Globalization, Macroeconomic Imbalances, and South
America’s Potential to be the World’s Food Basket
Evolving Trade and Price Policies
for Latin American Agriculture
Alberto Valdés and William Foster
ICAE/IAAE August 2012
Pre-Congress Workshop
Foz do Iguazú
Objective: document trade and price policies in
LAC and review some selected issues related to
incentives facing the region’s agriculture.
• Why care about agricultural trade policy in this region?
– In this workshop, the concern is the ability of LAC agriculture to
contribute to global food supply. This will depend in part on the
incentive framework. Here we focus on trade and price policies.
• Why LAC? And why look at it’s recent history?
– Had a fairly radical change in trade policies in the 1990s. Potential
roadmap for other countries. But with risk of backsliding.
– Export oriented, with a notable experience with FTAs.
– Case studies for examining the economic consequences of natural
resource abundance – curse? – and the role of exchange rates.
– LAC experience as a reference for future policies to enhance
agriculture’s contribution both to global food supply and to
national growth and poverty reduction.
Structure
• Who exports and imports? The region is heterogeneous. LAC as
a unit is almost meaningless.
• Evolution of trade openness.
– Tradability through time.
– Protection measures. Up to 2004, post-2004.
– Composition of protection. (Brooks and Godoy, 2012)
• Trade reforms, incentives, and performance.
• What about exchange rates? RER and misalignments mediate
impact of policy and reforms on performance.
• FTAs – some remarks.
• China and Mercosur – special relation.
• Various issues related to trade strategy not covered here: Natural
resource curse debate? Doha negotiations?
Who in LAC exports?
• Region heterogeneous, and the story about the
important agricultural exports for feeding the world is
mainly a story about the Southern Cone countries and
particularly Brazil.
• 1995-2009: Southern Cone countries and Brazil
contributed about 75% of the growth in total
agricultural exports.
• The story for the future – e.g., World Bank’s work in
progress – is built around the land-abundant and
grain-surplus countries of the Southern Cone and
mainly Brazil.
Net food and agricultural imports/exports in
developing countries by region: 2005-2009
Region
East Asia & Pacific
South Asia
Latina America & Caribbean
LAC non-English-speaking
Europe & Central Asia
Middle East & North Africa
Sub-Saharan Agrica
Total
Net ag and
net food
importing
12
6
11
8
9
11
25
82
Net ag
exporting
and net
food
importing
2
1
9
6
5
1
18
42
Net ag
importing
and net
food
exporting
0
0
1
0
2
0
0
3
Net ag and
net food
exporting
6
1
9
6
4
0
3
29
Total
20
8
30
20
20
12
46
156
Source: From FAOSTAT, Valdes and Foster, 2012, “Policies and mechanisms that can help
poor countries in high price periods”, presented at “Securing food in uncertain markets:
Challenges for poor, net food-importing countries,” sponsored by ICTSD and FAO,
Geneva, March 23, 2012
“Food” includes basic food goods: Cereals, meats, milk and eggs, vegetable oils, and sugar.
5
Export and import shares and trade balance for all agriculture and
forestry, and in food products in LAC 2005-2009 averages.
Argentina
Bolivia
Brazil
Chile
Colombia
Ecuador
Paraguay
Peru
Uruguay
Venezuela
Exports
Imports
Total Agr.
Balance
Ag/ TOT
Ag / TOT
EXAg/ IMAg
EX-IM
EX/IM
1553%
223%
762%
215%
186%
260%
523%
93%
487%
4%
Millions US $
11419
156
17134
-406
-507
-220
986
-1084
1657
-2159
85.6
2.2
7.8
0.7
0.6
0.4
19.1
0.1
12.7
0.0
47%
18%
28%
11%
18%
21%
85%
8%
59%
0%
4%
10%
5%
7%
9%
8%
7%
11%
9%
11%
NEX
NEX
NEX
NEX
NEX
NEX
NEX
NIM
NEX
NIM
Total food
Balance
Ag exports from FAOSTAT. Food is basic group: grains, meat, milk and eggs, vegetable oils.
Implications
• Agriculture contributes significantly to overall national
trade: more than a third of export revenues in recent years
are in agro-forestry exports, although this share has been
declining. Our food definition excludes processed.
• Mercosur: Argentina 47%, Brazil 28%, Paraguay 85%,
Uruguay 59% of total export due to ag.
• Second, this high degree of heterogeneity carries over to
countries’ net trade positions in both food and all agroforestry products. Several net food importers.
• In terms of the number of countries, there is a high
degree of food import dependence, relevant for future
WTO negotiations. But Mercosur big plus.
• Third, exports of agro-processed products are increasing
rapidly in this region, in spite of the pronounced degree
of tariff escalation encountered in most countries.
LAC countries as early reformers: historical
patterns of agricultural policies
• The economic reforms: things started to change during
the1980s.
• The goal of the reformers in the mid 1980s and early
1990s was to create a better climate for productivity and
private investment in all economic sectors, including
agriculture. Macroeconomic stability, lower country
risk, better investment environment, improved services,
etc. good for agriculture.
