Friday, August 31, 2007

IEB: The gift that keeps on giving


Tate a perfectly plausible and (probably) harmless stand or position, for which there may be reasonable arguments. And begin stretching it. To the max. Beyond its breaking point.

In this exalted blogging realm, the Indian Economy Blog has been a consistent outlier [see footnote]. Here's the latest episode in which Dweep Chanana argues that India should refrain from "[demanding] cuts in agricultural subsidies".

There is, of course, the argument that lower subsidies will raise prices and thus raise farmer incomes. But this reasoning is egregious in so many ways, I don’t know where to begin.

First, it ignores the fact that while there are several million farmers in India, there are over 1 billion consumers too. This is the classic problem with farm subsidies in general - they benefit a strong, well organized group of producers, but against the interests of the much larger, but disorganized majority of consumers. Worse, the result will be incentives for farmers to stay in farming - just when they should be encouraged to move into other forms of production. [bold emphasis added by me]

I think Dweep has failed some of his IEB colleagues in not going far enough. Here's how we can stretch this argument even further.

We should get rid of our totally counterproductive anti-dumping laws, and allow Asia's manufacturing biggies to just dump their goods at rock bottom prices: Barbies, GI Joes and Holi water guns, bicycles, motorbikes and cars, computers, mobile phones and MP3 players, ... ! It makes perfect sense because manufacturing accounts for only a small share of our GDP and employs a far smaller workforce than our agricultural does. On the other hand, we have a BILLION consumers who have a gucking-fod-given right to enjoy their cheap toys and low-priced gadgets and dumped cars! Worse, keeping manufacturing alive will only result in perverse incentives for the workers to stay in manufacturing -- just when they should be encouraged to move into our sunrise sector: BPO.

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Footnote: We have encountered IEB insights on incentives for academics (even for those who participate in open source projects), on the role of expectations, and on how quotas may interfere with India's quest for excellence.

14 Comments:

  1. vatsan said...

    Abi, since lower subsidies wont increase india's agri exports, demanding lower subsidies does not make sense. We could get something which provides greater benefits for us.

    thts essentially the point made at IEB.

  2. kuffir said...

    vatsan,

    lower subsidies where? in india? or america/eu?

  3. Vishnu said...

    on a different note nanopolitan my question to you is...
    whats your view about BPO. If possible post something on it too..

  4. Krish said...

    With the usual disclaimer that my economics knowledge is as good as Vatsan's science knowledge, I want to post the following question.

    Isn't it true that subsidies to American farmers are affecting our farmers in India's domestic market?

  5. Anonymous said...

    Krish:

    "Affecting" most certainly: in a world with trade, that part is trivial. What you imply is "affecting adversely" and that is not clear at all. For the most part - even now - agricultural trade is heavily regulated. Both imports and exports are subject to regulation: for instance, when the prices of onions rose, the government revoked the free export of onions.

    Let alone international trade, I think even inter-state agricultural trade is regulated. Certainly, there was a time when smuggling across state lines flourished. Many (middle class) older Tamilians would have memories of coming back with a few kilos of rice whenever they traveled outside the state - taking good care to stuff it into a pillow in the "hold-all." Probably this is not so much now.

    Anyway, the analysis is still complicated. Even if trade in agriculture is banned totally, agricultural producers will still be affected because there is trade in non-agricultural items. In that sense, subsidies to American farmers does impact Indian farmers but in an indirect way and in a manner not totally obvious. (Remember that farmers are not only producers but also consumers - some of them also use things like cell phones etc. etc.)

    My personal feeling is that at this point, what matters more to our farmers is our own government's interventions in agriculture due to things like fertiliser subsidies and support prices. Of course, if agriculture is opened up, then things will change and subsidies to American farmers will impact our own farmers in a direct way. Indeed, to some extent, this is what the dispute at the WTO is all about: Developing countries like India are demanding reduction in agricultural subsidies in the US/EU before they themselves open up the agricultural sector.

    SM.

  6. vatsan said...

    Krish Kuffir,

    If one has been reading the paper one would be aware of the dire distress agriculture is currently in (without including the impact of farm subsidies in EU/US). secondly, there are doubts being raised if there can be enough crop production to meet the demand. Under these circumstances, India is in no position to export agricultural goods. Reviving agriculture in india is not going to happen through reducing subsidies, the governments needs to make a more focussed attempt.

    Under this circumstance, asking and demanding that subsidies in EU/US be reduced makes no sense, as even if they are reduced it will have a nominal impact on agriculture. India is better off demanding the opening up of other sectors (some are mentioned in the IEB post), where India isin a position to leverage its competitive advantage.

    The post is based on a simple cost-benefit analysis vis-a-vis global trade negotiations.

  7. kuffir said...

    vatsan,
    'Under this circumstance, asking and demanding that subsidies in EU/US be reduced makes no sense, as even if they are reduced it will have a nominal impact on agriculture.'

    thanks for the explanation though i didn't want it. and i wish you didn't club your response to me with that to krish- we're asking different questions. what i'd asked was more specific- who should/shouldn't reduce/bother about subsidies.

    as for your views on what good will the reduction of american subsidies do to indian agriculture - i've posted my views on what i think of dweep's ill-thought out views on the issue on ieb. indian agriculture will revive with greater access to newer markets.. i've pointed out clearly which segments would benefit from such an access (small, medium and large farmers or those who hold more than one acre of land each and constitute 20% of all indian farmers and together own 70% of arable land and produce 60% of the needs of the indian markets now) to newer markets. for them the subsidy structure and the msps work adversely in india (even though most of them demand such protection). and these are the people most capable of making investments in productivity in a more competitive environment, both in domestic and overseas markets.
    the subsistence or marginal/sub-marginal farmers(those who hold less than one acre each) would never be able to make investments in productivity in a competitive environment and hence would not gain much as producers. but they would gain as consumers because of gains in productivity made by the first set of farmers. and the rural economy would gain as a whole, creating new non-farm jobs, if the first set of producers gain access to newer markets.

