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 AGRICULTURE IN A
TURBULENT WORLD
ECONOMY

PROCEEDINGS
OF THE
NINETEENTH
INTERNATIONAL CONFERENCE
OF AGRICULTURAL ECONOMISTS

Held at Malaga, Spain

26 August-4 September 1985
Edited by
Allen Maunder, Institute of Agricultural Economics, University of
Oxford, England
and
Ulf Renborg, Department of Economics and Statistics,
Swedish University of Agricultural Sciences, Uppsala

INTERNATIONAL ASSOCIATION OF
AGRICULTURAL ECONOMISTS

INSTITUTE OF AGRICULTURAL ECONOMICS

UNIVERSITY OF OXFORD

1986

Gower
 MANCUR OLSON

The Exploitation and Subsidization ofAgriculture in

Developing and Developed Countries*

DEVELOPING COUNTRIES
So far as one can tell from the available literature, the developing areas of
the world differ profoundly from the developed areas in their treatment
of agriculture. In most of the less developed countries there are a vast
variety of public policies and institutional arrangements that make many
agricultural prices lower than they would otherwise be, and in particular
often lower than the prices on the world market. In many of the poorest
countries agricultural marketing boards are given a monopoly over the
right to trade in the main agricultural export commodities and the
growers of these commodities receive only a fraction of the price their
products fetch on the world market. In some developing countries
multiple exchange rates have been used to give growers of agricultural
commodities a less favourable exchange rate than is accorded to
exporters or importers of other products. In most developing countries
the production of manufactured goods and certain other import
substitutes produced in cities is heavily subsidised through tariffs and
quotas. This not only raises the prices that farmers must pay for these
products, but also tends to reduce the prices that they receive for their
exports; restrictions on imports reduce the amount of a country's
currency that is supplied to purchase foreign goods, with the result that
the value of the country's currency tends to be higher than it would
otherwise be and the prices in domestic currency that agricultural
exporters receive are correspondingly lower. Many governments in
developing countries also provide disproportionate amounts of social
overhead capital in major cities and subsidise some types of consumption
only in these cities.
The disadvantage of agriculture and rural areas in most developing
countries is reflected not only in product prices and in explicit
governmental policies, but also in many urban and rural labour markets
and in the often extra-governmental and less conspicuous institutions that
*I am grateful to the International Food Policy Research Institute for supporting some of
the research on this paper and to the National Science Foundation, Resources for the
Future, and the Thyssen Stiftung for supporting the more general research out of which
this paper has grown.
49
50 Mancur Olson

influence wages in these markets. Though I do not know of any

comparable world-wide data on urban-rural or intersectoral wage
differences, there appears to be virtually a consensus among observers
that in most developing countries the real wage rates in the 'modern'
sectors of the biggest cities are often vastly higher than they are for
comparable labour in the agricultural and traditional sectors. There is
important evidence for such real wage differentials in the exceptionally
high unemployment rates in many of the biggest cities in the developing
world. So conspicuous are the real wages differentials and the associated
unemployment rates that one of the better-known models in develop-
ment economics- the 'Todaro model'- is devoted to explaining how the
flow of labour from rural areas to major metropolitan centres could
continue in spite of the low probability of employment in the modern
urban sector. W. Arthur Lewis's very famous model of 'unlimited
supplies of labour' to the modern and mainly urban sectors of the
developing economies also explicitly assumes a significantly higher return
to comparable labour in the modern sector than is available in the
traditional and mainly agricultural sector.
Though references to well-known theories cannot substitute for the
systematic and comprehensive international measurements that are
needed, it is doubtful that the models I have mentioned would have been
so widely used and accepted if the observations of a significant
urban-rural real wage differential were not shared by many students of
the developing countries. Substantial real wage differentials for compara-
ble labour and high unemployment rates in the very locations with the
highest wages cannot be sustained in an entirely unconstrained and
unorganised market. The unemployed and low-wage labours will, of
course, have an incentive to offer to fill the jobs of the high-wage workers
for somewhat less and the employers will have an incentive to accept such
offers. It follows that in some sectors of many of the major cities of the
underdeveloped world there must be institutions, such as collusions or
cartels of relatively fortunate workers, that generate supra-competitive
wage levels partly at the expense of potential entrants from the
agricultural sector.

