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List of Tables iv


Agricultural Producer Support Estimates for Developing Countries Measurement Issues and Evidence from India, Indonesia, China, and Vietnam

David Orden Fuzhi Cheng Hoa Nguyen Ulrike Grote Marcelle Thomas Kathleen Mullen Dongsheng Sun

RESEARCH

REPORT

152

INTERNATIONAL FOOD P OLICY RE SEARCH INSTITUTE

IFPRI

sustainable solutions for ending hunger and poverty
?

Copyright ? 2007 International Food Policy Research Institute. All rights reserved. Sections of this material may be reproduced for personal and not-for-profit use without the express written permission of but with acknowledgment to IFPRI. To reproduce material contained herein for profit or commercial use requires express written permission. To obtain permission, contact the Communications Division <ifpri-copyright@cgiar.org>. International Food Policy Research Institute 2033 K Street, NW Washington, D.C. 20006-1002, U.S.A. Telephone +1-202-862-5600 www.ifpri.org DOI: 10.2499/9780896291607RR152 Library of Congress Cataloging-in-Publication Data Agricultural producer support estimates for developing countries : measurement issues and evidence from India, Indonesia, China, and Vietnam / David Orden . . . [et. al]. p. cm. — (IFPRI research report ; 152) Includes bibliographical references. ISBN-13: 978-0-89629-160-7 (alk. paper) ISBN-10: 0-89629-160-X (alk. paper) 1. Agriculture and state—India. 2. Agriculture and state—Indonesia. 3. Agriculture and state—China. 4. Agriculture and state—Vietnam. I. Orden, David. II. International Food Policy Research Institute. III. Series: Research report (International Food Policy Research Institute) ; 152. HD1417.A457 2007 338.1′85—dc22 2006101891

Contents
List of Tables List of Figures Acronyms and Abbreviations Foreword Acknowledgments Summary 1. Introduction 2. Measurement of PSEs in Developing Countries 3. The Four Economies and Their Agricultural Sectors 4. Agricultural Policy Reforms and Recent Policy Settings 5. Producer Support Estimates 6. Effects of Exchange Rate Misalignment on PSEs for India and China 7. Summary and Conclusions References iv vi vii ix x xi 1 9 20 36 61 110 123 130

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Tables
2.1 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 Comparison of PSE to the WTO AMS Overall and sectoral GDP growth rates of India, Indonesia, China, and Vietnam, 1970–2004 Production of major agricultural commodities in India, 2003 Exports of major agricultural commodities by India, 2003 Imports of major agricultural commodities by India, 2003 Production of major agricultural commodities in Indonesia, 2003 Exports of major agricultural commodities by Indonesia, 2003 Imports of major agricultural commodities by Indonesia, 2003 Production of major agricultural commodities in China, 2003 Composition and growth of China’s agricultural production, 1970–2000 (percent) 16 22 25 27 29 29 30 30 31 31 32 33 34 35 35 41 42 43 44 46 47 47 51

3.10 Exports of major agricultural commodities by China, 2003 3.11 Imports of major agricultural commodities by China, 2003 3.12 Production of major agricultural commodities in Vietnam, 2003 3.13 Exports of major agricultural commodities by Vietnam, 2003 3.14 Imports of major agricultural commodities by Vietnam, 2003 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 India’s WTO domestic support notifications, 1995–97 (million $) Estimated input subsidies in India, 1980/81–2002/03 (billion Rs) Farmers’ share of fertilizer subsidies in India, 1981/82–2002/03 Comparison of estimates of irrigation subsidies in India, 1980/81–2002/03 (million Rs) Indonesia pre- and postcrisis (1997–98) international trade and agriculture policies: Commitments and reforms Indonesia’s WTO bound tariff rates for selected agricultural commodities, 1994 and 2004 (percent) Indonesia’s tariff structure, 1998 and 2002 (percent) Selected agricultural tariff cuts for China, 2000 and 2004

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TABLES

v

4.9

China’s TRQ system for selected commodities, 2002 and 2004

52 53 55 56 58 64 66 68 72 74 78 80 81 86 90 92 94 96 98 100 102 104 104 106 108 118 119 121

4.10 China’s state and designated trading 4.11 China’s agricultural subsidies, 2004 4.12 Agriculture-related taxes in China, 1990–2003 (million yuan) 4.13 Tariffs on selected agricultural importables in Vietnam 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 Components of MPS estimates for Indonesia: Definitions and sources for import crops Components of MPS estimates for Indonesia: Definitions and sources for export crops Components of MPS estimates for Vietnam: Definitions and sources India’s wheat and rice exports, 2000/01–2002/03 (million metric tons) India rice prices, %MPS, and %PSE under various assumptions, 1985–2002 Rice %MPS and %PSE for Indonesia (1985–2003), China (1995–2001), and Vietnam (1986–2002) Regional estimates of rice %MPS for Indonesia, 1985–2003 Quality indices for domestic and exported rice in Vietnam, 2000 India sugar prices, %MPS, and %PSE under various assumptions, 1985–2002

5.10 Sugar %MPS and %PSE for Indonesia (1987–2003), China (1995–2001), and Vietnam (1986–2001) 5.11 Summary for India of other commodity-specific MPS and PSEs, 1985–2002 5.12 Summary for Indonesia of other commodity-specific MPS and PSEs, 1985–2003 5.13 Summary for China of other commodity-specific MPS and PSEs, 1995–2001 5.14 Summary for Vietnam of other commodity-specific MPS, 1986–2002 5.15 India total PSE under the modified procedure, 1985–2002 5.16 India total PSE under the exportables hypothesis, 1985–2002 5.17 India total PSE under the importables hypothesis, 1985–2002 5.18 Indonesia total PSE, 1985–2003 5.19 China total PSE, 1995–2001 5.20 Vietnam total PSE, 1987–2002 6.1 6.2 6.3 Comparison between counterfactual and direct PSEs under different pass-through assumptions Direct, indirect, and total effects and counterfactual PSEs for India by periods, 1985–2002 Direct, indirect, and total effect and counterfactual PSEs for China by periods, 1995–2002

Figures
2.1 3.1 3.2 3.3 3.4 3.5 4.1 4.2 4.3 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 6.1 6.2 6.3 6.4 Computing the MPS under alternative price scenarios Growth in value of high-value agricultural output in India, 1990–2000 Growth in food consumption in India, 1970s–1990s Agricultural imports and exports of India, Indonesia, China, and Vietnam, 1990–2004 India’s exports of nontraditional agricultural products, 1980s and 1990s Share of agricultural crops in total value of Vietnam plant output, 2000 WTO URAA bound and applied agricultural tariffs for India, 1997 General services expenditures in Indonesia, 1995–2000 Agricultural input subsidies in Vietnam, 1987–2001 Net rice trade of India, Indonesia, China, and Vietnam, 1985–2003 Food grain stocks in India, April 2000–December 2002 Rice %MPS and %PSE for India, Indonesia, China, and Vietnam, 1985–2002 Net sugar trade of India, Indonesia, China, and Vietnam, 1985–2003 India levy and free sale sugar prices and ratio of quantities, 1985–2002 Sugar %MPS and %PSE for India, Indonesia, China, and Vietnam, 1985–2002 Market price support and budget expenditures for India, Indonesia, China, and Vietnam, 1985–2002 Percentage total PSEs for India, Indonesia, China, and Vietnam, 1985–2002 Actual and estimated equilibrium real exchange rates for India, 1980–2002 Actual and estimated equilibrium real exchange rates for China, 1980–2002 Direct, indirect, and counterfactual PSEs for India, annually 1985–2002 Direct, indirect, and counterfactual PSEs for China, annually 1995–2002 15 26 27 28 28 34 38 49 60 71 71 76 83 85 88 102 103 115 116 120 121

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Acronyms and Abbreviations
General
AFTA AMS ASEAN BEER BP CGE c.i.f. FAO FDI f.o.b. GDP GSSE IFPRI IMF MPS OECD PPP PSE QR REER SOE STE TRQ URAA VAT WTO ASEAN Free Trade Agreement Aggregate measure of support Association of Southeast Asian Nations Behavioral equilibrium exchange rate Budgetary payments Computable general equilibrium Cost, insurance, and freight Food and Agriculture Organization of the United Nations Foreign direct investment Free on board Gross domestic product General services support estimate International Food Policy Research Institute International Monetary Fund Market price support Organisation for Economic Co-operation and Development Purchasing power parity Producer support estimate Quantitative restriction Real equilibrium exchange rate State-owned enterprise State trading enterprise Tariff rate quota Uruguay Round Agreement on Agriculture Value-added tax World Trade Organization

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viii

ACRONYMS AND ABBREVIATIONS

India
AEZ CACP EXIM FCI GOI MIS MEP MSP NABARD RIDF SAP SDF SMP Agricultural export zone Commission for Agricultural Costs and Prices Export-import Food Corporation of India Government of India Market Intervention Scheme Minimum export price Minimum support price National Bank for Agriculture and Rural Development Rural Infrastructure Development Fund State-advised price Sugar Development Fund Statutory minimum price

Indonesia
BULOG CPO NPIK Food Logistics Agency Crude palm oil Special importer identification number

China
ADBC FTC GGBRS HRS NDRC RCC Agricultural Development Bank of China Foreign trade corporation Governors’ Grain-Bag Responsibility System Household Responsibility System National Development and Reform Commission Rural credit cooperative

Vietnam
GOV GSO IAE MARD Government of Vietnam General Statistics Office of Vietnam Institute of Agricultural Economics of Vietnam Ministry of Agriculture and Rural Development

Foreword
he levels of support that trade and domestic farm policies afford to agriculture, and the related processes of policy reform intended to improve the economic efficiency of agricultural production, processing, and marketing, are important issues for developing countries. The effects of policy on agriculture are well documented for wealthy countries, especially by the established and respected studies from the Organisation for Economic Cooperation and Development. However, systematic analysis is often lacking for poor countries because of the difficulty and cost of measuring policy effects consistently over time and across commodities. This study contributes to filling the existing research gap by examining the impacts of agricultural policies and policy reforms on the incentives of agricultural producers in India, Indonesia, China, and Vietnam. It investigates critical measurement issues and analyzes the levels of market price support and producer support estimates for key commodities and in aggregate for each country. The results show a range of outcomes. In India a countercyclical support policy is evident despite market-oriented institutional reforms; in Indonesia high levels of support for agriculture have persisted; while China and Vietnam have moved away from past disprotection toward modest support for agriculture. The results demonstrate the importance of tracking the transitions of agricultural policy that improve farmers’ incentives as economic growth occurs, as well as the difficulty of making reforms in cases of entrenched policy interventions. The report is part of a series of recent studies carried out by researchers at the International Food Policy Research Institute and their partners on the impact of domestic support policies, trade policy, and trade agreements on the poor in developing countries. These include studies of the impact of alternative outcomes from the World Trade Organization Doha Development Round, the effects of global cotton markets on poverty in Benin and Pakistan, the impact of rice policy on poverty in the Philippines, and analysis of the potential effects of trade liberalization in the Near East and North Africa region. These studies provide policymakers with objective, empirically based analyses to inform pro-poor policies related to agricultural support and trade. We hope the report will contribute to informed policy discussions both at the domestic level and in international negotiations.

T

Joachim von Braun Director General, IFPRI

ix

Acknowledgments

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his report is part of a larger effort to understand and assess agricultural policies in developing countries undertaken at the International Food Policy Research Institute (IFPRI) from September 2003 through June 2005. We express our appreciation to Joachim von Braun and Ashok Gulati, who inspired this study and launched it as an IFPRI activity. We gratefully acknowledge financial support from the Economic Research Service, USDA, Washington, D.C., U.S.A.; Center for Development Research (ZEF), Bonn, Germany; German Agency for Technical Cooperation (GTZ), Eschborn, Germany; Australian Center for International Agricultural Research (ACIAR), Canberra, Australia; National Natural Science Foundation of China (grant 70203013), Beijing, China; and World Bank, Washington, D.C., U.S.A. Throughout the country studies for which this report provides an overview and synthesis, we have benefited from helpful formal and informal comments from numerous colleagues. While we alone are responsible for the final content of the report, for their helpful comments we thank, in particular, Xinshen Diao, Eugenio Diaz-Bonilla, Praveen Dixit, John Dyck, Maurice Landes, Bill Liefert, Steve Magiera, Will Martin, and several anonymous reviewers of discussion papers on which the report draws. During extensive field work in Vietnam we are indebted for their assistance to Professor Le Dinh Thang, Professor Le Du Phong, Mr. Nguyen Duc Song, Mrs. Nguyen Thi Hien, and Mr. Trinh Van Tien. For work about Indonesia, we thank Reno Dewina, Claudia Ringler, and Charles Rodgers for their assistance. We have also benefited from presentation of parts of this research at various seminars and conferences. These include the International Association of Agricultural Economists triannual meeting, August 2006; the American Agricultural Economics Association annual meetings, August 2004 and July 2005; the international conference on “Globalization, Market Integration, Agricultural Support Policy, and Smallholders,” Nanjing, China, November 8–9, 2004; the CAAS-IFPRI conference on “The Dragon and the Elephant: Rural Development and Agricultural Reform Experiences in China and India,” Beijing, China, November 10–11, 2003; a workshop on agricultural support measures at the Food and Agriculture Organization of the United Nations (FAO), Rome, Italy, October 23, 2003; and seminars at IFPRI, Washington D.C., September 22, 2006 (for publication review); the Pakistan Agricultural Research Council (PARC), Islamabad, Pakistan, June 14, 2005; Lahore University of Management Sciences (LUMS), Lahore, Pakistan, March 10, 2005; and the Economic Research Service (ERS), USDA, Washington, D.C., U.S.A., January 29, 2004.

x

Summary

T

his report provides an analysis of the evolution of agricultural policies from 1985 to 2002 and presents empirical estimates of the degree of protection or disprotection to agriculture for India, Indonesia, China, and Vietnam. In all four countries—as in many other developing countries with smallholder-dominated agricultural sectors and weak market infrastructure and institutions—government interventions were initially pursued, in lieu of reliance on market forces, to achieve the twin goals of self-sufficiency and low food prices for consumers. The policy reform processes pursued in these countries during 1985–2002 differ in many details yet display similar characteristics. In each country there has been a movement from an autarkic and state-led setting to a more deregulated market environment with greater integration into the world economy and a new and larger role for the private sector. The agricultural reform process has often lagged reforms in other parts of the economy; it has not been uniform over time or across the countries; and it has been marked in each case by policy reversals and setbacks. However, it has been two decades since agricultural reforms began in China and Vietnam and over ten years since India extended its broad-based economic reforms into agriculture. Indonesia too has recently included agriculture more fully in its policy reform process. After a brief introduction, we describe the conceptual and measurement issues that arise in assessing agricultural protection or disprotection among developing countries, where most of the effects arise from the gap between domestic and international output or input prices, not direct subsidy payments. Next we provide a brief overview of the general economic situation in each country since the 1980s; of the pivotal role of the agricultural sector in output, employment, and trade; and of the international trade and domestic policy regimes for agriculture. With this background, we report our key results about agricultural protection or disprotection for both specific commodities and the agricultural sector as a whole. We describe the specific coverage of commodities and budgetary expenditures by country and other unique aspects of each analysis. We present commodity-specific results and the total producer support estimate (PSE) measure computed for each country. For India and China we extend the analysis to examine the effects of exchange rate misalignment on the measures of agricultural support. Our key findings can be summarized as follows. For India, our results, based on eleven main commodities, indicate that support for agriculture has been largely countercyclical to world prices. Agricultural support has increased when world prices were low (as in the mid-1980s and the period 1998–2002) and decreased when world prices were high (as in the early and mid1990s). The results demonstrate an increased level of budgetary payments for input subsidies to agriculture over the period of study. Yet in the aggregate, taking into account both price support and budgetary costs, the countercyclical dimension of agricultural policy dominates a clear trend from disprotection toward protection over the period 1985–2002. By using different variants of market price support (MPS) and PSEs, we also extend earlier analyses for India in several dimensions. We find that, when trade volumes are relatively small, as occurs with India pursuing a self-sufficiency policy for important commodities, the standard procedure of computing the MPS through a comparison of the domestic price to an

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xii

SUMMARY

adjusted international reference price based on the direction of observed trade can lead to a misleading conclusion about the level of support provided. Under the approach we adopt to address this reference price issue (following that of Byerlee and Morris 1993), the level of protection or disprotection is based on a counterfactual reference price (import, export, or autarky) chosen according to economic criteria as the price that would exist domestically in the country if the policy interventions were removed. We also observe that, in the standard PSE approach, the MPS measured for the covered commodities is often scaled up based on the share of these commodities in the total value of agricultural production. When the commodity coverage is less than complete, the scaling-up procedure leads to a total MPS of greater absolute value than the MPS for the covered commodities, a result that is only appropriate when MPSs for the two sets of commodities are similar. Taking these and other measurement issues into consideration, the support estimates we derive confirm that Indian agriculture was disprotected in the 1990s. More recently, high levels of subsidies were required for India to export the key food grains of rice or wheat during 2000–02, a conclusion reached by several other studies. However, we report less disprotection of Indian agriculture in the 1990s, and less protection at the end of the decade, than in earlier assessments. This difference is partly explained by the modified procedure for choosing a reference price. A large component of this difference can be accounted for by whether or not the scaling-up procedure is invoked. For Indonesia we evaluate agricultural support for four imported commodities (rice, sugar, maize, and soybeans) and two exported commodities (crude palm oil and natural rubber). The MPS and PSEs show that, in spite of the reforms, the government of Indonesia has consistently subsidized agriculture since 1990, although not uniformly across commodities. Support was interrupted briefly by the Asian financial crisis of 1997–98, but it subsequently reverted to precrisis levels and increased during 2000–02 for some crops and in the aggregate. For China our analysis is limited to the years 1995–2001. Over this short period, China’s agricultural policies are estimated to have been nearly neutral (neither protection nor disprotection), although domestic prices lagged the run-up in world prices in 1996, creating negative protection for that year. For China and also for India, we evaluate the effects of exchange rate disequilibrium on the MPS and PSE measures of agricultural support. Our results show that the indirect effect of exchange rate misalignment can either amplify or counteract the direct effect from sector-specific policies. In India the indirect effects are relatively small after the macroeconomic reforms undertaken in the early 1990s. In China the exchange rate undervaluation since the end of the 1990s has had a greater impact than the direct policies, serving to subsidize agricultural output prices. Finally, Vietnam has followed China in moving from a centrally planned economy toward a market-oriented economic system under a communist political regime. Our results, covering more than 70 percent of the value of agricultural output, show that most agricultural products were taxed in Vietnam from the mid-1980s until the mid-1990s. Domestic economic reforms have opened up the economy since the early 1990s, and there has been a policy shift from an import substitution strategy toward export promotion, with decreasing disprotection changing to positive protection overall. Taken together, our measures of support and disprotection of specific crops and agriculture in total provide a reasonable basis for assessing the agricultural policies of India, Indonesia, China, and Vietnam. Our attention to measurement issues provides a form of sensitivity analysis, and the results we report are indicative of the range of outcomes likely to be found more broadly among developing countries. Starting with a regime of heavy intervention in agricultural markets, each of the four countries in our study has undergone a substantial reform pro-

SUMMARY

xiii

cess that has reduced government involvement and created opportunities for economic activities within the private sector. Nevertheless, the outcomes in terms of levels of support show clear differences. Indonesia has provided the most consistent support for agriculture, particularly food crops. India has supported agriculture when world prices are low but has disprotected key grains, including rice and wheat, as well as agriculture overall, during many years. In these two economies, the reform process does not seem to have fundamentally changed the pattern of support levels observed over the period 1985–2002. China and Vietnam, in contrast, have transitioned from communist disprotection of agriculture to providing net support to the sector.

