Resolved: That the United States should substantially change its federal agricultural policy.

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Source: The Economist (US), June 9, 2001 p4.

Title: Towards efficient farm support; Agricultural subsidies; Dealing
with farm trade.(Leaders)(Brief Article)

Full Text COPYRIGHT 2001 Economist Newspaper Ltd.

THE World Trade Organisation is girding itself up to launch a round of trade talks in November. Despite failing to agree a deal with America this week, China still hopes to seal its WTO membership later this month. Both developments make the time ripe for dealing with perhaps the biggest blot on the world's trading system: agriculture. Interference in agricultural markets remains endemic, even as big countries struggle to fulfil their commitments from the previous set of trade talks, the Uruguay Round (see article). Early negotiations hint at progress on the most egregious trade distortions. Domestic support, however, is harder to tackle.

All of the WTO 's 141 members have a stake in farm trade, and most hold their positions passionately. The politics of farming have been sensitive at least since this newspaper campaigned against Britain's Corn Laws in the 1840s; it is no surprise that agriculture has lagged behind in trade liberalisation. This time around, too, the WTO 's talks coincide with the formulation of a new, five-year farm bill in America and with growing arguments over the reform of the European Union's Common Agricultural Policy ahead of enlargement.

Most support measures offered by governments-payments to farmers, price subsidies, intervention purchases and so on-are justified by appealing to broader social benefits. These are said to include environmental protection, food security, sustaining poor rural communities and the preservation of cultural traditions. Yet most such benefits could be achieved more directly and at lower cost. To protect the environment, for instance, governments could set aside nature reserves; to sustain rural communities, they could use redistributive taxation; to enhance food security, they could buy up stockpiles on world markets.

Other benefits, such as the preservation of rural traditions and the satisfaction of having farms to look at, cannot be derived from anything other than local, non-intensive farming. But these benefits are not factored into farm prices. Left to its own devices, therefore, the market will not deliver enough non-intensively farmed acres. The economics of externalities argue for enhancing this type of farming so as to maximise society's well-being. That, in essence, is the case for public support for farmers. But even on this basis the way that governments have chosen to deliver it distorts prices, trade and behaviour, at huge cost.

A sounder system would aim directly at what is desired. If governments want to increase non-intensive farming, they should rely on those farmers most able to practise it. One way to do this would be to impose tradeable "obligations" that demand non-intensively farmed acres, somewhat analogous to pollution permits. Each year, governments would decide how many non-intensive acres they wanted. They would then allot obligations, which producers could trade.

A scheme like this would have several advantages. First, it would be economically efficient: farmers who benefit most from intensive farming would trade their obligations with those who can run non-intensive farming at least cost. The distribution of obligations could be skewed towards smaller or poorer farmers, if desired. Big, intensive farms would also pay the less well-off to take on their obligations; that would help to sustain farm-reliant communities.

A system like this would also be completely transparent. Monitoring should be feasible: at a crop-by-crop level, checking how many acres are farmed non-intensively requires only information on acreage and the volume of production, plus occasional inspections. The system would be easily adaptable to changing economic and environmental conditions. A different target for non-intensive acreage could be set each year. And the whole plan would cost governments far less than farm support does today.

Best of all, this system would distort trade as little as possible. It would change the composition of farms, but not necessarily their production; one would expect many intensively farmed acres to be replaced by non-intensive acres. This may result in slightly higher prices, but only to the extent that non-intensive farming carries social benefits; so society would be better off. The key would be to find out whether these benefits really exist. To do that, governments would have to assess how much their people really value having non-intensive farms. That would give an idea of how much support is enhancing social welfare, rather than merely distorting markets.

 
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