1. FOOD SECURITY
Concepts, Basic Facts,
and Measurement Issues
June 26 to July 7, 2006
Dhaka, Bangladesh

2. Rao 4b:
Factors in Food Security 2:
Trade and Aid
Learning: The important role of foreign trade and
aid in the functioning of the FS system in many
countries will be delineated. Trainees learn to use
the analytic models developed earlier to analyse
food aid impacts, incentives and efficacy.

3. Brief Contents
• trends in role of food trade and their significance
• the competitive structure of global food markets
• international specialization: pro and con FS
• unbalanced trade, concept of terms of trade, and
the food terms of trade
• the GATT Agreement on Agriculture; implications
of WTO for FS
• role and types of food aid: programme, relief and
project aid
• analysis of aid impacts: aid types and deficit types

4. Historical Trends in the Role of
Trade
• International food markets have developed very slowly.
Transport & storage costs were huge barriers.
• Highly valued tropical spices dominated trade before 18th
century. Thereafter sugar and tobacco, wheat and corn became
important tradables.
• The trade patterns established in 18-19 c still linger on today.
Western colonising powers developed their industrial export
markets which were paid for through export of cash crops such
as coffee, tea, rubber and palm oil. Late industrializers such as
USA and Japan imposed stiff protective tariffs against imports.
Thus, trade was selectively free in the colonizing but free trade
was often imposed on the colonized.

5. Historical Trends (contd)
• The depression & WWII saw colonies badly affected by
plummeting world prices.
• Since WWII, cash crops are still major export earners for many
developing economies (DEs) though many in SSA are food
importers.
• The cereals self-sufficiency of pre-1930s has given way to cereals
being 40% of food imports of developing nations.
• The trade ratio for all cereals was 12% in 1993, 4% for
rice, …22% for wheat. For comparison, 99% of coffee
production was traded in 1993.
• The "North" exports commodities also consumed
domestically, the "South" commodities with a minuscule home
market.

6. The Competitiveness of International
Markets
• Free Trade Argument Two countries N and S, which consume
both commodities A & B and can produce both, CAN, by
concentrating resources on producing the one which they can
produce with greater relative efficiency, and trading that for the
other, increase their total consumption of A & B combined.
• Basis of Comparative Advantage Could be climate and soils but
also could be result of decades of investment in technology &
appropriate infrastructure.
• Structures of Trade (Prebisch) Primary goods specialization can
lock countries into slow-growing markets, and so either slow
growth or falling terms of trade. This is a major explanation for
inequality between N(orth) and S(outh) - recall the historical
origins of the international division of labor.
• Many DEs are, in the short run, forced to choose between cash
crops for F/E to pay for manufactured goods and, for many,
even food OR to go for more food self-sufficiency

7. International Markets in Food
Commodities
• These markets can scarcely be described as "free and
competitive". Most advanced economies (AEs) have heavily
protected farmers and farm exports.
• AEs have invented increasingly novel ways to protect farmers -
concessional sales of surplus output, set aside schemes, and
sanitary/phytosanitary regulations.
• These measures "exported" problem of low and unstable prices.
Many believe this to have hurt DE farmers and a key cause of
their poverty. The Uruguay-GATT was 1st to include AG in
trade negotiations. Yet, AG remains the sector with much
higher average rates of protection than industry in most AEs.
• But some doubt the relevance of highly protective policies
pursued by some for the decision of others to keep their AG
trade open or not. Yet others doubt whether the prices in world
markets are the or even a fundamental force of poverty and low
growth in DEs.

8. International Specialisation Pro
Food Security
Can international specialization improve food security? Consider
some pros:
• It can spread some risks: a domestic food crop failure can be met
with imports paid for by cash-crop exports.
• A country with more developed trade can also import food at
lower transport cost and more easily. [But we can ask: does high
trade makes for low transport costs or lost transport costs makes
for more trade?]
• Insofar as greater trade yields greater national prosperity, this too
can indicate better economic access to food. [Again we can ask:
does greater trade make for greater national income or greater
national prosperity cause greater external trade?]

9. International Specialisation Con
Food Security
There are also cons one must note:
• International markets are not inherently less risky than domestic
markets. World prices are often highly unstable. Most DEs end
up buying & selling in unpredictable markets.
• Some grain markets are notoriously thin (e.g., rice). Such a small
proportion of world rice production is traded that variations in
domestic production or demand result in very high price
changes. Other markets (e.g., wheat) are more robust but
dominated by a few major suppliers leading to dependence on
one supplier and political influence.
• Even if trade benefits the "country overall", it may hurt the
food-insecure and the vulnerable through adverse distributional
shifts in income.

