TWELVE THESES ON AGRICULTURAL PRICES 21
The purpose of this note is simply to present some issues for discussion rather than provide a comprehensive critique.
TRADE POLICIES AND THE EXCHANGE RATE
Proposition 1: Import controls and an overvalued exchange rate operate to shift domestic inter-sectoral terms of trade against agriculture. They thus inhibit investment and output expansion of agriculture.
Fallacy: Trade controls and a high exchange rate are quite compatible with the domestic terms of trade moving in favour of agriculture, depending on the domestic subsidies provided and the nature of agricultural price formation (e.g., when the government can set a floor price). Further, in an economy characterised by oligopolistic price-setting in industry, the absolute level of agricultural prices can tell us very little about inter-sectoral terms of trade, which would be determined by the profit margins sought by industrialists. Freeing external trade can alter this only to a small extent when structural deficits on external account are likely. In any case, it is not clear that moving inter-sectoral terms of trade in favour of agriculture necessarily leads to an increase in investment and output in this sector, as mentioned in 5 below.
Proposition 2: Liberalising imports and allowing a 'flexible* exchange rate (i.e. devaluing) would lead to increased agricultural exports in most developing countries, and thereby provide an impetus to more production besides adding to agricultural incomes.
Fallacy: This does not hold in a whole range of situations which are extremely common for developing countries, as when world demand is inelastic, supply is determined in the medium term by exogenous factors (such as climate), or the commodities in question are subject to sharp market fluctuations and therefore require price stabilisation measures. A shift in domestic inter-sectoral terms of trade resulting from such a combination of trade liberalisation and exchange rjate devaluation similarly need not imply more agricultural exports. Additionally, increasing export volumes need not imply rising export values; this is particularly true of primary product exports whose markets show secular tendencies towards stagnation or decline. Most countries that have liberalised their trade regimes have found that agricultural export volumes have increased without much positive impact on total export values. In any case, export demand is only one (relatively minor) factor in boosting total production, as discussed below. There are very few 'success stories*—of which Chile, with high rates of high-value agricultural exports in the 1980s is considered to be one, and which is already facing problems of concentration on the unstable US market. Further, many countries that have increased agricultural exports have often done so at the cost of domestic