Northern Agriculture Subsidies Attacked At Ecosoc High Lebvel Session

29 June, 2003

A lively debate on the effects of Northern agricultural subsidies on developing countries was the highlight of the high-level segment of the ECOSOC session which began this morning.

The high level of subsidies in the rich countries was briefly touched on by UN Secretary General Kofi Annan, and singled out by the UNCTAD secretary general, who was one of he panelists, and most participants from the floor, for aggravating poverty in developing countries.

The meeting was opened by UN Secretary General Mr. Kofi Annan, and this was followed by a panel comprising UNCTAD secretary general Mr. Rubens Ricupero, World Bank managing director Ms. Mamphela Ramphele, WTO deputy director general M. Francisco Thompson-Flores and IMF representative to the UN, Mr. Muenzberg. ECOSOC President, Gert Rosenthal of Guatemala chaired the session.

The annual Ecosoc substantive session will last four weeks until 25 July, and its high-level segment will run from 30 June to 2 July with the theme on an promoting an integrated approach to rural development for povert eradication and sustainable development. The Council is expected to adopt a Ministerial Declaration on integrated rural development..

In his address, Kofi Annan said the WTO's Doha programme is more than just another round as it aims to eliminate unfair competition faced by farmers in poor countries, to open Northern markets to developing-country goods, and to give the poor better access to life-saving medicines. It could be an engine of growth and help attain the Millennium Development Goals (MDGs).

He said although the decline in aid has halted, aid flows are still at the mercy of recession and OECD countries' spending cuts. Even if the Monterrey commitments are fulfilled, the total will still fall far short of the US$100 billion needed to achieve the MDGs.

To achieve the MDGs, said Annan, the needs of rural people must be addressed. Rural development entails more investment in agricultural research, developing higher yield crops, raising non-farm income, secure land tenure and land reform, a new green revolution. 'It will require developed countries to allow agricultural products from developing countries to reach their markets, unimpeded by direct or disguised barriers such as subsidies.'

All this can happen, concluded Annan, only with a real commitment to bring rural development back to the centre of the development agenda, after a sharp decline in support for agriculture and rural development over thye past decade.

Ricupero's statement dealt at length with the nature of Northern agricultural subsidies and how they aggravate poverty in the South. He made three main points. Firstly, the small farmers in the world's wealthiest countries face 'distress and misery' even as these countries spend nearly US$1 billion daily on subsidies.

'Over the past 15 years as subsidies expanded relentlessly, small farmers in these countries have become poorer and poorer in relation to the rest of the population, so much so that they are now a vanishing species,' he said.

Secondly, if the most forceful justification for subsidies is that they are needed to save the peasants, said Ricupero, then the facts show they are not achieving this purpose. 'They should thus be abandoned altogether, or replaced by something more effective.'

And thirdly, farm subsidies have a perverse effect. Not only do they cruelly fail to help the poor in the North, they also seriously harm poor peasants in the South. Thus, promoting an integrated approach to rural development can only be achieved if a central element of this approach is the prompt elimination of external constraints that make it an 'absolute impossibility.'

Ricupero highlighted examples of increasing misery in rural areas of Northern countries, including the US where a New York Times article in 2002 concluded that 'we give a lot of tax breaks and direct payments to big agriculture companies that don't do much for the local economy,' and that in Nebraska, nearly 70 percent of farmers rely on subsidies, 'yet the biggest economic collapse is happening in counties most tied to agriculture, in spite of the subsidies.'

In France, said Ricupero, the peasant population declined by one third and the number of suicides in the French countryside increased rapidly. The subsidies are skewed towards the rich farmers, as 15 per cent of farms receiving in excess of Euro 20,000 account for 60 percent of total payments.

Thus, the shrinking rural population, the growing concentration in land ownership and increase in average size of farms belie the argument that subsidies are a necessary evil if the complete extinction of small farmers is to be avoided.

The increase in subsidies occurred even after the Uruguay Round (from an average of US$238 billion in 1986-88 to $248 billion in 1999-2001) despite its agreement to reduce subsidies. It coincided precisely with the period when peasants were vanishing and the average farm size doubled. This contradiction is explained by the fact that producer subsidies are highly regressive. Quoting an Oxfam study, Ricupero said far from benefiting small farmers, subsidies go overwhelmingly to large, capital intensive agriculture as support is closely linked with production levels or land ownership.

The 'evil' generated by this misdirected welfare policy affects poor-country farmers who are financing the social welfare doled out to rich-country farmers, according to Ricupero.

First, even if subsidies are only for locally consumed products, and even if they are decoupled from production or prices (as the EC proposes to do), they are still linked to high market access barriers and thus limit markets for developing-country exports.

Secondly, whenever subsidized products get into the world market, they drive prices down, hurting developing countries' exporters. Agricultural support in OECD economies insulates producers from world price changes, shifting the adjustment burden to the poor and this instability also causes fiscal and balance of payments problems.

