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Agriculture and The World Trade Organisation

 | 
Gurdarshan Singh Bhalla
, 
Jean-Luc Racine
, 
Frédéric Landy

IV. Trade in agriculture and WTO: benefits and problems

12. Market Dynamism, Trade and Comparative Advantage in Agriculture and Food Industries

Jean-Marc Boussard

Texte intégral

1According to a now well established practice, the next round of WTO negotiation will soon increase the pressure for more trade liberalization. Since food and agriculture are the almost last sectors to get liberalized, they will be the main focus of discussions. The continuation of the tendencies observed during the Uruguay Round is likely.

2In fact, despite advertised results, the Marrakech treaty looks more like a cartel agreement between Europe and USA than a true move toward the abolishment of all protections (Delorme, 1994). But the ideological pressure for liberalization is so great that many will not openly question the desirability of liberalizing the agricultural sector. They will rather try to find escape routes such as, for instance, imposing fake sanitary or environmental regulations, instead of frankly admitting that they are not in favor of tariff and other trade barriers abolition. Such behaviour is discussible, and dangerous, because lying to people, while a frequent short cut in delicate matters, is never a long run solution. In effect, under such an arrangement, the experts in charge of sanitary and environmental problems will bear a responsibility they are not prepared to assume. As a consequence, they will idly reach designed agreements, admitting imports when they should not, and refusing others without serious reasons.

3It would certainly be a more responsible and scientific attitude to tackle the true problem. From a pure economic point of view, are protectionism and trade restrictions justified or not? This is actually the subject of this paper. Of course, the answer cannot be yes or no. There exist very serious reasons to reject protectionism and trade intervention, especially when viewed from a static point of view. These reasons extend themselves to dynamic situations, but only under certain circumstances: we shall investigate these circumstances, and find that agriculture and food are not likely to belong to the set of industries to be liberalized.

Comparative advantage and trade liberalization, from static to dynamic

4Comparative advantage is at the origin of the trade liberalization idea. Any undergraduate student in economics knows the story of Portuguese wine and English cloth, as told by David Ricardo two hundred years ago. Here, the existence of a comparative advantage for wine in Portugal allows trade with Britain to expand the production possibility set of both wine and cloth. Notice that the core of the Ricardian analysis is much more subtle than many people think, even nowadays. The advantage of Portugal is not only in producing wine. Adam Smith, and before him Galiani (1776) and other authors, had already pointed out that trade is useful each time one of the partners is more gifted in producing one of the commodities. This is the case of “absolute” advantage. What is new, in the case of the Ricardian analysis, is that Portugal is more efficient in producing both commodities (80 men for wine and 90 for cloth in Portugal, against 120 and 100, respectively for the same quantities, in England). Hence, Ricardo’s argument is not only designed to convince Portuguese to trade with Englishmen. It is also targeted on those Englishmen who were afraid to trade with Portuguese on the grounds that “low salaries in Portugal would kill employment in England”. But because Englishmen have some comparative (and not absolute) advantage somewhere, they should not be afraid of trade.

  • 1 This condition is sufficient, in elementary optimization mathematics, for any objective fonction to (...)

5In effect, because the joint production possibility set for the two countries is expanded1, it is always possible with trade to find at least one (in the Ricardian example, an infinite number of) situation where nobody is worse off, and some are better off than without trade. Under such circumstances, one would simply be masochist not to trade!

6Yet, the Ricardo analysis has been criticized. Its main flaw is that it does not give any indication on where comparative advantage comes from. This is why further developments of economic analysis were oriented toward this question. Two main sources of absolute or comparative advantage have been identified: nature and factor endowments. More recently, the question of economy of scale and externalities has also drawn attention.

Nature

  • 2 And despite the famous spy novel by John Le Carré!

7This is apparently what Ricardo himself had in mind. As anybody knows2, it is much easier to grow grape in Portugal than in England. In that case, trade is the only reasonable manner by which the consumer of certain countries can be supplied some commodities. Nobody ever advocated taxing bananas at Greenland’s gate, on the grounds that, in this way, Eskimos would be induced to grow bananas by themselves. In effect, an Eskimo who wants to eat bananas, had better trade seal oil against bananas with some Caribbean (or Indian) citizen.

  • 3 The classical answer to this problem is that he will now find an employment as a seal hunter. In ad (...)

