Does the CAP harm the global poor?

by Chris Bertram on July 26, 2006

I wish Daniel would post more on CT and less on the Guardian’s Comment is Free site, partly because I worry that regular CT readers may sometimes miss his pieces. Today he has a really interesting article arguing that agricultural subsidies aren’t always bad for the global poor and, indeed, by lowering prices for Africa’s consumers, may often be good for them. That definitely goes against the conventional wisdom (both left and right) in blogdom. Definitely worth a read.

{ 35 comments }

1

Henry 07.26.06 at 2:20 pm

abb1 – you have been banned for one week – see the thread on Juan Cole. You will be allowed to comment again from next Tuesday.

2

dsquared 07.26.06 at 2:33 pm

I thought I had written something similar on CT in the past but history reveals that I didn’t.

3

Ray 07.26.06 at 2:52 pm

You were working as a waiter in a cocktail bar
When Chris met you
Chris picked you out, he shook you up, and turned you around
Turned you into someone new
Now five years later on you’ve got the world at his feet
Success has been so easy for you
But dont forget its Chris who put you where you are now
And he can put you back down too

4

Adrian Weston 07.26.06 at 3:06 pm

Interesting, it makes me think of the arguments of environmental economists like David Pearce who were arguing in the early 90s for ending trade embargoes on endangered species (Elephants, Economics & Ivory – Earthscan Publications) and instead pushing for managed trade.

5

Kevin Donoghue 07.26.06 at 3:19 pm

I presume this piece on Aaronomics is also Daniel’s. I thought it deserved a CT slot. So that makes four d-squared outlets; are there any more?

6

Jake 07.26.06 at 3:23 pm

Does this argument apply equally to low-paid Chinese labor being beneficial for US autoworkers, because they will spend less money on their cars, and instead of building simple brake pads they can build more complicated hybrid drivetrains?

And can we at least agree that import quotas and sugar tariffs are bad for poor farmers in 3rd world countries?

7

dsquared 07.26.06 at 3:33 pm

re: 6: no, it’s specifically an argument about agriculture. There is a general argument that export subsidies are in general an inefficient way to give money to foreigners, but in industrial production the argument is much more vulnerable to being overturned by strategic-trade type considerations.

tariffs are always bad, which is why a move from tariff-based to a subsidy-based agricultural policy was a really good thing when it happened in the EU.

8

John Emerson 07.26.06 at 4:51 pm

Perhaps D^2 gets tired of being the designated wacko on a generally stodgy site.

This is pure speculation on my part, but I would find that a heavy cross to bear, and perhaps he does too.

9

Chris Bertram 07.26.06 at 4:57 pm

Jesus Christ #3, how f-ing embarassing is that. It is a privilege to have Daniel here, and I’m not responsible for anything.

10

matt d 07.26.06 at 5:00 pm

Stodgy? CT? John Emerson, do you read Belle’s posts? There are many adjectives that I’d apply to them, but ‘stodgy’ ain’t on the list. (And we love her for it.)

11

John Emerson 07.26.06 at 5:13 pm

Perhaps that responsibility stresses Belle too.

12

Jake 07.26.06 at 5:18 pm

Wouldn’t strategic-trade considerations be more or less orthogonal to the question of “do these subsidies help the people in the competing industries in other countries”? I’d imagine these to be something along the lines of “The Korean government subsidizing their steel industry is good for Americans, but America has a strategic interest in having a domestic steel industry, so we have to refuse the theoretical benefit and indeed retaliate.”

13

harry b 07.26.06 at 7:49 pm

I wish he’d post at CT more because CT would be better if he did. Not a complaint Daniel, but would you consider double-posting, or having one of us (since you’re too shy to do it) do a weekly link to all your CIF posts?

14

David Weman 07.26.06 at 8:00 pm

Eh, only the English contigent is stodgy.

15

joe o 07.26.06 at 8:12 pm

3 is pretty funny.

