U.S. Farm Policy and Developing Countries 미국의농장정책및개발도상국. Dr. Gary W. Williams Professor of Agricultural Economics Texas A&M University

U.S. Farm Policy and Developing Countries 미국의농장정책및개발도상국 Dr. Gary W. Williams Professor of Agricultural Economics Texas A&M University

U.S. FARM POLICY AND DEVELOPING COUNTRIES Agriculture and Development - What is a less developed country? - Two polar views of the role of agriculture in overall economic development Brief Review of U.S. Farm Policy - Farm policies the U.S. has abandoned - U.S. farm policies currently in place - Changes likely under the new U.S. Farm Bill 2018(?) The Connection Between U.S. Farm Policy and Developing Countries

Agriculture and Development What Is A Less Developed Country? Comparing levels of per capita income is the most common method of defining level of development system World Bank Development Classification - 208 countries with populations of 30,000+ categorized by their annual per capita income levels into 5 groups: (1) Low-income countries (LICs) - $1,025 or less (2) Lower-middle-income countries (LMCs) - $1,026 to $4,035 (3) Upper-middle-income countries (UMCs) - $4,036 to $12,475 (4) High-income OECD countries } $12,476 or more (5) Other high income countries

Agriculture and Development World Bank Country Development Classification by Per Capita Gross National Income (GNI) Levels

Agriculture and Development

Agriculture and Development Ranking Countries by Level of Development - New Human Development Index (HDI) (2010)» Attempt by UNDP to compare relative development among countries using a broader concept of development» Ranks 187 countries by their human development on a scale of 0 (low) to 1 (high) based on four important aspects of development: (1) life expectancy at birth (2) mean years of schooling (3) expected years of schooling of today s school children (4) real gross national per capita incomes» Ranks the countries into three groups: (1) Low human development (index of 0.0 0.499) (2) Medium human development (index of 0.5 0.799) (3) High human development (index of 0.80 1.0)» The HDI reveals that: (1) a country can do much better than might be expected at a low level of income and (2) substantial income gains can still accomplish relatively little in human development. http://hdr.undp.org/en/content/table-1-human-development-index-and-its-components

Agriculture and Development New Human Development Index for 23 Selected Countries (2008 data) http://hdr.undp.org/en/content/table-1-human-development-index-and-its-components

Agriculture and Development Developing Countries Share Some Important Characteristics 1. Relatively high share of LDC population is employed in agriculture.

Agriculture and Development 2. The agricultural labor share of total labor decreases with increases in GDP per capita

Agriculture and Development 3. The more agriculturally-based a country, the greater the rural percentage of the country s poor Agriculture s Contribution to Growth and the Rural Share of Poverty in 3 Types of Countries

Agriculture and Development 4. LDC ag sectors account for much of the employment but less of the output than industrial sectors Agriculture s Share of Output and Employment in Selected Countries, 2017 43 21 14 57 15.9 8.7 4.8 16.2 United States European Union Republic of Korea Source: World Bank Development Report 2 4 5 1.0 1.4 2.0

Agriculture and Development 5. LDC ag production is growing Average annual growth rates in agricultural production, from 1995 to 2006-2009

Agriculture and Development 5. LDC ag production is growing and faster than population.

Agriculture and Development - Africa continues to face severe food production challenges despite some rebound in the last decade. Food Production Index, 1962-2014 (2004-06 = 100) 140 120 100 80 60 World 40 Africa 20 0 1960 1970 1980 1990 2000 2010

Agriculture and Development - On a per capita basis, African food production has made little progress Food Production Per Capita Index, 1962-2014 (2004-06 = 100) 120 100 Africa 80 60 World 40 20 0 1960 1970 1980 1990 2000 2010

Agriculture and Development - But African agricultural output per capita performance has been highly mixed across countries

Agriculture and Development 6. Uneven global distribution of agriculturally productive land is part of the problem

Agriculture and Development 7. Low productivity is a problem Many LDC farms are inefficient and low-productivity subsistence family operations Labor productivity increasing but at much slower pace than in DCs Low LDC land productivity as well.

Agriculture and Development - U.S. and other DC agriculture is more highly efficient as a result of technology adoption» DC farm output productivity has increased steadily since 1800s» Sharp jump in the 1940s due to new technology development and adoption

Agriculture and Development Two polar views on agriculture-to-development link 1. Agriculture as a supplier of resources for economic development: - Agriculture plays passive role in development as a supplier of resources, primarily labor, to support industrialization and development of a modern sector (Lewis Two Sector Model). - Development of agricultural sector not necessary for overall development. - In fact, agricultural development retards overall development by competing with the modern sector for resources. 2. Agricultural growth as a pre-condition for overall economic development Agricultural growth: - provides source of growing food supplies to feed economic growth - reduces dependence on foreign sources of food - reduces cost of food - increases incomes among the most poor and creates internal market for modern sector goods - increases urban employment and wages - promotes agricultural exports and foreign exchange earnings - leads to greater international economic independence - increases tax base and revenues for overall development projects

