The Pros and Cons of Decoupling

The EU pays non-farmers not to farm:

The loophole allows investors to become classified officially as farmers and then buy the right to receive annual EU subsidies to cut agricultural production. Because the subsidies are decoupled from the land they relate to, investors do not need actually to own the ground they are claiming for or even go anywhere near it.

The profits to be made are enormous, with investors potentially increasing their capital nearly fivefold in 5 years.

Auctioneers and brokers who used to sell cattle and farm-land are now focusing their attention on selling the rights to receive European taxpayers’ money — known as entitlement trading — in what one described as a “ferocious” market with the rights to subsidies “flying off the shelf”.

Demand is outstripping supply by five to one, because the profits from investing in subsidies are up to ten times higher than putting the money in a bank. After making a one-off payment, the investor is entitled to receive from the taxpayer every year a cheque that typically amounts to a third of the original investment.

While it’s unfortunate that this nonsensical redistribution scheme and its accompanying rent-seeking are wasting EU taxpayers’ money, it also has its merits: The payments are completely decoupled from production and exporting activities, so the subsidies are not market-distorting and the WTO will have no objections!

King Cotton & the 2007 farm bill

Reuters:

Speaking after a two-day World Trade Organization (WTO) meeting on cotton, representatives of cotton producers said they believed the 2007 farm bill — an umbrella law that will set most U.S. agriculture policy for five years — could boost aid to American cotton farmers by up to 66 percent…

African governments and farmers blame cotton subsidies to producers in rich nations for flooding the market, driving down global prices and causing poor farmers to run at a loss.

Of course, Congress hasn’t written the 2007 farm bill yet, so these comments must refer to the USDA’s proposal, which means criticism may be premature.

This next paragraph strikes me as odd:

Brazil has already successfully attacked the U.S. cotton program, winning a landmark 2004 verdict at the WTO’s Dispute Settlement Body that caused the United States to repeal certain export and import subsidies on cotton. But other U.S. assistance programs remain in place.

Where can I get more info about US cotton import subsidies? I had never heard of them before, and I’m slightly skeptical of their existence, given that most search results are copies of the Reuters piece.

Check out the blog dedicated to the 2007 Farm Bill, which has details of the Senate and House Agriculture Committees’ upcoming activities.

SAFTA's troubles

The South Asian Free Trade Agreement is not enjoying smooth sailing — New Delhi has decided to unilaterally withdraw tariff concessions given to Islamabad because of Pakistan’s non-compliance with SAFTA provisions. Read the Khaleej Times story.

SAFTA's troubles

The South Asian Free Trade Agreement is not enjoying smooth sailing — New Delhi has decided to unilaterally withdraw tariff concessions given to Islamabad because of Pakistan’s non-compliance with SAFTA provisions. Read the Khaleej Times story.

SAFTA’s troubles

The South Asian Free Trade Agreement is not enjoying smooth sailing — New Delhi has decided to unilaterally withdraw tariff concessions given to Islamabad because of Pakistan’s non-compliance with SAFTA provisions. Read the Khaleej Times story.

Empirical Tests of Comparative Advantage

In Free Trade Under Fire, Douglas Irwin points to two examples of large exogenous trade policy shocks that allow us to calculate the static benefits promised by the theory of comparative advantage:

In 1859, a bit of gunboat diplomacy by Commodore Matthew Perry ended two centuries of Japanese autarky and exposed it to foreign trade. Japanese prices converged to world prices, so the country became an exporter of silk and tea while an importer of cotton and woolen goods. Estimates of these gains from trade are as high as nine percent. (Daniel Bernhofen & John Brown, “A Direct Test of the Theory of Comparative Advantage: The Case of Japan,” JPE 2004, pdf; “An Empirical Assessment of the Comparative Advantage Gains from Trade: Evidence from Japan,” AER 2005)

In 1807, President Thomas Jefferson ordered an economic embargo to punish Britain for interfering with American ships on the high seas. This termination of trade raised the domestic price of imported goods by 33 percent and lowered the domestic price of exported goods by 27 percent. The static welfare loss was around five percent. (Douglas Irwin, “The Welfare Cost of Autarky: Evidence from the Jeffersonian Trade Embargo, 1807–09,” RIE 2005)

Neat.

Bhalla: Raise the Poverty Line

Surjit Bhalla, known for arguing that there are far fewer poor people than conventionally estimated, is putting forth a new bold argument: that more people ought to count as poor. That’s not a reversal of his position; it’s an implication:

Asian and world poverty has declined significantly, and the concept of absolute poverty has receded. Today, absolute poverty in most parts of the developing world is relative; hence the need for a new, and higher, poverty line.

Before arriving at that conclusion, Bhalla challenges numerous other conventional wisdoms. He says that the World Bank overestimates poverty, that world poverty today really means African poverty, and that foreign aid is already adequate in the Jeff Sachs sense — transferred resources are at least equal to the minimum required to eliminate poverty.

I’ve only read the introduction, but I know that this contrarian work is interesting enough to pass it along before having completed it. Bhalla’s paper is “Raising the Standard: The War on Global Poverty” (pdf), part of Joe Stiglitz’s Initiative for Policy Dialogue.