NCPA - National Center for Policy Analysis


December 1, 2008

As governments race to fill the vacuum left by the collapse of a particular model of financial capitalism, they would do well to remember that the perils of overly light regulation can be more than matched by heavy-handed interventionism of a kind that distorts and inhibits markets. They need only look at half a century of experience with agriculture policy, says Jack Thurston, a trans-Atlantic fellow of the German Marshall Fund of the United States.

Since the late 1950s, Europe had a command-and-control farm policy in which prices were set and farmers were guaranteed good prices regardless of whether their products were actually needed, resulting in an out of control farm budget.  But in 1992, the European Union (EU) began moving toward a more market-oriented model.  Yet, skeptics prevent more sweeping reforms, seizing on the recent volatility in global food prices as evidence of the failure of markets. 

But there are 3 principal causes of the food crisis, and each is an instance of too much government intervention, not too little, says Thurston:

  • Most significantly is the low productivity of farmers in sub-Saharan Africa, India and parts of Latin America.
  • A second and more proximate cause of the food crisis was the government policy that encouraged the burning of food crops as transportation fuel.
  • The recent tightening of food markets was amplified to crisis level when the governments of a handful of countries like Russia, Vietnam and Argentina, which traditionally grow a surplus of key crops, began restricting their exports to keep domestic prices low.

Moreover, EU farm subsidies amount to a permanent bailout with a twist. They are paid whether times are good or bad; and the more fertile your land, the more help you get.

The European Union could do worse than follow this logic and retreat to a supervisory role ensuring that national farm policies and subsidies do not distort the single market.  Such reforms could save tens of billions of Euros, says Thurston.

Source: Jack Thurston, "A Permanent Bailout," Wall Street Journal, November 24, 2008.

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