Lately, there has been a heated debate over the subsidy programs of the United States government towards its domestic cotton sector. Over the past two decades, the U.S. has grown into a dominating power in the international cotton trade despite having some of the highest costs of production for cotton. Due to an increasing amount of U.S. cotton subsidies over the years, American cotton producers have deflated the price of cotton by nearly 65% since 1990. This has resulted in welfare losses for cotton farmers in the developing world, market competitors who originally had a comparative advantage in cotton production regarding land endowments and cheap labor. Due to the resilience of the U.S. agricultural subsidy programs, despite the World Trade Organization's efforts to re-level the playing field in the cotton trade, some cotton farmers in the developing world have had to seek other avenues for income generation. This study is one of few to econometrically look at the effects U.S. cotton subsidies have on cotton producing households in the developing world, as well as the use of income diversification amongst some of these households to try and escape the poverty trap. Following the construction of a theoretical framework consisting of the agricultural household model, a 2SLS specification is employed on IFPRI's Pakistan Panel Survey. The data covers the years 1986-1990, and is used to analyze the impacts of U.S. cotton subsidies on 66 cotton producing households in Pakistan's Punjab province as well as income diversification as a mode of income smoothing. The regression results produce mixed findings.



Publication Date


Degree Granted

Bachelor of Arts

Document Type

Senior Independent Study Thesis



© Copyright 2009 Kabir Banerjee