Would Freeing Up World Trade Reduce Poverty and Inequality? The Vexed Role of Agricultural Distortions
FOR decades, earnings from farming in many developing countries have
been depressed by a pro-urban, anti-agricultural bias in own-country policies
as well as by governments of richer countries favouring their farmers with
import barriers and subsidies. Both sets of policies reduced national and global
economic welfare, inhibited economic growth and added to inequality and poverty
because no fewer than three-quarters of the world’s billion poorest people
still depend directly or indirectly on farming for their livelihood (World Bank,
2007). During the past two to three decades, numerous developing country governments
have reduced their sectoral and trade policy distortions, whereas some
high-income countries also have begun reforming their protectionist farm policies.
Yet myriad policy measures continue to distort world food markets, and
in many and complex ways (Anderson, 2009). In some developing country
settings, they raise food prices for consumers and the earnings of farm
households, in other settings they lower them; but in most situations, there is a
mixture of winners and losers in both rural and urban areas, not least because
many farm households receive some of their income from non-farm sources.
The only feasible option for discerning the net impacts of price-distorting policies
on poverty and inequality is to undertake quantitative analysis 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.
The need for undertaking poverty and inequality analysis remains strong,
notwithstanding the contributions of policy reforms over the past quarter-century.
Partly as a result of those policy reforms and the consequent growth of
incomes in many developing countries, the number of people living on less
than $1 a day nearly halved over the 1981–2005 period, and their share of the
global population fell from 42 to 16 per cent (Table 1). Yet that number of
extremely poor people was still almost 900 million in 2005, and it may have
risen above that following the eruption of the global financial crisis that began
in 2008. Moreover, most of the improvement has been in Asia (especially
China), while in Sub-Saharan Africa the incidence of poverty was little lower
in 2005 than in 1981, at around 40 per cent (amounting to 300 million people
in 2005). Despite the success of China, it still had over 100 million people on
less than $1 a day in 2005, 90 per cent of whom were rural. And in India, the
number of extreme poor remains stubbornly close to 300 million – and 74 per
cent rural, even with large subsidies to their farmers.
Less pressing than extreme poverty but nonetheless still important to the
welfare of individuals is the extent of income inequality. In the past, it was just
inequality at the local level that affected individuals’ utility, but the information
and communication technology revolution has increased awareness of
income differences not only within local regions but also nationally and internationally.
At the national level, there are concerns about rural–urban inequality
as well as inequality within each of those broad geographic zones. Within
rural areas, for example, differences in incomes can be vast between landless
unskilled farm workers, subsistence farmers, the larger commercial farmers and
non-farm workers in rural towns.
Assessing what has happened to the world’s income distribution in recent decades
depends on one’s focus. Milanovic (2005) points to three possibilities. One
is intercountry inequality, which compares country-level average incomes where
each country has an equal weight in the world distribution regardless of population
size. In that case income distribution appears to have become more unequal.
The second is international inequality, which still compares country average
incomes but this time weighting by the populations of countries. In that case
income inequality appears to have decreased, although mostly because of the fast
growth in populous China and India (Atkinson and Brandolini, 2004; Bourguignon
et al., 2004). And the third possible focus is global inequality, which
involves comparing individual incomes regardless of country of citizenship, thus
taking into account within-country inequality which is ignored by the international
inequality approach where individuals are deemed to earn their country’s
average income. Rapid growth in the large emerging economies has tended to offset
the increase in inequality within countries and so, by this last definition, global
inequality appears to have remained roughly constant since the late 1980s.
In the light of the evidence currently available, the question this article
focuses on is: how much scope is there to further reduce poverty and inequality
in the world, and in specific developing countries, by getting rid of remaining
distortions to incentives facing producers and consumers of tradable goods
unilaterally or globally?
Empirical studies undertaken as background for the World Trade Organization’s
(WTO) ongoing Doha Round of multilateral trade negotiations suggest
that in 2001, when that round was launched, policy-driven distortions to agricultural
incentives contributed around two-thirds of the global welfare cost of merchandise
trade barriers and subsidies (see e.g. Anderson and Martin, 2005).
While such empirical studies did not have access to comprehensive estimates of
distortions to farmer and food consumer incentives in developing countries other
than applied tariffs on imports, a more recent study that draws on a new database
of distortions to agricultural incentives has confirmed that earlier result: Valenzuela
et al. (2009) suggest agricultural price and trade policies as of 2004
accounted for 70 per cent of the global welfare cost of those and other merchandise
trade policies. This is a striking result, given that the shares of agriculture
and food in global GDP and trade are only 3 and 6 per cent, respectively. The
contribution of farm and food policies to the welfare cost of global trade-distorting
policies for just developing countries is estimated by those authors to be even
greater, at 72 per cent – of which two-thirds is because of policies of developing
countries themselves. Even so, the estimates of price distortions that went into
that modelling study show that many developing countries protect their lesscompetitive
farmers from import competition, so some farm households might
be hurt if all markets were opened (Anderson, 2009, Ch. 1).