DEVELOPED COUNTRIES
In the developed countries, by contrast, agricultural interests are
normally among the major beneficiaries of tariffs, quotas, price supports,
and other subsidies. In those developed economies that lack comparative
advantage in agriculture, such as Japan and most of the highly
industrialised nations of Western Europe, the subsidisation of agriculture
is quite striking, and probably far higher than the levels of subsidies to
many of the principal manufacturing industries in those countries. As T.
W. Schultz graphically puts it, many of these countries have carried
agricultural protection nearly to the point of 'greenhouse agriculture'.
Masayoshi Honma and Yujiro Hayami (1984a) have shown convincingly
 Exploitation and subsidization of agriculture 51
that the level of nominal protection for the major agricultural commod-
ities among the developed nations is greatest in those countries that are
the least likely to have a comparative advantage in agriculture. The
subsidies to agriculture are usually much less in the developed nations
with a comparative advantage in agriculture, such as Australia, Canada,
New Zealand and the United States, and the agricultural interests in
these countries (especially in Australia and New Zealand) lose substan-
tially from various forms of protection or subsidy to urban interests in
those countries. Nonetheless, agricultural interests in these countries also
conspicuously share in the society's subsidies and price-distortions. In
the United States, for example, the total government subsidies to
agriculture are in many years very large even in relation to total farm
income. There are in addition subsidies that do not show up in the
government budget. The producers of some farm products, such as fluid
milk, are systematically given supra-competitive prices at the expense of
consumers.
Unfortunately, I do not know of any data source of quantitative study
that documents this seemingly systematic difference in the treatment of
agriculture in developing and developed countries. But there appears
again to be nearly a consensus among the experts. As T. W. Schultz puts
it, 'the political market in a considerable number of high income
countries overprices agricultural products at the expense of consumers
and taxpayers. In many low-income countries the political market
underprices agricultural products'. Kym Anderson and Yujiro Hayami
(1986) similarly conclude that 'domestic food prices in Western Europe
and Japan are often twice international levels. In many developing
countries, on the other hand, agricultural prices are well below those in
international markets and manufacturing is the sector protected from
international competition.'

THE NUMBERS PARADOX

There is a strength in numbers. In democratic countries, the more
numerous interests obviously have more votes that the less numerous.
Even in non-democratic countries, the potential physical and social force
of more numerous groups should, when other things are equal, give them
more power than less numerous groups.
Why, then, is agriculture exploited in countries where farmers or
peasants constitute the great bulk of the population, and subsidised in
countries where farmers constitute only a tiny minority, often less than
five per cent, of the population? This is a question that has also puzzled T.
W. Schultz. Honma and Hayami (1984b) have underlined the paradox by
showing that Korea and Taiwan had negative nominal rates of protection
for agriculture before their rapid industrialisation began in the 1960s, but
that they have by now imposed very high levels of agricultural protection.
I would add that this change of policy has, of course, occurred during a
period when the proportions of their populations in agriculture have
52 Mancur Olson

declined. Indeed, Honma and Hayami show elsewhere (1984a) with a

regression analysis that in ten of the major industrialised countries
nominal protection for agriculture increases as the percentage of farmers
in the population declines.
The paradox that has just been described should for some purposes
have been posed in a less aggregative way. The extent of price distortions
varies from one urban industry to another and there are also great
differences in the extent of price distortions from one agricultural
commodity to another. Casual observation suggests that in urban
industries and occupations as diverse as the steel industry, the taxi
industry, and the learned professions of law and medicine there are
unusually large distortions. In the manufacture of scientific instruments
and plastics, and in the restaurant industry, I would guess, the incentives
are usually less perverse. I would also guess that there is more price
distortion in most countries (or at least most developed countries) in
dairying than in beef production, and more in rice production than in soya
beans.
Sadly, these vitally important questions about inter-industry, inter-oc-
cupational, inter-commodity and inter-group differences in the extent of
perverse incentives are usually not even asked, so that the data needed to
deal with them have not been collected. Eventually I should like to
examine these questions of inter-market and inter-group differences in
the perversity of incentives in a more detailed and disaggregated way than
one can do when one merely contrasts the agricultural and non-agricultu-
ral sectors.
Nonetheless, I think there is some interest and utility in a broad
comparison of agricultural and non-agricultural activities of the kind I am
attempting here. This comparison is some interest to me, partly because
of my farm background, and it should be of professional interest to
agricultural economists. There is also, as we shall see, one important
respect in which nearly all agricultural industries differ from almost all
urban industries, and this makes an agricultural/non-agricultural
comparison especially valuable.

