page 1 dr. paul dorosh senior research fellow, ifpri dr. quazi shahabuddin research director,...

Dr. Paul DoroshSenior Research Fellow, IFPRI

Dr. Quazi ShahabuddinResearch Director,

Bangladesh Institute of Development Studies

April 2002

Trade Liberalization and Food

Security in Bangladesh

Food Security in South Asia

Food production has expanded rapidly in South Asia in the last three decades. India and Bangladesh have both doubled their production of rice and wheat since 1970.

At the same time, poverty remains endemic in the region; 40 percent of the population (a total of about 500 million people) earn less than one dollar per day.

Agricultural Price and Trade Polices

The agricultural sector remains an important source of income and employment, however.

Agricultural price and trade policy reforms thus have a potentially large impact on food security.

Moreover, because of trade liberalizations in the 1990s, these policies can have important spillover effects throughout the region.

Outline

The Food Grain Economies of Bangladesh and India

Trade Liberalization and Cross-Border Rice Trade

Bangladesh and the WTO Concluding Observations

The Bangladesh and Indian Rice Economies, 1997-1999

Bangladesh India Population (million) 131.8 976.3

Rice Production ('000 tons) 20,518 85,990 Aman (Kharif) ('000 tons) (1997/98) 8,850 72,500 Boro/Aus (Rabi) ('000 tons) (1997/98) 10,012 11,000

Imports ('000 MTs) 1,169 41

Exports ('000 MTs) 0 3,315

Net Imports ('000 MTs) 1,169 -3,274

Net Imports/Production (%) 5.7% -3.8%

Government Rice Stocks ('000 tons) 537 12,027

Government Rice Stocks/Production (%) 2.6% 14.0%

Rice Consumption (kg/cap/year) 161.1 75.8

Calorie Share (percentage) 75.6% 30.9%

Net Foodgrain Production and the Food Gap in Bangladesh, 1980/81 to 2000/01

Boro

Aus

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Food Gap

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Source: Calculated from data from the Bangladesh Food Planning and Monitoring Unit.

Trade Liberalization in Bangladesh and India

In the early 1990s, Bangladesh liberalized food grain trade, allowing private sector imports of wheat in 1992/93 and rice in 1993/94.

In October 1994, India also liberalized its private rice trade, permitting private sector exports of non-basmati rice, (though an export quota remained).

Trade Liberalization and Private Foodgrain Imports

Following the large shortfalls in rice production in both 1997/98 and 1998/99, Bangladesh private sector rice imports, mainly from India, added a total of 4.6 million tons to national market supply.

Bangladesh Foodgrain Trade, 1980/81 - 1998/99

Aid/Grant Commercial Private Total

Rice 1980/81-91/92 73 153 - 226 1992/93-99/00 12 145 676 832 1980/81-99/00 49 150 270 469

Wheat 1980/81-91/92 1,191 376 - 1,567 1992/93-99/00 780 190 400 1,370 1980/81-99/00 1,027 302 160 1,488

Total 1980/81-91/92 1,264 529 - 1,793 1992/93-99/00 792 335 1,075 2,202 1980/81-99/00 1,075 451 430 1,957

Bangladesh Rice Imports by Source, 1994/95 – 1998/99

Country Imports ( '000 MTs ) Total Import ( '000 MTs )

Share of Total Imports

1994/95 1995/96 1996/97 1997/98 1998/99 ( 1994/95 - 1998/99 )

(1994/95 - 1998/99 )

India 575 1069 145 1120 1742 4652 0.81 Pakistan 442 40 17 24 6 528 0.09 United States 30 57 15 0 0 102 0.02

Myanmar 90 0 0 2 0 92 0.02 Thailand 47 19 15 0 33 114 0.02 Other Countries 32 54 3 40 5 134 0.02

Total 1249 1292 197 1227 1786 5752 1.00

Source: Foreign Trade Statistics of Bangladesh, BBS.

Import Parity Prices, Domestic Prices, and Rice Imports

Following production shortfalls in late 1997 and again in 1998, domestic rice prices in Bangladesh rose, making large-scale private sector rice imports from India profitable.

The import parity price, equal to the wholesale price in India plus transport and marketing costs to Bangladesh, thus provided a price ceiling for coarse rice in 1998 and 1999.

