FOOD SECURITYConcepts, Basic

Facts,and Measurement

Issues

June 26 to July 7, 2006Dhaka, Bangladesh

Rao 4b: Factors in Food

Security 2: Trade and Aid

Learning: The important role of foreign trade and aid in the functioning of the FS system in many countries will be delineated. Trainees learn to use the analytic models developed earlier to analyse food aid impacts, incentives and efficacy.

Brief Contents• trends in role of food trade and their

significance• the competitive structure of global

food markets• international specialization: pro and

con FS• unbalanced trade, concept of terms of

trade, and the food terms of trade• the GATT Agreement on Agriculture;

implications of WTO for FS• role and types of food aid: programme,

relief and project aid• analysis of aid impacts: aid types and

deficit types

Historical Trends in the Role of Trade

• International food markets have developed very slowly. Transport & storage costs were huge barriers.

• Highly valued tropical spices dominated trade before 18th century. Thereafter sugar and tobacco, wheat and corn became important tradables.

• The trade patterns established in 18-19 c still linger on today. Western colonising powers developed their industrial export markets which were paid for through export of cash crops such as coffee, tea, rubber and palm oil. Late industrializers such as USA and Japan imposed stiff protective tariffs against imports. Thus, trade was selectively free in the colonizing but free trade was often imposed on the colonized.

Historical Trends (contd)• The depression & WWII saw colonies badly

affected by plummeting world prices.• Since WWII, cash crops are still major export

earners for many developing economies (DEs) though many in SSA are food importers.

• The cereals self-sufficiency of pre-1930s has given way to cereals being 40% of food imports of developing nations.

• The trade ratio for all cereals was 12% in 1993, 4% for rice, …22% for wheat. For comparison, 99% of coffee production was traded in 1993.

• The "North" exports commodities also consumed domestically, the "South" commodities with a minuscule home market.

The Competitiveness of International Markets

• Free Trade Argument Two countries N and S, which consume both commodities A & B and can produce both, CAN, by concentrating resources on producing the one which they can produce with greater relative efficiency, and trading that for the other, increase their total consumption of A & B combined.

• Basis of Comparative Advantage Could be climate and soils but also could be result of decades of investment in technology & appropriate infrastructure.

• Structures of Trade (Prebisch) Primary goods specialization can lock countries into slow-growing markets, and so either slow growth or falling terms of trade. This is a major explanation for inequality between N(orth) and S(outh) - recall the historical origins of the international division of labor.

• Many DEs are, in the short run, forced to choose between cash crops for F/E to pay for manufactured goods and, for many, even food OR to go for more food self-sufficiency

International Markets in Food Commodities

• These markets can scarcely be described as "free and competitive". Most advanced economies (AEs) have heavily protected farmers and farm exports.

• AEs have invented increasingly novel ways to protect farmers - concessional sales of surplus output, set aside schemes, and sanitary/phytosanitary regulations.

• These measures "exported" problem of low and unstable prices. Many believe this to have hurt DE farmers and a key cause of their poverty. The Uruguay-GATT was 1st to include AG in trade negotiations. Yet, AG remains the sector with much higher average rates of protection than industry in most AEs.

• But some doubt the relevance of highly protective policies pursued by some for the decision of others to keep their AG trade open or not. Yet others doubt whether the prices in world markets are the or even a fundamental force of poverty and low growth in DEs.

International Specialisation Pro

Food SecurityCan international specialization improve food

security? Consider some pros:• It can spread some risks: a domestic food crop

failure can be met with imports paid for by cash-crop exports.

• A country with more developed trade can also import food at lower transport cost and more easily. [But we can ask: does high trade makes for low transport costs or lost transport costs makes for more trade?]

• Insofar as greater trade yields greater national prosperity, this too can indicate better economic access to food. [Again we can ask: does greater trade make for greater national income or greater national prosperity cause greater external trade?]

International Specialisation Con

Food SecurityThere are also cons one must note:• International markets are not inherently less

risky than domestic markets. World prices are often highly unstable. Most DEs end up buying & selling in unpredictable markets.

• Some grain markets are notoriously thin (e.g., rice). Such a small proportion of world rice production is traded that variations in domestic production or demand result in very high price changes. Other markets (e.g., wheat) are more robust but dominated by a few major suppliers leading to dependence on one supplier and political influence.

