Inflation, globalisation, agricultural liberalisation, and maybe a new chance for the Doha Round

February 12, 2008

wheat-field.jpg

(with slightest updates)

Until recently, we thought that the spectre of inflation had faded away. Monetarist theses had triumphed. Central banks have become independent in most OECD countries to shield monetary policy from populist demands to abuse the printing press. Increased globalisation, keeping imports and consumer goods cheap while acting as disciplining force on wages and policies had a positive effect on prices. Inflation is historically, a nightmare: the role of the 1920s hyperinflation in the rise of Nazi Germany is well ascertained. It is also an economic headache – no, a chronic migraine: raising uncertainty over returns, thus acting as a brake to long-term investment decisions. Obviously, rising prices hit the poor most, and developing countries such as those in Latin America suffered enormously during the 1970s and 1980s from excessive levels of inflation. Since the 1990s, inflation has become much less of a concern, and only pariah states like Zimbabwe have been prone to hyperinflation. Until the “credit crunch” last year, the international economic press was rejoicing about an era of low inflation and low interest rates – pretty unprecedented in history – that contributed to the general borrowing binge ranging from “subprime” homebuyers in the US to all the emerging markets, and even poorer nations in Africa.

A recent paper by Gernot Pehnelt at ECIPE corroborated the thesis that globalisation contributes to keeping inflation down. The paper reminds us that
 

“the world has experienced a remarkable process of disinflation, with average inflation rates in industrialized countries falling by 10 percentage points and an even sharper decline of the mean rate of inflation in developing countries.”

In his study, Pehnelt focuses on the case of 20 OECD countries and looks at the relationship between their growing international economic integration and their inflation rates between 1980 and 2005. I’ll let you to the joys of working through the technical details of this econometric study. The result points clearly to a positive effect (checked for its robustness) of globalisation on disinflation – although admittedly it is not all.

Having said all that, we have recently found ourselves faced with a new outburst of inflation all over the world. The European Central Bank is fighting hard to keep its 2% target, emerging markets such as Russia are faced with two-digit inflation rates again, and along with China or Venezuela, they try to fight the spectre by introducing price controls, which are likely to fail (price controls on e.g. food lead to lower supply and a booming black market with skyrocketing prices, that hit most, whom do you think: the poor).

The culprit? Food and commodity prices (not, to put it simplistically, trade unions like in the 1970s). “Interesting!”, I thought. “Exactly in those two sectors that are the least globalized!” Least globalized in the sense of: benefiting from import protection, and generally being subjected to “dirigiste” policies which include subsidies. In an era of growing demand for commodities and food fuelled by the growth of giants such as China and India, and more demand for renewable energy, production of oil and wheat is not keeping pace (droughts are not helping either). I will not dwell on oil (here a post that might interest you) or other commodity markets, but on agriculture.

Average import tariffs have gone down drastically in the last decades. But agricultural markets remain systematically more protected. Anybody who works in trade policy has noticed a systematic pattern in most World Trade Organization (WTO) countries: all import tariffs on manufactured goods are generally much lower than tariffs on agricultural products. According to the WTO, in 2006, the simple average applied MFN tariff (excluding notorious tariff peaks, and excluding trade weighted, which generally makes things worse) in agricultural and non agricultural goods for a few of the big trading nations was:

European Communities – ag (tariffs on agricultural goods): 15.4%, non ag (tariffs on non agricultural goods): 3.9%
US – ag: 5.3%, non ag: 3.3%
India – ag 37.6%, non ag 16.4%
China – ag 15.7%, non ag 9.0%
Brazil – ag 10.2%, non ag 12.6% (here an unsurprising exception)

Russia – ag 13.5%, non ag 11.1%

The world’s agricultural system isn’t able to meet the needs. Many things need to be done to solve this problem. Slashing tariffs is a first step. But it will not suffice. I do not believe we are objectively facing severe scarcity of available land and other resources. I rather believe that a window of opportunity is emerging to finally undertake the long overdue deep reforms of agricultural systems both in the developed and emerging world. This means, in a “typical” developing country: finalizing land reform, formalizing and securing property rights for peasants, increasing education and technical levels, facilitate access to global markets not least by developing infrastructure. I just read one of Amartya Sen’s latest books (The Argumentative Indian, published in 2005) which included a few pages on the agricultural system in India. He reminds us how the government’s system of public procurement and mass storage of agricultural products set up to sustain prices in fact keeps them artificially high, props up big producers and makes food unaffordable in a country where the majority of children suffer from malnutrition. When one adds to it the tariffs India applies to agricultural imports, then one becomes aware of how deeply shocking this situation is. I am not going here into the notorious distortions and wastage of the EU’s common agricultural policy (it would be too long…). Countries like Russia or Kazakhstan could become global agricultural powerhouses and major exporters of all sorts of wheats and grains to feed the planet. But the private property right system there is not yet functioning and agriculture works way under its potential.

The good news I heard today were in the Wall Street Journal: “As food duties fall, hopes rise for trade deal”.

The world’s scramble for affordable food is tearing at the patchwork of agricultural tariffs that governments have long used to control trade- and offering a glimmer of hope to those trying to kick-start a stalled global trade deal. Some countries are slashing import duties to attract staples like wheat, rice and cooling oil. Europe, traditionally the world’s most outspoken advocate of protected food markets, recently removed cereal-import duties for the first time. Others – notably China- are raising export duties to keep domestic markets well stocked.”…

Agriculture is the main obstacle to advancing the current round of trade negotiations. The so-called Doha Round is in many circles widely believed to be dead. Interestingly, the homepage of the WTO gives again one of its usual glimmers of hope, announcing: “Draft blueprints issued for final deal on agricultural and non-agricultural trade” . Hope this time it is a bit more for real.

In short, fighting inflation, and food price inflation will have to go via agricultural liberalisation accompanied by general agricultural reforms, subjecting agriculture to similar disciplines as the manufacturing sector.

One Response to “Inflation, globalisation, agricultural liberalisation, and maybe a new chance for the Doha Round”

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