CHAPTER 1

Introduction
overnments intervene in agricultural markets with trade and domestic support policies not only in developed countries but also in most developing countries. The nature and degree of these distortions, however, differs widely across developed and developing countries, with quite different impacts on their producers, consumers, and taxpayers. Support for agriculture in developed countries came into sharp focus during the 1986–94 negotiations of the Uruguay Round Agreement on Agriculture (URAA) of the World Trade Organization (WTO). Research by the Organisation for Economic Co-operation and Development (OECD) reporting market price support (MPS) and producer support estimates (PSEs) for the developed countries has helped to sharpen this focus. One often hears that agriculture in OECD countries receives support from government policies of one form or another totaling almost a billion dollars a day, a level that has significant repercussions on developing country agriculture.1 However, fewer estimates are available of support provided by developing countries for the recent period, such as from the Uruguay Round onward. One does not really know how much support (positive or negative) the governments of developing countries are providing to their agriculture through a complex web of policies, nor what impact this support has on their own agriculture and on world agriculture more broadly. In a seminal work, Krueger, Schiff, and Valdés (1991) studied agricultural policy distortions in 18 developing countries over the period 1960–85. Their findings, based on a partial equilibrium framework, revealed that developing countries had inflicted substantial implicit taxation on their agricultural sectors through their restrictive trade, pricing, and exchange rate policies. The implication was that the policies of developing countries had limited the output and growth of their agriculture. The effect of removing these distortions was estimated to be substantial. In particular, it was estimated that the rate of growth in agriculture in these countries would as much as double if the distortions were removed (Schiff and Valdés 1992). Since the mid-1980s, many developing countries have undertaken major policy reforms directly and indirectly affecting agricultural output and input prices. Moreover, the URAA has imposed several disciplines on agricultural trade policies in the developing countries. Given that more developing countries are becoming members of the WTO, including such large

G

1To be precise, agriculture in OECD countries received support of $318 billion in 2002, which is 35 percent of the value of agricultural production in OECD countries and nearly double the value of agricultural exports from developing countries (OECD 2003a). This comprises only 1.4 percent of the combined gross domestic product (GDP) of OECD countries, indicating that it is relatively easy for them to bear this burden. But OECD farm support is costly for taxpayers and consumers and for developing countries. According to an early IFPRI estimate, the OECD policies reduce economic welfare among developing countries by almost $24 billion per year (Diao et al. 2005; see also Anderson and Martin 2005). Throughout this report, figures in “$” refer to U.S. dollars.

1

2

CHAPTER 1

economies as India and China, and given their increasing influence on trade and trade negotiations, it is important to know more about the structure of farm support or taxation among developing countries. The need for such assessments is underscored by the highly confrontational positions taken on agriculture by the developing and developed countries, which have complicated progress in the ongoing Doha Development Round of WTO negotiations, launched in 2001. This report provides an analysis of the evolution of agricultural policies from 1985 to 2002 and presents empirical estimates of the degree of protection or disprotection to agriculture for four developing countries in South and Southeast Asia where the largest numbers of the world’s poor (both farmers and nonfarmers) reside: India, Indonesia, China, and Vietnam. These four countries are major developing agricultural economies, and changes in their trade and domestic support policies will have significant implications internally and for world agricultural markets. Its regional concentration gives cohesion to the study, but the countries included are nevertheless characterized by diverse agricultural resources, production, and trade. India and China are two of the world’s largest agricultural economies. They have a relative advantage owing to their low labor costs and are largely self-sufficient in agriculture, but they are net exporters of some major commodities and importers of others. Indonesia is primarily an importer of food grains but an exporter of palm oil and rubber, while Vietnam has recently emerged as a substantial exporter of rice as well as coffee and several other specialty crops. India and Vietnam can be characterized as being food insecure, at least from the household perspective.2 Indonesia and China are less vulnerable to food insecurity. India and Vietnam

are low-income countries; Indonesia and China are lower middle-income countries. Agricultural policies among the four countries differ given their different circumstances and the choices articulated by their policymakers. India and Indonesia have deep traditions as market economies, while China and Vietnam have emerged from communist central planning and continue to be governed by communist regimes. In all four countries—as in many other developing countries with smallholder-dominated agricultural sectors and weak market infrastructure and institutions—government interventions were initially pursued, in lieu of reliance on market forces, to a3chieve the twin goals of self-sufficiency and low food prices for consumers. The policy reform processes pursued among these countries during 1985–2002 differ in details yet display several similar characteristics. In each country there has been a movement from an autarkic and stateled setting to a more deregulated market environment with greater integration into the world economy and a new and larger role for the private sector. The agricultural reform process has often lagged reforms in other parts of the economy; it has not been uniform over time or across the countries, and it has been marked in each case by occasional policy reversals and setbacks. However, it has been two decades since agricultural reforms began in China and Vietnam and over ten years since India extended its broad-based economic reforms into agriculture. Indonesia too included agriculture more fully in its policy reform process in the 1990s. At this juncture, it is useful to have quantitative measures of the extent of agricultural protection in these countries in order to evaluate the levels of subsidization (or disprotection) that have existed and have been retained for major agricultural com-

2See

Diaz-Bonilla, Thomas, and Robinson (2000) for a statistical classification of countries by income level and degree of food insecurity by several measures.

INTRODUCTION

3

modities. Such measures, while subject to limitations, inform the debate on how to proceed with agricultural reforms from a domestic policymaking perspective and from the standpoint of the international trade negotiations such as the WTO Doha Development Round. Various indicators of agricultural protection can be computed to measure the degree of subsidization or taxation of the agricultural sector as a whole and of important commodities individually. In contrast to the aggregate measure of support (AMS) on which production-related (amber box) domestic support commitments are reported under the WTO, the PSE is a broader measure of the transfers to farmers from border protection and domestic policy interventions.3 It is defined by the OECD as “an indicator of the annual monetary value of gross transfers from consumers and taxpayers to agricultural producers, measured at the farmgate level, arising from policy measures that support agriculture, regardless of their nature, objectives or impacts on farm production or income” (OECD 2002a, p. 59). Thus the PSE spans all of the categories of support policies (amber, blue, and green boxes) reported to the WTO. The PSE includes transfers arising through domestic market intervention, border policies, input subsidies, and direct payments to producers. The OECD’s annual calculation of PSEs has focused on its member countries and some transition economies, and recently it has completed assessments for Brazil, China, and South Africa (OECD 2005a, 2005b, 2006). Others have applied variants of the approach to several developing countries (Pursell and Gupta 1996; Valdés 1996; Cheng and Sun 1998; Cheng 2001; Tian,

Zhang, and Zhou 2002; Gulati and Narayanan 2003).

Organization of the Report
In the next chapter we describe the conceptual and measurement issues that arise in assessing agricultural protection or disprotection among developing countries. These countries have often relied on border interventions and other price-based policy measures (input and/or output price controls) more than on fiscally budgeted direct support payments. Consequently most of the protection or disprotection of producers results from the gap between domestic and international output or input prices. In comparing a country’s domestic price to an international price, an accurate estimate of the policy-related gap must account for such factors as external and internal transport costs and marketing margins, as well as processing costs and quality differences between the products being compared. In addition, the net trade status of a commodity may itself be the result of policies already in place, which must then be taken into account in choosing the price comparison that would be appropriate in the absence of the policies. Finally, when MPS by commodity is combined with overall budgetary expenditures to assess the total PSE for agriculture, the extent of commodity coverage, and assumptions applied for commodities not included in the price support analysis, can play a critical role in the assessment. In the third chapter of the report, we provide a brief overview of the general economic situation in each country since the 1980s and describe the pivotal role of the agricultural sector in output, employment,

the URAA, subsidies are characterized in colored boxes. Amber-box policies are directly trade-distorting and are subject to limitation commitments by countries. Green-box policies are presumed not to affect trade directly, or to have offsetting social benefits, and are exempt from expenditure disciplines. Blue box policies combine potentially trade-distorting support with some supply-constraining provisions, and again are not subject to expenditure limits. There are also provisions regarding de minimis, allowing additional amber box subsidies up to a certain percentage of the value of total agricultural production. See further discussion in Chapter 2.

3Under

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CHAPTER 1

and trade. We then review, in Chapter 4, the international trade and domestic policy regimes for agriculture in each country, with reference to the policies affecting output and input markets and to the URAA commitments. These brief analyses are supported in greater depth in a set of background papers to which the reader is referred for further discussion.4 Chapter 5 provides our key PSE results for each country. Results are presented for both specific commodities and the agricultural sector as a whole. First, we describe the specific coverage of commodities and budgetary expenditures by country and other unique aspects of each analysis; again the reader is referred to the background country studies for further details. We compare the commodity-specific results for rice and sugar, which are important commodities subject to substantial but quite different policy interventions in the four countries. Results for the other commodities included in the country analyses are also summarized. We then compute the total PSE measure for each country. The commodity-specific and total PSE results presented in Chapter 5 follow the standard measurement approach of evaluating support at the prevailing nominal exchange rate. For the two larger economies, India and China, we extend the analysis, in the sixth chapter, to examine the effects of exchange rate misalignment on the measures of agricultural support. We utilize more advanced time series econometric techniques in this chapter to derive estimates of the equilibrium real exchange rates in India and China as determined by economic fundamentals, then examine the effects of currency undervaluation or overvaluation on the total PSE, taking exchange rate pass-through to domestic prices and budgetary payments into account.

Summary of Main Results
For India there has been substantial economic policy reform and economic growth. Though reforms in agricultural policy have lagged those in other sectors, they have nonetheless created a more open economic orientation than existed prior to the 1990s. We evaluate protection and support versus disprotection of agriculture in India by comparing domestic and international reference prices for 11 crops that comprise about 45 percent of total agricultural output, and by evaluating the total value of input subsidies benefiting farmers for fertilizer, electricity, and irrigation. We are fortunate to be able to draw in this analysis on the extensive price comparison and subsidy measurement datasets and assessments developed by Ashok Gulati and his co-authors, which often provide disaggregated estimates for key surplus and deficit Indian states (Gulati and Purcell 2002). This extensive data and prior research allow us to explore in depth how several key cost adjustments in our analysis affect the Indian MPS and PSE results. Our findings indicate that support for agriculture in India has been largely countercyclical to world prices. Agricultural support has increased when world prices were relatively low (as in the mid-1980s and 1998– 2002) and decreased when world prices were relatively high (as in the early and mid1990s). The results demonstrate an increased level of budgetary payments for input subsidies to agriculture in recent years. Yet in the aggregate, taking into account both price support and budgetary costs, the countercyclical dimension of agricultural policy dominates a clear trend from disprotection toward protection over the period 1985– 2002. Using different variants of MPS and PSE measurement, we also extend earlier analyses for India in several dimensions. The im-

4The

country studies and assessment of measurement issues were initially reported in MTID discussion papers by Mullen et al. (2004), Nguyen and Grote (2004), Thomas and Orden (2004), Cheng and Orden (2005), and Mullen, Orden, and Gulati (2005).

INTRODUCTION

5

pact of key assumptions on the calculations is important to consider. For example, we find that, when trade volumes are relatively small, as has occurred with India pursuing a self-sufficiency policy for important commodities, the standard procedure of computing the MPS through a comparison of the domestic price to an adjusted international reference price based on the direction of observed trade can lead to a misleading conclusion about the level of support provided. The approach we adopt to address this reference price issue follows that of Byerlee and Morris (1993). We compute the level of protection or disprotection based on a reference price chosen according to economic criteria as the price that would exist domestically in the country if the policy interventions were removed. The relevant price can be either the import- or export-adjusted reference price or the autarky (no trade) equilibrium price, depending on the relationship among these prices. We apply this modified procedure to six crops (rice, wheat, maize, sorghum, sugar, and groundnuts). The choice of the crops is dictated by the fact that India has been near self-sufficiency or there have been changes in the direction of trade over the period of analysis. We also observe that in the standard PSE approach, as described by the OECD, the MPS measured for the commodities covered in the analysis is often scaled upbased on the share of these covered commodities in the total value of agricultural production. If the commodity coverage is less than complete, as is nearly always the case, the scaling-up procedure leads to a total MPS of greater absolute value than the MPS for the covered commodities. Yet this result is appropriate only if MPS for the commodities not covered is similar to that for the covered commodities. Taking these and other measurement issues into consideration, the support estimates we derive suggest that Indian agriculture was disprotected in the 1990s. High levels of subsidies were subsequently required for India to export the key food grains rice or

wheat during 2000–02, a conclusion reached by several other studies. However, we report less disprotection of Indian agriculture in the 1990s, and less protection at the end of the decade, than in earlier assessments. This difference is partly explained by the modified procedure for choice of a reference price. A large component of this difference can be accounted for by whether or not the scalingup procedure is invoked. For Indonesia we evaluate agricultural support for four imported commodities (rice, sugar, maize, and soybeans) and two exported commodities (crude palm oil and natural rubber). Our analysis is based on the conventional OECD approach to reference prices for imports and exports, but we take the scaling-up issue into account. From the late 1960s through the mid1990s, Indonesia’s economy grew at an impressive rate. The progress in economic development is widely attributed to stable macroeconomic policies coupled with considerable investments in human resources (especially public health and education) and rural development. As in India, agriculture benefited from green revolution technologies. Agriculture also received injections of resources from the management of oil export revenues, and it has been an important income generator for the poor. Agricultural and trade policies have been dominated by the twin goals of achieving self-sufficiency in various food commodities and providing light manufacturing sectors with supplies of primary agricultural inputs. The government has intervened in the production, marketing, and trade of agricultural products through a set of complicated agricultural price, procurement, distribution, storage, and input subsidy policies. The government has also utilized many trade policy instruments, such as import tariffs, quantitative restrictions, import and export licensing, and interregional marketing restrictions, primarily to support domestic agriculture. The economic policy reform process in Indonesia started in the mid-1980s. The major agricultural reforms, which came relatively

6

CHAPTER 1

late in the process, have been the tariffication of quantitative trade restrictions for agricultural products, elimination of input subsidies, and removal of the monopoly on the importation and distribution of key commodities by the state-owned enterprise BULOG (the Food Logistics Agency), which nonetheless continues to be instrumental in implementing intervention policies for major food crops, especially rice. The support measures we compute quantify the net effects of the agricultural policy interventions and reforms. The MPS and PSEs show that, in spite of the reforms, the government of Indonesia has consistently subsidized agriculture since 1990, although not uniformly across commodities. Support was interrupted briefly by the Asian financial crisis of 1997–98, but it subsequently reverted to precrisis levels and increased during 2000–02 for some crops and in the aggregate. Agricultural policies in China fall into two distinct periods. From 1949 to 1978, China’s agricultural polices were set within a communist centrally planned economic system. During this prereform era, China’s socialized agricultural sector was characterized by large-scale production units in which farmers were organized on collectivized land or in communes. Agriculture was squeezed during the early stages of Chinese industrialization, with gross fiscal contributions to the sector outweighed by implicit taxation in the form of depressed prices for farm products, neglect of public infrastructure in rural relative to urban areas, and capital outflows via the financial system. Dramatic economic reforms initiated in 1978 brought rapid economic growth. The agricultural sector witnessed major changes in policies through the development of China’s dual-track system of a “socialist market economy.” The economic regime rapidly shifted from central planning to increased reliance on market mechanisms, with greater responsibilities of individual peasant households in the agricultural sector. The liberalization process also featured major changes

in agricultural trade policies. The highly monopolized foreign trade system was decentralized, and direct trade planning was replaced by indirect trade policy instruments. Trade and domestic agricultural policy reforms continued under China’s WTO accession process, culminating in 2001 with commitments to lower tariff and nontariff trade barriers, eliminate agricultural export subsidies, and cap trade-distorting domestic support. For China, we base our evaluation on the PSE analysis by Sun (2003), which is limited to the years 1995–2001. MPS is reported for nine major commodities. For rice, maize, sorghum, and peanuts, an export price is assumed to be the relevant international reference price. For wheat, cotton, soybeans, rapeseed, and sugar, an import price is assumed to be appropriate. During the period 1995–2001, there were few input subsidies or direct payments to farmers in China. Various taxes and fees targeted at specific agricultural commodities were collected by the local and central governments and are included in our analysis as negative budgetary payments. Over the short period of our analysis, in our estimation China’s agricultural policies have on average been nearly neutral (neither protection nor disprotection), although domestic prices lagged the run-up of world prices in 1996, creating negative protection for that year. In a longer-term context, there has been a substantial move toward lessened disprotection of agriculture in China (Cheng and Sun 1998; Mullen et al. 2004; OECD 2005b). The magnitude of the MPS we estimate for China is relatively small, so there is little impact of the scaling-up procedure. Vietnam has followed China in moving from a centrally planned toward a marketoriented economic system under a communist political regime. The country has undertaken several major economic and trade reforms since 1986 and has been negotiating accession to the WTO since 2000. Positive results of the reform process became visible in the early 1990s when poverty declined

INTRODUCTION

7

sharply. Since then the Vietnamese agricultural sector has experienced high growth, and Vietnam has gone from an importer to one of the world’s major exporters of rice. For Vietnam, the commodities included in the MPS and PSE calculations include rice, coffee, tea, rubber, pepper, sugar, groundnut, cashew nut, and pig meat. These nine commodities encompass the main agricultural products and exports of Vietnam. Their shares of total output exceed 70 percent, limiting the effect of the scaling-up of MPS and providing an estimated PSE representative of the whole agricultural sector. Our results show that most agricultural products were taxed in Vietnam from the mid-1980s until the mid-1990s. This taxation was due to the dominance and monopoly position of the state-owned sector, inefficiencies in the production and processing of agricultural commodities, restrictive trade policies such as import and export quotas and licenses, and distorted markets and prices maintained among regions within the country. Domestic economic reforms have opened up the economy since the early 1990s, and there has been a policy shift from import substitution toward export promotion. Since the mid-1990s, the support of agriculture shows a clear increasing trend. The level of support is moderate compared with that in many other countries, but it represents a reversal of prior discrimination against agriculture in Vietnam. For India and China, we also evaluate the effects of exchange rate misalignment on the total PSE measure of agricultural support. Long-run equilibrium relationships are found between the real exchange rate and economic fundamentals in both countries, and the estimated models suggest that the Indian rupee was continuously overvalued from the mid-1980s to the early 1990s while the Chinese yuan was undervalued in the early 2000s. Our results show that the “indirect effect” of exchange rate misalignment has often counteracted the “direct effect” of sector-specific policies at the prevailing exchange rates. We estimate relatively high

aggregate coefficients of exchange rate passthrough to domestic prices in India and China for the commodities covered in our PSE analysis. We then define a “counterfactual PSE” computed under the assumption that the exchange rate moves to its equilibrium level and the pass-through is taken into account. This measure suggests that Indian farmers would have faced improved production incentives in the late 1980s and early 1990s had the exchange rate misalignment during this period been corrected. In contrast, price incentives to Chinese farmers would have worsened in the early 2000s had the exchange rate appreciated.

