Agricultural Subsidies

A report due out at end of July on agricultural policies in countries that belong to the Organization for Economic Cooperation and development (OECD) quantifies the extensive government subsidies farmers receive in these countries. These subsidies amount overall to about 29% of their farm revenues. This per cent varies considerably: from highs of 68% in Switzerland, 64% in Norway, and 56 % in Japan, to "only" 16% in the US, and a relatively low 5% in Australia. The beautiful views of cows and sheep on the very green Swiss mountains are courtesy of the Swiss government that pays farmers generously to keep these animals grazing on the mountains.

Developing nations object to the farm subsidies by rich countries because they make it difficult for farmers in their own countries to compete in the world markets for agricultural goods. The European Union has high tariffs against farm imports from countries outside the Union, while the US gives significant export subsidies to its agricultural products. Most rich nations have direct payments to farmers when agricultural production increases, and they also help subsidize the cost of water, seed, machinery, and other farm inputs.

Farm subsidies are the main complaint lodged by developing nations against the trade policies of developed nations in the ongoing Doha talks on more open international trade. Richer nations in turn complain about the many barriers to imports of Western and Japanese goods erected by poorer nations. Both sides are right, but the US and other rich nations should greatly liberalize their farm policies irrespective of whether developing nations lower their trade barriers. The reason is not mainly to help poorer nations, although it would do that in a way that adds to world economic efficiency and trade. Freeing agriculture would also help consumers and even many farmers in rich nations.

Whether subsidies to agriculture raise or lower prices to domestic consumers depends on the form the subsidies take. Restrictions on imports of farm goods clearly raise domestic farm prices by cutting back access to farm products from more efficient producers in poorer nations. Subsidies to farm exports also raise domestic prices by artificially diverting production from the domestic to the export market. Subsidies to farm inputs like water encourage excessive use of water compared to other inputs. This is partly through inducing farmers to shift production toward crops that use a lot of water, such as rice, and away from crops that use little water. The result is lower prices for water-intensive crops, and higher prices for water-sparing crops. The OECD report estimates that more than half of the farm subsidies in member nations are through policies that raise domestic prices of agricultural goods.

The argument is sometimes made that farm subsidies are desirable to encourage small farms, and the way of life on these farms. Yet this claim is contradicted by the evidence available for many decades, and confirmed again in the OECD report, that the vast majority of subsidies go to the largest farms. In many cases they are given to people who own but do not farm their land.

Another argument in defense of farm subsidies is that they contribute to a better environment. Some of the subsidies may do this by reducing population density and pollution, but many others add to environmental damage. For example, subsidies to irrigation and other water use by farmers is one of the major ways that fresh water is wasted. Environmental and geopolitical arguments are used to justify the large subsidies to ethanol production from corn in the US. Ethanol helps reduce the West's dependence on oil because ethanol is a substitute for gasoline. GM and other companies are beginning to promote E85, which means 85% ethanol and 15% gasoline. Automobile fuel tanks can easily be modified to take this combination, but the US still has only a small number of gas stations that have the expensive equipment to dispense highly ethanol-intensive fuel.

Ethanol not only reduces dependence on oil imports, but also ethanol based fuel cause less pollution than gasoline does. Ethanol probably also uses less energy, although that is debated since both the plants that produce ethanol, and the fertilizers that help to grow corn, use considerable quantities of natural gas. The US has subsidized ethanol production from corn primarily to help corn growers rather than to reduce energy use since it is combined with a steep tariff on imports of ethanol from elsewhere. These imports would come mainly from Brazil that produces ethanol from sugar cane at a much lower cost than the US production from corn. Instead of subsidizing domestic production of ethanol, a much wiser policy for the US would be to eliminate these tariffs and import ethanol from democratic and friendly countries like Brazil that can produce ethanol more cheaply.

The economic case for eliminating farm subsidies by rich countries is a compelling one since these subsidies are inefficient, generally raise food prices to consumers in these countries, and anger developing countries that see their natural markets blocked. Yet while economists have been rather united in their criticisms of agricultural policies, the farm lobby has been powerful, especially in Japan and many European nations. This is despite the fact that farmers in most rich countries constitute no more than a tiny percentage of the labor force.

It may seem paradoxical that farmers are typically rather heavily taxed in poor countries, like India and China, where they constitute a large fraction of the population, and are subsidized in rich countries dominated by cities and towns. But the economic analysis of interest group politics demonstrates that small groups are often much more powerful politically than large groups, even in democracies where large groups would seem to command more votes. The explanation is that small groups may be organized more easily-although farmers tend to be spread out geographically- and the per capita tax on others to finance the subsidy to small groups tends to be smaller than the per capita cost of subsidizing large groups.

Whatever the explanation, experience has shown that it is difficult to eliminate, or even greatly cut back, farm subsidies in richer nations. There is more hope for being able to change the subsidies to ways that are less discouraging to agricultural imports from poorer nations, that do not mainly help richer farmers, and that do not raise food prices to consumers. Possibilities include the equivalent of an earned income tax credit to fulltime farmers who make low incomes, lump sum income payments to farmers, and possibly greater support for education in farm areas. While the best politically feasible alternatives to present policies are not so clear, it is obvious that the present system of farm subsidies in rich nations is a lightening rod for conflict in trade talks with third world countries, while they help their own farmers in highly inefficient ways.