Farm Subsidies: What’s Your Take
Published March 27, 2008
A FARM or agricultural subsidy is a governmental subsidy paid to farmers and agribusinesses to supplement their income, manage the supply of agricultural commodities, and influence the cost and supply of such commodities in international markets. These grants were initially introduced as a temporary solution, as a part of the ‘New Deal’ policy of President Roosevelt, to alleviate the farmers and producers from the effects of the ‘Great Depression’ of the 1930s. Many countries followed suit and started supporting the farmer community to enhance the production level.
But, if we consider the subsidies in today’s context then these can largely be seen as a corporate welfare programme rather than a common man programme.
The subsidies can be broadly discussed under two categories:
* Export Subsidies:
These are the payments given by the government to the farmers to facilitate the export of their product. Export credits ensure that those who want to export their goods will have the credit necessary to do so.
· Domestic Subsidies:
These subsidies are given by the government to encourage a producer to grow more of a certain crop, assist farmers who are not making a profit, promote environmental protection, and respond to the needs of farmers when natural disasters occur.
Different types of domestic subsidies include:
* Farm payments: These are usually cash payments or special loans made directly to the participating producers. These payments are generally given only to the producers of certain commodities including corn, wheat, soybeans, rice, upland cotton, and oilseeds. Farm payments given to support the production of certain commodities exceeded $11 billion in 2003.
* Conservation payments: Agricultural subsidy payments made to the farmers for environmental and conservation purposes come under conservation payments. The Conservation Reserve Programme (CRP) and the Conservation Security Programme (CSP) are the two primary programmes in this category. In 2003, the US spent just over $2 billion on conservation payments.
* Disaster payments: Disaster payments are made to crop producers when either planting is prevented, or crop yields are abnormally low due to weather conditions.
WTO Agricultural Support: ‘Box System’ definitions
Wide variations in the nature of subsidies given across the world forced the World Trade Organisation (WTO) to form distinct categories - each represented by a different coloured box - to classify the various types of subsidies, depending on the volume of their trade distortion. Trade distortion occurs when a country’s policies give its domestic companies an unfair advantage over other companies abroad. For example, export subsidies that cause dumping distort trade a lot because they lower the prices paid for agricultural goods.
* Amber Box subsidy: It is technically called the aggregate measurement of support (AMS), and is measured mainly in terms of the difference between the domestic price and international price. It is subject to reduction since it is for trade distorting payments.
WTO agreements allow minimal ‘Amber Box’ payments (roughly five per cent of agricultural production for the developed nations and 10 per cent for the developing nations.)
* Blue Box subsidy: It is a direct payment to the producers based on the area/yield and not subject to reduction in the WTO Agreement On Agriculture (AoA) at present.
* De-minimis subsidy: Product specific subsidy in the developed countries is five per cent of that commodity’s production and in addition, non-product specific subsidy is five per cent of the total agricultural production. For the developing countries, it is ten per cent of both.
* Trade-distorting subsidy: It is the sum of Amber Box, Blue Box and De-minimis subsidies.
* Green Box subsidy: It is not subject to reduction in the AoA as it is claimed to be non-trade distorting payments. They are neither directed at specific products nor connected to production or prices. Some Green Box programmes include rural development, renewable energy and land conservation.
Farm subsidies and the controversy!
The popular concept of farm subsidies, which was conceived to protect the interest of farmers and at the same time to ensure food security, is now finding itself amidst controversies. Before the WTO, its predecessor General Agreements on Tariffs and Trade (GATT) had provided the platform for eight trade negotiations in its chequered history until 1994. The last trade negotiations – the Uruguay Round- resulted in the creation of the WTO. In each of these rounds (high level negotiations), the developed world- mainly Europe, Japan and North America-dominated trade deals and the developing world, including India, China, most of Africa and Latin America, were ignored as backward and without any clout. Poor countries remained poor. Nobody spoke on their behalf, and they had no clout to make their presence felt.
The reasons are pretty evident. First, the poor countries had no money to compete in the international market with quality goods. Apart from that, the subsidies provided by the nations to encourage development after WWII made their products much cheaper.
In 1982, China burst on the international trade scene. In 2002, India became a rising economic power for the world to take a note. And the things started changing slowly.
Today at the WTO, the developing and the poor countries are pressurising the US and the European Union to change their agricultural policies. A group of 20 nations (G- 20) - led by Brazil, China, South Africa, and India) - is actively pursuing its cause regarding subsidies.
One of their key demands is the reduction of any farm subsidies that encourage farmers to produce more of a certain commodity as it leads to overproduction resulting in lower price of the commodity. This gives an unfair advantage to the farmers in the developed countries. Farmers in the West are able to sell their goods at a lower price because they know that they will receive subsidies from their government. Many countries in the Global South do not have the resources to subsidise their farmers in a similar fashion. Their main protection is using tariffs to keep out products from other countries. But the use of tariffs is under attack at the WTO as this is against the trade ethics.
Box game
Now we will see how developed countries in the name of decreasing subsidies are simply duping underdeveloped countries by playing with the Box (subsidy) framework of the WTO wherein they are just shifting subsidies from one box to another.
According to an estimate, in 1995-96, EU had provided US$ 48 billion under the ‘Amber-Box’ subsidies and another US $ 40 billion under the ‘Blue’ and the ‘Green Box’ subsidies. In 2002, it shifted and juggled the figures to provide US $34 billion in the ‘Amber Box’ and US $ 52 billion as the ‘Blue’ and the ‘Green Box’ subsidies. The net subsidy level however did not show any significant shift, and in fact remained almost at the same levels: At US$ 86 billion from the earlier US$ 88 billion.
