AFRICA: TRADE POLICY REFORM MUST BE PAID FOR BY RICH

8:32 AM Oct 8, 1993

AFRICA: TRADE POLICY REFORM MUST BE PAID FOR BY RICH
Geneva 8 Oct (Chakravarthi Raghavan) -- The need for re-thinking of aid conditionalities and policy advices to African countries, and others exporting tree-crops, so as to take account of fallacy-of-composition issue and given special treatment for a slower rate of reform or given compensation for reforms, according to the World Bank/OECD study on trade liberalization.

The recently published study has received much media attention and hype about the $223 billion gains to world income in 2002 as a result of partial liberalization of agriculture and manufacture trade (30 percent cut in agricultural subsidies and tariffs and additional 30% on manufactured products)

Apart from the basic deficiencies of the study as in any of such models and the variables and assumptions, often subjective, of the authors, the media reports have by and large ignored or played down several of the caveats of the authors of the study and their qualifications about their projections and need to see then more as likely trends.

In the case of Africa and many of the tropical product exporters, particularly tree-crop exporters, the study brings out that these countries will not gain in the Uruguay Round but may actually lose -- because of higher costs of food imports, terms of trade losses on their exports (like tea or coffee).

The study is by Ian Goldin senior economist at the World Bank, Odin Knudsen also at the World Bank and Dominique van der Mensbrugge, an economist at the OECD Development Centre.

When a briefing note for policy makers, based on this study, was published by the Centre last year, the OECD Secretary-General Claude Paye had underlined that this was a "pretty theoretical exercise" and had criticised the media for paying too much attention to the billions of dollars of gains, while ignoring the problems highlighted in it for many of the poorer countries and need for compensation.

The study has simulations based on various scenarios -- a partial liberalisation envisaged under the DFA in the Uruguay Round (the 30 percent assumption may turn out to be much less as now evidence in the market access negotiations), a full liberalisation that is not on the cards either now or well into the next century, and simulations based on resource transfers.

On Africa, the study cites a UN report about a further deterioration in the current catastrophic situation in which over 140 million Africans or one in four is under-nourished. It explains Africa's situation on a combination of internal and external factors, and also relates them to the link between Africa's debt crisis and fall in terms of trade (which is ignored in the Bank's recent claims of success for its SAPs).

The study claims that overall impact on Africa even under the partial trade reform scenario to be 'positive', but providing no more than a one percent gain in real income in 2002 (with the Maghreb region even losing).

Tables in the study though show a 0.1 percent loss in real income for Nigeria (the positive gain for world income itself is only 0.2%), for other Africa and Maghreb 0 percent, and Mediterranean countries a loss of 0.2%.

But the impact of the reforms on income distribution in Africa is seen as "disturbing" -- with farmers in the aggregate tending to lose, largely in part due to their reliance on exports of tree crops, and also because of lower protection in some of the other commodities.

Under its partial liberalization simulations, the study has projected a fall in world price of rice in 2002 by 1.9%, coffee by 6.1%, tea by four percent, and 'other food products' by 1.7%.

On wheat, the price will be up by 5.9%, coarse grains 3.6%, sugar 10.2%, meat (beef, veal and sheep) 4.7%, other meats one percent, vegetable oils 4.1%, dairy products 7.2%

The study notes that economic reforms have been recognised as indispensable element of revitalization in Africa, and a widespread perception of inadequacy of the public sector has led to an increased emphasis on deregulation and privatization.

While this has led to improvement, the study notes that "the limitations of the market have quickly been reached, so that policy makers are forced to chose between the inadequacy of the state and the failure of the market to perform a number of key functions".

"In particular," it adds, "the ability of agriculture to provide the foundations for enhanced growth has been undermined by the erosion of public sector investment and extension services which ensure that appropriate technologies reach farmers and that their crops reach market."

Within Africa, macroeconomic and trade policy interventions on rural-urban balance are the key to future growth, but these are linked to external developments, including development of world prices and markets and availability of external sources of capital. "It is evident that Africa's economic crisis requires an analysis which is both economy-wide and international in coverage," the study adds.

In terms of partial multilateral trade reform, the study claims that while international food prices will rise, there will be a decrease within Africa, and that the reduction in food prices would relieve pressure on real wages and expansion of the urban economy.

But rural incomes decrease overall -- because of reduction in level of protection, reduced input subsidies and fall in export prices. Farmers in Africa do not fare well from the partial liberalisation, despite increase in world prices. Nigeria would gain overall -- because of decrease in manufactured import prices.

Growth prospects of Africa through 2002 will lead to increase in income gap between Africa and all other regions. Due to its reliance on primary commodity exports, it will be particularly vulnerable to long-term relative price decline in price of these commodities as well as cyclical variations. While poor, macro- and micro-economic, policies are also responsible, a combination of trade reform, multilateral and/or unilateral, and higher transfers (an annual increase of $12 billion starting 1993) would be needed to provide better prospects for the continent.

Adverting to the position of tropical product exporters, the study focuses on policy-conditional adjustment aid being applied simultaneously in several developing countries and the outcome of fallacy of composition -- each of them expanding production and volume of exports of a commodity with the overall result of reducing the prices and earnings.

While what is called "the cosmopolitan view" (of a rule-based international trading system with no place for legitimisation of collective monopoly power of one country or a group) could be defended in the context of a rapidly growing world trade, in case of countries with market power and export taxes on chief export crops (which should be removed under any liberalisation scheme) who are also among the poorest, "the cosmopolitan view can be challenged from a poverty perspective".

"In the context of slower growth of world output and trade, the status of policy recommendations on trade policy reform in structural adjustment programmes requires further analysis. Should the costs of trade policy reform which increase global welfare be borne by the countries in question? Can the Bretton Woods institutions overcome the free-rider problem involved in taking into account the combined monopoly power of such poor producing countries when formulating policy-conditional structural adjustment assistance? Can it be done without undermining a rule-based world trading system?"

The report admits that international dimensions of adjustment are not fully understood. But from its model simulations, the annual tax revenue and GDP loss arising from a 25% across-the-board cut in tree-crop export taxes would be very substantial for the crops concerned. The GDP losses for this policy change alone would amount to over five percent of total ODA to developing countries.

"...in contrast to present practice, coordinated policy-conditional assistance needs to take into account explicitly the removal of small-country assumptions. The fallacy of composition issue is a valid concern for policy makers in tree-crop-exporting developing countries. Stabilization could be provided through continued use of trade policy instruments, such as export taxes, and this could enhance success of other adjustment measures..there may also be a case for special treatment -- allowing for a slower rate of reform of selective trade interventions during a transition period. Alternatively, tree-crop producers might require compensation for reforms which are in the general interest, either in the form of additional ODA or trade policy reform in developed countries with respect to downstream processing of tree crop products. The essential is to ensuring that legitimate concerns of developing countries are met without eroding the wider commitment to freer trade, including reduction in OECD countries' protectionism..."