India’s food price inflation has been a major driving factor behind the country’s accelerating inflation over the past few years.

In particular, agricultural food prices rose sharply during 2011. The price of vegetables increased by 18 per cent; pulses by 14 per cent; milk by 10 per cent; and eggs, meat and fish by 12 per cent. Fruit and cereal prices also increased, albeit by a smaller margin of 5 per cent and 3 per cent, respectively.

These price escalations are largely due to an inefficient supply chain in agriculture. Some factors which affect agricultural supply and help raise food prices include poor agricultural productivity, a lack of corporate involvement in agriculture, ceilings on landholding size, the existence of middlemen, hoarding, and, more importantly, insufficient cold storage facilities and transportation infrastructure. Around 50 per cent of fresh produce in India rots and goes to waste between the farm gate and the market because of inadequate cold storage facilities and a poor distribution network.

Controlling food price inflation has become an urgent policy objective for the Indian government because of the regressive tax that inflation imposes on Indian consumers. Moreover, persistent and spiralling food inflation threatens the country’s macroeconomic stability and its potential for high and sustained economic growth in the future. Consequently, the Indian Cabinet approved 51 per cent FDI in multi-brand retail on 24 November after intense deliberations at different levels that extended over a year, although these reforms have since stalled. With the clear objective of curbing inflation, the policy came with some riders to protect the interests of neighbourhood stores, farmers, and small- and medium-sized enterprises.

If effectively implemented, allowing FDI has the potential to streamline and modernise the sector through a number of ways. First, the development would bring in foreign capital, technology and the managerial expertise of big international retailers. Second, it would‬ develop an efficient linkage between the back-end supply chain and the front-end via capital investment and technological inputs,‬ creating a proper farm-to-fork infrastructure through direct purchase from farmers and the resultant control of intermediaries. This will also ‬bring about efficient movement of produce through the reduction of transit costs. Third, it would ‬minimise the prevailing wastage of fresh produce by improving upon the country’s existing cold-storage facilities, transport infrastructure, warehousing technology and food-processing facilities. Fourth, FDI should‬ help raise farm productivity through the application of contract farming, increase agricultural production, reduce intermediate costs, render remunerative prices to farmers for their produce and eventually lower final ‬food prices to consumers, thus integrating retailers into the value chain. And fifth, it would create employment in small- and medium-sized industries and back-end infrastructure.

Despite regulatory provisions to ensure domestic competition and protect the domestic retail industry and farmers, the policy received stiff opposition. Concerns included the possibility of foreign entrants’ monopoly power over both farmers and consumers; predatory pricing strategies by the new entrants; manipulation of prices for the entrants’ own benefit and a fall in income, employment and the eventual destruction of the unorganised indigenous retail sector, which is dominated by small family-run outlets.

But it is important to remember that other countries like Argentina, Brazil, Chile, China, Indonesia, Malaysia, Russia, Singapore and Thailand have allowed 100 per cent FDI in multi-brand retail since the 1990s, with encouraging experiences. China, for one, permitted FDI in retail as early as 1992. It has since attracted huge investments in the retail sector without affecting either small retailers or domestic retail chains. Since 2004, the number of small outlets has increased from 1.9 million to over 2.5 million in China. Employment in the retail and wholesale sectors also increased from 28 million to 54 million from 1992 to 2001. And in Indonesia, even after 10 years of opening up to FDI in multi-brand retail, 90 per cent of business remains with small traders.

The favourable experiences of other emerging markets suggest the appropriate implementation of FDI in multi-brand food retailing, with effective checks designed to protect indigenous small- and medium-sized enterprises, will eventually alleviate the supply-side impediments to agricultural production. It will transform the way perishable agricultural produce is acquired, stored, preserved and marketed — and thus help control India’s persistent food inflation.

Nandita Dasgupta teaches economics at the University of Maryland, Baltimore County. She is also Visiting Faculty at Johns Hopkins University. A version of this article was first published here in Columbia FDI Perspectives. 

1. Indian food stocks, prices and the exchange rate
2. Beating back India’s retail Luddites
3. The Indian Budget: Give it the benefit of doubt

Does the recent upturn in grain prices, or more generally food prices, signal a permanent reversal of the long-term downward trend in the real prices of foodstuffs?

This question seems to underlie most comments on the recent food price increases — and, incidentally, commentary on the 2006–08 upturn in primary commodity prices.

Adverse weather events such as droughts in China, Russia, Ukraine, Kazakhstan and Australia, and floods in Australia, India and Pakistan, and the nonsensical subsidising of bio-fuels by the EU, US and Australia have been at least partly responsible for the high level of volatility in food prices since 2006. Disruptions of food supplies due to adverse weather will no doubt continue. Likewise, irresponsible policies by major food producers, which have caused sharp fluctuations in food prices in the past, will no doubt continue.

The real price of foodstuffs (as measured by indices published by the IMF and World Bank) has been trending upwards since 2000 — except during the financial crisis. But this recent upturn is in the context of a downtrend in the index over the past century or so. During this time there have been fairly prolonged upturns: between 1910 and 1920; from the Great Depression to the end of World War II; and in the early 1970s. Is the 2000–2011 period any different? Does it point to a reversal of the century-long downtrend in real prices?

