International_Economics_Tenth_Edition (1)

Chapter 7

219

TABLE 7.1

Basic Economic and Social Indicators for Selected Nations, 2002

	Gross National Product	Life Expectancy	Adult Illiteracy
	per Capita'	(Years)	(Percent)
United States	$35,060	78	Under 5%
Switzerland	31,250	70
Japan	26,070	80
Sweden	25,080	79
Chile	9,180	75	5
Mexico	8,540	72	10
Malaysia	8,280	72	15
Algeria	5,330	70	36
Indonesia	2,990	65	21
Guinea	1,990	46	76
Chad	1,990	48	52
Mozambique	1,650	46	59
	11111	111111111111 •• 11111111 1	11111111' I !ililit

*At purchasing power parity.

Source: The World Bank Group, Data by Country, hnp:/Iwwwworldbank.org/data. Scroll to "Country at a Glance." See also the World Bank,

WorldDevelopment Report, 2004.

It is significant, however, that in the past three decades the dominance of primary products in developing-nation trade has greatly diminished, Many developing nations have been able to increase their exports of manufactured goods and services relative to primary products: China, India, Mexico, South Korea, Hong Kong, Bangladesh, Sri Lanka, Turkey, Morocco, Indonesia, Vietnam, and so on. These nations that have integrated into the world's industrial economy have realized higher significant poverty reduction.

How have developing countries been able to move into exports of manufactured products? Investments in people and in factories both played a role, Average educational levels and capital stock per worker rose sharply throughout the developing world. Also, improvements in transport and communications, in conjunction with developingcountry reforms, allowed the production chain to be broken up into components, with developing countries playing a key role in global production sharing. Finally, the liberalization of trade barriers in developing countries after the mid-1980s

increased their competitiveness. This was especially true for manufactured goods and processed primary products. Simply put, developing countries are gaining ground in higher-technology exports. However, they have been frustrated about modest success in exporting these goods to advanced nations.

However, developing countries with total populations of around 2 billion people have not integrated strongly into the global industrial economy; many of these countries are in Africa and the former Soviet Union. Their exports usually consist of a narrow range of primary products, These countries have often been handicapped by poor infrastructure, inadequate education, rampant corruption, and high trade barriers. Also, transport costs to industrial-country markets are often higher than the tariffs on their goods, so that transport costs are even more of a barrier to integration than the trade policies of rich countries, For these developing countries, incomes have been falling and poverty has been rising in the past 20 years. It is important for them to diversify exports

220 Trade Policies for the Developing Nations

Structure of Output for Selected Advanced Nations and Developing Nations, 2002

	Value Added as a Percent of GDP
	Agriculture, Forestry,
Economy	and Fishing	Industry			Services
Advanced Nations					72%
United States	2%	26%
Japan	2	38			60
Canada	3	29			68
France	3	26			71
Italy	3	29			68
Developing Nations		24			43
Albania	33
Chad	36	18			46
Pakistan	23	23			54
Tanzania	44	16			40
Mali	38	26			36

Source: The World Bank Group, Databy Country, http://www.worldbank.org/data. Scroll to "Country at a Glance Tables." See also The World Bank, WorldDevelopment Report, 2004.

by breaking into global markets for manufactured goods and services where possible.

Tensions Between

Developing Countries and

Advanced Countries

In spite of the trade frustrations of developing countries, most scholars and policy makers today agree that the best strategy for a poor country to develop is to take advantage of international trade. In the past two decades, many developingcountries saw the wisdom of this strategy and opened their markets to international trade and foreign investment. And yet, ironically, in spite of the support that scholars from advanced countries have given to this change, the advanced world has sometimes increased its own barriers to imports from these developing countries. Why is this so?

Think of the world economy as a ladder. On the bottom rungs are developing countries that produce mainly textiles and other low-tech goods.

Toward the top are the United States, Japan, and other industrial countries that manufacture sophisticated software, electronics, and pharmaceuticals. Up and down the middle rungs are all the other nations, producing everything from memory chips, to autos, to steel. From this perspective, economic development is simple: Everyone attempts to climb to the next rung. This works well if the topmost countries can create new industries and products, thus adding another rung to the ladder. Such invention permits older industries to move overseas while new jobs are generated at home. But if innovation stalls at the highest rung, then that's bad news for Americans who must compete with lower-wage workers in developing countries.

