Distortions to incentives in South African agriculture: A case study of the wheat industry

May 2018
By Michael Ross Bowerbank Day

1 Introduction

1.1 The political economy of agriculture

The economic benefits of specialization and trade are well known, yet governments persist in introducing measures that restrict international trade, including trade in agricultural products. While these restrictions differ from country to country, they contribute to volatility in global agricultural markets, consequently altering countries’ terms of trade. As Williamson (2008) notes, this volatility in the long-run terms of trade has a growth-retarding effect. 

In this regard, the governments of developed countries have tended to protect their farmers from import competition in order to counteract the competitive pressures to shed labour (Anderson 2009). Not only have these protective measures had a negative impact on domestic consumers of agricultural products and exporters of other products, but they have also depressed international prices of agricultural products, thus hurting both foreign producers and traders of agricultural products. On the other hand, governments of developing countries have tended to implement policies that directly or indirectly tax farmers, while at the same time pursuing import-substituting industrialization (Anderson 2009). As a result, producers face less of an incentive to produce – and this is compounded by the disincentive effect of subsidies for rich countries. 

As economies industrialise and develop economically, their policy stances undergo gradual shifts, from negatively assisting agricultural producers to positively assisting them, as well as from subsidizing food consumers to taxing them (Anderson 2009). While the historical trends in policy stances between the two country groups have been documented extensively, empirical measurements of the extent to which policy shifts have succeeded in moving towards a least-distorting policy environment have been limited to a handful of studies. These studies have been undertaken predominantly by the World Bank and by the Organization for Economic Co-operation and Development (OECD). 

Although the policy stances in developed and developing countries differ, both by their nature and the degree to which they distort agricultural incentives, the gradual policy developments within individual countries over time have had, and continue to have, a pronounced effect on the long-run growth and distribution of global welfare (Anderson 2009). Furthermore, in addition to the economic growth implications, distortions to agricultural incentives have knock-on effects on consumers through the price of food. Consequently, policy stances not only influence economic growth, but also influence poverty and income inequality due to the importance of food prices in these parameters. 

While policy intervention in agricultural markets has been reduced drastically over the past 25 to 30 years, the reduction of this intervention was only prioritised once agricultural commodities were duly included in the framework of international negotiations, specifically in the General Agreement on Tariffs and Trade (GATT). Prior to the inclusion of agricultural commodities in international negotiations during the Uruguay Round Agreement on Agriculture (URAA), signed in 1994, individual countries had been left free to determine their respective agricultural policies, even when these policies have had a disruptive effect on world markets (Butault 2011). Preceding the URAA, the Haberler (1958) Report to the GATT highlighted the presence of these policy-induced distortions and cautioned that they could worsen, which they did, as shown by Anderson and Hayami (1986). The signing of the URAA agreement in 1994, together with the concurrent establishment of the World Trade Organization, paved the way for the majority of signatory countries to shift their policy stances towards reducing agricultural support and progressively decoupling this support from the level of production (Butault 2011).  Read more

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