Consistency or conflict in OECD agricultural trade and aid policies.

In advance of the Cancun meeting of trade ministers convened in September 2004 to further the Doha Development Agenda (DDA), the heads of the IMF, OECD, and World Bank declared, "We need a decisive break with trade policies that hurt economic development. Donors cannot provide aid to create development opportunities with one hand and then use trade restrictions to take these opportunities away with the other--and expect that their development dollars will be effective." They accorded special emphasis to reducing OECD agricultural trade protection. "Agriculture is of particular importance to the economic prospects of many developing countries, and reforming the current practices in global farm trade holds perhaps the most immediate scope for bettering the livelihoods of the world's poor" (Kohler et al. 2004).

The two broad presumptions implicit in the Declaration--that OECD trade policies, particularly agricultural trade policies, retard economic progress in poor countries while donor aid effectively promotes it--have been questioned. Panagariya (2005) and Bhagwati (2005) dismiss the widespread contention that poor countries stand to gain from agricultural policy reform by rich countries based on two observations: (1) the majority of poor countries are net food importers, and (2) most of the least developed countries enjoy preferential tariff treatment on their exports to developed countries. Doubts have also been cast on the assumption that donor aid constitutes an effective mechanism for promoting economic growth. Easterly, Levine and Roodman (2005) and Rajan and Subramanian (2007) found little support for claims of a strong, stable, and positive relationship in the econometric evidence linking development and aid.

OECD Agricultural Policy and Developing Countries

The potential effects of OECD trade and agricultural policy on developing countries have generated a large literature of quantitative analyses, especially since the launch of the DDA in 2001. Most are based on policy simulations with general equilibrium models (Burfisher 2001; Bouet et al. 2004; Anderson and Martin 2005; Diao et al. 2005; Hertel and Keeney 2005; OECD 2006; Polaski 2006), and most emphasize the global and national totals of potential economic welfare gain, paying much less attention to sectoral distribution of impacts. Where farm income effects have been featured (Diao et al. 2005; Anderson and Valenzuela 2006; OECD 2006), the general conclusion is that OECD agricultural policy depresses farm incomes in developing countries.

Nonetheless, there are some considerations that moderate and could even reverse this conclusion. Excepting sugar, rice, and cotton, developing country farmers tend not to specialize in production of those crop and livestock commodities heavily protected and subsidized in OECD countries. While it may be argued that this is partly the consequence of a long history of subsidized OECD agriculture, climatic, and cultural differences must also be acknowledged. Most of the tropical products that feature prominently in developing countries are not subject to the high tariffs and subsidies that characterize developed country agriculture, thereby weakening the links between OECD farm support and developing country farm incomes. Even where there is overlap, the depressing effects of OECD agricultural policy will be felt by poor country farmers only to the extent that world market prices are transmitted to local markets where they sell their output. Many developing country farmers produce for self-consumption or for local markets that are isolated from world market fluctuations by own-country trade policies or geographical remoteness and poor market and transportation infrastructure.

OECD agricultural trade policy reform could reduce farm incomes in some developing countries through the erosion of the value of preferential access, as noted by Panagariya (2005) and Bhagwati (2005). Many developed countries offer developing countries preferential access to their markets at tariffs that are lower than those applied to competing exporters. This favorable treatment creates a preference margin equal to the difference between the Most Favored Nation (MFN) tariff and the preferential rate. This margin will be reduced and the associated economic benefits eroded, if MFN applied tariff rates are cut as part of OECD agricultural policy reform. The consensus emerging from recent analyses (Bouet et al. 2004; Wainio et al. 2005; Liapis 2007) is that erosion of the economic value of preferences is potentially an important problem for some developing countries. Developing country exporters now receive preferential access only for a short list of agricultural commodities, namely sugar, bananas, and meat products--a consequence of EU trade policy.

OECD Development Assistance Policy for Agriculture

Public expenditures on agricultural programs and projects are largely financed by foreign aid in many developing countries. The OECD's Development Assistance Committee (DAC) monitors agricultural aid from its members and multilateral donors, prominently the World Bank, to developing countries. The DAC defines agriculture sector aid as funds made available to finance development activities that have agriculture as their main target. The category incorporates aid financing of improvements of land and water resources; subsidies to inputs and agricultural production; agricultural research and extension; and agricultural policy development.

There is a large literature on the effects of foreign aid on economy-wide growth but the effects of agriculture sector aid on agricultural growth have received much less attention from economists. Norton, Ortiz, and Pardey (1992) included a total aid variable when estimating agricultural production functions for developing countries, but they did not distinguish between agriculture-specific aid and other categories of development assistance. Moreover, the production function they estimated also included indicators of both the quantity and quality of agricultural inputs (labor, tractor horsepower, land quality, education) which themselves could be the specific targets of aid.

Analytical Framework

Has OECD agricultural trade protection and support hurt agricultural sector performance in developing countries? Has OECD development assistance for agriculture helped it? Herein we address these two questions using cross-sectional regression analysis of data for a sample of eighty-seven developing countries for the period 1986-2004. Following Gardner (2003), we use the annual growth rate of real agricultural GDP per worker as an indicator of agricultural performance in developing countries. The key independent variables are country-specific indicators of OECD agricultural support policy and normalized agricultural development assistance.

Trend growth rates in agricultural GDP per worker were measured as the slope coefficients estimated from log-linear trend regressions of annual data for each developing country in the sample. Real agricultural GDP data were taken mainly from the World Bank's World Development Indicators (WDI) and from the United Nations Statistics Division; agricultural labor force data are from the FAO. (1) We adopt the average annual real agricultural GDP for 1981-1985 as the base value for the growth regressions.

Another variable introduced into the regression as an indicator of initial conditions is the base period share of each country's agricultural land base devoted to crops benefiting from OECD trade protection and subsidy. We included this variable to test whether, independently of the growth effects of OECD trade or aid policy that we measure separately, those countries exhibiting agricultural production profiles broadly similar to OECD countries might have better agricultural growth potential than others. One channel for such potential is through spillovers from OECD country investments in production-enhancing agricultural research, typically targeted to the same crops covered by OECD agricultural support. Another is in the higher degree of tradability of commodities protected and subsidized in OECD countries as compared to the bulk of commodities produced in developing countries. The global transportation, marketing, and regulatory infrastructure that fosters trade in OECD farm commodities may create trading opportunities for some developing countries.

The explanatory variable introduced to capture the effect of aid is the 1986-2004 average annual real value of a country's agriculture sector aid (DAC), expressed per hectare of agricultural land (FAO) to achieve comparability across recipient countries. There is some risk in using sample period averages of wrongly inferring the effects if donor countries in aggregate happen to favor either low-growth or high-growth countries in their aid allocations. There are many considerations affecting a donor country's decision to favor one developing country over another in its development assistance efforts. In the specific case of agriculture, an important political consideration limiting aid flows to certain countries, regardless of their growth performance, is whether aid fosters increases in their production of commodities produced in donor countries (de Janvry and Sadoulet 1988).