Agricultural Trade and Climate Change in South Asia

There is a consensus among scientists that climate change is real and will variably affect the world we live in and our livelihoods. With nearly 600 million people living below US$1.25 a day, high population density, low-lying areas, and high dependence on agriculture for livelihood, South Asia is one of the most vulnerable regions to climate change. More than 75 percent of South Asia’s poor people live in rural areas and bank on rain-fed agriculture, livestock and fragile forests.

Climate change affects agricultural yield, which in turn has a strong bearing on economy and livelihoods. It alters comparative advantage in the trade of agricultural goods. Due to an expected decline in yields, potential restrictions on food trade and food- price inflation, food insecurity might increase. Against such a backdrop, apart from attempts to reduce agricultural as well as non-agricultural emissions and smoothen trade flows, adequately funded and concerted adaptation measures have to be implemented in South Asia.

Agriculture and emissions

The emissions level of developed countries with respect to their population is higher than that of developing countries. Yet, the developing countries disproportionately bear the burden of climate change. High-in come countries, with one sixth of the world’s population, are responsible for nearly two thirds of the greenhouse gases in the atmosphere.¹ Methane and nitrous oxide produced by the agricultural sector account for about 10 percent of anthropogenic warming. Most of it comes from the guts of cattle and sheep.² Globally, agriculture and land-use change and forestry contribute 14 percent and 17 percent of CO₂ emissions, respectively.³

Source: WDI 2010

In terms of CO₂ emissions (kg per PPP$ of gross domestic product–GDP), the Maldives comes ahead of India and Pakistan in South Asia. Over this decade, CO₂ emission is decreasing in India, but is pretty much stable in other countries. Meanwhile, agricultural methane emissions were decreasing until 1995, compared to 1990 levels, but increased by over 10 percentage points in 2000 in all countries except Sri Lanka (Figure). India emitted the highest amount of agricultural methane in 2000. Fortunately, agricultural methane emissions are now again decreasing in all South Asian countries.

Trade and production

Since most of South Asian countries are net importers of food and all except India are consistently running agricultural trade deficit (Table 1), climate change will not only impact yields but also alter trade flows by affecting prices and volumes of agricultural goods traded within and beyond South Asia.

Table 1: Agricultural trade balance (US$ million)
Country	1994-1996	1999-2001	2005	2006	2007
Afghanistan	-103.919	-201.554	-708.639	-824.99	-722.815
Bangladesh	-847.266	-1619.12	-2078.89	-2706.83	-3611.82
Bhutan	-4.89333	-8.325	-13.183	-6.339	-5.859
India	2649.018	1351.741	3659.151	4190.592	8974.276
Nepal	-120.834	-151.065	-257.962	-135.267	-200.323
Pakistan	-992.736	-800.784	-1195.89	-1449.75	-1697.7
Sri Lanka	29.099	215.2273	389.077	-354.751	-398.91

Source: FAO Statistical Year Book 2009/10

A country’s supply of food is usually a function of total domestic yield, and prices of imports and exports of food. Hence, trade in agricultural goods is essential to satisfy demand in countries with deficit food production. They will suffer heavily if import prices go up due to a decline in regional or global production triggered by climate change. Climate change also alters temperature and precipitation patterns, directly affecting crop yields and indirectly affecting water availability for irrigation. Its impact on the economy will be reflected through fluctuating prices, production, productivity, agricultural investment, food demand and consumption, and human well-being. It will decrease per capita calorie availability, potentially increasing childhood malnutrition.

Climate change will alter the existing pattern of comparative advantage in agricultural trade. It will either in- crease or decrease trade flows depending on the biophysical determinants of relative advantage and socioeconomic determinants of demand. A sudden rise in prices either due to a fall in supply or an increase in demand might disturb agricultural trade flows, and ultimately production, as farmers tend to shift production to those crops that fetch high prices in the market. Partly because of high food and commodity prices, South Asia, on a net basis, suffered an income loss equivalent to about 9.6 percent of GDP between January 2003 and April 2008.⁴ Climate change is expected to affect prices of major crops such as rice, wheat, maize, soybean, and lentil. It will have a strong bearing on the vulnerability and livelihood of South Asian people.

The expected changes in monsoon—which alone carries over 70 per- cent of South Asia’s annual precipitation in just a four-month period—will affect agricultural yields. The melting of glaciers will increase flooding in the low-lying areas and might induce water scarcity in high altitudes from where glaciers recede. Rising sea levels will affect coastlines and intrude agricultural plains with saltwater, thus jeopardizing production potential of arable land.

