A New Approach to Reducing Intervention on Farm Products

I wrote this to set out my thinking.

Keywords: Globalisation & Trade;

The economics of the world food system in the twenty-first century is likely to be dramatically different from that of the twentieth. In the past, food prices fell relative to manufacturing prices, as manufacturing concentrated in a few rich (mainly North Atlantic but later also Japan) countries. With the shifting of the world’s manufacturing to lower wage (mainly Asian) economies, the demand for food has risen while the price of manufactures has (relatively) fallen. The FAO has predicted there will be future food shortages because production will not be able to keep up with demand. Hence the likelihood is that the future trend price of food will rise compared to manufactures. That has already been happening since about 1990 (coinciding with East Asian industrialisation).

Much of the response to the shortage will be domestic as new technologies and more capital production methods are introduced (institutional reform is also necessary). However, we should not overlook that there will be also limitations as the world tries to cope with global warming and with biofuels as an alternative to oil. Meanwhile the available land is restricted, there is much soil degradation and water shortages are growing (and aquifers being depleted); ocean fish are also being disappearing.

But international trade in food is not insignificant and will become more important if, as seems likely, the industrialising nations’ supply of food cannot keep up with rising demand. The international trade suffers from a very high level of interventions such as subsidies on domestic production, and quotas and tariffs on imports, especially, but not only, in rich countries. These distort the efficiency of world food supply and the utilisation of the resources whicvh supply it.

An optimist might hope that the rising food prices might mitigate these interventions. In principle those which are a form of income support ought to phase out as relative food prices rise. However not all the interventions are solely about income support and, in any case, because of the erratic way they apply they are likely to maintained and continue to cause production distortions which affect efficiency. Indeed as food prices rise the protection nominally be ratchetted up, nominally to protect farmers when they fluctuate downward but basically to continue to cosset them.

Some of the traditional arguments against the protection remain or become even more expansive. The interventions are fiscally expensive (or indirectly so if market restrictions have the effect of raising prices). As the rich countries enter an age of fiscal austerity (probably for at least a decade) reductions in fiscal outlays would be welcome. (Even the European Union might welcome reductions in farm outlays as it is confronted with the requirement that effective monetary union requiring greater fiscal integration and so a higher degree of fiscal discretion than applyies when half its budget finances the common agricultural policy.)

Moreover, the dumping of the rich countries’ surpluses undermines the capacity of the poor nations to nurture their own farmers. The single best support they can be given is better prices – which will not only add to their standard of living but provide the incentives and the funds to invest and expand their farming. (The pessimist points out that a host of other changes, including institutional – especially land – reform, are also needed.)

The implication of this analysis is that the traditional dispute over farm interventions needs to be extended in the light of the changing world food system. The change is likely to be sufficiently large (and ultimately for political reasons very complex), to make any analysis at this stage preliminary. Additionally any analysis needs to be put in the context of the evolution of the world food system (including response to global warming and biofuels), and not be solely focused on the interventions (which explains this long introduction).

Any analysis probably begins with that the world needs a sustainable and efficient world food supply and distribution. Our best understanding that such a system will be driven by market decisions in which relative input prices reflect the marginal costs of transformation and output price reflect the interaction between the input prices and the public demand for the products. As a general rule these conditions are met best with a minimum of public interventions, especially eliminating those which involve subsidies, tariffs and quota.

Thus international trade in reform in food (agricultural and fishing) becomes a part of the international strategy to improve world food supply. Without them the threats from food shortages will rise.

What makes the reform feasible is the expected rise in food prices. Bit of a bugger for the poor, but that cant be prevented. It can be moderated by improving world food supply (including less intervention) and of course the higher prices benefit subsistence/low income farmers.