This internal working paper is prepared for STAFF USE ONLY. The views expressed are not necessarily those of the World Bank. AGREP Division Working Paper No. 112 TRADE POLICY IN A CHANGING WORLD THE RELATIONSHIP OF AGRICULTURAL TRADE TO DEVELOPMENT POLICY D.E. Rathaway Economics and Policy Division Agriculture and Rural Development Department December 1985 TRADE POLICY,IN A CHANGING WORLD: THE RELATIONSHIP OF AGRICULTURAL TRADE TO DEVELOPMENT POLICY by Dale E. Hathaway Revised December 1985 Table of Contents Executive Summary i Introduction 1 I. Major Changes in the World Economy 2 The Move From Fixed to Variable Exchange Rates 3 The Move to International Capital Markets 5 The Rise of Developing Country Debt 6 Shifts in Real Resource Prices 8 Increasing Trade in Agricultural Commodities 11 II. Changes in Agriculture Arising from General Economic Change 16 III. Policy Directions Growing Out of the 1970's 29 Developing Countries 29 Developed Market Economies 32 Agricultural Policies of Industrialized Centrally Planned Economies 37 IV. The Future Context For Trade and Development Policy 39 V. Reviewing Priorities for Development and 42 Trade Investment VI. Dealing With Market Instability 49 Commodity Agreements 50 Using Market Mechanisms to Reduce Instability 54 VII. GATT and Agricultural Trade 56 VIII. State Trading Agencies in Agricultural Trade 60 IX. Implications for The World Bank 66 New Information Needed 68 The Scope and Criteria for Agricultural Lending 69 Assistance for Developing Countries in Trade Related Areas 70 Executive Summary The period 1970-80 brought major changes in the world economy and many of these changes had a significant impact upon agricultural trade. It is now possible to evaluate which of these changes are likely to have long-run impacts upon agricu.ture and agricultural trade. It appears likely that international capital mobility and unstable exchange rates are likely to be a feature of the international economic scene for the foreseeable future. Unfortunately, the external debt problems of many developing countries is likely to have a significant impact both upon their internal growth rates and ability to make continuing direct agri- cultural investments. After a turbulent decade in which the real price of traded agricultural commodities rose to new highs, it is now clear that these high prices were a temporary departure from the continuing long-run decline in the real prices of these commodities. However, for a number of reasons, it is likely that agricultural commodity prices will continue to be unstable. Developing countries have become an increasingly important factor in the trade of agricultural products, both as importers and exporters. Thus, the issues of agricultural trade deserve more attention in the food and agricultural development strategies of developing countries. However, conditions in the years ahead are likely to be such that the high costs of inefficiencies, bad policies, and economic mismanagement will be obvious where they exist and the pressures to change will be substantial. Many of the agricultural development strategies followed in the past are not likely to be appropriate for the remaining years of this century. More attention should be given to the trade aspects of agriculture and to methods whereby The World Bank can assist developing countries in this regard. The heavy emphasis on public investment, control, and operation of agricultural marketing, import, and export activities needsto be reexamined. Opening these areas to private capital investment and private enterprise may be the best way to obtain the necessary investments and management skills needed to be competitive in a changing environment. The Bank should consider new forms of assistance to its client countries in the agricultural trade areas. In addition, attention needs to be focused on new types of investments to make existing agricultural projects function better, as well as on assistance in new areas of activity. Introduction It has been said that generals are always preparing to fight the last war. Unfortunately, a similar observation could be made about most agricultural policy makers,.who often develop and operate policies no longer relevant to the current and prospective world context. Therefore, periodically, it is important that we step back and examine major forces in the world economic system, considering their implications for agricultural trade and development policy. It is important to differentiate between transitory economic changes and those which are more likely to be permanent or structural changes. Although it is difficult at times, agri- cultural policies and investments must be based upon longer run economic forces, for, as we shall note in subsequent sections, long-run investments based upon short-term phenomena tend to be erroneous and result in huge losses. The basic hypothesis of this paper is that the 1970's brought major and fundamental changes in the world economy which will persist for the foreseeable future. It also brought a world boom in agricultural commodity prices, agricultural trade, and agri- cultural investment. Now, however, world economic growth has slowed appreciably, especially in developing countries; as a result Qf these factors there has been a sharp and continuing decline in real prices of agricultural commodities, which have -2- resumed a long-term down-trend which was interrupted by the boom of the 1970's. The current and prospective situation is so different from the situation faced in the 1970's by policy makers that it requires a broad reevaluation of trade and development policy in agriculture. Whereas the appropriate strategy in both the public and private sector appeared to be to increase agricultural output at almost any cost, new questions and issues now must be facea by both the public and private sector. This paper attempts to suggest what some of these new decisions are and endeavors to indicate what some of the implications are for the World Bank and developing countries. I. Major Changes in the World Economy Several changes in the world economy occurred in the 1970's which have major implications for agricultural trade and development. All of them have been documented elsewhere, but their links to and implications for trade and development have been largely ignored. The most important of these include: 1. A breakdown of the fixed exchange rate system which had provided the underpinning of the world monetary system since the Bretton Woods Agreement and a move to market determined variable exchange rates. 2. A change from national to international capital markets -3- with an increase in capital flows which have now come to dominate exchange rate movements. 3. A marked increase in the real price of energy, particularly the price of petroleum. 4. A sharp rise in the volume of international trade of basic agricultural commodities. 5. A sharp rise in the level of external debt by developing countries. It is not the purpose of this paper to explain the root causes of these changes or their total implications for the future of the world economy. This paper will discuss some of the implications for agricultural trade and development, and will focus on limits placed on future policy actions by these changes. The Move from Fixed to Variable Exchange Rates International economists have always known that countries which overvalue their exchange rates are essentially taxing their exports and subsidizing their imports. They have also assumed, however, that a move to market-determined flexible exchange rates would be sound economic policy and that trade balances would be corrected by exchange rate adjustments. The collapse of the fixed exchange rate regime of the Bretton Woods Agreement put these theories to a test. The 1970's -4- and the first half of the 1980's brought a new and unprecedented fluctuation in the exchange rates of major international trading currencies. This in turn has added a new source of instability to world agricultural commodity prices. The exchange rate movements are especially worrisome to developing countries whose currencies must necessarily be tied to one of the major traded currencies. This causes the trading price of their exports and imports to be dominated by swings in exchange rates beyond their control. The exchange rate issue is significant because it has involved huge swings in the value of the U.S. dollar. The dollar is especially relevant to the pricing of agricultural commodities. Because of U.S. importance in wheat, coarse grain, oilseed and cotton trade, the prices of these commodities have been especially affected by dollar exchange rates. The world price of oil is also denominated in dollars. Thus, the strong movement of the dollar relative to many other currencies has meant that the decline in the real price of oil, while benefitting the U. S. economy, has not had a positive effect on the economy of many oil importing countries. It is unlikely that exchange rates will stabilize in the near future, because the underlying reasons for this volatility are unlikely to disappear in the short-term. One reason is the -5- increasing mobility of capital, which will be discussed in the next section. A second is the growth in new financial instru- ment-s and institutions, as well as new technologies which permit and encourage instantaneous reactions to both real and imagined events. These market reactions can be so large that they swamp the policy efforts of even the richest governments to control them. The Move to International Capital Markets One of the most important developments of the past fifteen years has been the growth of a truly international capital market which already has had and will continue to have major impacts upon trade and development. There are a variety of reasons for these changes, covered at length in the 1985 World Development Report. This paper will not attempt to explain them. One of the results of the change to an international capital market has been that exchange is now dominated by capital flows rather than by trade flows. Thus, we find that the huge and continuing U. S. balance of payments deficit has been sustained by an equally large capital flow into the United States. Whereas the trade deficit might be expected to cause the exchange rate of the dollar to fall, the shift of capital into dollar denomi- nated assets has increased the value of the dollar in the face of rising trade deficits. Conversely, a number of countries have found that massive capital outflows have forced devaluation of their currencies, despite relatively favorable trade balances. 6- The Rise of Developing Country Debt A related change which occurred was the huge rise in the external debt of many developing countries since 1970. There were several features to this increase in debt. The debt was increasingly held by commercial banks; it was largely denominated in dollars; its maturity was shorter than the traditional multilateral lending loans; and more of the debt had floating interest rates (See Table 1). The inability of a number of countries to service these ris- ing external costs because of falling export prices, high real interest rates and other factors is well documented. The result, however, has been a sharp decline in new commercial lending to many developing countries, serious balance of payments difficulties, and severe pressure to reduce imports and increase exports. External forces have required a large number of developing countries to apply more stringent monetary and fiscal policies, resulting in substantial declines in growth in general and absolute declines in real income. However, since these same countries were the most rapidly growing market for many of the basic agricultural commodities -- wheat, coarse grains, oilseeds, meat, and poultry -- the reduction in income and import controls have caused a decline in total world trade in many of the basic agricultural commodities and have contributed to the weakening of agricultural commodity prices in international markets. Table 1 External liabilities of developing countries, 1980-84 (billions ofdollars, unless othenvise noted) Country group 1980 1981 1982 1983, 1984 DRS reporting countriesc 540 629 699 - 761' 810' Medium- and long-term debtd 412 470 525 598' 655' From official sot-rces 160 174 191 209 225 From private sources 252 296 334 388' 430' Short-term debts 119 145 155 134' 122' Use of IMF credith 9 14 19 29 33 Other developing countries' 70 73 76 82 85 Medium- and long-term debtd 59 58 57 60 62 From official sources 17 18 19 20 20 From private sources 42 40 38 40 42 Short-term debts 11 15 16 20 20 Use oflMF creditO 0 0 3 2 3 Total 610 702 775 843 895 Memo item Growth of total liabilities (percent) .. 15.1 10.4 8.8 6.2 a. Preliminary. b. Estimated. c. Includes data for 104 developing countries for which standard and complete reporting is made through the World Bank's Debtor Reporting System (DRS). d. 