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OECD diatribe and the doublespeak on farm subsidy

G. Srinivasan

NEW DELHI, July 6

THAT the rich countries subsidise heavily their farming operations is indubitably an acknowledged fact and in the current ongoing mandated review of the Uruguay Round Agreement on Agriculture (AoA), several developing countries including India have drawn attention to the distortionary effect of such an open-ended farm subsidy on the global grain trade.

Against this backdrop, the Paris-based rich countries' club, the Organisation for Economic Cooperation and Development (OECD) has come out with a monograph on Agricultural Policies in OECD Countries: Monitoring & Evaluation 2001 which gives quite a compr ehensive picture of the farm policy support of the advanced countries.

Thus for OECD as a whole, total support to agriculture, as measured by the Total Support Measure (TSE, an indicator of the annual monetary value of all gross transfers from taxpayers and consumers arising from policy measures that support agriculture), a mounted to $327 billion or 350 billion euros or 1.3 per cent of the GDP in 2000, compared to an average of 2.2 per cent in the 1986-88 period. In 1998-2000, the percentage TSE ranged from 0.2 per cent in New Zealand to over 5 per cent in Korea and Turkey .

No doubt, support to producers as a share of total farm receipts decreased to 34 per cent from 37 per cent in 1999 and compares with 39 per cent in 1986-88 and accounted for about three-quarters of total support to agriculture with the remainder going to general services such as inspection, research and marketing.

OECD maintains reduction in support was mainly due to a narrowing of the domestic and world price gap. The share of market price support and output payments decreased from 82 per cent of support to producers in 1986-88 to 72 per cent in 2000. These forms of support continue to insulate farmers from world markets and to impose a burden on consumers with their greatest impact being felt on production and trade, both for OECD and non-

OECD countries.

Although the import tax or export subsidy, as measured by prices received by producers relative to world market prices, decreased, the fact that in 2000 prices received by OECD farmers were on average 38 per cent above world prices compared with 51 per c ent in 1999 and 61 per cent in 1968-88 testifies to the continued subsidisation of farmers in the rich world. There is, however, increasing divergence in support and protection levels across OECD bloc.

Thus support and protection levels remain very low in New Zealand (below 1 per cent PSE) and Australia (6 per cent PSE) and very high in Iceland, Japan, Norway, Switzerland and Korea (over 60 per cent PSE). The PSE for Mexico, Canada and the United State s is around 20 per cent.

What is particularly noteworthy is that since 1986-88, the gap between countries with the highest and lowest levels of support has escalated. Again, though OECD support decreased for almost all commodities with the average support levels for most commodi ties being below the 1986-88 average, support across commodities varies widely.

The average percent-PSE (percentage producer support estimate -- an indicator of the annual monetary value of gross transfers from consumers and taxpayers to agricultural producers) was greater than 80 per cent for rice, between 40 and 50 per cent for su gar, milk, coarse grains, wheat and mutton, between 15 per cent and 35 per cent for poultry, pork, oilseeds, beef and maize and less than 10 per cent for eggs and wool. Support to sugar, milk and rice continue to be provided almost entirely through marke t price support measure.

As the trade majors disapprove of developing countries subsidising their farmers even though the latter have enough leeway to do so with the only constraint being lack of funds to provide the full limits, a number of rich countries introduced new taxatio n or interest concessions or altered extant provisions to assist agricultural producers.

Several other rich countries introduced or extended programmes to support farmers whose incomes fell as a result of lower market returns. The most notable decision, OECD said, was to provide for a third year in a row, assistance to United States farmers who will receive over$5.5 billion to compensate for market losses, with assistance extended to cover a wider variety of crops than in the two previous years.

OECD does not mince words when it observes that though both market and price support and output-based payments for current production were reduced, they continued to circumscribe the ability of world market prices to affect production decisions, as they reduce the transmission of world price changes to producers.

Thus the current levels of farm protection in the rich world are still ``an important factor in encouraging production, distorting trade and depressing world prices of agricultural commodities'' with such protection continuing to be ``regressive'' as it mainly benefits large farms and impacts most strongly on low-income consumers for whom food constitutes a larger chunk of their total household expenditure.

The well-documented diatribe by the OECD need to be kept in view even as India has declared in the current year's Exim Policy the Government's intention to establish agri-economic zones and the proposed agri-export policy.

As the tertiary services sector is dominating the GDP composition, the authorities have to reinvent and regain the vital role farm sector should play in the larger interest of ensuring food security for the country.

India can take sufficient cue from the books of OECD to tailor its support measures for its farm sector through innovative market-based and better targeted measures and greater coherence among policies so as to bring about desirable results with less dis tortions to agricultural production, consumption and trade.