Adjustment Assistance and Compensation

There will always be winners and losers from agricultural trade policy reform. When the losers include the most vulnerable countries and communities, development assistance has an important has an important coherence role to play. At the country level, adverse shocks can arise either because food-importing countries must pay more for their food imports after reform, or because some food-exporting developing countries lose out because the advantages of preferential access to protected markets in developed countries are eroded. Such shocks can arise either in the multilateral context, e.g. the Doha Round, or because of unilateral policy changes, e.g. EU sugar or banana policy reform.

Helping Net Food-Importing Countries

The fear that food-importing developing countries might face short term difficulties in financing normal levels of imports of basic foodstuffs following the Uruguay Round Agreement on Agriculture was addressed in the Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food-Importing Developing Countries. This Decision provided guarantees of adequate food aid commitments and greater priority to requests for assistance to improve agricultural productivity and infrastructure. It also established a link with facilities provided by the international financial institutions to help vulnerable countries address short-term financing difficulties when importing food.

However, developing countries have been dissatisfied with the ineffectiveness of this Decisions and it was one of the implementation issues raised in the run-up to the WTO Doha Ministerial Meeting in 2001. In September 2001, the WTO Agriculture Committee reached an agreement, which covered food aid, technical assistance to improve productivity and infrastructure, financing for import, and follow up review. Disciplines on food aid are now being discussed in the export competition pillar of the Doha Round Agricultural negotiations, with the debate around whether an agreement will help to improve the quality of food aid or whether its developmental and humanitarian benefits will be sacrificed to satisfy the concerns of agricultural exporters.

Compensating for Preference Erosion

Preference erosion is one of the key issues in the Doha Round. While the average effect of preference erosion on developing countries is not large, it is important for particular commodities exported by a small number of countries – primarily small island economies dependent on sugar and bananas. In the case of a temporary shock to export revenues, it is sometimes appropriate to provide short-term support to affected industries until revenues recover. Preference erosion, however, is a once-and-for-all change in a country’s external trading environment. The ultimate aim of policies to address the loss of these income transfers must be to encourage public and private sector investment to diversify into new higher-growth industries, and on rationalising existing preferential sectors to improve their international competitiveness.

Existing adjustment initiatives

The IMF operates a Compensatory (and Contingency) Financing Facility as a concessional loan arrangement to help to mitigate balance of payments difficulties caused by a temporary decline in export earnings or a temporary increase in cereal import costs. In 2004, it launched the Trade Integration Mechanism, which enhances access to existing IMF facilities for countries experiencing a balance of payments shortfall resulting from multilateral liberalisation. However, borrowing to finance adjustment is not always an appropriate response where there is a permanent change in a country’s external trade environment, and is not always desirable or indeed feasible for vulnerable countries which are already highly-indebted.

Bilateral initiatives include a number of schemes run by the EU. Under the Cotonou Agreement, for example, the FLEX scheme is a mechanism to provide ‘fast-disbursing’ support to African, Caribbean and Pacific (ACP) countries with fluctuating export earnings. FLEX is also triggered by government revenue losses arising from a decline in export earnings. The EU has also put in place specific compensation arrangements in connection with the reform of its sugar and banana regimes.

Social Safety Nets

Greater access to agricultural markets in the EU and other developed countries will contribute to increased economic growth in developing countries. In the short run, however, some social groups in developing countries might be negatively affected by higher food prices, or by the increased risks of integration into world food markets, or by the dynamic forces of accumulation set in train by the emergence of profitable export opportunites for food or cash crops.

Identifying the losers from trade reform requires analysis of its effects on different groups stratified by income source and expenditure patterns. In vulnerable economies regularly buffeted by external shocks, some positive, others negative, it may not be easy to follow the chain of causation between, say, an EU policy change and its impact on particular livelihood in poor countries. It may also be questioned why assistance is provided only to mitigate the risks of one type of adverse shock (e.g. EU trade reform), rather than the many other shocks which these countries face.

Generalised social protection arrangements can take many forms, including employment generation schemes, transfers (whether cash or in kind) and microfinance services. Issues in the design of these schemes include whether to attempt targeting, whether to provide assistance in the form of cash or commodities, and how best to ensure transfer efficiency and fiscal sustainability. Project food aid (food-for-work, school feeding, and supplementary feeding) has been one of the traditional mechanisms for delivering social protection, although impact assessments suggest that it has only limited long-term development impacts.

Links

EU Commission DG Development commodities webpage
Provides detatils on EU adjustment assistance to developing country commodity producers

Resources

Page, S., Preference erosion: helping countries to adjust (PDF), Briefing paper, ODI, 2004
Makes the case for a WTO compensation fund for preference beneficiaries who would lose from further multilateral liberalisation

FAO, Social Safety Nets Briefing (PDF), 2005
Short paper providing short illustrative examples of social safety nets in operation from the FAO Food Security Service