'ebt of original maturity of more than one year. e. Reflects the rescheduling of $22 billion of short-term debt to banks into long-term debt during 1983. i. Reflects the rescheduling of $25 billion of short-term debt to banks into long-term debt during 1984. g. Debt of original maturity of no more than one year. Data are estimated from information on bank claims on developing countries &3 reported by the Bank for International Settlements and are amended to take account of information on short-term debt reported by individual developing countries. h. Excludes loans from the IMF Trust Fund; they are Included in medium- and long-term debt. . Includes data for developing countries that do not report through the DRS and for those that either have reported incomplete data through the DRS, or report in a form that does not permit publication in the standard tables. Excludes debt of the high-income oil-exporting countries and includii estimates for developing countries that tre not World Bank members but are included In the global analysis underlying the World Drmtlopment Report. -8- Developing countries often have been unwilling or unable to attract direct foreign investment,in agricultural production, processing, and marketing activities. In most developing countries foreign investment in agriculturally related projects was not encouraged because of the relative ease of obtaining foreign loans during the 1970's. There is no data available which indicates the proportion of external debt used to finance agricultural development. It is known that in the late 1970's and early 1980's a number of developing countries contracted short-term debt to pay for imports of basic food commodities. The prospects for significant voluntary new foreign lending to most developing countries by commercial banks appears quite dim until existing debt problems are resolved. This means that new agricultural investments will have to depend upon multilateral lending institutions or be shifted to equity financing. The first course will require substantial changes in lending practices of these institutions. The second will involve significant changes in the internal and external policies of the developing countries. Each of these topics is discussed in later sections of this report. Shifts in Real Resource Prices The 1970s saw a wrenching increase in the real price of energy, led by two OPEC increases in the price of crude oil. The ramifications for the world economy, and especially for developing countries without energy resources, was great. The internal policies of oil exporting countries were also affected, more significantly than has yet been fully realized. Some of the major implications were: 1. Energy price increases fueled world-wide inflation. 2. oil-importing developing countries faced huge new balance of payments deficits which they met by increased international borrowing. 3. The huge OPEC balance of payments surpluses led to sudden liquidity in capital markets which was recycled by commercial banks to middle-income developing countries. For the purpose of this report, the implications for world agriculture are of crucial interest. They are several, and they are related to relative prices of key inputs and output of agricultural commodities. Agriculture investment in both developed and developing countries had been made on the assumption of low relative prices for energy. This led to an emphasis on large-scale mechanization using very large equipment in developed countries, the increased use of pump irrigation in both developed and developing countries, an increased dependence upon the use of heavy chemical fertilizers, many of which are energy based, and also to the heavy use of petroleum-based chemicals for weed and pest control. - 10 - The energy price increases, coupled with a sharp rise in the nominal and real price of traded agricultural commodities brought a new set of fears to policy makers. One fear was that the real price of both energy and food would continue to rise inde- finitely, putting food importing countries at a permanent disadvantage; and, there were numerous predictions and projections to buttress this view. There were predictions of large-scale famine in developing countries on a continuing basis, and, as always in a period of stress dnd uncertainty, there was a hunt for scapegoats. Part of the blame for the situation was put upon "the green revolution." It was charged that the international research establishment had erred in the development of the new varieties which were overly dependent upon irrigation, fertilizer, herbicides, and pesticides, The development of tradeable non-food crops as an economic alternative to subsistence food production was criticized. The economic demand for red meat, poultry, and animal products in both developed and developing countries was criticized as taking food from the poor in developing countries. A part of the blame was put upon multinational agribusiness corporations. It was charged that they had led developing nations away from non-food to tradable cash crops, and that they were responsible for the shortages of foodstuffs which led to the rise in agricultural prices. - 11 - The critics often did not understand, for instance, that "the green revolution" was a process, not specific varieties, which brought the power of agricultural science to bear on the problem of agricultural production in developing countries. Thus, the critics were surprised when the system responded quickly with new varieties and production methods which were adopted to the new higher prices of energy and energy-related agricultural inputs. Oddly enough there was little criticism of the main reasons underlying many of the abrupt changes in prices, i.e., government policies in developed and developing countries which interfered with and tried to prevent market forces from working. The result was that where there might have been modest price increases there were sharp price increases and physical shortages -- of food, of gasoline, of fertilizer, of diesel fuel, and of many other products. This in turn fueled speculation and drove prices even higher. Increasing Trade in Agricultural Commodities One of the results of world economic changes of the 1970's was a marked growth in agricultural trade. It is important to note that much of this increase in agricultural trade was fueled by policy changes and forces arising outside of the agricultural sector, and not, as many agricultural analysts believed, from either successes or failures within agriculture. - 12 - In the late 1950's world trade only accounted for about two percent of world food consumption. But, by the end of the 1970's, trade accounted for about 12 percent of consumption. However, the growth in trade varied from product to product. Trade in rice has only amounted to about 4 percent of consumption and has shown no increase. World trade in wheat accounted for 15 percent of consumption in 1970/71 and rose to a high of 22.2 percent in 1981/82. Coarse grain trade was 7.8 percent of consumption in 1970/71 and 13.8 percent in 1980/81. For most of the inter-war and post-war period prior to the 1970's, agricultural trade grew slowly and was dominated by trade between developed countries. This changed in the 1970's in two significant and related ways. First, developing countries (especially middle-income developing countries) and centrally planned economies increasingly became importers of agricultural commodities. After the oil price increases of 1973 and 1979, there was also a marked increase in the income levels in oil- exporting developing countries which was directly transmitted into new and higher import demand. Concurrently, because the demand growth of these new importers was at a high rate, the growth rate of agricultural trade rose appreciably in the 1970s compared to the previous two decades (see Table 2). A second important change was the emergence of a number of developing countries as exporters of agricultural products. Rapid growth in demand and trade made it easy to enter export markets despite adequate policies or infrastructure. - 13 - Table 2 WHEAT AND COARSE GRAIN: NET IMPORTS TRADE YEARS 1/ 1960/61 - 1985/86 MILLION METRIC TONS LOWER UPPER OTHER LOW MIDDLE MIDDLE' WESTERN EASTERN INCOME INCOME INCOME YEARS CHINA JAPAN USSR EC-10 EUROPE EUROPE 21 3/ 41 1961161 2.6 4.7 -6.2 21.1 4.0 5.2 5.5 3.2 6.5 1961/62 6.0 5.1 -8.1 23.7 3.4 6.6 4.8 5.7 7.3 1io2/6. 5.1 5.5 -8.0 20.0 4.6 7.5* 6.1 3.9 7.3 1963164 5.8 8.4 5.2 20.3 4.4 7.9 6.5 4.0 5.2 1964!65 5.0 8.6 -1.5 17.2 4.0 8.3 9.3 4.2 5.7 1965:66 6.1 8.6 3.7 21.6 6.5 8.9 10.9 4.4 4, 19E6167 4.9 11.3 -2.0 20.3 6.3 4.0 11.7 5.5 7.2 1967168 4.2 11.7 -4.4 18.5 4,1 2.9 10.8 5.6 7.9 1968;69 3.5 12.6 -6.2 16.3 3.6 3.4 5.1 4,6 7.0 19691/70 5.1 14.4 -6.3 12.8 4.2 4.9 5.4 5.3 8.1 1970;71 3.6 15.8 -7.5 22.1 5.2 8.0 4.5 6.7 9.2 1971/l2 3.0 15.2 1.1 14.1 4.5 8.7 4.9 6.0 12.6 1972,'73 6.0 17.5 20.9 13.3 4.9 6.8 5.9 6.4 15.2 1973/74 7.4 19.4 .5.1 14.2 7.6 4.3 9.0 8.2 20.4 1974/75 5.9 18,5 0.2 13.1 6.9 .7.5 11.9 8.9 19.2 1975/76 1.9 19.4 25.2 10.2 6.5 8.4 11.2 7.9 17.7 1976,77 2.9 21.4 7.3 23.0 7.6 11.0 6.6 10.6 20.4 1977/78 8.5 22.7 16.4 8.8 9.1 9.2 4.6 12.1 26.7 1978/79 11.0 23.5 12.5 5.1 9.0 11.6 5.2 10.7 30.6 1979/80 10.7 23.7 25.4 3.2 9.9 14-7 4.8 15.3 38.5 1980/81 14.4 24.3 39.0 -4.2 9.1 11.5 4.1 15.8 38.5 1981/92 14.5 23.3 39.4 -6.4 12.9 8.3 6.4 17.3 30.1 1982/83 15.4 24.2 30.7 -10.0 8.2 3.7 7.4 16.4 36.8 19a3/84 9.4 26.3 31.9 -9.9 6.8 2.7 6.8 19.3 42.3 1984/85'5/ 2.4 25.9 55.0 -18.8 3.2 -1.4 6.7 19.9 42,0 1995/86 61 9.4 28.5 37.4 -9.0 3.2 5.6 6.3 17.0 40.5 I! JULY/JUNE THROUGH 1975/76. SUBSEQUENTLY, TRADE YEAR FOR COARSE GRAIN IS OCTOBERISEPTEMBER. 2! INCLUDES INDIA, NEFAL, BANGLADESH, BURNA, MALI, CHAD, UPPER VOLTA, ZAIRE, BURUNDI, RWANDAt ETHIOPIA, UGANDA, TANZANIA, XALAWI, HAITI, PAKISTAN, SRI LANKA, GUINEA, SIERRA LEONE, SHANP, NIGER, TOGO, BENIN, SONALIA, KENYA. 3; INCLUDES EL SALVADOR, HONDURAS. BOLIVIA, THAILAND, INDONESIA, PHILIPPINES, EGYPT, SUDAN, 9AURITANIA, SENEGAL, NIGERIA, ZAMBIA, ZIMBABWE, LESQTHO, GUATEMALA,14ICARAGUA, COSTA RICA, JAMAICA, DOnINICAN REP., COLONSIA, ECUADOR, PERU, TURKEY, OROCCO, TUNISIA, CAMEROON, IVORY COAST, CONGO. 4. INCLUDES NE1CO, PA1A4,. TRINIDAD, VENEZUELA, CHILE, BRAZIL, URUGUAY, PORTUGAL, GREECE, STRIA, IPAQ, IRAN, ISRAEL, JORDAN, KALAYSIA, SINGAPORE, S. KOREA, HONG KONS, ALGERIA. 5- PRELIWHARY. L1 VORECAST. - 14 - The growth in agricultural trade was not generated by a failure of agriculture to grow in a number of countries (See Table 3). This rapid growth in agricultural imports was made easier by commercial credit availability (both for agricultural imports and other purposes) which freed up government revenues for agricultural imports. Thus, the general recycling of the immense OPEC surpluses had a positive effect upon world agricultural trade which was already booming as the result of income growth which exceeded agricultural output growth in many countries. By the end of the 1970's, both importing and exporting countries appeared to be basing their policies upon a continuation of this extraordinary growth rate in trade. As will be noted later, both the United States and the E.C. based their internal farm prices and income policies upon a steadily expanding export market. As it turned out, the 1980's brought major changes in the underlying economic situation and as a result, a reduced rate of growth in agricultural trade. The growth rate slowed markedly and for some products actually fell. Table 3 Growth rates of agricultural and food output by major world regions (excluding China), 1960-40 Agricultural output Fod output Total Per capita Total Per capita Region and country group 1960-70 1970-80 1960-70 1970-80 1960-70 1970-80 1960-70 1970-80 Developing countries 2.8 2.7 0.3 0.3 2.9 2.8 0.4 0.4 Low-income 2.5 2.1 0.2 -0.4 2.6 2.2 0.2 -0.3 Middle-income 2.9 3.1 0.4 0.7 3.2 3.3 0.7 0.9 Africa 2.7 1.3 0.2 -1.4 2.6 1.6 0.1 -11 Middle East 2.5 2.7 0.0 0.0 2.6 2.9 0.1 0.2 Latin America 2.9 3.0 0.1 0.6 3.6 3.3 0.1 0.6 Southeast Asia 2.9 3.8 0.3 1.4 2.8 3.8 0.3 1.4 South Asia 2.5 2.2 .0.1 0.0 2.6 2.2 0.1 0.0 Southern Europe 3.1 3.5 1.8 1.9 3.2 3.5 1.8 1.9 Industrial market economies 2.1 2.0 1.1 1.2 2.3 2.0 1.3 1.1 Nonmarket industrial economies 3.2 1.7 2.2 0.9 3.2 1.7 2.2 0.9 Total world 2.6 21 0.7 0.4 2.7 2.3 0.8 0.5 Source: FAO. Note: Production data are weighted by world export unit prices. Decade growth rates are based on midpoints of five-year averages. except that 1970 is the average for 1969-71. - 16 - II. Changes in Agriculture Arising from General Economic Change The events in agriculture in the 1970's were by-most measures some of the most dramatic experienced in several decades. A series of events occurred almost simultaneously which resulted in an unprecedented movement in prices of agricultural products. These general economic changes came together at the same time that the weather provided an additional shock to the system in the form of a sharply lower grain crop in the Soviet Union, India, and other Asian rice-growing countries. As the U. S. sold its stocks to the Soviet Union, there was a huge jump in the annual volume of world wheat and coarse grain trade (by 29 and 20 percent, respectively), and an even more spectacular jump in prices (75 percent for wheat and 98 percent for maize). This increase in U.S. sales to the USSR pulled world stocks of grain down, since the U. S. held most of the "free" stocks of grain; and panic and speculation further drove up commodity prices. In fact, the year-to-year decline in world grain output (wheat, coarse grain, and rice) from 1971-72 to 1972-73 was only 36 million tons or three percent of world production. Since world stocks fell 41 million tons, world utilization actually rose (see Table 4). In fact, world utilization has shown a year- to-year decline once in the last 25 years, suggesting that the fears of worldwide shortages were never based on fact. - 17 - Table 4 WORLD rotAL GA1W% SUPPLI/ofmAM 1940/41 - 1985/14 MILL10M Of MiTRIC TOMS/MECTARKS AREA vilEl P#OoUCTZON VORI UTILIZATIOIM EN01 STOCK% At MARVESTED TRADE Ii TOTAL 2/ STKIS 3/ z of uIL 1940/61 444.7 1.31 144.1 72.4 832.3 199.4 23.1 1961/*2 441.4 1.24 404.3 43*2 833.3 171.9 20.4 1942/63 447.4 1.34 84.5 42.7 844.9 173.1 20.1 19å3/44 452.4 1.33 870,7 97.7 849.1 174.5 20.1 1944/85 443.0 1.39 924.3 95.3 919.8 179.0 -19.5 1945/64 459.4 1.40 921.3 110.9 955.2 142.4 14.9 1944/47 *440.4 1.52 1004.5 103.7 980.0 148.9 17.2 1947/44 472.8 1.54 1037.8 97.1 1017.4 189.3 18.4 1964/69 478.5 1.59 1079.2 89.5 1044.3 221.7 21.2 1949/70 - 479.4 1.40 1087.2 97.3 1102.3 204.4 1.1 1970t71 471.0 1.64 1102.5 109.4 1143.1 145.2 14.4 1971/72 440.2 1.74 1194.5 110.0 1171.3 143.3 15.4 1972/73 449.5 1.73 1140.9 134.4 1201.2 142.4 11.1 1973/74 497.8 1.82 1272.6 141.4 1244.3 148.5 1147 1974/75 Ö99. 