Bates summarizes his results by indicating that there were three factors that were important in determining the degree and nature of governmental intervention in the agricultural markets: the nature of the product (whether an export crop or a food crop), the structure of production (large versus small farms), and the degree of relative advantage that producers have in the production and marketing of the crop. The last point implies that the stronger the comparative advantage of a particular crop, the greater the potential for exploitation through low prices, since the high degree of relative advantage means farmers can continue to produce at very low prices for a considerable period of time.

The role of the structure of production is related to the political influence of large farmers relative to many small farmers. "Large farmers . . . often possess close social and political ties with governing elites. . . . One consequence is that crops whose production is dominated by large farmers tend to be less heavily taxed" (Bates 1981, 126). This

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result occurs because it is easier for a small number of large farmers to organize to protect their interests than it is for a large number of very small farmers. It is this phenomenon that explains the increased political influence of farmers in industrial countries as the number of farmers declines. Miller's analysis gives weak supports for this conclusion, but the reason for the weak support may be the large negative correlation between the number of farmers and the level of GDP per capita or agriculture's share of GDP.

Protection of Processing of Farm, Products

Not only is agricultural protection divorced from general trade policies, but similar differentiation often applies to the processing of agricultural products. Countries that import raw agricultural products that they do not produce often have zero tariffs on such products but have positive tariffs on processed product. Similarly, in response to the importers' actions, exporters often impose an export tax upon the raw product but no tax upon the products derived from it. Soybeans can be used to illustrate both phenomena: Brazil has had an export tax on soybeans of approximately 10 percent, with nil or much lower export taxes on meal and oil derived from the soybeans. As an importer, the EC permits the free entry of soybeans, but imposes duties on the importation of oil and meal. In both instances, the rate of effective protection of the processing activity is very high probably on the order of 100 percent. And it is the Brazilian soybean producer that pays for the protection of the processing sectors.

Both the EC and the United States have used subsidies to increase their exports of flour. Flour milling is not exactly a high-technology undertaking and is performed in many economies at much different levels of income and technology. Except to serve the interests of domestic flour millers, there is no reason industrial countries should subsidize the export of flour at a rate that differs from the subsidy, if any, on wheat.

Examples of the differences in LDC export taxes and developed country tariffs on agricultural products by the degree of processing are given in table 8.7. These data are for the early or mid 1970s, but the Tokyo Round did little to change the tariffs and obviously had no influence on the LDC export taxes.

To some degree the structure of LDC export taxes is a response to the structure of developed country import tariffs. If the industrial

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countries have no tariff on a raw product, such as copra, and 10 percent duty on coconut oil, the LDC that produces the copra is precluded from extracting the oil from the copra unless the LDC imposes a tax on the export of the raw product or controls the amount of the raw product exported.

Golub and Finger have presented estimates of the gain in LDC export revenue if the escalation of tariffs by the degree of processing were abolished in the industrial countries. For eight commodities as of the mid 1970s the elimination of developed country tariffs on processing would have resulted in an annual increase of LDC export revenue of $1.6 billion. If both the tariffs and export taxes were eliminated simultaneously, the gain in LDC export earnings was projected to be $1.2 billion. The authors compare this gain in annual revenue to projected increases from

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the Generalized System of Preferences of approximately $500 million (Golub and Finger 1979, 573).

The magnitude of the barrier confronting the LDC processor of raw farm products from what appear to be very low rates of tariff turns out to be surprisingly high. Assume that the industrial country permits the import of a raw product, such as soybeans, free of duty, but has a tariff on oilmeal and oil at the seemingly low rate of 10 percent. If the raw product accounts for 90 percent of the value of the two processed products, the effective protection of the processing turns out to be in excess of 100 percent. Assume that soybeans have a landed price of $250 per ton and that the value of the oilmeal and oil derived from a ton of soybeans is $275 per ton. This means that processing adds 10 percent or $25 per ton to the value of the soybeans. For the present example, it is assumed that the $25 per ton is the value added from processing; actually, the value added will be significantly less than this because of the costs of power and certain materials required for proper handling of the processed products. As noted, the tariff on the products processed from soybeans is just 10 percent. A developing country that attempted to export the oilmeal and oil from a ton of soybeans would have to pay a tariff of $27.50 per ton of the original raw materials. The tariff paid would be more than the value added in processing, and the effective protection of the processing would be a minimum of 110 percent. This is a remarkable effect from a seemingly modest tariff of 10 percent. It also explains why much of the processing of agricultural products occurs in industrial countries.

Alexander Yeats has compared the nominal and effective rates of protection for several processed farm products. A few examples will suffice. The EC had an 11 percent tariff on soybean oil; Yeats estimates that the rate of effective protection the protection of the value added in processing was 148 percent. For the same product, the Japanese had a tariff rate of 25.4 percent, which generated an effective protection rate of 268 percent. Somewhat less extreme, there was a Japanese tariff of 7.2 percent on palm kernel oil, which gave an effective rate of protection of 49 percent. The United States had a tariff rate of a mere 2.6 percent on cocoa powder and butter, but the effective protection turned out to be 22 percent (Yeats 1981, 6 7).

