Free trade and agricultural development in Africa

Free Trade & Africa

Neoclassical free trade theory argues that by opening trade, all parties in the international trading system will benefit. This paper makes the case that this is untrue of the agricultural sector. There are a number of reasons for this. One reason is that the neoclassical version of free trade does not exist in agriculture, and never will. Agriculture is an essential item for communities, which creates disincentives for nations to embrace free trade in agricultural goods. Moreover, wildly different demand patterns around the world, seasonality and perishability introduce variables that make the basic free trade equation substantially more complex where agricultural products are concerned. As a result, the outcomes associated with free trade and agricultural products have been less than ideal. The result of this is that a shift towards a more outcomes-oriented approach for agricultural trade is essential, as the free trade as presently constituted is not only a failure, but indeed is an illusion.

Neoclassical Trade Economics

Trade economics dates to Ricardo's theory of comparative advantage. This theory simply states that if nations trade in those goods in which they have comparative production advantages, global trade overall will increase. As this theory has evolved and been implemented by the world's nations, trade overall has indeed increased. There is no disputing the effectiveness of the central tenets of classical trade economics. These tenets have found their way into the modern trading system, in particular in the move towards globalization that began in the wake of the Second World War.

However, neoclassical trade theory is not without fault. It makes a number of assumptions that do not hold in the real world. One such assumption is that when the system is working perfectly, resources will be used effectively across the planet, and another is that earnings will be equalized across the globe as well. In practice, neither of these conditions has emerged, or even come close to emerging. Neoclassical trade theory also assumes that only relative cost matters, which is not the case. Lastly, it also assumes that factors of production are immobile. This last point is utterly false and indeed the ways in which we have implemented neoclassical trade theory encourages mobility in many factors of production. Capital is the most mobile of the factors of production, and international capital flows have increased exponentially since the movement towards free trade began in earnest. Another factor of production, information -- critical in today's knowledge-based economy, is also fluid across borders. Even labor, a critical factor of production even in Ricardo's time, has some degree of mobility, ranging from moderate mobility to significant mobility in the case of the European Union. Raw materials face more limitations, but those restrictions are being reduced as a direct result of the move towards a global trading system based on neoclassical trade theory. So we can see that some of the key assumptions that underlie the current global trading system do not hold, and it flows that from this that there will be imperfections in a system that is based on imperfect assumptions.

The global trading system that has developed from neoclassical trade theory is focused on free movement of most factors of production. Economies utilize tariffs and other trade barriers to manage the flow of such factors, and the flow of goods as well. The objective of the modern free trade system is to remove as many of these barriers as possible, on the assumption that the removal of trade barriers will bring the global economic system closer to perfect efficiency.

There are a number of implications for modern trade theory on agriculture. One such implication is that as efficiency increases, both as a result of trade and as a result of improving technology, labor resources be shifted from agriculture to industrial production. In a perfect system, this would occur primarily because the labor was simply not needed as the result of improved efficiency. Instead, some labor shifts out of agriculture because agricultural output is poorly compensated when compared to industrial output -- people leave farms because they can make more money elsewhere. This last case exemplifies one of the critical problems with neoclassical views on the agricultural sector -- it relies on macro level rather than micro level economics to understand the sector. Without understanding the decision drivers of individual farmers, neoclassical trade theory is handicapped in attempting to understand the dynamics of agriculture's role in the global trading system.

The Unique Case of Agriculture

Agriculture is a differentiated industry. Neoclassical economic theory assumes that farmers are entirely rational actors, yet many are not. There are a number of reasons for this -- lack of education or information, the need for subsistence, the lack of peasants on land tenure to retain their own profits among them. Each of these factors contributes to a situation where risk is poorly understood and not all actions are rational. Thus, agriculture does not meet the conditions required for efficient market function, even at a structural level.

