Impact of Trade Liberalization on Agriculture in the Near East and North Africa NEAR EAST AND NORTH AFRICA DIVISION 2007 Enabling the rural poor to overcome poverty Impact of Trade Liberalization on Agriculture in the Near East and North Africa Enabling the rural poor to overcome poverty Copyright © 2007 International Food Policy Research Institute and International Fund for Agricultural Development. All rights reserved. Sections of this material may be reproduced for personal and not-for- profit use without the express written permission of but with acknowledgment to IFPRI and IFAD. To reproduce the material contained herein for profit or commercial use requires express written permission. To obtain permission, contact the Communications Division at ifpri-copyright@cgiar.org. This report contains preliminary material and research results. They have not been subject to formal external review managed by the IFPRI Publications Review Committee, but they have been reviewed by at least one internal or external reviewer. This report is circulated in order to stimulate discussion and critical comment. Project funding: International Fund for Agricultural Development (IFAD) Project manager: Mylène Kherallah (IFAD) Authors: Nicholas Minot (IFPRI) Mohamed Chemingui Marcelle Thomas (IFPRI) Reno Dewina (IFPRI) David Orden (IFPRI) Contact information: International Food Policy Research Institute (IFPRI) 2033 K Street NW Washington, DC 20006-1002 USA Telephone: +1-202-862-5600 Facsimile: +1-202-467-4439 E-mail: ifpri@cgiar.org www.ifpri.org www.ifpri.org/divs/mtid.htm International Fund for Agricultural Development (IFAD) Via del Serafico, 107 00142 Rome, Italy Telephone: +39-06-54591 Facsimile: +39-06-5043463 E-mail: ifad@ifad.org www.ifad.org www.ruralpovertyportal.org 3 Table of contents LIST OF TABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 LIST OF FIGURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ACRONYMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 CURRENCIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 FOREWORD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 PREFACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Organization of the report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 2 Basic Characteristics of the Economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Classification of NENA13 countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Economic performance and growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Poverty, inequality and other social indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Structure of GDP and the role of agriculture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 3 Agricultural Production and Trade Patterns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Structure of agricultural production and trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Turkey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Egypt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Algeria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Morocco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Tunisia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Syria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Jordan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Other countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Structure of protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Trade agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 The Uruguay Round under WTO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 The Doha Round under WTO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 The Euro-Mediterranean Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 The Everything But Arms Initiative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 The US-Middle East Free Trade Initiative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Trade agreements among NENA countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 4 Impact of Trade Liberalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Effects of trade liberalization on world agricultural markets. . . . . . . . . . . . . . . . . . . . . . . . 58 Wheat . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Rice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Sugar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Cotton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Dairy products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Effect of higher agricultural prices on NENA countries . . . . . . . . . . . . . . . . . . . . . . 62 Effects of trade liberalization on NENA13 countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Global trade liberalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Regional trade liberalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Bilateral trade liberalization with the EU and the US . . . . . . . . . . . . . . . . . . . . . . . . 68 Unilateral trade liberalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 44 5 Agriculture, Trade and Poverty in Egypt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Agricultural sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Agricultural production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Agricultural trade patterns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Agricultural and trade policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Agricultural policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Trade policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Trade agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Poverty and household budget patterns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Poverty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Sources of income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Household consumption patterns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Impact of commodity price changes on poverty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Wheat . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Rice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Cotton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Fruit and vegetables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Sugar cane . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 Impact of crop price increases on overall poverty . . . . . . . . . . . . . . . . . . . . . . . . . 90 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Annex to Chapter 5: Methods for estimating the impact of trade liberalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 6 Agriculture, Trade and Poverty in Tunisia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Agriculture and Food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Agricultural and trade policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 Agricultural and food policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 Trade policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Trade agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 Poverty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 Impact of trade liberalization on the poor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 Annex to Chapter 6: Method for estimating the impact of trade liberalization on Tunisia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 7 Agriculture, Trade and Poverty in Syria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 Agricultural sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 Agricultural production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 Agricultural trade patterns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 Agricultural and trade policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 Agricultural policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 Trade policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 Effect of policy on agricultural prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 Trade agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 Poverty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 Impact of wheat market liberalization on small farmers . . . . . . . . . . . . . . . . . . . . . . . . . 130 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 Annex to Chapter 7: Design of a CGE model of the Syrian economy. . . . . . . . . . . . . . . 135 5 8 Agriculture, Trade and Poverty in Morocco. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 Agricultural sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 Agricultural production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 Agricultural trade patterns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 Agricultural and trade policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 Pre-adjustment period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 Structural adjustment period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 Global integration period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 Trade agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 GATT and WTO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 The EMP agreement with the EU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 Morocco-United States Free Trade Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 141 Poverty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 Impact of trade liberalization on small farmers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 9 Summary and Policy Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 Basic characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 Agricultural and trade patterns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 Impact of trade liberalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 Agriculture, trade and poverty in Egypt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 Agriculture, trade and poverty in Tunisia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 Agriculture, trade and poverty in Syria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 Agriculture, trade and poverty in Morocco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 Policy implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 Policy on global trade liberalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 Policy on regional trade liberalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 Position with regard to bilateral liberalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154 Position with regard to unilateral liberalization . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 Complementary policies to facilitate adjustment. . . . . . . . . . . . . . . . . . . . . . . . . . 156 Complementary policies to support agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . 157 Complementary policies to support farmers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 Complementary policies to assist the rural poor. . . . . . . . . . . . . . . . . . . . . . . . . . 159 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162 6 Table 2-1. Food security and openness classification of NENA13 countries . . . . . . . . . . . . . . . . 23 Table 2-2. Summary statistics for the NENA13 economies, 2003 . . . . . . . . . . . . . . . . . . . . . . . 25 Table 2-3. Poverty and social indicators for the NENA13 countries, 2003 . . . . . . . . . . . . . . . . . 