«Are the benefits of the liberalization of agriculture as great as they say? »

Jean-Marc Boussard, agronomist and researcher in economics, is a member of the Académie d’Agriculture. Former professor at the University of Paris I, he has worked throughout his career at the INRA (French national institute of agronomic research).

Françoise Gérard has a PhD in economics from the University of Paris I and is a researcher at the Cirad (Centre de Coopération Internationale en Recherche Agronomique pour le Développement). She has worked extensively in third world countries and in particular in Indonesia.

Marie-Gabrielle Piketty is an agronomist and has a PhD in economics from the University of Paris I. Researcher at the Cirad, she is currently working at the University of Sao Paolo.

Jean-Marc Boussard, Françoise Gérard and Marie-Gabrielle Piketty have just published a remarkable book entitled “Libéraliser l’agriculture mondiale? Théories, modèles et réalités “(Liberalizing world agriculture, Theories, models and realities, edited by the CIRAD) at a time when the crux of negotiations at the WTO is based on the hypothesis that “liberalizing exchanges of agricultural products would lead to a substantial gain in well-being for all the inhabitants of the planet”.

This book explains why it is necessary to put into perspective the results that are often used to evaluate the effects of liberalization. Indeed, even tiny modifications in the economic models used lead to a decrease by several billion dollars of the projected benefits. These models have many structural problems and it is easy to understand why it is highly unlikely that the liberalization of agricultural exchanges would have a significant positive impact on poverty and growth in the less developed countries.

WOAgri fully supports this analysis, recommends reading the book and presents here excerpts from the introduction.

« Quos vult perdere, Jupiter dementat »

« Whom Jupiter wishes to destroy, he first makes mad. »

The World is embarrassed by its agriculture. The developed countries produce too much and fight to win export markets by using subsidies seemingly unaware of the absurdity of spending two dollars to earn one euro, or two euros to earn one dollar, when the local exchange agent is still changing them at the same rate. The developing countries do not produce enough and famine is a real scourge. However, underproduction is not an issue in that these same countries, that cannot feed their own people, complain that they cannot export their agricultural products to the rich countries.

At the same time, a large number of highly educated and well-meaning people are well aware of the absurdity of the situation. They form a sort of global intelligentsia that is trying to find solutions for these all too obvious defects in the current political organization. In this book we hope to suggest some solutions by looking at things differently.

Liberalizing the commerce of agricultural raw materials and allowing production to be regulated by the market like any other economic activity is the solution the most often put forward at the moment. For a long time, in most countries throughout the world, agriculture has been more or less disconnected from the market in such as way that it is only natural to wonder if a return to “natural economic laws” would not solve a lot of problems. Moreover, all the students in economics know that the “invisible hand1”is both powerful and efficient. This theory ensures that there is no waste, like when we see surplus butter, flour or meat destroyed. It seems to guarantee that the consumer will always pay the “right price” thanks to competition that prevents anyone from making unfair profits. In the light of this reasoning we can wonder how we managed to get into such a situation and depriving ourselves of the benefits of the market, a natural and definitive institution that spontaneously takes over without anyone lifting a finger. To dissociate agriculture from the market was a voluntary act. Who is responsible?

In response to this question there are two points of view. For some the separation of agriculture from the market was decided out of malice because this was profitable for different social categories, in particular farmers but not exclusively and maybe not principally. Also on the list of infamous malefactors are the property owners, agricultural suppliers, chemical companies and bureaucrats who prosper by creating complicated rules and regulations. All these people had in interest in extorting a maximum amount of money from taxpayers under false pretenses and to share the spoils even at the cost of incredible inefficiency. This idea is very popular and justifies a return to the healthy discipline of a real market from which we have been unjustly excluded.

For others, on the contrary, the market was dissociated from agriculture because it did not function well, or at least how we believe it should function. Today the idea is totally iconoclast. Wasn’t the fall of the Berlin Wall a triumph of the free market system over communism which collapsed under the weight of its own bureaucracy after carelessly declaring its ambition to go against the laws of nature? And isn’t the prosperity of the Anglo-Saxon countries, which everyone can witness, the result of their profound belief in economic liberalism?

Before answering these questions it must be observed that the economic liberalism of the Anglo-Saxon countries has nothing to do with a laisser-faire system. The societies in question are highly regulated. Many measures are taken so that individual initiative, without being unnecessarily hindered, benefits society without harming anyone. This is true in general but especially in the area of agriculture and the food industry, sectors in which the market (since the policies of Roosevelt following the Great Depression in the 30’s) has a minimal influence on supply and the remuneration of producers. Paradoxically, in the 60’s, the agricultural market played a more significant role in the former Soviet Union, where the “kolkhoz” markets represented an important share of supply and sources of revenue, than in the United States where almost all the prices were controlled by the government and where strict limitations were set to prevent increases in supply. For the last sixty years, American agricultural policies have been imitated in this area by all the developed countries and by many developing countries.

The question is, therefore, whether the undeniable prosperity if the current “rich” countries was built “thanks to” or “in spite of “ the characteristic traits of modern agricultural policies […]

It is therefore interesting to examine the “liberal” arguments: why liberalize agriculture now and what can we expect from such a change in world policies? There are reasons that are temporary and anecdotal like the existence of huge surpluses and gigantic budgetary costs. There are also bureaucratic reasons. There is an international institution in charge of liberalizing everything and there is not much left except agriculture. But without going into these superficial considerations we must ask the question as to why, now, for the vast majority of economists “the liberalization of agriculture would be a good thing”. The reason behind this is that many economic models point in this direction. Hence, we must examine why and how these economic models are conceived […] We also should examine what the people opposed to liberalization have to say.

