Overcoming Good Intentions: Government Measures do More Harm than Good

Governments always mean well, and sometimes government programs actually achieve desired results. Nevertheless, government measures that distort production, consumption and trade always do more harm than good, and in a highly competitive world economy, cotton would be better off with less government “support,” not more. The private sector has a role to play in furthering the long term interests of the cotton industry by striving for efficiency through productivity, rather than seeking advantage through government interventions.

Government efforts to intervene in agricultural markets are at least as old as ancient Egypt when Pharaoh ordered the stockpiling of grain. Nevertheless, for the purpose of analysis, modern government measures to intervene in commodity markets in furtherance of various socio-economic objectives began in the 1920s and continue to the present. Measures include land set-asides, marketing quotas, minimum support prices, price smoothing schemes, buffer stocks, export bans, export subsidies, government imports, exchange rate manipulation, taxes that reduce production and subsidies that expand production, production quotas, requirements for license and registration, and a host of other interventions, some long forgotten.

Government measures have been tried by capitalist countries, and socialist, by developed countries and developing, by producing countries and consuming, and by exporters and importers. They all have a common characteristic: failure in the long run. Even if successful for a time, government measures that distort production, consumption and trade have all proven too expensive, too inefficient, too cumbersome or just plain too damaging, and they have eventually been abandoned, or they will be. The cotton value chain will be better served if the remaining government measures that distort market signals and interfere with competitive outcomes are abandoned sooner rather than latter. It is self evident that the private sector should not be obstructing efforts to reduce government involvement in markets.

Much progress has been made in the past decade in reducing government involvement in cotton markets. As a result of the Brazil cotton case under the Dispute Settlement Mechanism of the World Trade Organization (WTO), combined with the moral suasion brought by the Africans (Benin, Burkina Faso, Chad and Mali) collectively known as the C4 in the Doha Round of WTO trade negotiations, both the EU and the United States have drastically reduced and decoupled subsidies paid to cotton growers. The European Union revised its program in 2006 for cotton under the Common Agriculture Policy (CAP) to substantially reduce production aid and substitute decoupled payments. In the United States, expenditures under the 2014 farm bill for direct support to cotton under the revenue insurance scheme known as STAX are estimated at about one-sixth of expenditures under the 2002 farm bill and about two-fifths of expenditures under the 2008 farm bill.

However, market interventions by developing countries remain unreformed by the WTO process. Consequently, the greatest damage to the long run best interests of the world cotton industry today, as well as to the domestic interests of the countries involved, are being perpetrated by the governments of developing countries, in particular China and India.

Problems Caused Despite Good Intentions

The first problem with government interventions in markets, no matter how well executed, is that there is always rent seeking behavior. In economics, benefits conferred by government policies are described as “rents,” and when governments intervene in markets, representatives of various private sector organizations feel compelled to lobby government officials for favorable treatment. Rent seeking behavior is in and of itself a deadweight loss on social welfare because the gains that accrue to one segment are always offset by losses to other segments, and government interventions in commodity markets always engender more rent seeking behavior. It is almost automatic that Interventions in markets always engender more interventions in markets as industry segments compete for government favors through ever more vigorous rent seeking activities.

A second damaging impact of government interventions is that they undermine demand. While cotton has many advantages over polyester, it must nevertheless compete with alternative fibers on the basis of price. No fiber, not even premium fibers such as wool and silk, much less cotton, can maintain demand for long if prices are uncompetitive. No matter what technical performance advantages a fiber may possess, nor how preferred by consumers, if the incentive to substitute becomes great enough, engineers and designers will find a way to utilize the cheaper fiber. Government measures that result in higher prices, no matter that they are well intended as a means of helping farmers, are harmful in the long run.

A third damaging impact of government interventions is to promote inefficiency by slowing structural change. Governments intervene in markets for many reasons, but one of the most common is to support prices to protect the least efficient producers. Governments always cite a litany of reasons for their actions, including fairness, unfair competition, cultural traditions, national security, and others. But, in reality, governments are seeking votes by shielding the least efficient from economic pressures for change, and the result is waste and resource destruction.

China

It is self evident that with a buffer stock of more than 10 million tons, the Government of China is doing the most harm to the long run competitive interests of the cotton industry today. Cotton’s share of world fiber use is plummeting, and the role of China in maintaining a reserve and thereby preventing cotton prices from falling to competitive levels is benefiting farmers in the short run, but the national cotton reserve is destroying demand in the long run. Furthermore, China has to restrict imports in order to preserve its reserve, thus interfering with economic efficiency and normal trade patterns. By building the reserve between 2011 and 2014, China prompted farmers around the world to produce more cotton than consumers wanted, and the result is waste.

India

The Government of India is likewise harming the interests of its own cotton industry, as well as the world industry. While the Cotton Corporation of India (CCI) was successful in 2014/15 in supporting prices paid to farmers, those same operations encouraged an ongoing shift toward polyester by Indian textile mills, thus destroying demand for cotton in the long run. By supporting prices, the government of India is encouraging farmers who would not otherwise grow cotton to do so, resulting in economic waste.

Furthermore, India has a history of imposing export bans, and the mere possibility that such a ban might be imposed again undermines the interests of cotton. The Ministry of Textiles of the Government of India banned exports of cotton from India in November 2010, and the impact on the world cotton market was highly disruptive. The cotton industry of India still feels the impacts of that decision in the form of higher country risk premiums and lower prices paid to farmers for raw cotton, even now 5 years after the event. Furthermore, the export ban by India contributed to a temporary rise in cotton prices which accelerated the loss of market share of cotton to polyester among textile mills. As a consequence, the world cotton industry today suffers from lower market share, lower consumption, and lower revenue to farmers because of the ban on exports by India in 2010.

The issue of export bans to protect national industries has been discussed extensively at the WTO, and there is a strong consensus that short term advantages gained for national industries under the banner of resource security are far outweighed by the negative long term consequences of disruptions to trade. In the case of natural fiber industries, the negative impacts of trade bans are magnified by the impacts of interfiber competition and the resultant shift in demand away from natural fibers to synthetic fibers.

Conclusion

All segments of the cotton value chain the world over should unite in opposition to government measures that distort market outcomes. Government interventions in markets result in rent seeking behavior, reduced demand, trade retaliation, economic waste and yet more interventions as government officials try to offset the distortions caused by the first intervention. As noted by the Private Sector Advisory Panel (PSAP) in its report to the International Cotton Advisory Committee (ICAC) in May 2011, governments often intervene in markets in response to requests from their own cotton value chains that are seeking economic advantage by shielding inefficiency behind government policies. Thus, an important step forward in freeing cotton from the damaging long term impacts of short run interventions is for the private sector to stop asking to be shielded from market signals.