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____________Review_____________ Vol. (S9, No. 8 October 1987 F a rm P olicy: J u stifica tion s. F a ilu res and the N eed fo r R e fo r m 13 C h a n ges in F in an cial M a rk e ts an d T h e ir E ffe c ts o n A g ric u ltu re 20 U.S. f a r m P o licy: An A u stralian P ers p ec tiv e The Review is published 10 times per year by the Research and Public Information Department o f the Federal Reserve Bank o f St. Louis. Single-copy subscriptions are available to the public free o f charge. Mail requests fo r subscriptions, back issues, o r address changes to: Research and Public Information Department, Federal Reserve Bank o f St. Louis, P.O. Box 442., St. Louis, Missouri 63166. The views expressed are those o f the individual authors and do not necessarily reflect official positions o f the Federal Reserve Bank o f St. Louis o r the Federal Reserve System. Articles herein may be reprinted provided the source is credited. Please provide the Bank’s Research and Public Information Department with a copy o f reprinted material. Federal Reserve Bank of St. Louis Review October 1987 In This Issue . . . On May 21-22,1987, the Federal Reserve System Committee on Agriculture and Rural Development met at the Federal Reserve Bank of St. Louis. At this meeting, guest speakers addressed a variety of issues related to U.S. agriculture. This Review contains three of the papers presented at this meeting. Despite direct federal outlays to farm programs in the range of $20 to $30 billion per year in recent years, we have been unable to alleviate severe farm financial stress or prevent the continuing decline in the number of family farms. In the first paper, “Farm Policy: Justifications, Failures and the Need for Reform,” Thomas Gale Moore, a member of the Council of Economic Advisers, addresses the conceptual basis for a farm program. Although market failure — for example, excessive price or quantity risk that cannot be hedged through conventional market channels — often is cited as a basis for government intervention in farming, Moore notes that the government could also fail, and its costs must be evaluated against anv potential benefits from inteivention. He also notes that erratic or poorly designed aggregate policies can affect the farm sector through the close linkages between financial and commodity markets. Finally, after observing that the rent-seeking behavior of farmers is a major reason for the current scope and cost of farm programs, Moore acknowledges that any attempt to reform farm programs will require compensation sufficient to ease the costs of transition to a more market-oriented farm sector and overcome the political opposition of vested farm interests. In the second paper, “Changes in Financial Markets and Their Effects on Agriculture,” C. B. Baker, professor of agricultural economics at the University of Illinois, looks more closely at the linkages between financial markets and the markets for farm imports and outputs. Baker notes that agriculture, which is capital-intensive and export-sensitive, is affected profoundly by movements in interest rates and exchange rates. The growth and integration of international financial markets has modified signifi cantly the role of domestic financial markets in channeling the effects of macroec onomic events and policies to agriculture. In addition, he notes, a dependence on the U.S. dollar as the de facto currency of world trade has created severe problems for the United States; international consequences of domestic monetary policies can, and do, feed back to the United States with net negative results. In the final article, “U.S. Farm Policy: An Australian Perspective,” Geoff Edwards, senior lecturer in agricultural economics at LaTrobe University, Melbourne, Australia, points out that viewing solely the domestic consequences of U.S. farm programs ignores their important international consequences on other produc ing and consuming nations. Edwards compares the U.S. and Australian agricul tural sectors’ importance for their respective economies. He then assesses the effects of U.S. agricultural policy instruments on U.S. producers and other nations. Finally, he summarizes some evidence on the net benefits and costs of various agricultural trade liberalization schemes by the United States, Japan and the European Community. 3 FEDERAL RESERVE BANK OF ST. LOUIS OCTOBER 1987 Farm Policy: Justifications; Failures and the Need for Reform Thomas Gale Moore A LGRICULTURE is a very important sector of the U.S. economy. It accounts for about 18 percent of our GNP, a share larger than manufacturing. Because of its size, policies that affect farm prices and output have wide-ranging effects, not only on U.S. farmers, but on foreign producers and consumers as well. For policies with effects this broad, it certainly is important to understand why they exist and the effects they have. x j The general philosophical background behind our agricultural policy is largely the same as that being followed in most western countries: to increase the size and prosperity of the farm sector. It is interesting to note immediately that this philosophy is quite dif ferent in Third World countries where the objective is to tax agriculture. The reason for this philosophy, of course, is that the small urban population can exploit the more numerous rural population. In developed countries, the small agricultural population exploits the larger nonrural group. These results illustrate the public choice proposition that small groups are often in a position to tax the more general population. JUSTIFICATIONS FOR FARM POLICIES The case for government support of agricultural policies has several justifications. Basically, we go back to the 1930s, to the Great Depression, for the start of a major intervention by the federal government into agriculture. At that time, U.S. agriculture was de- Thomas Gale Moore is a member of the Council of Economic Advisers. This paper was presented at the meeting of the Federal Resen/e System Committee on Agriculture and Rural Development held at the Federal Reserve Bank of St. Louis on May 21, 1987. pressed by a combination of low product prices, in creasing debt burdens and soil erosion due to drought. A major justification for aiding distressed farmers was based on the idea of equity. Traditionally, U.S. society has been based on the idea of a fair distribution of wealth. Equity is good. Disparity is bad. Farm income has lagged behind urban incomes for many decades, and concern over economically disad vantaged farmers lay behind much of the support for doing something. This is a pure income transfer argu ment that is becoming less and less tenable as the absolute size of all payments rises and the distribution of payments, which is based on production, falls largely on the wealthy (see table 1). Is it equitable today to transfer $250,000 in deficiency payments to a farmer when he is worth $2 million? Another justification for aiding farmers is the hy pothesized existence of market failures. In fact, most of the recent focus on aiding farmers has been not on agriculture’s relative poverty but the difficulty of man aging farms in a risky and uncertain environment. The assertion is that farming not only is more risky than other businesses, but mechanisms for hedging that risk are not available in conventional private markets. Thus, government programs have been justified in terms of reducing risks, especially risks of nature, such as drought or flood. Other factors, such as low price elasticities of demand and supply and biotechnologi cal change also contribute to an inherent riskiness and uncertain environment faced by agricultural pro ducers. Wide variation in commodity prices and pro duction are offered as evidence to justify the design of price support programs and crop insurance. Granting that these farming risks exist, however, does not necessarily justify government intervention. At a minimum, we should recognize that government 5 OCTOBER 1987 FEDERAL RESERVE BANK OF ST. LOUIS Table 1 Direct Government Payments for 1986 Agricultural Programs Payees receiving over $50,000 Payments Program Com Wheat Cotton Rice Total (millions of dollars) Average payment to all payees $6,147 3,454 1,523 814 $ 8,000 6,000 14,000 25,000 Portion of all payees 6% 1 12 20 Portion received of total payments 24% 9 55 61 NOTE: Data are estimates for 1986 crop year. SOURCE: Office of Management and Budget failure exists and must be balanced against market failure. For example, the principal reason that a private-sector mechanism for hedging risks has not been developed is government’s heavy involvement in agricultural affairs. That is, government has provided price and income insurance to farmers at little or no cost, and this involvement has acted as a deterrent to the private sector supply of comparable insurance. Only recently are option markets being developed that allow farmers to purchase, in competitive markets, insurance against price decline. Moreover, government intervention can often in crease, rather than decrease, the agricultural sector's risk. Unstable monetary and fiscal policies increase risk. Trade embargoes, which may be imposed sud denly increase risk. Constant changes in farm policy increase risk. Studies by the World Bank, for example, show that protectionism exaggerates fluctuations in farm prices. Government policies generate huge sur pluses, which are stored and overhang the market, again increasing risk. Once it is recognized that gov ernment is not a perfect instrument for correcting market failures, we should turn to other schemes. A related element that lies behind many programs is the idea of preserving “the family farm.” Congress often talks about the family farm as being the back bone of all that is noble and truthful in America. We can smile a little bit about this, but the small family farm is part of the ideal Jeffersonian society. The trend in agriculture, however, is toward fewer and larger http://fraser.stlouisfed.org/ 6 Federal Reserve Bank of St. Louis enterprises run like commercial businesses. Most family farms now earn a significant portion of their income off the farm; hence, the applicability of this rationale has diminished. In fact, farm policies, as currently designed and administered, do very little for the family farm. Another rationale for government intervention has been conservation of resources and environmental issues. There often exists a difference between the interest of societies at large and farmers in terms of land use and water resources, pollution, erosion and common property problems. Generally, higher sup port prices have induced marginal land into produc tion; occasionally, however, programs such as the current Acreage Conservation Reserve have retired land from farming. Finally, there has been a concern about food security and reasonable consumer prices for food products. Specifically, subsidies to agriculture have been viewed as a way to increase production and, therefore, lower prices to benefit consumers, particu larly low-income consumers. Also, it has been argued that government intervention in commodity markets can alleviate temporary supply shortages or provide a degree of