When presenting numerical calculations of welfare losses of the agricultural policy in high-support countries, the same question always pops up: Why do the authorities pursue this policy if the economic losses are so huge? Are the calculations wrong? Do they fail to capture public good benefits or non-economic societal gains of agricultural policy? However, despite various limitations of numerical models, the documentation in the academic literature is overwhelming: the agricultural policy involves high costs in most countries, potential benefits are by far surpassed by the economic costs, and more targeted policy instruments are usually available to provide farm related public goods.
But in spite of convincing economic arguments, it proves hard to achieve major reforms of agricultural policy, as most recently demonstrated by the stalemate in the Doha development round of the World Trade Organization (WTO). Then, since politicians and elected governments seem to ignore traditional economic arguments, explanations for the highly distorted policy, and the key to reforms, have to be found in the realm of political economy. This is the point of departure in The Political Economy of Agricultural Price Distortions.
The book, edited by Kym Anderson, includes 14 contributions by reputed authors in the crossing fields of agricultural trade policy, political economy, economic history, and econometrics. The contributions are organized in three sections. An introductory section gives an overview of prevailing government interventions in agriculture, motivates why the field of political economy is important to understand these interventions, and ties together the different parts of the book. Furthermore, an extensive database of agricultural assistance is presented from which the authors extract 20 stylized facts of agricultural trade distortions that political economists should seek to explain. The second section provides a survey of findings in the political economy literature to date, and extends this theory with some new conceptual frameworks to be tested. This is complemented with a survey of the historical origin and development of agricultural support in different regions of the world. The last section, devoted to quantitative studies, utilizes the new dataset to test different political economy hypotheses of trade distortions.
The field of political economy of agricultural protection and distortions is, of course, not new. The persistence of high distortions in agricultural markets has made this sector a particular interesting subject for political economy research. Research efforts were, as reviewed by Johan Swinnen in Chapter 3, especially intense in the 1980s and the first half of the 1990s (which coincides with the process of including the sector in multinational trade talks). The novel contribution of this book is the presentation and utilization of a new and unique dataset that has the potential to revitalize the research in this field.
Kym Anderson, the editor of the book, has had a key role in developing the methodology that has been applied to construct the panel dataset of around 30,000 nominal rate of assistance (NRA) and consumer tax equivalent (CTE) distortion indicators. The details in the database are impressive, since it reports support indicators for 70 crop and livestock products in 75 countries over more than 40 years. More than 90% of the world's farmers, agricultural production, GDP, and population are covered.
Several unique characteristics of the dataset, making it appropriate for empirical analysis, deserve to be emphasized: a consistent methodology is applied for all countries and years; developing countries and non-OECD countries are included (in contrast to the OECD-PSE database); distortions in non-agricultural tradable sectors are included (since relative distortions are what matters); the impact of exchange rate distortions are incorporated (which has been high in many developing countries); several groups of policy instruments from which the price distortions arise are identified; and country specific indicators for political institutions and governance have been included.
A good introduction to the data material is provided by Anderson and his colleges in Chapter 2. Using descriptive statistics and simple regressions, they extract numerous stylized facts of agricultural trade distortions that serve as an instructive reference for the subsequent chapters. Many of these facts reconfirm earlier work from the 1980s to 1990s on the topic, most noticeably the positive correlation between agricultural protection and country income (and the related tendency for countries to shift from taxation to protection as they develop economically) and the relation between weak comparative advantage and high protection (with the corollaries that protection increases when relative farm incomes decrease and that import-competing sectors tend to be more protected than sectors that produce exportable products). However, in its richness of details, the database also elucidates many additional interesting observations.
First, aggregate protection in high-income countries has decreased significantly since the base period of the Uruguay Round (1986–1988), both seen isolated (NRA) and relatively to non-agricultural tradable sectors (RRA). Concurrently, protection in developing countries has increased to the degree that world-wide NRA has been kept unchanged, while world-wide RRA in fact has increased. Second, a high variation in assistance across products remains both in developing and developed countries. Products such as sugar, rice, and milk are characterized by high NRAs in almost all countries, while the NRAs of feedgrains, soybean, pork, and poultry are consistently low. Third, while the use of export subsidies (high-income countries) and export taxes (developing countries) has been reduced, the level of import protection is sustained or has even been raised in many developing countries. Trade policy instruments still account for three-fifths of agricultural NRAs. Finally, since the extensive use of trade instruments contributes to insulate the domestic market from the volatile world market prices, product specific NRAs and the corresponding world market prices are negatively correlated.
