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)