European Commission

Directorate General
Health and Consumer Protection

Rue de la Loi 200

B-1049 Bruxelles - Belgium

Università di Siena

Siena Interdepartmental Centre

on Agri-food-environmental Policy

c/o Dipartimento di Economia Politica

Piazza S. Francesco 17

I - 53100 Siena, Italia

Consumer Interests in the

Common Agricultural Policy
Efficiency and equity

Table of contents

Executive Summary

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 [1] 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 (€[2] 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[3] 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.

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

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.

0. Introduction

0.1 The Consumer Committee

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[4].

“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.”

0.2 Purpose of this study

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.

0.3 Plan of work [5]

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.

1. Basic judgement criteria

1.1 Terms of the question

Opinion of the Consumer Committee

“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. …

Issues involved

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).

1.2 Ethical grounds

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.[7] 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’.[8]

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).[9]

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.

1.3 Statements of supranational organisations signed by the EU

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”. [10]

. 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

GATT-WTO

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.[11]

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”.

FAO

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.

1.4 Objectives of the CAP in the EU Treaty

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[12] 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.

1.5 Consistency with other EU policies

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.

1.6 Summary and conclusions

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.”

2. Development of the CAP

2.1 Terms of the question

Opinion of the Consumer Committee

“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. [13] ….

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.

Issues involved

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.

2.2 Developments of CAP policy measures

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.

International commitments on policy measures

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.[15]

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.[16]

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.

2.3 Traditional policy measures

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[17] 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.[18]

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.[19]

Intervention buying

Notwithstanding border protection, farm-gate prices may occasionally fall below target prices; a market intervention mechanism was therefore envisaged to stabilise domestic prices at the desired level. For various market regimes (cereals, dairy products, fruit and vegetables, sugar) intervention authorities buy surpluses at a periodically adjusted “intervention price”. Surpluses are re-sold at a different time or destroyed, especially if perishable. For some commodities domestic surpluses are processed or sold at subsidised prices to state-trading countries or even to farmers[20].

Originally EEC policy makers conceived border protection and intervention buying to be used mainly for price stabilisation purposes. This is the case if the domestic target price does not substantially differ from the average long-term world market price. On the other hand, the larger the gap between domestic target price and the average long-term world market price, the greater is the price support effect of such policy measures and the distortions generated in domestic prices and investments. This was the policy approach most commonly implemented in practice.

Production aids

Production aids occasionally were used as an alternative approach to market price support, granting farmers high revenue per unit of product without increasing price levels in the domestic market. Such aids, called “deficiency payments” covering the difference between “market prices” and targeted “producer prices”, were extensively used in the United Kingdom prior to joining the EEC in 1973. The difference between the target producer price and the price on the domestic market is paid directly to farmers from the EU budget.[21]

The burden of production aids falls on taxpayers, while consumers may enjoy a free-trade price in the domestic market. The cost for households of such policy measures is detectable in the budget expenditure and is more easily perceivable by citizens than the cost implied by other price support policy measures. However, in order to distribute payments directly to each farmer, a bureaucratic apparatus has to be set up, involving extra administrative costs.

In order to dilute in time the shock of policy reforms involving a reduction in market prices, a special type of “compensatory production aids” was conceived. To effectively lead producers to adjust to the new market prices, such aids should have been limited in time and degressive.

Structural reform

Already in the late sixties, even before the completion of the agricultural common market, the Dutch farmer and EC Commissioner for Agriculture, Sicco Mansholt, in his famous “Memorandum” acknowledged the sectoral bias of the CAP price policy and proposed a substantial reduction in producer price support, together with targeted financial aids limited to farms showing a potential for adjusting their productive structures and becoming in six years’ time economically viable, i.e. without permanent need of public support.

His recommendations were crystal clear and fully consistent with the long-term interests of farmers, of European consumers and with the interests of the European society as a whole. Such a reform would have dismantled price protection and increased the international competitiveness of European agriculture by focusing on structural, cost-reducing policies. As a consequence of lower price support, land rents and land values would have decreased while short-term unemployment would have increased in more densely populated rural areas. However, temporary policy measures targeted to compensate losers and to favour inter-sectoral mobility of labour would have reduced the cost of structural adjustment for the labour force directly involved in the restructuring of Community agriculture, eventually increasing total employment.

Unfortunately in the early seventies a world-wide energy and food supply crisis temporarily increased agricultural world market prices and reduced the visible budgetary costs of the CAP. Consequently the Council of Agricultural Ministers followed only partially the recommendations of Commissioner Sicco Mansholt by approving three structural directives in 1972, which were loosely implemented by member states in the following years. The level of farm price support was not reduced, and as a consequence financial aids granted to farmers were invested to produce the most profitable commodities, where producer prices (market prices plus production aids) were highly supported, thus creating extra surpluses. Due to distorted domestic prices, what was good entrepreneurial behaviour for farmers turned into a liability for society as a whole.

In the following years, in order to limit the expanding budgetary expenditure, “producer levies” on larger producers and “budget stabilisers”, linking the level of price support to the amount of surpluses, were tried without success.

Short-sighted policies have then prevailed, aimed at eliminating the many symptoms of the persistent “crisis” of European agriculture by means of administrative and quantitative constraint on farm entrepreneurship, without addressing the true origin of the “disease”: the high level of price support, which is unbalanced among agricultural commodities and retains an excessive amount of inefficient resources in agriculture.

2.4 Supply management

After the partially aborted structural reform in the early seventies, the CAP budgetary costs were considered excessively high, even by farm organisations. Instead of eliminating domestic and international problems by reducing border protection and domestic market price support, as had been the case for non-agricultural commodities (Frame 2‑4), the interaction between farm lobbies and policymakers (mainly the Council of Agricultural Ministers) resulted in a variety of different policy measures aimed at reducing domestic supply to consumers in order to maintain an artificially high level of agricultural market prices.

At the time, national intervention agencies were bound to buy at the intervention price all produce offered by EU farmers. Due to the high budgetary cost of the CAP, “maximum guaranteed quantities” (sometimes “areas” under production) were defined in order to maintain the privileges of high price support only to farmers already producing specific commodities. Such measures engendered discrimination among farmers, brought further bureaucratisation of the CAP, increased administrative costs in order to control quantities produced, and created new red-tape for farmers.

Production quotas

Notwithstanding the previously mentioned ingenious ways of using taxpayers’ money to prevent reductions in producer prices in order to avoid a reduction of farm incomes, problems were far from being solved. The existing price support, together with the effects of technological progress increasing yields in crop and animal production at a rate much higher than the expansion of domestic demand for agricultural products,[22] was still creating surpluses. Surplus disposal was costly, difficult to disguise and increasingly criticised by EU policymakers and citizens.

In 1984 a reduction of milk producer prices by 12%, which could have substantially improved the equilibrium between demand and supply in the EU domestic market, was considered “politically unfeasible” by the Council of Agricultural Ministers, and supply management measures were introduced in the dairy market. Production quotas are fully at odds with all principles of a competitive market, totally in contrast with the Treaties, and much more similar to the policy instruments implemented in centrally planned economies[23]. Nevertheless, the threat of milk producers shedding milk in the Grand Place in Brussels and blocking railways and motorways convinced EC policymakers to maintain a high price support for milk by directly reducing domestic production.

While the budgetary costs of surplus disposal were at least rather transparent and perceived by EU citizens, the supply management approach was much less transparent. It is rather difficult to estimate the loss of social welfare in terms of the misallocation of economic resources generated by milk production quotas. Moreover farmers invested economic resources forced out from the dairy sector in producing other agricultural commodities, so creating extra surpluses in other agricultural markets. Consequently the appealing perspective, for some farm organisations, of extending production quotas to an increasing number of agricultural commodities was not advisable, as it was not a solution to the core problem of an excess amount of resources in agriculture.

Land set-aside

The ingenuity of farm lobbies combined with policymakers dealing with farm policies discovered another way of maintaining high levels of price support and disguising the negative economic impact on resource allocation: the “land set-aside”. At the time also top-level EU officials presented the idea of paying farmers not to use part of their cultivated area as an intelligent way of solving the persisting CAP problem. By means of a relatively limited budgetary expenditure granted to farmers in order to convince them to keep part of the land idle, a number of negative visible symptoms of the “crisis of the CAP” could immediately be cut. By limiting supply via land set-aside, the cost of dumping or disposing of surpluses could be largely reduced, and distortions on the international markets and related complaints at GATT-WTO by natural exporting countries would be reduced as well. Moreover the domestic market of agricultural commodities would have found a new “equilibrium” exactly at the level of domestic prices envisaged by CAP policymakers, without any need of reducing domestic protection and support to farmers. Such a rosy picture of the likely effects of sterilising domestic economic resources was obviously appealing and acceptable only in a limited “sectoral” agricultural perspective.

Actually the costs of the CAP for society as a whole were only hidden or disguised, but not eliminated. Paradoxically, if such a policy measure was so intelligent, why not extend it to all economic branches? From an unbiased, non-sectoral perspective it would have been immediately apparent that such policy measure could only generate a higher cost of living for households, a higher level of unemployment, reduced amount of goods and services sold on the market, and eventually a large drop in the rate of economic development and in the welfare level of all citizens. Such macroeconomic effects, if generated by a relatively small sector of production as agriculture (2% of GDP), are not immediately perceivable in the short term and are not so easily quantifiable, as it is the reduction in the budgetary expenditure for disposing of food surpluses or for subsidising exports.

2.5 International problems

Although the domestic price policy of a large country such as the EU was patently distorting relative prices on international markets, for many years EU policymakers were avoiding GATT jurisdiction in their agricultural market policy, by considering the CAP a “domestic” and not a “trade” policy.

Actually in the EU agricultural trade is mainly dealt with by the “Agriculture” Directorate General and not by the “Trade” D.G. as with all other EU trade policies. Such an institutional feature does not favour an unbiased policy, but is rather likely to favour a producer-biased agricultural trade policy. In fact EU policymakers have been much more sensitive to farm interests than to the interests of consumers or EU society as a whole, and have spent much time defending agricultural protectionist policies in international fora.

Frame 2‑4 Decreasing industrial tariffs and growth of international trade

Industrial tariff

Merchandise export in volume

Agricultural tariff

Source: J. Brooks (2000) Agricultural trade liberalisation, perspectives of emerging economies, OECD, Paris

Frame 2‑5 Trend in world export and GDP

GDP

Agricultural exports

Industrial exports

Source: J. Brooks (2000) Agric…….,OECD, Paris

Also due to the diplomatic action of the European Community, trade barriers for agricultural products were not dismantled at the same speed as non-agricultural trade barriers in GATT multilateral negotiations (Frame 2‑4). Such protectionist policies contributed to lower the rate of growth of international trade in agricultural commodities as compared to industrial trade (Fr. 2‑5).

Frame 2‑6 Components of agricultural support in 1998

Data source: WTO, Member states notifications, March 2003

Frame 2‑7 Country Shares in Worldwide Export Subsidy Expenditures, 1998

Data source: WTO, Member states notifications, March 2003

Source: Tangermann (2000)

The EU15 is the largest market of the world for agricultural products. According to available notifications to WTO for almost all members, in 1998 as a consequence of agricultural support the EU15 transfers to farmers accounted for €bn 95, 42% of total world transfers. Such share however was much smaller for green-box transfers (19%) and much higher for amber and blue box transfers (74%)[24] The EU15 was dumping by far the largest amount of subsidised agricultural exports onto the world market (88% of worldwide expenditure in export subsidies in 1998, Frame 2‑6), so depressing and destabilising world market prices and reducing the potential agricultural production and exports of developing countries.[25]

The GATT agreement signed in Marrakech in 1994 aimed at greater liberalisation of world markets and succeeded in the regulation of international agricultural markets.[26]

Blue-box policy measures

In order to reduce the manifest negative effects on the world market of domestic producer prices, without substantially lowering their level, EU policymakers introduced the aforementioned “supply management” policy measures, limiting the domestic supply by quantitative constraints on production or on factors of production.

On the one hand such policies are implemented in order to maintain high producer prices in the domestic market and consequently generate heavy price, investment and structural distortions, so they should be included in the “amber box” and in the reduction commitments on domestic support. However, on the other hand, such policy measures actually reduce the negative impact of domestic price support on international markets, are based on land and headage (i.e. are partially decoupled from the quantities produced, as are not affected by annual variation in yields), are managed through the public budget and, if implemented without any border protection, would not remarkably affect domestic market prices and consumer expenditure on food.

Source: Tangermann (2000)

From a viewpoint of society as a whole, both national and global, such policy measures should be dismantled as they manifestly reduce social welfare. From a sectoral viewpoint by implementing such policy measures it is possible to maintain the producer price support and reduce its negative effects on international markets.

The debate about whether such policy measures should be included in the amber-box was understandably very hot and eventually, in order to come to an agricultural agreement on the Uruguay Round, such policy measures were included in a special “blue box” and exempted from reduction commitments till year 2000. The maintenance of a “blue box” or the inclusion of such policy measures in the “amber-box” is a hot subject under discussion in the current WTO negotiations.

2.6 Recent reforms of the CAP

In the 1992 MacSharry reform of the CAP, approved under the pressure of the Uruguay Round of GATT negotiations, market price support for cereals and oilseeds was substantially reduced.[27] In order to allow farmers to adapt to the new market prices, “compensatory payments” were instituted, per ha (area payments) or per head of cattle (headage payments) in order to compensate for their income losses consequent to the reduction in market price support. In order to ease structural adjustment such payments should have been a temporary measure, degressive and limited in time.

Area and headage compensatory payments were not directly related to the actual annual difference between “target” and “market prices”, but were decided as a fixed amount and limited to the existing production. In the years immediately following the reform, world market prices for cereals increased substantially due to world market developments and also to the set-aside of arable land implemented in the EU, consequently such “compensatory payments” were largely an extra-bonus for cereal producers.[28]

Notwithstanding the recurrent declarations of Ministers and EU Commissioners for Agriculture that “compensatory payments” would have been reduced, as “there was no reason to compensate farmers in year 2000 for price reduction implemented in year 1993-95”, the EU document Agenda 2000 approved by the Council of Ministers in the Berlin summit does not mention any time limit or planned reduction of “compensatory payments” whose name has been changed to “production aids”. Such payments were originally conceived as being included in the “amber box” and ended up being fully included in the “blue box”; as such they have been exempt from reduction commitments until now.

The focal parameter for assessing distortions in the EU agricultural production is the “producer prices” (market prices plus direct production aids), not only the market price. It will not be possible to restructure EU agriculture if producer prices are not reduced. The recurrent CAP reforms were promising a substantial reduction in producer price support, but in practical policy making such reduction was always frustrated. This happened after the “1972 structural reform”, after the 1982 “stabilisers’” reform, and after the 1992 reform of the CAP, to quote only the most important examples.

If in the institutional decision-making process there had existed a “countervailing bargaining power” to defend the interests of consumers and of society as a whole, the short-term bonus on compensation of cereal producers and the recurrent frustration of CAP reforms in reducing price support could probably have been prevented.

2.7 Perspectives

Agenda 2000 and the Berlin summit

In March 1999 the EU Heads of State at the Berlin Summit finally approved the CAP reform package presented in the Commission document Agenda 2000. This package intends to continue the CAP reform initiated in 1992, shifting from supported prices to direct payments in the basic agricultural commodities: cereals, oilseeds, beef and dairy products.

Cuts in price support for cereals and beef should start from the year 2000, while for dairy products the cuts in price support compensated by direct payments will start in the year 2005. Milk production quotas will also be increased, in order to legalise the existing over-quota production. Such decisions, following the approach of the 1992 CAP reform are undoubtedly steps forward in the right direction, however the progress towards the needed reform is rather slow.

Although direct compensatory payments do not fully offset the reduction in domestic market price support, taking into account the increase in productivity due to technological progress and the room for managing the actual implementation of planned policy measures according to producer interests as has happened in the past, we may foresee that Agenda 2000 will result only in a rather limited reduction in existing distortions of market prices, of investments and of agricultural production.

The EU position in the WTO negotiations

According to the position taken by EU Ministers of Agriculture on 27 September 1999, Agenda 2000 will be the “essential element” for WTO negotiations. The EU should secure its world market share and improve market access. The “peace clause” should be maintained as well as special safeguard provisions and the “blue box”.

The EU agricultural ministers declare that they are prepared to negotiate reductions in domestic support and reductions of export subsidies, provided that export credit and other forms of export assistance are included in the negotiations. They intend to provide scope for the “European model of agriculture”, the “multifunctionality” of agriculture, and to protect geographical denominations. Food safety, improved consumer protection (by applying the “precautionary” principle) and fair conditions regarding animal welfare are also included in their position.

The declaration of good intents is commendable, however the EU should try to maintain its world market share by implementing a fair trade policy and not by taking advantage of large amounts of taxpayers money to support its agricultural production. In practice, if the blue-box is not dismantled, the basic approach to the CAP followed in the past, i.e. disguising the negative effects of price support in order to avoid reductions in producer revenues, will continue to be substantially followed in the future.

2.8 Scope and limitations of the analysis

The purpose of this preliminary section was only to give a wide overview of CAP developments, which were coherent with the view expressed by the Consumer Committee, but it was not intended to discuss any policy measure in detail. However the possible “scientific” proof that a policy measure is correct, attaining its objectives, or consistent with the interests of society as a whole, should be given by people proposing or maintaining in force such policy measure.

In the following sections we will not concentrate on minor technicalities, which may often divert the attention of citizens and policy makers from the most relevant issues. This has frequently been a strategy used by sectoral pressure groups to frustrate various policy reforms, which could have resorted in large benefits for society as a whole. An example is the debate on milk quotas developed in the mass media. EU citizens and policymakers were flooded and bored by all the technicalities of computation of quotas, by the fines paid by governments rather than by milk producers, etc., while a basic issue such as the excessive level of milk price support and the consequent annual costs for households was almost always overlooked.

2.9 Summary and conclusions

The CAP was created as an instrument for implementing first a customs union, then a common market and an economic union of European Member Countries in the agricultural sector. According to the Consumer Committee it has been “largely influenced by producers for their own benefit”.

In the early sixties import levies in the Common External Tariff were not set “at the level of the arithmetic average of the duties applied in the four customs territories comprised in the Community” as stated by the Treaty of Rome, but at a higher level, in order to maintain existing farm incomes and avoid painful structural adjustment in Germany and Italy, where the previous protection level was higher. The attainment of high domestic producer prices (market prices and direct payments) in the following years generated a persistent unbalance between a sluggish demand for food items and a rapidly expanding supply. Such unbalance was partially offset by various administrative policy measures disguising the detrimental impact of price support on the social well being of EU citizens.

After the huge budgetary costs spent in 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, policy instruments much less transparent to citizens and much more congenial to a planned economy than to a market-oriented economy.

Such a “status quo” approach, maintaining artificially high producer revenues and preventing structural adjustment in the sector, has remained substantially unchanged and it is still fully present in the Commission document “Agenda 2000” in the outcomes of the Berlin Summit and in the present position of the EU at WTO negotiations. According to this approach, while market prices will be gradually reduced to the international level, the EU budget will grant direct subsidies to farmers in order to compensate them for income losses. Consequently producer returns will not be substantially reduced, maintaining much 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 a CAP-like policy.

The opinion of the Consumer Committee is well grounded. Past developments and future perspectives suggest that the CAP never was, and is not likely to be in the near future, coherent with interests of consumers and of EU society as a whole.

Recommendations

Numerous technical instruments for reforming the CAP have been tried in the past forty years, without long-lasting success in reducing the overall support to agriculture. Consequently the problem of reforming the CAP is not technical but political. Transfers from consumers to farmers consequent market price support are not quantified or even only mentioned by the General Directorate Agriculture in the documentation provided to the EU Council when deciding EU agricultural price policy and in the reform proposals.

A profound institutional reform, creating a countervailing power to producer lobbies by consumer and citizen organisations is needed. Such countervailing political action should highlight the present social costs and perverse income redistribution of the CAP, while fostering a change in the present producer-distorted approach of policymakers and civil servants operating in the various decision-making levels (Community, national, regional, local).

Only radical reform could allow in the future the implementation of a consumer-oriented agri-food policy, operating in the general interest of farmers and of all EU citizens, promoting fair international trade and global welfare.

3. Impact on consumers

This section will answer the question: “What has been the impact of the CAP on EU consumers in the nineties?”

3.1 Terms of the question

Opinion of the Consumer Committee

A policy which is strongly influenced by sectoral pressure groups, pursuing their own interest, generates large costs for the rest of society. This is precisely the case with the agricultural policy in the EU, which costs taxpayers almost half of the Community budgetand, by increasing agricultural and food prices, costs consumers an extra large amount of money”.[29] …...

The burden of price support is proportionally higher for low-income households as they spend a greater proportion of their income on food and the benefit is higher for better-off farmers who produce the most. Exactly the opposite of what is expected from a public policy involving income redistribution. [30]

Issues involved

According to the Opinion of the Consumer Committee, the CAP is costing EU taxpayers about half of the Community budget, costs consumers an extra amount of money, and the burden of this policy is income-regressive, in contrast with the income redistribution policy implemented by all governments. The Committee does not quote any figure related to the cost of the CAP for consumers. This is actually an “invisible” cost generated by the increased price level of agricultural commodities in the EU, and governments do not record it in their national accounts or in any other official statistical records.

Actually some national (USDA) and international (OECD) organisations have been annually publishing estimates of the cost for consumers of agricultural policies in developed countries, where agricultural protection is higher. Such “invisible” transfers from consumer to the agricultural sector are approximately as large as the more “visible” transfers from taxpayers through the EU budget, which have always been rather high, more than 50% of the total EU budget, and even over 70% in the early years of the European Community (Frame 2‑1).[31]

It is rather surprising that although such estimates by the OECD[32] have been available since the eighties, they have been ignored in official documents produced by the DG Agriculture, even when annually providing the European Council of Agricultural Ministers with the extensive documentation on agricultural markets needed to take decisions on the level of market price support to be granted to farmers in the following agricultural year. In this voluminous documentation describing every facet of agricultural markets and of budgetary expenditure, no mention was made of the level of world market prices, nor of the cost for consumers of alternative decisions to be taken on the level of domestic price support. How the Council of Agricultural Ministers could make the right decisions in the interest of society as a whole, if the information provided was missing about 50% of the total cost for EU society related to the decision to be made, is difficult to understand. Such surprising procedures followed on the most important issue of agricultural policy-making could alone justify the statement of the Consumer Committee that the CAP has been and still is biased in favour of producer interests.

In order to perform an unbiased agricultural policy in the interests of society as a whole, it is essential to provide policymakers with reliable estimates both of the budgetary and non-budgetary income transfers generated by the CAP, together with the social costs involved in terms of inefficient resource allocation.

This section will present quantitative estimates of the transfers from households associated to the CAP (§3.2) based on OECD estimates for the EU (§3.3). National and regional public expenditure in favour of the agricultural sector will be mentioned next (§3.4). The income regressive burden on households will be examined by analysing the food and beverages share of households expenditure by classes of income (§3.5), before appraising the perspective future impact of the CAP on consumers (§3.6).

3.2 Effects of the CAP on income distribution

In order to estimate the costs of the EU agricultural price policy for households and especially for consumers, we refer mainly to the work done by the OECD in the last two decades. Experts in the field carry out such work and representatives of the governments of OECD member countries approve the results. The methodological approach used in monitoring agricultural policies in OECD countries has been changed recently; we will concentrate on the more recent approach and estimates.

‘Support’ vs. ‘assistance’

The OECD is computing the flows of income transfers from consumers and taxpayers to the agricultural sector and expressing them either in absolute terms (Euro mn) or in percentage terms. Traditionally relative indicators of domestic support make reference to the border price (or value) of commodities, indicating the tariff or equivalent tariff as a percentage of the border price (or value). It is common practice to indicate the impact of a certain policy measure (border protection or domestic price support) taking as a reference a counterfactual scenario where such policy measure does not exist, i.e. the border price (or value).

On the contrary in the EU, indicators of domestic support in relative (%) terms have often taken as a reference the domestic price, inclusive of the impact of the policy measure to be analysed. OECD is publishing both approaches, calling the traditional indices making reference to border prices “assistance”, and those making reference to the domestic price “support”.[33]

While the border price indicates the marginal opportunity cost of goods for the country whose policy measures are analysed, the EU domestic price does not offer such clear economic meaning, as it is not based on market forces. On the other hand, before the Marrakech GATT-WTO agreement, the EU was extensively protecting its producers by means of variable levies, generating a high level of stability in the domestic market as compared to the world market. This more stable and directly observable price reference could have suggested the use of less volatile “support” indicators.

However the traditional “assistance” approach is more neutral in analysing economic policies as it does not generate the implicit feeling that the decisions of the Council of Agricultural Ministers are a basic starting point for analyses. Our economic analysis is supposed to appraise the policy measures decided by the Council of Agricultural Ministers with reference to economic parameters in the domestic and international markets and not vice-versa. If the indicators of domestic support had been based on border prices, the DG Agriculture would probably have mentioned them in the documentation provided annually to the Council of Agricultural Ministers when deciding on the level of farm price support.

3.3 Citizens’ expenditure in agriculture

The analytical work carried out by OECD in computing the Producer Support Equivalents (PSEs) is based on 18 groups of agricultural commodities[34] (called from now on: PSE-commodities) representing relatively high shares of the final agricultural production of OECD member countries. For the EU-15 such analysis covers over 70% of Final Agricultural Production. Products cultivated especially in Mediterranean countries (Fresh fruit, Citrus fruit, Vegetables, Wine, Olive oil) are missing, together with other minor commodities. In order to estimate the market price support for the whole agricultural sector, the OECD is assuming for the non-PSE-commodities a level of support similar to the average assistance granted to the PSE-Commodities. To improve available information, the market price support of missing non-PSE-commodities was estimated.[35] (Statistical Reference in Appendix).