26 Table 2-4. Structure of the economies and the agricultural sector of NENA13 countries, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Table 3-1. Agricultural land use, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Table 3-2. Agricultural production, 2002-04 average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Table 3-3. Main agricultural exports and imports of Turkey . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Table 3-4. Net exports of selected commodities, 2001-03 average. . . . . . . . . . . . . . . . . . . . . . 33 Table 3-5. Main agricultural exports and imports of Egypt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Table 3-6. Main agricultural imports of Algeria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Table 3-7. Main agricultural exports and imports of Morocco . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Table 3-8. Main agricultural exports and imports of Tunisia . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Table 3-9. Main agricultural exports and imports of Syria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Table 3-10. Main agricultural exports and imports of Jordan . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Table 3-11. Structure of agricultural imports, 2001-03 average . . . . . . . . . . . . . . . . . . . . . . . . . 45 Table 3-12. Structure of agricultural exports, 2001-03 average . . . . . . . . . . . . . . . . . . . . . . . . . 45 Table 3-13. Applied global and sector-level protection in NENA13 countries . . . . . . . . . . . . . . . 46 Table 3-14. Applied bilateral protection on agriculture, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Table 3-15. Applied protection rates for selected commodities, 2001 . . . . . . . . . . . . . . . . . . . . 48 Table 3-16. Multilateral, regional and bilateral agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Table 4-1. Impact of higher agricultural prices on NENA countries . . . . . . . . . . . . . . . . . . . . . . . 63 Table 5-1. Tariff rates in 2005 and value of imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Table 5-2. Distribution of Egyptian households based on occupation and location. . . . . . . . . . . 78 Table 5-3. Expenditure and household size for different types of households in Egypt . . . . . . . . 79 Table 5-4. Incidence of poverty and number of poor people in Egypt. . . . . . . . . . . . . . . . . . . . . 79 Table 5-5. Incidence of poverty for different types of households in Egypt . . . . . . . . . . . . . . . . . 80 Table 5-6. Percentage of households involved in income activities by region . . . . . . . . . . . . . . . 81 Table 5-7. Sources of income for different types of households . . . . . . . . . . . . . . . . . . . . . . . . . 81 Table 5-8. Sources of income for rural households by expenditure tercile and farm size . . . . . . 83 Table 5-9. Expenditures patterns for different types of households. . . . . . . . . . . . . . . . . . . . . . . 84 Table 5-10. Percentage of households that are producers and consumers of wheat . . . . . . . . . 84 Table 5-11. Effects of increased wheat prices on poverty among wheat growers in Egypt . . . . . 85 Table 5-12. Percentage of households that are producers and consumers of rice . . . . . . . . . . . 86 Table 5-13. Effects of increased rice prices on poverty among rice growers in Egypt . . . . . . . . . 86 Table 5-14. Effects of increased cotton prices on poverty among cotton growers in Egypt . . . . 87 Table 5-15. Percentage of households that are producers and consumers of fruit and vegetables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Table 5-16. Effects of increased fruit and vegetables prices on poverty among fruit and vegetable growers in Egypt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 Table 5-17. Percentage of households that are producers of sugar cane and consumers of sugar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 Table 5-18. Effects of increased sugar cane prices on poverty among sugar cane growers in Egypt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Table 5-19. Effects of increased commodities prices on poverty among all households in Egypt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Table 6-1. Contribution of agriculture and food processing to GDP . . . . . . . . . . . . . . . . . . . . . . 96 Table 6-2. Composition of the Tunisian agriculture sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Table 6-3. Share of crop area allocated to different crop categories by farm size . . . . . . . . . . . . 97 Table 6-4. Structure and importance of food subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Table 6-5. Nominal protection by major economic activity (1995-2003) . . . . . . . . . . . . . . . . . . 100 Table 6-6. Tariff rates in and out of quotas and utilization of tariff quotas . . . . . . . . . . . . . . . . . 100 List of tables 7 Table 6-7. Effective protection by major economic activity (1995-2002) . . . . . . . . . . . . . . . . . . 101 Table 6-8. Poverty lines and poverty incidence, 1990, 1995 and 2000. . . . . . . . . . . . . . . . . . . 105 Table 6-9. Household expenditures by occupation of the head of household . . . . . . . . . . . . . . 106 Table 6-10. Impact of trade liberalization on macroeconomic variables . . . . . . . . . . . . . . . . . . 108 Table 6-11. Impact of trade liberalization on food and agricultural production by sector. . . . . . 108 Table 6-12. Impact of trade liberalization on food and agricultural exports by sector . . . . . . . . 109 Table 6-13. Impact of trade liberalization on food and agricultural imports by sector . . . . . . . . 109 Table 6-14. Impact of trade liberalization on the incidence of poverty by occupation . . . . . . . . 110 Table 6-15. Representativeness of the sample by occupation of the head of household . . . . . 115 Table 6-16. Dimensions of the Tunisian SAM for the year 1996 . . . . . . . . . . . . . . . . . . . . . . . . 116 Table 7-1. Characteristics of farm households in Syria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 Table 7-2. Tariff equivalents of quantitative restrictions and tariffs on agricultural products . . . . 125 Table 7-3. Comparison of official and parity producer prices . . . . . . . . . . . . . . . . . . . . . . . . . . 127 Table 7-4. Government price intervention: costs and beneficiaries . . . . . . . . . . . . . . . . . . . . . . 127 Table 7-5. Proposed changes in EU quotas for Syrian exports . . . . . . . . . . . . . . . . . . . . . . . . . 128 Table 7-6. Poverty measures by region using the lower poverty line for 2003-04 . . . . . . . . . . . 129 Table 7-7. Distribution of the population by location and poverty status . . . . . . . . . . . . . . . . . . 129 Table 7-8. Poverty measures for households of which the head is working in agriculture . . . . . 130 Table 7-9. Budget cost of food and agricultural subsidies in Syria . . . . . . . . . . . . . . . . . . . . . . 131 Table 7-10. Impact of wheat subsidy removal on macroeconomic indicators . . . . . . . . . . . . . . 132 Table 7-11. Impact of wheat subsidy removal on prices and production . . . . . . . . . . . . . . . . . 133 Table 7-12. Impact of wheat subsidy removal on welfare by income decile . . . . . . . . . . . . . . . 133 List of figures Figure 3-1. Ratio of food imports to total exports in Turkey, Egypt, Algeria, and Morocco . . . . . 31 Figure 3-2. Ratio of food imports to total exports in Tunisia, Syria, and Jordan . . . . . . . . . . . . . 38 Figure 3-3. Ratio of food imports to total exports in Djibouti, Lebanon, The Sudan, West Bank and Gaza, and Yemen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Figure 6-1. Evolution of poverty in Tunisia (1990-2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 8 Acronyms CGE computable general equilibrium (model) EMAA European Union-Mediterranean Association Agreement EMP Euro-Mediterranean Partnership (Agreement) EU European Union FTA free trade agreement GAFTA Greater Arab Free Trade Agreement GATT General Agreement on Tariffs and Trade LDC least developed country MENA Middle East and North Africa NENA Near East and North Africa OECD Organisation for Economic Co-operation and Development SAM social accounting matrix URAA Uruguay Round Agreement on Agriculture WTO World Trade Organization Currencies Algeria Algerian dinar (DZD) Djibouti Djibouti franc (DJF) Egypt Egyptian pound (LE) Jordan Jordanian dinar (JOD) Lebanon Lebanese pound (LBP) Morocco Moroccan dirham (DH) Somalia Somali shilling (SOS) Sudan Sudanese dinar (SDD) Syria Syria pound (SYP) Tunisia Tunisian dinar (TND) Turkey Turkish lira (TL) West Bank and Gaza Israeli shekel/Jordanian dinar Yemen Yemeni rial (YER) 9 The impact of trade liberalization on developing countries has been a topic of some interest and controversy for many years, but the debate became prominent during the Doha Round of multilateral trade negotiations. The suspension of the Doha Round will likely shift attention toward regional and bilateral agreements and toward unilateral reforms, but the topic remains relevant to international organizations and decision makers in developing countries. Because trade liberalization is expected to increase the world prices of agricultural commodities, concern about the possible negative impact of trade liberalization has focused on net-food-importing regions, including the Near East and North Africa (NENA). The recent food price increases in 2006 and 2007 have added to the relevance of the issue for these countries. Given the importance of the topic, it is surprising that relatively few studies have examined the impact of trade liberalization on small farmers and other poor households in the NENA region. With support from the International Fund for Agricultural Development (IFAD), this study attempts to fill this gap. It combines a comprehensive review of the literature on trade liberalization in the NENA region with four country case studies that examine the distributional impact in more depth. In addition to examining the likely impact of various types of trade liberalization on farmers and the poor in the region, this study identifies a number of policies and programs that would enhance the positive effects of these reforms and alleviate the negative effects. This report is one of a series of studies carried out by the International Food Policy Research Institute (IFPRI) on the impact of trade agreements and trade policy on the poor in developing countries. Recent research on this theme includes studies of the impact of alternative Doha outcomes, the effect of global cotton markets on poverty in Pakistan, the impact of rice policy on poverty in the Philippines, and a review of trade-related agricultural policies in four developing countries. These studies aim to provide policymakers with objective, empirically-based analyses that will contribute to informed, pro-poor decisions in the area of trade policy. We gratefully acknowledge the support of IFAD in carrying out this study and hope that it will be useful to IFAD staff and to their client countries. DR. JOACHIM VON BRAUN Director General International Food Policy Research Institute Foreword 10 In the past two decades, many countries in the Near East and North Africa region have reformed the agricultural sector by lowering agricultural tariffs, liberalizing domestic prices