CARLO BERNINI CARRI
Trade liberalization, growth and food security.
Introduction.
Almost 800 million people in the developing world do not have enough to eat, and another 34
million people in the industrialised countries and countries in transition also suffer from chronic
food insecurity (Fao, 1999).
In 1996, the World Food Summit set as a target a reduction by half in the number of undernourished
people in the world by 2015. This aim is confirmed inside the Millenium Development Goals.
Attention was also drawn to this issue in the Ministerial Declaration of the WTO Doha Conference,
held in November 2001, which launched a new round of multilateral trade negotiations. In
particular, with respect to agriculture, Ministers agreed that special and differential treatment for
developing countries should be an integral part of the negotiations and embodied in concessions and
commitments as well as in the rules and disciplines to be negotiated, “so as to enable developing
countries to effectively take account of their development needs, including food security” (Fao,
2004).
Food security is a multi-faceted concept, variously defined and interpreted. At one end of the
spectrum food security implies the availability of adequate supplies at a global and national level; at
the other end, the concern is with adequate nutrition and well-being.
There are two broad options for achieving food security at national level: food self-sufficiency or
food self-reliance. Food self-sufficiency means the satisfying needs primarily through domestic
supplies. Food self-reliance implies maintaining a level of domestic production plus a capacity to
import in order to meet the food needs of the population (Fao, 2004).
The benefits and risks of relying on international trade to ensure food security are at the heart of the
debate between these alternative strategies.
Considering the strict connections and assimilation between poverty and undernutrition problems 1
the free trade can be seen, in broader terms, in its impacts on poverty issue.
Despite the net economic and social benefits of reducing most government subsidies and opening
economies to trade, almost every national government intervenes in markets for goods and services
in ways that distort international commerce. Those distortionary policies harm most the economies
imposing them, but the worst of them (in agriculture and clothing) are particularly harmful to the
world’s poorest people.
This challenge in its modern form has been with us for about 75 years. The latter part of the
nineteenth century saw a strong movement towards laissez faire, but that development was reversed
following the first world war in ways that led to the Great Depression of the early 1930s and the
conflict that followed (Kindleberger 1989). It was during the second world war, in 1944, that a
conference at Bretton Woods proposed an International Trade Organization.
The GATT during its 47-year history (before it was absorbed into the World Trade Organisation,
WTO, on 1 January 1995) oversaw the gradual lowering of many tariffs on imports of manufactured
goods by governments of developed countries. Manufacturing tariffs remained high in developing
countries, however, and distortionary subsidies and trade policies affecting agricultural and services
markets of both rich and poor countries continued to hamper efficient resource allocation, economic
growth and poverty alleviation.
1
Food insecurity and poverty are closely interlinked but distinct phenomena. While food insecurity
is often a result of poverty, it is also a leading cause of poverty. Hunger and malnutrition can
permanently stunt the developmental capacity of children, making it more difficult for them to grow
and learn. Hunger has longer-term economic implications because it reduces people’s capacity to
work and fight disease (Fao, 2005, p. 10).
The Uruguay Round of multilateral trade negotiations led to agreements signed in 1994 that have
seen some trade liberalization over the subsequent ten years. But even when those agreements are
fully implemented by end-2004, and despite additional unilateral trade liberalizations since the
1980s by a number of countries (particularly developing and transition economies), many subsidies
and trade distortions will remain. They include not just trade taxes-cum-subsidies but also
contingent protection measures such as anti-dumping, regulatory standards that can be technical
barriers to trade, and domestic production subsidies.
The extent and the depth of trade liberalization reflect the wide and long involvement of most least
developing countries (LDCs) with structural adjustment programmes. As a result, most of the LDCs
now have more open trade regimes than other developing countries and as open trade regimes as
high-income OECD countries 2 .
The gains from trade: theoretical approaches
Long-term international trade flows in a wide range of commodities have steadily increased over
hundreds of years and they have accelerated spectacularly since the Second World War. This is
surely not just because transport and communications facilities have dramatically improved, but it
must also be because benefits are derived from trade.
Economists have put forward a number of arguments in favour of trade; some are rather obvious
and common sense, others are less evident. These arguments can be classified into three groups
according to whether they emphasize (i) the increase that trade can bring to the total amount of
goods and services available to the national population (increased consumption argument), (ii) the
diversity of goods and services made available through trade to this population (diversification
argument), or (iii) the stability in the supply and prices of goods and services brought about by trade
(stability argument) (Fao, 2000).
We can consider three main theoretical approaches on trade-development relationships:
I°) An “optimistic” vision: trade with positive effects extensible to all the partners thanks to more
growth rates, higher demand, more efficient allocation in resources, economies of scale, economies
of agglomeration, and so on. The consequence can be more resources devoted to the poverty fight
and to face food insecurity.
The arguments for trade liberalization are strong, and typically inform policy advice to governments
from international institutions. These arguments are premised on Ricardian “conventional” or “neoclassical” trade theory, and in particular the theory of comparative advantage.
One reason why the amount of goods and services available to a country at a point in time can
increase through trade is because it allows the country to buy goods and services from sources
where it costs comparatively less to produce them. Local resources tied up in the production of
these goods in the absence of trade are hence liberated so that comparatively more of other goods
can be produced.
The theoretical reference is the comparative advantages (costs) theory, both in its static and
dynamic version. The classical comparative cost theory of the gains from trade, also known as
2
The depth and extent of trade liberalization in the LDCs can be gauged by using the IMF index of
trade restrictiveness, which classifies countries according to their average tariff rate and also the
extent of non-tariff barriers. From these data is apparent that very few LDCs have restrictive trade
regimes now. In 2002, on the basis of this evidence: -the average tariff rate of 42 out of 46 LDCs
for which data are available was less than 25 per cent; - the average tariff rate of 36 of these 46
LDCs was less than 20 per cent; - the average tariff rate of 23 of these 46 LDCs was less than 15
per cent; -in 29 of these 46 LDCs, non-tariff barriers were absent or minor in the sense that less than
1 per cent of production and trade is subject to non-tariff barriers; -twenty-eight of these 46 LDCs
had no or minor non-tariff barriers coupled with average tariff rates of below 25 per cent (Unctad,
2004).
comparative advantage theory, originally was stated by Davide Ricardo in the early part of the 19th
century.
It deals with resource allocation in the whole economy under the stylised conditions of perfect
competition. The theory argues that differences in productivity and opportunity costs of production
between countries form the underlying reasons why it is advantageous for countries to engage in
trade. Many reasons explain why such differences occur. Climate is of obvious importance for
agriculture as is the availability of extensive arable land and abundant water supply. The availability
of other natural resources, such as large and easily accessible mineral deposits, and differential
access to productive technologies give rise to varying labour productivities.
The Heckscher-Ohlin (H-O) theorem provides the most widely accepted explanation of the pattern
of trade, based on countries’ differing factor endowments and the factor requirements of different
kinds of goods. This version states that trade occurs because the cost of labour relative to that of
capital is lower in the labour-abundant country, which means that the price ratio of labour-intensive
goods to capital-intensive goods is lower in the labour abundant country than in the capitalabundant country. The basis for comparative advantage is that each country exports commodities
that use the relatively abundant factors and imports those that use scarce factors more intensively.
This model is sometimes referred to as the factor proportions or factor endowment model. A logical
consequence of trade, therefore, is a process of eventual factor price equalization leading, for
example, to real wages (as well as other factor prices) becoming the same across trading countries.
The static gains arise from countries producing more of the goods and services they can provide
most efficiently and less of what others can produce more efficiently. Each country will maximize
the values of its output of good and services After trading, each individual country will be better
off than in a world without trade. The smaller the economy, the greater the static gains from trade
tend to be as a share of national output.
Additionally, dynamic gains result as increased trade fuels economic growth. Typically, freeing up
imports of intermediates and capital goods encourages entrepreneurs to make greater investments in
production capacity.
