Current Studies:

Commodity Risk Management and Commodity Exchanges

Commodity markets are volatile, and all countries have probably engaged in some type of public effort to manage commodity price risks. This research project reviews the development of international efforts to tame commodity markets and the economic thought that is behind those efforts. The study draws distinctions among the categories of risk faced by producers, consumers, and governments in developing countries and suggests appropriate roles for governments and for the international community. And it assesses whether the commodity price risk markets that have developed so rapidly over the past decade offer promising market-based policy alternatives.

Overall, the research has found that developing countries are hurt by commodity price volatility and that early efforts to deal with price volatility were unsatisfactory. Many institutions are looking for new solutions, and a growing number of private companies and governments in developing countries use commodity derivatives to hedge price risks. But commodity-dependent developing countries face problems in gaining access to market-based commodity risk management instruments, with counterparty risk and lack of institutional and legal and regulatory frameworks among the most serious ones.

Roundtable discussions were conducted on April 28, 1998, to address issues of commodity price uncertainty in developing countries. About 40 international experts participated in the discussions, including academics, providers of risk management instruments, and representatives of consulting firms, international commodity organizations, international financial institutions, UNCTAD, the European Union, and the African, Caribbean, and Pacific States. A proceedings volume based on the roundtable discussions is under preparation.

Implementation of the Uruguay Round Agreement on Agriculture:
New Issues and Progress in Post-Round Liberalization

The achievements of the Uruguay Round in bringing agriculture under GATT disciplines are well documented. New rules on market access were developed to control import barriers, reduce tariffs, and convert nontariff barriers into ordinary customs duties. But it is the implementation of the commitments made under the Uruguay Round that will determine both the economic impact of the Round and the starting point of future multilateral liberalizations, and only now is it apparent how countries have implemented their generalized commitments.

This research provides an ex post evaluation of countries' implementation of Uruguay Round commitments in market access in 1995-96. Based on actual implementation by 33 countries, the analysis evaluated whether countries are choosing to implement their commitments according to the spirit of the agreement or taking advantage of the opportunities it provides to manage trade and maintain protection. The study covered Australia, Canada, the European Union, Japan, New Zealand, Norway, the United States, and selected countries in Asia (India, the Republic of Korea, and the Philippines), Central Europe (Poland), Latin America (Chile, Colombia, Costa Rica, Guatemala, and Mexico), the Middle East (Egypt and Morocco), and Africa (Tunisia and Zimbabwe). The study estimated applied nominal protection based on price comparisons and a trade restrictiveness index for selected case study countries. It drew on data from World Trade Organization (WTO) country notifications, tariff schedules from governments, and UNCTAD sources.

The results show that the newly established tariff rate quotas created new opportunities for rent seeking and government intervention in agricultural trade. The new tariff rate quotas are allocated to particular countries, domestic producer groups, or state trading enterprises with monopoly or exclusive rights. Thus the new trade regimes have resulted in coalitions to preserve the status quo. The applied protection above the tariff quotas during the first year of implementation of the Uruguay Round is high in many products. The amount of liberalized trade is controlled by the tariff quotas, and market access is subject to administrative rather than market forces in these products. In some products under state trading in several countries, the operations of the state trading enterprise effectively nullify the intended objectives of the market access concessions reached under the Uruguay Round. Significant price distortions remain in trade in products subject to state trading.

For industrial countries the findings of high applied protection in agricultural products suggest that further reforms in multilateral trade rules are required. For developing countries the findings suggest that opportunities to gain from multilateral trade liberalization were lost because of lack of binding commitments.

The research outputs will be helpful in formulating policy advice in the context of Bank country assistance strategies for the rural and agricultural sector. They will also be helpful in identifying issues of interest to client countries and enhancing their participation during the next round of multilateral negotiations.

The findings have been disseminated at conferences and workshops, including a Bank training seminar, International Trade and the WTO: Implications for Developing Countries, in February 1998. The seminar was attended by Bank economists and staff from the International Monetary Fund and the Inter-American Development Bank.

