Policy Wise

Robert W. Klein is right on the money.

In an effort to expand program participation and reduce disaster aid, the number of insurance-eligible crops and the amount of federal subsidies going to the insurance program have increased dramatically since 1938. This expansion has come at a high cost, even in recent years; from 2000 to 2004 alone, the amount of the annual subsidy increased by 150 percent to $2.5 billion. Total federal expenditures on crop insurance are projected to increase to $3.6 billion in 2007.The rise in crop insurance expenditures might be palatable if it were offset by a significant decline in disaster assistance payments for agricultural losses. But that savings has not occurred. Over the period 1989–2005, disaster payments averaged $3.7 billion (in 2005 dollars) annually, and there is no indication that the trend in the amount of payments is declining. From 2000 to 2005, a total of $37.7 billion has been paid in “emergency” appropriations by Congress, averaging $6.3 billion annually (in 2005 dollars).[Link]

Though Klein misses one important point. American (and European) crop subsidies harm the interest of farmers in the developing world. The huge amount of subsidies artificially makes American crops cheaper making it impossible for the farmers in the developing world to compete. This is not only against the system of free markets and fair play, but is a complete antithesis to all the talks about helping the developing world. Countries like India don’t require foreign aid but only a chance to compete on equal terms.

Subsidized agriculture in the developed world is one of the greatest obstacles to economic growth in the developing world. In 2002, industrialized countries in the Organization for Economic Cooperation and Development (OECD) spent a total of $300 billion on crop price supports, production payments and other farm programs. These subsidies encourage overproduction. Markets are flooded with surplus crops that are sold below the cost of production, depressing world prices. Countries with unsubsidized goods are essentially shut out of world markets, devastating their local economies. Moreover, farm subsidies lead to environmental harm in rich and poor nations alike.Prosperous countries give about $50 billion to $55 billion annually in foreign aid to underdeveloped nations. If developed nations reduced their subsidies and eliminated trade barriers — such as import tariffs protecting domestic producers from international competition — this aid would arguably be unnecessary and rural poverty might be significantly reduced.[Link]