• For agriculture, the goal was to be an enhanced
competitiveness of tradables in a new scenario in which
agriculture was to be more integrated with the world
economy.
• Especially so with respect to agriculture was to reduce
the explicit and implicit anti-export bias.
Protection measures
• The implicit and explicit taxes on exports diminished
over time beginning in the late 1980s and early
1990s.
• The protection for importables falling slightly for the
region as a whole. But there is a large ranges across
countries.
• Asia and LAC moving in the same direction over
time.
• Brazil has low PSEs.
Total NRAag, NRAag-importables, and NRAagexportables, 7 selected countries
NRA Ag Total incl NPS
Anderson and Valdes, 2008
NRA Importables
00
-0
4
95
-9
9
90
-9
4
85
-8
9
80
-8
4
75
-7
9
70
-7
4
65
-6
9
60
-6
4
-20
0
20
LATIN AMERICA
NRA Exportables
PSEs by selected countries according to the OECD, averages for
2000-02, 2008-10
45%
Market Price Support
Payments based on output and variable input use
Other payments to farmers
40%
35%
30%
25%
20%
15%
10%
5%
0%
2000-02 2008-10
2000-02 2008-10
2000-02 2008-10
2000-02 2008-10
2000-02 2008-10
Brazil
Chile
Mexico
EU
US
Source: OECD, Brook and Godoy.
Performance
• After reforms more rapid growth of sector gdp and
exports.
• By end of 2000s harder to tell difference between
early and later reformers.
• Growth in late 2000s influenced by price spikes. E.g.,
Brazil went from US$ 35 b to 55 b between 2006 and
2008. Argentina from 20 b to 35 b.
• Past reforms no guarantee of backtracking. Return to
populist policies in the air in some countries.
Agricultural Performance of Early and Later Reformers in Latin America 2000s
Country
Earliest reformer
Chile
Early reformers
Bolivia
Costa Rica
Mexico
Average early reformers
Later reformers
Argentina
Brazil
Colombia
Ecuador
El Salvador
Guatemala
Peru
Uruguay
Honduras
Average later reformers
Others
Dominican Republic
Total average
Growth Rates of
Agricultural GDP
2000-2004
2005-2009
Growth Rates of
Agricultural
Exports
2000-2004
1976
6.9%
2.1%
9.1%
12.8%
1985
1986
1985
3.3%
1.4%
2.0%
2.2%
3.0%
3.2%
0.9%
2.4%
10.9%
2.6%
7.3%
7.0%
12.5%
10.7%
9.5%
10.9%
1990
1990
1990
1991
1989
1988
1990
1990
1990
0.5%
4.7%
1.4%
3.3%
-0.3%
3.2%
3.0%
1.4%
5.6%
2.5%
1.1%
2.6%
1.5%
4.8%
3.9%
2.8%
5.1%
0.7%
2.3%
2.7%
8.2%
15.5%
2.0%
5.2%
0.9%
0.5%
10.6%
10.0%
12.5%
7.3%
13.4%
14.8%
11.9%
14.2%
13.2%
18.3%
17.8%
17.3%
12.3%
14.8%
n.a.
3.1%
5.0%
3.2%
10.5%
2.8%
2.8%
7.0%
13.5%
Year of
Reform
2005-2009
Why are exchange rates influential for agriculture?
• Directly because of influence on individual country
competitiveness in foreign markets. Ag is highly tradable.
• Indirectly because of “mismanagement” of exchange rate risks
currency crisis and more macroeconomic instability. Effect on
GDP growth.
• Stable macro environment is good for Ag – country risk and
lower capital costs, greater domestic and foreign investment –
private and public – in roads, ports, etc., used proportionately
more by Ag.
• Region has gone through various regimes: multiple ERs, fixed
nominal, crawling pegs, dirty floats, dollarization.
• How to define realistic Real Exchange Rate? Under flexible
ERs and low inflation and open economies and low or no
fiscal deficit, what is the equilibrium RER and so
misalignment? What is the role of policy?
What about real exchange rates?
From 2003 to 2011
Mexico
Peru
Chile
Colombia
Uruguay
Brazil
Source: Authors’ calculations based on ECLAC 2012. Argentina is not listed by ECLAC.
FTAs and Latin America
• At first the evolution of the “new regionalism” was
an unplanned consequence of the unilateral decisions
by various governments.
• In early 1990s, it “emerged as an integral component
of the structural reform process … complementing
and reinforcing the modernization policies … and
adopted as part of the region’s participation in the
multilateral liberalization emerging from the Uruguay
Round.”
• And FTAs within and beyond the region have
proliferated.
Today, Latin America has seven regional
agreements within the hemisphere.
• But not only South-South trade relationships.
• Increasingly individual LAC countries are advancing
negotiations of bilateral trade agreements with developed
countries – their principal export markets for most agricultural
products.
• The USA, the EU and Canada are the principal potential
partners in the North.
• Several LAC countries have signed FTAs with the USA –
Mexico, Chile, Central America and Dominican Rep.,
Colombia.
• Mexico and Chile have FTA with the EU, Japan and China.