Synopsis of Broader Conclusions
In drawing conclusions from agricultural support measures such as MPS and PSEs, there are various reasons for caution. Our discussions of basic measurement issues in Chapter 2 and of exchange rate impacts in Chapter 6 highlight the types of assumptions and judgments made when computing and integrating the various components of these measures. The results reported herein for each country are drawn from coordinated but independently conducted studies undertaken by IFPRI from September 2003 to June 2005. The analyses are broadly comparable, but specific details of the evaluations differ across countries and commodities. By presenting results under various measurement assumptions, a form of sensitivity analysis is provided through which the findings can be compared and evaluated. Readers are also referred to the background study papers for additional details about the analysis for each country. With these caveats, our various measures of support and disprotection of specific crops and agriculture in total provide a reasonable basis for assessing the agricultural policies of India, Indonesia, China, and Vietnam. The results are indicative of the range of outcomes likely to be found more widely among developing countries. Thus it

8

CHAPTER 1

is timely that, as our study neared its conclusion, a major initiative to provide further analysis of developing country policies and their impacts was being undertaken at the World Bank, drawing partly on our assessment of measurement issues and empirical results (Anderson et al. 2006).5 The four countries included in our study all began with regimes of heavy intervention in agricultural markets and then underwent substantial reform processes that have reduced government involvement and created opportunities for economic activities within the private sector. Yet the outcomes in terms of levels of support provided to agriculture show clear differences. Indonesia has provided the most consistent support, particularly to food crops. India has supported agriculture when world prices are low but has disprotected key grains, including rice and wheat, and has also disprotected agriculture overall, during many years. In these two economies, the reform process does not seem to have fundamentally changed the pattern of observed support levels over the period 1985–2002. China and Vietnam, in contrast, have transitioned from communist disprotection of agriculture to providing net support to the sector. These divergent results in terms of levels of protection and support to agriculture occur even as domestic and border policy reforms have successfully provided greater opportunities for private-sector activity in the agricultural sectors of India, Indonesia, China, and Vietnam. This outcome high-

lights two distinct political economy dimensions to the evolution of support. The switch from taxation to protection is one important aspect of policy change among developing countries. The reliance on market-oriented reforms to improve incentives for agricultural producers in two of our cases, China and Vietnam, as they have transitioned from centrally planned economies, is a constructive policy reorientation in that it has removed distortions, enhanced efficiency, and thus raised rural incomes. Yet further shifts into production-distorting subsidization would be more troubling and have historical precedents in other countries as national incomes rise. Our results also highlight the difficulty of achieving open-market, liberalizing policy reforms in cases in which farmers have traditionally been protected. For India, we conclude that the countercyclical character of its support/disprotection policies has persisted from the mid-1980s through 2002. For Indonesia, agriculture has been persistently protected except during the country’s financial crisis. Thus across the four countries in our study the policy outcomes are more nuanced than a single story of movement from disprotection to protection. Past and potential cases of such monotonic movement toward support are important to track and understand. So too is the difficult task of lowering existing protection among developing and developed counties alike in order to attain a more open and less distorted global agricultural trade regime.

5The

website of the World Bank project is www.worldbank.org/agdistortions.

CHAPTER 2

Measurement of PSEs in Developing Countries

O

ur measurement of PSEs for India, Indonesia, China, and Vietnam follows the approach utilized by the OECD, with modifications described below, and is elaborated more fully by Mullen et al. (2004). Within the PSE, policies are divided into one of eight subcategories. Market price support (MPS) is defined as the component that is “an indicator of the annual monetary value of gross transfers from consumers and taxpayers to agricultural producers arising from policy measures that create a gap between domestic market prices and border prices of a specific commodity measured at the farmgate level” (Portugal 2002, p. 2). It is calculated based on the difference between the domestic price and an equivalent world price of a commodity. The seven other subcategories of support are measured by budgetary outlays for various types of government payments that subsidize farmers. On average for OECD countries, the total MPS (for all of agriculture) accounted for 63 percent of the total PSE in 2000–02 (OECD 2003a). The OECD also reports consumer support estimates (CSEs) and general services support estimates (GSSEs), but our analysis is limited to PSEs.

Estimating Market Price Support
Assuming competitive markets, ex post price certainty, and a small open economy whereby a nation’s domestic and border policies do not affect world prices, the domestic farmgate price, P , is compared with an adjusted reference price, P . The types of adjustments made to deterd ar mine P are as follows, for an imported and an exported commodity, respectively: ar P = P + (Cp + Td1) – (Td2 + M) – Qadj (importable) ar r P = P – (Cp + Td1) – (Td2 + M) – Qadj (exportable). ar r (1) (2)

The reference price at the border, P , is the “world market” c.i.f. price for an importer or r f.o.b. price for an exporter expressed in the domestic currency. The reference price is commonly measured either from observed unit values for imports and exports of the country or from observed international prices adjusted by international transportation costs. Under the latter approach, if the commodity is imported P can be imputed from the f.o.b. price of a major r exporting country, P exporterfob, plus the international freight, Ti , and other international costs (including insurance and margins) of moving the commodity from the exporting country to the importing country, Ci, according to P=P r exporterfob + (Ti + Ci). (3)

9

10

CHAPTER 2

If the country is an exporter of the commodity, the point of comparison in world markets between the country’s export price and the international price takes place as arbitraged at the border of a third-country importer (that is, the c.i.f. price in that third country). Similar to (3), the reference price at the border of the exporting country can be imputed from the c.i.f. price of a major importing country, Pimportercif , minus the costs associated with moving the commodity from the exporting country in question to the importing country, according to P=P r importercif – (Ti + Ci). (4)

Once a relevant international reference price is determined, it is then further adjusted by the port charges (Cp); by the costs of handling, transporting, and marketing the commodity between the port and the wholesale market (Td1); by the costs of handling and transporting (Td2) and marketing and processing (M) the commodity between the farm and the wholesale market; and to account for differences in quality between the domestic and internationally produced commodity (Qadj), as shown in equations (1) and (2).6 The price gap at the farmgate level, ?P = P – P , then is a monetary measure of d ar MPS per unit of output. Ideally ?P captures the differences induced by visible and invisible policy interventions. Expressed in percentage terms relative to the reference price (?P/P ), the price gap is a traditional nomiar nal rate of protection (), or as we refer to it later, the “%MPS.” The total MPS for any commodity is given by the per-unit price gap multiplied by the level of output. The difficulties in assessing market price gaps in the real world, especially in developing countries, are substantial, for several reasons. First, developing countries are more likely to utilize border policies or commodity price support programs backed by mar-

ket interventions and government stockholding. These are policies whose effects are measured in an MPS. Second, with lessdeveloped infrastructure, various costs associated with adjusting the reference price are likely to have larger impacts. Third, a developing country may be more likely than a developed country to switch from being an importer to being an exporter of a commodity across years. The relevant international reference price adjustments for internal costs will then differ, depending on the trade circumstances as shown in equations (1) and (2) and as discussed further below. Fourth, the price gap in developing countries, and difficulties in assessing its policy component, may be accentuated by imperfect competition in the handling, transportation, processing, or marketing sectors. Imperfect competition in these sectors would affect the mark-ups, but with different implications than border or price support interventions. Fifth, government polices toward markets or processing and infrastructure investments can raise costs by restricting efficient domestic movement, processing, and marketing. These are also policy effects that would influence the observed price gaps, but addressing these sources of inefficiency would require quite different reforms or investments than price support or border protection measures. Sixth, even if competitive market forces are functioning relatively well in the handling, transportation, processing, and marketing sectors, acquiring the requisite data on various costs may be particularly resource intensive (beyond plausible research budgets), or consistent data over a range of years may simply not exist. Since a substantial amount of data is required to calculate the price gaps, attempts to assess MPS in a developing-country context must be geared toward reducing measurement error. The importance of errors related to various within-country adjustments

6 In

the equations Qadj > 0 implies that the domestic quality is lower than the quality of the internationally traded commodity. If Qadj = 0, domestic and international goods are considered perfectly homogeneous substitutes.

MEASUREMENT OF PSEs IN DEVELOPING COUNTRIES

11

to the reference price will vary among situations. In the case of commodities that require complex processing, a substantial determinant of the MPS will be the adjustments to the reference price for these processing costs. In such cases, a comparison is sometimes made between the reference price of the processed commodity and the domestic price of that commodity at the wholesale level. Such a comparison might be more accurate than an estimated farmgate comparison given available data, but it does not separate protection (or disprotection) between domestic farmers and processors. This could be an important distinction, especially if processing is inefficient or noncompetitive (see Cahill and Legg 1990; Doyon, Paillat, and Guion 2001). A second issue of particular importance in measuring MPS in large developing countries is the need for regional-level analysis in cases in which there are substantial differences in the within-country adjustments to the reference price or in which support policies differ across states or provinces. In these large developing countries, it is possible that producers in some regions could be benefiting from policy interventions, while those in other regions could be losing.7 If internal markets are well integrated, observed differences in regional prices presumably result from differences in real costs, rather than being the result of policy interventions. Yet different adjustments for internal transport and marketing costs could lead to different MPS by region when, for example, panterritorial farmgate price support is provided by the government. If there are movement restrictions, state-level variations in minimum support prices, or other policies that vary at the subnational level, as can be the case in large developing countries, MPS may again differ markedly by region.

One useful distinction when state-level analysis is necessary for a particular commodity is to separate states in a country that are “net surplus” producers of that commodity from those that are “net deficit” regions. The deficit regions both produce the commodity and must purchase it from other states or internationally in order to meet regional demand. In these states, the relevant reference price may vary slightly from that in equation (1). Gulati, Hanson, and Pursell (1990) and Pursell and Gupta (1996) suggest that, assuming the commodity is an import, the domestic price in the deficit states should be compared with the lower of (1) the reference border price plus port charges plus transportation, handling, and marketing costs from the border to the deficit region or (2) the adjusted reference price for a nearby surplus region given by equation (1) plus the transportation, handling, and marketing costs from the surplus region to the deficit region. Pursell and Gupta (1996) find that, in the case of wheat in Lucknow, Uttar Pradesh, India, the latter adjustment gives the lower price, meaning that without trade or price interventions farmers in the deficit region would have to compete with domestic wheat from the surplus region. This adjusted reference price compared with the state-level domestic farmgate price gives a measure of the degree of protection (or disprotection) for farmers in the deficit region. The choice of annual (calendar year, crop year, or fiscal year) or average harvest season prices can also affect the results, particularly in developing countries. The OECD (2003a) uses annual average prices in the MPS and PSEs it computes for its member countries. Pursell and Gupta (1996), in contrast, use average prices during the period in which the bulk of the specific commodity is harvested to calculate nominal protection coefficients for Indian agriculture. They argue

7 The same could be true among regions in a developed country, but in developed-country PSE computation it is usually assumed that there is one domestic and import-adjusted (or export-adjusted) reference price for each commodity.

12

CHAPTER 2

that annual average prices capture the storage costs of traders in addition to the prices received by farmers. In many cases, owing to capital market inefficiencies and limited onfarm storage facilities, smallholder farmers in developing countries sell their products immediately after harvest. Under these circumstances, it may be more appropriate to use harvest season prices rather than annual average prices, keeping in mind that both the time of year and the duration of the harvest season are commodity- and regionspecific. Several authors have suggested that agricultural support indicators for developing countries be measured based on the quantity of marketable surplus rather than on the entire quantity produced, since a large portion of the output produced by smallholder farmers is consumed on the farm. However, in a household model framework, each producer maximizes utility by selling a portion of his or her output and allocating the rest to home consumption. This assumes that the producer values all production at the market price. In this case, MPS should be computed based on total production valued at producer prices rather than on marketed surplus, as the OECD has done for the transition economies (Melyukhina 2002).8

Budgetary Payments and CommoditySpecific PSEs
In the OECD measurement of PSEs, budgetary payments (BP) are divided into seven subcategories depending on the conditions of eligibility on which transfers are made to farmers: those based on (1) output, (2) area

planted or animal numbers, (3) historical entitlements, (4) input use, (5) input constraints, (6) overall farming income, and (7) miscellaneous payments.9 The patterns and levels of budgetary expenditures on agricultural support by developing countries differ substantially from those of wealthier OECD countries. In transition (and developing) economies, particular care must be taken to include budgetary assistance, even when it is not associated with direct payments to farmers (Melyukhina 2002). Preferential prices for such inputs as fertilizer, electricity, irrigation, and transportation are often more important in developing than developed countries. These subsidies are categorized as budgetary payments, though subsidies on tradable inputs at the farmgate level may be better measured through a price gap method analogous to the calculation of MPS for output commodities than by government expenditures, as Gulati and Narayanan (2003) have demonstrated. The calculation of commodity-specific support measures requires that budgetary support be allocated across commodities to determine the budgetary payments for a given product, BPj, where j denotes a specific commodity. If such payments are reported by commodity, the procedure is straightforward. However, for payments such as input subsidies or general subsidies such as tax or capital grants, calculations of allocation across commodities are required. In this case, the payments are often distributed on the basis of each commodity’s share in total value of agricultural production (Melyukhina 2002). Other criteria, such as the share of acreage, also provide plausible approximations, although each may introduce a measurement error.

8For

the nonmember transition economies, the use of official value of production was viewed as problematic by the OECD because on-farm consumption was valued at shadow prices that differ significantly from market prices (Melyukhina 2002). the increased use of support payments in developed countries that are at least partially decoupled from current production of any particular crop, the OECD is in the process of reexamining its classification scheme for various payments and how they are allocated within the overall measure for agriculture (OECD 2003b).

9With

MEASUREMENT OF PSEs IN DEVELOPING COUNTRIES

13

Once budgetary payments are allocated among commodities, the commodity-specific PSE is the sum of the MPS and budgetary support for that commodity. As discussed in Mullen et al. (2004), the commodityspecific PSE can be expressed on a percentage basis in two ways. The first approach, as in the OECD studies, expresses the proportion of gross farm income that is a result of policy measures, using (VP + BP ) as the dej j nominator of its percentage measure, where VP is the value of production at domestic j producer prices. An alternative (“trade economist”) measure (denominator) is to express support received by farmers as a percentage of the value of output at farmgate-equivalent international prices, VPj*. Because production is valued at international prices in the %MPS and in the trade economist commodity-specific %PSE denominator, the latter will be at least as high or higher than the %MPS (assuming positive budgetary payments). Quite different numerical representation of the policy effects can arise with the OECD commodity-specific %PSE, because the denominator for this measure is the value of farm output at domestic prices plus budget payments.

Calculating Total PSEs with and without Scaling Up of the MPS of Covered Commodities
The total PSE expressed in nominal terms for all agricultural producers is the sum of an aggregate MPS and aggregate budgetary payments. In the OECD approach, the calculation of aggregate MPS consists of three steps. First, a nominal value of MPS is estimated for individual products (the price gap per unit of each output multiplied by the quantity of output) included in the analysis, the set of which is known as the covered MPS commodities. The second step is to sum the commodity-specific MPS results into an MPSc for the covered commodities. One method to estimate the total nominal

PSE for a country (not used by the OECD) is to include only the MPS derived for these commodities in the calculation PSEc = MPSc + BP, where BP is the total budgetary payments to producers. In the OECD approach, a third step is included to calculate the PSE. The MPSc for covered commodities is scaled up to all products based on the share (k) of the covered commodities in the total value of production. The third step, or MPS extrapolation procedure, can be expressed as MPS = MPSc /k, where MPS is the estimated total MPS. With the scaling up, the OECD “total PSE” is calculated as PSE = MPS + BP. Either approximation (scaled up or not scaled up) introduces error, and any error is relatively more or less important as the MPS component of the PSE increases relative to the budget-payment component. For developing countries, feasible commodity coverage is likely to be less than for the OECD countries, and the assumption imposed by scaling up may be unrealistic if support is concentrated among those products included in the analysis. Total PSE measures are also expressed on a percentage basis. The measure reported by the OECD uses (VP + BP) as the denominator (where VP is the total value of agricultural production at domestic producer prices). This %PSE gives a “subsidy counter’s” measure of support relative to domestic farm revenue. Alternatively, a “trade economist” measure of support uses VP* as the denominator to give %PSE relative to the value of output at international prices. Because the value of total production at international prices may not be known, an approximation is required. One approach is simply to subtract MPSc from VP. This corresponds to not scaling up MPSc in computing the nominal value of PSE because commodities not covered are assumed to have the same value at international and domestic prices. Alternatively, an estimate of VP* can be based on scaling up the value of production at international prices of the covered commodities by the same k as above.

14

CHAPTER 2

Modified Procedure to Account for Domestic Market Clearing Prices
Beyond the practical difficulties in obtaining the necessary data to compute PSEs, and the issues involved in combining MPS and budgetary payments, another factor is likely to be relevant to their measurement and interpretation for developing countries. World price fluctuations, changes in the government intervention price levels, and domestic supply and demand shocks all determine whether a country will be importing or exporting (or, alternatively, depleting or accumulating) stocks of storable commodities. Byerlee and Morris (1993) pointed out that the likelihood that any of these factors will result in a change in the trade status of a country is greater if the country is near self-sufficiency in a particular commodity. They suggest that, under these circumstances (which describe the situation for cereals in many developing countries), agricultural protection indicators computed by the conventional methods of comparing the domestic price to an import- or exportadjusted reference price can lead to an incorrect estimate of the level and even the direction of protection. Instead, a corrected protection measure may need to be calculated based on a domestic market-clearing equilibrium price as the adjusted reference price rather than the import or export price, especially when a country has relatively high internal or external transport costs, so that there is a wide gap between the adjusted reference prices for imports versus exports. (From here on, the adjusted reference price for exports will be denoted as P and that for e imports as P .) Byerlee and Morris demonm strate this approach for Pakistan, which was more than 85 percent self-sufficient in wheat during 1985–90, had a controlled producer price slightly above the export price and well below the import price, and was a net importer of wheat. Conventional measures of support showed the domestic price as

much as 40 percent lower than the adjusted import reference price. But Byerlee and Morris conclude that if controls were removed the price would have increased by only about 10 percent to a domestic market-clearing level. Byerlee and Morris provide a more systematic approach than relying on the current direction of trade to dictate the adjusted reference price used to evaluate the MPS component of the PSE, but one that requires additional assumptions about elasticities of demand and supply. In order to know which price will be relevant when the policy intervention is removed, one must know the relationships among the autarky equilibrium price, which we denote as P*, and the adjusted reference prices P and P . Because of m e international and domestic cost adjustments, it is always the case that P > P . When P* m e >P , then P is the relevant P ; when P > m m ar e P*, then P is the relevant P ; and when P e ar m > P* > P , then P* is the relevant P . This e ar price relationship, not the observed trade under the policies in place, determines the level of protection or disprotection relative to the price level that would exist in the absence of the policy interventions. The argument is shown graphically in Figure 2.1 under the assumption of fixed supply.

Exchange Rate Impacts
Calculating reference prices in domestic currency for the MPS and PSEs requires the use of an exchange rate. Most PSE studies utilize the nominal exchange rate prevailing each year. Krueger, Schiff, and Valdés (1991), in contrast, accounted for the effects of exchange rate misalignment through a decomposition method in their seminal analysis of agricultural pricing policies in developing countries. Harley (1996) used a different type of decomposition analysis to provide a measurement of the contribution of annual variation in different PSE components, including the exchange rate, to the overall annual PSE change. Others have used the ad-

MEASUREMENT OF PSEs IN DEVELOPING COUNTRIES

15

Figure 2.1 Computing the MPS under alternative price scenarios
S P P4 P P4 Pm P3 Pe P2 P* S P P4 S

P* P3 Pm P2 Pe P1 D Qs a. If P* > Pm, then Pm is the relevant Par . Q

Pm P* Pe

P1 D Qs b. If Pe > P*, then Pe is the relevant Par . Q

P1 D Qs Q

c. If Pm > P* > Pe, then P* is the relevant Par .

