• Agricultural price policy is concerned with real prices, that is, agricultural prices relative to other prices in the economy. To obtain an index of real agricultural prices, a nominal index of agricultural prices may be deflated by an economy-wide price index, such as producer prices, consumer prices or the GDP deflator, or by an index of input prices. Each deflator gives rise to a different interpretation of the real index, but in some way each version measures the purchasing power of agricultural output.
• Three structural factors strongly influence real agricultural prices: trends in domestic supply and demand, real trends in international agricultural prices, and the presence of subsidies to agriculture in exporting nations.
• Trade in agricultural products has brought important benefits to many developing countries. However, since the completion of the Uruguay Round of trade negotiations, developed countries have increased their agricultural exports more than developing countries have.
• Worldwide, agricultural tariffs have been reduced much more slowly than non-agricultural tariffs have, and megatariffs of 200-300% still exist in developed countries.
• The extent of benefits to trade liberalization depend in part on how effective policies and other economic forces are in pushing an economy to reallocate resources in the direction of its comparative advantage. When such reallocations are slow, trade liberalization may have to proceed more slowly than other kinds of structural economic reforms that can improve the resource allocation process.
• High tariffs hurt a country's own competitiveness in international markets, by raising costs to all producers, including those who produce for export. Therefore, from a development viewpoint tariff levels should not be high, and if they are, a program should be put in place to scale them downward over time.
• It is equally important that tariffs be relatively uniform over sectors and products. This helps align domestic relative prices with international relative prices and is a way to encourage resources to be allocated to the lines of production that are most competitive, i.e. that have the best growth prospects.
111. Simon Maxwell and Robin Heber Percy, 'New trends in development thinking and implications for agriculture', in Kostas G. Stamoulis, 2001, p. 71.
The practice of granting tariff exemptions to food imports is an obstacle to making tariffs uniform over products. Such exemptions constitute implicit subsidies that are not targeted on the poor, and in fact they usually turn out to be regressive subsidies. In addition, through their effects on production incentives they tend to exacerbate the problem of rural poverty.
The three justifiable exceptions to a uniform tariff policy occur for (1) products whose international prices are distorted by subsidies in large exporting countries, (2) products whose international price fluctuations may be smoothed by price bands before they are transmitted fully to the domestic economy, and (3) one or two products that are the basic sources of food and income for the rural poor, since in the short and medium term their opportunities for finding alternative sources of income are very limited. Compensating for international price distortions is not advisable when the product in question does not have a comparative advantage in the developing country.
Stability of tariffs over time is often elusive but is important for providing appropriate price signals for investment and production. It may be more important to reduce tariffs in small but sure steps instead of attempting drastic reductions only to reverse the reforms later, as has occurred in some countries. Export incentives are discouraged under the WTO regime, with a modest exception for the poorest countries, but since the WTO allows sometimes very high tariffs, the net effect of the world trade regime is to discourage developing country exports, relative to import substitutes. This creates a bias against the products that generally create the most employment and income per hectare cultivated. In practice, existing export incentive regimes rarely provide benefits to small- and medium-scale producers of export goods. Thus, the management of such schemes is a bottleneck and warrants review with the aim of developing more equitable systems of incentives.
Trade restrictions, on both imports and exports, are damaging to growth prospects, in part because of the price uncertainty that they create. Except for cases in which emergency food aid is needed, financial food aid is generally more effective than commodity food aid, because it is now acknowledged that poverty is the principal cause of hunger and malnutrition. The exchange rate strongly influences relative prices in an economy and is the most powerful policy instrument for determining real agricultural prices.
An appreciating real exchange rate reduces real agricultural prices. An appreciating real exchange rate can be caused by purposive policy and also by large inflows of foreign exchange that are not associated with the main employment-generating sectors, for example, oil and gas earnings and remittances from workers abroad. In economies characterized by such phenomena, the tasks of agricultural development and poverty alleviation are more difficult than otherwise because of the resultant price disincentives for the sector. A useful measure to ameliorate the Dutch disease effects on the exchange rate is for the Government to purchase foreign exchange and invest it abroad in a long-term development fund.
Fiscal policy can influence agricultural prices through (1) investments in roads, ports and marketing facilities, (2) other basic investments that support increases in production, (3) the purchasing and selling policies of agricultural parastatal companies, and (4) commodity taxes. Selective commodity taxes on agricultural products distort incentives in the same way that unequal tariffs do and they reduce agricultural incomes relative to non-agricultural incomes. This text reviews arguments sometimes put forth in favor of agricultural commodity taxes and finds them generally lacking in solid foundations.
Macroeconomic policy can support agricultural development through alternative combinations of the policy instruments mentioned. Maintaining a competitive exchange rate is a powerful policy which is neutral with respect to resource allocation in productive sectors. If this is not possible, then exchange rate distortions can be compensated through trade and/or fiscal policy. Relying on tariffs alone creates other distortions by biasing the sector's prices and production toward import substitutes, and so a policy of tariffs and export incentives would be preferable to tariffs alone. Direct fiscal outlays to support production, as per the experiences in the European Union, Mexico and Estonia, constitute a non-distortionary policy but are demanding in administrative terms. Finally, any macro-economic policy for agricultural development should be accompanied by institutional and structural reforms in agriculture, in areas such as land tenure, water management, financial systems and agricultural technology. Reforms in these fundamental areas can improve the sector's efficiency and help reduce poverty.
