||Points of view
A Global Organization for the 21st Century
By Bertrand Munier,
Chief Economist, momagri
The latest setback in the Doha Round must generate further thoughts and most importantly new resolutions. The “Mouvement pour une Organisation Mondiale de l’Agriculture” (momagri)2 ––a think tank promoting a global organization for agriculture––proposes its solutions.
The latest setbak of the “Doha Round”3 last July is mostly due to the issue of agricultural trade. Once again, the discussions on the organization of global agricultural trade confirmed that, whatever one’s vision of globalization is, agriculture deserves special treatment. The specific nature of agriculture does not represent an automatic request but is justified by precise economic characteristics and their oversight partly explains the setback in negotiations.
That is the reason why, when the Doha Round is increasingly the focus of attention under the pretext of providing a quick solution to the crisis, we must not have a too short memory. Rather than rushing into a new round of hastened negotiations, it would be better to question the causes and meanings of previous breakdowns. We will then understand that agriculture is a specific and strategic activity, which must absolutely be dealt with outside of the World Trade Organization (WTO).
There lies the very challenge of assessments and views provided by the global economic model momagri, which, as it focuses on agriculture, generates growing international support. We are presenting below its main aspects.
Currently used models and perils of the Doha vulgate.
The time when key agricultural negotiations were exclusively held in Brussels is now gone. Whether we regret or we approve the development of globalization, today we must include Brazil, India, China, Ukraine and Russia, to mention only a few current agricultural powerhouses that may be joined by others tomorrow. We must therefore stand back, steer clear of the strictly technical issues of successive CAPs and broaden the debate.
Likewise, the time when negotiators only relied on their intuitions is behind us. The complexity of production and trade systems for agricultural products and food demands that economic models, acting as powerful knowledge amplifiers, assist mediators. These models help negotiators to better grasp the consequences of market organization methods or economic policies being discussed. It is thus very important to understand that the use of economic models not only influences, for a large part, the nature, the quality and chances of success for the propositions backed by European negotiators but also, for a certain part, affects the balance of power between Europe and other nations.
Up to now, Europe did not benefit from a model for global general economic equilibrium, or from its own comparable model. It could only rely on partial equilibrium models4 that allowed analyzing the consequences of a given European economic policy on milk prices for instance. Other negotiators were better equipped. Not only the interest for positions that Europeans wanted to back were weakened but this also generated a distressing dependence: in fact, consequences of propositions made by various parties in the Doha Round were often computed by models achieved by institutions outside Europe!5
A model never represents a “scale representation of reality”, as it is sometimes said. It is by definition a selective representation of the world (otherwise it would be too complicated to be useful). A model thus indicates its developers’ levels of concerns and values. Making use of models developed by others thus implies acceptance of the values on which they are based, along with their concrete economic and social consequences. Such cultural dependence carries a subtle form of “covert persuasion”. For all these reasons, it is now imperative––as we move toward 2013––that Europe reacts and outfits itself with a model of its own and consequently steps back from the traditionalism of existing methods, as explained below.
The momagri movement and the model of the same name that we currently firming up are carrying out these ideas. A February 2006 report on the models mostly used at international levels6 was able to bring out the deficiency of the overall formulation of almost all these models––and the “unique thinking” expression is not out of place here. Agricultural producers, with governments providing conditions, are portrayed as a kind of light industry, as we knew it in the 19th century, in a stable and irenic world, where price and quantity upheavals would occur smoothly, akin to Adam Smith’s Pin Factory. But in these models one can ask what then happens to farmers’ need to think ahead when faced with extremely volatile prices? That is ignored. What about the uncertainty that controls this advance thinking, the psychology of risk for farmers and its role in production decisions? None of these considerations ever come up in these models. Then maybe, the part played by rules of intellectual property as well as seed and agricultural innovation? These models do not include such topics. At least, one still asks, does the role of dependence on food imports and a related reassuring compromise come up? It is not even mentioned. How about the asymmetrical influences of some regions on prices? One does not even ask why it should be subject of worry. How about ties to the environment? It is barely mentioned and not included in models…. And so it goes.