Rice Prices and Quantity of Private Rice Imports in Bangladesh, 1993-2001

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Private Sector Imports Dhaka Wholesale Price Import Parity(ex: Delhi) Import Parity (ex:Bangkok)

Souce : Dorosh (2001) and authors' calculations.

Policy Measures to Promote Trade

The Government of Bangladesh took deliberate steps to promote trade following these production shortfalls• Removing the 2.5 percent tax on rice imports in January

1998• Raising the Open Market Sales price of rice• Direct communications with traders

In parallel, attempts were made to increase government food supplies through local and international tenders, (and following the 1998 flood through increased food aid).

Public sector imports were limited by problems with tender specification and 2-3 month delays in food aid arrivals.

Import Parity Prices, Domestic Prices and Rice Imports

Competition among traders kept domestic rice prices from rising above import parity.

Hundreds of traders each imported relatively small quantities of rice.

Out of 3291 letters of credit issued from January through mid-September 1998, the average quantity of rice imported was only 269 tons.

The ten largest traders imported only 16 percent of private sector rice imports.

Quantity of Rice Imports

Bangladesh data on the quantity of rice imports from India differs substantially from India data.

Indian data for the Indian fiscal year, April 1998 - March 1999 show approximately 2.2 million tons of rice exports to Bangladesh.

Bangladesh data indicate 3.2 million tons of rice imports from India in the same period.

Evidence from Domestic Demand and Prices

Total demand for rice in Bangladesh can be estimated using the observed change in rice price relative to the base year (1996/97) and the own-price elasticity of rice.

This estimate can then be compared with estimates of supply derived from net production, private stock changes and imports to check for consistency of supply and demand data.

Estimates of Net Supply and Demand of Rice

The 1.0 million ton difference between Bangladesh import data and Indian export data could account for about half of the estimated 2.1 million ton total discrepancy between calculated net supply (in the absence of private sector stock changes) and domestic consumption.

1998 Market Prices in the Absence of Imports from India

The Dhaka wholesale price of coarse rice averaged 13.3 Tk/kg from December 1997 to November 1999.

Import parity prices from Thailand averaged 16.1Tk/kg, 21 percent higher.

Assuming no change in government interventions, rice consumption would have fallen by an estimated 4.2 to 6.3 percent and rice imports would have been 0.7 to 1.0 million tons less.

Impact on Calorie Consumption

Average daily per capita calorie consumption of a sample of poor flood-exposed households in rural Bangladesh in December 1998 was only 1638 calories/day.

Based on econometric estimates of calorie demand equations, with rice prices 21 percent higher, per capita consumption of the rural poor in 1998/99 could have been 44 to 109 calories/day less than this very low consumption level (del Ninno, Dorosh and Smith, 2001).

Alternative Sources of Rice Imports

The potential for price stabilization through import trade in times of rice shortages does not depend on imports from India.

Alternative sources of rice imports are possible, as well, though imports by sea might involve fewer importers given economies of scale in shipping.

Export prices from Thailand and Vietnam were lower than those for similar grades of rice from India in 1999/2000 and 2000/01.


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Private Sector Imports Dhaka Wholesale Price Import Parity(ex: Delhi) Import Parity (ex:Bangkok)

Souce : Dorosh (2001) and authors' calculations.

Rice Imports Since 1999

Smaller amounts of private sector rice imports have continued since 1999.

In 2000/2001 approximately 300 thousand tons of (white, i.e. non-parboiled) rice were imported from Vietnam.

Another 300 thousand tons were imported from India. Much of this rice was medium quality (not coarse) rice.

Coarse rice imports from India have almost completely stopped.

Bangladesh Rice Imports, 2000/01

In early 2001, subsidized rice from India’s public stocks and some poor quality rice was imported by the private sector.

These subsidized imports had little effect on local markets, as total imports through land ports for 2000/2001 were only about 1.5 percent of total rice supply.

India’s Foodgrain Policy

High procurement prices to boost farmer incomes

Little change in total distribution despite lower sales prices through Below Poverty Line (BPL) channels

Large increase in Food Corporation of India (FCI) stocks

Measures to promote exports, including sales of grain to trading parastatals at subsidized prices

Average Average Average Procurement Distribution Net Procurement 1980-92 17.2 16.5 0.7 1993-2000 26.6 16.2 10.4 1980-2000 20.8 16.4 4.4 Source: Ministry of Finance, Economic Survey, 2001. Table 1.19.