Thirdly, many EU and US subsidies go to products exported to the world market, taking significant market shares away from more efficient developing country farmers. Fourthly, subsidized food from rich nations enter the markets of the poor, compete unfairly with local producers, who are often driven out of business altogether. They thus create an artificialdependency on foreign suppliers, aggravating food security problems in times when food aid disappears and prices go up.

Commenting on the EC agricultural reform process, Ricupero said the EU Agriculture Commissioner should be praised for trying to move away from production and price linked subsidies.

However, he added, the preliminary reports do not allow us to conclude at this juncture whether the reforms announced will substantially change the current pattern of concentration of 80 percent of payments going to 20 percent of bigger farmers, nor about the extent to which the new system will prove less trade distorting.

This will depend on clarifying:

(a) if there will be a quantitative cap in payments to large farms and what will be the final percentage reduction in subsidies to this privileged category;

(b) is decoupling supposed to remain partial and when will it be extended to products such as sugar and cotton? and

(c) how to reconcile the criterion on aligning payments to past performance over 2000-2001 with decoupling them from production and prices.

Despite these uncertainties, said Ricupero, the EU decision is an encouraging change in the right direction. He hoped the same inspiration will prevail in the US where the last Farm Bill went in the opposite direction of the 1966 Freedom to Farm Act and chose to link again subsidies to production and prices.

Ricupero said the OECD nations' farm support systems are seriously aggravating poverty. This is shown in the cotton crisis, caused mainly by American subsidies of $3 to 4 billion yearly. Despite its higher production costs, the US increased its world market share even when world prices fell to 38 cents a pound in May 2002. Africa lost about $300 million, with Mali and Benin losing more than its aid receipts from the US, and Burkina Faso losing more than what it got in HIPC debt relief.

Ricupero supported the proposal of the African countries in the WTO to get an 'early harvest' decision in Cancun with an accelerated phase out of production subsidies and immediate compensation from Northern cotton producers.

'Anything short of these demands is an additional blow to countries struggling to escape poverty created partly by unfair external constraints such as subsidies for the rich. If we cannot take these straightforward decisions, this discussion of rural development risks being little more than an exercise in futility.'

Mr Thompson-Flores from the WTO, speaking on the status of the negotiations, said there are 'positives' such as the very high level of engagement in services and tabling of ambitious proposals in many areas. But he said basic concerns remain, mentioning the missed deadlines on TRIPS and health, implementation, S and D, agriculture and non-agricultural products.

He repeated what the WTO Director General Dr Supachai had said at the WTO symposium last week, that Ministers may be faced with an unmanageable task at Cancun if understanding is not reached on some of these issues.

The fact that so many missed deadlines concern issues of particular importance to developing countries is a critical problem, he added. On agriculture, he said overcoming the impasse requires two developments: prompt engagement of major players in real negotiations, and simultaneous progress in issues of special interest for countries on the defensive side in agriculture. He described the EU announcement on CAP reform last week as an encouraging sign.

Ms Ramphele of the World Bank announced the Bank's two-pillar approach to a development strategy: the creation of a good investment climate, andempowering and investing in poor people. This approach, she claimed, moves 'beyond the Washington consensus' of macroeconomic policy to the questions left out: governance and institutions, empowerment, country ownership, the social costs and pace of transformation.

'The translation of the two pillars so as to move beyond the Washington Consensus is a first step to implementing in an integrated way the follow up to the major Monterry, Doha and Johannesburg consensus,' she said.

Mr. Muenzberg of the IMF welcomed the EU's announcement of its CAP reform. He said although details are still to be assessed, the decoupling in some areas is a step in the right direction. The Doha Round must addresstrade-distorting agricultural subsidies as its core.

He said the Monterry Consensus is the IMF's framework for development partnership and the operational vehicle is the PRSP process. The IMF had also reduced loan conditionality by focusing on macroeconomic aspects.

In the discussion, the Brazil delegate said we were in an unfortunate situation as there was no good news on the economic situation and the first few years of the new Millennium has been a development disappointment for developing countries and an 'absolute setback' for many. The MDG goals begin to look unattainable for most.

Although developing countries had carried out reforms, they face external pressures. Two areas need international cooperation crucially. Firstly, there must be democracy at global level ; at present decisions are concentrated in a few hands as in one forum they do not have enough voting power and in another forum they do not take part in decision making.

Secondly, the Doha WTO conference was a moment of hope for development, but now the situation is altogether different, Protectionism in the North had not been curbed, and instead new forms were established. At Doha we had agreed on reform, and this must be lived up to.

The Pakistan delegate spoke of the 'deleterious impact' of agricultural subsidies. He was struck by Ricupero's observations that despite rising subsidies, the rich countries' rural population is dwindling. 'Our impression was that subsidies are needed to preserve a way of life, but what we heard is this way of life is disappearing. There is thus a contradiction between the purpose and consequence of subsidies.'

He supported the call for an 'early harvest' in Cancun on subsidies. He called on the EU to respond to Ricupero's questions for clarifying the EU CAP reform decisions.