8Yet, even in this simple case, the introduction of time considerations into the reasoning can lead to difficulties. Just imagine our Eskimo, being of the highest cleverness, because he knows that contacts with Caribbeans are virtually impossible using 19th century technologies, develops banana production in heated glasshouses along the southern Greenland coast. He makes huge profits from that industry, and develops the taste for bananas among Greenlanders. Then, in the 20th century, steamboats do permit the importing of Caribbean bananas. Clearly, he is ruined. Then, although importing low price bananas is obviously in the interest of most his compatriots, yet, equity-and not only equity, but also interest, as indicated below3 – command to have him compensated for the loss of his job.

9This line of reasoning somewhat widens the traditional static approach of similar questions. Let us forget it temporarily now, and examine the second rationale for trade.

Factor endowment

10This is a more recent, but powerful argument in favor of trade. According to Heckscher and Olhin, trade between two nations allows for a more efficient use of factors, when one is deprived of labour, while the other is deprived of capital. Actually, this argument is not so new, and can be traced back to Adam Smith and his analysis of the pin factory with different skills.

11Notice that this factor endowments argument, at least in its most recent version, has a basically dynamic component, for capital endowment is a matter of time. Since, according to old writers, capital is simply accumulated labor, because the capital per worker in the more capital intensive country would be increased by savings and accumulation, waiting a sufficiently long time would suppress all incentive to trade. In addition, because of the convexity of production possibility sets, and the law of decreasing returns, the marginal productivity of capital in the labor intensive is greater than in the capital intensive country. Therefore, there is an incentive to move capital from one country to the other, thus again creating the conditions of trade diversion.

  • 4 Such situations actually occur. When Spain entered the European Common Market, great concerns were (...)

12In that way, the factor endowment linked comparative advantage is a temporary phenomenon, which should not last for long4. Yet, most analysts are sceptical about the reality, and, above all, the generality of such mechanisms. So that capital accumulation and capital displacement could occur, surplus should actually be shared between parties. This is not always the case, and perhaps the exception rather than rule. Other dynamic considerations in applying the Heckscher-Ohlin model raise true problems. When comparing a situation “with” and a situation “without” trade, it is clear that prices are not the same, especially for factors. In that circumstance, it may happen that some factor prices decrease, even if general theorems ensure that the total value of factors will increase. Consequently, the owners of price decreasing factors will lose from liberalization, while other will gain, just as the “clever Eskimo” alluded to above.

  • 5 A good example of this problem is provided by a recent wotk about trade liberalization, Hertel’s gl (...)
  • 6 From that point of view, the rapid growth of South-East and East Asian economies in the last 15 yea (...)

13In that case, there does not exist much ground to force the owners of price decreasing factors to accept the new situation, unless it is possible to compensate them. But to give them compensations implies the creation of redistribution institutions which are not easy to set up5. Finally, well known facts contradict the main conclusion of this too optimistic theory: firstly, the persistent backwardness of many underdeveloped countries6, where capital accumulation and migration are still to be expected, despite years of patience, and, secondly, the fact that trade is expanding more rapidly between countries with comparable levels of economic development and resources endowment. Similarly, the Leontief paradox casts doubt on the relevance of such theories, even if the real sources of the paradox remain somewhat mysterious. For these reasons, recently, after nature and factor endowment, another source of comparative advantage has been identified, namely: economies of scale and externalities.

Economies of scale and externalities

14This is the new, up to date, fascinating paradigm of international trade (Krugman, 1992). Here, an advantage is a consequence of the fact that, in presence of economies of scale or of externalities, it is possible that some “lumpy” production capacity be partially unused. For instance, with one research center and Internet, I can provide the whole world with word processors. Then, the cost of one copy of the word processor program is extremely low. It is all the more so since, by making use of trade, I can sell more copies to more people in more nations. In addition, this is the only way for me to cover my fixed costs. Thus, trade is all nice. Yet, because my marginal cost is low, I can always sell it at a price sufficiently low to deter any possible competitor from entering the branch. Therefore, I have a monopoly, which allows me to make profit (which is bad from the collectivity point of view), and to sell large quantities at low price (which is undisputedly good, and justifies the profit). The latter will remain unchallenged until a radically new mode of communication emerges from some research originally not targeted at word processing.

15Since discoveries occur more or less randomly anywhere in the world, although preferably in nations having big research and development budgets, some of them (among those which pay for research) get some comparative advantages in some domain. And this is sufficient to feed the trade upsurge that we observe now between developed nations. Again, time is implicitly present into this analysis. Otherwise, the first beneficiary of this process would keep the corresponding rent forever. But this is not the case, quite the contrary. The renewal of techniques imposes a continuous motion of creation and destruction of temporary monopolies, thus contribution to the building of a sort of evolutionary economic geography. At the same time, this motion should not be too rapid. Otherwise, even Bill Gates would not invest in word processing. For that reason, he is given a copyright by the State. In many respects, copyrights, patents and similar institutions play exactly the same role as custom duties.