In the industrial countries farmers have an ally in the firms that process agricultural products, especially from raw farm products that are imported. It is unlikely, however, that most farmers realize that their allies are receiving a much higher degree of protection than they are.

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An interesting case of mutuality of interest between producers of a farm crop and processors is to be found in U.S. sugar policy. During the period of time of the U.S. sugar acts from 1934 to 1974, and since 1978 essentially only raw sugar could be imported into the United States for consumption. Thus producers agreed to support a monopoly for domestic processors of imported raw sugar. In recent years there has been a rather different confluence of mutual interests. This has arisen because of technological changes that reduced the cost of producing sugar from corn. It is in the interests of the producers of high-fructose sugar to have a very high price support for cane and beet sugar in the United States. The domestic raw sugar price since 1981 has been approximately 20 cents per pound. The production of high-fructose sugar is very profitable at a price significantly less than 20 cents per pound dry weight equivalent. As a result, the share of the U.S. sweetener market captured by high-fructose sugar increased rapidly and in 1985 accounted for 40 percent of all caloric sweeteners consumed in the United States. One consequence was that U.S. imports of raw sugar declined from approximately 5 million short tons in 1980 to approximately 2 million tons in 1985 to as low as 1 million tons in 1989. During 1985 the U.S. sugar price was at least four times the international market price and for some months as much as six times.

There are now fewer than 12,000 producers of sugar cane and beets in the United States. The domestic production of beet and cane sugar has remained approximately constant over the past several years. Since there are no controls over the production of these sources of sugar, this means that the current high price of sugar is not especially profitable to the producers. In other words, the farmers are receiving a net income from producing sugar that on the average is approximately what they could obtain from producing the next best alternative farm product. The primary beneficiaries of the existing policies are the processors of cane and beet sugar and the producers of products that substitute for sugar, such as high-fructose sugar and the noncaloric sweeteners such as aspartame. Even the refiners of cane sugar are beginning to feel the pinch of reduced imports of raw cane sugar.

Food Security

Except for Honma and Hayami 1984, none of the studies of protection reviewed have included food security as a persuasive argument for positive protection. Even the Honma-Hayami analysis is rather ad hoc, since it is achieved by introducing dummy variables for Sweden and

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Switzerland and obtaining highly significant coefficients. But in the case of Sweden, at least, it may be that other explanations for the high level of protection are as relevant. The Swedish protection levels are not all that high compared to either Italy or Germany and are significantly lower than the Japanese ones.

The supporters of agricultural protection in Japan have made persuasive and effective use of the food security objective. The Ministry of Agriculture, Forestry and Fisheries (MAFF), with the support of politicians from all of the major political parties, has been an active propagandist for a high level of food security. The cynic might well argue that the emphasis upon food security is designed primarily to support the heavy taxpayer and consumer costs of Japan's agricultural policies. Public opinion polls indicate, however, that a large percentage of the Japanese people favor a high degree of food self-sufficiency.

The self-serving nature of MAFF's promotion of food security as an important national objective has been its emphasis upon the results of the "Projection for the World Food Supply and Demand Model" study. In June 1982 MAFF summarized the findings of this study in Farm Product Imports, Present State of Agriculture and Direction of Agricultural Policy . Included was the categorical statement that in the year 2000, if prices were constant, "a shortage of 53 million tons [of grain] will occur in the case of normal crop and a shortage of 198 million tons in case both the United States and the Soviet Union are simultaneously hit by crop failures. There will also be considerable shortages of livestock products." In terms of 1978 real prices, and assuming a normal crop and "a 2-to-3 percent increase in the prices of fertilizers, the prices will turn upward in the latter half of the 1980s. And in the year 2000, the prices of grains and soybeans will be about 1.7-fold to 1.8-fold and the prices of meat will be about 1.3-fold." And in a scenario in which the United States and the USSR were hit by simultaneous crop failures in 1985 and 1986, "the peak prices of wheat and coarse grains will be about 4-fold and those of rice and soybeans 2-fold to 3-fold (of the 1978 real prices)" (MAFF 1982, 24 26).

The first section of the report containing these statements is entitled "Problems about Farm Product Import Liberalization." The quoted material is from a section entitled "The Necessity for Maintenance of Domestic Agricultural Production." I have seen nothing to indicate that MAFF has repudiated the rather wild price projections or supplanted the earlier study by one more consistent with other reputable projections of future world demand for and supply of food.

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A speech given by an official of MAFF in 1980 painted a gloomy picture of world food demand and supply in an effort to justify the maintenance of the existing amount of land in rice paddy:

If Japan's agricultural production falls sharply, necessitating increasing grain and soybean imports, problems may arise in connection with the world demand and supply of grains. The world population will continue to grow, especially in developing countries. It will take a long time for those countries to improve their domestic agricultural production to a point approaching self-sufficiency. In addition, demand for feed grains for livestock production will rise steadily in developed and semi-developed countries. In the meantime, while demand for grain will increase in centrally planned economies, production remains somewhat unstable. In view of these tendencies, it is expected that the world demand-supply situation of feed grains and soybeans will become very tight, and the fragility of the demand-supply balance with regard to good or poor harvests will appear more frequently, thus throwing prices into instability. (Matsuura 1980, 6 7)

Later in the same speech, Matsuura declared that as an Asian nation, Japan should follow an import policy that would not adversely affect "those countries, particularly those in Southeast Asia, where people are suffering from serious food shortages" (8).

