Workshop on building trade safety nets in agricultural systems, in South Asia

Trade is a powerful catalyst for human development. Under the right conditions, international trade could generate powerful impetus for accelerated progress towards attainment of the Millennium Development Goals (MDGs). However, the human development potential of trade is diminished by a combination of unfair rules and structural inequalities within and between countries.

Existing trade agreements and the present trade flow are neither free nor fair. There still exists a high level of non-tariff barriers and an equally high level of market-distorting subsidies in world agriculture markets. There is continuous pressure on developing countries to liberalise agricultural markets, which is often cited as a pre-condition to development. Most developing countries are exposed to high trade flows which have adverse impacts on wages and employment and, when combined with an already high level of indebtedness, these agrarian systems can be pushed to deep crisis.

Countries in South Asia have large tracts of small-scale subsistence farming and lack any social security mechanism, making farmers highly vulnerable to the vicissitudes of trade.

Against this background, the Centre for Trade and Development (Centad), Centre for Economics and Social Studies (CESS) and Make Trade Fair (MTF) Oxfam International jointly organised a workshop on ‘Building Trade Safety Systems in Agricultural Systems in South Asia’, on March 26, 2007, in Hyderabad.

The mandate was to draw inferences from country and regional experiences of crop, enterprise and agriculture in South Asia and discuss possible trade safety nets to mitigate the risks from trade and build a facilitative environment that can make trade work in the interests of farmers in the region.

The workshop drew participants from Sri Lanka, India, Bangladesh and Nepal. It had five sessions:

• Inaugural session.
• South Asia trade and safety mechanisms.
• Country presentations on trade vulnerabilities.
• Training/Technical session.
• Valedictory session.

Click here to view the full agenda.

Farmers’ markets are one of the popular engagements practised in the country, wherein farmers directly sell their produce to consumers on a fair and assured basis. The workshop started with the release of a case study ‘Meeting local demands for vegetables and fruits: The dynamics of farmers’ market’ by Vadde Sobhanadreeswara Rao, former Minister of Agriculture, Andhra Pradesh, and a popular activist for ryothu or farmers’ markets in the region.

In the welcome address, Professor S Mahendra Dev (Director, CESS) noted that trade is an important engine of growth, but with unfair competition prevailing in agriculture, growth is constrained. Agriculture in India has been growing at a rate less than 2%; this is serious cause for concern.

Flagging the issue of building a trade safety system in South Asia, he raised the following questions:

• How do we build trade safety nets in South Asian countries?
• How do we help these countries benefit from these safety nets?  
• How do we shift farmers to the productive rural non-farm sector?

Professor Dev felt that trade safety nets are a public policy for protecting farmers in the process of marketing and meeting challenges from trade.

Professor Hanumantha Rao, member of the National Advisory Council, Government of India, in his opening remarks, spoke about the consequences and prospects for building safety nets in trade. After the mid-1990s, with the collapse of world prices, there was a major crisis in South Asian countries that were adversely affected by the price movements.

Compared to the situation in the 1980s, the Terms of Trade (ToT) for agriculture in India are still favourable, Rao said. But there is a strong need to reform domestic policies, as challenges due to both price and non-price factors are increasing. There is also a tendency for price volatility all around the world, which is likely to continue for some time he warned.

Productivity enhancement through technology breakthroughs is a silver lining and there is tremendous scope for investments in agriculture that can bring about desired changes in the region’s agricultural system, he said.

Contextualisation of the workshop: Presentation by Linu Mathew Philip

Trade is an important driver of growth and development. It has positive as well as negative effects. Though it brings in wealth and prosperity, it also leads to loss in revenue, lack of assured markets, price volatility, and unemployment. It is important to streamline all these development issues into the arena of trade. Therefore, the primary objective of the workshop is to look for ways to enhance the capacity of domestic agricultural systems in South Asia in order to safeguard livelihood, food security and development interests in a more vigorous environment. It is necessary to overcome unforeseen contingencies in trade.

Why trade safety nets?

