Policies that Raise Prices to Farmers Direct Subsidies and Eliminating Urban Bias
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Transcript of Policies that Raise Prices to Farmers Direct Subsidies and Eliminating Urban Bias
Policies that Raise Prices to Farmers
Direct Subsidies and Eliminating Urban BiasText extracted from:
The World Food ProblemLeathers and Foster, 2004
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Increasing Ag Production Important
• 89 undernourished countries had similar undernutrition– 1979-81
• Countries with high yield cereal growth 1998-2000– Undernutrition sharply reduced
• Countries with low yield cereal growth 1998-2000– Undernutrition increased
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How to help farmers produce more?
• Increase prices using subsidies
• Increase prices by removal of taxes on farm output
Grain Market, Ethiopia
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Direct Subsidies
• Target-Price Deficiency Payment Programs– Government sets target price– Farmer sells crop at market
price– Government makes up
difference if market price is lower than target price
Wheat Harvest, Sudan
http://www.cimmyt.org/worldwide/CIMMYT_Regions/CIMMYT_Africa/images_region_africa/images_africa.htm
Problems with Subsidies• Iraqi case study
– Saddam Hussein’s government subsidized Iraqi farmers
• Seeds• Fertilizer• Chemicals• Below-market prices
– No incentive to produce quality grain• Gummed up flour mills
• U.S. continued subsidy but– Fed Iraqi grain to animals
• Or burned it– Imported wheat for flour
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Distortionary Subsidies• Work through price mechanism• Farmer given subsidy per unit of
production– More farmer produces, more subsidy
received– This distorts farmer decisions
• Plants more
• Interferes with free trade– Reduces imports– Increases competition in export market
• World Trade Organization limits this kind of subsidy– Will be fewer in the future
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Non-Distortionary Subsidies
• Do not work through price mechanism– U.S. farmers
• paid based on how many acres historically farmed
– Increases in acreage or yield:• do not increase the subsidy
payment
• Not limited by WTO agreements
$600 million - $1.84 billion$4.2 billion $1.84 - $4.2 billion
U.S. subsidies 1995-2004
http://www.ewg.org/farm/redraw/
Urban Bias• Rural and Urban
populations compete – for policy control
• Urban population wins– Better education– Lower poverty– Better organization
• Get super highways – Instead of water pumps to
grow rice• Biggest problem in
developmentRice Paddy Irrigation Pump
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Urban Bias
• Developed countries– Strong farm subsidies
• Developing countries– Low farm prices– Subsidize consumers
• Discourages farmers– Produce less
Farming in Scotland
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Implicit Subsidies to Consumers• Subsidies carried out in name of
lower food prices:– Noncompetitive procurement of grain
from farmers– Below market food prices set by law– Foreign trade controls– Support of overvalued domestic
currency– Limits on cash cropping
• All result in implicit subsidies to consumers
• All result in implicit taxes on farmers
http://www.cimmyt.org/worldwide/CIMMYT_Regions/CIMMYT_Africa/images_region_africa/images_africa.htm
Fair-Price Ration Shops
• India, 1970s– Subsidized food at
about ½ price– Farmers had to sell at
below market price– Therefore farmers bore
much of the cost of food subsidy
http://india.eu.org/IMG/jpg/ration_card_shop_2004014.jpg
Food Ration Shop, India
Administered pricing• Case Study: Jamaica
– Government set ceiling on retail price of wheat flour
• Imported in capitol city (Kingston)– Barely profitable for supermarkets to
sell it in Kingston• Available to urban consumers at good
price– Not profitable in remote locations,
• Flour sold on black market– At considerable premium
• Only available to poor rural consumers at high price
– much more than without government policy.
Jamaica Market
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Export Taxes
• Generates revenue for governments
• Lowers domestic price of agricultural products– Farmers get world price
• Minus cost of tax
• Disincentive to production• Example: Cocoa in Ghana
– 1980-1982
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Overvalued domestic currency• Demand for foreign products drives
currency deficit– Local currency value falls
• Governments fix exchange rate in country– Higher than international rate
• Export prices based on international rates– Farmer gets little for crop
• Domestic prices based on Export prices– Low prices benefit consumers– Disincentive for farmers
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Overvalued Domestic currency
• African countries reducing problem of overvalued domestic currency– Had increasing agricultural
production
• African countries increasing level of overvalued domestic currency– Had declining agricultural
production
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Millet Farm, Niger
Limits on Cash Cropping• Cash crop: for sale or export
– Subsistence crop: for home use• Food First: cash crops bad
– Reduce local food supply• Raise prices
• Disagrees with Food First– Farmers better off growing cash crops
• Earn more: food security• Nutrition better• Can afford fertilizer
– Ex: Carnations in Columbia• Earn 80x more/hectare• Can afford to buy grain• Employs more workers
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Flower Market, Columbia
Tax alternatives
• Agricultural land– Use satellite imagery to
determine use• Agricultural income
– Target large landholders• Retail Consumption
– Shifts burden to urban consumers
http://www.trautman.net/farm/land/trautman/farm%20-%20satellite%202002-11_noted.GIF
Wisconsin farm
Cost of Urban Bias• Ag prices lowered
– Disincentive for farmers• Grain taxed
– Poor undernourished– Grain (untaxed) used to produce meat
• Benefits wealthy
• Local industry favored– Imports discouraged by high tariffs– “Import Substitution”
• Economy grows slowly– Fewer jobs
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Manila, Philippines