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This was written in response to a long article
by the Editorial Board of the New York Times on Sunday, July 20, 2003,
“The Rigged Trade Game.”
For more information see “The Relative Impact of Trade Liberalization on
DevelopingCountries,” by Mark Weisbrot and Dean Baker.
False Promises on Trade
By Dean Baker and Mark Weisbrot
July 24, 2003
The New York Times editorial
(7-20-03) on the developed countries' agricultural subsidies and trade barriers
massively overstates the potential gains that developing countries might get
from their elimination. While many of the agricultural subsidies in rich
countries are poorly targeted, and in some cases hurt farmers in developing
nations, it is important not to exaggerate these impacts. The risk of doing so
is that it encourages policymakers and concerned NGOs to focus their energies on
an issue that is largely peripheral to economic development, and ignore much
more important matters.
To put the problem in perspective:
the World Bank, one of the world's most powerful advocates of removing most
trade barriers, has estimated the gains from removing all the rich countries'
remaining barriers to merchandise trade -- including manufacturing as well as
agricultural products -- and removing agricultural subsidies. The total
estimated gain to low and middle income countries, when the changes are phased
in by 2015, is an extra 0.6 percent of GDP. In other words, an African country
with an annual income of $500 per person would then have $503, as a result of
removing these barriers and subsidies.
The Times editorial
misrepresents current economic research on this topic in a number of ways. For
example, the $320 billion in annual agricultural subsidies in rich nations is a
highly misleading figure. This is not the amount of money paid by governments to
farmers that would be less than one-third this size. The $320 billion
figure is an estimate of the excess cost to consumers in rich nations that
results from all market barriers in agriculture. Most of this cost is
attributable to higher food prices that result from planting restrictions,
import tariffs and quotas.
This distinction is important,
because not all of the $320 billion ends up in the pockets of farmers in rich
nations. Some of it goes to exporters in developing nations, as when sugar
producers in Brazil or Nicaragua are able to sell their sugar in the United
States for an amount that is close to three times the world price. The higher
price that U.S. consumers pay for this sugar is part of the $320 billion in
subsidies to which the Times editorial referred.
Another important misrepresentation
is the idea that cheap exports from the rich nations are always bad for
developing countries. When subsides from rich countries lower the price of
agricultural exports to developing countries, this will benefit consumers in the
developing countries. This is one reason why a recent World Bank study found
that the removal of all trade barriers and subsidies in the United States
would have no net effect on growth in sub-Saharan Africa (“Unrestricted Market
Access for Sub-Saharan Africa: How Much Is It Worth and Who Pays,” [http://econ.worldbank.org/files/1715_wps2595.pdf].
There is also a very important issue
concerning the displacement of people employed in domestic agriculture but
this issue does not arise in the standard economic models used by multinational
institutions such as the World Bank and the International Monetary Fund, or
generally accepted by the editorial board at the New York Times. It took
the United States 100 years -- from 1870 to 1970 -- to reduce our employment in
agriculture from 53 to 4.6 percent of the labor force, and the transition
nonetheless caused considerable social unrest. To compress such a process into a
period of a few years or even a decade, by removing remaining agricultural trade
barriers in poor countries, is a recipe for social explosion. Removing the rich
countries' subsidies or barriers will not level the playing field -- since there
will still often be large differences in productivity -- and therefore will not
save developing countries from the economic and social upheavals that such
"free trade" agreements as the WTO have in store for them.
Insofar as cheap food imports are viewed
as negatively impacting a developing country’s economy, the problem can be
easily remedied by an import tariff. In this situation, developing countries
would benefit far more if the ones that want cheap subsidized food have access
to it, whereas the ones that are better served by protecting their domestic
agricultural sector are allowed to impose tariffs without fear of retaliation
from rich nations.
This would make much more sense, and
cause much less harm, than simply removing all trade barriers and subsidies on
both sides of the North-South economic divide. It is of course good that such
institutions as the New York Times are pointing out the hypocrisy of
governments such as the United States, Europe, and Japan, for their insistence
that developing countries remove trade barriers and subsidies while keeping some
of their own. But their proposed remedy will not save developing countries from
most of the harm caused by current policies.
It is important to realize that from
the standpoint of developing countries, low agricultural prices due to subsidies
have the exact same impact as low agricultural prices attributable to
productivity gains. If the Times considers the former to be harmful to
the developing countries, then it should be equally concerned about the
potentially harmful impact of productivity gains in the agricultural sectors of
rich countries.
While reducing agricultural
protection and subsidies in rich countries might in general be a good thing for
developing countries, the gross exaggeration of its importance has real
consequences, because it can divert attention from issues of far more pressing
concern. For example, the IMF continues to play the role of an enforcer of a
creditors’ cartel in the developing world, threatening any country that defies
its edicts with a cutoff of access to international credit.
One of the most devastated recent
victims of the IMF’s measures has been Argentina, which saw its economy thrown
into a depression, after the failure of a decade of IMF-supported economic
policies. Argentina’s fate is widely viewed in the developing world as a
warning to other countries that might diverge from the IMF’s recommendations.
One result is that Brazil’s new president, elected with an overwhelming
mandate for change, must struggle to promote growth in the face of 26 percent
interest rates demanded by the IMF’s monetary experts.
Similarly, most of sub-Saharan Africa
is suffering from an un-payable debt burden. While there has been some limited
relief offered in recent years, the remaining debt burden is still more than the
debtor countries spend on health care and education. The list of problems
imposed on developing countries can be extended at length bans on the
industrial policies that led to successful development in the west, the
imposition of patents on drugs and copyrights on computer software and recorded
material, inappropriate macro-economic policies imposed by the IMF and the World
Bank. All of these factors are likely to have far more severe consequences for
the development prospects of low and middle-income countries than the
agricultural policies of rich countries.
Dean Baker and Mark Weisbrot are Co-Directors of the Center
for Economic and Policy Research, in Washington D.C. (www.cepr.net)