The relevant reference price depends on the relationship between P* and Pm and P . In the three panels, P1– P are possible prices set by doe 4 mestic policy. As shown in panel c, if Pm > P* > Pe , then P* is the relevant reference price. Whether the domestic policy supports agriculture (at P4) or disprotects agriculture (at P1), when the policy is removed the price becomes P*. Likewise in panels a and b, regardless of the level of the domestic price set by policy or the corresponding trade pattern, Pm and P are the relevant reference prices under the price relatione ships specified. In the figure and in our empirical calculations, we treat annual production as predetermined (consistent with interpretation of PSEs as transfers to farmers given an observed fixed supply) but allow demand to adjust to clear the market in our counterfactual annual determinations of P*. If we let the supply also adjust, the P* obviously would be different.

justed (shadow) exchange rates, mostly based on purchasing power parity (PPP), in PSE calculations. For example, Liefert et al. (1996) show that the 1994 PSE estimates for Russia change from negative to positive if a PPP exchange rate is used instead of a nominal one. Doyon, Paillat, and Guion (2001) contend that, in the context of comparing support levels across countries, PPP adjustments would provide a better conversion factor than nominal exchange rates. More generally, modern econometric models can be used to estimate equilibrium exchange rates and the effects of any exchange rate misalignment on PSEs can be evaluated, as we report for India and China in Chapter 6. Exchange rate adjustments can be particularly important for developing countries where exchange rate disequilibrium can be large and persistent.

Relation of the PSE to the WTO Aggregate Measure of Support
The preceding sections focus largely on adjustments relevant to PSEs within the framework laid by the OECD. It is also useful to compare the PSE to the estimates of AMS submitted to the WTO by member countries to indicate their trade-distorting domestic policies, to the agreed-upon WTO tariff bindings and export subsidy limits, and to other categories of support reported to the WTO, including its de minimis, blue box, and green box categories. The emergence of the AMS and the concept of the PSE are related.10 However, the final definition for the AMS embodied in the URAA as part of the WTO legal framework is clearly different from the PSEs calculated by the OECD. The main differences between the two

10See

Josling, Tangermann, and Warley (1996) for a history of the GATT negotiations on agriculture and the evolution of the concepts of the PSE and the AMS.

16

CHAPTER 2

Table 2.1 Comparison of PSE to the WTO AMS
Category General WTO AMS Includes domestic support that is considered to be trade distorting. This includes output price support if granted through an administered price and certain domestic subsidies. Excludes support provided only through trade policies such as tariffs and export subsidies. Excludes trade-distorting policies when the level of product-specific or non-productspecific domestic support falls below a specified de minimis level. Excludes certain types of budgetary payments. PSE Includes all gross transfers from consumers and taxpayers to agricultural producers, regardless of their nature, objectives, and impacts on farm production or income. Includes support provided through trade policies such as tariffs and export subsidies. Includes product-specific and non-product-specific support regardless of level.

Includes all budgetary payments to agricultural producers. Defined as transfers from consumers and taxpayers to agricultural producers arising from policies that create a gap between the domestic market price and the equivalent border price. Uses current observed domestic prices and observed external prices adjusted to the farmgate level multiplied by the level of production. One estimate of support calculated regardless of whether or not there is an administered price, border measures, or both.

Market price support (MPS)

Defined as the gap between the official administered price and the fixed external reference price multiplied by eligible production. Uses administered prices, fixed external reference price (average 1986–88), and eligible production. Only calculated when an administered support price exists. If border measures also exist, it is possible that the AMS support will be redundant with the protection provided at the border.

Budgetary payments to producers (BP)

Excludes payments granted under productionlimiting programs and exempt from reduction commitments (blue box). Excludes domestic support policies considered minimally trade distorting and exempt from reduction commitments (green box). Excludes certain policies that are categorized under special and differential treatment for developing countries.

Includes those measures that generate direct budgetary transfers to producers. Includes the portion of green box payments that create direct payments to producers. Includes some policies that are categorized under special and differential treatment for developing countries, such as investment and input subsidies available to lowincome or resource-poor producers.

measures are summarized in Table 2.1. PSEs provide a different and more complete characterization of border and domestic support policies affecting agriculture than does the AMS or any other single category reported to the WTO. Though useful for negotiations and binding commitments to reduce market distortions, the WTO measures often do not reflect the changing levels of support to agriculture over time. For example, the AMS keeps the world reference prices frozen at the 1986–88 base, as agreed by the member countries in

the Uruguay Round negotiations with a view to making reduction commitments from that fixed base. But these estimates lose much of their economic relevance in a dynamic world in which prices are continuously changing, as are exchange rates and price and other support policies. Viewed from this perspective, the AMS is basically a legal concept resulting from the political compromises of the negotiation process. It is not a useful economic tool to understand the degree and impact of distortions in agriculture. Similarly, applied tariffs can be different from

MEASUREMENT OF PSEs IN DEVELOPING COUNTRIES

17

bound tariff rates (or export subsidies below bound levels). In some cases, neither the applied nor the bound level has economic meaning (for example, for tariffs, when a certain product is exported rather than imported). The PSEs are indicators that capture the nature and degree of multiple policies, including production-stimulating border protection and amber box price supports. The PSEs also include support associated with production-limiting programs (the WTO blue box) and some policies affecting production and regional growth that are exempt from the amber box under de minimis exemptions or under special and differential treatment for developing countries. In addition the PSEs include measures in categories that under the WTO are classified as “non– or minimally trade distorting.” These WTO green box policies are exempt from reduction commitments. The green box includes such general services as agricultural research and extension, which are excluded from the PSE but are included by the OECD in its GSSE. The WTO green box mixes these general service expenditures with other more controversial policy interventions—such as decoupled income support (used primarily in developed countries), insurance schemes, environmental payments, and some regional development expenditures—whose possible distorting impacts on production and trade are being debated. The latter payments are included in the PSE.

Economic Critiques of the PSE
PSEs are widely utilized measures of agricultural subsidies and protection, along with the support measures reported to the WTO. With an understanding of the assumptions on which they are based, and the context in which they should be interpreted, MPS and PSEs provide very useful summary statistics for comparison of support across commodities and countries over different time periods.

For this reason, application of the PSEs to developing countries and analysis of the results is informative. Before turning to this analysis for India, Indonesia, China, and Vietnam, however, it is useful to also summarize a few of the broader conceptual critiques that have arisen over the use of PSEs. The concerns fall broadly into two categories, those related to the assumptions of the PSE concept and those related to its interpretation. Silvis and van der Hamsvoort (1996) argue that the assumption that the domestic price and quantity and international prices are independent (that all countries are small and therefore cannot individually affect world prices) is unrealistic. On this basis alone, PSEs may overstate agricultural support in OECD and other countries, because they are based on current world prices instead of long-term equilibrium (free trade) prices. Although long-term equilibrium prices are difficult to estimate, they are expected to be higher than current world prices that are depressed by subsidies and trade barriers, so using equilibrium prices would result in a PSE that is smaller than the OECD’s estimates for its member countries (Oskam and Meester 2003). For developing countries, the subsidies and border protection of OECD countries with protected agriculture drive down world prices, resulting in disprotection to their farmers being implicit in the adjusted reference price from world markets. Beierle and Diaz-Bonilla (2003) review numerous studies of these price effects and conclude that a common estimate of the extent to which OECD policies depress prices is 10 percent, with larger effects on commodities such as sugar, sheep meat, and milk. This external effect tempers the interpretation of PSE for developing countries calculated on the basis of observed world prices. On technical grounds, the PSE implicitly assumes that domestic and internationally produced goods are perfect substitutes or that a quality adjustment can be introduced to make them such. This is a departure

18

CHAPTER 2

from the Armington assumption often employed in computable general equilibrium (CGE), and some partial equilibrium, models. Under the Armington assumption, similar goods from different countries are imperfect substitutes for which equilibrium prices will not be equal even when adjustments are made for arbitrage. In these models, various elasticities of substitution in production and consumption are assumed between domestic and traded goods. Changes in output quantities affect prices in the models, and effects of policy change can be evaluated at the resulting equilibrium prices under each scenario. The assumption in measurement of MPS and PSEs that the price elasticity of supply is zero may be consistent with an ex post measurement of the gross transfers to producers, yet it cannot substitute for a modeling approach to measuring the price, production, consumption, trade, income, or welfare effects of agricultural policies either ex ante or over time (Herrmann et al. 1992). PSEs cannot be used directly to predict the trade effects of policy changes. For example, the liberalization of a production quota and price guarantee policy with equivalent PSE values would have very different effects on trade (Silvis and van der Hamsvoort 1996).11 Herrmann et al. (1992) argue that the PSE, as an income-oriented measure, is not well suited to capture the trade effect of agricultural policies. Instead they propose a “trade distortion equivalent” based on the difference between the quantity traded with policy interventions in place and a hypothetical quantity traded under free trade. It is particularly important to realize that PSEs are not the same as producer surplus, though sometimes they are misinterpreted as such (Oskam and Meester 2003). PSEs based on current prices and fixed quantities are neither linked with the welfare economic theories of producer surplus nor comparable

to the estimated benefits of agricultural liberalization derived from partial equilibrium or CGE models, when there is a supply response. Oskam and Meester (2003) demonstrate, for example, with a stylized, onecommodity, three-country model, that the MPS and producer surplus effects not only differ in magnitude but also can be of the opposite sign. Moreover, the authors argue that it is difficult to interpret the total PSE, because of the simple aggregation of MPS and budgetary expenditures whose measurement is not related to general welfare economics. Based on the strong assumptions on which the PSE is computed, its interpretation must be taken somewhat narrowly. The OECD originally adopted the PSE framework because it “incorporates explicitly all domestic agricultural policies directly or indirectly affecting trade” (Cahill and Legg 1990, p. 14). The PSE does provide a comprehensive measure of the support to farmers. But it is not feasible to interpret each dollar of PSE support as having the same effects on production or trade as any other dollar of support. The ultimate beneficiaries of support to agriculture are also an issue in the measurement and interpretation of PSEs for developed and developing countries. PSEs may overestimate the policy benefits to farmers if others capture a significant portion of the benefits. Several studies have demonstrated that a large share of the transfers from taxpayers and consumers to agricultural producers goes to other parts of the production chain or to fixed factors of production such as land. Dewbre, Antón, and Thompson (2001) find that subsidies on purchased inputs, on which many developing countries rely to transfer support to producers, are the least efficient in providing income to farmers. Burfisher and Hopkins (2003) calculate that farm operators may retain as little as 40 per-

11Oskam

and Meester (2003) also show that, if a quota system is in place, the PSE methodology may underestimate its effects on producers.

MEASUREMENT OF PSEs IN DEVELOPING COUNTRIES

19

cent of the benefits of the decoupled direct payments in the United States because the majority of the payments are capitalized into land values, resulting in higher rental rates. A comparison of two simple magnitudes illustrates these points. While most CGE models indicate that full agricultural liberalization would increase world agricultural gross domestic product by $40–80 billion per year (Oskam and Meester 2003), the average 2000–02 sum of total PSEs for OECD countries was $235 billion (OECD 2003a). The sum of total PSEs is sometimes misinterpreted as the benefits that would accrue to nonsubsidized agricultural producers under reform of agricultural policies, when those benefits are much smaller. Even with this greater breadth of the PSE, it must be noted, especially concern-

ing developing countries, that neither the AMS nor the PSE as usually reported takes into account a wide range of structural, institutional, and macroeconomic factors. Among these factors are more general trade policies, such as industrial protection, which can operate as a tax on agriculture, and macroeconomic measures, such as different combinations of exchange rate regimes and monetary, fiscal, financial, and labor policies, which may lead to overvalued exchange rates or otherwise higher costs for the agricultural sector.12 Josling and Valdés (2004) characterize these important forces on agriculture in a number of dimensions, and we address the important issue of exchange rate effects in particular in Chapter 6.

12 Specific exchange rate arrangements only for the agricultural sector in general, or for some products within it, are considered as part of domestic subsidies or taxes.

CHAPTER 3

The Four Economies and Their Agricultural Sectors

I

ndia, Indonesia, China, and Vietnam are major developing economies, and changes in their agricultural trade and domestic support policies will have significant implications not only internally but also on world agricultural markets. India and China are the world’s two most populous countries, with 1.1 and 1.3 billion inhabitants, respectively. Together with Indonesia and Vietnam, the four countries comprise over 40 percent of the world’s total population and 20 percent of global agricultural GDP. The economies of India and Indonesia have traditionally been based on private markets with significant state activity and regulation, while China and Vietnam formerly had Soviet-style centrally planned economies. Despite their differing political histories, the governments of all four countries have played significant roles by holding a tight rein over several major agricultural sectors. The four countries began to undertake economic reforms in the late 1970s (China) and mid-1980s (India, Indonesia, and Vietnam). The primary goal of these reforms has been to seek globalization of their relatively closed economies by opening up both trade and financial channels. Changes in both channels were slow and uneven during the early stages of the reforms, though some tentative steps toward liberalization were taken. Major progress took place in the 1990s, and the past fifteen years have witnessed a series of market-oriented developments in trade and finance. Concurrent with these later developments was the increased incidence of financial crises in some Asian countries, including Indonesia (1997–98). Notwithstanding uncertainty these events raised about the linkages between liberalization and economic instability, the four countries have continued to make progress in dismantling trade and financial market restrictions to further liberalize their economies, albeit sometimes more cautiously than in the precrisis period. In all four countries, liberalization has stimulated rapid economic growth but has also imposed structural adjustment pressures on the agricultural sector. With further industrialization and urbanization, the governments of these countries are facing the similar questions of whether and by how much to assist their farmers relative to other producers. Fiscal limitations and commitments to the WTO are likely to constrain the governments from fully following the experiences of the developed countries regarding levels of agricultural support. Within each country, however, major reforms in sectoral and economywide policies have been implemented, often to address a past bias against agriculture. This chapter reviews the broad policy outline and economic growth for each country and provides key indicators of agricultural production and trade. The agricultural policy reform processes that were implemented during 1985–2002 are described further in Chapter 4.

20

THE FOUR ECONOMIES AND THEIR AGRICULTURAL SECTORS

21

Broad Reforms and Economic Growth
Since achieving independence fifty years ago, the Indian democracy has implemented a mixed economic system with a socialistic bent and extensive central planning (USDAERS 2004). Basic economic activities are market driven but are dominated by the public sector and government controls. Historically India’s economy has been impaired by chronic large fiscal deficits, high inflation, and poor performance of the external sectors. India’s GDP grew more strongly in the 1980s than during the 1970s following the initial reform efforts, with growth rates higher in industry and service than in agriculture (Table 3.1). GDP has registered similar impressive economic growth in the 1990s, particularly in the period just after a 1991 financial crisis and the subsequent economic restructuring. The relatively slow process of Indian trade and financial liberalization in the 1980s was characterized by deterioration of the current account and gradual losses of foreign exchange reserves, which reached $7 billion annually (more than 2 percent of GDP) in 1990. The subsequent postcrisis adjustment program featured macroeconomic stabilization and structural reforms, and the effects of these measures became evident in India’s external accounts. Trade liberalization introduced reductions in government interventions, trade restrictions, tariff rates, and public sector dominance. Total trade flows (imports and exports) increased from $50.1 billion in 1991 to $161.5 billion in 2002. Capital inflows reached record high levels in 1994 and 1996, and the current account turned into surpluses in the years 2001 and 2002. During the immediate postreform period, the GDP of India grew at an annual rate of 6.5 percent. Growth was slightly lower subsequently than immediately following the 1991 reforms, a result, among other factors, of a slowdown in public sector investments, falling world prices of most agricultural

products, and poor monsoon rains, especially in 2002 (Mullen, Orden, and Gulati 2005). Despite its growth over the past two decades, India has lagged behind some of its neighbors in economic performance. India’s per capita GDP was roughly equal to that of China in 1970 ($213 in real 1995 value). But by 2000 its per capita GDP ($477 in real 1995 value) was only a little over half that achieved by China ($878) (Mullen, Orden, and Gulati 2005). Indonesia has also experienced rapid growth. For nearly thirty years, under the New Order regime of President Suharto, Indonesia underwent a transformation in performance (Temple 2003). The economy grew, benefiting from two oil booms as well as from policies aimed at stabilizing the macroeconomic environment and development of the agricultural sector. In the period from 1965 until the 1997–98 crisis, GDP per capita rose more than fourfold. The incidence of poverty declined, life expectancy improved from 43 to 68 years, and progress was made in raising the adult literacy rate of the population from 60 percent in 1970 to 90 percent in 2001 (Thomas and Orden 2004). In spite of its performance, Indonesia remains a lower middle-income country with a GDP per capita after the financial crisis of $678 in 2001 (just above half of its 1997 level of $1,110). From the 1970s through 1990, the average growth rate of the overall Indonesian GDP was above 6 percent, again with more rapid growth in industry and services than in agriculture. The macroeconomic management of the economy was thought to be among the best of the developing economies (Barichello 2000; Hill 2000; Temple 2003). Suharto focused on economic development, and the government undertook major reforms, outlined in a series of fiveyear plans (Repelita I–VI) starting in 1969–70 (Indonesia 1995). In agriculture, Indonesia made significant progress in increasing domestic food production, stabilizing food prices, reducing poverty, and

22 CHAPTER 3

Table 3.1 Overall and sectoral GDP growth rates of India, Indonesia, China, and Vietnam, 1970–2004
Indonesia Service 4.5 6.4 7.4 7.6 7.2 3.8 10.1 6.4 9.2 3.4 7.4 4.0 10.5 7.5 9.9 4.1 4.6 2.7 4.8 6.8 9.2 5.5 10.0 12.7 10.3 n.a. n.a. n.a. n.a. 7.5 2.6 11.5 Total Agriculture Industry Service Total Agriculture Industry Service 6.1 11.8 9.4 9.8 China Total 7.9 6.6 4.8 4.6 Vietnam Agriculture 4.6 4.0 2.1 3.5 Industry 10.9 7.8 6.2 4.2 Service 8.6 7.3 5.1 5.7

India Industry 3.8 6.9 5.9 6.2

Period

Total

Agriculture

3.3

2.3

5.9

4.4

5.5

2.8

1970– 1980 1980– 1990 1990– 2000 2000– 2004

5.7

2.0

Source: World Bank (2006). Note: n.a., not available.

