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From prices to incomes: agricultural subsidization without protection?

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  • Baffes, John
  • Meerman, Jacob

Abstract

Drawing on experience with direct income-support programs recently introduced in the European Union, Mexico, and the United States, the authors highlight problems that may arise when a developing economy's agricultural sector moves from price-based subsidies to income support programs. They conclude that income-support programs, despite their theoretical appeal, have many shortcomings and that developing countries may lack the support mechanisms needed to make them effective. The consequences of delinking support from current production decisions, even though fully expected, may be perceived as negative. Producers will undoubtedly face greater variation in prices, and as the ratio of output to input prices will be lower, a negative supply response for the crops affected may in turn reduce demand for agricultural labor. Finally, as with many types of support, the lion's share of support may go not to the target group most in need of support but to large producers. It is important to remember what a direct income-support mechanism does and does not do. Although it increases the income of subsistence landholders, it is not supposed to be a poverty reduction program. Nor is it supposed to be an investment program (as there is no provision for where and how the money will be spent). And because of its association with lower producer prices, it is not expected to induce sectoral growth. Instead, it is a transitional income-redistribution mechanism that could eventually transform agriculture into a fully liberalized sector that helps allocate resources more efficiently. And because it is linked to an asset -land- the lion's share of the payments will inevitably go to large farmers, subject to an upper limit (if such is in place).

Suggested Citation

  • Baffes, John & Meerman, Jacob, 1997. "From prices to incomes: agricultural subsidization without protection?," Policy Research Working Paper Series 1776, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1776
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Hualin Xie & Bohao Wang, 2017. "An Empirical Analysis of the Impact of Agricultural Product Price Fluctuations on China’s Grain Yield," Sustainability, MDPI, Open Access Journal, vol. 9(6), pages 1-14, May.
    2. Saldaña-Zorrilla, Sergio O., 2007. "Socio-economic vulnerability to natural disasters in Mexico: rural poor, trade and public response," Estudios y Perspectivas – Sede Subregional de la CEPAL en México 92, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    3. Schmook, Birgit & Vance, Colin, 2009. "Agricultural Policy, Market Barriers, and Deforestation: The Case of Mexico's Southern Yucatn," World Development, Elsevier, vol. 37(5), pages 1015-1025, May.
    4. John Baffes & Bruce Gardner, 2003. "The transmission of world commodity prices to domestic markets under policy reforms in developing countries," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 6(3), pages 159-180.
    5. Nejat ANBARCI & Mehmet ULUBASOGLU, "undated". "Endogenous Liberalization and Within-Country Inequality," EcoMod2010 259600008, EcoMod.
    6. Soloaga, Isidro & Lara, Gabriel, 2007. "Distortions to Agricultural Incentives in Mexico," Agricultural Distortions Working Paper Series 48432, World Bank.
    7. Baffes, John & De Gorter, Harry, 2005. "Disciplining agricultural support through decoupling," Policy Research Working Paper Series 3533, The World Bank.

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