self-sufficiency in agricultural products for the nation as whole. As we all know, programs have worked to increase production, but not to lower prices. Moreover, even if the prices of some specific commodities are lowered, consumers pay the cost of increased production or food reserves through higher taxes. FEDERAL RESERVE BANK OF ST. LOUIS RENT-SEEKING BEHAVIOR OF FARMERS Regardless of the particular justification for agricul tural policies, however, they are currently supported principally by what economists call rent-seeking be havior. Rent seeking might be defined simply as the personal interest of a vested interest group in getting more income. In agriculture, many commodity groups have much to gain from higher support prices, pro duction restrictions or quotas and tariffs on imports. Moreover, potential gains from such restrictions are large enough to induce groups to organize and incur the costs of lobbying for their adoption. Because farm lobbies are very powerful, the results of rent-seeking behavior by farmers have been quite predictable. Perhaps most visible is their effect on the U.S. budgetary exposure. Last year (fiscal 1986), the U.S. government spent some $40 billion on agriculture and related programs. This is an enormous budgetary cost that has expanded dramatically in the last few years. This large cost to the budget has been compounded by billions of dollars in consumer costs due to higher food prices. Given the incentives to produce under the stimulus of large government subsidies, the supply management bias of current programs has been doomed to failure. Stimulating production with higher target prices and fighting the predictable sur pluses with acreage diversions ensure only higher taxpayer costs. Restricting output with diversions or set-asides or controlling quantities of product sold in fresh or processed form, as under marketing orders, raises food prices to consumers. Policies that attempt to restrain production through land controls also have the effect of making our farm product less sellable in the world market and reducing our exports. THE FAILURES OF FARM POLICIES Federal farm programs simply have failed to ad dress the economics of social problems used to justify the aid. Farm programs do not reduce risk or reduce food prices to consumers. Moreover, as shown in charts 1 and 2, the billions of dollars of aid provided is not targeted to farmers with large debt or cash flow problems: most farmers under financial stress are in the family-farm class of $40-$100 thousand in annual sales, but most payments go to farms with more than $500 thousand in annual sales. Also, we should not forget that the benefits of farm programs are capital ized into higher asset values so that, in the long run, the only true beneficiaries of farm programs are land OCTOBER 1987 owners who owned their farms prior to the adoption of a farm program or an increase in its benefits. Much of the money spent on agriculture does not go to distressed farmers, of course, because federal farm subsidy payments are proportional to production. The largest farmers gain the largest share; thus, the government (taxpayer) assistance does not go to those most in need. In fact, as many of us have read, the largest farmers, those who get the biggest benefits, are often the richest: one farmer last year got a check for $12 million. Current policy also results in economic waste. Be cause the subsidies are tied to production, there are incentives to overproduce. The stock of surplus com modities is left unused or sold at prices below its cost. Excess production, which must be stockpiled by the government or dumped onto world markets, imposes economic losses either through inefficient use of land or restrictions on production. Domestic and world prices are depressed as a result of these government policies, which, of course, is something we are trying to offset with higher loan rates and target prices. It also is interesting to note that similar policies in other countries have given their farmers the same signals to overproduce, generating ever-expanding worldwide grain surpluses (chart 3). The adverse side effects will be eliminated only when the incentive to produce for the government is replaced by incentive to produce for the market. Government policies also have led to other dramatic effects not directly observable in program expendi tures. Studies show that there are large costs of subsi dized production due to misallocation of resources in the economy as a whole: large costs to the consumer, large financial cost to taxpayers and significant dead weight social costs. Agricultural policies result in a greater commitment of resources to that sector than will be generated in a free market. To subsidize agri culture, other sectors are implicitly taxed. Resources are drawn out of other sectors, notably industry, to the agricultural sector. Some say that this shifting of re sources has contributed to the “deindustrialization issue.” In fact, some studies suggest that Europe has sacrificed up to one million manufacturing jobs due to its agricultural programs. There are also macroeconomic effects. Money and commodity markets are linked. Shocks from one mar ket spill over into the other in terms of price changes and output. These policies have had a dramatic effect, for example, on land prices. In some countries, such as Japan, they've had significant effects. Japanese agri cultural policies have effectively bid up the price of 7 FEDERAL RESERVE BANK OF ST. LOUIS OCTOBER 1987 C hart 1 Distribution of Financially Distressed Farms by Sales Class, January 1, 1986 Less than 10 to 20 to 4 0 to 10 0 to 2 5 0 to Over 10 20 40 10 0 250 500 500 Farm Size by Annual Sales (thousands of dollars) NOTE: Financially distressed farms are d efin ed as those with d e b t /a s s e t ratio over 4 0 percent and n e g a tiv e cash flow. Source: U.S. D ep artm en t of A griculture land in Japan and increased housing costs substan tially. The European Common Market has developed programs to subsidize the export of its surplus farm products and; as a result, we have the export enhance ment program in the United States, which subsidizes our agricultural exports. So, at this point we are into a “subsidy war” with the Common Market. Other com mercial exporting countries have been caught in the crossfire of this subsidy war. Recently, w e’ve subsi dized the Soviet Union in grain sales, and it now will be 8 true that one can buy grain cheaper in Moscow than in Chicago. We developed the marketing loan concept for rice, which effectively subsidizes the export of rice abroad; this has hurt the market for Thailand, one of our major allies in Southeast Asia. This war of subsi dies now is hurting not only our taxpayers and other exporting countries, but is benefitting the main im porters, such as the Soviet Union. The result is a set of farm programs that contradicts many of our foreign policy objectives. FEDERAL RESERVE BANK OF ST. LOUIS OCTOBER 1987 Chart 2 A verag e Direct Governm ent Payments per Farm by Sales Class, 1985 Thousands of dollars 40 Thousands of dollars ---------------------------- 140 30 30 20 20 10 10 Less than 10 to 2 0 to 4 0 to 1 00 to 2 5 0 to 10 20 40 1 00 250 500 Farm Size by Annual Sales (thousands of dollars) Over 500 Source: U.S. Departm ent of Agriculture THE PROSPECTS FOR REFORM In matters of farm policy, as the comic strip charac ter Pogo used to say, “We’ve identified the enemy and it is us.” As w e’ve seen, domestic programs have been justified by a variety of concerns but remain in place largely because of special economic interests. Al though these policies have resulted in great and costly economic distortion, I would suggest that focusing reform on U.S. domestic farm policies alone, in terms of their design and cost, has not been a fruitful way to go and won't work in the future. The U.S. must recog nize that our agricultural sector is inextricably bound with the world’s agriculture trade, economic growth and policies of other countries. U.S. farmers and those interested in farm policy must deal with the fact that international forces play a critical role in determining farm prices, income, exports, imports and the health of our agricultural sector. Due to the pain associated with government price distorting interventions and the resulting chronic surpluses, the reform of U.S. farm programs today is widely considered a necessity. Moreover, when you start spending the monies we've been spending (the Common Market spent about $23 billion last year, nearly as much as the United States), 9 FEDERAL RESERVE BANK OF ST. LOUIS OCTOBER 1987 C hart 3 Carryover Stocks of Coarse Grains and W h eat Millions of metric tons 300 200 Millions of metric tons 300 - 1980/81 1982/83 1986/87 NOTE: D a ta are for crop years; 1 9 8 6 / 8 7 data are p relim in ary estimates. Source: U.S. D ep artm en t of Agriculture there is potential for reform of agricultural policies in other countries as well. A brief summary (table 2) of farm programs in effect in the United States and abroad clearly indicates there is plenty of reform to be adopted by all. Last year at the Tokyo economic summit, world leaders agreed that agricultural policies were in need of reform. The ministerial declaration at Punta Del Este, which launched the new GATT round of trade talks, made agriculture a top priority for reform and promised to examine both direct and indirect subsi dies affecting international trade. This spring, the sec retary general of the OECD released an interim report on agriculture. It said that “the causes of the present crisis are rooted in domestic agricultural poli 10 cies. Key to reform is emphasis away from price sup ports.” The United States has tabled a proposal in the new GATT round to eliminate all agricultural subsi dies and to allow free trade in agriculture by the year 2000 . The approach to reform discussed most often is decoupling. Decoupling removes subsidies from pro duction and directs farm benefits to those in need by giving them income support directly. This approach does not distort market prices and give false signals to overproduce; thus, the surplus problems are elimi nated. Moreover, the aid is targeted to those in need, rather than those who merely produce the most. Fi nally, resources employed in agriculture will be there OCTOBER 1987 FEDERAL RESERVE BANK OF ST. LOUIS Table 2 Sources of Producer Support Equivalents for Selected Countries and Major Commodities, 1982-84 Commodity Japan European Community United States Grains State trading Price supports maintained by intervention purchases Variable levy Export refunds Deficiency payments PIK entitlements CCC inventory operations and commodity loans Oilseeds Deficiency payments Deficiency payments CCC inventory operations and commodity loans Dairy Price supports through government stockholding and trade barriers Some deficiency payments Price supports maintained by intervention purchases Variable import levies Export refunds Price supports maintained by tariffs, quotas and government purchases Livestock Beef: Quotas Tariff Domestic price stabilization Port: Variable levy Poultry: Tariff Price supports maintained by intervention purchases Variable import levies Export refunds Beef: Tariff Other: General (research and development, inspection, etc.) Sugar Price stabilization Import levy Price supports maintained by intervention purchases Variable import levies Export refunds Production quotas Price supports Import quotas SOURCE: Department of Agriculture, Economic Research Service because, at market-determined prices, farm produc tion is their highest-valued use. According to the OECD, government-induced distortions are the cause of the problem and only their removal will provide a cure. Recently, the OECD ministerial met in Paris and produced a communique on agriculture. That com munique also reaffirmed that the cause of the current agricultural problems is public policy. The policies that prevent an adequate transmission of market sig nals to farmers lead to rising surpluses and declining prices and farm incomes. Thus, it is now being ac cepted internationally that public policy is a cause of the chronic surplus. The communique also provided guidelines for re form. First, a long-term objective is to allow market signals to influence the orientation of production, which will better allocate resources. Second, consid eration must be given to non-economic factors such as food security. Third, the communique endorsed de coupling, that farm income support should be made through direct income support targeted to farmers in need and not linked to production. Critics of such proposals argue that the immediate costs to farmers of dismantling the protection af forded by price supports and production controls will 11 FEDERAL RESERVE BANK OF ST. LOUIS be too great. Therefore, we need to know several things about compensation schemes: how they can ease the pain of adjustment; how they can counter effective political opposition to reform; how compensation can be based on the losses from policy changes; and how such schemes can be designed to reduce the moral hazards that might accompany these policy changes. One example of how these compensation issues can be addressed is the administration’s sugar reform package that was sent to Congress this spring. In this http://fraser.stlouisfed.org/ 12 Federal Reserve Bank of St. Louis OCTOBER 1987 package, compensation is to be offered to sugar pro ducers over a four-year period of time in exchange for lower support prices. Compensation will be costly — in the multiple millions of dollars for some sugar producers — but the distortions and long-run cost of sugar programs that could be reduced provide benefits way in excess of these short-run payments. And, in fact, it is possible to compensate farmers for giving up their price supports and at the same time benefit both consumers and taxpayers. FEDERAL RESERVE BANK OF ST. LOUIS OCTOBER 1987 Changes in Financial Markets and Their Effects on Agriculture C. B. Baker T -M. HE boom in U.S. farm income and wealth from 1971-80 raised proprietor’s equity in the farming sec tor to an unprecedented $1,065,441 million at the end of 1979, expressed in terms of 1986 dollars. By the end of 1986, proprietor’s equity had been about halved to a level only about $2 billion more in 1986 dollars than it was at the end of 1959.1 The total value of farm sector assets in 1986 dollars also peaked in 1979, at $1,280,712 million. Total sector debt did not peak until 1982, at $227,615 million. Farm real estate value peaked as well in 1982, at $978,338 million. It then declined to $506,791 million by the end o f1986, only a half million more than it had been at the end of 1965.2 Agriculture is affected by changes in both domestic and international financial markets. The changes in financial markets in the past two decades have been dominated by the deregulation of domestic markets, the growth and integration of international markets, and the technologies of information management, in teracting with the other two changes. Like all markets, financial markets cany information as well as resolve terms of exchange. Deregulation has reduced the repression of information and has accel C. B. Baker is a professor of agricultural economics at the University of Illinois, Urbana-Champaign. This paper was presented at the annual meeting of the Federal Reserve System Committee on Agriculture and Rural Development held at the Federal Reserve Bank of St. Louis on May 21, 1987. 'See Melichar (1987). 2lbid. erated product innovations and changes in manage ment practices in financial markets. Such responses have created startling changes in the structure and performance of both domestic and international financial markets, with more doubtless to come. Agriculture is capital-intensive and export-sensitive. It is affected profoundly, therefore, by interest rates and exchange rates. Interest rates are important to the cost of debt service and the value of durable assets, especially land. Because exchange rates influence the demand for farm exports, they are important to the trade and prices of farm commodities and thus to farm income. The growth and integration of international finan cial markets has modified the role of domestic finan cial markets in channeling the effects of macroeco nomic events and macroeconomic management to agriculture. The macroeconomy of the United States interacts with the macroeconomy of other countries in a worldwide system that determines interest rates and exchange rates. The interaction is especially in tense with countries related to the United States through trade and developmental issues, and involves multilateral financing institutions as well. The massive effects outlined in the opening two paragraphs are linked substantially with changes in financial markets. This paper will emphasize the inter national setting for the linkage, prefaced with a brief review of the role of agriculture in economic develop ment, owing to the importance of economic develop ment issues among factors that bear on the future performance of U.S. agriculture. 13 FEDERAL RESERVE BANK OF ST. LOUIS OCTOBER 1987 Chart 1 National Farm Income as a Percentage of National Income Percent Percent 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 Source: A dapted from ERS, Economic Indicators of the Farm Sector: Income and Balance Sheet Statistics, 1983, ECIFS 3-3, USDA, September 1984. Trend = exp 2 .4 3 9 3 -0 3 0 5 t; r2 = .8852; SEE = .0015. AGRICULTURE IN ECONOMIC DEVELOPMENT Perhaps nowhere in the world is the record of how agriculture affects and is affected by economic devel opment more clearly revealed than in the United States. The key is in resources made surplus by in creasing agricultural productivity. In market-led eco nomic development, agriculture is told by chronically declining terms of trade that economic development requires a continuing diminution in the share of the nation’s resources allocated to agriculture. This is what is revealed in the data of chart 1. Since 1930, farm income as a percentage of national income has de clined an average of 16 basis points per year. The trend now has flattened to a ratio of near 2 percent. http://fraser.stlouisfed.org/ 14 Federal Reserve Bank of St. Louis Half the explanation is found in secular increases in agricultural productivity. The process releases re sources from primary production to other sectors and thus provides the necessary condition for economic growth and development. It also shifts supply curves for food commodities positively across demand curves that are low in price elasticity, thus explaining much of the price instability that is chronic for food commodities. The other half of the explanation is found in Engel’s Law. Engel’s Law says that, as income increases, the proportion spent for food commodities decreases. Secular increases of income produce a continuing decline in the income elasticity of demand for food commodities. Income elasticities of demand for food FEDERAL RESERVE BANK OF ST. LOUIS commodities are near zero in the United States and other more-developed countries while still high in less-developed countries with low incomes. Trendwise deterioration in agriculture’s terms of trade does not imply a trendwise decline in the eco nomic well-being of U.S. farmers. No one has a prob lem identifying the 1960s as more prosperous for U.S. farmers than the 1930s, despite observations below the declining trend in the 1960s. Owing to adjust ments in response to the declining terms of trade, there are, trendwise, fewer farmers to share in the aggregate of farm income. Chart 1 also reveals positive as well as negative variations from the trend. Varia tions to either side create expectations all too readily capitalized into land values that then have lagged effects on the welfare of those who buy under such expectations. There is little in these propositions that cannot be found four decades ago in T. W. Schultz’Agriculture in an Unstable Economy, and further elaborated two de cades ago by E. O. Heady, in Agricultural Policy Under Economic Development.3 Subsequent observations simply support the early insights they provided. What is new, especially in the past two decades, is the internationalization of the propositions, owing to the spread of agricultural technology, the consequent spread of economic development, and the conversion of closed economies into open economies, especially through the internationalization of financial markets. INTERNATIONAL ASPECTS OF U.S. AGRICULTURE The U.S. food and fiber system accounts for about one dollar in five spent in the United States. The farm component is only 13 percent of the system. The farm component and the system as a whole is thoroughly internationalized.4 Farmers buy from farm suppliers who sell into export markets as well as to farmers. Farmers share a U.S. domestic commodity market with foreign producers. As U.S. farmers sell into export markets, they compete with both local producers and producers in other exporting countries. International trade is managed by multinational firms, augmented by a complex of state and parastatal agencies. The U.S. food and fiber system, farms included, are financed through financial markets that produce in 3See Schultz (1945) and Heady (1962). 