1. Page 1 Dr. Paul Dorosh Senior Research Fellow, IFPRI Dr. Quazi Shahabuddin Research Director, Bangladesh Institute of Development Studies April 2002 Trade Liberalization and Food Security in Bangladesh

2. Page 2 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.

3. Page 3 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.

4. Page 4 Outline  The Food Grain Economies of Bangladesh and India  Trade Liberalization and Cross- Border Rice Trade  Bangladesh and the WTO  Concluding Observations

5. Page 5 The Bangladesh and Indian Rice Economies, 1997-1999

6. Page 6 Net Foodgrain Production and the Food Gap in Bangladesh, 1980/81 to 2000/01 Source: Calculated from data from the Bangladesh Food Planning and Monitoring Unit.

7. Page 7 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).

8. Page 8 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.

9. Page 9 Bangladesh Foodgrain Trade, 1980/81 - 1998/99

10. Page 10 Bangladesh Rice Imports by Source, 1994/95 – 1998/99 Source: Foreign Trade Statistics of Bangladesh, BBS.

11. Page 11 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.

12. Page 12 Rice Prices and Quantity of Private Rice Imports in Bangladesh, 1993-2001

13. Page 13 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.

14. Page 14 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.

15. Page 15 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.

16. Page 16 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.

17. Page 17 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.

18. Page 18 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.

19. Page 19 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).

20. Page 20 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.

21. Page 21 Rice Prices and Quantity of Private Rice Imports in Bangladesh, 1993-2001

22. Page 22 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.

23. Page 23 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.

24. Page 24 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

25. Page 25 India: Average Food Grain Procurement, 1980/81 – 99/2000

26. Page 26 Central Pool Food Stocks in India

27. Page 27 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.

28. Page 28 APL Import Parity Rice Prices

29. Page 29 Rice Prices and Quantity of Private Rice Imports in Bangladesh, 1997-2002

30. Page 30 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.

31. Page 31 Export and Import Parity Rice Prices and Quantity of Private Rice Imports in Bangladesh, 1997-2001

32. Page 32 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).

33. Page 33 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.

34. Page 34 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)

35. Page 35 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.

36. Page 36 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.