Directions in Policy Analysis

By Schmitz, Andrew | Journal of Agricultural and Applied Economics, August 2003 | Go to article overview

Directions in Policy Analysis


Schmitz, Andrew, Journal of Agricultural and Applied Economics


It is an honor to receive the Lifetime Achievement Award from the Southern Agricultural Economics Association (SAEA). Even though I spent much of my career on the west coast at the University of California at Berkeley, the annual SAEA meetings and the Journal of Agricultural and Applied Economics have been important in my professional development. I have received excellent comments from papers I have given at these meetings. Also, my professional contacts through the SAEA meetings have been invaluable. The SAEA and its members continue to make outstanding contributions to the economics of agriculture, especially in the South.

I was asked to give some brief comments on future policy directions and limitations of past policy analysis. I am excited to do so, especially in view of our recent textbook, Agricultural Policy, Agribusiness, and Rent-Seeking Behavior (Schmitz, Furtan, and Baylis). Since arriving at the University of California at Berkeley in the late 1960s where I began my career, I started doing work in the policy field, including my work with Just and Hueth on applied welfare economics (Just, Hueth, and Schmitz). In addition, I have enjoyed working in the policy field because of my direct involvement in farming in California, Iowa, and Saskatchewan.

Rent-Seeking Behavior and Public Choice

Relatively little attention has been paid to public choice theory and its application to agricultural policy analysis. Applied Welfare Economics (e.g., just, Hueth, and Schmitz) has generally been accepted as an appropriate framework for conceptualising and quantifying the impact of farm programs. However, this methodology falls short in explaining why countries adopt certain farm programs. It is my contention that policy formation is generally the result of special interest groups lobbying politicians for support. This was well documented in a recent book by Schmitz, Furtan, and Baylis, in which we compared farm programs in the United States and Canada. Using the rent-seeking framework, it is easy to see why massive subsidies were given to U.S. farmers under the 2002 U.S. Farm Bill and why little support was given to Canadian prairie grain and oilseed producers.

The New Institutional Economics (NIE) and Vertical Markets

Although a great deal has been written on the NIE using examples outside of agriculture, little of the NIE has been applied to the changing structure of U.S. agriculture. Firm concentration is increasing and so has the degree of vertical and horizontal integration. For example, two of the large U.S. sugar producers in Florida are now fully integrated from production through to the marketing of refined sugar (Schmitz and Moss).

Policy should be discussed within the context of vertical market structures. In this context, it is easy to see why processors, for example, have lobbied for programs that are output increasing. Likewise, this is true for farm machinery manufacturers and fertilizer companies. For instance, machine companies strongly opposed the 1983 U.S. payment-in-kind program. Also, a vertical market structure framework is needed as a basis for general equilibrium policy analysis. (Just, Hueth, and Schmitz).

Multinationals

Much of our policy research does not take into account the fact that a large percentage of international and domestic trade is affected by multinationals lobbying for certain policy outcomes. For example, large amounts of soybeans that are exported from Brazil are in processed form. However, the processing in Brazil is done by multinationals such as Cargill, Ltd. Such firms lobby for free trade in soybean products.

Consider the case of U.S. sugar policy. Flo Sun, Inc. is a large sugar producer in both Florida and the Dominican Republic. A percentage of the exports from the Dominican Republic receives preferential treatment in that the quota rents go to the Dominican Republic. Therefore, Flo Sun, Inc. tries to maximize profits from production in both Florida and the Dominican Republic. …

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