The free trade approach also argues that, under competitive free market conditions, trade maximizes
potential economic welfare internationally, by creating a situation where no country can be made
better off without another being made worse off. It is a situation where those that gain from trade
could fully compensate those that lose and still be better off: the total gain will be greater than the
total loss. With free trade a point would be reached where more of each traded good is produced,
such that everyone will gain if suitable redistribution is made.
A general higher growth produces more resources devoted to the poverty and food insecurity fights.
In this context we can distinguish two interpretations around the role of trade in the growth
and development process: the first emphasizing the role of the trade as an engine for growth; the
second as a fuel for growth.
Some qualifications of the theory are: first, gains arise from the existence of different domestic
exchange ratios of the two goods in the two countries. These exchange ratios are associated with
different production conditions of the two goods in the two countries; second, the amount of
resources needed to produce both commodities may be higher in one of the countries, and trade can
still be advantageous to both parties. The concept of comparative advantage has to be distinguished
from that of absolute advantage, which indicates that the country in question uses in absolute terms
fewer resources in the production of the given commodity. The gains from trade arise from the
existence of a comparative cost advantage and not of an absolute cost advantage; third, the theory is
static. It explains trade and trade gains on the basis of comparative advantage at a certain point in
time.
There are a number of important qualifications to these predictions of the model, however, that
must be held in mind. First, the consequences described are dependent on the assumption of
competitive markets. In the absence of these, countries may be better off intervening to restrict free
trade. Second, countries will not necessarily gain equally from trade: the relative gains will depend
on the terms of trade 3 . Thirdly, there are no mechanisms in place to ensure that losers in the world
market will be compensated by those that benefit, so the gains remain potential. Fourthly, the issue
of redistribution also applies within countries, where there will also be gainers and losers from
trade.
Finally, any comparative static solution described by the conventional theory assumes that all
external costs are internalized, including environmental externalities.
Although this theory is the basis of modern “orthodox” trade economics, this does not mean that it
is accepted without questioning. Nevertheless, this theory remains the dominant framework of
analysis for the policy decisions of governments and international organizations 4 . The theoretical
approach outlined above underpins the policy advice concerning trade liberalization given to
governments by international institutions, as well as the approach adopted by the WTO Agreement
on Agriculture.
Taking advantage both by the different technologies available (Ricardo-Torrens model) or by the
different endowment in resources (Heckescher-Ohlin model) a specialization path leads all the
partners toward an income increase also if with possible different degree among them.
While this view, labelled as “mainstream economics”, has much to say on the benefits deriving
from trade and the welfare implications of protectionist policies and regional trade agreements, it
does not offer much by way of prediction with respect to the intercountry distribution of trade gains.
Under the comparative cost theory the distribution of benefits is inversely related to the closeness of
the international terms of trade to the domestic price ratio. In more modern forms of the theory, the
terms of trade continue to depend on the relative strength of the respective demands.
Taylor (1999) identifies several channels through which openness to trade can affect an economy’s
growth rate. They include the scale of the market when knowledge is embodied in the products
traded, the degree of redundant knowledge creation that is avoided through openness (Romer
1994), and the effect of knowledge spillovers. More importantly from a policy maker’s viewpoint,
3
The commodity terms of trade can be defined as the purchasing capacity of one good in terms of
another. The evolution of the terms of trade between agricultural commodities and manufactured
products provides information on the capacity for agricultural commodities to be exchanged
favourably with manufactured products, i.e. how much can be imported of manufactured products
by exporting one unit of agricultural commodity (Fao, 2000).
4
An important question emerges from this theoretical review, however. If free trade could
potentially raise economic welfare in the world as a whole and even in all trading nations, why are
border intervention policies so commonly used by governments to restrict free trade? Trade theory
literature provides three main explanations for this apparent anomaly. First, the case of the
“optimum tariff” shows that in certain circumstances a country can gain more from imposing a
tariff than from free trade (assuming other countries do not retaliate). Such gains are at the expense
of losses by trading partners (a zero-sum game, in other words). A more interesting reason for
protection is the infant industry perspective. Where an industry has large economies of scale, firms
may need protection to allow them time to grow before competing head-on with more established
firms overseas. It may concern the food and agriculture sector where the argument can be applied
to primary processing industries, in the context of a development strategy involving an export shift
from raw-materials to processed products. Another explanation concerns political imperatives,
including the influence of groups which gain from protection, and the importance of revenue from
border measures for developing country governments, where other tax bases are not strong. The
importance of non-trade concerns such as food security and rural viability are often put forward as
powerful imperatives for protecting domestic agriculture.
the available empirical evidence strongly supports the view that open economies grow faster (see
the survey by USITC 1997) 5 .
II°) A “pessimistic” vision: trade with asymmetric impacts and also as a possible source of
worsening for some countries or segments of population, generally the poorest ones. This approach
is based on the ‘immisering trade theory”: strong asymmetries in the market power and in the
competitive degree; declining terms of trade for primary commodities and, consequently, for
countries with more inclination in these productions that are, generally, the developing countries,
and so on.
This position was particularly present in ‘60s and ‘70s decades, constituting the base for “inward
looking” and “import substitution” strategies (ISI) in the development literature (particularly: Latin
America school: Prebisch, Singer, etc.).
In the 1950s and 1960s, the distribution of trade gains between developed countries (the “centre” of
the world economy) and less developed countries (the “periphery”) became an issue of intense
debate, due in no small part to the intellectual influence of Raul Prebisch (1950; 1959), one of the
fathers of the Latin American structuralist school. Structuralists argue that the periphery is
disadvantaged relative to core countries. The argument is based on the assumption of trade
specialization between centre and periphery, with the centre specializing in exporting manufactured
industrial products and the periphery primary commodities. After observing (and measuring) a
secular decline in the terms of trade of primary commodities vis-à-vis manufactured goods, the
structuralists view the decline not as a transitory phenomenon due to a specific set of circumstances
but as something embedded in the structural features of central and peripheral economies and in the
nature of the development process. The declining trend in the terms of trade for countries in the
periphery was explained by three reasons:1) the income elasticity of the demand for imports is
lower at the centre than in the periphery due to different type of the goods imported by both sets of
countries – primary commodities in one case, industrial product in the other. The consequence is
that the process of growth, and hence of income expansion, raises import demand more in the
periphery than at the centre pushing up the prices of periphery imports vis-à-vis those of exports and
thus lowering the terms of trade; 2) asymmetries are postulated in the impact of technological
change at the centre and in the periphery. In central countries, it is argued that technological
progress tends to decrease the demand for periphery country exports (many of which are substituted
by synthetic products). On the contrary, technological progress in the periphery increases the
demand for capital goods and inputs produced at the centre. This also lowers the terms of trade; 3)
product and factor markets are argued to be less competitive at the centre than in the periphery, with
prices (particularly wage rates) showing more downward rigidity in the centre. As a consequence,
cost savings from technical progress are passed on to export prices more in the periphery than in the
centre, where a significant portion of these savings goes to improve wages. Also, during the
downturn of the business cycle the prices of export products fall proportionally more in the
periphery than at the centre.
A natural policy corollary of the structuralist view was the emphasis on industrialization as a
vehicle for development, for it the diagnosis of the long-term evolution of the terms of trade was
right, the development process could not rely on export-led growth based on primary products
(import-substitution strategy).
Theorists subscribing to the so-called “unequal exchange” view have also insisted on the uneven
distribution of trade gains between the centre and the periphery. A key difference with the
structuralists is that, while the latter focus on the trend over time of an observable variable, the
terms of trade, the former have a more normative approach, focussing on the “unfairness” of trade
5
Evidence gathered during the second half of the twentieth century shows that countries which
have liberalised their trade have enjoyed an average 1.5% increase in annual GDP growth compared
with the pre-reform rate.
between the two sets of countries at any given point in time. “Unequal exchange” refers to the terms
on which different commodities entering trade between the centre and the periphery are exchanged.
