Dubious Crusade: The Push for Agricultural Laissez Faire

Drive along any rural road in the United States. Take Arkansas Highway 9, for example, between the quiet villages of Williams Junction and Oppelo. As you wind through the cattle pastures, sod farms, and soybean fields, it is easy to feel that the land is bursting forth with natural fertility and abundance.

Now drive along a rural road in West Africa. To be more precise, start walking; many farms lie more than a day's walk from a vehicle-accessible road. As you wade through the first mudhole of your journey, you will notice that although soils are adequate and rainfall is plentiful the fields along the road seem to produce more weeds than crops. By the time you reach the second mudhole, you will have grasped an important truth about global agriculture: Productivity depends on more than the innate quality of the soil or the richness of the environment.

The proverbial amber waves of America's grain harvest have not just spontaneously sprouted forth from fruited plains and purple mountains. They have been nourished and enriched over time by .he investments of government, farmers, and businesses. These investments in agriculture and the rest of the economy have helped to. create markets, to connect Apply and demand, to stabilize agricultural production, and to raise incomes. Without such investments, the land along Arkansas Highway 9 would look much more like its counterpart in West Africa, and the wheat fields of Kansas and Oklahoma would still be part of the Great American desert.

In recent months, agricultural policy has occupied a prominent place in the headlines, dominating the July economic summit meetings. Unfortunately, most of these discussions of global agricultural policies and trade liberalization have focused on inefficiencies and distortions without considering the underlying causes of productivity or development. As a consequence, although the debate has grown increasingly heated, it still seems curiously empty.

Why Governments Intervene
Many Americans think of agriculture as a cardinal case of the irrationality of government programs and undue influence of special interests. Reading of vast subsidies to farmers, they are inclined to regard all farm policies as pay-offs. But though some subsidies are favors to groups of producers, there is a broader and more defensible logic to government intervention in agriculture.

Almost every country in the world has enacted some policies that intervene in agricultural markets. These policies generally stem from a conviction that basic foodstuffs and fibers are inherently different commodities from television sets or plastic toys. Food represents the most fundamental item of human consumption, particularly for poor people. In an extreme case, India's poor spend 75-85 percent of their earnings on food -- almost all on coarse grains and root crops. From the producers' point of view, agriculture involves great risk and unpredictability Individual producers account for minute percentages of total market supply, and price swings for agricultural goods can be very large, with disastrous effects on both producers and consumers. Government intervention arises fundamentally from the need to control those disastrous effects and to make possible the long-run development investments on which agricultural productivity ultimately depends.

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To address the particular problems of agricultural supply, countries around the world have adopted policies ranging from price supports to fertilizer subsidies; from cheap credit to food stamps; and from tax breaks to tariffs. Many governments pursue seemingly contradictory policies, such as guaranteeing high prices to farmers but subsidizing cheap food in urban areas. The United States, for example, operates an elaborate and confusing system to pay farmers high prices while simultaneously limiting production. In other countries, policies do not always benefit farmers; many developing countries tax their farmers heavily, while urging greater levels of output.

Taken together, the policies of different countries have undoubtedly had a significant effect on world agricultural production and trade. Some absurdities are apparent. The United States and Europe produce copious amounts of sugar from beets, at prices several times higher than world market levels for cane sugar. Japanese consumers view beef and oranges as luxury items, while Brazilian farmers struggle to find markets for the same goods.

Economists and policy analysts swell up with outrage over the inefficiency of such market "distortions." For a number of years, these academics have allied with political conservatives in calling for an end to agricultural market interventions in the United States and around the world. They have argued that the world would benefit from global "liberalization" -- an end to all countries' market interventions in agriculture.

But this single-minded focus on the evils of government price supports and farm subsidies misses the point. Policies that stabilize the market for agricultural product, have a less obvious yet crucial function: They encourage farmers and others to make long-term development investment.

Agricultural productivity reflects a broad range of factors, including a whole host of present and past policies, investments, subsidies, and market quirks. Yet policy analysts frequently ignore or misunderstand the importance of development investments in agriculture. Those investments, however, are central to agricultural development and crucial in understanding U.S. farm policy and international trade.

