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European Commission
Directorate
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Health and Consumer Protection
Rue de la Loi 200
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Università
di Siena
Siena Interdepartmental Centre
on Agri-food-environmental
Policy
c/o Dipartimento di Economia Politica
Piazza S. Francesco
17
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Consumer Interests in the
Common Agricultural Policy
Efficiency and equity
Table of
contents
0
Introduction
1 Basic
judgement criteria
2
Development of the CAP
3 Impact on
consumers
4 Impact on
farm income
5 Impact on
agriculture
6 Impact on
agricultural adjustment
7 Impact on
the economy
8 Impact on
economic development
9 Synopsis
and conclusions
10 Appendices
Update June 2003
A study contracted by the European
Commission
to Professor
Secondo Tarditi, University of Siena
Acknowledgments
This is an updated version of the report produced in
September 2000
Very useful comments to various drafts by Michael
Hallingham (University of Oxford), Timothy Josling (University of Stanford),
John Marsh (University of Reading), and Stefan Tangermann (University of
Gottingen), the cooperation of Tommaso Albergotti, Francesca Donzelli, Monica Giliberti, Laura Governi, Milo
Malentacchi, Fabio Massimo Rapanà (University of Siena), Judith Piggott
(University of Oxford Brookes), and the provision of basic statistical
information and comments by EU
Commission are gratefully acknowledged,
in particular the meticulous cooperation of Yves Dussart (SANCO).
The
analysis and opinions expressed in this study do not necessarily reflect the
opinion of the Commission or one of its Services. All responsibility for deficiencies and mistakes remains on the
author.
Detailed table
of Contents
Executive Summary
0. Introduction. 19
0.1 The
Consumer Committee. 19
0.2 Purpose
of this study. 19
0.3 Plan
of work. 19
1. Basic
judgement criteria. 21
1.1 Terms
of the question. 21
1.2 Ethical
grounds. 22
1.3 Statements
of supranational organisations signed by the EU.. 22
1.4 Objectives
of the CAP in the EU Treaty. 23
1.5 Consistency
with other EU policies. 24
1.6 Summary
and conclusions. 24
2. Development
of the CAP.. 26
2.1 Terms
of the question. 26
2.2 Developments
of CAP policy measures. 26
2.3 Traditional
policy measures. 30
2.4 Supply
management 34
2.5 International
problems. 35
2.6 Recent
reforms of the CAP. 39
2.7 Perspectives. 40
2.8 Scope
and limitations of the analysis. 40
2.9 Summary
and conclusions. 41
3. Impact
on consumers. 43
3.1 Terms
of the question. 43
3.2 Effects
of the CAP on income distribution. 44
3.3 Citizens’
expenditure in agriculture. 45
3.4 National
and regional assistance. 52
3.5 Inter-personal
transfers. 56
3.6 Perspectives. 60
3.7 Scope
and limitations of the analysis. 60
3.8 Summary
and conclusions. 61
4. Impact
on farm income. 62
4.1 Terms
of the question. 62
4.2 Economies
of scale in agriculture. 63
4.3 Redistribution
of income by farm size. 68
4.4 Benefits
for landowners. 68
4.5 Perspectives. 69
4.6 Scope
and limitations of the analysis. 69
4.7 Summary
and conclusions. 69
5. Impact
on agriculture. 71
5.1 Terms
of the question. 71
5.2 Transfers
generated by agricultural policies. 71
5.3 Short-term
impact of price support 73
5.4 Long-term
impact of price support on structural adjustment 75
5.5 Empirical
evidence. 79
5.6 Green
box policy measures. 85
5.7 Perspectives. 87
5.8 Scope
and limitations of the analysis. 91
5.9 Conclusions. 92
6. Impact
on agricultural adjustment 95
6.1 Terms
of the question. 95
6.2 Long-term
trends. 95
6.3 Impact
of price support 97
6.4 Impact
of supply management 99
6.5 Impact
of structural policies in agriculture. 101
6.6 Perspectives:
labour mobility policies. 103
6.7 Scope
and limitations of the analysis. 106
6.8 Summary
and conclusions. 106
7. Impact
on the whole economy. 109
7.1 Terms
of the question. 109
7.2 Benefits
of price stabilisation. 109
7.3 Social
costs in production and consumption. 110
7.4 Social
costs of programme administration. 115
7.5 Macroeconomic
effects. 116
7.6 Perspectives. 118
7.7 Scope
and limits of the analysis. 118
7.8 Summary
and conclusions. 119
8. Impact
on economic development 121
8.1 Terms
of the question. 121
8.2 Impact
on EU employment 121
8.3 Impact
on less developed areas. 127
8.4 Impact
on international competitiveness. 130
8.5 EU
enlargement 130
8.6 Perspectives. 131
8.7 Scope
and limitations of the analysis. 131
8.8 Summary
and conclusions. 131
9. Synopsis
and conclusions. 134
9.1 Terms
of the question. 134
9.2 Other
components of social welfare. 134
9.3 Impact
on the overall welfare of EU citizens. 138
9.4 Perspectives. 141
9.5 Scope
and limitations of the study. 141
9.6 Summary
and conclusions. 141
10. Appendices. 147
10.1 Statistical
tables and figures. 147
10.2 Data
sources and definition of variables. 154
10.3 References. 155
10.4 Opinion
of the Consumer Committee. 157
10.5 OECD Glossary of Agricultural Policy Terms (selected items) 163
List of Frames
Frame 2‑1 Community
expenditure from 1958 to 2001 at current and 2000 prices. 28
Frame 2‑2
The 2000 budget by subsections (commitments) 29
Frame 2‑3
Amber-box policy measures by product 32
Frame 2‑4
Decreasing industrial tariffs and growth of international trade. 36
Frame 2‑5
Trend in world export and GDP. 36
Frame 2‑6
Country Shares in Worldwide Export Subsidy Expenditures, 1995. 38
Frame 2‑7 Notifications of Export Subsidy Expenditure. 37
Frame 3‑1
Components of citizens’ expenditure year <2000> (average 1999-2001) 45
Frame 3‑2
Components of agricultural support in year <2000>. 46
Frame 3‑3
Components of producer assistance by commodity. 47
Frame 3‑4 Coefficients of producer assistance. 48
Frame 3‑5
Components of Producer Payments and of
General Services. 49
Frame 3‑6
Value of production and components of support to agriculture (1986-2001) 50
Frame 3‑7
Analysis of support to agriculture
(1986-2000) Error! Bookmark not defined.
Frame 3‑8
Cost of agricultural support per EU citizen. 51
Frame 3‑9
Transfers per Annual Work Unit (AWU) 51
Frame 3‑10
Analysis of assistance to Italian agriculture (Euro mn, average 1996-98) 53
Frame 3‑11
Italy, transfers associated to agricultural policy (average 1996-98) 53
Frame 3‑12
Indicators of the development of transfers from households in Italy (€) 54
Frame 3‑13 Developments of assistance to agriculture in
Italy (current prices) 55
Frame 3‑14
Share of total income spent on taxes and social contributions. 56
Frame 3‑15
Share of consumer expenditure in specific food items (1996, UK) 57
Frame 3‑16
Italy, 1996, Household
expenditure in food by classes of total expenditure (1000 lire). 57
Frame 3‑17 Share of food in household consumption
expenditure. 58
Frame 3‑18
Share of food in consumption expenditure vs. per capita income. 59
Frame 4‑1 Gross labour productivity at domestic ad at
reference (border) prices. 63
Frame 4‑2 EU-15 Standard Gross Margin (Euro/year) per
Annual Work Unit (1997) 64
Frame 4‑3 Distribution of agricultural holdings
(EU-15, 1995) 64
Frame 4‑4
Gross income vs. labour force: concentration curve. 66
Frame 4‑5
EU, 1997, Gross income vs. number of farms: concentration curve. 67
Frame 4‑6
Change in concentration ratios between 1990 and 1997. Error! Bookmark not defined.
