Monopsony in factor market and monopoly in product market

What happens if traders directly purchase vegetables from farmers and then they themselves sell it in the market (and deprive of others from doing so, including the farmers)? Three things happen: (i) farmers either lose or gain; (ii) traders usually gain; and (iii) customers either lose or gain. Farmers will see gains if the traders pay high price for vegetables in the factor market (or they lose if the opposite happens). Traders mostly gain. Customers will see gains if traders purchase in bulk and sell it at a low price, largely accruing from economies of scale (or they lose if traders form a cartel and jack up prices in the product market).

What usually happens in a developing country is that traders pay low price to farmers, don’t let farmers directly sell produce in designated wholesale market set up by the government in cities, and traders form a cartel and jack up prices in the product market. Welfare of both farmers and consumers is reduced by traders by creating monopsony in factor market and monopoly in product market (they play with the quantity supplied in the product market to keep up high prices). This is what happens in Nepal and in other South Asian countries.

But, the story from Ghana is different. Traders in Ghana purchase tomatoes from rural farms and bring them to the large urban markets. A research by Robinson and Ngeleza 2011 shows that, in Ghana, the traders do operate a cartel but that farmers who sell to them receive higher prices than if they sell to the local market, even though there is little difference in quality compared with tomatoes sold to the local market.

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This suggests that traders share cartel rents with these farmers, resulting in lower prices in rural areas, higher prices in the cities, and a greater constriction of total market volume. Our paper suggests that policymakers would do better to focus on the full value chain and on opening up the urban markets rather than on strengthening farmers’ bargaining power with the traders, which restricts market volumes and harms farmers unable to sell to traders.

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What about the loss in welfare of consumers (due to high prices) in the product market? Does the welfare gains to farmers in the factor market offset the potential welfare losses to consumers in the product market?

The political J-curve

What happens when countries move from closed to open societies? Ian Bremmer argues that you get a “powerful political phenomenon” called the J-curve.

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The theory goes like this. If you plot the relationship between a country’s stability (on the vertical axis) and its social and political openness (on the horizontal axis) the points that mark every possible combination of openness and stability will produce a pattern that resembles the letter J. Most countries start off closed and stable (think: North Korea). Many end up open and stable (like Britain). But in between there is a turbulent transition. Some governments, such as post-apartheid South Africa, survive this transition. Others – the Soviet Union, Iran under the shah and the former Yugoslavia – do not.

The J-curve is a controversial idea. When I first floated it in 2006, it was used – in some ways hijacked – by those seeking to explain the unstable postwar environment in Iraq. But an intervention bringing democracy by force was always a poor example of the theory. The current upheavals in the Middle East, the result of internal dynamics of populations trapped between economic hardship and increasing political openness, make a much better test.

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There is a J-curve in economics as well. It refers to a situation when after a currency is devalued, the short-term relatively inelastic demand for imports persists and consumers pay more for the same goods and services. Meanwhile, exports become expensive for a short time, leading to worsening balance of trade. After some adjustments, the volume of exports will start to rise because of their lower more competitive prices to foreign buyers, and domestic consumers will buy fewer of the costlier imports. Eventually, the trade balance should improve on what it was before the devaluation. If there is a currency revaluation or appreciation there may be an inverted J-curve.

Trade in intermediates

Shim and Uri write: “The imported intermediate input content accounts for about one-quarter of OECD economies’ exports, and the European Central Bank (ECB) estimates that such imports accounted for about 44 percent of EU exports (or 20 percent for imports from outside of the EU) in 2000, ranging from about 35 percent in Italy to about 59 percent in the Netherlands. In the United States, imported intermediate input content in exports reached about 10 percent in 2005. Among emerging economies, imported content’s share in exports is particularly high in China―about 30 percent, or twice that for India and Brazil.”