The view that food prices in world markets will be unstable and display an upward trend persists in the face of overwhelming evidence to the contrary. In the summary of the 1983 agricultural white paper, released in April 1984, this position was taken by MAFF: "When we also consider the irregular weather conditions in recent years and the growth of the world population, it appears that the international supply-demand situation leaves little room for optimism in either mid- or long-term projections" (MAFF 1984, 24).

Essentially the same point was made in a handout at a small meeting with officials of MAFF in late 1984, with added comment about concerns of the population that have been reinforced, perhaps consciously, by ministry officials: "Under the probable unstability [sic] of world food supply and demand in the future, concerns over the low level of food self-sufficiency rate have been growing among people."

Among the benefits that MAFF claims for its agricultural and trade policies is that they contribute to stability of world markets. Again, in the handout referred to above: "We think our country has been contributing to the stability of world markts through the stable imports of agricultural commodities." This is an incorrect conclusion; japan does not adjust its imports either when world prices decline or when they increase,

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thus leaving consumers and producers elsewhere in the world to cope with the variability of supply and demand.

Given the projections and speeches by important public officials that point to the possible disastrous consequences of further declines in the self-sufficiency ratio, it is not surprising that opinion polls indicate that the majority of the Japanese population support efforts to maintain or increase food production in Japan. Kenzo Hemmi reports the results of surveys made in 1975 and 1980 that asked whether domestic production of food should be increased whenever possible. In 1975 affirmative responses were given by 71 percent; in 1980 the affirmative responses increased to 75 percent. Hemmi also reports the results of a poll by a major newspaper (no date) in which 65 percent of the respondents agreed with the statement that "import liberalization of agricultural commodities must be promoted if it is not harmful to domestic producers" (emphasis added) (Hemmi 1983, 324).

For Japanese who have any memory of World War II and the years immediately thereafter, it is relatively easy to arouse fears related to food security. In those years many Japanese went hungry. But it is somewhat ironic that Japan was nearly self-sufficient in rice, and in food generally, before 1940 yet this did not provide food security. Before 1940 Japan itself produced approximately 85 percent of the rice it consumed (the rest came from Taiwan and Korea) and imported hardly any other food products.

The lesson that could be emphasized from the World War II experience is that a high level of domestic food supply is not enough to provide security. And what was true four decades ago is even truer today. Japan today is self-sufficient in the capacity to produce rice, but if Japan were blockaded or its trade with the rest of the world significantly reduced, its dependence upon fertilizer produced from imported materials would rapidly result in a sharp decline in rice production. This could readily occur in one year. There would be other negative output effects of a sharp reduction in energy imports.

I do not want to leave the impression that national food security is an inappropriate objective of national policy. But even rather casual analysis shows convincingly that most countries have made no effort to devise a food security policy that would, in fact, protect their citizens against the more likely adverse circumstances. Nor can it be said that the particular policies that are followed are carried out with minimum cost. For example, assuming that the objective of rice self-sufficiency were appropriate for the circumstances that Japan faces, its current rice policy is not an efficient means. The recent and current levels of rice

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prices have resulted in more rice production than can be consumed domestically. The solution to that embarrassment has been an expensive land diversion program. There is clearly a lower rice price that would be consistent with rice self-sufficiency without the costly land diversion effort. The current program obviously pursues objectives other than food security, presumably increasing the incomes of farmers who produce rice. These, it may be noted, are primarily part-time and not fulltime farmers.

But there are other approaches to security of rice supplies. Domestic use is about 10.5 million tons and declining. One approach would be to set rice prices at a level required to produce about 5 million tons or about half domestic use and to continuously hold a beginning-of-the-year stock of 11 to 12 million tons. Against the types of interruption of supply that might adversely affect Japan, this policy could well provide a greater degree of food security than the current policy and at a significantly lower consumer and taxpayer cost. The cost of the storage program would be no more than a fifth of the budgetary costs of the present rice price policy.

This discussion of food security and the manner in which governmental and politcal groups have created and used the fears of the Japanese population for the benefit of the majority party is not meant to imply that what is done is in any way unique to Japan. Politicians everywhere make those expenditures and commitments that they believe will maximize their own interests.

In the European Community, for example, the CAP has been supported on several grounds that are without substantial foundation. The major appeal to consumers has been one related to security and stability. The EC's Guidelines for European Agriculture justifies the high and stable prices as follows:

Comparisons with world market prices may easily lead to misleading conclusions. It is highly unlikely that European consumers could be supplied for long at low and stable world prices if Community supply, because of reduction in production, would depend to a greater extent on imports. World market prices are notoriously volatile because the quantities involved in international trade are often marginal in relation to total production (e.g., sugar, cereals, dairy products) and may reflect short-term fluctuations in production. For several products (e.g., beef, wine, tobacco) there is no real world market and prices vary according to the destination of exports.

