Impacts of CAP Reform on Developing Countries
Measuring the impact of EU agricultural policies means that we must compare the world as it is with how the world would look if these policies were changed. Policy reforms will influence the level of domestic and world prices for agricultural products, the level and direction of production and trade, and ultimately the level of living standards and the numbers of people living in poverty in developing countries. To measure by how much the policy reform might lead to changes in prices, production, trade and welfare requires the use of economic models.
Empirical studies show that trade-distorting OECD agricultural policies, including those of the EU, lower world prices and reduce exports and welfare in developing countries. The overall impact is of the order of $5-10 billion, with different studies producing different numbers depending on the methodologies used. The potential global gains from comprehensive agricultural trade liberalisation are more significant. But because most of the costs of agricultural policies are borne by the countries which implement them, most of the gains accrue to the countries which undertake the reforms.
The distributional effects within countries are likely to be several orders of magnitude greater than the net welfare effects. In particular, given that poverty in developing countries is concentrated in rural areas, EU agricultural trade liberalisation will be pro-poor on average. Moving beyond these aggregate impacts requires decomposing these impacts into their country, policy, commodity, poverty and price volatility dimensions.
The main gainers from agricultural trade liberalisation among developed countries, including the EU, will be the Latin American exporters and some of the Asian countries. Sub-Saharan Africa and the LDCs are potential losers. Very few of them are net exporters of products which compete with those protected by the CAP, and higher world prices for their imports implies a terms of trade loss. The agricultural exports of these countries are often supported by preferential market access arrangements, and liberalisation reduces the value of these preferences.
Studies which include more broadly-based liberalisation or which take account of dynamic effects are more likely to show positive gains for developing countries including the least developed countries. However, where the possible losers from trade reform are among the poorest countries, measures to safeguard their interests in the reform process are necessary. The global gains from liberalisation always allow compensation to be paid while leaving the reforming countries better off.
Reducing tariff barriers to improve market access has the greatest positive impact on developing countries in aggregate. They will benefit far more from lower tariff barriers in rich countries than from lowering other forms of farm support, although there are some exceptions – for a commodity such as cotton, reducing domestic subsidies is the most important objective.
Export subsides distort trade against the interests of non-subsidising countries, although their development impact is ambiguous. Net importing countries with limited domestic production potential in a commodity benefit if rich countries subsidise their exports – EU milk powder exports to West Africa are an example. But export subsidies can be very disruptive for particular products and in particular markets if they compete with local production. However, the reductions that have taken place since the beginning of the Uruguay Round mean that even their total elimination would now have limited overall effects on food markets.
Livestock and livestock product markets are more heavily supported than crops, which suggest that liberalisation would have larger effects on livestock and livestock products. However, recent studies show surprisingly strong world price effects of removing OECD support for crops.
While EU agricultural policy reform is expected to be pro-poor on average, the impact on poverty will depend on the extent to which world price changes are transmitted into the domestic food markets of developing countries as well as on their structure of poverty, i.e. whether the poor are concentrated disproportionately among rural or urban consumers. OECD country agricultural policy reform is more likely to lower overall poverty in low income than in middle income countries.
Price volatility impacts
Agricultural policy reform will mitigate but not eliminate the instability of world market prices. Producers will continue to have to grapple with price and income risk in both developed and developing countries. The policy coherence perspective requires that the burdens of managing these risks are carried by those best able to bear them. Developed countries should avoid interventions to stabilise prices and concentrate on market-based mechanisms to help producers manage risk. However, developing countries may need access to mechanisms, including border measures, which help to stabilise market prices as well as international assistance mechanisms to cope with price volatility.
IFPRI, The Impact of Agricultural Trade Policies on Developing Countries (PDF), 2003
Briefing paper with research estimates of the impact of developed country agricultural policies on developing countries