August 27, 2003

Why Don't Mexico's Urban Poor Count?

I was telling my class yesterday that one of the principal benefits of thinking like an economist is that the analytical framework forces you to think systematically. Here's an example of Oxfam not doing so:

U.S. Corn Subsidies Said to Damage Mexico: The more than $10 billion that American taxpayers give corn farmers every year in agricultural subsidies has helped destroy the livelihoods of millions of small Mexican farmers, according to a report to be released on Wednesday.

Prepared in advance of critical trade talks next month, the report by Oxfam International argues that the subsidies given American corn farmers allow them to sell their grain at prices far below what it costs to produce. That has led to cheap American corn flooding the Mexican market and pushing the poorest Mexican farmers out of business, the report said.

"There is a direct link between government agricultural policies in the U.S. and rural misery in Mexico," according to the report entitled, "Dumping Without Borders: How U.S. agricultural policies are destroying the livelihoods of Mexican corn farmers."... Trade and development experts at the World Bank say that reducing or eliminating the agricultural subsidies and tariffs of wealthy nations would help developing nations more than any other single action....

Mexico, the birthplace of corn, opened its borders to American corn exports after signing the North American Free Trade Agreement in 1994. Within a year, corn imports from the United States doubled and today nearly one-third of the corn used in Mexico is imported from the United States. The United States is the biggest exporter of corn in the world and the biggest exporter of corn to Mexico.

The report said the price of Mexican corn has fallen more than 70 percent since Nafta took effect, severely reducing the incomes of the 15 million Mexicans who depend on corn for their livelihood. But Bush administration officials said the Mexican government gave some price support to its corn farmers. The support is minimal, however, since the entire Mexican agricultural budget is only one-tenth the size of the subsidies given to American corn farmers alone, according to the Oxfam report...

A seventy-percent decline in the price of the corn bought by Mexico's urban poor is an offsetting benefit to Mexico, yes? You can't just look at the (heavy) costs to poor rural near-subsistence farmers, you have to look at all the improvements in the lives of poor urban workers made possible by the reduced pressure the lower price of corn places on their budgets.

It seems to me highly likely that the best response for Mexico does not involve shutting off (or even reducing) the flow of corn from Iowa to Mexico. When we talk about how poor-country development is harmed by post-industrial-core agricultural protectionism, we are talking about how protectionism has shut off poor countries' ability to export to the industrial core. We're not talking about how rich-country agricultural exports have made the price of food staples for the urban poor "too low."

Posted by DeLong at August 27, 2003 07:05 AM | TrackBack

Comments

"It seems to me highly likely that the best response for Mexico does not involve shutting off (or even reducing) the flow of corn from Iowa to Mexico."

OK, but don't tell me that the Mexican government paying compensation to farmer (as in your FT piece) is the answer, unless you can find somebody in the PRI's presidential stable who is willing to run on a policy of taxing urban beneficiaries of the subsidy to compensate farmers. (I'm assuming Fox's troubles means the PRI will take back the presidency.) What is the best response for Mexico that Mexico is likely to undertake?

Posted by: K Harris on August 27, 2003 07:21 AM

So where's the data saying that the price paid for corn (or products thereof) by the urban poor has fallen by 70 percent? For all the vaunted efficiency of mexican markets, I can't help but wonder whether the change in price paid to producers has been reflected in the price to consumers...

Posted by: paul on August 27, 2003 07:22 AM

This seems like the rather obvious comparative advantage situation. While it is fairly easy to show that both entities as a whole benefit or break even from trade conducted without coercion, it does not follow that these benefits necessarily flow to all segments in a way that makes those benefits worthwhile.
Clearly, it is possible to spread those benefits, but i think economists would do well to focus on the second part of the bargain. What concessions are the benefactors of freetrade (nations as a whole, generally) willing to give to the misplaced in order to offset the higher individual risk involved with free trade?
Free trade, and in this case subsidized products, which overall benefits Mexicans, is not necessarly a good thing without ensuring that its benefits are widely distributed.

Posted by: theCoach on August 27, 2003 07:32 AM

K Harris as usual has made a most important point; Globalization is fine in theory, but for my family to suffer because we can not sell our corn because of globalization is intolerable. There must be such recognition among economists or globalization will be a mockery to countless poor families.

"It seems to me highly likely that the best response for Mexico does not involve shutting off (or even reducing) the flow of corn from Iowa to Mexico."

OK, but don't tell me that the Mexican government paying compensation to farmer (as in your FT piece) is the answer, unless you can find somebody in the PRI's presidential stable who is willing to run on a policy of taxing urban beneficiaries of the subsidy to compensate farmers.

Posted by: anne on August 27, 2003 08:29 AM

If we grant for the sake of argument that the paramount consideration is consumption levels of the poor, then one question is the losses to the rural poor v. gains to the urban. At a gross income level, this would be an interesting datum. More so in light of the likelihood that the urban poor and rural poor include many families that straddle both groups, who share income amongst themselves.

Since we're talking about really poor, I'd go further and suggest total consumption outweighs efficiency considerations.

If it could be shown that opening Mexico up to Iowa corn benefits the Mexican working class (rural and urban poor together) in some aggregate sense, that would be of interest to trade skeptics on the left, since we couldn't care less about commercial corn growers in the U.S.

