Agriculture: Why is it still so difficult to reform?

Directorate for Agriculture

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The breakdown of trade talks in Cancún showed, once again, the difficulty of achieving a multilateral consensus on agricultural trade reform. Many OECD countries are reluctant to reform their agricultural policies and dismantle protection, despite overwhelming evidence of the benefits. Why is reform so difficult to achieve and how can it be fostered?

In many OECD countries, the basic structure of farm programmes has changed little for several decades. The original motivations for these programmes included the need to support rural incomes during the depression of the 1930s and the desire to boost agricultural production in the aftermath of the Second World War. The needs of farming in the 21st century are very different, yet agricultural policy has tended to accumulate and to be revised at the margin; radical overhaul has been relatively rare.

In 2002, total transfers to agriculture cost consumers and taxpayers US$318 billion, representing 1.2% of GDP. This compares with an average US$298 billion in 1986-88, or 2.3% of GDP. Three quarters of transfers are provided as support to farmers, accounting for a third of their gross receipts, the rest being general expenditures on items such as research, marketing and infrastructure. There has been some shift away from market price support and payments based on output or input use towards budgetary payments that are less linked to production, but overall, output- and input-related transfers still account for three quarters of all support to farmers.

OECD research has demonstrated that market price support and other sector-wide policies fail to raise the incomes of farm households in an efficient or equitable manner. Only about a quarter of the value of price support translates into additional household income, with much of the increase in receipts paid back out to suppliers of purchased inputs, such as fertiliser, or capitalised into land values.

Moreover, when the value of support is linked to output, either directly or through higher prices, the distribution of that support is skewed towards larger, and typically wealthier, farmers. In any event, there is no evidence that farm households in industrialised OECD countries have systematically lower incomes than other households (although there are low incomes within agriculture), so policies to support incomes across the whole sector are unnecessary.

Another problem with this type of support is that it largely fails to address other social concerns efficiently, such as the environment, the provision of rural amenities, and food security. They also require trade barriers to hold them in place, making it harder for countries with a comparative advantage in farming – often developing countries – to compete.

The effects of reform on developing countries can nevertheless be complicated. For example, agricultural trade reforms could raise food import prices relative to what they would otherwise be, and could lead some exporters to lose their preference “margins”. Yet these potential “losers” are increasingly aware that subsidised imports and trade preferences are poor ways of fostering long-term development, and that there are potential multilateral mechanisms within a WTO framework or elsewhere for smoothing the transition to more productive activities, and offsetting short- to medium-term losses.

Given the overwhelming case for agricultural policy reform, it is essential to think about why reform continues to be so difficult to achieve. A fundamental stumbling block is the peculiar politics of agriculture.

With economic development, incomes increase and consumers spend a smaller share of their budgets on food. Thus, whereas consumers in developing countries typically spend about half their income on food, the figure for OECD countries is around 15%. Increasingly, consumers become “rationally ignorant” that they are paying more for their food than necessary – it is not worth the effort of becoming informed and protesting.

Weak demand growth contrasts with relatively strong gains in productivity, with the result that agriculture becomes a “declining” industry, albeit a successful one. Many developing countries have over half their workforce employed in agriculture, whereas the share in OECD countries is typically around 3%. Hence, a given transfer to producers imposes a progressively smaller burden on the overall economy. Also, the competitive process puts pressure on less efficient farmers, and increases their incentive to lobby for government support.

In addition, the decreasing size of the agricultural constituency raises the incentive for farmers to engage in collective action. This is because smaller groups are less able to “free-ride” on the benefits of lobbying by other members, as larger per capita gains can be achieved, organisational costs are likely to decrease, and shirking on political activity among members becomes easier to monitor and control.

These factors explain the obvious asymmetry that, for example, sugar producers are more likely to protest against the removal of support than sugar consumers and/or taxpayers are likely to mobilise in favour of it. However, the reasons for the political imbalance go further than straightforward economic incentives. If policymakers respond to these political pressures, then they are put in the position of having to defend existing policies. One way of doing this is to claim that the policies being pursued are in fact fair and efficient. This “noise” distorts the public debate and can drown out objective economic arguments.