1.74 1217.7 134.4 1229.2% 135.4 11.0 1975/76 717.4 1.74 1244.7 150.3 1237.8 142.1 1143 1974/77 719.3 1.19 1343.1 157.7 1309.7 T95.8 15.0 1977/78 714.8 1.87 1337.2 171.2 1338.9 193.7 14.4 t974/79 714.1 2.04 1445.7 174.r 1431.3 220.9 15.5 1979/40 713.0 2.00 1424.5 197.9 1450.1 197.2 13.4 1980/81 723.8 2.00 1444.8 215.2 1441.0 183.2 12.4 1981/82 733.9 2,04 1498.9 209.7 1442.7' 219.3 15.0 1982/83 717.8 2.15 1544.1 200.5 1511.0 252.3 14.7 1983/84 707.7 2.10 1443.2 207.4 1554.4 11.0 11.7 1944/45 4/ 714.9 2.29 1634.4 220.7 1597.5 221.9 13.9 15/84 5/ 721.4 2.30 1441.4 196.4 1408.4 274.9 17.2 wOT: OT0CS al PERCtMT Of UTILIZATZON" *(PRESENT TW R4T10 Of XAK(TZNC Tt&* (81tWG STOCE$ TO TOTAL UTIL2ATION. 1/ TAOE RATA At 9EPA(tt<8 14 TZI TABLE UTILIZATION (STIMATES REPR(NtWT APPARCMT* UTT4ZATZON, I.E. INCLUtt AIMUAL STOCK LEVEL A94UtritnyM. 3/ %TOCKS OATA AR( *MD, ON 44 AtniCATt Of N1ffERING LOCAL KANKETIMC TEXAS AN9 $0U MOT at COMSTift At IIPStILnTZMG WORB STOCK LtetLs AT a FIREt P0INT I TIME. STOCK$ DATA AR( MOT AVAÅILAökt fök AtL COUXTR91 AM £XCLVot TMOSC SUCK AS TKE PtOPIVaS *(PUBLIC Of CMINA A8O PART$ Of EASTER¥ EUROPE. k0*L STOCK LeVtLS KAV£ Stt# AJUSTZO FOS 1T71MATEh 1EA8-T0-TEAR CMAMGit I US$ GNAJI STOCKS RUT 80 MOT PURPORT TO XNCIU4 Tg£ ABSOLUTE LM¥ 08 T9E BASIS Of OFFICIAL STATISTtCt Of FOREIQM GOVEFOREITN, 0THct foREIG/4 spuct MATtXKALS, *KPOOTI Of U.%. ARICUtLTURAL ATTAC9S AM FORtIGN %ErVICE OfFICERSé kSULTS Of OFFICE RESEARCH ANG DELAT( INFORKATIO. COMMOITT PRO%&Axto fAt U%*A GRAIN A8D (MES DIVISION - 18 - There is no question but that if there had been freer trade in the major grains in the early 1970's there would have been far less price instability. The largest year-to-year decline in grain output only amounted to three percent of output and consumption only fell in one year. It should be noted, however, that the marked rise in the W price of traded grains was not due merely to the temporary weather problems which reduced production of those products. If we look at the prices of a large number of agricultural products during the 1970's we find a similar pattern (Table 5). For most of them, from beef to bananas, the real and nominal prices rose sharply, in many cases to all-time highs in real terms. Given the widespread rise in real prices of almost all commodities, one has to conclude that a combination of rising demand, inflation and speculation all contributed to the unusual price rises. These real price increases set off a flurry of activities and an extensive examination of national and international policies. There was widespread speculation that the world would be facing a continued period of adverse weather which would result in serious continuing food shortages, especially in developing countries. The United Nations called a special World Food Conference in November 1974 to deal with what was perceived as a major threat to world well-being and order. A number of significant changes come from the examinations of the national and international food policy. they include: - 19 - Table SA Current $ Prices, Selected Agricultural Commodities, 1950-84 wheat maize sugar coffee rice . soybeans 9/TON $/TON $/MT ¢$/MT $/TON 1950 66.9 68.1 109.8 111 136.7 114 1951 72.4 72.0 125.7 129 144.4 146 1952 72.0 62.6 91.9 126 156.3 112 1953 68.0 60.2 75.2 125 174.7 119 1954 62.8 58.3 71.9 170 157.9 122 1955 61.7 48.8 71.4 133 141.5 111 L956 62.8 51.6 76.5 151 136.9 116 L957 63.2 47.6 113.8 134 137.2 106 -958 61.4 47.6 77.2 109 142.3 95 .959 58.1 46.1 65.5 93 132.2 94 .960 59.2 43.3 69.2 92 124.7 92 .961 59.5 45.9 59,5 90 136.5 111 .962 59.9 51.4 61.3 83 152.8 100 -963 59.2 54.7 183.9 81 143.3 110 .964 63.6 55.8 127.2 101 137.7 110 965 58.1 55.0 44.5 100 136.3 117 .966 62.1 59.4 39.9 93 163.2 126 .967 61.7 49.9 42.3 86 205.8 112 968 58.4 49.1 41.9 87 201.6 106 969 56.1 53.9 70.6 88 186.9 103 970 56.9 58.4 81.1 115 144.0 117 971 62.3 58.4 99.2 99 129.0 126 972 69.1 56.0 160.3 110 147.0 140 973 136.8 98.0 208.3 137 350.0 290 974 178.0 132.0 653.9 145 542.0 277 975 138.4 119.6 449.1 144 363.1 220 976. 122.7 112.4 ,254.9 315 254.5 231 977 98.5 95.3 179.0 517 272.2 280 978 124.4 100.7 172.0 359 367.5 268 979 156.3 115.5 213.0 382 331.3 298 980 168.3 125.3 632.0 344 433.9 296 981 154.6 130.8 374.0 282 483.0 288 982 132.6 109.3 185.6 309 292.9 245 983 137.3 136.0 186.7 290 276.9 282 - 20 - Table 58 1983 Constant $ Prices, Selected Agricultural Commodities 1950-84 wheat maize sugar coffee rice soybeans $/TON S/TON $/MT s/KG $/MT $/TON 1950 283.5 288.6 465.3 468 579.2 288.6 1951 259.5 258.1 448.9 463 517.6 258.1 1952 250.9 218.1 319.1 438 544.6 218.1 1953 247.3 218.9 272.5 455 635.3 218.9 1q54 232.6 215.9 266.3 630 584.8 215.9 1955 223.6 176.8 257.8 482 512.7 176.8 1956 221.9 182.3 270.3 534 483.7 182.3 1957 214.2 161.4 385.8 455 465.1 161.4 1958 197.4 153.1 247.4 350 457.6 153.1 1959 196.3 155.7 221.3 314 446.6 155.7 1960 196.0 143.4 228.4 306 412.9 143.4 1961 195.1 150.5 195.1 293 447.5 150.5 1962 199.7 171.3 203.7 278 509.3 171.3 1963 196.7 181.7 608.9 267 476.1 181.7 1964 205.8 180.6 410.3 327 445.6 180.6 1965 186.8 176.8 142.6 323 438.3 176.8 1966 188.8 180.5 12.1.3 282 '496.0 180.5 1967 185.3 149.8 126.6 260 618.0 149.8 1968 187.2 157.4 133.9 278 646.2 157.4 1969 197 8.1 171.1 223.4 278 593.3 171.1 1970 164.0 168.3 233.0 331 415.0 168.3 1971 165.3 154.9 262.4 263 342.2 1972 167.3 135.6 387.2 267 355.9 135.6 1973 277.5 198.8 421.7 279 709.9 198.8 1974 288.0 213.6 1056.4 235 877.0- 213.6 19,75 197.2 170.4 637.9 205 517.2 170.4 1976 171.6 157.2 355.5 440 355.9 157.2 1977 127.4 123.3 231.0 669 352.1 123.3 1978 136.9 110.8 188.8 . 395 404.3 110.8 1979 154.6 114.2 210.3 378 327.7 114.2 1980 153.7 114.4 575.6 314 396.3 114.4 1981 147.4 124.7 355.5 269 460.4 124.7 1982 128.6 106.0 179.7 299 284.1 106.0 1983 137.3 136.0 186.7 290 276.9 136,0 - 21 - 1. National and international organizations placed.much more emphasis upon agricultural development, especially in food-deficit developing countries. This included the improvement of relative prices for agricultural products, more emphasis on agricultural research at the national and international level, more multilateral lending for agriculture, and more attention to agricultural investment at the national level. 2. Attempts were made to negotiate a world food security system through a system of nationally held reserves operating under a set of acquisition and release rules internationally agreed to . 3. An improved and enlarged food aid system was developed under an international agreement. 4, A Food Facility was developed in the IMF to ease the balance of payments squeeze created by sudden increases in food import costs of developing countries. It should be noted that in the considerable number of international discussions which occurred during the 1970's little or no attention was given to the positive contributions which might have been offered by improving trading of agriculture products. Indeed, quite the opposite was happening. Most of the discussions during the 1970's and into the 1980's were concerned with ways to increase government intervention in agricultural trade. Countries which used state trading agencies or which used - 22 - levies to control trade flows congratulated themselves on isolating their economies from world trade flows. A number of developed and developing countries made long-term supply-purchase agreements covering their imports of basic agricultural products. It is now a decade since the "food crisis" of the mid- 1970's. The passage of time allows us to determine which of the startling changes of the 1970's were permanent changes and which were temporary phenomena brought about by an unusual convergence of world economic events. As it turns out, many of the most disruptive events were temporary and did not mark a permanent change. The sharp rise in the prices of energy resulted in the form of reduced use, increased use of alternative sources of petroleum, and increased output of petroleum from new suppliers. The sharply higher real prices brought a major change in the relationship between energy use and economic growth. By mid- 1985, the question was whether the real price of anergy over the next several years would remain stable or decline markedly. The rise in prices of basic food commodities brought a reaction which was even quicker. The real prices of most traded agricultural products began to decline in the late 1970's and by the mid-1980's the real prices for all food commodities were well below the highs of the 1970's. For many products, including sugar, wheat, rice, and coarse grains, the real 1985 prices were the lowest since World War II. It should be noted that this - 23 - decline in world prices occurred during years in which grain imports by the USSR exceeded 30 million tons for seven consecutive years, and reached 53 million tons in 1984-85. It is now clear that the real prices of basic agricultural products (i.e., grains, oilseeds, and sugar) have resumed the long-run downtrend that has been the experience throughout most of the post-World War II period. There are several reasons to believe that this long-run trend will persist for some substantial period into the future. One is that the fears about chronic or continuing shifts in weather patterns which will markedly reduce world food output seems to have been unfounded. While the Soviet Union has had seven consecutive years of grain output well below the record 1978-79 level, and sub-Saharan Africa has had severe drought problems, world grain output has moved steadily upward every year since 1977-78, except 1983-84. The only year that world grain output failed to increase was the year in which the U.S. Government paid farmers to retire 80 million acres of farmland from production as a method of reducing government-held carryover stocks. Second, while there was widespread discussion of a dearth in new production technology in the 1970's, there is now increased evidence that the rapidly deve.oping field of bio-technology will provide new methods of increasing output of both plant and animal - 24 - products in the near future. These new developments, many of which are being made in the private sector, will have implica- tions for further development and trade policy changes in future years. Third, the extraordinary demand growth for food products, especially in middle-income developing countries, seems unlikely to resume in this decade. A combination of slower economic growth in industrial countries, a stable or declining oil, price, the huge overhang of debt owed by many developing countries, and a decline in population growth rates all have combined to bring a substantially slower growth in incomes, and in some cases, an absolute decline in income (see Table 6). Finally, the policy changes and investments of the 1970's have produced results in many developing countries in terms of increased agricultural output. The results were, in most areas of the world, marked increases in agricultural output which exceeded the rate of population growth. The two notable exceptions were Africa, where the rate of growth fell by more than one-half in the 1970's, and the non-market industrial economies. There are several reasons to expect that the basic trends which were established in the 1970's and increased the role of developing countries in agricultural trade will continue in the foreseeable future, albeit at a slower pace than in the 1960's and 1970's. The income elasticities and population growth rates T;hf e6 Population and GNP per capita, 1980, and growth rates, 1965-84 1980 1980 GNP 1980 GNP Awrage annual growth of GNP per capita (percn (billions population per capita n Country group of dollars) (millions) (dollars) 1965-73 1973-80 1981 1982 1983A 1984' Developing countries 2,059 3,119 660 4.1 3.3 0.8 -0.7 -0.1 2.1 Low-income countries 547 2,098 260 3.0 3.1 2.0 2.8 5.2 4.7 Asia 495 1,901 260 3.2 3.5 2.5 3.4 6.0 5.3 China 284 980 290 4.9 4.5 1.6 5.8 7.6 7.7 India 162 687 240 1.7 1.9 3.5 0.4 4.2 2.0 Africa 52 197 270 1.3 0.0 -1.7 -2.6 -2.6 -1.5 Middle-income oi importers %2 579 1,660 4.6 3.1 -0.8 -2.0 -1.6 1.1 L East Asia and Pacific 212 162 1,310 5.6 5.7 3.7 1.9 4.5 3.4 Middle East and North Africa 25 31 830 3.5 4.3 -2.5 2.6 0.5 -1.3 Sub-Saharan Africa 26 33 780 2.0 0.5 4.1 -4.8 -5.4 -5.4 Southern Europe 214 91 2,350 5.4 2.9 0.2 0.3 -0.5 0.2 Latin America and Caribbean 409 234 1,750 4.5 2.9 -4.1 -4.8 -4.5 1.1 Middle-income oil exporters 550 442 1,240 4.6 -3.1 1.5 -2.3 -3.6 0.1 High-income oil exporters 229 16 14,050 4.1 6.2 -1.1 -7.8 -14.1 -6.4 Industrial market economies 7,477 714 10,480 3.7 2.1 0.7 -1.0 1.5 4.3 a. Estinuted, b. Projected. - 26 - are both such that future increases in both wheat and coarse grain consumption will occur in developing countries as income growth allows shifts from roots and tubers to grains and from direct consumption of grains to greater consumption of meat, poultry, and eggs produced from grains. Thus, whereas in the great crisis period of the 1970's there was a substantial fear that tradeable supplies of agricultural products would be unavailable or only available at a constantly increasing real price, it is now apparent that this will not be the long-run situation. In looking ahead at investments and policies for the rest of this century, developing countries face three choices: 1. To make investments and follow internal policies required to produce most or all agricultural products needed for domestic consumption. This is the 'self- sufficiency at any at any cost' policy. 