and reducing consumer food subsidies. However, trade restrictions and domestic price support mechanisms are still prevalent for a few strategic commodities (such as wheat), and there is wide divergence among the countries in terms of the extent and depth of liberalization. Under the Euro-Mediterranean Partnership launched in 1995, ongoing and future bilateral free trade agreements between the European Union and several Arab Mediterranean countries could lead to further trade liberalization. In addition, some countries have recently signed free trade agreements with the United States of America, and more countries in the Near East and North Africa region are expected to sign bilateral trade agreements with the United States in the near future. Previous and ongoing domestic agricultural reform and bilateral and regional trade agreements, as well as any future trade liberalization that may result from further multilateral trade negotiations under the World Trade Organization, will have significant impact on the agricultural sector of the Near East and North Africa region. Some studies have tried to analyse the expected impact of these changes on the region’s agricultural sector, with divergent results depending on the assumptions and methodologies used, and no analysis has been done relating these changes to small farmers and poor rural households. Given its focus on improving the livelihoods of the rural poor in the region, the Near East and North Africa Division of the International Fund for Agricultural Development, in partnership with the International Food Policy Research Institute, has undertaken this study to examine the expected impact of agricultural domestic and international trade liberalization on this target group. The results of the study are very useful in identifying the measures that could be employed either to mitigate the potential negative impacts of trade liberalization on small rural producers or to help these producers seize new domestic and international market opportunities. The study concludes that trade policy by itself is an imprecise and costly instrument for addressing poverty. There is a need, however, for complementary policies to enhance the positive effects of trade liberalization (or reduce the negative impact); these include flexible factor markets (especially for labour), trade facilitation measures, support for public goods, direct income support for farmers, and safety net programmes. The complementarity between the research capabilities of the International Food Policy Research Institute and the operational experience of the International Fund for Agricultural Development has greatly contributed to enhancing the relevance of this research to the Fund and its country and regional partners in formulating pro-poor policies, strategies and programmes for agricultural and rural development. The findings of this study will contribute to the establishment of a common understanding of the impact of trade liberalization in the region and, hence, to an increase in the effectiveness of the collaborative efforts among policymakers, the International Fund for Agricultural Development and other development cooperation partners in their ongoing joint efforts to reduce rural poverty in the Near East and North Africa region. It is hoped that the success of the International Fund for Agricultural Development- International Food Policy Research Institute collaboration in producing this study will lead the way for further, similar partnerships in the future. DR. MONA BISHAY Director Near East and North Africa Division International Fund for Agricultural Development Preface 11 This report examines the impact of agricultural trade liberalization on the countries of the Near East and North Africa (NENA), with emphasis on the impact on small-scale farmers in the region. In particular, the study has four objectives: • to examine current agricultural trade policies in the NENA region; • to evaluate the degree of agricultural liberalization likely to occur as part of various trade agreements; • to analyse the impact of further trade liberalization on small farmers and other poor households; and • to explore policy options for mitigating the negative effects of agricultural trade liberalization. The study focuses on 13 countries and territories in the region: Algeria, Djibouti, Egypt, Jordan, Lebanon, Morocco, Somalia, the Sudan, Syria, Tunisia, Turkey, the West Bank and Gaza, and Yemen. We refer to these as the NENA13 countries. Background Most of the NENA13 countries are semi-arid, with limited water and arable land per capita, making agricultural production highly dependent on rainfall. The overall population density of the region is low compared to other developing areas, though the region is also more urbanized than the average for developing countries. The economic performance of many of the NENA13 countries has been relatively weak, with real per capita GDP growth during the 1990s of only 1.3% per year. The region has been subject to various conflicts, including the Arab-Israeli conflict, the Sudanese civil war, the insurgency in Algeria (until recently), the lack of a central government in Somalia, and the Iraq War. The slow economic growth means little expansion in formal-sector employment, resulting in persistent problems of unemployment, particularly among youth. Nonetheless, strong economic performance in Lebanon, the Sudan (recently) and Tunisia suggests that these problems are not insurmountable. For most NENA13 countries, agricultural exports represent a relatively small share of total exports. Wheat is a staple food and a major import for most of the NENA13 countries. Almost all the NENA13 countries are net food importers. Some countries in the region have relatively high levels of protection for farmers: Egypt, Morocco and Tunisia are among the 15 most protected economies in the world, according to one study. The commodities that are the most protected in the region are wheat, sugar, dairy, and livestock products. The European Union (EU) is the most important trading partner for most of the countries in the region. Trade agreements The NENA countries have signed a series of multilateral, regional and bilateral trade agreements. The Uruguay Round Agreement on Agriculture has had only a modest impact on trade policy in the region. Seven of the NENA13 countries are either not members of the World Trade Organization (Somalia, Syria, and West Bank and Gaza) or they are least developed countries (Djibouti, Somalia, the Sudan and Yemen) and are thus exempt from most of the agreement’s commitments. For the remaining six countries, the bound rates are often far above the applied tariff rates, particularly for agricultural products. Thus, the agreement commitments to reduce the bound rate have had little effect on the actual level of agricultural protection. The EU has signed European Union-Mediterranean Association Agreements (EMAAs) with five NENA countries, and three others are in the process of ratification, but the EMAAs generally make Executive summary 12 exemptions for agriculture. In 2001, the EU launched the Everything But Arms Initiative, under which the least developed countries have duty-free access to EU markets for almost all goods. Within the NENA region, Djibouti, Somalia, the Sudan and Yemen can take advantage of the initiative’s provisions. Bananas, rice and sugar were temporarily exempted, and duty-free access was delayed until January 2006, July 2009, and September 2009, respectively. Under the US-Middle East Free Trade Initiative, the United States has signed bilateral free trade agreements (FTAs) with Jordan and Morocco and intermediate agreements with four other NENA countries. The effect of the US-Jordan FTA will be small because Jordan’s level of protection is already low and because US-Jordan trade is small. The effect of the US-Morocco FTA will be larger because Moroccan trade barriers are higher. Of particular importance, Morocco’s wheat tariffs will be phased out over ten years. The US African Growth and Opportunity Act allows duty-free access to US markets for sub-Saharan African countries that meet certain criteria; however, within the NENA13 region, only Djibouti qualifies. A number of bilateral and regional agreements within the NENA region have been signed, but their effectiveness has been limited by the structural similarities of the NENA economies and the granting of exceptions for sensitive products. Nonetheless, a number of NENA countries, most notably Egypt and Tunisia, have reduced tariff barriers unilaterally in recent years. In other words, trade liberalization has occurred outside the context of global, regional and bilateral trade agreements. Impact of trade liberalization The evidence suggests that global trade liberalization, by reducing agricultural support policies in countries of the Organisation for Economic Co-operation and Development and by reducing protection, will increase world agricultural prices. The markets for wheat, rice, sugar, cotton and dairy products are the most distorted, and the prices in these markets will rise by 3-20%. Almost all the NENA13 countries are net agricultural importers; so, there is clearly some basis for concern that these countries will lose as a result of global trade liberalization. Our analysis finds that the terms-of-trade effect of a 15% increase in all world agricultural prices on the NENA13 countries is approximately US$1.2 billion, or 0.2% of regional GDP. This estimate is an upper limit because it assumes no response on the part of producers and consumers and because it does not include the efficiency gains associated with reducing distortions in domestic agricultural markets. Most studies of trade liberalization suggest that the efficiency benefits are larger than the terms-of-trade losses. Several dozen studies have been undertaken to examine the macroeconomic impact of various types of trade liberalization in NENA. These studies suggest that multilateral trade liberalization generally results in net gains to countries in the region, with real GDP expanding 1-3%. The benefits of trade liberalization to a given country depend largely on the degree of domestic liberalization carried out by the country. Most of the gains from agricultural trade liberalization are associated with domestic reform rather than changes in trade policy in other countries. Furthermore, the benefits of multilateral trade liberalization are generally greater than the gains associated with bilateral trade agreements with the EU or the United States and the gains from regional trade agreements within the region. Effects on small farmers and the poor Few studies look at the distributional effect of liberalization on small farmers and the poor in the NENA countries. We use household survey data and computable general equilibrium (CGE) models to simulate the impact of trade liberalization on small farmers and the poor in four NENA countries. Egypt has undertaken significant trade liberalization, but costly obstacles to doing business and investing remain. It is a major wheat importer and exports cotton, rice and horticulture. We analyse the data from the 1998 Egypt Integrated Household Survey to examine the distributional effect of hypothetical changes in agricultural prices. According to this