Problems for Developing the Free Trade Area of the Americas: Subsidies in Agriculture

Transcription

1 Problems for Developing the Free Trade Area of the Americas: Subsidies in Agriculture Roberto Junguito and Enrique Ospina Banco de la Republica, Colombia Introduction Since the early 1980s, the world has seen an increasing trend towards opening all national economies to free trade. The successful completion in 1994 of the GATT negotiations and the subsequent establishment of the World Trade Organization provide evidence of worldwide interest in a free international trading environment. At the same time, nations in geopolitical regions with common trade interests are forming alliances and free trade areas, signing treaties and cooperation agreements to ease restrictions and to increase trade flows among them. Thus, countries in the European Union and the Pacific Basin are committing themselves to integration, and are taking the first steps in that direction. In the Western Hemisphere, the Andean Community and CARICOM are regional agreements that have functioned since the late 1960s and early 1970s, while NAFTA and MERCOSUR were initiated during the 1990s. The success of these treaties and negotiations is essential to achieving any progress in hemispheric free trade goals within the proposed Free Trade Area of the Americas (FTAA). In theory, domestic and international prices for any good or commodity expressed in a common currency should be the same in all markets, if transportation and handling costs are accounted for. However, government intervention in the form of supports and subsidies prevent these price levels from being the same and even from moving in the same direction. These policies are a barrier to economic integration among countries, whether bilateral, regional or hemispheric. Despite all the progress made to date on global trade liberalization, subsidies remain among the most pervasive obstacles to free trade, particularly within the context of trade in agricultural commodities. Agricultural Subsidies Protection through price supports tends to favor importable goods at the cost of exportable goods. Importantly, agriculture in most developing countries is mainly composed of exportable products. The case of rice in Colombia is noteworthy. When Colombia was a riceimporting country, domestic prices were set well above international levels in order to promote production and protect against imports. Measures were taken to encourage production, and over time Colombia became self-sufficient, and even an exporter, of rice. At that point,

2 protection disappeared and producer price supports were suppressed, fundamentally changing the way the crop was treated. Sugar is a commodity featuring a strong international market that represents about onethird of total production and intense government intervention. It is produced worldwide both in beet and cane form. Government intervention is so strong it has been estimated that almost two-thirds of sugar producer revenues are the result of direct government subsidies and price supports (Devadoos and Kropf). Input price subsidies are based on the rationale that, in order to promote domestic production and increase productivity, it is important to intensify the use of inputs. As such, prices of agricultural inputs such as fertilizer are subsidized directly, or credit is provided at a subsidized interest rate. However, it should be noted that in developing countries that base their industrial development on protection, agricultural inputs produced locally end up being taxed in net terms rather than subsidized (Valdes). Furthermore, the value of input subsidies tends to be less than the losses incurred by low output prices, and rich farmers have greater access to these subsidized inputs than poor farmers. Export subsidies stimulate exports by supporting prices of exportable products through tax exemptions and other transfer mechanisms to make them more competitive in international markets. They are acceptable within the WTO framework only when they are designed as temporary measures to respond to situations of overvalued exchange rates and low international commodity prices. However, they tend to increase excess supplies of exportable goods which may result in depressed world prices (Valdes and McCalla). In the agricultural sectors of developing countries it is common to find agricultural credit subsidies based on below market interest rates. The literature on the subject finds that their overall incidence has not been positive because agricultural output has not increased and rural income distribution has in fact worsened, as the major beneficiaries tend to be larger farmers (Adams and Von Pischke). Discrimination against Agriculture in Latin America In the 1970s and 1980s countries in the Western Hemisphere adopted price support policies as well as input, export and credit subsidies. Despite this fact, the overall impact of macroeconomic and sectoral policies discriminated against the agricultural sector. A World Bank study (Kruger, Schiff and Valdes) analyzed in detail the direct and indirect price interventions for various countries. The study found that for five major Latin-American nations (Argentina, Brazil, Chile, Colombia and the Dominican Republic) the relative prices of agricultural commodities would have been higher in the absence of government intervention. They found that indirect taxation, due to high levels of protection for non-agricultural importable goods and misalignment of exchange rates accounted for two-thirds of the total taxation of agriculture. 2