4See Baker (1987). OCTOBER 1987 terest rates influenced by capital-intensive economic development in Asia and elsewhere, as well as in urban U.SA. Our own tight monetary and loose fiscal policies during the early 1980s revealed consequences that spilled readily over national boundaries, affecting interest rates everywhere, and the exchange value of the U.S. dollar. Debt service burdens Third World countries, influencing their demand for U.S. exports and threatening the solvency of international lenders, as the solvency of rural leaders is threatened by finan cially stressed U.S. farmers. We have one-world com modity and financial markets. They transmit shocks that heavily influence the U.S. food and fiber system and the economic welfare of firms, families and com munities throughout the system. A still smaller part of the food and fiber system is represented by research and development (R&.D). Yet agricultural R&D, U.S. and elsewhere, has a tremen dous impact on economic development. The impact is on the demand side as well as the supply side for agricultural commodities. Economic development re quires an economic surplus that can be tapped for investments to generate economic growth. In much of the developing world, as in 19th century United States, agriculture is the likely source in which the surplus can be produced. Agricultural R&D is the triggering mechanism. An economic surplus in agriculture is a necessary condition for economic development in countries still largely rural. The sufficient condition for economic development is using the surplus to develop other sectors in such ways as to generate continuing growth in per capita incomes. The demand for food commodities will fol low. If comparative advantages are consistent with economic development outside agriculture, the de mand will be for food imports. Indeed, this is the most promising remedy for the plague of chronic hunger, largely unabated in the world despite the well-publi cized, worldwide glut of food commodities. FINANCIAL MARKETS AND TRADE A significant consensus links the historic boom in U.S. farm commodities during the 1970s to increased demand for U.S. farm exports, triggered by the declin ing exchange values of the U.S. dollar in that decade. It was easy to argue, therefore, that the historic bust in U.S. farm commodities from 1981 through 1984 could be explained by the increasing exchange values of the U.S. dollar in that period. Since February 1985, the exchange values of the U.S. dollar have declined again — by nearly 50 percent with respect to the yen, for 15 OCTOBER 1987 FEDERAL RESERVE BANK OF ST. LOUIS example. The puzzle is in the apparent failure of demand for U.S. exports to respond more readily than it has to this second reversal in the exchange value of the U.S. dollar. Observations that fail to confirm predictions of widely accepted theory lead to questions on (1) the accuracy of the observations, (2) the assumptions and logic with which the theoiy is applied and (3) the theory itself. All three responses can be found in a burgeoning literature on exchange rates and trade. In a recent doctoral dissertation, Dr. Dimitrios Baroutis found that, over the past two years, the U.S. dollar has not depreciated in terms of the currencies of competing wheat exporters/' Deborah Olivier, in the Wall Street Journal, January 30,1987, reported that the U.S. dollar had in fact appreciated by 35 percent with respect to currencies of countries that export “food and live animals.” In the same issue of the Wall Street Journal, Profes sor Ronald I. McKinnon noted that, over the two-year interval, exports from Japan had indeed declined, as predicted by the theoiy. But, owing to the negative effects on Japanese incomes, imports to Japan had declined still more. The result is the apparent paradox of an increasing trade surplus for Japan in the pres ence of an appreciating yen and a lagging response in Japan to lowered prices of imports from the United States. In a letter to the editor of the Wall Street Journal, dated February 2,1987, Lawrence Kreicher of Irving Trust suggested that the appropriate question is "what would be the trade deficit had the dollar not been depreciated?” His calculations suggested about 15 percent higher than in fact it was over the two-year period. Our capacity to explain the failure of 1985-1987 to look like 1973-1980, or to reverse the adverse agricul tural trade events of 1981-1984 is somewhat limited, even after correcting for possible errors in observa tions. There may be something to the common belief that institutional rigidities preclude the adjustments predicted by the theoiy to restore trade equilibrium. However, why did they not also preclude the previous sharp turning points in the early 1970s and the early 1980s? There likely is much to the belief that positive supply shifts outside the United States for crops im portant in U.S. farm exports, at least in the short term, are irreversible. Insofar as the shifts occur in lowincome countries, the evidence suggests that subse- 5See Baroutis (1986). http://fraser.stlouisfed.org/ 16 Federal Reserve Bank of St. Louis Table 1 External Accounts of Selected Economies: 1985 (billions of U.S. dollars) Economy World MDCs United States LDCs Current Account Capital Account Changes in Reserves -$80.6 -5 3 .4 -117.8 + 16.3 + $73.6 + 57.3 + 123.4 -2 7 .2 + $7.0 -3 .9 -5 .6 + 10.9 SOURCE: International Monetary Fund, International Financial Statistics, 1986. quent economic development will in fact ultimately increase the demand for U.S. farm exports, and thus, eventually will be a positive factor for U.S. agriculture. Perhaps more important is the fact that our expecta tions rest on the heritage of a purchasing power parity (PPP) theoiy that focuses on adjustment processes in the current account, dominated by the trade balance, and emphasizing relative prices of tradeables between countries and of tradeables and nontradeables within countries. In 1985, the volume of commodity transac tions in world trade was about $U.S. 3.0 trillion. In contrast, the volume of world trade in financial assets was about $U.S. 110 trillion. The relative volumes sug gest that trade in financial assets, reflected in the capital account, has come to dominate trade in goods and services as a source of change in exchange values of national currencies, and also adjustments to varia tions in those exchange rates. To examine the capital account requires a brief digression into a simplified open-economy version of macroeconomics. The gross national product of an economy is given by: GNP = C + I + G + (X-M), where C equals consumption I equals investment, G equals net government expenditures, X equals exports, and M equals imports. X - M is the trade balance, the principle component of the current account. I = S, savings. Much of savings for the United States occurs outside the United States. The resulting capital inflow produces a capital ac count that is highly positive: $U.S. 123.4 billion in 1985 as shown in table 1. OCTOBER 1987 FEDERAL RESERVE BANK OF ST. LOUIS For any economy, the current account equals the capital account, plus or minus changes in reserves. Thus the large surplus on capital account for the United States contributes much of the offset for the large deficit on current account (minus $U.S. 117.8 billion in 1985). Indeed the U.S. current account has been highly negative since 1981, the last year with a positive trade balance. Two observations are impor tant relative to table 1: (1) the LDCs (less-developed countries) in aggregate are running positive current accounts and, therefore, are flowing capital to the MDCs (more-developed countries), notably the United States, and (2) in 1986, the United States became the world’s largest debtor nation. Just as PPP focuses on commodity trade and prices, interest rate parity (IRP) centers on trade in financial assets, and on interest rates and exchange rates. PPP proposes that commodity prices respond to changes in currency values so as to leave unchanged the ratio of home to foreign price levels. IRP proposes that changes in home to foreign interest rate differentials leave relative currency values unchanged, owing to counter-balancing changes in expected inflation rates and risk premiums. The appeal of IRP is supported by a logic that says financial assets are highly substitutable between juris dictions of the financial assets and independent of the currencies in which they are denominated.6The evi dence suggests that, if denominated in the same cur rencies, differences in jurisdictions do not impede substitutions among financial assets. If denominated in different currencies, however, the differences in jurisdictions do appear to impede substitution among financial assets. The most plausible explanation for this difference is in the risk premium. Despite large trade and fiscal deficits, the U.S. dollar persisted strong relative to the yen, the Deutsche mark, the British pound, etc. from 1981-1984. Currently, Japanese demand for U.S. finan cial assets has remained strong despite grievous losses associated with converting depreciating U.S. dollars into yen. The disciplines enforced upon other countries in both the current account and capital account are restrained for the United States because of the unique role of the U.S. dollar in international relationships, notably in the denomination of international con tracts related to commodity trading and of financial 6See Cooper (1986). Table 2 Exchange Rate Arrangements, by Group of Countries, as of December 31,1985 More-Developed Countries 7 with independently floating 4 with managed floating 2 with pegged Less-Developed Countries 8 with independently floating 17 with managed floating 31 with exchange rates pegged to the U.S. dollar 12 with exchange rates pegged to the'SDR 14 with exchange rates pegged to the French franc 35 with exchange rates otherwise pegged SOURCE: International Monetary Fund, Exchange Rate Arrangements and Exchange Rate Restrictions, Annual Report 1986, page 8. assets traded internationally. The U.S. dollar is the world’s principal reserve currency. While a depreciat ing U.S. dollar does weaken its use as a reserve cur rency, there appears to be no readily available substi tute at a relevant scale of use in international transactions. CURRENT EXCHANGE RATE ARRANGEMENTS Current exchange rate arrangements commonly are referred to as flexible. In fact, they consist of a combi nation of flexible, fixed and managed exchange rates. Among the currencies of the 148 members of the International Monetary Fund (IMF) on December 31, 1985, only 15 could be described as independently floating (see table 2).7These 15, however, include such major currencies as those of Japan, the United King dom and the United States. An additional 31 countries have currencies that are pegged to the U.S. dollar. The European Community (EC) has evolved the European Currency Unit (ECU), a basket of currencies that includes the currencies of France and West Ger many as well as six other EC countries. Although the individual currencies do not float independently (be yond a range of 4.5 percent), the ECU does. Moreover, the currencies of 14 more countries are pegged to the French franc alone. 