Module 1 - Reform of Agriculture Subsidy and Protection Policy

Past programs for providing support to farmers (for example, input subsidies, guaranteed prices, and border protection) have been market distorting and highly inefficient. Such policies are typically costly to consumers, detrimental to the environment, and regressive in terms of domestic income distribution. Impacts on world markets have significant consequences for developing countries where agriculture is of major economic importance. Key elements for policy reform in this area include: reducing input subsidies, decoupling support from production, converting existing tariffs to ad valorem forms, reducing the overall level of support/protection, and restructuring the classification and commitment system governed by the WTO.

 

Support to agricultural producers can be provided through (1) border measures, such as import tariffs and restrictions that raise domestic prices (thus financed by consumers), (2) export subsidies (generally taxpayer funded), and (3) subsidies to farmers (on both agricultural inputs and output) that are also financed by taxpayers. While these policies are generally intended to support economic development objectives, the impacts of support policies extend across international borders and can have major negative implications for producers, consumers, and the environment, both domestically and abroad. Agricultural support policies, especially in Organization for Economic Cooperation and Development (OECD) countries, lower the world price of many commodities and increase world price variability, both of which are damaging to developing countries. Counter-cyclical policies in rich countries tend to increase resource transfers to farmers when world commodity prices decline, leaving producers in developing countries to bear the brunt of fluctuations.

 

Protection for agricultural producers has remained very high, especially in the large OECD economies (box 1.17). This support has closed markets that otherwise would have been available to developing country producers, and it has led to surpluses that have been exported (sometimes using export subsidies) onto world markets, depressing world prices. Average levels of border protection (tariffs and nontariff barriers) are also high in developing countries, where governments have intervened heavily in commodity and input markets (through parastatals and marketing boards and with price supports and input subsidies).