16

Paul 07.26.06 at 8:22 pm

I found this surprising:
“the only African country which could produce sugar at anywhere near the same cost as Australia might be Malawi but even then it would be a risky thing”
My understanding is that the Australian sugar industry is a heavily-subsidised series of rotten boroughs that continues to exist only because of its disproportionate political influence. The idea that they are actually good at making cheap sugar while paying first world labour costs is hard to believe, though I’d be interested in hearing otherwise.

17

Maynard Handley 07.26.06 at 9:38 pm

After reading the comments to the Guardian post along with Daniel’s rebuttals I think a fair summary of the reason people find his position problematic is the following:

Daniel’s argument is that Africa has comparative advantage in producing goods that are labor intensive, examples in the agricultural sector being eg flowers or fruit, rather than producing bulk goods like sugar and wheat.

I think the reason people find this an unlikely scenario is an assumption (which may be reasonable, may be reasonable for parts of Africa, may be completely racist — take your pick) that Africa is not “advanced” enough for such production.
One aspect of this might be that this sort of production pulls everyone into a market rather than a subsistence economy, and such an economy has the potential to collapse pretty dreadfully into famine if the rains fail, there’s no fruit therefore no money to buy food etc etc (the standard Sen famine scenario). Ie such an economy, while more efficient is also more volatile, and too volatile for extant Africa.
Another version of this would have the villain not as drought but as whoever are this year’s bandits, marauders, would be liberation armies and so on. Such people could easily destroy the cash economy in part of country, once again leaving no subsistence economy to fall back on.
A different version of the problem is the infrastructure issue; that flowers and fruit require organized corporations and roads and functioning electricity to drive refrigerators and so on, all of which may not exist to sufficient extent. The same problem bedevils manufacturing.
Yet another version of the problem is the venal state issue; that subsistence agriculture is left alone, but anything unusual and smacking of organization is going to be stolen, taxed to death or banned so that the cousin of the minister of finance doesn’t face competition.

I am not enough of an Africa expert to say the extent to which these are real issues, as opposed to unfair stereotypes. I know that when I was last in South Africa a few months ago, there was a lot of complaining about Chinese companies setting up textile factories, the local white who used to own such factories muttering darkly about the terrible conditions under which such factories would operate (a continuation, of course, of their long respect for human rights during the days of apartheid).
My guess is that the Chinese will get their South African factories, will find them profitable, and that the whining will quieten down. The signficant point, however, which goes to my discussion above, is why are the Chinese creating these factories in South Africa, not Mozambique or Angola where wages would be a whole lot cheaper and the extant opposition rather less fierce? My guess is that the infrastructure in those places, both material and procedural (law, bureacracy, police etc) is just not good enough.

18

Maynard Handley 07.26.06 at 9:40 pm

The more important reason why Daniel should post more here and less at the Guardian site is that I (and god knows how many other people) can’t post comments at the Guardian site.
I have tried to register three times and every time the process dies partway through.

And old media wonder why internet savvy people hate them!

19

Abi 07.27.06 at 12:04 am

This article by Arvind Panagariya, a Columbia economist, may be relevant here; it has many strands, but one of them — that agricultural subsidies in rich countries could actually help (some) poor countries — appears similar to Daniels’s.

20

Daniel 07.27.06 at 12:37 am

I am apparently allowed to cross post everything here – I had assumed without checking that it all became irrevocalby the copyright of the Guardian but apparently it doesn’t. I had worried about posting links for fear of dragging the Guardian blog commenters over here.

21

Ray 07.27.06 at 2:48 am

So Chris, you’re saying that Daniel was working as a waiter in a cocktail bar, that much is true. But even then he knew he’d find a much better place, either with or without you?