THE FOUR ECONOMIES AND THEIR AGRICULTURAL SECTORS

23

increasing food security.13 The government also invested in broad-based rural development, including infrastructure, health, and education (BAPPENAS/USAID/DAI 1999; Magiera 2003). The 1997–98 Asian financial crisis led Indonesia into a deep recession, evidenced by a GDP drop of 13.1 percent, an inflation rate of more than 77 percent, and an increase in the unemployment rate to 17 percent (WTO 2003). The crisis resulted in a shortage of foreign exchange and the depreciation of the rupiah, affecting mostly the manufacturing sector and employment in urban areas. The rupiah depreciated by over 50 percent. During the same period, Indonesia experienced the worst drought in 50 years, brought on by El Ni?o weather conditions, putting additional pressure on agriculture, more specifically on the production of food crops (EEAU 2000). Trade suffered from the crisis, with merchandise export and imports declining by 10.5 and 31 percent, respectively, in 1998. Indonesia also experienced a political crisis, which forced Suharto to step down and led to general elections in 1999.14 The economy started to recover in 1999 and grew at an average rate of 3.2 percent between 1999 and 2002, but the unemployment rate remained at about 8 percent. China has a larger economy than India, and it has undergone more dramatic changes. Its economy has witnessed considerable achievements in the past two decades and has become the second largest economy in the world after the United States (in terms of GDP at PPP exchange rates). Starting in 1978, the government of China began a process of liberalization of agriculture, trade,

investment, and financial markets. The decentralization of government control and the creation of special economic zones to attract foreign investment led to considerable industrial growth, especially in light industries that produce consumer goods along China’s costal areas. In the 1990s a program of private shareholding and greater market orientation went into effect that increased the capitalization of the economy. However, state-owned enterprises (SOEs) continued to dominate several key industries in China’s “socialist market economy,” including the automotive, pharmaceutical, electronics, and petrochemical industries (Nolan 2002). Despite its progress, China’s economy also suffers from a series of social and economic problems, including income disparities, unemployment, excessive bureaucracy and corruption, and environmental deterioration. Even facing these constraints, from 1980 to 2004 the average annual GDP growth rate in China was over 9 percent. The average GDP growth rate was highest during 1985–95, increasing substantially compared to the prereform years 1970–78. During the Asian financial crisis, the average growth rate was sustained at 7–8 percent. As in India and Indonesia, the industry and service sectors in China have grown faster than the agricultural sector during the past two decades, but since 1980 agricultural GDP in China has mostly grown at a faster rate than in India or Indonesia. Foreign trade and investment remain strong elements of China’s remarkable economic growth. Export growth was rapid owing to deregulation measures, duty drawbacks on imported inputs used

13 The Third Plan, which covered the period 1979–80 to 1984–85, was called the Trilogy of Development because it included three government objectives: the equitable distribution of development gains, economic growth, and the maintenance of political and economic stability (Indonesia 1995).

authoritarian regime lasted from 1965 to 1998. He stepped down before his seventh consecutive fiveyear term in office had ended and following the mid-1997 financial crisis. The presidential election in October 1999 brought Abdurrahman Wahid to the presidency, and Megawati Soekarnoputri was appointed president in a special session on July 23, 2001.

14Suharto’s

24

CHAPTER 3

in the production of exports, and strong competitiveness associated with low labor costs. The value of imports increased, but at a slower rate, so the current account has been in surplus for most of the 1980s and 1990s. The surpluses peaked in the mid-1990s but decreased sharply in the following years, due largely to the Asian financial crisis and the collapse of the technology boom in the developed economies. China’s capital account during the same period also experienced continuous surpluses. By the end of 2002, a year after joining the WTO, China had overtaken the United States in foreign direct investment (FDI) capital inflows. It has become the most attractive FDI destination in the world and received about $49 billion in net investment during 2002 (IMF 2004). The modern era in Vietnam began with the reunification of North and South Vietnam in 1975. The economy of the reunited country was at first largely centrally planned. Production and the trading of goods were carried out by the SOEs or cooperatives following decisions by the government. In 1986 the government started to move toward a market-oriented system. An economic reform, Doi Moi, was launched, promoting agriculture as well as the production of export products and consumer goods such as textiles (Politburo 1987). The contractual quota system that had been established in the agricultural sector in 1981 was revised to promote production. The reforms also included liberalizing domestic and international trade, opening the economy to foreign investment, acknowledging the importance of the private sector, and developing a two-tier banking system. During the initial years of reform, the economy experienced moderate growth at an average rate of 4.6 percent. In 1989 the government launched a comprehensive stabilization program based on tight fiscal and monetary policies to end rampant inflation. Subsidies to the SOEs were reduced, government spending was tightened, the tax system was restructured,

and inflationary financing by the state bank was ended. In addition the reform included almost complete removal of price controls and encouragement of the private sector. The results of the economic reform process were evident by the early 1990s: lowering of inflation rates to around 10 percent per year throughout the decade, attracting increased foreign direct investment, and expanding overall private investment and exports (World Bank 2004). The growth rate increased in each sector of the economy and the overall GDP growth rate averaged more than 7 percent during the period 1990–2004. Per capita GDP increased from $170 in the mid-1980s to $480 in 2000. Poverty, measured as the share of poor households in the total population, declined from 58 percent in 1993 to 29 percent in 2002 (Nguyen and Grote 2004). Until March 1989, the exchange rate of the Vietnamese dong had been fixed, and it became substantially overvalued during two years of superinflation in 1986–88. From 1989 to 1991 the dong was depreciated several times as part of the stabilization program (Vo et al. 2000). Between 1991 and 1997 the exchange rate was kept rather stable through strict controls over capital outflows, but the dong was depreciated again in 1997 because of balance of payments pressures resulting from declined foreign direct investments and export earnings. Since February 1999 the exchange rate has followed a crawling peg.

The Pivotal Role of Agriculture
There have been significant changes in the structure of the economies of India, Indonesia, China, and Vietnam as agriculture has grown more slowly than other sectors over the past two decades. Between 1980 and 2001 agriculture declined from 38 percent to 25 percent of total GDP in India (Mullen, Orden, and Gulati 2005). In Indonesia agriculture represented just 17 percent of GDP by 2002 (Thomas and Orden 2004). In China the agricultural share of GDP dropped from

THE FOUR ECONOMIES AND THEIR AGRICULTURAL SECTORS

25

30 percent in 1979 to 16 percent in 2000 (Sun 2003). And in Vietnam agriculture accounted for 31 percent of GDP in 1991, but by 2001 its share was 24 percent (World Bank 2004). Even as these growing economies continue to undergo a relative shift of resources out of agriculture, the agricultural sector plays a pivotal role in each country. Agriculture still employs nearly two-thirds of the total work force and contributes about 15 percent of the foreign export earnings in India (Mullen, Orden, and Gulati 2005). In Indonesia agriculture employs 45 percent of the labor force, and it is home to 57 percent of the poor (FAO 2002). In China half of the workforce remains in agriculture (Sun 2003). And in Vietnam in 2000, the agricultural sector created employment for 61 percent of the labor force (Nguyen and Grote 2004). Agriculture is also a changing and dynamic sector in each economy. India India has a large and diverse agriculture sector. It is one of the world’s leading producers of rice, wheat, coarse grains, pulses, and cotton, among other crops. It has the highest level of bovine herd and milk production in the world. Table 3.2 gives levels of production of India’s top ten agricultural

products in 2003 (ranked by value of production at international commodity prices). For eight of the ten products, India is also the first or second largest producer in the world. It ranks lower for only indigenous cattle meat (ninth in the world) and cotton lint (third in the world). Traditional crops and livestock products remain dominant in Indian agriculture, but the output mix is changing rapidly. The composition of the production mix has changed in favor of high-value commodities (Joshi and Gulati 2003). During the 1990s highvalue agriculture—including fruits and vegetables, dairy products, poultry, eggs, and meat, as well as fishery products—grew by more than double the rate registered by the cereal sector. The growth rates (measured by the gross value of output) for fruits and vegetables, in particular, increased to over 6 percent per year during the 1990s (Figure 3.1). Thus Indian agriculture is undergoing a significant structural transformation from cereal-led to high-value product–led growth, which is being driven by increased domestic and export demand for noncereal foods and by improved supply capacity for high-value products. Within India, rising incomes, urbanization, and changing relative prices of cereals and noncereal foods are leading to diet

Table 3.2 Production of major agricultural commodities in India, 2003
Rank in India production 1 2 3 4 5 6 7 8 9 10 Rank in world production 2 1 2 2 2 2 2 1 9 3 Product Rice, paddy Buffalo milk Wheat Cow milk, whole, fresh Vegetables, fresh nesa Sugarcane Groundnuts in shell Chickpeas Indigenous cattle meat Cotton lint Production (metric tons) 132,013,000 47,850,000 65,129,300 36,500,000 37,000,000 289,630,016 7,500,000 4,130,000 1,489,929 2,100,000

Source: FAO (2006). Note: Ranked according to value of production at international commodity prices. a nes, not specified elsewhere.

26

CHAPTER 3

Figure 3.1 Growth in value of high-value agricultural output in India, 1990–2000
Growth rate (percent) 7 6.17 6 5 4.22 4 3.23 3 2.29 2 1.15 1 0 Pulses Cereals Oilseeds Sugars Meat Milk Eggs Fruits and vegetables 2.61 2.68 4.31

Source: Gulati and Bathla (2002).

diversification away from cereals and toward high-value agriculture. Preferences are shifting toward high-value products at all income levels. By contrast, growth in demand for staple foods—such as wheat, rice, and coarse grains, which have been the focus of agricultural development policy, institutional initiatives, and public spending—has slowed, as shown in Figure 3.2. India’s top ten exports of agricultural commodities in 2003 are shown in Table 3.3, and its annual agricultural trade balance from 1990 through 2004 is illustrated in Figure 3.3. India has been a net agricultural exporter since 1990. Agricultural exports grew at an annual rate of 8.1 percent during the 1990s, compared to an annual rate of 3.3 percent during the 1980s. Although the share of agriculture in total exports declined from 24 percent during the 1980s to 18 percent in the 1990s, the diversification in agricultural production has promoted exports of many nontraditional items. His-

torically there were virtually no exports of fruits and vegetables or of livestock and fish products. The export shipments of these commodities more than doubled during the 1990s (Figure 3.4). Nevertheless the traditional commodities are still dominant among India’s top agricultural export products. (An exception is fish, exports of which have reached a value over $1.1 billion, as shown in Figure 3.4.)15 Overall exports of basic agricultural commodities are only a small proportion of domestic production (for example, negligible amounts of rice or buffalo meat, but 6.3 percent of wheat, among the top ten commodities in production and exports in 2003). Agricultural imports make up a relatively small portion of total merchandise trade. In the period 1996/97–1999/2000, agriculture accounted for 4–7 percent of merchandise imports (WTO 2002). Palm oil and soybean oil are India’s top agricultural imports, and India is also the world’s first and second

15Some data sources include fishery products among agricultural products, while others exclude this sector. The FAO ranking of major agricultural commodities does not consider fish.

THE FOUR ECONOMIES AND THEIR AGRICULTURAL SECTORS

27

Figure 3.2 Growth in food consumption in India, 1970s–1990s
Growth rate (percent) 12 10 8 6 4 2 0 2
al s ls lse s le s ilk gs ts ui oi ea ul try m Po

1970s

1980s

1990s

4

Ce re

Ve ge ta b

Pu

Fr

Source: Landes and Gulati (2003).

largest importer of these products, respectively (Table 3.4). In recent years imports of edible oils have accounted for over 50 percent of the total value of agricultural imports. Indonesia Indonesia is the world largest producer of coconuts; the second largest producer of palm kernels, palm oil, copra, and natural rubber; and the third largest producer of paddy rice, cassava, and fresh tropical fruit (Table 3.5; Table 3.3 Exports of major agricultural commodities by India, 2003
Rank in India exports 1 2 3 4 5 6 7 8 9 10 Rank in world exports 2 5 9 1 3 1 6 11 9 12 Product Milled paddy rice Soya bean cake Wheat Cashew nuts, shelled Tea Buffalo meat Sugar, refined Tobacco leaves Cotton lint Coffee, green

Fa ts

an

Quantity (metric tons) 3,371,818 2,749,268 4,093,081 98,546 174,246 319,087 882,775 120,637 159,379 167,495

d

EEAU 2000). Production is concentrated in the islands of Java, Sumatra, and Sulawesi. Smallholder farms (average size 1 hectare) occupy the largest share of cultivated land (87 percent) and grow mostly food crops (90 percent of total rice and maize output). Large-scale plantations, privately or stateowned, account for a small share of agricultural output but the larger share of exports of agricultural products, such as rubber, palm oil, coffee, and cocoa (EEAU 2000). Agricultural GDP is still dominated by food crops

Value (thousands of $) 888,592 653,689 513,620 360,994 333,408 305,870 191,300 172,143 163,047 157,295

Eg

M

t

Unit value ($) 264 238 125 3,663 1,913 959 217 1,427 1,023 939

Source: FAO (2006). Note: Ranked according to value of trade at international commodity prices.

28

CHAPTER 3

Figure 3.3 Agricultural imports and exports of India, Indonesia, China, and Vietnam, 1990–2004
India Billions of dollars 8 7 6 5 4 3 2 1 0 1992 1994 1990 Import Export Indonesia Billions of dollars 10 9 8 7 6 5 4 3 2 1 0 1990 1992 1994

1996

1998

2000

2002

2004

1996

1998

2000

2002

2004

China Billions of dollars 35 30 25 20 15 10 5 0 1990 1992 1994 1996 1998 2000 2002 2004

Vietnam Billions of dollars 3.5 3 2.5 2 1.5 1 0.5 0 1990 1992 1994 1996 1998 2000 2002 2004

Source: FAO (2006).

(51.7 percent), and rice dominates among these crops. Livestock accounts for only about 12 percent of agricultural GDP, given Indonesia’s climatic conditions and topography, while fisheries have increased in im-

portance, rising to about 15 percent during 1999–2002 (Thomas and Orden 2004). Indonesia has maintained surpluses in agricultural trade during the past two decades. Agricultural exports grew at an aver-

Figure 3.4 India’s exports of nontraditional agricultural products, 1980s and 1990s
Millions of dollars 1,200 Three years ending: 1991–92 1981–82 900 1999–2000 1,125

600 461 300 0.4 0.2 25 Eggs 119 145 45 Processed fruits 75 79 Meat 263 198 110 120 320

0

Fruits and vegetables

Fish

Source: Joshi and Gulati (2003).

THE FOUR ECONOMIES AND THEIR AGRICULTURAL SECTORS

29

Table 3.4 Imports of major agricultural commodities by India, 2003
Rank in India imports 1 2 3 4 5 6 7 8 9 10 Rank in world imports 1 2 8 1 1 1 1 1 4 5 Product Palm oil Soya bean oil Cotton lint Cashew nuts Peas, dry Beans, dry Pulses nesa Silk, raw and waste Fatty acids, oils Wool, greasy Quantity (metric tons) 4,026,436 993,498 241,787 441,500 700,017 486,039 470,588 9,258 338,991 25,728 Value (thousands of $) 1,808,277 565,440 333,282 293,884 161,851 154,071 136,421 134,983 118,437 94,308 Unit value ($) 449 569 1,378 666 231 317 290 14,580 349 3,666

Source: FAO (2006). Note: Ranked according to value of trade at international commodity prices. a nes, not elsewhere specified.

age rate of 6.5 percent per year during 1985–2004, increasing from $3.2 billion in 1985 to $9.5 billion in 2004. Although manufactured products and fuels continue to dominate Indonesia’s foreign trade, diversification beyond its traditional dependence on oil and gas exports has improved the country’s international financial status. In the late 1990s and early 2000s, trade in agricultural commodities accounted for about 15 percent of Indonesia’s total merchandise trade. Crude palm oil and natural rubber are Indonesia’s top exports in agriculture (it is the second largest exporter of both in the world), and in 2003 the export value of these

two products reached $3.9 billion, accounting for about 40 percent of total agricultural exports (Table 3.6). Other major exports include cocoa beans, coffee and tea, and coconut oil. Among agricultural imports, Indonesia’s domestic textile and wheat milling industries have made cotton and wheat first and second in value. Indonesia is the world’s largest importer of feed supplement and a major importer of rice and sugar (Table 3.7). China China has only 9 percent of the world’s arable cropland but 20 percent of the world’s population. China is a leading producer of

Table 3.5 Production of major agricultural commodities in Indonesia, 2003
Rank in Indonesia production 1 2 3 4 5 6 7 8 9 10 Rank in world production 3 11 3 1 8 2 6 3 2 4 Product Rice, paddy Sugarcane Cassava Coconuts Maize Palm oil Bananas Fruit, tropical, fresh nes a Palm kernels Sweet potatoes Production (metric tons) 52,078,832 24,500,000 18,473,960 15,630,000 10,910,104 10,200,000 4,311,959 2,832,366 2,186,777 1,997,787

Source: FAO (2006). Note: Ranked according to value of production at international commodity prices. a nes, not elsewhere specified.

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Table 3.6 Exports of major agricultural commodities by Indonesia, 2003
Rank in Indonesia exports 1 2 3 4 5 6 7 8 9 10 Rank in world exports 2 2 4 2 6 2 17 5 7 5 Product Palm oil Rubber, natural, dry Cocoa beans Palm kernel oil Coffee, green Coconut oil Cigarettes Cocoa butter Tea Fatty acids, oils Quantity (metric tons) 6,386,410 1,648,394 265,838 659,895 321,180 364,820 22,651 43,354 88,176 283,851 Value (thousands of $) 2,454,626 1,482,523 410,278 264,678 251,250 153,608 136,139 118,340 95,816 94,746 Unit value ($) 384 899 1,543 401 782 421 6,010 2,730 1,087 334

Source: FAO (2006). Note: Ranked according to value of trade at international commodity prices.

many agricultural commodities and has remained largely self-sufficient. Table 3.8 shows the levels of production of China’s top ten agricultural commodities in 2003. For eight of the ten commodities, China is also the largest producer in the world. It ranks lower only for maize (after the United States) and sugarcane (after Brazil and India). Apart from the commodities listed in Table 3.8, China is also a major producer of sorghum, millet, barley, peanuts, and soybeans. In terms of cash crops, China ranks first in cotton and tobacco and is an important producer of oilseeds, silk, tea, ramie, jute, and hemp. The high levels of production for cer-

tain food commodities correspond to China’s domestic consumer preferences and income levels. About 70 percent of per capita food consumption expenditure has been allocated to grains (mostly rice and wheat) and vegetables, but consumption patterns are changing, especially in urban areas. As in India, strong income growth in China has recently boosted the demand for foods that are high in protein and nutrients relative to those high in carbohydrates (Anderson 2003). Within agriculture, such shift in demand has stimulated significant structural changes. Livestock and fish increased their share of agricultural output from less

Table 3.7 Imports of major agricultural commodities by Indonesia, 2003
Rank in Indonesia imports 1 2 3 4 5 6 7 8 9 10 Rank in world imports 3 8 8 11 9 7 17 1 2 5 Product Cotton lint Wheat Soya bean cake Soybeans Sugar, centrifugal, raw Milled paddy rice Maize Feed supplements Rice, broken Dry skim cow milk Quantity (metric tons) 523,124 3,502,373 1,558,558 1,192,717 911,677 829,000 1,345,452 412,028 671,433 71,600 Value (thousands of $) 644,483 579,925 362,161 330,497 215,766 173,300 168,658 146,896 132,027 122,000 Unit value ($) 1,232 166 232 277 237 209 125 357 197 1,704

Source: FAO (2006). Note: Ranked according to value of trade at international commodity prices.

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Table 3.8 Production of major agricultural commodities in China, 2003
Rank in China production 1 2 3 4 5 6 7 8 9 10 Rank in world production 1 1 2 1 3 1 1 1 1 1 Product Rice, paddy Vegetables, fresh nesa Maize Sweet potatoes Sugarcane Wheat Potatoes Watermelons Indigenous pig meat Cabbages Production (metric tons) 160,656,000 137,000,000 115,830,000 103,643,000 90,235,000 86,488,000 72,022,000 66,000,000 45,313,844 30,000,000

Source: FAO (2006). Note: Ranked according to value of production at international commodity prices. a nes, not elsewhere specified.

than 20 percent in the late 1970s to 40 percent by the late 1990s, while within the crop subsector fruit and vegetable production grew much faster than grain output, as shown in Table 3.9. Prices and marketing of grain and oilseed products continued to be highly regulated through the 1990s, whereas markets for horticultural, livestock, and fish products were mostly liberalized. This trend has accentuated growth in output of the latter group relative to grain and oilseed. The direct consumption of grain by rural as well

as urban households has remained virtually unchanged, a consequence not only of rising incomes and shifting food preferences but also of population growth having slowed to less than 1 percent per year and of reductions in the implicit consumption subsidy for food grains (Anderson 2003). China is a major player in world agricultural markets. Agricultural exports have been more stable in terms of aggregate value than imports, with two dramatic changes in net trade due largely to sharp changes in do-

Table 3.9 Composition and growth of China’s agricultural production, 1970–2000 (percent)
1970 Value share of agricultural output Crops Livestock Fish Forestry 1980 1985 1990 1995 2000

82 14 2 2 1979–84

76 18 2 4

69 22 3 5 1985–95

65 26 5 4

58 30 8 3 1996–2000

56 30 10 4

Output volume growth Grain Oilseed crops Fruits and vegetables Red meat Fish Source: Anderson (2003).