Myth making

One manifestation of such noise is the propagation of agrarian myths, which include the confusion of modern commercial agriculture with rural heritage and the suggestion that current agricultural policies serve to uphold fundamental social values. Some of these myths are being eroded, partly because of health scares such as BSE and concerns about the effects of biotechnology on food safety and the environment, but also because some of the trade-offs between the interests of developed and developing countries are being brought into sharper focus, notably in the more protected sectors such as sugar, dairy and cotton. However, there is also a danger of new myths taking hold, including those associated with biotechnology and some propagated by elements of the anti-globalisation movement.

Agricultural interests can exploit agrarian myths to generate public support for existing programmes and to forge common bonds around otherwise unrelated narrow policy benefits. Political pressure can then lead politicians to collude in propagating these myths. Once politicians are lured by the support of vested agricultural interests, they too have a stake in ensuring that the public is convinced of the agrarian worth of their policy actions.

Political lobbying can also explain why some sectors are supported more than others. Whereas farmers tend to become more politically influential as their numbers diminish, larger groups are nevertheless more effective provided they can overcome the obstacles to collective action. When policies are complex – for example, where they vary by region, or by some other factor that divides sectoral interests, such as quota allocations – there are fewer incentives for free-riding. This may explain why the dairy sector is relatively highly protected.

The institutional environment is a further influence on policy. In some cases, agriculture ministries can come to see themselves as defenders of farmers’ interests alone, and so claim the maximum possible budget for their activities. Moreover, when decisions are made at the supranational level, as in the European Union, countries receiving more than they pay in may have less cause for restraint.

Economic analysis, ideology, political pressure – and even nostalgia – all feed into the process of agricultural policy formation, making it difficult to identify the true motive behind any particular policy decision. But recognition of the importance of the farm lobby suggests a few ways in which reforms may be made more politically sustainable.

First, compensation can ease the process of reform. In the United States, the 1996 FAIR Act involved a switch towards less market-distorting forms of assistance. But the return to more production-linked instruments under the 2002 Farm Act highlights the need to think not just about compensation, but, even more importantly, about effective adjustment assistance. If people can be helped into more productive, and therefore better paying, activities within or outside agriculture, that is not only good for them, it also makes it less likely that they will make demands for protection at some point in the future.

For similar reasons, it is important that policies be simplified. Market price support sounds simple, but experience shows that it requires a broad range of instruments to keep it in place, both at the border, for example, through tariffs, tariff-rate quotas and export subsidies, and internally, via production controls. Transparent payments for the provision of identifiable public goods like environmental management, or as an income safety net, may have more administrative requirements, but if everyone is treated equally the costs associated with lobbying for special favours – rent seeking – should diminish.

According to OECD analysis, a significant share of farm support is capitalised into asset values, including farmland and other sector-specific investments. Hence, there is also a need to look beyond direct income effects when considering the implications of reform, and take account of the impacts on non-farming landowners, quota holders or industry suppliers.

It is also essential to look beyond the immediate interests of OECD countries and take a global perspective. Some issues that have assumed high importance among OECD countries, such as the “multifunctionality” of agriculture, have had little resonance at the global level.

So, where does all this leave the Doha round? The OECD’s assessment of the Uruguay Round Agreement on Agriculture was relatively upbeat, describing it as a “watershed” in that agriculture was finally brought under the auspices of WTO rules, despite the fact that it left high levels of support and protection intact. However, that optimistic assessment was based on the assumption that, having established a system of ground rules, the next round would tackle protectionism more forcefully. The failure of trade negotiations in Cancún suggests that, for this optimism to have been wellfounded, countries will need to face down political pressures and deliver on the promises they made when launching the Doha Development Agenda.

References

OECD (2002), Agricultural Policies in OECD Countries: A Positive Reform Agenda, Paris.

OECD (2003), Agricultural Policies in OECD Countries: Monitoring and Evaluation, Paris.

©OECD Observer No 240/241, December 2003




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