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short essays and reports on the economic issues of the day
2003 ■ Number 4

Aid, Trade, and Agriculture
Michael R. Pakko
he current round of multilateral trade negotiations among
product prices are depressed by farm-support programs in indusmembers of the World Trade Organization (WTO)—
trial countries.
launched in Doha, Qatar, in 2001—has been termed the
Because the costs of farm-support programs are diffuse, the
Doha Development Agenda, signifying the intention to focus on
benefits of eliminating these programs would be dispersed widely
development objectives in the world trading system. One of the
around the world. A recent International Monetary Fund study
most important and difficult issues in that agenda is the reform
calculated the potential gains of eliminating all agricultural supof agricultural policies. Specific reform proposals and objectives
port, in both industrial and developing countries: Worldwide,
are due to the WTO’s Committee on Agriculture March 31, 2003,
total potential benefits would be $128 billion, over 0.4 percent of
and the topic is to be included in the agenda of the ministerial
total world GDP.1 The accompanying chart shows that these gains
meeting in Cancun, Mexico, this September.
would accrue to residents of every part of the globe.
Agricultural supports take several forms, and the levels of
Reducing the level of trade-distorting agricultural support is
support vary greatly across countries. They are most prevalent,
a complex issue, and there are powerful interests in maintaining
however, among the world’s industrialized economies. The
subsidies. However, the magnitude of potential benefits from makOrganization for Economic Cooperation and Development estiing the world’s agricultural sector more efficient suggests that
mates that direct and indirect transfers from consumers and taxreducing trade-distorting farm policies is well worth pursuing. ■
payers to farmers in member countries totaled over $230 billion
IMF. “How Do Industrial Country Agricultural Policies Affect Developing
in 2001, comprising nearly a third of all farm receipts. Support
World Economic Outlook, September 2002.
levels range from a low of 1 percent of farm receipts in New
Zealand to a high of 69 percent for Switzerland. Japan, Korea,
and Norway are also near the high end of the range, while
support levels in Canada, the United States, and the European
Welfare Effects of Global Agricultural Liberalization
Union fall somewhere between the two extremes at 17 percent, 21 percent and 35 percent, respectively.
United States
The costs of farm supports are borne primarily by conAustralia, Canada, and New Zealand
sumers and taxpayers in the industrial countries, as well as
Japan and Korea
by farmers in the developing world. Protectionist agricultural
European Union
policies in industrial countries tend to keep domestic prices
Other OECD
high, so their elimination would enhance consumers’ purchasChina
ing power. In addition, subsidies tend to increase the total
supply of farm products to world markets, driving down
international food prices and depressing the incomes of
farmers in the developing world. More fundamentally, as
Rest of Latin America
with all protective trade policies, agricultural subsidies lead
North Africa and Middle East
to an inefficient allocation of resources: Countries are induced
Sub-Saharan Africa
to specialize in areas that are not necessarily to their comCommonwealth of Independent States
parative advantage.
Officials of major international organizations have emphaRest of World
sized the importance of reducing agricultural supports as
part of an overall development agenda. It is often noted that
0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6
total transfers from consumers and taxpayers to farmers
Percent of GDP
amount to six times the total overseas development aid
SOURCE: International Monetary Fund.
offered by the industrial countries, and the vast majority of
* Hong Kong, SAR, Taiwan Province of China, Singapore, and other ASEAN.
the world’s poor are farmers in developing countries whose


Views expressed do not necessarily reflect official positions of the Federal Reserve System.