Frame 5‑1 EU-15, Transfers associated to agricultural
policy (€ mn) 72
Frame 5‑2 Impact of price support on agriculture in
the short term.. 74
Frame 5‑3
Long-term cost curve: no government intervention. 77
Frame 5‑4
Long-term cost curve: impact of a price support policy. 77
Frame 5‑5 Distribution of employment by age classes
(%) year 2000. 78
Frame 5‑6 Change in average Standard Gross Margin per
holding (1990 vs. 97, Euro 1999) 80
Frame 5‑7
Structural change in member countries (SGM/holding, 2000 prices) 80
Frame 5‑8 Indicators of structural adjustment in The
Netherlands and in Italy (1990-1997) 81
Frame 5‑9
Indicators of structural adjustment in The Netherlands (1990-1997) 82
Frame 5‑10 Average disposable income of agricultural
households (all households =100) 82
Frame 5‑11
Indicators of structural adjustment in Italy (1990-97) 83
Frame 5‑12
Relation between Standard Gross Margins per AWU and producer support 84
Frame 5‑13
Redistributive impact of FEOGA-Guidance among member countries (1997) 86
Frame 5‑14
Redistributive impact excluding Germany and Italy (1997) 86
Frame 5‑15 Domestic Support in the EU and WTO
Constraint 90
Frame 6‑1
Trends in % of food, beverages and tobacco in consumer expenditure in Italy. 96
Frame 6‑2
Change in the composition of EU agricultural labour force (AWU, 1973-97) 96
Frame 6‑3 Long term trend indices in agriculture
(Italy, 1973=100) 97
Frame 6‑4
Share of agricultural employment vs. GDP per capita. 98
Frame 6‑5 EU-15, land set-aside in 1998-99. 100
Frame 6‑6
Short-term effects of land set-aside. 101
Frame 6‑7 Expenditure of FEOGA-Guidance by objective. 104
Frame 6‑8
Short term effects of labour mobility measures. 105
Frame 7‑1 Composition of FEOGA-Guarantee expenditure (1976-1999,
€ mn) 111
Frame 7‑2
Relative size of FEOGA-Guarantee expenditure (1975-1998) 111
Frame 7‑3
Value of products in public storage (€ mn) 112
Frame 7‑4
Budget expenditure in public storage and market withdrawals. 113
Frame 7‑5
Sensitivity of EU social costs to the elasticity of demand and supply. 114
Frame 7‑6 Impact of price support on non-agricultural
firms. 117
Frame 7‑7
Impact of farm price reductions in “Agenda 2000”(1) 118
Frame 8‑2
Change in labour productivity by economic branch in Italy (1991 vs. 2000) 122
Frame 8‑3
Scale economies in The Netherlands and in the EU (1998) 123
Frame 8‑4
Distribution of structural parameters in the Netherlands and in the Rest of EU.. 124
Frame 8‑5
Cumulated percentage in the EU and in The Netherlands. 126
Frame 8‑6
Alternative structure of production in the Rest of EU.. 126
Frame 8‑7
The Netherlands, interregional income redistribution generated by agricultural
price support 128
Frame 8‑8
The Netherlands, income redistribution in 1991 due to the CAP price support 129
Frame 9‑1 Relationship between price support and
fertiliser use. 135
Frame 9‑2 Substitution of grassland by arable land in
France (1960-1992) 136
Frame 9‑3
Synopsis of transfers and social costs associated to the CAP. 139
Frame 9‑4
EU-15, 2000. Estimates of transfers and social costs associated to the CAP. 140
Frame 10‑1
components of asistance to EU Agriculture (average 1998-2000) Error! Bookmark not defined.
Frame 10‑2
Development of average farm size in EU Member Countries in the nineties. 148
Frame 10‑3 FEOGA Guarantee: Breakdown of expenditures
by sector according to the economic nature in 2000. 149
Frame 10‑4 EU-15, 1998, FEOGA - Guidance expenditure by
member state (payments) 150
Frame 10‑5
EU, 1998-1999, Green box policy
measures. Error! Bookmark not defined.
Frame 10‑6 EU, 1998-1999, Blue box policy measures. 151
Frame 10‑7
EU, 1998-99, Aggregate measure of support (AMS) 152
Frame 10‑8
Impact of a production subsidy (constrained by a ceiling) 153
Executive
summary
0.
Purpose
of the study
The purpose of this
study is to appraise the Common Agricultural Policy from the point of view of
all citizens, including farmers, i.e. from the point of view of society as a
whole. It was designed to appraise the positions taken by the Consumer
Committee on different aspects related to the Common
Agricultural Policy The study focuses on two basic criteria for
evaluating sectoral policies: efficiency
and equity, and recommends a number
of policy measures to redress the situation.
Two preliminary
sections deal with the frame of judgement used in the subsequent analyses and
evaluations (§1) and on the past development of the CAP and its future
perspectives (§2). The effects of the
CAP on equity are examined first, by
analysing its impact both on consumers and society as a whole (§3), and on the
agricultural sector (§4). The impact on the efficiency of EU agricultural sector (§5) and on its structural adjustment
(§6) is then examined, followed by the analysis of the broader impact of the
CAP on EU economy both in the short (§7) and long term (§8). Synopsis and
concluding remarks (§9) also include advisable consumer strategies for
monitoring and balancing a sectoral economic policy such as the CAP.
1.
Basic
judgement criteria
According to the
Consumer Committee “the CAP should be oriented, as other
policies, to the public interest and not to the particular interests of a small
group of citizens”. Such a basic statement is fully grounded in commonly
accepted ethical principles from Aristotle to Adam Smith, to modern
philosophers. The goal of increasing
the citizens’ common welfare by means of an efficient and equitable economic
policy is repeatedly stated in declarations of supranational organisations,
such as OECD, GATT-WTO, FAO, where the EU is among the most important and
influential of members.
Consistent with
public interest, Article 33 of the “Treaty establishing the European Community”
clearly states the objectives of the CAP indicating efficiency as the first
goal to be reached by means of “the
rational development of agricultural production and the optimum utilisation of
the factors of production”. The equity goal “thereby to ensure a fair standard of living for the agricultural
community” is indicated as a consequence. According to the Treaty,
equitable farm incomes should then be obtained by means of a better allocation
of resources within the economy, i.e. by increasing both farmers’ and
non-farmers’ social welfare. Consequently income transfers from consumers and
taxpayers to farmers, especially when such transfers entail large economic
costs for society as a whole and perverse income redistribution, transferring
resources from poorer consumers to
better-off farmers, do not seem to be consistent with the Treaty.
Recommendations.
In order to reform the CAP consistently with the fundamental principles of
ethics and economic theory, with the international commitments of the EU and
with the Treaty establishing the European Community, its policy measures should
be permanently monitored and EU citizens should be well informed on the
achievement of the stated objectives. Such monitoring and information work
should not be performed by the same sectoral institutions or social
organisations which formulate and implement agricultural policy measures, but
rather by different public institutions and by social organisations aiming at
the interests of society as a whole, such as the Consumer Policy Departments of
the public administration at various administrative levels (Community, national,
regional, local), and consumer organisations.
2.
Development
of the CAP
According to the Consumer Committee, the development of
the CAP was “largely influenced by
producers for their own benefit”. In the early sixties, the Common External
Tariff for agricultural products was set at a high level, in order to maintain
existing farm incomes. The attainment of high domestic producer prices (market
prices + direct payments) generated a persistent unbalance in the following
years between a sluggish demand for food items and a rapidly expanding supply.
After the huge budgetary costs of disposing
of food surpluses, the costs involved in export subsidies, and the failure to
constrain budgetary expenditure by means of producer levies and budget
stabilisers, new quantitative policy measures were implemented to control
domestic supply, such as production quotas and land set-aside. These policy
instruments are much less transparent to citizens and much more congenial to a
planned economy than to a market-oriented economy. In order to increase market prices, they limit domestic supply by
means of administrative constraints interfering with the free interplay of
market forces.
Such approach is still present in the
Commission document “Agenda 2000”, in the outcomes of the Berlin Summit, and in
the present position of the European Community
at WTO. While market prices will be gradually reduced to the
international level, the EU budget will grant direct commodity-specific
subsidies to farmers in order to compensate them for income losses.
Consequently, the overall benefits for the producer will not be substantially
reduced, maintaining most of the present distortions in domestic production and
the related waste of economic resources for society as a whole. Moreover such
detrimental effects of the CAP are created also in the applicant Member
Countries, implementing the CAP as part of the acquis communautaire.
Recommendations.
Many policy instruments for reforming the CAP have been tried in the past forty
years, without long-lasting success in reducing the overall support to
agriculture or re-orienting it towards the interests of society as a whole.
Consequently, the problem of reforming the CAP is of political willingness. A
profound institutional reform is needed, creating a countervailing power by
consumer and citizen organisations in order to balance the unjustified
interests of producer lobbies not consistent with the common good of EU
citizens. Such countervailing political action should highlight the present
social costs and perverse income redistribution generated by the CAP, while
fostering a change in the present producer-distorted approach of numerous
policymakers and civil servants operating in the various decision-making
levels.
3.