The existing global trade has neither been fair nor free and the gains from trade have not been properly distributed as promised. This has adversely affected small and marginal farmers. In order to protect the interests of different sections of society, and also various aspects of trade, it is important to build safety nets. Safety nets can take different forms: market-oriented, credit-oriented, government-institutional support and/or compensational modes of safety devices.
 
Mandate of the workshop

The workshop is an introductory exercise with a mandate to carry forward discussions on the trade safety system; an interactive e-group will be formed, which will finally result in a compilation of the proceedings of the workshop.

Report of the case study: Presentation by K Sakthi Srinivasan

The case study on uzhavar sandhai (farmers’ markets) in the state of Tamil Nadu focussed on ways to meet local demands for vegetables and fruits. The study addresses the importance of participation in the organised marketing system, and the participation of women. Due to poor marketing facilities and the presence of middlemen, local demand has been adversely affected. This study brings out the importance of various aspects of marketing and their impact on demand.

Session I: Inaugural address by Vadde Sobhanadreeswara Rao

V S Rao, in his inaugural address, emphasised the need for trade safety nets. Since developed countries have been the major beneficiaries of global trade, it is important to protect the security of agricultural workers. National governments should evolve policy measures to provide safety nets for small and marginal farmers.

Though the USA produces only 2% of global rice production, its share in rice exports is 13% (according to 2006 data). Further, world prices of rice, wheat and cotton are depressed. This has an adverse effect on farmers in developing countries, including South Asian countries.

In recent times, farmer suicides have been increasing in Andhra Pradesh despite various programmes and the prime minister’s relief and support package.

There is a wide gap between what is available and what is required. Banks are willing to lend to big companies but not to small and marginal farmers, even though banks were nationalised with the objective of protecting small and marginal farmers. This is mainly because of high transaction and recovery costs.

A price stabilisation fund and insurance schemes should be set up by both central and state governments as appropriate protection measures. Government feels that too much money should not be spent on implementation of such schemes. But it is the government’s responsibility to protect the interests of farmers.

In his closing remarks, V S Rao explained the evolution of ryothu bazaars in Andhra Pradesh and listed their benefits. He said that the government’s efforts in this respect have been good. Wholesalers are also compelled to sell at a fair price.

The inaugural address highlighted the importance of building trade safety nets in agricultural systems, in South Asia, and set the stage for further discussions.

Session II: South Asia trade and safety mechanisms

In his introductory remarks, the chairperson of this session, Dr S Bala Ravi, Senior Professor, M S Swaminathan Research Foundation, stated that it was usually the farmer who was at the receiving end. No policy, till date, had addressed farmer-friendly mechanisms. We should not always blame the WTO, he said; domestic policies to support and protect farmers needed to be evolved.

The concept paper on trade safety nets, by Professor Mahendra Dev and Linu Mathew Philip, highlighted the fact that the WTO was a promise to developing countries. It was believed that the WTO would provide the necessary protection, and that distortions in trade would be removed. But, over years of global trade, it has been found that nearly 70% of the gains from trade go to developed countries and 30% to developing countries, leading to asymmetric globalisation and trade liberalisation.

In the course of discussions on the paper, it was noted that there are two important aspects to trade:

• Growth-induced distress, which is prevalent in Andhra Pradesh with respect to small farmers who put in more labour and cut down on leisure.
• Distress-induced growth, a concept propagated by Professor Jagdish Bhagwati, wherein increasing specialisation of cropping pattern gets caught in an inelastic market and, on account of price changes, induces stress. This phenomenon is prevalent in many high-growth pockets.

There is a need for a system to check the volatility of international prices of agricultural commodities. Also, there is the need to check shocks in the value chain in exports because gains from year to year may not be the same. It is important that gains from trade are reallocated to those in need.

In this regard, it was remarked that it is necessary to develop farmer safety nets that would redefine social security for farmers. Public policy assures farmers a minimum level of economic security. It is equally necessary to look at market safety options by providing:

• Domestic innovative mechanisms, like farmers’ markets, international trade rule safeguards and revenue allocation.
• Institutional safety options like credit, insurance, co-operatives, etc.