16This story, obviously, makes a lot of sense. It has inspired a number of models which reproduce reality quite accurately. It is not contradictory with the preceding Ricardo and Heckscher-Ohlin analysis. Rather, it completes and encompasses them - just like the theory of relativity encompasses the Newtonian theory of gravitation. Considered within a static framework, at a given instant, it does not imply any departure from the conclusion already described: trade is always “good”, whatever the value scale used to bear a judgment, simply because relaxing constraints cannot make an optimum worse.

17Firstly, despite the fact that we are here in the core of modern trade and growth theory, the essence of the argument was presented 150 years ago by Friedrich List, observing that “infant industries” should be protected, otherwise they would never be adult. Although the proponents of liberalism ironically observed that “some industries take very long to grow up”, the argument should certainly be taken seriously.

18Secondly, the above developed theory implies that “trade is good”. But it says nothing about how it can be implemented. Once the Kings of England and Portugal have met, and decided to trade, the rate of exchange between cloth and wine is still uncertain. The main advantage of the Heckscher and Ohlin approach is, by relying upon smooth and convex production functions and preferences, to unambiguously determine that price. But, the validity of the approach itself is challenged by the subsequent observations of Krugman on monopolistic competition. It must be clear, and Krugman himself strongly points it out, that in this case, the key problem is not with trade stricto sensu, which is always desirable, but with the functioning of markets, which may prevent the benefit of trade to materialize. Such a situation is particularly likely in the case of agriculture. This idea will be developed now.

The case of agriculture

How specific is agriculture?

19The considerations just developed apply straightforwardly to agriculture. The “natural” comparative advantage is obviously an unambiguous reason to trade, a reason, the strength of which is especially clear in this activity. Again, it is out of question to grow bananas outside tropical areas. On the other hand, the infant industry argument is obviously weak in agriculture. This industry is almost free of any economy of scale because (with perhaps the exception of a few luxury wine productions) no agricultural technique is applicable for a production so great as being capable of influencing the market. Even if I am the owner of a very large, say 1,000 or 10,000 ha farm, I can double my production without the least reaction from the market. This is quite in contrast with most industrial firms. Just imagine Volkswagen doubling its production, and you will consider the consequences on car prices! But if no firm can have any monopoly power in agriculture, then the infant industry and similar arguments no longer apply. They would only be relevant for food processing industries, where, curiously, they are seldom invoked.

  • 7 To be precise, almost the same product, since there are slight differences in the “qualities” of th (...)

20Finally, the factor endowment argument in favor of trade is probably less valid in agriculture than in any other situation. This is a consequence of the flexibility of the agricultural production function. The same commodity, for instance rice, can be produced almost without capital (in Senegal, in addition to seed, many rice growers do not possess any more capital than a burned rod for a light ploughing) or almost without labour (in Texas, one man can harvest 300 ha, against less than 2 in Senegal). Yet, these different production processes give out the same product7 sold on international markets. Obviously, such a situation makes the comparative advantage argument weaker. Methods of production may vary from country to country, but no international specialization emerges from these variations.

21The above discussion suggests that the situation is quite different from one agricultural commodity to another. Absolute and comparative advantages are frequently found, and are enormous in vegetable or fruit production, especially when the climate differences between the Northern and Southern hemispheres are taken into account. At the same time, they are almost absent for many animal productions. In the case of grains, in particular, they are much smaller than what people think in general.

22The most optimistic estimates of the benefits of agricultural trade liberalization, even if they represent a large number of million dollars, are in fact only a very low percent of the world income. Then, one may be puzzled by the anxiety of many economists to impose these relatively moderate gains at the expense of tremendous changes in all rural societies, while one has the impression that a few improvements in industrial organization-for instance, reducing the number of idle workers in developed countries would produce much larger gains for the world national income.

Insurance: another rationale for trade

23Now, one must notice that comparative advantage stricto sensu, as defined above, is far from being the only rationale for agricultural trade. Another reason to trade in agriculture (and in agriculture only) is linked with insurance, as pointed out very early in the literature. Thus, Galiani (1770), discussing the question of trade between French provinces, after having observed that grain can be produced “anywhere”, emphasizes the most important aspect of agricultural trade: when not founded on natural advantage, agricultural commodity trading is a risky business, that only wealthy merchants can undertake, some making fortunes, and others loosing their shirts.

