Trade and Agriculture: the Unimportance of Being Rational

by Ronnie Horesh

The author is a Policy Analyst with MAF International Policy. These views are his own.

It’s always helpful to have a couple of bland, platitudinous, all-purposes things you can say when somebody asks you what you think and you don’t know what to say. You might need to fill an awkward pause with some words that don’t commit you to anything, or you may just find that your attention has wandered. You become aware that people are looking at you expectantly, waiting for you to say something vaguely meaningful, but you either can’t think of a diplomatic answer, or you have no idea what you’ve been asked.

Over the years I have found reliable standbys in “it’s not black or white; it’s a continuum”. Similar to this, and just as useful is “there are arguments on both sides.” More recently, I found that you could hardly go wrong if you say “I think we should look at this holistically”. These seemingly masterful - but totally vapid - statements saw me through student life and a variety of vacation jobs. They were nearly always relevant enough to convince people that I had something useful to say.

In my work in trade policy I don’t fall asleep in the daytime any more, but these statements remain handy as a plausible way of ending prolonged silences. Recently I’ve discovered an even better one, which has the supreme advantage that it not only sounds reasonable almost all the time, but is very often the most sensible thing to say. It is: “I’m not sure that rationality comes into this.” In the world of agricultural trade, this statement is always appropriate, especially when you’re awake and fully aware of what’s going on.

Take a highly topical and contentious trade issue: genetically modified foods. There are studies that indicate cause for concern. In one, monarch caterpillars eating leaves dusted with pollen from genetically modified (GM) maize appeared to grow more slowly and die more quickly.[i] But studies like these need to be weighed against the enormous potential benefits offered by genetic engineering. Vitamin-A enhanced rice, for instance, promises to save millions of people from premature blindness. And whatever the threat to monarch butterflies that is posed by genetically modified maize pollen, it is almost certainly less of a hazard than drifting pesticide sprays – sprays that are not necessary when GM maize is planted. A rational approach would at least try to take into account the risks of not introducing GM foods – and estimate whether they are equal to or greater than the risks of introducing them.

What would be the result of restricting trade in GM foods, or even, as some in the New Zealand Government wish to see, on banning field trials?[ii] Development of GM foods would lose pace and they would become more expensive. The countries that need them most would be slower to adopt them. This is particularly unfortunate in light of the enormous potential that GM foods offer – of which the benefits of vitamin-A enriched rice will probably be just a small example, if the record of past technology is anything to go by.

Now let’s take assistance to the agriculture sector. ‘I’m not sure that rationality comes into this’, is not just an appropriate thing to say about it; it’s almost the only thing worth saying.

Unlike New Zealand, most of our overseas competitors subsidise their farmers, and most of these subsidies end up making life difficult for farmers in New Zealand and other would-be exporting countries. Many of these subsidies take the form of trade barriers, which are imposed to help keep domestic prices high. Thanks mainly to research done by the Organisation for Economic Cooperation and Development [OECD], a Paris-based think tank, the effects of the panoply of government policies on the sector have been quantified, as have the costs to the people who pay for it. The most recent calculations show that the annual cost to consumers and taxpayers of its 29 member countries’ support for agriculture and horticulture amounts to US$361 billion. Such a large sum is difficult to grasp, but it is large enough to pay for a first class, round-the-world air ticket for each of the 56 million cows in the 29-member OECD’s dairy herd, and to give each cow a further US$1450 spending money for her stopovers in the US, Europe and Asia. Or the cows could slum it in business class, and have US$2800 spending money. And they could have this sort of trip every year, thanks to the generosity of OECD consumers and taxpayers.

Is this expenditure rational?

Any hint that government might try to reduce its support to agriculture can be counted on to generate noisy and smelly demonstrations in opposition. Much of this comes from small farmers, whom you might therefore suppose would be big losers if government left the sector to its own devices. In fact farmers as a whole receive few of the benefits from government support to agriculture. OECD research[iii] shows that more than half of sums paid out to ‘agriculture’ end up as extra expenditure on farm inputs, such as fertilisers, pesticides, animal feedstuffs, machinery and farm buildings. Farmers, because they are subsidised, buy more of these inputs, and the suppliers, knowing that farmers can afford to pay more, charge higher prices for them. Soil tests, agricultural chemicals and veterinary fees, for example, typically cost about half the price in New Zealand that they do in Europe.[iv] There are also very high administrative costs, as farmers have to comply with a whole host of stipulations to qualify for their assistance, and the masses of forms they fill in have to be duly scrutinised, filed, archived or otherwise disposed of. Criminals too benefit from the taxpayers’ largesse: estimates are hard to come by, as you’d expect, but one German criminologist[v] who made a study of Euro-fraud, put the losses to the European Union at up to 10 per cent of its budget.

