The Agricultural Forum 2002:Prices, Policy, and the WTO: The Agricultural Forum 2002: Prices, Policy, and the WTO Persistence of Protectionism: Effects for Competitive Nations Decio Zylbersztajn Marcos Sawaia Jank André Meloni Nassar University of São Paulo, Brazil School of Business, Economics and Accountancy PENSA - Agri-Food Business Program


Objectives: Objectives Impacts of agricultural protectionism traditional and non-traditional impacts in developing nations Dimensions persistence and change: - Strategies of private players - Enforcement of WTO agreements


Structure: Structure Objectives Competitiveness of Brazilian farm sector Traditional impacts of protectionism Second-order impacts of protectionism Incentives (persistence) Conclusions


Evolution of Brazilian Farm Sector: Evolution of Brazilian Farm Sector Competitive costs of production Significant agricultural frontier (low cost) Production efficiency Rapidly increasing yield Decline in infrastructure costs Exports potential Traditional commodities: soybean, coffee, sugar cane, and orange juice Diversification: meat (beef, poultry, and pork), alcohol, dairy, and corn


Evolution of Brazilian Farm Sector: Evolution of Brazilian Farm Sector Are there real changes in LA agriculture? Traditional variables: investments in R&D, new role of government, deregulation, infrastructure. Also new profile of farmers, new financial tools, world networks


US/Brazil Soybean Average Costs (USDA data): US/Brazil Soybean Average Costs (USDA data) Fixed Costs Operating Costs Total Costs


Slide7: Brazilian Cerrados  diversification from beef/soy model to corn, cotton, poultry, pork, dairy, and coffee Source: FAO / SIFFERT NEW BRAZILIAN AGRICULTURAL FRONTIERS 46% of the Cerrados (230 million acres) are suitable for large-crop production


Slide8: Brazil offers world’s greatest geographic potential for agricultural expansion, with favorable climate, soil, and topography. Source: FAO (1) Forested (2) Unforested AGRICULTURAL FRONTIERS IN BRAZIL Belém


Productive Efficiency: Productive Efficiency Since the seventies, the yield has doubled in grain production Source: IBGE, CONAB


Declining infrastructure costs (USDA data): Declining infrastructure costs (USDA data)


Dynamics of Agribusiness Exports: Dynamics of Agribusiness Exports Agribusiness exports  US$ 22 billion per year 40% of all Brazilian exports 4th largest world exporter (3.5% of world total) Export focus  processed commodities


Impacts of Protectionism: Impacts of Protectionism Developing countries’ macroeconomic reforms Promote capital inflow (Govt. reputation) Incentives to exports Result from fiscal and monetary responsibility, debt management, tariff reduction (50% to 14%)


Impacts of Protectionism: Impacts of Protectionism Protectionism: over supply the agricultural commodities market International prices Exports value Farmers’ income


Second Order of Negative Impacts of Protectionism: Second Order of Negative Impacts of Protectionism 1) Distorts the FDI flow in agribusiness sector Firms in protected markets have no incentives to invest in emerging and competitive markets Emerging markets became a basis for origination Instead of a basis for origination and processing International firms in emerging markets focus only on domestic purposes MNC investments in emerging markets: dilemma (enjoy protectionism at home)


Second Order Negative Impacts of Protectionism: Second Order Negative Impacts of Protectionism 2) Developing countries to export only bulk products Green coffee x roasted coffee Tarifary escalation Brazilian food processing increases productive capacity abroad Brazilian orange juice firms in American market


Forces Inducing the Change: Forces Inducing the Change WTO: Redefinition of property rights of access to markets. Changes in domestic subsidy policies Capacity to enforce rules Dispute resolution system


Forces Inducing the Change: Forces Inducing the Change MNF: Interest groups. Importance of private strategies. Enjoy benefits from protectionism. At the same time, show clear signals of new strategic position.


Forces Inducing the Change: Forces Inducing the Change Evidences: Doux bought Frangosul in Brazil French beet sugar companies bought 6 sugar mills in Brazil in four years. Top 4 crushers own 45% of crushing capacity in Brazil (Bunge, Dreifus, ADM, Cargill)


Forces Inducing the Change: Forces Inducing the Change Uruguay Round Agreement on Agriculture and the Cairns Group. Agricultural policy inconsistencies in the developed world. Concentration of subsidies in the hands of a small group of beneficiaries. Benefits do not reach the target. Capture problem.


Forces Inducing the Change: Forces Inducing the Change Growing international pressures Bilateral and multilateral negotiations Ethics, fair trade, political turmoil Visible adjustments in some developing countries


Forces Inducing the Change: Forces Inducing the Change New domestic pressures Budgetary and political forces Macroeconomic adjustments in EU, JPN, and US Enormous source of instability for US partners (political and economic)


Forces Inducing the Change: Forces Inducing the Change Internationalization of agribusiness Poultry industry International migration of farmers (global farmers) New paradigm (Dutch, US farmers in Brazil) Land and labor costs Environmental restrictions


Forces Inducing the Change: Forces Inducing the Change Macroeconomic adjustments Decline in land prices Redefinition of credit system Increase in domestic demand Logistics enhancement Global input industry Managerial improvement Marketing capabilities Farm credit improvement Positive image with urban population (Pessoa and Jank, 2002)


Forces Inducing the Change: Forces Inducing the Change Competitiveness in Brazil is not only: Low labor costs Effect of devaluation Lack of environmental restrictions This is no longer true!


Inefficient by Design: Inefficient by Design Reasons to keep sub-efficient goals? Distortions are well known. Political market (role of constituents). Institutions are not designed to be efficient (Williamson) Explains the persistent suboptimal institutional architecture.


Persistence (Inefficient by Design): Persistence (Inefficient by Design) Agricultural interest groups (US and EU lobby) The argument for food security Quality standards and food safety Characteristics of agriculture in developed countries Agricultural non-trade concerns (NTC)


Persistence (Inefficient by Design): Persistence (Inefficient by Design) Characteristics of agriculture in underdeveloped countries Food dependence Trade preferences Technicians engaged in protectionist programs management (Krueger)


New Paradigm: New Paradigm Protectionism is difficult to maintain as it is. Agriculture is still based in the Taylorist model. Look ahead to check how agribusiness is changing; how groups of interest are affected by protectionist measures.


Conclusions: Conclusions Signals show changes in areas of origination US farmers face a difficult decision Learn how to operate in opened markets Build new paradigms in their agriculture sector Watch changes in countries of the world (USDA persistent mistaken forecasts)


Conclusions: Conclusions New paradigms in agriculture: build international networks invest in knowledge completely unexpected new markets co-specialization capacity to coordinate agribusiness chains