Economic impacts of biotechnology and trade policies

Kym AndersonUniversity of Adelaide, Australia, CEPR and World Bank

kym.anderson@adelaide.edu.au

www.econ.worldbank.org/programs/trade/biotech

Conference on Transgenic Plants for Food SecurityPontifical Academy of Sciences, Vatican, 15-19 May 2009

OutlineA few simple economic propositionsEmpirical results, using a multi-country model, of 3 case studies of effects on developing countries of prospective adoption by some or all countries of:

GM cotton1st generation GM maize and soybean (and prospectively rice and wheat)2nd generation GM Golden rice

A few simple economic propositions

How can transgenic crops boost food security in developing countries?

FAO definition of food security: Everyone always having access to

the minimum amount of basic food that is necessary for survival

= Having the wherewithal to grow, or

to purchase, a minimum basket of food

So transgenic crops can boost food security in developing countries if:

(a) it improves a household’s net earnings, including in the form of subsistence food production,

or (b) it lowers the price and/or improves

the quality of the food bought by the household

Does that GM technology have to come from a private R&D firm?

No, but if new seeds are more productive, or can reach the farmer at a lower cost or sooner if developed by the private sector than by the public sector, then it’s worth allowing private firms.

N.B. (i) in developing countries, the public sector spends an average of only 0.3% of the value of agric output on R&D,N.B.(ii) in the US, private ag R&D spending is now as large as public agric R&D spending

If the new technology comes from the private sector, won’t it extract all the benefits?

No, they have to pass some of the economic benefit to farmers in order to attract them away from their current technology

But tougher regulatory hurdles adds to R&D expense and so diminishes the number of private suppliers, and hence competition

In what ways are farmers affected by a profitable new transgenic seed?

In countries where they’re allowed to adopt it, early adopters benefit from its higher productivity, net of the cost of the new seedBut if many adopt, world price of product falls:

so those farmers not allowed to adopt are worse offand net buyers of that food are better off

Take home message 1: both net sellers and net buyers of food are affected by transgenics, regardless of whether their country adopts

First case study: Prospective effects of GM cotton adoptionby more developing countries

Modeling approachWe use the GTAP model of the global economy (a wonderful example of an open access research tool, see www.gtap.org) We ignore biotech and seed industries’ gains, and simply assume potentially profitable GM seeds become available for farmers to purchase and grow

so we underestimate substantially the gross gain to biotechnology-producing countries and hence the world

We ignore any producer or consumer externalities, positive or negative

Estimate of welfare effects from Bt cotton adoption as of 2001Even without South Asia and SSAfrica embracing this biotechnology, the global welfare gain to farmers & downstream users from all other countries adopting GM cotton exceeded US$1billion per year, assuming a total factor productivity (TFP) gain of 5% Adoption by SAsia and SSAfrica would raise that global benefit to $2.3b (assuming 15% TFP gain by those late adopters)

Prospective welfare effects from Bt cotton adoption (2001, assuming 15% TFP gain in SA & SSA)

Welfare($m/yr) of:

From:

South Asia

Sub-S.Africa (excl. RSA)

WORLD

GM cotton adoption by all except SSA

964 -18 2018

Global GM cotton adoption by all including SSA

970 187 2323

We understate gains because:Health of SAsia and SSA farmers and their soil and water would improve (less need to spray)Nearby food crops may benefit from less bollworm infestation from cotton cropN.B. Benefits to textile firms in developing countries (DCs) from lower world cotton price are included in previous slide = more jobs, higher incomes, less poverty,

hence more food security in many more DCs

Welfare effects of completing GM cotton adoption versus removing all cotton subsidies & tariffs

Welfare($million/yr) of:

From:

South Asia

Sub-Sahara

nAfrica

Global GM cotton adoption 970 199Global removal of cotton subsidies and import tariffs

-96 147

Global GM cotton adoption and cotton subsidy/tariff removal

911 370

Take-home message 2a:

Prospective gains from GM cotton adoption to Central Asia, Sub-Saharan Africa and South Asia are 10, 13 and 23 times greater than the global gains when expressed as a percentage of regional GDP

Take-home message 2b:

GM cotton adoption in SSAfrica could do far more for the region than removal of rich-country cotton subsidies – and would also boost the gain from any future subsidy reform

Second case study: Prospective effects of GM maize & oilseed adoption

by more developing countries

The GM food issue is more complex than the GM cotton issue

First-generation GM food crop varieties provided lower prices for buyers of food and animal feeds

So GM adoption by North and South America has already benefitted consumers in other developing countries (DCs), via lower world prices of food– but especially so in those DCs that allow imports of GM food

First-generation GM crop varieties (continued)

However, DC producers of competing foods, if denied the opportunity to adopt, are worse off, because of lower price

Hence allowing them to adopt boosts the chances that country will gain from the technology – and more so the sooner it approves and the lower the regulatory cost of doing so

Important caveat: the above ignores moratoria by 3rd countries

Modeling approachWe again use the GTAP model of the global economy (www.gtap.org), but modify it to separate the markets for GM and non-GM crop varieties We again ignore biotech and seed industries’ gains, and simply assume potentially profitable GM seeds become available for farmers to purchase and grow

So again underestimating the gross gain to biotechnology-producing countries (who could be DCs)

We ignore any producer or consumer externalities (positive or negative) and the value consumers place on their right to know if their food contains GMOs

Global welfare effects of GM corn and oilseeds (assumes 5.0-7.5% TFP gain), with & without EU moratorium

Economic welfare of

($billion/year):

NA,ARG & RSA

EU15 World

NA, ARG&RSA adopt: (a) no moratorium 1.4 0.3 2.3 (b) EU moratorium 0.9 -3.2 -1.2All countries adopt 1.2 0.6 4.0

What would happen if China and India adopted GM food?