• Even if trade benefits the "country overall", it may hurt the food-insecure and the vulnerable through adverse distributional shifts in income.

Unbalanced International Trade and Globalization

• Though often defended as the theory of international trade, the theory of comparative advantage makes some fundamental assumptions that do not seem to apply in practice. Major imbalanced prevail and the gains from trade highly unequally distributed.

• The rich North controls over 65% of world exports and most of the very large expansion in trade since WWII has been on account of the North.

• North-North trade accounts for more than half of all trade while South-South trade is a mere 3 percent. The North is the main export market of both the North itself and of the South.

• Trade expansion has substantially reduced the share of primary commodities (AG products, fuel and minerals).

• Primary products constitute about half of DE exports, and about 15% of AE exports. Many DE are dependent on export of one or two primary commodities.

Unbalanced Trade (contd)

• Low income elasticities coupled with new technologies restrict the growth of demand for raw products. Increased production can only be absorbed at decreasing world market prices.

• Primaries have highly competitive market structures as compared to the monopolies and oligopolies that prevail in advanced manufactures or services.

• DE suffer from greater export revenue fluctuations causing fiscal, macroeconomic and sectoral instability.

• All these factors have major implications for FS in the affected countries. They reduce or cause instability in food import supplies. By raising income risks, they prevent diversification and commercial development and so cause low incomes. This leads to a widening of market supply/import deficit as well as the demand deficit.

The Terms of Trade

Box 4.4: Terms of Trade 'Terms of Trade' are a measurement for the change of conditions in international trade. The following Terms of Trade concepts can be distinguished: 1) Commodity or Barter Terms of Trade show changes in prices of export commodities in relation to the price changes of import commodities (PE/PM). 2) Income Terms of Trade measure the total export proceeds of a country (export volume multiplied by export prices) in comparison with the total expenditures for imports (import volume multiplied by export prices) (EPE/MPM) 3) Factor Terms of Trade take, in addition to price changes, differences in productivity into consideration. They answer the question, how much can be imported for a given level of labour or capital input in export production (Single Factor Terms of Trade), or what is the rate of exchange of factor inputs in export production for factor inputs abroad in imported goods. To give an example: A skilled worker in Germany had to spend his wage income of 22 working days in order to buy an Indian carpet which was produced by an Indian carpet knitter in 240 working days.

GATT and AG Reform

Until 1993, 2 major sectors of concern to DE (AG and textiles) remained outside the GATT purview. The Uruguay round changed that situation. Apart from tariff reductions, the agreement also

allows some differential treatment of DE.

GATT and AG Reform (contd)

Box 4.5: The GATT Uruguay Round Agreement on Agriculture The implementation of the AA started in 1995, and the commitments of the AE to reduce support and export subsidies, to expand market access was to be completed by year 2000 while the commitments of the DE were to be completed by 2004.. The least developed countries are not required to make any reductions. The commodity coverage of the AA includes most AG products except rubber, jute, sisal, abaca and coir. The exclusion of certain products from the definition of agriculture does not imply that commitments to improve market access are not to be made. They are covered by negotiations under industrial products. However, domestic support measures for these latter commodities are completely excluded from reduction commitments as there are no such commitments for industrial products. Although the negotiations on tropical products were conducted separately from those on agriculture, in the end they have been grouped together with other agricultural products.

Uruguay Round Implications for Food

Security • What are UR’s implications for Negotiations for development and FS?

• Tariffication of barriers & tariff reductions are thought to make world markets more transparent and economies more integrated. This can enhance world-wide efficiency, growth, and hence FS.

• But liberalization will produce very limited gains for tropical products and for most low-income countries. Some, such as Lomé Convention countries, may even lose.

• If surplus production declines in AE, then, world prices are expected to rise. Aid supplies are also likely to decline. This will negatively affect FS in food-importing DE, in food-aid-dependent nations, and also stability of grain supplies. Its stimulating effect on food production may remain highly limited given the low supply elasticity typical of agriculture.

• It is AE that stand most to gain from liberalisation. So trade-based inequities will be compounded, not diminished.

The Role of Aid

• Food aid is, more than any other type of aid, specifically designed to enhance food security. Food aid is a resource transfer in-kind of food at concessional or better-than-market terms. It originated mostly as an instrument of surplus disposal of the surplus countries (USA, Europe in particular).

