Global farm incomes crisis calls for rethinking our economic ideas

In an address to the US Congress recently, US President Joe Biden stated: “Trickle-down economics has never worked. And it’s time to grow the economy from the bottom and the middle out.” This is the first time any US President has acknowledged the failure of a dominant economic paradigm that is behind much of the socio-economic crisis the world is faced with.

Trickle-down is an outdated economic concept. So much so that it should have been erased from the economic thought process by now. And yet, it continues to be part of the economic curriculum and, whether we like it or not, helps formulate global economic policies, thereby exacerbating inequality, and continuing to keep the world in the grip of poverty and hunger.

Whether Biden’s acknowledgement will bring about a change in the way the World Bank/IMF as well as the credit rating agencies have been promoting policies that hinge on the failed trickle-down theory, only time will tell. But let us hope that economic institutes, including business and management schools, initiate a debate on how to shift to more realistic policies that “grow the economy from the bottom and middle out” as Biden envisions.

Similarly, there are several other economic concepts and hypotheses that should have been discarded by now. After all, economics is a progressive science and it should move with changing times, improving on ideas with new learning. Holding on to outdated ideas and teaching young students the same outgrown concepts lead to building up a generation of economists whose economic orientation leaves much to be desired.

This becomes more relevant in the context of the ongoing debate on the three central farm laws. The predominant economic thinking that free markets lead to better price discovery for farmers, given the supply-demand equilibrium, has failed to translate into higher incomes for small farmers across the globe. To be told that less the population in farming, the higher will be the farm incomes; and bigger the land holdings, the higher will be the bargaining power thereby enhancing farm incomes -- that too is failed thinking.

While economists refuse to acknowledge that these hypotheses are outdated and need to be discarded, the same is being reiterated as the possible way to double farm incomes in India.

Given that roughly 50% of the workforce is engaged in agriculture, directly or indirectly, in India, it is amusing to read a report that says policymakers believe that increasing the rate of farm migration from the existing 1.81% to 2.4% per year in India will automatically lead to higher farm incomes. If this was indeed true, I wonder why the same economic thought has failed to hold true for farmers in the developed countries.

In the United States, the farming population has come down to 1.5% of the total population, and the average farm size has increased to over 440 acres. Still, farm incomes are on a steep decline. This defies the economic theories that we were made to believe.

Just to give you an idea, the wheat price farmers get today in the US is much less than what they were getting 150 years back at the time of the American Civil War. More recently, while the median farm income has remained negative for some years, farmers have been saddled with a bankruptcy of $425 billion in July 2020. Is it accidental then that the rate of suicides in rural America is 45% higher than that in the urban centres? Nor should agricultural subsidies make up as much as 40% of farm incomes in the US if free markets were so good for farmers.

In neighbouring Canada, where the farming population has shrunk to about 1.7%, and the farm size has grown enormously, farmers are indebted to the tune of $102 billion. Clearly, the popular economic understanding that farm incomes go up when the population in farming drops and as the farm size grows, has not worked here either.

This is not only true for North America it is true in Europe, too. In Sweden, since 1990, the number of farms has declined by 30%. While the farm size increased, the number of farmers has come down to less than 2% of the population. Despite the dominant economic thinking envisaging higher farm incomes when the proportion of farm population drops, farm incomes have slumped here, too.

According to the 2018 Common Agriculture Policy (CAP) Strategic Plan of the European Commission, 54% of the average farm income in Sweden is made up by subsidy support. With a direct income support, which is double than what an average European Union farmer receives, Swedish farmers are able to supplement farm incomes, reaching some level of parity.

The same holds true for France, Germany, Denmark, Belgium, Ireland, Spain and UK, to name a few of the EU’s major agricultural players. Europe provides a farm subsidy support of $100 billion, and yet farm protests against falling incomes are only increasing.

That free markets have failed to prop up farm incomes in the rich developed countries clearly shows that something is fundamentally wrong in our economic thinking and approach. We can argue about the virtues of markets till the cows come home, but the fact remains that market principles we learnt in our economic courses have failed to translate into higher farm incomes, the only visible beneficiary being the agribusiness companies. How will the same market principles work for small farmers in India, constituting 86% of the farming population?

This calls for economic rethinking. To make farming a viable proposition perhaps US President Joe Biden needs to include farm income parity or guaranteed farm incomes as the guiding principle for boosting the economy “from the bottom and middle out.”

(The writer is an agricultural economist)