With this sheer volume of trade in intermediate goods, they argue that (i) The importance of bilateral trade balances is exaggerated. Focusing just on bilateral trade imbalances would not address the underlying causes of imbalances as doing so would just redistribute trading costs across different partners; (ii) The importance of export-led demand is overestimated and that of trade as a source of efficiency (specialization) is underestimated. Policymakers fail to recognize that imported inputs feed into exports; (iii) Trade has become more volatile and a larger source of shocks as countries source intermediates from different destinations and are interlinked, magnifying the final impact of a shock. Fluctuations in trade is more volatile than that in GDP; and (iv)  The cost of protection is higher. Trade in intermediates means the cost of protectionism is higher than is generally understood, and rising.

Are services exports competitive than merchandise exports in Nepal?

The governor of Nepal Rastra Bank, Dr. Yuba Raj Khatiwada, argues that services exports are more competitive than merchandise exports in the context of Nepal. At a program organized by SAWTEE yesterday, he said that his confidence in merchandise exports is waning and that just looking at more market access in and preferences from the West will not be fruitful.

Well, he is right that focusing on more and more market access and surviving on preferential treatments offered by the West is not making our merchandise exports competitive. In fact, they are becoming increasing uncompetitive and are being displaced by competitive players in the international market. But, this does not mean that our service exports are competitive than merchandise exports. The former might have a larger market potential, but they might not be more competitive than the latter. The reason: the same constraints that ail merchandise exports persists in services exports sector as well.

Rising labor cost, high interest spread rate, power shortages, and lack of adequate infrastructures  are not the problems of merchandise exports sector only. These are very much obstinately persistent in the services sector (tourism, labor, IT, health, and education) as well. Meanwhile, high inflation and rise in real exchange rate (and the constraints that come with a pegged exchange rate regime) are also affecting both the sectors. High inflation domestically means that in nominal terms prices are expensive here. It means hotels, food, traveling and all other related services are relatively expensive here as compared to periods when there was low inflation. Furthermore, our services sector (except for low skilled labor) are not that competitive when compared to regional partners as of now.

To make them competitive, the government has to invest a huge amount of money in installing the prerequisites needed for these industries to take off. We do not have qualified human resource (or appropriate incentives in place) to take charge of the IT industry and spearhead cutting edge innovation. Meanwhile, the quality of our domestic educational system is far below the regional standard. Evidence: Just look at the number of students going to India and beyond for higher education. Remember how it took millions of dollars of investment in IITs and IIMs for almost a decade before they produced the kind of human resource needed for the Indian IT and management industries. Can Nepal emulate this success story given the existing political and economic constraints? May be, and may be not (look at the failure of the IT Park in Banepa). But, it still does not mean that services exports are competitive than merchandise exports.

As a whole, it sounds all good. The global services market are expanding and recent innovations in technology is facilitating this. But, the question is: how far can Nepal tap this given our domestic capacity right now? I believe not much. So, services exports might have the potential, if tapped rightly and timely, but it is not wholly competitive than the merchandise exports, which is, by the way, performing pretty bad since 1997. The belief that services exports is more competitive than merchandise exports is like plump fruit which one thinks of is sweet, but does not know if it is sweet or bitter without tasting it. Sometimes, perception and reality might differ.

What does data show?

Nepal has been having deficit in trade of goods for a long time. But, we are having deficit in services trade since 2005. We are importing more services than we are exporting in the the last five years. Also, the size of services trade deficit is also fluctuating, but still is negative. Competitiveness of services sector is not very strong than that of merchandise sector as of now. It might have the potential, but not right now.

In terms of employment, 65.7% of total employed are in agriculture sector, 13.4% in industrial sector, and 20.1% in services sector (data as of 2001). The value addition of agricultural sector, as percent of GDP, was 33.8% in 2009, with annual value added growth of 2.2%. The industrial sector value added (% of GDP) was 15.9% with annual value added growth of 1.78%. The manufacturing sector value added (% of GDP) was 7% with annual value added growth of –0.5% in 2009 (it was 2.6% in 2007). The services sector value added was 50.2% with annual value addition growth of 5.9% in 2009. Now, look at the employment being generated. Though the services sector contributes more than 50% of our GDP, it employs only 20% of the total employed.

