The objective of this paper is to consider the role that developing countries might want to retain for state trading enterprises (STEs) in agriculture. Further constraints on STEs are being strongly advocated by some WTO members in the ongoing negotiations on agriculture and could be detrimental to the interests of developing countries, where such enterprises play a far broader - perhaps more justifiable - role than in developed countries. This paper examines how state trading is defined and regulated in WTO and considers the perceived problems associated with STEs that are likely to feature in the agriculture negotiations. It evaluates the actual and potential role of STEs in developing countries and sets out the case for allowing developing countries to retain the option of using them.
1. Agricultural state trading enterprises in the WTO context
About 75 percent of the STEs notified to WTO under GATT Article XVII are involved in agriculture. The prevalence of STEs in agriculture “stems from the belief that state trading is an appropriate means by which governments can meet agriculture-related policy objectives” (WTO 1995, paragraph 5). Most of the STEs that play a significant role in global markets and almost all of the export-oriented enterprises are based in developed countries. In spite of the trend toward privatization in recent years, STEs remain important economic agents in developing countries, although few are large enough to influence international markets.
GATT principles regarding STEs
The Uruguay Round Understanding on the Interpretation of GATT Article XVII defines STEs as:
“Governmental and non-governmental enterprises, including marketing boards, which have been granted exclusive or special rights or privileges, including statutory or constitutional powers, in the exercise of which they influence through their purchases or sales the level or direction of imports or exports.”The Article requires that STEs act in accordance with the general principles of non-discrimination prescribed in the Agreement. Specifically, paragraph 1(b) requires that purchases or sales involving imports or exports be made “solely in accordance with commercial considerations, including price, quality, availability, marketability, transportation and other conditions of purchase or sale, and shall afford the enterprises of other contracting parties adequate opportunity ...... to compete for participation in such purchases or sales”. An exception is provided for STEs with an import monopoly that are bound by the country’s Schedule of Concessions under GATT Article II. Likewise, exporting STEs that serve to stabilise domestic prices for primary commodities are exempt from countervailing duties under GATT Article VI. Most STEs involved in agriculture qualify for one or both of these exceptions.
Types of agricultural STEs
Statutory marketing boards, also known as statutory marketing authorities or control boards, are the most common type of STE in the agricultural sector. Such boards may have any or all of the following objectives: domestic price stabilization, market regulation, and control and promotion of exports. They are usually producer-controlled, state-sanctioned monopolies with exclusive authority for a wide range of market interventions, such as the regulation and purchase of domestic output, setting consumer and producer prices, controlling domestic distribution, and conducting foreign trade. They typically have control over the movement, pricing, quality standards, and marketing of the agricultural products they cover. Other types of STEs generally have a narrower range of objectives and make fewer market interventions. Fiscal monopolies, for example, are largely concerned with the control of the production, marketing and distribution of commodities for which there are tax or public health implications, such as salt, tobacco and alcohol. Canalising agencies have monopoly rights for the import or export of a specific product with the objective of stabilizing domestic prices or domestic supplies or rationing foreign exchange.
2. STEs in the context of the WTO negotiations on agriculture
The main issues relating to STEs in the context of the negotiations on agriculture are associated with their potential to undermine the disciplines and transparency achieved in the AoA. The most vocal concern with respect to exporting STEs stems from firms and governments of countries that are competing in commodity export markets and believe that state trading activities are being used to circumvent commitments on export subsidies. The concerns voiced about importing STEs come mainly from exporters who believe they may be used to circumvent market access commitments, particularly in the administration of tariff quotas. A key question is whether the activities of STEs in developing countries are necessarily trade-distorting.
The extent of trade-distortion that may be caused by an STE depends, among other things, on: (i) the extent of market power it is able to exercise; (ii) its regulatory or institutional distance from the government; (iii) and its trade orientation. This typology is used to explore some of the issues that may be the focus of attention in the ongoing negotiations.
Market power
Monopoly control
Market power refers to the ability of an economic agent to exert monopoly or monopsony control in a market, whether domestic or international. As mentioned above, almost all of the monopoly exporting STEs are located in developed countries, and most of the monopoly importing STEs that are large enough to affect international markets are also in those countries. In developing countries, by contrast, the turnover of STEs is generally small relative to the world market, and thus they are unlikely to influence world prices or the agricultural terms of trade. They may create domestic distortions but are, in general, too small to affect the level of world prices.