In addition, one of the major factors of production is subject to a wide range of abnormalities not present in most other industries. Land for agriculture cannot be moved. This critical production factor also tends to be in private hands, where food in general is often treated by governments as a public good, even in Western nations. This leads to a sharp disconnect between the ideal system and the actual system. Private land ownership is, as with the modern economic system in general, a largely Western concept. Private land ownership is concentrated, and often the farmers working the land are not the owners of the land. Yet they are dependent on that land for their survival. In many countries, agricultural workers have no alternate employment options either. In the West, even in Ricardo's time, there were options for workers if they were unable to make a living from the land. This is not the case in many parts of the world, in particular in Africa. Peasants are not poor by choice, but by the simple fact that they have no other options.

Agricultural output -- food in particular -- is often treated as a public good. Western nations utilize government-run marketing boards to control food supply. Most nations have higher tariffs for agricultural goods than for other goods, as food security is considered a critical component of most nations' domestic and international policy. Government interference in agricultural markets is the norm all around the world. The failure of the Doha Round of trade negotiations was directly related to Western nations' intransigence on the issue of agricultural subsidies and tariffs (Kripke, 2007). These ongoing subsidies represent a substantial distortion in global commodity markets (Khor, 2005). Thus, there is no true free trade in food. Given that national security implications of food security, it is unlikely that any nation will voluntarily sacrifice its food production capability under the doctrine of neoclassical trade theory. The only nations that do tend to be those that have no hope of feeding their populations, such as Hong Kong or Singapore.

That land is immovable is central to the problem of treating agricultural output as any other commodity. While all commodities are ultimately constrained, land constraints are evident even today. The modern nation-state contributes to this problem, in particular in regions where the movement of people is restricted. Many nations have insufficient agricultural land with which to feed their populations. While some nations have adapted to this constraint by producing other goods or services that can be traded for food, many nations have been unable to do this. Governance is poor in such nations and those in power often act rationally by abusing that power to the detriment of their nations' people. Yet, the global economic system is not tied directly to democracy or any form of good governance for that matter. If rational politicians and landowners abuse their power to the detriment of the populace, unfortunately free trade does not address this issue. At best, corrupt politicians acting rationally will be replaced by multinational companies that also act rationally, which may be amoral instead of immoral but is equally detrimental to local populations (Murphy, 2009).

If agricultural output was not critical to survival, none of this would be as pressing a concern. Neoclassical trade theory is focused on bringing markets to an equilibrium point. Yet, by its very nature, no market has such a stable equilibrium point. Demand for food fluctuates with population. Supply of food is seasonal, and subject to considerable influence of nature. Because food preferences vary widely, and because most food products are perishable, it is difficult for a global trading system to efficiently allocate the right food to the right people at the right time. Other influences, such as the ongoing decline of arable land due to desertification and urbanization, or the reallocation of food output to non-food uses like biofuel (Feffer, 2008) also contribute to the fact that equilibrium is unattainable for agricultural products, even at peak efficiency. The problem with disequilibrium is that it directly results in death. Disequilibrium in almost any consumer good could cause inconvenience in the face of shortage, but a shortage of food is fatal. This is why governments protect their food supplies -- food markets might behave as any other consumer good but in the sense that society as a whole benefits from avoiding famine and the markets cannot guarantee this avoidance, food also functions as a public good. Public goods will always be subject to considerable regulation - even when competition is introduced and encouraged, it will be met with controls by any non-corrupt government to ensure its ongoing supply. Thus, food will never truly be subject to free trade, and any attempt to impose free trade on the world's food system will inevitably result in moments of disequilibrium and the attendant famine.

An Outcomes-Based Approach

When food markets fail, starvation often results (Diouf, 1989). Neoclassical trade theory views poverty reduction as an a priori outcome of increasing trade and thereby increasing wealth. Yet if poverty reduction is the ultimate objective of the global trading system, it should be defined and understood as such, rather than merely implied (Palley, 2006). While free trade may increase wealth, for this to translate into global food security requires that a number of other conditions also be met (Kripke & Mittal, 2007). The creation of wealth is one issue, the distribution of wealth is another altogether. In agriculture, landowners can create wealth and subsequently fail to distribute that wealth to the farmers who work the land -- this practice may have largely disappeared in the West but it remains common in the developing world. Indeed, Mittal (2007) argues that the current system of farm subsidies in the U.S. perpetuates a similar situation to the advantage of multinational agriculture firms and to the detriment of small family farmers. Free trade in agriculture fails to address this issue.