Agriculture's New Prominence in the Trade Debate
When the leaders of the major industrialized countries came to the United States in July for an economic summit, President Bush arranged to entertain them at a Texas barbecue and rodeo. The choice of festivities was presumably designed to add a Western flavor to the negotiations. But it also served as an appropriate introduction to the free-for-all and wrangling over agricultural trade that ensued during several days of summit meetings.

The attention to agriculture was surprising. In the past, agricultural policy has occupied a relatively minor position on the international economic agenda. Although farm programs and trade have occasionally surfaced as minor talking points, the summit meetings of industrial nations have previously focused on grander issues such as monetary and fiscal policy. So why, this year -- with tumult in Eastern Europe, mounting concern over the environment, and looming recession in the U.S. -- did the summit spotlight shine on the banal topic of agricultural trade liberalization?

The immediate reason is the impending deadline for negotiations in the Uruguay Round of the General Agreement on Tariffs and Trade (GATT). The GATT was one of the three international structures developed after World War 11 to foster global economic stability and growth. (The other two were the International Bank for Reconstruction and Development, now part of the World Bank, and the International Monetary Fund.) The GATT is not an institution so much as an agreement: a series of rules designed to define and encourage free trade among member nations. From the original 23 signatory countries, the GATT has now expanded to 96 members. The General Agreement has been amended several times since 1948, usually in response to changes in the global economy.

The latest set of negotiations, known as the Uruguay Round, was initiated in 1986. These negotiations are due to expire in December; hence the last-minute rush to resolve issues such as agricultural trade liberalization.

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Until the current round of negotiations, agriculture was effectively omitted from the GATE Because the United States and other founding countries initially insisted on the need to maintain elaborate domestic farm supports, agriculture was not covered under some of the free-trade provisions of the original GATT document.

In more recent negotiations, however, the United States has begun to press forcefully for including agriculture on the GATT agenda. Not coincidentally, the U.S. fervor for adding agriculture to the GATT has grown particularly acute with the strengthening of the European Economic Community (EEC) and its Common Agricultural Policy (CAP). The European policy has made it more difficult for U.S. farmers to export agricultural goods to European markets. In fact, the EEC has emerged as a formidable export competitor for the U.S. agricultural sector.

The United States has taken an especially hard line on agriculture in current GATT negotiations. The U.S. proposal, initially put forward by the Reagan administration and now championed by the Bush administration, would call for the total elimination, over ten years' time, of global subsidies and trade protection for agricultural commodities, food, beverages, fish, and forest products. The proposal would even extend to a standardization of all health and sanitary regulations. (See C. Ford Runge, "Environmental Risk and the World Economy," TAP, Spring 1990.)

The United States has particularly targeted the European Economic Community in the GATT negotiations, arguing that its Common Agricultural Policy is especially detrimental to free trade. U.S. negotiators contend that the CAP not only supports farmers, but effectively subsidizes exports. They maintain that the CAP's mechanisms -- import quotas and "variable tariffs" -- skew trade more seriously than the price supports and supply controls used as mechanisms of U.S. farm programs.

As expected, the U.S. proposal has encountered vehement opposition, from the Europeans and the Japanese in particular. The EEC has responded with a GATT proposal that would retain the status quo, while calling for producing countries to reduce commodity surpluses and trim back subsidies. Japan has called for eliminating export subsidies but insists that countries should be left free to pursue their own domestic programs, on the grounds that they constitute an integral element of national economic and social policy. A third proposal has been submitted by a coalition of fourteen agricultural exporting nations (Argentina, Australia, Brazil, Canada, Chile, Columbia, Fiji, Hungary Indonesia, Malaysia, the Philippines, New Zealand, Thailand, and Uruguay), known as the Cairns Group. The Cairns approach would set out mechanisms and targets for reducing global subsidies, with the ultimate goal of eliminating all such trade-distorting policies.

The battle in the Uruguay Round has pitted the United States against the European Community and Japan. The U.S. has continued to stress agricultural trade liberalization in bilateral and multilateral discussions. If, as seems likely, no agreement is reached before the December deadline, agricultural trade will remain a divisive issue for years to come.

Indeed, some observers have gone so far as to speculate that the whole GATT structure will collapse if no agreement is reached on agricultural trade in the current round. Critics of the process would not mourn its demise; they contend that the GATT structure has never been particularly useful, and that it has served merely as a convenient way for rich countries to control the trade policies of poor nations.

