GATT and Environmental Policy Reform: Discussion

Agricultural protectionism in developed countries such as the United States and those in the European Community (EC) involves subsidized production which has led to excess global supply and to low farm-output prices. In response, the purported goal of the Uruguay Round of the GATT negotiations is to increase global efficiency in agricultural production and trade by eliminating distortionary subsidy programs. Additionally, GATT opens the door for more general policy reform with an explicit focus on the environment. Papers by Abler and Shortle and by Just and Rausser address how agricultural interests and environmental resources may be affected by these reforms. Just and Rausser argue that the key to policy reform is the political feasibility of the policy change. A policy reform altering the current distribution of wealth will be contested by those currently empowered. Thus reforms will fail unless empowered interests are eased out and bought off-compensated to take early retirement from the rent-seeking game. A "golden parachute" is necessary to ease the current patriarchs into the front-porch rocking chair. The relevant task becomes estimating the compensation package necessary to make environmental policy reform feasible to the agricultural community. Although both papers address the costs of political feasibility in GATT, as well as environmental policy reform, at least four issues remain unresolved. First, both papers address policy reform in a deterministic framework. But target prices may be useful to stabilize returns of production. The decoupling of program benefits could involve an increase in output price instability such that producer risk preferences come into play. In addition, even if we assume risk neutrality, a nonlinear production risk could induce significant shifts in behavior. The implication of adding a stochastic element moves us into the world of ex ante choice-a world that Buchanan and Helms argue is less restrictive than the world of ex post choice inasmuch as the ex ante approach incorporates risk preference. In a world of incomplete markets for environmental assets, ex ante expenditures rather than ex post realized outcomes explain choice and welfare. Second, whereas the empirical models are developed in a dynamic context, the analytics of policy reform are static. It could be useful to tie the empirical to the analytical by exploring policy reform in a dynamic setting that accounts for either repeated play or asymmetric information between players. But this is a potential problem in that a multitude of potential Nash or sequential equilibria likely exist (see Fudenberg and Maskin). The Folk Theorems for repeated games suggest that any feasible self-interested payoff can be an equilibrium, provided that the players are sufficiently patient. The range of equilibrium compensation may be quite wide, requiring explicit recognition of how expectations are formed. For signaling games, Cho and Kreps (p. 180) argue that "what constitutes an equilibrium is powerfully affected by the 'interpretations' that would be given by [player] B to messages that [player] A might have sent, but in equilibrium does not send." Restrictions of out-of-equilibrium beliefs can reduce the number of acceptable equilibria but may require data that are impossible or extremely costly to acquire. Regardless, stronger links between the dynamic processes associated with policy reform will provide a more rigorous framework for empirical estimation. Although the first two issues may be dismissed as technical nitpicking, the third and fourth cannot. The third involves the potential production and yield impacts of alternative policies. The impact on the agricultural sector in both papers is large. Abler and Shortle argue that implementation of a stylized version of the EC's MacSharry plan of a two-thirds decoupling Jason F. Shogren is an associate professor in the Department of Economics, Iowa State University. Stan Johnson, Lilyan Fulginiti, and Pat Westhoff provided useful comments. Journal paper No. J-14795 of the Iowa Agriculture and Home Economics Experiment Station, Ames, Iowa. Project No. 2872.