Subsidise me, please

A little while ago a commenter asked why I hate subsidies so. I said I’d try and work something up, but the truth is that because this isn’t really my field of expertise, I rely on others. What I’ve read in the past has convinced me that production subsidies in general are a very poor idea, but I would only be parroting what I’ve read if I were to explain why. Fortunately I don’t have to.

There’s a somewhat brief discussion at an Economist blog. Better yet, Tim Haab at Environmental Economics has recently done a very good job of explaining, in reply to a student question. This is Haab’s own summary:

Who benefits from U.S. farm subsidies?

1. U.S. farmers—increased income

2. Foreign consumers—lower prices and increased quantity supplied of staples

Who is hurt by U.S. farm subsidies?

1. U.S. consumers—someone has to pay for the subsidies and that will come in the form of higher taxes and higher domestic food prices.

2. Foreign farmers—crowded out of the market by the surplus crop generated in the U.S.

Actually, you can delete U.S. from that without altering the arguments one bit. Subsidies generally create a surplus, and governments sell that surplus on world markets at whatever price they can get to reduce the cost of the subsidy. That can be good news for famine relief agencies, who may be able to get their supplies at low cost. But the gifts to rich country farmers damage farmers in poorer countries, who cannot compete with subsidized imports. They also damage the health of consumers there and at home, because the products that are available cheaply are generally rich in energy but very poor in other nutrients. Subsisting on a diet of cheap wheat flour fried in cheap oil and dusted with cheap sugar may prevent hunger, but it brings ill health in its wake.

There are many other ill effects of subsidies that people more expert than me have examined at length, but that’s enough to be getting on with and I think it justifies my dislike for them. In fact a few years ago the organization I work for, which is dedicated to improving the lot of poor rural farmers, was examining its future and wondering what directions it should take. At a retreat we were asked what the single most important contribution we could make would be. I said, “quit and devote ourselves to dismantling agricultural subsidies”. There was a somewhat embarrassing silence.

There are ways of supporting farmers that don’t encourage over-production. One is to pay the farmers not for what they grow but for how they grow it. Pay them for managing the landscape, in other words, and for providing goods and services such as cleaner water, hedgerows, public access and that sort of thing. One that I used to be a bit familiar with was Tir Cymen, a scheme in Wales ((Which, strangely, is not easy to find written-up on the intertubes.)). Farmers had to draw up a plan for environmental management, which if approved resulted in additional payments to them. As I recall it was pretty successful, and there other similar schemes dotted around Europe, which is still struggling to get rid of its main forms of (production) subsidy.

Most subsidy schemes in the developed world were created some time ago when there was a desire to support small farmers and secure domestic food supplies. They have been subverted by changes in the nature of farming, such that most of the cash goes to a few farmers (or farming companies) and the small farmers continue to struggle. The big ones, the ones getting the big money, can afford to lobby hard to protect their incomes. In times of crisis starving people may benefit from subsidized food, but rich governments might actually save money by simply buying food when emergencies require it and giving that food to the relief agencies.

All that is why I hate subsidies. Over to you …

12 Replies to “Subsidise me, please”

  1. I am certainly no expert but I agree with you completely. Australian farmers, for example, get no subsidies yet have to compete in world markets with everyone else.As soon as you introduce inequalities, there is an immediate bias to the biggest, most subsidized producer and this is always to the detriment of those who can least afford it.

  2. Is it really the subsidies you hate, or what they’ve turned into over time?

    I heard something on the BBC World service a week or two ago that said something along the lines that European farmers receive about 30% of their income from subsidies and US farmers about 11%. The important difference is US subsidies go almost exclusively to the wealthiest farmers, whereas the EU subsidies are more uniformly distributed.

    Would it really be so bad if a fair arrangement was worked out where subsidies primarily benefited the smallest and poorest of farmers, and were either limited to foods destined for domestic consumption, adequate steps taken to prevent distortion of global food markets or subsidies paid to farmers in the developing world as well? Of course I understand the complexities of this would be enormous, very difficult to sort out and made all that more complex by the current drive towards globalization.

    Is it just your belief that this would be totally impossible?

    It seems to me that food is too political an issue for governments to just leave their hands off. It’s simply a reality that governments are going to take an active role. In the great depression farmers were going bankrupt because farming wasn’t profitable without subsidies, and after WWII there were food shortages that needed to be addressed with government intervention.