Posted by: Max Sawicky on August 27, 2003 08:32 AM

Unless you are suggesting that the subsidies are a good thing, surely this is pettifogging.
Negative impacts:
Urban Americans footing the bill
Rural Mexican's handicapped by lack of subsidies
Security of Mexican food supply damaged by need for foreign exchange to feed itself
US watertables and landscape

Positive impacts:
US farmers receiving $10bn
Mexican poor receiving discount on the raw material of corn and sugar based foods.
Politicians with election financing.

Isn't it in your course that the first two on each side are unbalanced in favour of the negative?

Posted by: Jack on August 27, 2003 08:34 AM

What does a poor Mexican family do when a job is lost at a whim because a Dutch electronics company is shifting fabrication from Mexico to China? China will drive a tougher bargain than Mexico ever did, but who can compete with China in terms of costs relative to labor force skills?

Well, we have cheaper electronics goods and a Mexican family is in terrible shape and desperate to escape Mexico. We have to be able to support our families. Are economists able to grasp this point?

Posted by: anne on August 27, 2003 08:40 AM

the Coach and Anne I'm with you until the point where it's okay to give subsidies or at least their results must be fixed. "Free trade, and in this case subsidised products" in the same breath? (not to mention artificial surplus.) The point is that the subsidised products may well not benefit Mexicans overall. Some of them may be paying less for their corn but others are out of a job or working in areas where there skills are less well used. Mexico also has to live with the risk that a currency crisis will affect its food supply a la Argentina. It is possible that Mexico benefits overall in the immediate sense but only as long as Americans continue to be willing to pay. It is also only an argument in favour of the subsidies if no attention is paid to the Rich Urban Americans who are paying for expensive US corn to be shipped to Mexico

In any case the same benefit to Mexico could be obtained much more cheaply.

I also think that Brad is being a little harsh on the Oxfam report. It mentions the price of corn being low for its impact on people making a living out of it. In any case the emphasis on the weak (Mexico in this case) learning how to respond to the caprices of the strong is unedifying. The subsidies are manifestly unfair and have an impact that Mexico cannot possibly counter.

Posted by: Jack on August 27, 2003 08:50 AM

I find it funny that economists' vaunted notion of the holy free trade is so easily negated when it comes to paying subsidies for industries that are politically important for their individual countries. In my opinion free trade and open borders is perhaps a viable theoretical construct that only works when it is truly and duly practiced. In this case of subsidizing agriculture and then dumping it on third world countries it clearly is a gross violation of the principles of free trade and harmful to the short term growth of Mexico.

Brazilian farmers have been screwed for years by import restrictions on oranges (so as not to offend less competitive Floridian orange growers).
Free trade- it seems only if it benefits us in the short term.

Posted by: non economist on August 27, 2003 08:58 AM

Jack

I certainly do agree!

Example after example could be used. Mexico, however, needs to become as tough as China on trade negotiation. Brazil let America know they were going to produce generic drugs to treat AIDS patients, and America had better step aside. Well, America stepped aside and Brazil has worked a miracle in AIDS treatment and set up a burgeoning drug industry. Time for toughness.

Posted by: anne on August 27, 2003 09:00 AM

1/ Mexican urban workers may not benefit, if farmers forced off their land, go to the cities to look for work and force down wages.

2/ Mexican farmers certainly lose out.

3/ Mexico as a whole loses something when its economic diversity diminishes.

Posted by: Andrew Boucher on August 27, 2003 09:02 AM

Actually, the original blog and all the comments thereto ignore a central datum in the cost benefit comparison:

Until recently the Mexican gov't subsidized the price of corn flour (and other staples). When fiscal problems forced the abandonment of the subsidies, the gov't tried to compensate by reducing the tariff protections which propped up the prices paid to small corn farmers.

Thus any 'before & after' comparisons between urban and rural poor are inherently flawed. Any analysis should take into account: cost of former subsidies (both directly in taxes & indirectly in economic 'lost opportunity' costs), changes in markets, over-all market benefits or losses, etc.

Complicated, eh?

Problem with Oxfam is that they know nothing of multi-variant analysis, substituting slogans for thought.

MS

Posted by: Michael Spencer on August 27, 2003 09:05 AM

"Oxfam International argues that the subsidies given American corn farmers allow them to sell their grain at prices far below what it costs to produce."

I do not think that this statement is correct. Farm commodity prices are set by demand. Production is set by acres planted, inputs of seed and fertilizer and variables such as the weather. Without mechanization, poor rural farmers cannot match the productivity of large American agriculture. To keep workers down on the farm in subsistence situations is to ensure that productivity will not increase as much as it should. It keeps people employed but working many hours of hard labor on low value products.

The challenge is training workers to produce higher value products so that they can improve their purchasing power. To that end, purchasing the cheap grain and producing livestock or even more value added products would be a better alternative to the rural poor than production agriculture. Production agriculture in the US has become dependent upon subsidies because of overproduction of commodities. In the absence of government subsidies, more US production agriculture would be vertically integrated into large corporations that would use the value added dollars to defray the production costs. This has the undesireable effect of depopulation of large numbers of rural communities and the subseqent economic dislocation of the farm service sector.