analysis, a 40% increase in wheat prices would reduce the incidence of poverty among wheat growers by 3 percentage points. In the case of rice and cotton, a 40% price increase would decrease poverty among growers of those crops by 7 percentage points. For fruits and vegetables, an equivalent price increase would lower poverty among horticultural growers by 7 percentage points. The largest effect is for sugar cane growers, for whom a 40% increase in sugar prices would reduce poverty by 20 percentage points, largely because 13 sugar cane growers are poorer and highly dependent on sugar cane income. However, the effect of each of these price increases on national poverty is negligible because only a small share of the population grows each crop. Unlike Egypt, Tunisia maintains high tariffs on many products, including agricultural commodities. At the same time, Tunisia has a relatively good investment climate, which contributed to significant inflows of foreign direct investment and a healthy growth rate through the 1990s. Tunisia’s main exports are olives and dates, while the principle imports are wheat and maize. In order to study the distributional impact of trade liberalization in Tunisia, we use a CGE model linked to survey data for 400 representative households. The model is used to simulate the elimination of industrial tariffs on goods from the EU, the removal of all tariffs on imports from the EU, the elimination of all tariffs from all countries, and the elimination of all tariffs, combined with global liberalization, which is assumed to raise world agricultural prices by 15%. Domestic trade liberalization has the largest positive effect on GDP, but the fourth scenario (global trade liberalization) has the most positive effect on agriculture and poverty. In this scenario, poverty declines to its lowest level among the four scenarios. Syria has one of the most highly regulated economies in the region. Reforms in recent years have only begun to dismantle some of these restrictions. Although Syria has been successful in achieving wheat self-sufficiency and promoting cotton exports, these accomplishments have come at a high cost in terms of inefficiency and an unsustainable fiscal burden. The likely depletion of oil reserves is forcing the Government to reduce costs and find new sources of revenue. We use a CGE model to simulate the effect of liberalizing wheat markets on households in ten income categories. The macroeconomic effects are relatively modest, although government savings increases by almost 3% of GDP. Complete liberalization reduces the producer price of wheat by about 17% and production by about 2%. The effects of subsidy removal on the welfare of Syrian households is regressive in the sense that high-income households gain, while lower-income households lose. The size of the effects, however, is less than 1% of base income for all but the richest income group. Since the mid-1980s, Morocco has carried out a series of economic reforms to allow the market to play a larger role in production and consumption decisions, including price liberalization, a reduced role for state enterprises and the promotion of private investment. Morocco has signed an EMAA with the EU and an FTA with the United States, but the level of agricultural protection remains relatively high. A study by Ravallion and Lokshin (2004) uses a CGE model to simulate the effect of grain import liberalization and then uses projected price changes to simulate the impact on households in a nationally representative survey. The CGE model suggests that full liberalization of grain imports would reduce the producer price of grain by 24% and the consumer price of grain by 27%. This would reduce poverty in urban areas, where households benefit from lower priced grain, but raise poverty in rural areas because of the losses among net sellers of grain. The overall incidence of poverty in Morocco rises from 20% to 22%. These results, however, do not take into account the effect of global trade liberalization, which is expected to increase the world price of wheat and other grains. Implications for trade policy Global trade liberalization will likely increase world agricultural prices by 3-20%, imposing a terms-of- trade loss on 11 of the 13 countries under consideration (the Sudan and Turkey have small agricultural trade surpluses). The net food-importing countries have used the expected terms-of-trade loss associated with global trade liberalization to request special concessions in the form of reduced commitments to opening their own borders. The flaw in the mercantilist logic is that it only takes into account the gains and losses of producers, ignoring the effects of trade policy on consumers. Studies of trade liberalization suggest that most of the benefits to a given country from trade liberalization are the result of reforms within the country. Thus, the net food-importing countries appear to be demanding the right to forgo the efficiency gains associated with domestic trade liberalization as “compensation” for the terms-of-trade losses associated with reforms in other countries. The effect of agricultural trade liberalization on poverty varies widely across countries in part because the effect of liberalization on agricultural prices is ambiguous. Global agricultural trade reform is likely to increase world agricultural prices, but domestic trade liberalization will reduce domestic agricultural prices relative to the world price. The net effect of liberalization on domestic EXECUTIVE SUMMARY 14 agricultural prices depends partly on the country’s trade patterns, the original level of protection and the details of the liberalization. If the level of domestic protection is high, then full trade liberalization is likely to reduce domestic agricultural prices. If, on the other hand, domestic protection is modest, then full trade liberalization may increase domestic agricultural prices. Furthermore, the impact of changes in agricultural prices on poverty is ambiguous. Higher agricultural prices benefit farmers who can produce a marketed surplus, but they hurt the urban poor and rural net buyers. The analysis presented in this report suggests that higher agricultural prices benefit the poor on net, but the effect is quite small. Thus, the link between trade liberalization and agricultural price changes is ambiguous, and the effect of agricultural price changes on poverty is weak. This suggests that trade policy is a poor instrument for addressing overall poverty in the NENA13 region. The economic benefits of regional integration (such as the Greater Arab Free Trade Agreement) have been limited to date. One reason for this is that these agreements tend to be fairly flexible, allowing numerous exceptions for “sensitive goods”. A relatively small number of exceptions can largely negate the gains from trade liberalization. To generate significant gains for member countries, the Greater Arab Free Trade Agreement and other regional agreements will have to achieve a greater level of discipline over tariff and non-tariff barriers. The second reason for the modest benefits associated with these trade agreements is that regional trade is hampered by a variety of factors in addition to trade policy. The transportation infrastructure linking NENA countries is generally poor; transportation services in the region are characterized by lack of competition and high costs, and many of the countries suffer from cumbersome customs procedures that raise the cost of trade. Measures to streamline customs procedures and introduce greater competition in regional transportation services would enhance the benefits of regional trade agreements. The third reason for the modest gains associated with regional trade agreements is the similarity of the economic structures in the member countries. If all member countries import wheat and maize, export fruits and vegetables and have similar wage rates, then the gains from trade are likely to be limited. Regarding bilateral agreements, the EMAAs generally exclude agriculture. Simulation studies confirm the economic intuition that the gains from these agreements would be much larger if they included liberalization in the agricultural sector. The five countries with EMAAs should begin to explore the feasibility of a second round of negotiations that would include agriculture. While recognizing the political sensitivity of agricultural prices, NENA countries should keep in mind that most of the benefits of an expanded association agreement will be related to the degree of domestic liberalization in their own countries. At the same time, the liberalization of EU tariff and non-tariff barriers on fruits, vegetables, olive oil and sugar would be particularly beneficial to NENA countries. Regarding the US FTAs, the United States is a relatively minor trading partner with all of these countries; so, the NENA13 countries should not expect large impacts, positive or negative, as a result of these agreements. On the other hand, these agreements may facilitate investment (local and foreign) in the NENA countries, partly because they include measures to create a more favourable climate for private investment and partly because they signal a commitment to greater integration in the global economy. Regarding unilateral liberalization, economic analysis suggests that, in general, unilaterally reducing import protection and domestic support of agriculture will increase aggregate income. Indeed, it is easy to demonstrate that the benefits of lower domestic prices to consumers are greater than the losses to producers. Yet, policymakers, trade negotiators and many non-economists see reducing domestic protection as the “price” a country must pay to gain access to markets in other countries. One argument is that, in developing countries in general and in the NENA region in particular, poor farmers cannot compete with large-scale technologically advanced farmers in developed countries, particularly if the latter receive production subsidies. Certainly, commercial farmers in developing countries are hurt by the subsidies given to farmers in the countries of the Organisation for Economic Co-operation and Development. However, in spite of these subsidies, Egypt is a competitive exporter of cotton and rice, Morocco is able to export tomatoes to Europe, and Tunisia is a major exporter of olive oil. These examples suggest that NENA countries can compete in markets where they have comparative advantage. 