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Agricultural & Applied Economics Association

A Positive Theory of Agricultural ProtectionAuthor(s): Johan F. M. SwinnenSource: American Journal of Agricultural Economics, Vol. 76, No. 1 (Feb., 1994), pp. 1-14Published by: Blackwell Publishing on behalf of the Agricultural & Applied Economics AssociationStable URL: http://www.jstor.org/stable/1243915

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Articles

A ositive

T h e o r y

o

gricultural

rotection

Johan

F. M.

Swinnen

The

present paper

analyses

the

political economy

of

agricultural

protection

in a

general

equilibrium

framework. Rational

politicians

offer

protectionist

policies

in return

for

political

support

from their

constituency.

Individuals

in

the

economy

have

different

factor endowments.

Politicians

exploit

these differences in

establishing

redistributive

policies

when

maximizing

political support. Changes

in economic

variables-such

as

the

urban-rural ncome

gap,

capital intensity,

the share of

agriculture

in total

output

and

total

employment,

and the share of food in consumer

expenditures-affect

the

political

equilibrium

policy.

The

analysis

concludes that the observed correlation

between

economic development and agriculturalprotection is caused by a multiplicity of factors.

Key

words:

agricultural protection,

economic

development,

political

economy.

It

is well known that

agriculture

s

generally

taxed

in

developing

countries

and

mostly

subsidized

in industrial countries

(Bale

and

Lutz;

Krueger,

Schiff,

and

Valdes).

Protection

generally

shifts

from the

industrial

sector to

agriculture

during

the

process

of

economic

development:

There

is

a

striking

similarity

between

the

pro-urban pol-

icies of

the

European

nations

before

the

indus-

trial revolution

in Britain and

those

of

the de-

veloping

nations

that are at

a somewhat

similar

level

of

economic

development today

(Olson,

1985,

p.

55).

In

addition,

export

sectors are taxed

heavily

in

LDCs,

while food

crops

are

taxed much

less

severely

and,

on

average,

obtain a

slight

posi-

tive

subsidy (Krueger,

Schiff,

and

Valdes).

Theoretical

studies

attempting

o

explain

these

and

other

facts have

mostly

stressed the

impli-

cations

of

organization

costs

on the

political

de-

cision-making process.

It is

argued that eco-

nomic

development

reduces farmers'

organization

costs,

leading

to

government policies

that

are

increasingly

beneficial

for

agriculture

(e.g.

01-

son

1985,

1990).

Other

studies

on the

deter-

minants

of

agricultural policies

have

stressed

factors

affecting

the

distributional effects of

ag-

ricultural

protection

and have often

primarily

fo-

cused on

empirical

results. For

example,

Gard-

ner

(1987a)

finds a

negative

relationship

between

protection

and the

self-sufficiency

ratio of

ag-

ricultural

products.

His

analysis

also

indicates

for

the

United

States that low

supply

and

de-

mand elasticities are

associated with

more

in-

tervention. Other

papers

have

suggested

the

im-

portance

of

production

actor

intensities,

the

share

of

food

in

expenditures,

the

share of

agriculture

in

GNP and

employment,

the

ratio of

market

surplus

to total

expenditures,

and

responsive-

ness

of

industrial

profits

to food

prices

in

the

determinationof

agriculturalpolicies

(Anderson

and

Hayami,

Honma

and

Hayami,

Balisacan

and

Roumasset,

Anderson

and

Tyers,

de

Gorter

and

Tsur, Roe 1991b).

A

factor

receiving

little

emphasis

in

the

lit-

erature is the

negative

correlation

between

ag-

ricultural

protection

and

agricultural

ncome rel-

ative to other

income.

Tracy

describes

how,

ever

since

1880,

West

European

governments

have

implemented

measures

to

protect

farmers'

in-

comes

as

reactions to

'agricultural

crises.'

Sim-

ilarly

in

the

United

States,

agricultural

programs

were

established in

the first

part

of

the

century

to

solve

the

'farm

problem.'

Bullock

shows

how

U.S.

transfers to

agriculture

are

countercyclical:

farmersget more governmentsupportwhen they

face

harder times. A

more

general

overview

of

studies

indicating

a

negative

relationship

be-

Jo

Swinnen

is

a

research

economist

at

the

Leuven

Institute for

Cen-

tral and

East

European

Studies

in

Belgium.

The

paper

is

based on

a

chapter

of

his

unpublished

PhD

dissertation at

Cornell

University.

The

author

is

greatly

indebted to

Harry

de

Gorter

for

directing

his

attention

to

these

issues and for

numerous

discussions and

com-

ments. Further

comments

by Terry

Roe,

Tim

Mount,

Steven

Kyle,

Eric

Fisher,

Isabel

Lindemans,

the

reviewers,

and

participants

in

seminars

at

Cornell,

Berkeley,

and

Leuven

greatly

improved

the

paper.

The

author

is

grateful

for

financial

support

by

the

Depart-

ment

of

Agricultural

Economics

at Cornell

University.

Review

coordinated

by

Steven

Buccola.

Amer.

J.

Agr.

Econ.

76

(February

1994):

1-14

Copyright

1994 American

Agricultural

Economics

Association



2

February

1994

Amer.

J.

Agr.

Econ.

tween relative

income and

government

transfers

is

in

Baldwin

(1989).

While Gardner's

(1987a)

and

Honma

and

Hayami's empirical

work

indicate a

negative

correlationbetween farmers'

relative

income

and

agriculturalprotection, none emphasizes this re-

lationship

as a

major

factor.

Bullock

(p.

617)

claims that

current

political economy

models

fail

to

explain

countercyclicity

because

they

fo-

cus on

political agents'

constraints

to

the

neglect

of

political agents'

objectives.

De

Gorter

and

Tsur demonstrate

the

negative relationship

with

several

empirical

examples, including

data from

the World Bank

Political

Economy

Project

(Krueger,

Schiff,

and

Valdes).

They

claim

that

pressure

group

models

focusing

on

organization

costs cannot

explain

the correlation.

De

Gorter

andTsur arethe first to

explicitly

focus on farm-

ers'

relative

incomes

as a variable

explaining

agricultural

protection

in

a

political

economy

framework.

They specify

a

model

in

which

ra-

tional and

informed

politicians

and voters

inter-

act

and

in which individual

incomes

relative to

incomes

in

the rest

of

society

affect

voter

activ-

ities and

hence

policies.

I

attempt

here to

contribute

to

the

explanation

of

agricultural

protection

in two

ways.

First,

I

generalize

the

approach

of

de Gorter and Tsur

and

show that

the

observed

negative

correlation

between

agricultural

protection

and farmer in-

come can

be

explained

by assuming

(1)

that ra-

tional

politicians

maximize

political support

and

(2)

that

political

support,

provided by

informed

citizens,

is affected

by policy-induced

welfare

changes.

Second,

by

integrating

the

political

model

with

a

general

equilibrium

specification

of the

economy,

I

analyze

in

more

detail how

economic

factors

and

political

decision-mak-

ing

influence

one

another.

I

show that structural

changes

typically

coinciding

with economic de-

velopment

induce an

increase

in

agricultural

protection.

I conclude that the

empirically

ob-

served

correlation

between

agricultural protec-

tion and

economic

development

is caused

by

a

multiplicity

of factors.

My

analysis

of

the

impact

of structural

hanges

on the distributional

effects

of

agricultural

pro-

tection

is

based

on

a

specific-factor

model. It

assumes

two

inputs

for each

industry.

One of

the

inputs

is

perfectly

mobile,

while the other is

specific

and

fixed. This

model is

appropriate

ue

to the inherent

short-run

nature of the

political

process. Magee,

Brock,

and

Young provide

em-

pirical

support

for it. The model is used in ana-

lyzing

the

political

economy

of trade and

fi-

nance

policies

(Findlay

and

Wellisz;

Mayer;

Staiger

and

Tabellini;

Roe

1991a).

Individuals

are assumed to

differ from

one

another

by

their

ownership

of

production

factors.

The

political

model

is

in

the

traditionof

Downs

and

Stigler

and

builds

on the

approach

of

de

Gorter and Tsur. Rational politicians and citi-

zens interact

n

a

political

market.

