Agricultural subsidies have long been a consistent feature of government policies; they are granted in order to influence the use of resources in the pursuit of different policy goals. This support largely shapes production and consumption patterns, with potentially significant effects on poverty, food security, nutrition, and other sustainability concerns such as climate change, changes to land use practices, and biodiversity. This paper provides a broad mapping of different types of direct and indirect support provided by governments to different actors in the agricultural sector, and highlights some of the complex dynamics, in terms of political economy, that underpin the relevant policies.
In the absence of a universally agreed definition of what constitutes a subsidy, the paper builds on the approach taken by international institutions such as the World Trade Organization (WTO) and the Organisation for Economic Co-operation and Development (OECD) to define existing support measures, classify them under different categories, and estimate their magnitude and effect. Transfers covered in this paper consist not only of explicit budgetary disbursements, but also tax concessions, as well as market price support where policy measures such as setting minimum guaranteed prices or tariff barriers create a gap between domestic market prices and international prices for a commodity. Notably, agricultural policies that do not generate transfers are not addressed here. For example, regulations, even if they have an impact on production or prices (e.g. biofuels mandates), are not considered as subsidies.
- Agricultural subsidies, a mainstay of government policy, have a large part in shaping production and consumption patterns, with potentially significant effects as regards poverty, food security, nutrition, and other sustainability concerns such as climate change, land use practices and biodiversity.
- There are multiple types of direct and indirect support provided by governments to various actors in the agricultural sector; and in terms of political economy, there are complex dynamics underpinning the policies that sustain these subsidies.
- Overall, subsidies targeting producers have the most significant effect on production, and the greater trade-distorting effect. These subsidies promote domestic production and discourage imports, leading to overproduction that is largely disposed of on the international market, with the help of export subsidies. This can tend to intensify negative environmental agricultural practices, such as cultivating marginal land, unsustainable types of intensification, or incentivizing excessive pesticide and fertilizer use.
- On the other hand, producer subsidies that are not tied to output of a specific commodity (i.e. delinked) have far fewer distorting impacts and could help to deliver sustainable outcomes. For example, this type of subsidies can require crop diversification or be linked to conservation of permanent grassland.
- Subsidies that enable transfers to consumers, for example through food stamp programmes, also serve to delink production from consumption, can foster healthier diets, can play an important role in delivering food accessibility and security among low-income groups, and can represent one of the less trade-distorting subsidies.
- If subsidies are to be reformed to help promote healthier diets and encourage more sustainable production, it is essential to understand not only the type and amount of support that key countries provide, but also the domestic dynamics that can shape such policies.
- While price support, input subsidies or investment aids remain the central pillars of programmes in large developing countries such as Brazil, China or India, other economies – notably including the EU and Japan – focus on direct payments, support for general services and set-aside schemes, as well as significant border protection. The US, for its part, has tended to focus on subsidized insurance schemes and food programmes for poorer consumers.
- If subsidies are to deliver policy objectives, their design and implementation should delink production from consumption. For example, consumer subsidies designed to deliver nutrition and food security, or payments for environmental services to enable more environmentally friendly production systems, could prove to be the most effective, least trade-distorting means of achieving more sustainable and equitable agricultural production.
- The political economy of food means that the removal of subsidies is often highly sensitive, and tends to be met with significant resistance. However, reform that delinks support from production through a gradual transition process could ultimately prove successful in delivering effective subsidy schemes.
- Effective subsidy schemes must by design be truly result- and performance-based, supported by robust and objective indicators. At the same time, engaging multiple actors along key commodity value chains – including leading importing and exporting countries, traders and transporters – could lead to the development of international, commodity-specific arrangements that are able to deliver effective nutrition and sustainability goals.