    If there are going to be government interventions and subsidies, it seems to me the need is for making sure that they are as constructive as possible rather than taking a firm stand against them.

    I agree in a perfect world there would be no subsidies, but I just don’t see that happening.

  3. You are right Patrick, subsidies, if well thought out, can do what they are supposed to and in Europe, from what you say, this seems to be happening and I only hope it continues to be enough to support the small producers who are keeping alive traditions that ought not be lost. How to apply this to the developing world where governments are often not able to provide much, is the problem. This then may require subsidies to come directly or indirecly from other countries.

    I am sure it could (and should) be done, but there would be a lot of resistance by multi-national agricultural companies and it would take strong leadership. With rising transport and production costs, large-scale agriculture is beginning to feel the pinch. This can go 2 ways – retreat or fight harder. My money is on them fighting harder!

    If Australian farmers can survive without subsidies (and this is sometimes an issue, especially during hard times. They can get drought assistance though), why couldn’t/shouldn’t American?

  4. Patrick (and Kate) it really is the subsidies I hate, for their (un?)intended consequences. Australia and New Zealand have shown that farmers can thrive without subsidy, once the dead wood has been shaken out of the system. And no matter how painful that is, the system is much healthier afterwards.

    The problem, for policy-makers, is that farmers are not stupid. They certainly understand what they are doing far better than policy-makers. As a result, farmers invariably find a way to game the system. I’ve seen it when sheep subsidies were changed from headage payments — which essentially reward farmers for having too many sheep and overstocking — to density-based payments. Because these were based on the size of the whole farm, they did nothing to stop overstocking in a particular pasture or on the moors and fells. Of course a really smart farmer would not want all the ruination that comes with overstocking. But that requires a very long time-horizon and is also subject to the tragedy of the mismanaged commons.

    In sum, I don’t think Europe’s regime is currently any smarter than the US’s. All that lovely set-aside will vanish now with high prices. It just isn’t possible to manage production by interfering in the market. The only “subsidies” that do work are those that pay the farmers for public goods, as I mentioned, such as landscape or erosion control, and even those need very careful policing.

    Subsidies aren’t the only dumb agricultural policies, but they are the most obvious. There are also all those regulations that essentially involve a fixed fee, which becomes a negligible part of the cost of business for a large producer but drives a small producer out of business. I’m thinking, for example, of the cost of registering seeds on the EU Common Catalogue, which I suspect is the single most important factor behind the loss of diversity in Europe. And the fixed cost of compulsory veterinary inspectors in abattoirs and slaughterhouses, easily born by big businesses and of almost zero use in making slaughter more humane or meat safer. Meanwhile, the small butchers who can actually take the time to treat an animal well go bankrupt.

    This may seem a long way from questions of agricultural biodiversity, but it isn’t. The dead hand of regulation plus the bluntness of almost any subsidy scheme you can think of conspire to rob the world of small farmers and small farms, in all their diversity.

  5. I would say there’s plenty of room for abuse when it comes to subsidies not associated with farming, like taking care of the land.

    I understand they are stopping with the subsidy because of world food shortages, but with reference to the former subsidy that was given for unused agriculture land, I had a friend who had it all figured out.

    The subsidy was supposed to be for growing native plants that had been displaced by modern agriculture. My friend, who is not a farmer, owned a piece of agricultural land and was able to get the subsidy anyway. So they came along and planted a whole bunch of wildflower seeds on it. The flowers came up, and the first year were great! After the first year, grass overtook the land and the flowers were gone. Since they never came by to inspect the land, it didn’t matter that the native plants were gone.

    It was a rule that no animals were allowed on the land between January and August (because the land was supposed to be made idle under this subsidy), but he was allowed to cut the grass anytime he wanted. He made a deal with a local farmer who came by, cut the grass and fed it to his animals that were kept indoors. After August, the animals could be moved out on the land.

    In addition to what the local farmer gave him (I’m not sure how much), he got a €1000 per year subsidy for keep his 8000m2 piece of land idle and growing native plants, even though he did neither and is not a farmer, all within the rules of the subsidy.

