The National Catholic Review

Last September, the ministerial meeting of the World Trade Organization in Cancún, Mexico, failed. The agreed-upon agenda was overpowered by topics that favored the United States, Europe and Japan. The issues of state procurements, foreign investment, intellectual property and competition were given precedence over the issue of agricultural subsidiesthe various financial support programs that developed countries use to bolster their agricultural economies. As a result, the Group of 21 (G21), composed of developing countries harmed by the agricultural subsidy programs, rejected the developed countries’ proposals.

That agricultural subsidies are such a sensitive topic for developed and developing countries should not be a surprise. The subsidies impede the sale of the agricultural products of developing countries (often their principal export) in the markets of the developed world. Agricultural prices in developed countries are kept artificially low by the subsidies that domestic producers receive from their governments. As a result, developing countries cannot compete.

The situation is serious, because in the developing world the largest work force is in agriculture and the producers of agricultural goods are small farmers. In contrast, in the developed world the producers of agricultural goods are principally large agricultural companies. In the United States, for example, 10 percent of the farms account for about 70 percent of all agricultural production. If developing countries cannot export agricultural goods, what else will they export? And if they cannot export, with what resources will they be able to import the industrial goods they need for development?

In member countries of the Organization for Economic Cooperation and Development (O.E.C.D.), of which the U.S. is a member, agricultural subsidies amount to about $300 billion3.5 times the Colombian gross domestic product, or six times the Peruvian G.D.P. Just 10 percent of U.S. farms receive nearly two-thirds of all federal farm supports, and their Washington lobbyists fight to protect the lucrative subsidies.

International organizations like the International Monetary Fund and the World Bank are not much help. These champions of free trade have no influence on the economic policies of developed countries, which are violating free trade principles with their agricultural subsidies. On the other hand, the organizations have real power over developing countriesthe less developed the country the greater the power. When the I.M.F. and World Bank press developing countries to reduce their fiscal deficits as a condition of aid, the governments cannot use agricultural subsidies to offset the subsidies of the developed countries.

Threats From the United States

Fifteen members of the G21 met again in Buenos Aires on Oct. 10, 2003, including the most important: China, India, South Africa, Egypt, Brazil and Argentina. But six Latin American countriesColombia, Costa Rica, Ecuador, El Salvador, Guatemala and Perudropped out of the group because of pressure from the United States, their main commercial partner. That pressure came just weeks before the meeting, when the Republican chairman of the Senate Finance Committee said that countries belonging to G21 would be examined if they wanted to negotiate a bilateral free trade treaty with the United States. Fearing a negative examination, the countries interested in signing such treaties pulled out of the G21. Such bilateral treaties could increase trade by reducing tariffs and eliminating quotas on exports from Latin America, but they would most likely not address the subsidy issue.

So the question remains: are bilateral free trade treaties really helpful to Latin American countries? It depends. Preferential access to the United States is desirable for Latin America because the size of the American market would permit an aggressive expansion of Latin American production levels. But such expansion will be possible only if Latin American countries can compete successfully in U.S. markets, not only with American producers but also with Chinese producers. The world’s biggest producer of cereals, meat, fruits and vegetables is China. Eighty percent of the bicycles that are sold in the United States come from China; 20 percent of world garment exports are Chinese, and that will increase to 50 percent by 2010. As a result, Latin America needs W.T.O. agreements, not just bilateral agreements. Only the W.T.O. has the power to change U.S. government policies, which impede free trade and harm developing countries.

Latin American governments must also better position themselves to benefit from free trade. First, a country’s exchange rate should compensate for the difference in productivity. The real exchange ratethat is, the nominal exchange rate discounted by the relationship between domestic and foreign inflationshould stay at a stable level that assures Latin American competitiveness. For that, the nominal rate should fluctuate appropriately with the intervention of the country’s central bank.

Second, economic success requires competitive and transparent markets, particularly in the financial system and in such public services as electricity and communications. The Latin American financial and public services markets need efficient regulation that will make it possible for them to offer their services at internationally competitive rates and prices. This is a national responsibility and does not have to be part of any free trade agreement.

 

International Cooperation and Solidarity

Finally, the United States must contribute to the development of the economic infrastructure and human capital of Latin American countries. It is in the best interests of the United States that poverty in Latin America not increase. Greater poverty in Latin America would reduce U.S. exports and promote even more emigration to the United States. When the European Union was established, it was built on four pillars: competitive exchange rates, the promotion of competitive markets, a European fund to finance the infrastructure of southern European countries and the movement of free labor. If a U.S.-Latin America free trade region does not include free labor migration between north and south that is balanced, then the need for U.S. financial support of development in the south will be even greater.