7See International Monetary Fund. 17 OCTOBER 1987 FEDERAL RESERVE BANK OF ST. LOUIS The IMF’s Special Drawing Right (SDR) also is a basket of currencies. It is based upon five national currencies (U.S. dollar, Deutsche mark, French franc, British pound and the Japanese yen). The currencies of 12 countries are pegged to the SDR. Thus 79 of the nearly 148 currencies of IMF members are pegged or otherwise closely related to the floating currencies of the United States, EC and Japan.8 Much of the world trade in both commodities and financial assets is transacted in these currencies. POLICIES THAT TARGET EXCHANGE RATES The monitoring role of the IMF frequently places it in a key position with respect to countries with prob lems in external accounts, notably external debts to be serviced or renegotiated. The exchange rate is a com mon policy target in conditionality programs of IMF, owing to the effect it has on adjustments reflected in the current account. Both PPP and IRP suggest that a nominal deval uation, a remedy commonly suggested, is quickly off set by price changes for commodities and financial assets to restore the original parities in the absence of other macroeconomic measures. The other macroeconomic measures include controlled growth of domestic money and reduced fiscal deficits. But the size of the required reductions in fiscal deficits have been found by Kahn and Lizondo to depend on the policies adopted.9 It is larger if the deficit is reduced with increased taxes than if the deficit is reduced with decreased expenditures. If the deficit is reduced with decreased expenditures, the required reduction is less if targeted toward sectors producing tradeables than if targeted toward sectors producing nontradeables. THE CURRENT AGENDA It is an understatement to say that many important issues remain unresolved. There now is a clamor to return to fixed exchange rates. But there is little agree ment on parities in which they are to be fixed — or disciplined. Some call for a return to a gold standard. But there is little agreement on values to assign to gold. Dependence upon the U.S. dollar as the de facto currency o f world trade creates severe problems for the United States as well as other countries. Monetary policy to meet U.S. objectives is not always consistent with world needs in terms of U.S. dollars. International consequences of domestic monetary policies can and do feed back to the United States with net negative results. But there is little agreement on an alternative. Coun tries with alternative currencies appear too small rela tive to the world to provide the liquidity required of a world trading currency. There also must be general acceptance of the reserve currency as a medium of exchange and store of value. A potential alternative is the SDR. Much remains to be done, however, for the SDR to succeed as a world trading currency. It is not now widely used as a means of settling transactions. Governments of member countries of the IMF are not soon likely to arrive at an agreement on terms that would provide for the trans fer of sovereignty required to make the IMF the world’s “central bank.” The state of knowledge on how trade relates to exchange rates also remains at a primitive level. Much of what is thought to be known has been achieved with the use of models of commodity and financial markets that in retrospect are highly deficient. There has been a slow but hopeful movement from singlemarket partial equilibria to tradeables/ non-tradeables markets in general equilibrium; from simple models of bilateral exchange rate determination to multilateral models that include capital flows and income deter mination; and, largely in the future, joint determina tion of exchange rates, trade balances and prices, linked with macroeconomic policy variables and in formation on the all-important time lags. It is not surprising to discover that the modeling is complex. So is the system. So are the data require ments and the computing requirements. Yet progress is imperative as the international financial markets grow in size, integration and impact on capitalintensive sectors that are sensitive to exports. The problems are urgent, and progress toward their reso lution is slow. Nowhere is this more evident than for U.S. agriculture. REFERENCES 8The number of currencies is less than the number of countries because of shared currencies among certain countries. 9See Khan and Lizondo (1978). 18 Baker, C. B. Current Financial Stress: Sources and Structural Impli cations for U.S. Agriculture, W. I. Myers Memorial Lecture (Cornell University, January 1987), p. 28. FEDERAL RESERVE BANK OF ST. LOUIS Baroutis, Dimitrios. Triangular Exchange Rate Parities and U.S. Wheat Exports, unpublished Ph.D. thesis (University of Illinois, Urbana-Champaign, 1986), p. 229. Cooper, Richard N. “ Macroeconomics in an Open Economy,” Sci ence, 233:4769 (September 12, 1986), pp. 1155-159. Economic Research Service. Economic Indicators of the Farm Sec tor Income and Balance Sheet Statistics, EC IFS 3-3 (USDA, September 1984). OCTOBER 1987 ________ _ Internatiomil Financial Statistics, 1986. Khan, Mohsin, and J. Saul Lizondo. “ Devaluation, Fiscal Deficits and the Real Exchange Rate,” Economic Review, World Bank, 1:2 (January 1978), pp. 357-74. Kreicher, Lawrence. McKinnon, Ronald I. Melichar, Emanuel. 5 and 11. Wall Street Journal, February 2,1987. Wall Street Journal, January 30, 1987. Agricultural Finance Data Book (June 1987), pp. Heady, E. O. Agricultural Policy Under Economic Development (Iowa State University Press, 1962), p. 682. Olivier, Deborah. International Monetary Fund. Exchange Arrangements and Ex change Rate Restrictions, Annual Report 1986. Schultz, T. W. Agriculture in an Unstable Economy (McGraw-Hill, 1945), p. 299. Wall Street Journal, January 30, 1987. 19 FEDERAL RESERVE BANK OF ST. LOUIS OCTOBER 1987 U.S. Farm Policy: An Australian Perspective Geoff Edwards p JL RESIDENT Reagan has said United States farm programs are inefficient, costly and unfair.1The Aus tralian prime minister, Mr. Hawke, agrees with that assessment, and considers it applicable to the Euro pean Economic Community and Japan also. This paper compares the role and the recent situa tion of agriculture in the United States and Australia, assesses the international impact of U.S. farm policy and discusses possible approaches to reducing pro tection for agriculture in the United States and else where in the world. UNITED STATES AND AUSTRALIAN FARMING: A BRIEF COMPARISON The relative importance of farming in the United States and Australian economies from 1957 to 1987 is shown in table 1. Farming’s contribution to GNP fell from 4 percent to less than 2 percent in the United States; the fall in Australia was from over 14 percent to less than 4 percent. While the share of farming in employment was 50 percent higher in each country than the recent farm GNP component, it also fell substantially, especially in the United States over the three decades shown. Geoff Edwards is a senior lecturer in agricultural economics at LaTrobe University, Melbourne, Australia. This paper was presented at the annual meeting of the Federal Reserve System Committee on Agricul ture and Rural Development held at the Federal Reserve Bank of St. Louis on May 21, 1987. ’See Council of Economic Advisers (1987). 20 Table 1 Share of Farming in GNP and Employment, United States and Australia: 1957-87___________________ United States 1957 1967 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 Australia GNP Employment GNP Employment 4.1% 2.7 2.7 2.9 2.4 2.6 2.4 1.7 2.1 1.9 1.6 n.a. 9.3% 5.2 3.5 3.4 3.4 3.4 3.4 3.4 3.2 3.0 2.9 n.a. 14.2% 9.8 4.1 5.9 6.1 5.1 4.7 3.3 4.7 4.2 3.8 3.8 n.a. 8.5% 6.1 5.9 6.0 6.0 6.0 6.3 5.9 5.7 5.9 5.6 n.a. = not available SOURCE: Economic Report of the President (1987), BAE, Quarterly Review of the Rural Economy (September 1987). The percentage contributions of farm exports to total merchandise exports in the two countries are shown in table 2. This contribution was generally more than twice as high in Australia as in the United States. The proportionate fall in agriculture's share of exports over the decade to 1986 was higher in the United States than in Australia. OCTOBER 1987 FEDERAL RESERVE BANK OF ST. LOUIS Putting the shares of farm exports in total (merchan dise) exports together with the shares of exports in GNP (4.8 percent in the United States in 1986 and 14.1 percent in Australia) indicates that the Australian economy is affected to a much greater relative extent than is the U.S. by developments in world markets for farm commodities. Table 2 Share of Farm Exports in Total Merchandise Exports, United States and Australia: 1976-87 United States Australia 20.3% 20.1 20.7 19.1 19.2 19.1 18.1 17.9 18.3 14.8 13.0 n.a. 45.5% 45.5 43.2 42.7 44.9 44.3 41.0 34.5 34.9 35.4 35.5 34.1 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 For most of the 1980s, farm income in the United States and Australia has been depressed. This shows up most clearly by comparing deflated (or real) farm income in the 1980s and the 1970s (see table 3). Only in 1987 is United States real farm income expected to reach the levels it attained the second half of the 1970s, after being well below them until 1985. In Australia there is more ground to make up. Real farm income in 1987 was less than half its level in the second half of the 1970s, with a rise to 60 percent being expected in 1988. The proportionate increase in farm indebtedness has been much greater in Australia than in the United States (table 4). From 1976 to 1987, farm indebtedness in Australia rose faster than the 9 percent a year increase in the consumer price index, while farm n.a. = not available SOURCE: ERS, Agricultural Outlook (March 1987, Yearbook Issue), BAE, Quarterly Review of the Rural Economy (September 1987). Table 3 Farm Income in the United States and Australia: 1970-88 United States 1970-74 (av.) 1975-79 (av.) 1980 1981 1982 1983 1984 1985 1986 1987 1988 Australia Total net farm income (billions of U.S. dollars) Index of deflated total net farm income Total net farm income (billions of Australian dollars) Index of deflated total net farm income $22.1 23.6 16.1 26.9 23.5 12.7 32.0 32.3 37.5p 44. Oe n.a. 195 149 80 122 122 52 126 124 140p 157e n.a. $1.5 1.9 4.2 3.1 2.8 0.6 3.6 2.9 2.0 2.6p 3.5e 148 135 183 125 100 19 109 85 54 64p 81e n.a. = not available, p = preliminary, e = estimated NOTE: Total net farm income for Australia is equal to the gross value of rural production minus farm costs. SOURCE: ERS, Agricultural Outlook (November 1987). ABARE, Commodity Statistical Bulletin (November 1987). U.S. index calculated by and Australian index adjusted to 1982 = 100 by author. 21 FEDERAL RESERVE BANK OF ST. LOUIS OCTOBER 1987 Table 4 Table 5 Total Farm Indebtedness, United States and Australia: 1976-87_______________ Ratio of Debt to Value of Assets in U.S. and Australian Farming: 1978-86______ United States (billions of U.S. dollars) 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987e $ 97.0 114.9 131.9 155.2 170.4 188.8 203.6 202.4 198.7 192.1 176.Op 155.5 Australia1 (billions of Australian dollars) $2.6 2.7 3.0 3.3 3.8 4.4 4.7 5.5 6.0 7.3 8.1 7.8 Australia United Wheat/ States other crops 1978 1979 1980 1981 1982 1983 1984 1985 1986 16.8% 16.9 17.0 18.8 20.8 21.2 23.2 24.9 25.1 Mixed Sheep livestock/ and crops Sheep Beef beef 12% 12 13 12 12 12 12 16 19p 12% 10 9 10 10 9 8 11 12p 12% 9 10 10 9 10 9 10 13p 10% 8 5 7 7 7 7 6 7p 14% 10 9 8 8 7 8 11 10p p = preliminary survey estimate 'excludes debt to hire purchase companies, trade creditors and private lenders. p = preliminary e = estimated SOURCE: ERS, Agricultural Outlook (October 1987), BAE, Quarterly Review of the Rural Economy September 1987). indebtedness in the United States increased less over this period than consumer prices. Notwithstanding the increase in farm indebtedness, the ratio of farm debt to assets remains relatively low in both countries; however, Australian farmers have significantly lower measured debt-asset ratios than their American counterparts (table 5). Part of this dif ference may be due to differences in the liabilities included. It is notable that, apart from “other crop growers,” Australian farmers did not experience sub stantial increases in their debt ratio as did U.S. farmers over the period 1978 to 1986. However, the increase in indebtedness and the rise to high levels in real interest rates caused an increase from 8 percent to 14 percent in interest payments’ share in cash costs in Australian broadacre farming between 1978 and 1986.2 Changes in debt ratios reflect, in part, movements in land values. Falls in agricultural land values of 40 percent to 50 percent were common in the United SOURCE: ERS, Agricultural Outlook (May 1987), Kingma, O. “ Performance of the Farm Sector," paper presented at BAE Outlook Conference, Canberra (February 1987). States in the five years to February 1986. In Australia, farm land price declines have been much smaller and confined mainly to cropping areas. Average land val ues in the important wheat-sheep belt are estimated by the ABARE to have risen until 1985, and to have fallen by 20 percent between 1985 and 1987,3 After taking account of Australia’s high inflation rate, the fall is 33 percent in real values. There are important differences, arising largely from dissimilarities in climate and natural soil fertility, in farming practices in the United States and Australia. Approximately 70 percent of beef cattle are lot fed in the United States, while virtually all beef is produced on pastures in Australia.4Similarly, daily cows are not housed in Australia. Wheat grows in the winter in Australia and in the spring in the United States. Most Australian soils are deficient in phosphorus, and this is rectified by application of phosphatic fertilizers. However, United States farming makes much more intensive use of nitrogenous fertilizers. In Australia 3The Bureau of Agricultural Economics became the Australian Bu reau of Agricultural and Resource Economics in September, 1987. 