Factors that have been suggested as contributing to a long-term uptrend in the real prices of foodstuffs are the following: higher incomes in large developing countries leading to increased demand for income-elastic foods such as high-protein meats, dairy products, fruits and vegetables, edible oils, and seafood; increased demand for bio-fuels as substitutes for fossil fuels (in competition with their role as food stuffs or feedstuffs); reduced agricultural productivity growth (blamed largely on reduced funding of agricultural research); larger populations and higher incomes — particularly in developing countries — leading to agricultural land being drawn into urban and industrial uses (which means that lower quality arable land is being used in agriculture); higher long-term prices of increasingly scarce water and energy (important agricultural inputs); and the highly uncertain impacts of climate change.

Despite this forbidding list of factors, there is hope that the long-term downtrend in the real prices of food stuffs will continue — largely because the productivity increases that have driven the century-long downtrend will continue. It is noteworthy that over the latter half of the past century — the period of the most rapid growth ever in the world’s population — that agricultural output grew even faster than population growth. The rate of global population growth is slowing down rapidly and future population numbers are not likely to be as dire as the UN Population Division is projecting. I estimate that due to the UN’s propensity to under project the decline in fertility rates across the world that the global population will peak at 500 million to one billion less than what is currently projected. The declining populations now experienced in some countries in East Asia and southern Europe (with Total Fertility Rates close to 1.0, half the replacement rate) will be more of a future concern for many other countries, rather than increasing populations.

Because of the slowdown in the global population growth rate, the world does not need food output to increase as rapidly as it has over the past half century or so. Concerns about the slowdown in agricultural productivity growth are thus not as serious as many make out and should not be used to argue for sharply increased research funding. What is of more concern for agricultural research is that the main research tool in the agricultural researchers kitbag — bio-technology research — is being restricted by the Luddite actions of people trying to prevent such research. Governments need to develop some courage and support bio-tech research strongly.

The continuing slowdown in global population growth will also reduce the concerns about the loss of arable land and the increasing scarcity of water and energy. Water-saving and energy-saving agricultural research will also help to ameliorate such concerns, if allowed, as well as assist in adaptation to any adverse impacts from climate change.

Hopefully incomes in developing countries will continue to increase, leading to greater demand for income-elastic foods. Agricultural research and open trade around the world should allow these demands to be met without permanent increases in real prices. But bad policies, including export bans — which have contributed to the recent price increases — will no doubt remain a continual threat to cheaper, more available foods.

Ron Duncan is Emeritus Professor at the Crawford School of Economics and Government, The Australian National University

1. Indian food stocks, prices and the exchange rate
2. Urgent actions needed to prevent recurring food crises
3. Indonesia: why food self-sufficiency is different from food security

Trade bans often signal a lack of ideas or an attempt to constrain market forces, driven by the more vocal or influential rather than evidence-based policy analysis.

The recent proposed ban on livestock exports to Indonesia seems a prime example of this situation, with a ‘NineMSN’ survey of the issue indicating more than 50 per cent of respondents are against the ban. A better policy approach, as suggested by Permani in this Forum, would have been for Australia to remain engaged with Indonesia, trying to improve the situation with education in terms of better treatment of animals and building on decades of collaborative agricultural research between the two countries, such as that developed by the Australian Centre for International Agricultural Research (ACIAR). Research funded by ACIAR has shown a high value of returns to both countries on research in improving this supply chain, but the imposition of a ban crudely wipes out these gains.

The livestock trade between Australia and Indonesia developed off comparative advantage in both countries. Extensive far northern Australia has a comparative advantage in rearing young cattle. Indonesia has a comparative advantage in fattening and processing such cattle into Halal markets within their region, for example through its cheaper labour costs. Australia is relatively disadvantaged in such processing (with the exception of premium product) by arrangements, such as the tally system. Labour arrangements are based on a fixed number of animals being slaughtered and, in the process, all the benefits of any productivity improvements go to what have become part-time labour in under-utilised facilities, discouraging investment in processing facilities.

The problem in the Australian–Indonesian livestock trade until recently was that an Indonesian ‘ban’ applied; achieved by not issuing licenses, restricting trading ports and the like. This was driven by a self-sufficiency policy that involves aspects such as credit subsidies that, to be effective, need to be very costly from an economic perspective, either by restricting competitive trade or the extent of subsidies (estimated in joint ANU, University of Adelaide and Indonesian Ministry of Trade research to be of the order of $5 billion over five years for 90 per cent self-sufficiency). In contrast, a policy aimed at improving Indonesian productivity through R&D was estimated to be far more cost-effective and actually improved animal welfare. Such R&D is quite diverse and could include humane killing, which is in a producer’s own interests as a traumatic killing generally results in tougher meat that must be sold at lower prices. Such R&D is already provided through non-government channels; for example Australia’s LiveCorp, in a world first, has been developing a strategic vision for improving animal welfare in Indonesia.

The proposed Australian ban on livestock exports to Indonesia will be ineffective in its various guises if the policy objective is better, more humane, treatment of livestock in Indonesia. At first the policy seemed to be specifically abattoir-focused, which was never going to be enforceable. It then shifted to Indonesia as a whole, but again, livestock could have been traded to countries such as the Philippines and then on-sold to Indonesia at little cost given the freer trade among ASEAN members. Indonesia could have tried to constrain this trade — as it has on occasions with Australia through licenses and the like or even on protectionist, non-economic quarantine grounds as Australia does with many products — but that would have been Indonesia shooting itself in the foot, rather than Australia shooting itself in the foot, as it is now. The final move seems to be to ban livestock exports altogether seeing as the WTO may have embarrassed Australian agricultural trade policy again by disapproving of such country-specific policies. The WTO is becoming more concerned with the negative impacts of export bans, taxes and like policies.