    as for your view that indian agriculture can't be revived even if subsidies in america were reduced- it is wrong from a cost-benefit point of view- i'd pointed this out on nitin's post ('the full monty'), again on ieb. american agriculture costs the american people much more in terms of tax dollars than indian agriculture does. america spent 57000 dollars per farmer in 2005 as subsidy/support (it would cost the american taxpayers much less to directly transfer to each farmer a dole equivalent to the american median household income, which is actually much lower). india spent less than 100 dollars on each indian farmer- who'll survive in the long run in a more competitive environment? and do you think america's investments in keeping prices artificially low works to the benefit of consumers when it clearly imposes heavy penalties on the most productive farmers in the world who should logically be able to supply the world with much cheaper food in the long run? and do you think america's inefficient agriculture can support indian consumers' food needs (cheaply) for more than a few years in the short term?

    no, i don't think any 'other sectors' were mentioned in dweep's post. he talked of 'internal issues' that impact on agriculture - like supply chain improvement, lessening of govt intervention etc., i'd commrented that these would result in only marginal improvements in productivity and the big impact will happen only if the americans too start reducing trade and tariff barriers. american/eu barriers are unreasonable, ugly and unviable in the long run... following dweep's logic it is easy to see that american consumers and taxpayers would benefit a lot more from a reduction in american subsidies and tariffs than they do now. and american farmers would be happier consumers too.. what's the point of india going to wto anyway if we shouldn't bother about these issues? like abi said what we have here is an immature blogger trying to take an untenable but fasionable position and trying to argue his way out with virtually no quantitative/logical support.

  8. vatsan said...

    kuffir,

    first, your logic the large/medium farmers investing in productivity will help the rural economy as a whole, and specifically the small/marginal farmers and agri workers. there is an assumption that higher agricultural growth will automatically lead to savings and therefore investment. I would debate that view largely because the translation from savings to investment does not always happen.

    and while engaged in global negotiations for india, from an indian position, i dont really care if americans pay more for their agriculture, it does not matter to me. What i am concerned about maximizing my welfare. There are other more important issues like IPRs etc. FOr instance Data exclusivity and the recent judgment in novartis case highlights how IPRs could impose a huge burden on india, by increasing the cost of medicine.

    in negotiations, there is always a choice that has to be made, give something up for something in return, on those count, i think letting go of lower subsidies in return for lax IPR or other areas which provide a higher welfare is what india should be focusing on.

  9. kuffir said...

    'there is an assumption that higher agricultural growth will automatically lead to savings and therefore investment.'

    vatsan,

    there is an older example of indian farmers responding positively to increased access to markets (isn't that when the process of 'marketization' of indian agriculture actually start?) - think of the green revolution. there's no assumption here, it has happened earlier.

    two, even if you think savings wouldn't result in investments, it doesn't really matter. because it might translate into higher consumption (of non-farm goods) which would again lead to the growth of a more diverse rural economy.

    three, subsidised grains may be cheaper in the initial years but how long would that last? in the medium term, even the vast pockets of the american/eu governments wouldn't be able to foot the subsidy bills for what would turn out to be nearly half the world's population. and even if they do they have the capacity, they wouldn't really have to subsidise overseas consumption (even if they continue to subsidise domestic consumption) because there'd be no competition left in countries like india anyway. most indian farmers, 80% of whom are already reeling from indebtedness, would have either died or left agriculture altogether.

    about ipr and the novartis case, dweep, as i mentioned earlier, did not even touch upon those issues. and i don't see any major burdens that would result on india from ipr issues in pharma products.. most of the products we need are already being manufactured in india anyway and many indian pharma majors are investing in r&d on their own (and this has been happening gradually over the last two decades as indian companies saw growing opportunities in high priced western markets.. they invested in the barest infrastructure earlier in order to 're-discover' processes and now they've put in much more in higher end research -and i do have personal knowledge of this process.. and this would happen again in agriculture if the west drops its subsidies) and if novartis or some other mnc wishes to monopolise certain markets through minor improvements in existing products i think our own patent laws have enough safeguards built into them to ward off such designs. the madras hc decision is an indicator- but all this is an opinion formed over the last one decade or so from interacting with high ranking executives of major pharma companies based in hyderabad , which is a major production centre of apis in india.

  10. kuffir said...

    vatsan,

    on the ipr issue what i have put forth is naturally an opinion.. and i admit i could be ill-informed. but i do believe to a great extent that most medicines sold in india would be affordable in the long run too. but that said, let me repeat again that that was not dweep's main concern either. and if we were to prioritize these issues, in my view nothing should be more important than the livelihood and growth of the farmers of india at the negotiating table.

  11. truti said...

    TAB,
    IEB comes as a breath of fresh air, in a land that has been ruined by stale and stupid, 'economic' thinking. I have a nice little collection (going back to over a decade) of the pontifications of self-styled 'intellectuals' like Sukumar Muralidharan and Praful Bidwai. Even you would find that funny.

  12. Anonymous said...

    let the record show that a certain academic who has advocated reserving seats in not only the best technical institutes but also in the most coveted branches of engineering in the said institutes was being scornful of sound economic arguments.

    keywords : kettle, pot, black

  13. Anonymous said...

    anonymous, atleast wear some pant(ies) before using terms like kettle, pot, black etc. Why? Is your face blackened? Huh!!

  14. truti said...

    What will kill us is not quotas, but the tolerance of mediocrity. Like the tract released today by the CPI(M) crying hoarse over the Ek-do-teen samjhauta.