Recently I wrote a policy brief for my economics of development course where I outlined the adverse effects of lavish corn subsidies given to U.S. corn farmers. While I think it is fairly uncontroversial to state that first world agriculture subsidy programs have had harsh effects on rural Mexico and the third world in general, but commonly statist apologists seek to reform the subsidy program. So without further ado here’s my outline of the benefits of reforming subsidies and why it still fails to solve the biggest issues caused by the subsidies in the first place.
The advocates for reform of subsidies argue that the subsidies would be entirely net beneficial if only carried out in the right way, with proper transfers to supplement them. Many echo the World Bank and NBER argument that transfers have worked well to reduce bad effects in rural Mexico caused by the below production cost corn flooding the market. (Feiss & Lederman, 2004) (McMillan, Zwane, Ashraf, 2005) Furthermore the World Bank analyzed the trend of maize prices for many decades pre NAFTA and found that there was already a downward trend in maize prices, so that income for Mexican corn farmers would have fallen regardless of NAFTA’s passage. (Feiss & Lederman, 2004) This might indicate that an increase of transfers (though not at the level seen today) for rural Mexico may have been inevitable. Therefore one logical proposal would be to reform the oversight and efficiency of U.S. corn subsidies to prevent further fraud and waste, as well as negotiate with Mexico on reforming their corn subsidies to be less generous to larger farmers and more generous to medium and small size farmers. There are several upsides to this proposal.
The reform of subsidies and transfers in the corn industry allows; guaranteed price setter status for U.S. companies, the ability continue very low prices for consumers in both rural Mexico and the U.S., and free up resources by cutting down on fraud and waste in the subsidy program. The U.S. has been and continues to be the major exporter of corn on the world market, and the comparative advantage derived from this ensures the U.S. consistently has the biggest market share of a staple crop in the global economy. (Wise, 2004) Secondly, they argue that very low food prices are conducive to keeping up consumption in other sectors of the economy as low prices in food allows for more consumption of other products. A rise in food prices would have a very regressive effect since the poorer someone is the higher percentage of their income goes toward food consumption, therefore subsidizing prices below production costs allows the poor a higher utility. Finally, those who argue for reform of subsidies argue that if there were more oversight of U.S. corn subsidies and more progressive transfer programs in Mexico that any negative effects felt by subsidies will be largely mitigated. While on the surface this may seem to be a reasonable proposal, for several important reasons it is destined to fail. It simply cannot solve the larger problems created by a government supported oligopoly in the corn industry.
The reform proposal lacks credibility for a few distinct reasons. First, they assume that it is more beneficial for the U.S. to control the majority of the world corn market rather than simply allowing a free market to exist and letting comparative advantage determine who produces what. Many nations without food production commensurate to their population size find ways to not only survive, but thrive by specializing in technological or manufacturing goods and then trade them with other countries. Israel, Hungary, Costa Rica, and Mauritius are all good examples of this principle. It is also reasonable to expect U.S. corn growers to respond to increased competition with more efficient production, so that this industry is not likely to disappear without government support, as neither the freight shipping nor airline industry did when they were deregulated. (Lopez & Leighton, 2012)
Second, this proposal also assumes that a free competitive market in the corn industry could not eventually provide prices that are close to or below what the market value is now. This claim is highly suspect especially when one recalls the partial deregulation of airlines in 1978. “Since passenger deregulation in 1978, airline prices have fallen 44.9 percent in real terms according to the Air Transport Association.” (Smith Jr. and Cox, 2008) The commercial shipping rate also saw similar declines in price following deregulation. (Lopez & Leighton, 2012) It is reasonable to postulate that industries that are very protected by government subsidies have no incentive to take a risk on new innovative technologies that could increase yields and/or lower prices when they have guaranteed money coming from the government. Furthermore entrenched interests with government backing put up barriers to entry. Therefore increasing competition by lowering subsidies could entail lower food prices in the long run without the need for subsidies.
The third and final flaw that this policy proposal has is that it ignores all the significant externalities caused by such subsidies. Subsidies go toward lowering prices so spreading out subsidies more evenly will only raise food prices as the biggest producers will not be able to produce at the same low prices and guaranteed subsidies still hinder the risk taking incentives needed for further innovation. Another externality is that it ignores the fact that all net sellers in Mexico are hurt by U.S. subsidies, especially medium size farmers without the political or economic capital to lobby for generous subsidies. This not only lowers rural income, but also opportunities in rural Mexico which will continue to drive people to immigrate illegally to the U.S. Furthermore advocates of continuing subsidies continually ignore that money transfers used to stem the bad effects of U.S. subsidies could be used for much more productive purposes such as increasing accountability of elected officials (corruption is still a serious issue in Mexico), increase public infrastructure, promote public health, education, and sanitation as well as service the debt. There are many more productive ways for Mexico to spend its tax revenues and only by ending subsidies to U.S. and Mexican corn producers is this possible.
Sources are cited in APA in text, so if anyone is interested in reading the studies I cite please feel free to message me and/or reblog with what sources you seek and I’ll do my best to get you them. Some are only accessible through universities so I can always email a pdf if you’re interested