The main certainty of the ban from an Australian perspective is that it will cost internationally-competitive Australian jobs to competing exporters like New Zealand or Brazil (via live or slaughtered meat trade competition). It may also induce retaliatory action by Indonesia, most probably a ban or trade constraints against Australian meat imports or even other key imports like wheat, favouring competitors like the United States or Canada. But, ultimately, no one wins in a trade war and Indonesia would lose as well as Australia in such retaliatory actions.

Longer term, all the efforts of trying to convince Indonesia that trade is a better way to address food-security concerns than self-sufficiency policies (which is dependent on a strong certainty of supply through trade) has been badly if not permanently damaged by recent events in Australia. It would have been better all round if the bans had been banned, forcing more thoughtful, efficient policies to be applied.

Dr Ray Trewin is Visiting Fellow at the Crawford School of Economics and Government, Australian National University.

1. Australian cattle exports to Indonesia: ban or more assistance?
2. The end of Doha as we have known it: what next for Australian trade policy?
3. Indonesia: why food self-sufficiency is different from food security

Videos showing Australian cattle being subjected to inhumane treatment in Indonesian abattoirs have prompted calls for an immediate ban on live cattle exports to Indonesia.

But is banning Australia’s only option?

As Indonesia’s per capita income increases there has been increased domestic demand for imported livestock, including from Australia, thanks to its quality, relatively affordable price and availability at the supermarket.

The Indonesian government is hoping to achieve beef self-sufficiency by 2014. To this end, it has launched various programs to assist small farmers and imposed a tariff (which is currently low at 5 per cent and heading to zero under some Free Trade Agreements such as the ASEAN-Australia-New Zealand FTA in 2020) and some non-tariff barriers. This self-sufficiency program may explain why Australia sends live animals to Indonesia instead of beef. The Indonesian government has set the maximum weight of imported live cattle at 350 kilograms to ensure Indonesia receives cattle that will have value added in Indonesia. This has led to the development of the feedlotting business in Indonesia, which receives supplies of feedlot cattle from Australia. The Australian government, through the Australian Centre for International Agricultural Research (ACIAR), has funded several programs to review the effectiveness of the Indonesian government’s programs and investigate the supply chain in the beef market. A complete ban on live cattle exports may lead to these Australian investments in research and development in Indonesia losing all value.

If banning exports is not preferable, working with the Indonesian government to ensure animal welfare might be. Many suggest the ban of Halal slaughtering. But it is not Halal requirements that result in the inhumane treatment of animals. Halal defines what is lawful according to Islamic law including acceptable food, slaughtering procedures, and how Muslims get the money they use to purchase food. Most abattoirs in Indonesia meet Halal requirements. They must apply for the Halal certificate from The Indonesian Ulema Council (Majelis Ulama Indonesia or MUI) and obtain a Veterinary Control Number (Nomor Kontrol Veteriner) from Government Livestock services (Dinas Peternakan) under the Ministry of Agriculture (MoA).

What has been debated is whether stunning must be performed before cutting. This is practised in most Halal abattoirs in Australia and complies with the Australian standard. As stated by Mohamed El-Mouelhy, the chairman of Halal Certification Authority Australia, stunning is completely acceptable under Halal; it is done in Australia and throughout Europe, and Indonesia willingly accepts Halal meat products from overseas abattoirs known to use stun guns. In Indonesia, the MUI allows slaughterhouses to stun the animals before cutting as well as cutting without stunning. To avoid similar cases in the future, perhaps the MUI should regulate to ensure that stunning must be conducted before cutting. Alternatively, if stunning is not conducted before the cutting, there has to be a clear guideline to ensure that the animals die right away.

This episode clearly demonstrates the failure of the Indonesian livestock services system, in particular the monitoring and supervision roles of the MUI and MoA. More regular and stringent monitoring and inspection practices need to be implemented. The lack of monitoring of Halal practises in Indonesia has been a concern of Muslim Indonesians for a long time. Muslim Indonesians are equally as upset as Australians over the issue. Most Muslim Indonesians feel that the inhumane treatment of animals is not in keeping with the spirit of Islam generally, or Halal. They feel their basic need to access Halal food cannot be satisfied by the government.

Australian support for Indonesia to deal with this issue is of critical importance and would be greatly appreciated. Worker exchange and capacity building programs to train the MUI members and MoA officials to supervise and monitor slaughtering effectively would be a positive step forward. Australians should also consider investing in abattoirs in Indonesia, and the Indonesian government must ensure easy market access for investors. LiveCorp has recently launched a strategic vision for improving animal welfare in Indonesia making Australia the only country in the world investing in animal welfare in its overseas markets. This goodwill toward Indonesia may also contribute to Australia’s own economic growth and strengthen Australia’s regional influence.

Risti Permani is a post-doctoral fellow of the School of Economics at the University of Adelaide.

1. Australian–Indonesian livestock trade: Ban the bans
2. Indonesia: Islamic courts as governance institutions
3. Clinton’s visit to Indonesia

Given that Prime Minister Kan has survived the vote of no confidence in his government on Thursday, he may be in a position to make good on the commitment he made at the recent G8 summit to decide Japan’s possible participation in the Trans-Pacific Strategic Economic Partnership (TPP) at an early date.

The subject came up in the conversation between Prime Minister Kan and President Obama. The subtext of the Kan-Obama discussion was US anxiety that in the wake of the disaster, Japan would adopt an inward-looking attitude to international issues such as the TPP. Another unspoken concern was that for the prime minister, who has a weak government, the most difficult issues will be those that take time and require domestic adjustment, such as the TPP.