Solidarity with foreign people and the poor is at the heart of both the Old Testament and the New. Jesus demonstrated how to love by experiencing the joy and pain of his neighbors and working with the neediest to build concrete solutions to their problems. I was hungry and you gave me food, I was thirsty and you gave me water, I was naked and you clothed me. All that you do to one of these least, you do to me, Jesus tells us.

Justice and the economic principles of free trade demand a progressive reduction of agricultural subsidies to growers in developed countries and the tariffs that wealthy countries impose on imports from poorer nations. If this is done, the agricultural products of the third world will have access to first world markets, guaranteeing economic growth in the developing world and alleviating the grave problem of world hunger, which affects three billion people, half the world’s population.

Resistance by wealthy nations to the reduction of these subsidies and tariffs is leading to the suffering and death of millions of people. A recent study by the World Health Organization notes that six million children die of hunger around the world every year. The attitude of the first world at the last Cancún meeting brings to mind the pathetic biblical figure of Cain, who was indifferent to Abel’s death, which he himself had caused: Am I my brother’s keeper? As the former general superior of the Society of Jesus, Pedro Arrupe, said, Humankind can abolish world poverty, but it does not want to do it.

Yet the solidarity of rich nations with poorer nations is essential if world poverty is to be overcome. According to the World Bank and the International Monetary Fund, 80 percent of the world’s wealth is owned by 20 percent of humanity, most of whom live in the United States, Japan and the European Community. The citizens of these countries, particularly Catholics, must press their governments to adopt just international economic policies and programs, including the end of agricultural subsidies. Opening markets to third world products and increased development assistance is a matter of life and death in the developing world.

Cesar Ferrari, former managing director of the Central Bank of Peru, directs the master’s degree program in economics at the Universidad Javeriana, Bogota, Colombia. Carlos Novoa, S.J., is a theology professor at the Universidad Javeri

Comments

Kathleen Vinehout | 4/6/2004 - 3:45pm
I am a small dairy farmer in Western Wisconsin. In response to the (3/1/04) article by Mr. Ferrari and Mr. Novoa I ask that consideration be given to the American farmer. For seventy years American agricultural policies have been developed to keep food inexpensive. As our food tastes have changed and we move from direct consumption of farm products to consumption of processed food, farmers have witnessed a dramatic decline in their percentage of the food dollar. Farm programs have increasingly replaced market derived income to make up the difference between market price and the farmer’s cost of producing the product.

Let me be clear. The price I receive for milk is well below the costs I have invested into producing milk - even with the direct government subsidies I receive. In dairy farming this problem has reached a critical point. Dairy farmers have arguably had the worst two years in history. For 21 months the price of milk (which is set through a complex government formula that neither senators, reporters nor cheese makers can explain) was at twenty five to thirty year lows. Eighty percent of dairy farmers in Wisconsin were not cash flowing. Farmers sold off assets and cattle, took out loans, fired employees, used savings, did not pay bills and spouses took off farm jobs. The stress this has created in farm families is magnified by the culture of silence towards rural poverty. Inevitably bankruptcy, domestic violence and suicide resulted. This is in America. Wisconsin lost almost 1000 dairy farms last year (a little more than 6% of the total). Policy makers say without the new Milk Income Loss Contract (MILC) program the number would have been much higher. Yes, I said new. Dairy farmers have not received milk subsidies prior to the 2002 farm bill. Yes, dairy processors receive program benefits (that are supposed to "trickle down"). Yes, there is a federal program of buying cheese and butter when prices are low. But participation in this program is voluntary (by the cheese maker) and the money goes directly into the pockets of cheese makers not farmers.

Ag statistics tell us that farm income is almost entirely related to ag subsidies. Without them there would be no net farm revenue. Hence I would caution against removing farm subsidies without visiting questions of structural reform including the adequate enforcement of antitrust laws that should prohibit the market power food companies wield. Some details of this market power were recently made public in the class action lawsuit Picket v. Tyson Fresh Meats, Inc.(formerly IBP) in which a jury awarded nearly $1.3 billion to cattle ranchers. The jury found the food giant guilty of using captive supplies to manipulate prices downward.