2Kingma (1987). 22 "McLeish and Spill (1987). OCTOBER 1987 FEDERAL RESERVE BANK OF ST. LOUIS Table 6 Production and Trade by Selected Countries for Australia’s Four Largest Farm Export Commodities (Average 1985-87)1________________ Production Trade2 WOOL United States European Community Japan Australia WORLD 000 tonnes 41 151 0 827 2,968 000 tonnes - 553 - 4373 - 1 943 + 7073 1,21134 WHEAT United States European Community Japan Australia WORLD 000,000 tonnes 64 75 1 17 513 000,000 tonnes + 30 +13 -6 +15 92 BEEF AND VEAL3 United States European Community Japan Australia WORLD 000,000 tonnes 10.8 7.2 0.5 1.3 45.85 000,000 tonnes -0 .8 +0.5 -0 .2 +0.7 2.56 SUGAR United States European Community Japan Australia WORLD 000,000 tonnes 4.6 14.3 0.9 3.5 100.0 000,000 tonnes - 2.3 +2.3 -1 .9 +2.7 29.5 'With the exception of beef and veal, production and trade are measured for 12-month periods that do not coincide with calendar years. The 1987 year, for example, means the relevant 12-month period ending in 1987. 2A minus size indicates imports, and a plus exports. 3Average for 1984, 1985 and 1986. “Exports by Australia, New Zealand, South Africa and Argentina for 1984,1985, and by Australia, New Zealand and Argentina for 1986. 5World production for 1984. 'Exports by Argentina, Australia, New Zealand, Yugoslavia, Uruguay, Canada, European Community and United States. lia. Both countries are significant players in interna tional trade in Australia’s four top farm export commodities (shown in table 6 in decreasing order of export earnings). For the two countries, the volume of beef and veal traded is similar, and this is true for sugar also. The United States exports twice as much wheat as Australia, while Australia is a much bigger player in world trade in wool. On the production side, the United States produces much more of each commodity apart from wool: 30 percent greater for sugar; nearly four times as large for wheat; and eight times as large for beef and veal. This means that, except for wool, there is much greater potential for changes in production in the United States — changes arising from developments in do mestic farm policy, gains in productivity or other fac tors to influence world prices, and hence the benefits from trade to other exporting and importing coun tries. The European Community produces more wheat and sugar than the United States, but less beef and veal. U.S. FARM POLICY AND ITS INTERNATIONAL IMPACT Compared to Australia, the European Commu nity and many other countries, agricultural policy in the United States is considerably more complex, and its effects exceedingly difficult to assess. There are several reasons for this. First, the optional nature of farm programs for wheat, corn and other grains means that policy ana lysts must assess separately the effect of programs on incentives and on producers’ responses for program participants and non-participants. (Programs typi cally cause price changes for non-participants as well as for participants.) The proportions of production that will be accounted for by each category of pro ducers must also be estimated. Second, substantial changes in U.S. farm programs occur frequently. grain crops are normally grown in rotation with pas tures containing legumes to provide nitrogen for use by pasture grasses and by subsequent crops. Third, U.S. farm policy relies heavily on a large number of policy instruments. Six of these instru ments are listed in table 7. The first column in table 7 summarizes the effect of each instrument on farm producer incentives in the United States. Each instru ment is considered in isolation from the others; the effects shown are relative to a situation of no govern ment intervention in agricultural markets. A final important fact is the difference in the abso lute size of agriculture in the United States and Austra The first instrument, mandatory unpaid land setasides, acts as a tax on farmers. The second instru SOURCE: BAE, Commodity Statistical Bulletin (January 1986, December 1986). 23 FEDERAL RESERVE BANK OF ST. LOUIS OCTOBER 1987 Table 7 The Effect of U.S. Policy Instruments on Domestic Producers and Other Countries Instrument Acreage reductions (unpaid) Loan rate/CCC stockoperations Target price/deficiency payments (with incomplete decoupling) Two-price schemes Tariffs/quantitative import restrictions Export subsidies Effect on domestic producers Export countries Import countries Tax Subsidy or Tax + + or - - or + Subsidy Subsidy - + + Subsidy Subsidy - + ~ + ment serves as a production subsidy when the loan rate is high relative to the world price, so that the Commodity Credit Corporation accumulates stocks. When the CCC releases stocks, the effect is equivalent to a tax on producers. The other instruments act as subsidies and, except for two-price schemes having a particular characteristic — farmers’ return from their marginal production being equal to the world price — encourage extra production. The two final columns show the effect of each United States farm policy instrument on the net eco nomic benefits to other countries. Most of the instru ments shown reduce world prices, making other na tions that export these commodities worse off, and importing countries better off. This is true of target prices achieved via deficiency payments, two price schemes (the resulting reduction in U.S. consumption causes the world price to fall even if U.S. production is not increased), tariffs/quantitative import restrictions, and export subsidies. The massive value of deficiency payments to United States farmers is illustrated by their capitalized values per acre. In 1985 these were: $450 for wheat, $562 for corn, $1050 for cotton and $1725 for rice.5If deficiency payments were made completely independent of cur 5Council of Economic Advisers (1986). 24 Effect on welfare of other: - rent production as suggested by several U.S. congress men and the Administration, deficiency payments could support farm incomes without inducing in crease in production. One important instrument of United States farm policy invariably works to raise world prices for farm commodities, and another policy sometimes does. Mandatory acreage reductions increase world price in two ways. First, they reduce production via a move ment down the industry supply curve. Second, they increase costs per unit of output as farmers substitute fertilizers and other inputs in place of land. Of the instruments listed in table 7, acreage reductions alone clearly benefit other exporting countries such as Aus tralia. When the loan rate for crops is set at a level that draws commodities from the commercial market into CCC stocks, the world price is raised. This was the situation in the period covered by the 1981 Farm Bill. When stocks are sold, however, other exporting coun tries are harmed, while importing countries benefit from the lower prices. The effects of United States farm policies on output do not arise only through higher producer prices. These policies, especially the loan price and target price deficiency payment schemes, provide a much higher level o f certainty about future prices that would exist in a free market. For example, the 1985 Farm Bill provided target prices for wheat to be maintained at their 1985 level of $4.38 per bushel in 1986 and 1987, OCTOBER 1987 FEDERAL RESERVE BANK OF ST. LOUIS Table 8 Nominal Protection Coefficients for Producer and Consumer Prices of Selected Commodities in Industrial Countries: 1980-82 Australia Wheat Coarse grains Rice Beef and lamb Pork and poultry Dairy products Sugar Weighted average European Community Japan United States Prod NPC Cons NPC Prod NPC Cons NPC Prod NPC Cons NPC Prod NPC Cons NPC 1.04 1.00 1.15 1.00 1.00 1.30 1.00 1.04 1.08 1.00 1.75 1.00 1.00 1.40 1.40 1.09 1.25 1.40 1.40 1.90 1.25 1.75 1.50 1.54 1.30 1.40 1.40 1.90 1.25 1.80 1.70 1.56 3.80 4.30 3.30 4.00 1.50 2.90 3.00 2.44 1.25 1.30 2.90 4.00 1.50 2.90 2.60 2.08 1.15 1.00 1.30 1.00 1,00 2.00 1.40 1.16 1.00 1.00 1.00 1.00 1.00 2.00 1.40 1.17 SOURCE: World Bank, World Development Report, Oxford University Press (1986). declining to $4.29 in 1988, $4.16 in 1989 and $4.00 in 1990. Although the bill announced reductions in loan prices, (effectively minimum prices for producers' cur rent production), it provided valuable reductions in uncertainty about prices through to 1990. The greater certainty about prices provided by the target price and loan price undertakings of the Farm Bill means that risk-averse farmers find it attractive to produce at higher levels than they would do with the same ex pected prices but without the price guarantees. While the role of price supports in producing the problems of global agriculture has rightly been em phasized, the contribution to surplus-generating in vestment provided by a high degree of certainty about process for several years ahead has been relatively neglected. While it is difficult empirically to separate these two effects, it is obvious that production would be reduced substantially if existing price support lev els were provided in the form of subsidies on prices in free markets, with the price guarantees being re moved. Of course, the critical issue for Australian wheat or sugar producers is the overall effect that the entire package of policies making up the commodity pro gram exert on other countries. While assessing this is complicated, some evidence on the effect of United States agricultural programs on world prices and trade can be presented. The Matter o f Prices and Access The extent to which one nation’s agricultural policies effect the economic fortunes of another coun http://fraser.stlouisfed.org/ 25 Federal Reserve Bank of St. Louis try depends