Politicians

offer

a

policy

to

their

constituency

in

return

for

po-

litical

support.

Citizens increase their

political

support

if

they

are

helped by

the

policy

and re-

duce

support

if

they

are hurt. The

change

in

po-

litical

support

is

assumed

proportional,

so

that

politicians apply

a

redistributive

policy

up

to the

point

where the total increase

in

support

from

those

benefiting

is offset

by

the

aggregate

loss

in

support

from those taxed. The first

implica-

tion

is

that

deadweight

costs,

which

reduce the

benefits and increase the losses from redistri-

bution,

will reduce

the

level of the

transfer

pol-

icy.

Second,

if

political support

is

a

concave

function

of the

policy-induced

welfare

change,

politicians

will increase

redistributive

transfers

to farmers as

agricultural

incomes fall

relative

to the rest

of

the

economy.

Third,

any

transfer

can occur as

long

as

political gains

to

the

po-

litical

entrepreneur

are

larger

than

the

political

losses.

Therefore,

either a

minority

or

a

major-

ity

of the

population

can benefit

from

redistri-

butive

policies.

However,

a decline

in

rural

population

will increase transfersto farmers. Fi-

nally,

structural

changes

in the

economy

affect

the benefits

and losses

of

agricultural protec-

tion. Structural

changes

therefore

change

the

political

reactions

to redistributive

policies

and

hence the

equilibrium policy.

For

example,

in-

creasing

capital

intensity

in

and

outside

agri-

culture,

decreasing output

elasticities,

or

de-

creasing

shares

of

agriculture

n

employment

and

total

output

will increase

agricultural

subsidi-

zation.

The

Model

Consider

an

economy

with two sectors:

agri-

culture

(A)

and

manufacturing

(M).

All individ-

uals have

identical

preferences

and maximize an

indirect

utility

function

U(y'),

where

(y')

rep-

resents

individual

disposable

(net)

income

and

i

=

A,

M. Assume

first that each sector has n,

identical

individuals with

a

pre-policy

'endow-

ment' income

y'.

Politicians have

a

redistribu-

tive

policy

R at their

disposal, representing

the

total size of a potential income transfer from

industry

to

agriculture.

Therefore,

net income

y'

=

f'

+

R',

where



Swinnen

A Positive

Theory

of

Agricultural

Protection

3

RA

= [R

-

CA(R)]/nA

RM

= -

[R

+

CM(R)]/nM

with

C'(R)

representing

the

deadweight

costs as-

sociated

with transfer

R. I assume

C'(0)

=

0,

C'(R)

> 0 for R >

0,

C'(R)

< 0 for R <

0,

and

CKR(R)

>

0,

where

C'

and

Ci,

represent

the first

and

second

order derivative

of

C'.

The

marginal

effect

of R on individual

disposable

in-

come

is

then

(2)

AyA/aR

=

[1

-

CA]/nA

y

ayM/aR

=

-[1

+

CM]/nM.

Political

decision

making

is modeled

as the

interaction

between

rational,

fully

informed

pol-

iticians

and voters. Politicians

provide

a

transfer

R to their constituency in return for political

support.

Citizens

increase

political

support

f

they

benefit

from the

policy

and

reduce

support

if

the

policy

decreases

their

welfare.

Specifically,

in-

dividual

i's

political

support

S'

is

assumed

to

be

a

strictly

concave and

increasing

function

of

the

change

in

utility

caused

by

the

policy':

v'(R)

=

U'(R)

-

U'(O).

Therefore,

(3)

S'

=

S[U'(R)

-

U'(0)]

=

S[v'(R)]

where all individuals

are assumed to

have

iden-

tical

support

functions.2

'Political

support'

here

is

comparable

to

'political pressure'

in

pressure

group

models.3

However,

there

are

two

impor-

tant differences

with

respect

to the

resulting

equilibrium.4

First,

resources invested in

the

po-

litical

process

are

ignored.

Second,

most

pres-

sure

group

models

ignore

the role

of

political

entrepreneurs

and

focus

on the

strategic

behav-

ior of

opposing

political groups.

The

resulting

political equilibrium

is

typically

a

Nash

one,

which

may

not exist or

may

not be

unique

(Roe

1991a;

Magee,

Brock,

and

Young).

In the

pres-

ent

model,

interactionbetween

active

politicians

and

the

informed

constituency

is

the

determin-

ing

force. Politicians

offer the

transfer

(level)

maximizing

their total

political support,

subject

to the

government

budget

constraint.5

The

po-

litical

calculus

leads

to the

following

equilib-

rium condition

for the

politically

optimal

in-

come

transfer

R*:

sA

uMa

+

cM)

SM U A

C A

where

S

,,

U'.,

and

Ci

refer to the first

order

derivatives

of

S, U,

and

C,

respectively.

First,

strict

concavity

of

S(')

and

U(')

assures

that

R*

=

0

is a

unique

optimum.

Second,

condition

(4)

implies

that,

at

the

politically optimal

transfer,

the

marginal

increase in

political support

from

those who benefit

from the

policy

is

equal

to

the

marginal

decrease in

political support

from

those

who lose. Redistributive policies will be estab-

lished

up

to

a

point

where

the increase

in

polit-

ical

support

from the

beneficiaries is

exactly

offset,

at

the

margin,

by

the

growing opposition

from the taxed

group.

As

a

consequence,

the

size

of

the

transfer

depends

on

factors

that

affect

either

the

marginal

utilities in

the different

groups,

costs involved in

the

transfer,

or the

distribu-

tional

effects of the

transfer

policy.

Endowment Incomes

and the

Politically

Optimal

Transfer

Consider the scenario

whereby

prepolicy

in-

comes

between

groups

are identical. This

results

in

R*

=

0. With identical

endowment

incomes

(YA

=

YB)

and R =

0,

the

marginal

utility

of

income is

identical for both

groups:

U,A

=

The

right

hand side of

(4)

will

therefore

equal

one for

R

=

0.

Also,

R

=

0

implies

that

v'

=

0 for

both

groups

and,

hence,

that the

ratio

of

marginal political

supports

equals

unity:

SA

S~

Consequently, equation

(4)

holds

for

R

=

0.

The

optimal

government policy

is to not transfer

any

income

between

groups.

This

outcome

holds

under the

extreme

assumption

of

identical

sup-

port

functions

(SA

=

,

at

R

=

0).

As

political

support

functions

differ

among

individuals,

the

result

is

mitigated.

The

optimal

subsidy

shifts

toward

individuals with

more

sensitive

political

support

(Swinnen

and

de Gorter

1992).

How-

ever,

the

latter

assumption

does

not

affect

the

following

results.

Consider an

exogenous change

in

the

relative

per capita

incomes between

groups:

i.e. now

i

I follow

Downs'

(chapter

4)

specification

that

political

support

is a

function of the

utility change

induced

by

the

policy.

Unlike

Downs, however,

I

assume that both

politicians

and

citizens

have

perfect

information and that there are

no

voting

costs.

Alternative

specifications

are

Peltzman, Hillman, and

de

Gorterand

Tsur.

More

discussion of

the

political

model and its relation to

the literature

is

in

Swinnen and de

Gorter

(1992, 1993).

2

The

impact

of

this

assumption

is

discussed where it

affects

the

results

importantly.

3

Becker

(p.

372)

quotes

Bentley (p.

259)

in

defining

political

presure:

Pressure

is

broad

enough

to

include

. .

.

from

battle

and

riot to abstract reasoning and sensitive morality.

4

Under

perfect political

competition,

political

support

max-

imization is the

only way

for a

politician

to

stay

in

government,

irrespective

of

personal

preferences

(Becker 1958).

'

See Swinnen and van der Zee

for

a

discussion of the

differences

between different

voting

models and

pressure group

models.



4

February

1994

Amer.

J.

Agr.

Econ.

U(yA)

<

U(yM).

This will

induce

a

political

re-

action to

partially

offset the

gap

in

endowment

incomes. The

politician

can

increase

total

polit-

ical

support by

introducing

a

transfer

from

the

manufacturing

sector to

farmers

whose

relative

income has fallen. A given transferR has smaller

marginal

welfare effects on

higher

than

on

lower

income

individuals.