A predicament faced by developing countries is that in order to make progress, they must displace producers of the least advanced goods that are still being produced in the advanced countries. For example, if Zambia is going to produce textiles and apparel, it will compete against American and European producers of these

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Developing Economies

goods. As producers in advanced countries suffer from import competition, they tend to seek trade protection in order to avoid it. However, this protection denies critical market access to developing countries, thwarting their attempts to grow. Thus, there is a bias against their catching up to the advanced countries.

Those who are protected in advanced countries from the competition with developing countries tend to include those who are already near the bottom of the advanced countries' income distributions. Many of these people work in laborintensive industries and have limited skills and low wages. These are the people that income redistribution programs ought to aid, not hinder. To some extent, advanced countries face a tradeoff between helping their own poor and helping the world's poor. But critics note that the world as a whole needs to treat all poor as its own and thar a purpose of international institutions is to ensure that. For example, it is the responsibility of the World Trade Organization (WTO) to prevent advanced countries' trade policies from tilting too far in favor of their own people and against the world's. This is why recent meetings of the WTO have been filled with tensions between poor and rich countries.

However, providing developing countries greater access to the markets of advanced countries will not solve all the developing countries' problems. They face structural weaknesses in their economies, which are compounded by nonexistent or inadequate institutions and policies in the fields of law and order, sustainable macroeconomic management, and public services.

Trade Problems of the

Developing Nations

The theory of comparative advantage maintains that all nations can enjoy the benefits of free trade if they specialize in production of those goods in which they have a comparative advantage and exchange some of these goods for goods produced by other nations. Policy makers in the United States and many other advanced nations maintain that the market-oriented structure of the international

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221

trading system furnishes a setting in which the benefits of comparative advantage can be realized. They claim that the existing international trading system has pro-

vided widespread benefits and that the trading interests of all nations are best served by pragmatic, incremental changes in the existing system. Advanced nations also maintain that to achieve trading success, they must administer their own domestic and international economic policies.

On the basis of their trading experience with the advanced nations, some developing nations have become dubious of the distribution of trade benefits between them and the advanced nations. They have argued that the protectionist trading policies of advanced nations hinder the industrialization of many developing nations. Accordingly, developing nations have sought a new international trading order with improved access to the markets of advanced nations. Among the problems that have plagued developing nations have been unstable export markets, worsening terms of trade, and limited access to markets of industrial countries.

Unstable Export Markets

One characteristic of many developing nations is that their exports are concentrated in only one or a few primary products. This situation is shown in Table 7.3 on page 222, which illustrates the dependence of selected developing nations on a single primary product. A poor harvest or a decrease in market demand for that product can significantly reduce export revenues and seriously disrupt domestic income and employment levels.

Many observers maintain that a key factor underlying the instability of primary-product prices and export receipts is the low price elasticity of the demand and supply schedules for products such as tin, copper, and coffee, as indicated in Table 7.4 on page 222. Recall that the price elasticity of demand (supply) refers to the percentage change in quantity demanded (supplied) resulting from a 1 percent change in price. To the extent that commodity demand and supply schedules are relatively inelastic, suggesting that the percentage change in price exceeds the percentage change in

222 Trade Policies for the Developing Nations

";iJ'ABLE7 . 1,		, ,
Developing-Nation Dependence on
Primary Products, 2002
		Major Export
		Product as a
	Major Export	Percentage of
Country	Product	Total Exports
Nigeria	Oil	96%
Saudi Arabia	Oil	86
Venezuela	Oil	86
Burundi	Coffee	79
Mauritania	Iron ore	56
Zambia	Copper	56
Ethiopia	Coffee	54
Chad	Cotton	40
Rwanda	Coffee	31

Source: The World Bank Group, Databy Country, http.r/www.world bank.org/data. Scroll to "Country at a Glance Tables."

Long-Run Price Elasticities of Supply and

Demand for Selected Commodities

		Supply Elasticity	Demand Elasticity
		(Developing	(Industrialized
	Commodity	Countries)	Countries)
	Coffee	0.3	0.2
	Cocoa	0.3	0.3
	Tea	0.2	0.1
	Sugar	0.2	0.1
	Wheat	0.6	0.5
, Copper		0.1	0.4
	Rubber	0.4	0.5

Source: Jere Behrman, "International Commodity Agreements: An Evaluation of the UNCTAD Integrated Commodity Program," in William Cline, ed.. Policy Alternatives for a New International Economic Order (New York: Praeger, 1979), pp. 118-121.

quantity, a small shift in either schedule can induce a large change in price and export receipts.