mainly on the resulting price distortions in the former country and on the non-price restric tions placed on the latter country's trade. A useful indicator of price distortions in agriculture is given by nominal protection coefficients for pro ducer prices and consumer prices. These coefficients express domestic prices as the ratios of border prices, where border prices can be considered as export prices for export situations and import prices for im port situations. Information on nominal protection coefficients for producer and consumer prices for the United States, Australia, the European Economic Community and Japan for the years 1980-1982 is shown in table 8. Rates o f producer protection were at least as high in the United States as in Australia for each of the seven commodities. The figures in the bottom row indicate that United States price supports encouraged aggre gate agricultural production much more than Austra lian pricing policies did. Overall, the price of food to consumers was also raised more by market interven tions in the United States than in Australia, although buyers of wheat and rice fared better in the United States. Policies that raise domestic consumer prices also harm other export countries by increasing the output that must be disposed of on other world mar kets. For perspective it should be noted that producer and consumer prices were higher relative to world prices in the European Economic Community than in the United States, and they were much higher still in Japan. FEDERAL RESERVE BANK OF ST. LOUIS Rates of producer subsidy would generally have been higher in more recent years than in the years 1980-1982. This is due mainly to the lower level of world prices — against which subsidy rates are mea sured. Anderson and Tyers (1987) projected average producer to border price ratios of 1.5 for United States agriculture in 1988 and 2.0 for all industrial market economies. Australia’s top rural export is not included in table 8. Wool growing is very lightly assisted through gov ernment intervention in Australia. The United States tariff of 10 cents a pound (clean) on wool appears to be a relatively minor impediment to Australian exports of wool in this market. In addition to the benefits con ferred by the tariff, United States wool growers re ceived payments from taxpayers amounting to about 20 percent of their cash receipts in 1985.6 Australia's agricultural trading opportunities are not restricted only by policy interventions that raise prices to overseas producers and consumers. It also faces quantitative restrictions on access of some com modities to major markets. Restrictions on exports of beef and sugar to the United States are important cases. The Impact o f U.S. Farm Policies on International Trade The Bureau of Agricultural Economics has esti mated that the Common Agricultural Policy of the European Economic Community caused income losses to Australian farmers of almost $A1 billion a year in the five years to 1985.7 That was around 14 percent of the gross value of exports of the six com modities included in the study — wheat, coarse grains, sugar, beef, sheep, meat and dairy products — in 1985. No comparable estimate has been made of the effects of United States farm policies on the income of Australian farmers. The greater complexity of farm policy in the United States than in the European Economic Community, and the greater frequency of major policy changes, are strong deterrents to at tempts to duplicate the European Community study for the United States. However, two major projects are in progress in the Australian Bureau of Agricultural and Resource Economics of the international conse quences of United States farm policies. One project focuses on grains and the other is more general in scope. 6Economic Research Service (1986). 'Bureau of Agricultural Economics (1985). http://fraser.stlouisfed.org/ 26 Federal Reserve Bank of St. Louis OCTOBER 1987 The World Bank has published estimates of the effects on world prices and world trade volume of removing policies in major countries and blocs that cause prices of agricultural commodities to differ from world prices. These estimates provide a general indi cation of the way a small trading country such as Australia would be affected by liberalization of com modity markets in large countries. Some of these esti mates are shown in table 9.8Note that liberalization in a country or bloc means that policy-caused price distortions are removed simultaneously for all seven commodities, so that the results reflect interactions between the commodities as liberalization changes relative prices to producers and/or consumers. Except for wheat and coarse grains, liberalization in the United States is estimated to have a much smaller effect on world prices, and hence on other exporters such as Australia, than liberalization in the European Economic Community. A movement to free commod ity markets in the United States is found to reduce the world price for coarse grains, to the detriment of other exporters. This appears to be due to the removal of acreage restrictions and to substitution of coarse grains for wheat upon liberalization. World trade volume for coarse grains, pork and poultry, and dairy products are found to increase more with removal of protection in the United States than in the European Community. Prices and trade volume for beef and lamb are increased much more by market oriented policies in Japan than by liberaliza tion in the United States or the European Community. THREE APPROACHES TO MORE OPEN AGRICULTURAL TRADE MARKETS Solutions to the problems of distorted and re stricted agricultural trade can be sought through uni lateral, bilateral and multilateral actions. The balance between domestic benefits and costs can be expected to determine action under each of these approaches. The most plausible explanations of government intervention in agriculture emphasize ec onomic characteristics (such as price elasticity of de mand and number of producers) which determine an industry's effectiveness in seeking assistance, and the 8The World Bank pointed out that the figures in table 9 almost certainly underestimated the benefits to developed countries from trade liberalization. OCTOBER 1987 FEDERAL RESERVE BANK OF ST. LOUIS Table 9 International Price and Trade Effects of Liberalization of Selected Commodity Markets, 1985_________________ Country or country group in which liberalization takes place EC Japan United States OECD Developing countries All market economies EC Japan United States OECD Developing countries All market economies Wheat Coarse grains Rice Beef and lamb Pork and poultry Dairy products Percentage change in international price level following liberalization 1% 3% 1% 10% 2% 12% 0 0 4 4 1 3 1 -3 0 0 -1 5 2 1 27 5 16 2 7 3 -12 0 -4 36 9 4 -8 16 -2 67 Percentage change in world trade volume following liberalization 107% 0% 4% 0% 3% 34% 0 3 30 57 -8 28 -2 14 7 0 14 50 -1 19 32 195 18 95 7 12 75 68 260 330 6 30 97 235 295 190 Sugar 3% 1 1 5 3 8 -5% 1 3 2 60 60 NOTE: Data are based on the removal of the rates of protection in effect in 1980-82. Data for the EC exclude Greece, Portugal and Spain. SOURCE: World Bank, World Development Report 1986. costs of providing assistance.9A consequence of this view, in contrast to the alternative “public interest” explanation for trade in interventions, is that govern ments are unlikely to change their programs quickly in response to new studies revealing that interventions are costly to the overall community. Nevertheless, research and education can educate the electorate about the costs and benefits of agricultural programs.10 other farm policy proposals, as prepared by Resources for the Future, is reproduced in table 10; it ranks the various policies in decreasing order of desirability to each of three groups: farmers, agribusiness and households.11Actual values for net farm income, acres planted (the criterion for ranking the policies from the perspective of agribusiness) and food and tax costs per household are also shown for most policies. Unilateral Changes in U.S. Farm Policy Not surprisingly, the policies rated as best for pro ducers (mandatory supply controls with export subsi dies, and two price schemes) rank near the bottom for agribusiness and for households. On this approach, the interests of agribusiness are more closely aligned to those of consumers (taxpayers) than they are with producers. This increases the prospects for reform of United States farm policies in wavs favorable to house holds. Market-oriented policies involving complete or Many suggestions have been made for reforming United States farm policy. An interesting comparison of the effects of the Food Security Act 1985 and of six 9For example, Gardner (1987); von Witzke (1986); Sieper (1982). ’“One development is a large study of the economic effects of agricul tural policies in several countries that is being coordinated by the Australian consultants Andy Stoeckel and Sandy Cuthbertson and funded by the Australian and United States governments and Aus tralian farmers. "Resources for the Future (1987). 27 FEDERAL RESERVE BANK OF ST. LOUIS OCTOBER 1987 Table 10 Rankings of Farm Policy Proposals: Snapshot of 1990-91 Producers (net farm income) Policy proposal Mandatory supply controls with export subsidies Two price scheme Extension of marketing loans Food Security Act of 1985 Low target price with partial decoupling Mandatory supply controls without export subsidies Decoupling with transitional income support Other exporters (world price) Households (food and tax costs) Agribusiness (acres planted) Billions of dollars Rank Millions of acres Rank Dollars per year Rank Rank $41 n.a. 1 2 169 n.a. 6 5 $3,482 n.a. 7 5 5 7 27 3 204 4 3,111 4 2 25 4 207 2 3,101 3 4 20 5 211 1 3,040 2 3 n.a. 6 153 7 3,308 6 1 n.a. 7 n.a. 3 n.a. 1 6 n.a. = not available SOURCE: Resources for the Future (National Center for Food and Agricultural Policy), Farm Bill Revisited: Midcourse Corrections or Stay the Course? (April 1987). Final column is author's assessment. partial decoupling of producer assistance from cur rent production rank highest from the view of house holds. I have added a ranking of the policies from the perspective of other exporting countries, such as Aus tralia. Unilateral use of mandatory supply controls, with idling of 127 million acres (more than 40 percent of the total cropland base) in 1991, is the policy that Australian farmers would endorse most enthusiasti cally. However, mandatory supply controls rank very poorly for all U.S. interest groups. Of some comfort to other exporting nations, perhaps, is that the worst U.S. policies from their perspective (two price schemes, decoupling with transitional income support, and supply controls with export subsidies) would be un http://fraser.stlouisfed.org/ 28 Federal Reserve Bank of St. Louis popular also with at least one of the domestic U.S. groups.12 Bilateral Liberalization Agreements reached between two countries to reduce trade barriers may be consistent with the Gen eral Agreement on Tariffs and Trade (GATT) objective of increasing world trade. This depends on whether 12lf the United States were more concerned about the foreign relations fallout from its farm