While agricultural markets are in fact complex systems, these simplifications lead us to adopt economic policies that do produce projected results and are always inefficient (their costs are excessive compared to results that can be achieved, thus constituting a net loss for the population). Such policies sometimes drive to organize markets in a way that is completely contradictory to the stated objectives (one then achieves a result at the exact opposite of what was hoped for).
These ideas can be generalized by studying the various markets that are characterized by important “financiarization”. This financiarization implies that one deviates from the sacrosanct concept of equilibrium in which global supply equals global demand at any time and in all industries. It implies the inclusion in the models of behaviors of newly important players; such as short-term investors whose motives are purely speculative and whose demand should not be likened to that of final buyers of agricultural goods. Such financiarization means that we take into account a limited rationality of players’ behaviors in a highly uncertain universe, which implies sometimes-heterogeneous expectations from automatically heterogeneous players, because of their tendencies to see the world beyond their own assets.
The policies of pumping “emergency liquid assets” conducted for the past thirty years by central banks (thank you Mr. Greenspan!) and the shortcomings of financial regulating authorities, which allowed the development of instruments and behaviors that gave us the serious crisis we are facing today, stem from serious weaknesses of financial models7 as much as from the lure of gain offered to private investors for the past thirty years. One must understand that equally serious weaknesses describe international agricultural models. The Doha vulgate would lead, if it were implemented, to a crisis that we really do not need, with consequences even more drastic on food supply for the most impoverished populations.
In this context of guiltily ignoring facts of permanent observation, the economic vulgate picked up anew by the WTO holds that the suppression of almost all subsidies, of almost all customs duties, the ignorance of preferential agreements, the free course of intellectual property agreements in matters of new products (in seed farming, in plant biology, in pharmacology, etc…) should lead to the closest economic optimum, thus increasing the wellbeing of global consumers through gradually stabilized and the lowest possible agricultural prices… Hence the assertions, made by the World Bank since 1995, followed by those of the WTO and repeated with very little precaution by many politicians8, which state that the opening of agricultural markets we just outlined would be enough to improve the fate of the most needy people, stabilize prices to the lowest possible levels and increase the purchasing power of the most impoverished populations.
Yet, considerable efforts in that direction during a quarter of century lead us to observe that these formulas––which delivered many expected positive results in manufacturing and some types of services (air transportation for instance)––yielded opposite anticipated effects in the agricultural sector: prices are increasingly volatile, uncertainty is greater than ever, hunger riots are taking place in many countries where poorer populations become ever poorer! Beyond local or interpersonal events widely reported in the medias, we must seek the causes of the latest Doha Round negotiations setback in this ignorance of the specific and complex nature of agricultural markets. Far from the planned development round, the Doha Round became the round of illusions. Will our political leaders now sign off on an agreement based on illusions? Or is it a question of “saving face” in a round that does not flaunt its true countenance, as has already been said.
Reducing agricultural price volatility and harmonizing sustainable development policies.
In the spring of 2008, one was very pleased with the high levels of agricultural prices that nobody seemed to have anticipated. Some were already rejoicing over this fortunate windfall, since they thought that these high prices would remain stable. No agricultural policy, subsidy, custom duty of any kind would thus be needed for agriculture and every type of gurus were promising a rosy future to the world. As it were, it would have meant a new instance of the “End of History” argued by Fukuyama.
One will also observe the flimsiness of our modern soothsayers: only yesterday we were promised the lowest prices, as we just recalled, and today we are rejoicing over current high prices! The public at large rightfully sees this as inconsistencies that destroy its trust in leaders. The events of the past few months are showing that we were right to warn against the false belief that future prices would rise to high levels.
