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OECD Domestic Support and the Developing Countries

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  • Dimaranan, Betina
  • Hertel, Thomas W.
  • Keeney, Roman

Abstract

This paper aims to shed light on the potential interests of developing countries in reforms to domestic support for agriculture in the OECD economies. In order to accomplish this goal, we begin by reviewing the literature on the impacts of domestic support on key variables, including farm income, in the OECD economies themselves. We then proceed to revise the standard GTAP Model of global trade, based on recent work at the OECD, in order to permit it to better capture these impacts. A series of stylized simulations are subsequently offered to illustrate the differential impacts of alternative types of domestic support. These suggest the possibility of policy re-instrumentation, whereby farm income is stabilized in the face of cuts to overall support levels by shifting the mix of subsidies away from the more trade-distorting instruments which also tend to be ineffective tools for boosting farm incomes. We then explore in considerable detail the mechanisms by which OECD agricultural reforms affect developing country welfare. The primary channel for such effects works through the terms of trade which in turn depend in part on whether a country is a net exporter or a net importer of the affected OECD products. Long term support for agricultural program commodities in OECD countries, coupled with relative taxation in many developing countries, has left the latter increasingly dependent on imports of these subsidized products. This has, in turn, made them more vulnerable to agricultural reforms that raise these prices. As a result, we find that an across-the-board, 50% cut in all domestic support for OECD agriculture leads to welfare losses for most of the developing regions, as well as for the combined total group of developing countries. The 50% cut in domestic support also results in large declines in farm incomes in Europe, and, to a lesser degree, North America. This makes such a reform package an unlikely political event. An alternative approach to reforming agricultural policies in the OECD would be to focus on broad-based reductions in market price support. This has already been occurring in the EU, in particular, where domestic support has increasingly replaced border measures. As demonstrated in this paper, the basic economic principles of agricultural support policies suggest that a shift from market price support to land-based payments could generate a “win-win” outcome whereby farm incomes are maintained and world price distortions are reduced. This is the direction charted by the OECD in its recent “Positive Reform Agenda” for agriculture. We formally examine such an agricultural reform scenario, implementing a 50% cut in market price support for OECD agriculture, with a compensating set of land payments designed to maintain farm income in each of the member economies. This comprehensive reform scenario results in increased welfare for most developing countries, with gains on other commodities offsetting the terms of trade losses from higher program crop prices. We conclude that developing countries will be well advised to focus their efforts on improved market access to the OECD economies, while permitting these wealthy economies to continue – indeed even increase – domestic support payments. Provided these increased domestic support payments are not linked to output or variable inputs, the trade-distorting effects are likely to be small, and they can be a rather effective way of offsetting the potential losses that would otherwise be sustained by OECD farmers. This type of policy re-instrumentation will increase the probability that such reforms will be deemed politically acceptable in the OECD member economies, while simultaneously increasing the likelihood that such reforms will also be beneficial to the developing economies.

Suggested Citation

  • Dimaranan, Betina & Hertel, Thomas W. & Keeney, Roman, 2003. "OECD Domestic Support and the Developing Countries," GTAP Working Papers 1161, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
  • Handle: RePEc:gta:workpp:1161
    Note: GTAP Working Paper No. 19
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    File URL: https://www.gtap.agecon.purdue.edu/resources/res_display.asp?RecordID=1161
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    References listed on IDEAS

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    1. Hertel, Thomas W. & Will Martin, 1999. "Would Developing Countries Gain from Inclusion of Manufactures in the WTO Negotiations?," GTAP Working Papers 397, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
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    Cited by:

    1. Hoekman, Bernanrd & Ng, Francis & Olarreaga, Marcelo, 2003. "Reducing agrcultural tariffs versus domestic support : what's more important for developing countries?," Policy Research Working Paper Series 2918, The World Bank.
    2. Raihan, Selim & Razzaque, Mohammad A, 2007. "WTO and regional trade negotiation outcomes: quantitative assessments of potential implications on Bangladesh," MPRA Paper 38475, University Library of Munich, Germany.
    3. Joseph Stiglitz & Andrew Charlton, 2005. "Un cycle de négociations commerciales pour le développement ?," Revue d’économie du développement, De Boeck Université, vol. 13(4), pages 17-54.
    4. Surabhi Mittal, 2007. "OECD Agricultural Trade Reforms Impact On India's Prces and Producer's Welfare," Working Papers id:1072, eSocialSciences.
    5. Hertel, Thomas W. & Keeney, Roman & Valenzuela, Ernesto, 2004. "Global Analysis Of Agricultural Trade Liberalization: Assessing Model Validity," 2004 Annual meeting, August 1-4, Denver, CO 20199, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    6. Hertel, Thomas W. & Reimer, Jeffrey J. & Valenzuela, Ernesto, 2005. "Incorporating commodity stockholding into a general equilibrium model of the global economy," Economic Modelling, Elsevier, vol. 22(4), pages 646-664, July.
    7. Raihan, Selim & Khondker, Bazlul Haque, 2010. "Doha Round Impacts on India: A Study in a Sequential Dynamic CGE Framework," MPRA Paper 37897, University Library of Munich, Germany.
    8. Keith Walsh & Martina Brockmeier & Alan Matthews, 2005. "Implications of Domestic Support Disciplines for Further Agricultural Trade Liberalization," The Institute for International Integration Studies Discussion Paper Series iiisdp99, IIIS.
    9. Surabhi MITTAL, "undated". "Will OECD Agricultural Trade Reforms Impact India's Crop Prices and Farmers Welfare?," EcoMod2009 21500067, EcoMod.
    10. BOUËT Antoine & BUREAU Jean-Christophe & DECREUX Yvan & JEAN Sébastien, "undated". "Is Northern Agricultural Liberalization Beneficial to Developing Countries?," EcoMod2003 330700021, EcoMod.
    11. Claudio Paiva, 2008. "Assessing protectionism and subsidies in agriculture-a gravity approach," Journal of International Development, John Wiley & Sons, Ltd., vol. 20(5), pages 628-640.
    12. Shakur, Shamim & Rae, Allan N. & Chatterjee, Srikanta, 2004. "A Road Ahead From Cancun? Weighing Up Some Give-And-Take Scenarios In A Dda Spirit," Discussion Papers 23709, Massey University, Department of Applied and International Economics.
    13. Thomas W. Hertel & Jeffrey J. Reimer, 2006. "Predicting the Poverty Impacts of Trade Reform," QA - Rivista dell'Associazione Rossi-Doria, Associazione Rossi Doria, issue 2, May.
    14. Hertel, Thomas W. & Winters, L. Alan, 2005. "Poverty impacts of a WTO agreement : synthesis and overview," Policy Research Working Paper Series 3757, The World Bank.
    15. Surabhi Mittal, 2007. "Oecd Agricultural Trade Reforms Impact On India’s Prices And Producers Welfare," Trade Working Papers 22225, East Asian Bureau of Economic Research.

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