The most severe climate change scenario predicts that the Maldives will be submerged and Bangladesh will lose 18 percent of its land. There will be an increase in pressure on natural resources due to rapid urbanization and industrialization. The impact on agriculture and production will cost the economy dearly. Even a temperature rise by 2 degrees Celsius above preindustrial level, which is the minimum the world is likely to experience, could result in a permanent reduction in annual per capita GDP by 4–5 percent in South Asia.⁵

Compared to a no climate change scenario, various models show that, under a climate change scenario, production of maize, millet, rice, and wheat is expected to decline by 6–23 percent, 9–19 percent, 15–22 percent, and 48–53 percent, respectively, by 2050 in South Asia.⁶ Meanwhile, net cereal imports are expected to increase by 66.32–87.20 percent by 2050 compared to 2000 levels in South Asia under all climate change models. Note that all South Asian countries except India and Pakistan have a deficit in cereal trade (see Table 2). Only Afghanistan has a trade surplus in pulses. Afghanistan, Bhutan, India, and Pakistan have a surplus in potato and fruits trade. Except for India and Pakistan, all other South Asian countries have a deficit in meat trade. The trade deficit in major crops reflects production shortages.

Table 2: Agri-goods trade balance, 2007 (US$ '000)
Country	Cereal	Potato	Meat	Fruits
Afghanistan		752	-14,696	2381
Bangladesh	-613509	-2,953	-586	-29592
Bhutan	-2676	349	-1	2227
India	2938739	10,991	897,461	159962
Nepal	-83549	-6,784	-284	-23212
Pakistan	1267348	20,863	27,631	83726
Sri Lanka	-292116	-13,677	-6,954	-14875

Source: FAO Statistical Year Book 2009/10

Food demand for cereals will decline by 3 percent while demand for meat consumption will increase by 150 percent in South Asia in 2050.⁷ The decline in per capita cereal demand will be a result of high cereal prices, while the shift to meat consumption will be the result of an increase in incomes of South Asian people. Overall, per capita food consumption will decline by 19–22 percent in the same period.⁸

Reliable trade in agricultural commodities might help countries effectively cope with food shortages resulting from unexpected weather patterns. More predictable production, supply and trading regimes will help countries manage food stocks and agricultural trade flows. This will also help tame a rapid rise in food prices, as in mid-2008. South Asian countries should work towards creating a framework on not only increasing production, but doing so in an environmentally and economically sustainable way so that there is adequate production and supply for trade to take place unhindered.

Food security

Climate change is expected to increase the frequency and intensity of floods, droughts, storms and heat waves—all of which will negatively impact agricultural production and increase food insecurity. It will not only impede the flow of agricultural goods within and across borders, but also put the already vulnerable people at risk.

With climate change, the price of rice is expected to increase by 29–37 percent when compared to a no climate change price scenario by 2050.⁹ Rice and soyabeans will see the highest jump in prices by 2050. The total number of malnourished children in South Asia will increase by 2.54–2.82 percent in 2050. Prices of other food items such as maize and wheat are also expected to increase. This will further affect the already vulnerable people and potentially push many below the poverty line.

Furthermore, yield of wheat—a critical crop for regional food security—is expected to drop drastically by 2030. Given the existing agricultural practices and crop varieties, agricultural yields will decrease by almost 18 percent in South Asia.¹⁰ Clearly, South Asia will be one of the most affected and vulnerable regions in the world.

Adaptation and mitigation

Even with the best efforts, global temperature will rise to some extent. Such rise will negatively impact agricultural production, human development and agricultural trade flows. So, there has to be serious and substantial efforts aimed at both mitigation and adaptation. Developed countries should primarily focus on mitigation, while developing countries should focus on both mitigation and adaptation.

The adaptation costs in South Asia are estimated to be around US$ 1.5 billion per year, in addition to costs for increased agricultural research and irrigation efficiency. However, there is lack of sufficient financial and technical capacities to manage increasing climate risk. There should be national, regional and global efforts to help South Asian economies adapt to climate change.

At the national level, countries themselves should initiate better agricultural practices such as zero tilling, irrigation efficiency, preservation of forests and afforestation, and protection of biodiversity, among others. Furthermore, crop production per drop of water and per hectare of land should be increased. Smart cultivation techniques geared towards preserving soil moisture, maximizing water infiltration, increasing carbon storage, minimizing nutrient run-offs and raising yields have to be adopted.