John Richardson of the EC responded by first saying that the EU had been accused of being the main obstacle to Doha's success due to its agricultural subsidies. First the export subsidies had been criticized, and as they declined, the emphasis switched to trade distorting domestic subsidies.

'We were told it has to stop,' he said. 'We have stopped it, we've cut the links between production and subsidies. This is a major change in our whole philosophy and it was pushed through against strong opposition.'

On Ricupero's comments on the social phenomenon in Europe, he said there are good reasons not to neglect rural areas, and payments to these areas will continue but the link to production is broken. On Ricupero's remarks on the distribution of payments between rich and poor farmers, he said this was an 'internal problem' and it was up to the countries for to think about it.

He added the impact of subsidies has been more serious on poorer countries, that is why the EC had the everything-but-arms policy for LDCs. And as for cotton, the EU countries do not export cotton and the exports of African countries have entered the EU markets.

The Benin delegate said the impact of cotton subsidies on West Africa is an eloquent testimony that should touch the conscience of the world. He called for cessation of distorting policies affectiing trade so that countries could benefit from the fruits of their labour.

The Peru delegate agreed that falling incomes and prices in agriculture were due to Northern subsidies and the WTO talks should come to grips with this. There was also a technology gap, which put the Southern farmer further back.

The WTO negotiations should give developing countries the rights that EU states enjoy in giving community preferences to themselves.

Ricupero, in response, said he respected the EC delegate's view that distribution of subsidies was an internal problem, but he had focused on it as the most frequent argument to defend subsidies had been the need to protect small farmers in the North. 'Thus the North had opened themselves to scrutiny as we have to see if it is true or not and whether it happens in practice or not.'

His information sources were unimpeachable as they included the OECD and confirmed by many other sources. The question was: to what extent are subsidies, which are defended on the basis of the need to protect small farmers, doing their job. If they are not, then we should find another way to protect small farmers.

'If it is true that subsidies are going mainly to large farms, then what is the real rationale of subsidies if they are not to protect small farms? There is hen only one explanation, that is, to keep their share in the world market,' said Ricupero, adding that all the largest agriculture exporters are the developed countries even though there are some developing countries like Argentina which are very productive.

'If the reason (for subsidies) is not to protect small farmers, then it is a trade reason,' concluded Ricupero. 'Then it conflicts with the philosophy of the multilateral trade system where nations must compete on the basis of comparative advantage.'

He added that when Ricardo gave the example of comparative advantage, he used Portugal as exporting agriculture goods and England as exporting industrial goods.

'So Ricardo and Adam Smith did not make an exception for agriculture. If we exclude agriculture from the multilateral trading system, what is the justification for developing countries to open their markets for industrial products and services? Why do they have to do away with subsidies? Almost all subsidies for industrial production is outlawed and prohibited. Why does this imbalance exist?'

Ricupero said while he acknowledged the EU's step in moving away from direct links between subsidies and production, he also raised reasonable doubts as much needed to be clarified. Although the EU Farm Commissioner had said there would be a cap of 300,000 Euros on large farms, was this adopted? There were contradictory reports in the media on this.

Similarly, it had been announced that subsidies to large farms would be cut by 20 percent but according to news reports the reduction was to be only by 5 percent.

And there wee doubts whether decoupling would extend to sugar and cotton. These reasonable doubts should be addressed.

At the end of the session, Martin Khor of the NGO, the Third World Network, made a statement . He said the high Northern subsidies not only prevented market access for developing countries' products but more seriously it had allowed high-cost products to be exported at artificially cheap prices to swamp the markets of many developing countries, threatening the farmers' livelihoods.

He cited many examples of how millions of farmers in the Carribean, Sri Lanka, Indonesia, Philippines, and Africa had lost their incomes and livelihoods due to surges of cheap imports.

The flaw in the WTO agriculture agreement, he said, was in categorizing some subsidies as non trade distorting and thus escaping disciplines, and this allowed the rich countries to maintain or raise their very high subsidies by switching from one kind of subsidy to another. The so-called blue box and green bhox subsidies could be just as trade distorting or even more so as they were better able to disguise their protectionist reality and enable exports at cheaper prices even without an export subsidy.

Khor said it was well known that both the US nor the EU were not going to reduce their overall subsidies, and that the recent EC announcement on CAP reform would not reduce the amount of subsidy nor would it stop the trade distortiveness of domestic support.

Given this reality, the least that the developed countries could do was to allow the developing countries to defend themselves through the WTO negotiations. The developing countries should be allowed not to reduce their bound tariffs on food products and products of their small farmers, they should be provided a special safeguard mechanism (such as the one which the rich countries can now avail themselves to), and they should be able to choose for themselves the special products which are exempted from obligations of tariffs and domestic subsidies.

So long as the high Northern subsidies continue, developing countries should also be able to revert to the use of quantitative restrictions, which they had given up in the wrong expectation that the Northern countries would stop their protection.

'Developing countries should not be forced to disarm altogether when the developed countries reserve the right to keep their arms and to build even more armaments', he concluded.