Expanded summary

Governments in almost all countries intervene in the process of agricultural sector development. They subsidize farmers, stimulate agricultural productions, try to stabilize prices on agricultural products, establish tariffs and quotas on import, invest in irrigation systems, provide farmers with consultancy service and necessary machinery, subsidize inputs and etc.

In the developed countries farms usually have more financial and material means to operate using modern production methods. In countries like Georgia small farmers are unable to adopt modern technologies without support from government. Hence pressure on the government increases to support farmers.

Agricultural policy is often directed towards small households who produce small quantities and aren’t competitive on the market. These households are severely affected by price reductions and other fluctuations taking place in the field. Because of the fact that the most of grape growers in Georgia are relatively small in size it is clear how reductions in the price affect on the development of sector. Sometimes, government tries to offset the losses caused by the low prices and supports their revenues. This was the reason for Georgian government to start price support policy for grapes.

Free market itself provides huge advantages for organizing economic activity. In spite of this, country sometimes try to improve situation after “market failure” and makes corrective measures. When competing on a free market small farms are not competitive relative to large producers. If government considers these small farms as important it tries to support them.

“Agricultural subsidy can be defined as any intervention from the government that makes price of agricultural product different from what it would be when the intervention doesn’t exist” [Peterson E. Wesley F., 2009:12].

Economic rationale of subsidy is economic efficiency, i.e. improving the situation after market failure and allocation effect, i.e. achieving justice [Lister N. M., 2011]. Subsidies are supposed to increase farmers’ productivities, their revenues and competitiveness on market.

There can be number of reasons triggering support policy from the government. These reasons are:

- Development of national agricultural production and reducing dependence on import;

- Resource allocation usually towards the less developed areas;

- Government participation in crop insurance in order to avoid losses in the sector due to the adverse weather conditions;

- Filling the gap between the revenues and wealth of population in rural and urban areas;

- Consumption stimulation by increasing purchasing power;

- Avoid migration from rural areas to the cities and etc.

One of the reason that is often stated to support agricultural policy is that without some financial support from the government local farmers would not be able to compete with importers. Without subsidies the gap between the revenues of people living in rural and urban areas will increase and farmers will start to leave their homes and go to the cities for living.

Decrease in the number of people living in the rural areas and national production levels are often considered as unwanted scenario by the government, because it contributes to the increase in unemployment and makes the country dependent on imported products that in turn is a risk of being affected by global food crisis and high global prices.

One form of the government support is price regulation. Often the prices of agricultural products are very low that brings farmers in unfavorable conditions. While regulating prices government can choose two goals – maximum prices and minimum prices.

Minimum price is set when the equilibrium price is considered to be very high and in case of its presence for a long time some groups of society will be brought in very unfavorable situations. Maximum price is set on the markets where the equilibrium price is considered to be very low.

Several policy instruments are often used: subsidies on inputs, subsidies for consumers, taxes on import, state procurement and etc. For analysis purpose we assume that the country where these instruments are used is small open economy that has no impact on the world prices on product [Colman D., Young T., 1989].

There are to general types of subsidies – linked with the levels of production (coupled) and with no relation to the production levels (decoupled). If subsidy is decoupled and farm is given fixed amount of money based on the area of land its production decisions are depend totally on market signals.

Agricultural program is coupled if it is directly associated with production volume. These programs potentially have more effects on agricultural production and agricultural product markets [Westcott P. C., Young E. C., 2004].

Decoupled subsidies are fixed transfers that are not dependent on production choices, volume or market conditions. These programs don’t subsidize production activities or inputs. They don’t affect earnings per unit. In spite of this, decoupled subsidies increase farms’ total revenues and economic wealth [Westcott P. C., Young E. C., 2004].

Another way of supporting agriculture is funding of researches and innovations that should increase productivity growth in this field.

Ways of economic interventions can be totally different from each other. For example, in the sense of implementation some of them are direct and is accomplished in a short term, some of them is quite complicated and needs many intermediaries.

Policy forms depend on existing problem, its complexity and topicality, groups of interest, government’s view towards this problem and in general on its resources.