The World Bank’s recent study of price distortions (Anderson, 2009) shows
that the rate of assistance to farmers relative to producers of non-farm tradables
has fallen by one-third for high-income countries since the latter 1980s (from
51 to 32 per cent), whereas in developing countries it has all but disappeared
(rising from )41 per cent in the early 1980s to þ1 per cent in 2000–04). The
latter trend for developing countries is mainly because of the phasing out of
agricultural export taxes, since assistance via import restrictions has risen over
the period shown. In both high-income and developing countries, there remains
a large gap between their nominal rates of assistance for import-competing
and exporting agricultural industries, as well as a continuing large gap (albeit
smaller than in the 1980s) between the relative rates of assistance in the two
groups of countries. In the light of that evidence, the above question to be
addressed here can be expressed more specifically, for any developing country
of interest, as: how important are its own policies compared with those of the
rest of the world in affecting the welfare of the poor in that country, and what
do agricultural policies in particular contribute to those outcomes? Clear
answers to this question can guide countries in their national policymaking and
as they negotiate bilateral and multilateral trade agreements.
Now is an appropriate time to address this multifaceted question for at least
two policy reasons. One is that the WTO is struggling to conclude the Doha
Round of multilateral trade negotiations, and agricultural policy reform is once
again one of the most contentious issues in those talks. The other is that poorer
countries are striving to achieve their United Nations-encouraged Millennium
Development Goals by 2015, the prime ones being the alleviation of hunger
There are also several analytical reasons as to why now is the time to focus
more thoroughly on this issue. One is that methodologies to address it have
advanced at a rapid pace recently, involving microsimulation modelling based
on household survey data in conjunction with economy-wide computable general
equilibrium (CGE) modelling. Prominent examples include the studies in
Hertel and Winters (2005, 2006) and in Bourguignon et al. (2008). Household
income information is increasingly important for poverty and inequality analysis
because farm households and rural areas of developing countries are rapidly
diversifying their sources of income beyond what agricultural land and farm
labour can generate, including from part-time off-farm work and remittances
(Otsuka and Yamano, 2006; Otsuka et al., 2009). Hence, the earlier close correspondence
between net farm income or agricultural GDP and farm household
welfare is fading, even in some low-income countries (Davis et al., 2009). Frequently,
many of the poor, including the rural poor, are net buyers of staple
foods, causing them to be adversely affected – at least in the short run – by
increases in prices of staple foods.
Second, the compilation of national household surveys that are comparable
for cross-country analysis has progressed rapidly such that there are now
recent surveys for more than 100 countries available at the World Bank. That
dataset (http://www.worldbank.org/prospects/gidd) has already begun to be
used in conjunction with the World Bank’s LINKAGE model of the global
economy to assess global income distribution issues (e.g. Bussolo et al.,
Third, the World Bank has recently compiled a very comprehensive new
global database that updates and expands substantially our understanding of the
distortions to agricultural incentives in developing countries in particular.
Those estimates have since been expressed so as to make them usable in
national and global economy-wide models (Valenzuela and Anderson, 2008).
They differ from the usual ones employed by trade modellers of developing
country policies in that they are based on direct domestic-to-border price comparisons
rather than (as with the Global Trade Analysis Project (GTAP) dataset;
see Narayanan and Walmsley, 2008) on applied rates of import tariffs and
other key border measures.
A first attempt to exploit those new methodologies and databases has
recently been undertaken to assess the relative impacts on national, regional
and global poverty and inequality of agricultural and non-agricultural trade policies
at home and abroad. This article summarises and draws lessons from the
papers that have emerged from that research project.
At the outset it should be made clear that agricultural and trade policies are
far from the first-best policy instruments for achieving national poverty or
income distribution objectives; that is the prerogative of domestic social welfare
and income tax policy measures. However, if empirical studies reveal that
national trade-related policies are worsening particular countries’ poverty or
inequality, they provide yet another reason – on top of the usual national gainsfrom-
trade reason – for those countries to reform their policies unilaterally.
Should the inequality and poverty-alleviating effects of national trade-related
policy reforms be contingent on the rest of the world also reforming, that provides
a further reason for that country to participate actively in promoting
multilateral trade negotiations under the WTO. And should global modelling
studies reveal that multilateral trade reform would alleviate global inequality
and poverty, it underlines the importance of bringing the WTO’s Doha Development
Agenda expeditiously to a successful conclusion with ambitious reform
commitments. In contrast, a negative finding (e.g. that trade liberalisation would
increase poverty in a particular country) need not be a reason to shun welfareenhancing
trade reform. Rather, such a result could be used to provide guidance
as to where tax or social programmes need to be targeted so that all groups in
society can share in the economic benefits from such reform (see Ravallion,
2009). Global reform results could also provide bargaining power to developing
countries seeking aid-for-trade side payments to alleviate any increase in poverty
projected to result from multilaterally agreed trade reform.
The article begins with an outline of the analytical framework and the common
empirical methodology adopted by the global and national case studies being
summarised. It then compares modelling results from both global and national
models, before mentioning some caveats and drawing out policy implications.
The findings are based on two studies that each use a global model to examine
the effects of farm and non-farm price and trade policies on global poverty and
its distribution within and across many identified countries, plus nine individual
developing country studies spanning the three key regions of Asia (where nearly
two-thirds of the world’s poor live), Sub-Saharan Africa and Latin America.
Kym Anderson, John Cockburn and Will Martin
The World Economy
Central Africa; Central America, South America & Caribbean; East Africa; East Asia