Thursday, April 24, 2008

Cheap Food-Good Or Bad For Third World Countries?

There are many good arguments for abolishing any and all farm subsidies. Farm subsidies cost tax payers money even as they raise the price for consumers. Normally you would have expected subsidies to lower prices for consumers. But not so, at least not for consumers in the country with the subsidy, making it the worst deal possible.

However, just because farm subsidies is clearly a bad thing, and should be abolished ASAP, doesn't mean that all arguments against it are sound. I have often seen certain prominent Swedish libertarians argue against farm subsidies on the basis of how it supposedly impoverishes the Third World by destroying their ability to focus on their alleged comparative advantage in farming, with Africa being depicted as the big loser, and so constitutes "the White Man's Shame", to quote the phrase that one of them used in his best-selling book.

There are however two big problems with this argument. One problem is in terms of political impact. If we accept the argument that somehow African poverty is the fault of "our" government's policies, then this will be used by the foreign aid lobby to argue for higher foreign aid to compensate for that alleged negative impact. Moreover, if these imports are so bad, why don't the African countries stop them by slapping tariffs on them? Thus, by emphasizing this argument these libertarians might decrease, not increase, freedom.

The second, and much bigger, problem with this argument is that it isn't true. While exporting subsidized food to the third world, we may hurt their farmers, but we will help non-farmers in those countries. And it is simply not the case that just because a country is poor, its comparative advantage is in farming. Some of the biggest farm exporters outside the U.S. and EU is in fact food exporting middle income countries like Brazil, Argentina and Russia. They, and not the very poor African countries, are the losers from U.S. and EU farm subsidies. By contrast, most, if not all, African countries are in fact net food importers, and thus benefit if they receive cheap food imports. This is all the more true if you exclude crops like coffee, cocoa and bananas that aren't grown in either the U.S. and the EU and thus are unaffected by farm subsidies.

"But", I can already imagine someone objects, if U.S. and EU farm subsidies are abolished wouldn't this increase the incentive for Africans to farm and wouldn't it thus perhaps change the current status of Africa as a net food importer? Well, yes it would increase the incentive for Africans to farm and yes this would reduce their net imports, hypothetically but not likely, to the point where they would no longer be net importers. But that does not mean the African countries would be better off. The reason is that to the extent these imports are cheaper than the cost of producing them, they are according to the principle of comparative advantage, something which is not economically beneficial to produce. That this comparative disadvantage might to some extent be the result of subsidies is irrelevant for the African countries.

This is only relevant from the perspective of the global economy and the subsidizing countries. The subsidies reduce overall global output, but the loss for the subsidizing countries and alternative food exporters like Brazil and Argentina is bigger than the overall global loss, meaning that the African countries gain.

If someone still doubts this, imagine that somehow food started to rain down from the sky, like in the Bible. Would the libertarians promoting the "farm subsidies hurt African countries" argument at that point curse the skies, and tell Africans to still use their alleged comparative advantage to farm even though the food that would produce is already available? That would make put them in the same position as the candle makers in Bastiat's famous petition who similarly argued that natural riches are bad because they damaged some producers.

That cheap food isn't bad for poor countries are now illustrated by the riots and possible famine caused by the sharp increases in food prices. If the above discussed argument was correct, then they should be really happy about this because this mimics the effect of abolishing subsidized exports. But given the problems it has created, it should be obvious that it isn't a good thing.

To summarize, abolishing farm subsidies is certainly something we should do and something we should do ASAP. But this is not because it hurts African countries, which it doesn't, but because it hurts us. The argument that it hurts African countries by providing them with cheap food is not only false, but obviously false given the obvious problems created by higher food prices, and risks promoting more government interventions.


Blogger Allen said...

Refreshing to see someone able to see some different angles in this debate. I too am against subsidies. IIRC the USA federal government forked over something like $5billion in cotton subsidies last year alone. But I've always wondered the difference it makes knowing that things like cotton, corn, wheat, coffee and other crops are a commodity. How much can farmers in other countries scale up and find the capital to do so in these countries? How are they going to efficiently get these crops to domestic markets let alone around the world?

5:54 PM  
Blogger flute said...

Very sensible argumentation, Stefan!
I am also in principle against subsidies, but now that we have them, we have to think twice before removing them. Maybe the money used for farming subsidies should instead go directly to food aid to LIFDC (Low Income Food Deficient Countries) instead. It would probably be much more efficient. And then we could remove the subsidies without causing havoc in these countries.
But unfortunately removing farming subsidies in the EU seems politically impossible. Can you picture every entry to Paris blocked by heaps of tomatoes and other vegetables?

2:47 PM  

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