Saturday, January 26, 2013

Trade and productivity growth is vital to feeding Asia

Rapid trade-led economic growth in emerging economies is shifting the global economic and industrial centres of gravity away from the north Atlantic, raising the importance of Asia in world trade, and altering the commodity structure of Asia’s trade.

This is a process that began with Japan’s re-emergence in the 1950s. Hong Kong, Korea and Taiwan joined the process from the late 1960s, then some Southeast Asian countries. The much more populous China and India are now its drivers.

The early-industrialising Northeast Asian group represents just 3 per cent of the world’s population. Its rapid growth was easily accommodated, including in primary product markets. But China and India account for more than two-fifths of humanity. Their rapid industrialisation and income growth has far greater significance for primary product markets and for food and energy security. The increasing impact of China and India has already been felt over the past decade in terms of historically high international food, mineral and energy prices. The pressure on food prices has been exacerbated by new biofuel policies in the United States, EU and elsewhere that provide an incentive to re-direct crop use from foodstuffs to biofuels. Agricultural export booms in emerging economies like Brazil are only marginally offsetting these effects on food prices.

I recently completed global economy-wide modelling work with Dr Anna Strutt of Waikato and Adelaide universities that projected the world economy to 2030. We asked how the model’s baseline projection would be affected by changes in farm productivity or agricultural trade policies.

In the baseline the share of developing countries in global GDP rises from barely one-quarter in 2007 to almost one-half by 2030, and their average per capita income rises from 33 to 56 per cent of the global average. This increase in the spending power of developing countries boosts the global demand for food along with other goods and services. The net result in that baseline projection is that the real international prices for agricultural and food products in 2030 are slightly above the 2007 level. This rise contrasts with the decline in real food prices over much of the 20th century, and is despite projecting rapid farm productivity growth over the same period.

If the economies of China and India were to grow by one-quarter less than in the baseline scenario to 2030 this would not lower international food prices. The reduction in projected demand in that scenario is accompanied by a parallel slowdown in farm (and other) productivity and thus in these emerging economies’ projected food supply that would maintain the baseline price projection.
Should slower Asian growth lead to less investment in R&D to the extent that annual global primary sector productivity growth fell by a further one percentage point, it would cause real farm product prices in international markets to be about 10 per cent higher in 2030. This underscores the importance of continued investment in agricultural R&D, especially since the social rate of return to such further investments is very high because of past underinvestment. Assigning public funds for this purpose is highly likely to be growth-enhancing, and more so the greater the need to adapt to climate change.

However, it matters where agricultural R&D is undertaken. At one extreme, if investments are only in relatively poor agrarian African economies with high population growth rates, that would boost not only food supply but also food demand there. This is because such technological improvement in those countries raises real incomes in very populous rural areas. At the other extreme, if productivity growth was confined to high-income countries the boost to demand would be much lower because there less than 3 per cent of the workforce would directly benefit from that productivity boost. If faster grain productivity growth is confined to middle-income China and India over the projection period, the impact is in between those two extremes: it would boost those countries’ grain self-sufficiency by several percentage points, as well as their per capita consumption of calories and protein. But it would only reduce the rise in international farm product prices by less than 1 per cent in aggregate and 3 per cent for grains.

It also matters which farm technologies are the focus of any new R&D. Conventional crop-improvement breeding is very slow, taking on average 25–30 years from initial research expenditure to widespread improvements on farms in cases of successful R&D. New biotechnologies and nanotechnologies, by contrast, allow accelerated and more-targeted crop breeding, including for such desirable traits as higher yields, more nutrients, or drought tolerance. In many cases these traits can be stacked, further speeding developments. Parts of the world that have allowed the adoption of new biotech crops have enjoyed substantial benefits, as have consumers insofar as those technologies have lowered international food prices. Many countries have denied themselves these new crop technologies, including China and India except for cotton. Denying developing countries’ farmers and food consumers those potential benefits is enormously costly.

If developing countries neglect to expand their investments in agricultural R&D they not only forego economic growth and the chance to alleviate poverty but also the associated boost in their food self-sufficiency. Should this prompt demands for protection from food imports that governments are not able to resist, the consequent growth in agricultural protectionism would raise domestic food prices and thus harm net buyers of food in those developing countries. It would also reduce export prospects for farmers in food-surplus economies. And it would make international food markets even ‘thinner’, so prices would be even more volatile.

If the WTO’s Doha Development Agenda could be resurrected and concluded with commitments to open markets multilaterally, its trade reforms would not only boost global economic welfare but also reduce global inequality and poverty. Multilateral reform of agricultural trade would also ‘thicken’ international food markets and reduce the capacity of countries to “beggar thy neighbours” by insulating their domestic markets from variable world food prices. This would be especially the case if export restraints could be disciplined more by the WTO. A desirable consequence of comprehensive multilateral trade reform would be fewer fluctuations in international food prices and fewer and less-severe food price spikes. Benefits could be compounded by removing biofuel subsidies and mandates and thereby reducing the link between food and fossil fuel prices.

Kym Anderson is George Gollin Professor of Economics at the University of Adelaide and Professor of Economics at the Arndt-Corden Department of Economics, Australian National University.
This article appeared in the most recent edition of the East Asia Forum Quarterly,‘Energy, Resources and Food’.

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