A healthy agricultural sector needs plenty of sunlight. To that, our guest commentators this month would add that it also requires a bright light on farm subsidies. Jack Thurston and Nils Mulvad, the founders of Farmsubsidy.org, are two people who have helped foster greater transparency in agricultural subsidies by pressuring governments in the European Union to publish data on payments and recipients of farm subsidies. With the help of journalists and researchers, their deft and persistent use of so-called "Freedom of Information" laws has led to notable breakthroughs over a short time.

The efforts of farmsubsidy.org, along with other similar initiatives in the EU and the United States, have done much to enlighten the debate on the role subsidies should play agricultural policy. Overall, however, the quality and availability of data on subsidies varies widely from country to country, while within countries information differs considerably depending on the economic sector and level of government. More often than not, quality data on government subsidies is sorely lacking. This is especially true in the services sector, as Pierre Sauvé notes in his introduction to subsidies and services. The complexity of the services sector goes some ways in explaining paucity of data, although a lack of political will is also to blame.

On the lighter side, we introduce a new feature in Subsidy Watch that we call Waffeloids, in which we highlight the contradictory, the absurd, or the plain wrong when it comes to comments on subsidies. This month we feature two recent quotes from Vinod Khosla, the founder of Khosla Ventures and one of the most vocal proponents of biofuels. Mr. Khosla is not always consistent, it seems, when he speaks on the topic of subsidies for biofuels.

Transparency in farm subsidies: is sunlight the best disinfectant?

Jack Thurston and Nils Mulvad
Co-founders, www.farmsubsidy.org

Question: what do Prince Albert of Monaco, Ted Turner, Lufthansa, Congressman Marion Berry (D-AK), the Danish State Prison Service, Nestlé, the Duke of Westminster and Dutch Agriculture Minister Cees Veerman all have in common? Answer: they all receive large payments under the European Union and United States farm subsidy programs. Until recently, governments kept records of such payments in files marked 'top secret'. But thanks to the achievements of investigative journalists, academic researchers and campaigning non-governmental organizations, light is now being shed on the question of who gets what — and why.

In 1996, the Washington Post newspaper won a landmark court case forcing the US government to hand over lists of all farm subsidy payments. In 2002, the Environmental Working Group (EWG) made these data available to the public in its online Farm Subsidy Database. It was not long before European journalists and researchers started to request farm subsidy data from their governments. The first breakthrough was in Denmark in 2004.

Today as many as 13 EU countries have released data on some or all of their farm payments. In most cases, ministers and their advisers have sought to thwart freedom of information requests, fearing the public reaction. Only in the former eastern bloc countries of Estonia and Slovenia did governments make a virtue of openness by voluntarily releasing the data. But aside from exposing showbiz and celebrity 'farmers' on the public payroll, embroiling politicians in rows over conflicts of interest and uncovering new levels of 'corporate welfare' in the agri-food sector, what are the consequences of transparency for farm policy?

First of all, the sheer scale of farm subsidies is becoming apparent, as is the concentration of payments among a few large recipients. US federal subsidies totalled $143.8 billion from 1995-2004, according to the EWG. Some 72% of all payments went to the top 10% of recipients. In 2003-04, the EU paid €30 billion to its farmers, with 80% these payments going to just 20% of recipients. These results undermine the argument used on both sides of the Atlantic that farm subsidies exist to help the 'little guy' and traditional, family farms. It is no surprise that small farmers' groups like the Confédération Paysanne in France and the Arbeitsgemeinschaft bäuerliche Landwirtschaft in Germany are in the vanguard of transparency campaigns. As a result, individual recipient payment limits are now top of the agenda in Washington DC and Brussels.

Geographical analysis is showing that the most heavily subsidized land is often the land with the most severe problems of fertilizer runoff, overgrazing and soil erosion, and the least rich in natural beauty. The EWG has analysed farm subsides in the Mississippi River watershed and found a strong positive correlation between farm subsidies, over-application of agro-chemicals, soil erosion and flood risk. Are federal farm subsidies responsible for the poisonous 'dead zone' that appears every summer in the Gulf of Mexico?

In Europe, farm subsidies are often justified as rewarding farmers for being the stewards of the countryside, providing non-market benefits enjoyed by the rest of society. However, transparency is showing that farm subsidies are concentrated in Europe's areas of industrial agriculture and not in places to where people actually choose to go when they want to enjoy the countryside.