Graph 1: Intermediate version of momagri simulations, international market, a 2001-10 scenario for recognized grain production. We observe that a study of the actual situation showed higher volatility between 2003 and 2007 than that shown in this scenario. Other scenarios more accurately reproduced actual conditions between these dates. This is only an indicative example of behaviors in the grain market.
|More simply, the truth is that agricultural prices show increased volatility (see graph #1) and that it is unwise to assert that we will not recover past levels for these prices, even if it is true that demand for end food consumption should rise in the long term, due to market access by the most destitute populations. This access to market will not be achieved smoothly, as confirmed by the current crisis, unless development policies––infrastructure creation in developing countries, organization of international trade as recommended below––guarantee a cap to this volatility, a higher investment rate and a more secure growth. Agriculture and the production of commodities now account for a crucial share of wealth creation in many developing nations9. Contrary to the model of a straightforward and ideal market conveyed by the above-mentioned Doha vulgate, agricultural markets, unlike other markets, would not reach by themselves this path to stabilization. This is related to the specifics that can be compared to the structure (“macrostructure”) of agricultural markets10.
A market “macrostructure” characteristic to agriculture.
Agriculture is indeed specific since it is the only sector to meet the four following distinctive characters:
1. Once production decisions have been made, an extensive, and sometimes critical natural hazard can arise in the results of harvest. This is the better-known aspect of the problem and results from a direct experience as old as the existence of agriculture itself.
2. Agribusiness leaders have to make decisions in a very uncertain environment, in particular regarding price volatility. In contrast to a widespread analysis, this price volatility is not one and the same as the above-mentioned natural hazard. In fact, historians demonstrate that if this confusion could be accepted in the Middle Ages and up to the mid 19th century, it is no longer valid nowadays. One of the main causes for this change of course lies in the development of transportation and preservation of agricultural products. But this factor should have triggered less erratic agricultural prices. If the opposite occurred, it is because other causes of uncertainty affect agricultural activities.
3. Agribusiness leaders have to make irreversible management decisions and are thus different from industry, service sector and non-agricultural commodity executives. All these activities can gradually adapt their supply according to regularly received data, but farmers cannot significantly do so.
4. Agricultural products do not only meet the end demand and intermediary demands from other industries, but also and at the same time represent backings for large financial transactions, which can often be speculative. The interaction between currency and financial policies and agricultural price volatility is more prevalent than ordinarily thought. In a world not very regulated, one must recognize that demands resulting from these transactions have a key consequence on price level decisions (and that explains substantial variations during the past few years), while none of the above-mentioned models include these components of the problem.
The momagri model therefore undertook the inclusion of agriculture in the global economy by taking into account this set of specific characters. To preserve the model’s relative clearness and readiness makeup, we conceived a modular design that includes, around a general computable model of equilibrium that is “relatively classic”, several modules representing the forgotten phenomena in currently used models outlined above. We are therefore speaking of a complex equilibrium model for a general macroeconomic body/partial agricultural microeconomic unbalances, that incorporates most of the missing elements in the large models officially used until now.
Today, we must restore confidence; speak the truth and model observations. We must not be driven to think that the drop in prices of oil and agricultural commodities during 2008 was only due to the drop in end users’ consumption. And we do not know the breakdown of the two types of demand. In agricultural markets, there is, on one hand, only one overall demand that is conveyed by end users and by financial operators; and on the other hand, the specific nature of these markets above all implies price volatility. And previous increases cannot be justified by the sole increase in end demand but by similar causes. Uncertainty in agricultural markets is partly endogenous.
The geographical scope of the momagri model is global. It therefore represents a challenge met by economic research devoid of general considerations. A prototype (over 6,000 equations), including four zones in the world, 20 economic sectors (among which seven agricultural activities and four agribusinesses fields), has already been tested in March 2008 using a somewhat craftwork-type equipment. One of the achieved simulations for grain and large field crops based on consolidated data for 2001 fits rather well with variations observed up to the end of 2008 (besides the fact that it reveals a somewhat more noticeable volatility than that observed, due to the scenario of a “70 percent completion of Doha” that was supposed to take place in mid-2008 and which did not happen), namely a 55 percent drop in grain and large field crops in a few months. A more complete and automated version of the model covering the same 20 economic sectors but divided into 10 zones throughout the world has been drawn up and recently (March 2009) produced more detailed simulations that include additional scenarios. Whichever scenario is used, a fact remains constant: total liberalization increases volatility.