IS THE EXPLOITATION OF AGRICULTURE REQUIRED FOR

DEVELOPMENT?
In many circles, the resolution of the paradox I have posed will seem
obvious. The developing nations wish to develop- to become economi-
cally similar to the nations that have already become prosperous. The
highly developed nations devote relatively small proportions of their
populations and resources to agriculture, so many believe that the
developing nations should subsidise and promote industries of the types
that are most prominent in the economically advanced countries, and
discriminate against those industries, such as agriculture, that have
become relatively minor parts of the advanced economies. Because they
mainly export primary products, the developing areas are perceived to be
 Exploitation and subsidization of agriculture 53
the hewers of wood and drawers of water for the economically advanced
nations, and they naturally strive to escape from this apparently
subordinate and unrewarding role.
It is instructive to compare low-income individuals who are striving to
become prosperous with low-income countries that are striving to
develop. There are many more individuals to observe than there are
countries, and the study of individual advancement has gone on far longer
than the study of the development of poor countries, which in one sense
began only after the Second World War. Thus much more is known about
how individuals should get ahead than about how nations should
advance. So let us ask what the low-income individual would do if he
approached his personal advancement in the way so many people, in rich
countries and poor countries alike, advise the less developed nations to
do. He would observe, for example, that rich people consume more
champagne and caviare than poor people do. By analogy with the precept
that developing nations should try to imitate the developed countries by
having more industry and less agriculture, he would then conclude that
the way to get rich was to consume more champagne and caviare!
Since knowledge about personal affairs is less ideological and based on
more experience than popular knowledge of development economics,
everyone knows that imitating the behaviour patterns of the rich is not the
best way to become rich. Almost everyone realises that it would be better
to note what those low-income people who became rich did when they
were becoming rich; it is better to take note of the hard work, the
investments in education and other assets, and the profitable innovations
(often in combination with good luck) that enabled some individuals to
earn a lot of money. Similarly, developing nations ought to examine what
the now developed nations did when they first began to develop
economically.
There is not enough space to go into this here, but I believe that a
careful examination of the economic history of the developed nations
shows that the discouragement and exploitation of agriculture is by no
means the way to bring about economic development. Indeed, our
knowledge of economic history and economic theory is already sufficient,
in my opinion, to show that the notion that the developing nations can
best develop by protecting heavy industry and discriminating against
agriculture and primary production is one of the most onerous burdens
that the millions of poor people in the developing nations have to bear.
But that is another story that I have told elsewhere and must not repeat
here (Olson 1982, 1984).

AGRICULTURE IN PRE-INDUSTRIAL EUROPE

Beliefs are realities even when they are illusions. Thus the belief that the
exploitation of agriculture and the subsidisation of industry is necessary
for economic development, even if it is (as I claim) wrong, may still help
to explain agricultural policy in developing countries. So long as the
54 Mancur Olson