The European Commission, for many years hesitant about transparency, has officially embraced the idea. Following the French and Dutch 'no' votes on the draft EU constitution, the Commission has realised that transparency is necessary to reconnect citizens with the political institutions that serve them and the policies that are carried out in their name. If subsidies form part of a 'social contract' between recipient and society, then it is essential that the public knows to whom the money is being paid – and why.

There is no reason, therefore, why transparency should be limited to farm subsidies. Subsidies to fisheries, energy, infrastructure and industry ought to be brought out into the open as well. And not just in Europe and the United States. Why should the citizens of Japan, South Korea, Brazil and India be denied the same rights? Former US Supreme Court Justice Louis Brandeis said that 'sunlight is the best disinfectant'. For us, transparency is more than just a safeguard against fraud and corruption. We believe that transparency promotes accountability, civic engagement and legitimacy, the result of which is better public policy.

Jack Thurston and Nils Mulvad are the co-founders of www.farmsubsidy.org, a network of journalists, analysts and campaigners in more than twelve European countries who are seeking to obtain detailed data on farm subsidy payments and make these data available in a way that is useful to European citizens.

An introduction to service subsidies

Pierre Sauvé*

The last round of World Trade Organization (WTO) trade talks, the Uruguay Round, broke new ground by broadening the scope of world trade rules to cover areas never before subject to multilateral disciplines, and the services sector was without doubt where such broadening was most significant in economic terms. Nonetheless, some twenty years after the Uruguay Round was launched, the framework of rules governing services trade globally – the General Agreement on Trade in Services (GATS) – remains incomplete.

In trying to craft new disciplines for the services sector, the trade policy community faces formidable challenges, due to the regulatory complexity, sectoral diversity, public good sensitivity, and ubiquitous nature of services as inputs into much of what societies produce, market and export. Within this scenario, the matter of subsidy disciplines for services trade, one of the unfinished areas of GATS rule-making, is proving to be a hard nut to crack.

Article XV of the GATS directs WTO Members to develop multilateral disciplines necessary to reduce the distortive effects subsidies may have on trade and investment in services. Alongside discussions on emergency safeguard measures, government procurement for services and the trade effects of non-discriminatory domestic regulation, subsidy talks form part of the GATS' so-called "built-in agenda" that since 2001 has been subsumed under the Doha Round of negotiations.

But when the Doha Round trade talks ground to a halt this summer over tariffs and subsidies to agriculture and market access for industrial goods, little progress had been made in the services negotiations. What energy had been spent focused more on market access and parameters for domestic regulation than on subsidy disciplines.

In the absence of multilaterally agreed disciplines, WTO Members' subsidy practices in services are currently subject only to the GATS' general obligations. These include its most-favoured nation treatment obligation, which prohibits discrimination among trading partners, and its national treatment obligation in sectors where liberalization commitments are scheduled (i.e., formally notified). National treatment in respect to subsidies means that a subsidy that can be used by domestic service providers must be available to foreign service providers as well.

Information on the nature, extent and economic impacts of subsidy practices in services is generally scant. With the exception of the European Union's highly developed regime on state aids, a general lack of information is the norm. This is true both nationally and internationally, as efforts to collect and disseminate cross-country information on services-related subsidy practices at the OECD and the WTO have to date revealed. The GATS imposes a general transparency obligation relating to "all relevant measures of general application which pertain to or affect the operation" of the Agreement (Article III), including subsidies. However, the number of countries that have notified the WTO of subsidies affecting trade in services can be counted on one hand.

Nevertheless, the little evidence that has become available indicates that sectors such as transportation, tourism, audio-visual services, energy services, finance and, most recently, IT-related business process outsourcing, tend to benefit from subsidies. The policy rationales behind such measures are typically multi-dimensional. These include the desire to promote infant industries, to help secure the achievement of universal access objectives (e.g. health, education, and sanitation), to encourage more sustainable patterns of production or consumption (e.g. in energy and transport), as well as the more general need to respond to market failures and their potentially undesirable social and developmental consequences.

That service subsidies may also have distortive effects on international trade and investment akin to what one observes in goods trade is also not in dispute. Subsidies affecting trade in services can be classified into three broad categories, depending on how their distortive effects are most likely to be felt. These are: export subsidies; import-displacing subsidies; and production subsidies that can materially affect the price and quantity of services available for export or for competition in domestic markets (in the case of investment-related subsidies).