24In effect, because production can be unexpectedly large or small in one specific province, trade plays a role in helping over-producing to relieve under-producing regions. In this way, trade is a substitute to stockpiling, replacing inter-temporal by geographical arbitraging. As pointed out, especially by Bale and Lutz (1979), in presence of independently distributed random shocks across the geographical space, trade is stabilizing. And since many authors, from Waugh (1994) to Just et al., (1978) (also Massel, 1969, Oi, 1961, and many others) have shown the detrimental effect of price fluctuation, this means that trade, even in the absence of comparative advantage, is highly beneficial.

25Yet, for this geographical insurance scheme to be feasible, one more condition is necessary. No insurance scheme is workable without relying on the Law of Large Numbers - which says that many independently distributed small shocks cancel each other. But the question is then: are random shocks affecting agriculture really small and independently distributed, in such a way that the law of large number can be invoked in this matter? The answer depends upon the source of these shocks, which depends itself upon other specificities of agricultural production.

  • 8 The distance of correlation is the maximum geographical distance between two points for the correla (...)
  • 9 Roll (1984) is an outstanding exception. This author demonstrates that if weather undoubtedly influ (...)

26The most natural and frequent assumption with respect to the origin of supply and demand shocks in agriculture is related to climate. Anybody knows that agriculture is climate sensitive (this is obviously true for wheat, less so for milk, probably completely false for hogs), so that the explanation does not seem to require further investigations. Yet, if one relates the magnitude of areas likely to be submitted to one agronomically significant meteorological event with the surface large enough for the reduction or increase of yield to be noticed by markets, then, questions arise. Given that the correlation8 distance between such events is of an order of magnitude of 100 km, it is not surprising that food markets of the 19th century were highly weather sensitive. But this is no more true in the 20th century, when market basins are commonly larger than 1 000 x 1 000 km. In any case, few studies have been made on this subject, which could be an interesting topic for further research9.

27In any case, if the volatility of agricultural prices is caused by climate, then the Bale and Lutz argument for trade is perfectly valid. But one can imagine other and wider sources of volatility. They deserve to be studied.

Can market kill trade?

28As pointed out by the Swedish school of economics at the beginning of the 19th century, a striking fact about markets (agricultural or not) is that they equate instantaneous supply and demand, without the equilibrium being warranted ex ante. Yet, the consequences of this observation are far from having been fully exploited in economic theory.

29The fact is especially important in the case of agriculture, where there exists a cascade of decisions with different time horizons. If I intend to be a cereal grower, I shall make that decision early in my career, and stay in it for many years. If, as a cereal grower, I decide what to produce, I have to take the decision between six months and one year before selling the output. If I have to decide whether I’m stocking or selling my harvest, the planning horizon is a matter of days. Finally, the trader who operates on virtual markets from his computer terminal, buys or sells millions tonnes in a matter of minutes. Since nobody has any real control on grain and commodity markets, the law of supply and demand is extremely efficient in regulating the instant traders market. It is far less clear that it is just as efficient in regulating yearly and decennial production decisions.

  • 10 The "cobweb model" is a set of three equations which describe the functioning of a market:
    P
    t = α qt(...)

30The old Ezekiel (1938) argument still holds in that respect. When in 1935, President Roosevelt decided to save American agriculture (and the American banking system, which was highly dependent upon the capacity of American agriculture to repay its debt), to replace market by administered prices, many traditional Americans spoke against this move toward “socialism” (Lindley, 1934). Ezekiel, one of Roosevelt’s advisors, could convince them of the rationality of the approach, by making use of the “cobweb model”10. The later demonstrated the possibility that a supply and demand system, under the influence of “naïve” expectations, can lead to situations where market never converges toward equilibrium. The chance of such a situation to occur depends exclusively upon the ratio: “slope of demand curve” over “slope of supply curve”, both taken as absolute values. If the absolute value of the demand curve is greater than the supply curve slope, then the market cannot reach its equilibrium. This is a situation which justifies State intervention. State should correct market failures, and if possible establish the situation which the market should have generated if it had functioned normally.

  • 11 It must be recalled that the supply curve and the marginal cost are two closely related notions.

