More troubling is the trajectory (see chart). Among major emerging markets tracked by the OECD, China is second only to Indonesia in the rate of its subsidy growth. China’s farm support rose from 1.4% of GDP in 1995-97 to 2.3% in 2010-12. It is moving in the opposite direction from developed countries, which are gradually reducing such support. Average spending on it in the OECD countries fell from 1.6% of GDP in 1995-97 to 0.9% in 2010-12.
There are also concerns about the kind of support provided by China. Even those who advocate less intervention in farming by governments acknowledge that it can play a useful role in mitigating boom-bust cycles. The challenge is to design support that minimises distortions. Schemes that lead to more investment in yield enhancements or that provide flat subsidies, regardless of production levels, are best. Those that encourage farmers to plant crops even if real demand is weak are harmful.
The OECD calculates that nearly 70% of Chinese subsidies are of the most distorting sort. For example, the government guarantees minimum purchase-prices, currently well above global levels, to grain growers. Other Asian countries are worse offenders. In Indonesia, the most problematic forms of subsidies account for nearly all of the government’s agricultural spending. But given China’s size, its interventions and the mismanagement of its food reserves are likely to have more far-reaching consequences for global markets.