Politicians will

'exploit'

this

difference between

the two

sectors in

marginal

welfare

impact

to

obtain an

increase

in

total

po-

litical

support.

PROPOSITION.

Agricultural

protection

will

increase

if agricultural

income

falls

relative to

income outside

agriculture.

To

show this

formally,

consider

equilibrium

condition

(4) again.

Define

r(R)

=

SAI/S

and

k(R) = [U,'(1

+

C/)]/[UA(1

-

CA)]. It follows

that

rR

<

0

and

kg

>

0

where

rR

and

kg

represent

the first order

derivatives

of

r

and k.

With

yA

<

yM,

k(R)

<

1

for

R

=

0.

The

ratio

of

marginal

support

levels

depends

only

on

the

level of

R:

r(O)

=

1. With k

increasing

in R

and

r

decreas-

ing

in

R,

it follows

that

(4)

holds

for a

positive

transfer

evel,

i.e.

that

r(R*)

=

k(R*)

for R*

>

0.

Proposition

1 is similar to

the

'relative in-

come effect' in de Gorter

and Tsur and

to

the

'compensation

effect' in

Magee,

Brock,

and

Young,

and

in

Hillman: economic

change

fa-

voring

a factor reduces the factor's

political

ac-

tivity,

and

political

involvement

increases

when

market

returns

fall.

A

change

in

economic

cli-

mate affects

the

change

in

political

support

for

a

given

transfer

level. This

leads to

an

adjust-

ment

of

the

politically optimal

transfer

policy.

Political

self

interest induces redistribution

to

farmers

when their income is

falling.

The in-

duced

government

transfer, however,

does

not

lead

to an

egalitarian

income distribution.

From

the

previous

argument,

it follows

that with R*

>

0,

it must

be the case that

r(R*)

=

k(R*) <

1,

which

in

turn

implies

that

yA(R*)

[=

yA

+

RA(R*)]

<

yM(R*)

[=

M

+

RM(R*)].

Hence,

politicians

only partially

offset the

increase

in

the

income

gap.

This

representation

of

the

political system

is

driven

by

a

support

function that has

both

a lib-

eral

and a

conservative

tendency.6

The

liberal

feature

of the

political system

is reflected

in

the

politically

induced

government

transfer that

re-

duces income

inequality

in

the

economy.

To un-

derstand

the

conservative

tendency,

let

us com-

pare

the

politically

optimal

transfer

R*

with

the

transfer level R

that would be

optimal

for

a

na-

tional

planner

who

maximizes

a

weighted

social

welfare function. In case of an additive social

welfare

function,

where

WA

and

WM

represent

the

welfare

weights

of

individuals

in

sector

A

and

M,

respectively,

the

condition

determining

R

is:

WA

UM

(1+

CM)

(5)

=

wM

uA(

_

CA)

To see the

implications

of this

condition,

con-

sider the case where

all

individuals have

iden-

tical welfare

weights

(WA

=

WM).

The

national

plannerwill now always fully compensatea drop

in

income,

i.e.

yA(R)

=

y

B(R),

if

there

are no

transfer costs. Even with

transfer

costs,

it

still

holds

that

(R)

>

0 for

Y

<

Y

B.

So,

the

national

planner

will distort the

economy

if

a

first-best

instrument s not available.

Comparing

(5)

with

(4)

shows that

the

national

planner

and the

sup-

port-maximizing

politician

will

choose the

same

optimal

transfer level

(R*

=

R)

only

in

the

case

where

the

ratio

of

the welfare

weights

W'

is

identical

to

the ratio

of

marginal support

levels

S't.

One can

depict

S'•

as the

'political

weight'

of individual i in the politician's objective func-

tion. An

important

difference between

the

po-

litical

weight

and

the welfare

weight

is

that,

while

W'

is

fixed,

the

political weights

are

endoge-

nous. Recall that at

R

=

0,

Sa

=

Smso

that

the

political

weights

are

equal.

With

Sa

decreasing

and

S'increasing

in

R,

the

political

weight

of

the taxed

person

increases while the

weight

of

the subsidized

person

decreases with an

increase

in

the transfer.

Therefore,

independent

of

the

transfer's

distortionary

ffects,

it follows

that the

politician's

optimal

transfer

will be less

than

that

of the nationalplanner:R* < f

<

YA

<

YB.

This

results

reflects the conservative

tendency

of the

political

system.

Deadweight

Costs

and Redistribution

Deadweight

costs reduce the level of the

equi-

librium transfer.

The intuition is

straightfor-

ward. Let

R*

represent

the

politically optimal

transfer

without

deadweight

costs.

For

the

ben-

eficiaries of

R*,

positive

deadweight

costs re-

duce the net transfer. For those who lose from

the

policy,

deadweight

costs increase the

per

capita

tax for a

given

R*.

The decrease in

the

6

Liberal

refers to the American sense

of

the word: i.e.

egal-

itarian, while conservative refers to Corden's (1974, p. 107)

conservative

social welfare

function in which

any significant

ab-

solute

reductions in

real incomes

of

any

significant

section of

the

community

should

be avoided.



Swinnen A Positive

Theory of

Agricultural

Protection

5

net

transfer

reduces

the

increase in

political sup-

port

which the beneficiaries

of

R*

provide.

On'

the

other

hand,

the

increase in

per capita

tax

in-

creases

the losers' reductionin

political

support.

It

will therefore

no

longer

be

optimal

for

the

politician

to

implement

R*. Both effects will in-

duce

a reduction in the

equilibrium

transfer.

Therefore:

PROPOSITION

2.

An

increase

in

marginal

deadweight

costs reduces

the

equilibrium

trans-

fer.

An

exogenous

increase

in

marginal

deadweight

costs will increase either

Cm

or

CA

(or

both)

in

optimality

condition

(5).

This

implies

a

reduc-

tion in

the

equilibrium

transfer

R*.7

Number of Farmers

and the

Politically

Optimal

Transfer

Equation

(4)

determines

the

equilibrium

transfer

R*

as an

implicit

function of

the

number

of in-

dividuals in

each

sector.

I

can

therefore for-

mally

derive the

impact

of

group

sizes on

R*.

The first

result is

that,

only

if

R*

=

0 for

a

given

employment

distribution,

a

change

in

this

dis-

tribution

will not

affect the

condition

that

the

transfer is zero. In

any

other

situation, a change

in

employment

distribution

affects

the

optimal

transfer.

Per-capita

transfers

increase with

a

de-

crease in the number of

individuals in

a

sector.

Assume for

the discussion

that

farmers

are

sub-

sidized,

i.e.

R*

>

0. As

the

number of

farmers

decreases

relative to

the

number of

people

in

in-

dustry,

farmers

become less

important

in

terms

of

votes.

However,

it

becomes

less

expensive

to

subsidize

them

as there

are

relatively

fewer

farmers. It is

also

(politically)

easier

for

the

government

to

collect the

necessary

tax

to

sub-

sidize

agriculture

because

the per-capitatax de-

clines

as there

are more

people

in

industry.

On

the other

hand,

the

manufacturing

sector

rep-

resents

relatively

more

voters

now.

The

com-

bined

impact

is

summarized in

the

following

proposition.

PROPOSITION

3. An

increase in

industrial

em-

ployment and/or

a

decrease

in

agricultural

em-

ployment

will

increase

agricultural

protection

(R*

>

0).

To show

this,

define

RA*

=

[R* -

CA(R*)]/

n,

and

RM*

=

-[R*

+

CM(R*)]/nM

with R*

as

determined in

(4).

For

the sake of

simplicity,

assume

deadweight

costs are zero.

The

impact

of an increase

in the numberof

farmers,

holding

the size of

group

M constant, is determined

by

(6)A*

RA*(ZM

(6)

OnA

na

ZA

ZM

where

ZA

=

-[Sa UA,

+

S

-,(U)2]nA

>

0

and

ZM

-[SYUM,

+

SW(U; )2]/nM

> 0. The term

be-

tween brackets

in

(6)

is therefore

positive

and

less than

one.

Consequently,

ORA*/OnA

<

0

for

R* > 0. It can also

be shown that the

per-capita

tax on industrialists decreases

(oRM*/OnA)

for

R* > 0.

