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Today, we published this year’s Commitment to Development Index (CDI), which ranks 27 of the world’s richest countries in how well their policies help to spread global prosperity to the developing world.
We will be presenting the Index and our recommendations at the high-level period of the UN General Assembly (UNGA) later this month. As political leaders prepare to meet for UNGA, here are some key takeaways from our research that should help guide their policies and discussions.
1. Leadership on global development isn’t only for the richest!
The CDI analyzes the policies of 27 of the world’s richest countries in seven key areas: aid, finance, technology, environment, trade, security, and migration. The indicators adjust for size and economic prosperity—and the results demonstrate that country wealth does not determine the results. The wealthiest countries—represented by the G7—rank anywhere between fourth and twenty-sixth. Income per person averages half that of the United States in Visegrád countries (Czech Republic, Hungary, Poland, and the Slovak Republic), but all four now rank higher in their commitment to development. Portugal, who ranks sixth, performs well in most components despite being less prosperous than many of the CDI countries. Smart policy design is not a matter of prosperity only. Therefore, our first key message to all the leaders of the 27 CDI-countries:
Domestic economic challenges needn’t prevent leadership on smart policies to increase global prosperity.
2. Development is about much more than aid
The CDI draws attention to the fact that global development is about so much more than the amount or quality of foreign development assistance provided. Policymaking in various policy fields directly affect the lives of poor people around the globe.
For example, the design of our policies on technology or finance affect the prospect for people living in poorer countries. Both research and development policies and investment policies are mainly pursued for domestic goals. However, they have a lasting effect on developing countries. Smart intellectual property rights can enable knowledge sharing and technology transfer. Also, bilateral investment agreements with developing countries recognising specific public policy goals such as labour rights, environmental standards, or human rights can have an important effect on the prospect for development.
The commitment to implementing balanced and sustainable policies domestically also sends a strong signal about their importance globally and irrespective of countries borders. Money spent on foreign development assistance does not have the same lasting effect if countries don’t recognise the international impact of their actions in other policy areas. Therefore:
In our integrated world, your policies and decisions as a leader of a rich country have an important bearing on the lives of people in developing nations.
3. Even the bottom-ranked country has smart policies we all can learn from
Like the Sustainable Development Goals (SDGs), the CDI recognizes development has many angles. But while the SDGs cover all nations and their outcomes, the CDI concentrates on the richest countries and emphasizes how policies can make a huge difference to development globally. The fact that we limit our evaluation to high income countries means that policy recommendations are more tailored and relevant. Even the best-ranked countries have weaknesses where they can learn from their peers. Overall leader Denmark performs weaker on migration and could learn from the migration policy designs from countries as varied as Luxembourg, New Zealand, or neighbouring Sweden. Similarly, bottom-ranked South Korea could advise all other 26 CDI countries on how to build long-lasting support for research and development. Accordingly:
Use the CDI as a tool to learn from others and to inspire change through your own best-practice policies.
4. Some overall progress on the Environment component but stronger commitments are needed
Tragically, Hurricane Harvey has reminded the United States how vulnerable we all are when natural disasters hit. Further, people in South Asia were left suffering after massive flooding and devastation affected millions, while earlier this year we saw how the unprecedented drought in Africa affected the lives of millions facing malnutrition. These tragic events, sadly far from unique, remind us that we all need to do more to combat climate change.
This year’s CDI points out that progress has been made—CDI countries report progress in curbing new greenhouse gas emissions and the amount of Ozone-depleting substances has been cut significantly. However, many environmental challenges remain. We need to see an even bigger commitment to development from the CDI countries in the future, such as a complete support for the Paris Agreement and the willingness to tackle issues such as overfishing and deforestation. Thus, our final recommendation:
While progress has been made, many global challenges remain. We ask this generation of world leaders to strengthen and deepen their commitment to development.
These findings show that we and our governments can do so much more to spread prosperity to poorer countries. The CDI serves as a useful tool to identify which national policies still have potential to be designed in a more development friendly way. We hope world leaders use the opportunity of UNGA to discuss ways to make further progress in all policy fields, inspiring each other to achieve more on global development.
