Index

Expert Opinion: Dealing with the Hidden Agenda on Agricultural Subsidies

By Vangelis Vitalis

One expected outcome of the “Doha Development Round“ will be commitments by developed countries to reduce and eliminate some, if not all, agricultural subsidies.

Unfortunately, however, there is also a very real possibility that this process will be undermined by attempts to retain certain subsidies and limit overall reductions. This is not surprising. What is perhaps surprising is the vehemence with which environmental arguments are being used to defend such moves.

Particularly striking is the argument advanced by some sectoral interests and an assortment of non-governmental organizations (NGOs) and politicians. They argue that reductions in agricultural subsidies in some countries in the Organization for Economic Cooperation and Development (OECD) should be limited or frozen altogether because this may cause output in developing countries to increase with potential negative consequences for the environment there and/or globally.

It is important to be clear at the outset about what the argument underpinning this approach is. Basic principles are a good starting point. There is no doubt that a reduction, or indeed an increase, in subsidies will affect the environment in a number of ways. These impacts occur through changes in the structure of production across countries, scale of economic activity, mix of inputs and outputs, and production technologies.

Nevertheless, these changes should not be used as a reason to freeze or limit subsidy reform. After all, developed-world living standards are built on the conversion of natural resources into intellectual and human resources. This substitution of natural capital with human capital is a trade-off that every country rightly regards as its own sovereign choice and was reaffirmed by the Rio Declaration.

If the developed world is really so concerned about the potential negative effects on the environment by subsidy reductions, then the right response is not to freeze reform, but to improve the targeting of technical and development assistance. Here’s a practical real world example. OECD member subsidies to cotton farmers lowers world prices by some 25 per cent. A reduction in such support would certainly have a positive effect on economic growth through improved market access and global prices for a number of developing countries.

One of the reasons suggested for retention of such support, however, has been the likely negative effects on the environment as a consequence of raised production in developing countries and the pressure this might have on resources like water and energy. Uzbekistan is a case in point. It has significant cotton interests. Improved world prices would certainly have positive implications for poverty reduction and economic growth in this Central Asian economy where nearly 80 per cent of the population lives on less than US$2 a day. It is also true that increased output in response to improved market access may have negative implications for water, which is already a scarce resource that is drawn almost exclusively from the Aral Sea. Currently, more than 40 per cent of the water taken from the severely stressed Aral Sea to irrigate the cotton fields of Uzbekistan evaporates before it even reaches those fields (Uzbek farmers use open channels, not closed pipes, for irrigation). Further pressure on the Aral Sea water resource would have significant negative spillovers to other parts of the Uzbek economy.

If those groups and countries citing their concern for the environment are serious, then the answer is not to stall subsidy reform, but to focus on how technical and development assistance might plug the gaps. Thus, when market access is improved for Uzbek cotton as a consequence of subsidy reductions with the attendant benefits in terms of farm incomes, developed country policy-makers should be in a position to consider how best to fund flanking measures to ameliorate any potential environmental problem (such as enhanced technical assistance for improved irrigation techniques. Put simply, install pipes to replace the open irrigation ditches in Uzbekistan.). A win-win outcome in action.

In sum, fundamental reform of agricultural trade must be pursued with the vigour and indeed the rigour it requires. It should not be derailed by spurious environmental considerations. There is no question that trade negotiators should bear the sustainability aspects in mind when negotiating agricultural trade liberalization. They should, however, be looking to international assistance and other sources to address these kinds of issues, rather than restricting the growth prospects of developing countries.

These are urgent issues. Negotiators must not shy away from them in their pursuit of improving the global inter-linkages and complementarities between social, economic and environmental development—that is, sustainable development.

Vangelis Vitalis is a former Chief Advisor at the OECD and currently a Senior Trade Negotiator for the New Zealand Ministry of Foreign Affairs and Trade. This essay is written in his personal capacity.