in Negotiating the Future of Agricultural Policies: Agricultural Trade and the ... a small share of the economy, government intervention is designed to ..... Downs, Anthony (1957), An Economic Theory of Democracy, New York: Harper and ... Magee, Stephen P., William A. Brock and Leslie Young (1989), Black Hole Tariffs and.
in Negotiating the Future of Agricultural Policies: Agricultural Trade and the “Millennium” WTO Round, edited by Sanoussi Bilal and Pavlos Pezaros, Kluwer Law International, 2000.
Chapter 3:
The Political Economy of Agricultural Policies and Negotiations Sanoussi Bilal1 1. Introduction With the conclusion of the Uruguay Round Agreement on Agriculture (URAA) in 1994, some discipline in the use of public support for agriculture was introduced for the first time. Trade in agricultural products was finally, although only partially, subject to some of the same basic World Trade Organization (WTO) principles applied to trade in manufactured products. Yet, agriculture is still considered by many as a sector deserving special attention and which should not to be left to market forces only. While efficiency considerations stem from the heart of standard economic analyses, it is not possible to comprehend the determination and evolution of trade policies in general, and even less so of trade policies in agricultural products, without taking into account not only the economic factors, but also the historical, sociological, ideological and political factors that shape the policy-making process. Public choice approaches and specific interest groups have long been considered significant in explaining the endogenous determination of trade policy. The purpose of this paper is to present a brief overview of the main political economy considerations which influence agricultural trade policies and their evolution. In particular, it will highlight some of the reasons identified for the differences in agricultural polices between developing and developed countries. In doing so, it will briefly review the main lessons from the political economy literature and will discuss a recent, common rationale for interventions in agriculture, non-trade concerns (also referred to as the multifunctional role of agriculture). The paper will conclude with some considerations about the next round of negotiations on agricultural trade at the WTO. 2. The paradox of agricultural policy When considering national agricultural policies throughout the world, one cannot avoid being struck by a well-known phenomenon: developing countries generally characterised by a large population of farmers tend to discriminate against (i.e. tax) their agricultural sector, whereas in richer countries, where agriculture represents only a small share of the economy, government intervention is designed to support (with subsidies and price-support measures) and defend (with various protectionist trade measures) farmers.2 This apparent paradox has generated a great deal of attention 1
I am grateful to Phedon Nicolaides, Marcelo Olarreaga and Pavlos Pezaros for their helpful comments. 2 Exceptions to this general pattern include some food-exporting countries and some food-importing developing countries (like Mexico, Nigeria or South Korea).
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from academics who have focused on the patterns of, and explanations for, agricultural policy. Reasons commonly put forward for these distortive policies often rest on historical, cultural and societal grounds, but are also based on structural, economic, political and ideological factors. Nevertheless, until the 1980s, very few systematic investigations had been carried out to explain why, as countries become richer and their farmer population shrinks, discrimination against agriculture diminishes and eventually turns into positive support. A notable exception is the study initiated by the World Bank (Krueger, 1992; Krueger et al. 1991; and Schiff and Valdes, 1992). 3. The political economy of agriculture in developing countries Among the several studies on agricultural policies in developing countries, the seminal work undertaken under the World Bank Project on the Political Economy of Agricultural Pricing Policy, covering 18 countries, provides one of the first systematic analyses of policies on agriculture. One of the merits of this study is that it covers not only policies directly targeting the agricultural sector, but also other specific and economy-wide policies that indirectly, but significantly, affect agriculture. This has led for instance to the very interesting, and rather surprising, conclusion that the impact of indirect policies (such as foreign exchange rate policies and the general trade regime) on producer prices and on the purchasing power of those prices for farmers is greater than the impact of direct interventions in agricultural pricing policies. Yet, farmers’ groups focus their lobbying activities on direct measures affecting the price of their inputs and outputs while ignoring macroeconomic policy. Of course, lobbying for macroeconomic policies may prove much more difficult. The reason