On September 5, we launched the results of the 2017 Commitment to Development Index (CDI), which scores 27 countries on how development-friendly their policies are. This year, we include two new indicators assessing how rich-country “tariffs” (taxes on imports) and “subsidies” (payments to domestic producers) inhibit development. But which is more damaging, and therefore deserves a greater weight in the Index?
Using the approach embedded in previous CDI calculations, we calculate that tariffs may be over three times as damaging as agricultural subsidies in inhibiting developing country trade. Below, we look at how tariffs and subsidy inhibit development, and assess their respective impact.
How do rich-county trade and agriculture policy matter to development?
Trade is just one of seven components in the CDI, but it’s a crucial one: no country has prospered without strong trade relationships. However, rich countries often protect their markets with tariffs on imports, or support their industries with subsidies—in either case, it is harder for developing country producers to sell to those markets. Alongside measures on impediments to imports and openness to services trade, the CDI attempts to capture the effect of this “market protection” on developing countries.
This year we’ve decided to assess agricultural subsidies separately so their policy impact is clearer. In previous CDIs, agricultural subsidies were converted into their tariff equivalent, and then added to tariffs to produce a measure of overall “market protection.” In order to separate tariffs and subsidies we need to assign respective weights in the index. In other words, do tariffs or agricultural subsidies inhibit trade more?
Below we look at each in turn.
What trade tariffs do developing countries face?
Assessing tariffs is a major analytical task. There are some 5,300 different product categories and tariffs differ between them and bilaterally across country partners. Many tariff assessments are flawed due to what has become known as the “endogeneity problem”: they understate the distortive effect because there is little trade in products with high tariffs (leading them to be underweighted). David Roodman, the creator of the CDI, developed a method that overcame this—weighting tariffs by production, instead of trade volumes. The data for this method is not available past 2007—but the “Roodman” effective applied tariff on developing country trade was estimated around 7.7 percent across CDI countries (this includes tariffs on agricultural products which averaged 28 percent). Even though many rich countries grant reductions in tariffs for developing countries (“preferences”), this estimate is only just below the global average trade tariff which applies outside of trade deals of 9 percent in 2013 (i.e., the applied tariff for the “most favoured nation”).
So, in previous years across the 27 CDI countries, the effective tariff using Roodman’s method, and weighted across all sectors, averaged just under 8 percent.
How distortive are agricultural subsidies?
Agricultural subsidies increase domestic output, lower prices and reduce imports. This creates an uneven playing field in a sector that’s a large part of developing economies.
Agricultural subsidies are usually expressed as a proportion of production. Some subsidies are more more damaging than others (for example, the EU’s “decoupled” subsidies are less distortionary as they are not directly dependent on production levels) but the overall subsidy rate, as proportion of agricultural output using OECD data, is now around 13 percent for CDI countries.
Previous editions of the CDI drew on Cline (2002) to convert subsidy levels into tariff-equivalents. Higher subsidies increase domestic output, lower prices and reduce imports. Cline’s model also suggests the impact is higher for a given level of subsidy if a country’s imports were small relative to its domestic production (this is an arithmetic point—a given proportional increase in domestic production from subsidy would have a higher impact on imports when they were a low proportion). So, these variables also fed into the CDI tariff-equivalent estimates for each country, visible in table 6 of Roodman (2013).
Using Cline’s approach, the average tariff-equivalent of agricultural subsidies was between 10 percent and 15 percent in the relevant years in the CDI. However, this estimate only applied to the agriculture sector—which accounts for roughly a sixth of developing economies. So, averaging the effect over an entire economy implies they’d be equivalent to a tariff on all sectors of perhaps 2 percent.
Tariffs appear more distortionary than subsidies
Based on the Roodmand and Cline methods above, effective tariff levels were just under 8 percent and the (whole-economy) tariff-equivalent of agricultural subsidies were roughly 2 percent. This suggests tariffs were more than three times as distortionary as agricultural subsidies in CDI countries.
The new trade tariff and agriculture subsidy indicators in the CDI trade component will therefore be weighted to reflect these respective impacts. These weights will be kept under review in the light of new research or new data on tariffs and subsidies (alas neither have moved transformatively in the last decade).
