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A Libertarian Approach to Rural Development
Dermot Hayes
Iowa State university
Overview
• Is there a problem?
• A possible market based solution: creating a new property right
• Prospects for this solution in the US
• Welfare analysis
• Current work in Canada
• A learning experiment at ISU
Is there a problem?
• D. Gale Johnson has argued that the most important role for Midwestern educational establishments is to educate people so that they can leave and be productive elsewhere
• By allowing markets to allocate resources in this manner we would reach a new equilibrium where those who remain in rural areas control enough resources to cover their economic costs
• This is not a “leave it alone” approach, it actually suggests that the more you distort markets to achieve a different outcome, the worse it is for the resources that are attracted in, or who chose to remain
However…
• As people leave, the per capita fixed costs of maintaining courts, schools, roads and main streets increases
• Some communities have responded by increasing taxes on commercial property and this has exacerbated the problem
• A possible solution is to look for a new market mechanism, which in this case is a missing property right
Relationship Between Dependence on Farm Income in 1990 and Per-Capita Income Growth 1990 to 2001 for
Midwestern States
-100%
-50%
0%
50%
100%
150%
0% 10% 20% 30% 40% 50% 60% 70%
Percent of County Income from Farming
Inco
me
Gro
wth
199
0 to
200
1
A Market Based Alternative
• 700 Geographic Indicators now approved in the EU many more on the way. One approved in Quebec
• A subset of these have an effective supply control mechanism, for example limited production area for lentils, price fixing for wines in Tuscany, supply controls for Parma ham producers
• They appear to have generated economic prosperity in the Po valley, “The Iowa of Italy”
• We have called these successful GI’s “Farmer Owned Brands” to emphasize the connection with brands in the rest of the economy
The Concept of Farmer-Use of Brands
• Farmers (or their agents) develop a niche product
and market this product as a collective brand
• If the product succeeds, output must be restricted to
preserve economic profits
• Regulators must protect the product from
competition from outside the group and from
competition from within the group via property right
protections.
Lessons from the EU
• There are at least 100 successful EU applications
of the concept and many more in the legal
pipeline
• Price premiums range as high as 400% for lentils,
and land values are as much as 1,000% higher
for vineyards eligible for the Brunello di
Montalcino brand
• Most of the economic activity occurs near the
source
• These brands can run afoul of antitrust legislation if
the price fixing aspects are obvious; therefore, no
explicit production of price triggers should be used
• Connecting the brand to the local environment in the
minds of consumers is helpful, but a continuous
production history is not essential
Lessons from the EU (continued)
A 14th Century Fresco
The Super Premium Cinta Cenese
Is the concept legal in the U.S?• Among U.S. producer groups, only wine producers have the legal
right to develop brands
• a certification mark is subject to cancellation if its owner “…refuses to certify or to continue to certify the goods or services of any person who maintains the standards or conditions which such mark certifies.” US Trademark Act (Section 45 15 USC. §1127):
• Congress changes marketing order guidelines in 1982 to discourage programs limiting entry, supplies, or direct control of output levels in general (Kohls and Uhl)
• Even the Italian ham manufactures have been subjected to price fixing lawsuits
• We think U.S. rules are ambiguous, and open to interpretation
Consumers gain Consumers gain ex-anteex-ante but lose but lose ex-postex-post
Commodity producers lose market shareCommodity producers lose market share
Lence et. al. examined this issue in two papersLence et. al. examined this issue in two papers
Both models assume that brands allow producers to Both models assume that brands allow producers to
capture a margin in excess of marginal costs, the capture a margin in excess of marginal costs, the
degree of market protection is measured by this degree of market protection is measured by this
markupmarkup
Both models also assume that the consumer can Both models also assume that the consumer can
always revert to the commodity productalways revert to the commodity product
Is the concept welfare enhancing?Is the concept welfare enhancing?
Strength of Legal IP Protection
Present Value of Expected Change in
Total Surplus ($)
Length of Legal IP
protection (years)
Present value of expected change in total surplus as a function of strength and length of legal IP protection
Tradeoff between present value of expected changes in (consumer + farm) surplus and PV of R&D surplus
0.00
0.05
0.10
0.15
0.20
0.25
0.00 0.05 0.10 0.15 0.20
Present Value of Expected Change in R&D Surplus ($)
Pre
sen
t V
alu
e o
f E
xpec
ted
Ch
ang
ein
(C
on
sum
er +
Far
m)
Su
rplu
s ($
)
IP approp. > 200%
IP approp. = 0%
T = 20 years
T = infinity
IP approp. = 100%
IP approp. > 200%
IP approp. = 120%
Present Value of Expected Surplus for Consortium and Consortium Members
Change in World Well-Being
Protection in the EU
No Protection in the U.S.
Protection Level in the EU
Protection Level In the EU
Harmonized Protection
Developments in Canada
• Canada has just approved its first FOB for lamb
and it appears to be a success
• Initial price premiums are 25% greater than the
commodity product
• So far the consortium accepts all breeds produced
in the region!
• We were told that there is a “line of other producer
groups” waiting in Canada
Charlevoix lamb is the first product to be place-protected in Canada.
Used to protect the name from counterfeit lamb.
Charlevoix
Opportunities in the U.S.
• Most U.S. states are too large to act as a geographic
limit on production and state brands often become a
commodity standard
• Additional criteria are needed; these criteria should
increase quality without the use of variable standards
• The concept should also make intuitive sense to an
uninformed consumer
• CARD and ISU are in process of creating an FOB to see
if it can be done under U.S. situations ,and to describe
what needs to be done.
Where Did Japanese Want to Purchase Beef?
• At packing plants that process cattle from regions
with inexpensive feed and improved breeds
• Japanese have often asked for more I 80 beef
• These animals are often fed on grain after weaning
and they are often beef breeds, but there is no
guarantee; someone has to eat the Holsteins
Our Proposed Requirements
Minimum Certification Requirements
• The cattle must be produced from Black Angus, Red
Angus, bulls
• Individual animals must be source verified to the farm of
birth using an electronic animal identification system
• The cattle must be fed in Iowa for a minimum of 200
days on a high-concentrate ration of at least 75 percent
corn or corn co-products
Individual animals must be age verified and Individual animals must be age verified and
processed by 18 months of ageprocessed by 18 months of age
Each carcass must grade Choice Plus or better Each carcass must grade Choice Plus or better
according to official USDA Gradesaccording to official USDA Grades
•A second quality level must grade Middle A second quality level must grade Middle
Choice or higherChoice or higher
Product may be aged at least 14 days prior to Product may be aged at least 14 days prior to
being soldbeing sold
Our Proposed Requirements (continued)Our Proposed Requirements (continued)