The fight against price volatility in developing countries (DCs), including through the prism of managing public reserves, represented one of the key challenges for the WTO Ministerial Conference held in Bali between December 3 and 7, 2013. Yet, the superficial agreement does not provide any solution to the nevertheless crucial issue: How can price instability in developing countries be managed?
We invite you to read the report of the conference and debate hosted by the French Agency for Development (AFD), and are publishing below a summary of the document2
. Distinguished researchers and economists focused on this sensitive issue that addresses the financialization of agricultural markets and related links to price volatility, the strategies to be carried out in DCs to fight hyper-volatility, as well as the required implementation of an effective public action supported by a strengthened global governance system.
In the end, if “there is no universal solution to fight price instability”, as stated by Franck Galtier, it is clear that the uncontrolled liberalization of trade has shown its limitations, especially in developing countries where the agricultural potential has not yet been fully exploited.
With this in mind, momagri thus advocates reshaping the global agricultural governance system through the creation of a global organization for agriculture.
momagri Editorial Board
“There is no universal solution to fight price instability,” says Galtier. The four identified strategies can be modulated and combined in different ways by nations, and implemented with various tools. When dealing with developing countries, governments and the international community has a key role to play.
The liberal doctrine has not generated the expected benefits
The instability of food prices is a crucial issue for developing countries. In the short term, it concerns household finance, and thus food security. In the long term, it adversely affects the development process (Galtier), particularly since it discourages agricultural investment. To address this challenge, calls were made in the 1980s to liberalize agricultural markets and to make use of private risk-coverage instruments, such as insurance, futures contracts and options. That strategy was supposed to foster investment, productivity, and thus the development of agriculture, especially in Africa.
This thinking was widespread both in political and academic circles, especially in international organizations and lenders (Galtier). The disappointing results in terms of price stability and agricultural development, and the many food crises––the Sahel crisis in 2005 and the 2008 crisis in international markets––have shown the limitations of such doctrine. The criticism on the inefficiency of insurance tools may be alleviated however, as “implementing them was seldom tried, or sufficient means to enact them were not available” (Debar). Of course, all was not attempted regarding insurance tools (Galtier).
Yet, we do not have instances of a country where a green revolution would have been fueled by insurance instruments. History teaches us that it is only after agriculture changes and becomes productive that agricultural producers want and are capable of using insurance instruments.
New solutions that restore the legitimacy of public action
The debate was reopened in the 2000s and research efforts were renewed. Four strategies were identified: Two of them aim to stabilize prices and the other two to cut price instability. “It seems that the only strategy able to protect producers in developing countries is guaranteeing ‘floor prices’ through public stocks and the regulation of imports and exports” (Galtier).
While the recommended policies generate positive results––cutting back food insecurity and encouraging investment––their costs, such as governmental budgets and risks of surplus, must be carefully assessed.
It is therefore important to make sure the chosen strategy is the most pertinent for a given country (costs/benefits positive ratio). To that end, a significant analysis must be conducted. “The most probable sources of instability, the possible consequences and eventual correlations must be studied in an in-depth way” (Anton). The objectives targeted must be realistic ones: Floor prices must be set at reasonable levels. The implementation of such policies also requires financial means and reforming trade agreements between nations (Galtier). Lastly, the quality of a governance system and the technical and financial abilities of public authorities are decisive: “Public action must be measured, prudent and not totally disconnected from markets” (François). Implementing such policies requires precise monitoring by authorities. “When these policies reach their objective––transforming agriculture by stimulating investment––these floor prices must be reduced, and then phased out” (Galtier).
The international community must play a decisive role
It must provide developing countries with “financial means, and the reform of WTO rules to ease constraints dictated to developing countries regarding trade agricultural policies” (Galtier). International organizations may help improve governance systems, so that they become “more stable and more reliable” (Anton). Some initiatives have already been launched, such as the Platform for Agricultural Risk Management (PARM).
1 They are, respectively, Researcher in the MOISA unit of the CIRAD; Senior Economist at the OECD Trade and Agriculture Directorate; Head of the Office Assessment and Economic Analysis at the French Ministry of Agriculture’s Center for Studies and Strategic Foresight; and Head of the Department of Agriculture, Rural Development and Biodiversity at the AFD.
2 The full text of the report is available from: http://www.afd.fr/webdav/site/afd/shared/ELEMENTS_COMMUNS/imgs_newsletter_afd/pdf/Conference-iD4D-synthese-instabilite-prix-alimentaires.pdf