22

john m. 07.27.06 at 3:09 am

I’m sure that this may be covered in other comments elsewhere but a couple of things:

the CAP subsidy regime for milk and grain is not a volume subsidy; it’s a non-trade-distorting flat rate payment to the farmer

I can’t quite follow this. If the Government pays a farmer x to effectively reduce his cost of production to a level below the market cost in the absense of that payment, such that he can then sell his products for less that he would have been able to do so in otherwise, is this not a trade (market) distortion?

The farm subsidy regime is basically an inefficient way of sending money from us to the third world, with domestic producers taking a cut.

Thay may well be the case but it most certainly not why the CAP exists – at best what is described is a side effect of the EU’s policy to support agriculture internally. The lgoic of the statement also suggests we should stop doing this as it is an inefficient way of trasferring money.

23

bad Jim 07.27.06 at 3:16 am

There is a case to be made for indigenous production, for both agriculture and manufacturing, which is perhaps not captured in Ricardo’s abstractions, namely the know-how and the infrastructure, the services underlaying the final output.

I’d argue that if Africa was feeding itself, or America making the things its citizens buy, the necessary investments would be made and the next generation schooled in how things can be accomplished. More people would have ownership in their futures and their countries would be less threatened by the vagaries of the market or the misfeasance of their governments.

Every country ought to be able to demonstrate the entire food chain to its citizens and its children, if only for educational purposes.

When DeLong blithely supposes that, as the dollar declines, American manufacturing exports will rise, I worry that too much of our capability has withered away in the meanwhile.

24

agm 07.27.06 at 3:46 am

ray,

I may be less than totally sober, but that is f’n hilarious.

25

Jimmy Doyle 07.27.06 at 4:03 am

Daniel,

First thoughts are often best. We don’t want CiF commenters coming over here! You think you’ve changed your mind: you’d better change it back, or we will both be sorry.

26

Daniel 07.27.06 at 4:14 am

Johnm: think about it this way – if the government gave Porsche a billion dollars, then they could afford to sell Boxsters for a dollar each. However, in fact, they would still sell them at the market clearing price, because just ‘cos you’ve got a billion dollars doesn’t mean you’re going to want to make a loss selling Boxsters. A flat rate subsidy, like a flat rate windfall tax, doesn’t have marginal effects.

27

Aaron_M 07.27.06 at 4:42 am

Yes, least developed countries dependent on the world market for food imports will be hurt by significant reductions to support in the agriculture in developed countries. The economic modelling for full liberalisation of the agricultural sector predicts increases in global world market prices for the major food commodities. If you are dependent on world markets for food and do not have the capacity to produce the food you need domestically you will be hurt by liberalisation. The least developed countries of Africa that are net-food importers have serious food security problems today, meaning that large portions of the population live with chronic under nourishment. If world market prices for food go up and the benefits from liberalisation to their export markets (i.e. in the agricultural sector) do not compensate for this rise of import costs (which in many cases they will not) then we will see a worsening of the food security situation. More people will die from starvation.

Those developing countries that have a competitive advantage in the agricultural sector are harmed by the huge levels of support in developed countries because 1) this support depresses world market prices and 2) it takes away from them market share. However natural exporters like Brazil, Argentina, Malaysia, and Indonesia do not have the same food security concerns. For net-exporting developing countries it is more often an issue of lost income that the further loss of life.

This is how we get to the reasoning that we should keep the CAP for humanitarian reasons, but we should remember that domestic support in developed countries is an important part of the reason for why Africa’s least developed net food-importing countries find themselves vulnerable to global markets for their food supply. Over the last 45 years the production of food domestically in these countries has decreased significantly in part due to the fact that artificially depressed world market prices undermined domestic production and the strategic efforts of developed countries to gain market share in developing countries, sometime even using food aid for this purpose. Certainly the dependence of world markets for food would be much less if we had not spent huge amounts of money on agricultural support over a fifty year period. Thus, we in the rich parts of the world have played an important role in creating the conditions in which starving African countries are dependent on the CAP.