Countries should also invest in rural roads so that there is smooth flow of agricultural goods from production sites to markets. Switching to a low carbon world through technological innovation and easing access to them along with instituting complementary institutional reforms will be important to mitigate vulnerability.

At the regional level, South Asian countries should cooperate on areas such as facilitation of agricultural trade, technology and knowledge sharing, effective management and utilization of rivers that cut through multiple nations, among others. Innovative and novel water management strategies are required to help South Asia cope with rising incidence and intensity of floods during monsoon and decrease in water level during dry seasons. It should especially be a combined effort of the members of the South Asian Association for Regional Cooperation that have the same sources of water, i.e., the Himalayas. Additionally, to facilitate agricultural trade, regional infrastructural net- works should be built.

At the global level, South Asian countries should seek funds for better adaptation to climate change. Along with putting a proper carbon financing mechanism in place, donors should increase the share of official development assistance for agriculture as it has the highest number of poor people directly dependent on agriculture.

There should be greater collaboration on technology, knowledge transfer and funding for agricultural trade facilitation. Since the right price of agricultural products sends a good signal to famers, trade- and production-distorting subsidies in the agricultural sector in developed counties have to stop. To counteract the negative impact of climate change on nutrition intake, an estimated annual investment of around US$2,311million to US$2,963 million is needed in South Asia. Specifically, under different climate change scenarios and models, agriculture research will need US$239 million to US$347 million, clean water US$46 million, education US$737 million, irrigation expansion US$310 million to US$403 million, irrigation efficiency US$823 million to US$889 million, and roads US$62 million to US$532 million.¹¹ Developed countries and donors should provide adequate funding to meet these costs.

In the case of high vulnerability in the short run, social safety nets should be introduced. For example, Bangladesh has safety net programmes— such as vulnerable-group feeding programme, food-for-work programme, and employment guarantee programme—to reduce vulnerability to cyclones and floods.

Notes

¹ World Development Report 2010.

² The Economist. 2009. A Special Report on Climate Change and the Carbon Economy. 3 December.

³ IPCC Change Synthesis Report 2007.

⁴ World Bank. 2009. South Asia Climate Change Strategy.

⁵ Note 1.

⁶ ADB. 2009. Building Climate Resilience in the Agriculture Sector of Asia and the Pacific. ⁷ ibid. ⁸ ibid. ⁹ ibid. ¹⁰ ibid. ¹¹ ibid.

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[Published in Trade Insight, Vol.6, No.3-4, 2010, SAWTEE]

Poverty and hunger in Nepal circa 1909

Source: Patan Museum

The picture shows lines of poor people being fed at Tundikhel when the then autocratic Prime Minister Chandra Shamsher, fifth PM from the Rana dynasty, returned from Europe in 1909. The tall structure in the picture is Daharaha.

Are emissions level below 2°C possible?

An IEA economists says that it is “too good to be believed”. The 2°C below pre-industrial temperature benchmark is widely used these days. But, the pre-industrial temperature itself is, on average, 6°C above ice ages temperature.

The Economist writes, “Despite 20 years of climate negotiation, the world is still on an emissions trajectory that fits pretty easily into the “business as usual” scenarios drawn up by the Intergovernmental Panel on Climate Change (IPCC). According to the IEA, the scenario puts the world on course to warm by 3.5°C by 2100. For comparison, the difference in global mean temperature between the pre-industrial age and the ice ages was about 6°C.”

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The IEA also looked at what it might take to hit a two-degree target; the answer, says the agency’s chief economist, Fatih Birol, is “too good to be believed”. Every signatory of the Copenhagen accord would have to hit the top of its range of commitments. That would provide a worldwide rate of decarbonisation (reduction in carbon emitted per unit of GDP) twice as large in the decade to come as in the one just past: 2.8% a year, not 1.4%. Mr Birol notes that the highest annual rate on record is 2.5%, in the wake of the first oil shock.

But for the two-degree scenario 2.8% is just the beginning; from 2020 to 2035 the rate of decarbonisation needs to double again, to 5.5%. Though they are unwilling to say it in public, the sheer improbability of such success has led many climate scientists, campaigners and policymakers to conclude that, in the words of Bob Watson, once the head of the IPCC and now the chief scientist at Britain’s Department for Environment, Food and Rural Affairs, “Two degrees is a wishful dream.”

The fight to limit global warming to easily tolerated levels is thus over. Analysts who have long worked on adaptation to climate change—finding ways to live with scarcer water, higher peak temperatures, higher sea levels and weather patterns at odds with those under which today’s settled patterns of farming developed—are starting to see their day in the uncomfortably hot sun. That such measures cannot protect everyone from all harm that climate change may bring does not mean that they should be ignored. On the contrary, they are sorely needed.