The most influential economist over the past decade

Basically, Keynes’s followers prevailed. Here is more from The Economist.

Setting a deadline for the Doha Round

A “High Level Trade Experts Group”, co-chaired by Jagdish Bhagwati and Peter Sutherland, argues that passage of the Doha Round is doable in 2011, but this would require increased attention of world leaders. The Group has called for December 31, 2011 as the deadline for the passage of the Doha package.

• Doha is doable this year; rapid progress is being made in closing the negotiating gaps; this started in November 2010.

• Getting the deal done requires head-of-state attention; they must authorize, or personally negotiate the last trade-offs framed by the draft agreement that their WTO ambassadors hope to have ready for April.

• The window for this deal is the first half of 2011; after that all bets are off until 2013 at the earliest (due to elections in the US).

Major points from the document:

-A development friendly trade deal must demand less of countries in a way that is proportionate to their state of development. The final Doha package should be measured against this criteria.

-The Doha Round’s development mandate will be delivered in two key ways: (i) complete exclusion of all LDCs from any obligations except binding their tariff schedules at the current level (‘Round for Free’); and (ii) the concept of agreed ‘modalities’ for tariff cuts (subsidy reductions in agriculture) in principle agreed by all member, but in practice tempered by various forms of ‘flexibility’ for developed and developing countries. The last Doha negotiations in 2008 failed over differences in defining one of these flexibilities—a  special safeguard mechanism for agricultural exports to developing countries.

-The use of formula plus flexibility system is both the greatest potential strength and fatal weakness of the Doha Round. Positive in the sense that tariff landscape will be compressed across the board, with the highest farm tariffs in the developed world compressed. Also, industrial tariff in developing countries will also go down. Weakness in the sense that unless it is clear where all countries will exercise their flexibilities to shield tariff lines from cuts through exclusions or where the special safeguard mechanism will apply, it is impossible, or at least very difficult, to value a final package in a way that makes it possible to sell to domestic constituencies.

-Because completion of the Doha Round would demand political concessions, it cannot be completed solely by trade negotiators as it needs a much stronger and direct involvement of political leaders.

Why the Doha Round should be completed?

• It will act as an insurance policy against future protectionism. It will consolidate unilateral liberalization agreements since the end of the Uruguay Round in 1994.
• It will help reform global farm trade, particularly it will make the EU’s Common Agricultural Policy irreversible and seriously constrain any future US Farm Bill from increasing support should commodity prices fall. It would also eliminate all export subsidies for agricultural goods.
• It will provide new market access through tariff reductions and the contraction of market share of those countries whose agriculture subsidies will be withdrawn.
• It would protect the WTO and the multilateral trading system itself. A permanent collapse would likely provoke a wave of preferential trading agreements.
• Unless the Doha Round is finished and the WTO moves to 21st century trade issues, it will find itself stuck with out-dated disciplines while deeper disciplines are established by the EU’s, the US’s and Japan’s deep RTAs, with new sets added when China, India and Brazil internationalize their own supply chains
• Even if tariff reductions and the dismantling of non-tariff barriers can be achieved bilaterally, the multiplier effect of a multilateral agreement is considerably higher. Also, agricultural subsidy reform will be agreed multilaterally or not at all.

Structure of a final package

Agriculture

• Under current draft texts the EU would reduce its MFN duties on agricultural imports by close to 60%. The highest and most distorting tariffs will be cut proportionally more, with only 4% of tariff lines treated as sensitive and therefore subject to smaller cuts. As a compensation tor these partial exemptions import quotas amounting to 4% of domestic consumption must be opened and subjected to zero or very low duties. IT will translate into real new market access opportunities from day one of implementation. Agricultural exporters in developing countries, in particular Brazil and Argentina, and in developed countries, in particular Australia, New Zealand, and the US will likely benefit the most.
• The support to products like cotton and sugar in the US would be severely constrained, but negotiators still have to tackle this issue. Also, the form and functioning of the special safeguard measure for developing countries need to be worked out.
• Under trade distorting domestic support to agriculture, developed countries will reduce substantially the ceilings currently applied (by up to 80% in the case of the EU and up to 70% in the case of the US).
• The current text foresees the complete elimination of all forms of export subsidies by 2013 by developed countries, and by 2016 by most developing countries, with the remainder by 2021.

