Agricultural & Development Process - Example

Running Head: Agricultural & Development Process _______________________ Word count 3000 The governments of today’s developed countries distort their economies by protecting their farmers. Governments of developing countries, by taxing their farmers heavily, distort their economics even more. The explanation for this apparent tendency is just emerging. Since comparative analysis of agricultural pricing began in the 1970s, analysts using postwar data have revealed two patterns: the developmental pattern, according to which the more advanced the nation, the more its government favours agriculture and the anti-trade pattern, according to which governments tend to tax exportable good agriculture and protect import competing agriculture. The developmental pattern implies that successfully developing nations will drift toward subsidizing agriculture, although the record does not point to an obvious ending point in the most advanced nations. The anti-trade bias implies that policy will dampen comparative advantages the world over, cutting dependence on and gains from international trade in agricultural products. Both patterns seem to conflict directly with economists’ models of efficient resource allocation. But research on this issue is relatively new and cuts across several disciplines, not just economics, extending well beyond traditional agricultural policy analysis1. For each product, there was a rough upward slope relating net protection to GNP per capita around 1980. In this international cross section, the slope is due almost entirely to the discrete jump in (Nominal protection Coefficient) NPCs across the income gap separating developing from developed countries2. The raw correlation between NPC and GNP per capita is insignificant among developing countries. It is also lacking among developed countries, partly because two high-income nations, Canada and the United States, were relatively unprotective agricultural-exporting nations in 1980. But there does seem to be a difference between the two groups of countries. No industrial country has resisted the pressure to subsidise its producers of importable goods, though the North American and Australasian governments have kept fairly neutral toward their exportable agricultural products. A food-commodity pattern also exists, but is hardly mentioned by the literature. The general ranking by NPC for 1980 is Milk, beef, sugar, grains, chicken, eggs, and pork (From the most to the least). The ranking for 1980 had some glaring exceptions: eggs received heavy price protection in Australia and New Zealand, and beef was much more heavily protected in the European Community than elsewhere. Yet there is a pattern of sorts, running from dairy products down to pork, chicken, and eggs. Fruits and vegetables are difficult to categorise, but they were generally less protected than grains. This general ranking of protection and the exceptions to it need explanation even if they are unique to the postwar economy. But if the patterns have deeper historical roots, the nature of the explanation must also be deeper. Before attempting to build a political economy model of agricultural policy, it is necessary to see just how pervasive the patterns to be explained are in historical terms. Agricultural protection grew in each of the now industrialised nations since the 1860s. Was there a similar trend in the long independent countries of the Third World? Did they tax agriculture even more heavily in the past? Historical data are scarce on this issue. For the postwar era, only tentative judgments can be made about trends in the relative taxation of agriculture in developing countries. Over periods of ten years or longer starting from the 1960s, Brazil, Colombia, Korea, Mexico, the Philippines, and Taiwan have shifted to lower taxation or positive subsidization of their farm sectors. “From the 1970s to 1980s, a group of thirteen African nations switched to net subsidization of cereals, with no net trend in the taxation of their export crops Preliminary results from eighteen developing countries, however, show no change in protection rates from 1975-79 to 1980-84” (Timmer 39: 1991). It is still premature to say there was a postwar trend toward lighter taxation of agriculture in developing countries. It is unlikely that governments of developing countries have been drifting toward lighter taxation over a century or longer. Analysis of the historical data suggests that the anti-trade pattern was always strong and that the drift toward protecting agriculture was weak or nonexistent until the nations reached the threshold of industrial country status. Before World War II, developing countries were generally exporters of agricultural products. They followed the anti-trade pattern faithfully, protecting nascent industries with tariff rates of 15 to 35 percent, while denying such support to farmers or mineral exporters. The anti-trade pattern among developing countries remained fixed and trendless from the earliest nineteenth-century data to the present (except in countries such as Egypt, Meiji Japan, or Thailand, where pressure from the great powers delayed the rise of protectionism). There was a counter cyclical tendency to stiffen the anti-trade policies during the depression of the 1930s and to weaken them during the inflation of the 1970s, but there was no trend towards protecting agriculture. The Patterns of Agricultural Protection A difficult task has now been set. We must now explain dynamic paths of agricultural policy, not just static cross-sectional puzzles. The historical record demonstrates a richness and variance in these paths that prohibit the simple extension of “development” variables as explanatory factors in the model. How, then, do we explain the similarities and differences between the patterns of history and those of today? How do we deal with exceptions like Corn Laws England? To answer these questions about the general patterns and their exceptions, we turn first to some familiar explanations and then to some new ones. Rhetoric and Reality A typical reaction to the developmental pattern of agricultural policy is that the basic explanation is easy and well known. There are in fact several explanations that are well known and commonly invoked and inappropriate. They have a common shortcoming: they are all theories simply of the urge to