The Issue of Support for Agriculture

The arguments in the two foregoing lists usually would be considered in the context of proposals for individual policies or programs. There is another class of reasoning that applies to the sector as a whole. If the discussion about the uniqueness of the agricultural sector in Chapter 2 is correct, especially in the sense that allowing agriculture to falter would create irreversible labor-market effects and impose high costs on all of society as a result of excessive rural-urban migration, then there are grounds for considering a policy of generalized support for the sector. Indeed, almost all of the more industrialized economies subsidize their agricultural sectors, many of them extensively. The irony is that the less-developed economies, which have a greater problem of rural poverty, often implicitly tax their agriculture rather than supporting it. Part of the historical reasoning for this strategic approach was reviewed in Chapter 1, but today it appears inappropriate in most instances.

The World Trade Organization (WTO) accords make provision for domestic support for agriculture, as long as it does not distort prices and markets. The issue is the extent to which developing countries can and will avail themselves of this opportunity. The case for generalized support to agriculture has been advanced not only by politicians but also in the economic literature. Peter Timmer has written:

Because the [international] prices... are depressed by the dumping of surplus commodities generated from subsidies in rich countries, the undervaluation of the agricultural sector in poor countries is even more severe than would be apparent in a world of free trade. . . .

It has long been clear that political discrimination pushes the domestic value of agriculture in developing countries below its value in markets at the border. .. . however .. . border prices themselves undervalue the contribution that agriculture can make to growth in the early stages of development. If agriculture is critically important to stimulating and sustaining rapid economic growth, those countries that fail to correct this discrimination exact a heavy toll in economic performance. Furthermore, the poorest countries will suffer the most.. . .

There is widespread agreement that agricultural protection in rich countries depresses world prices for many commodities. .. . World prices for staple grains do not reflect the importance to countries of maintaining food security. . .. The special role of the agricultural sector in alleviating poverty is ignored in the market value of agriculture . . .7

If these arguments for support for the sector in general are accepted, then the operational questions become the following: (a) how much support is appropriate?, and (b) what are the most efficient ways to extend the support?

In asking how much support is appropriate, it must always be borne in mind that part of the population must pay for the support. It is the urban population and, in terms of sectors, mostly the service sectors who would pay, either through

7. Reprinted from Food Policy, 20(5), C. Peter Timmer, 'Getting agriculture moving: do markets provide the right signals?', pp. 456 and 459-561, Copyright (1995), with permission from Elsevier.

higher food prices or through higher taxes, or through both mechanisms. This consideration alone will tend to limit the amount of support for the sector, through the normal workings of the political process. In reality, net support to agriculture has tended to be very low and even negative in many developing countries, especially when the effects of exchange rate and tariff policies are taken into account.

If agricultural support is proposed in order to offset the consequences for commodity prices of international subsidies, then calculations of the quantitative effects of those subsidies can be made, on the basis of published estimates of their effects on world prices, combined with data on the quantities of production of the affected commodities in the country concerned. For example, an OECD study concluded that eliminating agricultural subsidies in all countries would raise the price of wheat by 30%, of coarse grains by 19%, of sugar by 59%, of tea by 17.5%, of dairy products by 53%, and of cotton by 16%. Some other commodities' prices would rise by less, for example, rice by 6%, and some would decline (mainly coffee and cocoa).8 More recent estimates show distortion levels that are lower but still significant. As of 2000, elimination of all subsidies in wheat would have raised its international price by 18%, in rice by 10%, in other grains by 15%, in oilseeds by 11%, in sugar by 16%, and in meat and milk products by 22%.9 Accordingly, for a wheat-producing country, multiplication of its average quantity of wheat produced by 18 % could constitute one estimate of the amount of support for agriculture. Of course, other commodities should be included in such calculations as well - and the estimates of the international market effect of subsidies would have to be updated.

If poverty alleviation is to be accomplished by programs and policies that stimulate agricultural growth, rather than transitory forms of assistance, then a possible indicator of the fiscal magnitude of the programs would be the 'poverty deficit', namely the difference between poor households' income levels and the poverty line, or minimum acceptable income level, summed over rural households. For establishing the magnitude of support for specifically agricultural programs, the relevant sum should be the difference between the poverty deficits in rural and urban areas.

These are illustrations of possible ways to make calculations of budgetary magnitudes that would correspond to the concept of generalized agricultural support, as justified by the arguments in this present chapter and Chapter 1. They are minimum estimates as they do not take into account the economic externalities that arise from slowing the rate of rural-urban migration, also mentioned previously. Those externalities constitute additional grounds for supporting the sector's development.

Efficiency considerations should be foremost in designing programs of agricultural support. They are increasingly taken into account in all agricultural strategies and policies. For example, they underlie the recent moves of the European Union to reduce the kinds of support that affect commodity prices and to increase direct income support to farmers. Direct support to factors of production does not distort price relationships from their market levels, and therefore it does not induce farmers to invest in products which may have unpromising prospects for being competitive in the long run. For this reason, it does not interfere with the efficiency of the market in allocating productive resources.

The arguments against subsidies listed above are relevant to efficiency concerns. In other words, the fiscal support provided to the sector should not create the types of problems indicated by these arguments. The risk is that the sector could

8. I. Goldin, O. Knudsen and D. van der Mensbrugghe, Trade Liberalization: Global Economic Implications, OECD, Paris, 1993. The US Department of Agriculture and other institutions provide regular updates of these estimates.

9. Mary E. Burfisher, ed., The Road Ahead: Agricultural Policy Reform in the WTO-Summary Report, Market and Trade Economics Division, Economic Research Service, U.S. Department of Agriculture, Agricultural Economic Report No. 797, January 2001, p. 8.

be made less competitive and accordingly its growth prospects reduced.

In conclusion, in developing and transitional countries there are valid reasons for making fiscal outlays to support agricultural development, more so than for other sectors, but great care must be exercised in the design of the policies and programs which would convey support to the sector. The topic of appropriate design of policies is the main subject of this volume.

Equally, attention should be directed to possibilities for raising more revenues to support infrastructure development, agricultural research and other programs in the sector. Commodity taxes are not advisable because of their distortive effects on incentives. Often efforts are made to improve the administration of income taxes, but with the lack of reliable accounts on most farms in developing countries, that route to revenue collection always will be difficult in rural areas. Among the more viable options are rural land taxes (on a per hectare basis), which are discussed extensively in Chapter 5, and partial user fees for services. In effect, the decentralization to users of the operation and maintenance of irrigation services is a form of levying higher user fees. Similarly, under privatization of extension services, measures can be taken to require that medium-and large-scale farms pay at least part of the cost of the services. Other revenue measures, including the participation of farmers in the cost of agricultural research, are discussed throughout this volume. Thus, fiscal policy for agriculture should not be viewed only from the expenditure side, but nevertheless the case for at least a degree of net support to the sector is a strong one.

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