15 According to another argument, import barriers on agricultural products reduce poverty among poor agricultural producers. The analysis presented in this report suggests that higher agricultural prices have small and mixed effects on the poor. This is because: (i) higher agricultural prices benefit some poor households (farmers with net sales), but they hurt other poor households (the urban poor and net buyers in rural areas); (ii) the percentage of households that are net sellers of agricultural goods is relatively small; (iii) farmers who are net sellers tend to be richer than the average farmer, so higher farm income does not always translate into lower poverty; and (iv) even those farmers who are both poor and net sellers rely on non-agricultural activities for a significant share of their incomes. In other words, agricultural protection is a costly and imprecise tool with which to address the problem of rural poverty. Complementary policies The impact of trade liberalization on small farmers and other poor households in the NENA region partly depends on non-trade policies. Several studies have indicated that the size of the gains from trade liberalization will be greater when there are flexible factor markets that allow land, labour and capital to be reallocated from formerly protected sectors to newly profitable sectors. Regulations that constrain the response of these factor markets reduce the positive impact of liberalization. In agriculture, flexibility is likely to be enhanced by effective agricultural services such as extension and market information systems that can provide farmers with useful information about the agronomic and economic aspects of shifting into new commodities. Another type of policy that enhances the economic effect of trade liberalization is trade facilitation. This refers to measures that reduce the transaction costs related to trade, including excessive documentation requirements, authorizations from multiple agencies, unclear or subjective criteria for applications of duties, and delays and uncertainties related to customs clearance. One study found that the gains from trade liberalization are twice as large if combined with trade facilitation measures. Under World Trade Organization rules, the agricultural sector can be directly supported through a variety of green box programmes, such as agricultural research and extension, pest and disease control, inspection services, marketing infrastructure, market information services, environmental protection programmes and regional assistance programmes. Most of these investments involve the provision of public goods, implying that they may be justified in terms of economic efficiency, as well as in terms of supporting poor farmers. One type of green box programme does not involve the provision of public goods: decoupled payments to farmers. Payments are decoupled when they are not based on current production, but rather on some fixed basis such as production or area planted in a base year. Over the last 15 years, economists and policymakers have become increasingly interested in agricultural reform that shifts from producer subsidies and import protection towards decoupled payments to farmers. This type of reform has been tried in the EU, Mexico, Turkey and the United States with some success. At the same time, it should be recognized that switching from import protection to a programme of decoupled payments implies both a loss in tariff revenue and significant new expenditure. If the objective is to assist poor and vulnerable households regardless of their occupation, a different type of programme should be considered. A wide variety of safety-net programmes have been established in developing countries with the goal of reducing poverty. Targeted food subsidies make subsidized food available to selected households either geographically, through low-price shops located in poor neighbourhoods, or some form of ration card that entitles the bearer to purchase food at subsidized prices. Egypt, Jordan and Tunisia have attempted to introduce targeting into food subsidy programmes. Labour-intensive public works programmes usually combine infrastructure development (such as road building) with hiring policies to maximize the pro-poor impact. If designed well, they can improve community infrastructure and provide assistance to the poorest households with able-bodied members. Conditional cash transfer programmes have generated considerable interest in the last 10-15 years. These programmes provide cash grants to households that comply with certain requirements, usually keeping children in school, attending health clinics, or receiving pre- and postnatal care. Conditional cash transfers serve a dual purpose: providing assistance to poor households and encouraging investments in human capital that reduce the chance that poverty will be transmitted to the next generation. EXECUTIVE SUMMARY Introduction 1 18 1.1 Background Agriculture is one of the most problematic areas in international trade negotiations. While significant progress has been achieved in reducing trade barriers and other policy distortions in manufacturing through various multilateral agreements, in regional and bilateral arrangements and under unilateral trade reforms, agricultural markets remain highly distorted. Both industrial and developing countries still provide relatively high levels of protection to agricultural sectors. In addition, many countries, particularly the industrialized countries, provide various forms of support for agriculture. Agricultural trade liberalization is particularly sensitive in developing countries because policymakers are concerned about the potential impact on small-scale farmers, who typically account for a large share of the poor. The issue is politically sensitive in industrialized countries as well, at least partly because of the disproportionate political power of farm groups. In spite of this sensitivity, there is a widespread belief that reducing the trade barriers and policy distortions affecting agriculture will increase economic efficiency and aggregate income. The theory of comparative advantage suggests that aggregate income is higher when trade barriers are lower. Empirical studies of trade liberalization generally show that the aggregate benefits of trade liberalization outweigh the costs. Studies also show that more outward-oriented countries tend to grow more rapidly over time, suggesting that trade liberalization generates dynamic gains through the free flow of investment and technology. By this logic, even unilateral trade liberalization should usually benefit a country. In the political arena, however, there is resistance to unilateral liberalization. In the view of many policymakers, reducing domestic protection is a necessary cost used as a bargaining chip to gain access to markets in other countries. In addition, there is concern that, even if liberalization brings benefits in the aggregate, the distributional impact may be negative. Economic theory and empirical studies suggest that current agricultural policies suppress the world price of many agricultural commodities below what they would be under liberalized trade. This is because import restrictions reduce world demand, and agricultural producer support tends to stimulate supply. The effect on domestic agricultural prices in countries that protect their agriculture is ambiguous, however, because multilateral trade liberalization may increase world agricultural prices, but unilateral liberalization in the form of lower tariffs will reduce domestic prices relative to world prices. The impact of trade policy reforms varies substantially across commodities, across countries and across households within a country. Some commodity markets, such as those for sugar and rice, are more distorted than others; so, trade liberalization would have a larger effect on the prices of these commodities. Some countries are net exporters of agricultural commodities; so, they would gain from the higher agricultural prices associated with multilateral liberalization. Net importers of agricultural commodities could lose from multilateral trade liberalization, though this depends on the degree of reform they carry out in their domestic policies. The negative effect of multilateral reform that raises prices of imports could be partially or wholly offset by domestic trade liberalization, which reduces market distortions and tends to lower agricultural prices. Obviously, urban households gain from lower food prices and lose from higher prices, but the effect is ambiguous for rural households because some are net sellers, while others are net buyers of agricultural products. The region of the Near East and North Africa (NENA) examined in this report comprises 12 countries considered traditional borrowing countries by IFAD. The countries are Algeria, Djibouti, Egypt, Jordan, Lebanon, Morocco, Somalia, the Sudan, Syria, Tunisia, Turkey and Yemen. The study also includes the West Bank and the Gaza territory, which has not yet achieved full sovereignty. For convenience, we will refer to the 13 as countries and refer to the group as the NENA13 region. The NENA13 region has experienced slow economic growth in recent years, leading to various social problems, including high levels of unemployment. The growth of per capita GDP in the region has generally lagged behind the average of developing countries, and some countries, such as Djibouti and West Bank and Gaza, have suffered negative growth rates over the period 1990- 2003 (UNDP 2005a, Table 14). At the same time, the countries in this region often have levels of trade protection (including agricultural trade protection) that are higher than the levels in many 19 other regions of the world. This raises the question whether a more outward-oriented trade policy would stimulate more rapid growth in the NENA13 region. Even if this is the case, one of the main concerns of policymakers regarding agricultural trade liberalization is whether it will adversely affect poverty and inequality in the region and thereby heighten social tensions. 1.2 Objectives In light of the background described in the previous section, this report has four objectives: • to describe the current agricultural and trade policies of the NENA countries and their impact on the agricultural economy of the region; • to describe the current status of agricultural trade liberalization in the NENA region and the extent of additional agricultural trade liberalization that will result from the Euro- Mediterranean Partnership (EMP) agreements, bilateral FTAs, and World Trade Organization (WTO) multilateral trade negotiations; • to analyse the potential impact of unilateral, bilateral, and multilateral trade liberalization efforts (including the reduction of domestic support) on the agricultural economy in the NENA region, with particular emphasis on agricultural commodity prices, rural wages and small farmer income; and • to explore the types of measures that could be used to mitigate the potential negative impact of trade liberalization on small farmers and rural wage-earners in the NENA region. Because of the large number of countries in the NENA region, we provide two levels of analysis. For all 13 countries, we provide a descriptive analysis of trade patterns and levels of trade protection and a review of previous research on the impact of trade liberalization. In addition, we provide more in-depth analysis of four countries in the region: Egypt, Morocco, Syria and Tunisia. 