Impact of Agricultural Subsidies

Agricultural Subsidies refer to the subsidies provided to the agricultural producers by the government mostly in developed nations. What we want to look at is the impact of these subsidies on a global level- especially on the farmers in developing nations like India.

Rich countries of the world like the U.S. have lavished subsidies on their farmers-guaranteeing them a minimum price for the products they produce (Minimum Support Price- MSP).

For instance, if the market price of a commodity falls below the MSP, the governments of the rich nations transfer the difference in price to the farmers-either in the form of direct transfer or in the form of subsidies.

The aim of this practice is to protect farmers in the developed world from the potentially devastating effects of low commodity prices. Typical is the guarantee of this transfer that U.S. cotton farmers will receive at least $0.70 for every pound of cotton they harvest. If the market price of cotton falls short of this, the U.S. government writes a cheque to the farmers for the difference in price.

The practice of providing agriculture subsidies has led to the financial support of approximately $300 Billion/year for farmers in rich countries.

Impacts of these subsidies:

~Farmers who are receiving these subsidies are incentivised to produce more due to the guaranteed amount they will receive. This may be very fruitful for the domestic farmers, who are, as a result, financially stable.

~ But the surplus production is often a lot more than their domestic markets can absorb. As a result, this surplus is dumped into the world markets, which depresses prices (global market prices).

~ Due to the low market prices, it becomes very difficult for the farmers in developing nations to earn a profit by selling their output (as a result of the low price realised in exchange for their output).

e.g. In the EU farmers produce more sugar than the EU market can absorb. The surplus (which is about 6 million tonnes per year) is dumped in the world market, thus, lowering the world market prices. If the EU stopped dumping their surplus sugar in the world market, it would raise the world sugar prices by nearly 20%. This would make a huge difference for the sugar producers in developing nations which can reap the benefits of exporting their products and earn profits.

If the world prices were increased and production was shifted from high cost protected producers in Europe and the U.S. to lower-cost producers in nations like India, it would have two positive implications:

~ Consumers in the developed world would benefit from lower domestic prices and the elimination of taxes required to pay for these subsidies and subsequently higher market prices.

~ In the long run, greater economic growth would occur in agriculturally dependent developing nations would be to everyone’s benefit.

Moreover, the United Nations has estimated that rich nations give about $50 Billion a year in foreign aid to the developing nations, agricultural subsidies cost the same countries of the developing category, some $50 Billion in lost exports. This effectively cancels out the effect of the aid.

It’s no good building up roads, clinics, and infrastructure in poor areas if you don’t give them access to markets and engines for growth.