It is interesting to know if some of these findings, in particular the observed decrease in aggregate NRA in high-income countries over the last 20 years, indicate major reforms in agricultural policy or if the emperors simply have got new clothes. Disaggregated on regions, the data show that the decrease in aggregate NRA mainly can be attributed to the EU, Australia, and New Zealand, which in fact have reformed their agricultural policy, while no clear trend can be observed for other high-income regions such as the USA, Canada, and Japan. Going further into the data, it appears that the decline in price support in the EU has been accompanied by an increase in so-called decoupled payments to the degree that overall farm assistance is nearly unchanged. This kind of compensation policy has, however, not been pursued by New Zealand and Australia.
As the examples show, the dataset illuminates the development and variation in agricultural assistance along many dimensions. However, some care is needed when applying the dataset to assess the price distortive effects of agricultural policy, or the importance of a distinct change in NRA in a specific region. To use Norway as an example, the NRA seems to include only half of the total support, that is mainly the pure price support, even though most of the remaining support, oddly categorized as decoupled, is closely attached to production (e.g., acreage and per animal payments).Footnote 1 Along these lines, it is demonstrated in a new book edited by Orden et al. (2011)Footnote 2 that many high-income countries, adapting strategically to existing and anticipated WTO trade agreements, mask production support as decoupled support. Another and more obvious example of disconnection between reform and change in NRA is the strong decrease in NRA observed in 2005–07 (even in Norway and Japan) that solely can be explained by surging world market prices.
Nevertheless, the consistent methodology and the wide coverage of the data make it appropriate as input in studies that aim to identify variables that contribute to explain variation in agricultural assistance, or to test competing theoretical models in the field of political economy. The six empirical essays of the book serve as good examples. In addition to a more thorough investigation of the models and explanations of the 1980–90s, broadly related to income development and comparative advantage in agriculture, the authors test the importance of numerous political economy variables, such as group size versus free-ridership, perennials versus annual crops (time-inconsistency), checks and balances in governance systems, electoral competition, constitutional rules, trade agreements, and public finance aspects.
Policy implications of the empirical findings are, however, more or less absent in the book. The major challenges associated with translating the findings into real policy reforms can be illustrated by the following caricature: in order to avoid price distortions, it helps, first and foremost, to be a relatively poor country or to have a comparative advantage in agriculture, but also to have few checks and balances in governance systems and low electoral competition. For high-income countries such factors either belong to ‘gravity’ or they describe an undesirable development.
The unresolved question is then how to build internal political support for agricultural reforms in the market of political interests. The authors emphasize in this respect the importance of political institutions and ideology. Building on the more recent literature on political economy, Raussser and Roland provide in Chapter 4 a conceptual framework for moving forward. The units of analysis are vested interest groups that compete by spending resources on political pressure to influence policy. The framework, incorporating both public and private sector agents, distinguishes between policy instruments that seek to correct market failure (supply national public goods) and are redistributive (both between sectors and regions), and it takes into consideration that the design of these instruments typically is influenced by institutional structures, market structures, and socioeconomic characteristics.
Empirical testing based on this conceptual framework is, however, not provided. In general, such testing will require detailed knowledge of the countries involved and their policies. Although some country-specific indicators for political institutions and governance are included in the database, there may be other important mechanisms that are hard to operationalize. This suggests more case-based studies of actual reforms in specific countries (or for specific products) that try to identify reform triggers in the light of political processes, national sentiments, and external circumstances. An approach in this direction is the country narratives that supplement the national spreadsheets for many countries.
But examples of autonomous reforms of agricultural policy in developed countries not driven by acute public finance aspects or external conditions are, in fact, few. The reform in New Zealand was, for example, triggered by economic problems and the recognition that it is unsustainable to provide subsidies to a huge and competitive advantaged sector in the economy. Furthermore, the recent reform in the EU from production to decoupled support was a prerequisite for the inclusion of the new and farm-intensive member countries. Finally, pressure imposed by the WTO, strongly opposed by most high-support countries, merits some reforms (e.g., tariffication and decrease in export subsidies).
As an overall impression, this is a well-written and composed book on an important topic. The feature that makes it stand out from earlier contributions is the presentation and use of the unique database. The interdisciplinary approach is interesting and also crucial to understand agricultural price distortions. Most readers would therefore benefit from reading the whole book. Nevertheless, many of the chapters can be read alone; for example, Chapter 2 gives a good survey of agricultural distortion patterns over time and regions (the systematization of these patterns in 20 stylized facts are, in particular, instructive), Chapter 3 provides an excellent summary of the political economy literature, and Chapters 5–6 give an interesting survey of the historical origins of agricultural policy in Europe. The econometric studies give examples on how the dataset can be applied, which, hopefully, can stimulate further research based on the impressive dataset.
