Agricultural Policy Distortions

Which sector in the economy accounts for 70% of the global cost of trade distortions but only 3% of global GDP?  Agriculture.    

Kym Anderson, Gordon Rausser, and Jo Swinnen have an excellent review article in the newest issue of the Journal of Economic Literature on agricultural policy worldwide.  They reveal that agricultural markets are among the most distorted in the world, recent price spikes have been amplified by agricultural policies, and some of the poorest people in the world are hurt by agricultural policies in developing and developed countries alike.  

A few of quotes: 

For advanced economies, the most commonly articulated reason to restrict food  trade has been to protect domestic producers from import competition as they come under competitive pressure to shed labor. However, such measures harm not only domestic consumers and exporters of other products but also foreign producers and traders of food products. Accordingly, these measures also diminish national and global economic welfare


policies in developing countries have not been motivated by a desire to alleviate poverty in their rural areas (where most of the world’s poor reside) any more than have been the policies of developed countries.


In developed countries, agricultural policy remains disproportionately important compared to the relatively small shares of the upstream agriculture component in GDP and employment. For example, the Common Agricultural Policy (CAP) continues to absorb 40 percent of the entire EU budget

The paper is chock full of fascinating figures on trade distortions in agriculture, such as this one on international comparisons of relative rates of assistance (RRA), which measure the policy-induced price distortions in agriculture relative to a country's non-agricultural policy-induced price distortions.  A positive number means a country's policies are pushing up agricultural prices relative to the world price (and relative to non-agricultural sectors); a negative number implies the opposite.  The larger the number in absolute value, the bigger the distortion and thus the larger the misallocation of resources.