Agri-Subsidies, Redux

A lot of good and interesting feed back on agri-subsidies. Let's go through the commentary.

One comment reads:

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.

Just to get this out of the way: it may be the case that an individual may mean to cover all types of economic policies that disadvantage the third world by the term "subsidies," but if so, what a sloppy use of language. The word "subsidy" has a specific economic meaning, and it is best to use it by its economic definition.

Megan McArdle writes:

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.

I should clarify that my original use of the word "subsidy" did not cover Megan's last point, paying producers not to produce. So that's a side issue (economically, not politically). Come to think of it, it seems fair to say that this, too, would have a neutral effect on the third world, provided that the market was open to them to sell at what would now be a higher US price. If they weren't so allowed they certainly would be hurt, but not because of the transfer from US taxpayers to farmers. They would be hurt from the closed market, which is economically independent from the payment.

Nonetheless, Megan makes the point that some non-trivial populations in third world are hurt by the true subsidies. Undoubtedly, this is true, but the question then becomes: what is the net effect when you balance these people vs. the others who get cheap food?

Well there seems to be some controversy on this point. One comment:

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.

Robert Lawson:

I think this depends on whether the third world country is (or rather would be under free trade) a net importer or net exporter of the food in question. If a country is a net importer of the food being subsidized, then they are better off (in the usual Marshallian way of things). The gains to the consumers in the form of lower prices/more food consumed will exceed the losses to the domestic producers in the form of lower prices/less food sold. If it is a net exporter, then the country is worse off. The gains to the consumers will be less than the losses to the producers. Inasmuch as many third world nations are (or rather again would be under free trade) net exporters of food, then they are probably worse off as a result of the subsidies. (This is another assumption, but it seems reasonable to me.) It is conceivable that the first world could be subsidizing food that other countries would normally import. In this case, they gain by receiving the dumped products.

I think the data are good enough to conclude that the third world are net importers, meaning that by classic analysis, these subsidies are a net transfer to the third world.

So the whole debate turns on the question of whether the third world's status as net importers is an artifact of the subsidies. The argument is that the third world would be net exporters if the subsidies disappeared. One commenter:

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.

David Tufte of Voluntary Exchange:

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.

Mark Steckbeck:

For example, if the subsidy paid to U.S. farmers means that the world price of, say, lettuce, is reduced enough to force lettuce farmers in developing countries out of business and into producing other goods and services for which they do not have a comparative advantage, say, grapes, the spending power of lettuce farmers in developing countries is reduced. If the savings to residents of developing nations from the U.S. lettuce subsidy is, say, $10 billion per year, and as a consequence of this subsidy lettuce farmers in developing countries are forced to produce grapes or other goods and services, and thus find their spending power reduced by, say, $1 billion, then the subsidy, although reducing the farmers’ income, is on net beneficial to foreigners. If, however, the farmers lose $11 billion in aggregate spending power as a result of the subsidy, then the subsidy is on net detrimental to residents of developing nations.

I suppose it's possible that these subsidies are so distortionary that they could change the arrow of flows between the developed and the developing. And at the end of the day the answer to that question brings the answer to my original question. However, without anyone producing any data supporting this effect, I'm left to conclude that it is ambiguous, at best. Which leads me to conclude that I'm correct in my notion that libertarians should back off this one (possibly) meaningless angle, and pursue the less controversial remedies for improving wealth in the third world: open markets with free trade, the rule of law, education, ending the AIDS pandemic.

(To clarify, it certainly is a good thing to eliminate the subsidies, but not because it would help the third world.)

Thanks to all who commented and emailed.

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Paradoxically, the abolition

Paradoxically, the abolition of EU subsidies, which are considered much more egregious than US subsidies by anti-subsidy activists due to their much larger size, would cause an unambiguous terms of trade deterioration for all in poor nations, due to LDC farmers having preferential market access to the EU, as I explained in a recent post. I oppose both preferential trade and agricultural subsidies, but those are the facts.

Just to get this out of the

Just to get this out of the way: it may be the case that an individual may mean to cover all types of economic policies that disadvantage the third world by the term “subsidies,” but if so, what a sloppy use of language.

No, I was using it to cover all types of policies that are meant to help existing farmers. Many of which happen to be the same policies that disadvantage the third world. Which is the point being made by commentators who decry those policies.

The word “subsidy” has a specific economic meaning, and it is best to use it by its economic definition.

Well, consider this:
http://en.wikipedia.org/wiki/Agricultural_policy

Another major U.S. subsidy program is the "conservation reserve program" (CRP) which leases land from producers who take marginal land out of production and convert it back to as near its natural state as possible, by planting native grasses and other plants.[emphasis added]

In the first world, agricultural subsidy programs increase the local price of agricultural goods. That is their primary purpose. As a secondary effect, sometimes they reduce the cost of goods being sold to the third world. That is, if the overproduced goods are exported rather than merely destroyed or prevented from existing in the first place. It's not at all clear that the benefits to the third world of these policies exceed the costs.

Here's a mini-reality check

Here's a mini-reality check on the issue: A loaf of brown bread costs US$0.50 in South Africa.

http://www.picknpay.co.za/ (choose "Click Here to Shop Online" and browse some prices without logging in). Exchange rate can be found at http://www.xe.com/ -- it is US$ 0.15 at the time of posting. Granted, South Africa is not your typical developing country, but a lot of sub-Saharan food prices derive from there. In my experience, the lower cost of land (not just agricultural land, but commercial property) and labor influenced prices much more than international policy. An economist could no doubt enlighten me on how global nominal prices could be related to local purchasing power prices here.

I owned a dairy there, and my main interest in the dropping of subsidies was that I could use the export of specialty cheese to the US to build a nest egg in a real currency. If it had worked, we would have bought more equipment and hired more local workers (but very cautiously, given the disincentives to hiring from the SA government policies), set up a US distribution company and shifted profits from the SA operation to the US operation.

As an argument against hysteresis, family farms and mom & pop businesses make a point of staying nimble. We ran our business through three radically different regimes, went through a period of 30% mortgage interest rates, droughts, and nightly farm attacks. You know that your investment horizon is very short when 5% of your neighbors are murdered each year. When it comes to global political trends, you don't build mansions on quicksand.