If we liberalise then Europe will be the biggest winner economically speaking and least-developed net food-importing countries will be the biggest losers. But when we say that this shows that we should not liberalise what we are really saying is that we know that Europeans will not take responsibility for the situation we have created over the past 50 years and take serious measures to address the food security problems in Africa given liberalisation. We will take the benefits and will not do nearly enough to address the costs to Africa of our policies over the past 50 years. It is an admittance of our own moral weakness that makes the ‘humanitarian CAP’ argument work.

28

soru 07.27.06 at 4:54 am

26: that would be true for Porsche, because those making the decisions have MBAs.

It’s not obvious that those European farmers who haven’t been to business school would behave the same way.

Some farmers might be more like the typical owner of a small record company or football club, who if given more money, would use that money to sign as many bands and players as possible while still avoiding bankruptcy.

Any studies on this?

29

Daniel 07.27.06 at 4:56 am

Farmers go to agricultural college, and they are in my experience sharp enough to know that you don’t get rich by spending money on growing stuff at a loss. (It’s rather academic these days anyway as lots of big subsidy payments are actually conditional on taking land out of production).

30

john m. 07.27.06 at 7:41 am

Sorry, but I don’t think your example holds up but rather than get bogged down in that let’s go back the case in hand. Essentially you seem to be contending that subsidies have no effect on the market price being charged (in your Porsche example, this means the subsidy would go straight to the producer in the form of additional profit,yes?) as the value of the subsidy is either being passed on to the market or it isn’t (partially or in full). If it is, then it affects the market price, correct?

Your last post makes this even more explicit in that they wish to keep prices at a level greater than the natural market equilibrium, hence they pay a subsidy which is not tied to production of goods but is in fact tied to the non-production of goods. Why bother with this if the payment does not affect the market otherwise i.e. overproduction is not causing an issue?

I still think it is a flawed argument to contend that the CAP does have an effect on trade via price distortion – you can make your case as to why that is a good thing but the price effect must be present – much like how welfare payments create a de facto minimum wage for each recipient which is generally higher than the payment itself.

31

john m. 07.27.06 at 7:55 am

That would be: “I still think it is a flawed argument to contend that the CAP does NOT have an effect..”

32

Daniel 07.27.06 at 8:13 am

John: yes, my argument is that a flat rate subsidy unrelated to the quantity produced, does not effect the quantity produced. I have decent support from nost orthodox Marshallian economics here.

The only caveat is that there are dynamic effects; the existence of the subsidy keeps some farmers in business who would otherwise exit the farming industry; the EU pays them to reduce capacity for this reason, because we have decided for political reasons that we don’t want all the farmers to give up farming at once. But this isn’t “trade distorting”, because the period in which farmers enter and exit the industry is much longer than the period over which export and production decisions are made.

33

john m. 07.27.06 at 8:23 am

Daniel, I’m arguing that price effects exist not whether quantity effects do. Simply put, I contend that there is massive overproduction and capacity and one of the effects the CAP is to keep prices artifically high. If not the CAP, what is in fact keeping the prices so high? In any event, I freely confess I have not kept up with this but are much of the subsidies not indirectly connected to quotas and thus quantity produced? I concur with the statement that a flat rate subsidy unrelated to the quantity produced, does not effect the quantity produced, I just do not agree that the CAP is in actuality that pure a subsidy – whether intentional or not.

34

Daniel 07.27.06 at 9:11 am

John, I think we’re arguing at cross purposes here. The CAP includes subsidies, tariffs, quotas and exemptions regimes (and market operations though not so much any more); I’m just talking about the subsidy element here. Note by the way that poor countries benefit greatly from the CAP keeping prices high within Europe as poor countries under the “Everything but Arms” regime can sell within Europe at high tariff-protected prices without paying the tariffs.

35

john m. 07.27.06 at 12:20 pm

Fair enough! The CAP is still a dog’s breakfast though…despite any unintended beneficial side effects for poorer contires.

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