Exchange is said to be unequal (in the normative sense of “unfair”) because production conditions
in the periphery lead to exporting goods at cheaper prices than if the conditions had been those of
the centre. At any point in time, production conditions at the centre lead to high prices of the
commodities exported, whereas production conditions in the periphery lead to cheap prices of
exports. For the authors belonging to the under-development and dependency schools, inequalities
in trade are seen in connection to inequalities in development. These in turn are seen as a
consequence of the way in which the capitalist system has expanded over time and has come into
contact with other modes of production, central countries subordinating periphery ones to their own
advantage (for example: Frank).
Moreover, in more recent times, this position has emphasized significant controversial elements in
the trade liberalization-food security relationships: a) trade reform can be a damage for food
security with its benefits only for the bigger farms, ‘export-oriented’ and the push toward the
marginality of little farmers with a consequent result of more unemployment and poverty; b)
agricultural system has got a special role in an underdeveloped context, not only as an economic
activity but also as a social protection (safety nets, income and labour integration) for the poorest
families and so on. Consequently it needs to reserve a special treatment for this sector and not to
abandon it to the uncontrollable forces in the world market; c) a particular support and protection is
needed also for the institutional lacks and scarcity of capital in the poor countries; d) a growing
domestic agricultural production is a necessity to improve food security and to reduce rural poverty;
e) low-income producers in developing countries are very vulnerable to the fluctuations in the
international prices because of a limited capacity in the supply adjustment. Also for the strong
asymmetry in the public support for agriculture between developed (higher) and underdeveloped
countries (lower) a special protection can be justified for the primary sector in poor countries; f)
finally there is the political question concerning the ‘food sovereignty’ and the protection of the
biodiversity, threatened by the liberalization and globalization processes.
III°) An “intermediate” or more “neutral” vision: trade with global net benefits but also with
possible consistent asymmetric spread effects. (Unctad, 2002; 2004). The standard theory shows
that countries as a whole gain from trade but makes no reference to whether and how different
groups within each country benefit or lose from trade. Trade can have important impacts on income
distribution and this adds a social dimension to the trade issue.
Two issues can be distinguished on trade and equity relationship: one is the impact of trade on
different economic or social groups within a country, the other is whether the gains from trade are
fairly distributed between trading countries. The standard theory is silent about the impact of trade
on income distribution within a country.
It is obvious that workers, entrepreneurs, investors and owners of natural resources (i.e. the owners
of productive factors) engaged in export industries stand to win from increased trade since their
activities develop if exports expand. Contrariwise, the owners of factors engaged in industries
which have to compete with products imported from abroad, i. e. of import-competing industries,
stand to lose from increased trade. The distribution of the gains and losses arising from trade among
the owners of productive factors will depend on the situation in the respective markets. In general,
however, factors which are intensively used in an industry, for instance labour in textile industries
or land in extensive farming, will stand to gain or lose more than those not intensively used.
Similarly, owners of factors that are rather specific to the industry and hence relatively immobile,
for instance workers skilled in some agricultural operations (e.g. pruning) or the owners of lands
particularly suited to the production of specific crops, will gain or lose more than the owners of
more undifferentiated and mobile factors.
Since, in comparison with other industries, factor mobility and product differentiation are rather
limited in agriculture, the farming sector is particularly vulnerable to the impact of trade. Thus, it is
difficult for agricultural land to change its use to urban or recreational use in response to import
competition, or for agricultural labour to find another type of employment since this normally
requires reskilling and will often imply migration. It is possible for farmers to change crops to
adjust to international competition, but weather, soils, technical know-how and other factors that
may restrict or jeopardize possible changes will often come into play. Shifting from plantation or
livestock farming to other type of agriculture will be particularly expensive and take a long time.
These rigidities, typical of the farm sector, are one of the reasons why governments have
traditionally tended to protect farmers from the effects of international competition.
The comparative advantages can change and can be acquired over time through, inter alia, policy
action. In that case, having a comparative advantage in one good would not necessarily imply that a
country should specialize in the production of that good at the expense of other lines of production.
New industries (so-called infant industries) may not have a comparative advantage when they are
being established and may need to be protected until they achieve the size required to benefit from
economies of scale. Countries may also lose comparative advantage in certain types of production
as technology evolves abroad (the so-called sunset industries issue). In addition, world prices
change over time, impacting on a country’s comparative advantage;
Moreover, trade may itself be a source of price instability. Thus, if a country is highly specialized in
the production of some export commodities and depends largely on imports of other commodities, it
will be very exposed to international price fluctuations. These fluctuations are also felt in tradable
goods which are only marginally exported or imported, in the absence of policy instruments
designed to isolate domestic prices from world price fluctuations. Agriculture has traditionally been
the main sector where these instruments have been applied, with varying effects. This is not
surprising in view of the characteristic instability of international agricultural prices and the
importance attached by governments to the stabilization of food prices and farmers’ incomes.
Growth and trade opening relationship.
The arguments that openness to trade contributes to economic growth and that this can, in turn, be
beneficial for poverty reduction and food security, are well grounded in conventional economic
theory and have been supported by a number of empirical studies.
No country has experimented successfully fast and stable growth in a context of lack in the trade
opening and integration process. But not all the countries improving the opening and integration
degree have experimented successfully economic growth.
According Unctad (2004), in the relationships between consumption per caput increase and trade
(exports) increase, the total of cases characterized by ambiguous effects (no clear trend) and
immisering effects (consumption decrease together with exports increase) overtook the total of
cases characterized by virtuous effects (consumption increase at the same time with exports
increase) in 1990-1995 and 1995-2000 comparison 6 .
A recent World Bank report (2000/2001; also 2002) reviews the evidence as to whether
globalization supports poverty reduction and concludes that whilst a category of “new globalizers”
are benefiting from greater integration into the world economy, a significant group are becoming
more marginalized.
International trade is vital for poverty reduction in all developing countries. But the links between
trade expansion and poverty reduction are neither simple nor automatic.
These findings suggest that positive export growth rates are a necessary condition for poverty
reduction. But export expansion is no guarantee of poverty reduction.
6
Using a very conservative threshold growth rate of average private consumption per capita (+1 per cent per annum and
–1 per cent per annum) to distinguish between situations where there is a virtuous trade effect, an ambiguous trade
effect or an immisering trade effect, during both 1990-1995 and 1995-2000, the Report shows that the potential role of
trade in poverty reduction is not working as expected: -the immisering trade effect is present in 18 of the 51 cases; - the
ambiguous trade effect and the immisering trade effect, which together account for 29 of the 51 cases, occur more
frequently than the virtuous trade effect; - the virtuous trade effect is present in only 22 of the 51 cases (Unctad 2004).
For LDCs exporting agricultural commodities, there is a mixed picture which reflects differences in
export performance and also differences in the inclusiveness of the export growth process, which is
related to the organization of production (plantations versus smallholders), access by farmers to
production inputs (credit, land and labour), trends in productivity and prices, the bargaining power
of farmers in relation to traders and processors, and the relationship between export crop expansion
and food prices.
The infrequency of export expansion with poverty reduction in the LDCs may have two causes.
First, export growth may not be facilitating sustained economic growth at levels sufficient to lead to
substantial poverty reduction. Second, economic growth may not be of an inclusive form that
increases average household incomes and consumption 7 .
Moreover, also if cross-country and time-series analysis show a positive correlation between trade
and economic growth, there is a relevant question: what is the actual direction of the relationship.
“Simultaneity problem”, as it is known in statistics: is trade influencing positively growth or is
growth influencing trade?
Also with reference to food security question, several cross-country analysis show an inverse
correlation between food insecurity incidence and trade increase: trade increase is the determinant
factor of the food insecurity quota decrease or is there another element (income per-capita growth)
explaining the trend evolution of the two variables?