Support under the ‘Green Box’ is not considered under Total Domestic Support (TDS). The US - which spends more than a third of its Gross Domestic Product (GDP) on this support- is the highest contributor to this sector. Japan uses around one fourth while Canada and the EU spend around 13 per cent of their GDP on ‘Green Box’ support. Developing countries provide much less support. India in 1995 provided support, which accounted to 2.34 per cent of its GDP. TDS exceeded 50 per cent of the GDP in Japan and the EU while in the US it was more than 38 per cent. In case of India if, we don’t consider negative AMS, the total support was nine per cent during 1995.
Are subsidies pro-poor in the developed countries?
Although politicians in the US love to discuss the plight of small farmers, the vast majority of farm subsidies go to the largest farms. In recent years, the biggest 10 per cent of the farm businesses have received 72 per cent of the farm subsidies, according to the environmental working group. Export subsidies benefit the food industry and traders; the farmers get little. In the EU, 80 per cent of the subsidies are paid to only 20 per cent farmers, most of which are cornered by large farms owned by rich landlords and corporations.
The US favours the ‘Swiss Formula’ (a mathematical formula designed to cut and harmonise the tariff rates in international trade) to lower domestic support-which results in trade distortion- to an amount equal to five per cent of the value of a country’s total agricultural production. This would lead to greater reductions in domestic subsidies in countries that currently have the highest levels of trade-distorting support, and would have the effect of reducing the European Union’s limit on such subsidies to $12 billion from $62 billion and the US limit from $19 billion to $10 billion. But unfortunately, all on paper only, as the shifting of subsidies to more suitable ’boxes’ is already going on.
Impact on the Indian economy
Now we are interested in studying the impact of farm subsidies on the Indian economy in the liberalisation era.
American wheat is available in Chennai at a landing price much lower than that of the home grown golden grain. Food processing units in south India therefore find it economical to import wheat than to transport it from northern parts of the country. The result is that while the wheat surplus in the north-western parts of the country (wheat cannot be grown in south India) rots in the open, traders and food processing industry relies on imports. Wheat growers in the north suffer, and many of them have gone bankrupt.
The government too is reluctant to purchase any more wheat harvest, thereby creating an unprecedented crisis for the farming community.
Similarly, India- the world’s biggest producer of milk- is unable to export as it cannot reduce the prices to match the prevailing low international milk prices due to its inability to subsidise its dairy industry.
Developed countries can afford farm subsidies as their agricultural sector constitutes a paltry two to four per cent of their economy. To subsidies agriculture to the extent of 50 per cent, developed countries need to spend around a meagre one to two per cent of their total GDP whereas in developing countries like India, where more than 60 per cent of population are engaged in agriculture, the spending needed is 13-14 per cent of the GDP.
Can we live without subsidies - New Zealand experience?
In 1982, Federated Farmers of New Zealand (New Zealand’s leading farmer organisation) submitted to the government that the key cause of inflation was the budget deficit required to fund farm subsidies and more subsidies are only increasing the prevailing inflation rate.
In the next few years, subsidies were scrapped in New Zealand. Output and net incomes for the New Zealand dairy industry increased after the subsidies ended and the cost of milk production is among the lowest in the world. Since subsidy removal, the agricultural sector has grown faster than the rest of the economy. Agriculture’s contribution to New Zealand’s GDP has risen from 14.2 per cent in 1986-87 to 16.6 per cent in 1999-2000. Agriculture accounts for 11.4 per cent of the total workforce. Agricultural productivity has gone up to an average 5.9 per cent a year since 1986. Prior to 1986 agricultural productivity gains were about one per cent a year.
The New Zealand experience strongly suggests that most of the supposed objectives of agricultural subsidies and market protections - to maintain a traditional countryside, protect the environment, ensure food security, combat food scarcity, support family farms and slow the corporate take-over of agriculture-are better achieved by its absence.
In 2001 Alistair Poulson, chairman of New Zealand Federated Farmers, told the BBC News that the average New Zealand farmer’s advice to his or her colleagues in other countries would be to “get off the subsidy gravy train as soon as possible.”
Conclusion:
Thus we see how the unjustified use of farm subsidies by the exclusive club of developed countries is creating havoc for the millions of poor and subsistence farmers around the globe and at the same time they are using the shield of faulty economics to pamper their farming community.
The growing volume of subsidies, particularly the ‘Green Box’ subsidies, are the new excuse instruments of the developed countries for projecting a pro-poor image. But in effect, it is only forcing the farmers from the developing countries to abandon farming and migrate to the urban centres. Domestic support in the developed countries is leading to the newly emerging phenomenon of agriculture displacements in the developing countries. In the years to come, the developing countries will witness an upsurge in the displacement of the farming populations from their only economic possession – meagre landholdings.
Given what is at stake, walking away is not an option. The key to the solution lies with the developing countries. They must strive to bring the ‘Green Box’ subsidies to zero before any meaningful talks on agriculture trade are reinitiated. There is no other way out. There is no other formula to strike a compromise.
But whatever solution that may come up in this regard should be in the spirit of following lines….“The real destroyer of the liberties of the people is he who spreads among them bounties, donations and benefits.”