Impact
on consumers
The total amount of income transfers
generated by the CAP from Households (consumers and taxpayers) to the
Agricultural Sector (producers and general services to agriculture) in 2000 (€ bn
102) was almost equally shared between consumers (€ bn 46) and taxpayers (€ bn
55). ). It is higher than the “Agricultural Value Added” of the European Union,
i.e. the net contribution of agriculture to the production of goods and services).
In other words, the total amount of transfers to agriculture offsets the value
of good and services produced by the sector even if computed at present highly
supported domestic prices.
Although in the nineties the cost per EU
citizen (€ 270 in 2000) associated with the Common Agricultural Policy and the
monetary transfers per ha of Utilised Agricultural Area (€ 779) were slightly
diminishing in real terms, total transfers per agricultural annual work unit (€
16556 in 2000) have been increasing both at current and at constant prices.
Notwithstanding the various attempts to reform the CAP, the actual support per
farm worker increased.
The CAP farm support is increased by the
extra support provided by national and regional policies. Unfortunately, comparable
statistical information among Member States is not available to assess the
total burden of agricultural policy at Community, national and regional level.
On the basis of estimates limited to Italy in 1998, which include tax rebates
and social contributions rebates for farmers, the total transfers to the
agricultural sector can be estimated in € 403 per EU citizen.
Market price support is equivalent to an
inequitable income-regressive tax on households as the burden is proportionally
higher for poorer than for richer households. Actually the share of food and
beverages on total consumer expenditure is much higher in low-income
households, as well as in poorer EU Member Countries (23% in Portugal, 16% in
Germany).
EU citizens and consumer organisations are
not fully aware that such a huge burden is involved notwithstanding the
excellent work carried out by OECD in
estimating such income redistribution generated by the CAP. Moreover,
policy-making institutions are largely biased in favour of farm representatives,
while consumer interests are poorly represented.
Recommendations. In order to substantially reduce and/or
reorient such large transfers of income, consumers should be better represented
at all CAP decision-making levels. Substantial research is needed as well as a
permanent network for updating information and making it readily available to
people working in policy-making and to all EU citizens.
All policy measures manipulating market
prices and involving income transfers from consumers should be carefully
monitored to establish whether such transfers are justified in terms of the
general interests of EU citizens. The democratic features of any policy measure
are strictly related to its transparency and to the possibility for citizens to
understand its real effects on society and on their own welfare.
4.
Impact
on farm income
Income transfers generated by the producer
price support policy are still largely proportional to the volume of production. The redistribution of income thus generated is
fundamentally perverse as it favours in greater proportion better-off farmers
and large landowners while poorer farmers and landless workers benefit only in
minimal proportion from the transfers flowing to the farming sector. About 35%
of transfers related to the volume of production benefit 3% of larger EU
agricultural holdings, while, on the other hand, only 5% of such income
transfers benefits the 50% smaller agricultural holdings.
Only part of the transfers generated by
price support policies increase the income of farmers, the rest is absorbed by
higher input costs and by the low productivity of invested resources. This is
true especially in under-sized marginal farms, surviving thanks to permanent
public support, where modern technology, management and machinery cannot be
properly applied. On the other hand, such transfers contribute to increase the
prices of farm land, which reach very high levels especially in more fertile,
irrigated areas and in better-off countries.
The transfer of income generated by the
support of agricultural prices is not clearly perceived by farmers as a
public subsidy. It also generates misunderstandings on the actual value of
agricultural production for citizens, who are not aware of the existing
distortions in agricultural prices generated by the CAP. Moreover, at present
such transfers are not directly targeted to any specific allocative,
redistributive, or other objective of interest to society as a whole.
Recommendations.
In the interests of consumers and of the whole EU society, it is important that
income transfers to the agricultural sector should be de-coupled from the
volume of production. By targeting policy measure to specific objectives, the
overall results in terms of better resource allocation and income redistribution
would be highly improved. Income transfers would be much more transparent and
could be directly related to their positive impact on structural adjustment or
to the amount of positive externalities (environmental, territorial, etc.
benefits for society ) produced by
farming.
5.
Impact on
agriculture
In contrast with
their originally declared aims, price support policies actually impacted more
positively farms and areas that were less in need of support. Indeed, price
support policies generated a large increase in
farm land prices and rents and
in farm incomes especially in large farms and in regions or countries where
farm structure was already efficient in the fifties, (e.g. in the Netherlands,
where as a result the
income of farm households is now
much larger than the average disposable income of all households). Such income
transfers to better-off farmers has increased disparities in the income
distribution of the EU. On the other hand, the same price support measures have
hampered the intra- and inter-sectoral reallocation of resources, especially of
labour and cultivated land, and hindered a much needed structural adjustment,
especially in regions and countries where the average farm size is
insufficient, preventing the full exploitation of scale economies and of modern
technology.
On the whole, the
impact of the CAP on structural adjustment in agriculture, appears to be
detrimental. In the nineties, the annual increase in the average farm size was only 1% in the EU, and lower in
Mediterranean Member Countries. Although average farm sizes, in terms of value
of their gross production, vary substantially among member countries (being 14
times larger in the Netherlands than in Greece), in the nineties there was no
convergence among Member Countries, differences remained unchanged or worsened
slightly.
Paradoxically,
higher levels of price support do not generate higher average farm incomes.
Actually, in the long term, price support is likely to retain farm labour in
inefficient small farms rather than increasing average farm incomes.
Consequently, a large share of income transferred by the CAP price support from
consumers and taxpayers does not improve the incomes of the farming population,
but becomes rather a welfare loss for EU society as a whole, as it merely
compensates higher average costs of production in inefficient undersized farms.
The impact on
efficiency of structural policy measures should be evaluated project by project
or by regional plan. At present, cost-benefit analyses are rarely used in such
evaluations. Moreover, a large share of public expenditure in rural development
is already earmarked by Community or national regulations for further
development of agriculture. , This
prevents a more efficient allocation of available resources at local level,
where economic resources invested in farming are already often in excess.
Nevertheless, the FEOGA-guarantee expenditure
does generate as a side effect
an income redistribution among
EU Member Countries, favouring poorer countries and agricultural regions, and
as a result greater cohesion in the Union. However, this positive impact on the
overall economic cohesion could probably be better achieved by more targeted
measures.
The European
Community is proposing to reduce market price support and to substitute it with
payments linked to the mechanisms limiting production (Ecu 20 bn, included in
the blue box). It should be mentioned that supply management policies, by
artificially limiting the use of available resources are fully at odds with the
goal of efficiency in economic policy.
This study establishes that this orientation:
- limits
the impact of the 1992 reform on structural adjustment hindering the
inter-and intra-sectoral mobility of resources;
-
imply considerable administrative costs for implementation increasing the
bureaucratisation of agriculture and costing farmers red tape and waste of
time;
-
penalise better entrepreneurs (farmers) willing to expand production at lower
average costs, while benefiting inefficient farmers operating in
non-viable farms with high average production costs.
Recommendations. In order to
effectively promote and implement a
reorientation of the CAP towards the general interest and achieve “substantial progressive reduction in
agricultural support”, production-limiting policies (blue box) should be
included among policy measures which are subject to a international
commitment for their reduction (amber box) under WTO. Compensation to farmers for income losses consequent on the
reduction of market price support should be limited in time and carried out in
the most equitable and least distorting way.
Compensation
could be granted for a well-defined time period, and the EU could issue an
equivalent amount of bonds in order to allow farmers the most flexible use of
compensations and to spread in time the
financial burden of such compensation.
Farmers
could cash such bonds annually, or sell them on the financial market and use
the capitalised value for improving farm structures. Other farmers might prefer
to sell the farm to neighbours, if not economically viable, and start a
non-agricultural activity or transform such capital into a life-long pension
scheme.
Such a lump-sum
approach to compensation would foster a rapid structural adjustment, and reduce
market distortions. Compensation would
only affect the wealth levels of farmers and would not distort market prices,
or other incentives to produce. The CAP reform would be less prone to pressures
from vested interests and, by improving efficiency and equity, could
effectively be implemented in the interests of better farming and of EU society
as a whole.
6.
Impact
on agricultural adjustment
Change in
agricultural employment is a consequence of long-term trends in food demand and
agricultural supply and the result of economic policies implemented, especially
in the agricultural sector and in the labour market. As stated in Article 33 of
the Treaty instituting the EC the real issue is not to maintain a large farm
workforce, but rather to increase “the individual earnings of persons engaged in
agriculture”.
