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ANTONIO LA VINA

LINDSEY FRANSEN

PAUL FAETH

YUKO KURAUCHI

WRI WHITE PAPER Street, NE

Suite 800

Washington, DC 20002

www.wri.org REFORMING AGRICULTURAL SUBSIDIES"No Regrets" Policies for Livelihoods and the Environment

WRI WHITE PAPER

REFORMING AGRICULTURAL SUBSIDIES:

"NO REGRETS" POLICIES FOR LIVELIHOODS AND THE ENVIRONMENT

Antonio La Vina

Lindsey Fransen

Paul Faeth

Yuko Kurauchiwashington, dc

JEN LESAR

EDITOR

HYACINTH BILLINGS

PUBLICATIONS DIRECTOR

MAGGIE POWELL

LAYOUT

Each World Resources Institute report represents a timely, scholarly treatment of a subject of public concern. WRI takes responsibility for choosing the study topics and guaranteeing its authors and researchers freedom of inquiry. It also solicits and responds to the guidance of advisory panels and expert reviewers. Unless otherwise stated, however, all the interpretation and findings set forth in WRI publications are those of the authors. Copyright © 2006World Resources Institute. All rights reserved.

ISBN 1-56973-617-0

Printed in the United States of America on chlorine-free paper with recycled content of 50%, 20% of which is post-consumer.Cover Photographs:

Cotton Harvest: FAO photo

Corn Harvest: Photo by Bruce Fritz, USDA Agricultural

Research Service

Forest: FAO/17810/A. Conti

Meeting: FAO photo

Contents

ACKNOWLEDGMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iv

EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

SETTING THE STAGE: AGRICULTURE, POVERTY, TRADE AND THE ENVIRONMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

WHAT ARE THE IMPACTS OF AGRICULTURAL SUBSIDIES ON THE POOR AND THE ENVIRONMENT? . . . . . . . . . . . . . . . . . . . . .6

What are the Impacts in Developed Countries?

What are the Impacts in Developing Countries?

REFORMING DEVELOPING COUNTRY SUBSIDIES: POTENTIAL CONSEQUENCES FOR LIVELIHOODS

AND THE ENVIRONMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Impacts in Subsidizing Countries

Impacts in Developing Countries

THE ROLE OF A DOMESTIC POLICY REFORM AGENDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Empowering Small-Scale Farmers to Use and Protect Natural Resources

Mainstreaming Poverty Alleviation and Environment

Protecting Ecosystems for Human Well-being

Best Practices in Governance

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24

NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27

This White Paper was produced as part of the World Resources Institutes Poverty, Agriculture and Trade Objective. An earlier version of this publication, enti- tled Beyond The Doha Round and the Agricultural

Subsidies Debate: Toward a Reform Agenda for

Livelihoods and the Environment,was launched at the fifth ministerial meeting of the World Trade

Organization in Hong Kong in December, 2005.

The authors gratefully acknowledge colleagues Peter Veit, Liz Marshall, and Jenny Guiling for review and

revision of this manuscript; and David Jhirad andFrances Seymour for review and support of this publi-

cation. Xander Slaski provided research assistance. The authors and the World Resources Institute also extend their thanks to the reviewers of the manu- script, Vice Yu, Ann Thrupp, and Kimberly Pfeifer. Their comments provided valuable insight and helped to improve the document; the final paper does not necessarily reflect their views. This publication was made possible through the gen- erous support of the Netherlands Ministry of Foreign

Affairs.

Acknowledgments

1REFORMING AGRICULTURAL SUBSIDIES

EXECUTIVE SUMMARY

Agricultural subsidies are among a number of factors determining whether and how agriculture can help the poor and protect ecosystems. Reforming the cur- rent agricultural subsidies system in developed coun- tries, a central goal of the Doha Round 1 negotiations of the World Trade Organization, provides an oppor- tunity to generate a number of positive impacts: for poor farmers in developing countries whose ability to compete is hampered by subsidy-driven overproduc- tion in rich countries; for taxpayers and consumers in developed countries faced with rising deficits; for the environment in developed countries where subsidies contribute to ecosystem degradation; and, possibly, for the environment in developing countries where poverty is one driver of environmental degradation. But an agreement to reduce subsidies at the interna- tional level does not guarantee that the poor and the environment will benefit; the realization of benefits will require the implementation of strategic domestic policies in developing nations. Even in the absence of subsidy reduction through the Doha Round, countries can take steps to make agri- culture work for the poor and for the environment.