4.7 14.9 7.2 9.1 7.9

1.7 4.4 12.7 8.8 13.7

0.03 5.6 8.6 6.5 10.2

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mestic production and sudden policy shifts. The first one occurred in 1995, when China abruptly increased its grain imports and cut off maize exports owing to concerns about domestic grain shortages and rising prices. The spike in China’s imports helped push world grain prices near historical highs. Subsequently several consecutive years of good weather combined with changes in domestic agricultural policy to boost China’s grain production, and this caused imports to fall. In crop year 1996/97, wheat imports fell by nearly 10 million tons, representing roughly 10 percent of average annual world wheat trade (USDA-ERS 2005). The second sharp drop in net exports occurred in 2003, followed by a large deficit in 2004. China’s agricultural exports increased immediately after its accession to the WTO in December 2001 and have continued to grow moderately during the postaccession years. However, delays in finalizing the rules for administration of imports, such as its tariff rate quota (TRQ) system, contributed to a delay in the expected increase in agricultural imports relative to exports (OECD 2005b). As problems implementing the new trade rules were overcome, agricultural imports increased in 2003 and 2004. Moreover, rising grain prices on domestic markets at the end of 2003 led the

government to import nearly 8 million tons of soft and durum wheat to replenish its strategic stocks. Combined with continued rapid growth in imports of soybeans and cotton, this increase contributed to record net imports of agricultural products in 2004, even as agricultural exports also reached their highest level. China’s leading agricultural exports and imports of agricultural commodities in 2003 are shown in Tables 3.10 and 3.11. The trade patterns in agricultural products have shifted to its comparative advantage: China tends to export labor-intensive commodities (fruits, vegetables, poultry, and processed agricultural goods) and import land-intensive commodities (grains, soybeans, cotton). China is also a major exporter of maize. Most of its exports go to neighboring countries in Asia. Vietnam Vietnam’s topography and climatic conditions are favorable for growing tropical as well as subtropical crops. About 2.8 million hectares of land are being cultivated, of which 1 million hectares are irrigated. Agricultural development since its economic reforms is largely due to an increase in crop output, whereas the production and export of livestock products is constrained by qual-

Table 3.10 Exports of major agricultural commodities by China, 2003
Rank in China exports 1 2 3 4 5 6 7 8 9 10 Rank in world exports 2 1 7 1 2 6 1 2 1 1 Producta Maize Crude organic materials Food, prepared nes Fruit, prepared nes Meat, canned chicken Milled paddy rice Vegetables, prepared nes Tea Garlic Beans, dry Quantity (metric tons) 16,399,453 8,326 619,743 688,093 158,701 2,456,496 578,249 259,914 1,142,237 946,455 Value (thousands of $) 1,766,830 1,255,210 805,975 520,336 463,987 449,268 431,001 367,187 354,903 332,740 Unit value ($) 108 150,758 1,300 756 2,924 183 745 1,413 311 352

Source: FAO (2006). Note: Ranked according to value of trade at international commodity prices. a nes, not elsewhere specified.

THE FOUR ECONOMIES AND THEIR AGRICULTURAL SECTORS

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Table 3.11 Imports of major agricultural commodities by China, 2003
Rank in China imports 1 2 3 4 5 6 7 8 9 10 Rank in world imports 1 2 1 1 1 1 1 1 1 6 Product Soybeans Palm oil Cotton lint Rubber, natural, dry Soya bean oil Hides, wet: salted cattle Wool, greasy Fish meal Crude organic materials Chicken meat Quantity (metric tons) 20,741,007 3,324,757 870,059 1,073,460 1,884,320 532,023 116,913 802,843 29,233 565,082 Value (thousands of $) 5,416,861 1,443,173 1,162,801 1,050,335 1,014,970 711,741 613,264 518,409 488,890 412,121 Unit value ($) 261 434 1,336 978 539 1,338 5,245 646 16,724 729

Source: FAO (2006). Note: Ranked according to value of trade at international commodity prices.

ity problems in livestock rearing and processing technologies (Nuguyen and Grote 2004). Food crops accounted for 60 percent of the total value of agricultural plant output, while industrial and perennial crops and fruits and vegetables accounted for 24 percent and 14 percent, respectively (Figure 3.5). Vietnam has also become a major exporter of fish and fish products. In 2003 Vietnam ranked second and third in the world’s fresh fruit and vegetable production and fifth in production of rice and sweet potatoes (Table 3.12). Among food crops, rice accounted for 85 percent of total cultivated land and 43 percent of total output value in 2003. Other important food crops include cassava and maize. Coffee is the most important industrial crop in Vietnam (it ranked 11th in total Vietnamese agricultural production in 2003 and so is not shown in Table 3.12). Ninety-five percent of Vietnamese coffee is of the robusta type, produced since 1975 mainly on smallscale farms with diverse levels of processing knowledge and technology. Thus the quality of Vietnamese coffee varies. But the country’s yield of nearly 1,300 kilograms of coffee per hectare is twice the world average. Apart from coffee, other important industrial and perennial crops are rubber, sugarcane, groundnut, soybean, tea, and pepper.

At the beginning of the 1980s, Vietnam went from being an importer to a net exporter of agricultural products. Its agricultural import value since 1990 is only about half the value of its exports in agriculture. Stimulated by trade liberalization and agricultural reforms as it moved toward a market-oriented economy (described further in Chapter 4), agricultural export revenues rose from around $100 million in 1985 to nearly $2.4 billion in 1999, then declined in 2000– 02 before reaching record levels in 2003 and 2004. Exports of agricultural products, together with exports of crude oil, seafood, textiles, and footwear, represent the main sources of foreign exchange earnings for Vietnam, with rice being the primary agricultural export commodity. The top ten agricultural exports in 2003 are shown in Table 3.13. Agricultural exports other than rice are mainly semiprocessed products (shelled coffee, dry rubber latex, and shelled groundnut). Processed items account for a very small part of the total export volume. Its poor technologies prevent Vietnam from being competitive for processed products; for example, there are only a few factories, with limited capacity, that polish rice or process tea and coffee (Nguyen et al. 1997). The high share of relatively low-grade unprocessed commodities

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Figure 3.5 Share of agricultural crops in total value of Vietnam plant output, 2000
Percent 70 60 50 40 30 20 10 0 Food crops Industrial and perennial crops Fruits and vegetables Others

Source: GSO (2000).

in total agricultural exports has also contributed to a gap between Vietnamese export prices and international prices, although this gap has declined with improvements in the quality of Vietnamese agricultural exports

(UNDP 2004). Import values of agricultural products have also increased but at a lower rate. In 2003 the main imported agricultural commodities were soybean cake, wheat, milk, palm oil, and cotton (Table 3.14).

Table 3.12 Production of major agricultural commodities in Vietnam, 2003
Rank in Vietnam production 1 2 3 4 5 6 7 8 9 10 Rank in world production 5 16 3 12 — 2 10 5 12 8 Producta Rice, paddy Sugarcane Vegetables, fresh nes Cassava Maize Fruit, fresh nes Indigenous pig meat Sweet potatoes Bananas Coconuts Production (metric tons) 34,518,600 16,524,900 6,326,274 5,228,500 2,933,700 2,620,000 1,800,295 1,592,100 1,221,300 920,000

Source: FAO (2006). Notes: Ranked according to value of production at international commodity prices. —, not ranked. a nes, not elsewhere specified.

THE FOUR ECONOMIES AND THEIR AGRICULTURAL SECTORS

35

Table 3.13 Exports of major agricultural commodities by Vietnam, 2003
Rank in Vietnam exports 1 2 3 4 5 6 7 8 9 10 Rank in world exports 3 3 4 2 1 8 2 6 3 — Producta Milled paddy rice Coffee, green Rubber, natural, dry Cashew nuts, shelled Pepper Tea Cassava, dried Groundnuts, shelled Fruit, fresh nes Food, prepared nes Quantity (metric tons) 3,813,000 749,200 345,000 83,900 74,100 59,800 632,006 82,700 96,359 56,579 Value (thousands of $) 727,000 330,000 265,000 260,000 127,680 70,000 52,795 52,000 45,781 41,873 Unit value ($) 191 440 768 3,099 1,723 1,171 84 629 475 740

Source: FAO (2006). Notes: Ranked according to value of trade at international commodity prices. —, not ranked. a nes, not elsewhere specified.

Table 3.14 Imports of major agricultural commodities by Vietnam, 2003
Rank in Vietnam imports 1 2 3 4 5 6 7 8 9 10 Rank in world imports 15 19 — — 6 — 19 — — 18 Product a Soya bean cake Cigarettes Wheat Food, prepared nes Tobacco products nes Beverages, distilled, alcoholic Dry whole cow milk Palm oil Cotton lint Dry skim cow milk Quantity (metric tons) 990,000 6,706 794,257 18,995 13,889 3,298 39,296 148,500 43,745 29,776 Value (thousands of $) 240,000 123,982 112,700 81,149 77,776 71,047 59,664 57,500 55,403 53,299 Unit value ($) 242 18,488 142 4,272 5,600 21,542 1,518 387 1,266 1,790

Source: FAO (2006). Notes: Ranked according to value of trade at international commodity prices. —, not ranked. a nes, not elsewhere specified.

CHAPTER 4

Agricultural Policy Reforms and Recent Policy Settings

T

here are many similarities in the prereform domestic market and agricultural trade policies in India, Indonesia, China, and Vietnam, and in the reform paths they have pursued within their agricultural sectors. As in many other developing countries with smallholder-dominated agricultural sectors and poorly developed market infrastructure and institutions, government interventions were initially pursued, in lieu of reliance on market forces, to achieve the twin goals of self-sufficiency and low food prices for consumers. While similarities in the countries’ prereform agricultural policies should not be overstated, a few basic patterns emerge: ? India, Indonesia, China, and Vietnam all pursued a series of closed-economy policies and created an autarkic environment for agriculture. Self-sufficiency was believed to be essential for the nations’ food security. In Indonesia oil export revenues provided an additional basis for supporting agriculture. ? All four countries heavily restricted the market’s role in balancing supply of and demand for agricultural products. In India and Indonesia a set of complicated agricultural price, procurement, distribution, storage, and subsidy (mainly on inputs) policies was employed. The initial government interventions in the market in China and Vietnam were quite similar to those the Indian government pursued; mistrust of the market, combined with communist orthodoxy, resulted in the entire economy being almost fully planned by the government. ? In India, China, and Vietnam, agricultural trade policies served as complementary instruments to effectively close the economy. Trade in major agricultural products, often called strategic commodities, was highly restricted, although exports of some agricultural products were encouraged to earn foreign exchange to cover imports of capital equipment and industrial intermediates. ? India, Indonesia, China, and Vietnam have utilized many trade policy instruments—such as import tariffs, quantitative restrictions, import and export licensing, and marketing restrictions—to limit foreign trade in agriculture, and all these policies had to be implemented by the state trading enterprises (STEs), which were extensions of the government bureaucratic system. To encourage the development of domestic processing industries, export taxes were levied or quotas imposed on primary products. The policy reform processes in India, Indonesia, China, and Vietnam display a gradual transition from an autarkic and state-led setting to a more deregulated market environment with greater integration into the world economy and a new and larger role for the private sector. The

36

AGRICULTURAL POLICY REFORMS AND RECENT POLICY SETTINGS

37

reform process has not been uniform over time or across the countries, and has been marked by frequent policy reversals and setbacks. These reversals plague the reform processes of all four countries, particularly their external trade regimes, with intermittent bans and the imposition of license requirements on imports and exports of strategic commodities depending on domestic food availability, prices, and foreign exchange concerns. More recently strong growth in the nonagricultural economy has motivated the governments to offer subsidies to agriculture, a practice that was not possible in the past. The reforms and recent policy settings in these countries are described in the sections that follow. The section on India draws heavily on Hoda and Gulati (2007), who provide an insightful and comprehensive policy review. We also draw on an earlier draft manuscript of their book. Further discussion is provided in the other references cited herein and the five background papers for this study.

but WTO commitments have also played a role. Trade Policies Throughout much of the 1980s, restrictive import policies, direct export restrictions, and an overvalued exchange rate imparted a considerable antitrade bias to the Indian economy. The economic reforms introduced in 1991 included currency devaluation (discussed further in Chapter 6) and initiated a partial liberalization of India’s trade regime, but progress in phasing out QRs on consumer products, including agricultural products, was slow. Only in 1997, after considerable improvement in its balance-of-payments situation, did India agree to phase out its QRs over a nine-year period. Under a dispute settlement ruling by the WTO Appellate Body, India had to accelerate the lifting of these measures to April 2001.16 India also reduced the number of products for which trade was controlled by SOEs after 1991 and modified its tariff structure as part of the reform process. This lowered applied agricultural tariffs while generally retaining the overall structure of high bound rates notified after the WTO Uruguay Round. Figure 4.1 shows average bound and applied tariffs (in 1997) for 46 agricultural commodity groups. Of these, 33 had average bound tariffs at or above 100 percent, and 7 had average bound tariffs at or above 150 percent. Thus an important feature of India’s post–Uruguay Round tariff structure is that there is often a wide gap between the bound and applied levels. Hoda and Gulati (2007) calculate that the average applied tariff rate (as of April 1, 2002) was 37 percent compared to a simple average bound tariff rate of 115 percent. The gap between bound and applied rates, as maintained by India, has two key implications. First, policymakers have room to make their own tariff adjustments as an

India
Indian agricultural policy has long been characterized by border and domestic interventions aimed at protecting farmers from international price volatility. To achieve this goal the government of India (GOI) has implemented myriad policies, including tariffs, quantitative import restrictions (QRs), import licensing, domestic marketing controls, and export restrictions. These controls have been implemented with a view toward balancing domestic demand and supply, export potential, and the national balance-ofpayments situation (WTO 2002). Sweeping reforms in exchange rate and industrial policies were adopted after a financial crisis in 1991, but it was not until later in the decade that direct reforms began in agriculture. These reforms have to a large extent been a consequence of unilateral policy initiatives,

16See

Hoda and Gulati (2007) for further discussion of these developments.

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Figure 4.1 WTO URAA bound and applied agricultural tariffs for India, 1997
Oilseed oil Fats and oils Tobacco products Horticulture: cut flowers and foliage Fruit: frozen Eggs Essential oils Food preparations Tea and tea extracts Nuts and fruits: dried, fresh, and prepared Coffee Coffee: other Meat: prepared Fruit: preparations Grain products Sweeteners Cocoa beans and products Vegetables: dried and fresh roots and tubers Spices Vegetables: frozen or prepared (other) Oilcake Starches Vegetables: frozen Feed Nuts Tobacco: unmanufactured Sugarcane Sugar beet Vegetables: fresh Fruit: dried and fresh (coconuts, dates, and figs) Fruit: dried (raisins) Live animals Oilseeds Vegetables: preparations Meat: fresh or frozen other meat Fiber Meat: frozen beef, pork, or poultry Meat: fresh beef, pork, or poultry Fruit: fresh Vegetables: dried Vegetable juice: tomato Fruit juice Dairy Skins and hides Grains Horticulture: live 0 50 100 Percent 150 200 250

Bound

Applied

Source: USDA-ERS (2004).

AGRICULTURAL POLICY REFORMS AND RECENT POLICY SETTINGS

39

instrument of agricultural policy while remaining within their WTO commitments. Second, this gap in principle offers the country considerable flexibility to negotiate for more open markets in other countries in exchange for reducing its own tariffs bindings (Magiera 2003). Exports of agricultural goods from India have been restricted through controls that have included prohibitions, licenses, quotas, marketing controls, and minimum export prices (MEPs). The quantitative controls on exports were often administered through trading enterprises in the public and cooperative sectors, and they were maintained, it was argued, for the sake of domestic food security (WTO 2002). Hoda and Gulati (2007) describe policies by which “a limited number of items, such as wheat and wheat products; barley, maize, and other coarse cereals and their flours; ghee (butter oil); and hydrogenated vegetable oils were allowed for export against a limited ceiling.” In addition, exports of milk powder, butter, and certain oilseeds and edible oils were prohibited. Simultaneously, with a view to improving export competitiveness, the GOI provided support for exports through three instruments: cash incentives to manufacturers of export-oriented processed foods (eliminated after the 1991 economic reforms), subsidization of freight costs, and income tax exemptions on export earnings (Hoda and Gulati 2007). India’s agricultural export policies began to show signs of change with the opening up of exports of rice in 1994. Export policies have been progressively liberalized since then, but with some reversals. Procedurally the Ministry of Commerce, through the Director General of Foreign Trade, announces the imposition or elimination of restrictions in order to promote exports while ensuring an “adequate” domestic supply of essential commodities at “reasonable” prices (WTO 2002). The policy reforms leading to the liberalization of exports included reductions in the list of products subject to state trad-

ing, the relaxation of export quotas, the abolition of MEPs, and increased credit availability for exports (Hoda and Gulati 2007). However, the GOI retains the authority to reimpose minimum export prices, and support was provided to promote exports of wheat and rice when world prices fell in the late 1990s. Domestic Policies In India domestic support for agriculture has been provided mainly through two channels: minimum support price (MSP) guarantees for basic staple commodities and provision of input subsidies. A complex array of other policy instruments has also been employed. India has achieved only limited progress in domestic market liberalization in the agricultural sector since economic reforms were launched in 1991. It was only since 2001 that steps were taken to remove some of its numerous marketing restrictions. For example, India’s Milk and Milk Products Order was reformed in 2002 to eliminate restrictions on investments in new processing capacity (Hoda and Gulati 2007). Among other notable developments discussed by Hoda and Gulati (2007) are the removal in February 2003 of licensing requirements, stocking limits, and movement restrictions on wheat, paddy rice, coarse grains, edible oilseeds, and edible oils under the Essential Commodities Act of 1955. Price Support Policies. Basic staples in India have been subject to MSP guarantees. These commodities included in the mid 1980s paddy rice, wheat, coarse cereals (including maize and barley), various pulses (gram, moong, urad, tur), various oilseeds, sugarcane, cotton, and tobacco (Hoda and Gulati 2007). The stated objectives of the agricultural price policy are to ensure remunerative prices to farmers, smooth out the effects of seasonality, and promote agricultural diversification (GOI 2001b). Nevertheless, the guaranteed prices can be below

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those prevailing in the market.17 India reports its MSP policies as part of the productspecific AMS in domestic support notifications to the WTO. In its AMS base period and its 1995–97 notifications (still the latest available), the product-specific support is negative because the MSPs are less than the external reference prices for all commodities except sugarcane (Table 4.1)18 For horticultural and other agricultural commodities not covered by the MSP, there is a Market Intervention Scheme (MIS) of somewhat ad hoc support measures. Under the MIS, if the price of a commodity falls below a specific “economic” level the GOI can intervene, at the request of the state governments, by purchasing the product at intervention prices that do not exceed the cost of production (WTO 2002). Losses incurred in implementing the MIS are shared equally between the central and state governments. Since 1998 the MIS has been used to support a number of horticultural products, including oranges, coriander seed, apples, oil palm, potatoes, red chilies, areca nut, ginger, and onions (WTO 2002). Input Subsidies. Key subsidies to farmers result from interventions in fertilizers, electrical power, and irrigation. These subsidies

began to increase in the mid-1980s, and they have continued to climb in current and constant (real) value (Table 4.2).19 By 2002 they were being cited as fiscally unsustainable and also environmentally harmful (GOI 2002b). The GOI argued that it was gradually moving toward a more deregulated regime while emphasizing the need for investment in power, irrigation, and rural infrastructure. In the budget speech for 2002– 03, for example, the minister of finance highlighted, inter alia, an increased allocation of resources for rural roads, irrigation, and credit; electrification of villages; rural employment (including through payment in the form of food grain); and measures to improve diversification of crops.20 India initially reported input subsidies to the WTO under its non-product-specific support commitments (Table 4.2). Despite high levels of recent expenditures, India’s support has been less than the de minimis binding for developing countries of 10 percent of total value of agricultural production. India’s non-product-specific AMS decreased from $5.77 billion in 1995 to $0.93 billion in 1997, because of a shift in the accounting of input subsidies from non-product-specific support to special and differential treatment.21 India’s green box payments in 1995–97 are

17Hoda

and Gulati (2007) discuss the decisionmaking process of the Commission for Agricultural Costs and Prices (CACP). In formulating its recommendations, the CACP considers a number of factors, including inputoutput price parity, trends in market prices, demand and supply, intercrop price parity, effects on industrial cost structure, effects on general prices, cost of living international market prices, and the terms of trade.

