Just before the failed Cancun WTO Ministerial in September 2003, there was a flurry of activity in establishment economic circles. Studies came out concluding that any drastic reduction in agricultural subsidies in the rich and developed countries would not make any appreciable impact on global commodity prices. The timing of the reports was crucial.
The underlying premise was crystal clear. Prominent economists in the developed countries (and their clones in the developing countries) had ganged up to throw a protective ring around much of the US $320 billion agricultural subsidies that farmers (in reality the big transnational companies) in the OECD (Organization for Economic Cooperation and Development) were getting.
It is now the turn of the Columbia University professor Jagdish Bhagwati to join the bandwagon. Writing in the Far Eastern Economic Review (and quoted in the Economist March 23, 2005), he says: “Agricultural subsidies are certainly undesirable. But the claim that removing them will help the poorest countries is ‘dangerous nonsense’ and a ‘pernicious’ fallacy.” His colleague Arvind Panagariya defends it further by arguing that these subsidies make food cheaper for the importing countries. The timing is again perfect. The next WTO Ministerial is scheduled to be held at Hong Kong in December 2005.
Jagdish Bhagwati is a distinguished economist. After all, he holds several eminent positions, including member of UN Secretary General Kofi Annan's high-level advisory group of the NEPAD process in Africa. As a former external adviser to the director general of the WTO, special policy adviser to the UN on globalization, economic policy adviser to the director-general of the erstwhile General Agreement of Tariffs and Trade, I thought he would have by now realized the fallacy of thrusting an unjust globalization and that too by creating an illusion of reducing poverty, eliminating hunger and leading to economic growth for all.
He agrees that agricultural subsidies are “undesirable”. But in the very next sentence Bhagwati makes a complete turnaround and defends the subsidies, arguing that ending them would make food expensive for the net food importing countries, and therefore terms the demand for scrapping them as “dangerous nonsense.”
In reality, what Jagdish Bhagwati now calls “dangerous nonsense” is actually a reflection of the economic lunacy that he finds himself and his tribe in. The growing anger against the fundamentally unsound economic prescriptions being doled out by these economists has already pushed at least 54 of the developing countries into what I call a “dark age.” A majority of the developing countries have now become net food importing countries thereby gradually destroying the food self-sufficiency so assiduously achieved.
Arvind Panagariya also uses the same fallacious argument: “A study in 1999 found that 33 of the 49 poorest countries import more farm goods than they export; 45 of them are net importers of food. Subsidies depress the price of agricultural products on world markets. That hurts rival exporters, as Burkina Faso can testify. But importers gain.” Economists from the IMF/World Bank would always echo such analysis. This time it is the turn of Stephen Tokarick of the IMF who even works out how India would benefit a bit, but the rest of South Asia would be $164 million worse off. Sub-Saharan Africa would lose $420 million, while North Africa and the Middle East would face a cost of $2.9 billion.
The underlying premise is the same: agricultural subsidies in the rich and developed countries should not be scrapped.
Before we move any further, let me answer this. There is no denying that some of the least developing countries are dependent upon food imports. Good economics would surely aim at pulling these countries out rather than pushing them perpetually into the dependence syndrome. Needless to say these countries need to emerge out of the “dark age” and become economically strong. This can only happen if the world agrees to cooperate and join hands in pulling them out of the economic morass. And if you are wondering how this can be attempted or achieved, let me take you back to the times when India and China -- a third of world humanity -- literally emerged out of hunger and starvation.
India’s independence came amidst the backdrop of the Great Bengal Famine. Soon after Independence, India had begun to seek food aid and, in fact, emerged as the biggest food importer of the 20th century. After all, for a country literally on a “ship-to-mouth” existence, there was little hope. The political ramifications of importing food were felt by then Prime Minister Jawaharlal Nehru. It was as early as 1955 that Nehru realized the pain of being food dependent, and in his Independence Day address from the ramparts of the Red Fort said: “There is nothing more humiliating for any country than to import food. Therefore everything else can wait, but not agriculture.”
Jawaharlal Nehru did not seek the advice of Jagdish Bhagwati and his economist gang, otherwise India would have remained a “gone case” as most of the Sub-Saharan Africa is today referred to as. Fortunately, Nehru and his able successors followed the reverse route to globalization to attain economic sovereignty. Lal Bahadur Shashtri and Mrs. Indira Gandhi later laid the foundations of a “famine-avoidance strategy” to take India out of the blue and turn the country food self-sufficient. The strategy included raising tariffs to ensure that cheaper imports do not marginalize the farming communities. Given the right policy framework and incentives, the Indian farmers did the rest.
China too followed almost the same agricultural path to growth. Despite hiding behind the bamboo curtain, China’s remarkable turnaround in agriculture laid the strong foundations for economic and political sovereignty. Both China and India have conclusively demonstrated how important it is for any country to get out of the dependency syndrome. Both these countries couldn’t have emerged on the global map if they had followed the misguided path that IMF/World Bank and the mainline economists have been relentlessly pursuing. If India and China could do it, and do it so effectively, why can’t the same model follow for the rest of the developing world, including Africa? Isn’t it economic insanity to suggest dismantling a food self-sufficiency structure that virtually saved almost half the humanity from being led to a slaughterhouse??
For the 45 poorest and net food importing countries that Arvind Panagariya is worried about, the right path is not to remain dependent upon food imports from the United States and the European Union but to close the national borders by raising tariffs and to bring in policies and support mechanisms that provide an enabling environment for their farmers to grow more. If Indian and Chinese farmers could do it, there is no reason why African farmers cannot become economically viable.