The level of market price support of non-PSE products in the EU turned out to be lower than the average granted to PSE-commodities[36], consequently our estimates of EU market price support to agricultural commodities (expressed in € mn in Frame 3‑1) are somewhat lower than OECD estimates. Income transfers from consumers to the agricultural sector are variable from year to year mainly as a consequence of the variability of market supply. In order to figure out the impact of the CAP on consumers, it is advisable to refer to the year <2000> indicating the average of years 1999, 2000, 2001.

Frame 3‑1 Components of agricultural support of the CAP

Frame 3‑2 Nominal Assistance Coefficients (NAC)

As shown in Frame 3‑1 and Frame 3‑3, the value of EU-15 agricultural production at farm gate is estimated to be € bn 248. If the market price support (€ bn 53) is detracted, the value of production at border prices is estimated at € bn 195. Including Producer Payments (€ bn 40) the estimated value of Producer Revenue amounts to € bn 288. Public support for EU producers via market price and direct payments is then € bn 93.

Taking into consideration also support granted to agriculture for general services (€ bn 10) and other budget expenditures (€ bn 4), Total Support to agriculture reaches € bn 107. The total expenditure of EU citizens including both the value of agricultural production and total support amounts to € bn 302.

Frame 3‑3 Components of agricultural support in year 2002

Market Price Support

Market price support accounts for 49% of total support to agriculture (Frame 3‑3). By protecting the domestic market via trade barriers at the border, export subsidies and direct surplus withdrawals in the domestic market, domestic prices are maintained at the desired level, involving a transfer of € bn 53 from consumers to producers.

Frame 3‑4 indicates the components of price support by commodity together with their value at border prices in million Euro. The lower par to the frame indicates the per cent support for each commodities.

The most supported commodities through border protection increasing domestic market price are sugar, beef, milk and poultry, while direct payments are especially important for cereals, sheepmeat, beef and olive oil.

The relative level of assistance granted to each commodity is well apparent in Frame 3‑6 where are indicated producer assistance coefficients, taking as a reference the border price. On average Mediterranean products (vegetables, fruit, wine, olive oil) are less supported than continental commodities.

Frame 3‑4 Components of producer support by commodity

Frame 3‑5 Components % of producer revenue

Frame 3‑6 Coefficients of producer assistance

Producer Payments

Payments granted to producers ( € bn 40) are indicated in Frame 3‑4 and Frame 3‑6 by commodity and in Frame 3‑7 by type of payment. The larger amount of producer payments (64%) are based on area planted or animal number. They originated as compensatory payments as a consequence of the reduction in ,market price support after the 1992 CAP reform. About 17% of producer payments are then based on input use, largely granted at national level.

Frame 3‑7 Components of Producer Payments

General Services

Budget expenditure in general services related to agricultural policies is estimated in € bn 10. The largest share, one third, of such expenditure flows to services concerning marketing and promotion of agricultural production, almost one fifth (18%) is spent in infrastructure, 16% both in research and development and in public stockholding.

Frame 3‑8 Components of General Services

Other Budget Expenditure

Various components of this last part of support related to agricultural policies refer to grants to firms in the food chain. Their effect is mixed, part contributes to increase the producer price, part contributes to lower consumer prices and part is absorbed by intermediaries in the food chain. OECD classifies such expenditure as transfers to consumers from taxpayers, however the market impact of at least some items, such as the distillation of wine, is much more in favour of producers than of consumers.

Developments of support to agriculture

The various components of assistance to agriculture are indicated by commodity in Frames 3‑1 to 3‑3 for the last years and in Frames 3‑4 and 3-5 for the last decade both in absolute and in relative percent terms. In Frame 3‑5 we may notice that after the 1992 CAP reform market price assistance (amber-box) was reduced, but such reduction was fully compensated for by output related payments (largely blue-box) in order to avoid a reduction in producer revenues and incomes, while on the whole assistance was increasing.

Frame 3‑9 Transfers to agriculture per 4-member household (1990-2001)

A more detailed description of inter-sectoral income transfers generated by the CAP is indicated for the year 2000 in € bn in Frame 3‑6 and in Euro, making reference to a 4-member family budget, in Frame 3‑7. Besides the indicators suggested by OECD: Producer Support (assistance) Estimate (PA), Consumer Support (assistance) Estimate (CA), General Services Support (assistance) Estimate (SA) and Total Agricultural Support (assistance) Estimate (AA), we have introduced the symmetric indicators of Taxpayer Assistance (support) estimate (TA) and Households Assistance (support) estimate (HA).

The total burden of the CAP for EU-15 households is estimated at € bn 102, almost evenly distributed between cost borne by consumers (€ bn 47) and cost borne by taxpayers (€ bn 55). Expressed in more easily perceivable terms, such burden is equivalent to an average cost of € 270 per person, € 1080 for an average 4-member family budget (13% of consumer expenditure on food, beverages and tobacco), subdivided in € 500 spent in higher consumer prices and € 580 in higher taxes.

Frame 3‑10 Cost of agricultural support per EU citizen

Frame 3‑11 Transfers per Annual Work Unit (AWU)

Developments in assistance

Frame 3‑8 compares the amount of assistance to agriculture in the last decade with some other relevant sectoral parameters such as the agricultural Value Added, and the net “income from labour input” in agriculture. Assistance to the agricultural sector has been on average higher than the “Net Agricultural Value Added” at market prices and often higher than the “Income from Labour Input”.

It is rather surprising that, notwithstanding the recurrent caustic critics of the CAP, the total amount of assistance is not diminishing as a proportion of the Net Agricultural Value Added. The amount of assistance per annual work unit is increasing as well, not only at current prices but also at constant prices (Frame 3‑9). On the other hand the cost of agricultural assistance per person in the EU-15 is slightly decreasing at constant prices, as well as the average amount of assistance received per ha of Utilised Agricultural Area (Frame 3‑9).

3.4 National and regional assistance

Costs borne by EU consumer-citizens as a consequence of the CAP are not only those previously identified, actually an additional burden comes from the expenditure of national and regional governments in agriculture. Unfortunately systematic and consistent surveys on such budgetary transfers and on the related administrative costs associated to the implementation of the CAP together with national and agricultural policy measures are not available. [37] Nor is available EU-15 comparable information on other less visible transfers from households to the agricultural sector, such as the rebate on farm taxes and social contributions. In Italy (Frame 3‑10, Frame 3‑11 and Frame 3‑13) the estimated average annual burden for households associated with agricultural policy in 1996-98 (Ecu bn 23.6) was almost evenly distributed between community budget expenditure (22%), financial rebates (22%), and national and regional governments’ expenditure (21%), while transfers from consumers due to price support accounted for over one third (35%) of the total burden borne by Italian households.

Frame 3‑12 Italy, 2001, Transfers to agriculture (Euro mn)

Frame 3‑13 Italy, 2001, Components % of transfers associated to agricultural policy

In Frame 3‑10 the assistance to Italian agriculture is classified according to two criteria: the administrative institution involved and the target of policy measures involved. The largest share of the total cost born by households flows to producers as increased market price (35%) or aids to production (25%). Only 3.2% is directly targeted to farm investments. Indicators of the transfers from households per Italian citizen, at 1998 prices, per full-time worker and per ha of cultivated land are substantially stable since the 1992 reform of the CAP (Frame 3‑12).

In Frame 3‑13 available information on total assistance to agriculture for the years 1996-98 is compared to an estimate of such assistance utilising pro-rata the commodity assistance computed for the EU-15, mainly based on information collected by OECD in all EU-15 Member Countries.

4.3 Redistribution of income by farm size

The distribution of EU farms by farm size shows a concentration in small-size classes (Frame 4‑3), while the agricultural workforce is more evenly distributed. Over one third of EU-15 farms and 17% of the workforce are included in the smaller size class, less than 2 ESU. As a consequence the flow of income transfers and area payments are very concentrated in a small number of larger farms. Among Member Countries The Netherlands show the highest level of homogeneity among its farms (concentration ratio 45% in Frame 4‑6) while Italy shows the highest heterogeneity (concentration ratio 72%), almost a bi-modal distribution with relatively fewer average-size farms.

According to estimates based on available statistical information, 35% of all transfers related to the volume of production benefits the 3% of larger EU agricultural holdings, while 63% of such transfers benefits the 11% of larger EU agricultural holdings (Frame 4‑5). On the other hand, only 5% of production-related transfers benefit the 50% of smaller agricultural holdings. However as some of the farms classified in the smaller size classes are managed by retired people or run as a hobby, they are not fully oriented to produce for the market.

Such concentration is less apparent if labour is taken as a reference: 35% of the labour force, working in farms smaller than 4 ESU benefits from 7% of total transfers while 14% of total labour, employed in the largest farm size class (over 100 ESU), benefit from 35% of total benefits.

Between 1990 and 1997 the concentration of gross incomes and transfers was not reduced, on the contrary in the whole Union there has been a slight increase, more apparent in the concentration ratio making reference to the number of farms (Frame 4‑6).

Only part of such transfers received by farmers increase the income of the farm household, part are absorbed by higher input costs and by the lower marginal productivity of resources, especially in inefficient under-sized farms where modern technology management and machinery cannot be properly applied. The relative amount of these social costs due to delayed structural adjustment will be discussed in the following sections of the report (section 8.2).

4.4 Benefits for landowners

Benefits of price support flow in larger proportion to factors of production whose supply is rigid to price changes. Supply of farmland is usually rather rigid, as a consequence land values have reached very high levels in more fertile, irrigated areas and in better-off countries (24000 €/ha in the Netherlands, 53000 €/ha in Luxembourg) parallel to high levels of land rents (338 €/year in the Netherlands, 420 €/year in Greece).[42]

The 1992 reform of the CAP further concentrated farm support on landowners by tying compensatory aids to the cultivated area and did not dismantle some manifest existing rents by maintaining quotas in milk and sugar production. For example, the market price of milk quotas is higher than the current value of milk produced in one year in the Italian plain areas of Emilia Romagna and is more than twice the value of milk in the Lombardia region.

Non-transparent transfers

The income redistribution generated by price support policies is not transparent. Farmers are almost always implicitly convinced that market prices are indicators of the per unit value of production to consumers and to society as a whole. This is also a consequence of the very limited information among farmers on the actual level of price support concerning the commodities produced. Area or headage payments are more transparent as they are clearly identifiable in budget expenditures.

In the Commission document Agenda 2000, area and headage payments are considered as substitutes for price support and farmers perceive them as justified, as was the previous price support. This perception is very detrimental to the aim of seriously reforming the CAP. It should be clear to everybody that, according to the general principles stated in international declarations by the EU, direct payments related to output should be under reduction commitment, unless they are targeted to specific objectives in the interest of farmers and of society as a whole, such as a positive impact on structural adjustment or the amount of positive externalities (environmental, territorial, etc.) produced by farming.

4.5 Perspectives

Agenda 2000, while reducing market prices for cereals, beef and dairy products, will not substantially reduce producer price support in the coming years, at least until 2006. Moreover milk and sugar production quotas have not been dismantled and land set-aside will be maintained at least for the next few years.

As a consequence the present distribution of farm incomes will not change substantially. The ongoing shift from market price support to area payments will increase the share of benefits for landowners. Owners of farmland, if they are not farmers, are usually better off than farm workers, consequently income distribution within society is not going to improve.

4.6 Scope and limitations of the analysis

The estimate of the impact of CAP on different farm sizes could be improved by more detailed analyses on the different shares of farm costs and output-related transfers for each farm type.[43] However the overall conclusion of inequitable income redistribution would not change.

Sometimes farm organisations claim that reduction in farm prices are not reflected in consumer prices due to the non-competitiveness of firms in the food chain (wholesalers, food processors, retailers, etc.). Transmission of price changes between producers and consumers may be delayed in the short term, as intermediaries try to take advantage of volatile prices. However as a general rule, in the long term, if price changes are permanent, new market equilibria guarantee a rather good transmission of price changes between producers and consumers.[44]

4.7 Summary and conclusions

According to the Consumer Committee: Price support policies as well as area payments introduced by the 1992 CAP reform and developed in Agenda 2000 benefit mostly large landowners while their impact is much lower on the income of small farmers and negligible on landless workers.

Income transfers generated by the CAP price support policy are still largely proportional to the volume of production. Area and headage payments are slightly less directly proportional at farm level, but are substantially proportional to the volume of production at aggregate level. The resulting income redistribution is perverse as it favours better-off farmers and landowners while poorer farmers and landless workers benefit only in minimal proportion from the transfers flowing to the farming sector.

According to estimates based on available statistical information, 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. Between 1990 and 1997 the concentration of gross incomes and transfers increased slightly, especially making reference to the number of farms. However, part of farms classified in smaller size classes are managed by retired people or run as a hobby, they are not fully oriented to produce for the market.

The concentration of gross farm incomes and of transfers from households associated with the CAP price support policy is lower if the labour force is taken as a reference. Approximately 7% of total transfers flow to 35% of total labour, working in the smallest farm size classes, while 35% of total transfers flow to 14% of the labour force working in the largest farm size class.

Only part of the transfers generated by price support policies increase the income of the farm household, the rest are absorbed by higher input costs and by the low productivity of invested resources, especially in under-sized marginal farms where modern technology, management and machinery cannot be properly applied.

Benefits of price support flow in larger proportion to factors of production whose supply is inelastic to price changes. Supply of farmland is usually rather rigid, consequently farm values have reached very high levels in more fertile, irrigated areas and in better-off countries. The 1992 reform of the CAP further concentrated farm support on landowners by tying production aids to cultivated areas and did not dismantle some existing rents by maintaining quotas in milk and sugar production.

Price support transfers are not transparent, as they are not easily identifiable by farmers as a public subsidy to agricultural production and generate misunderstandings on the actual value of agricultural production for society as a whole. Moreover, at present such transfers are not well targeted to any specific allocative, redistributive, or other objective of interest to society as a whole, which also prevents an efficient attainment of the objectives stated in the Treaties.

To conclude, the uneven income redistribution of price support policies reported by the Consumer Committee is fully grounded on empirical evidence.

Recommendations

In order to improve the income distribution operated by means of agricultural policy measures, the advice of the 1987 OECD Committee for Agriculture at Ministerial level should be followed: “ … 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”

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. The present agricultural price support policy is generating non-transparent redistributive effects contrary to principles stated in the Treaties.

By decoupling agricultural support from the volume of production and targeting each policy measure to a specific objective, the overall results in terms of better resource allocation and income redistribution would be highly improved. Income transfers would be much more transparent, would not necessarily be related to the volume of production but, if income redistribution is the objective pursued, could be inversely correlated to the level of farm incomes. Otherwise they could be directly correlated to the positive impact on structural adjustment or to the amount of positive externalities (environmental, territorial, etc.) produced by farming.

5. Impact on agriculture

This section answers the question: What has been the impact of the CAP on the agricultural economy in the European Union since 1992?

5.1 Terms of the question

Opinion of the Consumer Committee

Distorted prices generate inefficient decisions in the short run and distorted investments, worsening the performance of the economy in the long run. ………

Quotas have contributed to a reduction in surpluses and the related budgetary cost, but increased considerably the less visible economic costs to the development of a competitive and sustainable agricultural sector. Current policy is not solving existing agricultural problems but is rather worsening them or at least postponing their solution. Using taxpayers' money to pay farmers in order to set aside agricultural land is a clear misallocation of resources both by wasting public money and by not exploiting a share of the available land.

Issues involved

The CAP is made up of a large number of policy measures generating different effects on European agriculture; we have then classified policy measures in main groups, according to the traffic-light approach used in the GATT negotiations (section 5.2).

The overall impact of price support measures on agricultural firms is well described in the traditional economic theory of the firm, both in the short term, when important factors of production such as the farm size are fixed, and in the long-term, when all factors of production can be changed. First we will describe how the effects of producer price support on a specific commodity are spreading in the agricultural sector in the short term, when structural changes do not take place (section 5.3).

We will then analyse the likely effects of price support on structural adjustment by describing how some key types of firms are likely to react to policy measures increasing producer prices in the long run (section 5.4). Such theoretical analysis should highlight how the farming sector, which is made of a large variety of firms due to different regional, ecological, social and economic conditions, is likely to react to the most important policy measures implemented by the CAP.

The quantitative analysis carried out in the following sections will verify if the results of the theoretical analysis of price support policy are supported by statistical evidence (section 5.5), and will identify some redistributive effects of green-box policy measures (section 5.6).

5.2 Transfers generated by agricultural policies

The “cost of the CAP” for EU citizens should be basic information, known to policymakers and bureaucrats involved in agricultural decision-making and should be mentioned frequently by mass media dealing with European economic policy. This is not the case in Europe where such information is rarely quoted and most of the time is not quoted in correct terms.

In publications issued by the Directorate-General for Agriculture[45] the “costs of the CAP” are the “budgetary” costs indicated in row 14 of Frame 5‑1 computed by subtracting from the FEOGA budget the proceeds of levies from imported agricultural products. According to these calculations, the cost of the CAP in 2000 was € bn 39.5, equivalent to € 105 per citizen per year. Such a view is however consistent with the fact that the Directorate-General for Agriculture usually does not mention the cost for EU consumers generated by market price support.

If we take into account the cost borne by consumers for market support policies in 2000 we must add an extra € bn 51, equivalent to € 134 per citizen, giving a total of € 257 per capita. However this estimate includes only the expenditure of the EU policy and budget. OECD is annually publishing estimates of the cost of agricultural policy in the EU including national expenditure associated to the CAP policy measures. Ministries of Agriculture of Member Countries provide such figures on national expenditure, which are frequently considered under-estimated by experts. Including these extra costs (€ bn 11.4, equivalent to € 30 per capita) the total cost of agricultural policy amounts to € bn 102, equivalent to € 270 p.c. in 2000. Such estimates do not include various transfers generated by regional policies and by national policies and rebates on taxes and social contributions. Estimates of these, carried out for Italy, bring the annual costs associated to agricultural policies per Italian citizen at € 446. Administrative costs, at Community, national, regional and local level, are not included in such estimates.

Frame 5‑1 EU-15, Transfers associated to agricultural policy (€ mn)

Price support policies

We will focus our analysis of the impact of the CAP on European Agriculture at first on the “price support policies” which are usually commodity-specific and under reduction commitment at the WTO, i.e. included in the amber-box. Such policies still account for the largest share of the costs borne by households: € bn 82 in 2000, about 81% of the cost generated by the CAP. If blue-box policies are excluded, the amber-box policies account for 61% of the total cost borne by EU households.[46]

Blue-box policies

According to the EU notification to WTO, in 1999 production-limiting blue box policies were estimated at € bn 20.5, about 20% of the total amount of transfers generated by price support policies.

Green-box policies

According to the EU notification to WTO, in 1998 green box policies, exempt from reduction commitments, were estimated at € bn 19.2, about 19% of the total amount of transfers generated by price support policies.

5.3 Short-term impact of price support

Reference scenario

In the upper panel of Frame 5‑2 are shown six interrelated agricultural markets[47]. An open exporting market (commodity Q), the market of commodity J substitute to commodity Q at consumer level, the market of another commodity (K) competing with Q at production level for available factors of production. Moreover the markets of three factors of production are indicated: land (L), labour (B), and other inputs purchased by farmers (N), e.g. fertilisers, fuel, feed, water for irrigation, etc.

In the reference scenario the government does not intervene and domestic prices are either equal to world market prices (Po= Pw for commodity Q) or generated by the equilibrium reached between domestic demand and supply if markets are not open to trade.[48]

Effects of an export subsidy

The middle panel indicates the effects of granting an export subsidy (P-Pw) to commodity Q. It is now profitable for exporters to buy in the domestic market, to cash the export subsidy, and sell in the world market until the domestic price increases by the same amount as the export subsidy (DP, i.e. from Pw to P). At higher prices consumers reduce the amount of domestic demand of Q (from Qd to Qd’, or DQd) while producers increase the amount supplied (from Qs to Qs’, or DQs) resulting in a convergent increase of exports of commodity Q, (Qd-Qd’ + Qs’-Qs).

The impact of such changes on the incomes of producers, consumers and taxpayers is indicated in the lower panel of Frame 5‑2[49]

Frame 5‑2 Impact of price support (export subsidies) on agriculture in the short term

Besides these effects on the market of commodity Q, the higher price for commodity Q is likely to increase the demand for its substitute at consumption level, commodity J, whose price will increase. The increased production of commodity Q will increase the demand for factors of production and their market price.

The price increase is related to the elasticity of factors’ supply, for land the supply is usually rather inelastic, for labour it is largely dependent on local markets. For purchased inputs the elasticity of supply may be much higher and even infinite for a small country if the input is internationally traded in free competition, in this case the domestic price will not change.

However the increase of factor prices in the domestic market will be reflected in the cost of production for farmers and will shift to the left the supply functions of commodities who compete on the factor market, for example commodity K, whose price is likely to increase. Such a shift in supply is also likely to affect commodity Q,[50] leading to a new equilibrium of prices and quantities produced in the domestic market.

The impact of a price support policy is therefore diffused among agricultural commodities and in the markets of the factors of production, especially the most important, land and labour, which present specific characteristics according to the geographic location of the farm.

Such effects occur among agricultural firms in the short term, when farmers cannot change some factors of production (e.g. the size of the farm, the type and use of buildings and machinery, the amount of family or hired labour force, etc.).

5.4 Long-term impact of price support on structural adjustment

Let us have now have a brief glance at the likely behaviour of agricultural firms in the long-term, when all factors of production may be changed according to the decisions of the entrepreneur.

Reference scenario

Frame 5‑3 presents the “reference scenario”, with no government intervention, free trade and open competitive markets, where domestic market prices may be considered equal to world market prices (Pw), assuming for simplicity no transport costs. Internationally competitive firms would develop in this reference scenario, although with different average and marginal costs, especially in agriculture where technology and sizes are usually different among firms in the same country.[51]

Firms are indicated by their short-term average (continuous line) and marginal (broken line) cost curves. Firms of type A are very efficient at exploiting the existing technology and scale economies, consequently their production costs are as low as possible, given the existing technology and local economic environment.

By equalising its marginal costs to the market price[52] Pw, a firm of type A produces the volume qA, and the difference between its revenues (qA*Pw) and its costs (qA*acA) results in normal profits (qa*Pw-qA*acA). A firm of type B does not exploit all its economies of scale as its size is smaller than firm A, (qB<qA), it operates on the market without making any profits. Total cost (acB*qB) equals total revenue (Pw*qB). Between firms B and A various other firms would develop in the market with intermediate characteristics of their short-term cost curves.[53] Firms larger than A may also develop although presenting some scale diseconomies, as their size is too large and their short-term costs are higher than the costs of firm A. Such firms are not shown in Frame 5‑3 for the sake of simplicity, however they also earn competitive profits as long as their average costs are lower (or equal to at the margin) than the world market price Pw.[54]

Price support scenario

Frame 5‑4 indicates the “price support scenario”, i.e. the impact of a price support policy increasing the domestic market price from Pw to Pc by means of border protection (e.g. a tariff equal to Pc-Pw if the country is net importer, or by granting also an export subsidy of the same amount if the country is a net exporter).

Such a price support policy generates four major effects.

(a) Creates rents[55] (unearned income) in efficient firms that could be economically viable in a free market scenario.

(b) Allows the creation of new inefficient firms operating with higher average costs. Such firms are commonly originated by splitting former efficient farms among heirs, or as a consequence of Community or local policy measures discriminating in favour of smaller farms, etc.

(c) Allows a consistent misallocation of available economic resources. A large share of income transfers from consumers and taxpayers will not benefit farmers but will be turned into social dead-weight losses as a consequence of the inefficient production structure of technically and economically inefficient farms.

(d) Stiffens the production structure and, by increasing land rents, generates problems in the reversibility of such structural change.

a) Creation of rents in efficient firms

A first effect of price support policies concerns firms already efficient, such as firm A and B in Frame 5‑3 and Frame 5‑4, economically viable without government intervention. For such firms the increase of market prices generates a windfall gain as their production can be expanded (from qA to qA’ and from qB to qB’) and sold at a higher price (from Pw to Pc). The new difference between their revenues (qA’*Pc) and their total cost (qA’*acA’) indicates the profit in the “price support” scenario (qA’*(Pc-acA)). This outcome does not greatly affect the efficiency of resource allocation, but may rather create inequity in terms of income redistribution.[56]

b) Creation of inefficient new firms

In the new market conditions, two types of inefficient firms are likely to develop. Firms of type C are technically efficient but their size is too small to allow the implementation of a better management capable of reducing average costs by properly exploiting scale economies. Firms of type C in Frame 5‑4 are surviving in a protected market without making profits above normal, as their average cost per unit of output is equal to the market price. However, for society as a whole, other efficient firms (e.g. of type B or larger) could produce the amount of output (qC) at an average cost equal to or lower than Pw. The amount of economic surplus qC*(Pc-Pw) is then lost for society as a whole and for firms of type C. This is a clear example of the inefficient resource allocation generated in the long term by price support policies, we will see in the following sections how many small and inefficient farms are maintained in the market by the CAP price support policy, especially in Southern European countries.

Firms of type D are large enough to exploit scale economies, but high market prices allow them to use backward and inefficient technology without going bankrupt. Also in this case available resources are misused. Actually firms of type D, if properly managed, could produce at much lower average costs (between firm B and A), but by using inefficient techniques of production, although making some profits (qD*(Pc-acD)), they are losing a large economic surplus (qd*(acD-Pw)) which could have benefited both type firms D and society as a whole.

Frame 5‑3 Long-term cost curve: no government intervention

Frame 5‑4 Long-term cost curve: impact of a price support policy

c) Misallocation of available resources and social costs

Under conditions of price support, foregone surpluses of firms due to higher production costs are lost not only in private terms for firms C and D but for society as a whole as well, as income transfers to producers turn into higher production costs. Actually consumers pay a higher market price in order to benefit farmers, but only a share of the extra price paid by consumers is transferred to producer incomes.