Discussions on the paper were followed by a listing of the following recommendations:

• There is an urgent need to adjust to the changing trade system.
• There is the need for rational reallocation of resources and effectuation of trade safety nets under national programmes.

Trade flows in South Asia

The paper on ‘Trade flows in South Asia and implications’, by Professor Ramesh Chand, National Professor, Indian Council on Agricultural Research, emphasised the growth fatigue in the developed world. Post-WTO liberalisation aimed at promoting multilateralism but ended up promoting regional groups. There is a lot of potential in South Asian countries and there is need for greater integration in South Asia. There has been greater interaction between South Asian countries and non-South Asian countries than between South Asian countries themselves. Hence, there must be emphasis on greater regional integration to promote trade and face globalisation.

The outcome of the current deadlock in WTO negotiations has weakened the spirit of multilateralism. The paper stresses that Regional Trade Agreements (RTAs) are welfare-enhancing and are here to stay. Trade orientation of agriculture (before and after the WTO) has shown that the trade share of many South Asian countries with India increased faster than any other country. Also, trade between South Asian countries and Asia grew much faster than trade between Asia and the rest of the world.

The paper concluded that South Asia trade in recent times has become India-centric. This is mainly because of the country’s geographic location. The move towards liberalisation in the 1990s led to faster growth in trade within South Asian regions compared to South Asia’s trade with the rest of the world. This implies that South Asian countries are in a good position to promote welfare through RTAs.

However, with regard to self-reliance (ratio of imports to exports), South Asian countries have been adversely affected. There is, therefore, the need for mutual trust and commitment.

Global trade safety experiences

Most developing countries were dependent on commodity trade and there was proposal to come up with a common currency. The paper ‘Global trade experiences: How can safety systems work?’, by Dr Rasheed Sulaiman, Research Fellow, International Food Policy Research Institute (IFPRI), Ethiopia, outlined the guiding concept, lessons from past policy experiments, challenges from the West, and the implications for South Asian countries. In the 1980s, the focus was mainly on markets. The guiding concept was that the government would withdraw from the market and, if the markets function well, then the ‘invisible hand’ was capable of delivery. The focus was, therefore, on getting prices, infrastructure, intention and information right, since every process has an outcome.

The International Collective Actions proposal, whose origin can be traced to Keynes’ proposal in the 1943 Bretton Woods conference, aimed at creating a common currency based on the index of 30 most traded commodities. This involves two major mechanisms: International Commodity Agreements (ICAs) and International Financing Policies (IFP) to cope with commodity trade risks.

ICAs worked during the initial years but failed as markets developed. ICAs largely focused on African, Caribbean and Pacific (ACP) countries. Its functioning did not affect South Asia.

IFP Common Funds are still in operation. However, only Compensatory and Contingent Financing (CCFF) and Common Funds for Commodities (CFC) are of relevance to South Asian countries. These countries particularly benefit from the commodity development programmes of the CFC.

The paper also looked at experiences with national policies. It noted that public and private partnerships have worked in a number of countries. The organisation and management structure should be mutually beneficial and the management of compensatory or stabilisation funds distortion-free and unbiased. The challenge of this partnership is that boom-time funds are often used in other development projects and the compensation process is difficult to manage.

As regards public sector-led policies, it is seen that, over time, they became financially unsustainable, victims of special interests, and did more harm than good to agriculture.

International commodity agreements have failed, and marketing boards have largely been dismantled. Playing with the exchange rate is not an option. The policy prescription is to turn to market-based institutions. The challenges that remain involve the livelihoods of millions of poor households that are dependent on commodities. Commodity export earnings, a major source of forex earnings, and sharp decreases in prices continue to create havoc.

The determinants of market-based risk management include a well functioning domestic market. Domestic markets should be integrated. Markets should not be thin. The government should not interfere on an ad hoc basis. Other determinants are a strong financial sector (stable exchange rates and well functioning banking sector), strong legal institutions, and information and communications systems.
 
