International Borrowing and Agricultural Export Markets: Discussion

In my view, the topic of this session is not one that is easily reduced to macroeconomic identities or single-equation models. This presents a formidable challenge to the Dutton, Grennes, and Johnson and to the Grigsby and Pagoulatos papers. The Katz paper was not available. I shall attempt, within the confines of limited space, to sketch my view of the key elements of the topic and, by implication, my critique of the papers. The literature (see Balassa) on countries' reactions to the 1973-76 and 1978-80 shocks to world markets have separated countries into those pursuing outward-oriented (OOC) as opposed to inward-oriented (IOC) policies. The OOC suffered larger terms-of-trade effects and adverse export volume effects than did the IOC because of their relatively greater exposure to world markets (28% of gross national product (GNP) compared to 10% of GNP). The policy response of the OOCs was to apply deflationary policies to limit their reliance on external finance. They also pursued policies to induce efficient output-increasing and efficient import substitution. These adjustments served to compensate for the adverse balance-of-payments effects of external shocks and reversed the temporary decline in their economic growth. While many of these countries (e.g., Korea) have relatively high external debt to GNP ratios, they have managed to avoid debt service difficulties. The problem lies with the IOC, many of which are either major importers of U.S. agricultural commodities or major competitors. Inward-oriented countries pursued policies which essentially amounted to attempts to maintain internal market distortions despite world market shocks. It is the nature of these distortions that provide insights into questions of adjustment, liquidity, and insolvency. For the most part, the policies pursued by the IOC served to transfer resources from agriculture into inefficient import substitution activities (Roe). This transfer was accomplished by interventions in foreign trade markets where quotas, tariffs, export taxes, and exchange rates are effective policy instruments: These instruments were most often used to maintain low and stable prices of food through excessive imlorts relative to import levels under free trade, or to discourage the export of food crops for which a country has a comparative advantage. At the same time, primary exportable commodities tended to be heavily taxed. Coincident with these distortions, policies were adopted to protect the domestic industrial sector. Results from a recent IMF study of developing countries found that the average effective rates of protection were 50% during 1966-72 and 60% in the late 1970s. Exceptions to these high rates of protection are the OOC countries. Many of the countries which have high rates of protection for manufacturers also allow imports of raw materials intended for export production to enter duty free (IMF, p. 74). This serves to distort further the domestic terms of trade against agriculture. Interventions in foreign trade markets that induce a transfer of resources from agriculture invariably lead to depressed conditions in the sector. Some governments react to these depressed conditions by policies to subsidize agricultural inputs and policies to raise farmlevel commodity prices while at the same time maintaining low and stable food prices to urban consumers. This policy leads to a narrowing of the marketing margin and, in some countries, to farm-level prices that are higher than their retail market counterparts. Without subsidies, the narrowing of the margin implies lower returns to the resources employed in marketing activities and hence to an exodus of merchants and middlemen traditionally involved in these activities. The implementation of the policy often leads to the taking over of Terry L. Roe is a professor, Department of Agricultural and Applied Economics, University of Minnesota.