Export growth can play a number of different roles in supporting economic growth. These include:
(a) static efficiency gains which arise through specialization according to current comparative
advantage; (b) increased capacity utilization which arises if external demand enables the
employment of previously idle labour and land resources which previously were not utilized (“vent
for surplus” theory); (c) increased physical and human capital investment owing to improved
returns to investment which can arise either through the identification of new opportunities
associated with external demand or through the improved profitability of investment; (d)
productivity growth which can arise through the transfer of technology or increased efficiency
owing to the pressure of exposure to international trade competition; (e) export-accelerated
industrialization, involving a labour re-allocation from agriculture into manufacturing; and (f)
relaxation of the balance of payments constraint on sustained economic growth. Another reason
why trade can increase efficiency is because it allows an expansion of the market for a certain
industry beyond the limits of the domestic economy. Through exports, the output of the industry
can expand and, if there are economies of scale, the average cost of the industry’s product will fall.
The relative importance and the mix of these roles vary between countries. In particular for most
LDCs, the primary sector, specifically agriculture, dominates production and employment in the
economy, and productive capacities are weakly developed. In this situation, the key role of exports
is that they enable the acquisition, through importation, of goods which are necessary for economic
growth and poverty reduction, but which are not produced domestically. These include food,
manufactured consumer goods, fuel and raw materials, machinery and equipment and means of
transport, and intermediate inputs and spare parts.
The income elasticity of demand for imports is likely to be high in the early stages of development.
Exports must thus grow sufficiently fast, and in a sufficiently stable way, to meet growing import
demand. If not, and in the absence of capital inflows in the form of grants and compensatory
financing facilities to cope with temporary shocks to export earnings, the sustainability of economic
growth will be threatened by the build-up of an unsustainable external debt (Unctad, p. 107).
7
The Unctad Report considers three possible factors related to the form of economic growth that
may be contributing to trade expansion without poverty reduction and to immiserizing trade. They
are the following: the level of income inequality; the demand-side sources of economic growth; and
the scale of domestic resource mobilization efforts (Unctad, 2002).
In conditions of mass poverty, poverty reduction requires sustained economic growth of a type that
substantially increases average household incomes and consumption. International trade can play a
powerful role in poverty reduction. It is important because exports and imports facilitate a process
of sustained economic growth, the development of productive capacities and expansion of
employment opportunities and sustainable livelihoods.
Although international trade can play a powerful role in poverty reduction in the LDCs, in practice
the positive role of trade in poverty reduction is actually being realized in very few LDCs.
The first and obvious reason for this is that there has been a lack of export dynamism in many
LDCs. This is closely related to export structure, and in particular commodity dependence.
The non-oil-commodity-exporting underdeveloped countries generally depend on a narrow range of
low-productivity, low-value-added and weakly competitive primary commodities serving declining
or sluggish international markets.
International trade cannot work for poverty reduction if export performance is weak. But even when
the underdeveloped countries have increased their overall export growth rate, better export
performance rarely translate into sustained and substantial poverty reduction. The relationship
between trade and poverty is thus asymmetrical. Although LDCs with declining exports are almost
certain to have a rising incidence of poverty, increasing exports do not necessarily lead to poverty
reduction.
The usual view of the relationship between trade liberalization and poverty is that trade
liberalization is likely to have adverse effects in the short run, particularly as social groups which
formerly benefited from a protectionist tariff regime are exposed to international competition, but
that in the long run the effects will be favourable because trade liberalization will increase the
growth potential of the economy. In according to Unctad Report the findings are the opposite,
however. Poverty trends during and immediately after trade liberalization in the LDCs are very
mixed, and not invariably negative as some claim. But there are many grounds for concern about
the long-term effects in terms of both the sustainability of economic growth and its inclusiveness.
The short-term effects to the process of trade liberalization on poverty vary considerably between
the countries, with some groups benefiting and other losing. This pattern is related to export
specialization as much as to trade liberalization, and also to differences in the speed of trade
liberalization in Asian and African LDCs. African LDCs have undertaken deeper and faster trade
liberalization than Asian LDCs. But it is the latter that have generally had a better performance in
terms of poverty reduction and also have been more successful in developing more market-dynamic
manufactures exports, partly through regional trade and investment linkages (see: Unctad 2002;
2004). According to Unctad, there has been a tendency for the countries that have opened more
gradually and less deeply to have a better trade-poverty relationship than those that have opened
further and fastest, and better also than those which have been restrictive
Whatever the short-term trends, however, the central issue is whether the new policy environment is
likely to facilitate substantial and sustained poverty reduction in the long run. In this regard, there
are some positive elements and some negative elements. For the underdeveloped countries which
have undertaken deep trade liberalization, comparisons of economic trends before and after trade
liberalization indicate that GDP growth rates, export growth rates and investment growth rates are
all higher in the post-liberal economic environment. But, given high population growth rates, the
rates of economic growth that are being achieved are in many cases not sufficient to yield GDP per
capita growth rates that will make a major dent in poverty.
The composition of trade is as important for the nature of the trade-poverty relationship as the level
of trade. This applies both to exports and imports. Ignoring the form of a country’s integration with
the rest of the world through trade can lead to major fallacies.
For exports, there is a particularly sharp distinction between commodities and manufactures.
Commodity exports are subject to short-term price and demand fluctuations, as well as having
episodes of medium- to long-term terms-of-trade decline. Commodities are also subject to intense
price competition, as a result of which productivity gains are normally passed to the consumers
rather than benefiting the producers. Because of the involvement of fixed factors of production,
such as land and reserves in mines, they can be also subject to diminishing returns. In contrast,
manufacturing is subject to substantial static and dynamic economies of scale. There is often higher
income elasticity of demand for manufactures exports than for commodity exports. The
composition of imports also matters.
In very low-income economies which depend on a narrow range of low-value-added primary
commodities and have deep mass poverty, there is a strong tendency for the domestic vicious circles
of economic stagnation and persistent poverty to be reinforced by external trade and financial
relationships. In this situation trade can be part of an international poverty trap in which low and
unstable commodity prices interact with unsustainable external debts and an aid/debt service system
(Unctad, 2002).
The inclusiveness of the post-liberal growth process also gives cause for concern. A form of
economic growth in which expansion is localized within a small geographical and sectoral enclave
is becoming a problem in some LDCs whose major exports are manufactures and mining. With this
form of economic growth, there are weak links between the rapidly growing export enclave and the
agricultural sector where the majority of the population and the majority of the poor have their
livelihoods. In this circumstances, it is possible to have very high rates of export growth but no
change in the incidence of poverty.
What is required is not simply a process of export expansion, but also the promotion of
development linkages between growing export activities and the rest of the economy. For an
inclusive process of economic growth, it is particularly important that the development
complementarities between agriculture and non-agricultural activities be strengthened.
Although there are some exceptions, agriculture is the main source of livelihood in the LDCs 8 .
There are some large-scale capitalist farms (plantations, estates and agribusiness). However,
agricultural production is mainly organized on a household basis with the unity of production and
consumption overlapping and part of total household production not entering the market system but
being consumed within the household.
Both agribusinesses and smallholders are engaged in export production. But, in general, exports
constitute only a small fraction of total output 9 . The ratio of agricultural exports to agricultural
value-added is a certainly not a perfect measure of the extent to which agricultural livelihoods are
export-oriented. But it suggests that direct involvement of people working in agricultural activities
in LDCs in exports is rather limited, with a few notable exceptions, including Guinea-Bissau,
Malawi and the West African LDCs which export cotton.
Given this structure of production, enterprise and employment (also for mining, industry and
services), there is no guarantee that export expansion will lead to a form of economic growth which
is inclusive. Indeed, there is a great likelihood that export expansion will be associated with
“enclave-led growth”. This is a form of economic growth which is concentrated in a small part of
the economy, both geographically and sectorally. Enclave-led growth offers a short-term solution
to the many binding constraints on economic growth which are characteristic of a low-income trap
of underdevelopment and generalized poverty (Unctad 2004) 10 .