10. Unbalanced International Trade and
Globalization
• Though often defended as the theory of international trade, the
theory of comparative advantage makes some fundamental
assumptions that do not seem to apply in practice. Major
imbalanced prevail and the gains from trade highly unequally
distributed.
• The rich North controls over 65% of world exports and most of
the very large expansion in trade since WWII has been on
account of the North.
• North-North trade accounts for more than half of all trade while
South-South trade is a mere 3 percent. The North is the main
export market of both the North itself and of the South.
• Trade expansion has substantially reduced the share of primary
commodities (AG products, fuel and minerals).
• Primary products constitute about half of DE exports, and about
15% of AE exports. Many DE are dependent on export of one
or two primary commodities.

11. Unbalanced Trade (contd)
• Low income elasticities coupled with new technologies restrict
the growth of demand for raw products. Increased production
can only be absorbed at decreasing world market prices.
• Primaries have highly competitive market structures as compared
to the monopolies and oligopolies that prevail in advanced
manufactures or services.
• DE suffer from greater export revenue fluctuations causing
fiscal, macroeconomic and sectoral instability.
• All these factors have major implications for FS in the affected
countries. They reduce or cause instability in food import
supplies. By raising income risks, they prevent diversification
and commercial development and so cause low incomes. This
leads to a widening of market supply/import deficit as well as
the demand deficit.

12. The Terms of Trade
Box 4.4: Terms of Trade
'Terms of Trade' are a measurement for the change of conditions in international trade. The
following Terms of Trade concepts can be distinguished:
1) Commodity or Barter Terms of Trade show changes in prices of export commodities in
relation to the price changes of import commodities (PE/PM).
2) Income Terms of Trade measure the total export proceeds of a country (export volume
multiplied by export prices) in comparison with the total expenditures for imports (import
volume multiplied by export prices) (EPE/MPM)
3) Factor Terms of Trade take, in addition to price changes, differences in productivity into
consideration. They answer the question, how much can be imported for a given level of labour
or capital input in export production (Single Factor Terms of Trade), or what is the rate of
exchange of factor inputs in export production for factor inputs abroad in imported goods. To
give an example: A skilled worker in Germany had to spend his wage income of 22 working
days in order to buy an Indian carpet which was produced by an Indian carpet knitter in 240
working days.

13. GATT and AG Reform
Until 1993, 2 major sectors of concern to DE (AG and textiles)
remained outside the GATT purview. The Uruguay round
changed that situation. Apart from tariff reductions, the
agreement also allows some differential treatment of DE.

14. GATT and AG Reform (contd)
Box 4.5: The GATT Uruguay Round Agreement on Agriculture
The implementation of the AA started in 1995, and the commitments of the AE to reduce
support and export subsidies, to expand market access was to be completed by year 2000 while
the commitments of the DE were to be completed by 2004.. The least developed countries are
not required to make any reductions. The commodity coverage of the AA includes most AG
products except rubber, jute, sisal, abaca and coir. The exclusion of certain products from the
definition of agriculture does not imply that commitments to improve market access are not to
be made. They are covered by negotiations under industrial products. However, domestic
support measures for these latter commodities are completely excluded from reduction
commitments as there are no such commitments for industrial products. Although the
negotiations on tropical products were conducted separately from those on agriculture, in the
end they have been grouped together with other agricultural products.

15. Uruguay Round Implications for
Food Security
• What are UR’s implications for Negotiations for development
and FS?
• Tariffication of barriers & tariff reductions are thought to make
world markets more transparent and economies more integrated.
This can enhance world-wide efficiency, growth, and hence FS.
• But liberalization will produce very limited gains for tropical
products and for most low-income countries. Some, such as
Lomé Convention countries, may even lose.
• If surplus production declines in AE, then, world prices are
expected to rise. Aid supplies are also likely to decline. This will
negatively affect FS in food-importing DE, in food-aid-
dependent nations, and also stability of grain supplies. Its
stimulating effect on food production may remain highly limited
given the low supply elasticity typical of agriculture.
• It is AE that stand most to gain from liberalisation. So trade-
based inequities will be compounded, not diminished.

16. The Role of Aid
• Food aid is, more than any other type of
aid, specifically designed to enhance food
security. Food aid is a resource transfer in-kind
of food at concessional or better-than-market
terms. It originated mostly as an instrument of
surplus disposal of the surplus countries
(USA, Europe in particular).
• Major food aid donors are the US, EU and the
World Food Program.