2. To concentrate investments in non-agricultural industries and follow policies which encourage imports at the expense of domestic agricultural producers. This is to ignore agriculture and depend upon food imports policy. 3. Make agricultural investments based upon competitive world prices in both domestic and foreign markets, recogni4ing that the real prices of these products - 27 - will decline and that new factors will drive the basic position of competitiveness. Unfortunately, there has been a tendency for countries to shift sharply from one of these policies to another or sometimes try to pursue two policies simultaneously, though all three policies are mutually exclusive. Much has been written about the frequency of pursuit of the second policy among developing countries in the 1960's. Elements of this policy included over-valued currencies which made food stamps cheap, artificially low internal agricultural prices main- tained by import pricing policies carried out by state agencies, the use of export marketing boards which taxed exports and, thus, reduced producer incentives, lack of adequate spending on agricultural research, and state-influenced investment policies which ignored public investment and discouraged private invest- ment in agriculture. National policy makers were often aided and abetted in these policies by multilateral lending institutions. Some of the most notable of these cases were Poland and a number of developing countries, especially oil exporters, whose over-valued currencies were supported by expanding oil revenues. The food crisis of the 1970's brought a major reversal of these policies in many countries to the opposite extreme -- self- sufficiency at any cost. One of the most notable is the Saudi Arabian experience with wheat. By paying huge investment - 28 - subsidies and guaranteeing producer prices of $1000 U.S. per ton (six (6) to eight (8) times the world price), Saudi Arabia, once an importer of one million tons of wheat annually, acquired a domestic surplus production which would require an export subsidy of over $600 U.S. per ton if sold in world markets. While this mey be the most extreme case, it is not unique. It is a policy followed in varying degrees by Japan, Korea, and a number of developing countries. As the world price of these tradeable foodstuffs returned to the long-term trends (or lower) the real costs of these policies became more apparent, and increasing numbers of questions arose. Unfortunately, it is easier to build such policies than dismantle them, for dismantling them almost always results in reduced incomes for some segments of domestic agriculture and a fall in asset values which are dependent upon the high domestic agricultural prices. Another all-too-frequent policy has been for a country to announce its pursuit of one policy while actually pursuing another greatly inconsistent with it. This is often done by announcing large-scale agricultural investment projects and then maintaining artificially high exchange rates, currency controls, capital controls, state trading companies, and other macro policies which insure that the investments will not be economically sound. - 29 - The most difficult, and therefore the least common, policy is an agricultural investment and trade policy based upon competitive world prices in both domestic and foreign markets. It is difficult because it means determining and following consistent policies in the face of major instability in the world macro economy of exchange rates, commodity prices, and trade policies. III. Policy Directions Growing Out Of The 1970's While there are as many national agricultural development and trade policies as there are nations, it is possible to draw some generalizations as to policy directions. It is important to remember, however, that during the 1970's both the market signals and political pressures were in the same direction -- expanded agricultural investment, agricultural output, and if in a food surplus situation, expanded exports. Policy makers and private investors responded to these signals. Moreover, the circums,ances of rising oil prices, easy credit, and booming world commodity prices all made poor policies workable by masking the effects of poor investments, over-valued exchange rates, and agricultural export taxes. Developing Countries From the early 1970's throughout the decade there was heavy emphasis in many developing countries to expand domestic food production at almost any cost. Investment priorities shifted and agricultural investment rose markedly. - 30 - Unfortunately, there were not parallel improvements in macro economic policy, agricultural price policy and agricultural trade policy. Many countries were reluctant, because of the adverse impact upon the urban population, to allow internal commodity prices to rise to world levels. They already had or instituted state trading agencies which controlled imports and exports, generally using them to attempt to maintain low and relatively stable internal prices. Agricultural exporting countries used these state trading agencies and export taxes to raise revenues and maintain low internal prices. A number of developing countries maintained an over-valued currency which made imports cheaper and penalized internal producers. A number of policies also were widely used to stimulate agricultural production. In addition to basic investment in irrigation, drainage, research, and education, many governments invested in fertilizer production facilities and sold the output at a loss to farmers. They also provide subsidized credit, differential export taxes to encourage processing, and other incentives to increase the output of agricultural commodities. There was one serious side effect of the sudden wealth and r-lush balance of payments position enjoyed by the.oil-exporting developing countries. In a number of them, the apparent lifting of all balance of payments constraints led them to believe that they did not need to be concerned about the development of their - 31 - internal agricultural resources inasmuch as they could now afford sharply rising food import bills without facing the problem of straightening out their internal agricultural policies. On the other side were a group of oil-exporting countries which concluded that their huge oil revenues would allow them to become self-sufficient in basic food production regardless of cost. They invested heavily in imported technology and hired foreign experts to install and operate it. They offered local producers price guarantees which were multiples of the world price. In retrospect, neither of these extreme approaches to agri- cultural trade and development appear wise. As oil revenues fell, those countries which had relied entirely on imports suddenly found their balance of payments problems affecting their ability to import food. Those countries which were paying huge internal subsidies to achieve self-sufficiency now find that these subsidies must either be scaled back or other government expenditures cut. In the 1980's a number of developing countries have been or will be required to face the policy issues they evaded in the 1970's. The substantial pressures to reduce internal budget deficits is requiring reevaluation of the huge subsidies to fertilizer production and other subsidies to agricultural producers. Conversely, the fall in commodity prices has made the use of export taxes and other devices, which depress internal - 32 - prices below world prices, less attractive. For the first time many develop.ng countries are forced to look at the possibility of opening trade and investment activities in their agriculture to the private sector and world market forces. Substantial adjustments are in prospect as these changes occur. Developed Market Economies The developed market economies have a long history of government intervention in pricing and trading of agricultural products. These interventions usually have taken the form of some kind of minimum price guarantees for major farm products. These guarantees are carried out by the government purchases and storage in countries which are exporters, often accompanied by export subsidies, and by quotas and levies which maintain the desired internal price levels when countries are importers. In the case of the Common Agricultural Policy (CAP) of the European Economic Community (E.C.) all may operate more or less simultaneously, Most of these programs are operated for the purpose of protecting the income of the agricultural producers in the country concerned. Some lip service is also given to assuring adequate domestic supplies, which for most of the products is not an issue. Developed market economies moved in two directions in their policies in the 1970's. Beginning in the 1960's the United States moved to open its agricultural economy to market forces by lowering its minimum price guarantees to farmers to the point - 33 - that world market demand became the major price determinant for most traded products. This policy worked well in the 1970's as prices rose and exports boomed. There was a substantial expansion in acreage of major crops and huge new private investment in agricultural production, export facilities, and facilities to supply agricultural inputs such as machinery, chemicals, and fertilizer. Government farm program costs fell to very low levels and import restrictions on several lproducts such as sugar and meat were relaxed or abandoned. The European Economic Community (E.C.) followed a different path from the inception of its Common Agricultural Policy (CAP). From the outset the E.C. maintained internal prices at well above world levels and protected its prices by variable levies on imports and export subsidies for products exported to countries outside the E.C. These internal price levels were steadily escalated during the 1970's as internal inflation and higher world prices made the policy workable. The policies of both the U.S. and the E.C. began to experience major difficulties during the 1980's, The E.C. became a surplus producer of grains, sugar, meat, poultry, and eggs during the late 1970's, and when world market prices rose at the same time as revenue from import levies fell. 34 In the U.S. the minimum price supports were increased as the boom of the 1970's increased commodity prices. When commodity prices began to fall these price supports became operative and the government began to accumulate large stocks of surplus commodities. The price declines led to import controls on sugar and beef to maintain internal prices. These programs, now operating in the U.S. and Western Europe, have several characteristics differing in degree according to the product and the country concerned. In general, however, they have the following effects: 1. For many products, the internal price is above world price. In addition, the governments concerned often make payments to producers to maintain producer income. 2. These price and other subsidies encourage and support domestic production at higher levels than would other- wise be the case. 3. These programs reduce the consumption of the products in domestic markets by modest to substantial amounts and encourage substitutions in use. 4. As the real price of agricultural products falls, the cost to the government of sustaining these programs rises sharply until they become a significant burden. 5. In the case of import restrictions in deficit countries consumers pay a substantially higher than world market - 35 - price and income is transferred from consumers to pro- ducers. 