Similarly,

the effect

of a

change

in

the

size of industrialemployment on the per capita

transfer to farmers

oRA/OnM

is

positive

for

R*

> 0.

Olson has

argued

that

a

decline

in the

number

of farmers has

improved

farmers'

ability

to

or-

ganize politically

and hence their success

in

ob-

taining protection.

However,

Proposition

3

sug-

gests

that the increase

in

agriculturalprotection

as the share of farmers

in the

working

popula-

tion

decreases

is,

at least to some

extent,

be-

cause the decline

in their

political importance

(number

of

votes)

is more than

offset

by

the

change

in the distributionalimpact. It becomes

politically

easier

to transfer

income to

them

as

it

requires

a lower

per-capita

tax for

a

given per-

capita

subsidy

to

farmers.

Economic

Development

and

Agricultural

Protection

Typically, agriculturalprotection

increases

as

an

economy

develops.

A

number

of

structural

changes generally

take

place

during

the

process

of economic

development:

or

example,

the share

of

agriculture

n

employment

and

in

total

output

becomes less

important,

the

share of

food in

to-

tal

consumption

expenditures

declines,

and

ag-

ricultural

production

becomes

more

capital

in-

tensive. Here I

attempt

to

explain

the

correlation

between

agricultural

protection

and

economic

development

by

showing

that each of

these

changes

affects

the

politically

optimal protec-

tion

level. The first

result was

already

derived

in the

previous

section,

where I showed

that a

decline in the share of

agriculture

in

total em-

ployment

induces an increase in

agricultural

protection.

For the

analysis

of

the other

structural

vari-

7

A

corollary

is

that

competition

among politicians

favors

'effi-

cient' methods of taxation and subsidization, i.e. those

minimizing

deadweight

costs.

Such

results and

proposition

3

are

similar

to

re-

sults

from

Becker's

pressure

group

model

(Swinnen

and

de

Gorter,

1992).



6

February

1994

Amer.

J.

Agr.

Econ.

ables,

the

model is modified in

four

ways.

First,

I

introduce

a

more

detailed

specification

of

the

consumption

and

production

system.

A

specific-

factor

model allows us to

derive the

general

equilibrium

effect

of a

transfer

policy.8

Second,

I use a

production subsidy

first and a tariff later

on

as

stylized

transfer

policies.

Third,

I

allow

for

different endowments

among

individuals,

but

assume that the distribution f

endowments

within

a

sector can be

represented

by

a

linear

function.

Finally,

to

keep

the

analysis

tractable

with

these

elaborations,

I

simplify

the

political

model

by

assuming

that

S'

and

U'

are

linear in

their ar-

guments.

Politically Optimal

Production

Subsidy

Assume

each sector

of the

economy produces

one

good,

A and

M

respectively.

Each sector

uses one

specific

immobile

factor:

KA,

agricul-

tural

capital

or

land,

for

agriculture

and

KM,

industrial

capital,

for

the

manufacturing

sector.

The

specific

factors

are

in fixed

supply

to their

industries.

In

addition,

each sector

uses

one

per-

fectly

mobile

factor:

K,,

called

labor,

with

LA

and

LM

representing

the

quantity

of labor em-

ployed

in both sectors.

The

total

quantity

of la-

bor

equals

the

fixed

aggregate

supply

of

labor:

LA

+

LM

KL.

The productionfunctions for the

two commodities

are each

linear

homogeneous

in

their

respective

inputs

and have

the standard

neoclassical

properties

of

differentiability

and

of

positive

and

declining

marginal

physical

prod-

ucts

for each

of the

inputs.

The

economy's

ag-

gregate

income

is

given

by

Y

=

qA

+

M,

with

q

the

producer

price

of

agricultural

output

( food )

in

terms

of

manufacturing

output.

An

individual

owns

KJ

units

of factor

Kj(j

A,

M,

L),

with

factors

fully

employed by

N

in-

dividuals:

iu

Kj

=

Kj.

Individual

gross income,

yG,

is the sum of returns to i's factor endow-

ment:

(7)

Y

C

rjK

j=A,M,L

where

rj

represents

the

return

per

unit of

factor

K1.

Let the

government

give

a

subsidy

s

per

unit

of

output

to

agricultural

producers.

The

subsidy

is

financed

by

an

income tax.

Per

capita

tax

is

defined as

T'

=

ty'G

with

t the constant

marginal

tax rate.

A

balanced-budget

policy implies

that

total tax income

equals subsidy

expenditures:

I

T'

=

sA,

where

A

is the

total

food

supply.

Individual

disposable

income

y'

is

therefore

(8) y'=(1 - t) rjK: (1 - t) 'Y

j=A,M,L

where

0'

is the share of

i's income in

total in-

come:

yG

=

0'Y.

When individuals

have

iden-

tical and

homothetic

preferences,9

the

effect of

a

producer subsidy

on

individual

welfare can

be

obtained

by differentiating

the indirect

utility

function and

using

Roy's

identity:

dU(p, y')

OU _A

D

dp

dy'\

(9)

-

A

-+

ds

Oy'

ds

ds

/

where

p

is the

consumer

price

of

A in

terms of

M,

and AD'

represents

i's

demand

for

food.

The

first term between brackets

represents

the ben-

efit consumers

obtain

from a

producer

subsidy.

Consumer

prices

decline because

of an

expan-

sion

in food

production:

dp/ds

<

0.

The

second

term

represents

the

change

in

disposable

in-

come.

Using

(8),

this can be

analyzed

further:

dy'

dyG

dT'

dyG

dt

(10)

(1-

G

-

t)

-

yG

ds ds

ds ds

ds

The last term of

(11)

represents

the

impact

of

the

subsidy

on

the tax rate. It consists of

three

effects:

'

dt

I

dAs

dp

(11)

-

As

+

s

--

tAs

+

1

.

ds

Y

ds

\ds

The

first

(positive)

term

in

brackets

reflects

the increased

need

for tax

revenue

as

food

pro-

duction,

and therefore

the

amount

of

subsidies,

increases. The second

(positive)

term

reflects the

deadweight

losses

associated with s.

These

losses

increase

with s and

therefore result

in

higher

taxes.

The

third

(negative)

effect reflects an in-

crease

in

aggregate

nominal

income: a

smaller

tax rate

raises the

same tax

revenues with a

larger

8

Full

specification

of the

general equilibrium

model and

more

details

on the

derivation

of the

results

are in

Swinnen.

9

Demand

is

specified

as in

Mayer.

Findlay

and Wellisz

are

not

able

to

derive

precise results

because

they

assume

that individuals

lobby

to

increase

their

income.

This

is due

to

an

indeterminancy

property

of

Ricardo-Viner

models

known

as 'neoclassical ambi-

guity'

(Ruffin

and

Jones).

Assuming utility

maximization

removes

the

ambiguity

(Young)

10

The

Viner-Wong

envelop

theorem is used

in

deriving

this.

The

effect on aggregate income is positive unless demand is completely

inelastic:

dYlds

=

A(dp/ds

+

1)

>

0. The effect

on

aggregate

disposable

income

is

negative

(with

dp/ds

<

0 and

dAlds

>

0):

dYl /ds

Adp/ds sdA/ds

0.



Swinnen

A Positive

Theory

of

Agricultural

Protection

7

tax

base.

The

total

effect

is

positive.

Let

A'

be

the

marginal

change

in real

disposable

income

due

to

a

subsidy

s.

Using

(8),

(9), (11), (12),

and the

assumption

of

identical

preferences,

this

can

be derived

as

(12)

dy

dA

dq

A

=

(1

-

t)

dys --

+

(1

-

t)

A-d

ds

L

ds

ds

The

first term

represents

the

impact

on factor

income

(gross

effect

minus the tax

redistribution

effect:

a

higher

income

leads

to

a

higher

income

tax).

The terms

in

square

brackets

measure

the

share

of individual

i in

deadweight

losses

and

in the net

tax and

consumer

effect,

respectively.

Both

effects are

negative

since

dA/ds

and

dq/

ds are

both

positive.

