Tuesday, April 23, 2013

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Impact of subsidies

Farm subsidies have the direct effect of transferring income from the general tax payers to farm owners. The justification for this transfer and its effects are complex and often controversial.

Global food prices and international trade
Although some critics and proponents of the World Trade Organization have noted that export subsidies, by driving down the price of commodities, can provide cheap food for consumers in developing countries,[1][2] low prices are harmful to farmers not receiving the subsidy. Because it is usually wealthy countries that can afford domestic subsidies, critics argue that they promote poverty in developing countries by artificially driving down world crop prices.[3]

Agriculture is one of the few areas where developing countries have a comparative advantage, but low crop prices encourage developing countries to be dependent buyers of food from wealthy countries.

So local farmers, instead of improving the agricultural and economic self-sufficiency of their home country, are instead forced out of the market and perhaps even off their land. This occurs as a result of a process known as "international dumping" in which subsidized farmers are able to "dump" low-cost agricultural goods on foreign markets at costs that un-subsidized farmers cannot compete with.

Agricultural subsidies often are a common stumbling block in trade negotiations. In 2006, talks at the Doha round of WTO trade negotiations stalled because the US refused to cut subsidies to a level where other countries' non-subsidized exports would have been competitive.[4]

Others argue that a world market with farm subsidies and other market distortions (as happens today) results in higher food prices, rather than lower food prices, as compared to a free market

Mark Malloch Brown, former head of the United Nations Development Program, estimated that farm subsidies cost poor countries about US$50 billion a year in lost agricultural exports:

"It is the extraordinary distortion of global trade, where the West spends $360 billion a year on protecting its agriculture with a network of subsidies and tariffs that costs developing countries about US$50 billion in potential lost agricultural exports. Fifty billion dollars is the equivalent of today's level of development assistance."[5][6]

  1. Panagariya, Arvind (2005–12). "Liberalizing Agriculture". Foreign Affairs. Retrieved 26 December 2006.
  2. "World Bank's Claims on WTO Doha Round Clarified" (Press release). Center for Economic and policy research. 22 November 2005.
  3. Andrew Cassel (6 May 2002). "Why U.S. Farm Subsidies Are Bad for the World". Philadelphia Inquirer. Archived from the original on 9 June 2007. Retrieved 20 July 2007.
  4. "US blamed as Trade Talks end in acrimony". Financial Times. 24 July 2006. Retrieved 18 May 2008.
  5. Address by Mark Malloch Brown, UNDP Administrator, Makerere University, Kampala, Uganda, 12 November 2002
  6. "Farm Subsidies That Kill", 5 July 2002, By NICHOLAS D. KRISTOF, New York Times

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