governments of developing countries, and the foreign advisors and

intellectual elites that influence them, believe that the underpricing of
agricultural products is necessary for economic development, this belief
can influence public policy. Though my main explanation of the
discrimination against agriculture in the developing countries is quite
different, I think that the prevailing belief that the protection of
manufactures at the expense of agriculture is good for economic
development is part of the explanation. But not the largest part, as we can
see when we look at policy toward industry and agriculture in western
Europe (and especially in Britain) in pre-industrial times. When these
presently developed nations were undeveloped, pre-industrial areas,
they did not have any plans or policies to bring about what we would
today call economic development. They did not think sustained and
substantial increases in income per caput were possible. What some
historians call the 'idea of progress' was largely still in the future. It was
usually taken for granted that the overwhelming majority of the people in
every country would always remain poor. Mal thus's apparent demonstra-
tion that this must be so, because of population pressure and the finite
supply of land, was promptly and widely accepted. The British in the late
eighteenth century not only had no plans to promote an industrial
revolution, they did not even really understand that one was going on: it
was the 1880s before Arnold Toynbee even coined the phrase 'industrial
revolution'. Thus any promotion of industry at the expense of agriculture
in pre-industrial Britain and in the rest of Western Europe at this time
could not possibly be explained as due to any beliefthat this was necessary
for economic development.
The institutions and government policies in Britain and the rest of
Europe before the industrial revolution definitely and strongly over-
priced many industrial goods and commercial services and underpriced
many agricultural products. This is evident not only from modern work in
economic history, but also from the testimony of one of the most
observant economists of all time: Adam Smith.

The government of towns corporate was altogether in the hands of

traders and artificers; and it was in the manifest interest of every
particular class of them, to prevent the market from being overstocked,
as they commonly express it, with their own particular species of
industry, which is in reality to keep it always understocked ... In their
dealings with the country they were all great gainers . . . Whatever
regulations ... tend to increase those wages and profits beyond what
they would otherwise be, tend to enable the town to purchase, with a
smaller quantity of its labour, the produce of a greater quantity of the
labour of the country. They give the traders and artificers of the town
an advantage over the landlords, farmers, and labourers in the country,
and break down the natural equality which would otherwise take place
in the commerce which is carried on between them ... The industry that
is carried on in towns is . . . more advantageous than that which is
carried on in the country ... In every country of Europe we find, at
 Exploitation and subsidization of agriculture 55

least, a hundred people who have acquired great fortunes ... for every
one who has done so by ... raising of rude produce by the improvement
and cultivation of land (Bk. I, Ch. X, Pt. II).
The whole emphasis of the mercantilistic policies of the national
governments, as well as the guild rules of the towns, was to encourage
profit from commerce and manufactures at the expense of agriculture and
unskilled workers.
There is a striking similarity between the pro-urban policies of the
European nations (and, for that matter, Japan) before the industrial
revolution in Britain and those of the developing nations that are at a
somewhat similar level of economic development today. The pro-urban
and anti-rural policies of pre-industrial countries of Europe could not
possibly be explained by any desire to imitate the patterns in more
developed countries, for there were no such countries, nor by any beliefs
that that would promote sustained growth in incomes per caput, for no
such sustained growth was thought possible. The underpricing of most
agricultural products in most poor countries must accordingly be
explained by the inherent characteristics of poor or developing societies. 1

COLLECTIVE ACTION
How do the inherent characteristics of low-income societies, whether
those in the developing areas today or in Europe before the industrial
revolution, generate a tendency to underprice agricultural products and
overprice certain industrial products? And how does this tendency
disappear as a country becomes developed? And does it sometimes even
lead to a reverse tendency in developed countries without a comparative
advantage in agriculture?
In this paper I have tried, in accordance with normal scientific
procedure, to offer mainly new conceptions and information, and not
merely repeat what has already been said in my previous publications.
Unfortunately, this means that readers of this paper who have no
acquaintance with my books on The Logic of Collective Action (Harvard
U.P., 1965) and the The Rise and Decline of Nations (Yale U.P., 1982)
will learn about only a small part of my argument. My explanation of the
great differences in the treatment of agriculture in the developing and
developed nations is, in large part, derived from these two books. Neither
of these books deals with the differences in agricultural policies and
institutions in societies at different levels of development, but the
theories that are presented in them are the main source of my explanation
of these differences.
My explanation begins with the difficulty of collective action,
especially for large groups. Suppose any group of firms, workers, or
farmers should strive to act collectively to lobby for a tariff, price support,
tax loophole, or any other legislation that favours them, or act
collectively in the marketplace to restrict supply and thus obtain a
56 Mancur Olson