The

only way

an individual

can benefit

from

a

subsidy

is when the

gross

income

effect

of the

subsidy

(dy'/ds),

is

large

enough

to

offset the

negative

consumption

and

tax effects.

The

subsidy

raises

the returns to

all

production

factors

in

agriculture

and lowers

the

return

to

industrial

capital:

drL/ds

>

0,

drAlds

>

0,

and

drM/ds

<

0. The

change

in

gross

in-

come is

positive

for workers

(for

whom K

=

K1

=

0)

and

for farmers

(for

whom

KA

>

0,

KM

=

0).12

Combining

(7)

and

(12)

allows one

to write

the

marginal impact

on i as

a

linear

function

of

i's

endowment:

_db

(13)

Ai

=

K

j=A,L,M

ds

where

(13a)

dbj

dr.

0

dA

dq

d

=

(1

-

t)

j

s--

+

(1

-

t)

A

ds

ds

ds

ds

forj

=

A, M,

L

where

4P, 4,P

and

44,

represent,

respectively,

the share

of the

return

to

a

unit of

labor, land,

and

capital

in

total

(national)

income.

In

this

no-

tation

bj

represents

the net

return

per

unit of

fac-

torj,

with net

referring

to

real

disposable

return,

accounting

for

changes

in

consumption prices,

taxes,

and

deadweight

costs induced

by

the

sub-

sidy.

The

marginal

impact

of s

on net factor

re-

turn

bj

depends

on the

size

of

s and

on

the struc-

ture

of

the

economy.

For s

>

0,

db,/ds

will be

positive

and

dbM/ds

negative,

while

dbL/ds

can

be

positive

or

negative,

depending

on

whether

the positive impact on the wage rate rLis less

or

more than

offset

by

the

sum

of

the

negative

impacts

on

deadweight

loss and taxes.

Combining

the

linearity

assumptions

on

S' and

U'

and

the endowment

distribution

unction with

the

politician's

optimization

problem

yields

the

following

condition

for

the

political

equilib-

rium:

db

(14)

Ky

-=0.

j=A,M,L

ds

This condition implies that in equilibrium the

marginal

impact

on the total

quantity

of

fixed

factor

in

agriculture

(land)

has

to

equal

the

total

marginal

impact

on industrial

capital, adjusted

for

the

marginal

impact

on

labor.

The

sign

and

size of

dbL/ds

depend

on

the

subsidy

and on

the

factor

intensity

and

substitution

elasticity

of

pro-

duction factors

in

various

sectors

of

the econ-

omy.'3

Equation

(14)

defines

the

political equilib-

rium

subsidy

s* as an

implicit

function of

ex-

ogenous

parameters

affecting

the

marginal

im-

pact

of the

subsidy

on individual welfare and

deadweight

costs.

In this

way,

these

parameters

affect the

change

in

political support

induced

by

the

subsidy

and hence

the

political equilibrium.

I

will now

derive

formally

how s* is

influenced

by changes

in

variables

such as

factor intensi-

ties,

the share

of

agriculture

in

production

and

consumption,

and demand and

supply

elastici-

ties.14

TO

eliminate

unnecessary

complications,

I

consider

variations

from the

equilibrium

for

which

dbL/ds

=

0.

Impact

of Capital Intensity

in

Agriculture

and

Manufacturing

To

derive the

impact

of

an increase in

the

capital

intensity

in

agriculture

or

manufacturing

on

the

Equation

(11)

can be rewritten

as

dt/ds

=

[(1

-

t)

A

+

sdA/

ds

-

tAdp/ds]/Y

>

0.

With

dp/ds

<

0 and

dAlds

>

0,

all

terms

are

positive

and therefore

dt/ds

>

0.

2 Assuming that each person owns one unit of labor (K = 1)

and

capital

in

one

sector

only,

it can be

shown that

gross

income

increases

for

everybody

who owns less

industrial

capital

than

the

capital

labor

ratio in the

manufacturing

sector

(Swinnen).

13

Food

production

is said to be

unbiased

with

respect

to labor

if

the

price

elasticity

of

the

wage

rate

equals

the share

of

agriculture

in

GNP

(Ruffin

and

Jones).

In this

case

dbL/ds

equals

the

share of

one

unit of labor in national

income times

total

dead-weight

loss.

Unless

food

production

is

sufficiently

biased towards

labor,

dbL/

ds

is

negative

(Swinnen).

'14

The share of agricultureand food in total production and con-

sumer

expenditures

are

endogenously

determined

in

the

model.

Therefore,

in

analyzing

the

impact

of

changes

in these

variables

on

the

equilibrium subsidy, everything

else is

held constant.



8

February

1994

Amer.

J.

Agr.

Econ.

optimal subsidy

s*,

define

Vj

=

rjKj

as

total

fixed

factor return in sector

j.

Combining

(13a)

and

(14),

one

can

write the

political

equilibrium

condition as'5

(15)

VA7TA

= - VMTM

where

(15a)

7rj

=

(1

-

t)

Vj

+

(1

-

t)

a

-

tEA

and

where

i)

represents price

elasticity

of

the

gross

return to factor

j,

a

=

qA/Y

is

the

value

share

of

agricultural

production

in

the

economy,

and

EA

is

the

price elasticity

of food

production.

The

first

term

in

brackets

in

(17)

reflects the

ef-

fect on

factor

income,

the

second term

the

net

tax

and

consumption

effect,

and

the

last term

the deadweight loss effect.

PROPOSITION

.

If

the industrial

capital

stock

is

sufficiently large

vis-a-vis

the

capital

stock in

agriculture,

either

an

increase in

agricultural

capital

intensity

or an

increase in

industrial

capital

intensity

will

induce

an

increase in

equi-

librium

subsidy

s*.

For

lower

ratios

of

indus-

trial over

agricultural

capital,

the

impact

de-

pends

on the

input

substitutability

n

agriculture

and

on

the

subsidy.

The

impact

on

equilibrium

subsidy

s* of a

ceteris paribuschange in

VA

is

as*

7A

+

VA

7'AA

+

VMI7MA

(16)

aVA

VA

TAs

+

VM7TMs

where

7rji

=

-

/7rjVi

and

7rjs

=

a7rj/as

for

i,

j

A,

M. The denominator

is

always

negative

since

7rA

are

7rM

decreasing

in

s.

The first term of

the

numerator

s

positive:

as more

agricultural

cap-

ital

income

benefits

from the

subsidy

(i.e.

the

'vested

interest'

increases),

a

subsidy

increase

induces

a

larger aggregate

increase

in

political

support. The signs of the second and the third

term

depend

on the

signs

of

a07A/aVA

and

a7rn/

a

V,

respectively.

From

(15a)

it follows that

these

marginal

effects,

in

turn,

depend

on

the

com-

bined

marginal

impact

of

the

change

in

agri-

cultural

capital

intensity

on the effect

of

the

subsidy

on

individual

taxes

and

consumption,

deadweight

costs,

and factor

income.

An

in-

crease

in the share of land

in

agricultural

pro-

duction costs

shifts the

marginal-product-of-

labor

curve,

making

it less

elastic.

This reduces

the

supply

response

aEA/aVA

< 0)

which,

in

turn,

reduces the tax

burden

and

deadweight

loss.

The

effect is

positive

for

all

individuals

since

every-

body pays

taxes.

To

analyze

the

impact

of a

ceteris

paribus

in-

crease

in

VA

on

the

elasticity

of

industrial

inter-

est rates

(1'IM/OVA),

recall that in a Ricardo-

Viner model the return to industrial

capital

is

defined as revenue

in

manufacturing

minus

the

wage

bill. The

impact

of

an increase

in

agri-

cultural

capital

intensity

on

the

responsiveness

of

wages

to

a

food

price

increase

determines

therefore

he

effect

on industrial

profits.

As

wages

are less

responsive

to

agricultural price

in-

creases,

industrial

profits

are less affected

by

in-

creased

wages:

1JM/OVA

0.

With

Oa/OVA

0,

this

implies

that

a7/TmaVA

>

0.

Consequently,

industrialists

will

reduce

their

resistance

to

the

subsidization of agriculturalproduction.