The lack of progress registered in some twelve years of post-Uruguay Round discussions, and the absence of new subsidy disciplines in the proliferating spaghetti bowl of preferential trade agreements covering services, suggest a collective preference for inaction. Yet as the intensity of competition in services heightens, pressure may build for a more comprehensive set of disciplines to respond better to the potentially distortive effects of domestic support measures on patterns of cross-border trade and investment.

In developing such disciplines, negotiators will likely need to adapt and learn from the rules designed to discipline subsidy practices in goods trade (manufacturing and agriculture). In so doing, they will need to ensure that any new disciplines respond to the more complex ways in which trade in services occurs (e.g. the need for factor mobility – the cross-border movement of capital and labour), the considerable public sensitivity over subsidies to a number of key sectors, and the difficulty of finding 'one size fits all' rule-making solutions for a sector as diverse as services.

Negotiators will also need to contend with more complex definitional challenges in mapping the scope of possible new disciplines in view both of data weaknesses (which will complicate attempts at determining the extent of injury driving from alleged subsidization) and of the greater degree of regulatory intensity present in services trade. Finally, negotiators will need to consider the operational feasibility and ultimate desirability of countervailing mechanisms in a sector where border measures (i.e. tariffs and duties) are of limited relevance as possible instruments of contingent protection. The above discussion suggests that such a rule-making journey is likely to prove arduous.

Pierre Sauvé is a faculty member and non-resident Senior Research Fellow at the World Trade Institute, in Berne, Switzerland, and a Visiting Fellow and Research Associate in the International Trade Policy Unit at the London School of Economics and Political Science, in London, U.K. Contact: pierre.sauve@wti.org

Readings

• US to introduce on-line database on government spending
  A searchable database that tracks federal spending by the United States government will come on-line by 2008, following legislation passed in September. The Web-based search engine, which will include all federal funding to public and private organizations, has been hailed as a victory for transparency in government operations by a broad coalition of advocacy groups.
  
  For each entity receiving federal funding, the database will show the amount of money received in the last 10 years and an itemized breakdown of each transaction. Users should be able to search a particular company (say Archer Daniels Midland or Boeing) and be shown all grants, contracts, subcontracts, loans, awards and other forms of financial assistance paid out to it by the federal government.
  
  Initially, the database will cover data for the 2006 and 2007 fiscal years. By 2009, the data will stretch back to 1999.
  
  The bill mandating the new on-line database was introduced by two Senators, Democrat Barack Obama of Illinois and Republican Tom Coburn of Oklahoma. Two senators who had anonymously placed a hold on the legislation, Republican Ted Stevens of Alaska and Democrat Robert Byrd of West Virginia, acquiesced after they were revealed by bloggers.
  
  President George Bush signed the Federal Funding Accountability and Transparency Act into law on 26 September 2006.
  
  "We applaud Congress and the President for working together on this common-sense legislation," said Andrew Moylan, the government affairs manager of the National Tax Payers Union (NTU), an organization that helped promote the bill.
  
  OMB Watch, a non-profit organization dedicated to government accountability, stresses that the database must be user-friendly. "While the enactment of this bill is certainly a victory for transparency and access to information for the American people, it does not guarantee the online database will be easy to use and accessible for novice users and analysts alike," said OMB Watch in a statement.

• Modernizing America's Farm and Food Policy: Vision for a New Direction
  The Institute for International Economics, of the Chicago Council for Global Affairs, has called on the US Congress to reform trade distorting agricultural subsidies, in a report authored by a group of influential policy makers and economists.
  
  Agricultural policy under the current US farm bill may be popular among agricultural producers, but has worked against smaller farmers by promoting consolidation and higher land prices, states the report, which urges Congress to move ahead with subsidy reform despite stalled talks at the WTO. That reform includes bringing an end to countercyclical payments, loan deficiency payments and marketing loans.
  
  "The Farm Bill budget will likely be a smaller, zero-sum game in 2007," said Robert Thompson, the former USDA Assistant Secretary for Economics, and one of the authors of the report. "Now more than ever, spending decisions must be driven by investments in the future of US agriculture, the real needs of rural America, the national economy, public health and the environment."
  
