Crumb Trail
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Sunday, August 31, 2003

In Countdown to Cancun Kevin Watkins, head of research at Oxfam, repeats the muddled nonsense about agricultural subsidies so often heard of late. Using a combination of half truths and carefully selected case studies Watkins constructs a completely false picture of current agricultural practice in the developed world, a wildly unlikely scenario for unsubsidized free trade and a deceitfully false restatement of reform commitments.

Nobody gets rich from agriculture. Food is cheap and getting cheaper like all commodities. If the developed world bought as much food as the LDCs could produce and only produced to make up the shortfall the LDCs would still be poor. This is perfectly clear when we consider crops such as coffee that are not produced in developed countries. Oxfam's own reports document this and propose quotas, tariffs and subsidies for those coffee producers.

We have to think dynamically to see how changes in trade relations will turn out. If cotton, one of the commodities Oxfam bleats about, was no longer subsidized and so no longer produced in developed countries the demand for cotton would raise the price. But that would cause more cotton to be planted wherever it can be cheaply produced. Soon, as with coffee, there would be too much cotton and the price would fall below production cost. In time production would fall to meet demand and the price would be that of the lowest cost producer, the poorest of the poor. And they would stay poor.

Worse, those LDCs would face increasing costs of production over time and degraded environments as they exhausted their soils, used their water and plowed their meadows to produce a low priced commodity. There is a fundamental asymmetry when the environmental cost of producing a commodity occurs in a different place than where the commodity is consumed.

The relationship of agricultural production to environmental management is what US/EU subsidy reform proposals that decouple subsidy from production address. If the environmental management costs of agricultural products were included in their prices food would be too expensive for poor people to purchase. Those poor people could be directly subsidized by their governments, given direct aid to buy food. But unless there were trade barriers cheap food would be imported from countries less concerned about their environments. To keep domestic food prices low farmers would be paid to do environmental management, subsidized at a flat rate independent of their production levels.

There are many defects in current US/EU subsidy programs that would be improved by changing from subsidy of production to subsidy, in effect, of land. The subsidies would be more evenly distributed among farmers. Market distortions that cause excess production of subsidized crops would end. Farmers would make their planting decisions based on their land's capabilities and market needs rather than government programs.

A sensible plan for agriculture that addresses the whole system needs to pay farmers enough to live well, manage the environment well and produce proper amounts of food and fiber. Each country needs to do this, rich or poor. Viewing food only in economic terms, as a commodity, leads to nonsense policies that don't achieve the required outcomes.

Seeking to grow richer from the export of cheap commodities is the wrong policy. The sensible thing to do when you have easy access to cheap and abundant raw materials is to develop value added products made from those materials. If you have cheap cotton then make cloth, clothing and industrial products for sale to rich markets. If you have cheap raw coffee beans then roast them, grind them, package them and advertise them to rich markets. Build brand name recognition and loyalty. The French don't sell grapes, they sell wine. Vertically integrating diversifies the economy and builds manufacturing capabilities that become self sustaining and spawn new applications. It provides jobs for different skill sets and creates a more robust and resilient society. If there are trade barriers for these value added goods then that is where pressure and negotiation should be applied.

posted by back40 | 8/31/2003 09:33:00 PM


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