At the onset of the doi moi reforms, Vietnam’s hard currency earnings from agriculture were negligible. But in 2006, Vietnam expects to rake in $1.4 billion from rice exports, $1.2 billion from rubber and nearly $1 billion from coffee sales overseas. Cashews will bring in another $400 million.
Vietnam is now ranked second in the world in rice exports, second in coffee, third in processed cashews, fourth in rubber and first in pepper.
These figures are on top of the $3 billion that Vietnam will earn from seafood exports.
Agricultural exports create millions of jobs, raise farmers’ incomes and earn the foreign currency needed to finance imports.
Vietnam’s success on international agricultural markets began with reform at home. Control over land and other productive assets was turned over to farming households, giving them the freedom to decide how best to use their time and capital. International trade, once a state monopoly, was opened up to a range of actors, including private companies. Competition among exporters reduced trading margins and raised prices received by farmers.
Nowhere has Vietnam’s success been more striking than in the rice market. Before the launch of the doi moi reforms Vietnam was a rice deficit country. This year, Vietnam expects to export over five million tonnes. The recovery of world rice prices since 2004 has also boosted rice export earnings to record levels (see Figure 1).
Earlier this year, the United Nations Development Programme (UNDP) published an Asia-Pacific Human Development Report entitled Trade on Human Terms: Transforming Trade for Human Development in Asia and the Pacific. The main message of the report is that trade liberalisation is not an end in itself but rather one policy instrument among many in the development tool kit. Liberalisation is only of value if it benefits the poor and contributes to human development.
Liberalisation of Vietnam’s rice trade has delivered benefits to the poor in two ways. First, improved access to international markets has stimulated Vietnamese farmers to raise the productivity of their rice fields. Even after decollectivisation in the early 1990s, production and exports have continued to rise despite some land shifting out of rice and into higher value-added crops. Average yields increased from 3.7 tonnes per hectare in 1995 to 4.8 tonnes in 2004.
Secondly, introducing competition into the rice trade has narrowed the gap between international and domestic prices (Figure 2). Under the quota system, state companies were assigned export contracts and retained the profits from the difference between the prices paid to farmers and the border price. With the introduction of competition, exporters must compete for international contracts and for domestic rice surpluses. Farmers now receive more of the export price than they did under the quota system.
However, trade liberalisation of food staples like rice does have one major disadvantage, which is that it exposes domestic consumers to international price fluctuations. This is not a problem when world prices are low and steady, since it means that poor domestic consumers consistently pay low prices for food grains. But when prices are high, as they are at present, poor people have to pay a larger share of their incomes on food. This can force many poor households below the poverty line. Erratic food prices are damaging to the poor and farmers, since rapid and unpredictable price changes complicate consumption and production decisions.
Staple food prices in Vietnam have been rising faster than the general price index since 2002 (Figure 3). Higher food prices help food-growing farmers but hurt the poor who buy their food on the market. Since food makes up a large share of total expenditures by less well-off households, rising food prices can push poor wage-earning households deeper into poverty.
People used to assume that higher prices are good for the poor because most of the poor grow food. But, according to the most recent living standards surveys, wage and salary workers now make up the largest single category within the labour force. As the economy changes, Vietnamese people will become better off, but also increasingly dependent on wages to earn their living. Since they buy their food on the market, higher food prices lower their living standards.
One way to make rice trade liberalisation work better for the poor is to shift from quantitative restrictions on rice exports to an export tax.
There are three advantages to an export tax over quotas. First, export taxes raise money for the government that can be used to finance anti-poverty and social security programmes. Under a quota system, this money is handed over to exporters in the form of excess profits. Export taxes are easy to collect and can help replace lost revenue from import tariffs as Vietnam enters the WTO.
Secondly, export taxes have the effect of reducing domestic prices, since they effectively lower the export price to traders. For many years, Thailand used export taxes to maintain domestic rice prices below world levels. For large exporters like Thailand and Vietnam, foreign rice buyers finance lower domestic prices and tax revenues since they pay higher prices for the rice that they import.
Thirdly, export taxes are market friendly. They do not rely on the withdrawal or award of licenses to specific trading companies and are therefore less open to manipulation. If domestic stocks are running low, the government can simply increase the rate of tax, which will have the effect of redirecting rice from the export to the domestic market.
Rice export taxes would work even better for big producers like Vietnam if rich countries would reduce their levels of agricultural subsidies.
According to UNDP’s Asia Pacific Human Development Report, the US spent $763 million in 2001 subsidising domestic rice production. Producer subsidies in the US and elsewhere increase supplies on the world market and lower the prices received by Vietnamese farmers. The report estimates that world rice prices were 35 per cent below equilibrium as a result of rich country subsidies.
In the absence of these rich country subsidies to their farmers, Vietnam could collect more taxes from rice exports without reducing the incomes of Vietnamese farmers below current levels.
This is another example of how protectionism in the OECD countries imposes costs on developing countries. In 2001, the rich countries spent $311 billion on subsidies to their own farmers. In the same year, they spent about one-sixth of that amount on official development assistance (ODA) to developing countries.
Vietnam has demonstrated that trade has an important role to play in human development. Rich countries need to remove the obstacles that their policies place in the way of developing countries seeking to maximize the development impact of economic integration. Vietnam’s recent accession as the 150th member of the WTO should not only open up significantly more economic and trade opportunities for the country but also give Vietnam an opportunity to join forces with other like-minded countries to advocate a substantial reduction in rich country subsidies and a more development-oriented trade system.