supra-competitive price or wage. The benefits of the favourable

legislation or the monopoly prices or wages would automatically go to
everyone in the relevant industry, occupation, or category, whether or
not they had borne any of the costs of the lobbying or the output
restriction. It follows that in sufficiently large groups, the benefits of
collective action offer no inducement to individuals to engage in
collective action- they would get the benefits of any such action whether
or not they participated in it, and any typical individual's contribution
would have no significant impact. Thus some large groups with common
interests, such as the consumers, the taxpayers, the unemployed, and the
poor are not organised in any society.
By contrast, the large firms in a concentrated manufacturing industry,
where the numbers are small enough so that each firm will get a
significant share of the benefit of collective action in the interest of the
industry, will usually be able to make a bargain to engage in collective
action without exceptional difficulty. In rare cases, the landholdings in a
country will be so concentrated that the landowners will also be a small
group that can organise fairly readily. Large groups will be able to
organise for collective action only when they can work out special
'selective incentives' that punish or reward individuals in the group that
would benefit from collective action, if they do or do not support the
action. The most conspicuous example of a selective incentive in the
compulsory membership and coercive picket lines of labour unions, but
all large groups that are able to organise for sustained collective action
have analogous, if often very subtle, selective incentives that mainly
account for their membership.
There are often particularly interesting examples of this is the
agricultural sectors of the developed economies. In the United States, for
example, most of the membership of the major farm organisations arises
because membership dues are 'checked off' from the patronage dividends
of farm co-operatives or added to the premiums of mutual insurance
companies associated with the farm organisation. Various tax advantages
given to co-operatives and various complementarities between farm
organisations and certain types of business organisations can make such
arrangements viable even in highly competitive environments. Some-
times farm co-operatives themselves will, in effect, function as lobbying
organisations as well as firms.
Because collective action by large groups is inherently difficult to
organise, it will emerge only slowly and in favourable conditions. It turns
out, for reasons that are explained elsewhere, that most organisations for
collective action have incentives to strive to obtain more of society's
output for their own clients through distributional struggle, rather than to
produce useful outputs themselves, and to persevere in distributional
struggle even when the costs to society are very large in relation to the
amounts that are won in distributional struggle. In this they are
fundamentally different from firms, individuals, and democratic govern-
ments in environments free of lobbying organisations. This helps to
 Exploitation and subsidization of agriculture 57

explain why long-stable societies that have had time to accumulate many
of these organisations, such as Great Britain, have in recent times been
growing less rapidly than expected. It also helps to explain the economic
miracles in Germany, Japan, and Italy after the Second World War, for
totalitarian governments and occupying armies had eliminated or
transformed most organisations for collective action.

COLLECTIVE INACTION IN RURAL AREAS OF POOR

SOCIETIES
What are the favourable conditions that are needed before collective
action by large groups is likely to emerge? Clearly organising requires
that people communicate with and sometimes meet one another. The
success of private cartelisation or collusion will depend on the costs of
insuring that all members adhere to the collusive agreement. Thus
collective action by large groups will be less likely the higher the costs of
transportation and communication. These costs depend on such things as
distance, the technology of transportation and communication, and the
degree of literacy. Private cartelisation will be dependent not only upon
the numbers that must combine, but also upon the distances that picket
lines or other forms of collusive enforcement must cover. Since
organising large groups for collective action takes a lot of time even in
favourable circumstances, the likelihood that large groups will be
organised also depends on the frequency with which organisations are
destroyed by the upheavals and repression that are common in unstable
societies.
Because farmers and peasants are obviously spread out over more
space than people in urban industries, their capacity to organise will be
particularly dependent on the costs of communication and transporta-
tion. In rural areas of low-income societies without dense, modern
networks of transportation and communication, such as Europe before
the industrial revolution or many developing countries now, sustained
large-scale collective action is normally impossible. 2 This is especially
true if the society is politically unstable, as most developing societies are.
The small number of firms in manufacturing or major urban activities
will, on the other hand, often be able to organise even in the pre-modern
economy, because of the advantages of small numbers and proximity to
each other in cities. Thus my argument predicts that some urban
industries and occupations in the pre-modern economy will be organised
to lobby and collude, and that the goods and services they sell will be
overpriced, and that main agricultural industries will by contrast not be
organised and their outputs by comparison will be underpriced.

