Dare We Hope?

The European Union has offered to end farm export subsidies by 2013 – a major obstacle to talks in Hong Kong on a new global trade agreement.

I mentioned in the previous posting that deciding on what to do to create more just societies is not merely a matter of waving a magic wand to implement the right policies. The example I gave to sober up people in rich societies who just don’t understand why people in poorer societies cannot get their act together was …. farm subsidies, an utterly stupid, destructive, and unjust set of policies that we have been unable to eradicate in the wealthier societies. Well…not yet, at least. (I am hopeful, but realistic; the farm lobbies will move into high gear to oppose elimination of their exploitation of the rest of society.)

9 Responses to “Dare We Hope?”

  1. You are right, of course, to be “realistic”. It’s hard to take seriously promises that won’t accrue for 8 years. I think we had a Balanced Budget proposal that was supposed to work that way.

  2. Juan Carlos Hidalgo

    There was an excellent commentary last Friday in the New York Times called “Yes, we have Bananas. We just can’t ship them” by Tim Harford. Much blame has been directed to farm subsidies in rich countries, and rightly so. But we should also point fingers to the regulatory nightmare that hinders growth in developing countries. The World Bank has been doing a great job exposing this reality with its “Doing Business” report.

    Farm subsidies is the scapegoat for those who don’t was trade at all. If rich countries want to give us food for less money, why complain?

  3. Oh boy, an econ topic! And the semester just ended and me with no one to lecture to…

    I think that farm subsidies and price supports *by themselves* aren’t the issue. In the EU in particular, price supports have raised the prices of agricultural products, and must be accompanied by trade barriers to prevent less expensive foreign production from swamping local markets. The EU’s surpluses are then dumped on foreign markets at low prices, reducing world prices for ag commodities.

    Foreign consumers indeed benefit from these crazy policies, but foreign farmers are hurt. Given that many developing countries seem to have comparative advantage in agriculture and little else, it’s understandably an important issue. In a sense, getting cheap foreign commodities is like receiving welfare payments, when learning to be productive is what developing countries need.

    The U.S. sugar program is another example. The price supports rarely take effect, because the import quotas are so successful in constraining supply.

    Hence we produce sugar in Montana, Idaho, Minnesota, etc. It’s a crazy waste, because the farmers who grow sugarbeets admit the only reason they grow them is because on the program; otherwise they’d be growing something that’s actually worth more than the inputs used. We could be importing all the sugar we could stand from the Carribean at less than half the price we currently pay.

  4. Juan Carlos Hidalgo

    Foreign farmers can move away from producing goods that are subsidized by rich countries and try others that are not. The same rule that applies for getting rid of tariffs.

    With so much hunger going on in the Third World, I don’t see any logic in complaining that the U.S. and EU dump food in these countries.

    Please note that I’m talking from the perspective of a foreign consumer. I agree that agricultural subsidies make no sense from your perspective (rich countries), but I don’t buy the argument that they hurt poor countries.

    Here again, let’s talk about individuals. Not everyone in the Third World are farmers of subsidized goods but we’re all indeed consumers of these products.

  5. Juan Carlos: You are correct that on net, the people in countries that are recipients of subsidized goods gain, as measured by the usual consumer surplus. This is why “anti-dumping” rules makes no sense.

    The story of ag subsidies is more than this though. First, subsidies, price supports, and trade barriers are used by developed countries because farmer groups there are small, well-organized, and somehwta popular — hence they have political pull and are successful in getting these kinds of legislation.

    This results in surplus commodities that the governments of developed countries send to less eveloped countries (LDCs) for free or at very low prices. This has the effect of reducing the world prices for ag commodities — benefiting LDC consumers but hurting farmers who would otherwise be able to compete on world markets.

    The short run effect, as you have correctly said, is that there are net gains in the LDCs. But the argument is that there are dynamic effects. Given a *free market*, LDC farming could become profitable, and an engine of long run, sustained growth and development. Hence in the long run, giving cheap food may, in some cases, hamper economic development.

