It's not only the CAP that's preventing developing countries from becoming biofuel exporters

Europe's World is a policy journal published three times per year, in co-operation with the independent think tank Friends of Europe. It wants to be a forum for analysis and debate on EU policies in their global context.

The current spring issue features the topic that has kept Europe in its grip during the past few months: energy and the geopolitics that go with it. Europe's energy dependency on Russia is of course key. After the gas-dispute between Russia and Belarus, the world learned how fragile the EU really is, and the crisis united Europeans in their call for a common energy policy.

Against this background, biofuel advocates recently showed that Europe could in principle reduce all imports of Russian gas by 2020, by investing massively in biogas production (earlier post). For our part, we think the EU can drastically cut its dependence on foreign oil, by investing seriously in liquid biofuel production in the South. The technical potential is certainly there (earlier post) and trading biofuels globally makes sense, both from an energetic and climate change perspective (earlier post).

We have always argued that one of the crucial steps needed to make such an initiative viable, is for Europe to abandon protectionist trade barriers (import tariffs on biofuels), non-trade barriers and subsidies (earlier post). But to create a bioenergy trade relationship with the developing world, much more efforts are needed by African, Asian and Latin American countries themselves, on a range of fronts: from investments in the most basic of agricultural techniques aimed at raising productivity and strengthening sustainability (earlier post), in rural communications and basic market access, in science and research (earlier post), to infrastructure and transport (earlier post), good governance and institutional capacity.

Europe's World features an interesting article in this context, written by Andreas Schneider, Research Fellow at the Centre for European Policy Studies (CEPS) in Brussels. In his text "It’s not the CAP that’s hurting the developing countries", Schneider offers an overview of the EU's Common Agricultural Policy (CAP), which is widely reviled for damaging the livelihoods of the world's poorest farmers, and argues that the developing countries' problems stem much more from precisely such structural weaknesses and internal policy shortcomings, and that these should be the targets of reform instead:
biomass :: bioenergy :: biofuels :: energy :: sustainability :: ethanol :: biodiesel :: trade :: Doha :: tariffs :: subsidies :: agriculture :: developing world :: CAP :: EU ::

Europe's common agricultural policy, the CAP, is widely criticised for blocking development in poorer countries, and it's a view frequently heard from NGOs and the developing countries themselves. It's also probably one of the factors in the likely collapse of the WTO's Doha Development Round of international trade negotiations. But what lies behind the claim? Is it mainly rhetoric, or are there hard facts behind it? I would argue that the EU's agricultural policy is often wrongly criticised for hindering development, and that instead it is the lack of local investment and the developing countries' own poor farm business infrastructure that are blocking their growth and economic development.

Central to the debate is the argument that developing countries suffer from barriers to trade and development that result from Europe's and other OECD countries' protectionism primarily in the form of domestic subsidies and export supports. A very different view is that the barriers arise from indirect obstacles to trade, and are the result of the developing countries' lack of institutional capacity to engage in the global economy and to participate on equal terms in multilateral institutions like the WTO. This argument carries some weight as most African, Caribbean, and Pacific (ACP) countries have since the Lomé Convention in 1975 enjoyed a series of preferential trade agreements with the EU that allow free market access of all goods. Lomé's successor pact, the Cotonou Agreement of 2000, expires this year but is set to be followed on similar terms.

Microeconomic factors are often a key factor behind low productivity in so many developing countries, and these factors are seldom coupled to any great degree with the protectionist practices of the EU. The EU's food policy, which is of course part of the CAP, nevertheless influences the agricultural practices of developing countries as it requires their adherence to its standards before products can be exported to Europe. Compliance is costly for developing countries, especially for the least developed, and imposes a huge burden on their export earnings. The world's poorer countries therefore find that they are often faced more with non-trade barriers than with market-access issues.

When it comes to products where developing countries can compete directly, the critical issue is the extent to which EU agricultural policies will influence prices. That's what largely determines the impact on developing countries' farmers. Another key question concerns the products that are most likely to cause price volatility in the EU and thus influence Europe's own farm exports. The products most likely to be affected in developing countries are sugar, cotton, milk and crops like maize. Livestock and fruit and vegetables products tend not to be significantly affected as they are usually protected by non-trade barriers in the form of food safety requirements. As for wheat, the EU's low internal intervention price doesn't usually affect other wheat exporting countries.