Price support and
the more recent measures of supply management - production quotas and land
set-aside - have increased rents on cultivated land and reduced further the
inter- and intra-sectoral mobility of economic resources. Land set-aside,
although reducing some distortions created by price support, generates a large
waste of domestic economic resources. EU land set-aside resulted in taxpayers
paying € bn 1200 in order to induce farmers not to use 4,2 million hectares of
arable land in 1998-99, in order to reduce the domestic supply of agricultural
products and maintain higher market prices paid by EU consumers. EU citizens
pay, as taxpayers, a rather large amount of money in order to increase the
price of products they buy as consumers. To do so they have to withraw a
considerable amount of available economic resources. Such a policy is not in
the interests of consumers and of EU society as a whole.
According to
decisions taken by the European Community in the early sixties, at least 30% of
the agricultural budget expenditure should have been spent on structural
policies, which solve agricultural problems by adjusting the production
structure and reducing average costs, while price support policies maintain or
even worsen existing productivity and income problems. Contrary to this
decision, in actual fact, the share of the Guidance section on total FEOGA
expenditure has been on average much lower than 10% and, within it, the
expenditure flowing directly to agricultural investments has been very low,
about 2.4% of FEOGA expenditure. Including national expenditure, the EU
Commission estimates that assistance to structural adjustment reaches only 8%
of total domestic support to agriculture.
However,
it is almost impossible to implement a successful structural reform if
production prices are very distorted as they still are at present. Financing
with public money the creation of more productive, competitive and
market-oriented agricultural enterprises would orient investments towards
commodities whose price is more supported and to increase surpluses or to be in
contrast with supply management policies limiting agricultural production. Such
a public expenditure would benefit private farmers, but would involve extra costs
for society as a whole, as government is compelled to destroy or dispose of
extra food surpluses and/or face a lower social productivity of invested
resources.
Recommendations. In order to help producers to develop their
farms and help new farmers to enter the profession, in the interests of more
efficient farmers and of society as a whole, existing barriers to inter- and
intra-sectoral mobility of economic resources should be rapidly dismantled. In
parallel, an effective policy for favouring widespread information on
agricultural and non-agricultural job opportunities in rural areas should be
instituted.
Instead of reducing
arable land and keep it idle, involving a net loss of social welfare for
society as a whole, a policy favouring the flow of labour force towards more
productive activities would not only avoid such a large welfare loss, but would
generate an increase of total domestic production and of social well-being.
This could be done by providing inventive to allow labour with a low social productivity
in farming and permanently supported by public income transfers to move towards
non price-supported non-agricultural activities, more productive in social
terms.
In order to
successfully reform the CAP it would be very useful to let policymakers,
farmers and citizens know how large is the share of farm income which can be
attributed to the production of farm goods and services (including remuneration
for environmental and other positive externalities) valued at non-distorted
market prices, and how large is the complementary share of income directly or
indirectly generated by unjustified public support, which will have to be
gradually reduced in time. Citizens and farmers themselves have the right to
know the farmer’s share of present income, which is “real”, productive for
society as a whole in a market-oriented economy, and the share which is
“additional”, dependent on subsidies or transfers from the rest of society,
roughly equivalent to an unemployment benefit.
7.
Impact
on the economy
Producer price support, obtained by border protection and
supply management measures, is generating negative effects on the whole economy
of the Union, balanced by only rather modest benefits. Before the
implementation of supply management measures the cost of storage and disposal
of agricultural surpluses was rather high, especially considering that
agriculture now accounts for only 1.7% of the Union’s Domestic Product. During
the last 24 years, the EU budget spent over € bn 80 for storage and surplus
disposal and over € bn 150 for export subsidies. These massive figures are of
the same dimension or higher than the
current Net Domestic Product of some Member Countries such as Ireland (€ bn
84), Portugal (€ bn 110) or Greece (€ bn127) in 1998.
In order to reduce surpluses without dismantling price
support, some policy measures subsidise farmers for reducing their output by
adopting less productive techniques or setting aside available resources. This
goes against a better allocation of economic resources available in order to
increase the production of goods and services to be used by consumers..
Moreover, price support is generating large distortions in the allocation of
available resources both at production level and in food consumption.
The increasing bureaucratisation of the CAP brought about by
supply management policy measures generates a number of extra costs for EU
society as a whole. Economic resources are needed for collecting taxes to
finance the agricultural expenditure of the EU budget, and for the administration
of agricultural programmes at Community, national, regional and local level. On
the farmer’s side red tape needs time and money that otherwise could be used in
more productive activities, while increased government involvement in
production is also related to fraud at various administrative levels.
At macroeconomic level, higher agricultural prices increase
the consumer price index and reduce the real disposable income of consumers and
the aggregate demand in the economy. Lower aggregate demand, together with the
above-mentioned waste of economic resources, plus higher non-farm real wages
consequent to higher food prices, reduce firms’ profits and investments in the
economy, resulting in lower capital stocks and labour productivity, and
eventually in lower overall employment and in a reduced rate of economic
development.
Conversely, the effects due to the reduction in agricultural
market prices envisaged by the Commission document Agenda 2000 are definitely
positive. According to the result of research carried out by the EU
Directorate-General for Economic and Financial Affairs, a reduction of
intervention prices of arable crops (-15%), beef (-20%) and dairy products
(-15%), as planned in Agenda 2000, would significantly increase the EU GDP,
private consumption and investments, together with international trade and
overall employment. Unfortunately taxes raised for financing compensatory
payments will largely offset such beneficial effects.
Recommendations.
Price support policies do not solve existing farm problems but delay them in
time and often make them worse; a permanent work of monitoring present and
proposed policy measures is needed. In the almost 40 years of CAP the EU
Council and the Commission have most of the times delegated the design of solutions
for agricultural policy problems to the agricultural departments or ministries,
whose decisions have systematically been biased in favour of short term
interests of agricultural producers. An effective solution to agricultural
problems is possible only if consumers, the natural counterpart of producers,
bearing the largest burden of wrong policies implemented in the past, are
granted by EU policymakers a proper Consumer Policy, endowed with adequate
institutions and procedures, permanently monitoring sectoral policies and
detecting all hidden microeconomic and macroeconomic costs for society as a
whole.
8.
Impact
on economic development
On macroeconomic grounds a reduction of agricultural and
food prices would increase the real income of consumers and the demand for farm
and non-farm commodities, while reducing the real wage cost for firms. The
resulting effects on investments and on the rate of economic development would
be positive.
If a sound structural reform had been implemented in the
early seventies, after the proposals presented by the Dutch European
Commissioner for Agriculture, Sicco Mansholt, the present distribution of EU
farms per farm size classes would probably be now much more efficient, for
example more similar to the existing distribution in the Netherlands. If we had
now such distribution of farms per farm size classes, the average productivity
of agricultural labour would be much higher, more similar to the productivity
in non-agricultural activities, and the present agricultural output would be
produced by about half the present agricultural labour force. The average gross
income per labour unit, even without market price support, would be about 30%
higher than at present.
From 1975 to 1998 the FEOGA-Guarantee spent € bn 733 at
constant 1998 prices for market price support, i.e. nine times the whole 1998
EU budget, or € 109000 for equivalent full-time worker in agriculture. If such
budgetary resources were spent in structural reform, increasing inter- and
intra-sectoral labour mobility, protecting the environment and favouring
agricultural and other economic activities in disadvantaged areas, at present
the productivity of labour invested in farming and agricultural incomes would
be much higher. In the last 25 years, EU citizens would have paid lower food
prices, saving an amount of economic resources most probably higher than the
mentioned budgetary expenditure. Moreover, the labour resources gradually
released from agriculture would have had a beneficial impact on
non-agricultural economic activities. Even assuming a low average productivity
of such labour force, the annual increase in EU GDP could have been
considerable.
However the CAP price support policy had an overall positive
impact on the distribution of income between the regions of the EU, improving
the cohesion between EU member states and regions. As agriculture is more
developed in poorer and less populated areas than in richer urbanised areas,
any transfer from consumers and taxpayers to agriculture is likely to reduce existing
differences between rich and poor regions. However, in most cases, targeted
regional policies would have the same effects on inter-regional income
distribution in a more cost-effective way and with more positive long-term
effects on the economic development of disadvantaged areas.
Dumping EU agricultural surpluses on the world market has
contributed to depressing world market prices for agricultural and food
products, as a consequence net food importing countries have benefited in the
short run. However agricultural development in Third Countries has been
hindered, damaging in particular those Less Developed Countries where
agriculture is an important local resource and one of the few activities with
potential international comparative advantages. Lower international food prices
have favoured non-agricultural sectors, especially in newly industrialised
countries, and have increased their international competitiveness. Altogether
the international effects of EU price support policy substantially disadvantaged
EU non-agricultural sectors.