Tomorrow’s world and the agenda for the international community.
Agriculture will represent a strategic activity of the highest level for tomorrow’s world, just as other commodities and energy. But free market regulations are not complied with everywhere, any more than those of democracy, and they will probably be even less followed in tomorrow’s world than they have been for the past 50 years. Let’s learn from the oil crises: let’s not wait for the first crisis to learn to live in such environment! The concept of international trade of goods and services that we have put into practice since the 18th century––promoted by Turgot or Smith––is indeed commendable but will probably not reflect the reality of future exchanges. The search for optimal economic dependence in certain industries thus becomes a pertinent query and its solution will probably depend on circumstances, even if using simple criteria of effectiveness. Negotiations will be led to override straight market exchanges. Thus, what are to goals to shoot for?
Authorities in charge should immediately aim to reducing agricultural price volatility in every region of the world and, at the same time, make free trade possible, within limitationsto be negotiated , for a group of economic and currency policy tools (customs duties, exchange rates, currency policies, aid to infrastructure policies…). This is the price to pay so that our planet can feed its population. Such objective should not be confused with current WTO projects for industry and services, whatever their merits are. The organization that will tomorrow follow yesterday’s GATT and today’s WTO must thus have a competence limited to these activities. As far as agriculture is concerned, a specific organization should be in charge and have the objectives we just mentioned. This global organization for agriculture remains to be outlined with care. It represents a first-rate challenge for tomorrow’s world.
|1 The main part of this article updates the contents of a commentary published in issue n°31 of France-Forum dated September 2008. It is certainly amazing that recent events confirmed the views expressed in that article. We are grateful to France-Forum editorial board for its kind permission.
2 Mouvement pour l'Organisation Mondiale de l'AGRIculture, 5, rue Saint Germain l'Auxerrois, 75005 Pans.
3 Round of international trade negotiations conducted by the World Trade Organization (WTO) since 1994 and named after the city in which it was initiated.
4 One speaks of partial equilibrium models when the analysis is conducted by sector, without any considerations to the links between various industries. For instance, the industry of alcoholic beverages is examined separately from other industries. The limitations of such type of analysis are obvious. In particular, this can lead, without noticing it, to conclusions that are incompatible with changes in the economy as a whole.
5 We even saw past cases where a single foreign institution advised, on specific issues at the same time, several delegations with various legitimate interests and received sizeable fees from each of them.
6Please consult “Les modèles au banc d’essai” by Nicolas Drouhin, Bertrand Munier and Michel Trommetter, momagri, February 2006.
7 Readers who received a minimal introduction to economic analysis––sorely lacking in France––can be interested by reading “L’Arrogance de la Finance” written by my colleagues H. Bourguinat et E. Bryis printed in early 2009 by La Découverte Publishers.
8 Should economists have warned politicians of the extremely restrictive hypotheses on which their models were based? Be that as it may, they were directed to recommend (and sometimes implement) inadequate policies because of their ignorance––whether voluntary or not––of such hypotheses.
9 We are not considering here lesser developed countries: if the Moscow stock exchange dropped by 30 percent between May and early-June 2008 (equivalent to a yearly slump of 85%, or more than a crash!), it is less due to international events (the Georgia incidents occurred later) than the fact that a significant segment of securities quoted on that market deals with commodities.
10 Our nomenclature on this point has been altered due to our research since September 2008 and we now reserve the term of “microstructure” to the organization of market transactions, in accordance with the widespread practice in the business. In the limited framework of this article, we will not go into this very important aspect of the microstructure used by the momagri model.