On the export side, South Asian countries are not very vulnerable because they are not heavily dependent on exports. There is greater vulnerability on the import side. However, as these countries have high levels of poverty, shocks from any side have huge effects.

South Asian countries are more diversified and therefore it has been recommended that they should make effective use of commodity development funds and create regional funds to deal with agricultural trade risks.

Current state of negotiations

The final paper presented in this session by Dr Saikat Sinha Roy, Professor, Department of Economics, Jadhavpur University, looked at the current state of agricultural negotiations in the WTO. The paper began with an introduction to the various dimensions of world trade in agriculture. Agriculture in developed countries is characterised by domestic support, export subsidies and market access restrictions. All these forms of support have led to overproduction in developed countries and depressed world prices, and have adversely affected producers in developing countries. The combination of support and adverse movements in world prices affect production and employment in agriculture.

Agriculture’s share in exports is as high as 30% in developed countries. The working population in agriculture stands at nearly 58% of the total working population in developing countries, around 40% in middle-income countries, and less than 4% in developed countries. The diverse nature of agriculture in developing countries and the poor capacity of these countries to match the levels of support given to producers in developed countries create unfair competition for poor producers. This calls for immediate reform in the global agricultural scenario.

The three pillars of AoA (addressed in the Doha Round, July 2004) aim to bring about a reduction in domestic support and export subsidies and improve market access for developing countries. Developing countries are to be given special treatment and the flexibility to design Special Products (SPs) based on food security, livelihood and rural development issues. Special Safeguard Mechanisms (SSMs) are to be evolved as contingency measures for these countries.

SPs, which are long-term measures, are needed on account of structural features in developing countries. The need for SSMs arises on account of short-term shocks from imports and the inability of developing countries to cope with these shocks, resulting in market disruption. Countries like India are in the process of identifying SPs with greater flexibility.

The paper concluded that it is important to adhere to the long-terms goals of the AoA, accommodate non-trade concerns like rural development, livelihood security, etc, and promote SPs and SSMs as they could be the main instruments of trade safety measures.

Session III: Country presentations

This session consisted of country-level presentations from Sri Lanka, India, Bhutan and Nepal. All presentations highlighted vulnerabilities in trade in the era of liberalisation.

Sri Lanka
Contrary to perceptions that liberalisation would usher in better prospects for the agricultural sector in Sri Lanka, it was seen that while consumers gained, producers lost. The presentation by Parakrama Samaratunga, Research Fellow, Institute of Policy Studies, drove home this point with the help of a micro-level study that highlighted the fact that net gains to the consumer did not translate into gains to the producer.

India
In a case study on paddy and cotton in India, presented by Dr Aldas Janiah, Senior Scientist, National Centre for Agricultural Economics and Policy Research, New Delhi, emerging challenges in paddy production were identified as price volatility, heavy water consumption, growing labour shortages, gradual declines in relative profitability and the fact that trade forms only 2% of rice production. Moreover, at the international level, there are high levels of distortions in international trade coupled with price instability, lack of assured markets and the issue of proper packaging.

In the case of cotton, major bottlenecks include high levels of risk in terms of production, price (instability at both domestic and international levels), technology and trade. This is evident from the pattern of farmer suicides, especially in mono-cropped areas of Andhra Pradesh where it was predominantly cotton farmers who committed suicide. Therefore there is a need to evolve safety nets to protect farmers in the current market situation.

Bhutan
The presentation on Bhutan by Pema R Rinchen, Ministry of Trade and Industry, Bhutan, highlighted the challenges and opportunities that emanate from liberalisation. The challenges include promoting agricultural development, food security, rural livelihoods, biodiversity and the environment, while the opportunities were to tune agricultural production to widen its reach in the internal market.

As agriculture became more market-oriented, farmers opted for cash crops leading to an imbalance in the food basket. While agricultural exports are predominantly cash crops, these are low in volume though high in value. Thus, the objectives of promoting food security and alleviating poverty through the expansion of trade have not materialised to their fullest extent.