A very large
negative impact of price support is likely to be borne by the citizens of the
Central and Eastern European Countries (CEECs), which will have to accept the
CAP as part of the acquis communautaire.
Consumers will have to bear the equivalent of an income-regressive tax on food,
worsening in particular the living standards of retired people and of
households with numerous children. Although a substantial part of the budgetary
cost of the CAP will be borne by citizens of the EU-15 Member Countries, CEEC
national budget will also have to divert economic resources from productive
investments in expanding economic activities towards income transfers for
maintaining artificially high income levels for farmers.
On their side CEEC farmers will receive a windfall increase
in their revenues, hard to justify in terms of overall social welfare, which
will increase income disparities within the agricultural sector and within
society as a whole. Part of such windfall gain will be capitalised in land
values, hindering the structural adjustment towards optimal farm sizes and
slowing the inter- and intra-sectoral mobility of land and labour. Less
efficient farm structures and higher land rents will increase the average costs
of production and reduce the international competitiveness of CEEC agriculture.
Negative effects of the CAP price support policy on non-agricultural firms,
similar to those already mentioned for the EU-15, are likely to reduce the
domestic and international competitiveness of CEEC non-agricultural sectors,
reducing the overall rate of development and employment. In European economic
history there has probably never been a decision on sectoral policy that has
had such a huge potential to decrease European citizens’ well-being.
Recommendations.
In order to foster economic development, apart from a reduction of producer
price support, local policy measures preventing inter- and intra-sectoral
labour mobility should be dismantled. Moreover, specific policy measures should
be envisaged to favour broad professional education and re-training of farmers
in order to ease mobility of
entrepreneurs and employees among sectors, especially in rural areas. The
result would be an increase in the average productivity of labour, a better
structural adjustment in agriculture, improvement of the international
competitiveness of the EU agricultural and non-agricultural sectors, and an
increase in overall EU employment.
Given its economic size, share in world trade, and political
influence, the EU bears a large responsibility in WTO multilateral
negotiations. In the interests of EU consumers and of society as a whole, and
according to the principles stated in the Treaty and to the commitments taken
in international organisations, the EU should play a fundamental and effective
role in further liberalising the international trade of agricultural
commodities. In order to avoid the possibility that welfare losses similar to
those generated by the CAP in the EU-15 could be imposed on new members the
Union as part of the “acquis
communautaire”, blue box policies should be included in the amber-box and
reduced before or at the same time as the enlargement to candidate countries of
Central and Eastern Europe.
9.
Synopsis
and conclusions
The overall cost of the CAP for EU households, including
transfers to the agricultural sector, social costs for consumers and
administrative costs, amounts to a total of
€ bn 123 a year (over € 1300 per 4-member household, based on 1998
figures).
Only a part of such
cost for society can be considered a net benefit to people working in the
agricultural sector. If we take into account the economic welfare losses
consequent to the CAP price support policy (in terms of higher production costs
related to the inefficient structure of production and to the distorted
producer prices) and the resources lost in storage and disposal of agricultural
surpluses, in fraud and in red tape for compliance with the public
administration, the net benefit for people working in the agricultural sector
can be assessed at about € bn 58, 47% of the total cost.
We may conclude that the present CAP
based on the price support policy is surely not an efficient instrument to
channel economic resources to the agricultural sector
In addition, such net benefit for the agricultural sector
does not flow entirely to farmers. A spill-over of resources towards other
people working in the agricultural sector providing goods and services to
farmers and involved in the local trade of farm products is further reducing
the net benefit that farmers are likely to enjoy as a consequence of the CAP.
Among the items not quantified in this analysis, the social
welfare impact of CAP price support on EU security of food supply and on the
development of disadvantaged areas is likely to be positive, while considerable
net social costs are likely to occur in terms of macroeconomic effects on the
rest of the economy and in terms of the impact on environment.
The well-known aphorism: “Give
a man a fish, you will feed him for a day; teach him to fish, you will feed him
for life” may well be adapted to the appraisal of the CAP. Since its
institution, the EU Council of Agricultural Ministers has been very sensible to
the short term claims of farm organizations asking for higher institutional
prices and income transfers to agriculture, in order to counter the long-term
reduction in farm prices due to the slow expansion of demand for food and to
the more rapid increase in supply consequent to technological progress. In the
interest of all citizens the CAP should have promoted a physiological
inter-sectoral mobility of the labour force, while teaching farmers to adjust
the size of their farms and their techniques to the long term preferences of
consumers and to the needs of economic development. On the contrary, the CAP
provided annual transfers of income approximately as big as the net
agricultural value added at market prices, retaining in the sector numerous non
economically viable farms and a large amount of disguised unemployment.
As a general principle, economic policies should be
justified in terms of increasing efficiency (i.e. by providing a high social
internal rate of return to public expenditure), or in terms of some other
component of social welfare, such as better income distribution, environmental
protection, or adequate improvements in safety or security for EU citizens.
After the analytical work done in this study, we conclude than the overall
burden for the EU of CAP price support policy is very high, larger than the
whole EU budget, while its marginal social rate of return is most probably
negative and no other positive effect on the welfare of EU citizens is big
enough to justify the huge costs borne by households.
Recommendations. The changes needed in CAP policy
measures have been repeatedly identified and mentioned also in numerous
documents of the EU Commission and of the Council of Ministers, while basic
changes are included in the EU international commitments signed at
Marrakech.
In synthesis the EU should:
(a) abolish
production limiting (blue-box) policies,
reduce and de-couple from production other policy measures distorting
market prices (amber-box),
(b) improve policies oriented to the general interest of
society and not only to particular interests (as may apply for green-box
policies),
(c) compensations to farmers for the loss of farm income
consequent to the reform should be transparent, decreasing and limited in time.
The EU should also investigate the feasibility of providing
EU-15 farmers with lump-sum compensations for dismantling price support,
financing them by issuing EU bonds. Such approach could be very flexible in
adapting the compensation rates to equity criteria and efficient in avoiding
future distortions in market prices. Immediately after such reform, market
prices would not be distorted any more, consequently new EU member countries
could not claim compensation for dismantling their market price support, which
is still limited. Major agricultural problems in CEECs accession to the EU
would be solved.
Consumer strategy
A very large share of the important information on the CAP
is influenced, directly or indirectly, by farm organisations and by
policymakers working in agricultural institutions or supported by agricultural
constituencies, and is often biased by a sectoral view of existing problems. It
is important to create a “countervailing” research and information network
looking at agricultural issues from the point of view of EU consumers and
society as a whole. It would then be possible to provide EU citizens,
policymakers, consumer and farm organisations with complete and unbiased
information on the likely effects of the CAP.
Such information should be based on a permanent monitoring
network, including at least:
(a)
an annual estimate of inter-sectoral income transfers and
social costs generated by the CAP, integrating existing estimates (e.g. OECD)
and formulating projections of the likely impact of present and proposed policy
measures;
(b)
a similar analysis for new EU member countries in order to
appraise the likely impact of accession both in the EU and in new Member
Countries;
(c)
a regional analysis estimating the flows of income affecting
each region as a consequence of the CAP, this would help local consumer
organisations to better perceive the impact of the CAP on local consumers,
taxpayers and farmers;
(d)
a structural analysis at EU, national and regional level
estimating the amount and cost of the disguised unemployment created or
maintained by agricultural policy measures.
Properly diffused, updated and available on internet, such
research and information should provide all EU consumer organisations, farm
organisations and policymakers with a consumer-oriented point of view on CAP,
stimulating debate on the grounds of transparency.
The consumer strategy in reforming the CAP by making it more
consistent with the interests of EU consumers and of EU society as a whole, as
indicated by the Consumer Committee, should be also based on a stronger
participation of consumer organisations in the CAP decision-making process at
all levels: community, national, regional and local.
Institutional changes
EU institutions should be reformed in order to improve the
transparency and representation in the policy decision-making process, where
all interests at stake should be properly represented. The EEC was successful
in integrating the European economy because it did not immediately tackle the
central issues of macroeconomic and monetary policy, but proceeded from the
periphery, by integrating sectoral policies, among which agricultural policy
was the most successful achievement in the sixties. Unfortunately, in the
following decades this sectoral approach became a sectoral bias, generating
increasing economic and financial costs for the EU society as a whole.
All decisions in economic policy where inter-sectoral
allocation of resources are involved should not be instructed or taken by
sectoral institutions (Ministries, Directorates General, Regional Departments,
etc.). It is important that the whole policy decision-making process evolves in
a bias-free environment.
