End government support to developed country farmers

It has been a year since the Group of Eight (G8) met in Gleneagles, Scotland and by Tony Blair’s own admission the key G8 commitments to developing countries have not been met. Blair singled out trade as an area where progress has been too slow, citing the logjam at the recent round of World Trade Organisation (WTO) talks as the key problem.

On the one hand developing countries are complaining about the farm subsidies that developed country governments pay their farmers. On the other hand rich countries are complaining about the trade barriers in the form of tariffs on manufactured goods that developing countries have in place. Of course, both parties are right – the key is to substantially reduce all barriers to trade.

This weekend the G8 countries will meet again in St Petersburg, Russia. In addition to the G8 countries, leaders of five developing countries (Brazil, China, India, Mexico and South Africa), representing the emerging markets, have also been invited to join the meeting. This provides the ideal opportunity to make amends for the failed WTO talks and to address the chronic trade distorting practices applied in both developed and developing countries.

The parties should avoid the simplistic yet seductive view that developing countries will take off into sustained growth by pouring more money into these economies. Aid in the form of intergovernmental transfers has done more harm than good. It has simply allowed recipient country governments to postpone much-needed reforms and avert crises that would otherwise have forced them to take unpopular corrective measures to improve economic efficiency.

Most developing countries have a comparative advantage in the production of agricultural products. But many developed country farmers are given an unfair advantage by their governments through various forms of protection. A recently released report entitled: “Agricultural policies in OECD countries”, estimated that government support to farmers in OECD countries totalled approximately €225 billion in 2005, representing 29 per cent of farm receipts. Furthermore, the report noted that this proportion is unchanged from the previous year and only marginally lower than the 30 per cent reported in 2003.

The amount of support given to developed country farmers varies considerably from highs of 68 per cent in Switzerland, 64 per cent in Norway, 63 per cent in Korea, 56 per cent in Japan, to ‘only’ 16 per cent in the United States and a relatively low 5 per cent in Australia. The report shows that most of the support goes to those who have the largest farming enterprises while government aid often “leaks” out to those who are not the intended beneficiaries – such as agricultural goods suppliers or people who own, but do not farm, land.

Many developing countries have compounded the problems of their citizens by erecting myriad protectionist barriers, motivated by infant industry arguments, to protect their local producers from foreign competition. But the evidence shows that protected infant industries never grow up, never become internationally competitive, and persistently appeal for extensions of protection. These import-substituting policies have imposed substantial costs on developing country consumers and greatly reduced their well-being.

Recent trade statistics show that Africa’s trade with the rest of the world has been declining. UNCTAD reports that Africa’s share in world exports fell from about 6 per cent in 1980 to 2 per cent in 2002, and its share of world imports from about 4.6 per cent in 1980 to 2.1 per cent in 2002. The substantial decrease in trade is almost entirely attributable to trade barriers, including developed country subsidies to their domestic producers that prevent African countries from exporting to the very countries that provide them with aid.

The eight richest countries are therefore faced with the following decision at the weekend. Either they can continue to make aid a regular fixture on their budgets or they can remove the offending government support to their farmers, thereby allowing poor developing countries access to their markets in those sectors where they have a comparative advantage. The only way these countries can break out of the poverty trap is through trade and export-led growth. Lower import barriers and substantially fewer subsidies is the key to this type of growth.

Developed country taxpayers gain a double whammy: no more, or much reduced aid to poor countries, and no more subsidies to domestic producers. Eliminating the barriers preventing developing country farmers from exporting farm produce to developed countries will allow money to go directly to where it is needed most – into the hands of the farmers and their families in poor countries. Without reductions in these barriers to trade, poor developing countries will never escape the poverty trap.

Author: Jasson Urbach is an economist at the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author's and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article/11 July 2006
Help FMF promote the rule of law, personal liberty, and economic freedom become an individual member / donor HERE ... become a corporate member / donor HERE