protect. They cannot account for the equal or greater prevalence of discriminatory taxation of agricultural producers or for the switch from taxes to protection. The most common rationale for supporting farm incomes and imposing barriers to food imports is the need to assure a safe food supply for future crises. The rhetoric of food security was prominent in the building of the strongest farm supports, especially in Japan and Switzerland, two nations scarred by memories of shortages during World War II. Among the high-income countries, concerns for food security cannot explain the degree and pattern of agricultural protection so readily observed. Rice policy in Japan is a case in point. Since 1968 the government of Japan has been disposing of surplus rice beyond the amount the nation wants to stockpile for emergency reserves. Japan has even become a net exporter of rice since 1977. Japanese rice policy is not the only case of a glaring departure from goals of food security. Canada, the United States, and the EC also, like Japan, subsidise acreage reductions and exports of food crops. EC dairy products, like Japanese rice, were converted from importables to exportables by generous subsidies to producers. The types and levels of farm subsidies among the high-income countries reveal that support of farm incomes, not food security, is the main motive. In developing countries, the set of governments with the ostensible goal of food security far exceeds the number that protect the food sector. “ Out of twenty-five combinations of nations and food products for which nominal protection coefficients were measured for the period around 1980, only four were cases of genuine protection (NPC above 1.20. Seven others were nearly neutral (NPC between o.80 and 1.20), and fourteen taxed food producers severely (NPC < o.80)” (Timmer 57: 1991). The agricultural products sector is afflicted with particularly unstable prices and perhaps also with particularly unstable producer surplus. Policies to raise farm incomes are often defended as insurance against the problem of price instability. Yet the policy and the problem are a mismatch in three ways. First, they are a conceptual mismatch, because instability calls for stabilization policies, not a perennial income redistribution. Second, they are a historical mismatch. To match the problem and the demand for support policies over time, one should show rising instability of producer surplus (or at least domestic prices) in less regulated settings, followed by lower instability after support policies were enacted. Only in the Great Depression of the 1930s were instability and public demand for support policies linked. Finally, the problem of instability lacks a strong raw correlation with farm-support policies when we look across the spectrum of commodities. The most protected commodities are not the ones with the greatest price deviations from trend since 1900. Among those with the worst instability in the terms of trade, only sugar, highly protected and highly unstable in price, favours the instability explanation of support policies. Even in the case of sugar, it is not clear that reverse causation, from the policy to the instability, can be ruled out, especially since high levels of sugar protection started well before the 1930s and became more generous as price instability rose over time. Furthermore, among the primary products with the worst price instability were three tropicals that are now heavily taxed: rubber, cocoa, and coffee (Timmer 63: 1991). A common intuition, though one seldom made explicit by scholars, is that agriculture gets special policy protection because farmers would have income far below the average if they were not supported by government. It is plausible to view the rise of generous farm supports as part of the broader twentieth-century mandate to fight poverty. The idea is not refuted by the fact that median income is as high for U.S. farm households as for other U.S. households and for Japanese farm earners, almost as high as for all Japanese earners. It could still be true that the average farm earner would be poorer than the average earner if the generous postwar supports were removed. Nor can the political perception of this point be dismissed, even though the actual benefits of farm supports eventually accrue to the wealthier owners of farmland, not to the average or small farmer. The main stumbling block in the path of the poor-relief interpretation of the developmental pattern in agricultural policy is that higher-income settings are not the ones in which farmers have their lowest earning potential aside from government support. The best crude indicator of the part of farm earning power that is less directly tied to government subsidy is gross product per employed person in agriculture, compared with gross product per employed person outside of agriculture. This indicator did not fall over time or development during the shift from agricultural taxation to agricultural protection. In the international cross section of today, this relative labor productivity of agriculture is slightly higher in the most industrialised, and farm-protecting, countries, failing to show their greater need to offset agricultural poverty. The picture is similar over the long sweep of history: the relative labor productivity of agriculture has not declined in the United Kingdom since 1856, or in the United States since 1900, or in Japan since the Meiji reign. Despite the clear link between farm poverty and the demand for support policies in the depths of the Great Depression, there is reason to doubt that trends in the threat of farm poverty explain trends in policy. Indeed there is an equally plausible counterargument suggesting that farm poverty should weaken political support for farmers. The greater their social distance, and particularly their income distance, from the rest of the population, the less sympathy there may be for subsidizing farmers on self-insurance grounds as suggested in the pressure-group framework. The voices of farmers may also have been raised by a long-term upward trend in their sensitivity to shifts in prices, shifts that government could control. Here lies a potential explanation for the developmental drift from taxation to protection. Price sensitivity has been raised by a simple basic fact of economic development: farm products decline as a share of