It is difficult to see how a halt to subsidies would help poor Mexican farmers. The US would still have a surplus of grain that could be sold to Mexico at a price still much lower than poor farmers need to make ends meet.

Corn is a really bad example because one farmer can grow several hundred acres of corn with 2 weeks of work in the spring planting and another 2 weeks of harvesting. This allows for off farm employment, or else one spouse, often the man works off farm and the wife operates the equipment during the weekdays.

Posted by: bakho on August 27, 2003 09:06 AM

http://www.nytimes.com/2003/08/27/international/asia/27AIDS.html

U.S. Cuts Off Financing for AIDS Program, Provoking Furor
By RACHEL L. SWARNS

The State Department has discontinued financing for a small but well-regarded AIDS program for African and Asian refugees because it contends that one of the groups involved in the project supports forced abortions and involuntary sterilization in China, officials said this week.

The decision to end the financing has raised a furor among AIDS and refugee groups. Relief workers fear that officials are bowing to pressure from anti-abortion factions within the Bush administration and allowing politics to interfere with desperately needed AIDS programs, assertions that the State Department denies.

The group, Marie Stopes International, offers abortion counseling and services.

State Department officials acknowledge that they have no evidence to suggest that Marie Stopes is involved in forced abortions or involuntary sterilization, and the group itself says it has been trying to end forced abortions in China and to expand voluntary family planning....

Posted by: lise on August 27, 2003 09:15 AM

July 22, 2003

Harvesting Poverty
The Great Catfish War - New York Times

For Tran Vu Long, who lives atop his floating catfish trap on the Mekong River near the border with Cambodia, the recent biannual harvest day was not the joyous payday it usually is. Mr. Long, a 35-year-old Vietnamese catfish farmer, sold his flapping fish -- 40 tons' worth, all painstakingly weighed and carried in bamboo buckets onto the trading company's launch -- at a loss of some $2,000, a small fortune here.

Mr. Long, who stood sullenly to the side as his hired hands scooped out seemingly endless gaggles of fish from underneath the space that doubles as his living room, has Washington politicians to blame. "The United States preaches free trade, but as soon as we start benefiting from it, they change their tune," he said.

His misfortunes are just another part of the tale of how wealthy countries that preach the gospel of free trade when it comes to finding markets for their manufactured goods can become wildly protectionist when their farmers face competition. The fate of Vietnam's catfish offers a warning to poorer nations short on leverage in the world trading system: beware of what may happen if you actually succeed at playing by the big boys' rules.

After embracing decidedly un-Marxist reforms, Vietnam became one of globalization's brightest stories in the 1990's. The nation, a onetime rice importer, transformed itself into the world's second largest rice exporter and a player in the global coffee trade. The rural poverty rate was slashed to 30 percent from 70 percent.

The normalization of ties between Hanoi and Washington brought American trade missions bent on expanding Vietnamese free enterprise. One of these delegations saw in the Mekong Delta's catfish a golden export opportunity, with the region's natural conditions and cheap labor affording Vietnam a competitive advantage. Sure enough, within a few years, an estimated half-million Vietnamese were living off a catfish trade nurtured by private entrepreneurs. Vietnam captured 20 percent of the frozen catfish-fillet market in the United States, driving down prices. To the dismay of the Mississippi Farm Bureau, even some restaurants in that state -- the center of the American catfish industry -- were serving the Vietnamese species....

Posted by: anne on August 27, 2003 09:22 AM

what i don't get is how subsidies aren't protectionism... and doesn't this actually reduce true infrastructure in the long run, by allowing the americans to function below their possible efficiency, and encouraging mexicans to dismantle their corn infrastructure altogether?

Posted by: quinn on August 27, 2003 09:48 AM

One problem is that even if there were overall benefits from the subsidies some of the deficits hit people pretty early on in their heierarchy of needs while the benefits accrue in rather less basic needs. There might not be so many urban poor if farming were more viable.

bakho, the in for a penny in for a pound "they wouldn't be able ot compete anyway" argument is silly. If it were not, why on earth is there a subsidy in the first place?
The subsidies blight not only current production but also the investment needed to farm more efficiently. They also defray the costs in terms of labour, environmental distortions and irrigation that Americans might not actually want. Also since most subsidies are arranged proportionately to production they produce surpluses that damage pricing power, thus enhancing hteir effect, and damage any attempt to compete on quality or other differentiators.
Last but not least they maintain Mexico in a fools paradise that can be taken away whenever unaccountable US politicians change their minds. It even creates an artificial reliance on food imports that would dry up in the event of a currency crisis. Even Argentina suffered severe hunger problems when it got into currency trouble.

Posted by: Jack on August 27, 2003 09:50 AM

One thing - doesn't the fact that Mexican land that previously was producing something of value now lies fallow because farmers can no longer sell their corn enter into the equation?

Posted by: jimbo on August 27, 2003 09:57 AM

From K Harris to Jack, Quinn, Jimbo etc., this is a critical topic and I think the comments excellent!

Posted by: anne on August 27, 2003 10:03 AM

Somebody said "what i don't get is how subsidies aren't protectionism"

You can certainly define protectionism to include export subsidies, but that is just semantics. It remains that there is a crucial difference between subsides and trade barriers such as tariffs. Consider two countries trading with each other.