There are many reasons why, especially in agriculture, firms of type C and D, if not compelled by lower market prices, do not fully exploit more efficient technology and scale economies by adjusting their size. A large share of European farms are “family” farms, based on family labour and managed by the head of the family, who is often over 60 years old.[57] His propensity to invest in new technologies and in adjusting the size of the farm to more advanced standards are often much lower than in the case of younger farmers. His willingness to learn new technologies is likely to be lower as well. Moreover, in mere economic terms, he would not be able to enjoy all the benefits of long-term investments, as he is instead looking forward to retirement. His farm will therefore remain, or become, type C and D. Moreover numerous hindrances set by national and local regulations on the land and labour markets are likely to reduce the propensity of farmers to adjust the size of their farms if not compelled by market forces.

The CAP is actually subsidising early retirement and young farmers in order to favour structural adjustment. From the point of view of society as a whole, it is rather inefficient to aim at a better structural adjustment by implementing costly government interventions while, on the other hand, by manipulating market prices, the same government prevents market forces from attaining the same structural adjustment.

Frame 5‑5 Distribution of employment by age classes (%) year 2000

d) Structural rigidity and costly reversibility of structural change

When price support policies are implemented for subsequent years, inefficient farms (too small or too large) may survive and delay the spread of new cost-reducing technologies, while making some profits. Moreover producer gains are largely capitalised in land values as will be discussed in the next section. Such high land values are one of the major political obstacles for reducing price support, because, if market prices are reduced, farmers owning their land would not only lose in terms of annual receipts, but also, and sometimes much more, in terms of reduced market values of their land assets. This has been one of the main causes of the failure of previous reforms of the CAP. Such detrimental experience in EU-15 should at least prevent the extension of the present acquis communautaire to CEECs, where land values are still rather low but would rapidly increase if CEECs have to implement the CAP.

5.5 Empirical evidence

The outcome of the above investigation, based mainly on the economic theory of the firm, finds empirical support in the analysis of the structural development of European agriculture in the nineties.

Slow structural adjustment in the nineties

Frame 5‑6 shows the increase of production in European farms per Member Country by comparing the average net output (Standard Gross Margin, SGM) per holding in 1990 and in 1997 at constant 1998 prices. Other indicators of changes in productivity are shown in Frame 5‑7, where the annual rate of change (arc) of the output per holding and per full time farmer equivalent (AWU) are indicated as well, together with an indicator of the change in productivity net of variations in farm labour, which is more directly related to structural adjustment.[58]

The average size of farms as indicated by their SGM is very different among EU Member Countries. Northern Countries present a much better structure of agricultural production with relatively high SGM per holding (€ 103,000 in the Netherlands, 70,000 in Denmark, 58,000 in the UK, 57,000 in Belgium, 43,000 in France and Luxembourg, followed by Germany and Ireland). On the contrary Mediterranean Countries present a very low SGM per holding (€ 7000 in Greece, 7900 in Portugal, 9800 in Italy, 13000 in Spain).

The average annual increase of SGM per holding between 1990 and 1997 at constant prices (1998) was only 1% in Europe and was negative in some Member Countries (Italy -3.4%, Greece –0.6%). Taking into account the rate of reduction of the labour force which, if matched by a higher reduction in the number of holdings, would have increased the labour per holding, two thirds of Member Countries show a regression in this feature of structural adjustment, together with the European average (-2.9%).

In addition to this slow or even regressive structural adjustment, the coefficient of variation of average SGMs among EU Member Countries remains constant or slightly increasing, consequently it does not indicate any significant convergence. Partial indicators of physical parameters (hectares of land and number of dairy cows per holding) in various member countries shown in Frame 10‑2 provide an insight into other aspects of the long-term impact of the spread of new technologies in farming. According to such partial indicators, in the nineties we notice a relative improvement of farm size and some convergence between Member Countries.

Frame 5‑6 Change in average Standard Gross Margin per holding (1990 vs. 97, Euro 1999)

Frame 5‑7 Structural change in member countries (SGM/holding, 2000 prices)

However the price support policies implemented by the CAP, together with the more recent supply management measures (production quotas and land set-aside) further hindering mobility in land and labour markets, seem to have had a strong impact on EU agriculture by preventing structural adjustment and convergence among Member Countries, exactly the opposite of what citizens would have expected from the creation of a European customs union, a common market and eventually the implementation of a Common Agricultural Policy.

Divergent negative effects on farm structure

According to the previous theoretical analysis, price support, together with an overall hindering of structural adjustment in time, is creating new land rents and increasing land values in regions and countries where the farm structure is already good and efficient, while maintaining or worsening the structure of agricultural production where it is already inefficient i.e. with a large number of too small farms[59] as compared with the optimal size which would maximise farm profits in existing conditions of technology and local amount of available resources. The Netherlands and Italy are examples of such divergent negative effects generated by the CAP in the nineties.

Frame 5‑8 and Frame 5‑9 indicate the distribution of key parameters on the structure of agricultural production in The Netherlands and in Italy with reference to classes of farm size (European Size Units, ESU), allowing the comparison of existing situations in 1990 and 1997. Between these two years, in the Netherlands the distribution of holdings by farm size has shifted towards larger farms. This shift has been rather clear in the distribution of the labour force, of the agricultural area and of output (SGM) per farm, all parameters shifting towards the upper class of more productive farms, over 100 ESU.

Notwithstanding a slow average structural adjustment in Europe, in The Netherlands, where the existing farm structure was already efficient, both before the institution of the EEC as well as at the beginning of this decade (only 15% of holdings were classified below 8 ESU), the existing structure has improved and farm incomes, largely supported by the CAP price policy, have been distributed in fewer hands, increasing land rents and land values.

This statement is confirmed by information shown in Frame 5‑10, where The Netherlands is the EU Member Country where disposable income of farm households is much higher by far (almost three times) than the average income of all households.

Frame 5‑8 Indicators of structural adjustment in The Netherlands and in Italy (1990-1997)

Frame 5‑9 Indicators of structural adjustment in The Netherlands (1990-1997)

Frame 5‑10 Average disposable income of agricultural households (all households =100)

Source: EU Commission (1997) p.21

Frame 5‑11 Indicators of structural adjustment in Italy (1990-97)

On the other hand the Italian situation, shown in Frame 5‑8 and Frame 5‑11 with the same indicators, looks much more gloomy. The structure of farm production was much worse than in The Netherlands both at the institution of the CAP and at the beginning of this decade (over 80% of holdings were classified below 8 ESU). Notwithstanding such favourable starting point for a rapid structural adjustment, in the seven years examined the distribution of basic structural parameters remained almost unchanged, as clearly shown in Frame 5‑11. Such differences between The Netherlands and Italy cannot be the result of part-time farmers cultivating smaller farms; actually part-time workers make up a larger share of total employment in agriculture in The Netherlands (31%) than in Italy (13%).[60]

The CAP price support and supply management policy measures, together with substantial indirect support of agricultural population granted by national and regional budgets (as shown in section 3.4) seem to have strongly hindered structural adjustment, especially where farm restructuring was more necessary.

Commodity-specific impact of price support

Further evidence of the short- and long-term theoretical outcome of the previous analysis is given in Frame 5‑12. The level of producer price support (market price and commodity-specific subsidies) provided by the CAP for each farm type is not positively correlated to the value of production (and related income) per full time equivalent worker (AWU).[61]

Such evidence is consistent with the previous theoretical analysis. In the very short term producer price support actually increases farm incomes, however after a few years new market equilibria take place, and the commodity-specific benefits attract resources and generate increases in the prices of inputs and of other commodities (5.3). In the long run a major effect of price support is to retain labour in agriculture and prevent structural adjustment towards more economically viable farms, which exploit scale economies better.

Frame 5‑12 Relation between Standard Gross Margins per AWU and producer support

Factors of production, labour in particular, flow (or remain) where public support is higher and, given the limited amount of agricultural land, prevent re-structuring towards more efficient farms, with a higher amount of land and capital per farmer and/or farm worker, able to produce at lower average costs and to provide higher incomes per unit of labour.

As a consequence, in the long term, the higher the producer price support the less efficient seems to be the farm structure, the higher the disguised unemployment, and the lower (or at least not higher) the average farm incomes. In the long run the high cost borne by households in supporting agriculture does not fully result in higher farm incomes but largely results in less efficient production, i.e. in a dead-weight loss of welfare for society as a whole.

Taking into account the fact that annual CAP transfers to the agricultural sector by means of price support and direct payments related to the volume of production are rather high (as indicated in section 3), these results are rather alarming. The non-correlation between rates of farm assistance and average SGM per AWU could indicate that such huge transfers may be not only ineffective in increasing average farm incomes and in solving farm problems but in the long run may have a negative impact on farm structural adjustment and on the average farm income per labour unit.

The waste of economic resources related to the present distortion of market prices is even more manifest if we consider that the CAP on the one hand encourages domestic supply by supporting high market prices for important commodities such as milk and sugar, and on the other hand enforces production quotas limiting supply by using inefficient administrative policy measures which are very expensive not only to the EU budget but to national and regional public budgets as well. The red-tape extra work for farmers and the amount of fraud emerging as a consequence of the quota regime just highlights other negative aspects of the short-term inefficiency of the CAP.

Alternative price policy

Squeezed between such a rapid increase in supply and a stagnating demand, economic resources, especially labour, should have been let free to flow to economic activities where consumer demand was growing. As a consequence, levels of labour productivity and farm income would have been comparable to other branches of the economy without any need for a permanent public assistance. The government could have facilitated such inter-sectoral labour mobility by supporting the economic and social transition costs of farmers changing profession, while maintaining environmental and demographic standards in rural areas by means of targeted regional and environmental policy measures.

On the contrary the CAP has operated in a short-term perspective, supporting farm prices and incomes in order to avoid short-term rural-urban migrations and social distress. In so doing a large amount of disguised unemployment has been created in agriculture, price support has capitalised in land prices and the farm structure has been frozen, especially in low income Member States in Southern Europe. Consequently producers have been hindered in developing their farms and for young people not in farming it has become more difficult to enter the profession.

5.6 Green box policy measures

The majority of green-box policy measures are financed by the FEOGA-guidance fund. As a general rule green-box policies do not have an impact on the whole EU market as price policies do, but are more regionally defined and are financed after the evaluation of a project or a regional plan. Consequently the appraisal of their efficiency and equity impact on agriculture and on the local economy is different project by project and plan by plan.

Usually structural funds are earmarked for agricultural projects, reducing the inter-sectoral mobility of resources at local level. Monitoring of projects involving structural funds is very poor, especially in methodological terms. Cost-benefit analysis is used only on 4% of project evaluations[62] and very few analyses use shadow prices in order to appraise the social value of agricultural output. Projects implementing a correct cost-benefit analysis between alternative agricultural and non-agricultural investments are very rare.

Frame 5‑13 Redistributive impact of FEOGA-Guidance among member countries (1997) rifare

Frame 5‑14 Redistributive impact excluding Germany and Italy (1997)

By identifying the correlation between the net transfers[63] from each country and the average GDP per capita, as indicated in Frame 5‑13, we may draw some conclusions on the impact of the FEOGA-Guidance expenditure on income redistribution among Member Countries. The resulting correlation is negative, indicating on the whole a prevalence of transfers from better-off countries (on the right side of the frame) towards worse-off countries (on the left side of the frame); however the correlation is very poor (R²=0.05). A similar correlation may be identified with reference to the average gross agricultural income per full-time farmer equivalent (SGM per AWU) showing that there is a prevalence of transfers from countries where agriculture is on average richer towards countries where agriculture is poorer. The results are slightly better in statistical terms (R²=0.17).

However, this poor performance of the impact of FEOGA-Guidance expenditure on regional income distribution and on EU cohesion is mainly a result of expenditure in Germany (receiving more financial aid than expected, probably due to the ex-DDR regions) and in Italy (receiving less financial aid, probably due to its less effective public administration and to the competition of national and regional aids to agriculture). The same correlation among EU Member countries without Germany and Italy shows a much higher financial transfer from richer to poorer countries, as shown in Frame 5‑14 (R²=0.56)

The impact of the FEOGA-Guidance expenditure on the convergence of regional per capita incomes is therefore positive, favouring European cohesion, however it could be improved by a better use of available funds, especially in Germany and in Italy.

5.7 Perspectives

The future impact of the CAP on EU agriculture is largely dependent on the outcome of the new round of WTO negotiations. The basic issue of such negotiations is a progressive liberalisation of international markets in the broad strategic framework agreed in the GATT Uruguay Round.

Proposals presented to WTO by the US simplify the classification of agricultural policy measures in two categories: “exempt support” if domestic support measures do not have, or at most have minimal trade distorting effects, and “non-exempt support” which are subject to reduction commitments. [64] The blue-box would be eliminated and, as it is almost impossible to uphold that the total over € bn 18 spent at present in blue-box policy measures by the EU is not distorting international trade, such policy measures would be subject to reduction commitments. Contrary to this, however, the EU delegation is proposing to maintain the blue-box policy measures, exempt from reduction commitments.

Position of the EU delegation at WTO negotiations

The EU proposal to the WTO Committee on Agriculture[65] focuses mainly on the blue box issue. According to this official document the long-term objective is a “substantial progressive reduction in agricultural support”. “The 1992 reform of the CAP has been translated into a shift from market price support to blue box payments. It has ensured transparency of support policy and allowed for restoring market balance. The market orientation of producer decision has been significantly improved. The latest CAP reform, the so-called Agenda 2000, has further improved the possibility of farmers to react to market signals. In view of these positive results blue box direct payments can be expected to continue to be an important tool for further agricultural reform”.

The document then refers to an OECD study[66] showing that “as compared to market support area payments in one country or region … lead to smaller production, trade and welfare impacts on other countries or regions”. Besides such reduced spill-over effects, “area payments were found to be relatively more income efficient and less trade distorting than market price support, payments based on output or payments based on variable input use”. The document concludes by stressing that “the concept of the blue box, like that of the green box, must be maintained”.

A producer-distorted approach

The document of the EU delegation at WTO is in line with the “producer-distorted” approach to EU agricultural policy implemented in the past CAP and very apparent in Agenda 2000 for the future.

As is the case in Agenda 2000, the “producer compensatory payments” instituted in the 1992 CAP reform, which should have been decreasing and limited in time[67] in order to smooth the impact of the change in relative prices on farmers and ease a rapid structural adjustment of agricultural production based on the new set of market prices, are not mentioned at all, while blue-box “production limiting” measures are not considered any more as “compensation” for the 1992 reduction in price support but as a direct producer subsidy. Blue box policy measures are not included in the Aggregate Measure of Support (AMS) and consequently are not under WTO reduction commitment.

Blue box payments are used as a substitute for a “reduction” in price support, and not as an alternative to an equal “decrease” in price support; consequently the comparison in terms of the impact on domestic welfare and trade distortions made in the OECD study is not applicable to the actual political issue of a “substantial progressive reduction in agricultural support”. The effects of blue box payments must be compared to the impact of trade liberalisation and not to the impact of the implementation of parallel amber-box measures such as market price support, or payments based on output, or payments based on variable input use.

In an unbiased approach to the evaluation of economic policies, the judgement should be based on the impact of a policy measure on all components of the social welfare of EU citizens, not only on trade effects, although in WTO negotiations trade effects are the main issue discussed. The proposal of the EU delegation at WTO mentions only some of the effects of blue box payments, and only those favouring income transfers to EU farmers.

Actually production-limiting programmes, by reducing domestic production, reduce exported surpluses and are therefore less “trade distorting” than an equal amount of (per unit price) support.[68] Moreover blue-box payments are more transparent, less income regressive (the burden falls on taxpayers and not on consumers) and their spill-over effect on other products and on other regions is lower than market price support; however these effects are relatively positive only if compared to price support and not if compared to a reduction in price support, the effect of which does not create but eliminates existing domestic and trade distortions and relative spill-over effects.

An unbiased document, taking into account the interest of EU citizens would also have mentioned the negative effects of blue box payments on social welfare, which are rather important.

a) In principle “production limiting” policy measures are immediately at odds with the usual objective of economic policies aiming at maximising the amount of goods and services produced, and making the best possible use of available resources. Constraining production and sterilising available resources such as cultivated land at the expense of taxpayers in order to increase the level of market prices paid by consumers can hardly be presented as an efficient strategy in the interest of European citizens.

b) Blue box payments, by compensating producers for losses consequent to the reduction in market price support, frustrate the positive impact of such reductions on structural adjustment, prevent a better reallocation of economic resources, and maintain the inefficient and inequitable features of the present CAP, together with the overall income transfers from European households.

c) Production-limiting policy measures need an administrative apparatus to implement them and to prevent the possibilities of fraud emerging when self-policing market forces are substituted by government intervention. Administrative costs are borne not only by the EU budget but also by national, regional, and local governments. It is not easy to estimate them, however the cost for society of such an amount of financial resources is likely to be much higher than the benefits mentioned earlier, even if we compare blue box payments with a parallel increase in price support, which is not the case in present political issues. Such costs are higher in regions with a poor and inefficient public administration, as was apparent from various conspicuous fines to Italian milk producers, paid largely by the public administration itself, i.e. by the Italian taxpayer.

d) Farmers, who must spend more time in red tape and bureaucratic practices, generate a parallel waste of economic resources. The negative impact on producers penalises especially better and more productive farmers, who would like to increase their production investing more land, using better technologies, reducing average costs in their own interests and in the long-term interests of consumers. Contrary to economic efficiency, production-limiting programmes, by maintaining high per unit revenues to a limited number of privileged producers, favour the less efficient producers who are not compelled by market forces to improve their technology and reduce production costs. Some of the income transfers from taxpayers do not flow to farmers’ incomes, but offset higher production costs due to inefficient production practices often necessary as a consequence of inadequate farm structures.

e) In terms of income redistribution, production limiting policy measures generate privileged producers and rents, i.e. unearned income, capitalised in land values and market values of production quotas. Land values have increased substantially after the 1992 CAP reform. In the Po Valley the right to produce milk is already valued more highly than the milk price itself. Such effects on income redistribution do not favour all farmers but only those owning the right to produce, as it happened in centralised economies. They can hardly be consistent with a market economy and with consumer interests as stated in the Treaty establishing the EU.

Reduction commitments on amber box measures

The blue-box was a bargaining device formulated in the Blair House agreement in order to convince the EU to accept the overall resolutions of the Uruguay Round of GATT negotiations. In order for the CAP to be consistent with the interests of EU consumers and citizens the blue box should be dismantled and production-limiting policy measures should be included in the Aggregate Measure of Support, which is subject to reduction commitments.

Frame 5‑15 indicates the recent development of policy measures included in the amber and in the blue box, together with the constraint agreed in WTO negotiations. If blue box policy measures were considered as being under reduction commitments, as with the traditional amber-box measures, then the EU should have started already in 1998 reducing these price-distorting policy measures. If blue-box policy measures are not considered under reduction commitments, then the WTO agreement will not constrain CAP policy measures at least until 2001.

As blue-box payments are tied to production-limiting constraints, they are less trade distorting than price support. According to the EU delegation at WTO, mainly for this reason they should not be subject to reduction commitments. If such a principle is accepted at the next WTO negotiations, it could then be applied not only to the “compensatory payments” instituted by the 1992 CAP reform, but to a number of other market regimes such as olive oil, tobacco, etc., where production aids are actually tied to production limiting constraints. This could allow a generalisation of direct payments to farmers without any relation to domestic or international markets.

By opposing the dismantlement of the blue box, the EU delegation at the WTO is not only reducing efficiency and equity in the EU, so damaging its citizens, but is worsening the global allocation of economic resources, favouring indirect support of agriculture in developed countries to the disadvantage of agricultural producers in less developed countries where agriculture is often the most easily exploitable competitive advantage.

Compensation for reduction in price support

In order to effectively reform the CAP by means of a “substantial progressive reduction in agricultural support” as stated in the EU proposal at WTO, market signals must reach producers and cannot be partially offset by blue-box policy measures. However we have already seen how difficult it is to reform agricultural policy measures under the permanent pressure of farm lobbies.

The best way to compensate farmers for income losses consequent to a reduction in market prices is probably to apply the reform by defining the annual amount and the number of years on which compensation will be paid by the EU budget by issuing and distributing an amount of bonds[69] equivalent to the total compensation to be paid.

Frame 5‑15 Domestic Support in the EU and WTO Constraint

Source: Tangermann (2000)

This approach (a) would allow high flexibility in the payments and in their use, (b) would not distort market prices, (c) would help to obtain the impact on income distribution desired by the policymaker, (d) would generate a rapid structural adjustment in agriculture, (e) would be much less subject to pressures by special interest lobbies during the implementation of the reform and payment of compensations. Equity and efficiency would be improved.

(a) The EU budget would pay compensation during the planned number of years (e.g. 15), while farmers could behave in different ways: 1) cash the annual compensation every year; 2) sell the bonds on the financial markets and get the whole capitalised compensation immediately in order to invest in their farm or sell the farm, if is too small and non-viable, and invest the whole capital in non-agricultural activities; 3) invest the whole capital into a life-long pension scheme, if the farmer is already old and is planning to retire.

(b) If price support were suddenly dismantled, the new relative prices would not be distorted, compensation would be a lump-sum and not an income flow coupled to production, to ownership of factors of production, or to other features of the farm or of the farmer. While changing the stock of individual wealth, lump sum compensations would not distort relative prices and incentives to produce in the future.

(c) For the same reason such decoupled compensations do not necessarily have to be proportional to the farmers’ income loss, as their amount does not have a direct impact on market prices. While at present granting higher annual direct payments to small farms than to larger farms would distort the structure of production and prevent adjustment to more efficient farm organisation because farmers would have an annual benefit if maintaining a small farm, such market distortion would not exist if different lump-sum compensations were granted to different types of farms. Whatever the compensation, the earnings for future investments would not be distorted by any discrimination among farm types. It would then be possible to adopt a more equitable strategy, by overcompensating owners of small farms and under-compensating owners of large farms who have already benefited greatly in the past from the CAP, without creating problems in terms of market distortions and worse resource allocation.

(d) The possibility of immediately cashing the capitalised equivalent of future annual compensations would provide a large liquidity among farmers. They could sell the farm if too small, if the farmer is old and without a son willing to take over the farm, or for any other reason, and retire or start a new non-farm activity. Other farmers could take advantage of such active land markets and adjust their farms to the optimal size, reducing production costs. Structural adjustment in agriculture would rapidly improve reducing the need for permanent government support.

(e) The reform would be decided and implemented in a relatively short time, consequently the lobbying for changing the implementation modalities of CAP reforms in favour of vested interests would not be as active and effective as it has been in the past.

In order to effectively reform the CAP, present blue box payments and other commodity-specific producer payments should then be limited in time and paid by means of financial bonds. Other commodity specific price support should be changed to similar direct payments to producers. This would guarantee that an effective reform of the CAP is taking place, changing relative market prices and incentives to produce in the interests of society as a whole.

Existing accompanying measures together with new well-targeted non-price-distorting policy measures should be implemented in order to ease structural adjustment, especially in terms of inter- and intra-sectoral labour mobility.

5.8 Scope and limitations of the analysis

The theoretical analysis presented in order to indicate the major effects of the CAP on agriculture is based on a standard neo-classical approach. The underlying assumption of competitive markets, although not fully implemented in practice, is however a very useful analytical tool to indicate how various markets react to public intervention. Various econometric models are worked out to assess in quantitative terms the theoretical effects indicated in our analysis.[70]

The implications drawn on the changes in social welfare are based on the assumption that prices of other goods and services not considered in the analysis are not distorted and indicate the true social marginal utility and marginal production cost of such goods and services for citizens. If such assumption were not verified in practice, we would not be able to say whether the change in market prices generated by the policy measure we are analysing is actually distorting the system of relative prices or if it is correcting it because the prices under analysis were already distorted in the opposite direction in the reference scenario (i.e. without the policy measure under analysis). This fundamental methodological issue[71] is surely very important in the analysis of relative prices subject to small distortions, where conclusions are difficult to draw.

However, at present in the EU agricultural policy is the only policy generating large changes in domestic commodity prices, sometimes 100% higher than the border price. Trade barriers for industrial products have been dramatically cut down in GATT multilateral trade negotiations since the Second World War (Frame 2‑4), consequently the price distortions of non-agricultural commodities are much lower. Our conclusions on the impact of CAP price support on social welfare should therefore be substantially reliable estimates, although obviously still dependent on available statistical information and on the aggregation levels used.

Better estimates are desirable especially if including all major international markets, in order to be able to assess the impact of the examined policy measures on international terms of trade as well. As the EU is the largest market in the world for numerous agricultural commodities, a global approach would substantially improve estimates on trade and welfare effects.

The more basic outcomes of the theoretical analysis carried out in this section applied to the effects of price support on EU agriculture in the nineties have been substantially supported by empirical evidence. Other events, such as the spreading of technology, changes in consumer demand for food items, and effects of national and regional economic policies, have had a role in worsening or improving the mentioned effects of the CAP producer price support on EU agriculture, however its basic impact is clearly identified and reliably quantified.

5.9 Conclusions

According to the Consumer Committee, the impact of price support policies on the efficiency of EU agriculture is negative: “Distorted prices generate inefficient decisions in the short run and distorted investments, worsening the performance of the economy in the long run”

According to the 1992 MacSharry reform of the CAP, a decisive step should have been taken towards the long-term objective of a substantial progressive reduction in agricultural support. At the end of the nineties, we cannot find unequivocal evidence that such a reduction in agricultural support has taken place. As indicated in previous sections, in the nineties the overall annual income transfers to the EU agricultural sector have not been substantially reduced, while transfers per equivalent full-time agricultural worker have actually increased. Over 90% of the expenditure of the FEOGA-guarantee is still spent in commodity-specific policy measures, distorting domestic and international agricultural markets. As happened in the previous three decades, since the institution of the CAP, the high price support granted to agricultural commodities is producing detrimental effects on EU agriculture.

