How Political Economy Can Inform the GM Labeling Debate

By Eunice Kim and Moon Parks

In recent years, controversy surrounding genetically modified [GM] food has taken on a new dimension in the form of mandatory labeling of GM products. Legislative attempts requiring the labeling of consumer GM products have failed to pass on the federal level and in states like Washington and California, while it has seen success in states like Maine and Connecticut. Proponents of mandatory labeling often cite the ‘right-to-know’ argument as well as emphasizing the uncertainty of their effects on human health while opponents state that mandatory labeling would create unnecessary and cumbersome regulations and undue financial burden onto the consumer.

The term political economy has a long and storied past. Besley (2007) succinctly outlines the evolution of this discipline as a series of three important historical events: (1) classical political economists who used the term political economy synonymously with economics, (2) “political economy” as a term that existed under the purview of Marxist analyses of capitalism and finally (3) the New Political Economy which ‘borrows ideas and develops themes from all of its historical predecessors’ (Besley 2007) adding important elements such as the use of empirical data, incorporation of institutional analysis and confrontation of the reality of imperfect information. In sum, political economy is the study of political forces can impact both macro and microeconomic choices and thus affords us the opportunity to conduct policy analysis using this unique lens.

Anderson, Rausser and Swinnen (2012) emphasize the agricultural and food sectors as a ideal mechanism for investigating the political economy of government policies. They argue that even in highly developed countries where agricultural activities constitute a relatively low share of the aggregate economic activities, agricultural policy continues to play a significant role in government activities. As such, a natural corollary is the significance of analyzing policies surrounding agricultural biotechnology and, specifically, genetically modified (GM) food products.

This paper will steer focus on the actors involved and the events that occurred around attempts to pass legislation for mandatory labeling of GM food. Using a political economy lens, this paper analyzes the welfare effect of mandatory GM labeling for various actors hoping to draw meaningful conclusions on its current state.

Federal attempts at legislation for GM labeling and California’s Proposition 37

Based only on the discussion of GM labeling in much of the media, it would seem passage of such laws were imminent. Indeed in both California and Washington, the tide certainly seemed to flow in this direction, yet the reality stands in stark contrast to this hypothesis. For 10 years, legislation at the federal level has stalled in committee, indicating the lack of political will to pursue the issue.[1]

The public debate around GM labeling legislation involves the American consumer, special interest groups, and elected government officials and their respective welfare gain and/or losses resulting from the passage of GM labeling laws.

In 2012, California’s Proposition 37, a statewide measure that would require the mandatory labeling of GM food products, was a hotly contested and controversial ballot initiative, garnering the attention of national and international media.   Despite early polling that predicted overwhelming support, the measure was rejected by the electorate. This surprising result may have interesting implications for the political economy of future GM labeling policies. According to several different statewide polls, Prop 37 enjoyed popular support at its introduction. Table (2) outlines the shift of public sentiment.

Early on, arguments for the proposition focused on consumer safety and public health. Later on however, the discussion shifted towards Prop 37’s economic consequences. Several studies emerged, including Alston and Sumner (2012) and Carter et. al., (2012), showing food costs would increase by nearly $400 for the average California household as producers absorbed higher costs then passed them along to consumers in the form of higher prices.

Figure (1) graphs the consumer and producer welfare function of a mandatory GM labeling policy for the GM food market under equilibrium . This shows that GM labeling policy impacts both the supply and demand sides of the economy, by increasing marginal costs for producers and potentially depressing demand from consumers for GM products. Increased costs for producers may include additional storage needs to separate GM and non-GM products and added labor costs associated with monitoring and regulation. On the demand side, studies have shown that labeling of food items –  whether for informational or warning purposes – decreases consumption (Roberto, Schwartz and Brownell 2009).

Figure (2) illustrates the welfare function for the non-GM food market under equilibrium. As you move along the supply line, demand for non-GM food increases because previous consumers of GM products may switch to non-GM due to labeling requirements and the increase in relative food prices between GM and non-GM, thus increasing the new equilibrium quantity from ,?-0. to ,?-1., whereby increasing the equilibrium price from ,?-0. to ,?-1.. Thus for consumers of non-GM products, they have a welfare increase (surplus B-C) as do producers of non-GM products (C + D).

Impacts of GM labeling on innovation: To spend or not to spend on R&D?

In addition to the impact that GM labeling may have on prices, there may be other significant impacts outside of the marketplace. Graff, Hochman and Zilberman (2009) argue that excessive regulatory regimes on agricultural biotechnology may stall and even halt public and private investment, as in the case of the European Union. To illustrate this potential latent [dys]function (Merton 1968), we model the impact that GM labeling may have on investment into R&D by the public ‘α ‘(financed by the consumers, e.g. taxpayers) and the private sector ’1-α ‘( (financed by producers). Equations (1) – (3) illustrate the demand for biotechnology investment for (1) consumers, (2) producers, (3) the government and Equation Table (4) illustrates that solving for all equations increases the right side of the equation for all 3 parties due to a decrease in equilibrium quantity (,?-∗.). This makes investment into R&D for agricultural biotechnology less attractive for all three actors.