31Now, in the specific case of agricultural markets, it turns out that the demand curve has all the chances to have a large slope, simply because demand is not elastic: large changes in prices do not change demand very much, for at least three reasons. Firstly, agricultural products are mainly used as food, and people are ready to make all kinds of sacrifices to keep their level of food consumption constant. Secondly, as people become wealthier, the price of food is less and less important for them, and, thirdly, as more people live in town, agricultural product prices are less important in determining the final price of food. At the same time, the slope of the supply curve is more or less constant, and relatively small, because, in view of the importance of fixed factors in agricultural production, the marginal cost is normally small11.Thus, there is a need for state intervention in agriculture, and in agriculture only (of course, the argument is not valid for “luxury” agricultural commodities, such as for instance goose livers, that Frenchmen like so much, which can find their market equilibrium by themselves).

32The weakness of Ezekiel’s analysis - a weakness which jeopardized the validity of his conclusion in the eyes of professional economists - was the “naïve expectation scheme”. Firstly, nobody would admit that farmers are stupid enough not to observe that the price two years ago is a better predictor of this year’s price than last year’s price. Secondly, it is clear that nobody ever saw an “exploding” market - which means that something is wrong with the analysis.

  • 12 Muth (1961); see Malinvaud (1994) for details.
  • 13 Specifically, the model suggested by Boussard was:
    P
    t = α qt + β (demand)
    P
    t - Aσtqt = a qt + b (supp (...)

33In the 60’s and 70’s, many alternatives to naïve expectation scheme were proposed, among which Nerlove’s “adaptative expectation scheme” (Nerlove, 1958). None were fully satisfactory (Nerlove, 1979). The least satisfactory of all is certainly Muth’s “rational expectation scheme”12, which results in assuming that farmers, much more skilled than economists, know the market equilibrium point, and make their plans in accordance. I suggested recently (Boussard, 1996) a scheme which keeps the basic simplicity of naïve expectations (although it works with any other “moving average” formula) while explaining “turning points” and the fact that the market cannot “explode”. The key ingredient of the theory is that expectations pertain not only on average price values, but also on their dispersions. Then, while the market is always “locally” unstable (because of the demand/supply curve slopes ratio), with a tendency to explode, it is systematically brought back to “under supply” when it appears that operators are taking too much risk13.

34In that way, it can be shown that agricultural markets are likely to be “chaotic”, that is, price and quantities are apparently random, with no periodicity (although certain values may be more frequent or “probable” that another), but confined within a “box” (they cannot grow to infinity), and unpredictable. The corresponding series are somewhat peculiar, with autocorrelation at all ranks, thus forbidding any attempt to make use of them in any “classical” econometric study (figure 1).

  • 14 For instance Voituriez (1999), Fulponi (1994), Chavas and Holt (1993), Holzer and Precht (1993), et (...)

35Although Boussard’s model may be considered as “special” or “ad hoc”, other authors suggested slightly different but similar analysis. Many tried to check the chaotic character of agricultural price series, often with positive results14. As a consequence of these studies, the chaotic character of many commodity prices and quantity time series is by now widely admitted.

FIGURE 1: A RISK GENERATED COBWEB

FIGURE 1: A RISK GENERATED COBWEB

36But if agricultural commodity price series are chaotic, in addition to being mostly unpredictable, they display very unpleasant characteristics. In particular, the “law of large numbers” cannot be invoked to expect trade functioning as an insurance scheme. The reason is apparent on figure 2a and b, where two independent Boussard’s chaos have been represented. They are identical, with the same A, a, b, α, and β, but not the same starting point. In both case, a given proportion, c, of the market A commodity production is sold on market B2, (and vice versa), thus perturbing the price formation on this market.

  • 15 See Alligood et al (1996).

37In figure 2a, c = 0.1, meaning that 10% of the production of market 1 is sold on market 2, and vice versa. In figure b, this proportion is increased up to 40%. One sees clearly that in experiment a, the two chaos are performing independently one from the other. As a consequence, they “diverge”, each series being different from the other, as expected from two identical chaotic maps starting at different points. But what is striking is the situation of figure b. Then, the motions are quickly synchronized, with the result that the two trajectories are now indistinguishable. This is actually a common behavior for this kind of chaotic functions.15 The main lesson to be drawn from this experiment is that if agricultural price fluctuations are endogenously chaotic, then one should not expect any alleviation of these fluctuations as a consequence of trade. The Bale and Lutz scheme of insurance simply does not work, and is, indeed, very dangerous.

  • 16 Again, this idea has been developed by a large number of authors. Let us only quote Just and Zilber (...)

38In turn, this circumstance implies a considerable departure from the standard assumptions about the optimality of markets. Because, in a risky business, any rational operator requires risk premium and safety nets of all kind, production stays in the strict interior of the production possibility set. It presents thus all the characteristics of “inefficiency”, in such a way that production “with” is always far smaller than production “without risk”16 for the same expected level of price.

