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Industrial and developing countries have pursued equally misguided agricultural policies, International Macroeconomics Co- Director Christopher Bliss told a lunchtime meeting on 26 September. While the agricultural sectors of developing countries are taxed and discouraged, those of industrial countries are subsidized and protected. These policies are not only economically inefficient, but are also difficult to sustain because the volume of agricultural output is very responsive to changes in its price. Although comprehensive reform of these misguided policies is unlikely, Bliss argued that the nations concerned should extend to agriculture similar rules to those applied by GATT to trade in non-agricultural products. The continuation of present policies will lead to a damaging agricultural trade war between the United States and the EEC, which could be avoided by a coordinated reduction of agricultural output. Bliss's Table of Agricultural Compared to Manufacturing Protection in Selected Developing Countries
Bliss described the various means by which LDC policies, particularly fiscal policies, discourage their agricultural sectors. LDC agriculture seems a good target for taxation on account of its high savings-to-investment ratio. Of all the developing countries surveyed by the World Bank, only South Korea treated its agriculture more protectively, or less antiprotectively, than its manufacturing. The OECD countries, on the other hand, protected their agriculture far more than their industries, Bliss noted. But he argued that reform would not be achieved merely by demonstrating the economic inefficiencies that result from current agricultural policies. It was also essential to understand why such misguided policies are so widely adopted and what political and social forces sustain them. In both industrial and developing countries, agricultural policies serve powerful but numerically small interest groups, and have been opposed in the past only by relatively weak political forces. Such policies, although politically expedient, face an inescapable economic obstacle, according to Bliss. Even if their economic costs pass unnoticed, they can only be sustained if the supply of agricultural output changes little in response to changes in its price. Research suggests, however, that the elasticity of supply of agricultural output is high in both developing and industrial countries. This means that current LDC agricultural policies are expensive and undesirable, because unfavourable treatment and low producer prices reduce agricultural output. In industrial countries the high elasticity of supply provides the protectors of agriculture with many problems, including grain mountains and wine lakes. {v20 b900}Bliss then turned to analyse the consequences of possible reform packages. Pressure from the World Bank, for example, might induce LDCs to adopt policies more favourable to domestic agriculture. An individual LDC could benefit by adopting policies that do not discriminate against agriculture, according to Bliss, even if industrial countries' agricultural policies remained unchanged. Such reforms would increase an LDC's agricultural production and exports, and this might be accompanied by the elimination of food deficits and a reallocation of its labour force towards more productive employment in agriculture. What is good for a single LDC, however, may not be beneficial if adopted by all LDCs - the 'fallacy of composition'. If all LDCs expand their agricultural output, they will soon saturate their own markets. If they attempt to increase their exports of food, high supply elasticity means that the price of these exports may fall and the LDCs' terms of trade deteriorate. Reform of LDC policies was likely to be problematic, Bliss concluded, unless accompanied by reduced protection in the industrial countries. Bliss considered another possible scenario: agricultural policy reform in the industrial countries with LDC policy unchanged. This would involve lowering the prices of agricultural products in the industrial countries, eliminating surpluses and allowing non-industrial countries easier access to agricultural markets. While these reforms would be beneficial to industrial country consumers and industries and to LDC exporters, they would be harmful to farmers in industrial countries and to their suppliers. Bliss agreed with the World Development Report that the losers from such reforms will not just be those who gained the most from past policies, but will also include, for example, farmers who bought land at a price inflated by agricultural protectionism. Interest groups form a powerful bloc, but Bliss argued that reform would be beneficial even if existing producers were fully compensated for the economic losses they would suffer from reform. Producers have been unenthusiastic about such compensation proposals in the past because existing systems of price supports have seemed less politically transparent and therefore more reliable. But when surpluses become too large and farmers must be paid not to produce, as in the United States, then existing policy becomes just as transparent. To avoid a trade war in agricultural products the United States and EEC need to coordinate their policy reforms; the costs of reducing agricultural protection would be lower if the main exporters do so in tandem. A joint reduction of excess production would allow both the United States and the EEC to enjoy the full benefits of more buoyant international agricultural prices. Reforms by both industrial and developing countries would be the most desirable outcome, but Bliss held out little hope for coordinated worldwide reform. Nevertheless, some immediate steps could be taken that would benefit all members of the world community. One example would be the extension of the GATT 'most favoured nation' principle to agriculture, as has been proposed in the current round of GATT negotiations. This principle would, however, present some difficulties: it would require the EEC to be treated as a single economic unit, and it would have to confront the desire of many countries, particularly France, to discriminate in favour of their former colonies. In the discussion after the talk, several participants wondered about the price effects of agricultural policy reform in both industrial and developing countries. Bliss cited recent studies by Tyler and Anderson, which suggested that world agricultural prices would rise, but that this increase would be mainly in the prices of temperate crops. Since the largest producers are LDCs such as India, these price rises may even stimulate LDC agriculture. The World Development Report showed that the supply elasticity for each agricultural commodity was high, but perhaps agricultural output as a whole was subject to low elasticity? Bliss knew of no estimates of this, but he noted that whereas the overall supply elasticity of Indian agriculture, for example, was almost zero due to the lack of any further land which could be brought into cultivation, this was certainly not so in Africa. One member of the audience wondered what lags were involved in this high supply elasticity; whatever the long-run effects of price changes, significant effects in the short run were essential to create the political will to reform. The question was raised of the stability of exchange rates and of world agricultural prices. Macroeconomic policies exerted strong influence here, Bliss argued; for example, the depreciation of the dollar and the instability of exchange rates can be traced to US macro policy in the early 1970s. The current US agricultural crisis owed more to the level of US interest rates than to agricultural policies, Bliss suggested. |