Consumers (taxpayers) maximize net surplus of their contribution to R&D expenditure at the equilibrium.

Equation Table (4). demand for biotechnology innovation 

As a decrease in equilibrium quantity (Q*) would increase right side of equation for interested parties (consumers, producers, and government), mandatory GM labeling would result in parties preferring less expenditure on R&D for innovation.

Mandatory GM labeling as a form of social reform

Lyons, Rausser and Simon’s (1994) characterization of Bulgarian land reform policies provides insight into the political economy of GM labeling. They modeled policies during the transition from the old order of the Communist regime to a post-Communist regime and describe the inherent trade-offs in implementing such a change. In the Bulgarian scenario, the key actors and social relations were between the peasantry and the nomenklatura, who played a supervisory role in the Communist regime and thus held an implicit elite status. In the Bulgarian scenario, the reform process became subject to a ‘disruption-continuity’ tradeoff, which was the choice between either the swift and deft removal of the old order (disruption), or creation of lasting change that required the establishment of sustainable institutions to take its place (continuity) (Lyons, Rausser and Simon 1994). According to this model, disruptions result in decreased productivity, lower output, increased prices and decreased social welfare while continuity resulted  in the nomenklatura increasing their capacity for rent-seeking. While there are competing theories as to why Bulgarian reformers chose the continuity model for land reform, Swinnen (1994) provides a basis for an economic explanation. He argues that reformers employed the more time-consuming model to affect the future ‘political constellation’, e.g. they gave up on short-run efficiency for the more long-run goal of stability and ‘stickiness’ of their reform.

Insofar as GM labeling disrupts the old order, it can be viewed in the same economic lens. Mandatory labeling will decrease productivity due to decreased incentive to invest in agricultural biotechnology which will stall technological innovation (Graff Hochman and Zilberman 2009), decreased output as producers will have less input capital because of the extra cost of labeling, and increased prices as producers pass along these extra costs to the consumer. The political rhetoric surrounding Prop 37, specifically from pro-GM labeling interest groups, supports this theory. Pro-labeling groups justify labeling as a means to counteract the influence of GM food producers like Monsanto and DuPont. It appears the pro-labeling crowd is more willing to accept the potential short-run adverse economic consequences in order to achieve a more long-run ‘political constellation’ of a more progressively leaning ‘green’ governance structure.

Conclusion

As GM labeling debates continue in the public sphere, it’s important to consider the implications these policies have beyond the supermarket and our pantries, on a large and complicated network of issues including the investment of public and private resources in furthering agricultural biotechnology, intellectual property issues and more. The study of political economy affords us a unique lens with which to investigates these effects, which goes  beyond the rhetoric of both the pro and anti-labeling groups. Further research is needed for a more complete understanding of all of the potential effects of such widespread legislation and is a subject that should be pursued by academics and practitioners alike.

REFERENCES:

Alston, Julian M., and Daniel A. Sumner. “Proposition 37–California Food Labeling Initiative: Economic Implications for Farmers and the Food Industry if the Proposed Initiative were Adopted.” (2012): noonprop37.com.

Anderson, Kym, Gordon Rausser, and Johan Swinnen. “Political economy of public policies: insights from distortions to agricultural and food markets.” (2012).

Besley, Timothy. “The New Political Economy*.” The Economic Journal 117, no. 524 (2007): F570-F587.

Carter, C.A., G.P. Gruère, P. McLaughlin and M. MacLachlan. “California’s Proposition 37: Effects of Mandatory Labeling of GM Food.” ARE Update 15 no.6 (2012): 3-8. University of California Giannini Foundation of Agricultural Economics.

Graff, G.D., Hochman, G., & Zilberman, D. (2009). “The political economy of agricultural biotechnology policies.” AgBioForum, 12(1), 34-46.

Lyons, Robert, Gordon Rausser, and Leo Simon. Disruption and Continuity in Bulgaria’s Agrarian Reform. Springer Netherlands, 1994. Merton, Robert K. “Social theory and social structure.” (1968).

Palfrey, Thomas R., and Sanjay Srivastava. “Mechanism design with incomplete information: A solution to the implementation problem.” Journal of Political Economy (1989): 668-691.

Roberto, Christina A., Marlene B. Schwartz, and Kelly D. Brownell. “Rationale and evidence for menu-labeling legislation.” American journal of preventive medicine 37, no. 6 (2009): 546-551.

Swinnen, J. “Political Economy of Reform in Bulgarian Agriculture.” InPrivatization of Agriculture in New Market Economies: Lessons from Bulgaria, pp. 119-148. Springer Netherlands, 1994.

Zilberman, David, Scott Kaplan, Eunice Kim, and Gina Waterfield. “Lessons from the California GM Labeling Proposition on the State of Crop Biotechnology.” In Handbook on Agriculture, Biotechnology and Development. eds. Smyth, Stuart, Peter W. B. Phillips and David Castle. Elgar, forthcoming.