Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Tuesday, February 24, 2009

Ag Subsidies From the Developing World's Perspective

Hi Everyone,

In a comment to the thread "The Problem With the Central Valley" I asked LTG, in the interest of an exchange of ideas, to list the best reasons he can think of for supporting ag subsidies broadly defined.  I thought I would get the ball rolling with what I understand to be the biggest problems of ag subsidies from the point of view of the developing world.  I'm not an expert on the political economy of agriculture but I have a kind of hobbyists interest in it and I'd like to think I've got a half way decent understand of the basic political and economic issues at play.

1)  Dumping and import restrictions:  When developed countries subsidize and otherwise protect their own ag sectors it directly hurts farmers in the developing world in at least two ways.  First, it artificially lowers the costs of ag products from big farms in the developed world which gives them an unfair advantage in the world markets - this is dumping.  Second, it may actually lock out imports from developing country producers, cutting them off from potentially lucrative markets.  

2)  Debt:  Often, the governments in developing countries respond to the ag subsidies in the rich countries by instituting their own subsidies.  This was a popular strategy in the 1960s and 1970s.  The problem is that subsidies cost a lot of money.  Developed countries can pay for them through tax revenue but many developing countries had to borrow the extra cash.  When interest rates spiked in the late 1970s and early 1980s, these countries found themselves in debt crises.  Many governments were destabilized by this.  

3)  Neo-feudalization:  In his classic book about the political economy of agriculture in Africa, Robert Bates described how government agriculture projects designed to encourage commercial agriculture through subsidies and price controls, led to the emergence of rural elites that had not existed before.  These are not the old tribal and clan elites but rather commercialized land owners with vested interests in perpetuating the costly subsidy programs.  The problem here is that many theorists of democratization - see especially Barrington Moore - have argued that the presence of an entrenched agrarian elite in rural areas can hinder democratization.  

4) The Incentive to industrialize:  If developing countries cannot succeed trading agriculture products that fit their comparative advantage, they turn to industrialization as a means to successfully engage with the globalizing market.  The problem is that since many of these countries may not have comparative advantages and factor endowments that favor export oriented industrialization, they have to subsidize the new industries.  This costs more money and brings on more debt.  

5) Migration:  As ag subsidies in the rich countries undermine the profitability of farms in developing countries, the millions of rural poor who had eeked out a living farming are forced off their farms.  They migrate to cities within their own countries leading to more pollution and urban overcrowding and poverty.  They also may migrate to adjacent rich countries.  This is what we see in the US.  Many of the illegal immigrants that come to the US from Mexico and Central America are people who were forced off their farms back home and come to the US looking for work - often on our own subsidized farms.  

There are more reasons but this should get us started.  Enjoy!


The Law Talking Guy said...

A few things spring to mind in this list.

1. This list of harm caused by agricultural subsidies are generalized and don't seem to take into account the level of the subsidy. Presumably somewhere between a penny an acre and a dollar a banana these ill effects happen, but how much and how bad is not obvious without a ton of data. Assuming that US subsidies are high enough and in the right kind of crops to cause all this harm is not clear.

2. Presumably the harms RBR lists are aused by the crops or food being provided to developing countries cheaper than their farmers could sell it (absent subsidies of their own). The bottom line is that these proposals would, at least in the near term, raise food prices , and the benefit of more prosperous farms will depend on food prices remaining high. That harm is worth contemplating.

3. US Agricultural policy is more than 150 years in the making. Changing it tomorrow will cause great economic hardship and dislocation.

4. Like all markets, the market for food has a lot of problems. Bad quality food and lack of information abound. There are risks to importing food from places with no environmental, health, or safety regulation or enforcement that we can rely on. A tendency of bad food to drive out good food is also seen in our markets. If we started rating vegetables and fruits by taste and freshness, the producers would revolt and the importers would collapse.

5. We are basically talking about a tradeoff between the certainty of pain now for a large number for the theoretical hope of a brighter future for a greater number. Count me as a trade pessimist: I believe the pain will come, but I am less sanguine about benefits supposedly to flow later.

So I get what you're saying, theoretically, about the harms and the benefits. But I can't imagine that anything other than a very, very gradual change would do any good.

Raised By Republicans said...

It's not that the American subsidies are keeping prices lower. They are keeping them higher for Americans. When you factor in the taxes that pay for the subsidies into the price of the food item, the prices are higher they appear. Ending the subsidies would rationalize the price - make it more transparent and accurate.

Part of the long term problem also is that after years of dumping many of the farmers in the developing world have shifted over from farming to work in the cities (the Migration and industrialization points).

The Freshness argument: LTG keeps coming back to this argument that foreign food is bad food because it's not fresh and vine ripened. So we should subsidize farms to encourage higher quality food. But this is a meaningless argument for two reasons.

First, for anyone who doesn't actually live near the subsidized farms they are not choosing between vine ripened American food and ship or truck ripened foreign food. They are choosing between truck ripened food from two competing sources - one American and one foreign. I live just under 2000 miles away from Modesto, CA. The agricultural areas around Monterrey, Mexico are actually about 500 miles closer to me.

Second, if the food quality really is that different then the demand for local food products and the their price will reflect that difference in quality. If people are willing to pay a little more to get locally grown food, then these farms would not need subsidies. If people are not willing to pay a little more to get locally grown food then subsidies are essentially hiding the extra costs and tricking into buying products they would not otherwise choose if fully informed about the price.

Finally, there is an implied derision directed against the developing countries in LTGs quality argument. The implication is that these countries don't enforce safety and quality regs and will never be able to even if their ag sectors became more profitable. But even if we assume this to be true, we could still save money by subsidizing these countries enforcement efforts - or even by simply taking over the enforcement efforts ourselves at the point of entry. Sure there would be a period of transition but it's not like Bush administration was enforcing our consumer protection laws anyway so think of the transition like a Republican Presidency. This too shall pass.

The Law Talking Guy said...

Subsidies may or may not keep prices higher for Americans, but you don't address the argument that the cheaper food being "dumped" abroad is actually positive for many poor third world dwellers.

The Law Talking Guy said...

Although you are in Iowa, RBR, I do not think that qualifies you to speak "from the developing world's perspective." =) Iowa seemed rather prosperous when I was out there.

Actually, one of the bigger problems facing farmers in Central America and Mexico is the introduction of GM crops which allow neighbor to outproduce neighbor, and which cross-polinate (esp. corn) and destroy traditional landraces. The GM crops are good in that they increase yield, but they are economically disruptive, too. This phenomenon would increase with any additional shift of agricultural production to Central America.