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Unfair Trade and Poverty: 

Unfair Trade and Poverty Parthapratim Pal IIM-Calcutta

How free and fair is the Current Global Trade regime?: 

How free and fair is the Current Global Trade regime? Unfortunately, the answer is that it is neither a free nor a fair system. It is not free because there still exist significant distortions in international trade Most importantly, some key sectors for developing countries face significant trade barriers. It is unfair because as the Nobel Prize winning economist Joseph Stiglitz points out it reflects the priorities and needs of developed countries more than developing countries. In essence, it is a lopsided system.

Agriculture: The Prime Example of Distortion: 

Agriculture: The Prime Example of Distortion Agriculture plays a different role in developed and developing countries. Because of high dependence of poor countries on agriculture, it holds the key for poverty reduction. However, this is the most distorted sector in international trade.

Some Telling Figures from FAO: 

Some Telling Figures from FAO

Distortions in Agriculture: 

Distortions in Agriculture Developed countries maintain very high level of subsidies. Total OECD subsidies to farm sector is more than 300 billion USD. Total international agricultural exports is about 600 billion USD. HDR2005 says: “It would be hard to design a more regressive-or less efficient-system of financial transfer than currently provided through agricultural subsidies.” Chapter 4, Page 130, HDR2005 To put the extent of farm support in perspective, Ann Krueger has some interesting observations: “I'd like to start by sharing with you one of my favorite—and most telling—illustrations of the folly of agricultural support. Somebody has taken the trouble to do some calculations putting the cost of farm support in the OECD countries into context. It turns out that those countries spend enough to send every one of the 56 million cows in the OECD's dairy herd on a first class round the world ticket—complete with $1450 spending money—every year.” - Anne O. Krueger, Moving on from Cancun: Agricultural Trade and the Poor, First Deputy Managing Director, IMF, Agricultural Trade Policy Workshop, November 3, 2003, Washington D.C.

Subsidies in Developed Countries: Some Pointers based on US data: 

Subsidies in Developed Countries: Some Pointers based on US data In 2002, wheat was exported at an average price of 43% below cost of production; Soybeans were exported at an average price of 25% below cost of production; Maize was exported at an average price of 13% below cost of production; Cotton was exported at an average price of 61% below cost of production; Rice was exported at an average price of 35% below cost of production. In 2001-02, USA gave USD 3.9 billion as subsidies to its 25,000 cotton farmers This amount is higher than Burkina Faso’s total GDP. In Burkina Faso, more than 2 million people depend on cotton for their livelihood Cotton is produced in West African countries at USD 0.47 per Kg and in USA at USD 1.61 per Kg. But subsidies in USA led to overproduction of cotton in USA and price of cotton has collapsed The Cotton Story… Some more examples…

To make matters worse…market access Barriers are Plentiful in Agriculture..: 

To make matters worse…market access Barriers are Plentiful in Agriculture.. Tariff rate in agriculture remains much higher than industrial goods There are major incidences of tariff peaks in agriculture Then there are tariff escalations…tariff escalation is crucial as it prevents developing countries take the advantage of value addition.

How about other sectors?: 

How about other sectors? Textiles and clothing, which is one of the most important sectors for developing countries, was blocked by a regime of selective quota till 2005. Textiles, Leather and marine products attract higher tariff than other industrial goods in developed country Impact of trade on wages and work condition is not clear For most sectors, services trade liberalization is extremely limited because of very tight restrictions on movement of service providers. But other industrial goods and certain services trade is quite liberalized. FDI is growing exponentially…are they a threat to SMEs?

Kicking Away the Ladder…the lessons from development history of now-developed countries: 

Kicking Away the Ladder…the lessons from development history of now-developed countries

So, who is benefiting from this trade regime?: 

So, who is benefiting from this trade regime? Definitely not primary producers. They are at the bottom of the value chain and a very low percentage of the actual price is accruing to him Examples of coffee and tea market value chains will be important here. This also shows the problem with tariff escalation mentioned before.

Example of Tea Pricing in India: 

Example of Tea Pricing in India

Present Scenario: Value Chain in India : 

Present Scenario: Value Chain in India Cost Build Up For One Kg. Basket Of Fruit FARMER TRADER WHOLESALER RETAILER CONSUMER PRICE 3.3 4.1 1.7 2.5 11.6 Retail Markups FARM GATE PRICES MILK FISH FRUITS &VEGETABLES 350 220 160 100 Source: Food Processing Industries in India: Opportunities & Challenges, http://agricoop.nic.in/rabi06/JS(MKTG).ppt

The problem lies in Increasing concentration of bargaining power in Agriculture: The Story of an Hour Glass: 

The problem lies in Increasing concentration of bargaining power in Agriculture: The Story of an Hour Glass Market concentration in international farm trade is quite high. For example, in USA, Four companies (Cargill, Cenex Harvest States, Archer Daniels Midland, or ADM, and General Mills) own 60% of terminal grain handling facilities. Three companies (Cargill, ADM, and Zen Noh) carry out 82% of corn exporting. Four companies (Tyson, ConAgra, Cargill, and Farmland Nation) concentrate 81% of the beef-packing industry. Four companies (ADM, ConAgra, Cargill, and General Mills) own 61% of flour milling capacity Similar examples are there for certain commodities like tea and textiles in India also.

Is Better Supply Chain Management the solution?: 

Is Better Supply Chain Management the solution? In India there is a feeling that opening up of retail market to big capital will take care of this problem. However, there is no guarantee as this has not happened in USA. The spread between farm and retail prices is increasing in USA. The State and the Civil Society can help rectify the situation. Awareness and bargaining power are key to ensure fair trade- that the producers are getting their rightful share.

To end on a optimistic note, certain positives are emerging…: 

To end on a optimistic note, certain positives are emerging… The G20 and G33 countries are posing as counterbalance to traditional big players in WTO to ensure a fair deal for developing countries and support for their non-trade concerns. There is a growing recognition that in spite of their obvious weaknesses, small producers have certain advantages…. Control of commercially valuable forest resources, land, or fishing rights Lower cost structure for some products Sole providers of some products Ability to compete in domestic markets for some products Small producers must be empowered to use these advantages properly. Civil society can play a major role in this. In fact civil society movement has helped coffee traders to receive fair trade deal in Africa.

But domestic markets should not be ignored…: 

But domestic markets should not be ignored… While promoting fair trade, it must also be kept in mind that low-income communities will find it easier to compete in domestic markets because there is less competition with large-scale producers, because there are few substitutes for their goods, where their low labor and start-up costs give them a lower overall cost structure, and because their deficits in transport are minimized. For a big country like India, developing its own domestic market to ensure fair trade should be seen as a viable option.

So Key Questions: 

So Key Questions Given these problems and prospects the key question for deliberation is how do we ensure fair trade for primary producers for a country like India? Which sectors should benefit from the fair trade movement? What strategies need to be followed to develop a structure of fair trade based business model in India?

Wish you a Great Conference: 

Wish you a Great Conference Thank you An IIM-Calcutta Presentation

Poverty in Developing Countries: 

Poverty in Developing Countries We all know the basic facts. Half the people in the world live on less than $2 a day. A fifth live on less than $1 a day. Over the next three decades, two billion more people will be added to the global population—97 percent of them in developing countries, most of them born into poverty. —James D. Wolfensohn, President, World Bank, Oct. 3, 2004