8
In 2000, 71 per cent of the population of working age was employed in agriculture in the LDCs as
a group, and the proportion engaged in agriculture was more than 50 per cent in all except seven
LDCs.
9
Agricultural exports were equivalent to less than 10 per cent of agricultural value-added in more
than half of the LDCs for which data were available (Unctad 2004).
10
Basic features of the export structure of the LDCs are:
-The total merchandise exports of the LDCs are divided more or less equally between oil exports,
non-oil commodity exports and manufactures exports.
So, trade liberalization is a necessary but not sufficient factor for sustained growth (Pronk) 11 .
Evidence presented by Dollar and Kraay (2002), Sala-I-Martin (2002) among others suggests
aggregate economic growth differences have been largely responsible for the differences in poverty
alleviation across regions. Initiatives that boost economic growth are therefore likely to be helpful
in the fight against poverty, and trade liberalization is such an initiative. But cuts to subsidies and
trade barriers also alter relative product prices domestically and in international markets, which in
turn affect factor prices. Hence the net effect on poverty depends also on the way those price
changes affect poor households’ expenditure and their earnings net of remittances. If the consumer
and producer price changes (whether due to own-country reforms and/or those of other countries)
are pro-poor, then they will tend to reinforce any positive growth effects of trade reform on the
poor.
The effects of trade reform on global poverty can be thought of at two levels: on the income gap
between developed and developing countries, and on poor households within developing countries.
How poor households within developing countries are affected is more difficult to say (Winters
2002; McCulloch, Winters and Cirera 2001). The agricultural policies of developed countries
provide a major source of developing country gains from reform, and lowering barriers to textiles
and clothing trade also is important. Both would boost the demand for unskilled labour and for farm
products produced in poor countries. Since two-thirds of the world’s poor live in rural areas and, in
least-developed countries, the proportion is as high as 90 per cent (OECD, 2003a),and since most
poor rural households are net sellers of farm labour and/or food, one would expect such reforms to
reduce the number in absolute poverty (Anderson 2004; Cline 2004) (Hertel, Ivanic, Perckel and
Cranfield, 2003).
Making international trade a more effective mechanism of poverty reduction in the LDCs requires a
development approach in which three pillars work together coherently and synergistically: better
national development strategies which integrate trade objectives as a central component;
improvements in the international trade regime, including issues which go beyond the scope of the
WTO, to reduce international constraints on development in the LDCs; increased and effective
international financial and technical assistance for developing production and trade capacities.
-On the basis of a classification in the late 1990s, primary commodities are the major source of
export earnings in 31 out the 49 LDCs. Four countries are oil exporters; seven countries are
predominantly mineral exporters; and 20 countries are predominantly agricultural exporters.
-Whatever their main exports, the export structure of most LDCs is concentrated on a narrow range
of products. For the group as a whole, the three leading export products constituted 76 per cent of
total merchandise exports in 1997-1999.
-The non-oil primary-commodity-exporting LDCs have a low-productivity, low-value-added and
weakly competitive commodity sector that is generally concentrated on a narrow range of products
serving declining or sluggish international markets. In 1997-1999, 84 per cent of total primary
commodity exports of this group of countries were unprocessed before export.
-Manufactures exports also tend to be narrowly concentrated on a few low-skill lines of
manufacture with competition on the basis of cost, and industries have often been built up on the
basis of market access preferences granted by developed countries, including especially the EU and
the USA, as well as market access preferences granted by multilateral agreements, namely the
Multifibre Arrangement (Unctad 2004).
11
Winters argues that although he believes that trade liberalization aids economic growth, it “may
have some adverse consequences for some – including some poor people – that should be avoided
or ameliorated to the greatest extent possible”. He suggests that rather than using this as a reason for
resisting reform, it should “stimulate the search for complementary policies to minimize adverse
consequences and reduce the hurt that they cause”.
Trade liberalization and food security.
The agricultural trade policy reform involves a combination of: a) domestic support measures; b)
export subsidies; c) tariffs.
In each case, there are complications that must be taken into account. For example, the removal of
domestic price support on, say, wheat, will lower output of wheat and raise its price in the world
markets. Wheat-exporting developing countries will benefit and wheat-importing countries that
continue to be importers after the removal of the support will lose and those that switch from being
importers to exports may benefit or lose.
In the same vein, a reduction in tariffs by the developed importing countries will increase the world
price of the product, benefiting exporters, hurting importers and leading to an ambiguous effect on
those turning from importers to exporters. But this standard analysis is complicated by the presence
of trade preferences. The reduction in export subsidies raises the world price of the product,
benefiting developing country exporters, hurting importers and yielding ambiguous effect on those
turning from being importers to exporters. Again, if the export subsidies were being countervailed,
the net impact of the two measures is likely to be a transfer of the export subsidy from the exporting
country government to the importing country government in the form of duty, without a significant
effect on prices and output. The removal of the export subsidy will also result in the removal of the
countervailing duty and the world supply will be unchanged. This is the case with export subsidies
in general, although with the removal of targeted export subsidies the affect may be less predictable
(Unctad, 2004).
The trade barrier removals in developed countries supply increasing opportunities of access for the
underdeveloped countries exports; this process can supply more resources to finance more food
imports. Nevertheless, if the export increase in developing countries happen through a shift process
to detriment of domestic production, for example shifting the resources devoted to it to exports, or
triggering off “enclave” systems, the net benefits for poor and for small rural and urban producers
could be, at best, insignificant.
The subsidies removal for developed countries exports could damage, in the other hand, the poorest
countries net food importers in consequence of higher import prices.
Besides, the tariff reduction or removal can determine a stronger competition among developing
countries in consequence of the changes in trade preferential treatment systems.
Nevertheless, according to some authors all these negative effects could have a short period of life,
followed by higher positive effects coming out by better incentives for domestic producers and by
domestic production increase.
Trade liberalization in food and agricultural goods, with the reduction in the protectionist level
especially in developed countries, would imply a food international price increase. If this increase
will be passed on domestic markets, according to some authors, most of the poor could benefit from
in accordance with their dependence by the rural economy and net food suppliers. This is because
the poor are found predominantly in farm households and are net sellers of food.
Also in the case that most of the poor are net food buyers net benefits could derive by increased
labour demand for them. Nevertheless, this presupposes the existence of potential conditions for the
agricultural growth (resources, technology, education availability) and a limited number of urban
poor or rural landless 12 .
12
If the consequence of an export subsidies removal for a commodity is to increase its
international price, the scale of the change could be variable. It depends on the incidence of
subsidied exports compared to the total trade volume, to the cross-commodity effects, to the
demand reaction and so on. A recent OECD analysis (Oecd, 2002; 2003), based on Aglink model,
simulates, for example for wheat, very limited effects on its price, proving previous studies, in
consequence of a full liberalization in the agricultural policies in OECD countries, with a bigger
impact on the quantities rather than prices.
If rich countries subsidize food exports, the presumption should be that this is good for consumers
in food importing countries. The poor in particular can benefit from lower food prices. One needs to
assess carefully if imports actually represent unfair competition with domestic producers. Often,
independently of the price of imports, domestic production is insufficient to meet demand.
Furthermore, the commodities imported are often not directly competing with local production
(there is market segmentation), so an increase in (cheap) imports does not necessarily pose a threat
to local farmers.
In any case, for countries characterized by a strong vulnerability in weakness and food insecurity
conditions also a limited increase in the international price level could have harmful consequences.
What about in developing countries where multilateral agricultural trade liberalization means lower
domestic prices for agricultural products because such countries had kept domestic food prices
above international levels via import restrictions? It is true that removing those distortions will
reduce farm incomes in those countries, and urban households will benefit from lower food prices.
