Back to the Main ET Page

Economics focus

Punch-up over handouts 

Mar 23rd 2005

The Economist print edition

Rich countries are under pressure to end their farm subsidies. Might some poor countries be sorry to see them go?

BURKINA FASO, in west Africa, depends on cotton for about 40% of its merchandise exports. Alas, prices are not always what they might be. According to the International Cotton Advisory Committee, a body that advises governments, world prices would have been about 26% higher in the 2001-02 season were it not for the $4 billion in subsidies America lavished on its cotton growers. Farming upland cotton in the United States was once about separating lint from seed. Now, it is a convenient method for parting the American taxpayer from his money.

The pickings may soon become less rich (see article). This month the World Trade Organisation (WTO) upheld its ruling that such subsidies distorted trade and breached limits agreed in 1994. Mr Bush's budget for the coming fiscal year proposes deep cuts in farm subsidies. Furthermore, a promise to eliminate rich countries' export subsidies (eventually) and to make a “substantial” cut in other kinds of handouts was vital to reviving the Doha round of global trade talks last summer. It was also agreed that the grievances of Burkina Faso and its neighbours should be addressed “ambitiously, expeditiously and specifically”.

But as the round inches forward, some free-traders are troubled. Jagdish Bhagwati, an economist at Columbia University and author of a book defending globalisation, is one of them. Agricultural subsidies are certainly undesirable, he wrote recently in the Far Eastern Economic Review. But the claim that removing them will help the poorest countries is “dangerous nonsense” and a “pernicious” fallacy.

Arvind Panagariya, a colleague of Mr Bhagwati's at Columbia University, agrees*. His argument rests on a surprising observation: most poor countries are net importers of agricultural goods. A study in 1999 found that 33 of the 49 poorest countries import more farm goods than they export; 45 of them are net importers of food. Subsidies depress the price of agricultural products on world markets. That hurts rival exporters, as Burkina Faso can testify. But importers gain.

By the same logic, the repeal of subsidies should benefit exporters but hurt importers. In a paper published in 2003†, Stephen Tokarick, of the International Monetary Fund, estimated by how much. He reckoned that, if OECD countries were to scrap their subsidies (but keep their tariffs), Brazil and Argentina, both strong agricultural exporters, would gain. But the rest of Latin America would lose $559m a year (in 1997 dollars). India would benefit a bit, but the rest of South Asia would be $164m worse off. Sub-Saharan Africa would lose $420m, while North Africa and the Middle East would face a cost of $2.9 billion.

The impact on different households within a poor country is another question. In a recent book‡, William Cline, of the Centre for Global Development, an American think-tank, points out that poor households tend to be rural, and rural households tend to sell more food than they eat. For them, rising farm prices are to be welcomed. It is the urban poor that should worry—and maybe the rulers of poor and fragile nations, who have traditionally striven to keep food prices low. Hard-pressed peasants are less of a threat than disgruntled city folk within a stone's throw of the presidential palace. An end to OECD farm subsidies, however, would transfer money from town to countryside.

If such a transfer is to be welcomed, Mr Panagariya asks, why wait for OECD countries to cut their subsidies? Poor countries could take matters into their own hands by slapping a countervailing tariff on the subsidised produce. That would raise the domestic price of food, benefiting rural households. It would also be a neat way of raising revenue at rich countries' expense.

Such a tariff would only raise farm prices at home, of course. Mr Cline thinks most poor countries would benefit from a rise in the relative price of agricultural goods in the world market. He argues that many poor countries possess an underlying comparative advantage in farm goods. Yes, they tend to be net importers of food. But that is deceptive. Thanks to the large aid flows such countries receive, they tend to be net importers of everything.

The privilege is mine Mr Panagariya again demurs. He points out that many poor countries enjoy privileged access to the sheltered markets of the European Union. Thus they already enjoy higher prices for their exports than they could expect to find on the open market.

The sugar producers of Mauritius, for example, sell their produce behind the EU's steep import barriers at three times the market rate. By some estimates, the island owes almost 30% of its export earnings to the preferences the EU bestows upon it. But these privileges are not without cost. The World Bank reckons that every $1 that a country such as Mauritius gains from its trade privileges costs the EU and the United States $6. As an aid programme, it is not terribly efficient.

The paradox of the Doha round is that the members fighting hardest to retain subsidies, such as the EU, are those with most to gain from abolition. Poor countries, on the other hand, stand to gain more from cuts in tariffs. According to Mr Tokarick, the abolition of rich-world tariffs would yield $12.5 billion for poor countries, with no regional losers. If they also liberalised their own agricultural trade, they would reap another $21.4 billion.

America's cotton subsidies deserve to be addressed “ambitiously, expeditiously and specifically”, as the WTO agreed last summer. But no less ambition and expedition must also be mustered in the fight against tariffs.

* “Agricultural liberalisation and the developing countries: debunking the fallacies”. Available at http://www.columbia.edu/~ap2231/

† “Measuring the impact of distortions in agricultural trade in partial and general equilibrium”. IMF working paper 03/110

‡ “Trade Policy and Global Poverty”. Centre for Global Development and Institute for International Economics, 2004

 

.