India Must Halt Farm Subsidies: Olson

Safety nets in the form of direct sops to the poor and employment guarantee by the Union government is necessary before opening up agriculture, said Mancur Olson, professor in Maryland University, in an interview with Business Standard yesterday.

He also said domestic prices should be aligned to international prices. Emphasising that exploitation of agriculture was common in developing countries and that there was an urgent need to stop subsidising industry at the cost of agriculture, Olson recommended that farmers should be given the benefit of world prices which are invariably higher than that in the domestic market.

But this would increase the domestic price of foodgrain and make it inaccessible to a large section of the population. Thus, a back-up should be created to ensure that the poor do not suffer.

The present system subsidises for rich and poor alike and encourages inefficiency. The public distribution system is a case in point. Instead of this, specific help should be directed only to the poorer section of society. Olson refuted the point that higher domestic agricultural prices will lead to spiralling inflation. Even though large sections of industry depend on agriculture for their raw material inputs, if foreign enterprises were allowed to play a role then the required inputs will be available at competitive prices and will thus negate the tendency for price rise. Even if prices do rise, it will be a one-time change in relative prices, said Olson.

A rise in agricultural income will not reduce the source of cheap labour for industry, feels Olson, as Indias population is vast enough to provide cheap labour even after a rise in rural incomes.

He said with rise in agricultural productivity huge amounts will be exported and the net amount should be positive.

This rise in agricultural productivity can only be achieved if employment opportunities at more attractive wage levels are created in the industrial sector and the pressure of population on land is eased.

Once this happens, land holding will cease to be fragmented and capital investment in the form of fertilisers, tractors, harvesters, etc, will be possible. This will increase the production per labour and allow agriculture to take on the nature of an industry.

But the industrial sector is certainly not throwing up enough employment opportunities to soak up or induce labour laid off by agriculture at higher wages.

Olson also said foreign capital from developed countries usually set up units which use capital intensive methods and do not generally generate as much employment as is expected. He could not provide an answer to this bottleneck in his strategy for third world development and skirted the question by saying that industries, both foreign and Indian, should use labour-intensive methods of production.

He felt the development of technology would have been more labour intensive if India had not closed its doors to foreign technology for many years. He cited the example of the US and Germany and stated the osmosis of technology between countries served to create country specific technology.

But he was again clueless when asked how an open policy in technology could prevent developed countries from dumping outdated know-how in less developed nations.

Olson agreed that foreign capital is not being invested in developing nations in the areas where it is needed most urgently, especially infrastructure.

If investment is made by foreign capital in these areas it comes with a lot of strings attached. But he explained this by saying that it is in infrastructure that the government is usually heavily involved in developing countries.

The foreign companies are always wary of the political instability and demand various guarantees to safeguard against possible reversal of policy. Olson categorically agreed, however, that free trade is a myth.

Even developing countries like the US reacted to Japans huge car exports by imposing tariff and demanded quantity restrictions.

Most of Europe too has heavy agricultural subsidy. He stated this was a big mistake on the part of the developed world, even while they were framing policies for free trade in the international forum.