Why Agricultural Subsidies Don't Mean Lower Food Prices

Do agricultural subsidies lower food prices? When I looked at this question last month, I dismissed it as a second-order effect: they might, they might not, either way it's not going to be a big deal when compared to the enormous swings in food prices that we've seen of late.

But Dean Baker is still bashing his drum, and now, after what I learned yesterday about rice in Japan, I'm much less indulgent of this sort of thing:

The truth is that the U.S. and European subsidies that cause the Post, the NYT, the World Bank and many NGOs to get apoplectic have the effect of lowering world food prices. That means that fewer people go hungry than would be the case without these subsidies.
This isn't rocket science, it's almost definitional. The U.S. and European effectively pay their farmers to keep farming, thereby producing more food than otherwise would be produced. This may have negative consequences for farmers elsewhere in the world, but it does mean that supply is greater and prices are lower than they would be in the absence of the subsidies.

Dean seems to live in some kind of frictionless econoworld where prices fall as supply rises. But the world of agricultural subsidies is anything but frictionless: for one thing, it's dominated not by direct subsidies so much as by tariffs. And so you end up in a situation where Japan is sitting on 1.5 million tons of rice, which it's not allowed to sell at any price to, say, the Philippines, which is in desperate need of it. Instead, the rice will be allowed to rot to the point at which it's useful only for pig food. High rice prices aren't a function of low supply - rice production is at record highs. But the market is broken, thanks largely to the system of subsidies and tariffs which distorts incentives and prices around the world.

As Paul Collier says, what's needed is much more large-scale agricultural production in developing countries. The model he uses is Brazil, which by no coincidence is a major agricultural exporter. In order for the supply of agricultural goods to rise substantially, we need much more in the way of agricultural exports, especially from the developing world. And one way to get there is to increase the demand for agricultural imports from Europe, Japan, and the US. No one in Africa is going to bother trying to grow sugar for export to the US, not with the present subsidies and barriers in place. But if they came down - then we might see some large-scale agricultural investment in Africa.

Of course, none of this would change food prices overnight. But if our goal is feeding the planet over the long term, then it would be a great idea to abolish agricultural subsidies and tariffs. Defending them on the grounds that they lower food prices is therefore counterproductive, and largely wrong. They might lower food prices in theory; in practice, I doubt they do.

(Is this the same argument which I dismissed last month as being "all a bit vague and hopeful"? Yes. The rice-bubble paper changed my mind on this one, and moved me from the subsidies-are-irrelevant camp and into the subsidies-are-actively-harmful camp.)