Agriculture contributes to the trade imbalances not only through the current account but also through the taxpayer cost of farm programs. Since federal government deficits are partially responsible for current trade imbalancest the huge subsidization to the agricultural sector by the federal government has contributed to the U. S. trade deficit. This trade deficit has been the cause of some instability in nominal and real interest rates in this country as well as exchange rates. It has also contributed to pOlitical instability by providing a formal justification for protectionist trade legislationt actively debated by both the House and Senate and opposed by the Reagan Administration.The gains to LDCs from industrial countries’ elimination of agricultural protection are potentially large. The recent study by Loo and Tower estimates that LDCs would gain $26 billion and would experience a 2.4 percent per year reduction in external public debt. Coincidentally, industrial countries would gain $17 billion from reduced needs of LDCs for aid. Other studies have captured large domestic employment effects of farm policies. For example, Stoeckel and Breckling have estimated that, by removing both the Common Agricultural Policy of the EC and individual government protection,planting blueberries in containers about three million additional jobs could be generated in the four largest EC countries. Manufacturing output would increase by over 1 percent and manufacturing exports would rise by 5 percent.
For the United States, Robinson, Adelman, and Kilkenny have estimated that the unilateral removal of agricultural protection would generate a $10 billion gain in the u. S. GNP, a $26 billion reduction in government deficits, and a $36 billion increase in investment. These general equilibrium effects identify a number of other potential losers to current agriculture and food policies in the developed world. In addition, a recent study by DEeD estimates the burden placed on consumers and taxpayers by the agricultural policies of industrialized countries to be approximately $200 billion in 1986. Moreover, less than half of this burden reaches farmers in the way of subsidization. In light of the large potential benefits of policy reform, why is it as yet unrealized? Evidently, current protectionism is not unanimously condemned. Individual farm policies are usually claimed to serve some social good. In some instances, the agriculture and food policies are motivated by perceived market failures or imperfections and, in other cases, they are motivated by the desire to redistribute income and wealth.Unfortunately, not only are markets sometimes imperfect or incomplete, but government policies are also less than perfect or complete in their design and implementation. Corresponding to the notion of market failure is government, or political, failure. In a prescriptive or normative sense, policies serving the public interest should minimize the adverse effects of both types of failure. This perspective is especially important in evaluating policy reform.
Given the distinction between political and economic markets, simply knowing the adverse effects of current distortionary policies is not sufficient to motivate reform. Policies are in place, in part, because they serve the interest of those with relative political power and influence. Political or government failure is the tendency of the legislative or policy-making process to be influenced by self-interested private groups. To the extent that government intervention is directed by such groups, the public interest is not adequately served. Some existing farm and food policies do serve the public interest , and some serve only the self-interests of particular economic groups . PERT policies attempt to correct market failures by offering a set of rules that reduce transaction costs associated with an unregulated market. The purpose of PERT policies is to increase economic efficiency. In contrast, PEST policies are political economic-seeking transfers and lead to government failure. In the formation of these policies, interest groups compete by spending time, energy, and money on the production of pressure to influence both the design and tactical implementation of policies. Most governments employ a portfolio, or mixture, of PERT and PEST policies. There is a wide scope of possibilities to interchange the use of PESTs and PERTs so as to acquire and maintain political power.Understanding the role and formation of PESTs and PERTs is especially important in the evaluation of various reform proposals. In a world of rational policymakers, the actual selection of policies reflects a governing criterion or political-preference function .
Current policies maximize a political objective, not the public interest, nor a social welfare function . Policies cannot be designed by some fictitious utilitarian criterion function or be based on laws written de novo on a “clean sheet of paper.” Such a model is a guide for public policy in the Garden of Eden where only the public interest is given any weight. In reality, optimal policy reform must take as its starting point the existing policy system, including the governing criteria function that rationalizes whatever PEST and PERT policies are in place. Operationally, policy reform is piecemeal and dynamic in contrast to the once and-for-always character of utopian policy design. Simply put, the mechanics of reform must be conditioned by the existing policies. The governing criterion function in the context of political economic markets plays much the same role as Samuelson’s net-social-payoff function plays in pure economic markets. In the case of pure competition, Samuelson showed that maximizing the net social payoff is equivalent to finding the price equilibrium in a particular market. Similarly, actual policy settings maximize the political-preference function reflecting the relative weight and influence of various interest groups in the policy formation process. Conceptually speaking, there is a political economic market for policy reform. The reason that reform does not occur is because of the political preference function, institutional constraints, and the transaction costs faced by various groups entering and exiting this market. The demand for reform is potentially from diverse and unorganized persons who, because their per capita burden of current policy is very small, do not have sufficient incentive individually to reveal their demand for reform. The total benefits of reform to these groups would, however, outweigh the associated total costs of supplying the reform. This is a classic market-failure outcome in which a market for reform is missing. Collective action, orchestrated by the government, can playa major role in the market for reform by lowering the transaction costs facing various interest groups. A change in the transaction costs will alter the makeup of the political-preference function. Moreover, to the extent it has some separate autonomy,container growing raspberries the government can structure alternative compensation schemes that leave no interest group worse off as a result of reform. Structuring such compensation schemes requires economic modeling to identify winners and losers of reform. Based upon some initial crude estimates of gains and losses, the government can facilitate the negotiations between losers and winners by bearing the cost of eliciting their ”willingness to pay” or “willingness to accept” reform. To the degree that the empirical results outlined at the beginning of this section are correct, the willingness to “pay” and “accept” negotiated compensation schemes can be found that lead to a positive supply of reform. The more credible is government, the lower will be the cost of supplying reform and the less waste will be generated by the strategic behavior of various interest groups. A government with sufficient credibility can also design expenditure-minimizing compensations that would counter the opposition to propose reform. Such compensation to losers of reform would be less than the capitalized loss of whatever rents such groups might be receiving from current policies.