CDI 2017 and next steps
The updated CDI will use the latest data on agricultural subsidies, and newer “average applied tariff” data from MacMap (which correlates strongly with Roodman’s measure). These scores will help rank countries on trade, as well as on their overall commitment to development. We'll also be making the spreadsheets behind the CDI full calculations available for the first time.
Of course, this is far from the final word on measuring the developmental impact of subsidies and tariffs. On tariffs in particular, we hope to bring in a poverty-weighting—where tariffs against trade partners count more where income per head is lowest. Comments and suggestions on our current and future approach are very welcome.
Note: This post was updated to reflect that the CDI results are now available online.
Transfer pricing is what happens when goods and services are traded between companies that are part of the same multinational group. It is often stated that developing countries are “haemorrhaging billions of dollars” of tax revenues through companies abusing this mechanism, in particular by mispricing commodities. Numbers racking up in the tens and hundreds of billions have influenced international debates on the subject (see for example: here, here, here). These big numbers—based on gaps and mismatches in trade data—are unreliable and should be taken with a pinch of salt. So too should narratives which offer extraordinary examples, such as the accusations being made in the ongoing case of Acacia Mining in Tanzania, as a guide to general expectations.
There is no doubt that customs inspection and auditing of transfer prices are significant technical challenges, and that companies can take advantage of weak regulations and enforcement. There are real gains to be made by developing countries strengthening transfer pricing rules and auditing capacity, and from developed countries sharing information with them to reduce information asymmetries between international businesses and national authorities.
However, the scale of revenues that might be recovered is unlikely to match up to heightened popular expectations. South Africa developed new transfer pricing rules in 2012, and in the following four years the revenue service successfully finalised 35 transfer pricing cases which raised around $650 million (see annual reports from 2013-2016). Early results from the “Tax Inspectors Without Borders” programme include increasing revenue from transfer pricing audits in Colombia from $6 million in 2012 to $33 million in 2014, in Kenya from $52 million in 2012 to $107 million, and in Vietnam from $3.9 million in 2013 to $40 million in 2014.
If the popular “billions and trillions” studies are not a good guide to sizing the prize from improving international corporate tax compliance, what is? A number of revenue authorities including the UK’s HMRC, the South African Revenue Service, the Finish tax authority, and the IRS allow carefully vetted researchers to analyse anonymised tax records under controlled conditions. Studies based on microdata from such “datalabs” may yield a clearer picture of the revenues which might be at stake.
Some recent studies
Hayley Reynolds and Ludvig Wier used firm-level tax returns to estimate profit shifting in South Africa. They find “a semi-elasticity of taxable income with respect to the parent tax rate of 1.7.” That means that a South African subsidiary of a foreign company whose headquarters is based in a country where the tax rate is 10 percent lower than South Africa’s (i.e., something like the UK or Singapore) would tend to have a 17 percent lower taxable income than one whose parent company is in a country matching South Africa’s rate. They make a ballpark estimate of revenues lost in this way; finding that it amounts to 7 percent of subsidiary income or 1 percent of the total corporate tax base. This implies that profit shifting removes 0.2 percent of the total tax base in South Africa, reducing government revenues by 0.05 percent of GDP (around $147 million or $2.60 per person per year).
Li Liu, Tim Schmidt-Eisenlohr, and Dongxian Guo look at UK company tax returns and transaction level trade data to explore transfer pricing of goods exports from the UK. They find that transfer prices of exports to lower tax countries such as Ireland, Turkey, Denmark, Russia, and Netherlands are most sensitive to changes in relative tax rates, while there is little mispricing of exports via small economy “tax havens.” The price differential is more pronounced for R&D intensive firms (i.e. where the product exported are specific rather than generic). However again the revenue forgone was small in absolute terms—amounting to £168 million in 2010 (0.01 percent of GDP, again $2.60 per person per year).
There are many caveats to these studies. Both rely on statutory tax rates for their calculations, which does not allow for the impact of special incentives. The UK study only looks at goods trade, so does not include profit shifting via services, interest and royalties. On the other hand, it is not at all clear that the price differences it identifies as “mispricing” would necessarily fall outside of a defensible arms length range. The South African study only considers revenue losses associated with foreign multinationals, not profit shifting by South African headquartered companies.
