By Eugenio Díaz-Bonilla, Senior Research Fellow and Head of IFPRI's Latin America and Caribbean Program
The G33 countries recently submitted a report (in which IFPRI work was quoted [1]) to the WTO Committee on Agriculture arguing for the need to negotiate a special safeguard mechanism (SSM) for developing countries. This mechanism would essentially make possible the use of temporary restraints on agricultural imports when those imports affect local producers, particularly resource-poor, small-scale farmers. The submission dismisses other possible ways of extending a safety net for such farmers (paragraph 1.10); it also cites the report on the "Price Volatility and Food Security" by the High Level Experts on Food Security and Nutrition of FAO, which suggests the need for "[s]afeguard measures that effectively protect against import surges" and "[f]lexibility to raise tariffs according to pre-defined conditions, possibly including price bands for vital crops" (paragraph 1.11). Finally, the submission insists (para 1.12) on the “implementation of an effective and operational Special Safeguard Mechanism (SSM)” to be able to effectively address the negative impacts of short-term international price volatilities on the resource-poor, small-scale farmers. [2]
In this post, I will briefly discuss the idea of the SSM and whether it is truly an effective tool to protect poor producers.
In my recent book , I discuss the widely divergent size of average land holdings around the world; this data was also mentioned in the G33 submission. While some of this data may need to be updated (for example, anecdotal evidence tends to suggest that farm sizes have increased in Africa south of the Sahara; similarly, it may be useful to present LAC data both with and without Brazil), it remains clear there is a large disparity in the size of land holdings and that this disparity is one of the structural problems that make agricultural negotiations so complex. Sometimes, countries that are considered “competitive” and with “large” producers present drastic trade liberalization proposals that may not take into account the problems of countries considered “less or un-competitive” with scores of “small farmers". On the other hand, it is not uncommon for less competitive countries to advance protectionist trade policies that would hurt their own poor and vulnerable populations, even when asserting that the protection is needed to help the poor. It should be noted that with very few exceptions, the large majority of small-scale farmers are net food consumers; therefore, anything that keeps food prices artificially up would negatively affect the food consumption of the poor and vulnerable. Research shows that the application of an SSM-like safeguard to cereals in developing countries may in fact result in a decline in overall food consumption in these countries. In fact, one specific version of the SSM that has been discussed (a volume-based safeguard) would in fact increase poverty significantly .
The G33 submission mentions price volatility in world markets as a reason for the SSM. An important point to consider in this regard is the definition of volatility itself. In the ongoing debates about these topics, there remains some confusion about what volatility means and how such volatility, in its various definitions , may affect producers’ and consumers’ decisions and well-being. Under many of the possible definitions, volatility in international prices has declined significantly in recent years, which would limit its importance as a rationale for the SSM. Furthermore, some research shows that adjusting import tariffs and other trade measures in response to price volatility in world markets would actually lead to more volatility in those markets.
In fact, people often use the term “volatility” to refer to price levels as being “too high” or “too low” at some point in time (and this is different from prices actually being volatile). The G33 submission seems to be concerned about future prices being potentially too low, thus harming the incomes of poor producers (even though this would help poor consumers). Of course, this is the traditional food price dilemma: governments are always pursuing the dream of “high” prices for producers and “low” prices for consumers. A single policy instrument (such as the SSM) would not solve this dilemma.
Whatever definition of price volatility is used, the implications for producers and consumers depend on much more than just international prices. Producer prices also depend on the exchange rate, trade policies (import taxes, import quotas, and the like), marketing margins set by the traders and processors, transportation costs, and many other factors. IFPRI research (part of which was cited in the G33 submission) shows that volatility in domestic markets in countries in Africa south of the Sahara where governments intervened the most trying to stabilize prices was higher than volatility in international markets. Thus, government interventions in those countries appeared to be a more significant factor in domestic volatility than volatility in international markets. Other studies have pointed out that find that domestic macroeconomic policies plays a large role in domestic price volatility. For instance, in the case of Ethiopia in 2008 , the rationing of foreign exchange (a macroeconomic policy) resulted in the domestic price of some staples, such as wheat, going clearly above world prices.
Finally, poor and food-insecure populations are affected by many shocks in addition to food price fluctuations, including (1) violence (wars, civil strife, community violence, and domestic violence); (2) natural disasters; (3) harvest failure; (4) disease or injury; (5) unemployment or under employment; and (6) shocks that worsen the relative price of food compared to income. In particular, violent conflicts, macroeconomic crises, and extreme weather events are now the major causes of poverty and food insecurity in the world.
Therefore, if the concern is for poor and vulnerable populations, focusing on only one factor (prices being too high or too low) and on only one instrument (the SSM, for instance) is too narrow a policy and will most likely be ineffective. I believe that it would be far more productive for trade negotiators to dedicate more time to address the specific challenges faced by poor and vulnerable populations through properly designed and funded safety nets. To dismiss this option with the argument that “it costs money” ignores the fact that protection also costs money, being a tax equivalent privately collected by producers (particularly the larger ones) and paid for by consumers (with larger negative impacts on poorer consumers).
Safety nets have the advantage of focusing directly on the problem that is supposed to be addressed (poverty, in this case). Safety nets also can include not only poor consumers, but also poor and vulnerable agricultural producers if their incomes fall below a national poverty line due to harvest failures, sharp price declines, or other factors. In general, safety nets should be based on poverty considerations, despite a household’s status as a food producer or a food consumer.
In this regard, I think it would be more appropriate, both for poor and vulnerable populations and for the international trading system in general, if the current special safeguard, which has been used as a non-transparent mechanism of permanent protection for producers (and not necessarily poor producers), were to be eliminated in favor of more effective safety net programs. In addition, it would be useful for policies in the WTO Green Box aimed at the provision of public goods (e.g. agricultural research) to be separated from measures targeted at decoupled income support; within the latter group, there also needs to be a further distinction between income payments to farmers in general (which should be capped under WTO rules) and poverty-focused safety nets (which should not be capped).
[1] TN/AG/GEN/45. 29 May 2017. THE SHORT-TERM PRICE VOLATILITY IN AGRICULTURE NEED FOR STABILITY FOR SMALL-SCALE FARMERS IN DEVELOPING COUNTRY MEMBERS. SUBMISSION BY THE G-33).
[2] The submission also cites several recent IFPRI publications, including Diaz-Bonilla (2015) ; Minot 2014 ; and Ceballos et al (2015) .