is not only that farmers may be less aware or sensitive to the indirect effects of such policies on agriculture, but also that farmers’ groups are likely to encounter stronger resistance from other interests in the economy, such as producers of manufacturing products who can engage in effective counter-lobbying. Hence, while macoreconomic policies could provide substantial support for farmers, these benefits have to be assessed in view of the higher cost of lobbying in a competitive environment (i.e. against other interest groups) and the lower chance of success, compared to lobbying for specific agricultural policy measures. In general, countries facing a lot of state intervention in the economy also experience significant discrimination in their agricultural sector. That is, countries with high trade barriers to manufactured imports and overvalued exchange rates also discriminate against agriculture. In that sense, agriculture does not represent a special case. Governments intervene in all sectors of the economy, including agriculture. However, the main difference relates to the nature of the intervention: favourable in the case of industry and negative for agriculture. The rationale for this bias against agriculture can partly be found in the widespread belief that industrialisation is the engine for growth and development in poor countries. Hence, industrial sectors are favoured at the expense of agriculture. It has also often been argued that this discrimination against agricultural producers is intended to provide cheap food for the poorest segment of the population. If it is true
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that the taxation of agriculture is not only designed to raise revenues necessary to boost the industrialisation process, the benefits mainly accrue to middle and higher income consumers in urban areas, at the expense of the poorest segment of the population. Another common justification for intervention in agricultural pricing is that it fosters domestic price stability by protecting the domestic economy from international price fluctuations. Apart from the fact that such “stability” policies contribute to increasing the variability of international prices, they have indeed been rather successful in dampening price changes in developing countries compared to the situation that would have prevailed under free trade.3 This does not explain however the differences in discrimination between agricultural commodities, nor why less-distortive measures have not been adopted to stabilise prices. It is important to note, however, that the bias in government intervention in agriculture is not consistant. Some parts of the agricultural sector are supported, while others are discriminated against. Some common features can be identified: (1) agricultural inputs are almost always subsidised, and (2) import-competing agricultural commodities are protected or subsidised, whereas (3) exportable agricultural commodities are generally discriminated against (i.e. taxed). Nonetheless, the overall bias in government expenditure is strongly tilted against agriculture. Finally, the evolution in agricultural policies often follows changes in the structure of the economy as a whole. Political factors also play a significant role. The discrimination against agriculture is lower in countries where farmers’ groups are part of the ruling coalition. However, once in place, agricultural interventions tend to remain, and even to proliferate. Pressures for reforms usually arise only when the system becomes unsustainable because it is too expensive, creating chronic deficits and economic instability. 4. Why so much support for farmers in developed countries? The paradox of agricultural policies stems from the fact that, contrary to common intuition, a small minority of farmers in developed countries (less than 5% of the labour force) have managed to obtain a high level of support, whereas in developing countries the large population of farmers (representing the majority of workers) has been discriminated against. Several explanations have been offered in the literature of the political economy of agriculture (see Swinnen and van der Zee, 1993, for a survey). A classical analysis coming from the Logic of Collective Action by Olson (1965) which explains the “number paradox”: a specific interest group composed of a few members is better able to exert pressure than a large group as it can more easily control the “free-rider” problem and it ensures a greater homogeneity of preferences. The free-rider problem stems from the possibility some members have to benefit from the group’s action, without having to contribute to its costs. The larger the group, the 3
Indeed, by resorting to unilateral free trade, a country could be prevented from protecting itself from international price fluctuations. However, such stabilisation mechanisms, and more generally tradedistorting agricultural policies, create a negative externality which contributes, if adopted by many countries, to reducing the size of the world market and to generating higher world price instability.