Figure 7.1 illustrates the export market of Costa Rica, a producer of coffee. In Figure 7.1(a), once coffee has been planted, the quantity supplied is fixed for the following marketing period, irre-

spective of how the price of coffee may fluctuate, Let the supply of coffee be perfectly inelastic (vertical), as shown in the figure. Because of changing preferences, suppose the world demand for coffee falls from Do to D[. The decrease in demand causes the price of coffee to decline from $6 to $3 per pound; this price decrease is larger than would occur if Costa Rica's supply schedule were upwardsloping (that is, if it exhibited greater price elasticity). As a result of the price decline, Costa Rica's export receipts fall from $240 to $120. Conversely, an increase in the world demand for coffee would lead to higher prices and export receipts for Costa Rica. We conclude that export prices and earnings can be extremely volatile when supply is inelastic and there occurs a change in demand.

Not only do changes in demand induce wide fluctuations in price when supply is inelastic, but changes in supply induce wide fluctuations in price when demand is inelastic. The latter situation is illustrated in the two-period framework of Figure 7.1(b). Costa Rica's export supply schedule, So, is portrayed as perfectly inelastic, while the world demand schedule, Do, is relatively price-inelastic. In equilibrium, the price of coffee equals $3 per pound, and Costa Rica's export receipts total $120.

In time period 1, suppose the world demand for coffee increases so that the demand schedule shifts from Do to D l . This results in a substantial increase in price, from $3 to $5.25 per pound, and an increase in Costa Rica's export receipts from $120 to $210. Suppose that, because of the price increase, growers in Costa Rica plant additional coffee in the next time period, shifting the supply schedule from So to 51' With a relatively inelastic demand, the ensuing decrease in price will be substantial; the price of coffee falls from $5.25 to $1.50 per pound, and Costa Rica's export receipts fall to $90. Again we see that export prices and receipts can be very volatile when supply and demand conditions are price-inelastic.

Worsening Terms of Trade

How the gains from international trade are distributed among trading partners has been controversial, especiallyamong developing nations whose exports

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223

FIGURE 1.1

Export Price Instability for a Developing Country

10)Elasticity of Supply Effect

(b] Elasticity of Demand Effect

So 5,

5.25

~

o o

'" 3.00 v

d:

V,

OL----	'--------	'---	'-------	'---------	~
		40			40	60
		Caffee [Pounds]			Caffee (Pounds)

When the supply of a commodity is highly price-inelastic, decreases(or increases) in demand will generate wide variations in price. When the demand for a commodity is highly price-inelastic, increases (or decreases) in supply will generate wide variations in price.

11I11I11II111

r lililiill" 'I

are concentrated in primary products. These nations generally maintain that the benefits of international trade accrue disproportionately to the industrial nations.

Developing nations complain that their commodity terms of trade has deteriorated in the past century or so, suggesting that the prices of their exports relative to their imports have fallen. Worsening terms of trade has been used to justify the refusal of many developing nations to participate in trade-liberalization negotiations. It also has underlain the developing nations' demands for preferential treatment in trade relations with the advanced nations.

Observers maintain that the monopoly power of manufacturers in the industrial nations results in higher prices. Gains in productivity accrue to manufacturers in the form of higher earnings rather than price reductions. Observers further contend that the export prices of the primary

products of developing nations are determined in competitive markets. These prices fluctuate downward as well as upward. Gains in productivity are shared with foreign consumers in the form of lower prices. The developing nations maintain that market forces cause the prices they pay for imports to rise faster than the prices commanded by their exports, resulting in a deterioration in their commodity terms of trade. Moreover, as income rises there is a tendency for people to spend more on manufactured goods than primary goods, thus contributing to a worsening in the developing nations' terms of trade.

The developing nations' assertion of worsening commodity terms of trade was supported by a UN study in 1949.' The study concluded that from the period 1876-1880 to 1946-1947, the prices of

'United Nations Commission for Latin America, The Economic Development of Latin Americaand Its Principal Problems, 1950.

224

~,'.­ -

Trade Policies for the Developing Nations

ILNa	1'111 Ii I 1111111.

Does "Fair Trade" Help Farmers in

Poor Countries?

What fair-trade coffee costs wholesale roaster Dean's Beans in 2004Prices. for one-pound bulk bags of organic coffee.

