The short- to medium-term effects of agricultural policies in developing countries

In the case of OECD countries, the OECD has used its Policy Evaluation Model (PEM) to examine the “transfer efficiency” of farm support policies in OECD countries, i.e. the effectiveness of alternative instruments in raising the incomes of farm households relative to the cost to consumers and taxpayers (OECD, 2001). A general finding of this analysis is that, when markets function smoothly, policies that interfere with the functioning of those markets, such as price supports and input subsidies, perform poorly in terms of raising the incomes of farm households, with a significant share of the transfer leaking to input suppliers or leading to deadweight efficiency losses.1 Thus, a dollar of market price support raises the incomes of farmers by less than half a dollar, while input subsidies increase farm households’ incomes by just one third of a dollar. By contrast, payments which distort markets less, such as payments based on area, are considerably more effective at raising farm based incomes. That said, no form of payment linked to farming in any way provides the gain in net income that would result from a fully decoupled income payment. A further finding of OECD work is that market interventions also often have perverse distributional effects, paying more to larger and richer farmers than to smaller and poorer ones, and taking money away from consumers and taxpayers to boost the incomes of households whose incomes are already above average (OECD, 2003a).