Monday, November 07, 2005

Agricultural Subsidies: Almost Conclusions

I've been doing a good bit more research into agricultural subsidies, and the effects they have on politics. At the heart of it, they're very simple - basic free market economics have a drive toward producing the goods that are most profitable, and to counter this, states offer money to produce goods that are necessary - wheat, milk, or the like. However, with demands now coming from various parts of the world (Brazil, most recently) for the USA to do away with subsidies, the response has been that they'll drop them when Europe does. And Europe is not quite unwilling to do so.

As I understand it, the Republican party in the USA is generally in favour of unfettered trade. As such, the current administration will probably be reasonably happy to stop paying subsidies. There are two reasons they can't simply do so. One of these is that with the subsidies gone, farmers will turn to more profitable crops, and the goods will have be imported from other areas, hence raising prices, with that money flowing out of the country. The second is the agricultural industry itself, and while it's not as powerful in terms of liquid cash as other industries, it reaches deeper and further in terms of influence. Washington is driven by industrial lobbying groups as much as any other mechanism, and a great many of the Republican states are stronger in agriculture than the more urban Democratic ones.

Europe's more left-leaning governments are much inclined towards subsidies to begin with, and agricultural subsidies are a major component of the economic functioning of Europe. The US offer to drop subsidies if Europe will do likewise has therefore led to some not inconsiderable campaigning, with France leading the pro-subsidy efforts. Ireland has thrown its weight behind France on this, at least officially, and probably with considerable public support. Part of this is because, two years ago, France did away with the connection between produce and subsidies, and agreed to pay each farm then in existence a standard subsidy for the following ten years, based on previous subsidies. The argument is that French farmers are now free to produce for the market, and after the ten years are up, the subsidies can be done away with. According to an article in The Australian, some French farms are now receiving 40-50% of their income in subsidies.

From that same article, "Across Europe, however, there is a growing view that the massive agricultural subsidies cannot be maintained. While gradually declining, agricultural subsidies still represent as much as 55per cent of the EU budget even though farmers account for less than 5per cent of the EU's labour force." Particularly considering the expansion of the EU, that number is becoming very significant.

At the core of it, the political maneuvering around subsidies come down to two points: money, and the principle of free trade. Money is a little alrge for me to examine just yet. I'll move on soon to examining free trade as a principle, but I want to look first at a topic that's having effects here in Ireland at the moment: strikes within essential services. One friend of mine in the US was surprised to find that the Post Office here is a company, not an arm of the state, and has asked me to comment on the effects of that. Given that there's no postal delivery today in Ireland, due to a strike that is sort-of going ahead despite some resolutions yesterday, this is rather timely. Of course, privitisation of services concerns free trade in any case, so I expect one to lead into the next.

Part of the point of this research, of course, is to make up my own mind on things. I haven't yet come to a conclusion about subsidies. It seems obvious to me that the production of necessities like wheat and milk should not be left to the market to determine, because it may choose simply not to provide them. Envoronmental concerns are also important, and they simply will not be addressed by the market. However, 55% of the budget for 5% of the workforce is clearly not sustainable. So I have more thinking to do, and while I'm moving my research on to other topics, I'll be keeping an eye on news coverage of subsidies.

8 Comments:

At Wednesday, November 09, 2005 8:49:00 a.m., Anonymous Anonymous said...

my main problem with the subsidies is that they contribute to the poverty in the 3rd world by closing our markets to them. This also was a bid issue of the Geldoff project. This also is my reason for wanting to abolish them. If we are globalising, we need to to so fairly and equitably, not in a club of the rich. If that means majorly modifing our agricultural production, so be it. Or even stopping it and using our natural environment for a park/wilderness rather than agricultural production.

(graylion)

 
At Thursday, November 10, 2005 12:49:00 p.m., Anonymous Aidan Kehoe said...