Peru and Colombia signed in June with EU.
• And Mercosur?
• FTAs developing between diverse economies and
populations, north and south, mixing large and small countries,
and developed and developing economies.
• FTA growth has offered a much higher degree of economic
integration and therefore a reduction of the influence of
protectionist measures on trade.
• LAC has been very active in FTAs, within the region and
beyond. Chile, Mexico, Peru and Mercosur have led the way.
• In contrast to the previous emphasis on regional agreements,
both analytically and in practice, bilaterals have propagated
more quickly, perhaps a reflection of the difficulties of
negotiating common external tariffs and a perception of the
disappointing performance of past regional agreements.
• The EU agreement is a different animal, with common trade
policy, currency and free factor mobility.
18
• FTAs part of the so-called “spaghetti bowl” criticized by
Bhagwati and colleagues.
• Continuation of regional integration agreements (RIA), in the nottoo-distant past held in suspicion by trade economists, although
elicited high expectations among policy makers.
• Economists and policy makers had different counter-factual
scenarios in mind to compare gains and losses.
• Policy makers thinking in terms of the gains from trade with
neighbors Usually with cultural affinity. Their counterfactual
scenario not based on multilateral desire but on probability of no
agreement at all with potential trading partners.
• Moreover, politicians saw other gains from integration: promote
bargaining power of a block.
• Security might be enhanced by further interlocking economies
and therefore making conflicts more costly. EU is an obvious case
of this latter concern, but Mercosur and the Central American
Agreement could also be viewed in this light.
• Furthermore, trade agreements could serve as a commitment
mechanism to avoid policy reversals in domestic economic
19
reforms.
Country pair
Date
Chile-Canada
Chile-Mercosur
Chile-Mexico
Chile-Peru
Cent. America-Chile
Chile-EFTA
Chile-EU
Chile-Korea
Chile-US
Chile-China
Chile-New Zealand-Singapore-Brunei (P4)
Chile-Japan
Chile-Australia
Chile-Turkey
1996
1996
1998
1998
1999
2002
2002
2003
2003
2005
2005
2007
2009
2009
Country pair
Bilateral and LAC regional trade agreements
and date signed. As of September 2011.
In June 2012, EU signed FTA with Colombia
and Peru.
NAFTA
Mexico-Bolivia
Mexico-Colombia
Mexico-Costa Rica
Mexico-Peru
Mexico-Nicaragua
Mexico-EFTA
Mexico-EU
Mexico-Israel
Mexico-Northern Triangle
Mexico-Uruguay
Mexico-Japan
1992
1994
1994
1994
1995
1997
2000
2000
2000
2001
2003
2004
Peru-Thailand
Peru-Mercosur (ACE59)
Peru-US
Peru-Singapore
Peru-Canada
Peru-China
Peru-Korea
2005
2005
2006
2008
2009
2009
2011
Date
Mercosur-Bolivia
Mercosur-Canada ( ACE59)
1998
2004
CAFTA-DR
Colombia-US
Panama –Singapore
Costa Rica - China
2004
2006
2006
2010
Note that Mercosur has no agreements outside LAC except Canada. FTAs less
important for a commodity exporter.
20
LAC and China: Questions, challenges, growth
prospects and opportunities
• Exports to China concentrated in few products and a
few South American countries.
• Why not other products, such as dairy and meats?
How to identify potential exports to China?
• Is there potential friction with Mercosur if China’s
moves to become more self-sufficient in food?
• The small farm sector in Mercosur has been left out
of the commodity export boom.
• The role of bilateral free trade agreements (FTAs) as
marketing tool. More relevant for non-commodities.
Based on A. Valdes (2012) for Agricultural trade linkages between Latin America and China: Conclusions
and Future Priorities. World Bank and Investment Center, FAO, Rome, 27-28 September 2011.
Discussion – what do we know?
• Agriculture represents more than a third of total exports
revenues, and agr. exports represent a critical engine of
growth for agriculture.
• Before the economic reforms (1980s and early 1990s)
consistently positive NRA for importables and negative
NRAs for exportables
• Have protection measure fallen after reforms?
– Yes, LAC countries are taxing exportables less.
– And the average regional NRA for importables shows a slight
reduction, but significant inter-country dispersion.
• Exchange rates less of a problem, but recent nominal
appreciation has raised concerns in Ag sector.
• A decade ago no one would have thought of ChinaMercosur trade link and of proliferating FTAs.
Some additional questions for future trade policy in LAC
• The natural resource curse – does it matter what you export
and to where?
– The evidence is weak. Most interesting in the question of
the relationship between current comparative advantage
and how to induce future innovation.
– Technology and new practices – e.g., Cerrado in Brazil –
strengthen link to nat’l resources but a positive.
– Design clusters? Support those that emerge? Do nothing?
– Exchange rate issues will remain. Some countries – Chile,
Venezuela, Ecuador, Colombia – the problem comes from
non-Ag resource exports.
• Is Doha dead? Just resting? Revivable?
• Challenge to perishable exports from food quality and safety
issues – SPS is one.
• Market access to processed foods restricted.