From Prices to Incomes : Agricultural Subsidization Without Protection?

In theory, moving from price-based subsidies for agriculture to less-distorted income support programs makes sense. In practice, income-support programs have many shortcomings, and developing countries may lack the support mechanisms needed to make them effective.Drawing on experience with direct income-support programs recently introduced in the European Union, Mexico, and the United States, Baffes and Meerman highlight problems that may arise when a developing economy's agricultural sector moves from price-based subsidies to income support programs.They conclude that income-support programs, despite their theoretical appeal, have many shortcomings and that developing countries may lack the support mechanisms needed to make them effective.The consequences of delinking support from current production decisions, even though fully expected, may be perceived as negative. Producers will undoubtedly face greater variation in prices and, as the ratio of output to input prices will be lower, a negative supply response for the crops affected may in turn reduce demand for agricultural labor.Finally, as with many types of support, the lion's share of support may go not to the target group most in need of support but to large producers.It is important to remember what a direct income-support mechanism does and does not do. Although it increases the income of subsistence landholders, it is not supposed to be a poverty reduction program. Nor is it supposed to be an investment program (as there is no provision for where and how the money will be spent). And because of its association with lower producer prices, it is not expected to induce sectoral growth.Instead, it is a transitional income-redistribution mechanism that could eventually transform agriculture into a fully liberalized sector that helps allocate resources more efficiently. And because it is linked to an asset - land - the lion's share of the payments will inevitably go to large farmers, subject to an upper limit (if such is in place).This paper - a product of the Commodity Policy and Analysis Unit, International Economics Department - is part of a larger effort in the department to analyze policy reforms in developing countries