    In my opinion, the argument is correct but the likely gains are often exaggerated; it’s still true that institutional reform at home (in LDCs) is the more important task for development.

    Another point — all of the above analysis utilizes consumer surplus & producer surplus, and assumes in the usual fashion that it doesn’t matter who receives a gain, so long as someone does. But this misses an important point. Clearly some people in LDCs are hurt, as are some LDCs.

    For example, U.S. barriers to imported sugar clearly damage some Carribean economies, on net. I don’t have the exact details at hand at the moment, but I recall that one small Carribean island nation had its U.S. quota cut sharply, and suffered an enormous increase in unemployment almost instantly — something in the neighborhood of 50% as I recall. Cheap food from the U.S. (assuming they received any) wouldn’t offset such a loss.

  6. Juan Carlos Hidalgo

    Well, we should make a distinction between tariffs, quotas and agricultural subsidies. You last example on sugar refers to quotas, and has nothing to do with subsidies. Yes, quotas and tariffs harm LDC’s.

    Indeed, some people in LDC’s are hurt by agricultural subsidies, but the same argument applies for regular imports that don’t receive subsidies. These producers should move to other activities where they have chances of survival and allow cheap food to come into the country. It’s just a matter of stop producing what others want to give you for free and produce what they will buy from me.

  7. Juan Carlos — tariffs and quotas have 8everything* to do with subsidies. The EU Common Agricultural Policy (CAP) is a great example. This uses price supports and subsidies to encourage farmers to produce at very high cost. Given these high prices, foreign farmers would be happy to undercut EU farmers and flood Europe’s markets. So to protect the CAP, trade barriers are necessary.

    Since the price supports raise prices in Europe above equilibrium. So the EU purchases the resulting surpluses and turns around and sells them abroad, or gives them away. It makes sense that LDCs would oppose all of this nonsense.

    In the case of the U.S. suager program, again, quotas are used to defend what are, in essence, price supports. The U.S. government makes extremely low cost loans to sugar producers to produce a crop (sugarbeets or cane), essentially a free loan. Then if the market price falls below the support target, the farmer uses his sugar to pay of the loan — that is, the U.S. government takes the sugar at the high guarantee price. This system is defended by a system of tariff-rate quotas.

    The matter isn’t really whether someone is hurt or not by a policy change; someone will always be hurt regardless of what is done. Rather, the key issue is this — these interventions in the market end up doing more harm than good.

  8. Juan Carlos, I also meant to address your statement that if foreigners are willing to dispose of cheap ag commodities in the LDCs, then LDC producers should just find something else to do and enjoy the cheap commodities.

    The point is that the next best alternative for them may be far less productive and profitable. They may well be equipped to be profitable providers of ag commodities, but not much good at anything else.

    Also, a major point of debate has been cotton — not (for the most part) a food crop. People in LDCs are not benefitting from big gifts of cheap cotton — but if cotton were not subsidied (in, for example, America) and trade were freer, a number of farmers in LDCs could probably make good incomes producing this for world markets.

    It would be far better to have LDC farmers producing for free trade than to keep LDCs as welfare clients for the DCs.

  9. Charles, according to the Ag Digest put out by the EU every so often, the EU no longer subsidises products directly, but instead pays the CAP money to farmers for ‘tending the environment, animal welfare’ and other such things. I can’t tell what economic impact this will have, but they seem confident it will lead to a reduction of surpluses.

    Concerning tariffs and quotas, the EU gives tariff and quota-free access to to its markets to 49 LDCs (with the exception of one or two products, and weapons, of course). I suspect the quantities aren’t huge, but it does work – I saw strawberries from Palestine, and an array of other products from LDCs in my local shop the other day.

    So far as I understand, the arguments against tariffs and quotas are mainly coming countries such as Brasil and Australia, who certainly would benefit from a downward adjustment.