6. As government stocks mount and costs increase the governments concerned tend to use export markets to dispose of excess stocks. Both the U.S. and the E.C. use export subsidies on several products, and Japan used export subsidies on rice during the late 1970's. In the 1980s, the various programs of government support and surplus disposal have become so expensive that both the E.C. and the U.S. have been forced to consider policy changes which would reduce budget expenditures. The changes include a move to lower levels of market supports for many products, a limit to the quantity of products supported, and the imposition of producer fees on excess output to pay for storage and disposal costs. Even so, indications are that these program expenditures have nearly reached their political limits, As a result, there will be a trend toward lower product prices in both the domestic markets and in world trade as the supports are lowered and production incentives continued. These programs have had, and are likely to continue to have, a disruptive effect upon international markets for agricultural products. This disruption probably is the most most dramatic in the international sugar market. The EC has followed a policy of high internal prices which has resulted in the EC becoming a major sugar exporter. Consumption has declined and production soared as internal producer prices have reached five times the - 36 - world market price. The United States has re-adopted sugar import quotas which maintain internal sugar prices at four times world prices and which has stimulated the steady substitution of other sweeteners for sugar. Thus, the U. S. import quota for sugar is declining rapidly as domestic sugar production is maintained and total sugar use falls. Low cost sugar producers, which are pri- marily developing countries, are both being denied access to the two largest markets and are being increasingly faced by competition from subsidized production in the few remaining markets. While sugar is the extreme case, it is evident that the agricultural policies of the developed market economies result in higher production of many items, reduced consumption of some products, and, as a result, lower world prices than would be the case in the absence of these interventions. Moreover, as is most obvious in the case of sugar, the various import protection and other subsidies distort and sometimes completely mask comparative advantage. The short-run gainers of these programs are the producers being protected and the countries which are large importers of these products, namely the USSR, Japan, and some devebapig countries. The short-run losers are the consumers and tax-payers in the countries concerned and the producers in developing and developed countries which do not have the same subsidies to protect producer incomes, - 37 - The long-run costs are the rather substantial costs resulting from significant and continuing misallocation of real resources. Too many resources are being used to produce agricultural products in high-cost areas and too few resources are used in low-cost areas. Despite the high cost and obvious resource misallocation, it is not reasonable to assume that these programs will disappear quickly in either the E.C. or the U.S. The economic and social dislocations that would result in the agricultural and related industries in the EC and the U. S. would be too great to be imposed upon industries already plagued by low demand growth and over-capacity. The experience of the U.S. and the E.C. in these programs carries some lessons for developing countries which might consider emulating some of these programs. When there are severe downward pressures on world commodity prices, even these huge wealthy governments eventually find that the program costs more than they can bear. Moreover, in spite of the dominant size of the agricultural industries and the resources available to the governments concerned, they have not been powerful enough to permanently alter the powerful economic forces which are driving world commodity markets. Agricultural Policies of Industrialized Centrally Planned Economies As noted earlier, the industrialized centrally planned economies made a basic policy change in the early 1970s which had - 38 - a profound effect upon world agricultural trade. These countries have had a policy of maintaining low and stable internal food prices over a long period of time. This was accomplished by having the state procurement agencies pay substantially higher prices to internal producers than were charged to consumers. Similar losses were sustained on imports. Prior to the 1970's these countries generally dealt with domestic production variation by internal belt tightening, However, as the production of livestock expanded in modernized production systems, belt tightening meant severe disruptions in the poultry and livestock industries and, subsequently, in the consumer meat and poultry supplies. In the early 1970's, these countries began to use grain imports as a method of offsetting domestic crop variations. This had two immediate results: 1) It brought a sharp rise in world trade of these products, and 2) It shifted the internal production instability from their internal systems to world commodity markets. Some of the countries maintained these policies by the use of supplier export credits which added to their rapidly mounting external debt. Finally, in the early 1980s when these debt burdens and balance of payments problems became excessive, several countries reverted to their earlier belt tightening as a 39 - way of coping with internal production short falls. The result has been a decline in internal meat and poultry consumption. The USSR has maintained its import policies and now accounts for the largest variations in year-to-year changes in international grain trade. For instance, the Soviets increased imports by 17.5 million tons from 1978-79 to 1979-80 and by 22 million tons from 1983-84 to 1984-85. Imports were reduced by 13.5 million tons from 1981-82 to 1982-83 and are estimated to go down about the same amount from 1984-85 to 1985-86. T; ble 7 shows that year to year changes in world grain trade have been in the same direction as USSR imports in 11 of the last 15 years. There is no evidence to indicate that this year to year variability in imports by the USSR is declining as it has in Eastern Europ;ean countries. Thus, it appears that this source of instability in world grain markets which has now persisted for one and a half decades is likely to continue. IV. The Future Context For Trade and Development Policy The 1970's and 1980's have brought a series of important changes in the world economy and these, together with changes in agriculture have brought major changes to the world agricultural investment and trade situation. It is now possible to view which of these are likely to persist for a significant period and thus deserve serious attention in agricultural development and trade policy. - 40 - fable 7 Changes in World Grain Trade and USS.R Imports Change in total trade Change in USSR Imports (in million metric tons) 1970/71 - 71/72 +0.3 +8.6 1971/72 - 72/73 +24.9 +19.6 1972/73 - 73/74 +7.8 -11.6 1973/74 - 74/75 -4.7 -5.7 1974/75 - 75/76 +12.6 +20.5 1975/76 - 76/77 +5.2 -15.4 1976/77 - 77/78 +14.5 +8.1 1977/78 - 78/79 +3.1 -3.3 1978/79 - 79/80 +20.5 +15.3 1979/80 - 80/81 +16.9 +3.6 1980/81 - 81/82 -4.2 +11.0 1981/82 - 82/83 -9.3 -13.5 1982/83 - 83/84 +5.9 +0.5 1983/84 - 84/85 +13.6 +22.5 1984/85 - 85/86 -16.9 -17.0 Source: USDA, Foreign Agricultural Service - 41 At the world economic level several important conditions seem likely to persist: 1. The international mobility of capital will continue. 2. Unstable exchange rates will continue as international capital flows place more pressures on government policies. 3. The LDC debt problem will result in continuing ,balance of payments problems and will restrict voluntary foreign bank lending for the foreseeable future. These situations all contribute to the following likely trends in agricultural trade and development issues. The boom in public and private investment in agriculture, in both developed and developing countries, has resulted in large increases in productive capacity. this capacity, together with new advances in biotechnology, will combine to put continuing downward pressure on the real prices of agricultural commodities in the coming years. The economic factors which contributed to the rising instability in agricultural commodity markets have not disappeared in the 1980's. Indeed, some of them, such as the increasing role of the irregular importer or exporter, is increasing and adding to other sources of instability. - 42 - The po2icies of developing countries which tend to exacerbate both the downward price pressure and market instability seem likely to continue. Even though these policies are being changed, the changes are likely to be slow. Despite these difficult trends, the importance of developing countries in agricultural trade will continue to grow -- both on the importing and exporting sides. This means that the developing countries will have to reexamine how they can become more efficient in the new trade context, because they will no longer have worldwide commodity price inflation and generous foreign loans to hide bad policies and economic mismanagement. V. Reviewing Priorities for Development and Trade Investment Since it is clear that the longer-run trends in supplies are such that physical shortages and rising real prices are not in prospect, national development planners and international lending institutions must take this into account in planning investment and growth strategies. It probably would be embarassing to go back and look at the price projections used in calculating cost- benefit ratios for many agricultural production investments made in the 1970's, whether the calculations were made by project planners or private investors. But, past mistakes are not the issue; it is important, however, to avoid new mistakes. - 43 - As a minimum, it is now possible for national planners to drop the view that investments in achieving food self-sufficiency were desirable over any and all export oriented investments, in or out of agriculture. Also, there clearly is no economic rationale that can be found to justify the investment schemes for large scale storage of basic grains and oilseeds as a method of dealing with possible frequent world crop shortfalls. This is not to imply that developing countries should not be making new investments in producing agricultural products both for domestic consumption and for export. It does suggest, however, that some of the criteria used in making new investment should be re-evaluated. In the future, much of the changes in agricultural output will come from the new biotechnologies which drastically adapt plants and animals to new environments. But increasingly, the development of those new agricultural technologies is being done in the private sector and thus are becoming proprietary materials. This suggests that many countries should re-evaluate their policies regarding exclusive reliance upon public agencies for development and distribution of new seeds and animal production techniques. Private sector companies often refuse to operate and share their technology in situations where there is a state monopoly for such activites. Countries which deny these private companies the right to operate may in the process end up denying their producers the new technology necessary to become and remain competitive in world agricultural markets. - 44 - A second issue.that needs re-examination is continued use of debt financing for the development of agricultural production capability. For a number of reasons many governments have prohibited equity financing of agricultural production, processing, and marketing activities. Instead, they have relied heavily or exclusively upon government projects financed by multilateral lenders or foreign private banks. There are a large number of agricultural development activities which clearly require that they be funded by the public sector and controlled by it. These include projects which are so large that the private sector is unable to handle them; projects where there are major external costs and benefits which are not reflected in the market, and projects where it is not possible to use market prices to provide returns. Large scale irrigation, drainage, and flood control projects are an example, as are roads, agricultural schools, and other investments in human resources. While there are many valid cases where only public sector investment can be expected, in agriculture they are far fewer than the investments actually made or attempted. The results are several. First, the scarce public sector funds are diverted from other needs vhich can only be met by the public sector. Second, public sector investment almost always leads to public sector operation, and in the dynamic field of agricultural operations there is no evidence this is as efficient as private sector - 45 - management and a lot of evidence to the contrary. Finally, the over-reliance on public sector investment and management prohibits capital-poor countries from tapping the immense pool of private capital within and outside the country. It is true that if private capital is to be allowed to enter the fields of agricultural production, processing, and marketing, capital will only be invested with the expectation that it will receive competitive returns. On the other hand, it should be remembered that if investments financed by public borrowing abroad fails, the country has a huge debt which requires repayment. If a private venture fails, it is the capital of the investors involved which is lost and the public at large does not bear any obligation. In most countries outside the centrally planned economies, the agricultural production sector is privately owned and managed. In many, however, the sectors that produce goods used by farmers, i.e., fertilizer, seeds, machinery, etc., are publicly owned and much of the sector which markets farm products, both domestically and to and from international markets is publicly owned and managed. It is this complex of activities which needs re-examination, especially if a country is going to be involved in either importing or exporting agricultural commodities. It is estimated that almost 90 percent of world wheat imports are by countries which use state-run agencies as the sole importer. Marketing - 46 - boards or similar agencies also control a substantial proportion of agricultural exports, especially in developing