Price support policies generated a large increase in land rents and farm incomes in a few well structured farms and in regions or countries where farm structure was already efficient in the fifties, e.g. in The Netherlands where the average disposable income of agricultural households is now much higher than the 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 mobility of agricultural resources, especially of labour and cultivated land, and hindered a much needed structural adjustment, especially in regions and countries where the average farm size was insufficient, preventing the full exploitation of scale economies and of modern technology.

The impact of the CAP on the efficiency of EU agriculture, on average, was detrimental. In the nineties the annual increase in farm sizes (expressed in European Size Units) was only 1% on average in the EU, and lower in Mediterranean Member Countries. Although average farm sizes, in terms of gross production, vary substantially among member countries, being 14 times larger in the Netherlands than in Greece, there was no convergence among Member Countries, differences remained unchanged or worsened slightly. In Italy in 1998 over 50% of farms still have a gross income lower than € 10000. Such differences in farm size cannot be attributed to part-time farmers who are actually a larger share of total employment in agriculture in The Netherlands (31%) than in Italy (13%) or in Greece (10%).

Higher levels of price support are not positively correlated to higher average levels of 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 dead-weight loss for EU society as a whole, as it contributes to retain on the market inefficient farm structures and high average costs of production.

The opinion of the Consumer Committee on the impact of the CAP price support on resource allocation is fully supported by empirical evidence.

The impact on efficiency of green-box policy measures should be evaluated project-by-project or regional plan. At present such evaluations rarely use cost-benefit analyses and Community or national regulations already earmark for agriculture a large share of public financial resources invested in rural development. This prevents a better allocation of available resources at local level, where there is frequently an excess of economic resources invested in farming. However, the FEOGA-guarantee expenditure generates positive income redistribution among Member Countries, favouring poorer countries and agricultural regions, and greater cohesion in the Union.

Recommendations

In order to reach an agreement in the Uruguay Round of GATT multilateral negotiations, direct payments granted to EU farmers under production limiting programmes, linked to factors of production (as land, livestock units) were provisionally not included in the “amber box”, i.e. under reduction commitments, but were included in a special “blue box”, (direct payments under production limiting programmes) temporarily exempt from reduction commitments. The EU delegation at WTO is proposing to maintain the blue box, consequently over € bn 20 annually granted as direct payments to producers of arable crops and cattle breeders would not be under reduction commitment.

Blue box payments are more transparent than market price support and less income regressive, being paid by taxpayers rather than by consumers. Moreover, if the production limiting constraints are effective, such payments are limiting EU domestic production and exported surpluses, consequently they are less trade-distorting than market price support.

However, the EU delegation is proposing to substitute such blue box payments for a reduction in market price support, the comparison should then be made between the effects of blue box payments and the effects of freer trade. There is no doubt that blue box payments are more trade distorting than a reduction in market price support. Moreover if the EU, as stated in the WTO proposal, were aiming at a “substantial progressive reduction in agricultural support”, and if it were acting in the interests of the EU society as a whole, then the trade-distorting effects of blue box policies should only be a secondary objective. The main issue should be the impact of the CAP on the welfare of EU citizens. Consequently it should be mentioned that “production- limiting” policies, as a general principle, (a) are fully at odds with the efficiency goal of economic policy, (b) by compensating farmers for the reduction in price support without a time limit, frustrate the impact of the 1992 reform in price policy on agricultural production and on structural adjustment, (c) imply administrative costs for implementation, which are also paid by national and regional budgets in order to manage the programmes and control fraud, (d) increase the bureaucratisation of agriculture, costing farmers red tape and waste of time, (e) penalise better entrepreneurs willing to expand production at lower average costs, while benefiting inefficient farmers operating in non-viable enterprises with high average production costs, (f) hinder the inter-and intra-sectoral mobility of factors of production, especially land and labour.

It would be rather difficult to assert that blue-box production-limiting payments operate in the interests of EU society as a whole, and are not a means for maintaining present market distortions and privileges at the disadvantage of taxpayers and of a better domestic and international allocation of available resources.

In order to effectively implement a “substantial progressive reduction in agricultural support”, blue box policies should be included in the amber box, subject to reduction commitments, while 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 should be granted for a well-defined time period, and the EU could issue an equivalent amount of bonds diluting in time the budgetary financial burden and allowing farmers the most flexible use. Farmers could cash such bonds annually, or sell them all 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 an approach to compensations would foster a rapid structural adjustment, without market distortions. Compensation would only affect the wealth levels of farmers and would not distort market prices or other incentives to produce. The rate of compensation could then be different for owners of large farms, which could be under-compensated, and for owners of small farms, which could be overcompensated if policymakers intend to use compensation to redistribute farm wealth. Such discrimination between farms would not have a negative impact on structural adjustment as happens when permanent subsidies are granted only to small farms, so reducing their incentive to reach an optimal economic size compatible with environmental conditions and local markets. The CAP reform and price compensations, if well planned, should 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

This section will answer the following question: To what extent has the CAP support price mechanisms helped or hindered producers to develop their farms and for new farmers to enter the profession?

6.1 Terms of the question

Opinion of the Consumer Committee

The opinion of the consumer Committee on this subject is quite clear: “High support prices have resulted in higher land (and quota) prices making it harder for producers to develop their farms and for new farmers to enter the profession.”

Issues involved

The amount of agricultural employment in the European Union is the result of long term trends (§6.2) in demand and supply of agricultural and non-agricultural products and services and of the economic policy implemented in agriculture, in the rest of the economy, and in particular in the labour market. Among agricultural policies, price support (§6.3), supply management (§6.4) and structural policies (§6.5) generate the most important effects on farm employment. However, direct policies favouring inter- and intra-sectoral labour mobility in EU economy (§6.6) could play a very important role in reforming the CAP.

6.2 Long-term trends

Food items are indispensable for human life but their demand is much less reactive to increases in per capita income than for other products. As a consequence in developed economies, where the rate of demographic expansion is low while per capita income is increasing, the share of food and beverages in total consumer expenditure is decreasing in time. Market forces react to changes in demand and supply by changing relative prices and, if the mobility of economic resources is not hindered, capital and labour will move from agriculture towards the production of commodities and services where relative prices are higher. This inter-sectoral flow of economic resources creates new market equilibria where relative agricultural prices and incomes are higher. However, this structural adjustment may be delayed for various reasons (difficult inter-sectoral labour mobility due to various barriers, sociological, psychological, geographical, etc.), resulting in excess resources in agriculture and lower farm incomes.

In the EU, the amount of labour in agriculture is decreasing both in relative (Frame 6‑2) and in absolute terms, this is a condition for increasing the land/ labour ratio, the average economic dimension of farms, reducing average costs of production and improving per capita income in agriculture up to a level comparable to incomes in non-agricultural activities. The real issue of economic policy is actually to reach more equitable incomes for individual farmers and farm workers, as stated in article 33 of the Treaty,[72] improving the long-terms effects of commodity market forces rather than keeping “more people employed” in agriculture. If, during the structural adjustment process, local demographic, environmental or social problems occur, such problems can be better solved with specific targeted regional, environmental, social or agricultural policies at local level rather than by means of EU-wide agricultural market policies such as agricultural price support.

Long-term changes in EU member countries are very clear. In Italy, for example, since 1973 the share of food in total consumer expenditure has decreased at an annual rate of 1.7% (Frame 6‑1) while, on the supply side, yields per ha of staple crops have increased at a rate of about 1% and the final output per ha of agricultural area at constant prices have increased by a rate of 1.1%. Notwithstanding a consistent reduction in agricultural labour force, the share of agriculture in the GDP decreased at a slower rate (-0.9%) than the share of food, beverages and tobacco in total consumer expenditure (Frame 6‑3). Such trends show how dynamic the production structure of the EU-15 is in years of economic development, reallocating resources among production sectors and activities. Agricultural policy may favour or hinder such dynamic restructuring of the economy.

Frame 6‑1 Trends in % of food, beverages and tobacco in consumer expenditure in Italy

Frame 6‑2 Change in the composition of EU agricultural labour force (AWU, 1973-97)

Frame 6‑3 Long term trends in Italian agriculture (1973=100)

6.3 Impact of price support

By supporting market prices of agricultural products, the CAP contributed to maintaining a higher share of labour in agriculture. In periods of economic depression such an effect was favourable to the whole economy by reducing the rate of unemployment. However, as the agricultural sector is rather small[73] and the CAP did not have a specific anti-cyclical approach in order to relieve existing problems on the labour market, in the long term the excess agricultural labour force has become disguised unemployment as it does not reach a productivity level comparable to other sectors of production and it is in need of permanent income transfers from the rest of society. As such transfers are hidden behind distorted market prices, EU citizens and farmers themselves do not perceive their low level of productivity for society as a whole.

The high land values generated by price support policies prevented farmers from developing their farms and new farmers from entering the profession. Moreover, since the institution of the EU, the agricultural labour force has diminished by almost 50%. Members of farming families changing profession or getting married to non-farmers receive their share of the farm assets’ value as inheritance. Members of the family remaining in farming frequently have to buy from their relatives such inheritance shares, in order to prevent a reduction in farm size and efficiency levels. Such costs borne by farmers are often a heavy burden for many years of their life. Paradoxically, price support capitalised in high land values benefits the living standards of people leaving farming more than people who intend to remain or enter farming. For them low land values would ease the burden of refunding relatives for the inherited share of the farm, of buying a new farm, of expanding their own farm when needed, or of borrowing extra land.

High land prices are therefore an important cause of the low land resource mobility and delayed structural adjustment. In terms of income redistribution, it is apparent how some of the benefits of price support capitalised in land values flow to non-agricultural people.

Frame 6‑4 Share of agricultural employment vs. GDP per capita

Frame 6‑4 shows the different shares of agricultural employment in total employment in EU member countries and how such shares are inversely correlated to the average per capita income, which is a basic indicator of the level of economic development in each country. High levels of employment in agriculture are present in the less developed Member Countries, while higher income countries diversify their economy more in industrial sectors and services.

We can see a remarkable convergence among Member Countries between 1985 and 1997 in terms of average per capita Gross Domestic Product. The coefficient of variation is reduced from 0.38 to 0.33 as differences among EU countries have been remarkably reduced. On the contrary, differences between the shares of agricultural employment among EU countries have remained unchanged in terms of their coefficient of variation (3.46).

This lack of convergence among Member Countries in such important indicators of structural change confirms the conclusion already reached in the previous section. Especially in southern EU countries, CAP prevented a “physiological” development of the economic structure in the European Union, retaining excess labour in the primary sector, with a low average productivity and a permanent need of public support. It hindered producers in developing their farms and new farmers in entering the profession.

6.4 Impact of supply management

As indicated in Frame 5‑2, describing the impact of price support in agriculture, the increase in output price (from Pw to P) generates a shift in demand in the land market with an increase in land prices (from Pl to Pl’). Supply management policy measures, such as production quotas, increase land prices further, create rents for privileged farmers who have the right to produce, and have a further effect in discouraging farmers from adjusting the size of their farms to the requirements of economic progress and modern technology, and for new farmers entering the profession.

Impact of land set-aside on efficiency

Land set-aside is implemented in order to reduce food surpluses and related export subsidies without reducing the level of domestic price support. In the agricultural year 1998-99, 4200 ha of arable land were set-aside, an average 8.2% of EU arable land, but such shares vary among Member Countries from 1% in Greece to 15.1 % in Spain (Frame 6‑5). The cost to the EU budget of compensating farmers not to use their land in 1997-98 was € mn 1251 (Frame 10‑6), while the market value of such land can be estimated at € bn 30. [74]

In order to describe the impact on resource allocation of land set-aside and the difference between alternative measures on labour mobility dealt with in the following paragraphs, let us refer to the previous analysis of the effects of price support (Frame 5‑2) but adding to it the impact of land set-aside (Frame 6‑6). The impact on domestic production (Qs’-Qs) of commodity Q is generated by the shift to the left of the supply function (from S to S’’)[75] due to the reduction in land use. There is no direct impact on commodity J, which is substitute to Q at consumption level,[76] while land set-aside is actually reducing the previous distortions generated by the price support of commodity Q on the labour market and on the market of purchased inputs, whose demand and market prices are reduced. Land set-aside is likely to generate an opposite effect on the land market and on the market of commodity K, which is competing with commodity Q for land.[77] On the land market the land set-aside programme is reducing the supply of land for agricultural use (shifting supply to the left from Sl’ to Sl’’) and is likely to increase land prices (from Pl’ to Pl’’) beyond the level already reached by the effect of the previous price support policy (from Pl to Pl’).

Frame 6‑5 EU-15, land set-aside in 1998-99

In Frame 6‑6 the grid area ((Qs’-Qs)*(P-Pw)) indicates the reduction of export subsidies as a consequence of removing the extra production generated by the price support policy. The previous increase in exports generated by price support as a consequence of the reduction in domestic demand (Qd’-Qd) is not offset by such land set-aside.

It is worth noting that by setting aside land and reducing production, a share of the complementary factors of production are not used any more (e.g. labour, capital, purchased inputs),[78] however such factors are likely to find some alternative use in the economy. The factor of production, which usually does not find any other alternative use, is the land itself. Consequently, analysing the problem in terms of social welfare, from the point of view of EU society as a whole, the payments to farmers for setting aside land can be considered a proxy for dead-weight losses for society. Farmers are compensated for the income losses of not cultivating the set-aside areas by the CAP payments, but no one is compensating the EU society for such losses as reducing the overall amount of available resources and of the related potential production of goods and services.[79]

As, according to the Treaty, EU policies should be consistent with consumer interests and with the interests of society as a whole, it is rather hard to justify land set-aside, costing annually € mn 1200 in the EU budget spent in order to sterilise about € bn 30 of capital assets, reducing agricultural employment, preventing structural adjustment, and all this in order to maintain high domestic prices.

Frame 6‑6 Short-term effects of land set-aside

6.5 Impact of structural policies in agriculture

Since the origin of the CAP,[80] policy analysts have been concerned about the possibility that particular vested interests could orient CAP policy measures towards permanent price support. This would not solve the farming problems, but rather worsen them by increasing market distortions and demanding increased public support. In their opinion public money should have been better used if invested in structural policies, which would gradually solve the problem of low farm incomes in an efficient way.

In the early sixties the EEC Council of Agricultural Ministers decided that at least one third of agricultural expenditure should be devoted to structural policies[81]. However, in practice, the Guidance section of the European Agricultural Guarantee and Guidance Fund (EAGGF or FEOGA in the French acronym) in the sixties and seventies received on average less than 5% of the FEOGA budget, and even now this share reaches only 10%.

Moreover, only a minor part of the FEOGA-Guidance funds flows to actual investments to improve farm structure. Funds officially targeted for the improvement of agricultural structures are included in Objective 5a, accounting for 24% of the Guidance expenditure, but for only 2.4% of the total FEOGA expenditure in agriculture (Frame 6‑7).

According to the EU notification to WTO on domestic support to agriculture, which also includes national and regional expenditure, assistance to structural adjustment, included in the green box, accounts for 34% of green box measures and 8% of total domestic support (Frame 10‑5). Such expenditure for assistance to structural adjustment is classified under three headings: Producer retirement programmes, aiding early retirement from farming (€ mn 709), Investment aid (€ mn 5401) and Resource retirement programmes (€ mn 428).

From a consumer point of view it is surprising to find public expenditure to “resource retirement” classified as “assistance to structural adjustment”. Most people still believe that economic policy should develop available EU resources and foster their better use in order to produce goods and services and improve the welfare of all EU citizens. Yet the CAP is financing with taxpayers’ money the set-aside of land in farms where “at least” 20% of cultivated land should be left fallow, wooded or used for non-agricultural purposes, together with compensations for grubbing up, leaving or suspending production.[82]

The likely effects of such measures are somehow in opposition to the effects of other public expenditure on investment aids (such as land improvement, etc.) favouring increases in output. However the investment aid to agricultural production is very limited, the largest share of the mentioned “structural adjustment assistance” through investment aid flows to processing, packaging and storage equipment, etc.

Why, notwithstanding the beneficial long term effects of structural policies, and notwithstanding the decision taken by the Commission in the early sixties to devote at least 30% of agricultural expenditure to structural policies, has an effective structural policy in agriculture promoting a rapid structural adjustment in practice never existed? Why was the 1972 “structural reform” following the 1969 Mansholt Memorandum not successful? We mention here three possible explanations, one economic in nature and two political.

Successful structural reforms are incompatible with distorted prices

The basic feature of a structural policy is to provide financial aid to farmers who can improve the economic size of their farm and, by implementing the best technologies and choosing the most profitable crop-mix, become competitive in the future and manage economically viable farms, not in permanent need of aid from the rest of society. Obviously, in a market economy, the farmer decides the allocation of farm resources, no EU Commissioner or agricultural minister could choose better than the farmer himself how to use the available funds on his farm with its specific natural, economic and social environment.

The success of structural policies is rather easy if market prices are not distorted and the benefits to the farmer coincide with the benefits to society as a whole. On the contrary, if market prices are distorted, an efficient farmer will however maximise its profits by investing in more profitable activities. Unfortunately such commendable private behaviour may be in opposition with the interests of society as a whole if highly priced commodities are already in surplus in the domestic market and extra production must be destroyed, if their domestic use must be subsidised by the government, or if such commodities must be dumped on the world market by paying export subsidies.

This is what happened in the seventies after the 1972 structural reform, subsidising farm investments while maintaining the existing unbalanced market price support. In order to avoid further budgetary costs needed as a consequence of the increase in supply of highly price-supported commodities, a number of constraints to farmers’ decisions had to be instituted by the CAP, eventually increasing supply management measures such as milk production quotas and land set-aside.

Such “production limiting” measures in some sense are even worse than those implemented in the centralised economies. In centrally planned economies the final objective was usually to increase the total amount of goods and services, even if the instruments used were usually not very efficient. It is hard to believe that central bureaucrats could deliberately aim at reducing available resources and overall production of goods and services. On the other hand it is also hard to believe that such policies could be implemented in an Economic Community instituted on the principles of free competition and free trade, based on market forces as the major means to improve resource allocation and the welfare of EU citizens.

In market-oriented economies successful structural reforms are not compatible with such highly distorted agricultural market prices still maintained in the EU. If they are however implemented, as in the case of the present CAP, their social cost is very high.

Policymakers prefer short-term policies

Another reason for the failure of an effective structural policy is related to the short political mandate of policymakers. Structural policies involve costs in the early years while benefits are enjoyed some years later, consequently policymakers must ask their voters to pay the necessary costs now and wait for future benefits. This risks losing the favour of the electorate, of not being re-elected, and letting the candidate of the opposition reap the benefits of structural policies, even if such policies are very beneficial for society as a whole.

Low-income farmers are a good excuse for maintaining price support

Another possible explanation for not implementing structural policies is the fact that a large number of small, inefficient farms, and consequently a large number of low-income farmers, are a basic short-term political motivation for maintaining the present support to agriculture. Although a consistent share of income transfers to agriculture are lost in dead-weight losses, such transfers also contribute to maintaining the present income level of low income farmers, together with the rents which benefit especially better-off farmers and landowners.

6.6 Perspectives: labour mobility policies

Reducing price support should be the first priority of policy-makers. However if, as it is at present, policymakers prefer to lower food surpluses by means of a reduction of the factors of production, then it should be stressed that policies aiming at a reduction of the agricultural employment would be much better, both in terms of resource allocation and of income redistribution, than policies reducing cultivated land.

EU agricultural policy at all decision-making levels: Community, national, regional, local, is frequently oriented to keeping a large amount of people in farming, and market price support is very often justified on such grounds.

Frame 6‑7 Expenditure of FEOGA-Guidance by objective

Frame 6‑8 Short term effects of labour mobility measures

In some regions the risk of depopulation and abandonment of small villages has been serious in the past and, although large rural areas are now re-populated by owners of second residences, tourists and weekend dwellers, in various marginal areas the danger of depopulation still exists. However, local problems are likely to be better solved by locally targeted and well-monitored economic or environmental policies, rather than by EU-wide agricultural policies, which do not take into account local problems and possible alternative solutions.

If the present approach towards agricultural employment is reversed and agricultural policies at EU and national levels were not oriented to keep people in farming, but rather oriented to favour labour mobility towards more productive employment offering better income opportunities, excess labour force in agriculture could be substantially reduced especially where its productivity is particularly low. As a consequence less productive farms could be sold to remaining farmers fostering structural adjustment and lowering production costs in agriculture. Although the marginal productivity of farmers who would leave agriculture is rather low, nevertheless total agricultural production could be reduced, reaching the same effect of present land set-aside, as far as the target objective of reducing production and export subsidies is concerned.

The basic difference between this policy and land set-aside is that labour resources leaving agriculture would not be a dead-weight loss for EU society, as is the case for land set-aside, but would rather be an amount of extra resources invested in non-agricultural sectors where their marginal productivity is most probably higher than in agriculture[83]. Instead of generating a dead-weight loss for society, labour mobility policies would lead to a net gain in social welfare.

Frame 6‑8 shows how a reduction in agricultural labour (B’-B in the central panel of the second row) would generate a reduction (Qs’-Qs) of supply of commodity Q, and a reduction in distortions generated by price support in other related markets: commodity K, competing for agricultural resources with commodity Q, land market, and markets of purchased inputs.

The price of agricultural labour would increase (wages and remuneration of self-employed farm workers). As this effect is exactly the major objective of agricultural policy, it would be reached in a market-oriented way, via increased average productivity, without generating unjustified income transfers from the non-agricultural population.

6.7 Scope and limitations of the analysis

The theoretical and empirical analysis mentioned in this section shows how, from the point of view of consumers and society as a whole, the objective of increasing farm sizes and favouring new farmers entering the profession must be compatible with the balanced economic development of the whole economy. The primary objective is not an increase in agricultural employment, often claimed by some farmers’ unions, but an equitable “individual” farm income earned in a more efficient way, provided that other environmental and regional targets are attained. Following such a point of view, it is shown how structural polices and direct government intervention to increase mobility in the labour market would be a better choice than present price support and land set-aside policies.

Further analyses by farm type and at regional level could allow reliable estimates of the potential increase in social welfare associated with greater inter-sectoral labour mobility.

6.8 Summary and conclusions

Agricultural employment is a consequence of long-term trends in food demand and agricultural supply and the result of implemented economic policies, especially in the agricultural sector and in the labour market. In Italy, for example, in the last 25 years the share of food in consumer expenditure decreased annually by 1.7%, land productivity raised by 1%, while the share of agriculture on total GDP decreased at an annual rate of 0.9%. For such a dynamic structural change in EU economy, the real issue concerning agricultural employment is not to maintain the farm workforce, but rather to increase “the individual earnings of persons engaged in agriculture”, as stated in article 33 of the Treaty instituting the EC, while attaining other environmental and territorial objectives.

By heavily supporting agricultural prices, the CAP has reduced the outflow of labour from the sector, but in the mean time has hindered structural adjustment, reduced the average productivity of labour employed in farming, and has perpetuated disguised unemployment in agriculture. Benefits of price support were capitalised in high land values, these have hindered the possibility of increasing the farm size when needed, and prevented new farmers from entering the profession. This is especially so in less developed Member Countries and regions where excess labour force in agriculture does not favour economic development. In the last fifteen years, while there has been a remarkable convergence among EU Member Countries in terms of per capita Gross Domestic Product, the existing differences in their shares of agricultural on total employment were not reduced.

The more recent measures of supply management - production quotas and land set-aside - have created further rents on cultivated land and reduced further the inter- and intra-sectoral mobility of economic resources. Land set-aside, although reducing the distortions created by price support on the domestic market, generates a large waste of domestic economic resources. In 1998-99 taxpayers paid € bn 1200 in order to induce farmers not to use 4,2 million hectares of arable land, for an estimated land value of over € bn30, in order to reduce the domestic supply of agricultural products necessary to maintain higher market prices paid by EU consumers. Seen from the viewpoint of society as a whole, EU citizens as taxpayers pay a rather high amount of money in order to increase the price of products they buy as consumers, and to do so they have to sterilise a considerable amount of available economic resources. However open and positive the attitude in favour of farmers, it is hard to believe that this policy is in the interests of consumers and of EU society as a whole.

According to decisions taken by the EEC Commission in the early sixties, at least 30% of the agricultural budget expenditure should have been spent in 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, 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. The EU Commission estimates assistance to structural adjustment by as 8% of total domestic support to agriculture, including national expenditure.

However it is almost impossible to implement a successful structural reform if producer 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 is likely to orient investments towards the more profitable, i.e. price supported, commodities and increase surpluses or be in contrast with the numerous supply management policies limiting agricultural production. Such a public expenditure would benefit private farmers, but would be a liability for society as a whole, which would be compelled to dispose of extra food surpluses and/or face a lower social productivity of invested resources.

From the point of view of society as a whole and in a perspective of balanced economic development, the opinion of the Consumer Committee that high support prices make it harder for producers to develop their farms and for new farmers to enter the profession is correct.

Recommendations

The necessary condition for a successful structural policy within the framework of balanced economic development is the elimination of existing distortions among agricultural market and producer prices by a reduction of support.

Moreover, 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 information on non-agricultural job opportunities in rural areas and labour mobility should be instituted.

Instead of reducing arable land and keep it idle, involving a net dead-weight 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 dead-weight loss, but would generate an increase of total domestic production and of social well-being, by moving farmers with a low social productivity and permanently supported by public income transfers towards non price-supported non-agricultural activities, preferably in rural areas, which are much more productive in social terms.

