Opportunities for Green Trade – Agriculture

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Why agriculture?
Having realized that consuming local foods is not always environmentally-preferable to consuming imported products (see my last post), what else can I do to save the planet as a conscious consumer? Obviously, I go for organic food. And as the number of fellow conscious consumers has significantly increased the last decade or so, aggregate demand for organic foods and drinks (OFD) has followed suit. In fact, the global market for OFD has more than tripled between 1999 and 2009 (see Figure 1).

Source: http://ictsd.org/downloads/2012/06/trade-and-green-economy.pdf

 

“So what?”,  you might ask, why is that important for developing countries?

      1. First, a closer look at the spatial composition of supply and demand reveals a significant role for international trade. In terms of sales, global consumption of OFD is highly concentrated in developed economics, the largest markets being the United States, Germany and France. A stunning 96% of global OFD consumption is concentrated in these countries, whereas more than 80% of producers are located in developing countries or emerging markets.
      2. Second, the share of agriculture in developing countries’ overall economies is typically relatively high, making agriculture particularly important as a source of income. Of course this is a double-edged sword, as agricultural commodity price fluctuations are quite substantial. But often lacking sound industrial bases, developing countries’ agricultural sectors are relatively easy targets for productivity and environmentally-friendly upgrading. The potential to build on existing infrastructure warrants – at least in the short run – most “bang for the bucks”.
      3. The third point that is often put forward is that many developing countries enjoy a comparative advantage in the agricultural sector. This concept implies that countries export what they are relatively best at (i.e. vis-a-vis other sectors and other countries). The underlying reason is that agriculture is typically labor and land intensive and both are factors of production that are relatively abundant in many developing countries.

Hence, as consumer awareness is expected to grow, so will the opportunities for developing countries to export ODF.

Windows of Opportunity?

In this context, it is not surprising that many of the panelists at the numerous side events on related topics at Rio+20 tend to agree with this reasoning. Yovita Ivanova of Pontifica Universidad Catolica del Peru, panelist at the Multi-stakeholder Dialogue on Trade Opportunities in the Context of a Green Economy Transition, explored the opportunities of Peru in exploiting its exceptional biodiversity to harness global trends in OFD. She pointed out that Peruvian biodiversity-based products fetch a price premium of up to 2000% when exported to the US market. Products like quinoa and purple corn are increasingly popular with western customers as organic supermarkets flourish worldwide.

Conventional agricultural products also fetch higher premia when produced organically, creating jobs and fostering eco-tourism at home. Of course, these products are not restricted to agriculture, and organically cultivated produce finds much end-use in a variety of products, such as organic cosmetics. The free samples of Brazilian NATURA cosmetics handed out to Rio+20 conference attendees naturally spring to mind.

Virginia Reyes Gatjens of CEDARENA spoke about Costa Rica’s strategy to promote organic agriculture and argued that active government involvement is crucial. Devising incentive-compatible financing schemes for ecosystem services provided by land-owners, setting the right tax incentives for energy use and active export promotion are just a sample of the tasks that governments can undertake in order to promote green agricultural products trade.

These benefits are not confined to export revenue, as Alexander Kasterine of the International Trade Centre (ITC) emphasizes: a move towards adoption of organic production methods in agriculture could improve developed countries’ trade balances, as they would save on costly inputs like fertilizers.

Moustapha Kamal Gueye of UNEP cites the case of coffee exports in Uganda as a success story for the adoption of organic cultivation methods. He gives the example of Sub-Saharan Africa, where agricultural productivity is low and average fertilizer use is only 1/10 of the global average in terms of kilogram per hectare. How can we improve African productivity? According to Gueye, following industrial agriculture’s lead in heavily making use of synthetic fertilizers is only one of the available options to farmers to increase productivity. Referring to organic cultivation practices, he argues that there are many other options that are much more environmentally friendly. Moreover, as western countries adopt increasingly stringent standards, Africa stands to lose if policymakers do not go for raising productivity through such “greener” means. Still, he laments, the African Union has recently decided to significantly increase its productivity – not by organic means, but by a heavy increase in fertilizer use.