Besides cotton, sugar is a commodity that can have a substantial impact on Europe's farmers. Now that EU countries have ratified the Union's new sugar policy, there will be a 36% cut in the EU domestic support paid to sugar producers. This will also affect ACP sugar producers, as the preferential quota that set their sugar exports to the EU at 1.6m tonnes is to be reduced to 1.3m tonnes, cutting their earnings by about €150m a year. The reform means that 2m tonnes less of EU-subsidised sugar will be exported, and that in turn will raise the world sugar price. The main benefits of this will go to countries like Brazil, Thailand, Zambia and Mozambique that enjoy a comparative advantage. Those that will be squeezed are the high-cost Caribbean sugar-producers, as they will not be able to afford to grow sugar without the EU's higher guaranteed payments.

A decrease of 10% in the world sugar price and the subsequent liberalisation of trade by 50% will have a mixed effect on the developing world's farmers. In least developed countries (LDCs) they'll be at a price disadvantage because of cheaper sugar from more competitive producers and the loss of the protection they previously enjoyed. Their sugar is too expensive, and investment for restructuring too slow, for them to take advantage of increased market opportunities.

Another sensitive sector for developing countries is dairy products, which currently enjoy relatively high protection in the EU. Liberalising dairy trade would lead to a decrease in prices, but would also open up a more level playing field by providing farmers in developing countries with greater opportunities in the world's richer markets. However, in many developing countries benefits arising from liberalisation are often captured by officials through nepotism and streamlined marketing channels. The result is that the benefits rarely filter through to farmers.

Despite the preferential trade agreement between most developing countries and the EU, the import quota allowed by the EU has never been filled. This suggests that the developing countries have failed to overcome local barriers to trade like a lack of transport and low productivity. Analysts have long observed inadequate transport from producers to markets, and more importantly inadequate arrangements for shipping the products to international markets. An example of this has been the recent spate of cancelled flights from Zambia to Europe because of insufficient goods traffic. The extent to which an erosion of preferential trade agreements may further exacerbate this situation is now a hotly debated topic.

Another barrier that developing countries impose on themselves is that they often tax their own agriculture. Although it is one of their few viable industries, developing countries often have no choice but to tax their agricultural sector because it's a vital source of government revenue. This contrasts starkly with practice in the EU. The result is that poorer countries' food products become relatively more expensive and lose their competitive edge in world markets, so the new policy thrust should be aimed at making the agriculture more competitive in developing countries.

Developing countries also have a thorny State versus Market problem that is often characterised as "market failure". The inability of private sector markets to deliver all the ingredients of development, together with the imperfect workings of many of these markets, has resulted in a set of market failures that seemed to call for state intervention. But that approach has now been called into question, with analysts instead pointing to "state failure" when development strategies don't deliver. And that often has a more detrimental impact on society than the market failure it purported to overcome.

The greatest problem of all is often said to be the pervasive inefficiency and impropriety of state institutions in developing countries; the familiar charges span mismanagement, malpractice, overstaffing, corruption, bribery, nepotism and personal fortune-seeking. For one reason or another, many farms in developing countries are confronted with incomplete or imperfect markets for their inputs and outputs. Economists point out that sometimes the markets do exist, but function poorly because of a lack of information. Many smaller farms in these countries are in any case unconnected with the market because a substantial share of their food output is consumed by the family rather than sold in the market.

But so far there is little evidence of a link between microeconomic factors − production-related matters like credit and farming methods − and the macroeconomic impact of trade policies. There is plenty of specific evidence on both of these levels individually, but virtually none that explicitly links the two and shows the interaction between them. The link between the liberalisation of trade policy and its impact at farm level in developing countries is still shaky. Some analysis has been done on the effects of Foreign Direct Investment (FDI) and trade, but what has not been done is to assess what impact trade liberalisation will or might have on displacing or complementing local investment in rural areas.

Developing countries would benefit most from a successful conclusion of the Doha Round, even though that would not solve all their internal and microeconomic problems. Completion of Doha would provide developing countries with a net gain in agricultural trade; even though some of the poorest nations stand to lose from the erosion of existing trade preferences as tariffs overall come down, only a handful are likely to be seriously affected. From 2009 onwards, these LDCs would enjoy free market access to the EU's market under the so-called "Everything but Arms" initiative. And while most of the benefits from lowering protectionist barriers would go to a few advanced developing countries, who were expected to make some concessions in return, many of the WTO's poorer members would have had the ‘round for free', meaning that they did not have to open their markets but would enjoy free market access.

It seems clear that in general the EU's agricultural policy is not blocking development in LDCs, as there is free market access with zero quotas. Instead, it is on non-trade barriers that the EU is influencing their policies and affecting their agricultural practises. Both the level of local investment and farm industry knowledge must be improved, and the role that trade reform can play is to improve their domestic agricultural performance.