In order to implement such radical reform of 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 compensation for environmental positive externalities) valued at non-distorted market prices, and how large is the complementary share of income directly or indirectly generated by sheer 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 “non productive”, dependent on public support, roughly equivalent to an unemployment benefit

7. Impact on the whole economy.

This section will answer the following question: To what extent has been the impact of the CAP on the EU economy since 1992?

7.1 Terms of the question

Opinion of the Consumer Committee

The CAP has had a detrimental effect on the EU economy. Domestic prices are not a result of the interaction of consumer demand and producer supply but are largely a consequence of the bargaining strength of producer lobbies. Distorted prices generate inefficient decisions in the short run and distorted investments, worsening the performance of the economy in the long run.

Moreover, the Consumer Committee refers to the costs of the CAP for society as a whole in terms of reduced efficiency: “Whilst production control measures succeeded in reducing, or at least constraining, the agricultural budget, the less obvious costs of the CAP to society increased through a waste of economic resources, higher administrative costs, increased bureaucracy, and constraints on farm entrepreneurship.”

Issues involved

The impact of the CAP on the efficiency of resource allocation in the EU economy may be indicated by the amount of “economic benefits or costs” due to a better or worse allocation of available resources as a consequence of the CAP. Such benefits or costs affect society as a whole, increasing or reducing the real income and welfare of EU citizens. We will try to appraise the size of some economic benefits/costs in quantitative terms, although this often involves a large amount of arbitrary assessment. However it is important to attempt such a quantitative approach in order to identify the relative importance of each type of dead-weight loss for society and to develop a discussion on alternative methodological approaches and estimates.

Such benefits/costs are here grouped as follows: economic benefits of price stabilisation (§7.3), social costs in production and consumption (§7.2), social costs of taxation (§0), social costs in programme administration (§7.4). The macroeconomic effects of the CAP will be discussed last (§7.5). Some long-term economic benefits and costs in overall employment and in Third Countries will be discussed in the next section.

7.2 Benefits of price stabilisation

The benefits of the CAP for society as a whole are numerous and relevant, although mainly concerning externalities and public goods, and the attainment of policy objectives such as environmental protection, food safety and security. However such are not directly related to the efficiency issues dealt in this section. The CAP social benefits more related to efficiency are a consequence of the stabilisation of food prices and of farm incomes.

Stabilising to a certain extent agricultural prices and farm incomes generates net benefits both for producers and consumers. Agricultural markets are much more unstable than other commodity markets due to the variability of supply, largely dependent on weather conditions. Droughts, excessive rains, frost, animal or plant diseases may generate large variations in supply, which are transferred to prices especially in the case of perishable products.

If the volatility of market prices is reduced, producers can plan their investments much better and reduce the risk of going bankrupt as a consequence of too low market prices. In addition stable food prices favour consumers in their choices and prevent abnormally high margins in the market chain by intermediaries who, when high variability occurs, are more ready to increase selling prices than to reduce them.

The pricing policy of the CAP was conceived in the late fifties mainly as a market stabilisation tool, by enforcing import duties to support domestic market prices when considered too low and export taxes for reducing them when considered too high. A remarkable stabilisation of domestic prices was attained, however the foreseen benefits of price stabilisation for producers and consumers were largely offset by large disadvantages for consumers, for the simple reason that policymakers were usually fixing floors and ceilings too high in the stabilisation band, without a precise reference to a moving average of long term world market prices. As a consequence, in the past forty years of CAP market regimes, the imposition of export taxes (upper price bound) has been very rare, while the imposition of import levies (lower price bound) has been almost permanent, supporting rather than simply stabilising prices.

Moreover such very effective stabilisation of domestic prices favoured extra investments and extra production of surplus commodities. Export subsidies and supply management measures were then used mainly to stabilise such high levels of domestic prices.

Producers benefited from such price support and stabilisation, but the overall benefit for society as a whole was probably rather negative as a consequence of higher food prices and excessive budget expenditure in export subsidies or in surplus disposal.

7.3 Social costs in production and consumption

Costs in production and consumption for EU society as a whole will be classified in four groups: (a) reduction in technical efficiency, (b) dead-weight losses in surplus disposal, (c) dead-weight losses related to land set-aside, (d ) dead-weight losses in the overall allocation of available resources.

Reduction in technical efficiency

In order to reduce domestic supply and related surpluses, CAP policy measures sometimes subsidise inefficient farm practices not fully exploiting production opportunities, such as slaughtering new-born calves, reducing fertiliser use in marginal areas where the risk of fertiliser pollution is non-existent, etc.

Such effects of the CAP on EU agriculture have often been amplified or reduced by parallel national and regional agricultural policies.

The quantification of the economic impact of consequent reductions in the potential agricultural output would require specific research on such a topic.

Dead-weight losses associated to surplus disposal

Before the implementation of supply management for various commodities, the cost of surplus disposal used to be the most apparent example of the waste of economic resources entailed in the EC price support policy.

Frame 7‑1 Composition of FEOGA-Guarantee expenditure (1976-1999, € mn)

Frame 7‑2 Relative size of FEOGA-Guarantee expenditure (1975-1998)

Frame 7‑3 Value of products in public storage (€ mn)

In the last 25 years the peak expenditure in storage and surplus disposal was in 1986, reaching € mn 9600. After 1994, as a consequence of the price support reduction for cereals and the implementation of “production limiting” policy measures, this expenditure was reduced to less than € mn 2000, then raised again to the present level of € mn 2434 (Frame 7‑4).

In the 24 years between 1975 and 1998 the FEOGA expenditure on storage and surplus disposal was over € bn 80, at 1998 prices. In order to have a clearer idea of such expenditure, we may compare it to the Net Domestic Product (NDP) of the Irish Republic in 1998 (€ bn 84), or to the agricultural Net Value Added of EU agriculture in the same year (€ mn 77, Frame 7‑1 and Frame 7‑2). The value of products in public storage and the expenditure for price support related to public storage and market withdrawals are indicated in Frame 7‑3 and Frame 7‑4.

The impact of the 1992 CAP reform, substantially reducing price support for cereals and gradually implemented in the years1993-95 is very apparent, the total expenditure in storage and withdrawals falls from € mn 6518 in 1993 to € mn1504 in 1996 (Frame 7-4).

The larger share of such costs should be considered dead-weight losses for EU society. Actually, without the CAP price support policy, an effective stabilisation policy of agricultural markets in the EU would have been much less expensive. We may assume that not more than 25% of the EU budget expenditure in storage and market withdrawals would have been needed by a Community policy aiming only at market stabilisation. The social cost would amount to € bn 1,1 (Frame 9-3).

Frame 7‑4 Budget expenditure in public storage and market withdrawals

Dead-weight losses related to land set-aside

The land set-aside policy implies a transfer from households to farmers and a waste of economic resources in terms of non-utilised arable land. Besides the cost of subsidising farmers for not cultivating the land, in 1998-99 over 4.2 million ha have been kept idle, the asset value of which could be estimated in the order of € bn 30, about 40% of the net Agricultural Value Added of EU-15 (Frame 6‑5).

As already discussed in the previous section, the compensation to farmers for not cultivating the land set-aside was € mn 1251 in 1998 and should be considered a net dead-weight loss for EU society as a whole.

Misallocation of resources in production

The level of producer price support (market price support plus direct payments) has been very unbalanced among farm commodities, e.g. is non-existent for potatoes, flowers and other minor crops, very low for pigmeat and eggs, about as high as the border market price for oilseeds and milk, and about twice the border market price for durum wheat and sheepmeat (Frame 3‑2). There is no clear economic motivation for such differences in producer support, discriminating among farmers and distorting the allocation of economic resources within agriculture and between agriculture and other production sectors.

The assessment of social costs associated with all the direct and indirect distortions generated by the CAP among market prices is probably impossible. However, according to traditional economic theory, an indication of such dead-weight losses in the short run can be approximated by the increase in marginal production costs due to price support. Such increase aggregated for all firms is indicated in the diagram of commodity markets by the triangular area below the supply curve and above the world market price relative to the increase in domestic supply generated by price support. (e.g. 0.5*(Qs’-Qs)*(P-PW) in Frame 5‑2).

The quantitative estimate of such dead-weight losses is directly related to the level of price support in each commodity and to the estimated or assumed elasticity of supply. To be on the safe side we may assume a low elasticity of supply and a social cost of resource allocation of 9% of the transfers to producers generated by price support, i.e. € bn 9.6 (Frame 9‑3).

Frame 7‑5 Sensitivity of EU social costs to the elasticity of demand and supply [84]

Figures for dead-weight losses due to price distortions in production and in consumption tend to be underestimated due to the arithmetic averaging of different levels of protection for individual commodities within commodity groups. Actually the increase of such dead-weight losses is not linear in proportion with price support, but is more than proportional. As a consequence the arithmetic average of different price support levels for individual commodities in a group (e.g. fruit, vegetables, etc.) underestimates the real distorting effect. On the other hand it is almost impossible to formulate empirical estimates of demand and supply elasticities for all agricultural commodities for such a large range of price changes as would be necessary to fully dismantle existing price support. Consequently our assumptions are only indicative of an order of dimension, and of the need for further theoretical and empirical research on the subject.

Misallocation of resources in consumption

At consumption level price distortions generate social costs by creating under-consumption of price-supported commodities and over-consumption of commodities whose relative prices are not supported. The loss of consumer welfare is indicated by the triangular area below the demand function and above the world market price relative to the decrease in domestic demand generated by price support. (e.g. 0.5*(Qd-Qd’)*(P-PW) in Frame 5‑2). Demand for food items is notably rigid not only with regard to income but also to price changes; consequently social costs for consumers generated by price support are likely to be lower than social costs at production level. A reasonable assumption could be 7% of transfers generated by price support policies from consumers to producers, i.e. € bn 3.9 in 1998.

Social costs of taxation

Government expenditure must be collected from taxpayers and such collection generates administrative costs and dead-weight costs due to the distorting effects of taxation on economic incentives to producers and consumers. Such costs are different according to the type of taxation: income tax, value added taxes, taxes on lotteries, etc. affecting different propensities between labour and leisure and different social costs.

Estimates of the costs of taxation for society as a whole vary up to 50% of the marginal € raised to taxation.[85] The average social cost of taxation for funding agricultural expenditure in other research has been assumed as 15%[86], however, to be on the safe side we may assume a lower 10% rate of social costs due to taxation needed to fund the public money spent by policy measures associated with the CAP. The social cost in 1998 would be € bn 5.1 (Frame 9‑3).

7.4 Social costs of programme administration

Supply management policy measures increased substantially the direct involvement of the public administration in the agricultural production process. This interference of government in the decisions taken by farmers implies two possible dead-weight losses, coming from:

(a) the utilisation of human and financial public administration resources which could have been used elsewhere providing goods and services, rather than constraining their production as is now often the case in agriculture,

(b) the waste (for society as a whole) of farm resources in terms of time and money invested in red tape and administrative practices, or in lobbying and other rent-seeking activities, rather than in the production of goods and services useful to EU citizens.

Administrative costs

Administrative costs refer to the cost of the extra resources needed by public administration to implement the CAP. In the case of green-box policies such extra resources could generate either net social benefits or net social losses, depending on the specific programme in which they are invested. A social cost-benefit analysis should be carried out at all administrative levels in order to assess properly the social profitability of such policy measures.

We will refer only to the amber-box policies under reduction commitments and to the blue-box or “production limiting policy measures”. Such administrative costs in a country or region are inversely related to the average economic size of farms, as the number of files to manage is to a certain extent proportional to the number of farms to be administered and monitored in order to avoid mistakes or fraud. Administrative costs may be indicated as a percentage share of the amount of public expenditure transferred to farmers. In various analyses carried out at provincial level at the University of Siena, this share varies from over 100% in provinces such as La Spezia, where farms are numerous, small and prevalently on hills and mountains, to 13% in provinces where the average farm size is larger and in plain areas such as Latina.[87] However as a general rule green-box policy measures require more administrative work than direct payments related to price support policies.

For the EU, we may cautiously assume that programme administration costs including all levels of public administration account for 12% of public expenditure in market price support, i.e. € bn 6.1 on direct payments to farmers amounting to € bn 51 (Frame 9‑3).

Farmers’ compliance costs

Farmers are frequently complaining about the high amount of administrative work they have to carry out when paying taxes, social contributions, abiding with local environmental regulations etc. According to a survey carried out by a farmers’ union in Tuscany[88], farmers in this region spend at least 60 workdays per year managing bureaucratic practices (370 different practices in total, 40 common to all farmers).

The extra burden related to filling in applications for direct subsidies or for payments related to production-limiting policy measures, together with the co-operation with the monitoring work implemented by public administration, is a direct cost for farmers especially in terms of labour and is a cost for society as a whole provided that resources used in red-tape could be used elsewhere in a more productive way.

Such a burden for farmers can be indicated by a percentage share of the amount of budgetary transfers generated by the CAP. Further investigation should be done in order to estimate such costs; in this report we assume a 4% share of direct payments granted to farmers, about € bn 1 in 1998.

Fraud

Increased bureaucratisation of business economy is often related to an increase in fraud. A famous quotation on the subject is referred to K. Tiedemann: “The CAP is the largest incentive to commit crime in Europe” [89]. An alarming figure of 10% share of fraud on the budgetary expenditure of the EU has often been quoted.[90]

Actually it is not easy to verify if this estimate is correct or excessive, given the poor information available on the modalities of fraud detected by Community and national administrative bodies working on fraud control.[91] In this study we cautiously assume that price support policies involve fraud for 3% of FEOGA-guarantee budget expenditure, excluding expenditure for accompanying measures and rural development.

Such costs, about € bn 1.1 in 1998, may be considered costs for EU society. Moreover, fraud generates various negative externalities, worsening the economic environment among entrepreneurs, deteriorating incentives to fair interpersonal relations and preventing improvement of efficiency in production and trade.

7.5 Macroeconomic effects

By increasing consumer prices of agricultural products and consequently increasing the consumer price index, CAP price support has significant effects on basic macroeconomic variables such as private consumption, real wages, employment and GDP.

An increase in consumer prices (Frame 7‑6) from the demand side generates a reduction in real disposable income, in private consumption, in savings and in demand-driven investments. On the supply side, increased consumer prices generate a reaction from unions for increased wages, resulting in higher costs and lower profits for firms, reduced investments and capital stock, reduced employment and lower labour productivity. By reducing profitability and international competitiveness in non-agricultural sectors, higher farm prices eventually reduce capital formation and the overall rate of development.

It would be very interesting to simulate the impact of CAP price support on the EU economy, although econometric models are less reliable when large variations in basic parameters (e.g. price support levels) are involved. A simulation of the macro-economic effects of the changes in agricultural price support planned by “Agenda 2000” has recently been carried out by the Directorate-General for Economic and Financial Affairs of the European Commission.[92]

Frame 7‑6 Impact of price support on non-agricultural firms

According to this study, a reduction of intervention prices in three sectors - arable crops (-15%), beef (-20%) and dairy (-15%)[93] - would generate positive effects for the EU economy both in the short and long term. Assuming the average results of the two scenarios presented (last panel in Frame 7‑7), private consumption would increase by 0.3% after five years and remain at that level, GDP would increase by 0.09% after the first five years, then would continue to rise at approximately 0.19% in the long run. Employment would rise by 0.1% in the short run and increase further up to 0.16% by 2030. Similarly, with such decreases in real wage costs, exports should increase in time, while the impact on imports will be felt mainly in the first five years.

Frame 7‑7 Impact of farm price reductions in “Agenda 2000”(1)

According to this study, the macroeconomic multiplier effect of such change in farm prices will depend crucially on the timing of wage changes. If trade unions immediately share the benefits with firms, then the CAP reform will rapidly lead to an expansion of capacity output (panel (a) in Frame 7‑7). On the contrary, if workers try to reap the benefits of food price reductions for a longer time, then the incentive for firms to expand employment and productive capacity will be lower (panel b).

In any case reducing farm prices will have a positive effect through the consequent reduction of consumer prices, and increase in private consumption, GDP and employment. Such benefits depend on the size of consumer price change. A full reform of CAP price support is therefore likely to have much larger beneficial macroeconomic effects on the whole economy.

7.6 Perspectives

The above mentioned “rosy” perspectives of the macroeconomic impact of the reduction in agricultural market price support planned in the document of the EU Commission “Agenda 2000” are very useful in indicating what could be the effects of an “effective” reduction in farm price support, but are not applicable to the present agricultural policy. Actually Agenda 2000 and the decisions taken at the Berlin Summit of Heads of State on the one hand reduce some important market prices, but on the other hand increase producer subsidies in order to offset the impact of price reductions on farm incomes.

In order to finance such direct payments to producers, extra taxes should be envisaged (or possible tax reduction would not take place); consequently the benefit for households due to an increase in their real disposable income will largely be offset by extra taxation. The described increase in private consumption will not take place nor will the other beneficial macroeconomic effects on real wages, overall employment and GDP.

The other negative effects of price support described in the previous paragraphs of this section are likely to remain largely unaltered in the future, due on the one side to the relatively small net changes brought about by Agenda 2000, and on the other side to the traditional dilution of reform proposals taking place during their implementation.

7.7 Scope and limits of the analysis

The estimate of the social costs of the CAP, although very important in order to analyse and evaluate the various policy measures, is rather neglected in economic literature, probably because in the political arena there are no strong interests in knowing what could be the costs for society of alternative agricultural policy measures.

In order to answer the final question, i.e. what has been the impact of the CAP on the welfare of EU citizens, we tried first to identify the various effects of the CAP price support policy and then to quantify them. Our estimates are intended to be more indicative of likely orders of dimensions rather than precise estimates, as sometimes methodology is still rudimental and empirical information very poor. Our figures on dead-weight costs should be improved in terms of precision and detail, especially by people and institutions implementing present policy measures; however, even using reasonably different assumptions, the overall conclusions on the effects of the CAP should not change substantially.

It is obviously very important to develop methodological procedures to evaluate the social costs of the CAP and of other sectoral policies, in order to provide policymakers with correct and reliable parameters to support their political action.

7.8 Summary and conclusions

The opinion of the Consumer Committee that “…the less obvious costs of the CAP to society increased through a waste of economic resources, higher administrative costs, increased bureaucracy, and constraints on farm entrepreneurship” is fully supported by further investigation on the subject. It is important to try at least a rough quantitative assessment of such costs borne by society as a whole.

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.

The cost of storage and disposal of agricultural surpluses was rather high before the implementation of supply management measures, especially considering that agriculture accounts for only 1.7% of the Union’s GDP. In the last 24years the EU budget spent over € bn 80 for storage and surplus disposal and over € bn 150 for export subsidies, figures comparable 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. Consequently the very concept of economic efficiency, involving a better allocation of available economic resources in order to increase the production of goods and services to be used by consumers, is turned upside down by government intervention. The most apparent measure in this direction is the land set-aside, involving budgetary expenditure in order to pay farmers for not cultivating almost 10% of available arable land. Moreover, price support is still generating large distortions in the allocation of available resources at production level and in food consumption. The consequent reduction in the social welfare of EU citizens in the short term is not easily quantified, however it can be assessed to be in the order of € bn 12 .

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. Net costs of taxation are estimated at € bn 5, while a slightly higher loss of available resources is estimated to be needed for the administration of agricultural programmes at community, national, regional and local level. Moreover, in order to implement such administrative programmes, time and money is needed also on the farmer’s side. Such economic resources, that otherwise could be used in productive activities, are estimated in the order of € bn 1. A last negative impact generated by increased government involvement in agricultural production is fraud at various administrative levels (€ bn 1).

Besides the mentioned costs for EU society of CAP price support measures, their overall macroeconomic impact is definitely detrimental to economic development. Higher agricultural prices increase the consumer price index and reduce the real disposable income of consumers and the aggregate demand in the economy. Lower demand, together with the above-mentioned waste of economic resources, plus higher real wages consequent to higher food prices, reduce firms’ profits and investments, resulting in lower capital stocks and labour productivity, and eventually in lower overall employment and 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 the Commission Document Agenda 2000, would significantly increase the EU GDP, private consumption and investments, together with international trade and overall employment. Unfortunately taxes raised for blue-box payment did 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. The strategy followed by the strong rent-seeking agricultural lobbies in the past has been to find new policy measures capable of hiding or disguising the costs for consumers and for society as a whole in order to maintain large income transfers to the agricultural sector.

In order to avoid such large non-transparent costs to society as a whole, 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 always delegated the solution of 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 farmers, bearing the largest burden of wrong policies implemented in the past, are granted by EU policymakers a proper Consumer Policy, endowed with adequate institutions, permanently monitoring sectoral policies and detecting all hidden microeconomic and macroeconomic costs for society as a whole.

All estimates and assumptions mentioned in this and in similar reports should be scrutinised and constantly improved in terms of theoretical background and empirical reliability. Public money spent in consumer policy analysis, monitoring, and participation in sectoral policies would probably rank among the most socially productive investments.

8. Impact on economic development

This section will answer the following question: To what extent and how has the international competitiveness of non-agricultural sectors and the overall EU employment been impacted by the CAP?

8.1 Terms of the question

Opinion of the Consumer Committee

“…by increasing the cost of living and inflation, higher food prices hinder the development of the EU economy, reduce the international competitiveness of non-agricultural sectors, reduce overall EU employment and the welfare of its citizens.”

Issues involved

The impact of the EU agricultural price support policy on overall EU employment both in the short and long term has already been discussed in the previous section dealing with macroeconomic effects. In this section we will discuss two other aspects of the CAP on overall employment.

Price support maintains disguised agricultural unemployment, while this labour force could be much more productive in other economic activities (section 8.2). On the other hand it reduces unemployment, especially in less favoured and poorer regions of the European Union (section 8.3). The issue of international competitiveness will be dealt with next, by describing the impact of EU price support on international terms of trade (section 8.4), and finally we will mention the likely effects on new Members of the Union, in particular the Central and Eastern European Countries (section 8.5).

8.2 Impact on EU employment

The macroeconomic impact of price support on overall employment is negative, as mentioned in the previous section (Frame 7‑6), while a reduction in agricultural price support is likely to generate a virtuous chain of reactions in non-agricultural firms, increasing overall employmentFrame 8‑1. According to a simulation of the QUEST model of the EU Commission, the relatively modest reduction of agricultural market prices planned by Agenda 2000 would increase total EU employment by 0.14% (or 0.05% in the less favourable situation) by 2005, and increase it in the longer term by up to 0.24% (or 0.08%) in 2030 (Frame 7‑7).

This simulation deals with macroeconomic variables and does not take into consideration the specific characteristics of the agricultural labour force, especially in those countries and regions where agricultural Community and national policies have slackened inter-sectoral labour mobility. In such regions the labour force is now redundant in agriculture and delays farm restructuring and adjustment in the agricultural sector, in rural areas, and in the economy.

The high level of support granted on average to the agricultural sector, as compared to other branches of EU economy, creates further distortions between the farming sector and the rest of the economy. In various Member Countries the average gross productivity of labour in agriculture is less than 50% of the labour productivity in the rest of the economy. In Italy, for example, the Value Added at market prices per standard work unit in agriculture was only 35% of the national average in 1991 and raised to 54% in 2000 (Frame 8‑2). This is nominal productivity based on domestic agricultural prices. If border prices for agricultural products were used the computed productivity would be substantially lower.

Frame 8‑1

Moreover the marginal productivity of disguised unemployment artificially maintained in farming is likely to be negative in many regions and sub-sectors, where extra supply must be destroyed or constrained by administrative devices. Favouring the natural flow of labour resources from farming to other non-farm occupations is likely to increase national income considerably.

Assessment of disguised unemployment in agriculture

A quantitative assessment of redundant employment in agriculture, which is a major cause of the low average productivity and incomes in the sector, is rather difficult. Actually in agriculture family farms are in the majority and maintaining a large labour force, as a general rule, coincides with a low average farm size often preventing farmers from using more advanced technology and organising the production and sale of their output better. As a consequence average costs per unit of production remain high (Section 5.4 and Frame 2‑1).

In order to assess the redundant labour force in EU agriculture we should envisage a reference scenario where farm structure had evolved freely, without the price support incentives to agriculture and without the various Community, national and regional regulations hindering inter- and intra-sectoral labour mobility and structural adjustment. This scenario should include all territorial and environmental regulation necessary to avoid depopulation in less favoured areas and to protect environmental standards.

Obviously such a scenario does not exist in the real world and in order to build it into a theory a number of assumptions would be necessary, making it rather arbitrary in nature.

Frame 8‑2 Change in labour productivity by economic branch in Italy (1991 vs. 2000)

An alternative approach could be to select the country performing best in terms of labour productivity and compare it to the rest of the European Union (RoE).

Frame 8‑3 indicates the differences in agricultural labour productivity per class of farm size, in terms of European Size Units[94] between The Netherlands and the rest of the European Union. The upper panel indicates proportionally the farm size in European Size Units, while the lower panel indicates it by size classes in a column chart. Dutch farmers are definitely more productive than farmers in the rest of EU-15. Such differences may be the result of numerous specific features of Dutch agriculture, such as more modern technology, specific crops (flowers, vegetables under glass, etc.), better services to agriculture such as extension services, marketing, etc.

Frame 8‑4 compares the distribution by classes of farm size in The Netherlands and in the rest of EU-15 of three major structural parameters: the number of holdings, the output (Standard Gross Margin), and the agricultural labour force. The same comparison using cumulated percentages is shown in Frame 8‑5.

Frame 8‑3 Scale economies in The Netherlands and in the EU (1998)

These structural parameters are rather different between the Netherlands and other EU Member Countries. About 60% of Dutch farms are classified in the two more productive size classes (over 40 ESU), and less than 2% in the lowest productivity classes (less than 4 ESU) while in the Rest of EU-15 such indicators are reversed 9% over 40 ESU and 51% in the less productive farm classes less than 4 ESU. In the Netherlands over two thirds of farm output is produced in the large farm size class (>100 ESU) where over 50% of the labour force is employed, while in the rest of EU-15 in the same farm size class, less than one third of the output is produced and less than one seventh (13%) of the labour force is employed.