countries. One of the reasons that barter and countertrade have become so common in the 1980's is because so many countries are not capable of marketing their products effectively in competitive world market situations. There are two kinds of investments which have been largely ignored in the rush to increase agricultural output of the 1970's. One is the investment in physical facilities needed to collect, store, process, and trade farm products. The other is the sets of rules and institutions which will support competitive trade in such products. Countries expecting to rely in a significant way on either a significant export or import of commodities often need to give a much higher priority to the physical facilities to store and handle these products in an efficient manner. This physical handling often affects the quality of the products as well as the cost. Grain, oilseeds, and rice which is not properly handled loses quality just as fruits and vegetables do, though not as quickly, In many cases, agricultural commodities produced in developing countries would have a clear comparative advantage and would be able to compete successfully in world markets if the facilities for collecting, transporting, and selling them received the proper attention and investment. - 47 - There are some striking examples of success stories in this regard and in many cases they also involved the use of private foreign investment, both foreign and domestic. Among these examples are the development of the export of cassava and maize for animal feed from Thailand, soybeans and products from Brazil, fruit from Chile, and cut flowers from Columbia. There is an area in which government policies play a significant role even if the private sector is the source of financing and management of the activities. This is the area of provision of market reporting activities, the establishment and enforcement of grades and standards, and the establishment and maintenance of health and sanitary regulations. The establishment of an adequate reporting system to report prices, quantities, and trading activities on both local and international market levels is a key element of tying local producers and marketers to international markets. Relatively sophisticated and inexpensive sources of information on international markets is available on almost an instantaneouos basis. Many developing countries do not avail themselves of such information even if it might be relevant and it is not adequately disseminated. At the local and national level the information is even less adequate. Much is made of the ability of large corporations to exploit small farmers, traders, and others. What is not recognized, however, is that the main advantage enjoyed by such - 48 corporations is a superior knowledge about supply, demand, prices, and related factors. It is not unusual for large multinational corporations to have more timely and more precise information on such matters in a given country than does the government of that country. Moreover, when such information is known to the government, it is often not made public in the mistaken belief that public knowledge will lead to adverse public reaction. Of course, this kind of attitude gives an even greater advantage to those large organizations which can afford to collect their own information. Modern sampling techniques, data transmission, mini-computers, and communications have -dri stically lowered the cost of developing and maintaining accurate and timely market information. More attention needs to be given to the development of such information in developing countries dependent upon either import or export trade, Goods traded in international markets, especially agricultural commodities, need to meet certain grades and standards to be acceptable in international trade. In addition, most developed countries have strict laws relating to imports which might carry plant and animal diseases and chemical residues which threaten human, animal, and plant health. For instance, the United States has strict laws prohibiting the imports of many tropical and semitropical fruits and vegetables unless it can be proven that the exporting country is either free of the insects or diseases or that an agreed and approved method of treatment - 49 - has been used which eradicates the pest in question. Other countries have equally stringent laws and regulations. It is unreasonable to expect the governments of the importing countries to establish and maintain the research facilities or undertake the disease and pest eradication programs necessary in exporting countries to make their exports acceptable in developed country markets. Many developing countries would have a great comparative advantage in the production of many products which could compete in temperate climate developed countries, especially in colder seasons, if they would invest in adequate research, control, and treatment techniques to allow entry of a wider range of their products into foreign markets. VI. Dealing with Market Instability One of the characteristics of agricultural markets that developed in the 1970s was a substantial increase in market price instability. As already mentioned, this instability has its sources in a variety of changes that have occurred. This includes greater participation in world agricultural trade by centrally planned economies as a method of offsetting their domestic production instability, exchange rate fluctuations, widespread trade barriers, and erratic national policies of major exporter governments. It appears unlikely that these various sources of instability will be removed in the near future; therefore, countries involved in trade must consider ways to combat instability. - 50 - Commodity Agreements The period of the late 1960's and into the 1970's might be termed the era of international commodity agreements. The sharp rise in commodity prices of the 1970's gave added support to those . who already believed that greater management of world trade would be in the interest of a large number of countries. This approach received additional encouragement when the E.C. included commodity agreements in grains, oilseeds, dairy products, and bovine meat in their negotiating mandate for the Tokyo Round of GATT agricultural negotiations. By far the most ambitious of these attempts was the attempt to negotiate an international grains agreement which involved coordinated stock-holding by both exporting and importing countries. It would have involved commitments to undertake stock accumulations at various points which were to be triggered by falling prices expressed in terms of U. S. dollars and stock releases at various points triggered by rising prices. The negotiating effort failed. It failed because there was not sufficient commitment by countries to provide adequate stocks and because of major disagreements as to the advisability of attempting to guarantee absolute minimum and maximum prices. In retrospect, however, it is probably good that agreement was never reached because it was conceptually flawed and would have proven unable to cope with subsequent events. - 51 - There were major flaws in the approach to the grains agreement, either of which probably would have made the proposed agreement unworkable. One was the basic question of whether a commodity agreement using U. S. prices as its trigger mechanism can be successful in a situation with widely fluctuating exchange rates. A second flaw was the concept that all trading nations, importer or exporter, rich or poor, acquire and release stocks in a coordinated fashion linked to a U.S. price index and without regard to their internal needs and crop conditions. While each country needs to evaluate its food grain stocks policy to meet its policy objectives, it does not follow that the participation of most countries in a coordinated stocks policy is either necessary or desirable. Moreover, the cost of storing such stocks in diverse and often unfavorable locations would be large. This was recognized in the LDC demands for concessional terms both for acquiring and holding stocks. If, however, stock- holding is in fact to be financed by developed market economies, it would almost certainly be more efficient and less expensive for them to do it in their own countries. Finally, the approach of world-wide coordinated stock- holding ignores the basic issue of where the basic sources of instability in the system lie. An examination of trade data suggests that among importers only the USSR, the EC, the People's Republic of China, and occasionally India show enough - 52 - There were major flaws in the approach to the grains agreement, either of which probably would have made the proposed agreement unworkable. One was the basic question of whether a commodity agreement using U. S. prices as its trigger mechanism can be successful in a situation with widely fluctuating exchange rates. A second flaw was the concept that all trading nations, importer or exporter, rich or poor, acquire and release stocks in a coordinated fashion linked to a U.S. price index and without regard to their internal needs and crop conditions. While each country needs to evaluate its food grain stocks policy to meet its policy objectives, it does not follow that the participation of most countries in a coordinated stocks policy is either necessary or desirable. Moreover, the cost of storing such stocks in diverse and often unfavorable locations would be large. This was recognized in the LDC demands for concessional terms both for acquiring and holding stocks. If, however, stock- holding is in fact to be financed by developed market economies, it would almost certainly be more efficient and less expensive for them to do it in their own countries. Finally, the approach of world-wide coordinated stock- holding ignores the basic issue of where the basic sources of instablity in the systems lie. An examination of trade data suggests that among importers only the USSR, the EC, the People's Republic of China, and occasionally India show enough - 53 - year-to-year changes in import requirements to substantially affect world markets. On the export side, the U. S., Canada, EC, and Australia all have weather or policy induced changes in export availability large enough to have an effect upon world tradeable supplies and prices. It is both unreasonable and unwise to attempt to involve almost all trading nations in costly and complex programs to solve problems originating in a few countries. The coordinated stock-holding approach failed to address the basic source of the instability arising from the wide swings in import by the USSR and China. Although the USSR participated in the negotiations, it never agreed to meaningful stock-holding levels with transparency needed to verify them. The PRC never participated in the negotiations. One of the driving forces behind the widespread LDC participation in the negotiations undoubtedly was their belief that they could influence key decisions on important issues such as stock size, acquisition prices, and release prices without having to pay as significant a portion of the costs of those decisions. As it turns out, that was and remains an erroneous assumption. It is unrealistic to assume that democratically elected governments in developed exporting countries are likely to become involved in programs which are perceived as being against the interests of their producers, sharply increase their budget costs, or both. - 54 - Thus, the grains agreement which was attempted during the 1970's would not have provided the supply security sought by the developing countries as a hedge against absolute shortages, nor would it have provided the price stability in local currency they sought unless their currency is tied absolutely to the U.S. dollar. Given these facts, which are more obvious now than a decade ago, it will be necessary to look at other alternatives to provide market stability. Using Market Mechanisms to Reduce Instability In general, when the problem of market instability arises governments tend to intervene, attempting to isolate their economy from the problem. The successful isolation of large blocs of the world economy from market changes will add to insta- bility in the remaining portion of the market. The realities are that many of the devices which are used to isolate individual countries from the world market forces are costly and may not be effective. This is true of variable levies as used by the EC, state trading as used by all centrally planned economies, as well as many which are not, and most all other * forms of import controls and export subsidies. In the first place, none of these trade-restricting devices isolate agricultural trading economies from the effects of external macro economic disturbances, i.e., exchange rate and interest rate fluctuations. Indeed, there is substantial - 55 - evidence that given the huge and rapid capital flows which take place now even the richest and most powerful government can exert little direct influence on exchange rates, and must look to basic monetary and fiscal policies to bring about greater exchange rate stability. A number of new instruments have been developed and are available to countries, buying and selling agencies, and private firms which allow most of these risks to be shifted to other parties through the use of forward market transactions. There are now forward markets for major trading currencies, major agricultural commodities, and many other