Nevertheless, what is clear is that the figures they show, which approximate to the price of a hamburger per person per year, are far removed from the great expectations of transformative amounts of public revenue. Both studies suggest that companies are undertaking a significant degree of profit shifting, but this has a relatively small impact on overall public revenues, simply because multinational companies are a limited portion of the corporate tax base, and this in turn is a limited portion of the overall tax base.
Are these findings surprising?
These findings are similar to other studies of corporate tax elasticities. It is notable, however, that they are at least an order of magnitude smaller than those that were generated by the ‘spillovers’ study conducted by Ernesto Crivelli, Ruud De Mooij and Michael Keen of the IMF in 2015. This much quoted study gave a speculative figure that losses to developing countries from tax avoidance were in the order of 1 percent of GDP ($200 billion overall).
The amount of corporate tax revenues that countries might be losing fundamentally depends on the amount of profit that is generated by companies in the jurisdiction, the extent to which those companies are able to access international profit shifting opportunities (are they part of a multinational group?), the nature of their business (for example does it involve differentiated products and intangible assets?) and the effectiveness of the tax administration.
The IMF study did not include any of these factors but instead looked how fast a subset of countries (where data was available) were “broadening the base and lowering the rate” of overall corporate taxes, to try to identify a general relationship and isolate the impact of “base erosion” via tax havens. They then applied this tentative relationship more generally to a wider set of countries. A follow-up study by Alex Cobham and Petr Janský provides a breakdown by country, and notes that the methodology leads to some hard-to-believe findings. For example, Chad is said to be losing tax revenues worth some 8 percent of its GDP. Pakistan is said to be similarly losing tax revenues worth 5 percent of GDP. For this to be true untaxed profits related to internationally connected formal sector business would account for 20 percent of GDP in Chad, and 14 percent in Pakistan—suggesting the corporate sector might be more prominent in these economies than in countries such as the UK and Denmark where the corporate tax base is around 11 percent of GDP.
One place where findings from bottom-up studies, top-down studies, and popular expectations are closer together: the United States.
Kimberley Clausing uses microdata from confidential surveys carried out by the US Bureau of Economic Analysis. She estimates that losses to profit shifting from the US to countries such as the Netherlands, Ireland, Luxembourg, and Singapore was around $100 billion in 2012; that is around 45 percent of actual corporate taxes collected, or around 0.7 percent of GDP. (The lost revenue is around half of the amount suggested for the US by the IMF methodology, according to Cobham and Jansky’s disaggregation or more than 125 hamburgers per person per year.) This aligns with what we know from specific cases, which is that many US multinationals have very low effective tax rates on profits from revenues generated in other countries (including global household names such as Google, Starbucks and Microsoft) and US companies have permanently reinvested around $2.4 trillion of earnings offshore in order to defer US tax liabilities.
The United States is also exceptional—both as a major originator of globally-used intangible assets, and as a country with an unusual tax system that encourages retaining earnings offshore. Further studies using microdata will help to understand the nature of corporate profit shifting globally in different countries, but we should not be surprised if they don’t look like the United States.
In the last month three working papers were posted in the prestigious National Bureau of Economic Research (NBER) series on one very narrow question. The question is whether the massive and sudden migration flow of Cubans (around 90,000 arrived in six months April to October 1980) into Miami, USA from the Mariel Boatlift had an impact on the wages and/or employment of natives. The Mariel Boatlift is extensively studied because it is a nearly perfect natural experiment. In the classic study on the topic David Card (1990) compared Miami to other US cities and found little or no impact on the wages or employment of non-migrant workers, even those with a high school degree or less.
In 2015 George Borjas reanalyzed the Mariel experience and narrowed the question to whether the large scale arrivals of Cubans affected the wages or employment not of the “low skill” workers but of the “super low skill”—those without a high school degree. Peri and Yasenov (2017) estimate that there were 48,714 Mariel arrivals without a high school (HS) degree and in Miami in 1980 only 169,440 people without a HS degree in the labor force. For the “super low skill” segment the labor force was massive (almost 30 percent) and sudden. Borjas (2015) claims that for the Borjas sub-group (BSG)—non-Hispanic male natives, aged 25-59, with less than a HS degree—there was a large negative impact on wages. In a previous blog I show that two of the recent NBER papers argue the BSG finding is an artefact. Clemens and Hunt (2017) argue a sampling shift towards blacks explains the apparent wage impact. Peri and Yasenov (2017) show that the BSG is special and that nearly all other demographic sub-groups except the super low skilled (e.g. including women, including Hispanics, including younger and older workers) show no impact on wages.