Trade policies for agricultural products should be decided
mainly by the Council of Trade Ministers and not by the Council of Agriculture
Ministers. If this had been the case in the past, probably the European Union would
not have been the bastion of agricultural protectionism in the GATT
negotiations and would not now delay the international process towards more
free international agricultural markets.
Rural development policies should refer more to Regional
Ministers, rather than to Agricultural Ministers. If this had been the case in
the past, Community funds flowing to rural development projects would not so
often be earmarked for agriculture. At regional level public resources could
flow towards the economic activities more socially productive for local
communities, rather than increasing the resources, often inefficient, invested
in agriculture.
Environment Ministries should have a more important role in
deciding environmental policies also in rural areas. If this had been the case
in the past the “polluter pays” principle would be applied also in agriculture,
and farmers would pay taxes when polluting, and not be paid not to pollute, as
is now the case.
Unfortunately, such sectoral bias, favouring producers, is
not only operating in Community policies, producer biases are frequent also in
national and regional policy-making institutions, where agricultural interests
often prevail.
In parliamentary and government commissions dealing with
agricultural policy issues there should not be an overwhelming majority of
members directly interested in supporting agricultural producers. If this had
been the case in the past, in some EU countries agricultural producers would
not be largely exempted from taxes, domestic markets would be less distorted
and the present structure of agriculture production would be more efficient and
less in need of permanent public support.
The low social productivity of public investments in
agriculture, as compared to other economic activities in rural areas, would
have been noticed and corrected, the impossibility of monitoring the correct
implementation of some agri-environmental policy measures, such as the
subsidies granted in order to reduce the use of fertilisers, would have been
detected and the control on the use of public funds would have improved.
Recovering from the “European Disease”
Interference of particular sectoral
interests in public policies is frequent and diffused in all governments;
however, this cause of the malfunctioning of public policy-making seems to be
more deeply rooted and extended in the European Union than in other developed
countries.
This is probably due to the particular historical
development of EU institutions constrained in their childhood and adolescence
into narrow sectoral paths, and still following sectoral approaches in Councils
of Ministers where all members share the same sectoral interests, which
consequently almost necessarily prevail. Moreover, the decision-making
environment in Brussels, where more than 3 000 special interest groups of
varying types operate, with over 10 000 employees working in the lobbying
sector, is not ideal for unbiased decision making, unless general interests are
strongly defended by non-sectoral social groups, such as consumers’ organisations.
The European Union has now grown up enough to recover from
such a disease to its political system. This recovery is a necessary, even if
probably not a sufficient condition for solving the conspicuous problems of the
Common Agricultural Policy, moreover it is now very urgent, especially in view
of the enlargement to Central and Eastern European Countries.
The
Consumer Committee, the consultative committee of the European Commission
entrusted to represent the interests of consumers, adopted opinions on the
reform of the Common Agricultural Policy
(CAP) on 8 December 1998 and on 14 June 1999. The attitude of consumers
towards the Common Agricultural Policy is well expressed in the following
quotations.
“Consumers' views must be taken into account
in the development and implementation of the Common Agricultural Policy. This
is a question of public interest and balanced policy making. ……
“The Amsterdam Treaty
states in Article 153 that "Consumer protection requirements shall be
taken into account in defining and implementing other Community policies and
activities". Consumers will use all their strength to make sure that these
texts are concretely applied. The Common Agricultural Policy is a major area in
which consumers want to be fully involved.”
The purpose of this study is to reconstruct, on the
basis of broad evaluative questions, the causal links of some of the
evaluations made by the Consumer Committee on different aspects related to the Common Agricultural Policy
and, on the basis of a quantitative analysis, to recommend from a consumer
perspective a number of policy avenues and measures to redress the situation.
For each question, the study will identify what corresponds to a direct impact
of the Common Agricultural Policy or its implementation and what corresponds to
the impact of exogenous factors. It will also evaluate the likely impact of the
measures decided by Heads of States at the European Summits, identify where
improvements are needed and formulate concrete suggestions in this respect.
Recommendations
on alternative cost-effective and WTO consistent measures will be suggested,
especially for the issues covered by equity and efficiency.
Before dealing with the central issues of the impact of the
CAP on equitable income distribution and efficient allocation of economic
resources in the EU, the Opinion of the Consumer Committee expresses some basic
statements on the judgement criteria to be used in evaluating CAP measures and
the biased development of the CAP.
This report will begin by analysing the general judgement
criteria to be used (Section 1) and by
presenting an overview of the CAP developments (Section 2). The impact of the
Common Agricultural Policy on income redistribution is more apparent and easier
to quantify than its impact on the allocation of economic resources. This
report will analyse first equity and then efficiency issues.
The impact on EU consumers (Section 3) will be examined in
the broader context of the inter-sectoral income redistribution generated by
the CAP from households (consumers and taxpayers) towards the agricultural
sector (agricultural producers and other enterprises providing general services
to agriculture). The discussion will then focus on the income redistribution
generated by the CAP on a special group of consumers: farmers, whose income is
directly and consistently affected by CAP measures. (Section 4)
After assessing the impact of the CAP on income
redistribution, the report will appraise the impact of the CAP on efficiency,
i.e. on the welfare foregone by EU society as a whole as a consequence of the
policy measures implemented.
The impact on the agricultural economy of the European Union
will be discussed (Section 5), by
examining the likely effects of the CAP on EU resource allocation, in
particular since the 1992 reform. The longer-term impact on agricultural
structural adjustment (Section 6) will then be analysed in order to appraise if
the CAP helped or hindered producers to develop their farms and new farmers to
enter the profession.
What the impact of the CAP on the EU economy has been will
be discussed next section 7, focusing on the inter-sectoral and international
effects of the CAP. In particular the report will examine to what extent
dead-weight losses and misallocation of economic resources have affected the
welfare of EU citizens. Finally, (Section 8) the long-term impact of the CAP on
EU economic development will be considered, focusing on total employment and on
the international competitiveness of non-agricultural sectors.
A synoptic appraisal of the effects of the CAP on the
welfare of EU citizens will conclude the report and form the basis for sensible
recommendations for the future (Section 9) with reference to the strategy that
could be envisaged by policymakers involved in Consumer Policy.
“As opposed to
sectoral pressure groups, consumer organisations interests largely coincide
with the public interest. They represent citizens, whose interests must be the
primary and permanent concern of policy makers - to whom they are ultimately
responsible.” …
Consumers have been increasingly critical of the Common Agricultural Policy. Over the years, the CAP has developed a
policy whose main objective is to ensure farmers’ incomes. Unfortunately, this has not been properly
achieved. At the same time, it has had
negative consequences not least for the citizens of Europe, the consumers.…
Consumers want a CAP that is developed and managed in full transparency
and with the participation of all interested parties. They want a European agriculture whose primary concern is to
respond to consumers’ expectations in the interest of society as a whole as
stated in this document.
The fundamental issue raised in the ‘Opinion of the Consumer
Committee’ (CC) concerning the judgement criteria is the point of view from
which CAP policy measures should be judged. The CAP is surely the most
important “sectoral” policy of the EU and probably of most national
governments, consequently the temptation of pursuing the “particular” interests
of farmers is very strong, even when they do not coincide with the interests of
society as a whole (i.e. when farmers’ benefits generated by a policy measure
are lower than costs borne by non-farmers).
When dealing with private matters, according to the
principles of the market economy, it is normal for entrepreneurs and consumers
to pursue their own interests, without taking too much into account the costs
borne by the rest of society. In the basic theoretical economic models of
profit maximisation by producers and utility maximisation by consumers, the
welfare of the counterparts does not play a particularly important role.
Competitive market forces are expected to turn egoistic behaviours into overall
benefit for society. When such good performance of the “invisible hand” does
not take place, governments are supposed to correct the undesirable outcome of
the behaviour of private entrepreneurs or consumers by using economic policy
measures (e.g. taxes, subsidies, etc.) or normative constraints.
The problem raised by the Consumer Committee deals with the
particular (sectoral) behaviour of farm organisations when influencing
government decisions. In public policy-making competitive market forces do not
play a relevant role in correcting excessive egoistic behaviours, consequently
the interests of society as a whole should be pursued by all parties. Moreover
the Consumer Committee points out the special “nature” of consumer
organisations. As every citizen is a consumer, consumer organisations are “by their own nature” much more sensitive
to the general interest than are sectoral organisations.
