Wolf on Rich Country Agricultural Subsidies

Wolf on Rich Country Agricultural Subsidies

In a recent issue of the Financial Times, Alan Beattie explains the tradeoff "at the heart" of the current world trade negotiations (in the �Doha Round�):

"At the heart of any final deal is likely to be a bargain between the rich trading blocs, the European Union, US and Japan, and big emerging market countries such as India, Brazil and South Africa.

The deal would see the rich nations cut subsidies and tariff protection on agriculture in return for better access for their goods and services exports to those emerging markets."

("Doha round faces long and winding road", Financial Times) .  US, EU, and Japanese subsidies to agricultural producers could be an important part of the tradeoff.

Martin Wolf spoke to these subsidies in his recent book, Why Globalization Works. Rich country subsidies to agricultural producers poison the competitive environment for developing countries in an area that might otherwise be a strength for them:

��perhaps the greatest of all the scandals [Wolf charges that for various reasons, including the subsidies, rich country treatment of the developing countries is hypocritical � hence the term �scandals� - Ben] remains the treatment of agriculture. In this area, one of comparative advantage for many developing countries, they have hardly managed to raise their share of world exports. This is so even though agriculture is, for the high-income countries, of trivial economic importance in terms of GDP, employment and trade. What stops the developing countries is the staggering scale of rich-country subsidies.

Rich country spending priorities are wrong:

�According to the Organization for Economic Co-operation and Development, total assistance to rich country farmers was $311 billion in 2001, six times as much as all development assistance, indeed more than the GDP of sub-Saharan Africans. In 2000, the EU provided $913 for each cow and $8 to each sub-Saharan African. The Japanese, more generous still, though only to cows, provided $2,700 for each one and just $1.47 to each African. Not to be outdone, the $US spent $10.7 million a day on cotton and $3.1 million a day on all aid to sub-Saharan Africa.

The subsidies are counter-productive, even for the rich countries themselves:

�The priorities shown here are obscene. In order to justify the grotesquerie of its agricultural policy regime, the common agricultural policy, the EU has started to apply the notion of �multi-functionality�. By this it means that agricultural supports are justified by their ability not only to support farm incomes, but to protect the environment, food security and rural life. The EU is right about the multi-functionality of the CAP, just wrong about the functions its policies serve. The CAP is regressive (since it provides 50 per cent of its benefits to the 17 per cent biggest farmers, who need this help least), wasteful (since it still consumes almost half of the EU�s budget), environmentally damaging (since it encourages needless intensification of agricultural production) and harmful to developing countries (since it deprives them of markets and undermines the competitiveness of their farmers with its dumping of subsidized surpluses). This is multi-functionality with a vengeance. The picture is little different in the US: only 16 per cent of the support goes to the 80 per cent of the farmers who operate on a relatively small scale."

These subsidies damage developing countries in a variety of ways:

"Unfortunately, while the Uruguay round brought a little discipline to this sector, it was grossly inadequate. [Prior to the Uruguay Round of trade negotiations, negotiations to reduce trade barriers had not focused on agriculture. The Uruguay Round, completed in 1994, took first steps to address barriers to agricultural trade. Agriculture is supposed to be a central element of the current �Doha Round� of negotiations - Ben] Agricultural support in the EU and US was higher in the late 1990s, as measured by the OECD�s Producer Support Estimates, than between 1986 and 1988, the base years for the Uruguay Round agreements. Much of the support is still output related. [output related support may encourage additional, hurtful, production - better to "decouple" support from output - Ben] Moreover, many of the subsidies that are supposed not to affect production do so. Because farm supports are anti-cyclical, they increase the instability of residual world markets, with devastating effects on exporters from developing countries. Moreover, subsidized surpluses are still being dumped on world markets. The US and EU account for around half of all world wheat exports, with prices 46 and 34 per cent respectively below the costs of production. In 1998, subsidized exports made up a quarter of global exporters. The EU is the world�s largest exporter of skimmed-milk powder, at half the costs of production. It is also the largest exporter of white sugar, at a quarter of the costs of production. Some argue that such dumping can be beneficial to developing countries that are net food importers. With very few exceptions, this is not so. In most developing countries, farmers are not just the majority of the population, but the overwhelming majority of the poor. Thus the dumped products benefit an urban minority at the expense of the rural majority. Often the subsidized food has turned countries into net importers. Without it, they would both be net exporters and possess far healthier rural economies. While the transition to a world of higher international food prices needs to be handled carefully � and food aid needs to be available to help food importing countries and those vulnerable to harvest failure � it is virtually certain that developing countries would gain hugely from the elimination of current farm policies in the high-income countries. The World Bank has estimated the annual welfare losses to developing countries at $20 billion a year � close to 40 per cent of all development assistance.�

Source: Martin Wolf. Why Globalization Works.. Yale University Press. New Haven: 2004. pages 213-214.

Comments

[r4 ds]

While I do have a lot of empathy for the worlds poor, I am a bit more interested in how the food crisis will affect me here in the US. Both as a consumer and as an investor.

What do you think, Yves? How will this impact the US?

As a sidebar, a huge piece of protein and large portions in general are serious competitive issues in the food service industry, especially in sit-down resturants.

A call for smaller protein portions will be taken as a call to commit business suicide by the middle level of the resturant trade.