17. Types of Food Aid
Food aid is classified into 3 main categories:
• Programme, or non-project food aid
• Relief food aid,
• Project food aid.
This classification is not clear since the purposes can criss-
cross in practice.
Countries dependent on food aid would, in its absence, be
hurt by reduced food availability, or sharp price rises
due to commercial imports, or to a worsened balance of
payment.

18. Programmed Food Aid
• Programme food aid is provided to governments
mainly for BOP or budget support.
• It is usually sold on local markets at prevailing or
subsidized prices, but may also be used to build
up buffer stocks.
• The "aid component" depends on the
conditionalities of the aid given.
• Its effectiveness in FS depends on the
conditionalities and on the type of deficit.

19. Relief Food Aid
• Relief food aid is provided so as to be targeted to beneficiaries
who are victims of natural or man-made disasters. It accounted
for 26 percent of all 1993 food aid.
• SSA received about two third of the total in 1993.
• Setting up distribution channels in emergencies is always
difficult, especially in remote and inaccessible areas. But
provisions can be made including vulnerability assessment, early
warning systems, food security reserves at strategic locations, an
institutional framework for effective response on all levels, etc.
• Effective relief assistance is assistance that is targeted by
commodity type, quantity, and time according to need. But
targeting cannot be accurate. General food relief beyond an
emergency must be phased out to avoid dependency and
distortions of local food production and marketing systems.

20. Project Food Aid
• Project food aid is similar to relief aid in that it is
provided on a grant basis, in support of specific
development objectives and beneficiary groups.
• Part of project food aid deliveries may also be
monetised to generate funds to pay the costs of internal
distribution.
• The difference between programme and project food
aid is, in the latter case, largely reduced to the fact that
food aid is not provided directly to the government.

21. The Role of Food Aid Interventions
in Alleviating Food Insecurity
• The aid type depends on the nature of food
deficit & its causes (deficits being market
supply/import deficit and an effective demand
deficit). In Fig 4.6, p is import price and
total deficit = market supply deficit (B-A)
+ aggregate demand deficit (R-B)

22. Food deficits and the scope of food
aid interventions

23. Deficit Types & Aid Types
• B-A: Market supply/import deficit: Need for
commercial imports or (if F/E constrained)
programme food aid to cover gap between domestic D
and S.
• R-B: Demand deficit: Need for project and/or relief
food aid for targeted distribution to those lacking
entitlements.
• R-A: Total (structural) food deficit: Needs to be
covered by imports, and programme/project/relief aid
in order to meet total requirements.

24. Avoiding Disincentive Effects
Programme Aid can substitute for commercial imports to
cover (B-A) under a F/E constraint. The food aid can
be monetised up to B-A without affecting domestic
incentives. This, however, only applies under two
essential conditions:
• 1) That the imports+aid do not exceed the deficit.
• 2) The food aid must not be sold at "dumping prices"

25. Avoiding Disincentive Effects
• Relief & Project Aid A demand deficit (R-B) is due to
insufficient food entitlements. Targeted approaches of
employment and income generation or direct food transfers can
help. These are classical fields of relief and project food aid.
• But aid may lead to the sale of relief and Food for Work (FFW)
rations by the beneficiaries. This may be due to poor targeting.
Other reasons include immediate cash needs or preference for
other types of food commodities, etc. Such factors may cause the
recipients of relief and project food aid to sell part of the rations
received, in spite of the fact that their household food
requirements are not fully met.

26. Improving the Efficacy of Food Aid
Interventions
Assessment of food aid efficacy must take into account:
• objectives of the food aid: improving FS, F/E
support, fiscal support [Note: donor and recipient
nations may have different goals]
• type of prevailing deficit (production, market supply,
and/or demand deficits, latent, transitory or chronic
food shortages)
• agricultural and food policy and the role of food aid
in national food and/or nutrition strategies
• The intended and the actual use of food aid

27. Improving the Efficacy of Food Aid
Interventions (contd)
• the extent to which target groups are effectively reached
• Disincentive risks of food aid resulting from distortions of the
local food system
• The costs of food aid interventions (procurement
costs, international transport costs, internal transport and storage
costs, administrative and management costs, leakage, etc.), VS
alternative forms of "food" aid (e.g financial aid for imports, etc)
• To what extent food aid supplies represent additional
resources VS competing for resources with other forms of
development assistance
• The cost-effectiveness of food aid interventions in achieving
food security in comparison with alternatives