December 1978
Western Journal of Agricultural Economics
New policies of this kind are still desirable
even though the sectoral transfer of labor re-
sources out of agriculture is nearing an end.
Economic conditions will continue to change,
and with these changes there will be continu-
ing need for resource adjustment. The chal-
lenge is to advise spatial-locational policies
that will facilitate those adjustments, and that
provide a means of internalizing the negative
externalities.7
Finally, a more general negative income
tax would appear to offer considerable prom-
ise for dealing with the chronic income prob-
lem of agriculture. Data collected from the
rural income maintenance experiments indi-
cate the extent to which rural poor are illiter-
ate, undereducated, and unskilled [Palmer
and Peckman]. The experiments also provide
some evidence that income maintenance
programs encourage the accumulation of
human capital by the disadvantaged families
in forms ranging from improved nutrition, to
additional schooling, and to improved means
for job search and labor market mobility
[Schuh, 1978]. This accumulation of human
capital ultimately provides the means of deal-
ing with the poverty problem.
Trade and Exchange Rate Policy
The role and importance of exchange rate
policy are being increasingly recognized.
Eight of the nine member countries of the
European Economic Community have
adopted “green” currencies — an explicit
multiple exchange rate system — as the
means of opting out of the proposed common
price policy of the Common Agricultural Pol-
icy (CAP). The Japanese recognize that the
rising value of the yen is shifting the com-
parative advantage of their productive sec-
tors relative to ours. And, the President of
the German Central Bank has recognized the
competitive threat posed by less-developed
countries that keep their currency tied to the
U.S. dollar.
7The spatial-location dimensions to the problem of rural
poverty was recognized by Schultz some 25 years ago.
His seminal ideas have given rise to a rather large body
of empirical research both on U.S. agriculture and on
the agriculture of other countries.
238
Yet many of the implications of a flexible
exchange rate system are not yet fully under-
stood and thereby continue to pose important
challenges to U.S. agricultural policy. For
example, there has been little recognition to
date that over-and under-valued currencies
constitute implicit subsidies and taxes to im-
ports and exports. The multilateral trade
negotiations, for example, have given little
attention to exchange rate policy. Yet an
under-valued currency, like Japan’s has
been, is as surely a tariff on imports and a
subsidy on exports as are the more explicit
varieties of tariffs and subsidies. What does it
avail us to negotiate acceptable policies on
explicit tariffs and subsidies, if we ignore the
implicit forms?
A system of flexible exchange rates has
important implications for both U.S. agricul-
tural policy and macroeconomic policy. With
such a regime of exchange rates the response
to monetary policy resides primarily in the
trade sectors: import competing and exports
(for details, see Schuh, 1977). Therefore, to
the extent that domestic stabilization policies
are implemented by monetary means — and
that is the primary means we are now using
— agriculture as an export sector will bear a
disproportionate share of the adjustment
burden to changing monetary policy. Such
adjustments are brought about by changes in
the exchange rate induced by capital flows.
The capital flows occur in response to chang-
ing conditions in the domestic money mar-
kets.
For agriculture this means more instabil-
ity, caused by shifts in foreign demand.
Given the well-recognized long lags in re-
sponse to monetary policy, on the one hand,
and the similar lags in response to changes in
the exchange rate on the other hand, the dif-
ficulties of dealing with the instability in ag-
riculture will indeed be severe. Perhaps
more importantly, attempts to alleviate the
implied price instability in agriculture by
such means as buffer stocks will neutralize
the intended effects of monetary policy.
Finally, exogenous shifts in the exchange
rate can impose severe adjustment problems