Every country faces a dilemma — how to match domestic priorities with international obligations. A judicious reconciliation calls for sagacious leadership.

G. Chandrashekhar

Huge subsidies doled out by industrialised countries year after year to support their agriculture distort global agri-commodity production and trade. Farmers are compensated in many ways, including direct payment, if, the market prices fall below a target level. Output-linked payments encourage growers to produce more.

The surplus produce is then dumped on to the world market as a result of which world prices get depressed artificially.

US cotton subsidy

In the US, fewer than 25,000 farmers cultivate cotton and they receive annually payment to the extent of $3 billion as subsidy. The US is amongst the world’s largest producers and continues to be the topmost exporter of cotton.

As much as two-thirds of cotton produced in the US is exported. Low-priced US cotton depresses global cotton prices and hurts the competitiveness of other suppliers, for instance, African cotton. Despite a WTO ruling against US cotton subsidy, there is no evidence of its withdrawal.

Countries that committed to reducing trade-distorting domestic support, reducing high tariffs, phasing out export subsidies and grant greater market access have not fulfilled the commitment to any notable extent. Not only do developed countries not abide by their commitment, but also some of them use non-tariff barriers to restrict imports, including use of SPS (Sanitary and Phyto-Sanitary) provisions.

The Doha Round of global trade negotiations under the WTO has remained inconclusive so far because of a standoff between groups of countries on the magnitude and speed of addressing the subsidy issue. There is belief that OECD farm support would continue to remain high, despite pressure from developing countries, and continue to impact markets.

Priority for livelihood issues

Every country faces a dilemma — how to match domestic priorities with international obligations. All countries — developed and developing — face domestic compulsions (political, economic, social); but they also have to fulfil their international obligation, say under the WTO or other agreements.

It goes without saying that livelihood issues must get priority. Governments must exercise utmost caution when a commitment can potentially affect the livelihood of already poor and vulnerable people.

For instance, in the developed economies, less than 3-4 per cent of the population is engaged in agriculture. Farm sizes are large (several hundred, and even thousand, hectares) and are mechanised. What an American or European farmer practises is agribusiness. Contrast that with, say, India.

In an agrarian economy such as ours, farm sizes are rather small (80 per cent of farmers own less than 2 acres of land) and farming is a livelihood issue for about 600 million people. Policymakers must bear these and other factors in mind.

Importantly, countries that are hurt by lack of progress in WTO trade negotiations must begin to put their house in order. Governance and investment are the twin-key to success on the farm front. While on subsidy, developing countries have a lot to learn from what OECD countries do.

In addition to spending billions of dollars on providing direct support to growers, there is another category of expenditure called ‘General Services’. Support for general services to agriculture has been rising in recent years and stood at $69 billion in 2006, up from $67 billion in 2005 and $63 billion a year earlier.

General Services support

The General Services support is the monetary value of gross transfers to general services provided to agriculture as a sector and includes expenditure on research, development, training, inspection, rural infrastructure, marketing and promotion. This kind of support is not provided to individual farmers but is intended to benefit all stakeholders.

Latest estimates suggest the US spends $35 billion and the EU $15 billion on providing general services. Through a combination of technology adoption and subsidy, developed countries continue to produce more mainly for the export market, and are able to dominate world trade.

While this state of affairs is expected to continue for some years, the potential for growth in both production and consumption of agricultural commodities lies very clearly in Asia over the next 10-15-year timeframe.

In particular, China and India (with a combined population of 2.4 billion and both growing at 9-10 per cent a year) both of which are already major producers and consumers of farm goods, are set to witness heightened activity on the production and consumption front.

(This article was published in the Business Line print edition dated November 25, 2007)
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