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OECD agricultural subsidies are falling

15 October 2012

Following the recent publication by the OECD and FAO of its annual report on ‘Agricultural policy monitoring and evaluation’, the OECD Secretariat has reported that the agricultural subsidies of its members in 2011 were at the lowest ever recorded level – but this headline needs to be unpacked to understand the implications for ACP agriculture. The Secretariat has been surveying annually the agricultural support policies of its members since the mid 1980s. It uses a methodology that takes account of the many different ways in which this support is provided and aggregates these into several different measures, of which the Producer Support Estimate (PSE) is one of the most often cited. This allows the financial support provided directly and indirectly to agriculture to be expressed as a value, which can then be compared, for example, to the value of agricultural output (or to GDP).

In its latest report, the Secretariat finds that in 2011 the OECD’s PSE to agriculture totalled €182 billion, equivalent to 19% of gross farm receipts. In other words, roughly one in five of the euros or dollars received by OECD farmers was a direct or indirect subsidy from their governments.

The PSE figure for 2011 was the lowest since annual calculations commenced: the Secretariat reports that in the mid 1980s, PSE was equivalent to 37% of gross farm receipts, almost twice as high as the current figure. Despite this, the report includes several warnings that the 2011 results should not be taken as evidence that trade distortion as a result of agricultural subsidies by its members is a thing of the past.

One caveat is that there are wide differences, for example, between members. ‘In New Zealand, Australia and Chile’, it notes, ‘less than 1% to 4% of gross farm receipts were due to policy transfers in the 2009-11 period.’ At the other end of the scale, the figure was ‘between one half and two-thirds of gross farm receipts’ in Norway, Switzerland, Japan, Korea and Iceland. The figure for the EU is 20%.

Another caveat arises from the way that PSE is calculated. Indirect subsidies (such as import controls that increase the price of competitive imports or export subsidies) are measured by comparing domestic and world prices. So the PSE can fall either because governments have reformed their policies or because world prices have risen (making export subsidies less necessary and increasing the price of competitive imports). In 2011, the OECD Secretariat reported, the decline in PSE was due in most cases to the rise in world prices rather than domestic reform. If prices fall without any further reform, PSE levels will go back up. According to the OECD Trade and Agriculture Director Ken Ash, ‘The move toward lower farm support is a welcome trend, but we still see the need for better targeting and more cost-effective farm policy.’ ‘Farm support’, he argued, ‘should be more closely directed at increasing agricultural productivity and competitiveness. Governments should also be doing more to address environmental issues, ensure sustainable resource use and help farmers better cope with risk.’ 

Editorial comment

The PSE methodology pioneered by the OECD Secretariat is increasingly used by developing countries to assess the extent to which the net effect of government policy is to subsidise or to tax their agricultural sectors. Belize, Dominican Republic, Haiti and Jamaica, for example, have all had calculations made of their agricultural support using the PSE methodology. This is because it takes account of all forms of agricultural subsidy (or, the opposite, tax). It responds to the frequent, justified complaint that analysis of developing country policy too often overlooks the fact that poor countries find it more feasible (from both financial and administrative perspectives) to use import tariffs, rather than direct subsidies to support agriculture. The PSE methodology is not biased towards one form of government intervention rather than another.

Undertaking PSE analysis is particularly desirable in countries, like many in the ACP group, where administrative and financial constraints require government interventions to be more often indirect than direct. The results may be surprising. Governments can find that although they believe they are supporting particular agricultural activities, the net effect of all their policies is actually to tax rather than subsidise.


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