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India's Dangerous Food Subsidies

August 26, 2014 in Economics

By Daniel R. Pearson

Daniel R. Pearson

India’s trade-distorting farm subsidies are already far in excess of the limits agreed to in their World Trade Organization commitments. Now India wants WTO members to look the other way while it increases subsidies further. With global commodity prices weakening, those subsidies are likely to damage farmers in other countries, tempt tit-for-tat reactions from their governments, and threaten the rules-based international trading system. To staunch that threat, agricultural trading nations should bring a WTO dispute-settlement case seeking an end to India’s abusive practices.

India purchases basic crops from farmers at artificially high prices, and then sells a portion in 500,000 “fair price” stores to some 800 million poor people at low prices. An estimated 40 percent of the food never reaches its intended consumers. Much of it escapes from government control due to graft and corruption. The remainder of the wastage is due to inadequate storage and transportation facilities. The Food Corporation of India (FCI), a government agency, held 68.7 million metric tons (MMT) of grain in storage on July 1. Three MMT of that supply (equivalent to the annual wheat consumption of the Philippines) were kept in sacks on the ground covered only with plastic sheeting. Government-induced loss of food seems particularly cruel in a country where many people remain hungry. Yet India continues to exacerbate this inefficient system.

Government-induced loss of food seems particularly cruel in a country where many people remain hungry.”

India’s farm subsidies harm its own economy. Farmers are incentivized to devote more land and water to subsidized crops (wheat, rice, sugar, etc.) desired by the government. This leads to less production and higher prices for other items (fruits, vegetables, etc.) that consumers also want to buy. India justifies these policies under the guise of achieving “food security” by encouraging domestic production of basic crops. The same excuse is given to justify commodity prices being held above world levels through the use of high tariffs and other import restraints. Most economists would agree, however, that security of supply is hurt rather than helped by import restrictions. A failure of India’s annual monsoon rains can lead to drought and reduced crop output. By relying so heavily on its own production, India is more vulnerable to food supply shocks than would be the case if its agricultural economy was integrated fully into the large and resilient global market.

WTO rules on agricultural subsidies came …read more

Source: OP-EDS

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A Lesson in Economic Analysis from the Minimum Wage Debate

August 26, 2014 in Economics

By Ryan McMaken

Magician holding a magic wand

Mises Daily Tuesday by Ken Zahringer:

Supporters of government interventions like minimum wages often pretend the economy is far less complex than it really is, and then conjure up a statistic as evidence of success. Careful analysis reveals another story, however.

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Source: MISES INSTITUTE