Challenges
So far, organic agriculture is still a small, but growing, segment of overall agricultural production. In the Rio+20 panels, it seems as if policy makers in developing countries were reluctant to adopt measures that would move their countries towards the adoption of organic agriculture. I can think of a number of reasons why this might be so:

Unclear cost-benefit situation
Promoting sustainable organic cultivation practices is costly and benefits do not materialize immediately. Widespread poverty often makes it politically difficult to effectively regulate e.g. water use through pricing mechanisms and subsidies on fossil fuels and/or agricultural output are often seen as a key support to the poor. Moreover, there is still a lot of uncertainty as to the long-term success of organic agriculture, as it is a relatively new phenomenon (see figure 1). Countries may not be willing to incur the initial costs of developing an organic sector lest demand might ebb in the future. In fact, Robert Skidmore, Head of ITC’s Sector Competitiveness Section told me that their consultants hesitate to advise developing country firms to adopt organic production methods, as global markets for their products often simply do not exist yet. Referring to organic cotton producers in Mali, he pointed out that certified organic producers were forced to sell at conventional cotton rates, as the market for organic cotton is saturated. Foregoing the premium on organic products, this caused them to incur substantial losses.

Country heterogeneity
Developing countries are heterogeneous with respect to their endowments. While the adoption of organic cultivation practices for coffee in Uganda seems to have been very successful, it is not clear to what extent this could be replicated in, say, Ethiopia. The quality of land differs greatly from one African country to another and countries will therefore have varying difficulty adopting organic methods, at varying costs. The move by the African Union assembling a whole range of diverse countries might appear more understandable with this background.

Barriers to agriculture as an engine for growth
Agriculture is the most heavily protected economic sector in OECD countries and the inability of concluding the Doha Round of negotiations in the WTO stand testimony to the reluctance of developed countries to liberalize this sector. Shielding these markets where most of global demand for organic agricultural produce originates from developing country exports significantly reduces the scope for identifying promising export sectors.

Focus on diversification and industrialisation
Last but not least, developing countries have over the last decades attempted to diversify their economies away from agriculture (see e.g. Economic Development in Africa Report 2011 by UNCTAD/UNIDO). Activist government policies in the export-led growth of newly industrialized countries in Asia have led to a revival of the concept of Industrial Policy. As rising levels of economic well-being are associated with a relative decline of the share of the agricultural sector, many observers today see an important role for developing country governments in strengthening the manufacturing sector. In his new book New Structural Economics, former World Bank Chief Economist Justin Lin argues for government intervention to “upgrade” industries consistent with countries’ latent comparative advantage. While the concept of upgrading could easily cover the move towards organic agriculture in developing countries’ comparative advantage sector that is agriculture , Mattoo and Subramanian find that recent successful emerging economies have grown not only by following comparative advantage, but by defying it. Ha-Joon Chang makes a similar point in his book Kicking Away the Ladder: Development Strategy in Historical Perspectivestressing the crucial role of government-promoted manufacturing industries in countries’ development process. Hausmann et al. have developed a novel way to look at the problem (see figure below), introducing the idea of a country’s product space. As a full explanation is beyond the scope of this article, the interested reader is re-directed to their work cited above. A country’s product space illustrates the extent to which a country’s products are connected to other products it produces and the ease with which an economy can move to producing new goods depends on how close these are to existing product capabilities. Taking a closer look at the picture below illustrating the global product space, we find that agricultural products are mostly located at the periphery of the product space, indicating less connectedness to other products. Continuing this line of argument, each country may want to look at its own product space to determine which sectors are most likely worth developing.

http://atlas.media.mit.edu/media/atlas/pdf/HarvardMIT_AtlasOfEconomicComplexity_Part_I.pdf

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