The

impact

on the

elasticity

of

land rents with

respect

to

producer prices

is threefold:

(17)

Oa

A

a(1/OKA)

O(OLAIOKA)

OLA

1w

aVA

OVA

aVA

OKA

OVA

where

O,

and

OKA

re,

respectively,

the

cost

share

of labor

and of land

in

agricultural production.

The first

(negative)

term

shows that an increase

in

aggregate

returns

to

land

reduces the

per-unit

increase in land rents induced

by

a

price

in-

crease.

The second

term

is

positive,

indicating

that as

the share

of land in

food

production

cost

increases,

more

of the

price

increase

goes

to this

factor.

The last

term

is also

positive

and

reflects

the reduction

in the

wage

rate

elasticity,

leaving

more revenue

for the

return

to

the

fixed factor.

The

first

term

outweighs

the other

two

and,

hence,

&I'A/

aVA

<

0. The

net

negative

effect

is

mitigated

because

of

the

positive

tax and dead-

weight

loss

effect,

but unless

taxes

and

input

substitutability

are

high,

the

overall effect

will

be

negative

(O7TA/OVA

<

0).

The overall

effect

on the

equilibrium

subsidy

cannot

be determined

unambiguously.

It

de-

pends

on the

input

substitutability

and

on

the ra-

tio

of the

capital

stocks

(VA/VM).

As this

ratio

declines,

as

typically

happens

with

economic

development,

the effect

of

an increase

in

agri-

cultural

capital

on the

equilibrium

subsidy

will

be

positive:

as*/aVA

>

0.

The total

effect

of an increase

in industrial

capital

can

be

disaggregated

in a similar

way.

First,

the

opposition

to

the

subsidy

increases be-

cause more industrial capital is affected. Sec-

ond,

the

impact

on the

elasticity

of

the

returnto

industrial

capital

with

respect

to

an

agricultural

z5

One

can

write the

equilibrium

condition

as

ZAXA

=

ZMXM

where

Z,

=

bjK,

is

aggregate

net

return

to

fixed

factorj and

X,

is the

price

elasticity

of

per

unit net

return

to fixed

factor

j.



Swinnen

A Positive

Theory of Agricultural

Protection

9

price

increase

is twofold. As

the

industrial

cap-

ital stock

increases,

labor's

marginal

product

curve

in

manufacturing

shifts,

increasing

the

in-

flationary

effect of a food

price

increaseon

wages

which,

in

turn,

increases

the

negative

impact

on

industrial

profits.

However, the increase in the

wage

rate

is more

than

offset

by

reduced

share

of labor

in

production

costs.

Therefore,

the

net

effect

of an

increase

in industrial

capital

on

the

elasticity

of

industrial

profits

with

respect

to an

agricultural

price

increase

is

positive:

aVM/VM

0.

Third,

the

increased

sensitivity

of

wages

to

agricultural

price

increases

reduces

the de-

mand

for labor

in

agriculture,

restricting agri-

cultural

output

response

to a

price

increase

(aE,/

SVM

0),

which,

as

discussed

before,

benefits

taxpayers.

Finally,

the

increased

wage

demands

lower

agricultural

profits,

resulting in a reduced

impact

on

land

rents:

OItA/OVM,

<

0.

Because

land

rents

are

less

responsive

to

an

increase

in

the

agricultural

producer

price,

the

increase

in landowner

support

is

smaller.

On

the

other

hand,

with

increasing

capital

intensity

in

manufacturing,

the

negative

impact

of

agricul-

tural

subsidies

on

industrial

profits

becomes

smaller.

This reduces

the

loss

in

capitalists' po-

litical

support

when a

subsidy policy

is

imple-

mented.

Both

sides

experience

beneficial tax ef-

fects.

Again,

the

aggregate

impact

cannot be

signed

unambiguously.

However, as the indus-

trial

capital

stock

grows,

the overall effect on

the

equilibrium

subsidy

will become

positive:

as*/aVM

>

0 for

a

large

VM/VA.

Impact of

the

Share

of Agriculture

in

Production

and

Consumption

PROPOSITION

5.

The

political

equilibrium

sub-

sidy

s*

will increase

as

the share

of agriculture

in total

output

declines.

A

decline

in the

share

of

agricultural

output

in

the

economy

has

one

major

effect. The tax

base

enlarges

relative

to

total

expenditures.

The

tax

rate

required

to finance

both

the

subsidy

and

the

accompanying

social

costs declines.

With

all

taxpayers

benefiting,

the

loss

in

political sup-

port

per

unit

of

subsidy

decreases.

Two

minor

effects enhance

or

mitigate

the

increase

in

po-

litical

support.

To

see

this,

rewrite

the tax rate

t as a function

of the share

of

agriculture

n

GNP

(t

=

8a,

with

8

=

s/q),

and take the

partial

derivative

of

r

with

respect to a

(18)

=

-[1

-

t

+

8(

-j

a

+

EA)].

da

The

first term

between

square

brackets

(1

-

t)

represents

the

net reduction

in the

tax

rate,

and

SEA

reflects

the

reduction

in

deadweight

loss

caused

by

a

decrease

in a.

86i

reflects the

im-

pact

of a

change

in

a on the tax

redistribution

caused by a subsidization policy: those whose

income

increases

with

the

subsidy

have to

pay

more

income tax.

As

the share

of

agriculture

in

total

output

falls,

the

induced increase

in in-

come

tax

is smaller.

Finally,

-

Sa

represents

the

change

in the

output

effect

of

a

production

sub-

sidy.

With

a

decreasing,

the

expansion

of

the

tax

base

is

reduced,

adversely affecting every-

one's

welfare.

With

TA,/OaO

>

0

and workers

and

industrialists

benefiting

from a reduction

in

the tax

rate,

but

adversely

affected

by

the

output

and

tax redistributive

effect,

the

aggregate

effect

on the equilibrium subsidy will be positive for

a decrease

in

a.16

PROPOSITION

6.

The

optimal production

sub-

sidy

s* decreases

with

increasing food expen-

diture

shares.

The

beneficial effect of

a

produc-

tion

subsidy

on

the

consumption

side is

more

than

offset

by

a

(relative)

increase

in taxes.

In

a

closed

economy,

the

supply

increase

in-

duced

by

a

production

subsidy

reduces con-

sumer

prices.

A

larger

share

of food

expendi-

tures

will therefore lead

to more

support

from

consumers

for

production

subsidies. This is

merely

an

illustration

of

the fact that

production

subsidies

have

exactly

the same

effects on

all

factors as

do

consumption

subsidies

(Gardner

1987b).

For similar

reasons,

the

negative impact

on

the

return

to industrial

capital

of

an

increase

in

the

producer price

of food

declines.

However,

in

a closed

economy

situation,

a

higher

share

of food

in

total

expenditures

im-

plies-for

a

given

subsidy

level-a

higher

share

of

agriculture

in

GNP.

Using

(10),

it is

easy

to

show

that

the

positive

effect

of

a

production

subsidy

on food

expenditures

is

more than

offset

by

an increase

in

taxes

which

accompany

the

larger

share

of food

in

total

production

n

a

closed

economy.

The

aggregate

effect

of

a

change

in

the share

of food in

total

expenditures

(aD

=

pADlyd)

on

irj

will

therefore be

very

similar

to

the

impact

of

the share

of food

production

in

total

output

(as

=

a

=

qASIY):

a7/roaD

= (1

16

With

A

>

1

and 0

<

a

<

1, a?rA/aa

is

positive. arm/laa

could

be

negative

for

~m

sufficiently negative.

For this to

happen,

the share of labor in

manufacturing

costs has

to be

high,

while

the

share of

manufacturing

in total

employment

has to be low. The

latter can

happen

only

if the total return o

industrial

capital

is

small,

in which case the

positive

effect

on

agricultural

capital

will

more

than

offset the

negative

effect

on

industrial

capital.



10

February

1994

Amer.

J.

Agr.

Econ.

+

5)(yd/Y)2

aTj/as.

The

sign

and

interpretation

of

a-.i/aD

are

therefore dentical o

those of

(18).

Proposition

6

relies

on

the

assumption

that

in-

dividual

preferences

are

identical,

which im-

plies that the individual share in consumption

equals

the tax and income share.