Agriculture and Development Lewis Two-Sector Surplus Labor Theory The focus is on the structural transformation of a primarily subsistence, agricultural economy with two sectors: (1) Traditional sector: - overpopulated, rural subsistence sector with MP L = 0 (2) High-productivity, modern, urban, industrial sector to which surplus rural labor is transferred Focus on the process of labor transfer from traditional sector and growth of output and employment in the modern sector: Labor transfer and employment growth results from output growth The speed of output growth determined by rate of industrial investment and capital accumulation in urban sector Investments are made possible by excess urban sector profits over wages, assuming all such profits are re-invested The wage level in the urban sector is fixed and set at some premium over the average wage level in the agricultural sector

The Lewis Model of Modern-Sector Growth in a Two-Sector Surplus-Labor Economy Total Profit output D 1 Share of Total Output Paid to Labor

Brief Review of U.S. Farm Policy Over the years, U.S. farm policy has been criticized as being anti-developmental Since the 1930s, the U.S. has operated four main types of policies to support its farm sector: 1. Price Support Policies: 1930s through early 1980s Government Surplus Purchase (Stockholding) Program» Began in 1930s as a means of raising prices to farmers.» Huge government stocks of commodities in the 1960s and 1970s.» Abandoned in the early 1980s Demand Expansion Programs Began in 1960s and most continue under current farm policy:» Foreign economic development programs» Alcohol fuels programs» Food subsidy programs (SNAP) for low income consumers» School lunch program for low income school children» Many others. Supply Control Programs» Began in 1930s as a means of reducing surpluses from price supports.» Discontinued with the 1996 Farm Bill.

Brief Review of U.S. Farm Policy 2. Revenue/Income Support Policies: began in the 1980s Direct payments to farmers (decoupled payments): Began in 1996 Farm Bill but eliminated in 2014 Farm Bill Coupled Payments: Current policy under 2014 Farm Bill Farmers can choose between two programs: (1) Price Loss Coverage (PLC) program» A PRICE-based countercyclical program.» Farmers receive a subsidy equal to the difference between the support price (called the reference price ) and the market price.» When the market price goes down, the subsidy goes up and when market price goes down, the subsidy goes up.» Consequence: Production is higher and market price is lower. (2) Agricultural Risk Coverage (ARC) program» A REVENUE-based countercyclical program.» Farmers receive a subsidy equal to the difference between a guaranteed revenue per acre and their actual revenue per acre» When the farm revenue goes down, the subsidy goes up and when farm revenue goes down, the subsidy goes up.» Consequence: Production is higher and market price is lower.

Brief Review of U.S. Farm Policy 3. Crop Insurance: began in the 1930s but subsidies have increased under recent farm bills Crop insurance is a risk management tool Producers purchase crop insurance to protect against the loss of their crops due to natural disasters such as hail, drought, freezes, floods, fire, insects, disease, and wildlife, or the loss of revenue due to declines in price. Rather than support farm prices or revenue, crop insurance helps eliminate wide swings in farm revenue from year to year as a result of natural disasters and other production and price risks. The cost of crop insurance is federally subsidized and regulated and is sold by private crop insurance agents and companies whose costs are also subsidized. Crop insurance has grown from a small program to become a key component of U.S. farm policy in helping farmers manage the risks in farming. Nearly 90% of U.S. crop acreage is covered by crop insurance

Brief Review of U.S. Farm Policy 4. Trade Policies Export Subsidies Abolished under WTO in 2015 (the Nairobi package ) Import Tariffs - Reduced under WTO - Free Trade and Trump s Fair Trade - Trump s tariff trade war may hurt the U.S. agricultural sector but perhaps not as severely as many think.

Effect of Chinese Import Tariffs on US. Agricultural Exports Recent research shows that a 25% Chinese tariff on imports of U.S. soybeans, pork, cotton, and sorghum results largely in a change of destination of U.S. exports. So the result is largely a change in the patterns of world trade and small effect on the volume of trade. In the case of soybeans, U.S. exports fewer soybeans to China but more elsewhere while South America exports more soybeans to China but less to other countries. Zheng, Wood, Wang, Jones, Choices, 2018

Effect of Chinese Import Tariffs on US. Agricultural Exports Another recent paper concludes that the 25% Chinese tariff on U.S. agricultural commodities could reduce world trade in agricultural commodities and raise prices (benefits producers and harm consumers in low income countries). The extent of the effect depends on elasticities (responsiveness of supply, demand and trade to price changes). Taheripour and Tyner, Choices, 2018.

Effect of Chinese Import Tariffs on US. Agricultural Exports That same paper shows that the 25% Chinese tariff is a lose lose proposition for both China and the United States. The loss in economic well-being is about the same in both countries. South America and other countries experience significant improvements in their economic well-being. Taheripour and Tyner, Choices, 2018.