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easier it becomes for members to free ride. Besides, groups formed around a specific common interest with members sharing similar concerns (i.e. homogenous preferences) can target and coordinate their actions more efficiently than groups composed of members with various, sometimes even divergent, interests (i.e. heterogeneous preferences). Hence, a small group of farmers is a priori more efficient at lobbying than a large consumer association. Accordingly, the large number of farmers in developing countries face severe difficulties in organising themselves to defend their interests whereas a small number of determined farmers in industrialised countries are successful in pursuing collective action (Olson, 1986). Not only does the smaller number of farmers reduce the potential for free riding, but it contributes, together with economic development, to facilitating the organisation and communication structure (thus reducing transaction and organisation costs) of farmers’ groups in richer countries. The strong support enjoyed by agriculture in developed economies is often attributed to the so-called “compensation effect” (Magee et al., 1989). This comes from the observation that sectors in decline, or suffering from economic adversity, tend to benefit from greater support from the government than during periods of growth. This may be due to the greater propensity of sectors to exert pressure on the government to intervene in times of adversity, as the relative returns from lobbying increase when the rewards from productive economic activities fall (Murphy et al., 1991). Such an explanation fits the case of agriculture in industrial countries where farmers’ incomes depend to a large extent on government supports, as is the case for instance in the European Union (EU) with the Common Agricultural Policy (CAP). On the supply side, governments may also be inclined, subject to budget constraints, to preserve the income of specific groups in society, in particular during periods of economic downturns. In the words of Corden (1974), governments operate on the premise of “conservative social welfare functions”. Hence, with the shrinking size and role of agriculture associated with industrialisation and economic development, farmers demand for, and reliance on, state support increases while governments show greater concern to maintain the relative standard of living of farmers. As a consequence, government support for agriculture is negatively related to farmers’ incomes. Another reason why agriculture is more subsidised in industrial countries is that as national income rises and the number of farmers falls, the resistance to support for agriculture weakens (Anderson and Tyers, 1988; Anderson, 1991). Indeed, as the economy develops and personal incomes increases, the relative share of food in total expenditure per capita falls: consumers become less sensitive to food prices. This is reinforced by the fact that agricultural support generates less macroeconomic disturbances as the relative size of the agricultural sector in the economy diminishes. Thus, contrary to the situation in developing countries, the benefits of agricultural support are concentrated among a few farmers while the costs of government intervention in agriculture (in terms of both direct costs to tax payers and consumers on the one hand, and indirect costs generated by the distortions introduced which
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induce deadweight losses and incentive biases on the other hand) are spread over the whole population.4 The voting models provide an alternative approach to understanding agricultural policies (Mueller, 1989). Their basic features entail two components. First, the policymaking process is characterised by asymmetric information. Politicians defend policies for which voters possess only incomplete information. To decide how to cast their votes, citizens need to gather information, which is costly (in terms of time and effort). They will do so until the marginal cost of acquiring an additional element of information outweighs the marginal benefit. Hence, to the extent that information acquisition (and thus voting) is costly, voters behave rationally by willingly remaining partially ignorant (the so-called “rational ignorance” of voters described by Downs, 1957). In the context of agriculture, voting models justify why voters do not attempt to understand all the intricacies of agricultural policies, as this would require a potentially huge effort for arguably low benefits. In not doing so, they remain rationally ignorant, and accept paying the cost associated with their lack of perfect understanding of the issues at stake. This could also help explain the relative inefficiency of many measures adopted by politicians who do not have to fear the sanctions of an unsatisfied electorate. Moreover, politicians may decide to deliberately obscure the issue by adopting opaque policy measures in an effort to avoid voters’ scrutiny. Indeed, the choice of first-best measures, such as direct subsidies, may be more difficult to defend in a democracy as they are more transparent policy measures which have to be voted for in the budget and therefore have to be evaluated against other competing demands for public funds. In contrast, second (or third or fourth)-best policy measures, such as price intervention mechanisms and other indirect policy instruments, exert less pressures on the budget and generate costs for society which are more difficult to assess, therefore attracting less attention and thus less potential opposition, from voters. Second, politicians behave as vote maximisers (see Downs, 1957). As a result, they tend to adopt the position preferred by the median voter.5 Broadly speaking, and abstracting from the technicalities of this approach, politicians seeking (re-)election will reflect the views of their main constituents. For instance, Hoag et al. (1997) have shown that, in the case of the United States, political contributions by agricultural industries to members of Congress were targeted toward candidates from agricultural states.6 Yet, although voting models provide interesting insights into policy choices in a democratic setting, they fail to explain the extent of agricultural support compared to 4
Winters (1987) also notes that if in the short run all owners of factors employed in the agricultural sectors benefit from agricultural support, in the long run it is principally landowners and quota holders (i.e. the owner of fixed factors) that gain. In any case, the big losers are taxpayers and consumers. 5 This is valid in cases of single peak preferences only. 6 On the other hand, Browne and Paik’s (1994) empirical findings indicate that a large number of Congress members from non-agricultural states also defend the interest of farmers in their district as a way of satisfying a vocal minority.