Wholesale roaster (Dean'sBeans)

Costs	$1.41
Price paid to coffee grower
Administrative costs and shipping	0.39
Shrinkage during roasting	0.36
Operating and maintenance cost	2.50
Packaging and miscellaneous costs	0.14
Price at which wholesale roaster	4.80
sells to stores	5.00
Wholesale roaster profit	0.20

Retail store

Price at which store sells to customer 8.49 Price at which store buys from

wholesale roaster	5.00
Retail store profit, before expenses	3.49
111	rWllitJll1fllllilJJlft

Source: Data taken from"At Some Retailers. Fair Trade Carries a Very High Cost." The WallStreet Journal, June 8, 2004. pp. Al and A10.

.~ II·

Nicaraguan coffee farmer Santiago Rivera has traveled far beyond his mountain home to publicize what is known as the "fair-trade" coffee movement. Have you heard of fair-trade coffee? You soon may. Started in Europe in the early 1990s and just making its way across the United States, the objective of the fair-trade coffee movement is to increasethe incomes of poor farmers in developing countries by implementing a system where the farmers can sell their beans directly to roasters and retailers, bypassing the traditional practice of selling to middlemen in their own countries.

This arrangement permits farmers, who farm mainly in the mountainous regions of Latin America and other tropical regions where highflavor, high-priced beans sold to gourmet stores are grown, to earn as much as $1.26 per pound for their beans, compared with the $.40 per pound they were getting from middlemen.

Under the fair-trade system, farmers organize in cooperatives of as many as 2,500 members, which set prices and arrange for export directly to brokerage firms and other distributors. Middlemen-known as "coyotes" in Nicaragua-previously handled this role. So far,

primary products compared with those of manufactured goods fell by 32 percent. However, because of inadequacies in data and the problems of constructing price indexes, the UN study was hardly conclusive. Other studies led to opposite conclusions about terms-of-trade movements. A 1983 study confirmed that the commodity terms of trade of developing nations deteriorated from 1870 to 1938, but much less so than had been maintained previously; by including data from the late 1940s up to 1970, the study found no evidence of deterioration.' Consistent with these findings, a 1984 study concluded that the terms of trade of developing nations actually improved somewhat from 1952 to 1970.'

'J. Sporas. Equalizing Trade? (Oxford: Clarendon Press. 1983).

'M. Michaely. Trade Income Levels and Dependence (Amsterdam:

North-Holland, 1984).

It is difficult to conclude whether the developing nations as a whole have experienced a deterioration or an improvement in their terms of trade. Conclusions about terms-of-trade movements become clouded by the choice of the base year used in comparisons, by the problem of making allowances for changes in technology and productivity as well as for new products and product qualities, and by the methods used to value exports and imports and to weight the commodities used in the index.

Limited Market Access

In the past two decades, developing countries as a whole have improved their penetration of world markets. However, global protectionism has been a hindrance to their market access. This is especial-

Chapter 7

225

500,000 of the developing world's4 million cof-	less aware of social problems in the developing
fee farmers have joined the fair-trade move-	world than Europeans.
ment. However, the movement has led to inci-	The fair-trade movement has yet to get the
dents of violence in some places in Latin	support of major U.S. coffee housessuch as
America, mostly involving middlemen who are	Maxwell and Folgers. Nevertheless, organizers
being bypassed.	are trying to nudge Seattle'stwo big coffee
The fair-trade coffee movement is the latest	giants, Starbucks Coffee Co. and Seattle Coffee
example of how social activists are using free-	Co., into agreeing to purchase some of the fair-
market economics to foster social change.	trade coffee. In Oakland, Mayor Jerry Brown is
Organizers of the movement saythey have	persuading his colleagues to give more thought
signed up eight gourmet roasters and about	to how they purchase coffee. "1would hope
120 stores, including big chains like Safeway. Fair-	that the people sipping their cappuccinos would
trade coffee carries a logo identifying it as such.	take a moment to reflect on the sweat and
Fair trade achieved much success in Europe,	labor of those who provided it."
where fair-trade coffee sells in 35,000 stores and	However, critics question the extent to which
has sales of $250 million a year. In some coun-	"fair-traded" coffee actually helps. They note that
tries like the Netherlands and Switzerland, fair-	the biggest winners are not the farmers, but
trade coffee accounts for as much as 5 percent	rather the retailers that sometimes charge huge
of total coffee sales. Based on those achieve-	markups on fair-traded coffee while promoting
ments, organizers in Europe are expanding their	themselves ascorporate citizens, as seen in the
fair-trade efforts to include other commodity	table. They get away with it because consumers
items, including sugar, tea, chocolate, and	generally are given little or no information about
bananas. But fair-trade activists admit that seil-	how much of a product's price goesto farmers.
ing Americans on the idea of buying coffee with
a social theme will be more challenging than it	Source: U A Global Effort for Poor Coffee Farmers: The Wall Street
was in Europe. Americans, they note, tend to be	Journal. November 23. 1999, pp. A2 and A4.

