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Subsidies galore

Posted by Richard Tuesday, June 21, 2005

The scale of the farm subsidy problem is a big as ever it was. This has been highlighted today by the Organisation for Economic Cooperation and Development, which has just released a report showing that, last year, the rich nations raised their farm aid to $112 billion.

Furthermore, tariffs and other trade restrictions provided additional agriculture assistance valued at $167 billion, giving a combined total of $279 billion assistance, representing 30 percent of farmers' income in the 30 OECD nations. Rice represented the most heavily subsidised agricultural product, followed by sugar, milk, grains, mutton and beef.

In something of an understatement, the OECD says that these aid programmess are "encouraging output, distorting trade and contributing to lower prices of agricultural commodities." What is worse, for all the blather about reducing subisidies, little has changed in overall aid to farmers since the early 1990s, and support to farmers is unchanged from a decade ago, the OECD also says.

The organisation might also have said that the rich countries are stripping out money from developing economies, which often cannot compete with the subsidised and otherwise protected markets. The developing countries are hit by a "double whammy" of artifically lower prices in their target markets (and/or restricted access) and subsidied supluses dumped on the world markets – the effects being to drive down the prices they are able to get for their own products.

But what is staggering is the sheer scale of the aid - $279 billion. This dwarfs the value of the current world overseas aid programme, at approximately $50 billion. Even if the donor countries reached the UN target of 0.7 percent GNI, bringing the total aid to $125 billion, it would represent less than half the support given to farmers in rich countries.

All this somewhat puts into perspective the recent scrap over the EU budget, and highlights the wholly unacceptable level of expenditure on the CAP. The EU is by far the worst subsidy offender, its support to farmers totalling $100 billion in 2004, compared with $49 billion in Japan and $47 billion in the U.S. Beef, sugar, grains and milk are the EU's most heavily supported crops.

The worst of it all is that, even though the impact of farm support is well known, little can be done about reducing EU levels as the CAP is locked into the treaty structure.

While the US is a major offender – with Japan also high in the league – much of the reason why subsidies are kept so high is because of the protectionist interplay between the US and the EU. Neither will reduce their subsidies until the other does, with the result that attempts to wind down the subsidy race are constantly frustrated.

One can therefore sympathise with Blair's own outrage about the amount devoted to the CAP, therefore, but his insistence in working within an EU framework dooms his efforts to failure. Where Britian could really have an impact in as part of a "third force" allied with producer alliances such as the Cairns group, breaking up the power-play between the two major subsidy junkies.

But that would require a global, rather than a "little European" perspective, which means that little Blair is unable to come out and play. Instead, he is going to bleat away at the G8 summit about increasing aid – when the real solution lies elsewhere.