It Will Be Tough to Break Farm Subsidies

Almost all industrialized countries support and protect their farmers by using a variety of policy instruments--tariffs, variable levies and import quotas, domestic and export subsidies, marketing regulations, state trading and other measures.

The result of these policies, which guarantee prices for producers above world market levels, is to stimulate excess production that is dumped abroad or otherwise disposed of at a loss. The costs of these policies--now approaching $150 billion annually--are borne by consumers and, increasingly, by taxpayers. These costs have almost doubled in recent years as international trading prices fell back from the peaks experienced during the “world food crisis.”

Now that surpluses are becoming unmanageable, governments are attempting to reduce support prices. When faced with resistance by farm groups, the United States (and, to a lesser extent, the European Community) has resorted to production controls. Farmers don’t like production controls, either, but can be bought off by government payments or higher support prices. In the United States a new wrinkle has been added: Surplus commodities are recycled, as subsidies in kind to producers and exporters.

Despite their escalating costs, the farm programs have become increasingly ineffective in meeting the problems of modern agriculture. Originally designed for a fairly homogenous population of small, diversified farms, across-the-board price supports are ill adapted to the highly differentiated and specialized farm sectors of North America and Northwest Europe. Most of their benefits go to a minority of large and efficient farms that account for the bulk of the output. Less than one-third of the benefits go to farmers who may be considered to be in need of assistance.

Over time, the farm-support programs have become ever more complex as policy-makers attempt to control their side effects. The United States and Japan in effect pay their farmers twice: a high support price that stimulates excess production, and explicit or implicit compensation to induce them to idle part of their cropland. It is as wasteful as driving a car with one foot on the accelerator and the other on the brake.

Yet the politics of agriculture lend themselves to the escalation of protection. Although farmers represent a small and declining proportion of the population of the industrialized world, they are well organized to exploit their voting power.

Most of the agricultural price-support systems that are at the root of the current overproduction crisis evolved during the Great Depression. But protectionism may sneak in during cyclical peaks as well, once price-support systems are firmly entrenched.

When market prices are high, politicians can please their farm constituents by raising the price guarantees, at no immediate cost to consumers and taxpayers. Thus price supports were increased, in Europe and the United States, during the commodity boom of the 1970s, and then were locked in. The chickens came home to roost when the boom was over. In general, one can observe a ratchet effect: Farm supports, once entrenched, are difficult to dislodge.

Does this mean that we can look forward to a continuing escalation of agricultural subsidies? There are three developments that point to a turnaround.

One is the worldwide taxpayer revolt. Another is the growing public disenchantment with the inequity and ineffectiveness of present policies. The third is the fact that, for the first time, the governments of all industrialized countries have publicly conceded that their price-support policies are at the root of the agricultural surpluses and trade conflicts.

There is a widely shared consensus that price supports should be phased out and that they should be replaced by more precisely targeted, less market-distorting and less expensive forms of assistance to help farmers adjust to a more competitive environment. In the United States, proposals that would address these problems go under labels like phase-out , decoupling and targeting . The European Commission has recently submitted similar proposals. Within the past two months the governments of the industrial democracies have gone on record in support of guidelines for concerted agricultural policy reforms that would move agriculture toward greater market orientation.

Still, progress in this direction will not be easy. Agricultural producers who benefit most from present policies will resist it. In Europe as in the United States there are advocates of a radically different approach. They would impose tight mandatory production controls that would raise market prices and shift the entire cost of farm supports from the budget to the consumer. Producers would be compensated by even higher guaranteed prices. The national producer cartels would then conclude international commodity agreements to share markets and maintain high world trading prices. This is neither an attractive nor a viable alternative.