Here I argue that, even if there were a robust and credible negative impact on the wages of the BSG from low skill migrant arrivals (which there isn’t), this would not justify limiting immigration as there are better instruments to achieve the same objectives, with much less cost.
First, economists’ have a standard response to distributional concerns about Pareto-improving policies: “instruments to targets.” Most market oriented economists think about how to maximize the size of the pie by making all factors as productive as possible and about how to ensure the pie is best distributed. But they are trained to think of these questions separately. The reason is that it is nearly impossible that the same policy instrument both maximizes productive efficiency (reached a Pareto Optimal outcome) and achieves distributional goals efficiently.
Trade economists, who have debated protectionists for centuries, understand “instruments to targets.” Protectionists point to the specific job losses that would result from lowering protection. Economists calculate the total losses to the economy from the higher prices to buyers (both consumers and producers of the product as an input). Trade economists calculate the “cost per job saved.” Sugar quotas imposed by the United States raise the prices of domestic sugar and in 2010 the estimated cost of “saving” 2,260 jobs in sugar production was $1.9 billion or $826,000 per job. In 2009 the US imposed tariffs on imports of Chinese tires and “saved” 1200 jobs at a cost of $1.1 billion annually for a cost of $900,000 per job saved. A 1986 review of protectionism in 31 industries in the USA estimated an average cost per job saved of $516,208.
Of course, international trade in goods is only one source of job reallocations in a market economy. The arrival of a Walmart in a locality almost always means that mom and pop single store retail outlets lose business and hence jobs. One could, in principle protect those jobs by keeping Walmart out of a region—but the cost per job saved has to be offset by both the jobs gained and the value lost to consumers from lower prices and more variety.
Technological progress also creates and destroys jobs. The occupational codes for the 1900 US census themselves illustrate the changes in a dynamic economy. Not only were farmers and agricultural laborers 34 percent of the labor force (compared to less than one percent today), but there were 212,104 Blacksmiths and 37,249 Livery and Stable Keepers. These particular jobs could have perhaps been protected—and perhaps even their wages maintained somehow—but at what economic loss per job “saved”?(Of perhaps some relevance is that the 1900 Census also listed 65,310 whose occupation was Hucksters and Peddlers).
Demonstrating an economic policy does not benefit literally everyone is not an argument against that policy, it is the acknowledgement that all policy changes, even those that are massively overall welfare-improving and hence potential Pareto-optimal, have winners and losers. The costs to those affected by economic changes are an important and legitimate concern to economists, policy makers, and to politicians. But there are almost always vastly more cost-effective policies or programs to help these workers than restrictions on markets—trade, competition, innovations—that impose costs on all consumers (and other industries) in the USA.
Second, the “instruments to targets” approach might seem unrealistic, or even callous to the potential losses of the already disadvantaged, if instruments to help the disadvantaged did not exist or those instruments were themselves ineffective or if the instruments could not feasibly be scaled to address the losses to the super low skilled BSG from labor mobility. But in the context of the USA absolutely none of those things is true. The newly created data source USAFacts.org provides a treasure trove of data about what the government—federal and state—does in the USA. In 2014 the government in the USA spent $5,385 billion. Of that they report $862 billion was spent on “Standard of Living and Aid to the Disadvantaged.” The US state and federal governments spend $786 billion on “Education.” One particularly effective program for poorer workers is the Earned Income Tax Credit, which provides a refundable tax credit that, in essence, increases the wages of workers with low wages. This program provided $60.1 billion to working families in 2014.
A 28 percent increase in less than HS education migrants (the Mariel Boatlift experience) would mean about 4.2 million new migrants. The gain in (PPP adjusted) wages for each of those new migrants would be about $15,000 (CMP). So the first and most obvious consequence would be a gain to the movers of about $63 billion dollars and their total wages in the USA would, conservatively, be about $82.3 billion dollars.