If

this

is

not

the case:

COROLLARY 6.1.

Differences

in either

con-

sumer

preferences

or

marginal

income

taxes

among

individuals

induce

different

political

re-

actions

to a

change

in the

ood expenditure

hare.

'Poor'

people, experiencing

small

marginal

in-

come tax

rates,

few government

benefits,

and a

higher-than-average marginal

propensity

to

consume

food,

will be less

politically

resistant

to-or may even support-production subsi-

dies-than will 'rich'

people.

This

differential

political

reaction is

positively

related to the

share

of food

in

total

expenditures.

If

consumer

preferences

are

not

identical

among

individuals

or when individuals

have different

marginal

income tax

rates,

the

marginal

indi-

vidual

impact

of

a

subsidy,

A',

has

two

addi-

tional

terms

reflecting

these differential

impacts:

(19)

A

=

a+

(1

-

K')

dy'G

dA

dq

dys+

s--+

(1 -

t)

Ad

ds ds

ds I

dp

+

4'(Kr

-

KD)

Ap

ds

where

A'

is the

marginal

impact

given

identical

preferences

and

marginal

income taxes

as de-

fined

in

(10).

K'

is

defined as the ratio

of in-

dividual i's income

tax rate

(t')

to the

average

income tax

rate

(t

=

T/Y).

Similarly,

KD

rep-

resents the ratio of i's marginal propensity to

consume

food

(MPCA)

over

the

average

mar-

ginal

propensity

to

consume food.

The

second

term

reflects

the

impact

of a

higher-

or

lower-

than-average

income

tax

rate

and

is

positive

as

i's income

tax rate

is

below

the

average

income

tax rate

(K'1

<

1).

The

marginal

impact

of

a

sub-

sidy

on

individual i

depends

on

the relative size

of i's

income tax share

versus i's

consumption

share.

This

effect is

capturedby

the last

term in

(19).

With

dp/ds

<

0,

the

last term is

negative

if i's share

in

total

income tax

is

larger

than i's

share in consumption, and vice versa.

The

impact

of

an

increase

in

food

expenditure

share

then becomes

(20)

a

Kr

D

(K-

K)(1

+

)

aaD

Taa

(Y-d

2

dq

/ds

where

ar/o/aoD

represents

the

result

given

iden-

tical

preferences

and

marginal

income

taxes

as

derived in

the

previous

paragraph.Equation

(20)

shows

that an individual

with

a

lower-than-

average

income tax rate

(K',

<

1)

and

a

higher-

than-average

marginal

propensity

to

consume

food

(KD

>

1)

will lose

less

than an

'average'

individual

or

may

even benefit if

the

aggregate

share

of

food

in

expenditures

increases.

There-

fore, 'poor' people who pay less income tax and

have a

higher propensity

to

consume food

will

be less resistant to

production

subsidies

than are

'rich'

people

as the share

of

food

in

total con-

sumer

expenditures

increases.

In

the

last section

of

the

paper,

I

show that the result

changes

when

an

import

tariff

is

used to

protect

farmers.

Impact

of

Price

Elasticity

of

Demand and

Supply

of

Agricultural

Products

The

only

effect

of a

change

in

the

price

elastic-

ity

of

demand

for

agricultural

products

(food)

E

A

is on

the

price change

dq/ds:

a

higher elasticity

implies

that a smaller

consumer

price

change

will

be

induced

by

a

production

subsidy.

With

dq/

ds

=

dp/ds

+

1,

the

producer

price

change

in-

creases.

However,

it

was

demonstrated

earlier

that

this does

not affect

the

political

equilib-

rium.

Therefore,

a

change

in

E

Ahas

no

effect

on

the

political equilibrium.

PROPOSITION

7. The demand

elasticity

does not

affect political equilibrium

subsidy

s*.

A

higher

supply

elasticity, holding everything

else

constant,

increases

the

tax rate

and

the

deadweight

loss

burden,

decreasing

the

political

support

of those

benefiting

from

the

subsidy

(a7rA/

aEA

<

0)

and

increases

the

resistance of those

hurt

by

it

(raM/aEA

<

0).

Combining

this with

the

equilibrium

condition

(15)

yields

PROPOSITION

8. Agricultural protection will

be lower

for

products

with

higher supply

elas-

ticities.



Swinnen

A Positive

Theory of Agricultural

Protection 11

Agricultural

Trade

and

Protection

Thus

far

the

analysis

has focused on a closed

economy.

I now

analyze

how results

change

in

an

open economy,

then derive results when a

tariff

instead

of

a

production

subsidy

is used

as

the

policy

instrument.

Politically Optimal

Subsidy

in an

Open

Economy

The

adjusted

version of A' in an

open

economy

is

dq

dy'

(21)

dA=

(1-

t)-

G

ds

dq

s

+

(1

-

t)As

•'(A-

As

dp

dq

1ds

where

A

s

and A

D

represent

total food

production

and

consumption.

The

only

difference

between

(21)

and

the closed

economy

version

(13)

is

the

last

term,

which

is

the

tax share

0'

times food

imports

times the consumer

price

change.

Two

results

follow

immediately.

First,

the

differen-

tial

impact

on

consumption

versus

production

is

irrelevant

for

either

the closed

economy

(AD

=

As) or the small open economy (dp/ds = 0) case.

Hence

PROPOSITION

.

Results derived

for

a

closed

economy

hold also in

a

small

open

economy.

The

only

difference

in A'

between

the

closed

economy

and the small

open

economy

situation

is

the size

of

the

price

effect.

In

a

small

open

economy

dq/ds

=

1,

while the induced

supply

increase

will

limit the

producer price

increase to

dq/ds

<

1

in

a

closed

economy.

However,

this

does not

change

the

political

equilibrium,

since

optimality

condition

(15)

does not contain

dq/

ds. From

this

it

follows

that the

equilibrium

value

s*

will be

unaffected

by

the

size of

dq/ds.

An

induced

change

in

dq/ds

reinforces

(mitigates)

the effects

for

a

given

price

effect

on

factor

re-

turns.

Consequently,

the

marginal

increase in

political support

from

those

benefiting

from

the

policy

will

increase

(fall)

as

will

the

marginal

decrease

in

support

from those

adversely

af-

fected.

However,

at

the

optimal

subsidy

level

these effects will

exactly

balance,

since

%A

A

=

-

ITM

VM

in

equilibrium

for

IrL

=

0.17

Hence,

an

induced

change

in

dq/ds

does

not

affect the

comparative

statics

results

either.

Second,

for a

large

open

economy,

the

polit-

ical

equilibrium

will

depend critically

on

the

country's trade position. With dp/ds < 0, peo-

ple

in

a

food

exporting

country

will

experience

an additional

marginal

decrease

in

real

dispos-

able

income

per

unit of

subsidy

due to

a

nega-

tive terms-of-trade

effect,

affecting

all individ-

uals

proportionally

to

their income.

Ceteris

paribus,

the

politically

optimal subsidy

will

be

lower

since,

for

a

given

s,

the increase in

land-

owners'

political support

will

be

smaller while

the

decrease

in

political

support

from

capitalists

will be

larger.

The

opposite

result holds

for

a

food

importing

country.

Large

food

importers

will experience a terms-of-trade improvement,

leading

to

relatively

more

favorable reactions to

an

agricultural

production

subsidy.

Conse-

quently,

the

politically optimal

subsidy

in-

creases.

The

Politically

Optimal

Tariff

The

marginal

change

in

real

disposable

income

due

to

a

tariff

7, A',

is:

i,(AD

As)

d _

dd

where

p,,

is world market

price

of

food,

T

=

p

-

pW,

and

t,

=

T(As

-

AD)/Y.

Further,

p = q,

dA

S/d

>

O,

dAD/dr

<

0,

dp/d

>

0,

and

(AdD

-

A

S)dp,/d equals

zero for

a small and closed

economy, positive

for

a

large

exporter,

and

neg-

ative

for a

large

importer.

The

analysis

is lim-

ited

here to two

propositions.

Other

results,

in-

cluding

the

comparison

of

AT

and

7*

to A'

and

s*,

are

in

Swinnen.

PROPOSITION10.