On what grounds should we base such judgement criteria as
suggested by the Consumer Committee? We may refer to ethical principles (§1.2),
to statements of supranational organisations signed by the EU (§1.3), to the
detailed objectives of the CAP stated in the Treaty establishing the European
Community (§1.4), or to an overall consistency of the CAP with all other
economic policies implemented by the European Union (§1.5).
When dealing with economic policy, we usually assume that
the policy makers’ aim is the interest of society as a whole, and that they
seek to prevent possible abuses resulting from the private behaviour of
individuals. Economic policies in particular are supposed to aim at increasing
social welfare e.g. by fostering economic efficiency, improving interpersonal
income distribution, providing public goods, reducing negative externalities
and favouring positive externalities generated by private firms or individuals.
The concept that the
policy maker’s behaviour should aim at maximising the ‘common good’ when in
conflict with ‘private interest’ is as old as western civilisation. In the fourth century BC, Aristotle was
already classifying governments in two categories, according to their attainment
of the common good.
Forms of government aiming at increasing the welfare of society as a whole were
classified as ‘perfect’, while governments aiming at private interests of
individuals or social groups were classified as ‘degenerate’.
Such ethical principles are recurrent in history: with
Christian philosophers such as Thomas Aquinas (the search of the private good
is moral only if subordinated to the search of the common good
), with economic philosophers such as Adam Smith (the moral
viewpoint is comprehensive but impartial), with modern philosophers such as
Harsanyi, who defines two attitudes in human beings: particularistic
(maximising their own profit or utility) and universalistic (partial interests
are taken into account only if consistent with the general interest).
In order to assess the effects of sectoral policies on
social well-being, in the following sections we will examine in more detail two
main features:
- the ‘effects on equity’,
broadly appraised in relation to the ways in which sector policy measures
modify the inter-sectoral, inter-regional, interpersonal and functional
distribution of income;
- the ‘effects on efficiency’,
which can be appraised by analysing the dead-weight losses and economic costs
and benefits for society as a whole generated by policy measures in the short term, and in the long term,
consequent to their impact on the investment structure.
OECD
The Organisation for Economic Co-operation and Development
(OECD) at the meeting of its Council at Ministerial level on 12-13 May 1987
issued clear-cut principles for agricultural policy reform, further specified
by the statements of the OECD Committee for Agriculture at Ministerial level in
1992 and of the ‘High level meeting’ of the OECD Committee for Agriculture in
1994.
Reference to the efficiency and equity objectives is made in
the first principle (point “21.a”) of the “OECD Ministerial Communiqués related
to agricultural policies”.
.
Reform will be based on the following principles:
a)
The long-term
objective is to allow market signals to influence by way of a progressive and
concerted reduction of agricultural support, as well as by other appropriate
means, the orientation of agricultural production; this will bring about a
better allocation of resources which will benefit consumers and the economy in
general …
e)
Rather than being
provided through price guarantees or other measures linked to production, farm
income support should, as appropriate, be sought through direct income support.
This approach would be particularly well suited to meeting the needs of, among
others, low-income farmers, those in particularly disadvantaged regions, or
those affected by structural adjustments in agriculture. …
According to this statement, policy measures aiming at redistributing
resources in favour of low-income farmers should be clearly targeted, and
directly monitored by governments, without interfering with domestic or
international market prices.[DPST1] nche
According to the Ministerial Declaration adopted at the
Marrakech Ministerial Meeting in April 1994, an important aspect of the World
Trade Organisation (WTO) mandate is to co-operate with the International
Monetary fund, the World Bank and other multilateral institutions to achieve
greater coherence in global policy-making. The declaration recognises the
contribution that trade liberalisation makes to the growth and development of
national economies. It views such liberalisation as an increasingly important
component of the success of the economic adjustment programmes which many WTO
members are undertaking, even though it may often involve significant
transitional social costs.
At the Mid-Term Review of the GATT Uruguay Round, as a
long-term objective, it was agreed “… to
provide for substantial progressive reductions in agricultural support and
protection sustained over an agreed period of time, resulting in correcting and
preventing restrictions and distortions in world agricultural markets”.
In the preamble to the Constitution of the Food and Agriculture
Organisation (FAO) of the United Nations, the 44 founding governments signalled
their determination to “promote the
common welfare”[DPST2] . FAO
implemented this broad mandate especially with reference to the poorest
countries in the world by fostering education and training, rational use of
natural resources, environmental protection, control of plant and animal pests
and diseases, conservation of genetic diversity and promotion of sustainable
agriculture and rural development.
The efficient allocation of
available economic resources is a fundamental objective of economic policy.
This objective is not only mentioned in all economics textbooks but is repeated
many times in the Treaty Establishing the European Community.
The first article of Title VII: Economic and Monetary Policy
of the Treaty (Article 98) states: “The
Member States and the Community shall act in accordance with the principle of
an open market economy with free competition, favouring an efficient allocation
of resources”.
Also the objectives of the CAP are based on the fundamental
concept of an efficient allocation of resources. Article
33 of the consolidated version of the
Treaty states:
“ The objectives of the common agricultural policy shall be:
(a) to increase agricultural productivity by
promoting technical progress and by ensuring the rational development of
agricultural production and the optimum utilisation of the factors of
production, in particular labour;
(b) thereby to ensure a fair standard of living for
the agricultural community, in particular by increasing the individual earnings
of persons engaged in agriculture; etc.
…”
Although rarely mentioned in textbooks and in official
documents, the objective of ensuring a fair standard of living to the
agricultural community (point b) is clearly subordinated to the objective of a
better allocation of resources (point a) by the conjunction “thereby” which is
usually omitted in many quotations of article 33 of the Treaty. It is quite
clear in the Treaty that improvements in farm incomes should be attained by a
better allocation of economic resources, by improving the structural adjustment
and reducing production costs in the interests of farmers and of society as a
whole.
Reference to the “individual” earning of persons engaged in
agriculture is clearly at odds with hindering inter-sectoral labour mobility in
order to retain more people in the farming sector who would be in need of
direct or disguised public help. A “fair
standard of living for the agricultural community” should not be attained
by direct or indirect income transfers to farmers, especially if such transfers
would entail a misallocation of economic resources, hinder structural
adjustment, and increase income disparities by burdening in higher proportion
low income households and benefiting in larger proportion better-off farmers.
In order to attain the final goal of the common interest, it
is necessary for the CAP to be consistent with EU and Member States
non-sectoral policies, which are oriented towards the policy goals mentioned in
the document of the Consumer Committee: transparency (Information, Culture,
Research policies), efficiency (Internal market, Competition policies),
stability (Macroeconomic, Monetary policies), equity (Fiscal policy, Cohesion
policies), sustainability (Environmental policy), safety (Health policy) and
security (Defence, Social Security policies)
Article 153 of the Consolidated Treaty establishing the
European Community, by stating that
"Consumer protection requirements shall be taken into account in defining
and implementing other Community policies and activities”, is implicitly
advocating a reciprocal consistency among all EU policies. Such a general
principle is however necessary in order to avoid contradictory effects and a
lower level of overall effectiveness in attaining the policy goals stated in
the Treaty.
The main concern of the Consumer Committee is
that “the CAP should be oriented, as other
policies, to the public interest and not to the particular interests of a small
group of citizens”.
Such a basic statement is fully grounded in
commonly accepted ethical principles from Aristotle to Adam Smith, to modern
philosophers. The goal of increasing
the citizens’ common welfare by means of an efficient and equitable economic
policy is repeatedly stated in declarations of supranational organisations,
such as OECD, GATT-WTO, FAO, where the EU is among the most important and
influential of members.
Consistent with public interest, article 33 of
the “Treaty establishing the European Community” clearly states the objectives
of the CAP indicating efficiency as the first goal to be reached by means of “the rational development of agricultural
production and the optimum utilisation of the factors of production”. The
equity goal “thereby to ensure a fair standard of living for the
agricultural community” is indicated as a consequence. According to
the Treaty, equitable farm incomes should then be obtained by means of a better
allocation of resources within the economy, i.e. by increasing both farmers’
and non-farmers’ social welfare, and not by generating income transfers from
consumers and taxpayers to farmers, especially when such transfers entail large
dead-weight losses and perverse income redistribution from poorer consumers to
better-off farmers.
As will be shown in the following sections, the
present CAP is inconsistent with such basic judgement criteria; producer
interests have very often prevailed over consumers’ and taxpayers’ interests to
the disadvantage of society as a whole. The information and monitoring work
done on the effects of the CAP in the past has been insufficient and
ineffective.
