INTERNATIONAL: Agriculture sector divides BRICs

Analysis

The recent round of WTO trade negotiations in July found Brazil, Russia, India and China (BRICs) far apart on the issue of the further of trade liberalisation in agricultural products. The fundamental cause of their disarray is the different character of the agricultural sector in Brazil compared with those of India and China.

Forming BRICs. The acronym BRICs was coined in a study undertaken by Goldman Sachs in 2001. It pointed out that BRICs:

• cover a quarter of the world land area;
• have 40% of world population; and
• are expanding their share of world GDP (currently 15%) rapidly.

By 2050, even assuming their GDP growth rates decline, the study forecasted that they would be the four most dominant economies, surpassing the United States and other OECD countries.

Common interest. Originally, the BRICs did not act in concert on the international scene, although all four belonged to the G-20 group of developing countries. Now they have perceived a common interest in acting as a diplomatic counterweight to US hegemony and in pressing for a re-balancing of national representation in international organisations.

BRICs united? BRICs' unity was put to the test in last month's informal meeting of trade ministers in Geneva (see INTERNATIONAL: Agro trade deals possible, post-Doha - August 4, 2008; and see INTERNATIONAL: Uncertainty lies ahead for WTO - July 31, 2008). Brazil, India and China negotiated with Australia, the EU, Japan and the United States -- Russia is not yet a WTO member. The liberalisation of agricultural trade was a major issue of the talks (though not the only one).

The discussions centred on the design of a special safeguard mechanism (SSM) permitting tariffs to be raised against surges of agricultural imports. India and China held out for a very robust SSM, with a low trigger point and sharply increased duties being permissible. The other participants, including Brazil, could not agree to the Indian and Chinese demands.

As a result, the talks collapsed. Considering the Doha round has been billed as a 'development round' -- ie intended to benefit developing countries -- disunity among the BRICs does not augur well for their leadership of developing countries.

Brazilian agriculture. The key characteristic of a country's agriculture is its labour-to-land ratio. In Brazil, there are only 52 rural people per square kilometre of arable land. This is much below the Latin American average of 212 and the world average of 492. These factor proportions provide the opportunity for the development of highly efficient agribusiness, capable not only of feeding its own population, but of exporting to the rest of the world.

Until recently, Brazil had not exploited that opportunity fully. In the last two decades, market-based reforms in economic policy have paved the way to do so:

• Export taxes and other restrictions on the export of food products were removed.
• Minimum support prices, government food procurement and state marketing boards were abolished and state-owned agricultural enterprises were privatised.
• In the 1990s, Brazil eliminated hyper-inflation, then adopted a floating exchange rate for its currency (the real).
• Inward investment of multinationals stimulated agricultural research and development.

However, market-based reforms were by no means the only stimulus to Brazil's agricultural development. The state provided new incentives that contributed to agricultural growth. These included preferential credit, tax exemptions, financing for agricultural research, marketing and infrastructure improvement as well as a range of federal, state and local subsidies.

Export surge. Market-based policies plus better-designed government incentives together produced a surge of agricultural exports (see BRAZIL: Technology advances will boost agriculture - April 11, 2008). By 2005 Brazil had become:

• the world's largest exporter of sugar, ethanol, coffee, orange juice, tobacco, beef and poultry;
• the world's second largest exporter of soybeans and soy meal; and
• the world's fourth largest exporter of corn and pork.

The value of Brazil's agricultural exports has grown at 20 per cent a year since 2000 and now exceeds 30 billion dollars.

Competitive trade. Although Brazil has to import wheat, it has a trade surplus on agro-food commodities in excess of 25 billion dollars. Brazil has responded to rising global demand for food, while Africa -- despite enjoying a similar labour-to-land ratio -- has failed to do so.

A country in this highly competitive position has an obvious interest in trade liberalisation to increase its access to foreign markets. This national interest has guided it into a negotiating alignment with NAFTA (North America Free Trade Association) countries and Australia.

Chinese and Indian agriculture. In India and China the labour-to-land ratio is an order of magnitude greater than that of Brazil. In India there are nearly ten times (475) the number of rural people per square kilometre of arable land than there are in Brazil. In China, it is more than ten times (554).

These factor proportions generate -- under a system of private property and inheritance by sons as in India -- an extreme fragmentation of land ownership. The Indian countryside has a very large number of smallholders eking out a living from very tiny parcels of land.

Constrained investment. The fragmentation of land (plus various forms of insecure tenure) inhibits any investment in agriculture that is not scale-neutral. The new technology of the Green Revolution period (1965-75) consisted of higher yield seeds, irrigation, chemical fertilisers and credit, and was broadly scale neutral. At the least, cultivators with larger smallholdings could adopt it successfully. However, other forms of new technology -- such as tractors, combine harvesters, large storage and processing plants -- were indivisible and remained out of reach of individual smallholders.

In pre-Communist China the pattern of land ownership was very similar to that of India, though even more fragmented. The regime of Mao Zedong (1949-76) sought to overcome the problem of the indivisibility of certain forms of new agricultural technology by virtually abolishing private property in land.

Land ownership. Land was transferred to large state farms on the Soviet model, or to farm cooperatives where peasants shared large-scale services. Neither form of agrarian organisation provided sufficient incentives even to achieve self-sufficiency in grain, as the great Chinese famines of 1960-2 demonstrated. Only the agricultural reforms under Mao's successors set a new upward trend in Chinese rural production and income.

Population. Countries with hundreds of millions of poor people in the countryside (see CHINA: Labour shortages trump rural surplus - January 3, 2008) are not in a position to liberalise agricultural trade without robust safeguards against surges of food imports:

• The livelihoods of the bulk of their populations depend on selling the surplus from their low technology, low productivity cultivation to their fellow citizens.
• Imports that suddenly make rural cash incomes disappear would leave the peasants with nothing but pure subsistence, in the absence of a rural social security system.

Governments, not least the Chinese, are wary of putting their people (and themselves) into this kind of jeopardy.