Nevertheless, about 20-25 per cent of taxpayer and consumer support to ‘agriculture’ in the OECD countries does end up going to farmers. But because much assistance to the sector takes the form of subsidised prices for their production, most of it goes to the farmers who produce most, and who you might think need support least. In the US, for instance, about 88 percent of support goes to the largest 25 per cent of the farmers (in terms of gross sales).[vi] So the proportion of the billions of dollars for OECD agriculture that does end up with the smallest farmers is tiny: around three or five per cent. And many of these farmers are part-timers, who do not depend solely on agriculture for their income - in the US and Japan farming accounts for around one-sixth of the average farm’s household income[vii].

The big winners, then, from the complex array of agricultural support policies in the developed countries are: large farmers, many of whom were already very wealthy by any standards; agricultural chemical manufacturers; bureaucrats; and fraudsters. It’s unlikely that rational consumers and taxpayers, if they were given the chance to vote on whether they wanted to support these people, would do so with much enthusiasm.

But consumers and taxpayers aren’t the only victims. Farm subsidies have encouraged the decimation of wildlife throughout the developed countries. Market price support is still the main means by which these countries support their farmers and it does so in ways that encourage increased production per unit area. This imposes a bigger environmental burden on the land and encourages specialisation of production, which in turn, put pressure on animal welfare and food safety. Both have deteriorated, as market price support encourages ever larger units, and ever more intensive production systems.

Surprisingly, many of the farmers who were supposed to benefit, have also suffered from high support levels. Because most support is based on output, it is largely capitalised into the value of farmland. So those who were lucky enough to own land when these policies were first implemented benefited from a one-time windfall gain. But those who were unfortunate to borrow at the wrong time have suffered. And high land values have meant that entry to the farming profession has been restricted to the wealthy or to the sons and daughters of farmers.

There is a danger here of thinking that people in OECD countries have been the only victims of agricultural support policies. Perhaps these polices are really intended to help people in other countries? No they’re not, as we in New Zealand well know. They work by keeping out cheaper food from farmers and would-be exporters overseas, who suffer by being excluded from the world’s biggest food consuming markets.

We also suffer because the rich countries’ subsidised overproduction has reduced the value of our output on world markets and increased the volatility of world prices. Of course it’s not only New Zealand that suffers: many would-be exporting countries are desperately poor. The rich countries’ agricultural support policies hit them where it hurts - it makes development from their agricultural base that much more difficult. Agriculture, along with textiles and clothing, has been the traditional route for development of almost all the world economies, and it is precisely imports of these products that the rich countries do most to restrict.

Back in 1987 the OECD countries, many of them recognising the problems created by continuing high levels of assistance, others perhaps pressured into appearing to do so, committed themselves to:

A progressive and concerted reduction of agricultural support…; this will bring about a better allocation of resources which will benefit consumers and the economy in general.[viii]

Since that declaration, which was reiterated in 1992 and in subsequent years, one fact stands out amidst all the agricultural policy reform packages introduced in many of these countries and the frenzied opposition to them: overall there has been no reduction in support. Last year’s total agricultural support of US$361 billion in the OECD countries, compares to the US$326 billion reached in 1987, which is when these countries made their commitment to reduce assistance.

So why does it continue? I have no answers, except to say that rationality doesn’t really come into it. In this respect, belief in the virtues of agricultural support may not be very different from other beliefs. You might have thought that the economic and social shambles that was Marxism would have expired with the old Soviet Union. But it survives in China and elsewhere, not as an economic system, but as an extraordinarily potent ideology about an economic system. Freudian psychoanalysis, though discredited as a therapy, survives as a cult revolving around the life and work of Sigmund Freud.[ix] There is not a single proven example of a visit to Earth by an alien spacecraft – yet opinion polls consistently show that more than half of adult Americans believe in such an event.[x] We do our best in MAF to present rational arguments against the assistance our competitors receive. But … well, perhaps rationality doesn’t really come into it.

And what about growing fruit in New Zealand? Is that a rational activity? As you are probably tired of hearing, if you had cashed in your equity a decade or so ago, and invested in some world sharemarket fund, you would quite probably have enjoyed returns somewhat greater than you have actually achieved as an orchardist. Would that have been the more rational thing to do? This may be worth pondering as you walk back from your orchard at the end of a long day. A day in which you’ve been doing, but never quite completing, some of the myriad tasks necessary to produce the fruit from which you never seem to get a decent enough return. But then there are all the plusses: you have been fully employed, there is the satisfaction of producing something that’s nutritious and tasty, and there are worse environments in which to be doing it: New Zealand is still relatively clean, green, peaceful and tolerant. And as we know, sharemarkets go down as well as up. Perhaps, in spite of everything, growing fruit in New Zealand isn’t so irrational after all.

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