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PolicyReformsAffectingAgricultural

Incentives:MuchAchieved,MuchStill

Needed

KymAnderson

Fordecades,earningsfromfarminginmanydevelopingcountrieshavebeendepressedby

apro-urbanbiasinown-countrypolicies,aswellasbygovernmentsofrichercountries

favoringtheirfarmerswithimportbarriersandsubsidies.Bothsetsofpoliciesreduce

nationalandglobaleconomicwelfareandinhibitagriculturaltradeandeconomic

growth.Theyalmostcertainlyaddtoinequalityandpovertyindevelopingcountries,

sincethree-quartersoftheworld’sbillionpoorestpeopledependonfarmingfortheirlive-

lihood.Duringthepasttwodecades,however,numerousdevelopingcountrygovernments

havereducedtheirsectoralandtradepolicydistortions,whilesomehigh-income

countriesalsohavebegunreducingmarket-distortingaspectsoftheirfarmpolicies.The

authorsurveysthechangingextentofpolicydistortionstopricesfacedbydeveloping-

countryfarmersoverthepasthalfcentury,andprovidesasummaryofnewempirical

estimatesfromaglobaleconomy-widemodelthatyieldestimatesofhowmuchcouldbe

gainedbyremovingtheinterventionsremainingasof2004.Theauthorconcludesby

pointingtothescopeandprospectsforfurtherpro-poorpolicyreforminbothdeveloping

andhigh-incomecountries.JELcodes:F13,F14,Q17,Q18

Formanydecadesagriculturalprotectionandsubsidiesinhigh-income(and

somemiddle-income)countrieshavebeendepressinginternationalpricesoffarm

products,whichlowerstheearningsoffarmersandassociatedruralbusinessesin

developingcountries(Johnson1991;TyersandAnderson1992).Thosepolicies

almostcertainlyaddtoinequalityandpoverty,sincethree-quartersoftheworld’s

poorestpeopledependdirectlyorindirectlyonagriculturefortheirmainincome

(WorldBank2007).Currentlylessthan15millionrelativelywealthyfarmersin

developedcountries,withanaverageofalmost80hectaresperworker,arebeing

TheWorldBankResearchObserver#TheAuthor2009.PublishedbyOxfordUniversityPressonbehalfoftheInternationalBankforReconstructionandDevelopment/THEWORLDBANK.Allrightsreserved.Forpermissions,pleasee-mail:journals.permissions@oxfordjournals.orgdoi;10.1093/wbro/lkp014AdvanceAccesspublicationNovember9,200925:21–55helpedattheexpenseofnotonlyconsumers,taxpayers,andproducersofother

tradablesinthoserichcountriesbutalsothemajorityofthe1.3billionrelatively

impoverishedfarmersandtheirlargefamiliesindevelopingcountrieswho,on

average,havetoearnalivingfromjust2.5hectaresperworker.

Butinadditiontothisexternalpolicyinfluenceonruralpoverty,thegovern-

mentsofmanydevelopingcountrieshavedirectlytaxedtheirfarmersoverthe

pasthalf-century.Awell-knownandoften-citedexampleisthetaxingofexports

ofplantationcropsinpost-colonialAfrica(Bates1981).Furthermore,many

developingcountriesinthe1960sand1970schosealsotopursueanimport-

substitutingindustrializationstrategy,predominantlybyrestrictingimportsof

manufactures.AsKrueger,Schiff,andValde´s(1988,1991)showedintheir

seminalmulti-countrystudy,thisindirectlytaxedothertradablesectorsinthose

developingeconomies,includingagriculture.

Thusthepriceincentivesfacingfarmersinmanydevelopingcountrieshave

beendepressedbybothown-countryandothercountries’farm,food,andtrade

policies.Iwillsurveytheextenttowhichgovernmentpoliciesathomeand

abroadhavedistortedpricesfacedbydeveloping-countryfarmersoverthepast

half-century.Ibeginwithabriefexaminationofthemethodologyrequiredto

measuretheextentofown-countrydistortionstofarmerincentives.Ithensurvey

analysesoftheeffectsofthoseagriculturalandtradepoliciesonincentivesover

time,focusingontheworseningofthatsituationbetweenthe1950sandearly

1980sandontheprogressthathasbeenmadeoverthe25yearssincethen.

Notwithstandingrecentreforms,manypricedistortionsremainintheagricul-

turalsectorofbothdevelopingandhigh-incomecountries.Iprovideasummary

ofnewempiricalestimatesfromaglobaleconomy-widemodelthatindicatehow

muchcouldbegainedbyremovingtheinterventionsremainingasof2004.

Iconcludebypointingtothescopeandprospectsforfurtherpro-poorpolicy

reforminbothdevelopingandhigh-incomecountries.

NationalDistortionstoIncentives:BasicTheory1

Bhagwati(1971)andCorden(1997)definetheconceptofamarketpolicydistor-

tionassomethingthatgovernmentsimposetocreateagapbetweenthemarginal

socialreturntoasellerandthemarginalsocialcosttoabuyerinatransaction.

Suchadistortioncreatesaneconomiccosttosocietywhichcanbeestimated

usingwelfare-measuringtechniquessuchasthosepioneeredbyHarberger

(1971).AsHarbergernotes,thisfocusallowsagreatsimplificationinevaluating

themarginalcostsofasetofdistortions:changesineconomiccostscanbeevalu-

atedbytakingintoaccountthechangesinvolumesdirectlyaffectedbysuchdis-

tortions,ignoringallotherchangesinprices.Intheabsenceofdivergencessuch

22TheWorldBankResearchObserver,vol.25,no.1(February2010)