Monitoring and Implementation of the Uruguay Round

This project included a number of studies spanning the enormous range of issues addressed under the Uruguay Round. Some of the studies were pure research; others were more applied studies, undertaken in cooperation with Bank operational staff to obtain the best assessment of the country-specific implications of the Round. The project focused on the implementation of the commitments made under the Uruguay Round, which will determine both the long-run economic impact of the Round and the base from which future trade liberalization will be undertaken.

A key element of the project was the ongoing work on the implementation of the Uruguay Round agreement on agriculture. This study drew on members' notifications to the World Trade Organization to assess each country's implementation of key trade policy reforms. The analysis addressed two questions: How have countries been implementing their market access commitments under the Uruguay Round agreement on agriculture? And what has actually happened in agricultural trade liberalization since 1995? The results show that while many countries are faithfully implementing their market access commitments, the new rules have been less successful in actually liberalizing agricultural trade.

Several studies focused on the implications of the abolition of the Multifibre Arrangement (MFA) for developing countries and for particular sectors. Much of this work focused on South Asia, expected to be one of the largest gainers. Since up-to-date data on the restrictiveness of the MFA were unavailable, a survey of Indian exporters was undertaken to assess the export tax equivalent of the MFA.

Country studies of the implications of Uruguay Round liberalization were undertaken for a number of countries and regions, including China, Egypt, the Middle East, and South Asia. Much attention was devoted to the implications of China?s potential accession to the World Trade Organization (WTO). Studies also looked at the operation of the Agreement on Government Procurement, providing the most comprehensive assessment available.

During 1998 the project's focus turned from the context created by the Uruguay Round to the issues and opportunities for liberalization in the negotiations scheduled to begin by 2000. The agenda for these negotiations includes services and agriculture and may also extend to issues of trade facilitation, competition policy, investment, and government procurement. A number of studies analyzed the economics of these issues from a developing country perspective.

Much of the research was undertaken at the request of Bank operational staff and was disseminated in large part through the Bank's ongoing dialogue with its members. Results were also disseminated through extensive dissemination programs for major reports on South Asia and China to which the research provided inputs: South Asia?s Integration into the World Economy (Washington, DC: World Bank, 1997) and the China 2020 series of reports (Washington, DC: World Bank, 1997). And results have been extensively disseminated in developing countries through Economic Development Institute seminars .

Regulating Technology Transfer in Agriculture:
Impact on Technical Change, Productivity, and Incomes


This research continued work, begun in a pilot project, on regulatory barriers that block private technology transfer in agriculture. The pilot research developed a methodology to estimate the effect of regulatory reforms. Using this method, it studied the impact of Turkey's regulatory reforms in the 1980s, testing and confirming the hypothesis that removing barriers to private technology transfer accelerates technical change, boosting productivity and incomes.

This research further tested the hypothesis in other countries by investigating the effect of regulatory reforms in Bangladesh and India since the late 1980s and more recently in Zimbabwe. It collected and analyzed information on sales of agricultural machinery, seeds, pesticides, and other inputs, especially through private companies, to demonstrate the effect of regulatory reform on technology transfer, input sales, yields, production, and incomes. Drawing on country studies and other sources, the study proposed and discussed options for regulatory reforms that remove obstacles to private technology transfer while strengthening policies and programs that limit externalities. Further confirmation of the hypothesis that removing regulatory barriers blocking private technology transfer in agriculture boosts productivity suggested a need to focus more attention on reform of such regulations.

The project's research activities were designed on the basis of discussions with Bank operational staff. The study made suggestions to help improve Bank agricultural policy advice in general and for specific countries and to build capacity within the Bank to address regulatory issues through collaboration with sector and project activities. By subcontracting research activities to local consultants, the project also built capacity in client countries to address regulatory issues.

Results from both the pilot project and this project are being disseminated through participation in operational missions (the work made an important contribution to the design of an agricultural sector adjustment program in Romania), through many workshops at headquarters and in the field, and through Bank and outside publications.