Case 1. Country B limits imports of corn from country A below what it otherwise would be by imposing tariffs. The reduction in trade makes both countries poorer, each considered as an aggregate.

Case 2. Country B subsidizes the export of a product, say corn. This is equivalent to country B donating a quantity of corn to country A. This hurts country B but it helps country A, each considered as an aggregate.

Of course welfare effects considered here are aggregates only. It is perfectly appropriate to point out that there are distributional effects that one may or may not like. But the aggregate effects are absolutely unambiguous. I believe this is the point of Brad's post.

Posted by: Daniel Lam on August 27, 2003 11:56 AM

"We're not talking about how rich-country agricultural exports have made the price of food staples for the urban poor "too low.""

This is a bit of a straw-man. The urban poor don't make their living selling food that they themselves harvest, so how can this be directly compared? If your family's entire income dries up, the price of food may as well be a hundred dollars a pound because you no longer have the money to buy it.

And if you factor in the decreased opportunities for education in rural areas of developing nations, you end up with a crisis. The assumption that people in these environments are as flexible, in terms of job skills and mobility, as someone living in the urban environment of a developed nation is deeply flawed.

Posted by: natasha on August 27, 2003 11:59 AM

Not to switch sides in the debate (if I was ever on a side), but Bradís original post seem to be restricted to Mexican policy alone. Damage to the US is relevant to US policy makers, but not to those in Mexico. The standard trade-policy take is that subsidies should not be resisted by the subsidizers trading partners, because the subsidy represents a net gain to the trading partner. So while the points Jack makes are true, they donít hurt Bradís point, as far as I can tell. The same goes for any critique that keys on Brad abandoning free trade principles. I don't think that was his point.

The Max/Anne/Me point is distributional. Within Mexico, a US policy that benefits urban consumers to the detriment of farmers is not a no-brainer, even if there is a net gain in Mexican welfare. Domestic policies in developing countries have tended to subsidize urban residents at the cost of rural residents for decades. Mexico has liberalized, reversing some of those policies, so the skew toward urbanites is not what it once was. However, if the policy in question benefits the urban middle class (Mexico is a middle income country, in IMF/IBRD terms) at the expense of the rural poor, then there is a serious problem. Yes, there are urban poor, as well, but you really need to think about the extent of damage to income distibution (negative for rural poor, positive for urban poor and middle class) before deciding whether an net rise in welfare is all it is cracked up to be.

Anne, thanks.

Posted by: K Harris on August 27, 2003 12:03 PM

And reviewing your statement, if you were talking about the urban poor in Mexico, I think the sentiment still stands. The commenter above who noted that displaced rural farmers drive down wages (and quality of life when they're forced to settle in sprawling slums) for the urban poor is correct.

Not every society on the planet has such a small percentage of the populace involved in food production as we do.

Posted by: natasha on August 27, 2003 12:08 PM

Brad's point is that if you want to evaluate the effects of our policy, you have to evaluate all of the effects. If the price of food drops for the Mexican poor, that's a point in favor of the policy. How big is the effect? I don't know, but neither does Oxfam.

Posted by: Walt Pohl on August 27, 2003 12:09 PM

Everyone seems comfortable is saying that US corn production is receiving $10 billion in direct US aid. How accurate is this statement? Much of US farm aid actually goes to limiting US agricultural output. How much of this farm aid is actually directed towards farmers to plant? In addition, large corporations also see a good amount of farm aid. ADM for example. In order to know if the Oxfam report is accurate, we need an accounting of how much of the $10 billion is going to actually subsidize the growing of corn?

Posted by: james on August 27, 2003 12:12 PM

"they wouldn't be able ot compete anyway" argument is silly. If it were not, why on earth is there a subsidy in the first place?

The subsidy is there because it is a political payoff to the red states. It is a payment against social upheaval and restructuring in the American economy. The subsidy affects which Americans own and control production. The subsidy has little effect on the final price (yes some corn would be sold for little profit or a loss) and therefore little effect on Mexican farmers. Subsistence farming is not very productive. The US learned that during the Depression. After WWII, the US spent millions educating the returning soldiers rather than sending them back to the farm and low wage, low productivity jobs that were replaced by mechanization.

Posted by: bakho on August 27, 2003 12:48 PM

if "dumping", i.e. exporting industrial products below the cost of production, is an unfair or anti-competitive trading practice, why should this not also be the case for agricultural products? to be sure, dumping lowers the cost of products to comsumers in the importing nation and
reduces the losses to an overproducing industry
in the exporting nation by selling at a loss excess inventories rather than simply liquidating them, but it damages the productive capacity of the importing nation while subsidizing the misallocation of productive resources in the exporting nation which needs to be corrected for optimal productive efficiency. and "dumping" is at odds with the doctrine of comparative advantage
which presupposes an optimal allocation of productive resources, given resouce availabilities
and productivity levels, in both trading nations.
furthermore, why is it that economists arguing for free trade scarcely blink an eye at the often immense costs of socio-structural dislocation involved in the economic restructurings of free trade (a "heavy burden", indeed)? the simple neo-classical notion of substitutabilities as in butter/margerine does not work so well in production economics, even for so obvious and close a case as e.g. oil/natural gas; embedded technical constaints and time lags preclude any ready adjustments. why then is this not all the more the case for disruption of social structures,
which are after all the very poster child of "sunken costs". the breaking up of networks of social relations which are probably the prime survival resource for already desperately poor people must entail large costs both in real terms
(actual losses borne) and in terms of opportunity costs (idled resources and capacities). is it that such costs are immeasurable or that published
statistics are produced for other official purposes and such costs do not register in such sources? or is it that such costs are merely human
"externalities" and not to be included in the equations and formal models of economists? perhaps this is not a case of the virtue of systematic thought afforded by formal economic models, but rather a case of the blindness produced by fixation on formalized abstraction that while perhaps adequate for some problems and cases is bounded in its validity and that brings into focus only a single plane of social reality at the expense of understanding the intrication of levels involved in real social processes. i am not an economist and have no knowledge of "multivarient analysis" so i need these this to be explained to me in plain old, i.e. thoroughly ambiguous, english.