AGRICULTURAL POLICY IN DEVELOPED SOCIETIES

As transportation, communication, and the levels of education improve
and the political system becomes stable, the great difficulties of collective
58 Mancur Olson

action will be overcome even in the rural areas. Thus farmers will be
among the groups that are organised for collective action. Farmers in
such societies will be among the beneficiaries of tariffs and government
subsidies. Private cartelisation, such as that proposed by the National
Farmers Organization in the United States, will remain impractical
because of the distances that picket lines or other forms of cartel
enforcement must cover. But those highly developed societies, like
Japan and most of the countries of Western Europe, that have relatively
little good land in relation to the size of their populations, will not have
comparative advantage in agriculture. It will therefore be possible to
support agriculture in a major way in such societies with tariffs and
quotas. The social costs of the overpriced agricultural products that
result from this protection will be far less conspicuous than the social
costs of open subsidies from the public treasury or compulsory measures
to keep productive land idle. Thus countries with a pattern of
comparative advantage that leads them to export manufactured pro-
ducts and to import farm products may on average greatly overprice
agricultural products in comparison with manufactures.
When the present argument is elaborated it can help to explain
differences in the degree of subsidisation or exploitation across different
farm commodities and across different urban products. That is, it will
allow a more disaggregated analysis of the kind I argued was needed,
earlier in this paper. Unfortunately, the inevitable limitations on the
length of papers for these meetings make it impossible for me to go into
this here. I have, however, been invited to give a comparable address to
the annual meeting of the American Agricultural Economics Associa-
tion in the United States. That address will be a sequel to the present
paper, and will go into these matters. If the present paper is read along
with that paper and the two books from which my argument is derived,
it should be clearer and more persuasive. It would, I hope, then also
persuade some agricultural economists that this is a line of inquiry that is
worthy of their own research attention. If so, my own initial efforts
should happily be supplanted in due course by more precise and
informed analyses.

NOTES
'Some readers may wonder whether the famous English 'Corn Laws' that were
repealed in the 1840s call my generalisation into question. This matter is analysed in note
2, below.
2 When the landowning interest in a country is so concentrated that a relatively small
number of families owns a substantial proportion of the land, my argument about the
lesser difficulties of organisation in small groups implies that there can be considerable
collective action on behalf of agriculture even in pre-industrial countries. Thus 'landed
oligarchies' in these countries sometimes succeed in getting policies favourable to
agriculture. There is, for example, some evidence of small group action on behalf of
agriculture in Prussia and in some Latin American countries in the nineteenth century. To
some extent, the landowning aristocracy in Great Britain has in previous centuries also
offset the tendency toward mercantilistic policies, and it was a relatively small group with
 Exploitation and subsidization of agriculture 59
a disproportionate share of political power. Adam Smith was nonetheless right on balance
in giving the name 'mercantilism' to the policies of Britain and most other European
governments. It is sometimes supposed that the English 'Corn Laws',- made so famous by
the controversy over their repeal, indicated that agricultural interests were especially
favoured in Britain until the 1840s. This supposition is not, in my opinion, correct. The main
reason is that Britain was not in typical years a grain importer until about the 1770s, so that
the import duties on grain had little effect. There were also bounties on grain exports in
years of relatively low prices; but exports were prohibited and import duties and bounties
suspended in years of relatively high prices. Thus before 1815 the English Corn Laws are
generally believed to have had only a small effect on prices, and in years of dearth that effect
favoured consumers. After about 1815, the growth of population and income because of the
industrial revolution made Britain a substantial importer of grain and this unanticipated
change made the corn laws far more favourable to agriculture than they would otherwise
have been. Urban interests then gave a high priority to the repeal of these laws and they
were in due course abolished. (I am grateful to John Wallis and Adolph Weber for most
helpful criticisms on this point, but they are not responsible for my interpretation.)

REFERENCES
Anderson, Kim and Hayami, Yujiro, The Political Economy of Agricultural Protection:
East Asia in International Perspective, Allen and Unwin, London, 1986.
Honma, Masayoshi and Hayami, Yujiro, Structure of Agricultural Protection in Industrial
Countries, 1984a.
Honma, Masayoshi and Hayami, Yujiro, Determinants: East Asia in International
Perspective, 1984b.
Olson, Mancur, Australian Economic Review, 1984, pp. 7-17.