Subsidies: A powerful tool and a complex decision
Governments seeking to develop the agricultural sector in their country have a powerful tool available: subsidies. Structured correctly, agricultural subsidies can accomplish a range of policy objectives. They can, for example, ensure food security and social protection, enhance farmers’ productivity, stimulate exports, and speed disaster recovery. Each country’s situation and needs are unique, and the best-suited subsidy scheme will vary by country. Selecting the most appropriate subsidy scheme, given certain objectives or the desired subsidy impact, is not easy.
The complexity of the decision process is amplified by a dearth of empirical evidence. Governments often lack precise data about the true impact of various subsidy schemes, the opportunity cost of alternative approaches, or even the administrative cost of running such programs. Moreover, any subsidy assessment needs to consider more than the initial financial implications. It must also consider the long-term sustainability of the program, its efficiency, and its fairness in allocating benefits among multiple stakeholders.
Broadly, the two main subsidy schemes are input-based (which lowers the purchasing cost of raw materials for farmers) and output-based (which pays farmers based on finished agricultural products).
The shift from input-based to output-based subsidies
The global trend is toward output-based subsidies. In recent decades, countries with large agricultural sectors, such as China and Russia, have shifted to output-based subsidies from input-based subsidies.2 Indeed, China has introduced a number of output-based policies to benefit farmers directly and has phased out its taxes on farmers following its entry into the World Trade Organization. Previously, Chinese farmers had paid an agricultural tax based on the productive value of their land, an agricultural specialty product tax, and a myriad of additional local taxes and fees levied by village and township authorities.3
Other countries that have relied on output-based subsidies, such as Canada and Turkey, have increased their use of them relative to input-based subsidies. For example, Turkey’s Ministry of Agriculture and Forestry uses output-based subsidies to increase farmers’ revenues. The ministry pays farmers based on their production levels of certain crops, such as corn, cotton, rapeseed, and sunflower.4
2 Organisation for Economic Cooperation and Development 2019 database, “Producer Support Estimate (PSE)”
3 Fred Gale, Bryan Lohmar, and Francis Tuan, “China’s New Farm Subsidies,” USDA Economic Research Service, February 2005
4 Alper Demirdöğen, Emine Olhan, and Jean-Paul Chavas, “Food vs. fiber: An analysis of agricultural support policy in Turkey,” Food Policy, 2016, vol. 61, issue C, 1-8
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