Posted by: john c. halasz on August 27, 2003 12:49 PM

As usual K Harris makes the comment I wanted to make, only better, faster and in addition to his other good comments. But to clarify to Jack specifically quoting me, from the Mexican perspective it does not really matter unless the goal is to destroy that industry through dumping and then later take advantage of that destruction, something that goes beyond what I think is happening here.

Posted by: theCoach on August 27, 2003 01:00 PM

How does the subsidy not have an effect on the price? Is it just buying more comfortable cars for US farmers? If it is keeping farmers in business it is suppressing prices. If it alters the supply it is affecting prices. If it is not affecting prices there is a real genius at work somewhere who ought to be using their accurate knowledge of the market to clean up and retire. Somehow $10bn ($1bn even would do) is being thrown at US corn farmers and it doesn't affect prices? Please explain how this works and I will cut you in on the profits I make applying the same principles to the stock market.
I also think you left Mexicans, Brazilians, Ukrainians and others out of the people whose control of the means of production of food it affects.
In any case if it doesn't affect prices then Brad doesn't have a point, or at lest doesn't have the one he is making.
Subsistence farming is only meaningfully unproductive if there is a more productive alternative.
Doesn't most corn get turned into sugar/corn syrup anyway?

Posted by: Jack on August 27, 2003 02:05 PM

theCoach, effects not goals are what's important and it can still be bad even if it does not succeed totally.

I'm sure the goal is not directly to destroy Mexican farming and also probably that it will not totally do so but it will be left limping and starved of investment, many people will be displaced and Mexico will become more vulnerable to currency fluctuations.
What will the mexicans export to pay for the corn? If the problem is big enough the peso will simply devalue until the corn is competitively priced again. Obviously there is more to Mexico than corn but what? Add to manufacturing oversupply? More waiters in Acapulco. Whatever it is Mexico was obviously not so great at it before. If Mexico can't find anything else for the redundant farmers to do (and obviously it won't be easy or there would not be so many urban paupers. Cheap candy bars to eat while unemployed farmers do your job.

Posted by: Jack on August 27, 2003 03:29 PM

Jack,
I agree it is effect that is important here, but I think the effect is that the Mexicans, as a whole, are splitting up that 10billion with the US farmers (ratio unknown).

Posted by: theCoach on August 27, 2003 03:40 PM

John Halasz writes:

"furthermore, why is it that economists arguing for free trade scarcely blink an eye at the often immense costs of socio-structural dislocation involved in the economic restructurings of free trade (a "heavy burden", indeed)? ... is it that such costs are immeasurable or that published
statistics are produced for other official purposes and such costs do not register in such sources? or is it that such costs are merely human
"externalities" and not to be included in the equations and formal models of economists?"

Couple thoughts on all of this.
First, you're right to point out that the reallocation of resources entailed by freeing up of trade might have a "social cost" as the economy adjusts from one equilibrium to another. But the same thing is true of, say, technological improvements which make certain goods/industries less useful in relative terms or even obsolete.

Shall we ban technological progress then?

(And in a sense freeing up of trade can be thought of as a technological improvement)

The reason why this doesn't make it often into formal economic models is that the costs are probably difficult to measure and the concept itself is somewhat muddy.

Thinking about it, I guess one would include in the utility functions some kind of "status quo" bias, where any deviation from the original allocation of resources imposes an additional cost on the agents (and when agents make their decisions on who to buy from, they ignore the effect of their actions on the size of this cost -hence it's an externality). But this is a bit ad hoc. If those who lose from trade suffer a "social cost" in addition to the economic cost, as their social networks break down, why wouldn't it be the case those who gain enjoy a better social environment? Else, it's almost a tautalogical assumption that any change is bad, whether from trade, technology, or the fact that my neighbors one day opts for a career change. To most economists this etheral social cost just sounds sketchy. Economic cost one can define/measure precisely.


Thinking about it in terms of poor/rich countries. On one hand rich countries probably have more resources to deal with change (as you point out above)so the "social cost" for them might be relatively small. On the other, they're already rich, so perhaps we're just happy stagnating with the status quo (Germany?).
The poor countries though could be really screwed. Either they trade (or experience technological improvements) in which case they can get richer, but at the cost of screwing up existing traditions, customs and interpersonal relations. Or they stay poor. Forever. Hmmmm. I guess we all want to have our pie and eat it too.