This made Prime Minister Kan’s comments about the TPP all the more surprising. He said: ‘Although the deadline for the decision on whether we would participate in the TPP negotiations was delayed because of the earthquake, I would like to make a decision as soon as possible after comprehensive discussions.’ The president responded positively: ‘I believe that the TPP will contribute to development in the Asia-Pacific region. I appreciate that Japan is considering participation in spite of the earthquake.’ Obama adopted the same tone as US Trade Representative Ron Kirk in offering encouragement rather than pressuring Japan to join the TPP.

It would be a different story in the negotiations. Japan could expect strong US gaiatsu (external pressure) from the United States on market access issues, particularly for agriculture. Gaiatsu has been a consistent feature of US-Japan trade negotiations for decades, and has been credited with varying degrees of success in opening Japanese markets.

One could argue that both Japan and the United States view the TPP through a similar lens, aiming to revive their own economies by trading more with the fast-growing economies in Asia, thus engineering economic growth through expanded exports.

Beyond this common goal, the question is to what extent US and Japanese economic and trading interests would align in the negotiations. The TPP naysayers in Japan warn that because the United States will become the major power in the TPP, it will influence the negotiations to suit its own interests. Not only will the United States dominate the TPP agenda, including the timing of any final agreement and thereby risking a premature outcome that potentially allows many sensitive sectors to remain protected — but also, for Japan, US pressure would inevitably mean an inability to negotiate favourable terms for its own entry. As Akira Kojima, Senior Fellow of the Japan Center for Economic Research, observes, ever since the ‘TPP was thrust into the Asia-Pacific limelight by the United States’ announcement in November 2009 that it would seek to join this partnership and strengthen its involvement in the dynamically growing economies of Asia … the TPP talks have proceeded at Washington’s pace.’

One of the most outspoken anti-TPP voices in Japan is Assistant Professor Takeshi Nakano of Kyoto University. He argues, ‘if Tokyo’s hastening of Japan’s participation in the TPP is motivated by a diplomatic stance underscored by the nation’s growing dependence on Washington, negotiating rules beneficial to it would be next to impossible.’ The import of this comment is that Japan could not stand up to the United States in the TPP negotiations.

If Japan joined the TPP, it would be tantamount to signing an FTA with the United States. In fact, the United States has made it clear that its TPP goals ‘exceed’ those of past FTAs. The political arm of Japan’s agricultural cooperative organisation, the Zenkoku Noseiren, reports that information leaked from the 5^th round of negotiations amongst existing and prospective TPP members in Chile in February 2011 suggests that the United States is proposing to include all items without exception on their list of liberalisation of trade in goods. This considerably alarms Japan’s agricultural lobby.

Japanese economic analyst, Mitsuhashi Takaaki, argues that America’s TPP goals amount to an ‘an extreme Japan-US FTA’ that extends well beyond issues of agricultural market access. As he writes, ‘I think an increasing number of readers might be starting to realise that the TPP issue in Japan is not an agriculture issue or an issue for exporting industries such as electronics and cars….The US has a reason for wanting Japan to participate in the TPP. It is very simple and clear. The US wants Japan to abolish non-tariff barriers for the benefit of US domestic employment. That is, the US wants [Japanese] deregulation’. This would amount to gaiatsu for Japanese structural reform, reminiscent of the Japan-US Structural Impediments Initiative of 1989, the 1993 Japan-United States Framework for a New Economic Partnership and subsequent to that, the US-Japan Regulatory Reform and Competition Policy Initiative. In Mitsuhashi’s words, ‘“extreme structural reform” is the real spectre of the TPP’.

The import of Mitsuhashi’s comments is that what the United States is really targeting is access to Japan’s markets for financial and insurance services, made more difficult because of the pending government bill reversing the privatisation of postal operations, which raises the spectre of unfair competition in these markets posed by the government-backed Japan Post Holdings Co. Even more alarming is that the United States is also trying to make liberalisation of investment part of an expanded TPP with a view to participating in the Japanese government’s procurement market. In Mitsuhashi’s view, this would bring about the ‘Heisei collapse of Japan’ rather than the ‘Heisei opening of Japan.’

Aurelia George Mulgan is Professor of Politics at the University of New South Wales, Australian Defence Force Academy.

1. Japan now needs a credible fiscal plan
2. No breakthroughs in the Australia-Japan EPA negotiations
3. Japan: The Hatoyama government tackles the alliance early

The Doha Development Round of World Trade Organisation trade negotiations is in deep trouble and could become the first Round to fail.

What will happen if Doha fails?

If Doha is indeed all about agriculture, then not much will have been lost from a producer’s perspective, given current world food prices. And we will still have the WTO rules (dispute settlement mechanism and enforcement) though vastly weakened because of damage to the institution of a failed Round. But if Doha can’t do agriculture, then it surely can’t do behind-the-border reform. And the multilateral system will be further weakened with countries chasing more free trade agreements (FTAs).

The EAF this week features a series of essays on Doha led by Richard Baldwin and Simon Evernett who warn that ‘2011 is a fork in history’s road’ and that ‘if the US and China are unwilling to break the deadlock in 2011, no deal is likely before 2020’.

That matters. A failed Doha ‘would damage the multilateral system in an era when multilateral cooperation is in short supply’ as Peter Drysdale says. Drysdale goes on to argue that it is important since ‘The multilateral trading system is the economic sinew that constrains the exercise of international political muscle in ways that damages global wellbeing and inflicts national self-harm.’