The more modern and productive structure of agricultural production in The Netherlands is partly a result of the liberal policy of the Dutch government before becoming a member of the European Community, and also of the more liberal policy in the labour market after the institution of the EU. Labour markets are not yet fully integrated in the Union, but are still largely dependent on national policies.

Frame 8‑4 Distribution of structural parameters in the Netherlands and in the Rest of EU

The Dutch EEC Commissioner for Agriculture Sicco Mansholt in his famous Memorandum on the Reform of the CAP presented in December 1968 proposed dismantling price support and concentrating the government intervention in structural policies by (a) financing the economic adjustment and structural development of farms who could become economically viable after the implementation of a farm development plan on a 6 or 9[95] year time span, (b) favouring the retirement of farmers, and (c) creating a network of “socio-economic” advisors in rural areas in order to increase the mobility in the labour and land markets.

Such sensible and rational proposals were only partially included in the 1972 directives on the CAP structural reform and were largely misinterpreted because: (a) price support was not dismantled, (b) distorted market prices prevented a successful use of structural funds in the general interest[96], (c) public funds earmarked for socio-economic advisors were used by many regional governments to create advisors for agricultural extension services, reaching exactly the opposite goal, i.e. training people for agriculture in rural areas, instead of favouring the diversification of the rural economic fabric.

Likely effects of the Mansholt structural reform proposal

In order to envisage in very broad terms what could have been the effects of the Mansholt structural reform of the CAP, and what could now be the structural distortions and costs for EU society of missing such an opportunity, we may assume that its implementation could have generated in the rest of EU-15 the same distribution of the labour force by farm classes as is now in The Netherlands. Although the overall productivity of agricultural resources would have improved as well, we do not include this change in our comparison, and keep the average productivity of labour (SGM per AWU) per farm class as it is now in the Rest of EU15, in order to focus as much as possible on the sheer effect of scale economies in structural change.

In 1997 the average productivity per annual work unit in The Netherlands was € thousand 43.5, if productivity in all farm size classes were similar to the productivity in the Rest of EU (RoE), the Dutch national average productivity would have been only € 38.2 thousand (Frame 8‑6).

If the RoE had the same distribution of farms per farm size classes as in the Netherlands, the total Standard Gross Margin would have been distributed accordingly, i.e. following the distribution indicated in the central panel of Frame 8‑4, and the average productivity per AWU in the RoE would have increased up to € 38.2 thousand per work unit, i.e. almost twice as high as present productivity. As a consequence, in the RoE only 50% of the present agricultural workforce could have produced the present amount of agricultural output. Assuming an unchanged ratio between gross farm incomes (SGM) and net farm incomes, i.e. excluding capital depreciation, per capita net farm incomes would have doubled as well.

If the 1997 market price support policies were dismantled, in the rest of EU-15 the value at border prices of the average SGM per work unit would have decreased to € thousand 25, although remaining 30% higher than the present SGM (€ 19000).

Could the EU have enough financial resources to successfully implement such a CAP policy reform? The answer is likely to be positive if we take into consideration that from 1975 to 1998 the FEOGA-Guarantee spent, mainly for market price support, € bn 733 at constant 1998 prices, i.e. nine times the whole 1998 EU budget, amounting to € 109000 per full-time worker equivalent (AWU) in 1998. If such huge flow of taxpayers money were spent in structural policies, rather than in price support, most probably the Dutch distribution of farms by size classes could have been attained in the Rest of Europe,[97] properly compensating farmers for the costs of moving to non-agricultural activities, subsidising the necessary environmental policies, and properly supporting the less advantaged areas at least to the level they are supported at now. EU citizens would not have paid such high food prices in the last decades, saving more than € bn 733[98] in consumption expenditure. Now the problems of low average agricultural incomes would be largely solved.

Frame 8‑5 Cumulated percentage in the EU and in The Netherlands

Frame 8‑6 Alternative structure of production in the Rest of EU

The conclusion of this analysis, very simple and necessarily based on strong assumptions, pays tribute to the foresight and economic intuition of the Dutch Commissioner Sicco Mansholt. Moreover it highlights how different it is spending taxpayers’ money in socially productive investments rather than in income support which affects the interplay of market forces.

If we consider that an appropriate structural policy could have improved not only the distribution of farms by farm classes, but could also have increased the average productivity in the Rest of the EU towards the present Dutch levels, we may conclude that if EEC policymakers had followed the advice provided by policy analysts and academics in the conferences of Messina and Stresa, before instituting the CAP, they could have considerably increased the social welfare of EU citizens.

Opportunity cost of disguised unemployment

In thirty years approximately 50% of the present agricultural labour force (3.4mn work units)[99] leaving agriculture could have found alternative job opportunities over the whole EU territory. Job opportunities would also have been created as a consequence of macroeconomic effects such as the larger domestic demand and higher EU international competitiveness generated by the reduction in farm prices discussed in the previous section. Part of this workforce could have been employed in rural areas in order to attain specific environmental targets, but the majority would have found non-agricultural job opportunities implying an average productivity at least as large as the low productivity they had in agriculture.

This larger availability of workforce would have been an asset rather than a liability to the EU economy, contributing to higher rates of development and probably substituting part of the workforce which immigrated in the EU in the last thirty years.

The excess workforce now employed in agriculture at low marginal productivity for society as a whole[100] is unwittingly preventing a better restructuring of agricultural production and is lowering the potential productivity of other farmers. If in the last thirty years a proper structural policy in agriculture had moved them to non-agricultural occupations, the resulting net increase in non-agricultural Value Added could be considered a net welfare gain for society as a whole. Conversely this lost Value Added can be considered as a welfare indicator of the social costs of the present inefficient agricultural structure, and of the low productivity of labour resources invested. Assuming a minimal level of non-agricultural annual productivity of only one half of the 1998 average income per agricultural work unit, (€ 10615) this opportunity cost of the present disguised unemployment in agriculture for society as a whole would be € bn 35.7 per year (Frame 9‑3).

At present the income transfers generated by the EU price support policy disguise such high average costs borne in inefficient farms, such transfers do not flow totally to producer incomes but are largely lost in inefficient farm production.[101]

8.3 Impact on less developed areas

Analyses at EU regional level of the incoming and outgoing income flows, consequent to the CAP, show a positive effect on inter-regional income redistribution and on EU cohesion.[102]

Frame 8‑7 The Netherlands, interregional income redistribution generated by agricultural price support [103]

Actually in poorer and depopulated areas agriculture usually accounts for a larger share of the total Value Added than in better-off areas. Consequently such areas receive a net income flow from price support policies because the burden paid by consumers and taxpayers is rather small, while the benefit is higher thanks to the relative importance of agriculture in the local economy. Conversely, rich and highly urbanised areas contribute much more to the price support policy through consumers and taxpayers and receive little benefit, as agriculture is usually a very small share of the final production.

Frame 8‑8 The Netherlands, income redistribution in 1991 due to the CAP price support

Such redistributive effects of price support policy are very consistent with the regional income redistribution policy of the EU and improve cohesion among EU regions and Member Countries. Moreover, such net income flows in poorer regions and agricultural areas, with high manifest and disguised unemployment rates, are very likely to have a marked multiplier effect on local income and consequently positive effects on local employment and on local economic development.

A quantitative analysis of such redistributive effects in over 200 EU regions was carried out when assessing the impact of various common policies on EU cohesion. As an example Frame 8‑7 indicates the equitable income redistribution generated by the EU agricultural price support policy in The Netherlands. In the lower panel Dutch regions are presented in order of increasing average per capita income (indicated in the right hand vertical axes and by the continuous line), while the columns indicate the net regional income flows, which are positive for poorer regions (left side of the chart) and negative for better-off regions (right side of the chart). Frame 8‑8 indicates the negative correlation of transfers from poorer to richer regions (the names of the regions and relative figures are indicated in the upper panel of Frame 8‑7).

Are such apparent positive effects of price support policy in regional income redistribution sufficient to justify the CAP? Probably they are not, for at least two reasons. Firstly the redistribution is not always so clear in the Dutch case. Often agriculture accounts for a large share of regional GDP also in rich and populated regions,[104] while it may not account for a large share of the GDP in poor and depopulated regions.[105] In the second place, the positive regional income redistribution consequent to agricultural price support is a by-product of other objectives, namely the inter-sectoral income redistribution. Consequently targeted regional policies are likely to attain, and much better, the regional income redistribution objective and be much more cost-effective than agricultural price support. The same amount of income could be transferred in a more efficient and equitable way through targeted and locally defined regional and environmental policy measures, rather than through EU-wide agricultural market price support policy.

8.4 Impact on international competitiveness

As already mentioned in the previous section, the competitiveness of non-agricultural sectors is reduced by the CAP amber- and blue-box policy measures in converging ways.

(1) Higher food prices and higher taxes paid by households in order to finance agricultural subsidies increase inflation, reduce the real income of households and reduce the demand of non-agricultural goods. As such transfers result mainly in inefficient agricultural production and social dead-weight losses, we cannot claim an equivalent increase in farmers’ demand for non-agricultural goods.

(2) Increased food prices generate a higher cost of living and a likely increase in the cost of labour for non-agricultural firms. Their international competitiveness is consequently reduced.

(3) A depressing effect on international agricultural markets from dumping EU agricultural surpluses reduces the cost of living and of non-agricultural wages in Third countries. As a consequence Third countries are more competitive than the EU in the production and trade of non-agricultural commodities.

Impact on international terms of trade

As the EU is the largest trader in the agri-food world markets, distorted prices in the EU market are reflected in international trade flows and in further distortion of international markets, although production-limiting policies are reducing the impact of such distortions. By dumping surpluses on world markets, international agri-food prices are reduced, and the cost of living and real wages are lowered on average in Third countries, so increasing their competitiveness in non-agricultural markets as compared to the EU.

On the other hand agricultural incomes and employment are lowered in Third countries. This is particularly alarming in Developing Countries where agricultural production is often one of the few activities with potential international comparative advantage. Sometimes the EU bears feedback burdens from the reduced farm employment in some Developing Countries, for example the growth of present illegal immigration from North African and other developing countries.

According to estimates made during the GATT Uruguay Round, in 1995 the liberalisation of OECD and developing countries’ food policies, assuming incomplete price transmission in developing countries, would have generated a 33% increase in the international price of food.

The weighted average of the coefficients of variation of staple food commodity prices (wheat, coarse grains, rice, meat, dairy products, sugar) was estimated to decrease from 0.34 before liberalisation to 0.11 after liberalisation.[106] The change in net economic welfare in 1995 due to the removal of food price distortions both in OECD and developing countries was estimated at over $bn 200 (1985 prices), $bn 75 due to exogenous productivity growth and $bn 129 due to price-responsive productivity growth.[107]

8.5 EU enlargement

By asking the new member countries, especially Central and Eastern European Countries (CEECs), to accept and enforce the acquis communautaire in agricultural policy, the EU Council of Ministers is likely to create the same inefficiencies and inequities in the new countries as described for the EU-15.

In the longer term, instead of favouring the development of a competitive agricultural structure of production, inefficient farms, undersized or oversized, will survive thanks to the income transfers generated by the CAP from European households. Increased land rents will be capitalised and will rapidly boost farmland values, creating entry barriers to new farmers and making it very difficult in the future to dismantle the CAP price support policy, as is now the case in the EU-15.

This historical decision on the economic policy of the European continent will not only increase the burden of the CAP for EU-15 households, given the low income levels and fiscal potential of CEECs, but will generate a huge amount of dead-weight losses for the whole continent and globally. Actually an enlarged Union will further increase its shares of international commodity markets, and the impact of the CAP will distort the international terms of trade to a greater proportion. In recent European economic history there has probably never been a decision on sectoral policy implying such a huge potential to decrease European citizens’ well being.

8.6 Perspectives

Agenda 2000 and the decisions taken in the Berlin summit, while reducing to a moderate extent domestic market price support, by compensating farmers for their income losses through producer aids will not substantially reduce price support at producer level. Therefore the existing distortions in the labour market and in international competitiveness have not been substantially removed. Consequently overall EU employment will be reduced by the CAP and the international competitiveness of EU non-agricultural sectors will still bear the burden of an inefficient labour market and higher taxation necessary to finance agricultural production aid.

8.7 Scope and limitations of the analysis

The conclusions drawn in this section are based on available empirical evidence. A more precise assessment of such results could be obtained by ad-hoc analyses carried out with macroeconomic models, particularly in the EU Commission DG-2. Such monitoring of the macroeconomic effects of the CAP should be carried out annually and made accessible to all policymakers, EU citizens, consumer and farm organisations, and other interested people.

In our analyses we often assume a full transmission of variations in farm prices to the level of food prices. Such transmission may be rather imperfect and even perverse in the very short term, but in the long term it has been proved true. However it is very important that consumer policy monitors the performance of intermediaries in the food chain in order to increase the competitiveness and reduce to a minimum the margins between prices at farm and at retail level.

8.8 Summary and conclusions

The opinions of the Consumer Committee concerning the impact of the CAP on overall EU employment and on the international competitiveness of non-agricultural sectors are substantially supported by economic theory and empirical evidence.

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. According to the above-mentioned estimates of the Commission, the reduction of market prices for arable crops, beef and dairy products envisaged by Agenda 2000, if not frustrated by increased budgetary expenditure, is likely to increase overall employment by approximately 0.1% by year 2005 and by 0.16% in the longer run, by year 2030.

CAP price support has a remarkable effect on the quality of agricultural employment, reducing its productivity, as a consequence of the slow rate of structural adjustment, especially in countries where average farm sizes are small and a large number of farms would not be economically viable if price support were reduced. If a sound structural reform had been implemented in the early seventies, after the proposals presented by the Dutch Commissioner for Agriculture, Sicco Mansholt, the present distribution of EU farms per farm size classes would now be much more efficient, for example more similar to the existing distribution in The Netherlands. Assuming such farm structure, the average productivity of agricultural labour would be much higher 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 for market price support € bn 733 at constant 1998 prices, 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 not have paid higher food prices, saving an amount of economic resources most probably higher than the mentioned budgetary expenditure.

Moreover the labour resources released from agriculture would have had a beneficial impact on non-agricultural economic activities. Even assuming a low average productivity of such labour resources, the annual increase in EU GDP could have been considerable.

On the other hand the CAP price support policy had an overall positive impact on inter-regional income distribution, 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, such positive effects are not specifically targeted by the CAP price support policy. There are numerous exceptions of rich agricultural regions receiving a net flow of income transfers and poor non-agricultural regions suffering an outflow of income transfers. 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. On the other hand agricultural development in Third Countries has been hindered, damaging in particular those Developing 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 Third Countries, and have increased their international competitiveness. Altogether such international effects of the EU price support policy disadvantaged EU non-agricultural sectors.

The largest negative impact of price support is likely to be borne by the new members joining the European Union in the next few years, in particular the Central and Eastern European Countries (CEECs), which will have to accept also the CAP as part of the acquis communautaire. Their 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 will be borne by citizens of the EU-15 Member Countries, CEEC national budgets will 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 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 recent European economic history there has probably never been a decision on sectoral policy, which has had such a huge potential to decrease European citizens’ well being.

In conclusion, the impact of the CAP price support policy on overall EU employment and on the international competitiveness of non-agricultural sectors appears to be in open conflict with the objectives of increasing economic efficiency and the overall welfare of EU citizens stated in the Treaty.

Recommendations

In order to take account of consumer interests in the CAP, apart from a reduction of producer price support, 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 retraining in order to ease inter-sectoral labour mobility, 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 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 the Central and Eastern European Countries.

9. Synopsis and conclusions

This section will answer the following question: To what extent and how has the welfare of EU citizens been impacted by the CAP?

9.1 Terms of the question

Opinion of the consumer committee

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 unacceptable high cost for consumers and taxpayers.

Issues involved

As we have seen in the previous sections of this report, the impact of the CAP on the social welfare of the EU society is multidimensional and not all of the various dimensions are easily quantifiable. However the desire to have a synoptic picture providing at least a rough perception of the relative importance of the various components of EU social welfare is appealing to the policy maker and to the citizen as well. It is also challenging to the policy analyst.

This report focuses on two of the most important criteria for evaluating social welfare: efficiency and equity. Other criteria for policy evaluation mentioned in the December 1998 document of the EU Consumer Committee were transparency, environmental sustainability, safety, and security. As this report focuses on efficiency and equity, these other criteria are only mentioned by making reference to the CC Document, and cannot be fully and properly discussed

In order to outline a full picture of the CAP impact on the social welfare of EU citizens, we will mention what, in our opinion, are its most important components (section 9.2) and then summarise the results of this research in a synoptic table presenting a rough appraisal of the various components of the impact of the CAP on the welfare of EU citizens. (section 9.3). After a few comments on present policy perspectives (section 9.4), general concluding remarks will be drawn (section 9.6).

9.2 Other components of social welfare

Transparency

Consumers support the demand of the Economic and Social Committee concerning the publication of an annual report and regular information on the impact of the CAP on consumers. In addition, information on the impact of the CAP on Countries of Central and Eastern and Europe is also required.The opinion of the Consumer Committee on this subject is quite straightforward. It is rather surprising that Consumers’ requests have not yet been fully accepted by the EU Commission.

EU citizens and policymakers cannot evaluate economic policies if their effects are not transparent and understandable. The present agricultural policy is not transparent at all. Consumers as well as producers do not know what the price of agricultural commodities and of food would be without the CAP. The documents provided annually by the Commission to the Council of Ministers, the European Parliament and the Economic and Social Committee when taking decisions on price support do not provide sufficient information about the cost of agricultural price support policy for EU consumers. Such costs are not trivial, amounting to about 25% of the value of agricultural production. As a consequence, the media do not have adequate information and EU citizens are not aware of the impact of the policy on them. Even farmers are not fully aware of the impact of farm support prices and claim higher support without perceiving the economic burden that EU consumers and society as a whole face by accepting their requests.

Impact on the environment

The opinion of the Consumer Committee

High price supports have encouraged farmers to define 'efficiency' solely in terms of maximising output, with little incentive for concern about the long-term sustainability of limited resources, such as energy or the land, or for environmental pollution and damage.

High price supports favour intensive crop and livestock production and a higher use of agri-chemicals such as nitrogen and pesticides as well as excessive production of manure, leading to pollution of water and soil.

Frame 9‑1 Relationship between price support and fertiliser use

Impact on food safety

Highly supported agricultural prices do not increase food safety and quality. On the contrary, minimum price guarantee favoured production of low quality and standardised produce to be sold for intervention and destruction. There has been a loss of genetic diversity particularly in livestock production and, as a result, a reduction in consumer choice. High support prices have also led to inflated land prices providing further incentives to maximise output per hectare - resulting in greater use of agri-chemicals and veterinary drugs such as antibiotics, pesticides and nitrates. This can and does lead to residues in food above the maximum residue levels if not properly applied.

One of the most serious public health issue arises from the use of antibiotics. The high stocking densities of intensive farming systems raise concerns about animal welfare and increases the susceptibility to diseases and spread of animal diseases, leading to increased use of antibiotics to maintain the health of the herd. Antibiotics are also used to increase growth rates. Strong evidence is available to show that antibiotic use in animals leads to the selection of resistant bacteria that can be passed to humans making some human infections harder to treat.

According to the EU Consumer Committee, the overall impact of the CAP on the safety on the food supply for European citizens is negative, creating net costs for society as a whole.

The CAP has also had an adverse impact on the choice, and quality of food and on public health. This comes about in two ways. First, directly, through some of the CAP support mechanisms, and second, indirectly, through its encouragement of intensive farming methods.

For example, it reduces the availability to consumers of fruit and vegetables - products which nutritionists encourage us to eat more of them - subsidies are paid to withdraw produce from the market to keep prices high and much of this is destroyed. It encourages overproduction of meat, sugar and dairy products - products current dietary advice recommends we cut back on. Whilst it raises the price of these products, so discouraging consumption, the products come back into the food chain through a number of subsidised schemes - cut price dairy fat for the manufacture of biscuits and ice-cream and full fat milk and cheese for schools, hospitals and homes for the elderly.

The arguments put forward by the Consumer Committee on the likely impact of the CAP price support policy (amber and blue box policy measures) are interesting although needing further discussion on specific points. However the CC conclusion appears to be that, on the whole, the impact of CAP on consumer safety resulted in a net welfare reduction for EU citizens.

Impact on food security

On this subject the opinion of the Consumer Committee is rather favourable.

The CAP has had some positive results. Nowadays food shortages are practically unheard of in the internal market and consumers have access to a large range of products.

According to the EU Consumer Committee, the overall impact of the CAP on the security of European citizens was, and still is, positive, although this aspect of social welfare has lost much of its importance over time. At present EU security depends much more on the low level of energy self-sufficiency than on food self-sufficiency. The risk of a world war or of an economic embargo are rather low now. Globalisation of the world economy is further reducing such risk. In such an improbable situation preventing international trade, the EU economy would be much more vulnerable in terms of energy security than in terms of food security. The self-sufficiency rate of fuel is so low that the problems raised by a possible isolation from world markets would have to be solved somehow before facing a real risk to food security.

9.3 Impact on the overall welfare of EU citizens

Although the attainment of the highest level of social welfare is commonly accepted as the ultimate objective of economic policy, in practice it is rather difficult to verify to what extent this objective has been attained. In order to evaluate and compare alternative policy measures, their relative impact on social welfare should be expressed in quantitative terms.

Economic and statistical tools needed for the quantification of policy measures have developed dramatically in the last decades, often as a consequence of better computing facilities. For example, in the fifties numerous researchers and policymakers were still very sceptical on the possibility of quantifying such an abstract and complex concept as the Gross Domestic Product. Now such a concept is usually expressed in quantitative terms and currently used not only by policy analysts but also by policymakers and by the public at large.

We will suggest possible quantitative assessments of the various effects of the CAP on the social welfare of EU citizens, without any pretension of precision, given the poor methodology often used and the scarce information available on various issues, but rather with the aim of favouring a more complete picture of the issues at stake and a deeper debate on each of our assumptions. This effort could contribute to improve the current analytical approach and the results needed to envisage and implement a better economic policy for the citizens of the European Union.

Frame 9‑3 shows the quantitative estimates or assumptions of the impact of the CAP on various components of the social welfare of EU citizens. For other components, especially if not related to efficiency and equity, such as safety, security, etc., the assessed impact on social welfare is indicated only in qualitative terms, e.g. in terms of “net benefits” when the overall impact is likely to be positive, and “net costs” when the overall impact is likely to be negative.

Frame 9‑3 Synopsis of transfers and social costs associated to the CAP

The total costs of the CAP to EU society (Frame 9‑3) are classified in (a) intersectoral transfers, paid by households (consumers and taxpayers) to the agricultural sector (producers and general services) and (b) social costs, indicating the loss to society as a whole of economic resources as a consequence of the CAP. Such social costs may be extra costs for households or part of the transfers to the agricultural sector, the latter reducing the net benefit for producers of transfers paid by households.

According to the estimates given in previous sections of the report, in 1998 transfers from households to the agricultural sector could be assessed in the order of € bn 107 (€ bn 55 from consumers and 52 from taxpayers). Dead-weight losses at consumer level (estimated in section 7.3 at € bn 3.8), are extra burdens for consumers and for society as a whole, moreover extra administrative costs should be considered as well. The dead-weight loss of raising taxes necessary to finance the CAP price support policy was estimated at € bn 5.1, while the loss of economic resources for programme administration was estimated at € bn 6.2. Finally, the dead-weight loss for society as a whole of land set-aside[110] is estimated at € bn 1.3. Altogether the estimated social cost borne by EU households reaches € bn 123.

Frame 9‑4 EU-15, 2000. Estimates of transfers and social costs associated to the CAP

Part of the € bn 107 paid by households via higher market prices or via the EU budget may be considered dead-weight losses for society as a whole, such as the extra cost[111] of surplus disposal due to price support (€ bn 2), and fraud to EU budget (€ bn 1). Such resources could have had a much better alternative use in the absence of CAP.

Moreover out of the € bn 99 transferred to agricultural producers[112] part does not reach farmers. The burden of inefficient allocation of economic resources was estimate in € bn 10 in the short term and € bn 36 in the long term, while producer compliance costs due to the increased bureaucratic farm management was estimated in € bn 1. As a result net transfers to agricultural producers are estimated in € bn 53, i.e. 38% of the total burden estimated for households, and € bn 58 to the agricultural sector, i.e. 47% of the total burden for society.

From the point of view of society as a whole, on a total burden of quantified items associated to the CAP, estimated at € bn 123 in year 1998, social costs account for € bn 66 (53%), while transfers actually increasing the income of agricultural producers, allegedly the main target of agricultural policy, are estimated only at € bn 46, less than 40% of the total burden.

Among the items not quantified, the social welfare impact of CAP price support on EU security of food supply and on the development of disadvantaged areas is estimated to be positive, while net social costs are likely to occur in terms of macroeconomic effects and in terms of the impact on the environment and on the safety of EU citizens.

9.4 Perspectives

A detailed assessment of the future impact of the CAP on the welfare of EU citizens would need a further quantitative analysis, especially if the impact on Central and Eastern European Countries is included. On the whole, if the programmes indicated in Agenda 2000 and in the Berlin Summit are implemented, the present situation is not going to change substantially, and the CAP is likely to continue to generate a large loss of welfare for EU citizens.

9.5 Scope and limitations of the study

As mentioned earlier in this section, the aim of our quantitative estimates and assumptions made in order to assess the impact of the CAP on the welfare of the EU citizens is to provide a more complete framework of the various components of social welfare affected by the CAP and an incentive for further discussion and research work in this kind of policy analysis. Taking into consideration that policymakers often overlook the largest part of transfers flowing from consumers to farmers (€ bn 55), such a policy analysis, although preliminary, should be rather useful.

