The indirect costs of subsidising agricultural production

This article appeared originally in Gulf News: link to original article

Earlier this month, I discussed in two separate articles a common theme — food security. In the first, I pointed out that food-producing countries resorted to export bans in order to secure food for their own markets during the 2008 food crisis. In the second, I made reference to the EIU’s introduction of an adjustment factor to its Global Food Security Index (GFSI).

This article discusses food security too, explaining why it is hard today to assess or quantify comparative advantage. That is, there is too much distortion in today’s agricultural production and trade, making it almost untenable to evaluate what countries are best at producing and trading when it comes to food commodities, i.e., comparative advantage.

In the 1980s, and due to the promotion of Structural Adjustment Programmes (SAPs) by the World Bank and the IMF, many countries had to dismantle their marketing boards. The role of those boards was to decide a certain price for a country’s food commodity that farmers are happy with and is financially feasible, putting into use a strengthened bargaining power enabled by bulk selling.

Therefore, and without the need to subsidise their agricultural sectors, countries were able to improve the livelihood of their farmers, while solidifying their position in a globalised agricultural and food system.

The Canadian Wheat Board, though recently turned into a voluntary marketing organisation, is one prominent example of a once effective marketing board that ensured fair prices for farmers. The diminishing role of those marketing boards, along with the rise in agricultural protectionist measures and subsidies, have altered the comparative advantage landscape for good, skewing it in favour of countries with larger agriculture-related budgets.

Similar skewedness in comparative advantage has been extended to trade as well by setting quotas on imports and offering guarantees to exports. As a result, comparative advantage has been split into one that has to do with production and another that has to do with trade, transmuting comparative advantage into an almost alien concept that is hard to quantify.

The EIU’s newly introduced adjustment factor to its GFSI is a manifestation of the same, documenting discrepancies in ranks between GFSI’s overall score and its adjustment factor. For countries, subsidies and protectionist measures are crucial to retain their global foothold and to avoid unemployment in a sector that could be detrimental for national security.

However, such subsidies and protectionist measures could have negative outcomes, some of which are irreversible.

First, subsidies through fixed buying prices by governments, spending bills, or common policies across countries are a waste of resources. In the short-term, they are important to prop up a country’s food security by reducing its reliance on food imports and protecting jobs. In the long-term, however, it would require further financial and other resources to be poured into the agricultural sector that should otherwise be rendered inefficient.

Secondly, countries that cannot afford subsidies impose quotas and tariffs to protect their domestic agricultural production. Quotas and tariffs result in higher food prices that would benefit farmers but disadvantage nonfarmers, thus requiring governments to subsidise market selling prices to improve food security and avert famines. When that’s unaffordable, governments may exert pressure on farmers to sell at levels deemed unprofitable.

Whether affordable or not, agricultural protectionist measures and subsidies shift comparative advantage from where it should be to where it shouldn’t be.

Finally, a weaker understanding of comparative advantage results in misplaced investments into offshore agricultural production, particularly for countries with meagre or no food production. As those investments increased after the 2008 food crisis, ensuring that they go into the most efficient agricultural sectors is vital.

That is not only important for recipient countries of agriculture-related investments, but for a global food security that cannot do without those countries.

The last thought that I want to leave you with: can the World Trade Organisation succeed in eliminating all agricultural protectionist measures?