policies on countries importing agricultural commodities, the relevant ranking would be the reverse of that in the final column of table 10. That would increase the attractiveness of two price schemes, decoupling with temporary income supports and supply controls with export subsidies. FEDERAL RESERVE BANK OF ST. LOUIS the extra trade that results between the two countries is mainly a net addition to world trade or is obtained largely by reducing other countries’ trade. Although free trade areas between two or more countries are permitted under Article 24 of GATT, bilateral trade liberalization appears inconsistent with the GATT most favored nation principle of extending to all GATT members reductions in trade impediments negotiated with a particular member country. The Multilateral Approach GATT is the only forum for the detailed negotia tions required in an international approach to reduc ing impediments to freer trade. The fact that so little was achieved toward freer world agricultural trade in the previous seven GATT rounds is not a good omen for the round that commmenced in Punta del Este, Uruguay, in September 1986. Increased pressure from other international groups, notably the Organization for Economic Cooperation and Development (OECD) and the Economic Summit Countries, will be impor tant for progress towards a more liberal agricultural trade regime in the current GATT round. The United States tabled its Uruguay round pro posal for agriculture with GATT in Geneva in July 1987. Australia’s proposal is contained in the joint submis sion from the Cairns Group members, tabled in Octo ber 1987. While there are significant differences be tween the two proposals, these are much less important than the remarkable degree of common ground. The United States and Australian (Cairns Group) proposals both called for: • the phasing out by the year 2000 of all policy mea sures that directly or indirectly subsidize agricultural production and all measures that limit market access; • the use where governments provide income support for farmers of measures that make payments indepen dent of current levels of production and marketing; • the reform of GATT rules and disciplines consist ently with the above. Agreement on these steps in the Uruguay round, and their implementation, would ensure a new, liberal era in world agricultural trade. In deciding whether to participate actively in GATT efforts to reduce agricultural assistance multilaterally, each nation will likely compare the economic effects of multilateral liberalization on domestic groups with OCTOBER 1987 the economic effects of reducing assistance indepen dently of other countries. The differences arise from the larger increase in world prices when protection is removed from a bigger share of world production under multilateral liberalization. Anderson and Tyers (1987) have estimated the ef fects of gradually removing agricultural assistance by individual countries or groups of countries, and by many countries simultaneously, over the period 1988 to 1995 that throws light on this. Some of their results are shown in table 11. U.S. producers would lose approximately $22 billion in 1995 if the U.S. removes agricultural protection unilaterally. This large pro ducer loss becomes a gain of $3 billion if liberalization occurs in all advanced market economies. In the Euro pean Economic Community, unilateral liberalization would cost producers an estimated $89 billion; this would be reduced to only $74 billion if liberalization occurred in all industrial market economies. If, as seems likely, government decisions on reduc ing agricultural assistance depend mainly on the way producers are affected, the multilateral approach ap pears much more attractive for the United States than going it alone. It is much less clear that either ap proach to liberalization would appeal to the European Economic Community. This poses a substantial prob lem for negotiations in the GATT round. Producers in Japan lose heavily from multilateral liberalization, as they do from unilateral removal of protection. Japan, also, can be expected to oppose both routes to freer markets if producer interests pre dominate. In Australia and New Zealand, by contrast, farmers would experience significant net gains in income un der the “let’s all do it together” route. The losses (not shown in the table) from removal of their own (gener ally modest) assistance would be easily outweighed by the increases in world prices resulting from removal of much larger price distortions by the big players. Pro ducers in Australia and New Zealand can be expected to be more enthusiastic about multilateral liberaliza tion than farmers in the United States. Taking economic gains to consumers (taxpayers) as the difference between net economic welfare and pro ducer gains in table 11, the results suggest that other groups in the European Economic Community and, more so, in the United States would prefer unilateral to multilateral reform. This, also, may not augur well for progress in the GATT round. 29 FEDERAL RESERVE BANK OF ST. LOUIS OCTOBER 1987 Table 11 Welfare Effects of Liberalizing Food Policies by Selected Producers: 1995 (billions of 1985 U.S. dollars per year) United States European Community All industrial market economies Japan Net Net Net Net Producer economic Producer economic Producer economic Producer economic welfare welfare1 welfare welfare1 welfare welfare1 welfare welfare1 Effects on: US EC Japan Australia New Zealand All industrial economies $-21.5 5.0 0.3 0.4 $ 3.3 -1.9 -0.1 0.1 $ 7.6 -88.6 1.9 2.4 0.4 0.2 1.1 -13.9 1.1 -70.9 $ 1.7 21.4 - 3.1 1.1 $ 4.4 9.7 -40.2 0.9 $ - 0.1 - 1.8 27.1 0.3 $ 3.1 -73.7 -38.7 3.2 $ 3.1 17.6 19.5 1.7 0.6 0.5 0.3 1.6 1.1 22.7 -22.6 25.6 -122.9 50.9 'Net economic welfare in the Anderson-Tyers model is the sum of the change in producer welfare (change in profits), the change in consumer welfare (what consumers are willing to pay, less what they have to pay), and the benefits to taxpayers from lower government subsidies. SOURCE: Anderson and Tyers, Global Effects of Liberalizing Trade in Agriculture, Trade Policy Research Centre, London, 1987. CONCLUDING COMMENTS Australian farmers and Australia as a nation are harmed bv United States farm policies, though less than they are by the agricultural policies of the Euro pean Economic Community. These effects are experi enced through power world commodity prices and trade volumes and increased instability of prices. Mea sures of the international effects of agricultural protec tionism in major countries and blocs often understate the true effects. One reason for this is that protection ist measures often reduce domestic price uncertainty, as well as raising producer prices. The effects of re duced uncertainty on investment and output can be substantial, but frequently they are not captured in measures of the impacts of policies. Implementation in the United States of Administra tion proposals to reduce the assistance provided to farmers via subsidies and price supports, and reorien tation of assistance to supporting incomes indepen dently of production, would be welcomed in Australia. Similarly, the thrust of the United States proposal to GATT for multilateral phasing out of agricultural sub sidies and barriers to imports between 1990 and 2000 has been called “bold and imaginative” by Australia’s prime minister. http://fraser.stlouisfed.org/ 30 Federal Reserve Bank of St. Louis However, both in multilateral negotiations and in domestic policymaking, the powerful forces that have caused existing policies to be introduced and main tained will not easily be overcome. United States farmers will oppose more market-oriented policies if they lower their incomes. They will prefer multilateral reductions in agricultural protection, which will push world prices up more, to unilateral reductions confined to the United States. Moreover, they stand to gain relatively much less from multilateral reductions than do Australian farmers. With the relatively small gain to U.S. farmers and the large losses for European Community and Japanese farmers from phasing out agricultural protection, it is easy to be somewhat pes simistic about the outcome of agricultural negotia tions in the current GATT round. If production-oriented support programs that have produced the global agricultural crises are to be re placed by market-oriented policies supplemented by production-independent income supports, con sumers and taxpayers must be convinced that it is worthwhile to adopt more cost-effective approaches to bolstering farmers’ incomes. FEDERAL RESERVE BANK OF ST. LOUIS REFERENCES Anderson, K., and R. Tyers. Global Effects of Liberalizing Trade in Agriculture (London: Trade Policy Research Centre, 1987). Bureau of Agricultural Economics. “Agricultural Policies in the Euro pean Community," Policy Monograph No. 2 (Canberra: Australian Government Publishing Service, 1985). Carmichael, W.B. “ National Interest and International Trade Negotia tions,” The World Economy (December 1986), pp. 341-57. Council of Economic Advisers, Economic Report of the President (U.S. Government Printing Office, 1986, 1987). Dam, K.W. The GATT: Law and Economic Organization. (University of Chicago Press, 1970). Economic Research Service. Government Inten/ention in Agriculture: Measurement, Evaluation and Implications for Trade Negotiations, U.S. Department of Agriculture (GPO, 1987). Gardner, B.L. “Causes of U.S. Farm Commodity Programs,” Journal of Political Economy (April 1987), pp. 290-310. Hathaway, D.E. "Trade Negotiations: They Won’t Solve Agriculture’s Problems,” Choices (Fourth Quarter 1986), pp. 14-17. Hawke, R. Speech to the Contracting Parties of the GATT, Geneva, October 22,1987. Kingma, O. “ Performance of the Farm Sector,” paper presented at Annual BAE Outlook Conference, Canberra (February 1987). OCTOBER 1987 McLeish, R. and M. Spill. “ Livestock — Feed Grain Linkages in The Pacific Basin: The Impact of a Fall in Grain Prices," paper pre sented at Livestock and Feedgrains Study Program Pacific Eco nomic Cooperation Conference, Napier, New Zealand, October 1987. Pearlberg, R. “ International Agricultural Policy Coordination: An Im pediment to Liberal Reforms,” paper presented at Benjamin E. Lippincott Symposium, Policy Coordination in World Agriculture (Minneapolis: University of Minnesota, April 1987). Rausser, G.C. and B.D. Wright, “Alternative Strategies for Trade Policy Reform," paper presented at Benjamin E. Lippincott Sym posium Policy Coordination in World Agriculture (Minneapolis: University of Minnesota, April 1987). Resources for the Future, National Center for Food and Agricultural Policy. The 1985 Farm Bill Revisited: Midcourse Corrections or Stay the Course? (Washington, D.C., 1987). Sanderson, F. “ Putting Agriculture in the GATT: Comment" (Re sources for the Future, Washington, D.C., May 1986). Sieper, E. Rationalizing Rustic Regulation (Sydney, Australia: Centre of Independent Studies, 1982). World Bank. World Development Report 1986 (Oxford University Press, 1986). von Witzke, H. “ Endogenous Supranational Policy Decisions: The Common Agricultural Policy of the European Community,” Public Choice (1986), pp. 157-74. 31
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