A new indicator to assess agricultural subsidies.
by momagri Editorial Board
Maximizing the effectiveness of mechanisms to regulate agricultural markets––particularly regarding budget expenditures and subsidies granted to farmers––is increasingly at the heart of concerns for national and international decision-makers.
Agricultural support policies are indeed central to the European discussions on reforming the CAP to be operational on January 1, 2014, and a key point in the U.S. deliberations regarding the conditions to provide farmers with a minimum income in the next Farm Bill. Throughout the world, other agricultural powerhouses, which all support their agricultural activities through specifically dedicated policies, have more or less the same concerns and the same objectives. It is therefore not surprising that, for over twenty years and beyond tariff reductions, these policies have also been representing one of the key components of the GATT and then WTO talks on the liberalization of international trade and the regulation of global agricultural markets.
The lack of international consensus on the agricultural issue––particularly regarding internal subsidies––during the past four WTO ministerial meetings held since 2003 in the Doha Round, to a large extent explains the breakdown of the Talks up to now.
But why has the international community been unable to reach a global agreement during nine years of intense discussions on the issue? What does this breakdown ultimately reveal?
Actually, there is an undeniable fact at the root of the breakdown: An extremely low degree of initial consensus on the definition, perimeter and trade consequences of governmental ways to intervene in agriculture, and on the dismantling of these subsidies. Yet, now more than ever, the number (153) of participants to the Talks and the proliferation and opacity of agricultural support mechanisms fully require greater objectivity concerning their inventory and impact on international trade.
This has not been the case until now, while this represents one of the key elements in achieving a better redistribution of wealth between Northern and Southern agricultural powers and poorer nations.
This need for comprehensiveness and objectivity regarding subsidies to farmers through agricultural policies has increased because of the current environment. The occurrence of three global crises in less than three years––a financial crisis, an economic crisis and a food crisis––has acutely altered the perception of agricultural issues by public and private leaders. This awareness was thus expanded with tensions over prices, climate incidents, the growing and hard to control financialization, as well as the realization of a growing disjuncture between an unyielding food product supply and a very dynamic demand (the world population will grow by 80 million people each year between now and 2050, mostly in areas suffering from hunger).
Starting with the mostly budgetary approach of pre-crisis times––shrinking governmental intervention to improve the effectiveness of market mechanisms––public leaders are now moving towards the obligation to correct its failures. Whether this is achieved in or out of the framework of a strategic approach to food, the issue of scarce and need resources subjected to price hyper-volatility restores a strong legitimacy to the advocates of minimal regulation. The demand for more structured and effective agricultural policies is thus strengthened to counter the scissors effect currently observed and characterized by increasingly strained budget revenues against rising food and non-food needs.
Consequently, the main concerns and discussions are now focusing on two key issues:
- How to better support agricultural activities without actually increasing public expenditures earmarked to that end?
To resolve these issues, it is crucial to get an accurate and comparative representation of factual subsidies earmarked for agriculture in the world’s large agricultural zones.
- How to facilitate the interpretation and integration of existing national and regional support systems to improve their convergence with a multilateral negotiation rationale?
Yet, among the many evaluation tools and indicators that have been developed and are currently used in international arenas, not a single one is capable to provide such representation.
Indeed, there is no international budgetary listing that registers all subsidies granted to farmers, regardless of their nationalities.
This is especially true for the various support indicators developed by the OECD, whether we are speaking of the PSE1 or the TSE2.
As a case in point, the indicators, which some developed nations refer to in discussions in multilateral arenas (including the WTO for instance),
- Are built on the principle that not a single country is capable to influence global price levels;
Similar criticisms can be raised against the Aggregate Measurement of Support (AMS) that is the WTO main indicator to assess national support, including:
- Take as basis for calculation “global reference prices” that are virtual and centered on a rationale of economic, environmental, health and social lowest price worldwide;
- Consider global market prices as exogenous data, while, in practice, they are influenced by the very policies these indicators intend to assess;
- Include different analysis perimeters according to countries or regions, which implies both asymmetry and systematic under-evaluation of expenditures in some countries as compared with others3;
- Do not factor in the influence of monetary and exchange policies implemented in a given country, whereas they can represent very effective forms of indirect subsidies in international trade.
- A cursory and asymmetric representation of factual agricultural budgets (for instance, what about direct subsidies to production inputs? to investment? to replacement of illegal crops?);
All told, the indicators now serving as international reference are no longer able to precisely account for existing agricultural realities, nor can they fully grasp the scope and diversity of current and future agricultural challenges.
- The permanent reference to a global reference price, even though some agricultural policies are bearing a direct impact on its level (see above):
- A listing that has become obsolete and thus inadequate to take into account the diversity of support systems according to synchronized and common criteria.
The resulting opacity has proved its ineffectiveness in implementing agricultural policies. It also breeds disinformation and useless strife regarding a highly strategic issue. The recent awareness of the inability of markets––especially agricultural markets––to self-regulate nevertheless gives a boost to the urgency to deal with them, at least as much as with financial markets.
All these opinions, which are shared by most players and well-informed observers of the agricultural world and governmental spheres, has led the think tank momagri4 to establish a rating agency––the momagri Agency. One of its objectives is to provide decision-makers and various involved parties in agriculture with indicators capable to answer the questions at the heart of international concerns.
In 2009 and to address such goal, the Momagri Agency launched the design of an indicator that intends to assess all government subsidies actually paid to agriculture worldwide through the creation of an international listing applicable to all countries throughout the world.
This indicator, to be presented in the up-coming weeks, offers the following key features:
- It sorts and amalgamates, for each country, public subsidies (from national and decentralized programs) to agricultural activities according to their strategic objective and using criteria applicable indistinctively to all countries throughout the world;
This indicator is now completed and its very first results impart valuable lessons and present a complete departure from the conventional views currently accepted. These results will be presented shortly to the international community. We do hope that this indicator will prove useful to public authorities and various involved parties in the current talks and discussions concerning the implementation of regulatory mechanisms for agricultural markets. We will not fail to keep you informed on up-coming publications.
- It weighs in agricultural subsidies according to a vertical approach, from direct subsidies coupled to production to indirect subsidies linked to a country’s objectives to protect its strategic interests;
- It tallies paid budget subsidies as well as non-budgetary subsidies that are indirectly beneficial to farmers in a given region through an advantageous monetary or exchange rate policy.
1 Producer Support Estimate
2 Total Support Estimate
3 This is the case of the United States compared with the 27 members of the European Union: the PSE and TSE indicators are systematically under-valued for the U.S. and over-valued for the EU-27 (see charts 2 and 3).