Agricultural Trade Liberalization and Adjustment in Developing Countries

Agricultural trade liberalization offers the possibility of substantial income gains and poverty reduction in the developing world. For those gains to be realized, institutional innovations and realizations of export opportunities are crucial. Adjustment policies to foster gains from trade include initiatives to compensate losers, institutional reforms to integrate into the global trading system, and policies which facilitate resource reallocations and especially enhance investment activity, both foreign and domestic. Much can be learned from experience with structural adjustment reforms, in which substantial trade liberalization by developing countries was accompanied by numerous other reforms when successful. Agriculture is important in reforms because of the size of the agricultural sector, and because poverty reduction requires that agricultural investment be part of the overall development strategy. Good governance is key, because experience has shown that the free market left to itself will not bring about the institutional innovation nor provide the public goods necessary for equitable adjustment to occur, but corrupt governments can hinder adjustment. Timing and pace of reforms is also crucial, both to insure that institutional change keeps up with market incentives, and because the macroeconomic environment is crucial to both the need for compensation and the extent of social disruption trade liberalization can bring. The role of trade relative to other development objectives must also be kept in perspective, as meeting WTO rules or compensation schemes can be extremely costly and stall other development initiatives.