Recommendations
In order to
reform the CAP consistently with the fundamental principles of ethics, with the
international commitments of the EU and with the Treaty Establishing the
European Community, its policy measures should be permanently monitored and EU
citizens should be well informed on the achievement of the stated objectives.
Such monitoring and information work should not be performed by the same
sectoral institutions or social organisations which formulate and implement
agricultural policy measures, but rather by different public institutions and
by social organisations aiming at the interests of society as a whole, such as
the Consumer Policy Departments of the public administration at various
administrative levels (Community, national, regional, local), and consumer
organisations.
Such independent monitoring is necessary to meet
the objectives stated in Article 153 of the Treaty, that "….the Community shall contribute to protecting the health, safety
and economic interests of consumers … Consumer
protection requirements shall be taken into account in defining and
implementing other Community policies and activities", and that “The
Community shall contribute to the attainment of the objectives … through: …
measures which support, supplement and monitor the policy pursued by the Member
States.”
“Consumers are not opposed to a support system for European
agriculture, however they are very critical of the way the CAP has developed
and functions today. For years they have
been concerned about a CAP largely influenced by producers for their own
benefit, to the detriment of product price, quality, safety and choice, the
environment, and with negative socio-economic consequences. These negative aspects added to the CAP's high
budget represent an unacceptably high cost for consumers and taxpayers. ….
The CAP was conceived in the sixties when
the six European Economic Community countries were facing food shortages and
imported much of their food. Concerns about security of food supplies could
justify, at the time, some price support and import levies in order to expand
domestic production and reduce dependence on imports. In the following years,
notwithstanding adequate supplies and higher self-sufficiency rates, this system
was not dismantled and generated surpluses of many commodities.
Instead of reducing price support, which was encouraging the production
of certain commodities regardless of market demand, the Council of Ministers,
under pressure from producer lobbies, introduced new measures aimed at getting
rid of production surpluses: export subsidies, market withdrawals, wine
distillation, destruction of perishable products, all at a high cost to the EU
budget, and ultimately to consumers and taxpayers.
The Opinion of the Consumer Committee about the development
of the CAP raises a basic issue. The CAP assistance to producer (especially by
means of market price support and direct payments coupled to the volume of
production) could probably be justified in the sixties by motivations of food
supply security, but this high level of assistance was not reduced when such
justifications disappeared. Instead of favouring the structural adjustment of
agricultural production and employment to the relative decrease of the demand
of food, the CAP maintained artificially high agricultural prices and
implemented a set of policy measures hindering the structural adjustment and
very costly both to households and to society as a whole.
In this first section we will outline the progressive
escalation of the CAP in terms of inefficient and inequitable policy measures
implemented as a substitute for a reduction of domestic producer prices in
order to maintain large income transfers to farmers. After a brief
classification of CAP policy instruments used in the GATT negotiations (§2.2),
the development of traditional policy measures and the attempt to implement a
structural reform will be outlined (§2.3), followed by the more recent measures
of supply management (§2.4). Consequent international problems will then be
mentioned (§2.5), followed by the main features of the recent 1992 CAP reform
(§2.6) and by perspectives for the future (§2.7).
This preliminary descriptive section will be useful in
aiding a better understanding of the following quantitative analyses of the
equity and efficiency issues both within the EU agricultural sector and within
the EU economy as a whole.
Agricultural policies may be classified according to various
criteria. A common classification, used in GATT-WTO multilateral trade
negotiations, refers to the colours of traffic lights: green-box measures are
allowed, amber-box measures are red-box measures in their transitional process
of being eliminated.
In 1994 in Marrakech
all members taking part in the multilateral trade negotiations under GATT, now
the WTO, signed a commitment to reduce amber-box measures, as they are in
contrast with a fair development of international trade. They generate costs
paid by consumers, change the level and
stability of prices on international markets, and are by far the most
important cause of the negative impact of the CAP on resource allocation.
Measures under
reduction commitment
For the EU, as for a large number of other developed countries, the most
important policy measures included in the "amber box" point towards
increasing producer prices of agricultural products in the domestic market.
Price support is usually attained by limiting supply on the domestic market by
means of border protection (import levies and export subsidies). It is also
maintained by direct government intervention in the domestic market to buy
surpluses created by price support, to limit the production of specific commodities
(production quotas), or to subsidise the non-use of production factors (e.g.
set-aside of agricultural land).
The amber box also includes numerous subsidies to
farmers related to specific commodities, as they distort market prices and
stimulate extra production of goods not requested by the market. Reductions in the market price of
agricultural inputs, either via subsidies or via tax exemptions, are considered
to be distorting the correct functioning of the markets as well.
Besides
the income transfers generated from households to the agricultural sector, the
implementation of amber-box measures in the EU needed conspicuous and
increasing financial resources in order to manage the Common Market
Organisations (Frame 2‑1). The Guarantee section of the “European
Agricultural Guarantee and Guidance Fund” (EAGGF, largely known under the
French acronym FEOGA) was created to finance market support expenditure, while
the Guidance section of FEOGA mainly finances green box policies. The Guarantee
section of FEOGA was always the largest outlet of the EU budget and still
accounts for 45% of total EU budget expenditure (Frame 2‑2).
Frame 2‑1 Community
expenditure from 1958 to 2001 at current and constant (2000) prices
Legenda: FEOGA Guarantee (green), Structural funds
(yellow), Administration (blue), External Action (light yellow), Reseach (dark
blue), Other (pink). The black line indicates the total expenditure at constant
(2000) prices.
Source: EU Commission, DG Budget, Public finance
figures of the European Union.
Per cent share
Source: EU Commission D.G. Budget,
Frame 2‑2 The 2002
budget by subsections (commitments)
Measures not under
reduction commitment
Agricultural policy measures "not under
reduction commitment" (green box) are described in detail in Annex 2 of
the GATT agreement signed in Marrakech on 14 April 1994 (WTO, 1994). These measures cover a broad range of
economic policy instruments which: (i)
should have zero or negligible distorting effect, (ii) are financed by the
public budget and therefore are potentially transparent, (iii) do not cause
transfers of income from consumers and (iv) do not cause price support for
producers.
Measures under WTO reduction commitments deal mainly with
the producer price system in the whole EU, and their effects on resource
allocation may be appraised by analysing EU and international commodity
markets. On the other hand measures not under WTO reduction commitments often
have a limited regional scope, are directly financed by Community, national
and/or regional budgets, and their effects on resource allocation, as well as
on income distribution, often need to be analysed case by case, usually at
regional or local level.
Consumer interests at EU level are much more directly
involved in the redistributive and allocative effects of the CAP measures
“under WTO reduction commitment”. The appraisal of the effects of policy
measures “not under WTO reduction commitment” is more related to the
administrative performance of Community, national and regional institutions.
In order to appraise the impact of the CAP on the
agricultural economy we will therefore refer mainly to the measures “under WTO
reduction commitment” whose distribution among agricultural commodities is
indicated in Frame 2‑3.
In the first column of Frame 2‑3 are listed the most
important policy measures enforced by the CAP in order to support farm prices
and incomes. The early measures generate higher domestic prices by reducing the
supply available in the domestic market either by limiting imports or by
subsidising exports.
Border Protection
If a country is a net importer, imposing a tariff at the
border will increase the cost of the imported goods. As a consequence the price
in a competitive domestic market will increase approximately by the amount of
the tariff on imports.
The EEC-6 was
originally a net importer of staple agricultural products. The common external
tariff should have been the
weighted average of tariffs previously enforced by member countries, in order
to avoid imbalances in the new common market, but such a general rule was not
applied in practice for farm products. In the early sixties common farm prices
were set at a level much nearer to the high German and Italian farm prices,
creating price distortions and damaging EU consumers. Understandably, such high
price levels on the one hand were well accepted by German and Italian farmers
as they could avoid restructuring their domestic farm sectors whilst, on the
other hand, they were a windfall gain for French and BENELUX farmers whose
previous farm prices were much lower.
Export subsidies
In the early sixties the rate of food self-sufficiency in
the six EEC member countries was still rather low, but increased rapidly also
as a consequence of the price support policy, and the Community turned into a
net exporter of an increasing number of agricultural commodities.
As import restrictions were not sufficient any more to limit
domestic supply and maintain domestic market prices above world market prices,
export subsidies were granted to an increasing number of agricultural
commodities in order to favour exports and reduce supply on the domestic
market. As compared to import tariffs, export subsidies do not increase
budgetary receipts but, on the contrary, are a burden to the EU budget.
Moreover exported surpluses dumped on the world market depress world market
prices and are considered unfair by traditional exporters.
