Hurting first, healing second

In the Doha round of negotiations held two years ago, the Northern governments solemnly promised to provide better access to developing countries, cut support to agriculture and stop subsidising any attempt to dump the world market with surplus products from developed countries. But things did not improve at all and there was, in evidence, a perpetuation of distortions and inequities. The promises were honoured by breach. It seems to me that the policy that developed countries had long been pursuing is that of hurting first and healing second. That implies that agriculture of the developing countries should be destroyed first through an arsenal of protectionist policies and at the end, they be treated with aid.

Realities and research

Recent researches by the International Food Policy Research Institute (IFPRI) gave an account of the farm fallacies that developed countries continue to commit. I had the privilege of paging through two seminal articles on such policies, which amply articulated the dynamics of the deterrents deployed by developed countries. Joachim von Braun and Ashok Gulati (along with respected other authors) provided precise preview of the agricultural policies pursued by both Northern and Southern countries. They called for a rationale application of state interventions in the realm of agriculture in both developed and developing countries for ensuring a sustainable agricultureal livelihood system. There is another eloquent exposition of the issues in "Development Outreach" by Kevin Watkins (July 2003).

The pertinent question is: why subsidies should shatter the world's poor? First, because three-quarters of world's poor people live and work in the rural areas of Southern countries. Most of them are small farmers. Second, Northern agricultural policies are having devastating impacts on the agriculture of the Southern countries and thus the livelihood ladder, on which they tend to depend, is being weakened. Allow me to cite few observations from the papers written by the authors.

Farm fallacies

Each year, reportedly, industrialised countries spend $ 300 billion as support to agricultural producers. This is roughly six times the aid that they put in the accounts of the developing countries. The amount is also said to be more than the total incomes of the 1.2 billion people in the world living on less than $ 1 a day. The 'subsidy superpowers' -- as the US and the EU are comically called -- account for 60 per cent of rich country agricultural support spending. There is, of course, a subtle difference between the two. EU subsidies represent a larger share of the value of farm output while US spends more per farmer. The latter also concentrates on a narrow range of products. Both, however, tend to tag those with social objectives of their respective countries. But such a notion, allegedly, subsides one important scenario: in both the areas, subsidies result in inequities. For example, the biggest 7 per cent of the farmers receive more than 50 per cent of the total subsidy. Subsidy distribution in EU and US is supposed to be more unequal than income distribution in Brazil -- one of the most unequal countries in the world.

One could recoil by asking: why should one poke one's nose in the matters of domestic subsidies? After all, it is their money and they preserve the right to do anyhting they deem to be desirable.

Fun to some, foul to others

The answer is obvious. Unfortunately or fortunately, the world is growing globalised mostly at the prescriptions of the developed countries. Ipso facto, the helpful subsidy in Northern societies has been hurting the Southern societies via the global ripples. One could take the case of cotton. In 2001, US cotton growers received $ 3.6 billion in government support -- three times the US aid to Africa. Since US is world's largest cotton exporter accounting for 40 per cent of the world market, the subsidy-induced surplus reduced the price in the world market by a quarter to cripple African farmers. In West Africa alone, 10-11 million people depend on cotton cultivation to eke out a living. In addition, the crop is a major source of foreign exchange and government revenue. The American subsidy axed the income level of the poor households to put them below poverty line. In Benin, for example, the price decline translated into a four per cent increase in the incidence of poverty or 250,000 people sliding down. Burkina Faso loses more from American subsidy than it gains from debt relief. By and large, the American subsidy to farmers emerged as a death penalty to African farmers. Fun to some, foul to others!

American neoclassical economists could do well in calculating the comparative advantage in cotton production. By any standard of judgement, West African cotton growers are far more efficient than US producers. Fewer than 10 per cent of US growers would be competitive in the world market without support. But in 2000/01, the subsidy provided to American cotton growers could be higher than the total national income of Burkina Faso and Mali. It is not comparative advantage per se but comparative access to subsidies that seems to matter most. What else can be called concocted comparative advantage?

Sourish sugar

Europe is among the costliest producers of sugar in the world. It is also the dominant exporter of white sugar in the world. EU farmers are reported to be paid three times the world price of sugar to dump 7 million tons -- surplus generated by subsidy and hence concocted comparative advantage -- in the world market. As a result, non-subsidising exporters like Malawi and Thailand end to suffer seriously.

Escalating exploitation

Exploitation of the developing countries by the developed ones has many facets and we mentioned some of them in the preceding paragraphs. Average tariff rates of agricultural goods in US and EU are five times higher than manufactured commodities. Escalating tariff- duties -- that rise with stages of production -- is another instrument to constrain exports of the developing countries. Allow me to set an example from Kevin Watkins of Oxfam: "If Latin American tomato exporters make the mistake of processing the vegetables into sauce, the tariff they face rises by a factor of six per cent. Average EU tariffs on fully processed foods are twice as on products in the first stage of processing. Tariff escalation serves the deeply pernicious purpose of keeping poor countries trapped in low value added segments of the agricultural trading system."

Devils in developing countries

The above mentioned episodes apply to Northern countries, especially of EU and US. In Japan and Korea, rice production is heavily subsidised. Following the foot steps, some of the Southern countries also tend to embrace subsidy as a solution to agricultural problems. Brazil provides huge subsidy to agriculture as others do with important ramifications.The super subsidy powers among developing countries are, for example, India and Brazil. In a recent book: "The subsidy syndrome in Indian Agriculture", Ashok Gulati and Sudha Narayan gave an eloquent and quantitative submission of subsidy syndrome in Indian agriculture. For example, power subsidy increased from 43 per cent in 1983/84 to 64 per cent in 1999/00, fertiliser subsidy went up from 14 to 22 per cent but irrigation subsidy declined from 43 per cent to 14 per cent during the same period. Of late, Indian cereal exporters are reported to be subsidised with its attendant consequence of dumping ground in Bangladesh.

Negative sum game

The notable negative impacts of subsidies -- be it on developing or developed countries -- are mainly two fold. First, inequitable distribution of subsidies where the rich get richer and the poor poorer and second, wrong market signals generated by the concocted comparative advantage created by such subsidy. Economic theory would suggest that subsidy only suppresses the ailment rather than cure it and this could, possibly, be explained by the continuity of support for decades and even in developed countries -- the clamour of comparative advantage. The infants never grew old nor are they likely to gain adulthood in the presence of huge subsidy for inefficient use of resources.

Ways out

The Cancun conundrums carry important connotations. The developed countries should uphold the promises of the Doha round. As the developed countries have social obligations to protect their farmers' interest, so do the other parties. There must be a deal that addresses the issues of the developing countries, especially of the least developed ones, judiciously without jeopardising the interest of the basic economic principles of production. A failure to do that might round off the rounds of WTO talks and might push the world into a regime of restricted trade -- an era of 1970s or 1980s. The rich could afford to be less rich but the poor cannot afford to be more poor. There is both economics and ethics in the conundrums created by the Cancun conference.

Epilogue

There is a Swahili proverb and I quote Kevin Watkins: " When the elephants fight, the grass gets crushed; when the elephants make love, the grass gets crushed". Whether US and EU make love or fight each other developing countries seem likely to be demolished.

Abdul Bayes is Professor of Economics at Jahangirnagar University