Farm Subsidies Create Bounty, Boondoggles

DURING the runup to the United States election, President Bush sought to make political hay. He announced with some fanfare the government's plan to spend $1 billion subsidizing farm exports.

The September announcement followed a path well-trodden by leaders around the world. Politicians want to help their domestic farmers, and do so through price supports and protective import barriers. The result, experts say, is an inefficient and costly global agricultural system.

As the world's population grows larger and more affluent, demand for food could increase by as much as 50 percent this decade, says Dennis Avery, director of global food issues with the Hudson Institute. Rising incomes mean more people will be able to afford dairy products, meat, oils, and other foods.

But as long as trade policies are locked in the status quo, the world will be unprepared to turn this challenge into an opportunity. High trade barriers will mean instead a staggering loss in potential income and development, economists say. Burdens on both developed and developing nations

The US and European Community together spent more than $220 billion supporting the farm sector last year through higher taxes and food prices, estimates the Organization for Economic Cooperation and Development, the Paris-based association of industrialized democracies.

Such subsidies also mean that farmers in developing countries are discouraged from pursuing agricultural development, since production in most industrialized countries is much higher than it otherwise would be, says Rod Tyers, an economist at the Australian National University and co-author with Kym Anderson of a recently published book, "Disarray in World Food Markets" (Cambridge University Press).

The distorted system within which farmers operate is rife with ironies.

Consider, for example, that the wheat-export subsidies Mr. Bush announced will not put any extra money in farmers' pockets. The income of US wheat farmers depends on "deficiency payments" that the federal government pays, making up the difference between the market price and the higher government-set minimum payment per per acre of wheat, notes Harry de Gorter of Cornell University.

To help discourage overproduction under this system, farmers who get deficiency payments are required to let a certain percentage of their land lie fallow and are paid not to farm it.

When world demand for soybeans rose during the late 1980s, American farmers could have helped fill the void. Instead, Mr. Avery says, they apparently opted "to maintain the highest possible corn-payment bases" - acreage eligible for government payments. This year the US has a record corn harvest, while corn exports continue to fall. Self-sufficiency outmoded?

Avery calls for nations to shift from a goal of self-sufficiency toward a trade-oriented model in which farming would occur where

costs are lowest to consumers and the environment.

Failure to act "could probably knock as much as half a percentage point off the economic growth rates for 3 billion people," he says.

"Comparative advantages [of some nations over others] are bigger in agriculture than anywhere else," Avery adds.

Many Asian nations, with their fast-rising populations and manufacturing prowess, could enjoy a "marriage made in heaven" with strong agricultural producers such as the US, he says. Instead, Asian governments are erecting barriers to international supplies and spending huge sums to produce food domestically.

Although "food security" is an understandable aim for nations, some countries are notorious for extreme efforts to reach self-sufficiency.

Saudi Arabia, for example, went from being a wheat importer (1 million metric tons) to a wheat exporter (3 million tons) during the 1980s. The nation's production costs are as high as $500 per ton. Meanwhile wheat fetches roughly $100 a ton on the open world market, and some of the Saudi-produced grain has sold for as little as $75 a ton in Middle Eastern markets.

Following the path set by developed nations, most of the newly industrializing countries have set up import barriers to block international suppliers and subsidies to promote domestic production and penetration of foreign markets. Trade talks in the balance

Can the world trade talks - the Uruguay Round of the General Agreement on Tariffs and Trade - break the pattern of farm-trade barriers?

Negotiations to make important (though incremental) reductions in these barriers have been in a stalemate for two years, stalling the entire Round, which would cover commerce in everything from manufactured goods to patents.

European governments are reluctant to cut back on farm subsidies lest they lose the support of politically powerful farmers. France in particular has held out against concessions in the talks.

In recent days US and European Community negotiators closed in on a deal and at press time were still wrangling over the level of EC cuts in oilseed protection and export subsidies. The EC may agree to reduce export aid by about 21 percent over seven years.

"Consumers in industrial countries have little impact on agricultural policies," says Dean DeRosa, a research fellow in the International Food Policy Research Institute's trade and macroeconomic division. He adds that those consumers "would be the clear beneficiaries of liberalized prices."

