The ongoing Doha Round of multilateral trade talks on liberalisation of trade in goods and services, which began in November, has run aground. The point of contention is the inflexibility of rich countries over reduction of farm subsidies.
Attempts to persuade trade majors, particularly the US and the European Union (EU), to dismantle trade-distorting farm subsidies have not worked. The 1994 Uruguay Round Agreement on Agriculture is still the only legally binding multilateral system of rules that sets bounds on domestic support to agriculture and binds trade policies. In the stalled negotiations on agriculture, the last negotiating text dates back to 2008 draft modalities, covering market access, export competitiveness and domestic support.
OUTPUT-LINKED SUBSIDY
In this context, a recent report released by the Paris-based inter-governmental think tank of rich countries, the Organisation for Economic Cooperation and Development (OECD), makes for grim reading. In its 2012 flagship annual publication
After decades of decline in the real price of agricultural commodities, both the current situation and the medium-term outlook point to relatively high commodity prices. In essence, markets today are playing the role of government policy in providing recompense to farmers.
Support to producers stood at $252 billion (€182 billion). Even as there is a generalised move away from support directly linked to production, the report finds that such support is still about half the total.
While the support levels still vary widely across OECD countries, it said during 2009-11, New Zealand had the lowest level of support at just 1 per cent of farm income, followed by Australia at 3 per cent and Chile at 4 per cent. The US at 9 per cent, Mexico at 12 per cent, Israel at 13 per cent and Canada at 16 per cent were below the OECD average of 20 per cent.
Even as the EU has reduced its level of support to 20 per cent of farm income in the face of budgetary pressures and economic troubles in the peripheral countries of the Euro Zone, support to farmers remains remarkably large in Iceland at 47 per cent, South Korea at 50 per cent, Japan at 51 per cent and Norway at 60 per cent.
OTHER MECHANISMS
The countries of the rich club are now moving at different speeds away from supporting farmers through policies that raise domestic prices. Other mechanisms to channel support are progressively being put in place, such as payments based on historical area, livestock numbers and farm income or receipts, which do not directly affect current production decisions.
“The less that support is directly coupled to production, the less production and market distorting it is”, the report contends.
However, the report rightly rues that the share of support in the form of payments based on area, animals, receipts and income for the OECD area as a whole increased from 9 per cent of the OECD PSE (producer support equivalent) in 1986-88 to 19 per cent in 1995-97 and to 39 per cent in 2009-11.
In Australia and the EU, such payments constituted respectively 50 per cent and 65 per cent of the total PSE in 2009-11, no doubt having a trade-distorting effect on global grain markets. It is unfortunate that this reorientation was also substantial in Mexico, Switzerland and the US with such supports constituting around one-quarter of total farm support in these countries.
A report, used as a key input in the discussion of the G-20 Agricultural Group, states that “substantially reducing trade and production-distorting domestic support, improving market access opportunities, eliminating export subsidies and strengthening the disciplines on export restrictions will improve the enabling environment for investment and productivity growth” in agriculture.
The OECD report aptly bemoans that the “reform process towards more decoupled forms of income transfers to farmers has been unequal across countries and overall price support remains the largest form of support in many OECD economies”.
While market price support is provided through tariffs and other border measures and government interventions in the indigenous markets, it said last year there was some movement to reduce these interventions. But, “export subsidies and other trade-distorting measures are still in place”, the report adds, echoing the long-standing complaints of the developing world against the avalanche of farm subsidies being doled out by the rich that distorts its grains trade, both as exporters and importers.
The report is also forthright in pointing out that “there remains relatively little policy efforts directly targeted to improving the environmental performance of agriculture and ensuring the sustainable use of land, water and bio-diversity resources; ensuring farmers have available to them the tools necessary to manage their own farm risks, along with clear and predictable systems to address unavoidable catastrophic losses; and to increase both public support and private incentives for innovations across the food and agricultural systems including research and development, technology transfer and education and advisory services”.
With most OECD countries engaged in fiscal consolidation, the opportunity costs of budgetary resources are tight and agricultural expenditures are likely to tighten. It would be difficult for them to invest in farms and augment productivity. And, pruning unsustainable farm subsidies would be bad politics.