World Bank review of incoherence in the cotton sector

The World Bank released a staff trade note on September 10th 2003 looking at the impact of OECD cotton-sector subsidies on developing countries. Cotton was cited as an example 'where rich countries' trade policy negates the otherwise positive effects of their development policies'. The paper maintains that 'the cotton market is highly distorted' and that 'subsidies in relatively wealthy countries depress global prices'. This results in depressed incomes for millions of poor small holders in African countries. The paper looks in particular at the impact on Benin, Burkina Faso, Chad and Mali. The paper profiles the pattern of global cotton production (including production costs) and production trends over the past 40 years. It notes that 'real cotton prices have declined considerably during the last 40 years and that they 'are currently half their 1960s levels'…. 'the current low level of cotton prices have been undoubtedly influenced by the support provided by major players'. The paper outlines the nature of the high levels of cotton subsidies in the USA and that in 2001/02 'producer prices in the United States were 91% higher than world prices'. In the EU internal 'producer prices in Greece and Spain were 144% and 184% higher than world market prices'. The US$3.7 billion in subsidies provided to 25,000 US cotton farmers is 'three times the entire US aid budget to Africa'. At current prices it costs Burkina Faso more to get its cotton to market than the revenues it receives. Annual losses to African cotton farmers resulting from US subsidies are estimated at US$250 million a year. In Benin the 40% reduction in farm-gate prices which has occurred has led to a 7% reduction in rural per capita incomes and an increase in the incidence of poverty amongst cotton growers from 37% to 59%. Removal of support would 'reduce production and consequently boost prices, allowing third-world farmers to compete and earn profit on their crops'. Over the next ten years full liberalisation of the cotton sector would result in: an average increase of 12.7% in cotton prices; a 5.8% increase in world cotton trade; a 12.6% increase in African cotton exports. However such a liberalisation would in the case of the EU lead to a 70% reduction in EU cotton production. The paper concludes that 'cutting subsidies would have major positive effects for poverty reduction, particularly in Africa'. Comment: A 70% reduction in EU cotton production is scarcely an outcome consistent with the commitment under CAP reform to avoiding land abandonment. A complete liberalisation of the cotton sector and dismantling of systems of support is thus beyond the range of policy options which the EU is willing to consider under any reform of the cotton sector. Indeed, current proposals suggest only a partial decoupling of support in the cotton sector and only partial integration of the cotton sector into the system of single farm aid payments. For the EU the issue is about changing the basis of support to the cotton sector not withdrawing such support. While the EU is a relatively minor player in terms of cotton-sector distortions, with the US playing the major role, should the US decide to embark upon reform it is likely to follow an even more cautious approach to reform of the cotton secretor than the EU. The production and income gains to African farmers from any movements towards cotton-sector reform are thus unlikely to be substantial.The World Bank released a staff trade note on September 10th 2003 ..