BTW, externalities, human or otherwise make it into economic models all the time. Don't try to make us seem more cold hearted then we already are.

"perhaps this is not a case of the virtue of systematic thought afforded by formal economic models, but rather a case of the blindness produced by fixation on formalized abstraction that while perhaps adequate for some problems and cases is bounded in its validity and that brings into focus only a single plane of social reality at the expense of understanding the intrication of levels involved in real social processes."

Any approach is going to be "bounded in its validity". The problem is that once you depart from systematic thought and formalized abstraction, the "understanding of the intrication of levels involved in real social processes" often becomes an excuse for writing down a lot of gibberish and pulling any desired conclusion out of hat. There's certainly some people who can resist the temptation and can do good work in a non formal style. But they're rare.

(And at least when economist pull out rabbits from hats, they first show you what assumptions are hidden in the hat in the first place which make it possible).

Posted by: radek on August 27, 2003 04:55 PM

Some people in Mexico may share in part of the subsidy but few people will make a living out of it. The impact on Mexico's balance of payments and currency is likely to be negative which will offset some of the savings and the price might be a larger consideration. $10bn of over production may actually result in reduced corn revenues overall and of these an unfair share will be born by the non-subsidised suppliers. The effect on profitability is likely to be even worse. It is not clear that there is use for all the freed up but inappropriately skilled and located labour.
The "this is going to hurt me more than it hurts you" argument says that an action that causes Mexicans to pay Americans more money will actually make them better off. Perhaps because unemployed Mexicans will be able to console themselves with cheap candy bars (or will have some more money left over when they have done so) but that will be offset partially by the falling value of the Peso and increased unemployment.

Posted by: Jack on August 27, 2003 06:15 PM

"How does the subsidy not have an effect on the price?"

Some farm subsidies actually pay farmers to leave their fields fallow. US farmers, traditionally, grow more grain stocks per acre than other nations farmers. The drop in over all product has the effect of raising world corn prices. If a portion of the subsidy then goes to US farmers in an effort to offset this price increase, it is possible to have a subsidy that does not change the price of corn. Unlikly, but possible.

Another possibility. The subsidy goes to a corporation like ADM for ethinal research. The corn grown with this subsidy is labeled unfit for consumption. Because it is for research, the amount of the subsidy can be large without having an effect on the world corn supply.

US farm subsidies do not benifit family farmers as much as the press on them imply.

Posted by: james on August 27, 2003 06:20 PM

the Coach; The benefits of reduced prices are shared with every corn consuming country. and the US farmers. The US farmers only share that bit of revenue that is lost due to falling prices but also gain because of extra sales. It is quite possible that the subsidy will cause total corn sale revenues to fall by an amount larger than the subsidy itself (Think of web browsers as an extreme example) in which case corn growers as a whole lose more money than the subsidy and if they don't corn consumers will benefit by less.
In any case disregarding the disruptive effects, it is hard to see how a measure that will likely result in Mexicans sending Americans money will somehow make them richer overall. In which case accusing Oxfam of ignorance for not including a phrase like "While lower corn rices are good for most Mexicans, falling prices are really bad for the farmers." looks a little overcritical to me.