Moreover, the emphasis on labelling, quality and grading of products by the international community has severely eroded farmers’ profit margins.

The case study emphasised that exposure to stronger competition though bilateral or regional liberal trade and networking at national and international forums to exchange views and experiences was necessary in order to strengthen safety nets in Bhutan’s agricultural sector.
           
Nepal
Nepal witnessed a surge in exports, especially of primary commodities, between 1996 and 2002. However, there has been a deceleration in all commodity exports since 2000. This is a sign of vulnerability. The presentation by Bishwamber Pyakuryal, Professor, Tribhuvan University, Nepal, drew attention to the fact that there has been a surge in exports to India from Nepal since 1996, after a bilateral treaty was signed between the two countries. This continued till 2002 when India imposed an anti-dumping duty on goods from Nepal.

In Nepal 80% of households are dependent on agriculture; 2% of them are landless. There are regional variations. In less developed regions the proportion of landless households is high compared with developed regions. Of the total arable land, 11% belongs to small and marginal farmers. Investments in land management are low in Nepal with only 3% of total income spent on land management by farmer households.

One of the most important problems Nepal faces is lack of a focused policy on trade and domestic reforms. This is the urgent need of the hour.

Session IV: Technical session

The chairperson of this session, Professor C Ramaswamy, Former Vice Chancellor, Tamil Nadu Agricultural University, emphasised that it is usually not possible to achieve trade benefits in a short time. Although there have been some success stories, it is only in recent times that awareness about trade has increased and its impact become clearer. Integrating small farmers into the export process is an important step. But more important is increasing institutional sources to farmers, as they require institutional safety. One cannot do away with multilateralism, and it is essential to take agricultural systems to global markets. On this note, the Chair set the stage for the presentation of papers and discussions.

Dr Sukhpal Singh, Assistant Professor, IIM, Ahmedabad, highlighted the problems of South Asian agricultural markets in his paper ‘Public-private partnership and market safety devices’. Problems arise due to:

• High transaction costs and the high cost of market access.
• Producers’ share in the consumer rupee.
• Spatial and temporal price variations.
• Lack of quality standards and infrastructure.
• Changing pattern of international agricultural trade.

The above problems in South Asia trade accentuate the need for safety mechanisms. The paper focussed on Public-Private Partnership (PPP), which is a working arrangement based on commitment. The need for PPP arises out of the growing importance of the agri-business sector and the role of the private sector, social and public pressure on agri-business, sandwiching of the primary production sector (leading to agricultural slowdown) and the failure of input and output markets. PPP can help remove market imperfections and lower transaction costs. 

Potential partners in PPP are Panchayati Raj Institutions (PRIs) and NGOs. In India, SEWA is an example of PPP.

The paper brought out the link between trade, small producers and policy. Policy plays an important role in enabling market functioning. Public policy has an important role to play in PPP in terms of policy framework (design and analysis), quality control, etc.

The second paper by Dr B Vijayabhinandana, Faculty, ANGR Agricultural University, Hyderabad, explored agricultural extension systems and safety systems. It highlighted the fact that extension is not merely transfer. Extension systems in the post-Independence era can be understood by looking at the different periods:

• 1960 onwards: Intensive agricultural development era.
• 1970 onwards: Era of social justice programmes.
• 1980-2000: Self-sufficiency in foodgrain production.

The paper studied the public extension system and private extensions and talked about the mass media and information technology (IT). There have been several developments in extension systems, such as:

• Direct marketing (ryothu bazaars, etc).
• Extension reforms (shift from general to specific reforms).
• PPP.
• Capacity-building.
• Formation of groups.
• Contract farming.
• Farmer empowerment through IT, exposure visits and promotion of entrepreneurial skills.
• Market-led extensions (market intelligence, and backward and forward linkages).

