Chapter 23 – Policies that lower the price of food by increasing supply

I. Implicit subsidies that lower prices to farmers

A. LDCs use government polices to keep food prices low (price to consumer and price to farmer)

1. Discourages agricultural production in the country

2. Is an implicit subsidy to consumers (mostly urban) since it keeps food prices down

3. Is an implicit tax on farmers since it keeps the prices they receive below world market prices

a. Result is an income transfer from farmers to consumers

B. Noncompetitive procurement1. Farmers are required to sell their crop (usually grain) to the government buyer for a below-market price

2. Amounts to a tax on growers

3. Provides an incentive for farmers to switch from growing grain (main food of the poor) to growing a crop that can be sold at market prices (often fruits and vegetables eaten by the rich)

C. Administered prices1. Prices at the farm-gate and at retail are set by the government

a. Often set below the world market price

2. Implicit tax discourages production

3. Gives farmers an incentive to sell on the black market

4. Prices may not be allowed to vary by time or place

a. Discourages storage

b. Discourages transporting food to where supply might be low

D. Export taxes on ag products1. Generate money for the government2. Lower the price received by farmers because exporters pay them the world price minus the export tax

a. Discourages agricultural production

E. Overvalued domestic currency1. As development occurs, demand for

foreign goods increases.This increases the demand for foreign currency, and thus raises its value relative to the domestic currency (or causes a fall in value of the domestic currency).The government attempts to stop this fall by fixing the exchange rate at a high value for the domestic currency.

2. Example:Official exchange rate: 5 pesos = $1Market exchange rate: 10 pesos = $1Farmer exports 1 pound of beans which

are going for $1/pound.Only gets 5 pesos at the official rate.Would have gotten 10 pesos at the market rate.Farmer is taxed 5 pesos/pound of beans exported.

3. World Bank studies show that overvalued exchange rates have played the prime role in inhibiting agricultural performance

F. Limits on cash cropping

1. Government may limit the amount of cash crops that can be grown in order to encourage food crop production

2. This policy may not work because:

a. The region may have a comparative advantage in producing the cash crop

• Because of climate, soil, etc. it may be a better use of their resources to grow a cash crop to sell and use the money to import food

b. Cash crop production is often labor intensive thus providing jobs for poor landless laborers

II. Explicit taxation of agriculture vs. implicit food subsidies

A. Want to avoid excessive taxation of agriculture

1. Producers commonly taxed 50% or more on farm products that are part of implicit food subsidy programs

2. Export taxes could be as high as 50-75% on farm products

B. Heavy taxation of agriculture:1. Steers resources away from being used in agriculture2. Slows improvements in productivity in agriculture3. Lowers employment in agriculture4. Slows the overall growth rate of per capita income

C. Explicit taxes1. Examples:

a. Tax ag land

b. Tax ag income

c. Tax ag products at the consumer level instead of at the

farm level

2. More likely to be applied equitably relative to other sectors of the economy

3. Do not favor production of one product over another

4. More economically efficient

III. Urban biasA. Policies that favor urban areas over rural such as:

1. Favor industrial development over agricultural development2. Protect industry and tax

agriculture3. Channel resources from

agriculture to industry (from rural to urban areas)

B. Urban bias slows growth of the entire economy

1. Most of the poor live in rural areas and work in agriculture

a. <20% of investment for development goes to ag, yet >65% of people in LDCs (and >80% of the really poor) depend

on ag for their income

2. Return on investment is 2 to 3 times higher in agriculture

C. Urban bias comes about because of interests of powerful industrialists, urban workers, big farmers

1. LDCs shifting away from urban bias since the mid-1980s