18See Hoda and Gulati (2007) for discussion of calculation of the AMS and recalculation of some of the price support. 19In

addition to the fertilizer, electrical power, and irrigation interventions, there are a number of other input subsidy programs. Preferential agricultural credit provided through concessional interest rates, once a substantial input subsidy, has been progressively phased out. There are also several different kinds of subsidies on seeds. In the area of broader rural development, a Rural Infrastructure Development Fund (RIDF) has a cumulative value from its inception in 1995–96 to January 3, 2003, of Rs 285 billion (GOI 2003). In the budget speech for 2002–03, it was announced that assistance to states provided through the RIDF would be linked to reforms in the agriculture and rural sectors. Yet at least 60 percent of the RIDF for 2003–04 will be directed toward irrigation, flood control, agriculture, and allied activities and power systems (NABARD 2003).

20To

encourage capital investments by farmers, the 2002–03 budget also proposes a reduction in import duties on agricultural machinery and implements from 25 percent to 15 percent (GOI 2002a, Part A, paragraphs 20–26, and Part B, paragraph 143). Hoda and Gulati (2007) for details and further discussion.

21See

AGRICULTURAL POLICY REFORMS AND RECENT POLICY SETTINGS

41

Table 4.1 India’s WTO domestic support notifications, 1995–97 (million$)
Category Green box payments General services Public stockholding for food security Domestic food aid Decoupled income support Income insurance and safety net programs Payments for relief from natural disasters Structural adjustment through producer retirement programs Structural adjustment through resource retirement programs Structural adjustment through investment aids Environment payments Payments under regional assistance programs Other Total Special and differential treatment Investment subsidies generally available to agriculture Input subsidies to low-income or resource-poor producers Total Product-specific AMS Rice Wheat Coarse cereals Pulses Groundnut Rapeseed and mustard Cotton Soya bean Tobacco Jute Sugarcane Total Non-product-specific AMS Fertilizer subsidy Credit subsidy Subsidy on electricity Irrigation subsidy Subsidy on average supply of seeds Total As percentage of value of production Value of agricultural production Source: WTO notifications. Note: —, no expenditure. 1995 1996 1997

397.6 1,569.7 — — 10.9 125.0 — — 59.2 33.2 — — 2,195.6

239.3 1,708.7 — — — 444.3 — — 36.3 73.7 — — 2,502.3

264.6 2,018.2 — — — 443.8 — — 76.1 70.2 — — 2,872.9

104.8 149.5 254.3

1,117.3 3,737.8 4,855.1

1,142.5 4,029.3 5,171.8

–7,577.0 –9,625.0 –4,530.4 –1,705.8 –1,809.3 –1,688.7 –2,106.4 –191.7 –181.4 –387.6 184.4 –29,618.9

–1,321.3 –1,280.8 –1.5 — — — — — — — — –2,603.6

–1,479.9 –1,266.4 –2.9 — — — — — — — — –2,749.2

1,864.1 102.0 2,436.6 1,345.4 23.9 5,772.1 7.5% 76,736.0

413.6 — 373.6 143.1 0.1 930.3 1.1% 85,280.0

515.9 — 342.5 144.9 0.1 1,003.5 1.2% 84,972.0

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Table 4.2 Estimated input subsidies in India, 1980/81–2002/03 (billion Rs)
Total Years 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/2000 2000/01 2001/02 2002/03 Fertilizer — 2.33 0.82 2.15 12.12 14.22 –0.72 5.27 18.97 28.58 45.58 35.07 32.61 33.52 78.89 96.94 96.32 81.59 83.14 62.07 72.61 67.34 69.97 Power 3.68 4.47 5.83 7.67 9.97 13.04 17.06 25.35 30.07 35.94 46.21 58.84 73.44 89.57 112.00 138.38 155.85 190.21 224.96 262.71 288.14 319.79 356.75 Irrigation 4.12 4.58 5.42 6.32 7.25 7.44 10.78 19.72 23.54 23.09 25.71 28.68 32.88 34.41 39.54 44.12 44.39 46.56 49.37 52.18 54.95 57.76 60.56 At current prices 7.8 11.4 12.1 16.1 29.3 34.7 27.1 50.3 72.6 87.6 117.5 122.6 138.9 157.5 230.4 279.4 296.6 318.4 357.5 377.0 415.7 444.9 487.3 At 2000–01 prices 43.9 58.2 57.4 70.8 119.7 131.7 96.6 165.2 187.8 208.4 253.0 231.9 241.7 250.1 334.3 371.8 367.3 369.6 384.5 390.1 415.7 428.3 453.4

Source: Gulati and Narayanan (2003) for 1980/81–2000/01. Later years are authors’ trend projections. Note: —, not available.

dominated by expenditures on public stockholding for food security and totaled $2,872.9 million in 1997. Fertilizer. A retention price system for fertilizers was introduced in 1977 to insulate farmers from rising prices and to ensure the availability of fertilizers. The difference between the “retention price” (the normal cost of production, including a 12 percent aftertax return on investment) and the “notified sales price” (minus a distribution margin) was paid to manufacturers based on specific plants. A subsidy was also paid to cover the cost of transportation to the farming areas where fertilizer utilization is heaviest. Since there is a uniform issue (sales) price for

domestic and imported fertilizers, the government also bore the net cost between the delivery cost of imported fertilizers and the price paid by farmers (GOI 2002b). Nitrogenous (urea), phosphatic, and potassic fertilizers were included under the initial price control subsidy program, but phosphatic and potassic fertilizers were decontrolled in 1992. Their prices rose dramatically, leading to a decline in usage. As a result the central government has continued to provide a subsidy for decontrolled phosphatic and potassic fertilizers (GOI 2002b). The total fertilizer subsidy in 2002– 03 was estimated at Rs 112 billion, equal to about 3.8 percent of agricultural GDP (GOI 2003). Budgetary provision for the conces-

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Table 4.3 Farmers’ share of fertilizer subsidies in India, 1981/82–2002/03
Years 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/2000 2000/01 2001/02 2002/03 Import parity measure of subsidy (billion Rs) 2.33 0.82 2.15 12.12 14.22 –0.72 5.27 18.97 28.58 45.58 35.07 32.61 33.52 78.89 96.94 96.32 81.59 83.14 62.07 72.61 67.34 69.97 Budgetary subsidy (billion Rs) 3.75 6.05 10.42 19.27 19.24 18.97 21.64 32.50 45.42 43.89 48.00 57.96 44.00 52.41 67.35 75.78 99.18 115.96 132.44 Farmers’ share of budgetary subsidy (%) 62.27 13.48 20.66 62.91 73.89 –3.81 24.37 58.37 62.93 103.86 73.05 56.27 76.19 150.52 143.93 127.10 82.26 71.70 46.87

Source: Gulati and Narayanan (2003) for 1981/82–2000/01. Later years are authors’ trend projections.

sion scheme for decontrolled fertilizer had increased significantly, and for 2002–03 it was Rs 42 billion.22 While the budgetary expenditure on fertilizer subsidies is large, a portion of the subsidy supports an inefficient fertilizer industry, rather than providing farmers with low-cost inputs. Gulati and Narayanan (2003) calculate the implicit fertilizer subsidy accruing to farmers via an import parity price method. The price farmers would have to pay for imported fertilizer assuming free trade is estimated based on the c.i.f. price plus internal marketing and transportation costs. Comparing this price with the price that farmers actually pay gives an estimate of the implicit subsidy. Table 4.3 shows the actual budgetary outlays and the share of

fertilizer subsidies to farmers estimated by Gulati and Narayanan (2003). Overall the average portion of the subsidy accruing to farmers over the period 1981/82–2002/03 is nearly 70 percent. Electrical Power. Underpricing of power to agricultural users is estimated to provide the largest input subsidy to the sector (Table 4.2). In most states, power to agriculture is offered at a very low price, and in a few cases it is free. Industrial and commercial power consumers, in contrast, pay prices that exceed the unit cost of supply to compensate for the losses on agricultural power supply (Gulati and Narayanan 2003). Because agricultural power consumption is not metered and is determined on a

22The

GOI subsequently committed to undertake modest reforms in urea pricing policy. A multistage, groupwise concession scheme was to be established in place of the plant-specific RPS (GOI 2003).

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Table 4.4 Comparison of estimates of irrigation subsidies in India, 1980/81–2002/03 (million Rs)
Years 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/2000 2000/01 2001/02 2002/03 Government estimates 5,810 6,360 7,420 7,930 10,800 11,440 15,200 16,280 22,300 24,390 24,680 31,470 34,890 39,490 45,790 53,990 62,750 70,940 Vaidyanathan Committee method 4,121 4,578 5,424 6,320 7,255 7,440 10,779 19,715 23,544 23,088 25,713 28,681 32,876 34,414 39,542 44,118 44,394 46,557 49,367 52,177 54,954 57,758 60,563 Operations and maintenance method 2,744 2,996 3,589 4,173 4,724 4,656 7,682 16,234 19,588 18,547 20,828 23,429 27,220 28,296 32,889 36,894 36,290 38,692 41,093 43,495

Source: Gulati and Narayanan (2003) for 1980/81–1999/2000. Later years are authors’ calculations.

residual basis, power to agricultural users can be siphoned off to other uses. Gulati and Narayanan (2003) emphasize that agricultural power consumption is overstated by as much as 40 percent in some cases. As with fertilizer subsidies, a portion of the budgetary subsidy for electricity supports the inefficient supplier, in this case the state electricity boards. Gulati and Narayanan (2003) estimate the per-unit subsidy on power going to the agricultural sector as the difference between the cost of supplying electricity to all sectors and the tariff charged to the agricultural sector. Using this approach, and with the caveats that agricultural use may be overstated and electricity suppliers inefficient, they find that the estimated subsidy in 2000/01 was Rs 288.1 billion, nearly 19 times greater at constant prices than in 1980/81.

Irrigation. Irrigation subsidies, charged against states’ budgets, remain a mainstay of Indian agricultural input subsidies despite repeated attempts at reform. In most states, the pricing of canal water does not cover more than 20 percent of the operation and maintenance costs, nor does it recover capital costs. Gulati and Narayanan (2003) compare several methods for calculating irrigation subsidies (Table 4.4). The first is the GOI’s method, drawn from the National Accounts Statistics and used to estimate India’s irrigation subsidy in its domestic support notification submitted to the WTO. It is calculated as the difference between the cost of supplying water for irrigation and the revenue received as payment from irrigation water users. Gulati and Narayanan (2003) propose instead to follow suggestions by the Vaidyanathan Committee (GOI 1992) that

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pricing of canal water should cover operation and maintenance expenses plus 1 percent of cumulative capital expenditures.

Indonesia
Indonesia is an oil-exporting country, and the direction of its economic and development policies, including its agricultural support and trade policies, often follows the significant exogenous shocks to international petroleum prices (Hill 2000).23 A period of significant growth is attributed to the two oil price booms in the 1970s (1971–74 and 1978–80). The early 1980s marked a decline in GDP growth, as oil prices fell. Thus Bautista et al. (1997) refer to the mid-1980s as a watershed in economic policymaking in Indonesia. From 1985 to 1998, Indonesia initiated a series of domestic and trade reforms emanating from a combination of unilateral undertakings, the country’s commitments to the WTO, and the government’s agreement with the International Monetary Fund (IMF) following the financial crisis (APEC 2002; Magiera 2003). Trade Policies Agricultural trade in Indonesia has been heavily regulated by tariffs, import licenses, export taxes and bans, and informal export quotas. To encourage industrial production, export taxes were levied on primary products that provide inputs to the domestic processing sector. Processed agricultural products were subjected to import restrictions (Bautista et al. 1997). Reforms undertaken in the mid-1980s reduced the number of tariff rates, lowered the tariff ceiling, and raised the number of import items with very low tariffs. In spite of these reforms, products corresponding to 54 percent of domestic agricultural production remained on the Restricted Goods List. Import monopolies for most of these commodities were under the control

of BULOG and other STEs (Bautista et al. 1997). Three categories of commodities were subject to export controls: certain items were banned, others were controlled by the Department of Trade, and some were restricted to licensed exporters. The majority of these items originated in the agricultural sector; they included rice, soybean flour, and vegetable oils (Piggot et al. 1993). Although agriculture was mostly left out of the trade reforms of the 1980s, further reforms in 1991 reduced the share of agricultural products under import licensing restriction to 30 percent (Bautista et al. 1997). Key measures are summarized in Table 4.5. Commitments under the 1995 URAA were not very constraining on Indonesia’s trade policies because the country had unilaterally committed to a tariff reduction schedule (the Pakmei schedule, 1995–2003), which reduced the average tariffs below its WTO tariff bindings (Table 4.6; Magiera 2003). The 1998 agreement with the IMF following the financial crisis put further pressure on Indonesia to reduce its applied tariffs on agriculture: all food tariffs were to be reduced to 5 percent and nonfood agricultural tariffs to a maximum of 10 percent by 2003 (Magiera 2003). On this basis, the average applied import tariff for agriculture was 8.3 percent in 2002 (Table 4.7). By the end of 1998, Indonesia had also agreed to liberalize rice trade to include private traders, removing BULOG’s monopoly (Wailes 2003). But with the end of the IMF program in 2003 the trend toward protectionist and other interventionist measures in agriculture reemerged (Ray 2003; Wailes 2003). As in India, there is considerable room for tariff increases by Indonesia within its WTO binding commitments. Indonesia notified the WTO of TRQs for rice and milk and cream fats and products. Yet, after the implementation of the WTO agreements, Indonesia’s imports of these

23In

the 1980s crude oil and petroleum products contributed about two-thirds of total exports, a fourth of GNP, and 70 percent of government revenue (Bautista et al. 1997).

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Table 4.5 Indonesia pre- and postcrisis (1997–98) international trade and agriculture policies: Commitments and reforms
International trade commitments Tariff measures (Pakmei schedule and IMF) Nontariff measures Import tariffs of <20% in 1995 reduced to a maximum of 5% in 2000. Import tariffs of >20% in 1995 reduced to a maximum of 20% in 1998 and to a maximum of 10% in 2003. Elimination of restrictions on import licenses: Dairy products switched from approved importers (IT) to general importer (IU). Cloves switched from the regulation of the Cloves Marketing Agency (BPPC) to IU. Importation of sugar and rice, previously imported only by producer-importers, is liberalized. To date Indonesia has investigated 20 cases and has imposed antidumping duties on 7 nonagriculture products but none on agricultural products. To date no special safeguard measures have been imposed. Government of Indonesia notified WTO that both BULOG and BPPC operate as state trading enterprises (STEs).

Antidumping measures WTO special safeguard measures State trading enterprises

Reforms following the 1997–98 financial crisis Trade September 1998: BULOG import monopoly on rice, sugar, wheat, and wheat flour abolished. Soybeans: 1998: Abolition of tariff. Rice: September 1998–December 1999: Import tariff set at 0%. January 2000 to present: Specific duty of Rp 430/kg applied to imports (25–30% tariff equivalent). May 2002: Import licenses (NPIK) given to private traders. January 2004: Ban on rice imports imposed until June 2004 but later extended. Palm oil: 1998: Ban on exports of crude palm oil (and its products) followed by export tax rates ranging from 40 to 60 percent. Export tax rate reduced to 10 percent by 1999 and to 3 percent by 2003. Sugar: 2000: Import licensing replaced by a 20 percent tariff for raw sugar and a 25 percent tariff for refined sugar. 2002: Import ad valorum tariffs replaced by specific import duties of Rp 550/kg for raw sugar and Rp 700/kg for white sugar. Export quotas on coffee and rubber continue to be used. Domestic Fertilizer subsidies removed in December 1998 but reinstated in 2003. Rice: Market price support for rice provided through BULOG: It sets the criteria and announces the rice procurement to the public. It buys paddy or rice from farmers or traders on a first come, first served basis. August 1998–December 2001: GOI replaced its general consumer rice price stabilization through market interventions with a targeted rice distribution program to poor households, called OPK Beras until a change in name to RASKIN in 2002.a Sources: Casson (2000), Magiera (2003), WTO (2003). a OPK stands for special market operations; RASKIN stands for rice for the poor.

products exceeded the quotas and applied tariff rates were lower than the in-quota bound rates. TRQs for milk and cream were abolished in 1998. The current tariff for these products is 5 percent with no quota. The 1990s trade reforms also relaxed export controls, which had been used exten-

sively in Indonesia, especially affecting nonfood products. Under the 1998 IMF agreement, Indonesia agreed to eliminate export restrictions but maintained its export taxes on palm oil, crude palm oil, and their derivative products; wood; and rattan. Indonesia also continues to regulate exports of certain

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Table 4.6 Indonesia’s WTO bound tariff rates for selected agricultural commodities, 1994 and 2004 (percent)
Product Cloves Dairy products Soybean meal Garlic Wheat Wheat flour Rice Sugar Soybeans Alcoholic beverages Source: Magiera (2003). 1994 75 50–238 45 60 30 30 180 110 30 170 2004 60 40–210 40 40–50 27 27 160 95 27 150

products that are exempted from tariff reductions (Economic Intelligence Unit 2003; USTR 2004). Domestic Policies As in other developing countries, during the 1980s and early 1990s Indonesian policies were aimed at achieving self-sufficiency in food crops, especially rice. The rice crop is grown mostly by small-scale subsistence farmers and accounts for 65 percent of the country’s harvested area (Bahri, Kustiari, and Wittwer 2000). Nearly 80 percent of the rice is grown on irrigated lands, making this crop the heaviest aggregate user of water (Barichello 2003). The Indonesian government has combined price interventions and economic incentives through subsidized inputs, substantial investment in irrigation, and marketing activities in the outer islands to encourage agricultural production of staple crops (Piggot et al. 1993; Bautista et al. 1997; WTO 1998). Until 1998 a “nucleus estate” program was aimed at integrating smallholders into large plantation production. These programs promoted high-yield varieties together with subsidized inputs and credit, and they offered farmers technical assistance with new cultivation techniques (Fuglie 2001). Since the 1970s, fertilizer subsidies in Indonesia, used only for urea, have been intended primarily to assist rice and sugar farmers. Subsidized fertilizer was provided mostly to smallholder farmers; large estate users were not targeted. The subsidies

commodities (manioc, coffee and its extracts, rubber, veneer and plywood, and teakwood), using a combination of voluntary export and supply management arrangements aimed at reducing world supply in order to strengthen prices. Voluntary export quotas for coffee and rubber were terminated in 2002 (WTO 2003). Starting in 2002 Indonesia, along with the other five original members of the Association of Southeast Asian Nations (ASEAN), implemented the final phase of the ASEAN Free Trade Agreement (AFTA). Indonesia has reduced tariffs for all products included in its original commitment (7,206 tariff lines) to 5 percent or less for products of at least 65 percent ASEAN origin. Indonesia maintains rice and sugar on a list of sensitive