Without a WTO agreement, there will still be

immense pressure on developed countries to reduce their agricultural subsidies: from developing coun- tries, which are expected to file more cases in the

WTO challenging these subsidies, and from within

developed countries because of domestic or regional (in the case of the European Union) competition for scarce budgetary resources. Moreover, without a new

WTO Agreement, trade-induced changes that affect

agriculture are inevitable, whether they come in the context of global, regional, or bilateral trade agree- ments or through sheer market changes. Domestic policies that make agriculture pro-poor and pro-envi- ronment are 'no regrets" policies, and countries that adopt them are not only likely to be more prepared for the changes that will come with a new trade agreement, but will be better able to position their agricultural sectors to be effective agents for poverty alleviation and environmental sustainability.Trade can be an effective vehicle for poverty reduction (Cline 2004), but good governance, at both interna- tional and national levels, is necessary so that increased trade benefits the poor, and prevents or minimizes ecosystem degradation (WRI 2005). This

White Paper examines what reforms developing

countries need to implement so that they can capital- ize on reductions in developed country subsidies. It recommends that countries adopt and implement a domestic policy reform agenda that is based on a national assessment of the potential impacts of global trade decisions on ecosystem health and human well- being. The paper also recognizes the necessity of cooperation and support from development agencies and other international organizations in order to overcome the resource constraints that will be faced by many developing countries in the implementation of such reforms. While every country will have to develop its own package of reforms based on its unique physical, socio-economic, and political cir- cumstances, the paper identifies four areas to be addressed by policy-makers and supported by donors.

These include policies designed to:

?Empower small-scale farmers to use natural resources sustainably and strengthen their ability to negotiate with other actors in the market with respect to the use of land and other inputs to agri- cultural production;

?Mainstream poverty alleviation and environmentalconsiderations into sectoral plans focused on agri-culture;

?Promote ecosystem health for human well-being,in particular ecosystems" ability to provide essen-tial services; and

?Promote best practices in governance. The paper concludes with a set of policy recommen- dations under each of these categories.

2REFORMING AGRICULTURAL SUBSIDIES

This reform agenda, outlined in the following pages, is relevant to development organizations such as bilateral assistance agencies, multilateral cooperation institutions, private foundations, and development NGOs. It can serve as a guide for these organizations" financial and technical support for development- particularly for their agriculture and environment portfolios. By supporting the adoption and imple- mentation of a reform agenda, development organi- zations can help developing countries take advantage of a change in developed countries" subsidies, help- ing make agriculture a vehicle for poverty alleviation while protecting the ecosystems on which poor farm- ers and society in general depend.

INTRODUCTION

In December 2005, trade ministers and other offi-

cials from all over the world assembled in Hong Kong to attend the Sixth Ministerial Conference of the World Trade Organization (WTO). For six days, they reviewed the progress since the Fifth Ministerial in 2003 and made decisions leading toward the cul- mination of the trade negotiations launched in 2001, which have been dubbed the 'Doha Development Round" after the location of the Fourth Ministerial

Conference in Doha, Qatar.

At the center of the Doha round are the agriculture negotiations, where agreement is a must if progress is to be made in other trade areas. While internation- al trade in agricultural commodities has the potential Laws, policies, and programs to empower poor farmers should: ?Provide for rights-based land tenure policies, including agrarian reform laws and recognition of indigenous peoples territories;

?Provide a supportive environment for community enterprises,such as production and marketing cooperatives;

?Establish economic incentives for poor farmers to use land andother resources sustainably, including direct compensation forconservation activities, public goods, and ecosystem services;and

?Allow for payments to landowners in return for land managementthat protects ecosystem services, such as water quality and car-bon storage.

Macroeconomic policies and measures that integrate poverty allevia- tion and environmental goals should include policies that regulate: ?Pricing and trading of farm products; ?Property or access rights over land and water; ?Taxation of land and agricultural assets; ?Rural credit and insurance; ?Use of agrochemical inputs; ?Introduction of new technologies; and ?Transport services in rural areas. Laws, rules, and regulations related to agriculture that protect ecosystems and their ability to provide for essential ecosystem serv- ices include: ?Support for soil conservation practices that address land degra- dation and are designed for the benefit of poor farmers;

?Facilitation of crop diversification, recycling and conservation ofsoil nutrients and organic matter, and ecologically-based inte-grated pest and disease management;

?Flexibility and diversity in marketing standards to enable retailfood stores and distributors to diversify varieties of produce andreduce wasteful cosmetic standards for foods in markets.

