http://www.voxeu.org/index.php?q=node/4947Many economists argue that removing trade barriers such as the EU’s Common Agricultural Policy will be globally welfare-improving. This column presents findings from simulations that estimate the welfare effects depending on the extent of trade reform and possible policy responses. It suggests that removing the world’s price and trade distortions would reduce the number of poor people worldwide by 3%.
Trade policy reforms in recent decades have sharply reduced the distortions that were harming agriculture in developing countries. Yet global trade in farm products continues to be far more distorted than trade in nonfarm goods, and model results suggest removing the remaining distortions would put upward pressure on food prices in international markets. Economists argue that such multilateral reform is welfare-improving globally, since its market opening leads to a more efficient location of farm production. It would also improve economic welfare nationally for most countries, the exceptions being countries that have almost no distortionary policies of their own to reform and that are sufficiently dependent on imports of farm products as to suffer from a worsening in their international terms of trade.
Until recently it has also been widely argued that such an increase in farm product prices would reduce poverty in developing countries. This claim is premised on the fact that three-quarters of the world’s poor live in rural areas, with the majority of them depending directly or indirectly on agriculture for their livelihoods (World Bank 2007). However, as the international price of food rose during 2007 and spiked severely in 2008, key development-focused agencies claimed that this too would be harmful to the poor (see the many citations in Swinnen 2010).
How can both an increase and a decrease in international prices of farm products be bad for the poor? One step towards reconciling these two stances is to recall that a rise in those international prices, if associated with multilateral trade liberalisation, is a consequence of phased reductions in national import restrictions that typically reduce domestic prices over time in all but the least protective countries as protection is cut. By contrast, when prices spike as they did in 2007-8 the causes tend to be one-off exogenous shocks to output or demand during periods of low stock levels. In such situations a reasonable estimate of the poverty impact might be obtained by considering just the short-run impact of a change in international prices before farmers have time to respond. In Ivanic and Martin (2008), net buyers of food are made worse off in the short term, while any gains to net sellers of food, for example, come only after farmers have had time to respond.
Whether poverty rises or falls when trade is liberalised via unilateral or multilateral reform is clearly an empirical question. To answer it requires first being aware of the key ways in which economic welfare of an individual or household is affected by a price shock, and then undertaking quantitative analysis that captures those various mechanisms appropriately. The latter requires using economy-wide models with up-to-date price distortion data and ideally detailed household information on the earning and spending profiles of different groups of people, both rural and urban. Also, it is important to allow for supply to adjust to long-run price changes, such as those brought about by trade policy reforms. In a new CEPR Discussion Paper (Anderson, Cockburn and Martin 2010a) we outline the mechanisms at work and then summarise the results of a set of single- and multi-country simulation studies in a bid to address the question of whether agricultural trade liberalisation will increase or reduce poverty.
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