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industrial protection. In countries where farmers represent only a small minority of the electorate, politicians wishing to maximise votes would be expected to be less sensitive to agricultural concerns. Not only would the overall degree of support to agriculture be expected to be lower, but, in particular, the degree of efficiency of the measures adopted to support farmers would be expected to be far greater. In other words, voting models do not explain why governments choose to intervene in the agricultural sector in such a distortionary manner.7 The rational ignorance of voters seems insufficient to justify the goals of and the instruments adopted for agricultural policy. Finally, two other factors must be briefly mentioned to appraise the political economy of agriculture: the “restaurant bill” problem and the role of bureaucracy. The “restaurant bill” problem is particularly relevant in the case of the EU and arises when members have to share the cost of their actions but are also the beneficiaries of it. The theory explaining this problem is based on consideration of a dinner situation where each person orders his/her own course, but the restaurant bill for the dinner is shared equally among all those at the table. It inevitably ensues that, in the absence of a cooperation mechanism, each person pays more than he or she would have done otherwise, as individualistic behaviour leads at least some people to order the more expensive courses, knowing that the cost will be shared with the others. Participation in the CAP could fit this framework (see for instance chapter 4). A Member State may not favour the CAP, but since it is there, and the Member State has to pay for it anyway, it finds it preferable to include products or measures that would directly benefit its farmers, even though that entails a higher overall cost of the CAP. This phenomenon has also been referred to as “universalism”, since it can lead to a universal support for an inefficient redistributive policy which would not be adopted otherwise. A similar outcome may also be generated by concessions and log rolling (i.e. vote trading) among countries (Winters, 1994; Bilal, 1998). The proliferation of agricultural supports in industrial countries reflects such a pattern. This is true not only for the development of the CAP, but also for negotiations at the international level. Agriculture was basically left out of GATT until the URAA, although earlier inclusion (even partial) of agriculture within the discipline of GATT could have been beneficial for the majority of trading partners. Besides, concessions during the Uruguay Round (UR) negotiations were typically the result of “restaurant bill” situations, in particular when they concerned exclusions and derogations for agricultural measures or products (contained in the “blue box” for instance). The second crucial element in the determination (supply) of agricultural policies is the role played by the administrations and agencies concerned, i.e. the bureaucracy.8 As 7
Interesting lessons can nonetheless be derived from voting models. For instance, Swinnen (1994) develops a model which attempts to explain the factors behind the observed positive correlation between agricultural protection and economic development. In particular, he shows that a relative decrease in the number of farmers increases agricultural protection, noting that their reduced political influence (in terms of lower votes) is more than offset by the change in distributional impact. With fewer farmers, distortive policies favouring agriculture yield a relatively smaller redistribution of income from taxpayers and consumers to farmers, hence diluting the opposition to such policies. 8 Note that the terms “bureaucracies” (for public administrations) and “bureaucrats” (for civil servants) is commonly used in the political economy literature as a technical and neutral terms, and as such do not entail any negative meaning.
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argued by Niskanen (1971) and later Messerlin (1983), civil servants, acting as budget maximisers,9 tend to prefer opaque and sophisticated (i.e. technical) mechanisms of government intervention. As they have to adopt a narrow focus (since they are not concerned about issues out of their scope), they also tend to identify with the sectors and interests that fall under their umbrella. For instance, Ministries of Agriculture have by definition to provide policies for and if necessary remedies to agricultural issues. They are therefore naturally more inclined to defend the interests of farmers than Ministries of Finance, the latter having to take into consideration a wider range of interests in the society. Besides, civil servants also possess a high degree of expertise which allows them to design policy measures which are more complex and less transparent than those of politicians. All these factors may lead to a protectionist or interventionist bias on the part of bureaucracies.10 5. The rationale for distortive agricultural policies: non-trade concerns In view of the increasing pressures, both at the national and international levels, to reform agricultural policies, a common line of arguments to maintain agricultural support refers to the “non-trade concerns” (as referred to during the UR) or “noneconomic objectives” of agricultural policies.11 This terminology has the merit of clearly expressing the underlying intent of those who adopt it. Some issues, such as environment, food safety, etc, do not, or should not, fall under the scrutiny of the WTO, the argument goes, as they do not reflect trade, or even economic, concerns. As a consequence, governments should not be submitted to any international constraints regarding their usage. The fallacy of this argument is obvious. Although the justification for resorting to agricultural measures to address environmental or societal concerns may not directly relate to trade objectives, this inevitably entails economic consequences which often result in trade distortions. Protecting national farmers because they contribute to cultural diversity or the conservation of the countryside, irrespective of how laudable these purposes are, creates negative externalities for other countries which have to be taken into account. Hence, they must be addressed in an international forum. As they can potentially affect trade, they should be tackled within the WTO framework. The “green box” has indeed been designed under the URAA to address such issues. As a means of dressing old ideas into new clothes, the so-called “non-trade” concerns, which nevertheless affect trade, have been renamed “multifunctionality” by the European Union. Beyond the rhetoric facade, the intention is to stress the “mutlifunctional” role of agricultural policy, in particular with respect to: (1) food security and quality standards (including issues such as GMOs), (2) stability of food supply and prices, (3) employment, (4) the viability, development and vitality of rural areas, (5) animal welfare, and most importantly (6) the protection of the environment. In view of this wide set of objectives, agriculture commodities cannot, and should not, be treated as industrial commodities. The role of agriculture being special, the argument goes, it deserves special treatment.
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Budget is viewed as a proxy which captures both power and influence of bureaus. See also Winters (1987) for a brief discussion. 11 An abundant literature discusses this concern. See, among others, Winters (1990), Anderson (1998b), Bohman et al. (1999) and Freeman and Roberts (1999). 10
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The purpose here is not to discuss the merits of agriculture. The economic theory and in particular the political economy approach suggest however the following observations. First, a standard result from economics is that it is more efficient to address market failure directly rather than via indirect measures such as trade restrictions. Hence, measures to favour rural development or safeguard the landscape should not be linked to agricultural production, as general policies (such as infrastructure development) would be less distortive and probably more effective. Moreover, one policy instrument (i.e. an agricultural policy measure) cannot be efficiently used to pursue several policy objectives. The problem becomes even more accute when agricultural instruments are used to pursue conflicting policy objectives (e.g. support related to the volume of production – export subsidies, price support mechanisms – and environmental or animal welfare considerations; see discussion in chapters 8 and 9). Second, from a political economy perspective, interest groups like to appeal to broader objectives to defend their narrow interest, as this is more likely to generate considerable support (or reduce the opposition) from other groups in society with different interests. Hence, rhetoric plays a crucial role in “selling” a policy favouring a specific interest to the public at large. The danger exists then that altruistic motives and good intentions might be captured by specific interest groups. It is therefore crucial to be able to make the difference between genuine concerns (for consumers safety for instance) and protectionist motives disguised by rhetorical justification (e.g. stability of food supply). 6. The role of the WTO’s multilateral framework One of the major achievements of the URAA is that it has brought agriculture within the WTO framework. It has also increased the transparency of, and public awareness about, agricultural interventions. Most importantly, it has started a debate about appropriate measures and ultimately the role of agricultural policies in a world characterised by a process of liberalisation and globalisation. It is no longer possible to ignore agriculture when tackling policies which distort trade (Anderson, 1998a; Josling, 1998; Miner, 1998; Anderson et al., 1999). However, if the URAA has brought many agricultural trade measures under control, it has done little to significantly reduce border control and constrain domestic agricultural policies. Will the new round of negotiation offer better prospects? Again, focussing on the political economy of negotiations, the multilateral approach followed by the WTO offers several advantages. Firstly, it increases the transparency of the decision-making process. The development of the information society and the pledge by the WTO and many Member countries to operate in a more transparent way provide greater opportunities to follow the discussions on agriculture. It places de facto decision-makers under greater scrutiny from the public. It also exposes specific interests as transparency increases. Hence, decisions will not be made behind closed doors and politicians will become more accountable for their decisions. Secondly, the WTO system offers a more coherent system of negotiations than bilateral talks. Exceptions to the agricultural sector will have to be justified. This can already be seen by the negative reactions, in particular from the Cairns Group and the