Suppose that Borjas (2015) is right and the 28 percent increase in the supply of low-skill labor in Miami did cause wages for the Borjas Sub-Group to fall (and there is no evidence it affected any workers but that group so we are going to stick to just that group). Using the interface for the Public Use MicroSample (PUMS) for the March 2016 wage of the Current Population Survey we can see that the BSG has 1.8 million workers of a total USA labor force of 150.8 million—1.2 percent of the labor force. The average annual wages of this group are $32,996. Using the EITC formula a married couple with this level of income and two children would be eligible for cash refund of $3,627. So, there already exist many instruments to help families with low wages and just one of those, the EITC, provides a 10 percent boost to their income.
Suppose that a 28 percent increase in the super-low-skill labor force from 4.2 million migrants caused a four percent wage fall for the BSG. While Borjas claims much higher numbers for this narrow group from Mariel Boatlift I think the combination of shift in sampling (Clemens and Hunt 2017), methodological issues (Peri and Yasenov 2017) and the incredibly small samples imply a four percent loss is a generous estimate that cannot be rejected statistically as being too small for the BSG.
A four percent wage fall for the BSG would mean a wage loss of $59.8*.04=2.4 billion dollars.
There are several ways of putting this number of the potential wage losses in perspective.
First, it is 0.28 of one percent of the $862 billion US governments spend on assistance to the disadvantaged.
Second, it is 3.6 percent of the $67 billion in EITC payments. So a 3.6 percent increase in EITC payouts could fully compensate the affected BSG.
Third, the loss to the BSG is only 2.9 percent of the total wages of the newly admitted migrants (on the conservative assumption these new migrants with less than HS only make 80 percent of the existing wages of less than HS educated of $24,512). This implies that, suppose we wanted to have a “compensation fund” for the wage losses to the BSG that was fully funded out of a tax on the newly admitted migrants (bracketing for one minute the fairness of that) that would leave the movers massively better off and compensate the estimated wage losses. In fact, in the current situation many undocumented workers pay their full Social Security tax rate of 6.2 percent but will never see any benefits. Estimates of the net payments to Social Security are around $12 billion a year—far more than the wage losses to the BSG.
Third, once one puts magnitudes on the losses to less-skilled natives and takes an “instruments to targets” perspective the use of this argument against greater levels of low-skill labor mobility starts to look facetious, if politically astute.
That is, suppose one were devoted to improving the well-being of US citizens that were economically disadvantaged and were seeking the top five or ten most cost-effective ways to make their lives better. An expansion of EITC—a program that encourages work and labor force attachment, provides cash benefits, and has almost no administration cost—looks really attractive. Housing vouchers of a “moving to opportunity” type have, with fungibility, at least the impact of a cash transfer plus, with recent evidence on long-term benefits, perhaps some positive impacts on inter-generational transmission of poverty. Spending resources that prevent people from ending up as high school drop-outs, particularly early childhood spending on disadvantaged children, is argued by James Heckman to be cost-effective. Citizens with less than high school complete are disproportionately black and latino and so perhaps efforts to reduce racial and ethnic discrimination would be cost effective. If I saw someone making the strong, evidence-based argument for improving the lives and livelihoods of the disadvantaged and on that list were restrictions on low skill migration assessed on a cost-benefit basis with other potential interventions, that is worthy of serious consideration.
On the other hand, suppose I were opposed to the entry of low-skill migrants into my country and wanted to make the argument that had the broadest possible political and social acceptability and made me look noble. I obviously would not use the argument that “we” just don’t like “them” as this has the look and feel of widely distasteful racial and ethnic arguments made (and widely accepted) in the past. I obviously would not use arguments that “they” raise diversity and I don’t like diversity. I obviously would not argue that I just don’t like having poor people around. I obviously would not use the argument that “they” will debase our culture (at least not for a broad audience). Arguing that migrants hurt disadvantaged natives is, on the other hand, however weak empirically and pointless from an “instruments to targets” analytic basis, pure political gold.
