Pascal Lamy, the European Union trade commissioner, has recently accused Supachai Panitchpakdi, the Director-General of the WTO, of using the “misleading” and “contestable” figure of US$300 billion on “farm subsidies”. This number comes from the OECD, the only institution publishing internationally comparable information on this topic. What lies behind the estimate?
The OECD’s aim is to measure the total amount of money transferred through agricultural policies. Many governments support farmers by propping up domestic prices, behind tariff barriers and through export subsidies, but also through public expenditure going directly to farmers. Taken together, these transfers are called the Producer Support Estimate (PSE).
But there is more. Governments also provide support to agriculture in the form of "general services", for example, for research and development, advisory systems, and food inspection. The OECD also measures the associated budgetary costs, called the General Services Support Estimate (GSSE). Moreover, in some countries governments also transfer money to poor consumers through food subsidies. Together, the producer support, general services support and the taxpayer transfers to poorer consumers represent the OECD’s Total Support Estimate (TSE). This indicator, which has been published annually since the mid-1980s, is accepted by all OECD countries. Far from being misleading, it reflects the true overall value of money transferred through agricultural policies.
How much support
In fact, in 2002, total support to agriculture in OECD countries was just over US$318 billion. Of this, US$55 billion was used for general services as outlined above. Another US$28 billion of taxpayer money was channeled to poorer consumers, mainly through the food stamp programme in the US. But the lion’s share was support going directly to farmers (PSE) to the tune of US$235 billion, of which US$148 billion came from high prices resulting from tariffs and export subsidies, and US$87 billion was transferred by taxpayers through government payments to farmers.
Put another way, this amount of producer support means that as much as 31 cents in each dollar of revenue for the average farmer in the world’s richest countries comes from government support. Only the rest comes from the market.
If that is the price society wants to pay in pursuit of goals that markets are not delivering, then such policies may make sense. The fact is, however, that many price support mechanisms simply encourage farmers to produce more than their markets demand, without improving the environment or food safety. Is this sensible, particularly as the resulting trade distortions cause such tension among rich OECD countries, as well as between them and developing countries?
Clearly, in asking how much is spent on agricultural policies, it is crucial to consider overall support, rather than just government payments. Out of the Euro107 billion producer support going to EU farmers in 2002, Euro61 billion came from consumers’ pockets to pay the high prices caused by tariff protection and export subsidies, and €46 billion from tax transfers. In the US, total support to farmers was US$40 billion, of which US$15 billion came from consumers and US$25 billion from taxpayers. In Japan, farm support amounted to JPY5,500 billion, of which JPY5,000 billion originated from consumers and JPY500 billion from taxpayers.
Agricultural policies may come in different forms, but often with much the same effect. That is why the OECD’s producer support estimate adds up both government payments to farmers, often referred to as “subsidies”, and farm support provided through high prices. For example, in the U.S., support to wheat farmers comes through a government cheque per tonne of wheat produced, which raises the price farmers receive without raising the price paid by consumers. Japan, by contrast, applies import tariffs which raise the price paid by consumers and received by farmers. In both cases, the net result is that farmers receive higher prices than the market would generate. And a given price increase, whether via a government cheque or a border tariff, has exactly the same effect on domestic production, trade, and farm income.
But not all forms of government expenditure are as distorting. For example, some countries now make fixed payments to farmers, irrespective of what they produce. These payments result in less expansion of production than payments per tonne of wheat or milk produced. The key dividing line to understand is not between government payments and price support, but between policies that primarily distort markets and policies that interfere less with market forces, while also offering a better chance of achieving other important policy objectives in an effective way.
The trouble is, in the 30 OECD countries three quarters of total support still come through the most market-distorting policies, such as price support and payments per unit of production. And as OECD research has shown, such support does a poor job in achieving the objectives pursued by agricultural policy makers, like environmental protection and food safety. These policies are of primary importance in trade negotiations and are prime candidates for domestic reform. Some progress has been made in reducing market-distorting and inefficient support, both in the EU and elsewhere, but it is far too slow. If the world’s richest countries want to advance international trade negotiations, they are going to have to bite the bullet and tackle the thorny issue of farm support at home.
The debate is important, and while sound bites of one sort or another help to focus public attention on it, they don’t always hit the mark. It is simply not correct to suggest that the only "real support” is that provided by taxpayers through payments directly to farmers. In fact, support provided by consumers through artificially high prices for farm produce is just as trade distorting. This type of support requires urgent attention in WTO talks. It is time to weed out those policies that are ineffective and costly, and focus more on policies that really help governments achieve legitimate domestic goals.
OECD (2002), Agricultural Policies in OECD Countries: A Positive Reform Agenda. Paris.
©OECD Observer No 243, May 2004