End Farm Subsidies

COMMENTARY Agriculture

End Farm Subsidies

Feb 20th, 2003 4 min read

Former Policy Analyst

Sarah is a former Policy Analyst for The Heritage Foundation.

Members of the World Trade Organization are in a proverbial pickle. Although they're fond of discussing agricultural reform in the current Doha round of trade talks, they're reluctant to do anything to implement it. With only a few weeks left until the March 31 deadline for establishing tariff and subsidy reduction commitments, progress needs to come quickly.

Instead of fighting over competing proposals to liberalize agriculture, WTO members should follow the path broken by New Zealand and Australia. These countries have shown the world how to bring free markets to agriculture by unilaterally cutting government support through domestic subsidies.

Domestic subsidies are high all over the world. Many countries prefer to support their producers instead of relying on the efficiency of the free market. Subsidies prop up inefficient producers while forcing the efficient ones out of the market. By subsidizing inefficient farming, the governments of the developed world marginalize producers in the developed countries.

According to the Organization for Economic Cooperation and Development, government support for agricultural producers accounted for 31% of total farm income among its member nations in 2001. New Zealand and Australia are an entirely different story; these countries give their producers the least amount of support. Government support in New Zealand accounts for a mere 1% of farm income, and in Australia support is only 4%. New Zealand and Australia are undoubtedly models of reform.

That was not always the case, only two decades ago farmers in both countries were very dependent on government subsidies for their livelihood. According to the Federated Farmers of New Zealand, in 1984, the peak year for subsidies, nearly 40% of the average sheep and beef farmer's gross income came from the government.

But reforms were implemented quickly, avoiding the problems associated with a long and drawn-out process. By 1987, subsidies had been phased-out. Very few farmers, only 1%, lost their farms due to the transition. The vast majority survived the subsidy cuts by slashing spending, purchasing only essentials, implementing more efficient methods and through diversification. Farmers started to produce different products such as venison and wine.

Like their counterparts in New Zealand, Australian farmers survived the reduction in government subsidies by diversifying into other crops based on market demands. Farmers expanded beyond wheat, beef and wool into products more suited to Australian conditions. That diversity is now evident in Australia's agricultural exports. Whereas wheat, beef and wool dominated exports in the 1980s, their combined share of exports has fallen while there has been a surge in other products such as cotton, wine, oilseeds, dairy products and rice.

Education and training programs helped Australian farmers adjust to the reduction in state support, providing producers with added skills in production, business and risk management. According to a 1999 report by the Australian Agriculture, Fisheries and Forestry Department, "The capacity to acquire appropriate business skills in the face of rapid change is critical to the sustainability of farm businesses, both economically and ecologically."

While New Zealand and Australia have clearly changed, the United States and many other developed countries continue to lag behind by implementing higher subsidies instead of reforms. In May 2002, U.S. President George W. Bush signed a subsidy-laden farm bill that will cost American taxpayers over $180 billion over the next decade. The European Union has many skeletons in its closet as well, with a Common Agricultural Policy that provides direct subsidies to farmers. Around the world, the richest producers receive the lion's share of government support.

The mercantilist policies pursued by these governments hurt developing countries. Developed nations should not implement these destructive policies while giving lip service to liberalization.

According to Mike Moore, the former head of the World Trade Organization: "The No. 1 element of a true development agenda would be to reduce substantially the support OECD countries give their farmers, which undercuts developing countries and forces even the most efficient producers out of markets where they would otherwise be earning their living."

If Doha is to be a round for the developing world, developed countries need to move liberalization forward and lead by example. Judging from their subsidies, the U.S., European Union and many other countries are not leading the way. Tokyo recently hosted a mini-ministerial to discuss agricultural liberalization despite the fact that government support accounts for over 60% of total farm income in Japan. Developed countries have no shame when it comes to subsidies.

Reforming agriculture is crucial, since most developing nations dedicate the majority of their resources to it. Bolivia, for instance, relies on agriculture for nearly one-third of its national income. In the U.S., agriculture comprises a minute portion of gross domestic product, yet America continues to implement protectionist policies despite its talk of liberalization.

A popular American country-western song uses the phrase, "a little less talk and a lot more action." Doha's legacy should be one of action. Studies from the World Bank prove that the incomes of both rich and poor rise dollar for dollar when markets expand. Poor countries desperately need greater access for their agricultural exports to markets in developed countries.

Under the Doha ministerial declaration that launched the present round of trade talks two years ago, WTO members committed themselves to "substantial reductions in trade-distorting domestic support." Now WTO members seem to be retreating on this promise. While several countries have made proposals for reform, there is disagreement within the WTO as to how far subsidies should be reduced. Terse words have been spoken and a consensus has not been reached. Nothing has been done.

The successful examples of New Zealand and Australia prove that cutting government support is feasible. In New Zealand, growth in the agricultural sector has outpaced growth in the economy as a whole. Clearly, the end of subsidies doesn't indicate the end of farming.

WTO member states must not give in to protectionist temptations and must be held accountable for the promises made two years ago. If Doha is to achieve significant progress, members must be willing to make significant reforms. Commitment to a reform strategy needs to emerge before the end of March. Doha should not be a round that limps along but one that races ahead. The legacy of Doha should be one of exceptional reform not of failed promises.

Ms. Fitzgerald is a policy analyst in the Center for International Trade and Economics at the Heritage Foundation in Washington.

This piece was originally published in the Asian Wall Street Journal.