basic commodities (oil, lumber, aluminum, copper, etc.). The proper use of these markets and other risk management tools can assist developing countries and/or firms in those countries to cope effectively with these new sources of instability in both world exchange rates and commodity markets. Careful attention should be given to the effective use of these tools by developing countries and by the multilateral lending institutions which are assisting these countries. However, probably the greatest contribution to greater stability in agricultural commodity markets would come from a reduction in the number of governmental interventions in the buying, selling, and trading of commodities. The annual changes in world output of agricultural commodities under normal conditions are too small to bring about the market instability we have seen and the annual changes in market demand are smaller - 56 - yet. Most of the instability arises as governments attempt to isolate their producers or consumers from market forces, thus pushing all of the instability upon a minor part of the world market. Many of the restrictions involved are under the control of * individual gove-nments and can be dealt with by them. Many of the practices involved, however, are an insitutionalized part of the world trading system in agriculture and have to be dealt with in a broader context. VII. GATT and Agricultural Trade Agricultural trade has been treated differently in GATT from the beginning. The use of export subsidies in non-agricultural trade is prohibited under GATT, whereas the use of subsidies in agricultural trade is not. The use of import quotas on non- agricultural goods also is prohibited except for certain specialized situations, whereas import quotas are allowed for agricultural products whenever there are domestic production control programs for a like or competing product. Moreover, the GATT authorizes the use of state trading agencies as long as they act in a non-discriminatory fashion. State trading is the most common device used to control both import and export trade in agricultural commodities, - 57 - The rules relating to agricultural trade, especially relating to export subsidies, have been an increasing point of contention in recent years. Most of the disputes have involved the E.C. use of export subsidies on almost all agricultural pro- ducts exported. In addition to the general controversy over the overt use of export subsidies, there is no generally accepted set of international guidelines as to which kinds of domestic agricu- Itural programs constitute an export subsidy. For instance, pay- ment of a bounty or grant per unit of product exported clearly is an export subsidy, but the status of direct income payments per unit of output as in the case of target price payments in the U.S. is uncertain. In recent years, both the EC and the U.S. have charged Argentina and Brazil with the use of export subsidies to oilseed processors via the use of an export tax on unprocessed soybeans. Except in cases where they are directly involved, most developing countries seem reluctant to become involved in GATT negotiations relating to agriculture and have not been a significant force in pushing to bring agricultural trade rules in line with other GATT rules. There might be two reasons for their apparent lack of involvement. One might be a belief that developing countries benefit from the general lack of rules regarding subsidies because in some fashion their advantage in world markets is increased. A second reason for their continued disengagement might be that they view their economic interests served by the export subsidies of others. - 58 - Closer analysis is likely to prove these assumptions wrong for several reasons. One is that if export subsidies continue to be a way of life in agricultural trade, it is almost inevitable that countries with the largest treasuries will win the contest of comparative subsidies. This is especially true if developing countries find themselves competing in subsidies with rich developed countries where agricultural producers have substantial political powers as is the case in the E.C. Second, except for a few products like sugar, developing countries have apparently viewed themselves as importers and thus as gaining from artificially depressed world trading prices in agricultural commodities. This is wrong on several counts. First, developing countries are dominant in the exports of certain commodities such as sugar, rice, palm oil, and cotton. They are major exporters of wheat, soybeans and products, meat animals, animal feeds (coarse grains and cassava), and many other products. Artificially depressed world prices clearly hurt producers in exporting developing countries just as they do those in exporting developed countries. Developing countries which are net importers also are hurt by widespread use of export subsidies which encourage excess out- put and depress world market prices. Apart from one or two city states, most developing countries do not depend upon imports of agricultural commodities for a large portion of their supplies. The subsidy-created low import prices give the wrong signals to - 59 - developing country governments and often to their farmers in turn. It is a common feature that developing countries are told that they must provide their farmers with reasonable prices to insure the profitability of farming and provide necessary incen- tives. For exporting developing countries, doing this implies a budget drain they can ill afford; for importing countries there is a tendency to use the low world prices either to depress internal farm prices or as a source of government revenue. Actually, the biggest gainers from these low prices are the Japanese and the Soviet Union. Both these countries import large quantities of agricultural commodities but insulate their domestic producers from world markets, Over the years, a healthy concern about the price depressing effects of excessive quantities of low-priced'food aid has deve- loped. Both donor and recipient countries have taken policy measures to reduce the adverse impacts of large-scale food aid. It would seem obvious that measures should be taken to reduce the adverse effects of large-scale export subsidies upon prices and resource allocation in commercial trade, which exceeds food aid both in volume and value by many-fold. For all these reasons, developing countries have a major interest in improving GATT rules relating to agricultural trade. In general, developing countries have concentrated on trying to achieve international commodity agreements and special conces- sions on exports to developed countries. They have paid too - 60 - little attention to rules regarding trade with each other and general trade rules, or when rule changes have been suggested they have opposed them in the mistaken belief that the present imprecise rules are to their advantage. Inasmuch as the present trading practices of a number of countries are a major contribu- tion to continuing instability in international agricultural markets, it is in the interests of most countries to reduce these destabilizing practices. VIII. State Trading Agencies in Agricultural Trade The use of state trading agencies in centrally planned economies is to be expected. What is not expected and appears to deserve re-examination is the use of state trading agencies in market economies. The use of state trading agencies as the sole buyer to control imports of agricultural commodities is pervasive throughout developing countries. In many cases, these agencies also own and are responsible for the storage and internal distribution of the primary product to processors and other users. There also is widespread use in developing countries of governmental agencies as export marketing agencies for agricul- tural commodities. There are several reasons for this situation. One is that the price of basic foodstuffs is a politically sensitive issue, - 61 - especially among the urban populations in most developing countries; therefore, it is assumed that having the import and export of agricultural commodities under government control gives the government control over this politically sensitive area. Another reason governments use state trading agencies is that these agencies often are used as revenue sources, especially on the export side. Cases abound of state marketing agencies which consistently pay domestic producers lower than world prices for export commodities, thereby levying a heavy export tax on producers. Conversely, an equal number of cases exist where import agencies constantly subsidize the consumer price of key food imports, thereby subsidizing wealthy and middle-class consumers in the name of equity for the poor and also penalizing domestic producers whose prices are depressed by the subsidized import prices. It is bad enough when domestic producers have to compete with imports which contain price depressing subsidies from exporting countries, but it adds insult to injury when they then have the subsidy multiplied by their own country. These agencies apparently were created because of one or several assumptions which deserve examination. Apparently, one is that these agencies would be more efficient than would the private sector in importing and exporting, storage, etc. Closely related is a belief that part of this efficiency is from the elimination of excess profits that would accrue to the private - 62 - sector. These profits are often attributed to a somewhat elusive "market power" generally believed to be possessed by almost everyone involved in marketing farm products, especially by multinational firms. A good share of the excess profits argument arises from a failure to understand why some trading firms have shown substantial profits. Many of those profits, especially in the 1970's, were high returns to accurate information about market conditions, and as the amount of market information from both public and private sources increased those returns have declined appreciably. There is little.evidence to support the belief that there are "excess" profits in the importing and exporting business. In many parts of the world, these companies are publically traded stock companies whose business activities and earnings are public knowledge. In those cases, they are generally not more profitable than in other industries. Moreover, in many parts of the world, including the U. S. and Europe, farmer's co-operatives have entered the importing and exporting business and have not found them a high profit area. Indeed, the competition has been so great and margins so low that a number of these co-ops have withdrawn from the business. There also is little evidence to support the conclusion that government agencies are more efficient than the private sector in - 63 - carrying out international trading functions for agricultural commodities and there is substantial reason to believe that government agencies of individual countries would be less efficient in carrying out many of them. In order to understand this, one needs to view these trading functions as two separate but integrated functions. One function is the physical collection, storage, handling and transport of the products concerned. The other function is the collection of market information, the handling of risk, and the integration of these functions with the physical handling of the product. One of the arguments used to support government agency monopolies in these trading functions is that there are substantial economies of scale and that this is achieved best by these government agencies. However, if the scale argument is valid, as it may be, in the absence of overt government restrictions, it will be achieved by the private sector as well as the public sector. Moreover, in international trade activities much of the scale may be achieved through worldwide operations rather than by monopoly operations in a single country. For instance, this would be true in bulk shipping where the scale effect of time chartering can be achieved. It is in the area of information gathering and use of risk management tools that the private firms excel at a time when these functions are of rising importance to the cost-effective execution of agricultural trading. These management skills are very specialized and they must be integrated. Moreover, a large 46 - 64 - firm engaged in. both buying and selling simultaneously faces a substantially differed exposure to risk than does a single agency engaged in only a single activity, i.e., importing. This is especially true where the risk exposure involved both product prices and exchange rates. One of the greatest areas of weakness of the state trading agencies is on the international marketing side. In the bulk commodity area this is not as difficult, but once one moves away to the marketing of more sophisticated products which involve processing, packaging and direct appeals to foreign consumer preferences most state trading agencies are not very skilled. Even for bulk commodities, many countries have come to rely upon large international trading firms as intermediate buyers and sellers, recognizing that these firms are more efficient than they can be. One of the primary reasons for the pervasive use of these state trading agencies is likely to be as a substitute for sound internal economic policies and the development of rational sound economic institutions which would allow markets and the private sector to function, These