Industrial goods

• Among developed countries, which represent more than two third of the world’s final demand, tariffs would be virtually eliminated, with no tariff remaining above 6%. Duties levied by the EU on its total imports of industrial products would go down by 44%, more than in any previous round, amounting to $12.5 billion saved on exports to the US. On the US market, the amount of duties paid on imports would go down by $12 billion.
• For China, the current draft modalities would lead to a 22% reduction of duties levied on imports, well below the 36% cut that Chinese exporters would face on foreign markets.
• Other emerging countries need to make further tariff reductions.

-->Tariff reductions in particular sectors that are highly traded is needed as well. Sectoral tariff reduction would increase the gains for all countries.

--> The Doha Round should also include a new package on environmental goods and services, whose market is worth US 150 billion annually. The WB has already defined a list of 45 environmental goods that can form the basis for negotiation.

Services

• Given the fundamental role of services in the effective and efficient management of an economy, a strong outcome in services has huge potential spillover benefits for both developed and developing WTO members.

Package for LDCs

• The LDCs are not expected to implement any tariff reductions and are requested only to bind their tariffs at the level they currently apply. Since many of them depend on preferential market access to economies, multilateral liberalization erodes the preferential margin for their exports, which could pose as a challenge in the short-term as they will face stiff competition from advanced developing countries such as China and Brazil. This concern is partly addressed by eliminating tariff on certain products in a phased manner. Also, granting duty free quota free (DFQF) market access for all exports from all LDCs to all OECD countries and a set of major emerging economies would be helpful to LDCs. It could boost LDCs’ exports by 44% or US$ 7 billion a year.
• Since cotton is of crucial importance to several LDCs, the Doha Round will also have to address trade distorting subsidies to cotton farmers in developed countries.
• Aid for Trade (AfT) should be maintained as a necessary complement to boost LDCs’ productive capacity and help them reap the benefits of the Doha Round.

Trade facilitation

• Trade facilitation negotiation is a clear success story of the Doha Round. The WTO members have tabled more than 70 new proposals for improving the transit of goods between markets, charges levied for transit, penalties for minor breaches of customs regulations, the standardization of customs documentation and prompt publication of conditions for import and export.
• The proposed improvements in trade facilitation would increase trade by US$130 to US$450 billion annually. The benefits for developing countries could by far exceed the gains in other areas for negotiation. Meanwhile, the developing countries themselves should take initiatives to reform domestic policies and infrastructure to ease border-crossing for goods and services and the development aid that will be provided by developed countries to implement these reforms.

Here (the main paper by Antoine Bouet and David Laborde 2009) is an updated estimation of the potential costs of a failed Doha Round. The total cost of failure of the Doha Round is estimated to be US$ 1.171 trillion in forgone world exports if protectionist measures persist. Meanwhile, welfare loss are estimated to be US$ 193 billion. Here is earlier estimates of the Doha Round. Here is a piece about the industrial and export interests of Nepal in the Doha Round of trade negotiations. Here is a link to the recent WTO workshop on the Doha Round.

Links of interest about the latest on the Doha Round

• Roderick Abbott on how to revive Doha with some chance of success. He argues that “WTO members need to go back to the drawing board to come up with alternative approaches to the negotiations.”
• Peter Sutherland on a future for the WTO
• Peter Kleen compares the Uruguay Round and the Doha Round. He concludes that “negotiating trade agreements must remain the raison d’etre of the WTO, no matter how complicated it has become. Such negotiations, however, could take a less ambitious and more incremental form than these big rounds and must be able to muster support from the global business community if trade liberalisation is to continue advancing.”
• Stuart Harbinson on the main issues for a conclusion of the Doha Round

Here is a blog post about the need to finish the Doha Round by 2011.