Tuesday, May 29, 2007


Kristyn Birrell wrote a brief article on how successfully New Zealand has switched from agricultural subsidies to free market farming. As she wrote: "The fortune of farmers now depended on their ability to meet consumers."

As empirical studies evidently showed, agricultural subsidies mean nothing but a distortion of consumer prices. In fact, there has been no proof to subsidize farming as there are actually no neighborhood effects that could justify the use of farm subsidies. The reason why farm subsidies ought to be abolished is a substantial improvement in productivity, the effect of efficient allocation of resources as well as innovation and competitive prices which inevitably triggers benefits for customers. In New Zealand, after moving away from distorting farm subsidies, labor productivity nearly doubled and land productivity increased 85 percent. In fact, the share of agriculture in the GDP had been rising significantly while today; approximately 90 percent of farm output is exported, summing up more than 55 percent of total merchandise export. As a consequence of relying onto the efficient of market-based pricing, high quality, innovative processing and the efficient allocation of resources lifted New Zealand's agricultural sector into one of the most competitive in the world.

According to the Organization for Economic Cooperation and Development, government support for agricultural producers accounted for 31% of total farm income among its member nations in 2001. However, Australia and New Zealand are entirely different story. Thankfully, the reforms were implemented quickly by avoiding the setbacks of long drawn-out process instituted by the economic policy of gradualism. The reduction of government support thus provides producers to match knowledge-based solutions such as business and management risk as well as added production skills in bringing value and high quality to their customers.

Instead of liberalization, western countries have no shame when it comes to launching the policy of protectionism. However, hardly anyone is aware about its negative side-effects. First, agricultural subsidies distort general economic equilibrium by (1) creating the incentives to demand as well as by (2) imposing tariffs and quotas on agricultural imports from third-world countries. The farmers usually react is a simple way called rent-seeking. As an influential interest group, they frequently announce "resistance to any kind of cuts in farm subsidies." To be honest, this doubtlessly reminds me on a sequel from the middle age.

Meanwhile, removing import barriers could dramatically boost competitive pricing in agricultural market. The liberalization of world trade would foster the incentives to produce and supply very quickly. The elimination of import barriers would support the liberalization of prices as well as greater choice in the market. This cumulative effect would force domestic producers and farmers to cut their prices and introduce innovative capacities to match-up customer preferences. In addition, ending farm subsidies opens more and more opportunities to embrace competitive advantages and switch toward the edge of new economy by introducing quality service such as rural tourism. This is exactly what happened in New Zealand as farm employment fell and the employment in vibrant tourist industry grew significantly.

In Slovenia, there has been no such thing as farm liberalization. Prosperous agricultural sector without government support and open international trade flows is what boosts producers to streamline efficiency and competitive pricing by reducing costs and looking for what customers really want.

Kristyn Birrell: Kiwi Fruit for America, TCS Daily (link)
Sara J. Fitzgerald: End Farm Subsidies, Heritage Foundation (link)

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