Don't cry for Doha

Well the Doha Round appears to have collapsed yet again over disagreements on agricultural subsidies and tariffs. Even though we should never underestimate the ability of trade negotiators to resuscitate the dead, we will now likely see the usual hand-wringing about the huge costs of failure to conclude the round and about the losses to the world's poor nations. In fact, there was little to be gained from Doha, and little to lose from its collapse. Unless that is the U.S. over-reacts and turns the predictions of catastrophe into a self-fulfilling prophecy.

Not coincidentally, Oxfam just released a report on the prospective gains to poor farmers in Africa from the elimination of cotton subsidies in the U.S. The study estimates that in the absence of these subsidies, world cotton prices would be higher by about 10 percent, and the incomes of farmers in cotton-growing parts of West Africa higher by 3-6 percent. Cotton has long been the chief exhibit for the inequities of the world trade system, as Northern policies impose a straightforward loss on poor nations. In food products, the calculus is not that simple. The increase in world prices for food would on balance help the rural poor (who grow food) but hurt the urban poor (who don't) in Africa and elsewhere. This is one of the reasons Doha presents a very mixed picture overall for poor nations.      

Upon closer look, even the cotton case is not that straightforward. The estimated 10 percent increase in world prices is peanuts--if you will excuse my mixing my commodities--compared to the typical volatility in cotton prices--which has averaged around 20 percent up-and-down on an annual basis in the last quarter century. There is a real question as to whether the increase is large enough to be even noticeable.

To see the point, look at the graph below. The graph simulates the world price of cotton over a period of 40 years given its observed volatility in the recent past.

To simulate the effect of subsidy reform, I have raised the average of the series by 10 percent from time period T on. Can you tell when that change occurs? Can you tell that you were poor at the beginning of the time series, but are no longer by the end? And remember that cotton is the best possible case for demonstrating huge poverty gains from Doha.

My point is not that agricultural reform will not generate some gains for developing countries; it is that the likely gains have been vastly exaggerated. Many of the promoters of Doha have created expectations that are unlikely to be realized. The silver lining if Doha fails is that we will have an opportunity for a true development round sometime in the future.

And what might such a round look like? Here are my ideas.

Comments

[Matt Eckel]

I know this isn't the main point of the post, but isn't it possible that even a 3-6% overall gain in income by third world cotton producers (spread out over the industry, taking into account the price volatility that you mention) could push some beyond a tipping point in terms of savings rates and lead to a virtuous cycle of capital development? I fully admit that I say this as a layman and not an economist.

[asub]

Hi, where did you get the data of cotton price for the plot you made. Is there a resource like finance.google.com from where I can pull off commodity prices data for free?

[Jeremy McKibben-Sanders]

I also don't see why the volatility of cotton prices matters. Farmers may have to wait a little longer to notice the difference, but during the period after time T they will still have gained a %10 increase in total income compared to their total income during the period before time T (assuming the periods are of equal length). Wouldn't this make a big difference if you're in poverty, even if it's hard to see on a graph?

But judging from the numbers in the article (a $17 billion cap on American subsidies when farmers are receiving only $11 billion now), it doesn't seem like cotton prices will go up much even if Doha does succeed. That is, unless the US makes some serious (and seriously unlikely) concessions.

[paine]

dani
perfect post
the example
and better yet
the analytic
demo of the example ...
what can i say
you are a bit of an artist on occasions like this

[Barkley Rosser]

What about those egregious corn subsidies in the US that have triggered the huge outflow of population from the collapsing ejido farms in Mexico, with all the upshot of lower industrial wages in Mexico and the increased flow of migrants to the US?

[Joe]

Unlike the international prices of industrial commodities, prices of agricultural commodities typically show a much greater volatility. This is mainly because of a host of factors that make the supply of agricultural products erratic. The most important of these are specific to poor countries. These include (not in any order of importance) (1) poor (or lack of) transportation facilities, (2) poor (or lack of) storage facilities, and (3) low productivity--due to outmoded technology, inadequate irrigation facilities, unaffordability of fertilizers, etc. How do these factors affect poor-country farmers? The first factor stands in the way of farmers' getting their produce to markets that offer higher prices; the second factor is often responsible for impoverishing farmers in situations when bumper production leads to dramatic price declines; and the last factor is particularly important when international prices are high (but formers are unable to take advantage of it by selling more).

Once farmers in poor countries tackle these basic problems, aided perhaps by rich countries transferring part of their agricultural subsidies to poor countries, prices of agricultural commodities would become much more stable. I wonder if Dani Rodrik assumed, in his simulation exercise, that these supply side conditions would stay constant (they should not, at least from a moral point of view, if not economic) in poor countries for several decades.

[Sherry]

"And remember that cotton is the best possible case for demonstrating huge poverty gains from Doha." This is a very inaccurate statement which looks at Doha only through the narrow lens of what the press is reporting. Remember that cotton is not the only or most important item of the Developmet Agenda; let's not forget trade facilitation and a number of other areas that promise poverty gains from Doha.

[Ali Sohail (pakistan)]

I agree that there is a broader picture to consider and if Doha was to achieve this specific goal it would not be the solution to all epidemics that need to be addressed, but to disregard such a step on the grounds being presented by Prof Rodrik, optimizes the northern way of thinking!

Firstly, If even the jump was neglible on world graphical simulated data, a 10% jump within the 20% cyclical movements would be of great importance to any cotton grower who struggles to meet his day to day subsistence level needs (point to note: Prof Yunus of Grammeen bank proved that a handful of dollars ($27), were good enough to get the system rolling and turn the lives of poverty stuck beings into self full filling and independent lives.

Secondly, (to question the 10% increase) the imposition of subsidies do not lead to a one time fall in the world price of a commodity. It is the successive depressive implications it has i.e. Over a period of time it continuously depresses the overall price level hence an upturn would do the same, the opposite direction.

Thirdly, the model or tools used to attain the 10% again should be clearly stated as I feel extremely skeptical about the findings.

Fourthly, small small collective changes will bring about a change in the larger cause! A policy leading to an absolute 40 odd % jump is as idealistic as it can get!
More importantly, such behavior optimizes the hostile approach possessed by the northern world.
On that account, I completely support the proposition given by Prof Rodrik, the perspective of turning the role of such trade negotiators from market access to specifically development! and to focus on collective wellbeing and the perspective that such organizations deal and find solutions within the differences b/w nations rather than harmonizing and reducing the differences per say!