ly true for agriculture and labor-intensive manu-	the European Union and North American Free
factured products such as clothing and textiles, as	Trade Agreement, which have abolished tariffs for
seen in Figure 7.2 on page 226. These products are	industrial-country trade partners. Also, because
important to the world's poor because they repre-	developing countries did not actively participate
sent more than half of low-income countries'	in multilateral trade liberalization agreements
exports and about 70 percent of least-developed	prior to the 1990s, their products tended to be
countries' export revenues.	omitted from the sharp reductions in tariffs made
Tariffs imposed by the industrial countries on	in those rounds. Simply put, average tariff rates in
imports from developing countries tend to be	rich countries are low, but they maintain barriers
higher than those they levy on other industrial	in exactly the areas where developing countries
countries. Outside of agriculture, tariffs on	have comparative advantage: agriculture and
imports from other industrial countries in 2002	labor-intensive manufactured goods.
averaged 1 percent, while those from developing	Developing countries also are plagued by tariff
countries faced tariff averages ranging from 2.1	escalation, as discussed in Chapter 4. In industrial
percent (Latin America) to 8.1 percent (South	countries, tariffs escalate steeply, especially on agri-
Asia). The differences in tariff averages reflect in	cultural products. Tariff escalation has the poten-
part the presence of major trading blocks such as	tial of decreasing demand for processed imports

226 Trade Policies for the Developing Nations

IIGURE '1.2

Trade Barriers limit Export Opportunities of Developing Countries....

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High-	Developing	South	Africa	Middle	latin America	East	E Europe
Income		Asia		East and	and the	Asia	and
				North Africa	Caribbean		Central Asia

[b] Toriffs impede trade in labor-intensive rnonulocturers.

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They face high tariff walls, especially in agricultural commodities and labor-intensive manufacturers.

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Source: The World Bank, Global Economic Prospects and Developing Countries, 2002, p_ 45_

from developing countries, thus restncnng their diversification into higher value-added exports. Though less prevalent, tariff escalation also affects imports of industrial products, especially at the semiprocessed stage. Examples of such products, in which many developing countries have a comparative advantage, include textiles and clothing, leather and leather products, wood, paper, furniture, metals, and rubber products.

Global protectionism in agriculture is another problem for developing countries. In addition to using tariffs to protect their farmers from importcompeting products, industrial countries support their farmers with sizable subsidies. Subsidies are often rationalized on the noneconomic benefits of agriculture, such as food security and maintenance of rural communities. By encouraging production of agricultural commodities, subsidies discourage agricultural imports, thus displacing developing-country exports in industrial-country markets. The case of U.S. subsidies to sugar producers illustrates the adverse effects of support on developing countries' exporters. Moreover, the unwanted surpluses of agricultural commodities that result from government support are often dumped into world markets with the aid of export subsidies. This depresses prices for many agricultural commodities and reduces the export revenues of developing countries.

Moreover, protectionist barriers have caused developing-country producers of textiles and clothing to forego sizable export earnings. For decades, industrial countries imposed quotas on imports of these products. Although the Uruguay Round Agreement on Textiles and Clothing called for an abolishment of the quotas over a 10-year period (1995-2005), market access in textiles and clothing will remain restricted because tariff barriers are high.

Finally, antidumping and countervailing duties have become popular substitutes for traditional trade barriers, which are gradually being reduced in the course of regional and multilateral trade liberalization. Developing countries have argued that industrial countries such as the United States have limited access to their markets through aggressive use of antidumping and countervailing duties. Such policies have resulted in significant reductions in

							Chapter 7	227
export volumes and market shares, according to
the developing countries.
Indeed, poor countries have leaned on the
United States and Europe to reduce trade barriers.
However,		rich	countries		note
that	poor	countries		need		to	·IIIi1E1J'APPliWliOf1d
reduce their own tariffs,					which		Visit EconNews Online
are often higher			than	those		of
							International Trade
their	rich	counterparts.			The

average tariff rate of developing countries is more than 20 percent compared with less than 5 percent of developed countries, as seen in Table 7.5. Tariff escalation is also widely practiced by developing countries; their average tariff for fully processed agricultural and manufactured products is higher than on unprocessed products. Although trade among developing countries is a much smaller share of total trade, average tariffs in manufactured goods are about three times higher for trade among developing countries than

