The Multiplier Effect

Commentary, Agriculture, Rolf Penner

If all the world’s agricultural subsidies and tariffs were completely eliminated, the net benefit would amaze farmers beleaguered by low commodity prices. A multiplier effect already experienced by countries which lowered such trade barriers would kick in, and convey advantages far beyond the gross amount of current supports.

The net annual gain would range from a conservative US$245 billion to an astonishing US$2 trillion. That’s the conclusion reached by the Copenhagen Consensus, a group of economists that includes Nobel Prize laureates.

The brainchild of Danish statistician Björn Lomborg, a former Greenpeace activist and author of the controversial best–seller, The Skeptical Environmentalist, the Consensus tried to answer a simple question, “If we had $50 billion to spend on making the world a better place, what would be the best way to spend it?” Teams were assembled in courtroom style to argue for and against various proposals. The end result was a top-ten “investment” list, with trade liberalization of agricultural goods coming in third, after AIDS and malnutrition.

Some of our own economists, at the George Morris Centre and the Department of Foreign Affairs and International Trade, have concluded that the net benefit coming back to Canada from fewer trade barriers would come in between US$50 and $60 billion. That’s quite a feat, considering that Canada spent only US$5.7 billion supporting farmers in 2004. All OECD countries spent a record US$280 billion. How would the removal of these supports lead to such a massive increase in economic output?

In two distinct ways, the argument goes. First, there are static gains. Countries would offer up more of the goods they can produce the most efficiently and less of the ones that they can’t. The second advantage–dynamic gains–kicks in because increased trade fuels more economic growth, and reduced imports encourage greater investment in production capacity. The interaction of these two factors creates a huge multiplier effect, with the benefit-to-cost ratios running anywhere from 20 or 30 to 1 for the entire world, all the way up to 40 to 1 for developing countries.

Real-world data backs up those calculations and the reality of the multiplier effect. Recent evidence comes from the experiences of New Zealand, Australia and China, and further verification from three different countries on three continents in three different decades. In Korea (1965), Chile (1974) and India (1991), per-capita GDP growth accelerated markedly after trade liberalization. Numerous other examples are found in various studies cited by the Copenhagen Consensus.

Who would benefit from these economic gains? About half would accrue to Third World countries. In other words, we could accomplish with trade what we have never been able to do with traditional foreign aid, put an end to the most wrenching of the world’s poverty. Additionally, the report concludes, 70% of the entire gain would land in the hands of farmers.

What the Copenhagen Consensus shows us in a logical, evidence-based way is that much of today’s conventional wisdom is wrong. Subsidies, tariffs and radical market interventions are the cause of, not the cure for today’s farm income crises. They are incapable of producing true wealth and as social programs are complete failures. They do far more harm than good. Eliminating them would not only help us, it would also help the poorest people on the planet.

Trade liberalization is not a zero-sum game. The benefits are real, the multiplier effect is real, and the world’s real wealth will increase if we embrace it fully. Freedom and prosperity are not mutually exclusive; the latter depends very much upon the former.
Let’s roll.