An End-Run Around Congress?
In some respects, it is both ironic and puzzling that the United States has emerged as the strongest advocate of ending agricultural subsidies and trade distortions. The irony lies in the fact that the U.S. at present has perhaps the most elaborate and contorted system of agricultural protection of any country in the world.

The peculiarity of the U.S. position is that the administration's proposals for dismantling agricultural subsidies through GATT would almost certainly fail in the U.S. Congress. Both the House and the Senate recently rejected a move to cut sugar subsidies in the U.S. by two cents per pound, a small cut that would leave U.S. prices at nearly three times the world market level. It is extremely unlikely that Congress would support measures that would cost American farmers a great deal more.

One interpretation of the Bush administration's stance at GATT is that the trade negotiations offer an end-run approach to eliminating domestic agricultural programs -- precisely because the administration cannot hope to persuade Congress to make deep cuts. The idea is that Congress would be more likely to accept a termination of farm supports if it came as a component of a global liberalization package.

Seen in this light, the U.S. position at GATT looks a bit like a Trojan Horse" for a major change of domestic policy By the time most Americans would notice the change (and how many people follow GATT negotiations closely?), the signatures would be dry on a treaty. Then the administration would argue that it could not abandon the GATT without bringing down the whole structure of international trade.

Amore generous view of administration reasoning is simply that Bush administration trade and agriculture officials genuinely believe that the U.S. -- and the world -- would benefit from a total liberalization of trade and a corresponding elimination of domestic farm programs.

Certainly there have been many outspoken advocates of this viewpoint, including President Bush himself. The typical argument holds that, although farmers in most of the rich countries would lose from trade and policy liberalization, society at large would gain from increased efficiency in allocation of resources. Proponents argue that expanded trade would lead to unspecified "dynamic" effects, such as greater economic growth.

A much-cited 1985 study, prepared by Australian researchers Rodney Tyers and Kym Anderson for the World Bank, argues that a global liberalization of agricultural policy and trade would bring net benefits of about $41 billion for the world as a whole, strictly through increased efficiency. The biggest share of this windfall would accrue to rich countries; but Tyers and Anderson argue that poor countries would also benefit.

Advocates of liberalization argue that it will also result in a more rational allocation of production. Under a global free trade regime, agricultural commodities would be produced in those countries that are most efficient producers. Ian Goldin and Odin Knudsen, advocates of trade liberalization, call it "a vital step to the development of more efficient and equitable international allocation of agricultural production."

Within the U.S. farm policy debate, a core of free-market enthusiasts contends that free trade -- and an end to domestic agricultural programs -- is essential. Perhaps the most forceful (and surely the most vociferous) of these is James Bovard, an associate policy analyst with the Cato Institute and the Competitive Enterprise Institute. In his rhetorical tirade, Farm Fiasco, published last year by the Institute for Contemporary Studies, Bovard Writes that "agriculture is a classic case of a brain-dead federal policy -- of a zombie government agency that appears destined to repeat the same bumbling steps forever." Bovard calls for dismantling the U.S. Department of Agriculture and incinerating "a large pyre of wasteful government programs." In the process, he makes a pitch for global liberalization of agricultural trade:

Free trade is the best hope for future world prosperity ... Government agricultural policy today provides the largest impediment to reform of the General Agreement on Tariffs and Trade and one of the most inflammatory items on the agenda of world trade negotiations. The sooner we get rid of agricultural programs, the safer the world trading system will be.

There is clearly strong support within the Bush administration for this position (although it is couched in less strident terms). Free trade is a major component of the Bush administration farm policy. Indeed, if the U.S. proposals are accepted at GATT, free trade will replace other components of U.S. farm policy -- at least within ten years' time. This makes it particularly important to subject the arguments for agricultural trade liberalization to some careful scrutiny.

Trade Theories, Agricultural Realities
The arguments for free trade are standard fare in Economics 101, and they are based on a well-understood area of trade theory that goes back to David Ricardo's work in the early nineteenth century. Under free-trade systems, countries (and regions within countries) specialize in production of those goods in which they have a "comparative advantage" in production. A country should export goods that it produces relatively efficiently, so as to import goods produced more efficiently elsewhere. The importance of "comparative advantage" is that this argument holds true even if a country does not have an absolute advantage in producing its export good at lower cost than other countries.