There are, of course, many problems that must be faced in the practical implementation of compensation. Determining eligibility and interest group representation, fair compensation under uncertainty , financing compensation, designing credible threats, and reducing moral hazard concerns make implementation schemes difficult to structure. Nevertheless, there are a number of feasible alternative approaches, three of which have been developed in the literature with agricultural policy reforms specifically in mind .This process, however, will be simplified by a GATT code for agricultural trade. To the extent that this code is successful in imposing binding constraints on individual countries, it will incorporate multilateral and phased reductions in subsidies over time. To facilitate internal country reform and to enhance the probability of successful multilateral reform, proposals should recognize the significant dynamic adjustment costs that are faced by each country. The effects of reform on output and input markets, especially land markets, cannot be isolated from a country’s domestic macroeconomic conditions, nor from world economic conditions that arise during the process of joint reductions in coupled subsidies. To illustrate the importance of domestic and international economic conditions, consider U. S. agriculture in the early 1980s. Suppose that a GATT code had been established with phased reductions in coupled subsidies of 20 percent in 1980, 20 percent in 1981, 20 percent in 1982, and 10 percent thereafter per year for the next four years. This “reform” would have been indeed difficult to implement in the face of high real rates of interest, an appreciating dollar on world markets, slow growth in worldwide income, and a domestic recession. During this three-year period, market overshooting would have driven agricultural prices to unbelievably low levels creating a “policy disequilibrium.” Interest groups would have to exert pressure to change any orderly plan to phase out coupled subsidies. This would have added to the inherent instability of the market and detracted from the credibility of governments in implementing reform. The credibility of governments in implementing reform can be enhanced by the design of “flexible” agricultural policies. Flexible policy rules can explicitly incorporate macro and international linkages into automatic adjustment rules. The design of such policies should make clear what the adjustments will be so that changes can be anticipated by producers, processors, distributors, consumers, and others involved in the sector. This would result in smooth, orderly changes in prices insulated from overshooting. Accordingly, investment within the sector will be more stable and more nearly optimal and thus will not contribute to oscillating adjustments in related markets. Flexible policies imply some conditionality and admit the possibility of some variance in the implementation of reform, depending upon a country’s external economic conditions to its agricultural sector. Total liberalization by a fixed time, without some conditionality or variance, is indeed a very risky proposition. It threatens government credibility directly, and endangers the implementation of reform strategies. An inability to implement reform in a few countries can even undermine an externally binding GATT code.Government or political failure in implementing reform in some nations could lead to revisions in a GATT code that would make once binding constraints totally ineffective. Of course, if fiscal, monetary, wage, and exchange rate policies are well managed, there would be no need for a flexible, conditional process of phased reductions in coupled subsidies. Unfortunately, history provides little comfort that such policies will be well designed and implemented. To be sure, these policies are also in need of reform.In 2014, the California legislature passed the Sustainable Groundwater Management Act , the state’s effort to achieve the sustainable use and management of groundwater by 2040. The act requires the establishment of local and regional governance structures, known as groundwater sustainability agencies , to develop and implement groundwater sustainability plans by 2022. The legislation sent into action a process in which, basin by basin, local communities are identifying who they would like to govern groundwater and how they would like groundwater to be governed . The role of farmers is critical in achieving water sustainability because agriculture is the largest human use of water in the state, especially of groundwater in dry years . Agricultural production in California surpassed $20 billion in 2016, with California farmers producing more than 400 commodities . Much of the state’s agricultural production feeds a global population, with 44% exported out of the state, representing 15.6% of total U.S. agricultural exports . Agricultural production relies on both surface water and groundwater, depending on farm location and water access. At this early stage, much remains to be seen in terms of how the SGMA will be interpreted and implemented locally. Thus far, the process has primarily revolved around the forming of the GSAs.