Policy regime
The policy regime within which an STE operates reflects, to some extent, the degree of market power it is able to exercise. An importing STE that does not control the prices and quantities traded domestically must have recourse to other policy instruments to regulate the internal market. In this respect, tariffs are the WTO favoured policy instrument rather than quantitative controls, on the grounds that they are less distorting and easier to regulate.
Product range
The range of products for which the STE is responsible is an important determinant of the degree of market control it can exercise. When the enterprise has control not only over an individual commodity, but also over the market substitutes for that commodity, its potential to distort trade is enhanced through the opportunities which arise for product differentiation. Similar opportunities arise for market manipulation if the control extends to upstream or downstream commodities. At the same time, it must be recognized that vertical and horizontal integration are common features of private enterprises, and may occur for sound commercial reasons and as a result of competitive pressure.
Market environment
The market environment in which STEs operate is also a crucial factor in determining whether state trading is appropriate. Most studies of STEs assume that international commodity markets are in other respects perfectly competitive. In reality, most commodity markets are characterized by large firms that deal with many countries and products, in a number of vertically integrated activities. It can thus be argued that STEs operating in an imperfectly competitive market may be justified on economic grounds as a means of countering the monopoly power of existing market agents. Empirical investigation is needed on a case-by-case basis to determine whether a given STE is anti-competitive[59].
Distance from government
In the debate over the ownership and management, it has been argued that the more an STE is independent of government, the more it will be subject to commercial criteria, and thus less likely to distort trade. Clearly, STEs cover a wide spectrum of possibilities in this regard, ranging from enterprises which are directly owned and administered by an arm of government to those that are privately owned but operating under contract with government through which they are granted trading privileges. OECD (2000) contends that in most cases, any trade-distorting impact originates from the level of domestic prices and the choice of policy instruments set by governments, not the STE per se. Therefore an STE can be considered as an instrument of government policy and not necessarily a cause of distortion. This suggests that measures to ensure that the activities of STEs conform to commercial criteria could limit their potential for distorting trade.
Trade orientation
Whether an STE is concerned with commodity imports or exports influences the degree to which it may distort trade. Some countries have argued that the current WTO disciplines on imports by STEs are stricter than on exports and that this imbalance should be rectified.
Exporting STEs
For exporting STEs the concern revolves around the competitive advantages that they might gain from their special rights and privileges and their official status. They may be able to cross-subsidize export sales from the proceeds of their monopolistic rents and may also use domestic price pooling to facilitate discretionary pricing in world markets. Additionally, they may have: greater certainty regarding sources of supply as a result of their legal mandate, and thus more scope for concluding discriminatory long-term agreements with importing countries; greater scope for predatory pricing on account of their access to short-term government subsidies; and the possibility of benefiting from discriminatory interest rates and other government subsidies. Since export subsidies are already constrained by the Agreement on Agriculture, export-oriented STE activities will not significantly distort international trade[60], but lack of transparency in the activities could nevertheless enable export subsidy disciplines to be circumvented.
Importing STEs
With respect to importing STEs, concerns focus on the extent to which they distort or restrict market access. The monopoly status of some STEs may make it difficult to ascertain whether imports are determined by market demand or by government policy or constraint. There could thus be discrimination, for example, with respect to the allocation of tariff rate quotas (TRQs) or the control of grades and standards. Where the same enterprise has the capacity to influence prices and quantities traded both domestically and internationally, there is strong potential for concealing the true costs and returns of its activities and hence of disguising the degree of market distortion. Reforms that reduced the monopoly power of importing STEs and increased the transparency of their operations could overcome these concerns.
3. Role of STEs in developing countries
In developing countries, the objectives and activities of STEs extend well beyond the control of external trade to encompass broader concerns such as rural development and food security. Often, they seek to compensate for the greater incidence of market failure in these economies. Poorly developed physical and information infrastructures and - particularly in parts of sub-Saharan Africa - the lack of an indigenous trading class have provided additional impetus for state trading activities. Historically, these objectives were perceived to require an intervention agency to implement the necessary purchases and sales. Consequently, marketing boards in developing countries have been involved in the provision of marketing services, risk management and production inputs such as credit and fertilizers, all of which may be inadequately provided by the private sector. The reasons for the use of STEs given in notifications to WTO by developing countries can be summarized under the following headings:
Poverty reductionExperience with the reform of STEsTypical concerns related to poverty reduction include food security and rural development, particularly through increasing the level and stability of farm incomes. Activities in relation to poverty reduction include producer price stabilization and the regulation of food supplies to urban consumers to ensure adequate supplies at affordable prices. Namibia’s notification, for example, states that “the control boards were established .... for the purpose of promoting domestic production so as to contribute to household food security and employment”. Support of a floor price can provide an important safety net for rural incomes, as well as an incentive for expanding domestic food supplies. In food-importing countries, border controls are a common mechanism for regulating supplies and protecting domestic producers.