1.3 Organization of the report This report addresses trade policy issues and concerns through three complementary approaches. The first part of the report provides a regional overview that characterizes the current status of each country with respect to its economic and international trade environment. Chapter 2 provides background information on NENA13 countries, based on various economic and social indicators of the economies. Chapter 3 describes the structure of agricultural production and trade in the 13 countries, as well as ongoing trade liberalization initiatives under multilateral and regional trade agreements. Chapter 4 discusses the likely impact of further trade liberalization, including the effect on world agricultural prices and the effect on the NENA13 countries. In the second part of the report, we provide a more in-depth assessment of the impact of trade liberalization on four countries in the region: Egypt, Tunisia, Syria and Morocco. These four countries are broadly representative of the range of policies in the lower-middle income NENA13 countries. We exclude the four least developed countries (LDCs) in the region (Djibouti, Somalia, the Sudan and Yemen) both because of lack of data and because these countries face very different challenges relative to the other NENA13 countries. We also exclude Turkey as the only food surplus country and one that is moving towards membership in the EU, albeit slowly. Among the remaining countries, Egypt represents an early reformer with relatively low levels of agricultural protection, though it maintains a large system of consumer food subsidies. Morocco and Tunisia have made significant progress in recent years in opening their borders to trade and foreign investment, though the overall level of agricultural protection remains high. And Syria retains many of the policies that characterized the region 20 years ago: fixed producer prices, large-scale public procurement of major crops and high levels of agricultural protection. In the chapters devoted to each case study, we examine the structure of the agricultural sector and the composition of international trade, agricultural and trade policies, trade agreements, a brief profile of poverty in the country, and then an analysis of the impact of trade liberalization on small farmers and other poor households. In Chapter 5, we examine the case of Egypt. After a description of agricultural and trade policies in Egypt, we simulate the impact of trade liberalization on different types of households using a partial equilibrium analysis that combines household survey data and hypothetical changes in the price of individual agricultural commodities. In this analysis, the impact of an agricultural price CHAPTER 1: INTRODUCTION 20 change on the income of each household depends on the share of income from that commodity and the share of expenditure allocated to that commodity. Information on the income of each household before and after the price change allows us to estimate the change in poverty overall and for specific types of households. In contrast, the Syria and Tunisia case studies are based on computable general equilibrium (CGE) models for each country. In Chapter 6, a CGE model of the Tunisian economy is linked to data from 400 representative households, allowing estimation of the impact of three variants of unilateral trade liberalization and one scenario combining unilateral and multilateral trade liberalization. In Chapter 7, a CGE model of Syria is used to examine the distributional impact of liberalization. The Syrian CGE model incorporates ten representative households, each representing an income decile of the population. Since wheat is the most distorted agricultural market and the most sensitive crop politically, the model is used to simulate a reduction in producer wheat subsidies and consumer bread subsidies of 20%, 50% and 100%. The Moroccan case study in Chapter 8 includes a detailed description of an analysis by Ravallion and Lokshin (2004). In their study, the authors use a CGE model to simulate the effect of unilateral trade liberalization on prices and then use detailed household survey data to simulate the effect of these price changes on incomes and poverty. In the final chapter of the report, we summarize the main findings and discuss the implications for policy. In particular, we explore alternative policies and programmes that might enhance the positive impact and alleviate some of the negative effects of trade liberalization, with particular attention to the impact on small farmers and other poor households. Basic Characteristics of the Economies 2 22 2.1 Classification of NENA13 countries Although NENA13 countries share geographical and cultural similarities, they form a heterogeneous group with respect to income, food security and their integration in the global economy. They are all developing countries, but, based on their differing attributes, distinctions are drawn among them by various international organizations and by researchers. The Food and Agriculture Organization of the United Nations (FAO) classifies seven of the NENA13 countries as low-income food-deficit countries (Table 2-1). These countries are poor, with per capita gross national product of US$1,465 (at 2003 prices) or less. They also have had a deficit in grain trade over the preceding five years (FAO 2006). Included within this group are four NENA13 countries that are classified by the United Nations as LDCs: Djibouti, Somalia, the Sudan and Yemen; also included are the developing countries, Egypt, Morocco and Syria. In a related classification, WTO considers NENA13 member countries Egypt, Jordan, Morocco and Tunisia as net food-importing developing countries (Table 2-1). WTO recognizes this group of countries, together with the LDCs, as vulnerable to the possible negative effects of implementing agreements for free trade in agriculture. Specifically, both LDCs and net food-importing developing countries are expected to experience difficulties in financing food imports (WTO 2006a).1 In a recent study, Diaz-Bonilla et al. (2000) argue for better indicators of the food security status of countries. They use cluster analysis to classify 163 developed and developing countries based on five measures of food security: food production per capita (measuring the ability of a country to feed itself), the ratio of food imports to total exports (an indication of a country’s ability to finance its food imports), calories per capita and protein per capita (measuring the level of nutrition), and the nonagricultural population share (an indication of how vulnerable the population is to changes in trade and agricultural policies). Results generated from the cluster analysis classify NENA13 countries across all three groups of food security: food insecure, food neutral and food secure. The listing of countries in Table 2-1 is organized using these categories. The classification of LDCs as food insecure is in accordance with the WTO definition, but Diaz- Bonilla et al. classify the other NENA13 countries as food neutral, with the exception of Turkey, which is classified as food secure. While this classification of countries differs from the classification of low-income food-deficit countries and the net food-importing developing countries, Diaz-Bonilla et al. (2000) report that the NENA13 countries classified as food neutral are nonetheless trade stressed due to a high ratio of food imports to total exports. The NENA13 countries also vary in their integration into the global economy. Only six countries, Djibouti, Egypt, Jordan, Morocco, Tunisia and Turkey are WTO members. Four other countries, Algeria, Lebanon, the Sudan and Yemen, are observers at various stages of accession. All 13 countries have entered into some type of free trade arrangements with the EU or the United States or both. The various trade agreements and the composition of trade flows determine the differences in the level of protection and access to trading partner markets among the countries. 1/ While LDCs are defined by the United Nations, the net food-importing developing countries are a WTO defined group. Both groups are subject to differential treatment under a special ministerial decision agreed during the Uruguay Round WTO negotiations. The decision recognizes that trade reforms in agriculture could have negative effects on these groups “in terms of the availability of adequate supplies of basic foodstuffs from external sources on reasonable terms and conditions, including short-term difficulties in financing normal levels of commercial imports of basic foodstuffs”. The ministerial decision recommends such measures as food aid and aid for agricultural development. It also refers to the possibility of assistance from the International Monetary Fund and the World Bank to finance commercial food imports (WTO 2006a). The definition of low-income food-deficit countries provided by the Food and Agriculture Organization of the United Nations overlaps with the LDC and net food-importing developing country classifications. 23 TABLE 2-1 Food security and openness classification of NENA13 countries World Bank FAOa UNb WTOc Opennessd Income group Classification category Food insecuree Djibouti Lower middle LIFDC LDC High Somalia Low income LIFDC LDC Low Sudan Low income LIFDC LDC Low Yemen Low income LIFDC LDC Low Food neutral Algeria Lower middle Low Egypt Lower middle LIFDC NFIDC Low Jordan Lower middle NFIDC Low Lebanon Middle income Low Morocco Lower middle LIFDC NFIDC Low Syria Lower middle LIFDC Low Tunisia Lower middle NFIDC Low Food secure Turkey Lower middle Low Not classified West Bank and Gaza Low Sources: WTO (2005a); FAO (2006); UNCTAD (2004a, Part I, Annex 2); Bouet et al. (2004, Appendix I); Diaz-Bonilla et al. (2000, Table 8). a Low-income food-deficit countries (LIFDCs) are defined by the Food and Agriculture Organization of the United Nations (FAO) as those countries that have a per capita gross national product below US$1,465 (2003) and that are net importers of food (defined on a calorie basis). b Least developed countries (LDCs) are defined by the United Nations with respect to income and human development indicators. c The net food-importing developing countries (NFIDCs) are so defined by the WTO Committee on Agriculture. d The openness clusters are defined with respect to GDP and trade openness indicators computed from the MAcMap-HS6 database (Bouet et al. 2004, Appendix I). e The food security classification is defined with respect to five measures of food security: food production per capita, the ratio of total exports to food imports, calories per capita, protein per capita and the share of non-agricultural population consumption and trade variables (Diaz-Bonilla et al. 2000, Table 8). Most of the NENA13 countries have high levels of import protection. According to Bouet (2006b), who has ranked 147 countries with respect to their overall level of protection, Egypt is ranked 5th, Morocco 10th and Tunisia 11th among the most protectionist countries. Only Lebanon and Turkey are relatively open countries. Bouet finds that Algeria and Syria face relatively low duties on their exports, while Jordan and Lebanon face relatively high levels. He concludes that, in general, countries in the NENA13 region, while protectionist, benefit from relatively good access to world markets, either as a result of a specialization in products that do not incur high taxation (e.g., oil) or because of preferential agreements with the countries of the Organisation for Economic Co- operation and Development (OECD). The study also shows that all NENA countries face higher duties on their agricultural exports than they do on their non-agricultural exports. This pattern is not surprising given the high protection of agriculture in the EU, a major trading partner, and exemptions afforded the agricultural sector in trade liberalization. The patterns of trade protection are discussed in more depth in Section 3.2. The next three sections examine economic performance, social indicators, and the role of agriculture in the NENA13 countries. 