Wednesday, July 06, 2005

Do Agricultural Subsidies Hurt Africa?

Yesterday, I wrote about the issue of graft and corruption in inhibiting Africa's economic development, despite bushels of aid money being showered on the continent. (When the president of Senegal was recently asked "How much aid money will be enough?", he replied, "There will never be enough aid.") The other issue most often cited as a hindrance to African development is the huge subsidies and trade barriers employed by the US and EU for their agricultural industries. The thinking is that by subsidizing agriculture in "first world" nations, this depresses the price of agricultural commodities on the global market, harming farmers in poor countries. According to a 2002 UN report on African Recovery, it is noted that agriculture accounts for 70% of the labor force in sub-Saharan Africa, and is the main generator of export revenue. Given that, one can see how a world agriculture market "flooded" by subsidized first-world goods could be devastating to the struggling African economy. Thus, some of the activists outside the G-8 summit in Gleneagles, Scotland are calling for the ending of first-world agricultural subsidies.

It is not just the UN and left-wing activists who are espousing this theory. Daniel Griswold of the Cato Institute agrees. In a paper prepared for last year's G-8 summit, Griswold outlined the libertarian argument for why eliminating subsidies are good for the poor nations and for the rich ones. He cites an IMF study that estimated abolishing agricultural subsidies and trade barriers would raise global income by $100 billion, with 90% of that increase going to the rich nations. (It would be interesting to do the homework to figure it out, but I would suspect that even 10% of that increase going to the poorer nations would be a bigger increase to their economies as a percentage of GDP.) He also cites the positive example of New Zealand, which has weaned itself from agriculture subsidies and protections since the 1980s. Subsidies and protections now represent only 1% of New Zealand's farm income, as compared to 21% for the US, and 35% for Western Europe. As most (except the Hayekians) would be surprised to find, New Zealand's farm output as a share of GDP has actually increased. Cato's libertarian line is that "by embracing the liberalization of farm markets, the rich countries would score a triple play by enhancing their own economic growth, spreading wealth to some of the world's poorest nations, and reducing the stagnation and frustration abroad that fuels global instability."

One can also add new World Bank leader Paul Wolfowitz to those embracing this idea. Wolfowitz, who recently visited Africa, stated "the key to tackling the problem of cotton subsidies, which obviously hurts farmers here in Burkina Faso and in other poor countries ... is to tackle agricultural subsidies across the board ." The World Bank estimates that US cotton subsidies alone (which total $4 billion / year, larger than the entire economy of Burkina Faso), costs 7 African cotton producing nations a quarter billion dollars a year.

In the face of all this, Trent McBride of Catallarchy challenges this "conventional libertarian wisdom". He notes that while eliminating subsidies will help poor farmers, "most inhabitants of the poorest nations are poor non-farmers who could use some cheap food." He reasons that subsidies benefit producers in the rich nations and consumers in the poor ones (and that conversely, eliminating them would help poor farmers while hurting consumers in poor nations). The logic seems sound, and he cites similar arguments being made in a Financial Times article, and by fellow blogger Tyler Cohen at Marginal Revolution.

After reading all that, I'm not sure who is right. And I need to admit that I'm way out of my own water here, so any opinions I express should be taken cautiously. That being said, my uninformed hunch is that McBride is wrong, based on my admittedly superficial understanding of a couple of basic economic ideas. The first is the notion that subsidies and trade barriers distort the market, making it less efficient than it otherwise would be. In a free market, American farmers would be incentivized to make the most efficient use of the land to meet the market, but subsidies distort this process (e.g., incentivizing them to grow corn when they might otherwise have grown something else). And sometimes we even pay farmers not to grow things. Wringing inefficiency out of the market, other things being equal, would cause prices to fall, an effect that may counterbalance the halting of subsidies. (Look at the New Zealand case cited by Cato as an example of the power of letting the market be efficient.) In general, both importers and exporters benefit from the increased efficiency when everyone is allowed to produce to their comparative advantage.

The second idea is that if forced to a choice between aiding third-world producers or aiding third-world consumers, I suspect it's best to go for the producers. As noted in the UN report, the bulk of the African workforce are in agriculture. When the agriculture market fails, the African economy lacks the industrial capacity to pick up the displaced workers, so you just end up with more desperate out-of-work people. Cheaper food is still out of reach of those with no income, and only helps those with a small income on a day-to-day basis with no long term hope for improvement. On the other hand, if we help the African agricultural market, we enable poor nations to become more productive. We start the engine of economic development, as it were. The apparent "Hobson's choice" between helping poor producers or poor consumers, I think, comes down to teaching them to fish versus giving them fish.

1 comment:

Jeff said...

I too share your interest in the disconnect between aid dollars spent vs. actual progress in Africa. I've become deeply suspicious (at least as suspicious as a nonexpert can be) of the IMF's policies--and I'm trying to find out what I can about the possibility of Wolfowitz changing this. (That's how I arrived here!)

You may find these posts over at my blog (here and here) of interest.