Agricultural subsidies in poor countries ...

… are making a comeback.

After years of timid liberalisation efforts in the agricultural sector the momentum appears to have been lost. Part of this has to do with the hypocrisy of our own rich countries, which has been all too evident throughout the Doha round of trade negotiations. The persuasiveness of the technical advice provided by the World Bank is clearly eroded when the political leaders of the bank’s main shareholders (i.e. us, the rich OECD countries) appear incapable or unwilling to reduce their own agricultural subsidies.

The spike in food prices during the first half of 2008 has also led to a renewed focus on agricultural development and public investment in poor countries, including new multi-billion-dollar commitments from the G8 leaders at their latest meeting last month. Despite the well-meaning intentions of the donors and the bureaucrats that will eventually manage these funds, the reality is that a large proportion of these funds will likely be channelled towards unproductive subsidies.

I do not think agricultural subsidies in poor countries are necessarily a bad thing – there are informational asymmetries and credit market failures that provide an economic rationale for them sometimes. I even had a fleeting moment of fame two years ago being quoted in defence of the economics of the Malawi fertilizer subsidy in a front page New York Times article. I also believe subsidies can be designed in ways that support market development, which is what we tried to support the Government of Malawi with.

But in practice these nuances become too complicated for the politicians in charge, for whom the heart of the matter always appears to be to increase (or maintain) the size of the subsidies, rather than increase their efficiency and impact. Delivering the subsidies through Government structures rather than market ones also seems too difficult to resist for politicians. Thus we get the massive write-offs of agricultural debts in India or the delivery of fertilizer through government shops in Malawi, without a thought being given to the question of who will provide credit or who will invest in the fertilizer supply chain in future.

I got thinking about these issues again as I was reading “The Wealth and Poverty of Nations” by David Landes. Explaining why the Industrial Revolution and the era of capitalism took off in Britain of all places in chapter 15, he states “one can hardly exaggerate the contribution of agricultural improvement to Britain’s industrialization”. The tone of those few paragraphs appears to suggest that industrialisation was possible because first Britain was able to feed itself from its own production.

As much as I like Landes’ book (a highly recommended read), I am a little disappointed at the way this issue is addressed. Dan Morgan’s “Merchants of Grain” (an obscure source, I know) discusses Britain’s grain imports during the 19^th century. As early as 1815 there were trade laws regulating cereal imports. Albeit these had very protectionist elements, e.g. forbidding imports when domestic prices fell below a certain floor to protect domestic farmers, they show the increasing importance of imports early on in the century. Grain prices in the Polish port of Danzing often set the wheat price in England and the protectionist Corn Laws were finally repelled in 1846, leading to complete liberalisation of cereal imports. These imports, as much as any improvements in British agriculture, made it possible to feed an increasingly urban and industrialised workforce.

Both the G8 leaders discussing poor countries today and David Landes discussing 19^th century Britain focus exclusively on domestic agricultural production missing a factor at least of equal importance in achieving food security: liberalisation of agricultural trade, including getting rid of protectionist subsidies to rich-country farmers.

[Apologies for posting without including a single chart - that is a habit I don't want to get into]