3 Such discrimination was significantly reduced as a result of the structural reforms adopted in the 1980s to face the debt crisis. With the support of the International Monetary Fund and the World Bank, Latin-American countries undertook a realignment of exchange rates, reduction of their fiscal deficits and the opening up of trade, by lowering tariffs and eliminating non-tariff barriers. The World Bank extended loans conditioned on the elimination of subsidies and the opening of trade (Schu and Junguito). Recent Policy Adjustments in Latin America Agriculture In fact, more recent research on agricultural price and trade policy in Latin America confirms that most Latin American countries at the beginning of the 1990s embarked on a process of lowering tariffs, eliminating quantitative restrictions and removing export taxes (Valdes). In this way, countries sought to comply with WTO rules and prepared themselves for their participation in the different integration arrangements. The result was a remarkable growth in intra-regional trade. A few examples of the new type of agricultural policies employed in selected countries of the Americas are presented here as illustration. Mexico s Procampo At the time NAFTA was ratified in 1993, the Government of Mexico instituted a comprehensive program entitled Programa de Apoyos Directos al Ingreso del Productor, better known as Procampo. This is an innovative agricultural support program scheme, by which the State provides direct transfers to commodity producers based on the area planted for a period of 15 years. It is expected to cost US$4 billion per year, during the first ten years and subsidies should begin to decrease until they reach the NAFTA goal in the 15 th year. The program is designed to assist the modernization of agriculture and to provide a cushion for producers who face international competition. Procampo represents a new kind of public support in Latin America as it substitutes direct payments (e.g., prices, credit, insurance) for traditional agricultural support programs. This program reaches producers directly and efficiently without the need for the bureaucracy of traditional programs. It has important redistribution effects in the Mexican agricultural economy. Since payments are not linked to production they do not generate surpluses. Moreover, producers are free to switch to more profitable production alternatives or to leave agriculture altogether. Argentina: Protection of Importable Goods Until the end of the 1980s, agricultural policy in Argentina was characterized by protecting domestic production of importable commodities and taxing exportable commodities. Domestically produced importable goods were protected by means of tariffs and quantity restrictions. Policy reform began in 1987, with a general reduction of the export tax. By

4 export taxes on almost all commodities were eliminated and all state-operated market boards were closed. By 1992, export tax rebates were introduced. The literature has shown that the import substitution strategy Argentina followed up to the 1980s, together with the protection of agriculture, imposed high costs in terms of resource allocation on the country s agricultural sector (Cavallo; Mundlak). Colombia: Price Bands During the 1970s and 1980s, Columbia s agricultural policy aimed at self-sufficiency in food production through higher domestic prices (Jaramillo; Valdes). Thus, the Colombian Government intervened in agricultural markets (e.g., cereals, beans, milk) by means of support prices and controls exercised by the national agricultural marketing agency (IDEMA), which also had a monopoly on imports and commodity storage. As a result of the trade liberalization that began in 1991, government intervention has diminished significantly. Minimum guaranteed prices and price bands have replaced support prices in order to stabilize the production of the main tradable products. Management of inventories and agricultural imports has been transferred to private hands, with the Government becoming the purchaser of last resort in areas where marketing is restricted and communications poor. Thus, public sector interventions are directed to provide incentives for further private investment in activities such as buying and marketing enterprise development (Jaramillo). Moreover, the system of price bands was extended to all the countries in the Andean Community by Chile: Protecting Importable Goods Chile has not intervened in setting the prices of its agricultural export commodities. However, in the case of domestically produced commodities such as wheat, sugar and vegetable oil, a price band system has been implemented based on the notion of reducing price instability for producers. The general trend has been to reduce this protection and eliminate subsidies for, and taxes on, exportable goods. The level of protection has increased since 1990, mainly due to a drop in world prices and to adjustments in the agricultural price bands. Most of the income transfers result from price-based interventions, the bulk of which are directed at importable goods. Brazil: Minimum Price Program In addition to the Minimum Price Program, the Brazilian Government has traditionally maintained input subsidies for fertilizers and an elaborate credit support program for agriculture, together with a complex system of quantitative restrictions and tariffs. Importable goods were taxed and in general exportable goods were supported, but the pattern of government support is different from that of other countries. Brazil s support and transfer program covered a large 4