9.6 Summary and conclusions

In order to assess the likely effect of CAP market policy on the welfare of EU citizens, it is necessary to present a synoptic view ranking the relative importance of each major component of social welfare. Such quantitative estimates, with reference to 1998, are largely indicative, without any pretence of precision, given the lack of statistical information on many issues.

In terms of social costs, i.e. the dead-weight losses for EU society, the largest component is the higher cost of agricultural production due to the lack of structural adjustment, a conservative assessment of such cost could be in the order of € bn 36. The second largest component is the administrative cost borne by the government at Community, national, regional and local level, in order to administer and monitor CAP programmes, especially for direct payments to farmers and in order to raise the taxes necessary to fund such agricultural programmes. Altogether the loss of financial resources, which could have been spent better in different ways, is assessed in € bn 11.

A third component is the short term misallocation of economic resources due to the unbalanced level of producer price support for the various commodities, whose possible rationale in terms of social welfare is not easily understandable, unless we include a prize for the relative bargaining power of producer lobbies. Although some more apparent welfare losses related to such type of market price distortions have been reduced by the 1992 CAP reform, the likely social cost of such distortions in the whole EU agriculture could still be about Euo bn 10. On the consumer side, the parallel loss of efficiency due to price distortions is likely to be lower, approximately € bn 4, due to the price-inelastic demand for food items and to the lower distortions in agricultural market prices after the 1992 CAP reform.

The dead-weight losses for surplus storage and disposal in the last years have been largely reduced to about € bn 2, while the payments to farmers for the set-aside of arable land, € bn 1.3, must be considered at least a dead-weight loss for EU citizens, without taking into consideration the other economic resources which are sterilised as a consequence of such a policy measure. Eventually the costs borne by farmers for compliance with the public administrative and monitoring work, especially involved in supply management policy measures, may be assessed at about € bn 1, almost similar to the likely loss of economic resources involved in fraud.

The overall cost from EU households, including transfers to the agricultural sector, social costs for consumers and administrative costs, amounts to a total of € bn 123. On the other hand, not all the transfers from EU households mentioned in the previous sections (€ bn 107) can be considered a net benefit to people working in the agricultural sector. If we exclude 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, plus 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 should be assessed at about € bn 58. The share of net benefit to the agricultural sector on the total cost born by EU households is 47%. Such a percentage could be taken as an indicator of the efficiency of transferring economic resources to the agricultural sector via the CAP price support policy.

Actually even such net benefit for the agricultural sector does not flow entirely to farmers. A spill-over effect towards other people working in the agricultural sector providing goods and services to farmers and involved in the local trade of farm products further reduces the net benefit that farmers are likely to enjoy as a consequence of the price support policy. As a general estimate, the net income benefit for EU farmers might be assessed less than 50% of the total cost borne by EU households.

As mentioned in the previous sections, such benefit flows in much larger proportion to better-off farmers dealing with larger farms and landowners. Among the items not quantified, the social welfare impact of CAP price support on EU security of food supply and on the development of disadvantaged areas is estimated to be positive, while net social costs are likely to occur in terms of macroeconomic effects and in terms of the impact on environment and on safety.

General conclusions

The opinions on the Common Agricultural Policy expressed by the EU Consumer Committee on 8 December 1998 and on 14 June 1999 are largely supported by further investigation of the issues involved. This analysis, although taking into consideration all the CAP policy measures, focused on the CAP price support policy, concerning over 80% of economic resources involved in the CAP, largely “under reduction commitments” according to the Marrakesh GATT agreement. The impact of the remaining part of the CAP, mainly dealing with green-box policies, could be better assessed by analysing the various individual programmes at regional or national level.

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 organisations asking for 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. Instead of favouring a physiological intersectoral mobility of the labour force and 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, the CAP provides an annual transfer of income approximately as big as the net agricultural value added, retaining in the sector numerous small, non-economically viable farms and a large amount of disguised unemployment.

EU households not only pay the cost of income transfers to farmers by means of higher food prices and higher taxes to finance farm subsidies, but incur a substantial dead-weight loss. Extra social costs are related for example to the use of polluting inputs, increased by higher producer prices, and to the increase in soil erosion consequent to subsidising arable land in hilly and mountain areas.

A rough assessment of the more easily quantifiable costs for EU citizens associated to the CAP price support policy (amber and blue box policy measures) leads to the conclusion that over 50% of the overall cost borne by households does not reach farmers, the target social group. Moreover the largest part of the income transferred to farmers benefits better-off farmers worsening rather than improving the income distribution within the agricultural sector and within society as a whole.

As a general principle, economic policies should be justified either in terms of increasing efficiency, i.e. by providing a relatively high social internal rate of return to public expenditure, or the expected benefits for society as a whole should be apparent 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, we must conclude than the burden for EU CAP price support policy is likely to be rather high, larger than the whole EU budget, while its social rate of return is definitely negative and no other positive effect on the welfare of EU citizens is likely to be big enough to justify the huge costs borne by households.

The Commission document Agenda 2000 and the decisions taken in the Berlin Summit do not sufficiently reform the CAP which will maintain the largest part of its negative features. The recent position taken by the EU delegation in the WTO negotiations in favour of maintaining the production-limiting “blue box” policy measures will also frustrate the future potential benefits for households of the planned reduction in market price support. The budgetary cost of the CAP will increase, producer prices will still be heavily distorted and the overall efficiency and equity of the CAP will not substantially improve. Altogether such decisions are fully in contrast with the interests of consumers and of EU society as a whole.

Recommendations

Although never fully implemented, needed changes in CAP policy measures have also been repeatedly mentioned 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 Marrakesh. In synthesis: (a) dismantling “blue-box” and reducing amber-box policy measures, distorting market prices both at consumer and at producer level, (b) improving green-box policies, oriented to the general interest of society and not only to particular interests, (c) providing decoupled compensations (transparent, decreasing and limited in time) for the loss of farm income consequent to the reform.

Lump-sum compensation, financed by issuing EU bonds, could be very flexible in adapting the compensation rates to equity criteria and efficient in avoiding future distortions in market prices. Farmers could use them immediately in order to increase their economic farm size, or exploit other employment opportunities if their farm could not become economically viable, or transform their compensation in bonds into a life-long retirement pension. Immediately after the reform market prices would not be distorted and new EU member countries could not claim compensation for dismantling their market price support. Important agricultural problems in CEECs accession to the EU would be solved both for the EU and for the CEECs.

Consumer strategy

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 in the “Opinions on the CAP” of the Consumer Committee, should be based on complete and unbiased information on the likely effects of the CAP, supported by permanent monitoring, and on a stronger participation of consumer organisations in the CAP decision-making process at all levels: community, national, regional and local.

Complete and unbiased information

It is important to create a “countervailing” research and information network looking at farm problems 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 and other sectoral EU policies as well.

Such information should be based on a permanent monitoring network, including at least:

(e) an annual estimate of inter-sectoral income transfers and social costs generated by the CAP, integrating existing estimates (e.g. OECD) by including commodity market analyses and projections of the likely impact of present and proposed policy measures;

(f) 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;

(g) a regional analysis estimating income flows 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;

(h) a structural analysis at EU, national and regional level estimating the disguised unemployment created or maintained by CAP policy measures. Figures on employment are usually more concrete and easily perceived by citizens, policymakers, farm and consumer organisations than more abstract concepts such as “market price support” or “social welfare”.

Consumer participation in decision-making of sectoral policies

Sectoral institutions tend to be producer-biased, consequently they should deal mainly with technical decisions and research. Policy decisions, publicly funded research and monitoring, should be carried out mainly by non-sectoral institutions, where all relevant interests are represented. The ongoing reform of EU institutions should provide an open and representative decision-making process, where all interests at stake should be properly represented. The rapid institutional implementation of the guidelines decided in the Amsterdam Treaty and now included in article 153 of the “Treaty Instituting the European Community” could substantially improve the overall well being of EU citizens.

Institutional changes in the EU

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, and it is now the time to set free European institutions from this “original sin”.

Decisions in economic policy where inter-sectoral allocation of resources are involved should not be 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, otherwise final decisions may be sector-biased even if the institution per se is not biased.

Trade policies for agricultural products should be decided mainly by the Trade Council of Ministers and prepared by the trade DG, and not by the Council of Agriculture Ministers and the D.G. Agriculture. 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 be decided by the Council of Ministers of Regional Policies and the regional DG, rather than by the Council of Agricultural Ministers and agricultural DG. 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 those economic activities which are more socially productive for local communities, rather than further increasing the often inefficient resources already invested in agriculture in rural areas.

Environmental policies in rural areas should be decided mainly by the Environment Ministries and environment DG rather than by the Agricultural Ministries and agricultural DG. 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.

Changes in national and regional institutions

Unfortunately such sectoral bias towards agricultural producers is not only operating in Community policies, where the final decision-making institution, the Council of Agricultural Ministers, is made only of ministers directly interested in agricultural issues. Producer biases are frequent also in national and regional policy-making institutions, where agricultural interests often prevail.

In parliamentary and government agencies 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 member countries agricultural producers would not be largely tax-exempt, domestic markets would have been less distorted and the present structure of agriculture production would be more efficient and less in need of public support.

The same institutional problems are frequently diffused at regional and local level. If this had not been the case in the past, 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 Policy Disease”

Interference of private interests in public policies is frequent and diffused in all governments; however, there is ample evidence that the cause of the malfunctioning of public policy-making is more deeply rooted and extended in the government of the European Union than in governments of 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 almost necessarily prevail as a consequence. 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. Such a recovery is a necessary, even if probably not a sufficient condition for solving the conspicuous problems of the Common Agricultural Policy. Moreover such recovery is now very urgent, especially in view of the enlargement to Central and Eastern European Countries.

10. Appendices

10.1 Statistical tables and figures

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Frame 10.5 EU domestic support 1999-2000 (EUR mn)

Frame 10‑4 EU, 1998-1999, Blue box policy measures

Frame 10‑5 EU, 1998-99, Aggregate measure of support (AMS) (Amber Box)

Frame 10‑6 Impact of a production subsidy (constrained by a ceiling)

10.2 Data sources and definition of variables

Symbols[114]	Variables	Sources (EU)	Sources (IT)



C	Domestic Availability (t)		FAO Database online
FR	Fiscal rebate		INEA
GS	General Services	OECD Database	INEA
mps	Market price support (per unit)
MPS=mps*Q	Market price support	OECD Database	Same as EU
NVAbp	Net value added (basic prices)
OBE	Other budget expenditure	OECD Database	INEA
PP	Producer payments	OECD Database	INEA
PS=MPS+PP	Producer support
Q	Production (t)		FAO Database online
RE	Regional expenditure		INEA
SSR = P/C	Self sufficiency Rate
TBT = MPS*(SSR-1)	Trade Balance Transfers
TS=PS+GS+OBE	Total support
VPb=VPf-MPS	Value of production (at border prices)

VPf	Value of production (at farm gate)	OECD Database	Eurostat

10.3 References

Databases on line

Fao on-line database (2002): http://apps.fao.org/page/collections?subset=agriculture

Eurostat Eurostat New Cronos on-line database (2002): http://europa.eu.int/comm/eurostat/

OECD on-line database (2002): SourceOECD, Agriculture and Food Statistics, http://www.Sourceoecd.org

EC DG-Agriculture (v.y.), Agriculture in the EU- Statistical and economic information, http://europa.eu.int/comm/agriculture/agrista/2001/table_en/index.htm

Other references

Anderson K. and R. Tyers (1990) How developing countries could gain from agricultural trade liberalization in the Uruguay Round. In Golding I. and O. Knudsen. Agricultural Trade Liberalization – implication for developing countries, OECD, Paris, 1990.

Brown, C. (1988) Price Policies of the CAP: Retrospect and Prospect, Statens Jordbrugsokonomiske Institut, Kobenhavn, Report n. 41

Consumer Commettee, G.D. SANCO (1998) Opinion on the reform of the CAP http://europa.eu.int/comm/consumers/policy/committee/cc06_en.html

European Commission DG-6 (1984) Public expenditure in agriculture. Study P 229, November.

European Commission (1999) Indicators for monitoring and evaluation: an indicative methodology, Methodological working paper n.3

European Commission (1994) EC Agricultural Policy for the 21^st Century, European Economy, Report by K. Munk, K. Thomson, et al.

European Commission (1997) Towards a Common Agricultural and Rural Policy for Europe, European Economy, Report by A. Buckwell et al.

EU Commission (2000) The macro-economic effects of the CAP reform. In Agenda 2000 – CAP refomreform decisions, impact analyses. CAP Reports, Office for official publications, Luxembourg.

EU Commission (2003). Public Finance Figures of the European Union, DG Budget. http://europa.eu.int/comm/budget/pubfin/index_en.htm

Mahé, L.P. and Ortalo-Magne F. (1999) CAP and the countryside – Proposal for food production and the rural environment. Economic Policy, April, p. 89-130.

Marsh J. Green, B, B. Kerney, S. Tangermann, S. Tarditi (1991) The Changing Role of the Common Agricultural Policy, Belhaven Press, London.

Marsh J., S. Tarditi, D. Sarri (1998). The Consumers and the CAP. Consumers in Europe Group, London

OECD (v.y.) Agricultural Policies, Markets and Trade in OECD Countries - monitoring and evaluation, Paris.

OECD (v.y.) (Organisation for Economic Co-operation and Development), Agricultural Policies, Markets and Trade: Monitoring and Outlook (APMT), Paris, Annual reports.

OECD (1995) Adjustment in OECD Agriculture – Issues and policy responses. Paris

OECD (1999) A matrix approach to evaluating policy: preliminary findings from PEM pilot studies of crop policy in the EU, the US, Canada and Mexico. Paris

Palaskas, T. (1996) Statistical analysis of price transmission in the European Union. European Review of Agricultural Economics, 46(1), p. 61-69.

Perugini C., Sarri D., Nucifora A. (2001) “Estimate of the Producer support estimate (PSE) and consumer support estimate (CSE) for the fruit and vegetable sector in the European Union”. CIPAS, University of Siena.

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Tarditi, S. (1996) Problems and perspectives of consumer policy in the agri-food sector, EU Commissio, DG-XXIV, Bruxelles.

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Tarditi, S. (1999) Costi e benefici della Politica Agricola Comunitaria, Consumatori, Diritti e Mercato, II-2, giugno 1999.

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10.4 Opinion of the Consumer Committee

http://europa.eu.int/comm/agriculture/agrista/2001/table_en/index.htm

Consumer Policy Consumer Committee

Opinion of the Consumer Committee adopted on 8 December, 1998 on the reform of the Common Agricultural Policy

WARNING

The Consumers Committee (CC) is a consultative committee of the Commission, entrusted to represent the interests of consumers at the Commission and to give opinions to the Commission on all problems relating to the conception and implementation of policy and action on the subject of protection and information of consumers, either at the request of the Commission or on its own initiative. The opinion of the CC does not reflect the opinion of the Commission or one of its Services.

1. - Introduction.

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' 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.

A policy which is strongly influenced by sectoral pressure groups pursuing their own interest generates large costs for the rest of society. This is precisely the case with the agricultural policy in the EU, which costs taxpayers almost half of the Community budget¹ and by increasing agricultural and food prices, cost consumers an extra large amount of money². 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.

At the European level, the importance of consumer policy has recently gained some emphasis, not reflected in the very low level of expenditure on consumer policy³, and is now better recognised in the Treaties. 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.

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. This can be done together with increasing European agriculture's capacity to face the two challenges of EU enlargement and competitiveness on the international market.

2. - Appraising the CAP.

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. Besides the negative domestic consequences of over-production, the CAP also had depressing and destabilising effects on world market prices through the dumping of EU surpluses. In addition, EU expenditure on agricultural policy increased dramatically. Faced with this situation, EU Ministers introduced further measures to limit farm production such as quotas and land set-aside.

Whilst production control measures succeeded in reducing, or at least constraining, the agricultural budget, the less obvious costs of the CAP to society increased through a waste of economic resources, higher administrative costs, increased bureaucracy, and constraints on farm entrepreneurship. High support prices have resulted in higher land (and quota) prices making it harder for producers to develop their farms and for new farmers to enter the profession.

The CAP has had some positive results. Nowadays food shortages are practically unheard of in the internal market and consumers have access to a large range of products. Nevertheless, the CAP does not respond to many objectives singled out as priorities by consumers: transparency, efficiency, equity, sustainability, food safety, quality and choice.

Transparency

EU citizens and policymakers cannot evaluate economic policies if their effects are not transparent and understandable. The present agricultural policy is not transparent at all. Consumers as well as producers do not know what the price of agricultural commodities and of food would be without the CAP. The documents provided annually by the Commission to the Council of Ministers, the European Parliament and the Economic and Social Committee when taking decisions on price support do not provide sufficient information about the cost of agricultural price support policy for EU consumers. Such costs are not trivial, amounting at about 25% of the value of agricultural production. As a consequence, the media do not have adequate information and EU citizens are not aware of the impact of the policy on them. Even farmers are not fully aware of the impact of farm support prices and claim higher support without perceiving the economic burden that EU consumers and society as a whole would face by accepting their requests.

Efficiency

The CAP has generated large surpluses, which are disposed of at the expense of taxpayers. Between 1975 and 1995, the EU budgetary expenditure for storage and market withdrawals was about 140 bn ECU, while export subsidies for dumping EU surpluses on world market was about 240 bn ECU (valued at constant 1995 prices). For example, such amounts of resources are respectively, more than three times bigger than the Irish Gross Domestic Product (GDP) and higher than the Belgian GDP in 1995.

The use of quotas means that households pay higher prices for milk, together with higher taxes for subsidising exports and the domestic use of milk by manufacturers. In addition, higher taxes are needed to pay for the bureaucratic network needed to ensure that farmers do not increase their milk production and for combating fraud which risk prospering when state intervention is substituted for the market.

In addition, by increasing the cost of living and inflation, higher food prices hinder the development of the EU economy, reduce the international competitiveness of non-agricultural sectors, reduce overall EU employment and the welfare of its citizens.

Equity

The CAP can also be criticised on grounds of equity. The burden of price support is proportionally higher for low-income households as they spend a greater proportion of their income on food and the benefit is higher for better-off farmers who produce the most. Exactly the opposite of what is expected from a public policy involving income redistribution.

Price support policies as well as area payments introduced by the 1992 CAP reform and developed in Agenda 2000 benefit mostly large landowners while their impact is much lower on the income of small farmers and negligible on landless workers ⁴.

Consumers do not understand why the CAP promotes an income transfer from all households to the farming sector almost as large as the EU agricultural value added clearly favouring landowners, when the EU unemployment rate is around 10% and health care and social benefits for poorer people have been recently reduced in many Member States in order to comply with the Maastricht requirements for entering the EMU.

CAP price support policies have also been very damaging to some developing countries. Many of the less developed countries are heavily dependent on trade in one or two agricultural products for external income, so that any artificial depression of world prices hits them particularly hard. For example, the sugar regime has been disastrous for some developing countries. Since the mid-1980s, the EU has consistently dumped on the world market between 3 and 6 million tonnes of sugar every year. The limited preferential access into the Union for some African, Caribbean and Pacific country and Indian sugar, around 1.3 million tons a year, fails to compensate for the effect of large-scale subsidised exports from the EU which is distorting competition on the world market. The beef regime has also been damaging producers in developing countries as well where some of the world's poorest people are dependent on cattle farming. EU beef has been sold, with the assistance of subsidies, at up to one half of the price of locally produced beef destroying the market for local farmers.

Environment

Food safety, quality, and choice

The CAP has also had an adverse impact on the choice, quality and safety of food and on public health. This comes about in two ways. First, directly, through some of the CAP support mechanisms, and second, indirectly, through its encouragement of intensive farming methods.

For example, it reduces the availability to consumers of fruit and vegetables - products which nutritionists encourage us to eat more of - subsidies are paid to withdraw produce from the market to keep prices high and much of this is destroyed. It encourages over production of meat, sugar and dairy products - products current dietary advice recommends we cut back on - whilst it raises the price of these products, so discouraging consumption, the products come back into the food chain through a number of subsidised schemes - cut price dairy fat for the manufacture of biscuits and ice-cream and full fat milk and cheese for schools, hospitals and homes for the elderly.

3. - Reform of the CAP : the consumer view.

Notwithstanding the reforms introduced in 1992 and more recent decisions taken by the Council of Ministers, the CAP is still largely producer-biased and generates an unacceptably high social cost in terms of inefficiency, inequitable income redistribution, environmental damage, and an adverse impact on food safety and quality. The CAP must be fundamentally reformed for the benefit of all its citizens.

Consumers do not want to see public support for agriculture removed - they want to see a complete reorientation of policy so that it allows the development of a sustainable agricultural sector, provides consumers with a choice of safe and nutritious food at reasonable prices, respects the environment, and makes an effective contribution to rural development. To this end, we call for a shift away from price policy and the development of new policy instruments to meet the needs of consumers, producers and the EU economy.

Food safety, quality and choice

Consumers want a diversity of quality food produced to high safety standards. Diversity is important because consumers have different needs, tastes and budgets. This means a move away from the production of standardised low quality products encouraged by price support, intervention and inappropriate quality standards. A diversity of animal and vegetable species is needed in food production. The so-called "quality standards", which, actually, are more trade standards for marketing purposes, do not reflect the expectations of the consumers which relate to organoleptic and nutritional characteristics. Besides, it should be recalled that the so-called European quality labels (AOP, IGP) do not reflect the quality but the origin of the product. The procedure involved for obtaining these labels actually discriminates against small producers. Apart from fruit and vegetables, products which do not benefit from these labels may not make a claim on origin when this origin is not recognised at EU level in spite the fact that information on the origin of all products is a major demand from consumers.

There is overwhelming evidence that poor nutrition is related to poverty. A shift away from price support would help meet nutritional needs, as well as providing greater choice of food and a healthier EU population. Targeted policy measures stimulating the improvement of food safety and quality are in the common interest of producers and consumers alike.

Wherever there is a potential serious threat to human health and cause and effects are not yet scientifically established, the EU should adopt the 'precautionary principle'⁵. This is particularly applicable in the case of GMOs. The use of antibiotics as growth promoters should be prohibited and the prohibition of use of hormones must be maintained and strictly enforced. Strict control systems should be adopted to ensure that maximum residue levels (MRLs) for pesticides, veterinary drugs, and nitrates are not exceeded.

Agri-environmental policies

Consumers are very much in favour of improving the rural environment by using direct and well-targeted policy measures. They wish to see a reduction in intensive agriculture and the promotion of extensive agriculture throughout the EU. Local agri-environmental measures could be very effective in maintaining existing flora and fauna, valuable landscapes and rural heritage values.

On the other hand, environment polluting practices should be discouraged and reduced. The application of the 'prevention at source' and 'polluter pays' principles in rural areas could substantially contribute to this objective. Strategies, including education and training for farmers, to prevent pollution should be promoted and adopted by the agricultural sector. Farmers will also find that adopting the necessary measures to minimise the use of agrochemicals and veterinary drugs is more profitable in the long run. Improved monitoring and control systems must be implemented.

Rural development

In less developed and depopulated areas targeted rural development policies are needed. Such policies should include the development of alternative employment opportunities, adequate infrastructure and services in areas subject to reduced economic development and a process of depopulation. Agricultural contributions to the welfare of rural communities should be recognised and compensated if they are not reflected by the market.

Price policy

The phased reduction in price support developed by the 1992 CAP reform should be continued and extended to the remaining commodities, especially milk and sugar. At the same time, quantity controls (such as production quotas and land set-aside) and export refunds should be phased out.

In order to reduce the typical instability of agricultural markets and prices, related to variable supply and weather conditions, targeted market stabilisation policies such as private storage aids should be encouraged.

Competition in the various stages of the food chain connecting farmers to consumers must be constantly monitored and improved to ensure that price reductions at producer level are passed on to consumers. Consumers want to see greater transparency of prices all along the food chain. Much more information should be published. On the other hand, such market imperfections cannot constitute a justification for increasing or maintaining high prices at farm level.

Structural adjustment

The long-term direction of the CAP should be clearly stated by EU policymakers in order to ease the policy-making process and reduce the costs of structural adjustment for farmers and for society as a whole. If clear long term policy objectives are not decided soon, the consequent economic cost will be even higher for the new Member States which are now implementing market-oriented agricultural policies but are induced to apply an inefficient and inequitable acquis communautaire in agriculture, which will re-introduce features of previous centralised economies and reduce their rate of economic development, without improving, but rather worsening, the welfare of their citizens.

Direct payments following the reform should not compensate farmers for income losses; instead they should be oriented towards improving structural adjustment and should be related to the need for structural adjustment generated by the reduction of price support. They should be temporary and decreasing in time.

Direct payments framed into agri-environmental and rural development policy programmes could be permanent if justified by positive benefits to the environment and local communities. In order to avoid price distortions, all payments should be decoupled from agricultural production, i.e. not directly related to the amount of commodities produced by farmers.

General services to agriculture increasing the level of technology, efficiency and sustainability of agricultural production should be improved and diffused especially in less developed areas. Agronomic, veterinary, environmental and economic research, education and training should be oriented to developing sustainable production methods, providing a diversity of better quality and safer food to consumers.

4. - Perspectives: Agenda 2000.

(Please refer to the internet site)

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¹ The total expenditure of the FEOGA Guarantee under the Common Agricultural Policy was 40.4 billion ECU in 1997.

² This extra cost is estimated at 42 billion ECU (Ref: OECD; Agricultural policies, Markets and Trade in 1997: Monitoring and outlook. Paris, 1998).

³ The total budget spent directly on consumer policy at the level of the European Union was 19.5 mio ECU in 1997. By comparison, this represents only 0.048 % of the total expenditure of the FEOGA Guarantee.

⁴ It is estimated that more than 80% of the financial support given to the agricultural sector benefit to less than 20% of the farming population.