Effect of Chinese Import Tariffs on US. Agricultural Exports In response to the 25% Chinese tariff, U.S. producers will adjust by switching to the production of other commodities. Development consequence: LDC producers of soybeans, sorghum, cotton, pork and other products will benefit but LDC producers of most other commodities will be harmed. Taheripour and Tyner, Choices, 2018.

Connection Between U.S. Farm Policy and Developing Countries Price support policies: - The U.S. abandoned farm price support as a policy objective more than 20 years ago. - Demand expansion policies still used extensively (biofuel subsidies, food stamps, school lunch programs, advertising programs, etc.) Revenue/income support policies are now the main linkage between U.S. farm policy and development. - The consequence is substantially higher U.S. agricultural production and lower world prices through payments of subsidies to producers. - The criticism is that the U.S. is paying rich farmers in a rich country to produce more and dominate world agricultural markets at the expense of poor farmers in poor countries. Crop insurance helps reduce world price and production volatility - No price support or production change

Connection Between U.S. Farm Policy and Developing Countries Trade policies: - U.S. no longer utilizes export subsidies on agricultural commodities. - WTO agreement reduced the level and impact of import tariffs U.S. Average Import Tariff Rates, 1900-2012 Trump tariff war could erase gains made in reducing trade barriers... or force countries to negotiate leading to more free trade

Connection Between U.S. Farm Policy and Developing Countries So does U.S. farm policy have a negative effect on the economic development of LDCs? - Yes. and No. or Maybe! - U.S. farm policies have switched:» FROM anti-development price support policies that RAISE food prices in low income countries (but also stimulate LDC production)» TO anti-development revenue support policies that REDUCE LDC food production and incomes of low income farmers (but also reduce the cost of food in low income countries)» But crop insurance policies help stabilize LDC markets for both producers and consumers» A tariff war between developed countries could SUPPORT world prices for those particular commodities and LDC production (but also further increase the cost of food in low income countries). BUT the opposite would be the case for other commodities as U.S. production pattern changes. - Which is worse?» The current policies that discourage production in LDCs but hold down the cost of food to billions of low income consumers?» Or policies that encourage production in LDCs but increase the cost of food to billions of low income consumers?

Connection Between U.S. Farm Policy and Developing Countries But remember two things: (1) The U.S. is not the only developed country to support and subsidize its farm sector or the worst. Percent of Farm Receipts from Government Payments, 2011-2013* * PSE as a % of gross farm receipts

Connection Between U.S. Farm Policy and Developing Countries But remember two things: (2) U.S. farm policy also includes direct assistance to LDC agricultural development - Key objective in U.S. farm policy - Agricultural development activities help poor people in developing countries feed themselves. - As agriculture sectors become more productive, labor can then be transferred out of agriculture and employed in other economic activities, making the economy less dependent on agriculture. - U.S. economic development followed this process. Also, Japan, South Korea, Taiwan and other formerly less developed countries. - Development brings increases in incomes and standards of living. - Increased income leads to increased demand for food. - U.S. is major food exporting country so foreign economic development leads to increased foreign demand for food and increased exports of U.S. agricultural and food products.

Connection Between U.S. Farm Policy and Developing Countries Four General Categories of U.S. Economic Development Assistance: (1) Institution building - helping developing countries build governmental and private institutions to support and administer an efficient agriculture and food system such as land and property rights management, extension services, producer marketing cooperatives, and much more. (2) Infrastructure development - building transportation, energy, irrigation systems, storage facilities, etc. essential to the efficient functioning of agricultural markets and too expensive for developing countries alone to finance. (3) Technical assistance providing services of experts from developed countries to assist in institution building and infrastructure development. (4) Applied research funding for research by U.S. and international agencies to find practical solutions to problems facing the agricultural sectors of developing countries. (Examples: Internationa Rice research Institute (IRRI) in the Philippines and the International Maize and Wheat Improvement Center (CIMMYT) in Mexico.)

Connection Between U.S. Farm Policy and Developing Countries U.S. is also the world s largest provider of food assistance to developing countries - Various programs administered through USAID (Food or Peace or PL480) and USDA (Food for Progress) - Primarily in-kind donations which have become controversial due to the potential negative effects on production in the recipient country - Consequently, the U.S. is moving toward purchasing more in-country, locally sourced food and monetary donations

Summing Up Current U.S. commodity policy tends to benefit low income consumers in LDCs but negatively affect LDC producers. A tariff war between U.S., China and other U.S. export competitors would do the opposite for some commodities (soybeans, pork, others) but the same for others. U.S. food assistance polices have also tended to harm LDC producers by making U.S. food available to low income LDC consumers but programs are changing to reduce effects on local production. But the U.S. spends billions of dollars in agricultural development programs to benefit agricultural producers in developing countries. So, what do you think? - Is U.S. agricultural policy anti- or pro-agricultural development? - Is it economically more efficient for LDCs to produce their own food or import cheaper food from lower cost producers like the U.S.?

U.S. Farm Policy and Developing Countries QUESTIONS? 질문이있으십니까? Dr. Gary W. Williams Professor of Agricultural Economics Texas A&M University