5 number of commodities. Macroeconomic instability resulting from high inflation rates and fiscal deficits contributed to the scaling down of the minimum price mechanism (Valdes). US: The 1996 FAIR Act The Federal Agricultural Improvement and Reform Act of 1996, known as the FAIR Act, has been under implementation since April of It is the most fundamental change in US Farm Policy in many years, because it redesigned the income support programs and terminated supply management programs for major field crop producers. This legislation will expire in The price and deficiency payment programs that existed since the 1970s were substituted by a decoupled payment program for seven years, not related to either market prices or current plantings. A fundamental component addressed environmental and conservation concerns to retire land from production and to expand preserved lands. The Act is focused on market development, with particular emphasis on emerging markets with high potential for export growth. Concluding Remarks Measuring subsidies is a rather complex task and comparing them across countries is risky at best. The WTO, as a result of the different rounds of negotiations before the 1994 Marrakesh Agreement, established definitions for the types of support policies that constitute acceptable interventions. In general, the countries of the Americas should have little difficulty adjusting their policies to conform to these requirements (Valdes and McCalla). Overall, subsidies impose burdens on the economy in terms of fiscal costs and economic efficiency, often distorting competitive conditions among producers (Clements, Hugounenq, and Schwartz). The import substitution policies implemented up to the 1980s in countries such as Argentina and Chile, together with protectionism, resulted in high costs in terms of resource allocation, negatively affecting the agricultural sectors of these countries. This was contrary to what such policies were designed to accomplish (Cavallo; Mundlak). McCalla concluded in 1993, just a few months before the completion of the GATT negotiations and the signing of the Marrakesh Agreement, that current trade policy was not moving from zero trade to free trade. Rather, it was moving from one set of interventions or restrictions to another. The policies of selected countries in the Americas, illustrate that point. Analyses of the effects of the Uruguay Round are being conducted for different countries, scenarios and situations. There will be a myriad of studies in a field that is just beginning. The studies referenced in this paper confirm that prices of major agricultural commodities will increase in the next 5-10 years as a result of the Uruguay Round, and that shifts in their supply and demand may result as they move to areas where production is more efficient (Devadoos and Kropf; Hassan; Valdes and McCalla). 5

6 There is little question that as we move towards the goal of achieving a Free Trade Area of the Americas agreement, government intervention, though being reduced, remains a barrier to the economic integration of our countries. This is true for the developed nations of the hemisphere, as well as those that are in the process of developing to higher levels of economic well being. It took over seven years to conclude the Uruguay Round Agreement, with many breakdowns in the process and many difficulties along the way. The promoters of free trade in the Americas should keep this in mind and employ the lessons learned. Governments throughout the Americas should also take note that public intervention in agriculture has often produced results contrary to their intentions. Consequently, they should approach integration with policies and incentives that foster real economic growth and increase agricultural productivity. These policies and incentives should, primarily, improve the human resources and infrastructure so the sector can become more competitive, and they should leave the era of subsidies and interventions in the past. In this way, the local governments could play the role of promoters and facilitators of a process, and leave to the private sector the more prominent role, one that will provide a better chance for success. 6

7 REFERENCES Adams, D.W., and Von Pischke, J.D Microenterprise credit programs: déja vu. World Development, 20: Barbosa, J. H. and Jaramillo, C.F La evolución de la política agrícola colombiana y el equivalente del subsidio al productor ESP. Planeación y Desarrollo, XXVI: Bullock, J.B Future directions for agricultural policy. American Journal of Agricultural Economics, 66: Cavallo, D Agriculture and Economic Growth. Paper presented at the 20 th International Conference of Agricultural Economists, Buenos Aires. Clements, B., Hugounenq, R. and Schwartz, G Government subsidies: concepts, international trends and reform options. IMF working paper 91. Devadoos, S. and Kropf, J Impacts of trade liberalizations under the Uruguay Round on the world sugar market. Agricultural Economics,15: Hassan, Z. A Agreement on Agriculture in the Uruguay Round of GATT: from Punta del Este to Marrakesh. Agricultural Economics, 15: Jaramillo, C.F Apertura, Crisis y Recuperación. Tercer Mundo, Santafé de Bogotá. Krueger, A.O., Schiff, M. and Valdes, A, The Political Economy of Agricultural Price Interventions in Latin-America, World Bank and International Center for Economic Growth, Washington, D.C./ Panamá City. Krueger, A.O Political economy of agricultural policy. Public Choice, 87, 1-2: Lee, D.R Western Hemisphere Economic Integration: Implications and Prospects for International Trade. American Journal of Agricultural Economics, 77: McCalla, A.F Agricultural trade liberalization: the ever elusive goal. American Journal of Agricultural Economics, 75: Mundlak, Y. Agricultural Growth and World Development. Paper presented at the 20 th International Conference of Agricultural Economists, Buenos Aires. Rueda, X La transmisión de los precios externos a los mercados domésticos en la agricultura colombiana Planeación y Desarrollo, XXVI:

8 Perry. S Los peligros del acuerdo agrícola de la ronda Uruguay de Gatt. Planeación y Desarrollo, XXVI: Schu, G.E. and Junguito, R Trade and agriculture development in the 1980 s and challenges for the 1990 s. Latin America, Agricultural Economics, 8: U.S. Department of Agriculture (USDA) Agricultural Baseline Projections to 2005, Reflecting the 1996 Farm Act. World Agriculture and Outlook Board, Staff Report No. WAOB-97-1, Washington DC. Valdes, A Surveillance of agricultural price and trade policy in Latin America during major policy reforms. World Bank Discussion Paper 349, Washington DC. Valdes, A. and McCalla, A.F The Uruguay Round and agricultural policies in developing countries and economies in transition. Food Policy, 21: