6/26/2004

U.S. Agriculture Subsidies and Developing Countries

In class and in the text we covered subsidies. Corn is one subsidized good that has been and continues to be a hot topic. It is difficult to buy a product today without corn being one of the ingredients. Did you know that coke you drink has corn in it? Your cold medicine does too. It is probably listed as corn syrup or high fructose corn syrup. Government subsidies keep the prices consumers pay low and keep the supply high. Subsidies are nice for us (the consumers) because they keep prices low. In the United States corn subsidies to farmers have made it possible for corn to end up in so many products, because the subsidies have created a surplus. Believe it or not U.S. corn subsidies hugely impact markets in other countries. This is one of the many outcomes of globalization. U.S. subsidized corn has ended up in huge quantities in Mexico, and Mexican farmers are unable to compete with the low prices of the subsidized corn. An author of an article from Oxfam (available through http://www.oxfam.org/ eng/pr030827_ corn_ dumping. htm) remarks, “The US pays its corn farmers $10 billion a year which encourages them to produce a surplus that is then dumped onto world markets at artificially low prices. New Oxfam calculations show US corn is dumped in Mexico at between $105m and $145m a year less than the cost of production”. Poor farmers in Mexico get hurt.
To learn more about the effects of U.S. agricultural subsidies on developing countries I read an article headlines “As US Food-Aid Policy Enriches Farmers, Poor Nations Cry Foul: Sending Crops, Not Cash, Eases American Gluts, Ignores Local Surpluses” from the Wall Street Journal. I discovered that the United States government purchases surpluses from American farmers and ships it to developing countries like Ethiopia. In fact U.S. legislation requires that US grown food be used for aid with few exceptions. Unfortunately U.S. food aid leaves farmers in developing countries sitting on their surpluses. It is crazy to think that in a time of famine, Ethiopian farmers had warehouses full of surplus grain. Ethiopian farmers, who are unable to get rid of their surplus, fear not having enough money for the next round of harvest and storage. Also, prices in Ethiopia will drop, farmers will be unable to pay loans and expenses. These factors will contribute to a smaller crop planted for next season, and famine will continue. Many groups “charge that Washington uses food aid to dump surplus commodities, in effect subsidizing U.S. growers”.

Farmers in the United States often plant around double what is needed domestically. To prevent losses the federal government grants subsidies. This will keep prices from dropping. The government also protects farmers by purchasing much of the surplus grain for food aid to other countries. Food aid purchases often account for nearly one-third of farmer’s profits. Nevertheless, in spite of food aid programs famine continues. Discrepancies between food aid budgets and foreign development aid contribute in part. For example, $500 million in food aid was sent to Ethiopia but only $5 million for development programs was sent. These programs are crucial because they support local development which can help prevent future crises. “The emphasis on food aid, they say, needs to be matched by long-term investment in agriculture and water that will develop the economy and save livelihoods as well as lives”.
It seems to me that food aid is more of a business than a humanitarian program. There are many beneficiaries of food aid programs such as farmers, combine drivers, ship crews, and more. They seem to have the potential to benefit more than the poor in famine stricken countries. Food aid introduces American products to other countries which benefits producers. I think it is wonderful that the United States offers help to developing countries, but I think we need to evaluate the methods of helping. For example, why does the U.S. send lentils to Ethiopia while Ethiopia has a huge surplus of locally grown lentils?

4 comments:

Rolf Tiblin said...

I have to admit I do not know much about the Ethiopian economy and its inner workings. I do however see through your blog that the United States is once again caught in a damned if you do and damned if you don't policy of trying to help other nations. The United States is constantly critisized for being a world leader, yet we became that way from capitalizing on our ability to create, innovate, develop technologies, be more productive and profitable in a free market than most (if not all) other nations.
With that said I am opposed to subsidies, but those subsidies as bad as they are help people in this nation and in the long run our economy. Accepting that fact one has to ask what better thing can we do with our excess than share it with other nations that are not as fortunate as us? What they choose to do with it is up to their own accord and not our problem. If they would rather still complain that they are starving after we give them an abundance of our surplus then something is seriously wrong.
I am sure that labor costs in their country are far cheaper than ours and should they take that free food (corn for example) and turn it into something the world needs (high fructose corn syrup, Coke is sold worldwide) they could turn around and sell it. Since the food was free the labor cheap they could be competitive and enjoy a cash increase they could buy highly productive farm equipment (instead of an ox) and get more yield per acre. This would make their farmers competitive and making a profit. Clearly through this everybody wins.
The blame has to go on the heads of the leaders of those countries for not capitalizing on opportunity, not the United States.

C-Dizzle said...

It seems that the U.S., in this instance, is adopting the philosophy “Give him a fish and feed him for a day, don’t teach a man to fish and make him dependant for a lifetime.” Shouldn’t it be the other way around? As said in the Anonymous Authors’ comments, “It is wonderful that the United States offers help to developing countries” but when all we’re doing is fixing the symptoms and not the problem, there’s something wrong. I think that the U.S. should be more considerate of other countries markets when exporting a good such as this to places like South America. We’re ruing their corn market by flooding it with our subcost corn. What’s the beneifts that the U.S. gains from doing this?

(As a side note: This article brought light to a personal issue the fact that the government has the farmer produce an excess of corn. The corn, because of its low price caused by this created excess, is put into nearly everything. I go to health food stores constantly trying to find the few insanely expensive processed foods in this world without corn because of a food allergy I have to corn. (Maybe I could talk the government into producing an excess of some other food additive instead.)

Dr. Tufte said...

Thomas Sowell describes something he calls the vision of the annoited. By this he means social policies that are designed to make people feel good about themselves, rather than to actually do good.

In this case, farmers and their lobby have gotten the government to help support their business through subsidies. They perpetuate this by employing unwitting do-gooders to crow about the importance of food aid and the problem of famine. The upshot is that our government and farmers wreck agricultural industries around the world.

Continuing with Rolf Tiblin's comment, there are two new issues.

First, developing countries that receive food aid are usually forbidden to remarket the aid, either in its original form, or in something like high-fructose corn syrup. The reason is that the whole point of getting the grain out of America is to get it as far away from our markets as possible, to make it easier to keep the price high here. Doing anything to that would make it easier for it to leak back into our market would ruin the bureaucrats pricing scheme.

Second, there is something to be said for the problem being in developing countries. If we can "take care" of feeding the population of some developing country, then they should be able to employ the former farmers doing something else that is productive. But that doesn't usually happen, often because of corruption. But, part of this problem is on our end too. The key point in the original post is that we give away 100 times as much food as we do other development aid (in the case of Ethiopia). We're clearly not interested in helping them find ways to reconcile the free food with the useful employment of their population.

C-Dizzle sums all this up nicely. A big message of economics is that you have to think through all the unintended consequences of your actions (part of the problem with the annoited ones who suffer from this vision is that they don't). In some sense food aid which isn't coupled with other aid is worse than no aid at all. And then there is the whole allergy issue - in some sense our corn subsidies are also a tax on people with corn allergies. Can you imagine if Kerry or Bush ran on a platform of sticking it to people with allergies? Nonetheless, that is essentially what they're both doing (since neither will ever come out against farm subsidies).

Quinn said...

In addition to the third world, US Agriculture subsidies are destabilizing agriculture in the developed world. The market price for corn and other farm commodities in North America is driven by US subsidies. Canadian farmers have been struggling with prices below their cost of production (similarly for wheat and soybeans) for years.
The farm community finds itself with its back against the wall. Farmers held back last year’s crops in hopes of increased prices, which have not materialized. With the new crop year pending, farmers are agonizing over whether and, if so, what to plant. It's not pleasant, as they look at their livelihood and, in many cases their family heritage, going down the tubes.

Currently the Canadian and provincial governments are bearing the brunt of the "cash crop" community's anger. If the US can do it why won't you, after all we are the only G7 country in surplus? To the Government's credit it has not got into a subsidy war with the US (which I believe we can afford more than the US).

I would comment that the US couldn’t act unilaterally; the EU is at least as much a problem. Subsidies have become part of the culture. Achieving a cultural change is hugely difficult and often requires crisis. There are major economic problems on the horizon for the US but all will be impacted and that may provide the required stimulus.