FIGURE 2A: RELATONS BETWEEN TWO CHAOTIC COBWEBS: WEAK LINKS BETWEEN MARKETS

FIGURE 2A: RELATONS BETWEEN TWO CHAOTIC COBWEBS: WEAK LINKS BETWEEN MARKETS

39FIGURE 2B: RELATIONS BETWEEN TWO CHAOTIC COBWEBS: STRONG LINKS BETWEEN MARKETS

40Depending upon the characteristics of the price probability law, the slopes of the demand and supply curves, and other circumstances, producer or consumer can lose or gain from price instability. However, there is a consensus for saying that, since the gains of the winner are always smaller than the loss of the loser, society as a whole is losing when playing this game (Waugh, 1944; Oi, 1961; Just, Schmitz and Turnowski, 1978). In effect, in such context, there is a definite possibility that risk actually plays the role of a negative technical progress, shrinking down the production possibility set, just at the same time as trade expands it. Here is probably the core of the reasons why, apart from vested interests and rent seeking parasites, there are very serious reasons for being prudent in accepting uncontrolled trade liberalization when the benefits of trade (as measured by comparative advantages) are not as obvious as it is for tropical commodities.

Which remedies?

41We are thus led to the apparently preposterous conclusion that trade would be really nice if it did not rely on markets and market dynamics. Yet, the conclusion is perhaps not as absurd as it seems. The basic source of difficulty lies in the fact that nobody knows where the equilibrium point is. This is the main flaw of the rational expectation hypothesis to assume such knowledge, although even the most skilled of econometricians is not capable of finding it. Yet, the progress of statistics, modeling, and economic studies, is so large, that the uncertainty about the true equilibrium price of, say, starch, is considerably smaller than the actual interval within which starch price varies on international markets. Would it be possible to mobilize that knowledge in order to reduce uncertainty on this market, and, in this way, to increase by an enormous factor the efficiency of the world starch production system?

42Figure 3 traces out one possibility for doing that. The upper part shows the chaotic motion of a price series generated according to the above described Boussard (1996) model. The lower part shows the same series, in a different situation, where production quotas are imposed on the producer. The level of quotas is determined to be 10% lower than the equilibrium through a deficiency payment from the government. All the production under quota is guaranteed a price which is 10% above equilibrium. If a producer produces more than the quota, he must sell the extra quantity on free market. But for these rules, the two models are identical, with the same naïve expectation, risk aversion, supply and demand curves.

FIGURE 3: EFFECTS OF QUOTA ON PRICE VOLATILITY

FIGURE 3: EFFECTS OF QUOTA ON PRICE VOLATILITY
  • 17 On figure 3, Sc stands for consumer and Sp for producer surplus while G represents government expen (...)

43It is fairly obvious that, in this case, the social benefit from the stabilization policy is large. It has been computed, along standard rules for determining producer and consumer surplus, and found to be important and mainly benefiting to producer.17 The figure is illustrative of what can be expected from wise policies of stabilization. Of course, the difficulty is with the assumption according to which the parameters of the policy (quota levels, and guaranteed prices) are defined by reference to the equilibrium point. This assumption is absurd, since, by construction, one ignores the exact position of the equilibrium. Yet it is given here just in order to demonstrate that a very approximate guess of the equilibrium point is sufficient to set up a very sound policy.

FIGURE 4: US WHEAT PRICE AND PRODUCTION

FIGURE 4: US WHEAT PRICE AND PRODUCTION

Source: Globalfindata.com

  • 18 Displayed pp. 262-263 of the French edition, fig. 81.a and 8.16.

44On the other hand, such kind of market intervention can be, in the long run, extremely beneficial. In their famous book on agriculture and development, Hayami and Ruttan (1985) show a set of series of long run US productions and prices for maize and wheat.18 A striking fact when looking at the series is the break in the 40’s: before that time, prices are high, in average, and volatile. Production growth is slow, mainly ascribable to increase in cropped areas. After 1940, surfaces are shrinking but yields increasing, thus resulting in a rapid growth of production. Guaranteed prices are decreasing slowly, but thanks to the deficiency payment system, market prices are decreasing very rapidly, and smoothly.

  • 19 Obviously, cost lowering is due to technical progress, not directly to stability. But is it possibl (...)

