Policy Wise

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Improving market access, not aid, will help the developing world

Western countries are constantly criticized for the low level of their aid to developing countries. According to this logic, the rich countries are obliged to help the developing world and it’s failing in its moral duty by not increasing direct financial aid.

There is little doubt that hundreds of millions of people in the developing world continue to live in abject poverty and are unable to meet the most basic needs of human dignity and survival. No doubt, Globalisation and free markets have helped push down the poverty level, but much still needs to be done. However, aid is not the solution to their problem. Many of the underlying causes of the poverty of the developing world — poor governance and endemic corruption –guarantee that direct money transfer would provide little benefit to the poor. Worse, since many of these countries are dictatorships or sham democracies, it only ends up helping the dictators.

What would really help the developing world is freer access to the rich markets of the West. Here, unfortunately, the protectionist tendencies of the West take over and the need to preserve jobs triumphs over the concern for the poor in the developing world. Unable to reconcile to these differences, naturally, liberalization and free trade become the fall guys. Agriculture is a prime example of such muddled thinking.

The West has erected multiple barriers to trade in agriculture. These range from non-trade barriers (environmental and labour laws) to massive agricultural subsidies. The West, in fact, spends nearly a billion dollars a day on subsidizing agriculture, ostensibly under the name of preserving ‘a way of life’. But nothing could be further from the truth. Agriculture in the West is now largely corporate in nature and family-owned farms are few. On the other hand, agriculture remains the primary source of livelihood for the majority of people in the developing world. Agricultural subsidies harm them in two ways. Firstly, export subsidies drive down prices in their home markets. Americans export cotton at 43% less than the cost price, immeasurably harming cotton farmers from India to Peru. Secondly, they are denied access to Western markets that could have proved valuable in the case of over-production. Still, swayed by emotions rather than hard economics, taxpayers in Western countries continue to subsidize agriculture.

It’s not as if the West has not recognized the ill effects of following such protectionist policies. There is a belated recognition that subsidies are harming the farmers in the developing world and influential voices have favored phasing out the export subsidies while still retaining the producer subsidies. Europe has also granted quotas to developing countries, giving preference to the least developing countries. There is some existing research that shows such quotas are rather inefficient: It costs nearly 6 dollars to transfer one dollar to the least developing countries.

Quite clearly such measures are not enough. The question here is not the extent of subsidies but of allowing markets to function unencumbered by external concerns. Rural poverty in the developing world is directly linked to slower growth of agricultural trade as compared to industry and the failure of the developing countries to capture a larger market share. While there is little doubt that the developing world must continue their attempts to reform agriculture, the West can certainly help by dismantling barriers to trade in agriculture.

Granted, every country has the absolute right to protect its own interests, and that is exactly why agricultural subsidies make no sense. Ultimately, the West has to recognize that the subsidies are harming its own interests. Subsidies have only promoted inefficiency and imposed needless cost on the taxpayers while only helping a small group of people. They have diverted resources away from other important social causes and forced the poor in the developed countries to pay a higher price.

The abolition of quotas has immensely helped the textile industry in the developing countries and has opened massive new avenues for employment for the poor. At the same time, the lower prices have helped the poor in the West. It has been the ultimate win-win situation.

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