India: Average Food Grain Procurement, 1980/81 – 99/2000

Central Pool Food Stocks in India

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a Stock as of 1st January Note: Minimum January 1 stock norms: wheat 8.4 mn tons; rice 8.4 mn tons; total

Trade Restrictions on Rice Imports

In July 2001, India lowered its central issue price of rice through APL (above poverty line) channels from 11.3 to 8.3 Rps/kg for fine rice, lowering the import parity price in Dhaka from 18.0 to 12.1 Tk/kg, only 9 percent higher than the wholesale price in Dhaka.

In August 2001, Bangladesh raised its import duties on rice to 37.5 percent (from 5 percent) in an effort to protect its rice farmers from low cost imports.

APL Import Parity Rice PricesAPL Dhaka APL APL

APL Import Parity Wholesale Import Import Parity Import Parity /(Fine Rice) (without tax) Coarse Rice Dutiesa (including tax) Wholesale

Price (Rs/kg) Dhaka (Tk/kg) Price (Tk/kg) (percent) Dhaka (Tk/kg) Price

April 2001 11.30 17.28 12.13 5.0 18.01 1.48

July 2001 8.30 11.50 11.07 5.0 12.08 1.09

August 2001 8.30 11.51 11.86 37.5 15.82 1.33

January 2002 8.30 11.34 12.35 37.5 15.60 1.26

a Not including advanced income tax of 3 percent and a license fee of 2.5 percent.

Source: Bangladesh Food Planning and Monitoring Unit (FPMU) and authors' calculations.


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Private Sector Imports Dhaka Wholesale Price Import Parity(ex: Delhi) Import Parity (APL)

Source : Dorosh (2001) and authors' calculations.

Export Parity as a Price Floor

In principal, export parity, (the world price of rice in importing countries less transport and other marketing costs from Bangladesh), could serve as a price floor for rice producers.

Lack of established grades and standards, and marketing linkages, along with trade barriers in potential importing countries have prevented such trade from taking place, however.

Export and Import Parity Rice Prices and Quantity of Private Rice Imports in Bangladesh, 1997-2001

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Private Sector Imports Dhaka Wholesale Price Import Parity(ex: Delhi) Export Parity (to India)

Souce : Author's Calculation

Implications of the WTO for Bangladesh Foodgrain Trade

• Bangladesh bound its import tariffs for most agricultural products (including rice and wheat) at 200 percent.

• Actual tariffs have been much lower: 0-5 percent for rice and 10 percent for wheat for most of the 1990s.

• Aggregate measure of support in agriculture in the late 1990s was zero and non-trade distorting support (green box) was only 2.9-3.4 percent from 1993/94-95/96 (Asaduzzaman, 1999).

Implications of the WTO for Bangladesh Foodgrain Trade (2)

• As a least developed country, Bangladesh was not obligated under the Agreement on Agriculture to reduce its tariffs or its bound rates.

• Flexibility in trade policy, particularly for its key food commodities (rice and wheat), remains important if Bangladesh is to both ensure short-term food security for consumers in times of shortfall and promote medium-term food security through adequate producer incentives.

Benefits of Trade Liberalization

• Private sector rice imports in 1997/98 and 1998/99 stabilized rice prices at import parity levels and made a substantial contribution to food security in Bangladesh.

• In these years the private import trade was:• Timely (more than 0.5 million tons of

imports before food aid arrived)• Efficient (wholesale prices reflected actual

marketing and transport costs)• Cost-effective (no fiscal cost to the GOB)

Risks Associated with Trade Liberalization

Foreign markets may not be reliable in times of future domestic shortfalls

Very low import prices (due to dumping of surpluses by exporting countries or exchange rate overvaluation in Bangladesh) may threaten domestic agriculture.

Significant import tariffs may again be re-imposed if international trade threatens domestic producer interests.

Concluding Observations

• Erratic weather and frequent changes in country policies make domestic and international food markets very volatile, thus requiring a scope for flexible trade policy and constant monitoring of changing conditions.

• As South Asian countries liberalize their markets, the effects of each country’s agricultural and trade policies (particularly those of India) will have significant impact on its neighbors. Policy analysis in each of these countries will require more attention to intra-regional trade.

page 1 dr. paul dorosh senior research fellow, ifpri dr. quazi shahabuddin research director,...

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