In a small

open economy,

the

politically

optimal tariff

T*

declines as the

share

of food expenditures

increases due to an in-

crease in the

distortionary

effects

on

taxes

and

consumption.

In case of a tariff in a small open economy,

the loss to consumers of

increased

consumer

prices

is

exactly

offset

by

the revenue

gain

due

7

This

result

holds whether

or

not

db,/ds

is

zero.



12

February

1994

Amer.

J.

Agr.

Econ.

to

the distribution

of tariff

revenues.

However,

the

distortionary

effects

of the

tariff

on

produc-

tion

and

consumption

reduce the

marginal

in-

crease

in

political support

from

the

beneficiaries

and increase the

marginal

loss of

political

sup-

port

from those hurt

by

the

protection,

f the share

of

food

expenditures

increases.

Consequently,

a

decreasing

share of

food in

total consumer

ex-

penditures

will

lead

to

an increase

in

7*.

To

show

this

formally,

define

1Qr(7)

nalogous

to

j

in

(15a)

for a tariff-induced

food

price

increase,

given

identical

preferences

and

income

tax

rates.

It

follows that:

a0j(T)

D

(23)

=

,(EA

+

-

where 8, =

/ip

and

eD

< 0 represents the de-

mand

elasticity

of food. The term

,E

D

reflects

the

efficiency

loss on the

consumption

side,

which increases

with the

consumption

evel.

The

other

terms

in

brackets

reflect

the

'tax base'

ef-

fect

(a)

and the

tax redistribution effect

(IV.).

or workers

(j

=

L)

and

industrialists

(j

=

M),

arj(r)/aaD

is

negative.

For landowners

(j

=

A),

the

aggregate

term

is

positive

if

the

elasticity

of

land rents

with

respect

to

producerprices

is

high,

the share

of

agriculture

n

GNP

is

low,

and

food

demand

is inelastic.

Proposition

10

is

again

based

on the assumption that each individual's share

in

tax revenues

is the same

as her

share

in

con-

sumption.

If

this

is not the

case,

COROLLARY

0.1.

'Poor'

people,

experienc-

ing

small

marginal

income

tax

rates,

few

gov-

ernment

benefits,

and

a

higher-than-average

marginal

propensity

to

consume

food,

will

op-

pose

import

tariffs

more

vigorously

than do

'rich'

people.

Such

resistance

increases when

ood

ex-

penditure

share

increases.

Individuals

benefit

or lose from an

increasing

share

of

food

expenditures,

depending again

on

whether their

income tax rate

is

lower

or

higher

than

average

and

on

whether their

consumption

share

is smaller

or

larger

than their tax

share:

aT(7r)

Ia

(7)

(24)

=

KT

a

+

KD - K

).

The first term

reflects the

impact

of the

marginal

income

tax

rate:

the

larger

the

income

tax

rate,

the

more

negative

alrj(7)/3aD

becomes. The last

term

is

negative

for

individuals

whose share of

food consumption is larger than their share of

income

tax

(K'

<

KD).

The differential

impact

is the

opposite

of the one under a

production

subsidy regime.

Those

receiving

a

large

share

of

government

revenues

and/or

have a

small

MPCA

will

experience

a smaller

marginal

de-

crease or

a

marginal

increase

in

welfare

as

the

share

of food

expenditures

goes

up,

compared

to 'other'

people.

As the share of food

expen-

ditures

increases,

they

will

increase

their

polit-

ical

support

for

tariffs

or

oppose

tariffs less

than

those

people

whose

MPC

is

larger

or

whose

share

in

government

revenues is

smaller.

This

again

indicates that one has to

consider

the combination

of

tax/tariff

distribution

and

consumption

distribution

in

analyzing

the im-

pact

on

the

equilibrium subsidy

of

the

share of

food

consumption

n

total

expenditures.

The

idea

that a reduction

in

food

expenditure

share will

reduce consumer resistance

to

agricultural

pro-

tection is not

generally

valid. In

developing

countries,

urban consumers

often do not

receive

a

proportional

share

in

the redistribution

of

tariff

income,

if

anything

at

all.

In

such

case,

a

tariff

does have a

significantlynegative

effect on

urban

consumers.

In

general,

an

income tax

system,

and

proportional

axation and

reimbursement,

is

gradually

installed

as

economic

development

proceeds.

Hence the

perceived impact

of a

re-

duction

in

food

expenditure

share

on

agricul-

tural subsidization

may

'hide' the

impact

of

a

change

in

the tax

system.

The

final

proposition

relates the

politically

optimal

tariff

to

degree

of food

self-sufficiency.

Assume

again

that

each

individual's share in

tax

revenues

is

the

same

as

her

share in

consump-

tion

(ir(7)

=

t

(7r)).

The

marginal

impact

of an

increase

in food

self-sufficiency,

through

an in-

crease

in domestic

food

supply

holding every-

thing

else

constant,

can

be derived as

arQ(7)

_q

(25)

-

[1

-

t,

+

,((I

+

A

-

a)]

aAS

Y

where

ea

represents

the

price

elasticity of the ex-

cess

supply

curve.

The

first term between

square

brackets

(1

-

t,)

represents

the net increase

in the

tax rate

and

5,EAxreflects

he increase

n

deadweight

oss caused

by

an

increase

in domestic

food

supply.

6,?j

reflects

the

impact

of

a

change

in As on

the

tax

redistribution

caused

by

a tariff:

those whose in-

come increases

because

of the

policy

have to

pay

more income

tax.

Finally,

-Sa

represents

the

change

in

output

effect of a tariff.

As As

increases,

the tax

base

expands,

which benefits

everybody. With

aIA(T)/aA

s < 0 and workers

and industrialists

adversely

affected

by

an in-

crease

in the tax

rate and

deadweight

cost,

but



Swinnen

A Positive

Theory

of Agricultural

Protection

13

benefiting

from the tax

redistribution

effect,

the

aggregate

effect

on the

politically optimal

tariff

will

be

negative.18

Therefore,

PROPOSITION

1.

Agricultural protection

will

decline with an increase in the degree of food

self-sufficiency.

A

large

open

economy

will

experience

an ad-

ditional

marginal

decrease

in

real

disposable

in-

come

per

unit of tariff due to

a

negative

terms-

of-trade

effect. This affects

all

individuals

pro-

portionally

to their income.

Ceteris

paribus,

the

politically optimal

tariff

will

be lower

since,

for

a

given

7,

the

increase

in

landowners'

political

support

will be smaller while

the

decrease

in

po-

litical

support

from

capitalists

will

be

larger.

Concluding

Remarks

I

have

presented

a

political

model

in

which

rational

and

fully

informed

citizens

interact

with rational

political-support-maximizing pol-

iticians.

The

model is

integrated

with a

specific-

factor,

general

equilibrium

specification

of

the

economy.

It

predicts

that

politicians'

optimizing

behavior

will

lead

to an increase

in

agricultural

protection

as certain

exogenous parameters

change.

The

analysis

indicates

that the

observed

correlation between

agricultural

protection and

economic

development

is

not due

to a

single

factor. Structural

changes

in

the

economy

influ-

ence

the

political equilibrium

through

their ef-

fect on

pre-policy

endowment

incomes,

on

the

impact

of the

policy

on

individual

welfare,

and

on

the

efficiency

of the

policy

in

transferring

income. These

changes

affect

political

support

for

the

policy

and,

consequently,

have an

im-

pact

on

the

political

equilibrium.

First,

politi-

cians increase

agricultural

subsidies as

real in-

comes

in

agriculture

fall relative to

the

rest of

society.

The model

predicts

that the

equilibrium

subsidy

will

increase

as

the share of

agriculture

in

total

output

decreases,

as

capital

intensity

in

and outside

agriculture

increases,

and as

supply

elasticities increase.

Only

for

large

importers

or

exporters

will

demand elasticities

affect the

sub-

sidy.

The

impact

of

a

reduction

of

food in

total

consumption expenditures

on

the

equilibrium

protection

level

depends

on

the distribution

of

income taxes and

tariff revenues.

[Received

September

1991;

final

revision

received June 1993.]

18

The

argument

s

analogous

o

the one in

footnote 16.

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