The lack of progress on Doha signals a retreat from the days when international economic diplomacy helped diplomacy on other fronts — especially security. That does not bode well for relations between countries (read China and the United States) with different political systems that would tend towards conflict rather than cooperation without the positive sum economic diplomacy underlying the zero or negative sum security dialogues and interactions.

Ed Gresser explains that Doha is an example of a larger international system problem. Put bluntly, it is an example of the US being prepared to do a deal with anyone but China. We see the signs of this with the Trans-Pacific Partnership (TPP) agreement too with the United States making sign-on by China close to impossible.

What then, of progress with trade reform?

Making progress on trade reform (and economic reform more generally), will not be delivered in trade negotiating forums. As Krugman says, the case for free trade is primarily unilateral. And political will must be urgently mobilised at home.

What’s needed now (from both optimists and pessimists on the Round) is to keep ripping the fig leaf off current efforts at economic diplomacy. Doha is becoming a joke because, as Sourabh Gupta explains, the US keeps shifting the goal posts, with its take-it-or-leave-it diplomacy designed to ensure ‘anyone but China’ outcomes. FTAs are a joke because they are with nations that don’t matter in the total scheme of global trade and are designed by the powerful to exclude anything that matters or brings real gains. It’s hard to see how such FTAs could create a serious domino effect that is likely to bring in the other big players, as some still argue. If FTAs were about trade and economics, the United States would be negotiating with China and a Japan-China FTA would be on the table as well. So current economic diplomacy has become empty of content.

The world does not yet have a plan B. And losing all that has been gained in the 10 years of negotiating Doha is a monumental waste. What gains have been achieved should be locked in with a take-what-there-is deal because there is enough there and it is critical not to weaken the whole system at this juncture.

Leaders ‘should argue that Doha needs to be done to preserve one of the world’s most precious public good – the rules-based, WTO-centric trade system’. ‘It is a system’, as Baldwin and Evenett remind us, ‘that has created so much prosperity in America and lifted so many people out of poverty in China, India and Brazil’ that’s worth saving.

And while further actual trade and behind-the-border reform will now require mostly unilateral effort, a Plan B on economic diplomacy is vital because of the implications for security.

Philippa Dee is Adjunct Associate Professor at the Crawford School of Economics and Government at the ANU and Shiro Armstrong is currently a Visiting Fellow at Columbia University and Editor of the EAF.

1. Implementing the G20 commitment to World Trade Reform
2. Trade policy needs to go global
3. The end of Doha as we have known it: what next for Australian trade policy?

Author: G.E. Anderson, UCLA

Last October I wrote about a situation in which BYD, the private automaker from Shenzhen, was punished for attempting to build a factory on farmland near Xi’an.

BYD was fined about US$435,000, and seven buildings, on which it had already begun construction, were confiscated and ordered to be destroyed. In addition, 14 local officials in Shaanxi province were also punished for violating rules forbidding the use of arable land for non-farming purposes. This came in a tough year for BYD, whose sales only grew 16 per cent in 2010 (compared to China’s auto industry as a whole, which enjoyed a 32 per cent growth rate).

The story surfaced that BYD was preparing to restart construction in Xi’an. According to an earlier story in the Economic Observer, the land has been ‘legalised’ (合法化) and re-zoned as industrial land. BYD was allowed to bid for the land in a public auction, and, unsurprisingly, won the auction. (There was no word on whether anyone else bid for the land.)

Even though BYD did not get back all of the land it had secured before, it managed to retain most of it. And most conveniently, it got the part of the land on which its unfinished construction already stood. Back in October, an announcement from the Ministry of Land and Resources said BYD’s buildings would have to be destroyed, but, fortunately for BYD, no one had got around to destroying them yet.

This strikes me as quite a miraculous turnabout for BYD. The problem that led to BYD’s punishment was (and is) that China, despite being a huge country, has precious little of the arable land it needs to feed 1.3 billion people. The central government has recently become quite serious about preserving arable land.

But not that serious, apparently.

In the months following BYD’s punishment last October, local officials in Xi’an had begun to complain that they had been deprived of a major source of local income — sales of land use rights. The Economic Observer quoted a local official as saying that Shaanxi’s annual demand for industrial land is running at about 400,000 mu (67,000 acres) per year, but they are only able to supply about 150,000 mu.

I was initially happy to see the central government finally taking a stand last fall by supporting their own laws forbidding illegal use of arable land. For once, it wasn’t just about the money. At the time, I took this as a positive sign that rule-of-law was actually starting to mean something in China.

It’s amazing to me how a scarce resource such as arable land could have been so quickly and easily ‘rezoned’ as industrial. Apparently it really was about the money.

G.E. Anderson is a PhD candidate at the University of California Los Angeles, and is Principal of Pacific Rim Advisors.

This article originally appeared here on ChinaBizGov.

1. Land reform in China
2. Land at the heart of China’s reform
3. India: The problems of land acquisition

The recent volatility of international food prices has reinforced the mistrust felt within many food-importing countries towards international markets as suppliers of affordable food.

One possible response is to become less reliant on food imports. Concern about food security thus becomes transformed into concern about food self-sufficiency.

But food security and food self-sufficiency are different things and they can be in conflict. In this paper I will discuss the relationship between these two concepts in the Indonesian context, focusing on the staple food, rice. According to the World Food Summit of 1996, food security exists when all people, at all times, have physical and economic access to enough safe and nutritious food to meet their dietary needs and food preferences for an active and healthy lifestyle.

