Agri-Subsidies

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. Share this

Who Benefits? See

Who Benefits?
See Agri-Subsidies at Catallarchy, and other materials it references, for a semi-entertaining look at libertarians grappling with the muck and mystery of agricultural economics....

Poor countries can take

Poor countries can take advantage of farm subsidies given by rich countries
I had written about agricultural subsidies before:Third-world countries always protest against huge agricultural subsidies given by rich nations like US, Europe etc. They charge that subsidies are causing prices of farm products to drop, causing farmer...

The analysis is pretty good

The analysis is pretty good but doesn't go far enough. World prices for commodities won't rise even if the US leaves the market entirely. Coffee for example is not a US crop though it imports massive quantities. Coffee farmers are going broke because there is a market glut. Thus all the whingeing about "fair trade" coffee. The same would be true for cotton and sugar farmers even if the US left those markets.

Commodity farming just isn't a good business except in places like Brazil where industrial methods are used on cheap but fertile land with low cost labor. This benefits only a few wealthy and favored industrialists while the peasants driven from those lands starve in the favelas around big cities, scrounging in trash heaps to live.

Developing countries will help themselves more by lowering their own tariffs than whingeing about subsidies elsewhere. But that isn't their true goal or the goal of the alliance of doctrinaire libertarians and paleo-leftists. All these critics are pursuing abstract principles considered worthy in themselves whether they have desirable real world effects or not.

Your argument is right on

Your argument is right on target. In fact, I have extended the argument further in one of earlier posts. I had argued, that consumers from poor countries can use the savings from cheap imported food to invest in, say, Education which will allow to move away from agricultural and into service business.

The conventional wisdom is

The conventional wisdom is more correct if we somewhat sloppily use "agricultural subsidies" to refer to ALL the policies that "protect farmers" in first-world nations. Including quotas and "marketing orders" and "set asides" as well as plain old subsidies. For instance, suppose you're not legally allowed to sell oranges below a certain size in California, so those oranges get thrown out. Get rid of that law, and more oranges are on the world market; the world cost of oranges declines.

Likewise with paying people to refrain from growing crops. Or subsidies that keep land in use for a less-productive, soil-damaging crop when in the absence of subsidies its best use would be a more productive soil-enriching crop. All these policies are sources of inefficiency. Make the agricultural market more efficient and food should get cheaper, no?

We can't save Africa with a

We can't save Africa with a subsidy cut
Trent McBride at Catallarchy considers the subject of agricultural subsidies and reaches a conclusion that too few free traders have realized: rescinding agricultural subsidies is a good idea, but it's not going to help LDCs as Oxfam claims. McBride c...

The best Panagariya article

The best Panagariya article on this subject is at http://www.columbia.edu/~ap2231/Policy%20Papers/Fallacies_Agriculture.pdf

Your analysis begs the

Your analysis begs the question:  why have so many third-world people moved away from their villages to poverty in slums around major cities, where they are net consumers of food?

The answer is that subsidized food from first-world farmers has cut prices so low that they can't buy seed, tools and fertilizer.

If the food problem we're solving with subsidies was also created by subsidies, I certainly wouldn't feel virtuous about it.

I always assumed, because

I always assumed, because I've heard apparently economically literate people make the "subsidies hurt the third-world poor" argument, that third-world countries tended to be net exporters of food. Is that incorrect?

According to Panagariya 85

According to Panagariya 85 out of 148 developing countries are net importers of agricultural goods. It's useful to think ahead a bit to note that while developed world fertility rates are at or below replacement level, and so are losing population, developing countries are set to add a couple billion more hungry mouths. There will be more net importers as time goes on.

It's not necessarily a bad

It's not necessarily a bad thing when local producers have the ear of the government. The segment of the population in a third world country that conducts business and owns capital is a nascent middle class. And as Fareed Zakaria argued in The Future of Freedom, the rise in power of the middle class is often what leads to liberal democracies.

But it would also give a

But it would also give a boost to those few well-placed farmers.

Remember that "poor nations" are not homogeneous collections of people with the same goals, but are sub-systems with their own rent-seekers who seek distortions of the local market. The "well-placed farmers" (who would benefit from abolishing G8 agricultural subsidies) have much greater access to third-world governments than do food consumers (who may suffer in the short term from such abolishment). When third-world leaders call for abolishing first-world subsidies, it is a sign that local producers with concentrated power have their ear.

Of course, I'm not arguing that the subsidies should stay. As Glen said above, in the long run they make the market for food less efficient. And as I say (when I am in my moralist mood instead of consequentialst mood), they institutionalize theft. The beneficiaries of the theft become dependent on the thieves and resented by the victims.

That rent-seekers become the allies of free-trade is just a happy coincidence of the "stange bedfellows" variety.

It all reminds me of the saying I first heard in South Africa, "Foreign aid is a way to transfer money from poor people in rich countries to rich people in poor countries."