Reforms to promote better governance of the agricultural sector include: ?Accountable decentralization; ?Establishment of inter-agency and multi-stakeholder processes inagriculture; and ?Strengthened enforcement of environmental laws, rules, and reg-ulations.

Policy Recommendations

3REFORMING AGRICULTURAL SUBSIDIES

to provide economic benefits to small-scale farmers in developing countries, some elements of this trad- ing system can also perpetuate poverty. In particular, a number of academics, organizations, and develop- ing country governments argue that agricultural sub- sidies in developed countries 2 contribute to poverty in developing countries and should therefore be reduced (WTO 2003a; Diao et al. 2005; Stuart and Fanjul 2005; Vitalis 2004; Cline 2004). In fact, sever- al cases have been filed by developing countries claiming that certain developed countries" subsidies actually violate WTO rules. In addition, some subsi- dies are believed to exacerbate environmental degra- dation in countries where they are provided (EWG

2006a), increasing pressure for subsidy reduction.

Table 1 summarizes the environmental and livelihood issues that arise in both developed and developing countries with respect to agricultural subsidies.

Reforming the agricultural subsidy system has the

potential to generate a number of positive impacts: for poor farmers in developing countries whose abili- ty to compete is hampered by subsidy-driven overpro- duction in rich countries; for the environment in developed countries where subsidies encourageunsustainable practices; for taxpayers and consumers in developed countries; and, depending on domestic policies, for the environment in developing countries. However, these benefits are not guaranteed, and in fact subsidy reform, if carried out carelessly, could also have some negative effects, including placing increased pressure on the environment in developing countries. Strategic domestic policy reforms in devel- oping countries, supported by international coopera- tion, are necessary to ensure that subsidy reductions through the WTO indeed result in pro-poor and pro- environment outcomes. The stated purpose of the agriculture negotiations under the WTO is to "correct and prevent restrictions and distortions in world agricultural markets" (WTO

2001). Specifically, parties have committed to

addressing three issues: export subsidies, market access, and domestic support (see Box 1). In the liter- ature, these issues are often lumped under the single term 'subsidies." In this paper, we use this term as well as 'protection" and 'support" to refer to these three types of interventions in agricultural markets.

In Hong Kong, negotiators made tentative progress

toward agreement on the agricultural agenda items, including an agreement to end export subsidies by

2013, and in the case of cotton, by the end of 2006.

For other commodities, actual amounts of domestic

farm subsidy cuts were not determined, but

Members set parameters such as 'bands" dividing

countries into groups that will face differing degrees of subsidy and tariff reductions. Least Developed

Countries (LDCs) were also given increased market

access in developed countries, with 97 percent of imports able to enter developed countries free of duties and quotas. However, the three percent of excludable imports could consist of the goods most important to LDC economies, meaning that the duty- and quota-free access may not have the desired pover- ty reduction effects (Khor 2005). In Hong Kong, negotiators set an April 30, 2006, deadline to estab- lish full modalities-such as formulas for tariff and subsidy reductions-and agreed that comprehensive draft lists of commitments based on these modalities should be submitted no later than July 31, 2006 Table 1: Framing the Agricultural Subsidies Debate: Issues at a

Glance

Developed CountriesDeveloping Countries

Environment

?Land degradation ?Water pollution ?Decreased agro- biodiversity ?Expansion of area under produc-tion to marginal lands to com-pensate for low prices ?Difficulty investing in sustain-able practices ?Poverty exacerbated by low pro-ducer prices driving exploitationof natural resources

Poverty/

Livelihoods

?Majority of govern- ment subsidies to biggest farms rather than small family farms ?Government paymentsstrain budget ?Low farmer incomes due to lowworld prices for agriculturalgoods ?Reduced national export earn-ings ?Minimal investment in ruralinfrastructure ?Cheaper food for consumers dueto subsidized imports

4REFORMING AGRICULTURAL SUBSIDIES

(ICTSD 2005; WTO 2005). WTO Members failed to meet the April deadline, however (ICTSD 2006), and as of May 2006 negotiations on modalities were still underway.quotesdbs_dbs11.pdfusesText_17