Tariffs of Selected Developing Countries

and Advanced Countries

Poor nations typically impose higher tariffs than rich nations. Average unweighted applied tariff rates for selected countries for all goods in 2002:

	Average Tariff Rate
	(Percent)
Developing Countries
India	30.9%
Nigeria	23.4
Pakistan	20.6
Kenya	20.2
Mexico	15.6
China	15.3
Argentina	13.4
Brazil	12.9
Hong Kong	0.0
Advanced Countries
Japan	5.1%
United States	4.4
Canada	4.2
European Union	3.9
Source: The World Bank.	Global Economic Prospects, Washington,

DC, 2004. See also World Trade Organization, Annual Report. 2003.

228 Trade Policies for the Developing Nations

for exports to advanced countries. Critics thus note that developing countries themselves are part of their problem and they should liberalize trade.

However, this argument does not sit well with many poor nations. They say that quickly reducing tariffs could throw their already fragile economies into an even worse state. Just as is the case in rich nations that reduce tariffs, some workers inevitably will lose jobs as businesses switch to the lowest-cost centers. But unlike the United States and European countries, poor countries do not have social safety net and reeducation programs to cushion the blow. The message that the developing world receives is that it should do some market liberalization of its own. However, it is paradoxical that advanced nations want developing nations to lift their trade barriers, yet advanced nations like the United States and Canada had significant trade barriers during their developing stages.

As U.S. Subsidies and Food

Aid Support American

Farmers, Developing

Growers Cry Foul

After the first major rainfall of the 2002 agricultural season in West Africa, cotton farmers hitched their plows to oxen and began turning over the dirt of their fields. But why? The price being offered to West Africa's cotton farmers was 10 percent lower than the previous year's-a meager amount, given that world cotton prices had declined to the most unprofitable level in 30 years. After the previous harvest, once the farming costs were paid, the typical West African farmer was left with less than $2,000 for the year to support two dozen family members and relatives. Indeed, West African farmers worried that the lower prices in 2002, along with higher pesticide and fertilizer costs, would mean that they would be unable to replenish their cattle herds or send their children to high school.

At the same time, cotton seedlings in the United States pushed up through thick black soil of Perthshire Farms, a 10,000-acre cotton plantation in the Mississippi Delta. Farmers climbed into the air-conditioned cabs of their $130,000 Caterpillar tractors and prepared to apply fertiliz-

er to the seedlings. There were no obvious indications in Mississippi that world cotton prices were depressed. Why? Because U.S. farmers receive governmental subsidies in abundance, while West African growers don't.

Since the September 11,2001, terrorist attacks against the United States, such subsidies have fostered an acute controversy: They work directly against the U.S. policy to combat poverty as part of a broader campaign against terrorism. Fearing that poverty in the developing world may make it a breeding ground for instability and terrorism, the U.S. government aims to promote development aid and open trade. But this strategy is counteracted by subsidies to U.S. farmers, which help lower world prices of some vital cash crops that developing countries depend on.

Although subsidies shield farmers in America from declining world prices, they generally further reduce prices by encouraging continued production, and thus harm tillers in less-subsidized countries. Few places are these economics more apparent than in the discrepancy between the cotton farmers in Mississippi and West Africa.America is the world's largest exporter of cotton, and West Africa is the third largest, leaving both subject to market forces that slashed prices by 66 percent from 1995 to 2002.

Armed with almost $3.5 billion in subsidy checks, which constituted about half of their income, U.S. cotton farmers in 2002 harvested a record crop of about 10 billion pounds of cotton, aggravating a U.S. surplus and pushing prices below the breakeven price of most farmers around the world. However, West Africa's governments, hard-pressed to provide even the most basic education and health care to their people, can't keep up with subsidies of their own.

The reason Mississippi's farmers are so dependent on subsidies is that they are among the highest-cost cotton producers in the world. They could grow corn, soybeans, and wheat much more cheaply, but switching would render much of their investmentworthless, For example, a cottonpicking machine costs about $300,000 and is useless for other crops.

Analysts estimate that if the U.S. subsidies were removed, the world price of cotton would rise and