Could it be that in the

Could it be that in the short term abolishing ag subsidies would hurt poor people in the third world but in the long term it would help them? A third world country may, in aggregate, be a food importer. But, it seems likely that there will always be pockets in the economy where some farmers could be net exporters if subsidies were abolished. The immediate effect of prices going up, might indeed be more hunger and poverty. But it would also give a boost to those few well-placed farmers. Then at least the country would have some pockets of self-sustainability. Those farmers would invest their profits into increased productivity, and a real economy could grow and spread around them, gradually encompassing more and more people in the country. This process might begin with a sharp increase in hunger, and I don't know if rich donor countries could morally stomach that first phase. But the third world countries would finally break out of the vicious cycle of dependance, and it may actually result in less hunger over the long term. This might be more realistic than expecting a whole country to skip the agriculture-based phase of economic development and jump right into an industrial and information-based economy.

I don't have a background in economics, so I'd be really interested to hear from an economist on this blog if this is feasible.

Certainly, some people, even

Certainly, some people, even many people, benefit from agricultural subsidies. But there are a lot of people who suffer from artificially cheap food:

1) Farmers in countries where the majority of the population lives in agriculture

2) People in countries where the institutional infrastructure is insufficient to allow the sort of development that could absorb displaced agricultural workers; cheap food produces a subsidy for those already well often, and a miserable existance scrabbling in garbage heaps and relief efforts for thos who cannot get jobs in either agriculture or industry

3) People in countries that are next exporters of food. Those farmers are forced to compete on the world market with food subsidized by the astounding productivity of industrialised nations. Of course, they cannot. So they, and often their country, end up poorer.

4) Aging people with no skills except for farming

And as others have pointed out, not all agricultural subsidies encourage production. A number of them are subsidies designed to keep domestic prices high by a combination of price supports, import barriers, and production restrictions; think tobacco, sugar, cotton or milk.

Trade is not a panacea Trent

Trade is not a panacea
Trent McBride points out a common fallacy about free trade and developing countries, one to which I admit I have occasionally succumbed: Commonly, in an exercise in overstating the case, free traders may argue that we should eliminate our farm

I don't think "wrong" is the

I don't think "wrong" is the right word to describe your argument - but offhand I don't have a better one.

The tenor of your idea, and those of Panagariya and Cowen, is that the current subsidies are helping currently by reducing prices for current consumers. This is true.

The difficulty with this is that most of these people used to be producers. Many of them are no longer producers precisely because they couldn't compete with subsidized imports.

There is an element of what physicists call hysteresis here. That is the name for a process that cannot be reversed - like breaking glass. What's happened is that subsidies in developed countries have broken the production process in developing countries.

There's a big normative question here: which is better, a society in which producers do OK but consumers have to buy expensive produce, or a society in which producers struggle to compete but produce is cheaper for consumers? That question doesn't have a positive answer even before including the unnecessary but common problem that many countries don't have the capability of fruitfully employing those displaced producers.

But, I dont' think that undoing the subsidies is going to return those economies to where they were (that's the hysteresis). So, it's naive to propose that as the first-best solution.

But, the alternative may be worse. Continuing the subsidies will continue the erosion of the producers' positions in developing countries. This will tend to increase the need for subsidies in the developed nations as they take increasing responsibility for supplying food to the increasing number of consumers in developing countries.

Like I said, there are no good answers here, but I think there are two big picture issues to consider. First off, if the latter is the best possible strategy, then why not do it for all goods? We clearly can't do that. That isn't exactly a justification for never subsidizing any good, but it does point us in that direction. Secondly, the subsidies will have the tendency to unnaturally centralize production. I'm all for specialization, but it should be driven by comparative advantage. So if you're Hayekian, I think you probably need to be deeply uncomfortable with the idea of perpetuating a forced centralization.

Does Subsidizing Exports

Does Subsidizing Exports Hurt Residents of Developing Nations?
Trent McBride asks whether agricultural subsidies on net help or hurt individuals living in developing nations. There’s no easy answer to this question, but there are a lot of interesting

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Brian, that's why I think it

Brian, that's why I think it is important for economists and libertarians to resolve this issue. Because, if I'm right, then, no, we are not paying three times. If the subsidies are a transfer then that's cuts into the amount of aid needed. Thus, if we get rid of subsidies, they'll need more aid to buy food at higher prices. (Which is fine as far as that goes - I'd rather pay directly than have the farmers take a cut first).

C'est la government.

C'est la government.

Beyond what is right and

Beyond what is right and wrong with the concept of farm subsidies, I think a strong case should be made about the West's subsidizing our own farmers to produce a crop AND the enormous amount of aid that is then sent to these countries as a result of their inability to produce against our closed and subsidized markets. We pay three times for our own stupidity:

- Once to our own farmers to produce a crop that can be done elsewhere at a lower price
- Once to our restaurants and supermarkets to buy a product whose price is artifically inflated as a result of these policies (i.e. sugar)
- Once to international aid organizations and/or 3rd World governments as a means of soothing our collective conscience. We pay to "fight" against the level of (curable) poverty we have inadvertantly helped to prolong by closing our markets to the products these people can and should produce.

More thoughts here:
http://www.briandavidcrane.com/index.php/weblog/comments/patriot_act/