Only days ahead of next week’s make-or-break World Trade Organization meeting in Hong Kong, where a final push will be made to reach an agreement to liberalize agricultural trade, the FAO warned that the benefits of trade reform may not reach the poor unless urgent complementary policies and investments are made. The State of Food and Agriculture 2005 (SOFA 2005) examines agricultural trade and poverty, seeking to answer the question: Can trade work for the poor?
According to SOFA 2005, the answer is yes, but trade liberalization alone is not enough. Policies and investments must be put in place to allow the poor to benefit from trade opportunities and to protect the vulnerable against trade-related shocks. “Agricultural trade and further trade liberalization can unlock the potential of the agriculture sector to promote pro-poor growth, but these benefits are not guaranteed.”
Who wins and who loses in trade reform
The FAO report says that industrial countries have the most to gain from agriculture trade liberalization, because their agriculture sectors are the most distorted by existing policies. “Consumers in currently protected markets and producers in countries with low levels of domestic support would tend to gain the most.”
Developing countries as a whole would also benefit from liberalization, but SOFA 2005 warns that some groups could be hurt in the short run. Those groups include net food importing countries and countries that have been given preferential access to the highly protected markets of wealthier member countries of the Organization for Economic Cooperation and Development (OECD).
While acknowledging that OECD subsidies help net food importing countries keep their food import bills down, Hartwig de Haen, FAO Assistant Director-General, Economic and Social Department, said, “OECD subsidies to agriculture send incorrect signals to these countries leading them to neglect their own agriculture.”
For developing countries as a whole the greatest potential gains from agricultural liberalization will depend not on reform of the agriculture support system in OECD countries but on reforming their own trade policies, which would encourage greater trade between them. Between 70 and 85 percent of the potential benefits for developing countries would derive from their own reform policies in agriculture.
Trade liberalization can raise incomes for the poor
SOFA 2005 says that the benefits of trade liberalization go well beyond the immediate impact on producers and consumers because the reforms would contribute significantly to economic growth and to raising the wages of unskilled workers in developing countries. Trade can be a catalyst for change, promoting conditions that enable the poor to raise their incomes and live longer, healthier and more productive lives.
Because most of the world’s poor and food insecure people live in rural areas and depend on agriculture for their livelihoods, SOFA 2005 argues that a growing agricultural sector is crucial for sustainable poverty reduction. “Trade reforms that stimulate agricultural production often lead to a general increase in unskilled wages.” The report calls for policies that enable the poor to take advantage of their most valuable asset: their own labor.
But, the report warns, the poor often survive on so little that they are particularly vulnerable during any reform process, especially in the short term while productive sectors and labor markets are in transition.
The FAO report has a number of recommendations to ensure that liberalization supports pro-poor outcomes.
It calls for basic market institutions and infrastructure to be set up before opening national agricultural markets to international competition, especially from subsidized competitors. The report recommends consistent and sustained policies to provide “appropriate signals for pro-poor, pro-growth outcomes” and warns that “stop-and-go reforms” are particularly damaging.
To ensure that the poor benefit from trade, SOFA 2005 urges a twin-track approach that would on the one hand invest in educating people, building institutions and infrastructure and on the other provide safety nets to protect the most vulnerable people in society during the transition to freer trade.
Case studies cited by the FAO report show that reforms can help reduce hunger and poverty if they are designed and implemented within an explicit pro-poor strategy. The studies also show a clear need to provide carefully targeted investments and transitional compensatory measures for the poor during the early stages of trade liberalization.