• Major food aid donors are the US, EU and the World Food Program.

Types of Food Aid

Food aid is classified into 3 main categories: • Programme, or non-project food aid• Relief food aid,• Project food aid.This classification is not clear since the

purposes can criss-cross in practice.Countries dependent on food aid would, in

its absence, be hurt by reduced food availability, or sharp price rises due to commercial imports, or to a worsened balance of payment.

Programmed Food Aid

• Programme food aid is provided to governments mainly for BOP or budget support.

• It is usually sold on local markets at prevailing or subsidized prices, but may also be used to build up buffer stocks.

• The "aid component" depends on the conditionalities of the aid given.

• Its effectiveness in FS depends on the conditionalities and on the type of deficit.

Relief Food Aid• Relief food aid is provided so as to be targeted

to beneficiaries who are victims of natural or man-made disasters. It accounted for 26 percent of all 1993 food aid.

• SSA received about two third of the total in 1993.• Setting up distribution channels in emergencies

is always difficult, especially in remote and inaccessible areas. But provisions can be made including vulnerability assessment, early warning systems, food security reserves at strategic locations, an institutional framework for effective response on all levels, etc.

• Effective relief assistance is assistance that is targeted by commodity type, quantity, and time according to need. But targeting cannot be accurate. General food relief beyond an emergency must be phased out to avoid dependency and distortions of local food production and marketing systems.

Project Food Aid

• Project food aid is similar to relief aid in that it is provided on a grant basis, in support of specific development objectives and beneficiary groups.

• Part of project food aid deliveries may also be monetised to generate funds to pay the costs of internal distribution.

• The difference between programme and project food aid is, in the latter case, largely reduced to the fact that food aid is not provided directly to the government.

The Role of Food Aid Interventions in Alleviating

Food Insecurity• The aid type depends on the nature

of food deficit & its causes (deficits being market supply/import deficit and an effective demand deficit). In Fig 4.6, p is import price andtotal deficit = market supply deficit (B-A)

+ aggregate demand deficit (R-B)

Food deficits and the scope of food aid interventions

Deficit Types & Aid Types

• B-A: Market supply/import deficit: Need for commercial imports or (if F/E constrained) programme food aid to cover gap between domestic D and S.

• R-B: Demand deficit: Need for project and/or relief food aid for targeted distribution to those lacking entitlements.

• R-A: Total (structural) food deficit: Needs to be covered by imports, and programme/project/relief aid in order to meet total requirements.

Avoiding Disincentive Effects

Programme Aid can substitute for commercial imports to cover (B-A) under a F/E constraint. The food aid can be monetised up to B-A without affecting domestic incentives. This, however, only applies under two essential conditions:

• 1) That the imports+aid do not exceed the deficit.

• 2) The food aid must not be sold at "dumping prices"

Avoiding Disincentive Effects

• Relief & Project Aid A demand deficit (R-B) is due to insufficient food entitlements. Targeted approaches of employment and income generation or direct food transfers can help. These are classical fields of relief and project food aid.

• But aid may lead to the sale of relief and Food for Work (FFW) rations by the beneficiaries. This may be due to poor targeting. Other reasons include immediate cash needs or preference for other types of food commodities, etc. Such factors may cause the recipients of relief and project food aid to sell part of the rations received, in spite of the fact that their household food requirements are not fully met.

Improving the Efficacy of Food Aid Interventions

Assessment of food aid efficacy must take into account:

• objectives of the food aid: improving FS, F/E support, fiscal support [Note: donor and recipient nations may have different goals]

• type of prevailing deficit (production, market supply, and/or demand deficits, latent, transitory or chronic food shortages)

• agricultural and food policy and the role of food aid in national food and/or nutrition strategies

• The intended and the actual use of food aid

Improving the Efficacy of Food Aid Interventions

(contd)• the extent to which target groups are

effectively reached• Disincentive risks of food aid resulting from

distortions of the local food system• The costs of food aid interventions (procurement

costs, international transport costs, internal transport and storage costs, administrative and management costs, leakage, etc.), VS alternative forms of "food" aid (e.g financial aid for imports, etc)

• To what extent food aid supplies represent additional resources VS competing for resources with other forms of development assistance

• The cost-effectiveness of food aid interventions in achieving food security in comparison with alternatives