Indonesia is a net importer of all of its major staple food commodities, including rice, maize, cassava, soybeans and sugar, even though domestic production of each of these commodities is substantial. Prior to the Asian Financial Crisis of 1997 to 1999 rice import policy within Indonesia was to stabilise domestic rice prices at approximately the average international price. Until the early 2000s, Indonesia was the world’s largest rice importer. With the country’s transition to a more democratic form of government, the successful lobbying power of pro-farmer political groups led first to heavy tariffs on rice imports. Then, since 2004, rice imports have officially been banned, although limited quantities of imports have periodically been allowed. As a result of this policy, the price of rice within Indonesia has increased relative to other prices by about 40 per cent.

The argument advanced here is not that Indonesia’s self-sufficiency policy is a bad idea, but that protection policy (the import ban) as an instrument of achieving it results in unnecessary social costs and places food self-sufficiency into conflict with the goals of food security and poverty reduction. The distributional effects of protection policy as a means of reducing imports are the basis of the argument.

Consider the economic effects of a policy of restricting the quantity of rice imports, as under Indonesia’s ‘leaky’ import ban. The policy acts directly on the quantity of imports but its effect is to raise the domestic price by reducing the availability of imported rice. How much will the domestic price increase? A quantitative restriction on imports acts on the volume imported and lets the domestic price adjust accordingly. The domestic price will increase until the difference between the quantity demanded domestically and the quantity supplied domestically declines to the lower volume of imports now permitted under the quantitative restriction. When both the demand for rice and the supply are price inelastic, as is the case with rice, a large price increase is necessary to achieve this reduction in the volume of imports.

Obviously, people who are net consumers of rice are harmed by an increase in the price. But which consumers are harmed the most? Unfortunately, the answer is: the households for which rice is the highest proportion of their budgets – the poorest consumers. This includes not only the urban poor but also most of the rural poor, a surprising majority of whom are net buyers of rice. For example, this includes all landless agricultural labourers – people who sell their labour and buy rice.

What about the effect on producers? Obviously, anyone who is a net seller of rice benefits. Who benefits the most? The answer is obvious: those who sell the most – the largest farmers. Small farmers are both consumers and producers of food. Their net sales of rice might be positive or negative or, if they are subsistence farmers, zero. But if their net sales are positive they are small. Price changes have very little net impact on this group of farmers, one way or the other.

Some of the largest beneficiaries are not farmers at all. First, there are absentee landowners. Agricultural product prices become capitalised into the price of agricultural land. Raising the price of rice benefits anyone who owns rice land, or land that could be used to produce rice and these landowners are not necessarily farmers. Second, there are the rice millers. The import restriction operates on milled rice and the immediate impact is on the price of that product, rather than the price of paddy. Rice millers benefit directly from the increase in the price of their product. Paddy prices may increase as a result of the increased price of milled rice, but not necessarily in the same proportion. Third, those importers who receive the limited entitlement to import rice receive a windfall profit – the difference between the import price and the higher domestic price multiplied by the quantity of rice they are allowed to import.

Policies for pursuing rice self-sufficiency by raising the domestic price of rice are, in effect, policies for transferring massive amounts of money from the pockets of the poorest Indonesian consumers of rice to other, much richer Indonesians: large farmers, absentee landowners, rice millers and quota recipients. The policy achieves ‘self-sufficiency’, but only at the expense of reducing the food security of the most vulnerable people – the poorest net consumers.

A preferable strategy for raising self-sufficiency is to focus more effectively on improving agricultural productivity. This reduces imports by raising agricultural output but does so without raising the domestic price of food and so without creating a conflict between the goals of higher levels of self-sufficiency on the one hand and food security and poverty reduction on the other.

Peter Warr is Head of the Arndt-Corden Department of Economics and John Crawford Professor of Agricultural Economics in the College of Asia and the Pacific at the Australian National University.

1. How to achieve global food security
2. Ensuring Japan’s food security through free trade not tariffs
3. Self sufficiency in food and the Doha round

Japan’s triple earthquake, tsunami and nuclear disaster continue to have widespread ramifications for Japan’s agricultural sector and agricultural trade policy.

No doubt, the Australian Prime Minister’s advisors will be closely monitoring developments, or the lack thereof, as she heads off to Japan on 20 April.

Five main prefectures have borne the brunt of the disaster. Miyagi, Fukushima, Iwate, Ibaraki and Aomori are also major agricultural producing areas. Japan’s Ministry of Agriculture, Forestry and Fisheries (MAFF) has produced an assessment that reveals the area of cultivated land either washed away or damaged by flooding in these five prefectures (and also in Chiba). Of almost a million hectares under cultivation in these six prefectures, 23,600, or 2.6 per cent was damaged (85 per cent of it rice paddies and the rest upland fields). In Miyagi 11 per cent of farmland was washed away or damaged by flooding.

Miyagi was the hardest-hit prefecture. It estimates damage to agriculture at ¥414.2 billion (US$ 5 billion), a figure that is expected to increase. This includes ¥357.3 billion (US$ 4.3 billion) in agricultural land and facilities, ¥30.1 billion (US$ 0.36 billion) in greenhouses, storehouses and other infrastructure, ¥2.6 billion (US$ 31 million) in agricultural products, and ¥2.1 billion yen (US$ 25 million) in damage to livestock and related facilities and products. One report has revealed that approximately 80 per cent of cultivated land in the eastern districts of Miyagi prefecture has been damaged by the tsunami. It is assumed that the planting of crops will be impossible this year, and for several years to follow.