state trading agencies serve as an ineffective and often counterproductive substitute for a sound monetary and exchange rate policy, a sound agricultural policy, or a sound welfare policy for low-income consumers. They often do so, however, at great cost to the agricultural sector of the country concerned. - 65 - It is interesting to note the contrast between the way the agricultural sector trade is handled and the way the manufacturing sector for textiles and shoes is handled. Shoes and textiles have been two of the areas of most rapid growth in export earners for developing countries. By and large they have been developed with private capital, often foreign, and the production and marketing have been carried out by the private sector. (Even in centrally planned economies these sectors have a large component of private sector participation). A final reason for examining the role of these state trading agencies is that they often involve the use of substantial capital and direct operating expenses which are a considerable drain upon the government budget of the country involved. Moreover, it is almost impossible to attract foreign (or domestic) capital investment in agribusiness ventures when they can expect to compete with government owned and subsidized enterprises. Given the present and prospective debt burdens of the governments of many developing countries, the prospects of attracting new foreign bank loans for additional investments of these types are very poor. Therefore, countries are increasingly turning to a policy of removing the government activities in many of these fields and turning to foreign private investors. An example is the Government of Turkey which is actively seeking foreign private capital investment in the building and operation - 66 - of grain importing and exporting facilities, internal handling facilities, seed production facilities, and livestock and poultry production and marketing facilities, all of which have been government controlled in the past. This approach would appear to deserve careful examination by a number of countries and the multilateral institutions which assist them with agricultural investments financing. It will, however, require that a whole new complex of policies be understood, examined and improved in order to make it work. IX. Implications for the World Bank The significant changes which have occurred in the past decade have drastically changed the context within which the bank staff ought to consider bank projects related to agriculture. It is clear now that projects for agricultural production expansion should look carefully both at the internal production possibilities and at the possibility of using trade to achieve the same level of internal consumption of the products involved. Whereas a decade ago the pursuit of self-sufficiency in food products seemed a national objective for many developing countries, it now may be a goal which will cost these countries a great amount in terms of real resource use relative to other economic alternatives they might have. If countries have a real - 67 - comparative advantage in producing non-food crops or other products it will be lost by diverting scarce capital and other resources into high-cost agricultural production investments in the face of declining real prices of food commodities. This does not imply that developing countries should not invest in agriculture or that they do not have comparative advan- tage in the production of a large number of agricultural pro- ducts; in fact, in many cases quite the contrary is true. However, it means that projects should be considered which will enable developing countries to fully take advantage of their potential production capability in competitive world markets. The present and prospective future situation in world agriculture and agricultural trade has several implications for The World Bank and its operations. Included are 1) information needed on a systematic basis, 2) possible reevaluation of scope and criteria for agricultural lending, and 3) consideration of assistance for developing countries in agricultural trade related areas. - 68 - New Information Needed Agricultural trade is very important to developing countries and is likely to be more so in the future. It appears that neither The Bank staff nor many of its client countries have available to them a thorough and comprehensive review of the world agricultural trade situation. Certain aspects of this information is available in Price Prospects for Major Primary Commodities, but most of what is needed is not available. The information needed (on both a historical and current basis) are major developments in trading countries and in GATT which are likely to have an effect upon the economic interests of countries which either import or export agricultural products. Issues to be monitored would be major changes in domestic legislation of important countries or trading blocs (the U.S. farm bill, E.C. policies) major changes in import or export policies (the U.S. countervailing duty cases and E.C. regulations on testing for aflatoxin in feed ingredients, etc.). This information would be useful in two regards. One, it would give Bank project officers an overview of significant economic policies which are likely to affect project viability. Second, if made available to client countries, it could assist them in adjusting their policies to meet important changes in trading conditions. For instance, if a major importer (the U. S., E.C,, or Japan) has made a new determination that a certain policy constitutes an illegal subsidy and will be countervailed, - 69 - exporting countries would do well to review their use of such policies and project officers would be advised to be certain that project viability is not contingent upon similar subsidies. Second, an evaluation of the trade impacts of new investments needsto be considered in a systematic way (this is much more than a balance of payments impact). In addition, when project analysis is being done for an agricultural project, careful attention to external trade issues (such as exchange rate distortions) needsto be included. It is no longer enough to look at whether internal ratios of input Prices and output prices are favorable; it also is important. to look at current and prospective import and export prices for input and output. The Scope and Criteria for Agricultural Lending The use of mechanical input-output ratios in an engineering or agronomic sense may lead to excessively restrictive criteria for agricultural lending. It is impossible to quantify the benefits of an improved market reporting information system in a country or the development of a functioning risk management system. Yet, over the long run the functioning of these institutions may have more to do with the success or failure of agricultural investments than does the specific accuracy of physical input-output ratios. A second criteria which deserves consideration is asking the questions "could and would private investment do this project as - 70 - efficiently, or more efficiently as the public sector." And "if this investment is made, will it have a significant impact (positive or negative) upon private investment (local or foreign)." It is important to understand that these are serious and important questions of real resource mobilization and use at a time when investment resources are scarce; they are not merely philosophical questions. Assistance for Developing Countries in Trade Related Areas It is quite common for The World Bank to send major study teams to a country to carry out pre-project analysis of the agricultural sector. This is commonly done on matters such as agricultural education and agricultural research, as well as various projects for physical structures. The Bank should consider mounting pre-project teams of a similar type in the agricultural trade area with a view to looking at the entire physical structure, institutional structure and policies which directly and indirectly effect the efficiency of international agricultural trade by selected countries. In many cases, these might be viewed as an analysis to determine whether "retrofitting" might be useful as a country has gone from self-sufficiency to exportable surpluses or to becoming a major importer. - 71 - Such reviews might avoid some of the past difficulties which The Bank has had in bringing about certain policy changes in sectors heavily involve.d in importing and exporting, such as the Phillippine coconut industry. While the Bank was able to induce the Phillippine government to produce a report on the coconut sector, that report did not effectively address the effectiveness of its export capabilities as such and, thus, omitted much information of potential value to The Bank and the country. It would not be surprising if such reviews turned up substantial problems in the ability of many developing countries to compete effectively in international markets. Many of these might then be remedied by Bank financing of new institutional structures, new foreign or in-country training for the public and private sectors, and, in some cases, new physical facilities required to carry out international marketing. Additionally in the trade area, The Bank should examine ways it can assist its client countries in better evaluating their position regarding GATT issues and their interests in them. These negotiations are long and complex, and unlike UNCTAD, each country will have its own set of interests and priorities to defend and negotiate and cannot view the matters as generic issues. At present the large developed countries have a substantial advantage in such negotiations because of large and experienced staffs. - 72 - The Bank also should help developing countries put in place the necessary institutional mechanisms and personnel to carry out modern risk-management techniques where public sector agencies are responsible for imports or exports. This would involve sending a team of experts to analyze the individual country situation, the development of a specific program which would enable the country to carry out effective risk-management techniques and the implementation of that program in terms of personnel training, computer hardware and software, and associated physical investments necessary for the physical execution of importing and exporting. It is likely that undertaking this function would involve the heavy use of individuals from the private sector who have actual experience in such risk management. Finally, the Bank should consider the mounting of expert review and advisory teams to help countries which are seriously interested in attracting foreign private investment in the agricultural sector. These teams could examine the policies and regulations of the country and evaluate what changes might be necessary and/or desirable if there is serious interest in attracting such investment. As matters now stand a country may profess great interest in private investment but expect to maintain a series of policies which in fact will make such investment unattainable. At present, individual companies have to spend large amounts of time and money attempting to evaluate the policies which exist and then negotiate individually to change those that concern them. - 73 - The bank should consider the possibility of projects to upgrade the, agricultural marketing information system in developing countries. It is common to have bank survey missions on agricultural education, agricultural research, and agricultural training which look carefully at the production of these systems it i country and which often lead to loans to strengthen these sectors. It would appear that similar missions should be mounted on agricultural market information. Such a group would look at present availability, timeliness, and dissemination of information on domestic (and international) prices, quantities, supplies, etc. of key agricultural products and evaluate ways to improve the collection and dissemination of such information. We have rightly been concerned about the accurate and timely dissemination of research information on technology but in general we have failed to recognize the importance of having the key information to allow local, national, and international markets to work. Given the fact that the private sector must play a greater role in investment and trade in developing countries in the years ahead, The Bank should explore ways of improving and institutionalizing relations with the agribusiness sector. All parties would gain from a better understanding of the others' operations and closer working relations. - 74 - The Bank should consider establishing an agribusiness advisory committee which might help them develop some of the active ties outlined above. This committee could, if it functions well, both increase the effectiveness and add to The Bank's credibility in some of these new areas of activity. Finally, the Bank should consider establishing a professional personnel exchange program with agribusiness to build knowledge and competence regarding each other's activities. The Bank has a defacto exchange program with governments and universities around the world, but the movement of professional personnel between The Bank and the private sector is more limited. Many governments, including the U.S. Government, has found such programs useful in developing programs which have a major private sector component. It is likely The Bank also would benefit.