Agriculture and the Macroeconomy

It is argued that from the viewpoint of efficiency, agriculture should not be taxed relative to other sectors, and neither should it be favored. Nevertheless, developing countries have traditionally taxed the agricultural sector while developed countries have protected it, and both have incurred efficiency losses. Based on Schiff and Valdes (1992), it was shown that the taxation of agriculture in developing countries resulted in a slowdown in agricultural growth and in overall economic growth, and that the slowdown was caused essentially by indirect taxation policies (industrial and macroeconomic policies) rather than by the direct (sectoral) ones. A number of LDCs have undertaken structural adjustment reforms in the last fifteen years, including trade policy reform and stabilization efforts, and this has reduced the level of indirect taxation. One reason often given for direct taxion of agriculture is to keep food prices low for urban consumers and to obtain export tax revenue. However, the poorest are often located in the rural areas rather than in the cities, and it is preferable to use non-price instruments to attain social or distributional objectives. As for export tax revenues, LDCs who depend heavily on them will have to look for alternative sources of revenue by implementing a tax reform and/or will have to raise the efficiency of the public sector and/or reduce its size. In the developed countries, protection of agriculture has had adverse general equilibrium effects by raising costs and reducing production and employment in the manufacturing sector. A number of studies have found the cost in terms of higher unemployment to be significant. Moreover, a GATT study found that the policy had a negative impact on poor consumers. Since the Uruguay Round, agriculture is in the WTO and many LDCs have joined the WTO. This gives us hope that future multilateral negotiations will continue to lower the bias against agriculture in LDCs and in favor of agriculture in developed countries.