Millions of farmers in developing countries find they cannot compete with cheap, subsidized farm goods from Europe and the United States.

The Jamaican dairy industry may be on its last legs. Part of the reason is the milk powder flooding in from Europe at prices so low that local farmers cannot hope to match them.

According to Albert Walker, executive director of the Jamaica Dairy Farmers Federation, "In 1992 Jamaica produced 38 million liters of milk, but in 2002 we produced just 18 million liters. Imported milk powder rose by 50 percent just between 2001 and 2002. The cost of production, based on inputs like electricity and fertilizer, is skyrocketing, but the price paid to farmers has dropped by 20 percent. The industry is in danger of complete collapse."

How can Europe supply milk so cheaply? It is not only high productivity and economies of scale that give European producers a price advantage. It is also the subsidies they get from the European Union. According to a report from Cafod, a U.K.-based Catholic aid organization, the E.U.'s cash support and other transfers to the dairy industry total about $17 billion a year, or about $2.20 per cow per day-more than the daily income of half of the world's population. Dairy farmers produce a massive milk surplus, and exporters are given money to process this surplus and dump it onto world markets. This system of incentives pushes down international prices.

The situation is similar for dozens of other agricultural commodities. Cotton farmers in West Africa and corn farmers in Mexico suffer as a result of U.S. farm policies, and sugarcane farmers in Mozambique are harmed by the sugar policies of the Organisation of Economic Co-operation and Development (OECD) countries. According to statistics from the International Monetary Fund, between 1980 and 2000 the inflation-adjusted price of maize fell by 42 percent; wheat, 45 percent; cotton, 48 percent; rice, 61 percent; and sugar, a whopping 77 percent.At these low prices, developing-country farmers often cannot afford to compete on world markets, or even in their own domestic markets.

Government support to agriculture has sustained several generations of farmers in most of the industrialized countries.The U.S. government began supporting farmers after commodity prices collapsed during the Great Depression, and Europe adopted its support policies during the economic turmoil following World War II.The policies became part of how farmers do business in these countries. Price supports, for example, became embedded in the price of land, says Eugenio Díaz-Bonilla, a senior research fellow at IFPRI. "The price of land is related to the income that it generates," he explains. "If you get subsidies for the products of the land, then the value of the land reflects that. Naturally farmers want to maintain these policies even though the original reasons for the subsidies are gone."

Now, although farmers in these countries are relatively small in number-just 2.6 percent of the labor force in the United States and 4.4 percent in Europe-they use their considerable political clout to insist on the continuation of agricultural support. Their determination is understandable: U.S. farmers earn about 20 percent of their income from subsidies. European subsidies account for about 30 percent of farmers' income there, and in Japan the figure is nearly 60 percent. In all, agricultural support to farmers in the industrial countries has a value of more than $300 billion a year.

Agricultural support by the industrialized countries takes several forms, and nearly all of them encourage production by keeping domestic prices high for industrialized-country farmers. This overproduction increases international supplies and pushes down international market prices. Support policies include domestic subsidies like direct payments to farmers on the basis of their production level, and price supports, in which governments agree to buy farmers' produce at a certain price when the market price falls below this level.These policies distort the signals that tell farmers how much they can profitably produce. When governments offer price supports, explains Sherman Robinson, director of IFPRI's Trade and Macroeconomics Division, "it says to the farmer: Keep producing. Price doesn't matter." So farmers keep producing.

Governments also use export subsidies to help make their farmers more competitive in world markets, paying exporters the difference between high domestic prices and low world market prices. Again, the message to farmers is: Keep producing. Price doesn't matter.

Finally, governments protect their farmers from foreign competition by using tariffs and quotas to restrict access to domestic markets.These protections help keep domestic prices high by shutting out cheaper imports. Because prices are relatively high, domestic consumers buy less, and more of the product flows into international markets-pushing international prices down.

The first people to pay the cost of agricultural support are the taxpayers and consumers of the industrialized countries, whose taxes go to farmers and who pay higher prices for food than they otherwise would.The United States now spends about $19 billion a year on its taxpayer-funded farm support programs-about double its budget for foreign aid.The E.U. spends more than $40 billion a year.

The next to pay are farmers in the developing countries, and their losses can be enormous. For example, U.S. cotton subsidies totaling $3.9 billion a year have contributed to oversupply in the world market.The consequent dive in cotton prices has been disastrous for cotton producers in West African countries like Chad and Mali, as well as in Brazil. Brazil's National Agriculture Confederation estimates that low cotton prices cost the country more than $600 million in 2001/02. In September 2002 Brazil filed a complaint against the United States with the World Trade Organization (WTO) over the subsidies, and the parties are still awaiting a decision.