Posted by: Jack on August 28, 2003 12:29 AM

in reply to radek:
1) i am not opposed to technological progress per se, by any means. but i think the distributional effects of such "progress" deserve equal consideration in its evaluation as the gains in technical efficiency and economic productivity.
as to this particular case, "if those who lose from trade suffer a social cost in addition to an economic cost as their social networks break down,why wouldn't it be the case those who gain enjoy a better social environment?" i made some knocks against the virtues of formalized abstraction,but in this quotation the "case" cited
is precisely generalized and hypothetical. in this particular case, we are dealing with poor traditional perhaps largely indigeonous subsistence farmers who bear the costs, whereas, as a number of posts above have mentioned or hinted at, the benefits are distributed elsewhere, not just to the urban poor but perhaps more so , to the mexican middle class and to mexican businesses (hence those jibes about candy bars). and i would venture to guess that for the displace group in question social networks and costs and economic networks and costs are scarcely to be differentiated. that their lost social networks leads to an improved "social environment" for the middle class is precisely to the point. for the group in question the ad hoc status quo bias in their utility preference function that you suggest is simply staying alive,
not starving, even though in the long run we are all dead. what prompted my post, aside from confusion over the notion that "dumping" could be
regarded as a proper "free trade" practice under the doctrine of comparative advantage that standardly serves as its justification, which delong's comments seemed to imply, was the contrast between delong's initial blythely confident boast as to the superior insight of
formalized systematic abstraction and the fact that the case cited subsequently seems to contain a element of real tragedy, (though not for the first time and slow and immemorial). (we are invited to regard oxfam, through a limited citation of a report of their report, as a bunch of holy fools).
2) "in a sense freeing up trade can be thought of as a technologial improvement". is this not another instance of a precipitate identity that conceals differences? how is this so? though the effect of comparative advantage that distributes
mutually beneficial prductivity gains? i have no doubt that there is a real comparative advantage effect, a forteriori if one includes krugman's
industrial lock-in/strategic advantage approach, just as i have no doubt the warm low pressure air masses have an effect in meteorology (probably rain, perhaps heavy violent storms), but are there
not other, perhaps countervailing effects? do employment rates, wage rates, income distribution effects, both domestically and internationally, not exert an impact or are they simply assumed to follow along in train? or is it a matter of trade facilitating directly technological transfers?
then with what stipulations and conditions? and what of labor skills and education or is this simply a non-market function of the dreaded state?
the basic point i wish to make here is that it is
simply not enough for formal models to rearrange
pieces on the checker board under the mathematical
identity of general equilibrium, but an attempt to differentiate and specify particular pathways by which particular flows would or do occur would
better meet the requirements of epistemic realism.
these latter might be riddled with contingency and hence unpredictable (like the weather!), but a consideration of their ranges of possibility might temper the authoritative air of certainty
with which economic discourse all to frequently burdens itself.
3)i am aware that in the last 20 odd years economic modellers have found ways to incorporate externalities, both positive and negative, into their modelling to the point where they are sometimes no longer termed externalities. but economic processes are processes, i.e. they are temporalized and occur at varying rates. (there is actually no such thing as general equilibrium;
all markets do not clear with respect to all other markets simultaneously. there is only a tendency for markets to equilibriate with respect to one another with greater or lesser degrees of volatility.) we are all aware that time is money- (if money were time, we'd all be rich!); this is the point of interest rates. but what is one to make of a process, as with the case in point of mexican peasants, that involves the incurring of large initial costs and only after a long time lag confers minimal benefits? this is not a paying business proposition. (russians anyone?)
a model based on pareto-optimal market exchanges, no matter how reconfigured, can not take into account such costs, such cases. is the waste and devastation thereby less real? are opportunity costs only to be incurred by those who have opportunities? the broader point i was making about social structures is that, just as there are
production constraints that can not be reduced to market exchanges (although market processes in the real world can help to fudge them and they certainly contribute to the market for engineers),
so social structures can not be rearranged at will
and without cost by market exchanges. rather social structures, which are formed out of nexuses of releationships,(which are only "interpersonal" at a certain class level, insofar as one can afford the investment in the aquisition of jargon), are in fact a source for the aquisition retention and channelling of economic value, at what ever class level. the cost of their disruption is not merely an added "social" cost. its losses are not merely "interpersonal" but effect the absorbative
capicity of society for dealing with economic change, which, in turn, impacts upon political stability and repression. (just how do the palestinians survive?)
4)i am by no means opposed to formalized modelling
but would advocate a pluralism of theorectical models precisely in the name of epistemic realism.
responsibility to the real is after all one of the hallmarks of claims to knowledge, let alone truth, whatever the tergiversations between pity and contempt may be at stake in our notion of reality. there is no such thing as a totalized model of society for the simple reason that a map is not a territory; similarly, for that portion of social reality that is deemed economic. that any model is bounded in its validity is not simply
to be acknowledged as a truism, for it is precisely that boundedness that gives it its force of validity and its specific range of applicability and this must be borne in mind. i have no doubt that such pluralism complicates the conduct of economic discourse, let alone its ambitions for political influence. but only such a pluralism of models could hope to do justice, if that's the word, to the contradictory and various effects of economic processes as well as
proposed policies/remedies. what one can escape is the fact that economics is a discourse and,
formalization and calculability aside, subject to the disursive redemption of validity claims. thus
it does no good to disparage discursive modes as highly conducive to gibberish except for a few rare talents, e.g. alfred marshall, david ricardo,
when the talent for producing incisive well-bounded and specifically applicable formalization may be just as rare. formalization is no bar to gibberish or worse.
5)there is a semi-interesting dicussion on paul krugman's website of what he calls "high development theory" which developed in purely
"literary" form from the mid-30's to the early 50's. it was driven to the margins of professional
economic discourse by the subsequent vogue for mathematical formalization. lo and behold some thirty years later academic economists began to develop formalized models that accommodated and verified what the development theorists had been
saying in plain prose, like moliere's gentleman.
krugman treats this all as if this were simply the cost of doing academic business- as if the virtues of formalization commanded a high price in trade for the lost opportunities of generations. one lesson that could be drawn from this real time parable is where did the fundamental epistemic commitment to truth about the real go during this period of questing after formalization when the right rabbits just couldn't be stuffed into the right premises? but more interesting here is that the development theorists recommended thoughgoing land reform as a
premise for an economic takeoff into industrial development which would raise societies as a whole
out of persistent poverty (taiwan? south korea anyone?) yet our current "neoliberal" perscriptions are effecting precisely the reverse.
i do not know the answer by any means, but my question is this: would we not all (mexicans and americans) be better off if, rather than spending $10billion per annum on american corn subsidies,which no doubt go in large measure to agribusiness- and don"t get me started on those fat corn chewing cows-, the u.s.a. were to spend
the same amount on thoroughgoing rural land reform in mexico?