Operational efficiency
Efficiency gains may be possible by the rationalization of trading operations, particularly with respect to foreign trade, where trade in the domestic private sector is characterised by market failure. In terms of the efficiency gains associated with scale and with institutional costs STEs can be a means of grouping the efforts of potential exporters or importers, allowing commodity export and import trade to be accomplished more efficiently through lower operating and handling costs. The notification of Trinidad and Tobago stresses that the National Flour Mill’s major strengths reside in: competent, innovative management working through skilled and dedicated personnel; competencies in grain management and grain processing, together with a pool of specialized skills in specific areas; and sophisticated plant and equipment, situated in a strategic geographic location.
Strategic considerations
These include public health issues, natural resource management, and access to and control over investment resources. They involve manipulation of the terms of trade, as well as direct access to funds through direct taxation of imports and exports.
In sub-Saharan Africa, the impact of policies of structural adjustment over the past two decades has generally been to substantially reduce the extent of market intervention and regulation. In Latin America economic reforms were generally implemented earlier and have been more far-reaching, driven more by a desire for greater openness in multilateral trade than by the consequences of domestic economic crises. In Asia the extent to which privatization and liberalization have been pursued over the last decade has varied substantially. Generally, there has been a move towards greater openness and the termination of monopoly powers, rather than abandonment of the principle of state involvement in commodity markets. Thus, while the trend in developing countries has been towards less state control and greater transparency, STEs continue to play an important role in many instances.
It has been argued that the reduced importance of STEs in Africa as a result of structural adjustment programmes has had an adverse impact on the availability of agricultural inputs, particularly credit, where private intermediaries have not moved in to take on the role of provider[61]. On the other hand, wherever they have done so, as notably in Asia, their involvement has driven down margins and allowed greater returns to producers. This has been demonstrated in a number of case studies of successful agricultural development, where price transmission was found to be higher in the absence of marketing boards[62].
Examples of STE reform in developing countries (see box) clearly show that while removing the State from the distribution and marketing of agricultural commodities can improve the performance of the sector in some circumstances, restricting the scope for STEs may not always be appropriate, particularly where there are constraints to greater involvement of the private sector. A relevant question for developing countries therefore is whether or not STEs provide the most appropriate instrument for achieving official objectives. While this is a matter for debate, the decision should be one for national governments, except where there is a possibility of conflict with multilateral or regional obligations. It could also be argued that the benefits of STE activities that accrue to developing countries may in themselves justify a degree of trade distortion as a matter of special and differential treatment.
4. The future role of STEs in developing countries: Conclusions
The concerns regarding STEs in the WTO negotiations on agriculture basically refer to their potential to undermine the AoA disciplines on export subsidies and market access and diminish the transparency of the trading system. The ability of such an enterprise to distort trade depends essentially on the market power it is able to exert, its relationship to the government, and the market environment in which it operates. The previous discussion highlighted several points that support the argument that developing countries should continue to have the right to conduct state trading operations:
It may be debated whether state trading is the appropriate mechanism for a developing country to use in pursuit of its objectives in the agricultural sector. Case studies point to various situations in which state trading has been beneficial, though clearly it has not always been so. In fact, reducing state involvement in domestic agricultural marketing has improved the performance of the agricultural sector in some countries. But it would be inappropriate to apply the same approach to all cases, or to the international context, where the potential for small-scale private sector development may be much less. Given the open nature of the debate regarding the benefits of state trading, the choice should remain with the developing countries, especially in the absence of significant trade distortions. For these reasons, it is desirable that the WTO rules should continue to allow developing countries the option of using STEs.