The United States and the European Union sometimes point out that they have participated in specific agreements designed to give poor countries preferential access to rich-country markets, such as the E.U.'s Everything but Arms agreement and the U.S. Africa Growth and Opportunity Act. Although such agreements offer some trade opportunities to some poor countries, Robinson notes that the United States and E.U. still restrict the entry of high-value and potentially more profitable agricultural products, like sugar, meat, fruits and vegetables, and processed goods. "If you want to export cocoa beans to the E.U., that's fine," he says. "But if you want to export a chocolate bar, it's going to be much more difficult."

The heavy cost to developing countries of these policies is particularly damaging because, without a healthy and growing agricultural sector, many poor countries are simply unable to climb out of poverty. Whereas the industrialized countries have relatively small farming populations, many developing countries are still largely rural and agricultural. In developing countries overall, agriculture accounts for nearly half of all employment. Given agriculture's central role in these economies, when farmers and farm workers find their livelihoods threatened, the entire economy is weakened.

Trade in agricultural goods can play a key role in reducing poverty. Research by Díaz-Bonilla, Robinson, and Xinshen Diao from IFPRI shows that, if industrialized countries eliminated their agricultural supports and opened their markets, developing countries would triple their net agricultural trade, and an additional $26 billion in annual income would flow to their farmers and agroindustrial workers.This figure does not include the additional effects in the rest of the economy that would flow from this boost in income. Not everyone in the developing world loses from the current situation. In addition to the richcountry farmers who gain from subsidies and protection, cheap food benefits developing-country consumers whose income does not depend on agriculture and countries that have agricultural sectors that are small or that cannot be expanded, like the net food-importing countries of West Asia and North Africa. But, says Díaz-Bonilla, "there are other more efficient and just ways to compensate those potential losers without having to maintain the current system with its large costs for developing countries and the world as a whole."

Agricultural policies were for the first time fully on the table in international trade negotiations during the Uruguay Round. Now, in what is known as the Doha Development Round, trade negotiators meeting at the WTO in Geneva are working to hammer out an agreement on how to continue the process of reform initiated during the Uruguay Round, including the three main forms of agricultural support-domestic subsidies, export subsidies, and restrictions on market access.

Negotiating parties are still far apart on their key demands. The E.U. maintains that some form of domestic support is necessary to cope with the volatility of commodity prices and to help maintain its rural population and protect the rural environment. With regard to protecting its rural people and environment, an E.U. fact sheet states, "On its own, the market will fail to guarantee the provision of these desirable public goods, or at least provision will not be assured at an acceptable level."The Europeans are considering some options for decoupling subsidies from production by, for instance, giving farmers direct income supports or paying them for preserving land for environmental purposes. Whether those changes would help reduce the overproduction that lowers prices and harms developing-country farmers is an open question.

Although the United States moved in this direction in the mid-1990s, its 2002 farm act reversed course in response to political pressure from farm groups.The act effectively institutionalized price supports that the country had given farmers on an emergency basis in recent years. Passage of the act gave rise to a storm of protest by trading partners, who argued that the shift flew in the face of the country's own free-trade rhetoric.

As far as export subsidies, some countries want to phase them out quickly and completely whereas others want to reduce them slowly.The E.U. argues that in any case low prices are actually the result of falling transport costs and increasing productivity by farmers worldwide rather than of export subsidies by industrialized countries.

Finally, disagreement exists on how tariffs and other barriers should be reduced. Should all countries have to reduce their tariffs by equal shares, even though some countries' tariffs are much higher than others'? Or should all countries be required to bring their tariffs down to more or less equal levels? These questions are subject to intense political posturing and negotiation.

Gawain Kripke, senior trade advocate for Oxfam, is concerned that the developing countries are not well equipped to benefit from these complicated negotiations. "Negotiations are a rich country's game," he says."Developing countries don't have the resources to play the game.They don't have the phalanxes of negotiators and lawyers and researchers."

Kripke points out that the negotiations have high stakes for the developing countries and that they may fear putting at risk their special aid relationships and bilateral trade preferences with the industrialized countries. "The developing countries need better support in terms of legal mechanics and technical assistance. We think the northern countries should provide more assistance in that way."

Albert Walker of the Jamaica Dairy Farmers Federation also fears that developing countries will be the big losers from the negotiations, because industrialized countries are likely to get poor countries to open their markets still further while avoiding giving up their own agricultural subsidies: "You will have a wide open playing field that isn't level."