One such way is to denounce the input subsidies paid to developing country farmers and label it as “trade distorting.” At the third annual international conference on “policies against hunger,” organized by the German government at Berlin in October 2004, John Nash, a World Bank economist, was at pains to defend the domestic subsidies being doled out to European Union farmers. In 1999, 56 percent of all EU agricultural expenditure of approximately 78 billion euros was in the form of direct payment to farmers.
These subsides are believed to be non-trade distorting and therefore are justified. At the same time, the indirect input subsidies that the developing country farmers receive were painted as the villain of the free trade regime and needed to be immediately discontinued according to the economists. Asked what the developing countries should do in the event of withdrawal of the miniscule agricultural support being made available through cheaper farm inputs, he replied: “In the World Bank’s thinking, the best way to encourage agriculture in the developing countries is to shift the farm subsidies to laying out rural infrastructure like link roads, providing electricity etc.” In simple words, infrastructure development is the surest way to make agriculture productive, he concluded.
“If rural infrastructure is what is needed to prop up agriculture then you will agree that the rich industrialized countries have already got a well-knit infrastructure in place,” this writer said, and asked: “Why do the European farmers, or for that matter a few million farmers on either side of the Atlantic, get such huge support as direct payments?”
In other words, the rich and developed countries have perfected a well-established state intervention program to ensure that their farmers get a minimum level of income. Markets therefore have no meaning for the developed country farmers. These farmers, whether they live in the US, France, Germany, Switzerland, Japan or Australia, are financially insured and insulated from the volatility of the global markets. It is only the poor farmers in the developing countries who are being forced to face the vagaries and cruelty of the markets. For the rich, the scandalous cover of “green box” subsidies protects direct payments. For almost 3 billion farmers in the developing world, even their own governments (based on the faulty advice of the mainline economists) are refusing to address the consequences of the grossly uneven playing field to which they are being exposed.
Instead, an unnecessary fear is being created over rising food prices for the urban poor. The food scare is aimed at the urban middle class knowing well the political clout they wield in the developing economies. They know that the G-20 countries, for instance, will not be able to antagonize their own middle class. G-20 countries will therefore not be able to push for scrapping domestic support -- provided through “green box” and “blue box” subsidies -- beyond a point, and that remains the last hope for protecting the western agriculture subsidies.
Let us now understand the realities of cheap food. First let us look at how the prevailing subsidy structure is making food expensive in the developed countries.
Take rice as an example. An average Indian farmer produces a kilo of paddy at approximately Rs 6.25. Taking the prevailing conversion rate of Rs 44 for a US dollar, each dollar would buy roughly seven kilos of paddy. Can the economists tell us where in the developed world can you get seven kilos of rice for a dollar? How come the Indian farmer is then priced out of the market? In that case, isn’t there something terribly wrong with the way economics is dictating the trade agenda? Even in the retail market, a kilo of rice is available for Rs 10, which means you can get more than four kilos for a dollar. On the other hand, look at the retail market in the UK. A kilo of rice is available at 2.54 pound sterling, good enough to buy 20 kilos of rice from India.
European and American consumers stand to gain immensely if they were to scrap the monumental domestic support to their farmers. First, it will mean that taxpayers in these countries do not have to support inefficient and environmentally-unfriendly production systems in their own countries. And then, if the US were to instead import its entire rice requirement it would be available at much cheaper prices than what the American consumers are now paying. Isn’t it economically foolish therefore to follow a marketing system whereby the total rice output of the United States is worth US $1.2 billion and the subsidies paid to rice growers stands at US $1.4 billion.
Do US consumers realize that they can collectively save at least US $1.4 billion every year on rice by refusing to subsidize their producers? Cheaper imports from the developing countries will further lower the retail price of rice. It would surely price out domestic rice producers but the real beneficiaries would be the consumers. And in turn it would help millions of small rice producers in the Asian countries, who would then be able to find a substantial export market thereby raising incomes. Or else, gradually they abandon farming and migrate to the urban centers looking for menial jobs. Even if the food is available at low prices they often do not have the means to buy it. The reason is simple; unlike the industrialized countries, the producer in the developing countries is also the consumer. Unless he first produces and earns his livelihood he cannot afford to buy from the market.
It is for this reason that some 320 million people, a third of the world’s 840 million hungry, go to bed hungry in India. It is not because there is not enough food in India. It is because these people cannot buy food even at “below the poverty line prices.” They do not have the money to buy the cheap food that the government has made available for them. What they need is a job and that can come only from agriculture. After all in a country that has 600 million farmers, every fourth farmer in the world being an Indian, there is no other way to provide productive employment for all than to make agriculture more attractive.
Millions are meanwhile being pushed into penury with each passing year. Millions are being driven away from their only means of livelihoods and thousands are perishing as the mainline economists continue to misguide the political leadership. And that makes me wonder when will we begin to hold the economists accountable? After all, if a bridge collapses, we prosecute the engineers. If a doctor is held responsible for the death of a patient, we take him to court. Hundreds of thousands of people have silently suffered and continue to pay the price of faulty economics. Why should only economists be allowed to go scot-free? Why can’t we hold them responsible?
Devinder Sharma is a New Delhi-based food and trade policy analyst. Responses should be mailed to: firstname.lastname@example.org.
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