Therefore the Commission is convinced that a generalized and systematic alignment to world market prices would not be a practical policy guideline. (Commission of the European Communities 1981b, 8)

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The fact that the CAP is a major source of price instability in world markets is entirely ignored by the Commission of the European Communities. Also ignored is the available empirical and analytical evidence that with liberal trade among OECD countries there would be adequate supplies at prices much more stable than now prevail in the world markets. The commission does not recognize that the internal price stability resulting from the CAP is bought at the expense of greater instability of prices for many developing countries and consumers and producers in countries that permit domestic prices to vary with international prices. But failure to recognize the effect upon others outside the borders of the European Community is not unexpected, since there is no direct loss to EC policymakers from the costs imposed upon those who have no voice in EC policy determination.

4
Why There Has Been Modest Success in Liberalizing Agricultural Trade

By explaining why countries choose to intervene in agriculture (be it positively or negatively), the previous section has gone a considerable distance in suggesting why trade liberalization has made so little progress. The low-income countries could not carry out many of their urban-oriented or urban-biased policies if trade in agricultural products were liberalized. And in the high-income countries, the political influence of agricultural interests, including the processors and distributors of farm products, has become so great that the political process apparently does not have the capacity to deal with the issues involved.

But there are aspects of the General Agreement on Tariffs and Trade (GATT) rules and principles for agricultural products that also have responsibility for the lack of success. I have dealt with these issues in some detail elsewhere (Johnson 1950, 1984) and will only summarize the main main points here.

The general GATT principles for international trade were that both quantitative restrictions and subsidies, including but not restricted to export subsidies, were prohibited. However, exceptions to these principles were made for primary products at the insistence of the United States.

Article XI, paragraph 2, exempts certain quantitative restrictions from the general ban on all "restrictions other than duties, taxes or other charges:

(c) import restrictions on agricultural or fisheries products, imported in any form, necessary to the enforcement of governmental measures which operate:

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(i) to restrict the quantities of the like domestic product permitted to be produced . . . ; or

(ii) to remove a temporary surplus of the like product . . . by making the surplus available to certain groups free of charge or at prices below the current market level; or

(iii) to restrict the quantities permitted to be produced of any animal product the production of which is directly dependent, wholly or mainly, on the imported commodity, if the domestic production of that commodity is relatively negligible."^[5]

The following important guideline was indicated: "Moreover, any restrictions applied under (i) above shall not be such as will reduce the total of imports relative to the total of domestic production, as compared with the proportion which might reasonably be expected to rule between the two in the absence of restrictions. In determining this proportion, the contracting party shall pay due regard to the proportion prevailing during a previous representative period and to any special factors which may have affected or may be affecting the trade in the product concerned."

But these exceptions, inserted by the United States to placate Congress, were not enough to permit the United States to carry out some farm programs.^[6] To a considerable degree the failure of GATT to be an appropriate instrument for dealing with agricultural protection stems

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from the unwillingness of the United States to abide by the exceptions that it designed and insisted upon.^[7]

In the late 1940s and early 1950s unwillingness by the United States to subject its farm programs to the discipline of international trade or serious international negotiations resulted in the insertion into the GATT of exceptions for agricultural subsidies, including export subsidies. Article XVI of GATT contains a general provision against subsidies of all kind, including price and income supports, that might result in increasing exports. After January 1, 1958, subsidies on all products other than primary products were prohibited.

An attempt was made to include a clause that might hold subsidies on agricultural products in check, but it was written in such ambiguous language that it is without any effect. The export subsidy provision for primary products was that for any subsidy "which operates to increase the export of any primary product from its territory, such subsidy shall not be applied in a manner which results in the contracting party having more than an equitable share of world export trade in that product, account being taken of the shares of the contracting parties in such trade in the product during a previous representative period, and any special factors which may have affected or may be affecting such trade in the product."

This exception, which was designed to permit the United States to hold some of its farm prices above world market prices, especially those of cotton and wheat during the 1950s, is now being used by others for the same objective. Had the United States agreed to the prohibition on all subsidies after 1957, the shape of the Common Agricultural Policy might now be quite different. This point was well put in a recent book on the CAP

Ironically the Community's creation of the CAP in its current form, with its use of variable import levies and export refunds as its principal agricultural trade measures, was only possible as a result of earlier actions by, principally, the USA. Thus, in 1955 the US achieved a formal waiver from GATT provisions so that it could continue to use import quotas and fees to the extent necessary to prevent material interference with its domestic agricultural support programmes, so legitimizing the primacy of such programmes over international trade obligations. Then, in 1958, the USA was foremost among those countries which refused to endorse an absolute prohibition on the use of export subsidies. As a result, GATT allowed export subsidies to continue to be used for primary products, Sub-

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ject to the condition that they did not allow a country "more than an equitable share of world trade" (Article XVI of the GATT). Hence the EC has been able to use export refunds as a principal CAP policy instrument. (Harris, Swinbank, and Wilkinson 1983, 275)

As long as the United States retains the 1955 GATT waiver that permits it to use import restrictions as it sees fit, there can be no significant progress toward liberalization of agricultural trade. Generally speaking, the United States makes no pretense of abiding by the GATT exceptions for quantitative import restrictions exceptions the United States wrote. We have done nothing to bring our dairy price support program into conformity with the GATT exceptions. Our current sugar program is in clear violation of the GATT principles, as are our beef import restraints. The fact that we use "voluntary" export restraints by our suppliers rather than import quotas is beside the point. The voluntary restraint procedure is one designed to keep exporters from complaining, since we cooperate with them to exploit the American consumer. The same principle applies to our sugar quotas: for the diminishing amounts of the quotas, we permit the exporters to receive the U.S. domestic price, currently several times the world price.

