Brian Fallow: Europeans are still tilting at windmills

Vested interests of alpine proportions stand between the world and the promise of a trade round that would substantially lift living standards in the Third World.

The OECD estimates that agricultural protectionism cost taxpayers and consumers in developed countries more than $400 billion last year, of which the European Union accounts for nearly half. That sort of money buys a lot of distortion and inefficiency.

Those on the receiving end of this enforced largess naturally don't want it to end. Last week was good for them.

In the World Trade Organisation's ministerial meeting in Hong Kong, all the Europeans could be persuaded to do was to put a date, and a distant one at that, to what they already agreed to do in principle last year: End the export subsidies on farm products that depress prices in non-European markets. Better than nothing.

In equally fractious negotiations in Brussels over the EU Budget, all Britain could get for agreeing to pay an extra £1 billion ($2.57 billion) a year was a vague promise of a review of the common agricultural policy (CAP), with no commitment to reforming it.

On the crucial question of improving access to its markets for farm produce, Europe's arms remained resolutely folded. There was no improvement in Hong Kong on the offer it made in October, which was widely dismissed as inadequate.

The essential political deal that has to occur if the Doha Round is to succeed is a trade-off between better access for farm products in the rich markets of the north in exchange for better access to developing countries' markets for manufactured goods and services. That looks as elusive as ever.

A new deadline for a framework deal, April 30, has been set. The locomotive is still on the track, but the grade ahead is steep. There was no breakdown at Hong Kong but no breakthrough either.

Twenty years after New Zealand scrapped its farm subsidies and dismantled (most of) the protection surrounding its manufacturing sector, it is easy for us to be impatient, even scornful, of the reluctance of other countries to take even baby steps in the same direction. We forget, perhaps, that that transition was painful as well as liberating. But the pain passed and the benefits remain.

The British Treasury in a paper pleading the cause of CAP reform cites the New Zealand experience:

* Support to farmers fell from 35 per cent of farm incomes in 1983 to 13 per cent by 1987 and 3 per cent by 1994.

* Farm incomes fell 48 per cent in real terms between 1984 and 1986 but had fully recovered by 1989.

* By 1989, land values had fallen to 45 per cent of their 1982 level in real terms, reflecting the tendency for changes in farm incomes to be rapidly capitalised into land prices.

* Productivity growth in agriculture, which had run at 1.8 per cent a year between 1972 and 1983, more than doubled, averaging 4 per cent a year between 1985 and 1998.

Had the rest of the economy matched that productivity performance we would not be languishing in the bottom third of the OECD league table in per capita incomes.

"As an OECD market-based economy with a temperate climate, there are many similarities between New Zealand and many parts of the EU," HM Treasury says.

"And even where there are differences, some of these may actually suggest that the adjustment for EU farmers should be easier than it was for their New Zealand counterparts. New Zealand farmers are distant from many of their markets, whereas EU farmers operate within one of the world's biggest and wealthiest markets."

And how jealously guarded that market is.

Prohibitive tariffs - 100 per cent for beef, 101 per cent for butter, 60 per cent for lamb - mean that almost all the imported farm products that enter the European market do so by virtue of reduced-tariff quotas or other concessions.

The common agriculture policy costs Europeans €100 billion ($174 billion) a year. About half of that is consumers paying higher prices and half as taxpayers funding subsidy payments.

It estimates this costs the average family of four €950 ($1650) a year and is equivalent to an extra 15 per cent in value added tax (GST) on food.

Who benefits? By and large not the actual farmers, it would seem.

The OECD estimates that about 36 per cent of the CAP's market price support goes to the suppliers of inputs such as machinery, pesticides and fertilisers. A further 26 per cent benefits landowners, through pushing up the price of farm land. Only about half of that is owned by the farmers.

Ten per cent goes to those who work the land, and the remaining 28 per cent is lost through economic inefficiencies. It includes the forgone benefits of spending money on other things.

Theory suggests sustained increases in food prices encourage more intensive production on existing farmland and an expansion of farming to otherwise marginal land, the British Treasury says.

"This process bids up the price of agricultural inputs especially those, such as land or production quota, where supply is relatively fixed. Higher prices may initially boost returns from farming, but this benefit is soon eroded as agricultural costs are bid up."

The main beneficiaries of subsidy and protection are the owners of agricultural land, it says. Land prices in Britain rose 50 per cent after it joined the Common Market as the value of future CAP support was capitalised.

But, conversely, the removal of agricultural subsidies and cutting protection against the imports would not lead to the collapse of European farming, the Treasury argues.

There would be an initial squeeze on farm incomes (as in New Zealand) but as costs then fell incomes would recover.

Improved market access is key if developing countries are to benefit.

"Potential aggregate gains for developing countries from the removal of agricultural tariffs are much greater than potential gains from reductions in domestic support or export subsidies," HM Treasury says.

But the ability of developing countries to benefit from more open markets in Europe (and the United States and Japan) varies widely.

Some, such as Brazil, South Africa or Thailand are already relatively efficient producers and are more likely to be able to respond to better prices.

A larger group would be hobbled in the short term by constraints such as inadequate infrastructure or capital markets. For them, trade liberalisation is a necessary, but not sufficient, condition for progress. Still, a chance would be a fine thing.

A third group stands to lose from the erosion of preferential access agreements for some commodities, often founded on past colonial relationships.

But relying on other people's willingness to pay more than they need to for what you produce is a rickety foundation to build a livelihood on, whether you live in Jamaica or France.