A shorter comment this time, in the anticipation that it might be read; note that by removing the necessity for tariffs--thus allowing production of the agricultural goods in parts of the world with lower labour costs--and, in the EU, necessitating consolidation of production with the related economies of scale, removing subsidies will probably lower the prices the consumer sees, not raise them.

 
At Thursday, November 10, 2005 1:02:00 p.m., Anonymous Aidan Kehoe said...

Oh, and --

It seems obvious to me that the production of necessities like wheat and milk should not be left to the market to determine, because it may choose simply not to provide them.

That's almost impossible. Once there's a scarcity, or it's perceived that there might be one, people will ramp up their production in anticipation of higher prices. And the world market is so big and so flexible that wheat and milk will be to be had somewhere, though maybe at prices that will make potatoes and orange juice attractive substitutes. (It is fascinating to me that most of West Africa is lactose-intolerant, and as such, lives happily without milk.)

 
At Thursday, November 10, 2005 1:08:00 p.m., Blogger Drew Shiel said...

Aidan Kehoe wrote:

note that by removing the necessity for tariffs--thus allowing production of the agricultural goods in parts of the world with lower labour costs--and, in the EU, necessitating consolidation of production with the related economies of scale, removing subsidies will probably lower the prices the consumer sees, not raise them.

Interesting. Could you conjecture a drop in the price of agricultural land in developed areas, where labour costs are high? Farming can't be profitable if you can be undercut by someone paying 10% of your wage bill.

 
At Thursday, November 10, 2005 1:12:00 p.m., Blogger Drew Shiel said...

Aidan Kehoe wrote:

Once there's a scarcity, or it's perceived that there might be one, people will ramp up their production in anticipation of higher prices. And the world market is so big and so flexible that wheat and milk will be to be had somewhere, though maybe at prices that will make potatoes and orange juice attractive substitutes.

Given the argument in your previous comment concerning lower labour costs, this is very likely true for the next two to three generations.

However, all that money will then be flowing out of the purchasing country, with only consumables coming in. I'm not well up enough yet on economics to say for sure, but that looks like a bad thing to me.

 
At Thursday, November 10, 2005 4:46:00 p.m., Anonymous giftederic said...

I largely agree with what Graylion has to say and in addition feel that if the government desires there to be more of a certain good, it can offer to pay more to *anyone* who produces it. This will probably mean outflows of cash to 3rd world countries but that is not a 'bad thing'. If we are going to preach free market economics to the rest of the world, we need to have one ourselves.

 
At Saturday, November 12, 2005 5:54:00 p.m., Anonymous Aidan Kehoe said...

There should be a drop in the price of agricultural land in developed areas once subsidies are ended, yes. Of course, in Ireland, people are obsessed with buying property to live in, and people may be motivated to buy agricultural land with the speculation that it may be rezoned.

If you have the money to invest in labour-saving capital that would be impractically expensive in those countries where labour costs are 10% of yours, then it should still be possible to compete with them. One person farming 320 hectares with machinery versus 40 people farming that area in, say, West Africa, with minimal machinery, leaves a decent margin for profit for the first-worlder.

New Zealand ended their subsidies and tariffs, but their food is still competitive in their internal market. I don't think the European experience will be much different; vegetables in Poland, for example, cost pennies as it is, and that's with very labour-intensive production methods--transport costs from, say, Africa or South America will make vegetables from there uncompetitive.

Beyond that, food is a small fraction of what is traded in any modern economy. Sourcing it cheaper abroad, and redirecting resources to those areas where the country is more competitive in its exports, will have a net positive impact on trade figures, all other things being equal. (Which they're often not, of course.)

 
At Friday, May 26, 2006 1:31:00 p.m., Anonymous Will said...

Bit of background on the US politics side of things:

The Right doesn't want any part of Argricultural subsidies; government, to the American Right, has no place in commerce whatsoever. The problem lies in the economic structure of politics; agribiz is a large contributor to the center-right party. Rural farm states also produce many ideologically conservative senators, which the structure of the Senate gives disproportionate power.

 

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