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The Irish Pain

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"nothing quite symbolised this State’s loss of sovereignty than the press conference at which the ECB man spoke along with two IMF men and a European Commission official. It was held in the Government press centre beneath the Taoiseach’s office. I am a xenophile and cosmopolitan by nature, but to see foreign technocrats take over the very heart of the apparatus of this State to tell the media how the State will be run into the foreseeable future caused a sickening feeling in the pit of my stomach.

This is not to say that we would be happy to have our country’s affairs managed by the current, disgraced, government. I yield to no-one in my loathing of the men and women who have done this to my country. What has been the intellectual low-point of the last couple of years? Was it the cash-for-clunkers stimulus package (Ireland does not produce any cars)? Or the statement by our Finance Minister that Ireland need not fear a bank run, since Ireland is an island? Or the biggest Irish joke of them all, which underpinned the bank guarantee in the first place: that if we wanted investors to retain confidence in the creditworthiness of the Irish State, we needed to make sure that nobody who invested in our (private sector) banks ever lost a penny?"

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Dan O’Brien, the economics editor of the Irish Times, quoted by Kevin O'Rourke. He describes more of the Irish pain brought about by the irresponsible banking sector, who will get a substantial portion of the bailout funds. O’Rourke calls it “black hole that is the Irish banking system”. The Irish citizens are suffering because of its banking system. It got too drunk with lending-Guinness!! Now, the Irish State is having a terrible hangover while the debt-ridden drunkards are preparing to run scot-free again to cause another accident. Rein in them and force them to be sober before it is too late, again!

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The latter decision is the one that sank the country. It was the last great act of hubris of the Celtic Bubble, and was immediately denounced by one of the heroes of the crisis, my old UCD colleague Morgan Kelly.  On the night the guarantee was announced, Kelly pointed out that while it was the right policy if the Irish banks were facing a liquidity crisis, it was a terrible policy if they were insolvent, which was in fact the case. As they always do when confronted with someone smarter than them, the Dublin establishment circled the wagons, and Kelly was dismissed as an irresponsible young troublemaker of no consequence. He has been proved right, of course, but the establishment is still at it, making the

same fundamental mistake of thinking that a solvency crisis is just a liquidity crisis. Now, however, the establishment is European as well as Irish, and it is the State rather than the banking sector which is insolvent.

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More on Iceland versus Ireland here.

SMEs in SEZs

The role of SMEs in China’s growth is less well known, compared to the popularity of big manufacturing industries. But, SMEs have played a crucial role in growth in China’s success in light manufacturing success. A WB team visited industrial zones in China and Vietnam to study the success of SMEs there. They argue that facilities provided by the government in industrial zones led to the success of SMEs in China. The Chinese government provided market enabling conditions and encouraged firms to follow market-price signals. It, however, did not provide direct subsidies, thus avoiding inefficiencies and market distortions.

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One spectacular example of China's success and the role played by zones is the Weihai Zipper Company in Zhejiang. Starting from virtually nothing, over a span of two decades, it now exports $15 million worth of zippers to about 60 countries. It currently employs 3000 workers with an estimated daily output of 4 million zippers. This company is part of a zipper industrial cluster which counts more than 500 companies (China has more than 75% of the world’s market share in zipper, with the industry employing more than a million workers). Weihai Zipper Company decided to move to an industrial zone because the government offered a great package of cheap and abundant land and a predictable supply of utilities, especially water and energy. The manufacturer said that moving to the industrial zone enabled the scale up of the company by providing more space for plant expansion and for workers’ dorms in the park.

China has more than 1000 industrial zones following a central government policy encouraging the development of such zones. Most cities and counties have followed the models set by the large zones developed by the central and provincial governments. The local governments are motivated to develop industrial zones to get tax revenues and revenues from selling land, as well as nice records of administrative performance. Of course, not all Chinese industrial zones have been successful; the better ones were built on existing or potential industrial strengths, in other words, local comparative advantages.  These industrial zones played a critical role in facilitating the growth of Chinese SMEs from family operations catering to the local market to global powerhouses. These zones not only provided Chinese SMEs with good basic infrastructure (e.g. roads, energy, water and sewage), security, streamlined government regulations (e.g. government service centers) and affordable industrial land, they also provided technical training, low cost standardized factory shells allowing Chinese entrepreneurs to "Plug and Play" as well as Chinese workers with free and decent housing accommodations right next to the plants. Hence they played a very critical role in helping Chinese small enterprises to grow into mid-size and large enterprises, avoiding the "Missing Middle" problems that other countries face.