2.2 Economic performance and growth NENA13 countries are low-income or lower-middle income countries according to the World Bank classification (World Bank 2005a). Their national average per capita incomes range from below US$600 in the poorest LDCs (Somalia, the Sudan and Yemen) to US$3,925 in Lebanon (Table 2-2). The average growth in per capita GDP was only 1.3% across the NENA13 countries over the 1990s and barely 1.2% over 2000-03. The growth has been uneven among countries. Lebanon and Tunisia experienced solid economic growth (at least 3% per year in per capita GDP) during the 1990s, and the Sudan and Tunisia enjoyed solid growth in 2000-03. In contrast, Algeria, Djibouti, Somalia, and West Bank and Gaza experienced negative growth in the 1990s, and the decline continued (and even accelerated) in West Bank and Gaza during 2000-03. As a whole, the NENA13 CHAPTER 2: BASIC CHARACTERISTICS OF THE ECONOMIES 24 region has fared better than sub-Saharan Africa (excluding South Africa) and is on a par with South Asia during 2000-03 (World Bank 2005a), but the NENA13 region faces significant political and economic uncertainties. Various hypotheses have been advanced for the relatively weak growth rates among the NENA13 countries, as follows: • Conflict: The four countries with negative per capita GDP growth over the 1990s all experienced some conflict. In Somalia, there has been no central government since 1991. Algeria experienced a decade-long civil war following the 1991 elections. Djibouti also underwent a civil war in the early 1990s. And the West Bank and Gaza stagnated during the 1990s as a result of the Israeli-Palestinian conflict. Conflicts have direct costs in terms of lives and property, but they also destroy social capital (Collier 1999). Moreover, conflicts create a climate of uncertainty and discourage investment. • The policy and regulatory environment: In 2005, the International Finance Corporation started ranking countries annually on the ease of doing business based on 39 indicators grouped into ten categories. The categories include starting a business, licensing, employing workers, registering property, legal protections for investors and so on. In 2006, the International Finance Corporation ranked 175 countries, including all the NENA13 countries, except Somalia. Only three NENA13 countries are in the top half of the rankings (Jordan, Lebanon and Tunisia), and they are ranked in the 45th to 49th percentile range. According to this ranking, Djibouti, Egypt and the Sudan are among the 25 countries in the world with the most adverse environment for private sector investment and operations (IFC 2006). • Trade barriers: High import barriers in the region distort economic incentives and impede the flow of new technology, thus reducing productivity growth. As discussed below in Section 3.2, the average import protection is higher in the NENA13 countries than in other developing countries. Agricultural import tariffs in particular are 50% higher than the average for other developing countries. Indeed, this hypothesis is one of the main motivations for this report. The population of the NENA13 region has been estimated at slightly above 300 million in 2003 (Table 2-2). During 2000-03, the average population growth rate was 1.9%, a decline from the previous decade, when the rate averaged over 2% (World Bank 2005a). The average conceals the very high population growth rates still experienced by some countries, notably, Jordan, Somalia, West Bank and Gaza, and Yemen. In Somalia and West Bank and Gaza, population growth rates have increased compared to the 1990s (DeRosa 1997; Table 2-2). Lebanon, Tunisia and Turkey, the three highest-income countries in the region, have among the lowest rates of population growth. A serious economic problem facing many of the NENA countries is unemployment. Reflecting the low rates of economic growth, combined with the rapid population growth in some countries, the unemployment rate averaged 13% for the NENA13. The worst situation is found in Djibouti, where half of the work force is unemployed, and in Yemen, where the unemployment rate is 35%. Among non-LDCs, Algeria registered the highest unemployment rate, 27% in 2001 (Table 2-2). The rate came down significantly in 2004, to less than 18%, but youth unemployment remains persistently high (World Bank 2005b). 25 2/ The population density in Gaza is 3,853 persons per km2 (UNDP 2004a). 3/ The increase in restrictions since September 2000 on the movement of people and goods in West Bank and Gaza has contributed to the loss of jobs and to the increase in the unemployment rate from around 10% before September 2000 to 27% in 2002 (FAO 2003a, p. 21) to 31% in 2003 (Table 2-2). Population density is high in Lebanon (440 persons per km2) and West Bank and Gaza (541 persons per km2), but the average in the region is lower than the developing-country average of 63 and just above the European average of 31 (WRI 2005).2 Yet, in Egypt for example, the national average of 68 persons per km2 hides the fact that most of the population is concentrated along the Nile and in the Suez Canal regions, with an average of over 1,475 persons per km2. The NENA13 region is relatively urbanized (on average, 53% of the population live in urban areas), but the level of urbanization varies considerably across these countries. In the LDCs, less than 40% live in urban areas, except in Djibouti, where two thirds of the population live in the capital area (CIA 2005). Lebanon and West Bank and Gaza have the largest share of the population living in urban areas (91 and 87%, respectively), followed by Jordan with 79% (Table 2-2). The high rate of urban population is the result of a rural exodus due to the dwindling opportunities in rural areas. According to Fedjari (2000, cited in Radwan and Reiffers 2003), there are 180,000 rural migrants per year in Morocco, and 60,000 of these head for Casablanca. The statistics presented above illustrate an economic situation in NENA13 countries dominated by relatively low GDP growth per capita and high unemployment. These features are particularly notable in NENA13 LDCs and in countries that are developing in a conflict environment, notably Djibouti, Somalia, and West Bank and Gaza.3 GDP growth increased in the region during 2000-03 relative to the preceding decade, especially in oil-exporting countries, but the region faces substantial uncertainty in the mid-2000s. 2.3 Poverty, inequality and other social indicators The incidence of poverty varies widely across NENA13 countries. The LDCs have higher rates of poverty than other NENA13 countries; Somalia and Djibouti record the highest share of the population below the US$1-per-day poverty line, 72% and 56%, respectively (Table 2-3). Most other CHAPTER 2: BASIC CHARACTERISTICS OF THE ECONOMIES TABLE 2-2 Summary statistics for the NENA13 economies, 2003 Real GDP Population Land Area Annual growth in Annual Unemploy- Share of Population per capita GDP per capita population ment ratec urban density growth population 1990-2000a 2000-03b 2000-03 (2000 US$) (million) (1 000 km2) (%) (%) (%) (%) (%) (per km2) Algeria 1 916 31.8 2 382 -0.3 2.9 1.5 27 59 13 Djibouti 848 0.7 23 -4.0 0.7 2.0 50 85 30 Egypt 1 622 67.6 995 2.3 1.4 1.8 11 43 68 Jordan 1 801 5.3 89 0.6 1.3 2.8 13 79 60 Lebanon 3 925 4.5 10 5.3 1.0 1.3 9 91 440 Morocco 1 278 30.1 446 0.4 3.2 1.6 11 57 67 Somalia 600 9.6 627 -8.1 - 3.3 - 29 15 Sudan 433 33.5 2 376 3.3 3.8 2.1 19 39 14 Syria 1 135 17.4 184 2.1 0.6 2.4 12 53 95 Tunisia 2 214 9.9 155 3.1 2.8 1.1 14 67 64 Turkey 2 977 70.7 770 1.7 0.2 1.6 10 67 92 West Bank & Gaza 849 3.4 6 -1.7 -16.2 4.2 26 87 541 Yemen 553 19.2 528 1.7 0.9 3.0 12 26 36 NENA13 1 530 303.7 8 592 1.3 1.2 1.9 13 53 35 Sources: World Bank (2005a) unless otherwise specified; CIA (2005) for the per capita GDP of Somalia (PPP estimate for 2004), for the land area of West Bank and Gaza and for the unemployment rate in Djibouti and the Sudan. a Annual growth rates for West Bank and Gaza are 1994-2000. b Average growth rate excludes Somalia, for which GDP growth data do not exist. c Unemployment rates are from the last year available in World Bank (2006), covering 2000 to 2004 except for Lebanon, which refers to 1997. 26 4/ The Gini index measures the degree of inequality in income (or, in some cases, consumption expenditure) among individuals or households within an economy. The index may vary between 0, representing perfect equality, to 100, representing perfect inequality. NENA13 countries show low levels of extreme poverty, but register higher poverty incidence at the US$2-per-day and national levels. West Bank and Gaza also has a high proportion of people living below the US$1-per-day poverty line, a reflection of the burden the Israeli-Palestinian conflict continues to impose on the economy. Given its per capita income, Egypt has the highest poverty incidence (44%) using the US$2-per-day poverty line, more than twice the incidence under the national level. In contrast, Algeria, Jordan, Morocco and Turkey show higher incidence of poverty with respect to the national lines than with respect to the US$1-per-day or US$2-per-day poverty lines. The national indicators reveal unambiguously that poverty is more prevalent in rural areas than in urban areas. The ratio of rural to urban poverty ranges from 1.5 in Yemen to 4 in Tunisia. The Gini index of income inequality does not differ much across the seven NENA13 countries for which it has been calculated.4 In general, the higher-income countries, such as Tunisia and Turkey, show greater inequality, while the lower-income countries, such as Egypt and Yemen, show relatively low inequality by international standards (Table 2-3). Except for the LDCs, the NENA13 countries have relatively long life expectancies of 68 to 73 years. In the four LDCs, life expectancy ranges from 44 to 58, and infant mortality is at least three times as high as it is in the non-LDCs. These patterns reflect the low income and high poverty rates in these four countries (Table 2-3). The education index combines indicators of adult literacy and the gross enrolment ratios for primary, secondary and tertiary schools (UNDP 2005a). This index is generally higher in the non- LDC Middle East countries (Jordan, Lebanon, and West Bank and Gaza) of the NENA13 region than in the North African countries (Algeria, Egypt, Morocco and Tunisia). It is lowest in the LDCs and in Morocco. Countries with the highest education index, Jordan and West Bank and Gaza, have also the highest female to male literacy ratio. Adult literacy rates are roughly proportional to income levels, though among NENA13 countries, Djibouti and the Sudan have relatively high literacy rates given their income level, and literacy in Morocco is less than would be expected given its income level (Table 2-3). TABLE 2-3 Poverty and social indicators for the NENA13 countries, 2003 Population below poverty linea Gini Life Education Adult Female/ Infant index expectancy index literacy male mortality literacy rate $1 $2 National Urban Rural ratio (per 1 000 (%) (%) (years) (%) live births) Algeria <2 15 12 7 17 35 71 0.69 69 76 35 Djibouti 56 87 29 - 45 - 43 0.52 65 71 97 Egypt 3 44 17 9 22 34 69 0.62 56 65 33 Jordan <2 7 12 10 18 36 72 0.86 91 90 23 Lebanon - - 6 - 12 - 71 0.84 87 - 27 Morocco <2 14 19 12 27 40 69 0.53 51 61 36 Somalia 72 91 85 - 90 - 47 - 24 39 133 Sudan 23 70 85 - 87 - 59 0.52 60 69 63 Syria - 10 27 - 45 - 70 0.75 83 82 16 Tunisia <2 7 4 2 8 40 73 0.74 73 76 19 Turkey <2 10 16 - 40 40 69 0.80 87 83 33 West Bank and Gaza 24 36 32 - 55 - 73 0.86 91 91 24 Yemen 16 45 42 31 45 33 58 0.50 49 41 82 NENA13b 19 39 31 13 40 37 65 0.69 68 71 48 Sources: World Bank (2005a), unless otherwise indicated; World Bank (2005c, Table 2) for poverty headcount below the poverty line (national and rural); World Bank (2005b) for Algeria national poverty count; UNDP (2004a) for West Bank and Gaza literacy ratio; UNCTAD (2004a) for Djibouti and Somalia literacy ratio; UNDP (2005a, Statistical Table 1; Table 27) for education indices and Egypt’s literacy ratio and Syria poverty count under US$2 a day. a For Algeria (2003), Djibouti (1996), Egypt (1999/2000), Jordan (1997), Morocco (1998/99), Tunisia (1995), Turkey (2000) and Yemen (1998). b Unweighted averages. 