Food for thought

Written by Siddhartha Mitra | Updated: Jul 28 2008, 04:07am hrs
The Uruguay Round of the General Agreement on Tariffs and Trade (GATT) resulted in a decline in the tariffs imposed by developed countries to negligible levels. This was a matter of considerable jubilation for developing countries as their exports could now enter developed country markets more easily. Indeed experts reasoned that in the new era of almost complete openness in trade, countries could now specialise in areas of their comparative advantage to maximise productivity and then use the exchange mechanism underlying trade to augment welfare.

Thus, it was pointed out that self-sufficiency in food grains was no longer required by a country as it could meet its food grain deficits through resources generated from exports. The only people that emphasised self-reliance in food grains were stoic nationalists, who did not want to depend on other countries for their daily bread or bow to the cold logic offered by economists. The subsequent turn of events has vindicated the stand taken by such nationalists and defeated the cold logical arguments offered by pedants.

The above developments can be explained in the following manner. When developing countries pulled at and demolished the traditional system of tariff barriers to trade, they expected easier entry of their primary products into developed countries. Instead, most developed countries came up with an even more deadly and sophisticated set of barriers to agricultural trade which were promoted under the garb of national self interest. These were termed as Technical Barriers to Trade (TBT) and Sanitary and Phyto-Sanitary (SPS) Measures. TBT were linked to product and process specifications. For example, using such restrictions an export consignment of mangoes can be returned if they are not of a certain hue or size or if the processes used for cultivation have not met certain requirements.

SPS measures on the other hand try to anticipate the danger caused to human, plant and animal health by export consignments through tests for concentrations of chemicals and pesticide residues. A ceiling is set for concentrations of residues in consignments. Consignments which exhibit concentrations exceeding this ceiling are returned to the country of origin by the importing country. These barriers have become so important that in a single year from August 2002 to July 2003, the US Food and Drug Administration rejected 630 Chinese shipments of agricultural and aquatic products. These barriers can therefore be a source of considerable loss for the exporting country.

India too has come under the hammer of such barriers and is likely to do so again and again in the future. The government has tried to tackle such barriers by promoting agricultural exporting zones in select crops. These zones try to encourage organic cultivation of cash crops, fruits and vegetables as such cultivation does not involve the use of chemical fertilizers and pesticides and therefore minimises the chances of rejection of exports because of SPS and TBT regulations.

It must be remembered though that organic cultivation is not only more labour intensive than conventional cultivation, but also involves un-remunerative crop rotation which diminishes income of the farmer. Moreover, organic yields are often lower then conventional yields. Further, the price premium provided for organic produce in international markets often is not high enough to compensate for the various increases in cost that a switch to organic farming entails and justify such cultivation for exports. The silver lining is that niche markets for organic products are projected to grow in the immediate future and price premiums being offered for them are also likely to widen.

The implication of the above discussion is that a country cannot rush headlong into specialisation in crops for export. Given the various cost increases that a switch from conventional to organic farming involves, the decision to produce organic crops has to involve a careful comparison of underlying costs and benefits. The decision to farm organically for export should be taken only if the benefits over-compensate the attendant costs. Thus, the above considerations dictate that crops can be cultivated for agricultural export only to a limited extent. In cases where the price premium being offered for organic produce in the international market does not compensate for the decrease in yields caused by a switch to organic farming or the attendant increases in costs, such a switch is not justified.

Thus, the traditional argument about focusing on areas of comparative advantage does not go through in the changed scenario as this very comparative advantage has been distorted by the mentioned non-tariff barriers. Therefore, a large-scale switch from food grain cultivation to export-oriented production which would then pay for resulting food grain deficits is no longer feasible. Indeed such a strategy could be dangerous and result in a massive net drain of foreign exchange reserves with the inflows from agricultural exports nowhere matching the outflows due to food grain imports.

To conclude, the need for self reliance in food grains still holds in todays seemingly open but much more strategic world. The stoicism of nationalists emerges triumphant over the cold logic of the economic rationalist. In economics, like in life, the heart should sometimes be allowed to rule over the head.

The writer is Director (Research), CUTS International and can be reached at sm2@cuts.org