They would also apply it to rice and perhaps wheatSo with same TFP boost (5.0-7.5%) …

Global welfare effects of GM corn, oilseeds, rice and wheat, with & without EU moratorium

Economic welfare of

($ billion per year):

NA,ARG & RSA

EU15 China &

India

SSA World

NA, ARG, RSA, Ch. and India adopt: (a) no moratorium

1.5 0.4 1.51 0.0 4.3 (b) EU moratorium 1.0 -4.7 1.48 0.0 -0.9All countries adopt 1.4 0.8 1.57 0.2 7.5

Take-home message 3:

Adoption of 1st generation GM food in China and India would have huge payoff to them, and would be affected hardly at all by an EU moratorium: most of gains would be shared by producers and consumers in those two populous DCs (plus gains to their biotech and seed firms)

Third case study: Prospective effects of Golden rice adoption

by developing countries

GM food issue is even more complex with 2nd generation biotechnlogy

Some second-generation GM crops promise also direct health benefits to food consumers

especially poor households in developing countries in the case of micronutrient-enhanced GM varieties of staple food crops (e.g. Golden Rice)

Modeling of 2nd gen. GM attributes

For first-generation GM varieties, we assumed a farm productivity shock for a portion of the crop area (around half for food crops)For second-generation GM varieties, we assume unskilled labor in poor countries becomes more productive

ignoring their potential to also lower farm costs==> our calculated gross benefits, which also still

exclude net gains to biotech firms, are thus lower-bound estimates

Basis of golden rice assumptionIt has more beta-carotine, which is needed for provitamin A production that reduces blindness, morbidity and mortalityPhilippines case study (Zimmerman/Qaim 2004): first-strain golden rice could reduce number of DALYs lost due to provitamin A deficiency by up to 47%

That is equivalent to an increase in unskilled labor productivity in that country of 0.53%

• N.B. the latest strain of golden rice (Paine et al., 2005) is many times more effective than that first strain, so again our results represent lower-bound estimates

2nd generation scenarios

Two modeling experiments of effects of developing countries of Asia adopting Golden Rice: (a) if there are no import bans, versus

(b) in the presence of a moratorium by the European Union, Japan and Korea

Welfare effects of golden rice

Economic welfare of ($ billion/year):

China India Other Dev. Asia

EU15, Ja+Ko

WORLD

Dev. Asia adopts golden rice:

(a) No moratoria 1.8 0.6 1.0 1.2 6.4

(b) EU, Ja+Ko adopt moratorium

1.9 0.6 1.0 -4.7

1.0

Take-home message 4:

Second-generation Golden Rice benefits to Asia’s developing countries could be substantial, and those gains to the adopting countries would be reduced only very slightly if EU, Japan and Korea were to ban imports of those crops from GM-adopting countries

The malnutrition issue for Sub-Saharan Africa is even more acute than in Asia…

… yet Sub-Saharan African (SSA) countries are not embracing GM technology, partly for fear of losing access to EU markets

How does that potential loss compare with the potential gain from GM adoption to farmers and consumers in SSA?

Our GTAP model-based estimates suggest:Large gains to domestic farmers and consumers in SSA from adoption of 2nd generation nutritionally-enriched GM varieties, even if just for golden rice and wheat (assumed here to have a 2% labor productivity shock, or 4 times that in Asia)

Welfare effects of 2nd generation GM wheat and rice adoption by SSA

Economic welfare of($billion/year):

SSA adoption of 2nd gen.

rice and wheat, with

EU ban

SSA adoption of 2nd gen.

rice and wheat,

without EU ban

South Africa 1.79 1.78Other SADC 0.41 0.40Other SSA 1.44 1.42All SSA 3.64 3.60

Take-home message 5:

Second-generation GM rice and wheat could benefit Sub-Saharan Africa very substantially –and gains would be hardly affected if EU were to ban imports of those crops from GM-adopting countries

Caveats include …

Magnitude of boost to unskilled labor from the health benefit of 2nd generation GM crops is speculativeDifficulties of adapting and diffusing GM varieties for SSA conditions are ignored

But, once overcome, gains would be greater the more other GM crop varieties are developed

• Especially if those new crop varieties also provided cost savings/TFP gains & less pollution for farmers

Summary take-home message:

GM cotton and food varieties – especially 2nd generation ones – could benefit developing countries very substantially, regardless of who provides the technology (public or private, national or multinational, large or small firms)

–True even if the EU were to ban imports from GM-adopting countries, since most of the gains would be shared by developing country farmers, consumers and textile workers (plus those DC biotech firms able to survive the current high cost of getting through the regulatory approval process)

A few background papers:Anderson, K., E. Valenzuela and L.A. Jackson, “Recent and Prospective Adoption of Genetically Modified Cotton: A Global CGE Analysis of Economic Impacts”, Economic Development and Cultural Change 56(2): 265-96, January 2008Anderson, K. and E. Valenzuela, “The World Trade Organization’s Doha Cotton Initiative: A Tale of Two Issues”, The World Economy 30(8): 1281-1304, August 2007Anderson, K. and L.A. Jackson, “Some Implications of GM Food Technology Policies for Sub-Saharan Africa”, Journal of African Economies 14(3): 385-410, September 2005Anderson, K., L.A. Jackson and C.P. Nielsen, “GM Rice Adoption: Implications for Welfare and Poverty Alleviation”, Journal of Economic Integration 20(4): 771-88, Dec 2005These and related papers are available at:

www.econ.worldbank.org/programs/trade/biotech