The United States has never taken seriously the requirement that quotas are not to be used to reduce imports more than domestic production is limited. The GATT provisions were designed to assure importers that their share of a market would not be reduced by the use of quantitative restrictions. We have never seriously accepted this obligation. Thus it is not surprising that the EC has never accepted responsibility to administer the variable levies which are comparable to quantitative import restrictions in such a way as to assure exporters a constant share of the EC market.

The United States, so far as I know, has never attempted to explain how the deficiency payments that result from our target prices are consistent with the mild GATT provisions on subsidies. The deficiency payments affect U.S. farm production and thus inevitably the volume of our exports. It is true that the deficiency payments are usually associated with acreage diversions, but this is not always the case. Nor has there been any public indication of whether the output-increasing effects of the deficiency payments outweigh the output-reducing effects of acreage diversions.

The United States and the EC continue to talk past each other, each accusing the other of various violations of appropriate behavior. Japan continues grudgingly to resist opening its markets to agricultural

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products. It makes minor adjustments, though it has so far completely resisted any significant modification of its expensive rice policy. Until these three entities decide to approach trade negotiations in a serious manner, with the positive objective of reducing barriers to trade in agricultural products, there is little chance that there will be significant trade liberalization during this century.

5
Costs and Benefits of Agricultural Liberalization

The unwillingness to embrace liberalization of agriculture is almost universally attributed to the effect that it would have upon the incomes of farm people. There is also the associated argument, frequently noted in Japan and the European Community, that liberalization would drastically reduce the number of persons engaged in agriculture and would greatly diminish the role of the rural community in the nation's political and social life.

Let us consider first the effect of trade liberalization upon the incomes of farm people. The fear that trade liberalization would adversely affect farm incomes is derived from the proposition that the level of farm prices has a significant long-run effect upon farm incomes. The argument for protection and prices above market equilibrium is that farm incomes are enhanced thereby. This conclusion rests upon the proposition that incomes are determined by demand. If you increase the price of a product by a government commitment to purchase at the higher price, you increase the demand for that product and, in turn, the demand for the labor, capital, and land used to produce the product.

What this line of argument ignores is that prices of resources are determined by the interaction of demand and supply of those resources. The position or shape of demand is not sufficient to determine the price of any resource. True, increasing the prices of farm products does shift the demand for farm resources and does increase the amount of such resources demanded at any given price. But how large the effect of the increase in demand for labor will be from any increase in the price of a product depends upon its supply response to a change in wage. In the extreme, if the elasticity of supply of the resource is very high, an increase in demand for it will have almost no effect upon its price; the primary effect will be upon the quantity employed.

Increasing the demand for farm inputs, such as labor and capital, has no measurable long-run effect upon the return to a farm input or re-

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source unless the supply of the input can be limited. Since it is not possible to limit the amount of labor or capital engaged in farming, any increase in the return to labor through higher output prices will be quite temporary, because adjustment in supply of both labor and capital occurs quite promptly, especially in countries where agriculture is well integrated into the national economy. The lesson that the returns to labor and capital in agriculture are little affected by the level of farm prices is one that is very difficult for the layman, and I include politicians in this category, to learn and to accept. It seems self-evident that higher prices mean higher returns to labor and capital. But it just isn't so.

The supply of labor to agriculture in the industrial economies and in the newly industrializing economies (NICs) is very elastic. In other words, any increase in the returns to labor, other things being the same, results in an increase in amount of labor offered (Johnson 1973). This refers to both family and operator labor and to hired labor. As demand increases, whether owing to economic growth or to governmental intervention through higher output prices, the main consequence is to increase farm employment (compared to what it otherwise would have been) and not in any significant increase in the returns to farm families for their labor. There are a number of statistical studies that show that the supply of labor to agriculture is very responsive to differences in the returns to farm labor compared to nonfarm labor (Trychniewicz and Schuh 1969).

In the United States between 1960 and 1980, farm output prices declined by 15 percent relative to the prices of farm production inputs. Yet during the same period the incomes of farm people relative to nonfarm people increased from 50 to 80 percent. Dale Hathaway, a prominent agricultural economist who became under secretary of agriculture, strongly supported the view that adjustments in the labor market and not commodity programs were the source of the improvement in the relative income position of farm families that occurred after 1940.

During the war, the differential began to narrow. In the last half of the 1940's, per capita income of farm people averaged 60 percent of the per capita income of nonfarm people from all sources.

In the 1950's, however, farm income per person again fell behind remaining mostly static while the per capita income of nonfarm people rose by more than a third. In the last half of the 1950's, the per capita income of farm people was only one-half the per capita income received by people living off the farm.