Indeed, there are many authors who disagree with the previous assertions […] It is important to remember here the origins of “Roosevelt style” policies that were built precisely on the idea that the conditions were not favorable for the beneficial effects of liberalization to happen […] If we dig a bit deeper and analyze the theories put forward by economists at that time, in the light of modern mathematics, this idea would probably be confirmed by reality.

[…] An analysis of historical data available shows that, on the one hand, food consumption is quite independent from the price of basic foods and above all, on the other hand, food production depends, a little, on the level of prices, but also a great deal on their volatility. These are highly unfavorable conditions for a free market system to work. And it is necessary to analyze the consequences.
Be that as it may, these partial analyses are not nearly as convincing as the fabulous figures published by international agencies and that are based on economic models that use tens of thousands of equations. In order to evaluate the soundness of these calculations we must look at the way these models are constructed and consequently at the meaning and the impact of their results. It is a difficult and abstract, but necessary, exercise that consists in demystifying them by taking them apart and “seeing what’s inside” […]

Be analyzing the results of the “standard” model we can observe that liberalization would indeed be a good thing if markets functioned correctly and if we could count on the reliability of information transmitted via the price channels between the producer and the consumer. However, that is not possible and the models have to be modified to take this into account.

[…] It is therefore possible to define […] the modifications, which seem at first glance to be minor, that need to be made to the standard model. Then, with the same data and the same type of “marginally” modified model we can observe very different results than the ones that are the basis of the optimistic conclusions complacently provided by international institutions to promote liberalization programs.

[…] We have detailed these results […] and we have broken them down by regions, and especially into “rich” and “poor”. Indeed, the reasoning […] put forward up until now […] concerns only national revenues and global “well-being”. But in a matter such as the liberalization of agriculture it is impossible not to mention the fact that changing food prices has tangible consequences on the distribution of revenues. This is one of the arguments used to promote liberalization policies: they should help fight poverty by providing inexpensive food. We she see that this hypothesis is questionable.

[…] It is therefore necessary to ask which options are possible. First, are there no liberal remedies for the “market imperfections” highlighted in the economic policies proposed by the WTO school? Don’t crop insurance and “commodities markets” help cancel out the drawbacks of liberalization while preserving certain undeniable advantages? In the same way, wouldn’t a progressive tax on revenues be a way to restore a minimum of fairness to the system? We will see that this is not easy .

But then if liberalization has very few advantages and many drawbacks, and if the current policies are too expensive and a source of waste, is there no way out? What is the cause of this general dissatisfaction with agricultural policies? In order to understand it is necessary to go back to the theory of production to show that in agriculture (and only in agriculture) there are no reasonable limits to rises in production with guaranteed prices and without any restrictions on quality. This is why the only reasonable option other than the fluctuation of prices seems to be the “control of supply”, that is to say a system of generalized production quotas which is not in contradiction with allowing an important role for the market in making “marginal” adjustments. The relation between the “production quotas” that “liberals” abhor and the commodities markets that are often presented as the universal remedy for the defects of markets could be closer than it seems.

This panoramic view of agricultural trade does not mention a point of view that is, however, gaining importance and that is the “multi-functionality” of agriculture which covers large areas throughout the world. By definition it creates “sub-products” obtained without reference to the markets, amenities and nuisances that obviously effect general well-being. This is one of the arguments that “anti-liberals” use to refuse applying the “laws of the market” to agriculture. The argument is serious. Many free market fanatics are so aware of it that they are looking for, and claim to have found, a way to create sorts of virtual markets on which it would be possible to manage amenities and nuisances in a decentralized manner. We have decided to ignore this question so as to avoid creating a diversion and confusing the reader with issues that are outside the framework of traditional economic analysis. It is nevertheless extremely important. The economic models we have constructed also allow us to identify some of the consequences of the greenhouse effect.

The policies that are currently being followed throughout the world in terms of agricultural policy are far from creating a harmonious world and are likely to revive the old malediction of Robert Malthus who saw in the limitation of food supplies the ultimate stumbling block for economic growth. This will not happen gradually, providing politicians with time to think (time they usually do not use wisely). It will happen suddenly following an incident such as a drought or a flood. An event that would normally not cause a shortage will take on absolutely catastrophic dimensions due entirely to the fact that it was just waiting to happen2. Common sense, in such a case, would be not to get involved in a situation that turns a banal natural phenomenon into a catastrophe. It would therefore be absurd to give up traditional instruments of agricultural policy and rely without any guarantees on the “blind forces of the market” while being aware of the eminently perfectible character of current policies..

1 Term used by Adam Smith (1776) to illustrate the automatic regulation of the economy by free markets.

2 Exactly like stock market crashes that are often “triggered” by a fraud or the bankruptcy of a reckless company. But the proportion of dishonest traders and daring captains of industry is probably constant in time. If they trigger catastrophes at his place and time it is because the circumstances are favorable. On this point we can consult the remarks of Daniel Zajdenweber (2001) about the 1755 Lisbon earthquake and the controversy between Voltaire and Rousseau on the “cruelty of Nature”. It is not the Nature’s fault, said Rousseau, that hundreds of thousands of people live crammed together in wooden houses at the bottom of a narrow valley.