus also to consumer prices for food. For advanced economies, the most commonly articulated reason for farm trade restrictions has been to protect domestic producers from import competition as they come under competitive pressure to shed labor as the economy grows.

Recent and Prospective Adoption of Genetically Modified Cotton : A Global CGE Analysis of Economic Impacts

This paper provides estimates of the economic impact of initial adoption of genetically modified (GM) cotton and of its potential impacts beyond the few countries where it is currently common. Use is made of the latest version of the GTAP database and model. Our results suggest that by following the lead of China, South Africa and most recently India, adoption of GM cotton varieties by other developing countries – especially in Sub-Saharan Africa – could provide even larger proportionate gains to farmer and national welfare than in those early-adopting countries. Furthermore, those estimated gains are shown to exceed – and reinforce – those from a successful campaign under the WTO’s Doha Development Agenda to reduce/remove cotton subsidies and import tariffs globally.

How would global trade liberalization affect rural and regional incomes in Australia

Agricultural protection in rich countries, which had depressed Australian farm incomes via its impact on Australia’s terms of trade, has diminished over the past two decades. So too has agricultural export taxation in poor countries, which has had the opposite impact on those terms of trade. Meanwhile, however, import protection for developing country farmers has been steadily growing. To what extent are Australian farmers and rural regions still adversely affected by farm and non-farm price- and trade-distortive policies abroad? This paper draws on new estimates of the current extent of those domestic and foreign distortions: first, to model their net impact on Australia’s terms of trade (using the World Bank’s Linkage model of the global economy); and second, to model the effects of that terms of trade impact on output and real incomes in rural versus urban and other regions and households within Australia as of 2004 (using Monash’s multi-regional TERM model of the Australian economy).