In the early 1960's, we could see the beginning of adjustment. By the end of the decade, per capita income on farms averaged above $2,000

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compared with around $3,000 for nonfarm people. For the 5 years 1965 through 1969 people living on farms averaged 71 percent of the per capita income of people living off the farm.

In more recent years, this percentage has risen to 85 or more   although this of course varies from year to year.

So the labor market did adjust. But the adjustments were difficult for many. Despite government efforts to deal with these difficulties, it appears in retrospect that no government policy or program was significant in aiding the adjustment or softening the pain of adjustment for farm people. (Hathaway 1980)

What, then, does determine the incomes of farm people if it is not the level of output prices? The principal determinants of the return for the work of farm people are the amount of human capital (education) they possess, the level of wages in the rest of the economy, and the access that farm people have to available nonfarm employment. One need only look at the experience of the industrial economies, especially the European Community, the United States, Canada, and japan, to verify this.

There are large differences in farm incomes within the EC regional differences of 5 or 6 to 1. It is worth quoting the Commission of the European Communities on the wide regional differences in farm incomes and the reasons why they exist:

During the period from 1964/65 to 1976/77, regional disparities in agricultural incomes (as measured by gross value-added per agricultural worker) increased in the Community. The ratio between the regions with the highest agricultural incomes and those with the lowest rose from 5:1 to 6:1.

Generally speaking, the regions with an above-average-level of agricultural income are to be found in a favourable general economic context; the converse is true of regions with a low level of agricultural incomes. (Commission of the European Communities 1981a, 52)

What the commission is saying is that high farm output prices, even when maintained over a long period of time, have no significant effect upon the relative income positions of the low-income farm communities. Clearly the large differences in farm incomes cannot be explained by differences in output or input prices, since such prices are more or less the same in all countries. What does explain the differences are the opportunities for nonfarm work, as noted by the commission, and the amount of education farm people have acquired, something the commission tends to ignore.

If you find the previous line of reasoning unconvincing, compare data on the level of national income per capita with the percentage of the population engaged in agriculture. It is evident that the incomes

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of farm families are not going to exceed those of nonfarm families, except in a few high-income countries where farm people own much more wealth than nonfarm families. As of the early 1980s, countries with less than $400 per capita gross national product had about 70 percent of their labor force engaged in agriculture, those with incomes of about $1,000 per capita had about 50 percent; those with incomes of $2,000, about 30 percent; and those with per capita incomes of $11,000, about 6 percent (World Bank 1985). A similar relationship has prevailed for decades, either across countries or in the same countries over time.

It is easy to exaggerate the potential effects of the level of output prices upon farm employment. One effect of economic growth  increasing real per capita incomes upon agriculture cannot be modified or offset. As economic growth occurs, agriculture's share of both national income produced and of national employment declines. There is no escape. As people's incomes increase, they spend a smaller and smaller fraction of that income upon food. And agriculture has shown the capacity to increase productivity, at least labor productivity, as rapidly as the nonfarm sectors of the economy have. In fact, in the industrial countries labor productivity in agriculture has outpaced labor productivity in manufacturing and in the remaining nonfarm sectors. Japan is the only important exception to this rule.

The only effect that higher output prices could have upon farm employment is to slow down the rate of decline. But a comparison of the relationships between the levels of farms prices for wheat and corn and the decline in farm employment since the mid 1950s shows that the level of farm prices seems not to have had a significant effect upon the rate of farm employment decline.

Tables 8.8 and 8.9 provide simple comparisons between the levels of grain prices and the decline in farm employment. Employment change is presented for three time periods from 1955 to 1979; the grain prices are for 1970 and 1979. However, the relative grain prices in 1960 were about the same as in 1970. As noted, there is no apparent effect of high output prices in slowing down the decline in farm employment.

International Price Effects of Agricultural Protectionism

Before there can be consideration of the welfare and income-distribution effects of trade liberalization, it is necessary to have estimates of the effects of existing forms of agricultural protectionism upon international market prices. There have been a number of studies made of such effects, and several more are now in process.

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Protectionism has two effects upon international market prices: one is upon the average level of prices, and the other is upon the variability of prices. The studies that I now summarize generally include both.

It is important to note that the effects of the trade interventions in agriculture upon international market prices depend upon the level of

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protection that existed for the time period covered by the estimates. Some studies are based on the levels of protection that existed in 1975 77; others are based on 1978 80. Protection levels in the first period were significantly less than in the second one. As a result, the international price effects based on the 1975 77 period are the smaller of the two periods.

The studies undertaken by Tyers and Anderson (1984) and Chisholm and Tyers (1985) have been the most extensive. These studies included five commodities or groups of commodities: rice, wheat, coarse grain, ruminant meat, and nonruminant meat. In one exercise it was assumed that there was free trade in the six principal market economies, four NICs, and eight LDCs as of 1978 80. The results are presented in table 8.10 in terms of changes in projected prices. The 1990 estimates, which allow sufficient time for all production and consumption adjustments to occur, indicate that the expected level of wheat and coarse grain prices under liberalization would differ from the prices under continuation of present policies by an increase of 20 percent for wheat and 16 percent for coarse grains. The increase for nonruminant meat was projected at 2 percent. Liberalization was estimated to result in a 27 percent increase in the price of ruminant meat, but part of this difference may be owing to the difficulty of making appropriate adjustments for quality differences.