However, food self-sufficiency will fall; and it is the fall in both farm earnings and food selfsufficiency that focuses the attention of those who argue that agricultural trade liberalization is bad
for poor households. Focusing on just the direct effects of agricultural trade policy reform can be
misleading, however, not least because it does not take account of the fact that such reform would
be undertaken in the context of multilateral, economy-wide liberalization. Being multilateral means
that other countries’ farm protection cuts raise international food prices.
If the subsidies reduction or removal could increase agricultural international prices, the tariff
reduction or removal in OECD countries, particularly in EU, could decrease domestic prices. Many
poor countries, especially African countries, sell European Union commodities, obviously for
domestic prices. Consequently, an increased export quantity could involve lower earning for unity
of export and limited positive (or negative) effects on real incomes and on poverty and food
security.
Hunger and under-nutrition can be eased by trade not only in goods but also in agricultural
technologies, in particular newly bred varieties of staple crops (Runge et al.2003).
Anyway, more recent quantitative simulations, based on econometric and statistical models, support
the common judgment according to which the tariff and agricultural subsidies are the most
important obstacle for the development of the poor countries and, consequently, for the fight against
poverty and food insecurity (Fao, 2003).
At the same time, however, the potential gains from trade liberalization are not guaranteed and will
not necessarily be reflected in improved food security status of all groups within society. In
particular, there are likely to be significant differences between the impacts on small scale and
commercial farmers, rural non-farm producers and urban consumers both within and across
countries. These need to be considered in identifying the food security implications of trade
liberalization.
Trade policy will have implications for food security through the link with incomes and
expenditures. Any change in the trade regime will have a direct effect on both rural and urban
incomes, and employment, and through these on income distribution. In addition, there will be an
effect on government revenues through, for example, a change in the level of revenue from import
levies.
Trade liberalization implies also a change in the relative prices of traded and nontraded goods and
factors in a previously protected sector or economy. The change in relative prices will induce
changes in the allocation of resources to different activities and hence changes in both subsectoral
and aggregate levels of production. In turn, changes in income levels (which are expected to
increase in aggregate as resources are used more efficiently) have the potential both to reduce
poverty levels and in doing so, to improve the food security status by increasing the access of the
poor to food.
The strategy employed by individual countries to improve their food security status is one of the
key factors in understanding the relationship between trade liberalization and food security. The two
broad options followed by countries attempting to achieve adequate levels of food security are, as
said, food self-sufficiency and food self-reliance. While food self-sufficiency approach implies the
provision of sufficient domestic production to meet a substantial part of consumption requirements,
it does not necessarily imply that all households in the country have access to all the food they
require. In a number of countries which are net food exporters, substantial numbers of households
are suffering from malnutrition. A strategy of food self-reliance reflects a set of policies where the
sources of food are determined by international trade patterns and the benefits and risks associated
with it. This strategy has become more common as global trade has become more liberal.
The success of these broad options will depend, inter alia, on the ability of producers to react to
price incentives, or of countries to use income gains for improved efficiency of resource allocation
in order to procure food on the international market (Fao, 2003).
Accepting food self-reliance as the means to achieve food security, it is possible to ask how the
liberalization of trade in agriculture will impact on developing countries. It is necessary to
distinguish between importers and exporters of the products and between liberalization in the
developed and developing countries 13 . If the object is to study the impact on the poor, much finer
analysis is required since the effects must be decomposed at the national level into effects on the
poor and non-poor.
It is clear that the effect of liberalization by the developed countries is bound to be quite uneven on
developing countries. As said before, net importers of both food and agriculture are likely to be hurt
by the developed country liberalization, which must raise agricultural prices 14 . On the other hand,
the bulk of the benefits will accrue to the relatively well-to-do developing countries in Latin
America and Asia and the United States. Countries that are net exporters or naturally self-sufficient
can expect to benefit from trade liberalization. Countries that are inherently food insecure will need
some assistance, and will face increased import costs if multilateral liberalization leads to higher
food prices.
Trade theory tells us that developing countries, since they tend to be endowed with land, labour and
natural resources (rather than with capital and technology), should have a comparative advantage in
agriculture. At the same time, the conventional view among trade economists at least, has been that
the policy bias against agriculture in developing countries has often been severe. Trade policies, by
protecting manufacturing and taxing (implicitly or explicitly) agriculture, have contributed to this
distortion. Misguided agricultural, fiscal and investment policies have also contributed to the bias.
Consequently, it is argued, trade reforms alone will be insufficient to remove this bias against
agriculture; so also agriculture sector reform will be necessary. In many developing countries,
according to this view, protection has encouraged excess resources into inefficient manufacturing
and insufficient resources into potentially efficient agriculture. This bias is exacerbated by policies
13
Using Fao and World Bank data, Valdés and McCalla classify 148 developing countries
according to a variety of criteria, among others: a) classification according to income (the World
Bank divides these countries into Low Income Countries, Lower Middle Income Countries and
Lower Middle Income Countries; b) classification according to net trade status in food and
agriculture (countries are divided into Net Food Importing and Net Food Exporting; Net
Agricultural Importing and Net Agricultural Exporting). This classification shows that of the 148
developing countries, 63 are Low Income Countries , 52 Lower Middle Income Countries and 33
Lower Middle Income Countries. As many as 48 out of 63 Low Income Countries are net importers
of food. Even among the Lower Middle Income Countries, 35 out of 52 are net food importers.
14
Strictly speaking, it is only in respect of such countries that the issue of an active food security
policy arises. A costly option is to provide subsidies to farmers, and this may not be viable. A
number of countries are likely to remain dependent on food aid, or aid that can be used to finance
food imports.
that tax and discriminate against agriculture. Furthermore, protection reduces the quantity and
variety of imports and increases the price of importables, therefore reducing consumer welfare.
Tariffs and non-tariff barriers also encourage unproductive activities (rent-seeking), tax avoidance
and evasion. These also contribute to inefficiency in the economy. Agriculture sector reforms are
intended to increase productivity. In general, these will increase farm incomes or profit margins,
and allow prices (especially of foods) to be reduced (at least in real terms). In this sense, agriculture
sector reforms confer widespread benefits (Fao, 2003).
Trade reform has mixed benefits. Import liberalization (easier access at lower prices) benefits those
using imported inputs. This may include producers –farmers using imported fertilizer – or
consumers (e.g. lower prices for food). However, it increases competition against those competing
with imports, and this may include food producers. Commercial farmers, for example, may benefit
from cheaper imported inputs but face increased competition from cheaper food. Measures that
favour exporters are generally beneficial, but from the self-sufficiency perspective a problem arises
if farmers substitute from food to cash crops. However, if the cash crops earn the revenue to import
food, it is consistent with self-reliance.
Anyway, the claim that the removal of agricultural protection and export subsidies in the OECD
countries, also if with net benefits on efficiency grounds, will bring net gains to the least developed
countries as a whole is at best questionable and at worst outright wrong.
Developing countries face a number of risks associated with trade. Perhaps the best known is
declining terms of trade, as the world prices of the primary commodities they export tend to fall
over time relative to the price of the manufactures they import. A related problem is the volatility of
world prices for the primary (especially agricultural) commodities they export. Furthermore, these
prices are determined in markets beyond the influence of individual poor countries and typically
affected by factors beyond their control. Related to this are supply side risks, especially the
sensitivity of output to climatic variability. A new type of risk is emerging in the face of
increasingly integrated global markets. Trade in agricultural commodities is dominated by large,
typically multinational, companies that are present in all or critical stages of the commodity chain.
The risk arises because small producers, and even some large producers in small countries, are the
weakest link in the chain. In addition, most developing countries are price-takers in the majority of
international markets in which their nationals trade, but their activities are concentrated in a small
number of markets. They cannot influence world market prices (mainly because of the small
relative size of their market contribution), but at the same time are severely affected by changes in
world market prices. A related issue here is the increasing tendency for large multi-national
companies to capture the benefits of comparative advantage by virtue of their monopsony position
(Fao, 2003).