Export-subsidy proponents point to benefits for governments and farmers. By emptying warehouses of foodstuffs and commodities, the programs allow governments to save money on storage and ultimately enable farm growers to earn more from a market when the surpluses that push prices down are eliminated. And subsidies can equip farmers to compete better in the international marketplace.

But such export aid might not be needed at all if other subsidies didn't cause overproduction.

In Avery's view, the net impact of liberalized farm trade would be up to a 20 percent reduction in the cost of food and $500 billion worth of benefits per year to governments, producers in developing countries, and consumers.

Some economists predict that world-market prices would rise for a number of commodities, as farmers lost incentives to overproduce. This could mean higher prices in many importing nations. Winners

The winners from farm-trade liberalization, Avery says, include:

* Countries with good agricultural resources that can be further exploited. These could include the US, Thailand, Turkey, India, Argentina, Brazil, Sudan, Zaire, Zambia, and Zimbabwe.

* Countries that face high costs of achieving farm self-sufficiency: Malaysia, Mexico, China, and North African nations.

"The Western Hemisphere is the big winner," he says, citing the region's low population density (Asia has six times as many people per acre of arable land) and supportive infrastructure.

At present, subsidies not only drain many nations financially but also cause degradation of the environment, Avery says.

Throughout the European Community (EC), artificially high food prices have encouraged the clearing of forests, draining of wetlands, and overuse of chemical fertilizers, environmental critics charge.

In the US, Avery estimates, price supports have resulted in the drainage of 15 million acres of wetlands and the use of 50 percent more chemicals since 1950.

This year, the EC began following America's lead in shifting from price supports, borne by consumers, toward a system of direct government payments to farmers. As in the US, Europe's farmers will have to keep some land fallow to qualify for payments. This system reduces overproduction, but does not solve the problem completely, experts say.

Meanwhile, food production has been depressed in many developing countries. Most African governments import food more cheaply than they produce it locally.

The reliance on imports, coupled with the desire of governments to keep food prices low for urban dwellers, discourages farming for domestic consumption, "much less production for export," Mr. DeRosa says.

Larry Birns, director of the Council on Hemispheric Affairs, highlights the impact of US sugar subsidies and quotas on Caribbean production and American households. Sweet deal

Washington spends roughly $1 billion a year protecting American sugar producers and imposes quotas on Caribbean sugar imports "far lower than the Caribbean capacity to produce," Mr. Birns says. To prevent foreign imports from underselling higher-cost US production, a surcharge is slapped on the foreign imports.

"Taxpayers are paying for subsidies of US production as well as the higher price of foreign-supplied sugar," he says. The chance of those subsidies being cut is very remote "because the sugar lobby is so strong," representing growers in many states, Birns says.

The result: American consumers pay roughly 50 cents per pound for sugar - four to five times the world market price.

Washington's impact has been far-ranging, critics say. The protectionist policies have resulted in lost markets and revenues for producers in the Caribbean, Latin America, and the Far East. Countries in these regions have seen their need for aid rise as a result. Slow withdrawal seen

DeRosa sees one force putting downward pressure on subsidies: the growing budget deficits in the US, European Community, Japan, and other countries.

Already, the expansion of subsidies appears to be losing steam; but the prospect of them being substantially reduced or simply eliminated in the near term is slim.

"Withdrawal from subsidies is a lot like withdrawal from narcotics," says Nicholas Hollis, president of the Agribusiness Council Inc., a nonprofit Washington-based group charged with promoting US food trade with developing nations.

Avery says subsidies "give the illusion of helping the farmers, but they quickly become an addiction without any real payoff."

American farmers hold the key to reform of world agricultural trade, he says. "If American farmers refuse to be bought off by the US government," then differences could be resolved, Avery says. US farmers are choosing to forego opportunities in favor of government handouts, he asserts.

In the US alone, agricultural sales would be boosted by "an extra $50 billion a year, every year, in the first decade of reforms," Avery projects. "Over the same period we would see a $100 billion to $150 billion reduction in subsidies.... We're the best- positioned agricultural producer to satisfy increased demand."

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