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Box 1. Examples of STE reform in developing countries Indonesia: The Badan Urusan Logistik (Bulog) has the dual goal of stabilizing domestic prices for several food commodities, in particular rice, at levels affordable for consumers but adequate to stimulate production. Bulog historically had monopoly control of the international rice trade but never controlled more than 10 percent of the domestic market. While it has become an intermittent exporter and continues to stabilise domestic prices, it is no longer the sole importer and/or exporter of rice, sugar, wheat and wheat flour, soybean, and garlic and is therefore no longer granted exclusive or special privileges within the meaning of Article XVII of the GATT 1994. India: The Food Corporation of India has a substantial remit with respect to most cereals (excluding feed grade maize) to stabilise domestic prices and control foreign trade. It is not a monopoly purchaser in the domestic market, but has monopoly control over cereal imports in order to realise economies of scale in trading operations and ensure adequate food supplies. Private traders may operate in foreign markets subject to licence. Ethiopia: The scope for market manipulation has greatly diminished and there has been a substantial shift towards greater openness, but the State retains a role in domestic marketing and price stabilization, in competition with the private sector. It also maintains a strategic grain reserve and provides a channel for the newly re-emerging cereal export surplus. United Republic of Tanzania: The main STE involved with cereals, the National Milling Corporation, has been reformed since the late 1980s. Activities of the NMC are now confined to grain milling, although it no longer has a monopoly in this respect and the Corporation is scheduled for privatization. Responsibility for the strategic grain reserve has been transferred to the Food Security Unit of the Ministry of Agriculture. The Government has no mandate to intervene to stabilise prices, although it does purchase from more disadvantaged regions, where private traders are less active. Imports and exports are handled by private sector traders. Malawi: The State maintains only a regulatory role in foreign trade, although it previously had monopoly control over all trading activities associated with both maize and fertilisers. In a difficult period of transition over the last decade, the responsibilities of the parastatal have been substantially reduced to management of the strategic grain reserve and “buyer of last resort” with respect to maize, a role expected to diminish as private sector marketing increases. Tunisia: The Grain Board has a monopoly over the import of wheat and barley. In addition, it purchases wheat on local markets at prices fixed by the Government, and sells at subsidized prices to consumers. Private traders may, under certain circumstances, import cereals on behalf of the Grain Board, in which case import prices are determined through commercial negotiation. The resale value of imported cereals are the same as for local production. Mali: Policy intervention by the Government via the
parastatal Compagnie Malienne pour le Développement des Textiles (CMDT)
has been credited with the rapid development of the cotton sector. The CMDT
controls cotton production and manages all input supply including seed,
fertiliser, pesticides and extension services. Two features of the parastatal
have contributed to this success: (i) it benefits from the minority
stake-holding of a French textile conglomerate which has integrated research,
production and marketing operations and provides a stable market and (ii) since
1988, it has operated as a commercial private sector organization under a
performance agreement with the Government. The agreement includes: production
and marketing quotas designed to maximise the capacity utilization of CMDT
processing plants; farm level price incentives to ensure that the quota is met;
and organizational cost controls which include extensions to the growing season
and interest on production credit. This also aids the Government in its attempts
to buffer the sector against the volatility of the world market. |
References
Dorward, A. & Morrison, J.A. 2000. The Agricultural Development Experience of the Past 30 Years: Lessons for LDCs. Background paper prepared for FAO.
Kydd, J., Dorward, A. & Poulton, C. 2000. The Baby and the Bathwater: Agricultural Parastatals Revisited. (mimeo). Imperial College, University of London.
OECD. 2000. State Trading in Agricultural Markets: A Conceptual Framework. COM/AGR/APM/TD/WP(2000)17.
Paddock, B. 1998. State Trading and International Trade Negotiations. Trade Research Series. Economic and Policy Analysis Directorate. Agriculture and Agri-Food Canada.
Veeman, M., Fulton, M., & B. Larue. 1999. International Trade in Agricultural and Food Products: The Role of State Trading Enterprises. Economic and Policy Analysis Directorate. Agriculture and Agri-Food Canada.
WTO. 1995. Operations of State Trading Enterprises as they Relate to International Trade, Background paper by the Secretariat, 26 October, G/STR/2.
Young, L. 1999. Prevalence and Reform of State Trading Importers in World Grain Markets. Research Discussion Paper No. 32. Montana State University.
WTO Notifications to the Working Party on State Trading Enterprises:
India: 15 January 1996
Indonesia: 26 June 1995; 11 July 1997, 16 November 1998
Namibia: 28 February 1997, 5 July 1999
Trinidad: 17 November 1998
Tunisia: 15 June 1997