The United States is a major player in global agricultural markets. American farmers account for around 25 percent of world exports of wheat and corn, and are also among the largest producers and exporters of beef, pork, and poultry. This success is partly the result of those farmers having access to abundant land, deep financial markets, and modern technologies. But as I explore in my new book, Global Agriculture and the American Farmer: Opportunities for U.S. Leadership, it is also the result of government policies that distort markets and undermine the provision of global public goods. The poor in developing countries are particularly vulnerable to the negative spillovers of these policies.
Congress has already begun deliberations on next year’s farm bill, which provides an array of subsidies that form the core of US agricultural policy. In recent years, premium subsidies to encourage farmers to buy crop insurance has been one of the most costly. Producers of sugar, peanuts, and some other crops also receive protection from import competition. Both kinds of policies support higher domestic prices, but they suppress prices for farmers elsewhere. And many developing country governments cannot afford their own subsidies to offset the effects on their farmers. More disturbingly, the aid that the United States provides to help the hungry in overseas crises is far more costly and slower to arrive than it should be, thanks to the farm bill. This is due to obsolete provisions originating in a 1950s farm bill that require food aid to be purchased in the United States, and transported on US-flagged ships.
Other policies that are not always as visible as the farm bill support farm incomes by bolstering demand for their crops, or reducing their production costs. Two that I focus on in the book are the mandate to blend biofuels—made mainly from corn and soybeans—in gasoline and diesel, and the failure to effectively regulate the widespread use of antibiotics in livestock. The biofuels mandate contributed to the 2007-08 food price spikes and is more likely to contribute to climate change than mitigate it as intended. In the latter case, livestock producers have been using antibiotics to promote growth and prevent, rather than treat, disease and these practices are contributing to the global spread of antibiotic resistant superbugs.
In the book, I analyze these policies in detail with particular attention to the deleterious effects for the poor and vulnerable in developing countries. While an overhaul of US agricultural policy to make it less trade-distorting and more focused on providing public goods—such as research and development, environmental amenities, and infrastructure—is desirable, it does not seem likely in the short run. Thus, in the book I recommend more limited steps that still provide important benefits for American taxpayers and consumers, as well as developing countries.
In next year’s farm bill, I recommend that Congress:
Reduce the amount of the subsidy that farmers receive for buying crop insurance (now more than 60 percent of the value of the average premium).
Reform the complicated and increasingly expensive program protecting domestic sugar producers and remove the tight restrictions on imports.
Remove the requirements to purchase food aid in the United States and transport it long distances on US-flagged ships.
In addition, I recommend that Congress eliminate the mandate to blend biofuels in gasoline and diesel, or at least make the mandate more flexible and reduce the amount of biofuel that is derived from food crops. Finally, the executive branch should negotiate global targets to reduce the use of antibiotics in livestock and ensure that veterinarians who oversee such use do not have financial incentives to prescribe antibiotics. In a policy brief accompanying the launch of the book, I focus on food aid reform and more modest steps that Congress could take in the farm bill to lessen the distortions associated with the biofuels mandate and antibiotic use in livestock.
Farmers face numerous risks that markets alone cannot address, so there is a role for government assistance. But the US government supports the agriculture sector at levels far beyond what is socially optimal, or what other sectors receive. Unbeknownst to many, these subsidies go disproportionately to larger, richer farmers and only a few crops receive the bulk of the support—mainly grains, oilseeds, sugar, and dairy, rather than fruits and vegetables. This is not a set of policies that serves most Americans well, much less poor and vulnerable people around the world.
The US agricultural sector is critical to global food security, but many of the policies that currently govern it negatively impact people around the world. In a new book, CGD visiting fellow Kim Elliott argues for practical policy reforms in three areas that are particularly damaging to developing countries: food aid, biofuel subsidies, and antibiotic resistance in livestock. As the US Congress works through a major new farm bill, Elliott joins the CGD Podcast to discuss how the US can reform agricultural policy to achieve better outcomes.
In Global Agriculture and the American Farmer, Kimberly Elliott focuses on three policy areas that are particularly damaging for developing countries: traditional agricultural subsidy and trade policies that support the incomes of American farmers at the expense of farmers elsewhere; the biofuels mandate, which in its current form can contribute to market volatility while doing little if anything to mitigate climate change; and weak regulation of antibiotic use in livestock, which contributes to the global spread of drug-resistant super bugs. While noting that broad reforms are needed to fix these problems, Elliott also identifies practical steps that US policymakers could take in the relatively short run to improve farm policies—for American taxpayers and consumers as well as for the poor and vulnerable in developing countries.
