As already noted, agricultural protection and subsidies in high-income (and a few upper middle-income) countries have been depressing international prices of farm products for many decades, thereby lowering the earnings of farmers and associated agribusinesses in developing countries (Johnson 1991). Those policies almost certainly added to global inequality and poverty, since two-thirds of the world's extremely poor people are farmers and four-fifths live in rural areas in developing countries (Castañeda et al. 2016). As well as this external adverse influence on incomes of farmers in developing countries, their own governments taxed them following independence until at least the 1980s. This involved both directly taxing farm exports, and in some cases (in-kind) production, as well as harming farmers indirectly with an import-substituting industrialization strategy that involved restrictions on imports of manufactures and an overvalued currency.

An important aspect of those price-distorting policies was their anti-trade bias: they reduced the quantity of farm products traded internationally. Such ‘thinning’ of the international market meant that its prices have been more volatile than they otherwise would have been, and that has induced national governments to insulate somewhat their domestic food markets from international price volatility – so adding further to those fluctuations in international prices.

While many developing country governments have reformed their agricultural, trade and exchange rate policies, thereby reducing their anti-agricultural bias, and some high-income countries have reduced their farm price supports too, both groups of countries continue to have an anti-trade bias in their policies and to insulate their domestic food markets from international price fluctuations. As well, in the most advanced developing economies, the gradual removal of their previous discrimination against the agricultural sector is being followed by rising levels of support for their farmers, which will further depress the economic conditions facing farmers in poorer countries.

This chapter begins by outlining ways of measuring the price-distorting impacts of policies (which have improved considerably over the past half-century), before summarizing empirical evidence of domestic price distortions since the mid- 1950s. When placed in historical perspective, the reforms since the mid-1980s are as dramatic as the policy changes in the preceding three decades.