  However, while concrete discussion of next year's farm bill will come after the November mid-term election, there is a growing belief that it will look very much like the 2002 farm bill. With the Doha Round of trade talks in limbo, an agreement that would lock the US into agricultural subsidy reform before the new farm bill is passed is growing increasingly unlikely.
  
  Moreover, the mood in Washington is likely to be timid, as the outcome of US election is expected to be tight. "This would suggest that changes to the Farm Bill for 2007 will probably be relatively small," notes a recent report by Purdue University, Agriculture Outlook 2007.
  
  The Purdue University report predicts that the other big story in 2007 will be the continued growth of the biofuels industry, spurred by government policies and high oil prices. On top of federal legislation mandating the use of biofuels as a fuel additive, states are increasingly playing a role by passing their own renewable energy standards, notes the report. In Minnesota, for example, gasoline must be 20% renewable by 2015.
  
  Yet, as some skeptics have pointed out, the growth of the ethanol industry in the US will soon meet natural limits, particularly ethanol derived from corn feed. "It is clear that the ethanol industry cannot continue to grow on the use of the corn seed as a feedstock source for more than a few more years without hitting huge constraints including extreme competition of corn use for food," says the report.
  
  The Chicago Council on Global Affairs also discusses the growing role that biofuels are playing in the US agricultural sector. It calls on the federal government to subsidize research on biofuels, but recommends that the industry be weaned off support as it matures: "Federal support programs must insist that ... companies benefiting from biofuel subsidies and import restrictions develop business models that ultimately accommodate a scaling back of such federal support to levels consistent with those given to other fuel production sectors."

• European Commission proposes extending biofuel subsidies to accession states
  The European Commission has moved to extend biofuel subsidies to eight accession states that are currently ineligible under the Common Agricultural Policy (CAP). The so-called energy crop premium, introduced in 2003, provides 45 euros per hectare for land dedicated to energy crops. According to the EC, the scheme is designed to encourage farmers to produce crops for energy rather than food.
  
  Under a proposal announced on 22 September 2006, eight of the 10 new member states (The Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Poland and Slovakia) will become eligible for the energy crop subsidy. The maximum area which can benefit from the subsidy would rise from 1.5 million hectares to 2 million hectares, according to the EC. These countries would also be allowed to subsidize up to 50% of the costs incurred in establishing energy crops on new land.
  
  The European Commission has actively promoted biofuels in recent years, under a plan to meet 5.75% of its overall transport fuel supply with biofuels by 2010.
  
  Meanwhile, the French government announced in September that it intends to promote home-grown biofuels for the production of E85, a blend of 15% gasoline and 85% ethanol. France will block cheaper imports from countries such as Brazil, in favour of domestically produced product, said the French Agriculture Minister, Dominique Bussereau. "We must protect ourselves," said Mr. Bussereau, as reported by Dow Jones. "We must prevent such product from landing on our market."

Events

• Seventh Annual Global Conference on Environmental Taxation
  22-24 October, Ottawa, Canada
  
  Hosted by the University of Ottawa, the Environmental Taxation Conference is an annual gathering of leading international experts in law, economics, tax and accounting, political sciences, environmental policy and more who will present the latest research findings about how economic instruments can be used to advance sustainable development. The theme of this year's conference is Translating Theory to Practice. Topics to be covered include the following:
  
  

  • How have different jurisdictions succeeded in building public and political support for environmental taxes and charges?

  • What has been the experience to date using economic instruments to encourage sustainable transportation, promote renewable energy, reduce waste, rationalize mineral and water use and implement climate change policy?

  • Which instruments have worked under what circumstances? Which have proved unsuccessful?

  For more information, email envconf@uottawa.ca.
  
  

• Government support for ethanol and biodiesel
  Washington, D.C., 25 October
  
  The biofuels industry has seen tremendous growth in recent years, fuelled in large part by border protection, subsidies, government procurement, tax relief and rebates, as well as by mandated shares in total transport fuel sales. Government support—monetary and non-monetary—to the production and consumption of biofuels has potentially large and difficult-to-predict implications for trade and the environment. The International Institute for Sustainable Development's Global Subsidies Initiative (publishers of this newsletter) has made quantifying the extent of subsidies to biofuels a priority. Studies have been undertaken in Australia, Brazil, Canada, the EU, the United States and Switzerland. On 25 October, 2006, the GSI will release its report on subsidies to biofuels in the United States. For more information, contact GSI's Director of Research at rsteenblik@iisd.org.