Valdes and Zietz have estimated the effects of the agricultural protection of the OECD countries upon the exports of farm products by the developing countries (mimeographed paper). These estimates, based upon 1975 77 levels of protection, involved projecting the price effects of the trade restrictions. Based on reducing protection levels by 50 percent, Valdes and Zietz obtained results comparable to those reported in table 8.10, though not as large, owing to the smaller degree of liberalization. Their study included 99 commodities, with the price increases resulting from reducing the barriers to trade reported for 47. There were only 4 commodities with price increases greater than 10 percent  and all of these were processed products: roast coffee, cocoa paste and powder, malt, and wine. Other price increases were 2 percent for maize, 4 percent for wheat, 8 percent for raw sugar, 7 percent for beef, and 9 percent for pork. (The degree of protection for sugar from 1975 77 was much lower than in subsequent years.)

Ulrich Koester, using the model and data bases developed by Valdes and Zietz, estimated the effect of removing the grain protection by the European Community upon the level of international market prices for

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grain (mimeographed paper, 1982). The projected increases in world grain market prices ranged from less than 1 percent for millet and sorghum to almost 20 percent for oats. For wheat the projected increase was 9.6 percent and for maize, 2.2 percent. The price increase for barley was projected at 14.3 percent. If the grains are weighted by the value of world exports in 1975 77, the average increase in price would have been 6.7 percent.

Maurice Schiff (1983) has estimated a model of the world wheat market, based on econometric estimates of his own. Free trade is assumed for the European Community, the United States, Canada, Australia, Japan, and Argentina. The model includes estimates of the wheat trade functions of the USSR and the rest of the world for continuation of existing policies. Schiff estimates that if there had been free trade in wheat in the designated countries from 1964 to 1978, the average increase in world wheat price would have been 15 percent. He also estimates that if there had been free trade in the European Community only, with all other countries continuing their actual policies, the world market price of wheat for the same period would have been 17 percent higher. This result may seem somewhat surprising until it is remembered that during most of the years included in the analysis the major exporters, especially the United States and Canada, had limited the output of wheat by domestic supply-management programs. If there had been universal free trade, exports of wheat by the major exporters would have been somewhat higher than they actually were.

Stefan Tangerman and Wolfgang Krostitz (1982) have estimated the effects of trade liberalization on the beef sector and calculated the implicit tariff equivalent of the restraints on trade that existed during 1977 79. Elasticities of supply and demand were also estimated. With this information plus the actual levels of production and consumption of beef in each country or region, changes in production, consumption, and net trade were made for reductions in the implicit tariffs of 25, 50, and 100 percent. They estimate that with full trade liberalization, the international market price for beef would increase by 47 percent.

One very interesting result is that no one of the three degrees of reduction of the implicit tariffs would have any noticeable effect upon domestic prices of beef in the United States or Canada. The reason for this rather striking result is that the increases in world market prices would be approximately equal to the reduction in the implicit tariff for each of the three cases: 25, 50, or 100 percent. For example, if the United States reduced its implicit tariff by 50 percent, this would have amounted to

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a decrease in the tariff by $230 per ton (slaughter weight). However, if all countries reduced their implicit tariffs by 50 percent, the world price would increase by $220 per ton. For the European Community a reduction of its implicit tariff of 118 percent by 50 percent would have resulted in a decrease in the domestic price of 15 percent. The decline in the domestic price in Japan was projected to be 28 percent, or $163 per ton.

Roy Allen, Claudia Dodge, and Andrew Schmitz (1983) arrive at a much more modest estimate of the effect of the voluntary export constraints for beef on beef prices in the United States. For 1976 77, when there were voluntary restraints on beef exports to the United States, the U.S. price of frozen boneless beef was increased by about $85 per ton, or about 8 percent of the free-trade price. However, the price increase for all U.S. beef would be significantly smaller than the estimated 8 percent, since beef of the quality that is imported accounts for no more than a quarter of U.S. beef consumption. An interesting result of the study was that the average price received by the exporters was slightly higher than it would have been under free trade. Under the voluntary quotas the exporters realized the price gain from the reduced level of U.S. imports. It may be noted that there were no voluntary restraints in effect during 1980, 1981, and 1982, though such restraints were imposed for the second half of 1983.

The trade intervention policies not only affect the average level of international market prices but also influence the variability of prices. The figures in parentheses in table 8.10 are measures of the price variability under current policies and free trade. The measure is the coefficient of variation, which is in percentage terms and represents the relationship between the standard deviation of prices and the average prices. For wheat and rice the estimates indicate that current policies have substantially increased the variability of international market prices.

The much greater variability of international market prices under current policies than under free trade results from the nature of agricultural protection that prevails in many countries. Agricultural protection per se need not result in increasing price variability in international markets and in the countries where international prices are directly reflected in domestic prices. It is the form of protection that causes the increased variability. Protection of agriculture that functions by stabilizing domestic prices by varying imports and exports of commodities destabilizes international market prices. It does so by using import and export changes to meet any variations in domestic supply-and-demand variabil-

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ity and by preventing internal price changes that would absorb at least part of the variability.

