The recently concluded World Trade Organization meetings at Cancun offer a couple of puzzles. They also raise a deeper question about democracy and free markets. First the puzzles. The Cancun round of talks broke down because of the inflexible stance taken by the advanced countries, namely, the United States of America, the European Union and Japan, with respect to agricultural subsidies. These countries did not yield an inch when it came to the question of reducing their domestic subsidies on agricultural and farm products. Obviously they were protecting someone’s interest. Whose interest were they protecting' Whose interests are hurt by the subsidies'
The greatest beneficiaries of the subsidies are, of course, the Western and Japanese farmers. On the other hand, farmers in the third world, who could have penetrated the Western and Japanese markets in the absence of subsidies, stand to lose. But they are not the worst losers. Their loss, which is because of unrealized gains from trade, is only potential. The real burden is borne by the millions of taxpayers in the advanced countries who are actually footing the subsidy bill. In the advanced countries, about 2 to 4 per cent of the labour force earns its livelihood from agriculture and farm-related activities. So the agricultural subsidy policy is basically protecting the interest of a handful of farmers at the cost of millions of common taxpayers. Why would a government, which cares about future elections, want to do that' This is the first puzzle.
The puzzle is not hard to resolve though. Agricultural subsidies are financed by hidden taxes. The burden of the subsidy, which is to the tune of billions of dollars, is distributed over millions of taxpayers. So an individual taxpayer does not find the sting unbearable. Moreover, taxes are collected for a variety of reasons and subsidizing agriculture is just one of them. Of course, an individual taxpayer hates to pay taxes. But he has no way to find out exactly how much he is paying to subsidize agriculture in particular. For these reasons, taxpayers are not visibly opposed to agricultural subsidy policies.
On the other hand, the beneficiaries of the subsidy are small in number and so each of them gets a sizeable chunk of the cake. Therefore, each is extremely sensitive to the subsidy policy. More important, being small in number, the beneficiaries can easily form a group and effectively lobby with the government. The set of taxpayers, on the contrary, is too large and disparate to form a potent interest group.
There is, however, yet another puzzle. In the advanced countries, while agriculture is heavily protected through subsidies, industry is relatively open to foreign competition. As a result, although less developed countries had little success in penetrating agricultural markets in the West, they have made quite a dent in the markets for industrial goods over the last few decades. To this one may add the more recent phenomenon of outsourcing. Outsourcing, which is the dominant form of trade in services at present, has immensely benefited the less developed countries, especially India.
Relative openness of the manufacturing and the services sectors in the West has indeed inflicted significant costs on certain sections of the Western society. Over the last few years, in the US alone, nearly three million jobs have been lost because of foreign competition. If outsourcing grows at its present pace, according to most estimates, several million more jobs would be lost in the immediate future. These are not hidden costs. So public opinion is building up fast against outsourcing and foreign competition.
But in spite of all oppositions, no serious attempt has been made so far to restrict imports of manufactures and services from the less developed countries. Here is the second puzzle. While the governments in the West are so keen to protect the interest of the farmers who do not account for more than 4 per cent of the labour force, they seem to be reluctant to safeguard the welfare of the remaining 96 per cent. What is so special about agriculture'
Indeed, protection of agriculture in the West has a very long history. British farmers were protected from outside competition in as early as the 12th century by the well-known Corn Laws. This arrangement of prohibiting foodgrain imports from abroad continued for a long time and then in 18th and 19th century England, the issue of protectionism assumed a fresh political importance. There was basically a clash of interest between the newly emerging capitalists and the traditional landlords. The former favoured cheap imports of foodgrains from the colonies to keep wages down. The latter obviously resisted it, for cheap imports meant a significant reduction in their income. The strife ended in a repeal of the Corn Laws in 1846. This is sometimes viewed as a triumph of dynamic capitalists over defunct feudal lords. In 1932, however, the law was reintroduced, though in a milder form.
One may argue that the reason why protective umbrellas for agriculture have not been withdrawn for long is food security. It is certainly economical to import cheap foodgrains from abroad as long as supplies are stable and smooth. But foreign supplies are often uncertain, especially those from the less developed countries. For one thing, agricultural production in poorer countries is still dependent on the whims of nature and so supply is typically fluctuating. For another, dependence on a foreign country for something as basic as food puts the importing country in a vulnerable position.
The problem of dependence was not there during the colonial period, for the control of a colony, along with that of its food supply, lay completely in the hands of the imperial power. But not so any more. So, to guarantee food security, it is necessary to continue production at home, even if it is costly to do so. Perhaps there is a grain of truth in the food security argument, but it can hardly be a complete explanation of the coexistence of agricultural protectionism along with industrial openness in the advanced countries. Where do we draw the line between basics and non-basics' Basic existence in advanced industrialized countries requires so many commodities other than food. If free trade can be allowed in these commodities, why not in food' A better explanation is provided by a political economy argument of lobbying.
We have already explained how farmers in the West, being small in number, can lobby very successfully with the government. Small and powerful groups of industrialists are also capable of doing that. Indeed, outsourcing is in the interest of these industrialists. It reduces costs and increases profits. In recent years, there has been a spectacular increase in the profitability of the US firms and this is mainly due to outsourcing. True, outsourcing reduces domestic employment, but then who cares about the workers' Again, import of certain manufacturing items does not hurt the interest of the big industrialists because they have already shifted their capital away from these sectors to more technology-intensive ones.
One important thing needs to be explained though. If unemployment is rising and the workers are becoming more and more unhappy, how can the ruling party hope to win the next election' In fact, the chances of winning an election not only depends on the sentiment of the masses, it crucially depends on the funds to run elections. The funds, in turn, are provided by the different lobbying groups. Funds become more and more important in running elections as smaller fractions of the population actually turn up to vote. This is indeed the case in many advanced countries. So, it is not surprising at all that policies are adopted to satisfy small interest groups mainly. It appears that democracy is not working to protect the interest of the majority. Neither is it supporting open markets, free trade and the welfare of the people.