We have to consider another possible effect of trade liberalization: will commodity price volatility
in the international market increase or decrease? According to many authors we can expect a bigger
price volatility. In this case the impact on food security for poor countries could be more
remarkable in negative sense rather than a limited increase in the price. The price increase
presumably can be a short period phenomenon, intended to be counterbalanced by the declining
trend of the agricultural commodities international prices (Ayouz et al.).
Assuming volatility in agricultural prices to be due to the lack of price responsiveness in demand,
coupled with the fact that short run supplies are volatile and largely pre-determined, some authors
have documented the positive relationship between freer trade and lower market instability (for
example: Bale and Lutz, 1979, Tyers and Anderson, 1992 and Vanzetti, 1998).
Negative macro consequences of agricultural price instability was demonstrated by Timmer (2001)
and Dawe (2001) for developing Asia, where stabilisation schemes –although imperfect- enabled
farmers to invest, increase labour productivity and food supply, which in turn reduces consumer
prices, poverty and inflation. A huge body of literature isolates agricultural price-induced terms of
trade volatility as a significant factor reducing growth, through its effect either on investment and
saving instability (for recent findings and survey, see Turnovsky and Chattopadhyay, 2003).
Trade may also serve to smooth out transitory excess demand or excess supply situations in
domestic markets, thus avoiding or reducing price fluctuations and eventual supply shortages.
Agricultural products may benefit especially in this respect from foreign trade, since agricultural
markets tend to be particularly unstable as a consequence of supply rigidities (it takes time for
agricultural production to respond to market signals), exogenous factors affecting production (such
as weather and pest conditions) and the fact that the demand for food tends to vary little when prices
go up or down (it is inelastic). A country largely self-sufficient in food and agricultural products
may have agricultural surpluses in good years, which will place strong downward pressure on farm
prices. The international market may serve to dispose of these surpluses with minimum disruption
of domestic prices and incomes. The opposite will happen in poor agricultural years.
A number of steps are necessary to evaluate the link between trade policy and food security, and
such an evaluation needs to be specific to the country. An identical policy change in two different
contexts, whether within a country at two discrete points in time, or across a set of countries, can
result in quite different outcomes, because of modifying factors. Any attempt to assess the impact of
trade reform on levels of food security must therefore take into account the existing policy and
institutional environment, the agro-climatic constraints, and the level of physical and human capital
which will all influence the extent to which reform will cause a change in the intermediate
indicators, which in turn determine the final outcome in terms of changes in food security status. In
addition, even if increases in aggregate agricultural production and net incomes do result from such
reforms, it does not necessarily follow that the level of food security of the insecure will rise,
especially if the distribution of the benefits associated with increased agricultural production is not
in their favour, or the potential impacts of changes in agricultural production levels are offset by
changes elsewhere in the economy.
High-income countries must also open their markets to low-income countries, particularly for highvalue crops. They must also ensure that farm income transfers do not depress world prices.
In conclusion, there is a strong correlation between export expansion and economic growth but the
challenge is whether small farmers can participate effectively in international specialization. Such
participation is only possible if farmers’ productivity can increase and the costs and risks of
engaging in trade are reduced. As producer prices rise and farm input costs are reduced, farmers are
able to invest and commercialize their production activities, leading to structural transformation.
Estimating the potential effects of trade liberalization.
The potential effects of post U-R trade liberalization on developed and developing countries have
been assessed using computable general equilibrium (CGE) models in a number of recent studies
(for an overview see Unctad, 2003a). The models estimate the static gains from multilateral trade
liberalization based on product-specific elasticities of supply and demand which relate output and
demand changes to changes in prices associated with the reduction of tariff barriers, and also
dynamic gains which incorporate assumptions about induced capital formation and productivity
growth following trade liberalization. None of the studies include the least developed countries as a
sub-group of developing countries. Moreover, in interpreting the estimated gains it is important to
recognize that the models incorporate certain assumptions that diverge from real-world conditions,
notably that factors of production are fully utilized and industries are perfectly competitive and
there are constant returns to scale and constant elasticities of substitution. However, the studies
provide a basis for assessing the possible order of magnitude of the impact of multilateral trade
liberalization on the LDCs (Unctad).
The results of the studies suggest that the least developed countries cannot be expected to gain
much from further multilateral liberalization unless improvements are made to their productive
capacities to enable them to benefit from any subsequent global growth in trade. There are two
reasons for coming to this conclusion: firstly, the overall magnitude of gains from multilateral trade
liberalization; and secondly, the extent to which the LDCs can be expected to share in these gains.
What this static and dynamic gains imply in terms of poverty reduction depends on assumptions
about the relationship between the income gains and poverty. The World Bank (2003) estimates that
the dynamic gains from a “realistic” multilateral trade liberalization would be real income gains of
$518 billion for the world as a whole and $349 billion for low- and middle-income countries in
2015 in 1997 dollars. Without such trade liberalization the number of people living on less than
$1/day in the low- and middle- income countries as a whole would be expected to fall from 1.1
billion in 2000 to 734 million in 2015 and the number of people living on less than $2/day would be
expected to fall from 2.7 billion to 2.1 billion over the same period. With such trade liberalization
the number of people living in extreme poverty in the low- and middle-income countries would fall
by an extra 61 million (8 per cent of the projected 2015 level) by 2015, and the number of people
living on less $2/day would fall by an extra 144 million (7 per cent of the projected 2015 level) by
2015.
How the least developed countries would benefit in terms of welfare gains and poverty reduction
depends on whether the LDCs are affected in exactly the same way as other developing countries. If
one assumes that the poverty reduction associated with the income gains is exactly proportional to
LDCs’ population share on total population of low- and middle-income countries, about 8 million
of the extra 61 million people estimated lifted out of extreme poverty through multilateral trade
liberalization would be inhabitants of the LDCs.
This would clearly be an important achievement. However, as the group of least developed
countries is predicated to see an increase of poverty, if the trends of the 1990s persist, multilateral
trade liberalization would slow down the rate of increase of the number of extremely poor people in
the LDCs. Moreover, it is likely that (World Bank and others) estimates of the impact of
multilateral trade liberalization on poverty in the LDCs are optimistic. One basic reason is that
many of the least developed countries have already undertaken extensive unilateral trade
liberalization, and thus the gains from multilateral trade liberalization through further opening of
their own markets are likely to be smaller. This is significant as most of the models suggest that the
greatest gains from multilateral trade liberalization to developing countries come from liberalization
of their own markets. In addition, because preferential market access has been a major international
support measure for the LDCs in the past, multilateral trade liberalization will be associated with
the erosion of preferences. Finally, multilateral trade liberalization will only have the povertyreducing effects if there is an export supply to the opportunities that result from multilateral trade
liberalization. The problem here is that the ability of the LDCs to increase their exports is highly
constrained by weak production capacities (Unctad, 2002; 2004).
An area of multilateral trade liberalization that is likely to have a strongly positive poverty-reducing
impact in the LDCs in the long run is the phasing-out of agricultural support measures in advanced
countries in a way that ends the distorting effects of this support on international trade. This issue is
vital for the LDCs because agriculture plays such an important role in their economies, contributing
35 per cent of GDP, employing 69 per cent of the total economically active population, and
contributing 24 per cent of total exports in 1999-2001. The key mechanism through which the
phasing-out of agricultural support measures can help to reduce poverty in the LDCs is the way in
which it will stop low prices and cheap imports undermining the incentives for investment and
productivity growth in domestic agriculture.
The effects of the phasing-out of OECD agricultural support measures in the LDCs will,
nevertheless, be complex. They depend on what the LDCs produce, export and import now, and
also what they potentially can produce, export and import in the future. The LDCs have become
increasingly dependent on food imports. This implies, as seen, that in the short run, phasing out will
mean higher food prices and also considerable pressure on the balance of payments of many LDCs.
Proposals for a food financing facility have been put forward to address these adverse effects
(Unctad, 2003b).
