Steps on the Road to Agricultural Reform in Japan <Special Interview> Ken ASH

As the recent typhoon that hit southwestern Japan and Hokkaido reminds us, the winds of change can sometimes be destructive, causing physical and economic damage, as well as psychological hardship. When it comes to agriculture, many critics see the WTO, with its power to impose change, as a manmade economic gale, wreaking havoc on hapless Japanese farmers and consumers.

Ken Ash, deputy director of the OECD's Directorate for Food, Agriculture and Fisheries, takes a different view. In a recent follow-up interview to a presentation Mr. Ash gave on agricultural reform at a RIETI Policy Symposium "Agricultural Policy Reform in the 21st Century - An Agricultural Strategy for Surviving WTO and FTA Negotiations" on July 28, 2004, he notes an important shift in attitudes in Japan and among participants in the Symposium, saying they recognize both the need for and inevitability of reform. Mr. Ash argues that in order for Japan to maximize the benefits of such reform, and to play a more active role in the ongoing negotiations at the WTO, Japan should begin making policy adjustments now.

Ken ASH
Deputy Director, Directorate for Food, Agriculture and Fisheries, OECD
Mr. Ken Ash shares responsibility for managing a comprehensive program of economic and policy research and analysis relating to the food, agriculture and fisheries sectors. Before joining the OECD in April 1999, Mr. Ash was the Director General, Economic and Policy Analysis at Agriculture and Agri-food Canada. His early work experience was in the private sector, and he has worked at various levels of government, in the agriculture and food policy area, since 1978. Mr. Ash has Bachelor of Commerce and Master of Business Administration degrees.

RIETI Report: What was your impression of the discussion at the symposium? Were there any differences in the nature of the debate from the past?

Ash: My overall impression was very positive. I was encouraged by the widely held view that policy reform was necessary, feasible, and beneficial. This is very different from my previous experiences, when the debate was primarily focused on why reform could not and should not take place in Japan. This is an extremely important shift in thinking and such public dialogue is an essential first step in the reform process.

Of course important questions remain to be addressed, such as the precise details of the new policy measures (for example, whether direct payments are linked to current or past production), how the reforms will be financed (via existing agriculture budgets or new funding), the time frame for their introduction (as soon as possible or only when required by WTO commitments), the eligibility criteria of recipients (whether very small, part-time farmers with other income sources are eligible or excluded).

RIETI Report: If Japan moves from a price-supporting policy to direct income payments, arguments are likely to break among Japanese citizens as to why should only farmers continue to receive support while workers in other sectors do not. How can the government convince the public that such policies are fair?

Ash: There are several elements to consider.

Simply providing farmers an equivalent amount of support via [direct] payments, as is provided via price support, already has advantages for consumers as the regressive nature of price support is eliminated - that is, lower income consumers would no longer pay a higher proportion of their disposable income to support farmers than higher income consumers. But more importantly, direct payments can be targeted to specific goals and intended beneficiaries. In this way, the cost of support can be reduced, to the benefit of taxpayers, and policy goals can be more effectively and efficiently achieved, to the benefit of all.

For example, payments that are not linked to current production requirements are much more efficient in transferring income to producers than payments that also require recipients to produce. As such, the same amounts can be transferred at much lower cost to government and to taxpayers. OECD analysis suggests that such costs could be reduced by as much as 50%. In addition, it is possible, and even likely, that not all "farmers" would be beneficiaries. For example, if you wish to encourage farm consolidation, very small part-time farmers might be excluded from any support, and this could reduce costs considerably.

Further, if the purpose of the direct payments is to compensate farmers for the elimination (or reduction) of price support and/or to help them adjust to increased competition as border protection is removed, then payments should be degressive and temporary - at some point, farmers would be fully compensated and the necessary adjustments would have been made. Over time, the remaining farms would become larger and more productive, and direct income support may no longer be necessary.

Finally, some direct payments might not be related to income, compensation, or adjustment-related policy goals. Some support could be targeted to the provision of specific public goods, such as environmental amenities, whether by farmers or other providers. As such, associated costs should be commensurate with their value, and society should benefit directly from the supply of these public goods.

In brief, there is no apparent rationale today for providing permanent financial support to farmers simply because they are farmers. But there may be a solid rationale for providing temporary assistance to compensate farmers for lost or declining asset values, to help farmers adjust to new policy or market conditions, to improve farm productivity, to supply desired public goods, and so on. When the policy objective is clearly and explicitly stated, the specific benefits sought and paid for by governments can be more easily explained to society.

RIETI Report: Japan seems to be waiting until the last moment to take action on domestic agricultural reform. That is, Japan will do nothing until action becomes inevitable, based on the progress of the agricultural negotiations at the WTO. In contrast, EU has been pushing forward with domestic agricultural reform, reducing import tariffs and eliminating export subsidies, thereby gaining the upper hand in the WTO negotiations. What explains these differences between the EU and Japan and why do you think the EU has been able to implement agricultural reform?

Ash: Countries generally want to ensure that their domestic policy mix and their international trade policy positions are mutually compatible. In some cases, this can be achieved by anticipating trade policy outcomes and adjusting domestic policies in advance; in other cases, trade agreements can impose domestic policy changes. Whatever the sequence of reforms, the economic interest of any country is best served if it pursues its domestic policy objectives with instruments that are effective, efficient, and equitable (i.e. that does not impose unnecessary burdens on a particular segment of society, on other countries, or on world markets).

Many existing policies in OECD countries are ineffective in achieving their objectives, are excessively costly, transfer funds in relatively inefficient ways, and are inequitable. Better policy alternatives exist. Much of the benefit of opening markets in agriculture accrues to countries like Japan that liberalize their own policies. This is because increased resources then become available to consumers and taxpayers, to use as they decide, because available public monies can also be put to better use, and because domestic prices will then adjust in favor of that country's comparative advantage.

Farm policy reforms will always be more difficult if consumers, producers, and taxpayers do not understand the weaknesses of current policies and the nature of policy alternatives that would work better. Widespread agreement on the rationale for reform, how it can be achieved, and what the benefits are, is needed. The RIETI Symposium is a very important step in this direction.

One final, personal thought. Japan's consensus approach to policymaking may argue in favor of starting its own policy reforms before WTO negotiations are concluded, rather than waiting to be forced to make policy changes. This approach might also help Japan to contribute in a very positive manner to a successful conclusion of the Doha Development Agenda.

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