5/ The last available figure for Somalia is for 1990 when the share was 82%. 27 The various indicators demonstrate that the criteria used for measuring poverty and social circumstances matters among the NENA13 countries. In general, incidence with respect to the national poverty lines is greater than with respect to the US$1-per-day or US$2-per-day poverty lines. Poverty within the NENA13 region, as in many developing countries, is mainly rural. In terms of education and literacy, the NENA13 region is not homogeneous, with the Middle Eastern countries doing better than the North African countries, which do not fare much better than the LDCs. A higher female to male literacy ratio is generally associated with lower infant mortality rates. 2.4 Structure of GDP and the role of agriculture The GDP structure of the NENA13 countries indicates the dominant role of services and industry in these economies. On average for the region, the service sector contributes more than half of GDP, and industry nearly a third. But countries differ widely around these averages. Services account for two-thirds or more of GDP in Djibouti, Jordan, Lebanon, Tunisia, Turkey, and West Bank and Gaza. Algeria is the exception due to the dominance of the oil sector in the economy (Table 2-4). The contribution of industry to GDP for most countries reflects the region’s average. For some countries, this sector is dominated by manufacturing, and, in some countries, such as Syria, manufacturing accounts for nearly 90% of industry’s contribution to GDP (Table 2-4). The trade structure also varies across countries. Jordan, Lebanon, and West Bank and Gaza suffer from large trade deficits; the share of imports in GDP ranges from 1.5 to 5 times that of exports. Djibouti shows large shares of GDP for both imports and exports, reflecting the large share of re-exports to Ethiopia, for which it is the main transit port (WTO 2006b). In most of the countries in the region, agriculture comprises 10-20% of national output. The contribution of agriculture is highest in the Sudan (65%) and in Somalia (39%), which are LDCs. It is lowest in Djibouti, Jordan, and West Bank and Gaza. In all countries for which data are available, except in the Sudan, the contribution of agriculture to GDP has been declining since 1993 (DeRosa 1997). This reflects a structural transformation of the economy that is an almost universal pattern among countries experiencing GDP growth. For some countries (Algeria, Djibouti, Jordan and Morocco), the average annual growth rate of the agricultural sector has shown notable improvement between 1990-99 and 2000-03, but, for most NENA13 countries, it has stagnated (Egypt, the Sudan and Yemen) or deteriorated (Lebanon, Syria, Tunisia, Turkey, and West Bank and Gaza) (Table 2-4). Still, agriculture continues to play a crucial role in the NENA13 region, as in most developing countries, due to its contribution to employment (Table 2-4). This combination reflects the low productivity in agriculture in these countries and, consequently, the relatively large share of poverty in rural areas (IFAD 2003). In the NENA13 LDCs, the labour force engaged in agriculture is significant, more than 70% in Djibouti and Somalia and more than 48% in the Sudan and Yemen. This is consistent with the fact that, at least in three of these countries (Djibouti is the exception), the majority of the population lives in rural areas. Turkey has the highest share of employment in agriculture among non-LDCs, 45%, followed by Morocco and Egypt with 35% and 32%, respectively (Table 2-4). Another measure of the importance of the agricultural sector is the share of agricultural exports in total exports. In NENA13 countries, the contribution of agriculture to exports is below 10% in every country except the Sudan, and it has decreased since 1993 when it ranged between 10 and 28% (excluding LDCs). The Sudan saw a drastic fall from 95% in 1993 to 13% in 2003 (Table 2-4 and DeRosa 1997).5 However, the impact of agricultural trade liberalization on households may be large even if only a small share of exports is from the agricultural sector, because agriculture trade affects food prices and, thus, food security, especially among poor households. CHAPTER 2: BASIC CHARACTERISTICS OF THE ECONOMIES 28 2.5 Summary The 13 countries of Near East and North Africa under consideration in this study share a number of cultural characteristics, including language and religion. In addition, most of the NENA13 countries are semi-arid, with limited water and arable land per capita, making agricultural production highly dependent on rainfall. The exceptions are Turkey, which has relatively abundant water and land resources, and Egypt, where virtually all crop production is irrigated. The overall population density of the region is low compared to other developing areas, though Lebanon and West Bank and Gaza are quite densely populated. The region is also more urbanized than the average for developing countries, though Somalia, the Sudan and Yemen are exceptions to this pattern. The 13 countries also have some economic similarities. Nine of the 13 countries are lower- middle income countries according to the World Bank (Lebanon is classified as a middle-income country, while Somalia, the Sudan and Yemen are low-income countries). The economic performance of many of the NENA13 countries has been relatively weak, with real per capita GDP growth during the 1990s of 1.3% per year. Performance was no better during 2000-03 in spite of the global economic recovery during those years. The economies have been adversely affected by various conflicts, including the Arab-Israeli conflict, the Sudanese civil war, the insurgency in Algeria (until recently), the lack of a central government in Somalia and the Iraq War. Other possible explanations for the slow growth include the business climate and relatively high trade barriers in many NENA countries. The slow economic growth means there has been little expansion in formal-sector employment, resulting in persistent problems of unemployment, particularly among youth. Nonetheless, strong economic performance in Lebanon, the Sudan (recently) and Tunisia suggest that these problems are not insurmountable. TABLE 2-4 Structure of the economies and the agricultural sector of NENA13 countries, 2003 Structure of production Trade Agriculture (% share in GDP) (% share in GDP) Agriculture Industry Services Exports Imports Annual growth (%) Share (%) Share (%) Of which 1990-99 2000-03 in total in total mfg. employ- exports ment (%) Algeria 10 55 7 35 39 24 4.1 6.0 24 <1 Djiboutia 4 16 3 81 46 66 0.5 2.0 - <1 Egypt 16 34 19 50 22 24 3.0 3.2 32 5 Jordan 2 26 16 72 45 70 2.8 6.2 11 10 Lebanon 12 20 9 68 13 39 2.5 1.5 3 9 Morocco 17 30 17 54 32 36 5.5 8.9 35 7 Somalia 65 10 5 25 2 7 1.3 - 70 - Sudana 39 20 9 41 16 12 6.4 6.6 59 13 Syria 23 29 25 48 40 33 7.2 2.8 27 7 Tunisia 12 28 18 60 43 47 6.7 1.9 24 4 Turkey 13 22 13 65 28 31 1.7 0.7 45 7 West Bank and Gaza 9 18 10 73 10 49 -4.8 -8.6 12 <1 Yemen 15 40 5 45 31 36 5.4 5.3 48 3 NENA13b 18 27 12 55 27 40 3.3 3.0 36 7 Sources: World Bank (2005a) unless otherwise specified. CIA (2005) for Somalia’s structure of GDP; and West Bank and Gaza’s share of arable land. UNCTAD (2004a) for manufacturing share of GDP for Somalia; and employment in agriculture for 2002 for Djibouti and Somalia. WTO (2006b) for Djibouti’s trade shares in GDP, 2000-2004 average. a Djibouti’s indicators are for 2000 and Sudan’s for 2002. b Unweighted averages. Agricultural Production and Trade Patterns 3 30 Trade liberalization is expected to result in relative price changes that will affect each country at the national level according to its pattern of production and trade. NENA13 countries are characterized by a high dependence on food imports, a situation that may threaten food security if international food prices rise significantly. This chapter describes the patterns of agricultural trade and trade policy in the NENA13 countries so as to provide a background for the discussion of the impact of trade liberalization in the next chapter. Section 3.1 examines the patterns of agricultural production and trade in each of the 13 countries under consideration. In Section 3.2, measures of protection are computed for the NENA13 countries and for commodities of importance for the region. Section 3.3 provides an overview of the various trade agreements in the region. 3.1 Structure of agricultural production and trade The NENA13 region faces adverse climatic conditions, including low and highly variable annual rainfall patterns and poor soils for the most part. According to the Food and Agriculture Organization of the United Nations (FAO 2004), 62% of the region is hyper-arid, 17% arid, 11% semi-arid and 4.4% sub-humid. Agriculture in the region operates under severe limitations in water resources. Only a few countries rely strongly on irrigation (Egypt and Lebanon); the rest depend on rainfall (FAO 2003b). Yet, irrigated agriculture may provide the largest share of agricultural exports. For example, in Morocco, products from irrigated arable land account for 75% of total primary and processed agricultural exports (Roe et al. 2005). In the countries where irrigated agriculture is important, water for expansion will have to come mainly from efficiency savings on existing schemes (FAO 2004). Agricultural land represents 38% of total land area in the NENA13 region. Of the agricultural land, almost three quarters (73%) is permanent pasture, while the remainder (23%) is used for crop production. This type of distribution of area is a pattern found in the majority of countries. Egypt, Lebanon, Tunisia and Turkey are exceptions, with higher percentages of agricultural land in crops (Table 3-1). In this section, we discuss patterns in agricultural production and trade. We devote more attention to 7 of the 13 traditional borrowing countries of the Near East and North Africa. These seven represent the larger economies among the NENA13 that are not currently affected by civil conflict. They are discussed in the order of the size of their economies: Turkey, Egypt, Algeria, Morocco, Tunisia, Sy