Agricultural Subsidies and Globalisation

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Agricultural Subsidies and Globalization

This essay will discuss the effects that agricultural subsidies have on globalization. The main points that will be covered in regards to subsidies and their effects on worldwide productivity, poverty in undeveloped countries, the stance of the World Trade Organization (WTO) and International Monetary Fund (IMF) and some discussion on implementation. First, it would be prudent to define some terms that will be used in this paper. Globalization is defined by Charles Hill as, “the shift toward a more integrated and interdependent world economy” and includes both the globalization of markets and production. (Hill, 2009, p.6) He goes on to define subsidies as the payments to a domestic producer which takes the forms of grants, low-interest loans, and tax breaks. (Hill, 2009, p.208) With these important points being defined, we can focus on how agricultural subsidies and tariffs provided by governments affect the global marketplace. Agricultural subsidies are a form of protectionism for the industry by the government. The World Trade Organization (WTO) commenced addressing this in its DOHA Round but prior to that it was on the agenda for the General Agreement on Tariffs and Trade (GATT). Agriculture has typically been given higher tariffs than other manufactured goods or services. This means consumers pay higher prices than needed for imported agricultural products thereby reducing their ability to purchase other goods and services. (Hill, 2009, p.228). The WTO points to the benefit of removing tariff barriers and subsidies is to boost worldwide trade levels, lower consumer prices and increasing economic growth globally since funds could then be used for investment in additional productive resources and other consumption needs. (Hill, 2009, p.228) As we have seen in previous courses with supply, demand and subsidies, subsidies can be used to promote the underallocation of resources via a subsidy. In agriculture, the subsidies create a surplus supply which is then sold to the government in order to maintain production. A subsidy in this case creates a spillover. Typically, the government will allow subsidies to farmers to keep their land out of production thus decreasing supply while demand stays the same. This will then bring the prices towards equilibrium. Unfortunately, the cost for the subsidies comes from the federal budget and is a cost to consumers. The price at supply and demand is overly high since supply is controlled at a lower point while demand remains the same. (Mankiw, Kneebone, McKenzie, Rowe, 2008, p.416-417) The International Monetary Fund states that economic welfare would be globally enhanced by $128 billion or even up to $182 billion by removing tariffs and subsidies from agriculture. (Hill, 2009, p.228) As stated by Rodrigo de Rato, International Monetary Fund managing director, and Paul Wolfowitz, World Bank president, “WTO member governments have the chance to move collectively toward more open markets, lifting millions of people in developing countries from poverty and boosting growth in rich and poor countries alike.” (Daily Star, 2005, p.1) The effect of agricultural globalization would be worldwide economic gains, especially in undeveloped countries. Without international trade, nations would be limited to the goods and services produced within their own borders but by further opening markets worldwide economic well-being would be improved due to more efficient resource use in part due to the specialization, economies of scale, international investment, effects of competition and innovation. Also, the OECD believes that there are significant economic gains to be made. Specifically, an increase in trade of at least 10% will rise per capita income by 4%. If federal direct investment (FDI) was opened there would be an increase of .75% in OECD GDP per capita. That lower regulatory barriers to competition would increase per capita GDP in OECD...
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