Agricultural Subsidies By Developed Countries: Its Pros and Cons
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  • It's good, not bad, to get away from 'free market' conditions for agriculture, as prices are usually low, due to a 'lack of price responsiveness' 'on both the supply and the demand sides.' 80% of the 'undernourished' are rural, 70% of LDC populations. Economically free markets cause this damage, not subsidies. The solution lies with minimum farm price floors set at fair trade levels, and backed by supply reductions as needed. Plus ceilings & reserve supplies for occasional spikes. See my slide shows for subsidies in context.
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  • 1. Agricultural Subsidies By Developed Countries: its pros and cons Presentation on 24/09/2008 by: Probal Mojumder ISI, Kolkata
  • 2. Subsidies have always altered free market conditions
    • A subsidy is a form of financial assistance paid to a business or economic sector
    • Subsidy always results in a new economic equilibrium. In the figure:
      • (Q1, P1) is original equilibrium.
      • Subsidy shifts supply curve from S1 to S2
      • The red arrow shows the amount of subsidy
      • New equilibrium is (Q2, P2)
    • Subsidy may also refer to government actions which limit competition
    Diagram showing effect of subsidies Economic explanation of effects of subsidies Source: Cato Institute website• 1000 Massachusetts Avenue, N.W. • Washington D.C. 20001-5403
  • 3. Agricultural subsidies are largely present in developed nations Source: Yale Center for Environmental Law and Policy, CEISIN North America gives highest farm subsidies and scores low in EPI
  • 4. Expenditure on agricultural subsidies have increased over the years – Examples India’s annual outlays towards agricultural subsidies more than $12 billon Source: Economic Survey, Government of India; Gulati, Ashok & S Narayanan, The Subsidy Syndrome in Indian Agriculture, Oxford University Press, New Delhi, 2003 Expenditure towards agricultural subsidies in India $ billion years 14% increase European Union’s share of spending towards agricultural subsidies is significant Source: Chris Edwards, Budget & Tax News > February 2007; The Heartland Institute 44% EU expenditure is on agriculture $12 bl
  • 5. Subsidies reduce world prices and affect export dependent, developing nations World cotton prices have fallen over the years US cotton subsidies are comparable to GDP of some cotton exporting countries, 2003 Source: International Cotton Advisory Committee; Cotlook Limited Average monthly world cotton price Source: Environmental Working Groups, 2005; World Resources, 2005 $ bl 25000 farmers get $2.5 bl 4 ml people get $1 bl US Cotton subsidies and GDP of others
  • 6. Subsidies given by developed countries benefit large farmers rather than small farmers Percentage of agricultural subsidies given out to the largest 25% of farms Source: WTO Annual Report, 2003 US gives 89% of its subsidies to large farms
  • 7. Farm subsidies and trade barriers imposed by developed nations have gross ill effects
    • Transfer the earnings of average taxpaying families to well-off farm businesses.
    • Farm programs raise food prices and hurt consumers directly.
    • Farm programs are prone to fraud and scandal.
    • Farm programs cause overproduction, the overuse of marginal farmland, land price inflation and excess borrowing by farm businesses.
    • They are a serious hurdle to progress on global trade agreements.
    • Subsidy programs and trade barriers draw marginal farmland into production and encourage the overuse of fertilizers, thus damaging the environment.
    Effect on the consumers and tax payers Effect on economy and environment Source:, Cato institute Source: Environmental Working Group
  • 8. Reducing farm subsidies and trade barriers would benefit developed nations
    • Reform would deliver lower food prices.
    • Reform would lower costs linked industries and food processing.
    • It would promote production of crops demanded by consumers.
    • It would raise incomes of farmers in poor countries.
    • Reducing farm subsidies would save taxpayers tens of billions of dollars.
    • Agricultural reform would reduce the amount of top soil lost and use of fertilizers and pesticides by farmers.
    • Farmers would innovate, planting different crops and diversifying their sources of income.
    • Reforms would reduce the federal budget deficit.
    For the consumer and farmer For Governments and the environment Source: thehindubusinessline, Source: New York Times, Times of India
  • 9. Agricultural subsidies were criticized at Doha Development Rounds
    • Non-conformity with the original goals to facilitate the economic viability of small family farms and to ensure national food security.
    • In the face of falling prices, farmers are forced to leave the sector, leading to consolidation of land in larger farms across the country.
    • The distribution of support is uneven and is significantly skewed in favor of larger farmers.
    • Consumers face higher prices and taxes.
    • Overproduction in developed countries leads to dumping in the world market and subsequent reduction in world market prices.
    • A fall in prices constrains agricultural growth and development opportunities in non-OECD countries.
    • Developing countries in South and Central America, the Caribbean, and Sub-Saharan Africa lose about 10 to 15 percent of total agricultural and agro-industrial incomes due to developed country subsidies.
    Ill-effects on developed countries Ill-effects on developing countries
  • 10. No solution as of yet:
    • Doha Development rounds suggested the following steps:
      • Doha Ministerial Declaration calls for “ substantial reductions in trade-distorting domestic support ”
      • Substantial improvement in market access,
      • reduction (and ultimate elimination) of all forms of export subsidies
      • and substantial reductions in trade-distorting support.
    • July Framework (July 2004) – agreement on elimination of export subsidies, guidelines for reduction in domestic support.
    • Hong Kong Ministerial - draft provides a set of working hypotheses.
    Positive Steps Setbacks
    • Failure of Cancun Ministerial Meet
    • Lack of consensus among Member states.
    • No binding pact and so no certainty that the purported development goals agreed to in the Doha negotiations of the WTO will be achieved.
    • International decisions won’t be effective unless accompanied by domestic policy reforms directed at making agriculture pro-poor and pro-environment.