Unfair Trade and Poverty

1
Unfair Trade and Poverty

• Parthapratim Pal
• IIM-Calcutta

2
How free and fair is the Current Global Trade
regime?

• Unfortunately, the answer is that it is neither a
  free nor a fair system.
• It is not free because there still exist
  significant distortions in international trade
• Most importantly, some key sectors for developing
  countries face significant trade barriers.
• It is unfair because as the Nobel Prize winning
  economist Joseph Stiglitz points out it reflects
  the priorities and needs of developed countries
  more than developing countries.
• In essence, it is a lopsided system.

3
Agriculture The Prime Example of Distortion

• Agriculture plays a different role in developed
  and developing countries.
• Because of high dependence of poor countries on
  agriculture, it holds the key for poverty
  reduction.
• However, this is the most distorted sector in
  international trade.

4
Some Telling Figures from FAO
5
Distortions in Agriculture

• To put the extent of farm support in perspective,
  Ann Krueger has some interesting observations
• I'd like to start by sharing with you one of my
  favoriteand most tellingillustrations of the
  folly of agricultural support. Somebody has taken
  the trouble to do some calculations putting the
  cost of farm support in the OECD countries into
  context. It turns out that those countries spend
  enough to send every one of the 56 million cows
  in the OECD's dairy herd on a first class round
  the world ticketcomplete with 1450 spending
  moneyevery year. -
• Anne O. Krueger, Moving on from Cancun
  Agricultural Trade and the Poor, First Deputy
  Managing Director, IMF, Agricultural Trade Policy
  Workshop, November 3, 2003, Washington D.C.

• Developed countries maintain very high level of
  subsidies.
• Total OECD subsidies to farm sector is more than
  300 billion USD. Total international agricultural
  exports is about 600 billion USD.
• HDR2005 says It would be hard to design a more
  regressive-or less efficient-system of financial
  transfer than currently provided through
  agricultural subsidies. Chapter 4, Page 130,
  HDR2005

6
Subsidies in Developed Countries Some Pointers
based on US data
The Cotton Story
Some more examples

• In 2001-02, USA gave USD 3.9 billion as subsidies
  to its 25,000 cotton farmers
• This amount is higher than Burkina Fasos total
  GDP.
• In Burkina Faso, more than 2 million people
  depend on cotton for their livelihood
• Cotton is produced in West African countries at
  USD 0.47 per Kg and in USA at USD 1.61 per Kg.
• But subsidies in USA led to overproduction of
  cotton in USA and price of cotton has collapsed

• In 2002, wheat was exported at an average price
  of 43 below cost of production
• Soybeans were exported at an average price of 25
  below cost of production
• Maize was exported at an average price of 13
  below cost of production
• Cotton was exported at an average price of 61
  below cost of production
• Rice was exported at an average price of 35
  below cost of production.

7
To make matters worsemarket access Barriers are
Plentiful in Agriculture..

• Tariff rate in agriculture remains much higher
  than industrial goods
• There are major incidences of tariff peaks in
  agriculture
• Then there are tariff escalationstariff
  escalation is crucial as it prevents developing
  countries take the advantage of value addition.

8
How about other sectors?

• Textiles and clothing, which is one of the most
  important sectors for developing countries, was
  blocked by a regime of selective quota till 2005.
• Textiles, Leather and marine products attract
  higher tariff than other industrial goods in
  developed country
• Impact of trade on wages and work condition is
  not clear
• For most sectors, services trade liberalization
  is extremely limited because of very tight
  restrictions on movement of service providers.
• But other industrial goods and certain services
  trade is quite liberalized.
• FDI is growing exponentiallyare they a threat to
  SMEs?

9
Kicking Away the Ladderthe lessons from
development history of now-developed countries
10
So, who is benefiting from this trade regime?

• Definitely not primary producers. They are at the
  bottom of the value chain and a very low
  percentage of the actual price is accruing to him
• Examples of coffee and tea market value chains
  will be important here. This also shows the
  problem with tariff escalation mentioned before.

11
Example of Tea Pricing in India
12
Present Scenario Value Chain in India
Source Food Processing Industries in India
Opportunities Challenges, http//agricoop.nic.in
/rabi06/JS(MKTG).ppt

• Cost Build Up For One Kg. Basket Of Fruit

11.6
2.5
1.7
4.1
3.3
FARMER
TRADER
WHOLESALER
RETAILER
CONSUMER PRICE
Retail Markups
350
220
160
100
FARM GATE PRICES
MILK
FISH
FRUITS VEGETABLES
13
The problem lies in Increasing concentration of
bargaining power in Agriculture The Story of an
Hour Glass

• Market concentration in international farm trade
  is quite high. For example, in USA,
• Four companies (Cargill, Cenex Harvest States,
  Archer Daniels Midland, or ADM, and General
  Mills) own 60 of terminal grain handling
  facilities.
• Three companies (Cargill, ADM, and Zen Noh) carry
  out 82 of corn exporting.
• Four companies (Tyson, ConAgra, Cargill, and
  Farmland Nation) concentrate 81 of the
  beef-packing industry.
• Four companies (ADM, ConAgra, Cargill, and
  General Mills) own 61 of flour milling capacity
  
• Similar examples are there for certain
  commodities like tea and textiles in India also.

14
Is Better Supply Chain Management the solution?

• In India there is a feeling that opening up of
  retail market to big capital will take care of
  this problem.
• However, there is no guarantee as this has not
  happened in USA. The spread between farm and
  retail prices is increasing in USA.
• The State and the Civil Society can help rectify
  the situation. Awareness and bargaining power are
  key to ensure fair trade- that the producers are
  getting their rightful share.

15
To end on a optimistic note, certain positives
are emerging

• The G20 and G33 countries are posing as
  counterbalance to traditional big players in WTO
  to ensure a fair deal for developing countries
  and support for their non-trade concerns.
• There is a growing recognition that in spite of
  their obvious weaknesses, small producers have
  certain advantages.
• Control of commercially valuable forest
  resources, land, or fishing rights
• Lower cost structure for some products
• Sole providers of some products
• Ability to compete in domestic markets for some
  products
• Small producers must be empowered to use these
  advantages properly. Civil society can play a
  major role in this.
• In fact civil society movement has helped coffee
  traders to receive fair trade deal in Africa.

16
But domestic markets should not be ignored

• While promoting fair trade, it must also be kept
  in mind that low-income communities will find it
  easier to compete in domestic markets
• because there is less competition with
  large-scale producers,
• because there are few substitutes for their
  goods, where their low labor and start-up costs
  give them a lower overall cost structure,
• and because their deficits in transport are
  minimized.
• For a big country like India, developing its own
  domestic market to ensure fair trade should be
  seen as a viable option.

17
So Key Questions

• Given these problems and prospects the key
  question for deliberation is how do we ensure
  fair trade for primary producers for a country
  like India?
• Which sectors should benefit from the fair trade
  movement?
• What strategies need to be followed to develop a
  structure of fair trade based business model in
  India?

18
Wish you a Great Conference

• Thank you

An IIM-Calcutta Presentation
19
Poverty in Developing Countries

• We all know the basic facts. Half the people in
  the world live on less than 2 a day. A fifth
  live on less than 1 a day. Over the next three
  decades, two billion more people will be added to
  the global population97 percent of them in
  developing countries, most of them born into
  poverty.
• James D. Wolfensohn, President, World Bank, Oct.
  3, 2004