OECD and emerging economies have gradually reformed their agriculture policies over the past two decades. Agricultural support levels in OECD countries have declined and governments have shifted to more decoupled programmes, although progress differs across countries.
Key emerging economies have eliminated many policy distortions, but current low support levels disguise taxation of some sectors and protection of others. Much remains to be accomplished and the recent food price fluctuations and economic crisis may become a challenge for further policy reform.
The OECD continuously monitors these developments and evaluates progress in policy reform using its internationally comparable agricultural support indicators, published in the regular reports Agricultural Policies: Monitoring and Evaluation for both OECD and key emerging economies.
OECD governments have made a commitment to agricultural policy reform
Reforms have been driven by a shared understanding that domestic policy objectives need to be achieved more effectively, at a lesser cost and with fewer distortions to world markets (1998 Communiqué of OECD Agriculture Ministers).
Undesired spillovers of OECD agriculture policies on world markets, in particular on developing countries, have marked the on-going round of multilateral trade negotiations and provided much of the impetus to advance agricultural policy reform across the OECD area.
The level of support to farmers in OECD countries has declined. As measured by the Producer Support Estimate (PSE), policy transfers fell from 37% of farmers’ total receipts in 1986-88 on average to 23% in 2006-08. Nevertheless, the pace of reform has been relatively slow. In the most recent years, the reduction of support levels resulted more from high world prices than from explicit policy changes decided by governments.
Policies that interfere less with producer incentives gain importance
The ways in which support is provided have also changed. OECD governments are gradually shifting to support that is more decoupled from current production and which gives greater freedom to farmers in their production choices.
Support is increasingly being tied to parameters other than commodity output, such as area or animal numbers, and with respect to non-current levels of these parameters. Some recent new programmes (e.g. US Direct Payments and the EU’s Single Payment Scheme) go even further in that they do not oblige farmers to produce in order to receive the support.
Support is becoming increasingly conditional. Producers, if they want to receive support, are now more often obliged to contribute to improvements in the environment, rural amenities, or better treatment of animals. In 2006-08, nearly one third of support to OECD farmers had some such conditions attached, whereas in 1986-88 this share was only 4%.
Despite notable progress, policy distortions in the OECD area remain large
In 2006-08, around 44% of total support transfers to producers (PSE) in OECD countries were provided in relatively less distortive forms, i.e. they were not based on production or non-constrained use of inputs. 24% of transfers imposed no requirement for recipients to produce agricultural commodities. However, 56% of support in OECD countries continues to be provided in ways shown to create substantial distortions to producer incentives, and also least efficient in transferring income to producers.
In emerging economies, reforms in agriculture followed broader economic reforms
Emerging economies have also changed their agricultural policies, with the strongest impetus coming from their own broad economic reforms. These reforms often meant changes in the whole national development paradigm – from import substitution industrialisation to free market. Economic liberalisation implemented in the 1990s in key emerging economies involved large privatisations, and deregulation of domestic markets, trade, and exchange rate regimes. Liberalisation of agricultural policies was largely a corollary of these broader reforms, with the result that much of the earlier policy distortions in the agricultural sector were eliminated.
Sustained growth in the 2000s has strengthened agricultural prices and increased fiscal resources available to governments. The levels of agricultural support in emerging economies monitored by the OECD have tended to rise, but they remain far below those observed in the majority of OECD countries, varying from 4% of producer receipts in Chile to 14% in Russia. Nevertheless, these aggregate low support levels disguise in many cases negative support to some sub-sectors and high protection to others.
The momentum for reform should be maintained
According to OECD analysis, in the long-run perspective, OECD and emerging economies have taken important steps towards less distortive policies. However, recent food price instability has revived protectionist pressures, which is being reinforced by the current economic crisis. Advancing towards less distorted agricultural policies should not be undermined, and the momentum for reform should be maintained by:
- Continuing to reduce policy interventions in markets; for emerging economies this also means the elimination of policy disincentives to production where these still exist.
- Development of the policy frameworks and instruments to facilitate farmers’ management of risks, as well as safety nets, in the context of increased levels of instability.
- Changes in the delivery of support to farmers by decoupling support from production and targeting it to well-defined objectives, outcomes and constituencies.
- For the emerging economies, a change in the delivery of support also involves focussing support to development and long-term growth, rather than interfering in prices received and paid by producers.
- Emerging economies also face the difficult task of making agricultural growth inclusive for the rural poor, while also helping the poor reap economic opportunities outside agriculture.