Trade theory holds that, in most cases, tariffs and other trade restrictions have negative effects for both the country that applies them and the world as a whole. Trade theorists can also demonstrate how other government policies -- subsidies, taxes, and almost any other market intervention -- distort trade and result in inefficient allocation of resources and welfare losses. In short, most such market interventions are very, very bad.

Theoretically, all this applies to agriculture. The problem is that no one knows what "free trade" means as it is applied to agriculture. It is impossible to produce a comprehensive list of policies and market interventions that affect agriculture. Some are obvious: Price supports and farm programs fall into this category. And it is equally clear that tariffs, quotas, and trade restrictions distort world agricultural trade.

Different policies affect trade in different ways. Tariffs, price supports, and import restrictions influence trade by altering prices. Direct income support for farmers can affect trade by changing the profitability of agricultural production and, consequently, the amount produced. Input subsidies and taxes, such as credit guarantees or fertilizer subsidies, alter farmers' costs of production and thereby affect supply. Marketing and transportation subsidies reduce the costs associated with selling goods. And long-term "structural" subsidies -- such as agricultural research -- will alter trade patterns in the long run by changing costs of production.

All these policies affect prices, production, and trade. But where do you draw the line? What about infrastructure investments? A government-funded irrigation system certainly affects agricultural production and markets. Rural electrification alters the production possibilities for farmers.

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Go back, for a moment, to Highway 9 in Arkansas. As you look over the landscape now, examine it for the evidence of development investments. The highway itself comes into view first -- a neat ribbon of asphalt that winds across twenty miles of farm and forest land, serving a relative handful of people (most of them in the county seat of Perryville, population 1,100).

Examine the small bridges and culverts that the road crosses -- built over Cypress Creek, in 1938; Harris Creek, in 1939; the Fourche le Fave River, in 1938; Nowlin Creek, in 1948. Along the roadside runs a set of power lines, erected and maintained by the Perry County First Electric Cooperative -- created through the Rural Electrification Act of 1936. Many of the houses scattered across the countryside were financed through the Farmers Home Administration. A few miles to the north of the road, the Arkansas River is kept within its banks (and made safe for barge traffic) by the McClellan-Kerr Navigation System, an elaborate chain of locks and dams.

Hidden from roadside view are some of the other investments that have shaped this Arkansas landscape. These have included massive government investments in education, research, farm extension services, market information, produce inspection, and veterinary health services. Investments in other parts of the country have also created markets for this produce -- from food stamp programs to Social Security, from railroads to defense spending. It is impossible to capture all of these policies in an assessment of overall agricultural protection, because the policies cannot be disentangled from fundamental national goals and priorities. And yet, to ignore these issues is to focus on a tiny subset of policies defined as affecting agriculture. The point is manifestly clear that agricultural production patterns in the United States and other countries have been determined by a huge range of past investments and market interventions.

Before the opening of the Erie Canal in 1816, for example, the American Midwest had a comparative advantage in production of furs -- and little else. Between 1816 and 1840, the U.S. built more than 3,000 miles of canals; and over the following two decades, the country added nearly 30,000 miles of railroad track. These massive investments -- and subsequent development expenditures by public and private sectors -- transformed the center of the country into a grain-producing region, the "breadbasket" of the world.

Historical investments of this magnitude have not been adequately considered in the GATT discussions of agricultural trade. The present debate focuses on current policies and their effects. These are measured in terms of Producer Subsidy Equivalents (PSEs), which are said to calculate the net effects of countries' agricultural policies on producer earnings. PSEs sum up the effects of subsidies, taxes, tariffs, quotas, and direct interventions in agricultural markets. Some calculations also include indirect subsidies for transportation, credit, and research. Others do not, and considerable controversy has arisen over the alternate approaches to calculating PSEs.

In the final analysis, PSEs and similar measures of "net protection" provide a useful but flawed measure of policy effects. PSEs consider only a handful of the most obvious forms of farm support. They do not generally incorporate the effects of economy-wide policies (exchange rates, interest rates, fiscal policy) or of complex indirect subsidies (infrastructure, construction, technology spinoffs).

