Published by the African Executive, 2005-05-04


Free Trade or Subsidies?

Lately there has been growing skepticism about how developing countries will actually benefit from the abolishment of the export subsidies on agricultural commodities.

 Mr Jagdish Bhagwati, an economist at Colombia University and an outspoken advocate of free trade, argues that the focus on farm subsidies is very excessive, especially if you look at the consequences for the poor countries. Even so, he says in a paper, the subsidies are undesirable.

 Mr Arvind Panagariya, an economist also from Colombia University, goes a step further and, in an article in the Financial Times last year he, wrote that the abolishment of the export subsidies would harm developing countries economically. The reason, he explained, is that since most countries in the Third World are net importers of farm products, they gain from the impact that the subsidies have on market prices, thus keeping the prices down.

Both are likely to be right in that sense that the abolishment of farm subsidies alone will not be enough to give a boost to developing countries when it comes to trade and prosperity. The developed countries’ tariffs on agricultural products – in general 10 times as high as the tariffs on industrial goods – are probably just as harmful as export subsidies, if not more. The high tariffs on processed products in developed countries also restrain them from processing, especially within the agriculture sector.

 But the main question is what kind of world trade we are about to have in the future. One is the kind that is enclosed by a number of regulations, restrictions and subsidies. Some of these regulations will benefit certain countries and some other regulations will benefit others.

 Likely, developing countries will not always fall in the same group. One good example is the recent deregulation of the textile market. Some countries, among them Bangladesh and some African countries, are expected to lose out since they were favored by the previous system of quotas, while some countries, including India, are seen to gain from the deregulation since their industries were restricted by the textile quotas.

 The fact that Arvind Panagariya also wants to maintain the European Unions’ tariffs at the current high level – his explanation is that this will prevent the prices on the European market to fall, and that will benefit the least developed countries since they already have access to the EU market trough the "Everything but Arms" deal – shows that he favors this alternative. His suggestion is obviously that least developed countries can’t compete in an environment of free trade.

 The other alternative is a market with low tariffs, if any, and a minimum of regulations and restrictions where all countries compete freely. Not all countries, especially developing countries, will be among the winners in this market, particularly not in the early stages, but everyone will have the same opportunity and a fair chance.

 A preservation of the present system, maybe together with an increased number of deals of special preferences for the developing countries, will at the same time preserve the status quo where we have decided that some states are ‘strong’ while others are weak.

 Just as aid many times holds back progress in developing countries, trade regulations, even those that are supposed to be in favor of poor countries, often hold back desirable development in these countries. If you decide that some countries can’t compete, they will probably never be able to compete. They will always be dependent on special deals ‘given’ their developed counterparts.

 Bangladesh textile industry, for instance, is a likely victim of the old quota system, and not a victim of the recent deregulation. The old system hampered the development of the country’s textile industry since it was not exposed to real competition.

 About the idea that export subsidies within the agriculture sector actually are good for developing countries since they are net importers presupposes that they will always be so. But under another, freer situation, this is not necessary the case. In the 1970s, developing countries were actually net exporters of agricultural products.  How much can the export subsidies explain today’s deficit?

 Andrew Mold, who works for the United Nations Economic Commission in Addis Ababa, probably put it very right when he wrote in The Economist (16 April 2005): "To say that agriculture subsidies in the OECD (Organization for Economic Cooperation and Development) help poor developing countries is akin to saying heroin helps a drug addict."


By Par Krause