Farm Policies Play A Role In Global Economic Turmo
November 11, 1998
by Dennis T. Avery
CHURCHVILLE, Va.—Over much of the world, farm prices are down and farmers are hurting.
In America, Congress has assembled a $6 billion farm bailout package, while prairie populists are trying to revive the sort of permanent farm subsidies that the United States kept in place from 1933 to 1996.
In England, accounting firms say that farm income fell by about 50 percent in the last 15 months and may fall another 50 percent by next June. Without subsidies from the European Union, only 20 percent of British farms would be earning profits.
In Russia, most of the farms are literally bankrupt. The country is unable to feed itself, and there is no money available for food imports. Not surprisingly, Russian farmers are demanding a return to the old pattern of subsidies from Moscow.
NOTHING NEW is happening to the world's farmers, and that's the problem. They're all still hostages to the world's farm subsidies and trade barriers, and its economic ups and downs.
World farm prices are just about where we should expect, given ample world supplies, pervasive farm-trade barriers and sluggish economic growth.
European export subsidies still hammer down prices in a world market made a "dumping ground" by farm-import barriers in most countries.
THE KEY THING to remember amid the global fallout from the "Asian flu" is that nations around the world could make the slump even worse if they grab the wrong farm "solution" off the policy shelf.
The Asian slump started in Japan with an artificial scarcity of land in one of the world's most crowded countries. Japan has less land area than California but five times as many people.
Japan worsened its land scarcity by insisting on food self-sufficiency and high rice prices. (In the 1950s, two-thirds of Japan's population lived on farms. It's voting map has never been redrawn, so rural votes have been three times as important as urban ones.)
AS POSTWAR Japan entered its export boom, nonfarm workers earned higher incomes—and the legislature kept raising rice prices in parallel. In recent years, the Japanese rice price has been as much as 10 times the world market price.
Japan barred any rice imports, even a tourist's five-pound bag of souvenir rice from Thailand.
Since the government justified its rice policy on a perceived need for food self-sufficiency, it also imposed heavy penalties on converting land from farming to urban uses.
All of this gave Japan annual million-ton rice surpluses. But the policy also created a severe shortage of land for businesses, roads, parks and housing. Land values became astronomical.
BY 1990, A BUILDER asked $2 million for a modest-size new home with a tiny garden in a middle-class suburb that was an hour commute from downtown Tokyo. Meanwhile, average rice land was valued at $50,000 per acre.
Japanese investors told themselves they couldn't lose money on Japanese land; it was too scarce. But then the Japanese land boom collapsed.
Japan's banks were stuck with more than $400 billion in bad loans, the biggest share of them involving real estate.
THE BANKS have not yet been able to work off the old loans or make many new ones. Japan's economy, the world's second largest, has fallen into a prolonged recession.
Even worse, when Japan's lending dried up, its borrowers in South Korea, Indonesia, Malaysia and Thailand went bankrupt.
Japan's rice policies are not the whole explanation for the Asian flu, of course. Other, even larger problems festered, including massive corruption in Indonesia and Russia's failed effort to convert from Stalinism to the market.
BUT A KEY TRIGGER for the global flu was the collapse of Japan's land boom, which traces directly back to ill-considered farm subsidies. Countries that try to stop the modern era's exodus from farming risk derailing their whole economies, as Japan did.
For example, the European Union will mortgage its future economic competitiveness if it extends the costly Common Agricultural Policy to Eastern Europe.
Subsidies don't guarantee that small farmers will keep farming when better, easier jobs are available. America had farm subsidies for 60 years, while the number of people active in farming dropped from 20 million to 3 million.
WE MUST REMEMBER that the world's poor countries have 90 percent of their people on farms, and hardly anyone lives well. Rich countries have less than 5 percent of their people on farms and virtually everyone lives well.
Nonetheless, countries must provide their farmers with opportunities for profit or else their farms, rural communities and good land-management practices are all at risk.
It's a difficult balancing act.
HOWEVER, the world has tried farm subsidies, and history says they lead only to higher farm subsidies until the strains become too great and the subsidy systems collapse.
What we haven't tried is liberalizing farm trade, especially in a world where billions of people are newly affluent and hungry for meat and milk.
We are going to be given another chance for it next year at the World Trade Organization summit. Will the world seize the opportunity?
Dennis T. Avery is based in Churchville, VA, and is director of the Hudson Institute's Center for Global Food Issues.