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United States, to the multifunctional approach advocated by the EU, Japan and Korea. Trading partners are ready to challenge measures that would significantly deviate from WTO principles. Thirdly, the negotiations on agriculture can benefit from the experience gained in other sectors. This was the case for instance with the URAA with the tariffication and binding of non-tariff barriers in agriculture, following the approach adopted for other sectors. Fourthly, the potential progress in the liberalisation of agriculture would be greater in a comprehensive round. It could indeed be misleading to think that by focusing mainly on agriculture further concessions could be extracted from trading partners. The possibility of trade-offs between various sectors and topics of negotiations has proved to be a powerful instrument in avoiding deadlocks and preserving the bargaining power of key players. It also allows governments which concede significant ground in one sector to claim victory, and then gain public support domestically, by extracting concessions from other negotiating partners.12 To conclude, two notes of caution. First, as traditional trade-policy measures affecting agricultural commodities fall under WTO scrutiny and control, farmers’ groups have sought other forms of government assistance, either in the form of domestic measures or via “non-trade” and multifunctional policy concerns. It is therefore necessary that some form of discipline be introduced within the WTO to regulate these types of instruments. Second, if the WTO framework provides opportunities to expose the fallacy of the interventionist rhetoric of some countries in light of the WTO principles, the role of specific interest groups must be carefully considered. It would be tempting to assume that greater transparency, by reducing the so-called “rational ignorance” of citizens, reduces the influence of narrow focused interest groups. However, the explicit concern of many governments to generate sufficient political support during the current negotiations on agriculture has induced many of them to work in close collaboration with these special interest groups. Hence, parallel to the Third WTO Ministerial Conference in Seattle (from 30 November to 3 December 1999), business organisations and numerous NGOs were present to voice their concerns. If freedom of expression should always be encouraged, it seems dangerous that lobbying groups, whose objectives are by definition narrower that the ones that a government concerned with social welfare would pursue, are directly integrated in the negotiation
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Focusing on the commitment under the WTO (Article 20 of the URAA) to start negotiations on agriculture by 2000 (the so-called “built-in agenda” of the UR Agreements), Cairns Group countries insist that agriculture negotiations be considered as “stand alone”. This was a concession obtained under the UR as compensation for the moderate reforms adopted in the URAA. With the failure at the Third Ministerial Conference in Seattle (30 November – 3 December 1999) to launch a new round, they want to avoid further delays in the pursuit of more reforms in agricultural trade. Yet, the EU, Japan and Korea would prefer negotiations on agriculture under a comprehensive WTO round. The slow start of the agricultural negotiations, in March 2000 in Geneva, where countries agreed to a oneyear timetable to submit proposals for negotiating objectives and obtain further background information on the impact and implications of the URAA, could be seen as a delay (or wait-and-see) tactic to provide time for the launching of a new WTO round (WTO, press/172, 27 March 2000, http://www.wto.org/wto/new/Press172.htm).
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and policy-decision process, as appears to be more and more often the case. Ultimately, this may not serve democracy. As a consequence, it is the role of governments to provide opportunities for various groups in society to express their views, but in a channelled way. By making the WTO system and its decision-making process more transparent and open, governments would allow not only farmers and the agri-food sector, but also NGOs representing various interests to influence the negotiations. Such a process could also help to internalise, within the WTO framework, some of the negative externalities generated by the liberalisation of agricultural trade policies, in terms of methods of production or environmental safeguards for instance (Boyce, 1999; Whalley, 1999). Leading nations should also ensure that WTO negotiations do not turn into plurilateral talks among rich countries (mainly the US, the EU, Japan and Canada), but that the concerns of developing nations are also taken into account (chapter 14; Anderson, 1999; Binswanger and Lutz, 1999; DeRosa, 1999; Hoekman and Anderson, 1999; Josling, 1999). However, negotiators should avoid collusion with specific interests. For this reason, lobby groups should not be an integral part of the negotiations nor be given privileged access to negotiators. Policy-makers should have a clear platform, support their position with well-founded arguments and be subject to public scrutiny. By improving access to information, adopting transparent and open procedures, and allowing for structured discussion forums, the WTO system could offer a suitable framework for constructive negotiations to governments facing different domestic constraints, thus preventing specific interests from capturing the multilateral trading system for agricultural products.
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