The subsidies, labeled "farm", directly benefit food processors and leave farmers impoverished. Despite Mr. Ferrai and Mr. Novooa's best intentions, the enemy of the third world farmer is not the American farmer but large food companies that benefit from farm subsides by keeping inputs as low as possible. It is convenient for these profitable companies to hide behind the impoverished American farmer. The problem is a inequitable structure that has been built over many years that allows food companies, through their influence on the market and government policy, to control farm price but assume none of the risk of farming.

(Rev.) James McDonald | 2/9/2007 - 10:57am
Good for America for tackling a complicated subject like agricultural subsidies in “An Imbalance of Power” (3/11). Cesar Ferrari and Carlos Novoa, S.J., articulated how U.S. trade policies directly affect people in poor countries—the very recipients of our foreign assistance. And they have done so with a fluency born of personal experience.

Bread for the World Institute’s 2003 Hunger Report shows that the amount of money rich nations spend on agriculture subsidies ($300 billion annually) is an astounding six times what they give poor countries in development aid. Research released in the report also found that eliminating subsidies and protection in rich countries would allow developing countries to triple their annual net agricultural trade (exports minus imports), from $20 billion to $60 billion.

Going one step further, not only does the current system of subsidies hurt developing countries, it is not effective in dealing with poverty and economic decline in rural communities here at home either. About 80 percent of subsidy payments go to only a handful of farmers—primarily larger, commercial operators that grow specific commodities. Approximately 60 percent of U.S. farmers receive no subsidies at all. We also need a U.S. farm policy that targets assistance not based on what a farmer produces (corn, wheat), but on whom it should help, like smaller farmers, struggling rural entrepreneurs and poor people.

Bread for the World Institute heartily agrees that developing countries need a global rules-based trading system, and that citizens of rich nations, especially Christians, “must press their governments to adopt just international economic policies.”

Kathleen Vinehout | 4/6/2004 - 3:45pm
I am a small dairy farmer in Western Wisconsin. In response to the (3/1/04) article by Mr. Ferrari and Mr. Novoa I ask that consideration be given to the American farmer. For seventy years American agricultural policies have been developed to keep food inexpensive. As our food tastes have changed and we move from direct consumption of farm products to consumption of processed food, farmers have witnessed a dramatic decline in their percentage of the food dollar. Farm programs have increasingly replaced market derived income to make up the difference between market price and the farmer’s cost of producing the product.

Let me be clear. The price I receive for milk is well below the costs I have invested into producing milk - even with the direct government subsidies I receive. In dairy farming this problem has reached a critical point. Dairy farmers have arguably had the worst two years in history. For 21 months the price of milk (which is set through a complex government formula that neither senators, reporters nor cheese makers can explain) was at twenty five to thirty year lows. Eighty percent of dairy farmers in Wisconsin were not cash flowing. Farmers sold off assets and cattle, took out loans, fired employees, used savings, did not pay bills and spouses took off farm jobs. The stress this has created in farm families is magnified by the culture of silence towards rural poverty. Inevitably bankruptcy, domestic violence and suicide resulted. This is in America. Wisconsin lost almost 1000 dairy farms last year (a little more than 6% of the total). Policy makers say without the new Milk Income Loss Contract (MILC) program the number would have been much higher. Yes, I said new. Dairy farmers have not received milk subsidies prior to the 2002 farm bill. Yes, dairy processors receive program benefits (that are supposed to "trickle down"). Yes, there is a federal program of buying cheese and butter when prices are low. But participation in this program is voluntary (by the cheese maker) and the money goes directly into the pockets of cheese makers not farmers.

Ag statistics tell us that farm income is almost entirely related to ag subsidies. Without them there would be no net farm revenue. Hence I would caution against removing farm subsidies without visiting questions of structural reform including the adequate enforcement of antitrust laws that should prohibit the market power food companies wield. Some details of this market power were recently made public in the class action lawsuit Picket v. Tyson Fresh Meats, Inc.(formerly IBP) in which a jury awarded nearly $1.3 billion to cattle ranchers. The jury found the food giant guilty of using captive supplies to manipulate prices downward.

The subsidies, labeled "farm", directly benefit food processors and leave farmers impoverished. Despite Mr. Ferrai and Mr. Novooa's best intentions, the enemy of the third world farmer is not the American farmer but large food companies that benefit from farm subsides by keeping inputs as low as possible. It is convenient for these profitable companies to hide behind the impoverished American farmer. The problem is a inequitable structure that has been built over many years that allows food companies, through their influence on the market and government policy, to control farm price but assume none of the risk of farming.