The Determinants of Agri-Food Market Integration in the Transition Economies


In transition economies agri-food markets are typically segmented among different vertical chains, market locations, and types of owners and between domestic and international markets. This project investigated to what extent the segmentation of agri-food markets has been overcome through reform and what kind of government policies would facilitate further market integration.

The project's analytical approach was based on the solid understanding of market institutions and fluctuations of supply and demand. It applied models of market margin determination, price transmission, and cointegration to selected commodity markets, typically pork, wheat and wheat flour, and milk and dairy products. The analysis relied on statistical data published by government and nongovernment institutions and the results of field interviews and case studies.

The first phase of the study focused on Poland, where it found that agri-food markets are reasonably well integrated. Effective market liberalization led to the emergence of a strong private sector and intensive competition-and thus relatively high efficiency-in the agri-food markets. Market risk and a market structure dominated by processors are the two primary obstacles to further market integration.

This second phase of the study extended the analysis to Hungary, Romania, and Ukraine. Preliminary results for Ukraine suggest that liquidity, rather than a state monopoly, is the primary challenge in developing an integrated agri-food market.

The findings of the first phase contributed to the Bank's agricultural sector adjustment loan operation in Poland, and the results of the second phase are expected to contribute to agricultural adjustment programs in Hungary, Romania, and Ukraine. The summary of experience in Poland should be helpful to other transition economies in developing their agri-food market systems.

The findings from the first phase were disseminated through two Bank seminars in August and October 1995, through presentations to government officials in Warsaw in January 1996, and through presentations at the 1995 American Association of Agricultural Economists Conference and the 1996 European Association of Agricultural Economists Conference.

The first phase produced an Excel database containing monthly agri-food price data for Poland for 1990-96.

The Impact of Market-Oriented Policy Reforms on Households in Rural China
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In the 1980s China dismantled the commune system, in which land was communally owned and farmed, and replaced it with the household responsibility system, in which land is leased to and worked by individual households. In the early 1980s agricultural production increased dramatically. No further large increases are expected, however, as it appears that the gains from this new policy have now been reaped.

This research project intends to obtain answers to the following questions: What are the main determinants of the productivity of agricultural households in rural China? Would removal of restrictions on factor markets (credit, labor, and land) produce further increases in agricultural output? How has the household responsibility system affected income distribution, and what are the principal determinants of the variation in incomes across rural households in China?

Answering these questions requires detailed household-level information, data that are rare for China. To obtain such information, this project collected data from about 800 households in 30 villages in Hebei and Liaoning Provinces in the summer of 1995.

The project's results are expected to shed light on two broad policy questions. First, what would be the effect on productivity of further liberalization of the rural economy (ending restrictions on hiring labor, on private provision of credit, and on buying, selling, and renting land)? And second, what avenues are available for further reducing poverty in rural China?

Preliminary results have shown that clear property rights lead to more investment in land improvements, but the increase in investment may not be very large.

World Price Signals, Policy Reforms, and Domestic Commodity Price Behavior


Agricultural policies in many developing countries have tended to isolate domestic prices from world price movements either directly, through tax or subsidy mechanisms, or indirectly, through quantitative restrictions. These interventions have shifted resources into or out of agriculture, depending on whether the effect was to implicitly subsidize or implicitly tax the sector. A number of studies have found that both taxation and subsidization through these policies have harmful effects in developing as well as industrial countries.

During the mid-1980s and early 1990s many developing countries embarked on policy reforms under structural adjustment programs, usually with the assistance of multilateral and bilateral lending institutions. One of the objectives of such programs has been to move domestic prices close to international ones. The transmission of world price signals to domestic markets allows more efficient allocation of resources not only in the commodity sector directly affected but also in the overall economy.

This study examined the extent to which domestic prices move closer to world prices following policy reforms, using data on 31 commodities in Argentina, Chile, Colombia, Egypt, Ghana, Indonesia, Madagascar, and Mexico. The results indicate that world price signals account for only a small part of domestic price variability except in Chile and Mexico. Furthermore, in only a few cases have policy reforms accelerated the transmission of price signals.