The Hindu Business Line : Support that distorts

In addition to GM technology, farm subsidies play an important role in impacting agricultural production growth and trade. Developed economies that are grouped as OECD (Organisation of Economic Cooperation and Development — a group of 29 countries) spend huge money as subsidy to support farms and farmers.

According to the latest OECD data, estimate of support to agriculture during 2006 was $372 billion, slightly down from $382 billion in 2005 and the record $388 billion in 2004. This represents 1.0 to 1.1 per cent of total OECD GDP. The total support estimate comprises, broadly, ‘producer support’ and ‘general services support’.

Producer support, which has varied between $290 billion and $270 billion in each of the last three years, comprises mainly market price support to producers. There are also payments based on inputs used, area planted and so on.

General services support comprises expenditure relating to research and development, inspection, infrastructure, marketing and promotion, public stockholding and so on.

It is important to emphasise that despite some reduction, OECD agriculture continues to be characterised by high levels of support.

However, large differences in the level of support persist between countries. Progress in reducing the level of support remains uneven across countries.

However, greater progress has been made in changing the way in which support is provided to producers. Some supports are acknowledged to be production and trade-distorting. For instance, those linked to output or variable inputs.

There is a decline in the share of such support. Admittedly, most support is still for specific commodities; but policies allowing more flexibility to producers are growing in importance. High levels of farm support in the OECD countries have been a contentious issue at the Doha Round of World Trade Organisation negotiations. Multilateral agricultural trade negotiations that have been going on for five years got stalled recently due to perceived inflexibility of negotiating countries. Successful outcome has so far remained elusive.

The spending pattern

Which are the major countries that spend humungous amounts on producer support? European Union (25 countries) tops the list with payment of $138 billion in 2006 ($134.3 billion in 2005) followed at a distance by the US, $29.3 billion ($41.9 billion). Japan, and Korea, are other big spenders. It is widely known that in the 1990s and till the early years of the current decade, the global agricultural market was characterised by rising output and falling prices.

The combination of technology and subsidy resulted in significant increase in production of grains, oilseeds, sugar, cotton, milk, meat and so on. The negative impact of the economic crisis in South-East Asia for some years since 1997, as also problem of animal diseases that erupted from time to time, weakened the markets. As a result, global agri-commodity prices were rather depressed.

Danger of distortion

Although the world’s population doubled between 1960 and 2000 and levels of nutrition improved markedly, the prices of the world’s major food staples, rice, wheat and maize fell by around 60 per cent.

The fall in price indicated that globally not only did supplies keep pace with demand, but also outstripped it. It is well acknowledged that even now market prices support and output payments by OECD countries remains dominant. Such supports distort production and trade in agricultural goods.

Surplus production of farm goods in industrialised countries is dumped onto the world market which creates an artificial glut and depresses world market prices. Weaker prices hurt agrarian economies dependent on farm exports the most. In the next edition, we shall see how subsidies hurt growers in poor countries.

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