Some countries are counting on negotiating blocs to give them a greater say in the negotiations. Brazil, along with 14 other agricultural exporters, including Argentina, Australia, Colombia, New Zealand, and South Africa, is a member of a coalition called the Cairns Group that pushes for freer trading rules.The group takes credit for putting and keeping agriculture on the agenda and hopes that by negotiating together they can put more muscle into their demands. "For us the ideal outcome would be the complete elimination of all tradedistorting policies in the agricultural world market," says Antonio Donizeti Beraldo, director for international trade of the Brazilian National Agriculture Confederation. "It means the complete elimination of export subsidies and other measures with equivalent effects, such as export credit and food aid, as well as all the trade-distorting domestic support measures and high tariffs, with the aim of rapidly improving market access for developing countries."

One veteran of past negotiations, Clayton Yeutter, who has served as both U.S. trade representative and U.S. secretary of agriculture, thinks that countries like Brazil may be closer than ever to getting what they want.The conditions are in place for much greater progress in agricultural trade negotiations, he says, because trade barriers are now quantified and countries have a common vocabulary for discussing them, a situation that did not exist in the earlier Uruguay Round. In addition, the developed countries are facing budget problems that may make their agricultural supports unsustainable.

He also sees much greater determination among many of the developing countries than in the past. "They are not going to be intimidated.They're saying,'We're going to make progress or there will be no successful Doha Round.' It behooves the developed countries to appreciate that and respond to it."

No matter what happens during the Doha Round negotiations, the developing countries already have it within their power to make their farmers better off, encourage agricultural growth, and make their agricultural exports more competitive internationally. "It is true that industrial-country agricultural policies hurt some developing countries," says the IMF's Stephen Tokarick. "But developing countries' own policies, such as tariffs, hurt themselves substantially more in most cases." High tariffs in the developing countries cause people to move resources like capital and labor into the protected industry instead of into more efficient industries with export potential. Additionally, cautions Díaz-Bonilla, "it is important to understand that protection is a regressive hidden tax that is paid in proportionally greater amounts by poor consumers and collected mainly by large private producers and agroindustrial operators."

But while some developing countries may use protection to increase prices to farmers (hurting consumers in the process), the opposite happens in other developing countries. In a recent study Ashok Gulati, director of IFPRI's Markets and Structural Studies Division, points out that from 1982 to 1992 the value of domestic supports for farmers in Japan amounted to 71 percent of the value of that country's agricultural production, while in a number of developing countries that figure was below zero, according to data from the U.S. Department of Agriculture. In Tanzania, for example, it was -78 percent. Instead of seeking high prices for farmers, many developing countries are concerned with keeping food cheap for growing numbers of poor and urban people.To reduce farmers' costs and help ensure low food prices, India, for instance, subsidizes inputs like water, energy, and fertilizer, leading to wasteful use of these resources.

It is perhaps tempting for countries like India, Gulati points out, to believe that in order to compete they must vastly increase their subsidies and trade protections for agriculture.This approach would be misguided, and in any case unaffordable, he says. Instead, India and other developing countries need to lower their input subsidies and redirect the funds to investments in public goods, like infrastructure, that will help create thriving rural economies.Then governments can more carefully target assistance only to those poor farmers who cannot afford the higher-priced inputs. But the lack of a level international playing field for their farmers makes it difficult for developing countries to cut their own subsidies.

"Even as developing countries push developed countries to open their markets," says IFPRI Director General Joachim von Braun, "they need to invest at home in roads, market organizations, health, education, agricultural research, and food quality and safety.This will position their agriculture sectors to make the most of emerging trade opportunities in OECD countries. Just cutting subsidies in OECD countries will not be enough to tap the potential of agricultural growth in developing countries."

Although the industrialized countries are the major players in international agricultural markets for the moment, IFPRI research shows that in the coming decades their share in world trade will be dwarfed by that of developing countries. So for most developing countries, the best hope for profitable agricultural trade in the long term will lie in fair and active trading with their developing-country neighbors.

For now, developing-country farmers want the chance to compete on an equal footing with those in the rest of the world."Some developed countries pay lip service to free trade while keeping their domestic support for farmers," says Gulati."What the developing countries really need is free and fair trade with much reduced levels of domestic support in the developed world, as well as much better market access."

Ironically, observes von Braun,"developing countries use WTO anti-dumping mechanisms against each other almost twice as often as they do against developed countries. In any event, what we need is to maintain and expand rule-based global trade adhered to by all countries, and this must be at the top of the global agenda."