Models which estimate the effects of a phasing-out of OECD agricultural support provide a mixed
picture, with Hoekman et al. indicating welfare gains for the LDCs and Peters indicating welfare
losses 15 . The models are likely to underestimate the benefits of the phasing-out of OECD
agricultural support to the LDCs for at least three reasons. They assume that factors of production
are fully employed. They concentrate on the products that receive agricultural support rather than
both those products and potential substitutes for them. Their starting-point is the current pattern of
agricultural production and trade, which is itself a product of the agricultural support measures,
rather than a pattern of agricultural production and trade that reflects comparative advantage. In the
long run, those LDCs that have a comparative advantage in agricultural production should benefit
from the phasing-out of agricultural support measures. According to Cline (2004), although many
LDCs are net food importers, more than half of them have a comparative advantage in food
production.
The phasing-out of agricultural support measures is important for the LDCs because substantial and
sustained poverty reduction depends in many of the LDCs on improvements in agricultural
productivity and also beneficial complementarities between the agricultural sector and the nonagricultural sector. Without such complementarities, there is likely to be an enclave-based pattern of
development. The harmful effects of agricultural support lie precisely in its encouraging this
disarticulation in the domestic economy, which then prevents agrarian commercialisation and
development of national markets. The efforts to remove distortions in the domestic agricultural
sector within the LDCs is being subverted by distortions in the domestic agricultural sector in other
countries.
In order to encourage agricultural production in developing countries effectively the process might
start by focusing on strategic agricultural goods that are of particular importance to the poorest
developing countries.
Finally, it should be noted that the greatest benefits of the phasing-out of agricultural support will
accrue if the phasing-out is linked to increasing international financial and technical assistance to
agriculture in the LDCs to promote agricultural productivity growth and commercialisation
(Unctad, 2004).
1.6 Conclusion: some key questions
Achieving food security means ensuring that sufficient food is available, that supplies are relatively
stable and that everyone can obtain food. At least at the household level, if not at the national level,
food security can be interpreted as being determined, inter alia, by purchasing power. Changes in
the latter, in turn, are conditional on economic growth and the distribution of income and resources.
Over the next two or three decades at least, the world could produce enough food to feed the
population. The problem is not one of redistribution of scarce resources.
Food security is a political problem, requiring political solutions at national and international level.
International cooperation should also mean building a trade system that allows countries to have
access to world resources without endangering the lives and livelihoods of their people. However,
imports generally account for under 10% of food supplies in the countries most affected by hunger,
so the solution depends on increasing agricultural productivity. This in turn means improving health
and education services for small farmers, and notably for women, who are responsible for much of
the work. Redistribution could also make a significant contribution 16 .
15
Although export subsidies are a potent symbol of the rich world’s iniquitous farm policies, they
have little impact on global commerce. According to the World Bank, their abolition would yield
only 2% of the theoretical gains from free trade in agriculture. The European Union is the biggest
user, subsiding its exports, mainly of dairy products and sugar, to the tune of 2,8 billion euro a year.
Reform of the EU’s Common Agricultural Policy will reduce these subsidies sharply.
16
The US Department of Agriculture points out that malnutrition could be eliminated in the 40
poorest nations of the world if only 3% of their available food supply was redistributed to the
poorest segments of the population.
The relationships between free trade and development, and specifically between trade and poverty,
trade and food security is a very complex matter. In literature, in fact, there is room for different
theoretical positions, not completely clarified by the analytical, quantitative simulations based on a
large range of econometric and statistical tools. There is a predominant approach that considers as
strategic a freer trade for the prevalence of net benefits over the costs. But this assertion has to
match with the awareness of possible asymmetries in the distribution of the net benefits and also
with the prevalence of social and economic costs for some countries. There are many reasons
behind these more prudential approaches: asymmetric market power, incomplete market, different
positions of the underdeveloped countries as net agricultural exporters or net agricultural importers,
different conditions in their productive capacity, agricultural market instability and so on. Besides,
free trade does not seem a sufficient source to fight poverty and food security, because it can not
reach the poorer segments of a population.
According to Unctad (Unctad, 2004) an increased integration into international market could be
considered as a necessary condition for developing countries in order to grow and to fight against
poverty and malnutrition. At least at a national level, as no country experimented in the last decades
positive trends in the economic growth without improving own opening degree. But, at the same
time, the judgment that the persistent mass poverty and the widespread food insecurity in the less
developed countries are the outcome of an integration lack and inadequate trade liberalization rather
than the outcome of underdevelopment can be groundless.
The integration of economies in the international market mustn’t to neglect the policies aimed to
reduce poverty and food insecurity. Other than the ‘pro-poor’ strategies the integration form is as
important as the integration level and degree. Some econometric simulations show stronger positive
effects for the developed and more protectionist countries and for the medium income, net exporters
countries compared to the poorest and net importers countries linked to trade liberalization.
So, trade as a necessary but not also a sufficient condition to increase income and welfare;
consequently, a gradual strategy in the market opening could be pursued.
The effect of multilateral liberalization on developing country exports will vary considerably
according to the product and the market. The broad effect is that a reduction of import tariffs by
developed or developing countries should increase their demand for imports, including those from
developing countries. But how this affects particular developing countries depends both upon the
current trade regime for the products they export and their capacity to alter supply in response to
increased demand.
We can identify at least two strategic paths to link more strictly the trade reforms to the alleviation
of poverty and food insecurity for the least developed countries. One of them concerns more
appropriate and specific researches aimed to describe pools of countries characterized by different
position on the international market, on the productive capacity and so on and, consequently, by unhomogeneous exposure in terms of social benefits and costs deriving by a free trade. Some works
are already oriented in this direction, with interesting and stimulating contributions overcoming the
limits inherent in too aggregate analysis (for example: Valdes-McCalla; Diaz-Bonilla et al.; Sassi).
Another path concerns the capacity, both at a domestic and international levels, to connect trade
reform processes with pro-poor policies and to perform WTO discipline improving global welfare
and putting the needs of the least developed countries as a priority in its agenda. Special
international support measures have an important role to play in making international trade a more
effective mechanism for poverty reduction in the least developed countries.
Trade reform and trade liberalization have to become part of a global development approach and
not considered as the only and the most strategic factor to face poverty and food insecurity.
Also agricultural reforms that improve factor mobility and productivity (such as improved access to
credit and functioning markets for land) can play an important role.
The role of the agriculture sector in reducing levels of food insecurity goes far beyond simply
increasing the amount of available food. It is therefore important to understand how agriculture can
make its contribution. An emerging consensus view is that in many rural economies, agriculture has
greater potential than other activities to stimulate initial growth and improvements in income
(Mellor). Increases in agricultural productivity have the potential to increase incomes as rural
households specialize and intensify production. Supply response will also be affected by many other
factors, such as access to assets, skills and credit. Globalization can greatly enhance the role of
agriculture as an engine of growth in low-income countries by making it possible for agriculture to
grow considerably faster than domestic consumption. It also increases the potential for agriculture
to increase food security through enlarged multipliers to the massive, employment-intensive, nontradable rural non-farm sector (Fao, 2003).
A major element in ensuring food security is increased incomes of poor people. The marginal
propensity of the poor to spend on food is high. Low-income people increase their incomes and
hence their food security through increased employment. It is agricultural growth that reduces
poverty.
The great majority of persons below the poverty line work in the rural non-farm sector. The rural
non-farm sector uses very little capital and hence is highly employment-intensive. It produces goods
and services that are dominantly non-tradable, that is they are dependent on local sources of
demand. Agricultural growth is the underlying source of that demand growth.
The agricultural demand shows strong growth multipliers since the rural non-farm sector also tends
to spend substantially on itself.
Low-income countries need to invest far more than at present in agricultural research and
technology dissemination. Without such investment, opening markets will do little good for
agriculture and hence for poverty reduction and food security.
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