Moreover, the most important problem with PSEs is that they measure flows of subsidies, rather than stocks. Solutions based on PSEs, therefore, tend to penalize current subsidies and to reward past subsidies. Past subsidies have been capitalized into roads, bridges, and infrastructure; education, research, and extension services; buildings, tractors, and drainage systems. This system benefits the Iowa farmer who has already built his sheds with subsidized credit, terraced his corn fields when support prices were high, and studied for a degree at a land grant university. It tends to penalize the Thai peasant who lives five miles from a paved road, plows her rice paddies with a water buffalo, and threshes her grain by hand.

Thus, if the United States were to eliminate all its farm programs today, it would continue to reap the benefits of past subsidies for years to come. Hundreds of billions of dollars in past investments return a kind of "interest" today in the form of higher productivity and expanded economic activity.

Some Lessons for World Trade
Two clear lessons emerge from this discussion. First, in the current fascination with laissez-faire economics, both rich and poor countries should remember that trade liberalization is not a substitute for development investments. Although free trade is undoubtedly a stimulus to economic activity so also are well-planned strategic investments. Historically, the public sector has provided many of these investments for agriculture, and government can continue to play a valuable role in the future. The public sector will continue to be the key actor in such areas as infrastructure development, environmental control, research, and extension.

The second lesson is that, even if successful, global agricultural trade liberalization will lead to a new kind of distortion in world trade. Although Ian Goldin and Odin Knudsen have described the liberalization process as a chance to achieve a "leveling of the international playing field," liberalization will actually create vast advantages for countries that have historically invested in their agricultural economies. The world's poorest countries, in Africa and Asia, will not benefit from these reforms; in fact, they may find themselves handcuffed more tightly. With little money available for investment, and with prohibitions against direct or indirect supports for agriculture, they will have few opportunities to create comparative advantages.

Moreover, specific provisions of the liberalization package will have profoundly negative effects in poor countries. Elimination of fertilizer subsidies, for instance, will pose grave difficulties for countries in Sub-Saharan Africa that are seeking to expand food production to keep pace with population growth.

Here in the United States, although there might be some aggregate gains in efficiency from trade liberalization, there would be many dislocations -- and possibly some hidden costs, as well. In California alone, terminating water subsidies would eliminate cotton production and generally decimate agriculture. And, without commodity price supports, many of the rural communities in the Midwest could wither and die. An end to farm programs would probably leave taxpayers and consumers with smaller bills, but the indirect effects of agricultural liberalization would be felt throughout the economy -- in transportation, processing industries, rural retailing, and other sectors.

To defend the historic role of government in agriculture is not to defend every detail of current U.S. agricultural policy. It would take a strong stomach, as well as a weak mind, to rush into unquestioning acceptance of the whole crazy-quilt of U.S. agricultural policies. A few follies stand out; expensive tobacco subsidies, and archaic sugar and dairy programs are noteworthy examples.

But much of the seeming absurdity of U.S. farm policies stems from the multiple and mutually inconsistent goals that we ask these policies to achieve. We expect agricultural policies to guarantee steady and stable production, relatively cheap food, high export earnings, the continued viability of small-town economies, the preservation of farmland, the nourishment of the world's poor, and environmental safety, to name a few major goals. These are inherently contradictory goals, and we should not be surprised if they occasionally lead us to policies that appear nonsensical.

In the grand scheme, however, U.S. agricultural programs place a modest burden on taxpayers and consumers. Depending on how you count, the cost in taxes and food prices is perhaps $200-$400 per household per year. For this price, we have a safe and stable supply of food, good years and bad; and we achieve mixed success in our other goals. Consumers in the U.S. spend slightly more than 10 percent of their earnings on food, only about 2 percent on bread and food grains. These percentages rank among the lowest in the world. If our policies are occasionally absurd, most of us have the luxury of laughing with full stomachs.

Trade liberalization is, on balance, a worthy goal. But in the enthusiasm for economic rationality and free markets, we should guard against making them goals in themselves. After all, the $41 billion in estimated efficiency gains from liberalization is still a small number -- less than half a percent of world agricultural production.

Nor should we forget the lessons of our past: Economic rationality and efficiency must be accompanied by thoughtful investments in development. These investments will take many forms in different countries, and the international system should include enough flexibility to accommodate varying approaches to development.

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