  6. Perverse effects of subsidies are easy to find at the level of the global economy as well as in farmer game-theory. But perverse it would also be to dismantle it all (good luck anyway) and introduce free trade. There will never be a level playing field for trade in agriculture, you don’t have to read Sachs to know that the geographical disadvantages for many countries, not to mention villages, will keep them down and out. I basically think globalization is a cool thing, but not on all areas. Sachs do, and supposedly he claims that “It is globally more efficient for tropical regions to be fed by temperate-zone exports.” There goes the agricultural biodiversity in the tropics.

  7. Countries play games, just like farmers do.

    Sachs would certainly not be my go-to guy on subsidies, and I’d like, if you have it, a reference for the quote. But seriously, why would villages with geographical disadvantages be badly off? If they can grow their own, using all the tools and techniques at their disposal, and some new ones that maybe have not been developed, they would indeed be able to compete with food from temperate zones, which in any case would not be nearly so cheap if it weren’t for subsidies and unpaid-for externalities.

  8. There are also biological reasons why agricultural productivity is higher in temperate areas than in the (sub)tropics, that is, outside of their area of origin. This is a fairly general pattern for crops (Jennings, P., and J. Cock. 1977. Centers of origin of crops and their productivity. Econ. Bot. 31: 51-54). So I don’t think tropical farmers would win the race against temperate farmers, even without subsidies. But I agree that there are good ways to help agriculture without directly subsidizing production.

  9. The Sachs quote is second-hand from this. But it probably doesn’t do him justice, as he also says this, and I am not sure why I pulled him in to this at all. Let me try to say it myself instead.

    I see you nibbled an article in the economist about the CAP a few days back. It is clever as usual, but also a great example of their typical reductionism when dealing with this matter. I don’t know much about the CAP, but the reforms referred to in the article as a “health check” sounds interesting: “It suggests ending remaining subsidies linked to production, in favor of payments for tending the landscape while choosing what to grow. Most of these ideas will get through in some form, albeit watered down (eg, governments will still be allowed to pay farmers to rear sheep and goats on pretty, if unprofitable, mountaintops).” It sounds to me like the scheme is moving in the right direction, and the same is the case in the marginal country I am writing from.

    Why don’t I hate subsidies? Because 1) I think they can be effective to maintain a culturally and biologically diverse agriculture in the countries where they are delivered and 2) I think there is a flaw in the argument saying that subsidies in developed countries excludes agricultural products from poor farmers from the profitable markets in the developed world.

    Actually I spend this weekend on one of those “pretty mountaintops”. Not in the EU, but in Norway, on the farm of a couple of friends of mine in Valdres. The steep and patchy fields were fresh green as the spring is late in this part of the country. We spent the night drinking Italian red-wine and the days putting up a new fence so the grassland would be ready for the sheep with their lambs this week. My friend also thinks subsidies are lame, but he accepts them, and he says there is no way his or his neighbors’ farms would survive without them. In fact, this whole country is marginal for agriculture and you got to be a fanatic niche-market optimist to believe that agriculture would survive here without some kind of support from the government. Now, would it matter if we closed it down? I think so, but it is probably boarder-line to sentimentality to say that I think farms and farming villages have some kind of intrinsic value. I think the cultural landscape has an esthetic value. Agricultural biodiversity in Norway can’t boost about high numbers of crop varieties compared to, say Nepal, but landscapes are also a dimension of diversity. However, I suspect such emotional arguments disqualify me from The Economist’s discourse on the matter.

    Then to the question about exclusion of the poor guys. In a frictionless free-trade world where agricultural products are just another commodity, yes. But in the real world, no. Actually Norway has had duty and quota free market access for about 50 LCDs in many years. The market is open to all kinds of agricultural products, but still the import under this scheme is mainly meat from Botswana, Namibia, Brazil and Uruguay, and molasses (!) and cut flowers from Ethiopia and Tanzania (sustainable exports?). I don’t know if the EU has something similar to this scheme? Anyway, I think this shows a flaw in the rhetoric about how shutting down subsidies and opening the markets for agricultural products from the south will benefit the poor. The landlocked village growing maize on subsistence plots will never be able to compete, no matter how good the market access. Might just be that Bob Geldof has been lured by the free trade lobbyist on this point? No doubt “structural” things in economy and governance hinders “development” in the ag-sector around the developing world but it is just way too simplistic to fault subsidies as such for this. I tend to think we need more subsidies; subsidies for farmers in the south for incredible important job they are doing –a job the market just ain’t giving a proper price for.

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