Despite the strong case for free competition and globalization, a lot of resistance exists against it. This is to a large extent a case of special interests working against it in the hope of benefiting at the expense of the rest of society. An obvious example of this is farmers who with the present farm policy not only get partially shielded from foreign competition through tariffs and other import restrictions; they also receive subsidies both for farming and for not farming. Furthermore, they get subsidies for the farm products that are exported. The subsidies for not farming have the purpose of holding up prices on farm products, and export subsidies have a similar effect on the domestic supply and so also on the domestic price. The apparent benefits from this for farmers come mainly at the expense of domestic consumers and tax-payers (usually the same persons) which have to pay both higher food prices and higher taxes. Also, farmers in other countries will suffer as they cannot export to the EU and as they face competition from highly subsidized EU farm products even in their domestic markets.
It should, in this context, be noted that I wrote about “apparent benefits” for a purpose. Namely, to highlight how the existence of farm subsidies by reducing the competitive pressure for innovation and increased productivity could very well hurt even the farm sector. A good example of this is New Zealand’s successful abolition of farm subsidies. New Zealand used to have quite high level of farm subsidies, at roughly 33% of farm output. Then during a 6-year period, these subsidies were abolished. While some farmers experienced problems during the transition, the effects were surprisingly positive. Not just for consumers and tax-payers of New Zealand that could enjoy lower food prices and taxes, but even for the farm sector, where output increased faster than ever. Total productivity growth rose from 1.5% a year before the reforms to 6% after the reforms. Real farm incomes rose and today 90% of farm output is exported9. The fact that the New Zealand farm sector could thrive despite abolished subsidies illustrates just how strong the benefits of increased competitive pressures can be.
A similar mechanism could be at work with regards to regional subsidies. By subsidizing certain