45The reasons for these phenomena are multiple. It is nevertheless possible to assume that the most important of them is the “New Deal” policy, which, in agriculture, consisted mainly in sheltering farmers from market uncertainty. Because of its apparent cost, this policy caused concern in the US and elsewhere. Yet, when taking account of the magnitude of the fall in the real prices of cereals during this period, one may be rather confident that the American taxpayer was largely rewarded from his investments, through an enormous decrease in food costs.19 Actually, by now, food is almost negligible in the budget of many American families. Certainly, they pay high taxes for agriculture. But would they prefer pay less taxes and pay food at the price level it reached in the 50’s?

Conclusion

46This paper began by an apology for trade, which, just like technical progress, cannot be bad. Yet, also just like technical progress, trade can be harmful by preventing decision makers from investing their savings, thus creating a Keynesian wedge between savings and investment. It is the responsibility of State to compensate the loser for their losses to the benefit of the community. This is a strong justification for State intervention in trade.

  • 20 In any case, the Bible traces back such intervention up to antique Egypt, about 2 000 years BC, wit (...)

47But more importantly, we found that markets (and not trade) may cause very unpleasant effects under certain circumstances. In effect, when demand is rigid, markets cannot easily reach an equilibrium. When left to themselves, they create fluctuations which play the role of a negative technical progress - just the opposite of trade. There is a strong suspicion that the agricultural sector, because of its special characteristics, stands among the most likely sectors where such phenomenon are found. This is why State intervention in agricultural market is almost as old as agriculture itself.20 Such a situation implies that trade issues should not be envisaged in terms of static comparisons between the situations “with” or “without” trade as it is now. With such an approach, trade is unambiguously “good”, but all difficulties are masked, and facts are forgotten. Only a more dynamic approach can provide the hints which are necessary before trade can be established on sound and safe rules, for the benefit of mankind.

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Notes

1 This condition is sufficient, in elementary optimization mathematics, for any objective fonction to be greater with than without trade. Thus, this argument is much stronger than the "classical one" (see Bale and Lutz, 1981), which relies on market maximizing the joint surplus of consumers and producers. Market actually maximizes this special social utility function, but the argument is valid for any other one.

2 And despite the famous spy novel by John Le Carré!

3 The classical answer to this problem is that he will now find an employment as a seal hunter. In addition, because everybody’s productivity is increased by progress, seal hunters salaries will rise, thus leaving him with an increased income. This may be true. Yet, there is not the least reason for the personal benefit the owner of the glasshouse will derive from the increased salaries to be sufficient to compensate for the loss of his capital. At the same time, viewed from a dynamic point of view, it is in the interest of the community to encourage audacious ideas such as the building of the glasshouse, which did permit eating bananas even when transportation was not feasible. Now, if no compensation is paid to the owner of the glass house, there are all the reasons for, when confronted with the opportunity of investing in another endeavor such as, say, micro-computers, his comrades to be prudent in breaking their money boxes.

4 Such situations actually occur. When Spain entered the European Common Market, great concerns were expressed by southern French farmers, because, since wages were much lower in Spain than in France, Spain had a definitive comparative advantage in fruits and vegetable productions, which were the main source of income for them. The French government and the EC commission rightfully decided to ignore these complaints. Ten years after the full realization of the custom union, it turned out that wages in Spain had jumped to the EC level, with the consequence that the comparative advantage of this country, if any, had vanished. Recently, during a journey in southern France, I realized that, on the contrary, some Spanish preserve makers were buying tomatoes from Basque country French farmers... Notice that in face of such a situation, in fact, trade was not necessary.

5 A good example of this problem is provided by a recent wotk about trade liberalization, Hertel’s global trade analysis (Hertel, 1997). It is based on a computable general equilibrium model of the world economy which is much more complicated than the Heckscher and Ohlin’s model, although it is based on essentially the same argument. It has the main advantage of producing estimates of the surplus to be expected from a trade liberalization, based on data which are probably the most possibly accurate to get on the subject. In a recent paper (Elberhi et al, 1997), the model is made use of to see who loses and who gains in a trade liberalization round, with the outcome that gains are enormous in Southern Asia, while relatively moderate losses are expected in sub-Saharan Africa. Is it possible, from such an experiment, to infer that "liberalization is good", the gains from Asia largely over compensating the losses of Africa? For such conclusion to be drawn, the elementary welfare theory teaches that a tax should be levied on the Asians, in order to compensate Africans, and that it is the interest of the Asians, who would remain with a positive surplus once the tax paid to set up such a compensatory system. In the absence of such a levy, there are no reasons why the Africans would accept suffering losses for the benefit of the Asians.

6 From that point of view, the rapid growth of South-East and East Asian economies in the last 15 years could be viewed as a confirmation of the theory. But the crisis they suffered from after 1997 reinforces the skepticism of many analysts.