Table 4.7 Indonesia’s tariff structure, 1998 and 2002 (percent)
Simple average applied rate Product Total Agricultural products (harmonized system classification) Industrial products (HS classification) Textiles and clothing Source: WTO (2003). 1998 9.5 8.6 9.7 14.6 2002 7.2 8.3 7.0 10.5 Simple average bound rate 1998 37.6 47.3 35.9 29.3

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contributed to an increase in fertilizer usage from 676,000 tons in 1975 to 4,290,000 tons in 1998. But they have imposed a heavy fiscal burden on the government, estimated at 40 percent of the agriculture and irrigation development budget (Fuglie 2001) at a cost of Rp 2,257 billion in 1997/98 (ADB/ SEARCA/IFPRI/CRESCENT 2004). By the late 1990s the fertilizer subsidy policy was in flux. The subsidies were eliminated in 1997, reintroduced for food crops the same year, and removed again in December 1998. In 2001 the direct subsidy for fertilizer was replaced with a requirement that the state-owned petroleum company provide subsidized gas to the state-owned urea fertilizer manufacturers. The gas subsidy was eliminated in 2002. In 2003 the direct subsidy was reintroduced and applied to specific fertilizers. The subsidy was paid to the state-owned fertilizer manufacturers, with the goal of reducing the urea price to smallscale rice farmers (as well as horticulture) by 15–20 percent (ADB/SEARCA/IFPRI/ CRESCENT 2004). Because the subsidies did not apply to imported fertilizer and were targeted only at small farmers, they created a dual pricing structure and opportunities for abuse and leakage. The relative size of fertilizer and irrigation subsidies has changed over the period 1985–2002. While in the mid-1980s fertilizer subsidies accounted for nearly twothirds of total fertilizer and irrigation subsidies, in the 1990s their relative share dropped to below 10 percent. Irrigation subsidies have been increasing in absolute and relative terms, particularly during the mid-1990s (Fuglie and Piggot 2003). In addition to fertilizer and irrigation subsidies, farmers have increasingly benefited from subsidized credit: the coverage of crops eligible has increased, as has the ceil-

ing on allocated credit funds. The interest rate for farm credit in 1999, 10.5 percent, was much lower than market rates, which were around 30 percent (Bahri, Kustiari, and Wittwer 2000). Under conditions set by the IMF, the government agreed to structural reforms in 1998, including restructuring or privatizing key SOEs. The government ended BULOG’s monopoly on trade and replaced its program of general consumer rice price stabilization through market interventions with a rice distribution program targeted at poor households (Daly and Fane 2002). Because Indonesia did not commit to an AMS for agriculture, the developing-country commodity-specific and non-commodityspecific de minimis limits (10 percent of the value of production) apply (Magiera 2003). However, the Indonesian government has notified the WTO of support provided through various development programs primarily as green box measures, which are exempt from reduction commitments (Figure 4.2). Measures classified under general services constitute more than half of Indonesia’s total green box expenditures. Following the 1997–98 financial crisis, the second largest program, nearly a third of total support in 2000, was domestic food aid. Public stockholding for food security increased in 1998 and 1999, also during the crisis, but again declined in 2000 to precrisis levels.24 The composition of general service expenditures also changed in 2000. Total expenditures decreased by 40 percent, due mainly to the elimination of expenditures on estate crop development programs. Expenditures on agricultural research also declined by 40 percent, but expenditures on development programs for livestock and agribusiness have doubled and tripled, respectively.

24These measures include buffer stocks to cover minimum consumption requirements and operational stocks for budget group allocation and price stabilization. Budget group allocation is the distribution of rice to military personnel and civil servants.

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Figure 4.2 General services expenditures in Indonesia, 1995–2000
Food crops and horticulture development programs

Billions of rupiah 900 800 700 600

Agribusiness development programs Estate crops development programs Livestock development programs Agricultural training and extension programs Agricultural research and development programs 268.9

182.7

13.3

500 400 300 200 100 0
109.2 7 153.3 25.2 24.5 46.9 136.5 39.2 25.0 62.3 137.9

165.9 5.8 9.9 257.6 5.8 234.5 61.5 37.8 31.5 81.2 22.4 37.1 116.9 54.9 143.9 283.4 53.7 6 125.5 76.7 108.4 6 139.3

1995

1996

1997

1998

1999

2000

Source: Data from WTO notifications, various years.

China
Agricultural policies in China may be divided into two distinct periods since the country was founded in 1949. From 1949 to 1978, agricultural polices were set within the Soviet-style centralized command and control system. They were affected by a series of political and ideological campaigns, five-year plans, and various ad hoc measures. Economic reforms initiated in 1978 brought rapid economic growth, and the agricultural sector witnessed major changes in policies that gradually shifted from central planning to greater reliance on market mechanisms. China developed a dual-track system of a “socialist market economy” with an increasing role for markets and individual households in the agricultural sector. State controls through procurement, distribution, and fixed prices still existed but were restricted to only a few core commodities. The liberalization process has also featured major changes in agricultural trade policies. The highly monopolized foreign trade system was gradually decentralized, and direct trade planning has been replaced by indirect

trade policy instruments. Trade and domestic agricultural policy reforms under China’s WTO accession in 2001 included lowering of tariff and nontariff trade barriers, eliminating agricultural export subsidies, and capping trade-distorting domestic support. Subsequent domestic agricultural policy reforms in China focused on direct subsidies to farmers, elimination of agricultural taxes, large public investments, and development of rural financial institutions. Trade Policies China’s foreign trade policy reforms have involved four key steps: lowering trade barriers, depreciating the exchange rate, decentralizing the trading system, and introducing competition into foreign trade so that prices can play a role in determining resource allocation (Martin 2003). China’s agricultural trade policies—as part of an agricultural policy stance intended to maintain selfsufficiency in agricultural supply, especially in food grain production—have moved more slowly in removing restrictions and reducing protection.

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The early foreign trade reforms were mainly the result of reforms in the domestic economy, and hence they also adopted the dual-track approach (Martin 2003). Under the dual-track pricing system for commodities, the planned prices continued to operate for the quantity of the commodity that producers were contracted to supply to SOEs. However, producers were allowed to supply additional output at a market price. For the external sectors, the dual-track approach included dual export and import systems, a two-tier exchange rate system, and a twotier system for foreign exchange retention. Under the dual export system, prior to reforms in 1984, about 60 percent of exports were under the mandatory plan put forth by the central government, an additional 20 percent were assigned as value targets to the provinces, and the remaining 20 percent were nonplan exports. For the mandatory exports, the procurement prices were fixed and target quantities were assigned to the producing enterprises, similar to the domestic trading system. For the nonmandatory exports, procurement prices faced by decentralized foreign trade corporations (FTCs) were much more flexible, but they were still not fully linked with international prices. Analogous policies were applied to imports. The system under which the FTCs acted as agents of the production enterprises was even more prevalent for imports than for exports. For agricultural exports, the commodities in the mandatory categories were those that had production quotas, such as grains, oil crops, cotton, and other major industrial material crops. Various vegetables and fruits and other small crops were the first group of commodities that could be freely exported through the FTCs, a change that significantly increased trade in these products. The dual-track exchange rate was unified in January 1994, resulting in a depreciation of the official exchange rate of about 50 percent. The unification of the exchange rate further stimulated China’s exports, as prices faced by producers increased in terms of the domestic currency. Exchange rate mis-

alignment for China is discussed in more depth in Chapter 6. Under the dual-track trade regime, because of distorted domestic pricing, export subsidies were common (Huang et al. 2003). Since the early 1990s China has progressively taken measures to reduce these subsidies. Initially the country fixed its export subsidization for 1988–90 at about 4 percent of the total export value in 1987 (Huang et al. 2003). In 1991 it began to phase out export subsidies to FTCs. Nevertheless in the late 1990s China, like India, provided export subsidies for a number of commodities, including corn, rice, and cotton, as a means of easing the downward pressure on domestic prices brought about by large production surpluses. China’s corn and cotton exports are estimated to have received subsidies on the order of 34 percent and 10 percent, respectively, in 2001 (Huang and Rozelle 2002). In addition China’s value-added tax (VAT), introduced in the mid-1990s, is recognized to have affected agricultural imports and exports, but such taxes are allowed under WTO rules. In its WTO accession protocol, China has promised to eliminate export subsidies for all agricultural products. However, the national government has since implemented a transportation subsidy that may benefit exporters. Rail shipments of grains, cotton, and soybeans were exempted from payment of the railway construction fee from April 2002 through December 2005. While this measure did not specifically apply to products destined for export, it provided an incentive to export from the northeastern provinces. The reduction in the railway construction fee resulted in a substantial lowering of domestic freight costs for these commodities. Import Tariffs and Quotas. In 1991 China’s average tariff rate was 47.2 percent, one of the highest average protection rates in the world (Huang et al. 2003). During the 1990s, prior to its accession to the WTO, China gradually reduced its import tariff

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rates. In April 1996 it reduced its tariff rates for more than 4,900 items, lowering the simple average tariff rate from 35.9 percent to 23 percent. In October 1997 China further reduced the import tariff rates for more than 4,800 items and brought down its simple average tariff rate to 17 percent. The tariff rate for agricultural products followed this downward trend, though at a slower pace. In 2000 China’s average agricultural import tariff rates by commodity groups were 21 percent for live animals and animal products; 7 percent for grains; 17 percent for fats and oils; 29 percent for processed foods, beverages, and tobacco products; and 27 percent for textiles and other processed agricultural products (Colby, Diao, and Tuan 2001). In WTO accession commitments reached in bilateral negotiations with the United States, China agreed to substantially cut import tariffs for fruits, alcoholic drinks, meat, dairy products, and other agricultural commodities (USDA-ERS 2005). The average tariff rate for all agricultural commodities was reduced from 31 percent in 2000 to 17 percent in 2004. For over 80 agricultural products of special interest to the United States, the average tariff was lowered from 31 percent to 14 percent. For some major agricultural products, including meat, fruit, and dairy products, the tariff cuts are even greater (Table 4.8). Import quota and licensing measures have also been used by China to control domestic prices and the marketing and distribution of agricultural commodities, especially grains and edible oils (Colby, Diao, and Tuan 2001). In general the process for determining and allocating import quotas and licenses was not transparent. The National Development and Reform Commission (NDRC) was responsible for recommending a quota amount, with its allocation to individual provinces determined through an unofficial negotiation process between the central and provincial governments. After a similar negotiation between provincial and local governments, the quota was finally al-

Table 4.8 Selected agricultural tariff cuts for China, 2000 and 2004 (percent)
Product Beef Pork Poultry Citrus Grapes Apples Almonds Wine Cheese Ice cream 2000 45 20 20 40 40 30 30 65 50 45 2004 12 12 10 12 13 10 10 20 12 19

Source: USDA-ERS (2005).

located to firms holding import licenses. Trade was conducted on behalf of the quotaholders by STEs. In most cases quota-holder firms had no latitude to import directly from abroad, to choose their trading partners, or to specify the type or characteristics of an imported commodity. The central government adopted a more open system for domestic firms to engage in foreign trade in July 2001, immediately preceding China’s WTO accession. In April 2004 China’s Foreign Trade Law was amended to further liberalize its strict trading system. As of July 2004 all Chinese domestic enterprises were given the right to engage in foreign trade, provided they met minimal incorporation, capital, and tax criteria. Under WTO accession, China also agreed to replace its past quota and licensing system for basic agricultural products with a TRQ regime. Wheat, rice, maize, edible oils, sugar, cotton, and wool have in-quota tariff rates ranging from 1 percent for grains and fibers to 9 percent for vegetable oils to 20 percent for sugar. The quota volumes were set to grow over the period 2002–04 at annual rates ranging from 5 to 19 percent, but the over-quota tariffs are prohibitively high, remaining at 65 percent for most commodities in 2004 (Table 4.9). Despite the liberalization of the import regime in the 1990s, there were two broad

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Table 4.9 China’s TRQ system for selected commodities, 2002 and 2004
Quota amount (millions of tons) Commodity Wheat Corn Rice Cotton Vegetable oila Sugar 2002 8.45 5.70 3.76 0.82 5.69 1.76 2004 9.30 7.20 5.30 0.89 7.31 1.94 In-quota tariff (%) 1 1 1 1 9 20 Over-quota tariff (%) 2002 71 71 71 54 75 70 2004 65 65 65 40 25 65 Private share (%) 2002 10 25 50 67 60 50 2004 10 40 50 67 90 90

Source: Hsu and Gale 2001. aThe final year of implementation for vegetable oil is 2005. For 2006 the TRQ is eliminated, converting to 100 percent private trade with a tariff rate of 9 percent.

groups of commodities for which the number of firms entitled to engage in trade remained tightly restricted (Martin 2003). One of these groups is subject to state trading, while the other is subject to designated trading. The state trading system applies to a relatively small number of commodities that are asserted to be of particular importance for national economic development; the system of designated trading applies to a selected range of other commodities (Table 4.10). State trading and designated trading as a share of total trade has fallen substantially since the mid-1990s, with most of the imports in 1999 and 2000 consisting of oil in the case of state trading and ferrous metals in the case of designated trading (Martin 2003). China’s STEs create a layer of economically inefficient government control (Colby, Diao, and Tuan 2001). Yet privileged knowledge of China’s import quotas and monopolist position in conducting trade often allows state trading companies to extract large profits from their international operations. State trading is allowed under the WTO, but in its accession negotiations China committed to phase out its STEs (except for those trading in tobacco). China’s TRQ system stipulates that a predetermined share of the within-quota imports be reserved for private companies. The share is fixed for some commodities but rises in equal increments for

other commodities over the implementation period (Table 4.9). The private-sector provisions for TRQs are geared toward creating competition among importers in China and incentives for state trading companies to be responsive to domestic demand and the needs of end users. Overall the adjustments in China’s trade policy have contributed to a shift in its agricultural trade in a direction consistent with its comparative advantages, as described in Chapter 3. Huang and Rozelle (2002) calculate that the proportion of grain exports fell to 20 percent of total agricultural exports in the 1990s, from more than 40 percent in the 1980s. Horticultural, animal, and aquatic products accounted for more than 80 percent of agricultural exports in the late 1990s. By regrouping trade data according to factor intensity in production, Huang and Rozelle (2002) find that China’s net exports of land-intensive bulk commodities, such as grains, oilseeds, and sugar crops, have fallen, while exports of high-value and more labor-intensive commodities have risen. Domestic Policies During the prereform era, China’s socialized agricultural sector was characterized by large-scale production units in which farmers were organized on collectivized land or communes. Agriculture was squeezed during the early stages of industrialization, with

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Table 4.10 China’s state and designated trading
Type of trading State trading Imports Grain, vegetable oils, sugar, tobacco, refined oil, chemical fertilizer, cotton Rubber, timber, plywood, wool, acrylics, steel and steel products Exports Tea, rice, maize, soybeans, tungsten and tungsten products, coal, crude oil, refined oil, silk, unbleached silk, cotton, antimony, silver Rubber, timber, plywood, wool, acrylics, steel and steel products

Designated trading

Source: Martin (2003).

gross fiscal contributions to the sector more than outweighed by implicit taxation in the form of depressed prices for farm products, neglect of public infrastructure in rural relative to urban areas, and capital outflows via the financial system (Huang and Ma 1998). Reforms of China’s domestic agricultural policy began in the late 1970s with the introduction of family farming, followed by gradual liberalization of prices and markets. A quarter century of agricultural policy reforms in China has reshaped the agricultural sector, increasing the real income of those in rural areas, expanding agricultural output, and improving the quality and variety of available food (Johnson 2003). Land Reform. Domestic agricultural policy reform in 1981 established the now wellknown Household Responsibility System (HRS), which granted production decisionmaking power to farm households and allowed them to sell surplus crops at market prices after they had fulfilled their obligations under the state order system. The HRS generated incentives for production by giving farmers land use rights and decisionmaking authority, and by linking rewards closely with their effort and performance. As a result, China’s agriculture dramatically revived. Production of grain, the country’s most important agricultural product, reached 407 million tons in 1984, representing a net increase of more than 100 million tons within only six years. Despite its success in transforming Chinese agriculture, the HRS has some limita-

tions in the context of future Chinese development (Chen, Wang, and Davis 1999). Tiny, fragmented farming units emerged as farmland was distributed to individual households. An early survey indicated that, among 7,983 sample villages from 29 provinces, the average cultivated area per household in 1986 was only 0.466 hectare (7 mu), fragmented into 5.85 plots, each plot consisting on average of 0.08 hectare (1.2 mu) (Ministry of Agriculture of China 1993). This fragmented structure of private farming has remained largely unchanged, limiting the possibilities for adopting more advanced mechanical equipment and agricultural infrastructure. Land market transactions are minimal, even though the HRS extended to farm households the right to rent their land to other households. The central government continues to realize the need to rationalize farms and achieve the benefits of scale farming, but land rental transactions have been constrained by remaining ambiguity over land tenure rights, slowing the natural process of concentration of land resources into the hands of the most effective farmers (Chen, Wang, and Davis 1999). Given these problems, further initiatives have attempted to reform land use rights while retaining collective ownership of farmland. As early as 1983, households were allowed to exchange their labor with others and to employ limited amounts of hired labor for farm work. To provide better incentives for soil conservation and investment, leaseholds were extended to 15 years in 1984, and then to 30 years in 1995. In the

54

CHAPTER 4

late 1980s rural households engaged in nonfarm business were allowed to sublease their land to other villagers to prevent land from remaining idle. The central government also encouraged more flexible measures at the local level. In 2002 the National People’s Congress passed the Rural Land Contract Law, effective in March 2003, which was intended to establish a comprehensive legal framework for land relations between farmers and collectives. Market and Price Liberalization. Although early reforms in agriculture centered on decollectivization and increasing incentives to farmers, later measures have attempted to gradually liberalize markets and prices (de Brauw, Huang, and Rozelle 2002). Market liberalization began with nonstrategic products, including fruits, vegetables, livestock, and fish. Market reforms continued intermittently throughout the 1980s and 1990s, with progress depending on the stability of production and food prices. For example, on the heels of a bumper crop in 1984, the government replaced mandatory procurement with voluntary contracts between farmers and the government. Despite periodic delays in the reform process, markets have gradually emerged in China’s agricultural sector. According to Lardy (2001), the share of agricultural commodities sold through markets increased from just 6 percent in 1978 to 40 percent by 1985, 79 percent by 1995, and 83 percent by 1999. Under its reforms, China has allowed most agricultural prices to be set by market forces. The state procurement and distribution systems were substantially liberalized in the early 1990s, following several years of market stability. However, the government intervenes in various ways to stabilize prices. When food price “inflation” appeared in 1994, compulsory grain procurement was reinstated (Huang and Rozelle 2002

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