Trade-Offs

Is A Pareto Efficient Reconciliation of Agricultural Interests Possible?

The most glaring stylized fact reported in The Economist article “A Not-So-Perfect Market”[1] is the difference in the growth rate for trade in agricultural goods (three fold growth in the past 20 years) and the growth rate for trade in manufactured goods (nine fold growth in the same period).  While the article does a good job of explaining the distortionary implications of such an outcome for consumers in the developed economies and for producers in the developing world, it begs a deeper investigation of the causes of this anomaly.  Specifically, in this paper, I will explore the possibility of a Pareto efficient reconciliation of the interests of the entrenched agricultural base in the developed countries with those of the global consumers and of the emerging markets.  By Pareto efficient, I mean a regime change that makes some parties better off while not making any individual party worse off.  Any attempt to bolster growth in agricultural goods will need to be Pareto efficient in order to be politically feasible.

There Are Many Different Types of Market Distortions In Global Agriculture

Governments in developed countries, to varying extents, have manipulated prices and used other non-pecuniary techniques to favor farmers, at the expense of consumers and the developing countries.  These distortions take the form of domestic support policies, import barriers, export subsidies, and restrictions on the use of novel methods of agricultural production.  As the article notes, the level of this intervention is counter-intuitive in that the farming populations of developed countries typically make up less than 5% of the labor force and in that agriculture represents less than 2% of GDP.    The article also remarks on the correlation between the timing of pork-barrel agricultural policy announcements and the run-up to federal elections.  Perhaps, farmers have a disproportionate sway over domestic politics because of the geographic distribution of votes.

The Welfare Benefits of Trade Liberalization Are High And Asymmetric

Research by Kym Anderson of the University of Adelaide[2] suggests that removal of these distortions could mean as much as $160 billion in welfare gain, distributed between the OECD countries and the developing world.  Removal of subsidies (used by developed countries to dump their surplus agricultural production on the world market) would raise world prices for food, by up to 5% over time.  Trade liberalization would benefit countries with no or small subsidies such as the developing countries and the members of the Cairns Group, at the expense of heavy subsidy regions such as the European Union.  Moreover, there would be environmental implications of agricultural trade liberalization.  Developed countries tend to rely on technology and chemicals to enhance the productivity of their farming sectors, while developing countries tend to use crop land and pasture land more extensively.  One implication of trade liberalization is the possible extension of developing market deforestation.[3]  Another, dynamic general equilibrium effect may be a wealth effect that raises the income level in the developing country, encouraging a production switch to a heavier reliance on technology than on land. 

There Are A Number Of Public Policy Objectives To Serve

Agricultural support policies are often justified on the basis of the strategic imperative of securing the domestic food supply or on the basis of the maintenance of certain public goods such as ecological diversity.  In an increasingly global economy in which environmental effects transcend national borders easily, there are a number of important externalities to consider, as well.  Development of the emerging economies leads to better trade generally, not just in agricultural goods but in manufactured goods, too.  Richer developing countries are less likely to require financial assistance from the developed countries and immigration from the emerging markets to the rich countries can be expected to slow down as the developing countries trade their way to greater wealth.  In the aftermath of the Asian financial crisis, we saw a vicious cycle in which a damaged developing world economy led to a collapse in commodity prices (as these countries flooded world markets in their desperation for hard currency), which in turn led to an even greater perceived requirement for agricultural subsidies in the developed world.  Agricultural policy did not act as a dampening force in this disequilibrium.

Ecological diversity in different parts of the planet, such as the Amazon forest, has global significance for its impact on the world’s ozone layer and for the potential pharmacological benefits therein.  Distortionary agricultural policy leads to a less responsive domestic producer (in the absence of full competitive forces) and the way in which consumers are indirectly taxed creates a deadweight loss when compared to a straight lump-sum tax on consumers transferred to powerful, domestic farming political interests.  Furthermore, trade serves as a stabilizing geo-political force, reducing the likelihood of war. 

Science Is Being Used Unfairly

When the science is incomplete to answer questions of public safety in what is an emotive subject area, it is easily manipulated.  This is the situation in agriculture today with the introduction of genetically modified foods. Domestic interests can use fear to advocate breaking generally accepted international standards that permit genetically modified foods to be traded freely.  The only certain way to know whether these foods are dangerous is to wait for time to tell.  Effectively, this represents a real option that countries should pay for in order to enjoy.

A Pareto Efficient Solution Is Possible But Unlikely

If developed countries banded together to legislate the following policies, they could satisfy the needs of their constituents (theoretically) while simultaneously taking a series of steps closer to the accomplishment of the policy objectives set out above.  If agricultural trade was liberalized simultaneously with the introduction of a lump-sum scheme that taxed consumers and paid these monies to farmers in a non-distortionary fashion and if this liberalization was tied to environmental restrictions on deforestation and to requirements for the greater use of technology in agricultural production in the developing countries, the world could be better off in terms of the various externalities identified above.  This would be a welfare enhancing, Pareto efficient method of freeing trade.  Marrying the liberalization of agricultural policy with a global view of environmental policy would also make agricultural reform more domestically palatable, particularly in Europe, while assuaging the sentiment of the emerging markets.