7 To be precise, almost the same product, since there are slight differences in the “qualities” of the rice from different methods of production.

8 The distance of correlation is the maximum geographical distance between two points for the correlation between the probability laws of random events to be non negligible.

9 Roll (1984) is an outstanding exception. This author demonstrates that if weather undoubtedly influences the price of orange juice in Florida, on the other hand, it is far from being the only explanation for orange juice price fluctuations in this country.

10 The "cobweb model" is a set of three equations which describe the functioning of a market:
P
t = α qt + β (demand)
P
t = a qt + b (supply)
Ρt = Pt-1 (expectations)
P
t is the actual equilibrium price at time t, Pt is the expected price, qt is supply at time t, α, β, a, b are coefficients (α<0, a>0). When solved recursively, prices and quantities move up and down in opposite direction. Yet, the behavior of these swinging movements, is governed by the value of c = │α/a│. If c<1, the waves are of decreasing magnitude. They are damped out, in such a way that the system, whatever the starting point, converges toward equilibrium. On the contrary, when c>1, the wave magnitude is constantly growing, so that the system becomes quickly unsustainable, with negative prices and quantities. Ifc = 1, the motion is periodic, but the actual observation of such a situation is unlikely, because any small change in c will turn the system into “exploding” or “converging”.

11 It must be recalled that the supply curve and the marginal cost are two closely related notions.

12 Muth (1961); see Malinvaud (1994) for details.

13 Specifically, the model suggested by Boussard was:
P
t = α qt + β (demand)
P
t - Aσtqt = a qt + b (supply)
P
t = P* (average price expectation)
σ
t2 = (Pt - Pt)2 (average price expectation)
Here, P
t and qt are actual price and quantity at time t. Pt and σt2 are average and variance price expectation at time t.α, β, a, b are “technical” coefficients. P* is a constant. A is a “risk aversion coefficient”. Thus, producers consider the average price as a constant. Only the expected variance of price is subject to change from period to period (modifying this expectation scheme, and replacing P* by some sort of moving average is easy, and does not change results significantly). Producers maximize the certainty equivalent of their revenues, which, after transformation, yields the supply equation.

14 For instance Voituriez (1999), Fulponi (1994), Chavas and Holt (1993), Holzer and Precht (1993), etc.

15 See Alligood et al (1996).

16 Again, this idea has been developed by a large number of authors. Let us only quote Just and Zilberman (1986) among the most famous such colleagues.

17 On figure 3, Sc stands for consumer and Sp for producer surplus while G represents government expenses. In the situation “without quotas”, the collective surplus is 149.9 - 166.7 =-19.8. In the situation “with”, it is given by: 109.5+45.49-44.39 = 110.6.

18 Displayed pp. 262-263 of the French edition, fig. 81.a and 8.16.

19 Obviously, cost lowering is due to technical progress, not directly to stability. But is it possible to think that this technical progress would have been so large under the price fluctuations observed during the 100 preceding years? Especially, is it possible to admit that American fanners, under such conditions, would have borrowed so much, and replaced labour by capital to that extent?

20 In any case, the Bible traces back such intervention up to antique Egypt, about 2 000 years BC, with Joseph’s story, at the end of the Book of Genesis. It is striking to read in this episode that the political legitimacy of the King of Egypt at that time relied on his ability to guarantee a certain degree of food security in the region.

Table des illustrations

Titre FIGURE 1: A RISK GENERATED COBWEB
URL http://books.openedition.org/editionsmsh/docannexe/image/7568/img-1.jpg
Fichier image/jpeg, 88k
Titre FIGURE 2A: RELATONS BETWEEN TWO CHAOTIC COBWEBS: WEAK LINKS BETWEEN MARKETS
URL http://books.openedition.org/editionsmsh/docannexe/image/7568/img-2.jpg
Fichier image/jpeg, 80k
URL http://books.openedition.org/editionsmsh/docannexe/image/7568/img-3.jpg
Fichier image/jpeg, 80k
Titre FIGURE 3: EFFECTS OF QUOTA ON PRICE VOLATILITY
URL http://books.openedition.org/editionsmsh/docannexe/image/7568/img-4.jpg
Fichier image/jpeg, 124k
Titre FIGURE 4: US WHEAT PRICE AND PRODUCTION
Légende Source: Globalfindata.com
URL http://books.openedition.org/editionsmsh/docannexe/image/7568/img-5.jpg
Fichier image/jpeg, 390k

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