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“Rethinking public policy in agriculture:
lessons from distant and recent history”
Ha-Joon Chang, University of Cambridge,
Report published in the Journal of Peasant Studies
Since its last ministerial conference in 2008, the Doha Round has not made much progress, despite prompting by Pascal Lamy Director-General of the WTO. Perhaps specifically, because the Round’s underlying theory, in which developing countries benefit fully from the unregulated liberalization of world trade, particularly in the case of agricultural markets, is no longer as successful as it was a few years ago.
Directly derived from neo-liberal doctrines and assumptions, the principles of the Washington Consensus (privatization, trade liberalization, strict control of inflation through drastic policies, etc.) have been imposed on many developing countries by international institutions, often with only relative success – or even failure. There are countless examples today of countries that have never managed to progress because of the inadequacy of the methods recommended, particularly in agriculture where the suppression of public support policies proved disastrous. In comparison, the more calibrated and sequential approach to economic liberalization implemented in Asian countries has had better results.
Even if these detrimental effects are broadly accepted by all, a certain number of neo-liberal economic principles remain impervious, since they still serve as the foundation to the Doha Round for example. Today this gives rise to the survival of a "post - Washington Consensus", which is less fundamentalist than the previous one, but which, in many respects, still has the same neo-liberal basis.
However, a recent report, entitled "Rethinking public policy in agriculture: lessons from distant and recent history”, published with support from the FAO, shows how inadequate neo-liberal principles are when addressing the specificity of agricultural markets. Published under the leadership of Ha-Joon Chang (Cambridge University), the report reviews the historical evolution of agricultural policy in 20 developed and developing countries to demonstrate that their development did not draw on the neo-liberal principles that are still being applied today. Moreover, the report rejects the theory behind the neo-liberal philosophy of: eliminating market distortions, because the market’s free play provides the best reallocation of available and produced resources. This theory does not take market imperfections into account...
We recommend that you read this report and below we present one of its most significant extracts.
Momagri’s Editorial Board
Extract from the report “Rethinking Public Policy in Agriculture: lessons from distant and recent history, 2.1 Eliminating Distortions”
The persistent theme in the NCW1 was the need to “eliminate distortions”. According to the NCW, state intervention in agriculture (e.g. subsidized fertilizers, artificially cheap credit, tariff protection and state-controlled prices) distorts market signals and therefore channels resources into “wrong” activities. This creates inefficiencies because more outputs could be produced if the resources flowed according to the “right” signals created by the “natural” forces of supply and demand.
At one level, it is impossible to disagree with this view. If prices are distorted, then by definition they lead to distorted outcomes, which, by definition, cannot be good. However, we reach this conclusion only because the whole discourse is set up this way.
Underlying this argument is the assumption that distortions are bad because markets would have worked well without them. However, distortions may be good or bad, depending on what the market outcomes would have been without them. If markets are not working well, distorting the prices that prevail may be a good thing, if that is done for the right purpose.
First, certain government actions may create distortions that create inefficiencies in short- term resource allocation (which is what concerns neoclassical economics, which forms the theoretical basis of the NCW) but that actually may increase long-term productivity. For example, agricultural tariffs can impose short-run efficiency costs, but they may promote agricultural and overall economic growth if the tariff revenues are invested by the government in improving agricultural productivity (e.g. investments in rural infrastructure, research and extension) and/or if the increased agricultural incomes create offsetting extra demand for domestic industries. Agricultural protection had such an effect in Germany in the late nineteenth century and in South Korea in the late twentieth century. Therefore, policies that are distortionary in short-term resource allocation actually may help economic growth and poverty alleviation in the long run.
Second, even if we ignore the “dynamic” dimension and focus on short-term allocative efficiency, there are many instances of market failure that justify inducing price distortions in relevant markets. For example, if market signals lead agents to use less than socially optimal amounts of certain inputs, then “distorting” the market signals so that more of those inputs would be used would be socially justified. For example, if the market fails to provide agricultural research (because of the public goods nature of research output and/or the scale economy involved in conducting research), the government may be justified to “distort” the market signals by conducting the research even though it cannot make any profit from it or by providing subsidies to private-sector agents to conduct more research than what market signals would dictate.
Moreover, in some instances, it may be better to create “distortions” even when there is no market failure in the standard sense. For example, in countries where there is no citizenship-based welfare state or well-designed safety net, certain “distortionary” policies (such as tariff protection or a price stabilization scheme) may be the only mechanisms that can provide income stability to small-scale farmers. Greater rural income stability may bring greater political stability – which is good in itself – and also may contribute to growth by encouraging long-term investments. Moreover, income instability means that many people who are not poor over time may occasionally fall below the poverty line. This leads to episodes of malnutrition and interrupted education, which have irreversible negative impacts on people’s productivities in the long run. In this case, agricultural protection may be a good thing, even if there is no market failure in the standard sense.
Of course, in practice, it is difficult to agree about how often and exactly where markets fail. This is one of the main reasons why there is so much disagreement on concrete policy, even when most (if not all) people agree that markets do fail and fail more frequently in agriculture.
Moreover, even if we know how much and what to subsidize, there are many ways to do it, and the best way may differ across countries. For example, South Korea produced subsidized fertilizers in state-owned enterprises and sold them to farmers through state-controlled agricultural cooperatives, while Malawi distributed vouchers to poor farmers (the exact distribution of which was decided by village meetings, rather than by government officials) to buy imported fertilizers. Both types of initiatives have produced good results, but they may not work in other contexts, where, for example, state-owned fertilizer companies are inefficient, cooperatives are corrupt or village power structures are such that the strong hog the vouchers. In other words, even if we know the location and the scale of market failures, the design of delivery mechanisms will matter greatly and the discourse advocating elimination of distortions has nothing to say on this issue.
1 NCW : New Conventionnal Wisdom. Name the author uses to call the “post-Washington consensus”.
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Advocating for
agricultural market
regulation and global
food governance | |
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