These industrial "Plug and Play" zones considerably reduced the start up investment costs and risks for SMEs at a phase in their development where they are still too risky for bank loans. They also facilitated the development of industrial clusters allowing tremendous economies of scale and scope for Chinese industries (the emergence of clusters was further facilitated by the Chinese government's support for the development of input and output markets). In a nutshell, the Chinese government facilitated SME development through the efficient provision of public goods and market information about sellers and providers but not subsidies. For example, firms pay market prices for the use of utilities. Most importantly, competition between firms is intense. The government does not bail out failing firms. It should also be noted that most of these zones did not preselect particular light industries, letting market forces drive the organic development of specialized clusters.

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Now, India is also going on the same lane with this kind of industrial zone.

“Improving infrastructure in the entire country will take a long time, so if you want to promote industry, you need to create more islands of excellence, which these SEZs are.

[…]About 100 zones have opened since 2006, attracting 1.6 trillion rupees in investment, 60 times the level four years earlier. That helped create more than half a million jobs, the Commerce Ministry said. About 478 more SEZs have been approved.

[…]The government-sponsored and private enclaves reduce red tape by offering a single office for environmental, tax and other government clearances. They also offer a way around power and water shortages in a nation that produces 10% less electricity than it needs. Companies operating in the zones get tax breaks for 15 years and don’t have to pay local excise or customs duties.”

Impact of Climate Change on MDGs

Here is how climate change will potentially affect MDGs. It is sourced from South Asia Climate Change Strategy, 2009, pp.105-106.

Eradicate extreme poverty and hunger (Goal 1)

• Climate change is projected to reduce poor people’s livelihood assets such as health, access to water, homes, and infrastructure.
• Climate change is expected to alter the path and rate of economic growth due to changes in natural systems and resources, infrastructure, and labor productivity. A reduction in economic growth directly impacts poverty through reduced income opportunities.
• Climate change is projected to alter regional food security. In Africa, in particular, food security is expected to worsen.

Health-related goals (Goals 4, 5 and 6)

• Combat major diseases
• Reduce infant mortality
• Improve maternal health
  
• Direct effects of climate change include increases in heat related mortality and illness associated with heat waves (which may be balanced by less winter cold-related deaths in some regions).
• Climate change may increase the prevalence of some vector-borne diseases (for example, malaria and dengue fever), and vulnerability to water-, food- or person-to-person borne diseases such as cholera and dysentery.
• Children and pregnant women are particularly susceptible to vector- and water-borne diseases. Anemia – resulting from malaria – is responsible for a quarter of maternal mortality
• Climate change will likely result in declining quantity and quality of drinking water, which is a prerequisite for good health, and it may also exacerbate malnutrition – an important cause of ill health among children – by reducing natural resource productivity and threatening food security, particularly in Sub-Saharan Africa.

Achieve universal primary education (Goal 2)

• Links to climate change are less direct, but loss of livelihoods assets (social, natural, physical, human and financial capital) may reduce opportunities for full time education in numerous ways. Natural disasters and drought reduce children’s available time (which may be diverted to household tasks), while displacement and migration can reduce access to education opportunities.

Promote gender equality and empower women (Goal 3)

• Climate change is expected to exacerbate current gender inequalities. Depletion of natural resources and decreasing agricultural productivity may place additional burdens on women’s health and reduce time available to participate in decision-making processes and income-generating activities.
• Climate-related disasters have been found to impact more severely on female-headed households, particularly where they have fewer assets to start with.

Ensure environmental sustainability (Goal 7)

• Climate change will alter the quality and productivity of natural resources and ecosystems, some of which may be irreversibly damaged, and these changes may also decrease biological diversity and compound existing environmental degradation.

Global partnerships

• Global climate change is a global issue and response requires global cooperation, especially to help developing countries to adapt to the adverse impacts of climate change.

Q32010 world trade up relative to Q32009

The value of world merchandise trade was 18% higher in the third quarter of 2010 than in the same period of 2009, according to the latest WTO quarterly figures. However, this marks a slowdown in comparison with the 26% increase registered in the second quarter of 2010.

From January to September trade expanded by 23%, continuing the recovery that began in the second quarter of 2009. Despite this positive trend, the value of world trade remains below its peak level from before the present financial crisis.  (The chart on the left shows world merchandise exports, Q12005=100).

 

The chart below shows monthly merchandise trade, aggregate of 70 economies, January 2008=100