It has become conventional libertarian wisdom that among all the other anti-market policies that are stunting growth in the world's poor countries, agricultural subsidies in first world nations may be one of the baddest actors. You can find this argued in a variety of places; my colleague Randall McElroy this week:
If people... were really interested in helping the poor, maybe they’d be less hostile to putting plants and factories in Third World countries and more hostile to agricultural subsidies in rich countries.
Today at Hit & Run:
Wolfowitz said on Tuesday the key to helping Africa's poor cotton growers was to cut the subsidies paid to U.S. and European agriculture producers.
On a tour of a cotton-processing factory in Burkina Faso, Wolfowtiz said the World Bank would have a "strong voice" at the Doha trade talks to make a case for wealthy nations to reduce agricultural subsidies worldwide.
And in an article by Melinda Ammann reviewing Robert Guest's The Shackled Continent in this month's Reason print edition:
...Africa must be invited to competein global markets on an even playing field. Subsidies to rich farmers and tariffs on food imports to rich countries are an unbearable burden for Africa. According to Guest, "farm subsidies in rich countries are running at a billion dollars a day. This is roughly the equivalent of the entire GDP of Sub-Saharan Africa." Farmers in rich countries "sometimes are paid to grow stuff. Other times they are paid to stop growing stuff that they've grown too much of because they were paid to grow it." Surplus food is dumped on African markets, lowering the prices that African farmers can get at home. Opening agricultural markets to exports from Africa by eliminating tariffs and subsidies that shelter rich farmers overseas could make more difference for Africa than any aid program.
I think there's a big mistake being made here. Don't get me wrong - I'm all for eliminating agricultural subsidies for a whole host of reasons. Helping the world's poor doesn't seem to be one of the benefits. Usually we scoff at terms like "dumping" and "even playing field". And rightly so; so why are they accepted here?
Here's what I wrote last year, and I think it's worth re-asking to a larger audience:
...Commonly, in an exercise in overstating the case, free traders may argue that we should eliminate our farm subsidies to help poor farmers in developing nations. This would certainly help the poor farmers. But it ignores the fact that most inhabitants of the poorest nations are poor non-farmers who could use some cheap food. As it stands, our taxes that go to farm subsidies are very much simply redistributions to the world's poorest. The charge that "dumping" cheap food into the nations is harmful is just as fallacious as when those certain parties state that "dumping" of cheap imports is not harmful to us (and free-traders rightly call this one out).
It's pretty simple: subsidies for an exported commodity are helpful to the exporting producer and the importing consumer. They harm the exporting consumer and the importing producer. Free-traders seem to have fallen for the arguments of the politically connected farmers in the small countries, who happen to make the same arguments as the politically connected producers in this country who successfully impose tariffs...
...I have read around the 'net some who oppose free trade claim that statements like mine above are some sort of qualification of free trade that underminds the case for it. This is not so. The simple fact is that the farm subsidizing policies in the US are not trade policies. This is important point. You can talk about these policies with regard to their international effects without commenting at all on trade policy. Subsidizing is simply a wealth transfer (in this instance, one from US taxpayers to US farmers and foreign consumers)....
This argument was echoed in the Financial Times by Arvind Panagariya:
Current production and export subsidies flood world markets with the subsidised products and drive their prices down. The removal of these measures will raise the prices of the products in question. This will benefit the exporters and hurt the importers of these products. Food products happen to be among the most heavily subsidised items and as many as 45 of the world's least developed countries are net food importers, according to calculations by the economists Alberto Valdes and Alex McCalla. Even when we consider all agricultural products, 33 least developed countries are net importers.
A counter-argument may be that, once the subsidies are eliminated and world prices increase, the least developed countries will become net exporters of the products. But this is doubtful for two reasons: such a change can turn at most only a handful of these countries into net exporters and the switch from net importer to net exporter status by itself is not enough to bring an overall benefit. As food prices rise, so will losses on food imports. Only if a country becomes a sufficiently large exporter will it be able to offset these losses.
And by Tyler Cowen:
In other words, even if reform comes about, the main beneficiaries will be the taxpayers in the rich countries. Export subsidies benefit consumers abroad, even if they do not maximize aggregate value.
Nonetheless it is trickier than Panagariya indicates. Many agricultural interventions keep world prices up, not down, by preventing the reallocation of farming to its most productive geographic venues. Nonetheless it is not obvious that the very poor countries would be big winners in any competitive reshuffling of sectoral specializations. In fact we might expect technology to make agriculture increasingly high-tech. We are then back to the case where export subsidies hurt taxpayers in rich countries but help consumers in poor countries.
Also keep in mind that many poor countries already enjoy free bilateral access to EU markets for many agricultural commodities, with rice, sugar, and bananas being prominent exceptions. So if liberalization causes food prices in Europe to fall, agricultural exporters in the poor countries may again be worse off.
The bottom line is that the taxes I pay for farm subsidies partly end up as food in Africa that the Africans otherwise could not afford. The bigger problem is that the politically connected farm corporations take their cut first, and that I am against, but not because these subsidies hurt the poor (poor Americans, maybe).
Can somebody tell me where this analysis is wrong?
Update: Follow-up here.