• The sectoral policy instrument of price controls raises a number of issues, including the virtual impossibility of setting prices that continuously equilibrate supply and demand, the fact that maintaining price controls may create the need to impose trade controls as well, the consequence of inefficient resource allocations as a result of distorted relative prices, and the discouragement of the development of adequate private marketing mechanisms.
• Guaranteed crop prices, or farm support prices, encounter many of the same difficulties in addition to causing fiscal outlays. In most countries that have tried to support farm prices, State marketing agencies have proven to be inefficient and the benefits of the support prices tend to flow disproportionately to larger farms.
• When a government decides to reduce or eliminate its agricultural marketing interventions, the private sector may not always be fully prepared to step in and replace the government. It can be inhibited by limitations in both financial and managerial terms, especially in countries with a long tradition of State intervention in agricultural markets. To ease this problem, it is helpful to implement reforms in the proper sequence - which means having a targeted urban food assistance program in place and lib eralizing agricultural output markets before input markets - and maintaining clarity and transparency regarding the management of food reserves and revised rules governing public sector interventions in markets. In general, financial food security reserves are more efficient than physical ones.
• Grain storage policy is an element of pricing policy because of its influence on the efficiency of marketing channels. Components of such a policy may include privatization of State-owned grain storage facilities, with the option of providing for capital participation by farmers, development of a program of certificates of grain deposit that are available to all classes of farmers, establishment of quality standards for grains, and conversion of harvest and post-harvest systems to bulk handling of grains where feasible. All of these measures effectively improve farmers' access to markets.
• Opening of new export markets can be an important avenue of agricultural development, and an outlet for labor-intensive production from small farms, but it requires close attention to issues of product quality. These issues include phytosanitary conditions, food safety requirements, and satisfaction of consumer preferences in taste and product presentation. Government institutional capabilities are needed in this area, and for smallholders an essential step for penetrating non-traditional markets is sound farmer organization.
• Agro-processing industries may enjoy quasi-monopolistic positions with respect to primary producers, within regions of a country. Extreme exploitation of this position is rare because producers and processors need a long-term working relationship, but in the short term issues can arise concerning the price offered by processors. This is a difficult problem for policy to deal with, but measures that may help reduce its magnitude can include support for producers' joint purchase or construction of processing facilities, anti-monopoly legislation, and government mediation of price negotiations, on the basis of international guidelines regarding relative prices of primary and processed products. In other respects, such as improving product quality and identifying needed areas of agricultural research and other public sector support, producers and processors can work together fruitfully through the product chain approach.
• Liberalization of input markets can be as important as liberalization of output markets for improving agricultural productivity. However, many farmers in developing countries will always pay higher prices for agrochemical inputs than their counterparts in richer countries do, because of the small scale of production and/or shipments in the former countries. Farmer co-operation in input purchase can reduce this price penalty.
• Other measures that can assist in improving the prices received by farmers include investments in transport infrastructure, market information systems, encouragement of agricultural commodity exchanges and futures markets, licensing of grain dealers, programs to improve product quality, and ensuring consistency in pricing and trade policy over time.
• Food security is most usefully interpreted in terms of access to food on the part of low-income households, rather than national self-sufficiency in producing basic foods. Chronic undernourishment is still very widespread in developing countries, affecting approximately 800 million people.
• Sound agricultural policy as a whole, including measures that promote productivity improvements and institutional strengthening, is important in the effort to reduce undernourishment. Equally, in food assistance programs it is important to improve efforts to target the most needy populations.
• At the household level, the most important determinants of a family's nutrition levels have been found to be income, education and health status, in that order. The education of the woman in the family is especially important for improving the entire family's nutrition.
• Food security of poor households is not necessarily correlated with their production of basic foods. When agronomic and market conditions are appropriate, production of cash crops as well as food crops can lead to improvements in household welfare. Allowing cropping patterns to follow regional and national comparative advantage is the surest path to reducing undernourishment.
• Higher farmgate prices generally reduce rural poverty. They increase the economic well-being of families with even small plots of land, and their stimulus to higher production creates more employment for the landless.
• While price stabilization is a worthwhile goal of economic policy, care should be exercised in regard to how it is achieved. Bringing down inflation rapidly through distortions of the exchange rate and excessively rigid monetary policy may have the consequence of reducing real agricultural prices, slowing the overall economic growth rate and worsening poverty. In many circumstances, it may be preferable to reduce inflation in a lasting, structural manner, through reductions of the fiscal deficit, even though the process takes longer, because in the meantime the poorest households may fare much better. This central issue of balance in the goals of economic policy deserves fuller consideration than it is often given in prescriptions for developing countries.
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