Farm support's deep roots

Jun 22nd 2005
From The Economist Global Agenda

A new report from the OECD indicates that progress on reducing agricultural subsidies in the rich world has been glacial. Unless governments get tough with their powerful farming lobbies and cut their supports, farm subsidies could stymie further progress on world trade liberalisation

LITERATURE about farming often gushes about living in harmony with the eternal rhythms of nature. “Eternal” certainly seems the right word to describe the generous subsidies that rich-world farmers enjoy. For a group whose population is rapidly shrinking, and whose products have been declining in value for centuries, farmers wield an astonishing amount of political power. Though farm subsidies are the bane of liberal and conservative economists alike, farmers have survived decades of trade liberalisation almost unscathed, and may well emerge from the current Doha round of World Trade Organisation (WTO) negotiations with little alteration to their pampered existence.

A new report, released by the Organisation for Economic Co-Operation and Development (OECD) on Tuesday June 21st, shows just how little progress has been made on liberalising agriculture over the past two decades. While the value of farm protection in OECD countries has fallen from 37% of farm receipts in 1986-88 to 30% in 2002-04, progress has faltered since the late 1990s. The OECD estimates that the value of support to its producers was a staggering $279 billion in 2004.

There is, though, wide variation between OECD members. Producer support is worth less than 5% of farm receipts in New Zealand and Australia, but amounts to roughly 20% throughout North America, 34% in the European Union, and a whopping 60% in Japan. And while the overall value of support has fallen from 2.3% of GDP in 1986-88 to 1.2% now, the reductions have been uneven (see chart above). Canada and Mexico have made deep cuts in their farm supports, for instance, while Turkey has actually increased its supports.

While progress on reducing support levels may be painfully slow, most governments have managed to reduce the more distorting kinds of protections. Instead of subsidies tied to production levels, which were responsible for the infamous mountains of butter and lakes of wine that used to plague European agriculture officials, countries are slowly moving towards compensation based on acreage or historical support levels. In 1986-88, the majority of OECD countries had 90% or more of their support programmes linked to either current outputs or inputs; that number has now fallen below 75% in most of Europe, though it remains above 90% in Japan and South Korea.

But agricultural policies in rich countries still distort markets at home and abroad. Worse, they hurt the poor. Price-support mechanisms make domestic consumers pay more for their food, hitting low-income families the hardest. And for farmers in poor countries, OECD agricultural policies are disastrous. If those farmers aren’t being kept out of export markets by quotas or tariffs, they are being undercut in domestic markets by heavily subsidised produce from the developed world. While some have argued that rich-world subsidies are a net boon to poor countries because they provide cheap food to the masses, in those countries the poorest are often rural farmers, whose lives would be improved by higher prices for their products.

Even where distortions have been reduced, legislators have passed up the opportunity to tailor supports to specific beneficiaries or policy goals, such as environmental protection. Instead, new programmes have mostly been drawn along broad lines, the better to maintain the political support of farmers. Payments for acres of land or head of cattle may be better than compensation based on bushels of wheat or gallons of milk, but they still distort the economy, and give farmers incentive to cultivate marginal land.

Farm power

Europe, in particular, is struggling with its cosseted and deeply entrenched farm lobby. France has historically been the biggest obstacle to reform; almost half its area is farmland, and its farmers defend their subsidies vigorously. Thanks to such obstructionism, the EU’s common agricultural policy (CAP) accounts for nearly half of its overall budget, even though only 4% of its population still works the land. Though there has been some modest progress on reform in recent years, disputes over the CAP are still acrimonious. A row over its funding was the main reason for the collapse of the EU summit in Brussels last week.

America’s agricultural mollycoddling is less egregious, but egregious it still is, and the farm lobby is just as determined to keep the money flowing. In 1996, Bill Clinton signed a farm bill that was supposed to lead to the gradual elimination of agricultural protections. Mr Clinton is long gone, but the protections aren’t—indeed, the 2002 farm package signed into law by George Bush nearly doubled the level of federal subsidy.

This has not bought Mr Bush peace with the farm lobbies, however. Sugar growers are currently working overtime to derail the Central American Free Trade Agreement (CAFTA), which the president is trying to get through Congress before the July 4th holiday. Though other agricultural producers are actually supporting the agreement, the sugar lobby has a good chance of picking off enough Republican legislators to defeat it.

CAFTA is too small to make much difference to the American economy one way or the other, though passing it would give a huge boost to the other countries in the agreement. But politically, failing to pass CAFTA would be a deep blow to the Bush administration. And if the administration cannot manage to pass a small regional trade pact, prospects will look a lot dimmer for securing a substantial new agreement in the Doha round.

Nonetheless, the OECD is looking to the WTO for further progress on subsidies. A hopeful sign is that agricultural protections are beginning to be disputed at the WTO. Since last year Brazil has won WTO challenges against American cotton subsidies and EU sugar protections, on the ground that they far exceed established limits. This week the EU announced plans to cut its sugar subsidies by 39%, despite stiff resistance from uncompetitive European producers. Now that the Uruguay round's “peace clause”, which protected farm subsidies from challenge provided they did not exceed 1992 levels, has expired, rich-world subsidies are vulnerable to further onslaught.

But a successful challenge at the WTO does not guarantee the rapid dismantling of farm supports. More than a year after being told to scrap its cotton subsidies, the Bush administration still hasn't put forward a plan palatable to both its own producers and those in Brazil, which is threatening to retaliate by removing patent and copyright protection for American products. Perhaps farmers can be forgiven for thinking that they have eternity on their side.

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