The third paper, by K N Rao, Senior Manager, Agriculture Insurance Company of India Ltd, analysed agricultural credit and insurance as market safety devices and focused on the evolution of the National Agricultural Insurance Scheme (NAIS). This is the world’s largest programme in crop insurance. The scheme operates in all states and union territories and covers 35 different crops during the kharif season and around 30 different crops during the rabi season. On average, 4 million farmers receive benefits annually.
 
Conceptual issues: Crop insurance

Crop insurance is beneficial and an important way of providing safety nets to farmers. It cushions the shock of crop losses by providing farmers with a minimum amount of protection. It spreads the crop losses over space and time. It helps farmers make more investments in agriculture, and works as collateral for credit.

Individual farm-based insurance is suitable for high-value crops grown under standard practices. Liability is limited to cost of cultivation. This type of insurance provides for accurate and timely compensation. However, it is unsuitable for field crops and involves high administrative costs.

Area yield insurance is practically an all-risk insurance. This is very important for developing countries with a large number of small farms. However, there are delays in compensation payments.

Weather index insurance has similar advantages to those of area yield insurance. This programme provides timely compensation made on the basis of weather data, which is usually accurate. All communities whose incomes are dependent on the weather can buy this insurance. A basic disadvantage could arise due to changing weather patterns and poor density of weather stations.

Weather insurance helps ill-equipped economies deal with adverse weather conditions (65% of Indian agriculture is dependent on natural factors, especially rainfall. Drought is another major problem that farmers face). It is a solution to financial problems brought on by adverse weather conditions. This insurance covers a wide section of people and a variety of crops; its operational costs are low.

The paper by K N Selvaraj, Professor, Tamil Nadu Agricultural University, was specific to small farmers and safety systems and emphasised the Indian perspective and macro-level analysis of overall trade. The paper highlighted some key issues:

• Export markets have grown tremendously and the composition of exports has changed. This is because of changes in the domestic production structure.
• Reduction and rationalisation of tariffs were instrumental in increasing imports.

The ratio of India’s agricultural imports to total GDP was 1%. In the pre-reform period, agricultural imports grew at 11.03% and 6.62% in rupee and dollar terms, respectively, and 15.99% and 9.06% in the post-reform period. This is indicative of the growing integration of the agricultural production system in international trade. It also shows the need to get competitive in production, the need for investments in research and development and the growing importance of public-private partnerships.

Valedictory session

The Chair, Vadde Sobhanadreeswara Rao, former Minister of Agriculture, Andhra Pradesh, pointed out that the bane of the Indian agricultural sector is not the lack of standards or quality parameters to improve the sector, but lack of awareness among farmers about their use. For example, farmers are unaware of the level of pesticides to be used on crops, as provisioned under the WTO. Another important issue is the failure on the part of the government to highlight the plight of Indian farmers with the Dispute Settlement Body (DSB) of the WTO, unlike Brazil that was quite successful in protecting the interests of its cotton farmers.

In the course of the discussion that ensued, a number of important issues were raised. Many asked why there was an overemphasis on trade, and how reforms could be initiated at the global and regional level to protect the livelihood and development interests of marginal and small farmers.

It was pointed out that the Doha Development Round is in danger. The pressure to autonomously or bilaterally reduce tariffs is provisioned in all regional and free trade engagements. The interests of both consumers and producers need to be balanced, and this is possible only through effective monitoring and evaluation of the trade changes that are taking place in the region.

The objective of the workshop was to evolve a common approach among South Asian countries and crystallise interventions and ideas that can complement trade. The workshop also dealt with the issue of food security without affecting the livelihood interests of both exporter and importer.

It was felt that greater integration of agricultural markets could make these markets unviable and threaten livelihoods and food accessibility due to high price volatility. It is in this context that civil society must advocate for trade safety instruments like a stabilisation fund or levy of a livelihood cess (similar to the education cess) especially on agricultural exports/imports, as these can be a viable safety option.

Read a news report on the workshop here:
‘Trade safety nets for farm sector mooted’,
The Hindu (March 27, 2007)

Centad thanks Poornima Balijepalli and Soumya Vinayan from CESS,Hyderabad  for their substantial contribution in preparing this report.