On top of this, Chief Cabinet Secretary Yukio Edano and Minister of Agriculture, Forestry and Fisheries Michihiko Kano announced in a press conference on 9 April that rice fields would be subject to planting restrictions if the concentration of radioactive caesium exceeds 5000 becquerel (a radioactivity measurement unit) per square kilometre. In a report presented on 6 April by Fukushima prefecture, there were four districts where the concentration of radioactive caesium exceeded 5000 becquerel. The MAFF has also released a table listing all agricultural products that are subject to shipping or consumption restrictions due to the detection of radioactive substances, which is extensive.

The situation in agriculture affects the government’s trade policy in several ways.

Firstly, the farmers in these areas will be looking to government rescue packages and measures to ease their losses and to allow them to get back to producing and marketing their produce. To impose any kind of a free trade agreement on Japanese farmers at this time would be like adding insult to injury. There are widespread perceptions that free trade agreements with major agricultural producers such as Australia and the United States, and Japan’s participation in the TPP, would come at great cost to Japanese agriculture. This argument would carry a great deal more weight in the present circumstances than previously. Not surprisingly, the Kan administration has taken these trade policy ventures off the policy agenda for the time being, and the prime minister is immersing himself in a revival scenario in order to save his government. It would be too politically risky for his administration, which has not been able to halt the slide in its public popularity, to broach such initiatives at this time. The emphasis will be on public spending as the means to revive industries and regions affected by the disaster and on assistance to these industries, not on reforming them.

Secondly, it is possible that the government’s policy of income subsidies to farmers may be reviewed owing to changed fiscal conditions. The main giveaways incorporated in the DPJ’s 2009 manifesto are childcare allowances, abolition of highway tolls, tuition-free public high schools and farm income subsidies. These may all be adjusted in an attempt to obtain funds necessary for the rebuilding process. Both the main opposition LDP and Komeito parties are encouraging the government to review these policies in order to free up more fiscal resources. As a result, they may be revised or frozen as part of the horse-trading needed to pass the supplementary budgets and budget-related bills vital for financing reconstruction. As direct income subsidies for farmers would compensate agricultural producers for price falls consequent upon market opening, they represent a vital support to the government’s free trade policy. Hence, the likely fiscal squeeze may indirectly undermine any moves to liberalise trade.

Thirdly, one of the big selling points of the government’s interlinking of agricultural reform with free trade agreements was the prospect of increased agricultural exports. A number of countries have either banned or are restricting food imports from Japan, including Australia, and the likelihood is that Japanese agricultural exports will be viewed internationally as carrying greater risk of radioactive contamination. In these circumstances, the argument that agricultural reform could lead to greater food exports no longer applies.

Fourthly, the food security argument as a justification for maintaining high levels of agricultural protection will again arise in the wake of the current disasters. This is not because Japan is suffering a significant production shortfall (there is an ample supply of rice, for example), but because the triple disasters precipitated a distribution crisis, with food disappearing off the shelves of many stores. These events will re-awaken in the minds of the Japanese public a sense of how domestic or international disasters of one kind or another can disrupt vital food supplies. In the event of an emergency, Japan simply cannot feed itself.

The powerful and emotive concept of food security is absolutely pivotal to arguments justifying the maintenance of agricultural import barriers and the jewel in the crown of agricultural protectionist arguments against market opening. It is a persuasive weapon in the hands of vested agricultural interests not the least because it aligns so clearly and unambiguously with national concerns in a way that resonates amongst the Japanese public at large. Anxieties about food security are deeply rooted in Japanese history. They originate in the constraints on total agricultural output arising from the limitations of land area, land use, and periodic famine and food shortages in the past. Concerns about national food supply were evident in the pre-war years and also in the immediate post-war period when rapid increases in rice production were necessary to feed a nation on the verge of starvation. A similar emphasis on simply maximising domestic production will be seen in government agricultural policy.

In crisis lies opportunity, however. One constructive proposal has been advanced by Terashima Jitsuro, President of the Japan Research Institute, who argues that it will take the creation of a new food production and distribution industry to revive the regional economy in Tohoku, where food is a key industry. The revival of the regional food industry (interlinking agricultural production, processing and distribution stages) will need the input of technology and funds from the industrial sector, which may contribute to the industrialisation of agriculture in that area and engender greater cooperation between the agricultural and industrial sectors rather than conflict (as in the case of the debate over the TPP). Industrialising agriculture, which is strongly supported by the Ministry of Economy, Trade and Industry (METI), is a key aspect of not only the farm sector’s revival but also its ability to cope with further market opening.

Aurelia George Mulgan is Professor of Politics at the University of New South Wales, Australian Defence Force Academy.

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The Australia-Japan Economic Partnership Agreement (EPA) negotiations are the first real test of the Kan government’s new trade policy of ‘opening up Japan’ and a chance for it to show that it means business when it comes to agricultural trade liberalisation and economic reform.

However, if progress — or lack of it — in the new round of Australia-Japan negotiations is any guide to how successfully Japan’s revamped trade policy is being implemented, then it is difficult to be optimistic about a major breakthrough on Japan’s agricultural market access issues any time soon. The wider implications of failure are even more significant — Japan will have fallen at the first hurdle on its way to the TPP and a leadership role in Asia Pacific integration.