farmers’ own consumption. In early settings, the farm sector consumed a large share, say half, of its own product, including housing. A drop of 10 percent in the price of all farm products would lower the real income of the farm sector by only 5 percent. Today, by contrast, the farm sector sells 90 percent or more of its gross income in exchange for nonfarm products, so that a drop of 10 percent in the price of all farm products would lower the real income of the sector by 9 percent (Boestel, Francks, Kim: 1999). The primary source of the rise in the “openness” of the farm economy is, of course, Engel’s Law that the share spent on nonfood items rises with the level of income. Another source is the decline in transport and communications costs, which integrates individual farms into the market economy (Samuelson, Nordhaus: 1998). The rise in market exposure can be quantified at the level of individual farms for the twentieth century, with only rough suggestions of an earlier rise. In the United States, the marketed share of gross farm product had risen to 78 percent by 1910. An earlier increase in exposure to the vagaries of the market is believed to have been a key to the puzzle of U.S. farm protest in the midst of favourable farm-income trends in the late nineteenth century. In the twentieth century, there has been a further rise in the share marketed by individual farm households, to around 90 percent of household gross income (Boestel, Francks, Kim: 1999). It also seems likely that value added as a share of gross output has fallen faster in agriculture than in industry, raising income sensitivity to price changes. Another possible factor in rising sensitivity is the magnification effect of commodity prices on farm income, which seems to rise with economic development, whereas the effects of the same commodity prices on the nonfarm sector become smaller. This effect may be very strong in a quantified general-equilibrium model with three sectors and four factors, only one of which was mobile between sectors. The more advanced the economy, the greater the percentage impact of the terms of trade on farmland returns and the smaller its percentage impact on nonfarm factor incomes. The Role of Government The anti-trade bias, and possibly the developmental pattern, of agricultural policy must in large measure stem from the fiscal demands of the state. The relentless search by the state for sources of revenue helps explain, in at least three ways, the historical and global patterns of agricultural policy. In any country, the easiest way to explain the anti-trade bias is to acknowledge that the state is a peculiarly strong-voiced, special interest lobby. There is always at least some pressure to raise revenue by taxing imports, exports, or both. Although the degree of pressure to tax trade can vary with the strength of the protected and taxed groups and with the strength of the national security argument, the bedrock explanation for the tendency to favour producers of importables over producers of exportables is the interest of the state in revenue. Indeed, this point is general and not specific to agriculture. A second explanation can be traced to an “infant government” effect. In the least-developed settings, a nascent state apparatus must raise revenue where it can. It will concentrate on those tax bases that are large, easily monitored, and politically voiceless. In such settings, agriculture qualifies in all respects. It generates a large share of taxable product. Its products are visible, especially in the case of exports, which (like extractive mineral exports) need only be monitored and taxed in a few key ports. And in most cases the agricultural population is poorly mobilised for lobbying. The willingness to impose heavy burdens on agriculture may have been partly a by-product of early state-building, first in early modern Europe and as late as the 1970s in developing countries. Agriculture versus Other Sectors The switch to protection is more pronounced for agriculture than for other declining sectors. Other primary sectors (such as mining, forests, or fisheries) were not taxed so heavily when national income per capita was low, and they are not heavily subsidised in industrialised countries. Part of the explanation is easy. Whatever validity the small-is-powerful argument may have, it should have had more effect in agriculture than in other sectors. Agriculture shrank faster as a share of the electorate, the labor force, and GNP than other sectors, thanks largely to Engel’s Law. Even if policies were equally responsive to changes in the size of any sector, they would have changed more in agriculture, which shrank more. Once other forces, such as sector shrinkage, tip the political balance from taxing a sector to subsidizing it, the resulting swing in policy will be more pronounced, the lower the relevant long-run price elasticities. Lower price elasticities mean lower deadweight costs from each extra dollar of revenue redistributed from one group to another. Lower deadweight costs per dollar redistributed tip the political scales in favour of extra redistribution. Abstract as the idea may sound, there is a mechanism for its affecting political debate. The role of agricultural exports in development is to a large extent conditioned by the overall trade strategy of a particular country rather than by its agricultural strategy. Furthermore, while export prospects could be improved by a more liberal import policy on the part of the rich industrial countries, a developing country’s domestic policies are of special significance if it is to take advantage of the opportunities offered by foreign trade to stimulate economic development. One of the lessons learned from the various trade strategies for the industrial sector since the 1960s is that they make a greater contribution to overall economic growth when export-oriented strategies are followed. It is therefore assumable that the statement is half true agreeable and half disagreeable. References Timmer C.P. (1991). “Agriculture and the State: Growth, Employment, and Poverty in Developing Countries”, Ithaca, NY: Cornell University Press. Boestel J., Francks P. & Kim C.H. (1999). “Agriculture and Economic Development in East Asia: From Growth to Protectionism in Japan, Korea, and Taiwan”, London: Routledge. Samuelson P.A., Nordhaus W.D (1998), “Economics” (n.p.). Read More