Posted by: john c. halasz on August 28, 2003 01:28 AM

Should the Mexican government subsidize its farmers to keep them in business? Or should it use the money for training for more productive jobs either in agriculture or other sectors? The US really faces the same dilemma. As other sectors of the economy improve in productivity, agriculture must improve in productivity. If not, then the price of agricultural products must rise or the prices stays the same and those engaged in crop production lose purchasing power relative to workers in other sectors. Since demand is relatively static, and overcapacity exists, the price is not likely to rise. One could argue that US agriculture has been under deflationary pressures for decades. More agricultural productivity means fewer workers producing the same harvest. Fewer workers means fewer residents in the agricultural areas (barring the development of alternative economy) and that creates a downward spiral that creates rural ghost towns and a host of other negative social effects. The crop subsidies are intended to limit the rate of the downward spiral. The long term solution to preserving rural towns is developing alternative businesses. If that is not efficient, then the long term solution is depopulation of already sparsely populated areas of the US. This is politically unpopular especially among the red states that control the senate. Thus we have farm subsidies that do not effect price as much as supporting inefficiencies in the system. It is true that much of the farm subsidy goes to large corporations that are outside these intended targets. This tends to affect bottom line profits more than commodity prices. Have you ever compared the price of corn (raw commodity) in a box of corn flakes to the price of corn flakes? The corn flake price is dominated by processing costs, not the price of the raw corn.

Posted by: bakho on August 28, 2003 06:32 AM

anne asks what does a mexican worker do when their job is moved to china?
she answers that their lives are ruined, and they must become refugees in america.
the resistance to change, the closed-minded conservativeness that many on the left have is evident here. when productivity increases jobs are always lost, but those people do not become worthless and permanently unemployed. they suck it up, and they find another job.
what do americans whose jobs get moved to india do? immigrate to canada? no, they do the same as the mexican: collect some unemployment, possibly retrain, and get a new, (albeit often lower-paying) job.

Posted by: uber on August 28, 2003 12:17 PM

anne asks what does a mexican worker do when their job is moved to china?
she answers that their lives are ruined, and they must become refugees in america.
the resistance to change, the closed-minded conservativeness that many on the left have is evident here. when productivity increases jobs are always lost, but those people do not become worthless and permanently unemployed. they suck it up, and they find another job.
what do americans whose jobs get moved to india do? immigrate to canada? no, they do the same as the mexican: collect some unemployment, possibly retrain, and get a new, (albeit often lower-paying) job.

Posted by: uber on August 28, 2003 12:19 PM

"OK, but don't tell me that the Mexican government paying compensation to farmer (as in your FT piece) is the answer, unless you can find somebody in the PRI's presidential stable who is willing to run on a policy of taxing urban beneficiaries of the subsidy to compensate farmers."

The suggestion implicit here - that the US should force a set of policies on the governments of the third world using trade as a cudgel - tends not to work out too well.

Posted by: Jason McCullough on August 28, 2003 12:49 PM

A peasant farmer producing a crop with 1850s technology is going to have 1850s purchasing power. It does not take an economic genius to recognize that continuing to live in the past will not alleviate poverty nor will it provide workers with 1850s labor the purchasing power for 21st century goods. The produtivity gap is too great. The keys are identifying alternative ways to use labor that are more productive and training the displaced workforce to be more productive in another area. The alternatives are that the 1850s productivity workers remain in poverty or they are subsidized in some manner to raise them out of poverty.

If the price of corn has fallen 70%, then it is much more profitable to use Mexican grown corn to make tacos or corn flakes than previous. If mfg were previously stuck paying 70% more for their raw material than foreign producers in the US, then there would be little development of corn processing in Mexico. It would be cheaper to import processed corn products from the US and certainly Mexico would be at a disadvantage in exporting such products. It is not just the urban poor that purchase corn, but food processors as well.

The same problem is created in the US by the steel tariffs. Because steel in the US is artificially high, manufacturers of steel products can make them cheaper in countries where steel costs less. Thus, companies that use steel components find it more profitable to purchase finished steel components from foreign manufacturers than domestic manufacturers. This creates a loss of manufacturing jobs. This is exactly the problem that US automakers faced in the 1970s trying to compete with Japanese manufacturers who could make their cars with cheaper steel.

Posted by: bakho on August 28, 2003 01:14 PM

bakho, of course the price of corn has fallen for everybody else too so the Mexicans are gaining no comparitive advantage except for the loss of competition in the food processing business that comes from keeping the USians busy producing corn.

A real issue about the subsidies is the effect on Mexican farmers trying to invest in updating their methods. If there may suddenly be US subsidies rocking the market, how can they invest? There is no reason at all that Mexcan farming should not become more efficient. If there was somewhere else that the Mexicans had a greater competitive advantage it would already be sucking Mexicans away.

Once again the assumption that it is Mexicans business to accomodate US social problems and political whims is unpleasant as anything other than empirical observation.

Posted by: Jack on August 28, 2003 02:42 PM

Shall we ban technological progress then?

Of course we should in certain cases. If one of those marvellous young men and women at MIT were to invent a process by which essentially infinite amounts of electricity could be generated from tap water and a $30 device, we would be far better served by banning its usage and introducing it extremely slowly than by creating 20% unemployment overnight as every electricity, petroleum, and associated company collapsed and the world economy spun into immediate depression.

The purpose of an economy and an economic system is to serve us, not the other way around. If we have a choice between two systems, one of which is somewhat more productive but causes immense human misery and the other of which is less productive but does a better job of seeing to its people's needs, I know which one I'd choose.

That said, the idea that highly subsidized US agricultural products' victory over any other product represents a win for the free market amuses me tremendously.

Posted by: Kimmitt on August 29, 2003 05:10 AM
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