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Saturday, October 05, 2002

It's not just libertarians that get exercised about agricultural subsidies, less doctrinaire free-traders are just as scathing. This recent article in The Economist laments the demise of EU agriculture commissioner Franz Fischler's proposed reforms that would decouple CAP payments from production and decrease over time. A related article [subscription required] says much the same in more colorful language.

THIS summer the European Commission floated proposals for reform of the European Union's demented common agricultural policy. In many ways it was a timid plan, given all that is wrong with the CAP. The proposed reform aimed mainly to rearrange, not reduce, the mighty sums that the EU requires its taxpayers to hand over to farmers. The plan was nonetheless welcome. It would have broken the link between subsidy and production, tying farm aid more closely to rural conservation and—most important—reducing the extent to which the CAP dumps farm goods outside the EU, which drives down world prices at great cost to poor-country farmers.

CAP supporters tend to be those who receive payments rather than those who make payments so it's easy to suspect self interest in their arguments. $39 billion is twice as much as US agricultural subsidies, a lot of money in absolute terms, but small as a percentage of government spending so their argument is perhaps not as demented as it seems. Supporters also challenge the idea that the CAP harms developing countries:

How could anybody regard euro40 billion ($39 billion) a year of direct subsidy (plus twice as much again in higher prices demanded of European consumers) as too much to pay for producing food nobody wants, keeping third-world farmers poor and wrecking Europe's rural environment? Cheap at the price, say the ministers.


Anyway, the CAP's defenders continue, the broader effects of the policy have been misunderstood: “Some also claim that the CAP is responsible for causing hunger in developing countries. Nothing could be further from the truth.” How so? Well, the third world should really stick to subsistence farming, the ministers explain: all this haste to develop cash crops, move into export markets and rise out of poverty is not at all suitable for poor countries. By inhibiting their efforts at agricultural development, you see, the CAP lessens that dangerous temptation. In truth the CAP helps poor countries.

The Economist's snide commentary on the base idea that developing cash crops may not be a good way to develop poor countries conceals an interesting notion. Both supporters and defenders of the CAP claim that industrial agriculture generating surpluses for export is harmful, often citing environmental concerns as well as disruption of communities and cultures. It is also worth examining the idea that cropping one's way to wealth is possible.

There would have to be significant investment in developing countries to produce in quantity for export markets, something that would be neither quick nor cheap. The return on capital employed could be low, especially when compared to other uses for that capital within developing countries. More importantly, the market for food in the US and EU is likely to be stagnant or declining since their fertility rates and population growth are low and likely to decline further. The opposite is true for developing countries, that is where all of the population growth over the next 20 to 50 years is likely to occur. The UN estimates that food requirements will double in those countries. It may be all that developing countries can do to feed themselves. Surpluses, if any, would be exported to other developing countries rather than developed countries. It may be that the developed countries will still need to produce at a high rate for export to developing countries just to avert starvation. Unless the LDCs develop their industries and have money to buy food, a risky assumption, developed countries will not be paid for the food, it will be given in aid and so, in effect, subsidized by developed world governments and institutions.

When we look at world food production and markets over time it doesn't seem like there is a realistic chance that LDCs can lift themselves out of poverty with agricultural exports. There are other problems as well since LDCs tend to be clustered in warmer climate areas not always suited to crops adapted to the cooler developed countries. New cultivars might be required that can cope with the dislocation, probably GMOs, or developed countries might become markets for southern foods, a diet change in either case. Agriculture for export has an uncomfortable history in LDCs. Often the best land is used by large companies using modern techniques to produce foods that locals despise; 'gringo potatoes' in Peru for example. Agriculture requires water, often irrigation, and water is likely to be in even shorter supply than food in populous developing countries.

The EU defenders of the CAP may be making weak, self serving arguments but they may be right for the wrong reasons. Still, Fischler's proposals to break the link between subsidy and production and tie farm aid more closely to rural conservation seem worthy.


One curios association revealed at the recent WSSD and in subsequent writings is the apparent agreement between some libertarian free-trade thinkers and bureaucratic leftist fair-trade thinkers. Both have attacked rich countries for subsidies, tariffs and quotas which distort commodity markets to the apparent detriment of poor countries. Recent examples of this apparently contradictory cohabitation appear in a Reason magazine article:

Yet anyone who considers the ways in which the rich and powerful use government to get what they want will understand that fighting for the poor and downtrodden requires defending the free market. Consider the subsidies and trade barriers that benefit affluent Americans and Europeans at the expense of producers in developing countries who are struggling to eke out a living.


The protesters who march under the banner of the Anti-Capitalist Convergence may not be inclined to hear this message when it comes from representatives of organizations they see as irredeemably evil. But perhaps they'll listen to Oxfam International, a group with impeccable "progressive" credentials that is "dedicated to fighting poverty and related injustice around the world."

In a new report, Oxfam shows how the injustice of U.S. cotton subsidies contributes to poverty. "Cotton subsidies in the U.S.," it argues, "have been the single biggest force driving down world prices."

Doctrinaire libertarian free-traders might benefit from looking at other Oxfam reports since their opposition to economic controls is selective and inconsistent. A recent article in Spiked dealing with coffee prices gives a fuller perspective:

But for the 25million small-scale farmers who produce most of the world's coffee beans, the price of the commodity is a far more serious issue. A slump in the price of coffee, to just over half the level it was at three years ago, has devastated people's lives. In real terms, the price of coffee is just one quarter of its level 40 years ago.

New sources of production in Vietnam and higher productivity in Brazil have helped create a glut in the coffee market. And the slump in prices has had a serious impact on countries that are heavily dependent on coffee production, including Burindi, Ethiopia, Rwanda and Uganda.

Oxfam's position on coffee, a crop not produced in rich countries, advocates price controls to redistribute wealth from rich consuming countries to poor producing countries. Subsidies, tariffs and production quotas as well as moral extortion are the tools to effect redistribution.

Oxfam's apparent inconsistency is not the interesting part of this, politics is not about consistency. The interesting part is that if all the world's cotton, like coffee, was produced in poor countries they would still be poor. Libertarian bleating about rich world tariffs, subsidies and quotas misses the mark by failing to understand the free-trade system they advocate. Commodity production is not the path to wealth. Having a comparative advantage in the production of inherently low priced commodities is cold comfort when the tiny profits are counted, especially since it is a risky activity subject to failure due to a host of factors such as weather and disease.

Oxfam's notion of regulated prices is not the road to prosperity and development either. It is institutionalized poverty. As Oxfam notes, the price of coffee in real terms has dropped steadily over the past few decades, a trend we see with other commodities and resources, everything from metals to natural fibers. The idea that poor countries can follow the same path of commodity trade to wealth that rich countries followed in the past is false today and on closer examination is a myth, it didn't happen that way for rich countries either.

The real money is made by adding value to commodities. Make and sell cloth rather than cotton, clothing rather than cloth. Sell candy rather than cocoa, furniture rather than logs. Poor countries require a complex system of property rights, laws and capital investment to develop manufacturing capabilities which add value to their commodities. This is the real battle ground for subsidies, tariffs and quotas as well as related trade controls such as patents. In parallel poor countries would benefit from pursuing modern industries such as software development and business services rather than agriculture as the road to development. Software development is intellectually less demanding than farming and less capital intensive. There are higher margins and more room for competition. They have comparative advantages in this labor intensive activity since their income requirements are lower. India and some Asian countries are showing the way.

Friday, October 04, 2002

Bizarre. I just discovered that I have an account with blogspot and created this blog sometime in the forgotten past.

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