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GTAP Resources: Resource Display

GTAP Resource #1287

"OECD Domestic Support and the Developing Countries"
by Dimaranan, Betina, Thomas Hertel and Roman Keeney


Abstract
OECD Domestic Support and the Developing Economies

This paper aims to shed light on the potential interests of developing countries in reforms to domestic agricultural support in 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. Following that we examine the international trade linkages by which agricultural support reform in OECD countries might impact developing country welfare. We then proceed to model OECD agricultural support reform in a global trade model to analyze impacts of OECD agricultural economy indicators as well as resulting developing economy welfare.

The paper makes use of current contributions to the domestic support literature both in terms of data and model design. The GTAP version 5 database incorporates domestic support data following a similar specification as that of OECD PSE measure (OECD 2001). The modeling framework employs greater detail in farm supply and substitution relationships adopting the factor market and farm production structure of Hertel (1989) and OECD (2001). Hertel (1989) showed the importance of explicitly modeling these two relationships and here they are incorporated into a modified version of the standard GTAP applied general equilibrium model of global trade.

An important precursor to simulating domestic support reform and the impacts it has on developing economies is understanding the current and past trends in international markets from the perspective of each type of economy. Accordingly, we undertake an analysis of trade specialization by commodity and region for tradable goods with an eye towards generalizing these to reinforce the proposed OECD region policy reforms to be simulated. The analysis of trade specializations indicates that in general OECD agricultural support and export specialization occurs in temperate products that developing economies tend to import, marking this as an important explanatory linkage between developing economy welfare and OECD agricultural support.

A series of initial stylized simulations are offered to illustrate the differential impacts of alternative types of domestic support. The results of these experiments serve to validate the model as they agree with results on impacts of changing domestic support reported previously (Hertel 1989; Dewbre, Anton, and Thompson 2001; OECD 2001). These stylized simulations also deliver insight into what potential reforms might be best suited for efficiently reducing trade distortions in world commodity markets with the least impact on farm incomes. The results presented here and in Dewbre, Anton, and Thompson (2001) suggest as a candidate a policy re-instrumentation, whereby farm income is stabilized in the face of cuts to overall support levels by shifting the composition of support away from the more trade-distorting border measures which also tend to be ineffective tools for boosting farm incomes and compensating farmers with payments based on area planted or animal numbers.

The first of two comprehensive reform simulations is presented as a 50% reduction of domestic support in all OECD regions. The primary channel of impact on developing country welfare is identified as changes in the relative terms of trade, driven by the position of a country as a net exporter or a net importer of the affected OECD products. Simulation results combined with the time series data on regional trade specialization leads to the conclusion that 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 products. This has thus made them more vulnerable to agricultural reforms that increase world prices. As a result, a majority of developing countries incur significant welfare losses, leading to a large welfare loss for developing economies as a whole. Additionally, the 50% cut in domestic support 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 would continue the policy reform trend in the EU, where domestic support has increasingly replaced border measures. As suggested by the results of the earlier stylized shocks of agricultural support policies, a shift from market price support to land-based payments is the leading candidate for generating 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 (2002). 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 welfare gains in 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.

References

Dewbre, Joe, Jesus Anton, and Wyatt Thompson. 2001. “The Transfer Efficiency and Trade Effects of Direct Payments,” American Journal of Agricultural Economics, 83(5):1204-1214.

Hertel, Thomas W. 1989. “Negotiating Reductions in Agricultural Support: Implications of Technology and Factor Mobility,” American Journal of Agricultural Economics, August 1989, pp. 559-573.

Organization of Economic Cooperation and Development. 2001. Market Effects of Crop Support Measures. OECD, Paris, France.

Organization of Economic Cooperation and Development. 2002. Agricultural Policies in OECD Countries: A Positive Agenda for Reform. OECD, Paris, France.


Resource Details (Export Citation) GTAP Keywords
Category: 2003 Conference Paper
Status: Published
By/In: Presented at the 6th Annual Conference on Global Economic Analysis, The Hague, The Netherlands
Date: 2003
Version:
Created: Dimaranan, B. (4/30/2003)
Updated: Bacou, M. (4/30/2003)
Visits: 4,824
- Domestic policy analysis
- Economic development


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