In fact, for Japan’s National Strategy Minister, Gemba Koichiro, the chief value of the Australia-Japan EPA negotiations seems to be as a trial run for the TPP. In the January issue of Voice he wrote: ‘bilateral agreements are easier to accommodate domestically because some allowances can be made for maintaining tariffs on certain products … tariffs on some products remain, in line with the particular situation in each country … Similarly, if Japan first makes progress in advancing economic ties with its key trading partners, it will be in a more advantageous position, should it join the TPP, to negotiate for some products to be exempt from tariffs or for tariffs to be eliminated in stages.’

The negotiations began with both sides affirming their existing positions — the ones that led to the breakdown of talks last April. In particular, Japan’s Ministry of Agriculture, Forestry and Fisheries (MAFF) wants beef, wheat, dairy products and sugar to be treated as exceptions to tariff abolition — the very items on which the Australian side is demanding that tariffs be scrapped. The only major concession on agriculture appears to have come from the Australian side: it is now willing to exempt rice from tariff abolition, which is important from a Japanese perspective because it sets a precedent for the TPP negotiations, though not a good one.

Basing bilateral negotiations on this premise will make the Japanese side less willing to make concessions on agriculture, not more. In fact, the same old problems that stymied previous negotiations have not gone away.

The Kan government is still allowing the MAFF to make the running in the trade negotiations on agriculture, staking out its customary position of treating high-tariff agricultural items as exceptions to liberalisation. Not only do high tariffs protect domestic agricultural producers but the MAFF also has an institutionally vested interest in the current import regime because of the profit it makes on the purchase and resale of wheat. Similarly, the government-funded Agriculture & Livestock Industries Corporation (ALIC) makes a profit on the import and resale of dairy products, sugar, starch and corn for starch. These state trades are a lucrative source of off-budget funding for domestic agricultural industries.

Second, Prime Minister Kan has neither his wider ministry nor his own party under control on trade policy matters, and particularly on agricultural trade policy. Prime Minister Kan and his National Strategy Minister, Gemba Kōichirō, both of whom want an EPA signed with Australia by June, are seemingly incapable of imposing top-down, trade policy leadership that can override the naysayers in their own party and in the government. Both MAFF Minister Kano Michihiko and Deputy MAFF Minister Tsutsui Nobutaka want to protect Japanese agriculture even at the price of undercutting the implementation of the government’s new trade policy. Deputy MAFF Minister Tsutsui was quoted at a press conference four days before the restart of Australia-Japan negotiations as saying ‘we have no intention of changing our position on key items. The situation of tough negotiations will continue.’

This begs the larger question of whether Japan has the kind of political processes that can deliver reform in areas where vested interests are entrenched, such as in agriculture. There are major problems with party discipline, with divided ministries and with cabinet solidarity, which make it almost impossible to run coherent government, especially for reforming prime ministers.

Political parties in Japan remain conglomerations of individual Diet members pushing their own political barrows, while all too often ministers remain spokespersons for their ministries rather than for agreed government policy. It is difficult to believe that Deputy MAFF Minister Tsutsui belongs to the same party and same government as Prime Minister Kan and others in the cabinet supporting the government’s official trade policy, including National Strategy Minister Gemba, as well as Foreign Minister Maehara Seiji and Trade Minister Kaieda.

The same vertically divided bureaucracy that blocked change under successive LDP administrations is still all too evident. The appointment of the new METI Minister Kaieda, whose early, surprise trip to Australia this weekend at least symbolises the importance he attaches to the relationship, and earlier, the selection of Deputy Minister Matsushita Tadahiro, a late convert to the cause of agricultural trade liberalisation, to lead the pro-trade METI might have ‘levelled the playing field’ vis-à-vis the MAFF, its minister and deputy minister, but does nothing to mend a divided cabinet in which ministers representing the differing policy interests of their ministries cancel each other out.

Japan has a fragmented system of negotiating trade agreements — no single institution with final negotiation authority and no reliable mechanisms for coordinating conflicting intra-bureaucratic interests, or party-government interests. Kan’s idea of appointing Gemba as Policy Affairs Research Council (PARC) Chief and as Minister of National Strategy at the same time, and tasking him with carrying out adjustment between the party and the government on agricultural reform and trade liberalisation was designed to bridge the divide that has often stymied reform in the past. But Gemba is just another minister amongst many, and without a ministry, his status is lower in the cabinet pecking order. It has certainly not been sufficient to guarantee that the government would speak with one voice on trade policy because of all the other manifest problems in the policy process.

What Japan needs is an Office of Special Trade Negotiator with a cabinet minister in charge, which has authoritative powers of policy coordination across the ministries on trade matters, and which carries sufficient authority to negotiate deals on behalf of the government, thus bypassing vested bureaucratic and political interests. South Korea successfully implemented a similar institutional innovation, and it proved decisive in achieving a breakthrough on FTA negotiations with the United States and Europe. South Korea is showing the way in both this respect and in terms of the way in which it has compensated farmers for the likely influx of agricultural imports.

The official enunciation of a new trade policy without successful implementation remains simply a statement of good intentions. The risk remains that Japan’s political process will condemn it to the sidelines of major developments in regional economic integration, including the TPP.

Nor do we know how long the Kan government’s current trade policy will last. The Kan administration could fall — as early as next month — either through a Lower House election, or through the resignation of the prime minister and his cabinet. Right now the survival of his government is uppermost in Kan’s mind as he strives to pass the budget bills through the Diet before the beginning of the new financial year on 1 April.

Aurelia George Mulgan is Professor of Politics at the University of New South Wales, Australian Defence Force Academy.

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