Tuesday, July 25, 2006

The Doha Disgrace

The Doha round of trade-liberalization talks has collapsed. The primary cause is the intransigence of developed nations – especially the U.S., the European Union and Japan – over slashing their agricultural subsidies. While Europe and the U.S. are engaged in an acrimonious round of blame-trading over the other side's unreasonableness, it seems clear that neither side was ready to make significant sacrifices. Per capita, the farm lobbies are perhaps as powerful as any in the developed world, and the inability to rein them in, causing the collapse of talks that could have created billions of dollars in wealth in desperately poor countries, is nothing short of a disgrace.

Farm subsidies are costly in a number of ways. The most well-known are that excess produce is dumped in developing countries with comparative advantage in such production, preventing their farmers from competing, and the billions of dollars taken directly out of taxpayer pockets to pay the subsidies. These things are true, but the costs go far beyond that. They raise the price of food products in developed countries, because high-cost production becomes reasonable when taxpayers foot much of the bill. Some estimate suggest that the average EU-15 resident pays well in excess of $1000 a year in higher food bills because of the artificial incentives given to high-cost agricultural production. If the EU announced (and they are not the only sinner, by far) that it was simply going to take $1000 out of the bank account of every non-farmer in the EU and divide the money among the farmers, EU residents would never put up with it. But the poison of farm subsidies, as with most special government privileges, is that their costs are difficult to discern, hence there is little incentive to mobilize against them.

In addition, the high-cost production is carried out on relatively low-fertility land that would not be used if market prices provided the only incentives to farmers, and thus the land must be browbeaten into submission through the overuse of fertilizers and pesticides. In 2000 the OECD showed a chart, which I have been unable to find online, comparing agri-chemical use and government assistance to farmers. The positive correlation was striking. The four top jurisdictions in order in terms of subsidy were Korea, Switzerland, Japan and the EU, and the four top jurisdictions in order with respect to kg of fertilizer used per hectare were Korea, Japan, Switzerland and the EU. And so it went on down the line.

But clearly the biggest impact is in the poorest countries, which are most in need of opportunities for their agricultural entrepreneurs to earn income. (And in fact all their entrepreneurs, including the importing ones, as a deal on farm subsidies would have unlocked the entire Doha agenda.) It is thus they who will suffer the most from the Doha failure. Indeed, a primary hidden virtue of trade liberalization is that it corrals people into trade, giving them a greater stake in economic freedom and turning them away from rent-seeking and even political radicalism. That so many people piously lecture the rich countries, especially the U.S., about low levels of (completely ineffective and even corrupting) foreign aid while the power of the farm lobbies to derail much more effective changes is unfortunate. The politicians, and by implication the constituents, of the rich countries have much to be ashamed of in the whole sorry episode.


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