Consider the following example. A country has a fixed price of $100 per ton for grain, average use is 55 million tons and average production is 50 million tons. The price of $100 is maintained by varying the amount imported, with average annual imports being 5 to 10 million tons. The internal price remains at $100. In the next year production is 55 million tons and there are no imports, since none are required to keep the price at $100 if demand has remained unchanged. As this example indicates, all of the variability in domestic production is imposed upon the international market. None of the variability is absorbed by changing domestic use; since the price remains at $100, the users have no incentive to change. Nor are producers encouraged to increase their production in the year following the short crop. In effect, the country achieves domestic price stability by exporting its instability through varying imports to exactly offset production departures from the average.

Welfare Gains and Losses from Agricultural Liberalization

Chisholm and Tyers (1985) have provided estimates of the worldwide welfare impacts of full agricultural trade liberalization by the eighteen countries included in table 8.10. Their results are presented in table 8.11. Despite the likely increases in international market prices of many commodities, the welfare gains from liberalization are very large for Japan and the EC, two entities with high rates of agricultural protection. The per capita gains are also large for New Zealand, owing to the impact of greater market access at improved prices for farm products, in which it has a great comparative advantage. Australia also gains, while the United States is estimated to have a very modest gain.

Among the NICs, South Korea has a large gain at $158 per capita, and Taiwan has a significant, though smaller, gain in welfare. Most of the other developing countries are little affected by free trade in agricultural products as measured by per capita welfare effects. Bangladesh is an important importer of cereals, for example, and would lose as a result of higher international market prices. Some of the modest effects for the developing countries may result from the limited range of commodities included in the exercise.

The welfare gains and losses are measured as the sum of the changes in consumer surplus and producer surplus minus the net change in government revenue. I have argued elsewhere (Johnson 1973) that the

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conventionally measured welfare costs of market intervention are only a part perhaps a minor part of the economic effects. These policies frequently involve very large income transfers from one group to another within each of the economies. In the industrial economies the income transfers are from consumers to producers, whereas in many, though not all, developing countries, the transfers are from producers to consumers. What social and economic benefits are realized by such transfers is almost never asked. In the industrial countries, the transfer from consumers to farmers results in net transfers from at least half of the consumers to at most a fifth of the farmers, who have significantly higher incomes than the median consumer. Even where governmental expenditures are involved, there is a significant transfer from low-income taxpayers to farmers with much higher incomes.

At the time when Great Britain was considering joining the European Community, estimates were made of the distribution of costs and benefits of the EC agricultural policy compared to free trade (Josling et al. 1972). This study indicated that consumers with incomes in the lowest six quintiles would pay £ 581 million more for their food with the EC prices than under free trade. Of this total £ 366 million went to farmers who had incomes higher than the designated group of consumers. Farmers in the same income group as the consumers would have received £ 77 million in extra income if the EC prices had prevailed. These results are comparable to what occurs in industrial countries today when most of the transfer to producers is through higher prices.

6
Concluding Comments

What does the future hold? There was agreement among the OECD countries to include agriculture in the Uruguay round of trade negotiations. True, agriculture was also included in past GATT negotiations, though in the prior negotiations none of the participants were willing to seriously discuss the changes in their domestic programs that would be required to achieve significant trade liberalization. Nor has it been possible to achieve a modification of GATT rules governing the use of quantitative restrictions on trade or reasonable restraints upon the use of subsidies, including, but not restricted to, export subsides.

The current round of GATT negotiations could show more positive results. The financial costs of the farm programs of the EC and the United States and other OECD countries are enormous, with a total annual cost to consumers and taxpayers of more than $200 billion.

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The hope for positive results rests upon the combined effects of the large budgetary costs and the growing recognition that the needed changes in domestic farm policies can only be made if all the industrial countries act in unison. It is generally agreed that no country can unilaterally reduce its subsidies and trade restrictions and permit more liberal trade. To do so would result in the flooding of its market with large quantities of highly subsidized farm products. Politically none of the industrial countries can accept this outcome. But if in unison each gradually reduced the protective measures, including domestic subsidies as well as border measures, then the scope of the required adjustments would be reduced for all. This would be true because the gradual reduction in protection would result in increases in international market prices.

There may also be greater recognition among politicians that the current policy measures have not been effective in guarding farmers against the loss of income and financial difficulties. In neither the EC nor the United States have the high costs of the current programs been adequate to maintain the level of farm incomes, to say nothing about increasing such incomes. As of the mid 1980s in the United States, the total governmental expenditures upon farm income and price supports have, in some years, exceeded the net income of all farm operators from their farm operations. In the EC the sum of governmental expenditures plus consumer costs exceeds net farm income. One can have some hope that the combination of high costs and a recognition that these costs are not translating into increased farm incomes may lead the political process to try other means for improving the economic situation of farm families. Yet there is a significant probability that the Uruguay round will fail owing to the inability to devise an acceptable agreement for reducing agricultural subsidies.

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