Britain just announced a new policy for trading with developing countries after Brexit. It maintains the current framework of duty free, quota free access to British markets for least developed countries. It is a good basis for the further steps we’d like to see Britain take.
There’s a tedious old fallacy that developing countries need “trade not aid.” The fallacy is that these are alternatives, when in fact we can, and should, do both, as we at CGD have argued for the last 15 years. No country has ever developed without trade. We should provide opportunities for developing countries to trade with us and provide aid which can help them to use those opportunities. Aid also helps many of the world’s poorest people over and above the benefits their country might get from exporting more to us.
Enabling poor countries to trade is an excellent way to help the poorest countries to attract investment, create jobs and provide incomes for their people. Trade preferences mean far more to investors than aid subsidies. And they are good for British consumers too—market access is one of those win-win policies which helps developing countries and helps us too by keeping prices down and so enabling hard-pressed consumers make their money go further.
That’s why we welcome Britain’s announcement on Saturday that Britain will give duty free quota free access to least developed countries after Brexit—which continues the arrangements now in place under EU rules. This is an indefinite commitment which applies to everything other than arms.
The British Government also intends to maintain existing preferences for other developing countries (not just the least developed countries) but as they rightly say under international trade rules this has to be part of a reciprocal agreement so they can’t announce this unilaterally. These countries, like Kenya and Ghana, are still desperately poor (with national income per head around $1,500 a year) but they are the ones that are most likely to be able to take advantage of trading opportunities in the near future. Maintaining market access for these countries is critical to helping these countries and regions grow and create more jobs and income—making transition arrangements for these existing EU agreements should be a major priority for the Government in the next twelve months.
But we can do even better for the world’s poorest and help our own people too. Here are some ways we would like to see the British government build on this welcome first step.
Simplify red tape.
The EU rules aimed at preventing abuse of the scheme—the so called “rules of origin” to demonstrate produce originated in the exporting country—still make it hard for developing country exporters to take advantage of the market access we claim to be offering. Canada does this better and outside the EU, Britain can learn from the Canadians, and consider developing countries own proposals for these rules. Britain can also help smaller consignments of imports by increasing the very low EU minimum threshold (of 22 euros) for paying VAT—a figure so low, it is unlikely to justify the bureaucracy of collecting it.
Extending trade preferences to other developing countries.
Britain has announced a firm commitment that least developed countries will maintain their current preferences (which Britain can implement unilaterally) as well as the intention to maintain existing arrangements for other developing countries (which requires agreements that legally must wait until after Brexit). As well as all these welcome commitments to maintain existing access, the UK after Brexit can, and should, go further by offering duty free, quota free access to all low income and lower-middle income countries. This would address the substantial risk to developing countries that the EU’s existing deals, which cover 52 countries, are not replicated quickly by Britain. This would be good for the world’s poorest countries and good for British consumers too.
Improve trade facilitation.
There are a host of other mutually beneficial ways to make it frictionless for poor countries to sell to British consumers. For example, we could make it easier to obtain necessary certifications (e.g., organic, food safety, etc.) without undue cost and delay. We can improve access to trade credit (including ensuring that capital adequacy rules do not choke it off). We can facilitate links into retail supply chains. We can make business visas easier, which are vital to lubricate trade. An important first step would be much more extensive consulting with developing country governments and business representatives to find out where the most salient obstacles currently lie.
Stop undermining developing country exporters with unfair competition.
Developing countries face competition from subsidised British farmers—in UK markets, in their own countries, and in third countries where we compete. It doesn’t make sense for us to be subsidising our farmers to compete with exports from developing countries to which we are also providing much-needed aid. Efforts have been made to reduce the trade distortions caused by agricultural subsidies, but there is further to go—and doing so is another example of a policy that is good for Britain and good for development.
So, as a first step, let’s toast the welcome announcement made by the UK government, but let’s not forget there are many more steps to take to enable the poorest countries to trade their way out of poverty.