⁵ The precautionary principle is recognised in the field on environment as stated in Article 130 R of the Amsterdam Treaty. This principle should also be recognised in all questions relating to foodstuff.

10.5 OECD Glossary of Agricultural Policy Terms (selected items)[115]

This glossary provides definitions of policy measures and PSE/CSE terms. The list is not exhaustive.

* *

Administered price: A price fixed by policy makers in order to determine, directly or indirectly, domestic market or producer prices. All administered price schemes set a minimum guaranteed support price or a target price for a commodity, which is maintained by associated policy measures, such as quantitative restrictions on production and imports; taxes, levies and tariffs on imports; export subsidies; and public stockholding.

Ad valorem tariff: A charge levied on imports, defined in terms of a fixed percentage of value (see also Specific-rate tariff).

Aggregate Measurement of Support, AMS: The indicator on which the domestic support discipline for the Uruguay Round Agreement on Agriculture is based. It differs from the Producer Support Estimate (see Producer Support Estimate) in many respects. The most important difference is that price gaps in the AMS calculation are estimated by reference to domestic administered prices and not to actual producer prices, and that external reference prices are fixed at the average levels of the 1986-1988 base period. In addition, many budgetary transfers included in PSEs are excluded from the AMS.

Agri-environmental indicator: A summary measure, combining raw data, used to describe the state of the environment, a risk to the environment, a change in the environment, or a driving force behind such a change, that can be attributed wholly or in part to an agricultural activity or activities.

Anti‑dumping duty: A duty levied on imported commodities. Article VI of the GATT permits special anti‑dumping duties that are equal to the difference between the import price and the normal value of the product in the exporting country (the “dumping margin”).

Applicant country (EU): A country that is being considered for membership of the European Union. Negotiations are currently being held between the EU and the following 12 applicants: Bulgaria, Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia and Slovenia.

Area payments: Budgetary payments made to individual producers on the basis of area (acres or hectares) of eligible land. Under some programmes, payments are made per hectare of land planted to a specific crop in order to supplement producer returns earned through market price. When used as part of a supply control measure, acreage payments are made per hectare of land fallowed or withdrawn from agricultural use, or for non‑production of specific commodities. In some cases, an upper limit is set on the number of hectares or the percentage of total farm area eligible for acreage payments. In the EU, area payments are made to individual producers per hectare of eligible land planted to cereals, oilseeds and protein crops as compensation for decreases in administered prices. The number of hectares eligible is the base area. These payments are conditional on the implementation of a set-aside programme, referred to as mandatory set-aside.

Base area (EU): National base areas are defined on the basis of the average of areas planted to cereals, oilseeds and protein crops between 1989 and 1991. The sum of individual areas claimed for payments — areas under set-aside and areas planted in cereals, oilseeds and protein crops — cannot exceed the national base area. If exceeded, there is a reduction in area payments and a penalty set-aside which increases the level of mandatory set-aside during the following year.

Border price: See Reference price.

Bovine Spongiform Encephalopathy, BSE: A fatal disease of the central nervous system of cattle, first identified in the United Kingdom in 1986. On 20 March 1996 the UK Spongiform Encephalopathy Advisory Committee (SEAC) announced the discovery of a new variant of Creutzfeldt-Jacob Disease (CJD), a fatal disease of the central nervous system in humans, which might be linked to consumption of beef affected by exposure to BSE.

Central and Eastern European Countries, CEECs: An OECD term for the group of countries comprising Albania, Bulgaria, Croatia, the Czech Republic, Hungary, Poland, Romania, the Slovak Republic, Slovenia, and the three Baltic States: Estonia, Latvia and Lithuania.

*Coarse grains: Generally refers to cereal grains other than wheat and rice — in the OECD countries, those used primarily for animal feed or brewing. When used as a collective term in the context of PSE and CSE estimates, the composition will vary by country and may include any or all of the following: barley, oats and sorghum. Rye and triticale, the production of which is minor in the OECD, are not included in PSE composites relating to coarse grains, except in a few cases where statistical difficulties prevent the separation of data on rye from those for other coarse grains. Maize (corn in the United States) is a coarse grain but is reported separately from all other coarse grains in the PSE/CSE tables. In Mexico, most maize is produced for human consumption rather than animal feed.

Codex Alimentarius: An international code for food developed and administered by the United Nations’ Codex Alimentarius Commission. Sometimes simply referred to as “the Codex”.

Common Agricultural Policy, CAP (EU): The EU’s agricultural policy. Its objectives were set forth in Article 39 of the Treaty of Rome (1957). Financing of the CAP is provided through the Guarantee and Guidance sections of the European Agricultural Guarantee and Guidance Fund (EAGGF) (see European Agricultural Guidance and Guarantee Fund, EAGGF).

Consumer support estimate, CSE: An indicator of the annual monetary value of gross transfers to (from) consumers of agricultural commodities, measured at the farm gate level, arising from policy measures which support agriculture, regardless of their nature, objectives or impact on consumption of farm products. The CSE includes explicit and implicit consumer transfers to producers of agricultural commodities measured at the farm gate (first consumer) level and associated with: market price support on domestically produced consumption (transfers to producers from consumers); transfers to the budget and/or importers on the share of consumption that is imported (other transfers from consumers). It is net of any payment to consumers to compensate them for their contribution to market price support of a specific commodity (consumer subsidy from taxpayers); and the producer contribution (as consumers of domestically produced crops) to the market price support on crops used in animal feed (excess feed cost). When negative, transfers from consumers measure the implicit tax on consumption associated with policies to the agricultural sector. Although consumption expenditure is increased/reduced by the amount of the implicit tax/subsidy, this indicator is not in itself an estimate of the impacts on consumption expenditure. The percentage CSE is the ratio of the CSE to the total value of consumption expenditure on commodities domestically produced, measured by the value of total consumption (at farm gate prices) minus budgetary support to consumers (consumer subsidies). The nomenclature and definitions of this indicator replaced the former Consumer Subsidy Equivalent as from 1999.

Countervailing duty: An additional levy imposed on imported goods to offset subsidies provided to producers or exporters by the government of the exporting country. Countervailing duties are permitted under Article VI of the GATT.

Crop year: A twelve-month period used for collecting data on a particular crop — generally corresponding to the natural planting and marketing cycle for that crop. Usually, a crop year begins in a month other than January.

Decoupled payment: A budgetary payment made to eligible recipients that is not linked to the production of specific commodities or to the use of specific factors of production.

Deficiency payment: An output subsidy in which the rate per unit of output of a commodity is the difference between an administered price and the market price.

European Agricultural Guidance and Guarantee Fund, EAGGF (EU): A fund within the overall EU budget for the financing of the CAP. Spending under the EAGGF Guarantee covers direct subsidies to farmers, market intervention measures, export refunds, as well as co-financing for the agri‑environment (Reg. 2078/92), afforestation and early retirement schemes. The EAGGF Guidance Section, which forms one of the EU’s four Structural Funds, co-finances measures to assist structural change in the agricultural sector and to promote rural development. Specific measures include investment aid, schemes to help young farmers set up for the first time, training activities, support for processing and marketing of agricultural and forestry products, compensatory allowances for areas with natural handicaps and rural infrastructure projects. The EAGGF Guarantee Section provides the financing for most of the CAP. The EAGGF fund is often referred to by its French abbreviation FEOGA.

European Currency Unit, ECU (EU): The unit of account used in the European Monetary System until 31 December 1998. The ECU is a weighted average of the national currencies of EU member countries. With the creation of the euro on 1 January 1999, the ECU was abolished. (See euro).

European Economic Area (EEA), Agreement on the: An international agreement which entered into force on 1 January 1994 that links Iceland, Norway and Liechtenstein to the EU Internal Market through the creation of a “European Economic Area”. Within the EEA, uniform rules regarding the four freedoms, competition, state-aid and public procurement apply. The relevant Community legislation for the Internal Market and the EEA-specific adaptations are integrated into the 22 Annexes and 48 Protocols to the EEA Agreement and subsequently transposed into national legislation of the three EFTA States. These Annexes and Protocols are constantly updated as relevant new or amended EU legislation is adopted.

European Free Trade Association, EFTA: A free-trade area established in 1958 with a view to eliminating tariffs on goods produced in and traded among member states. Most agricultural products are not subject to EFTA schedule tariff reductions. Current members: Iceland, Liechtenstein, Norway, Switzerland.

Excess feed cost: A supplementary cost resulting from Market Price Support on quantities of crops domestically produced and consumed as feed by livestock producers. It is deducted from the PSE for livestock and the CSE for crops. This avoids double-counting when aggregating the PSE and CSE for crops and livestock.

Export credit guarantee: Generally, an assurance provided by a government to protect its exporters against loss due to non‑payment by a foreign buyer.

Export restitutions (EU): Variable export subsidies given to traders to cover the difference between the internal EU price of a commodity and its world market price.

Export subsidies: Subsidies given to traders to cover the difference between internal market prices and world market prices, such as through the EU export restitutions and the US Export Enhancement Program. Export subsidies are now subject to value and volume restrictions under the Uruguay Round Agreement on Agriculture.

Farm-gate price: See producer price.

FEOGA (EU): See European Agricultural Guidance and Guarantee Fund.

Food and Agriculture Organisation, FAO: A United Nations agency, founded in 1945, whose remit is to monitor and improve the distribution and production of food and agricultural products throughout the world.

General Agreement on Tariffs and Trade, GATT: A multilateral agreement, originally negotiated in 1947 in Geneva among 23 countries, to reduce tariffs and other trade barriers. It provides a framework for periodic multilateral negotiations on trade liberalisation. The most recent round of such negotiations was the Uruguay Round. Part of the final agreement of the Uruguay Round, concluded in December 1993, led to the establishment of the World Trade Organisation to replace the GATT; it commenced operation on 1 January 1995.

Generalised System of Preferences, GSP: An autonomous, country‑specific policy that permits tariff reductions or possibly duty‑free entry of certain imports from designated developing countries.

General Services Support Estimate, GSSE: An indicator of the annual monetary value of gross transfers to services provided collectively to agriculture and arising from policy measures which support agriculture, regardless of their nature, objectives and impacts on farm production, income, or consumption of farm products. It includes taxpayer transfers to: improve agricultural production (research and development); agricultural training and education (agricultural schools); control of quality and safety of food, agricultural inputs, and the environment (inspection services); improving off-farm collective infrastructures, including downstream and upstream industry (infrastructures); assist marketing and promotion (marketing and promotion); meet the costs of depreciation and disposal of public storage of agricultural products (public stockholding); and other general services that cannot be disagreggated and allocated to the above categories due, for example, to a lack of information (miscellaneous). Unlike the PSE and CSE transfers, these transfers are not received by producers or consumers individually and do not affect farm receipts (revenue) or consumption expenditure by their amount, although they may affect production and consumption of agricultural commodities. The percentage GSSE is the ratio of the GSSE to the Total Support Estimate.

Genetically Modified Organisms, GMO: Plant and animal organisms whose genetic make-up has been modified through the application of biotechnology.

Guaranteed export credits: Measures to promote agricultural exports. Under the United States’ Export Credit Guarantee Program (GSM‑102), for example, repayment of private, short‑term credit is guaranteed for up to three years. The Intermediate Export Credit Guarantee Program (GSM‑103), established in 1985, guarantees repayment of private credit for three to ten years.

Headage payments: Budgetary payments made to individual producers on the basis of the number of head of a specific type of livestock, to supplement producer returns earned through sales at market prices. Headage payments are sometimes subject to an upper limit on the number of livestock eligible per holding, or constraints on stocking densities.

Import quota: A quantitative restriction on the level of imports imposed by a country.

Interest concession: A reduction, compared with commercial interest rates on the interest rate charged on a loan taken out by a farmer, typically provided directly by a government agency or by a government grant to the lending bank (in the case of a commercial loan).

Intervention price: A form of administered price; the price at which national intervention agencies are obliged to purchase any amount of a commodity offered to them regardless of the level of market price (assuming that the commodities meet designated specifications and quality standards). Thus, the intervention price serves as a floor for market prices. In the EU, intervention purchases constitute one of the principal policy mechanisms regulating the markets in cereals, butter and skimmed milk powder, and beef. The Council of Ministers sets intervention prices every year on the basis of proposals by the Commission.

Intervention purchase: The act of purchasing a commodity once its market price drops below a set administered price (the intervention price) so as to raise its market price to at least the level of the intervention price. See also Intervention stocks.

Intervention stocks: Stocks held by national intervention agencies as a result of intervention buying of commodities subject to market price support. Intervention stocks may be released onto internal markets if internal prices exceed intervention prices; otherwise, they may be sold on the world market with the aid of export restitutions, under the regulation of commodity‑specific Management Committees.

Land set-aside, or land diversion: The removal of land from production, usually for supply control, regional development or environmental purposes. Set-aside is sometimes required as a condition for farmers to receive support payments.

Less-favoured area, LFA: In the EU, a term used to describe an area with natural handicaps (lack of water, climate, short crop season and tendencies of depopulation), or that is mountainous or hilly, as defined by its altitude and slope. LFAs benefit from area and headage compensatory allowances, and from a number of payments for structural adjustment. National governments designate their respective LFAs. In the Czech Republic, these are areas with less favoured conditions for agricultural production. These areas benefit from specific area and headage payments, and additional interest rate subsidies to support investment. In Hungary, these are areas with less favoured conditions for agricultural production (low quality land), which are defined in terms of the “Golden Crown Standard”, reflecting its productive potential.

Levies on output: Taxes on farm output which reduce the price received by producers.

Maastricht Treaty (EU): A treaty ratified by all member states in 1993 and implemented by means of extensive amendment to the Treaty of Rome, including the change from the name European Economic Community to European Union. The Maastricht Treaty includes sections on political union and on economic and monetary union, as well as a redefinition of the role of legislative and executive bodies. It establishes the principle of subsidiarity, by which any action by the Union shall not go beyond what is necessary to achieve the objectives of the treaty.

Market access: A provision of the Uruguay Round Agreement on Agriculture that refers to concessions contained in the country schedules with respect to bindings and reduction of tariffs, and to other market access commitments, such as tariffication. The only allowable exceptions to the process are those described under the Special Safeguard Provisions and the Special Treatment.

Market price support, MPS: An indicator of the annual monetary value of gross transfers from consumers and taxpayers to agricultural producers arising from policy measures creating a gap between domestic market prices and border prices of a specific agricultural commodity measured at the farm-gate level. Conditional on the production of a specific commodity, MPS includes the transfer to producers for total production (for domestic use and exports), and is measured by the price gap applied to current production. The MPS is net of financial contributions from individual producers through producer levies on sales of the specific commodity or penalties for not respecting regulations such as production quotas (Price levies); in the case of livestock production, it is net of the market price support on domestically produced coarse grains and oilseeds used as animal feed (Excess feed cost).

Market transfers: Transfers to (when positive) or from (when negative) consumers due to market price support policies.

Marketing agency (or board): Generally, a statutory body possessing certain legislated regulatory powers over prices, quality standards, foreign trade, etc.

Milk quota scheme: A supply control measure to limit the volume of milk produced or supplied. Quantities up to a specified quota benefit from full market price support. Over‑quota volumes may be penalised by a levy (as in the EU, where the “superlevy” is 115 per cent of the target price) or may receive a lower price. Allocations are usually fixed at individual producer level. Other features, including arrangements for quota reallocation, differ according to scheme. See also Supply quotas.

Modulation (EU): A term that refers to a provision of the EU’s Agenda 2000 package of measures (ref: Regulation (EC) No 1259/99) which allows EU Member States to decide criteria for, and rates of, reduction in the size of payments granted to individual farmers under CAP-financed direct support schemes. The reduction in support to any individual farmer may not exceed 20 per cent of the total amount of the payments for which he or she would otherwise be entitled. Member States can modulate payments — i.e., use the funds made available from reducing the amounts paid to some farmers by re-channelling them into other programme areas — to help finance agri-environmental measures, early retirement schemes, less favoured areas and areas with environmental restrictions, and forestry.

Multifunctionality, or multifunctional agriculture: Terms used to indicate generally that agriculture can produce various non-commodity outputs in addition to food. The working definition of multifunctionality used by the OECD associates multifunctionality with particular characteristics of the agricultural production process and its outputs: (i) the existence of multiple commodity and non-commodity outputs that are jointly produced by agriculture; and that (ii) some of the non-commodity outputs may exhibit the characteristics of externalities or public goods, such that markets for these goods function poorly or are non-existent.

New Independent States of the former Soviet Union, NIS: An OECD term denoting the group of states that formerly made up the Soviet Union, with the exception of Estonia, Latvia and Lithuania.

Nominal assistance coefficient, NAC: The producer NAC is the ratio of the PSE and the value of total gross farm receipts valued at world market prices, excluding budgetary support. The consumer NAC is the ratio of the CSE and the total value of consumption expenditure on commodities domestically produced valued at world market prices, excluding budgetary support to consumers.

Objectives 1, 5a, 5b and 6 (EU): Priority objectives for allocating structural funds for rural development and agricultural adjustment for the 1994-99 period. Objective 1: structural adjustment of regions whose development is lagging behind (defined as those areas with a GDP of less than 75 per cent of the EU average) including all of Greece, Ireland and Portugal. Objective 5a: structural adaptation of agriculture and fisheries. Objective 5b: economic diversification of vulnerable rural areas (defined as those rural areas with a low level of socio-economic development, a high dependency on agricultural employment, low agricultural incomes, low population density and declining population). Objective 6 (Finland and Sweden): structural adjustment of sparsely populated regions (defined as the regions north of the 62nd parallel with population density less than 8 inhabitants per km². Objectives 1, 5b and 6 are limited to designated areas (nearly three-quarters of the EU area and about 35 per cent of the EU population), while objective 5a may be implemented throughout the EU. Appropriations for objective 1 account for almost 70 per cent of all appropriations under the structural funds.

Oilseeds: Generally, seeds grown primarily for the production of edible (i.e. cooking) oils. When used as a collective term in the context of PSE and CSE estimates, the composition varies by country and may include any or all of the following: rape seed (colza), soybeans and sunflower seed. Linseed and safflower seed are not included in the definition of oilseeds used for PSE/CSE purposes, except in a few cases where statistical difficulties prevent the separating of data on these crops from those for other oilseeds. Cotton seed, grape seed, olives and groundnuts (peanuts), from which edible oils are produced as by‑products, are excluded from the PSE and CSE composites.

Organic farming: A variously defined term generally describing agricultural production methods that avoid the use of synthetic agrochemicals and plant and animal protection products. The fertility and biological activity of the soil can be maintained either by cultivation techniques and crop rotation or by incorporating organic material into the soil. Pests, diseases and weeds can be controlled by (among other methods) encouraging natural predators to flourish and through the use of disease-resistant crop varieties and mechanical weeding.

Phytosanitary regulations: Government regulations that restrict or prohibit the importation and marketing of certain plant species, or products of these plants, so as to prevent the introduction or spread of plant pests or pathogens that these plants may be carrying. See also Sanitary regulations.

Producer price: The average price or unit value received by farmers in the domestic market for a specific agricultural commodity produced within a specified 12-month period. This price is measured at the farm gate — that is, at the point where the commodity leaves the farm — and therefore does not incorporate the costs of transport and processing.

Producer support estimate, PSE: An indicator of the annual monetary value of gross transfers from consumers and taxpayers to support agricultural producers, measured at farm gate level, arising from policy measures, regardless of their nature, objectives or impacts on farm production or income. The PSE measures support arising from policies targeted to agriculture relative to a situation without such policies — i.e., when producers are subject only to general policies (including economic, social, environmental and tax policies) of the country. The PSE is a gross notion implying that any costs associated with those policies and incurred by individual producers are not deducted. It is also a nominal assistance notion meaning that increased costs associated with import duties on inputs are not deducted. But it is an indicator net of producer contributions to help finance the policy measure (e.g. producer levies) providing a given transfer to producers. The PSE includes implicit and explicit transfers. The percentage PSE is the ratio of the PSE to the value of total gross farm receipts, measured by the value of total production (at farm gate prices), plus budgetary support. The nomenclature and definitions of this indicator replaced the former Producer Subsidy Equivalent in 1999.

Quantitative restriction: A limit on the quantity or value of a product permitted to enter or leave a country. Examples are import quotas and voluntary export restraint arrangements.

Quota: See Import quota, Milk quota scheme, Supply quota, Tariff quota.

Reference (border) price: The import (c.i.f.) or export (f.o.b.) price of a commodity. An implicit border price may be calculated as, for example, the unit value of imports or exports.

Sanitary regulations: Government regulations that restrict or prohibit the importation and marketing of certain animal species, or products thereof, to prevent the introduction or spread of pests or diseases that these animals may be carrying. See also Phytosanitary regulations.

Special [Agricultural] Safeguard: A provision in Article 5 of the Uruguay Round Agreement on Agriculture that may be invoked by a WTO Member for a product subject to tariffication and for which application of the special safeguard is designated in the Member’s Schedule (listing of commitments). It is designed to prevent disruption on domestic markets due to import surges or abnormally low import prices, and can apply only to imports that exceed tariff-quota volumes. It permits additional duties to be imposed in situations where the volume of imports increases beyond a specified trigger level (which varies according to the share of the market that is supplied by imports) or in situations where prices fall below some specified trigger level. The special agricultural safeguard clause is an alternative to the general safeguard provisions in the GATT, and is much easier to invoke because it does not require a test of injury.

Specific-rate tariff: A charge levied on imports, defined in terms of a specific charge per unit (e.g., $100 per tonne). Contrast with Ad valorem tariff.

Stabilisation payment: A budgetary payment made to compensate farmers for falling farm prices incomes, or both. Stabilisation programmes include insurance or safety nets or underwriting schemes intended to compensate farmers for decreases in price, income or cash flow due to disturbances to yields (from drought, for example) or instability in factor and commodity markets.

State trading enterprise (or body), STE: An enterprise authorised to engage in trade that is owned, sanctioned, or otherwise supported by the government. Many STEs enjoy monopoly control over imports or exports.

Structural funds (EU): Funds intended to facilitate structural adjustment of specific sectors, regions, or combinations of both, in the EU. They include the European Regional Development Fund (ERDF), the European Social Fund (ESF), the Guidance Section of European Agricultural Guidance and Guarantee Fund (EAGGF) and the Financial Instrument for Fisheries Guidance (FIFG). Assistance is concentrated on six priority objectives (see Objectives 1, 5a, 5b and 6). These objectives are implemented through programmes proposed by the appropriate authorities of the member states (National Initiative programmes). The EC also co‑finances other programmes on subjects proposed by the EC (Community Initiatives).

Substantial equivalence: A concept, first described in an OECD publication in 1993, which stresses than an assessment of a novel food, in particular one that is genetically modified, should demonstrate that the food is as safe as its traditional counterpart.

Supply control: Any among a wide range of measures designed to affect the level of production or supply, including measures that restrict output directly (such as milk quotas) and those that restrict the use of an input. See also Acreage Reduction Programs, buy‑out schemes, set-aside.

Supply quotas: Limits on acreage, production or marketed quantities of a particular commodity in the context of a supply control programme.

Support price: See Administered price.

Sustainable agriculture: Agricultural production that is economically viable and does not degrade the environment over the long run. Definitions differ as to the period over which sustainability is intended to be achieved; whether sustainability should relate only to localised effects on the environment or also to effects on the environment caused by the production of farm inputs; and whether the environment in this context should be defined only to include the physical environment (soil, water, plants and animals) or also the environment created by agriculture, such as landscape amenities.

Target price (EU, Switzerland, United States): In the EU, a price fixed annually by the Council of Ministers for products of standard quality. It is not a guaranteed price but rather serves as a policy guideline. In Switzerland, an administered price from which a price range is derived for most livestock products. Domestic prices are determined by the internal supply/demand situation, within the limits of the range. If prices reach the upper or the lower limit of the range, the Government intervenes by importing or stocking livestock products. In the United States, target prices for wheat, corn (maize), sorghum, barley, oats, rice and cotton were abolished with the introduction of the 1996 FAIR Act.

Tariff: A tax imposed on imports. A tariff may be either a specific tariff (fixed charge per unit of product imported) or an ad valorem tariff (a fixed percentage of value). See also Variable Import Levy.

Tariffication: The conversion of non‑tariff barriers to tariffs that took place in the Uruguay Round Agreement on Agriculture.

Tariff quota: A term used interchangeably with the term tariff rate quota.

Tariff-rate quota, TRQ: A trade restriction involving a lower (in-quota) tariff rate for a specified volume of imports and a higher (over-quota) tariff rate for imports above the concessionary access level. Under the Uruguay Round Agreement on Agriculture, most countries have agreed to progressive reductions in the over-quota tariff rates. Some countries have also agreed to lower the in-quota tariff rates, raise the concessionary access level, or both.

*Total Support Estimate, TSE: An Indicator of the annual monetary value of all gross transfers from taxpayers and consumers arising from policy measures which support agriculture, net of the associated budgetary receipts, regardless of their objectives and impact on farm production and income, or consumption of farm products. The TSE is the sum of the explicit and implicit gross transfers from consumers of agricultural commodities to agricultural producers net of producer financial contributions (in MPS and CSE); the gross transfers from taxpayers to agricultural producers (in PSE); the gross transfers from taxpayers to general services provided to agriculture (GSSE); and the gross transfers from taxpayers to consumers of agricultural commodities (in CSE). As the transfers from consumers to producers are included in the MPS, the TSE is also the sum of the PSE, the GSSE, and the transfers from taxpayers to consumers (in CSE). The TSE measures the overall transfers associated with agricultural support, financed by consumers (transfers from consumers) and taxpayers (transfers from taxpayers) net of import receipts (budget revenues). The percentage TSE is the ratio of the TSE to the GDP. The nomenclature and definitions of this indicator replaced the former Total Transfers as from 1999.

Uruguay Round: The eighth round of multilateral trade negotiations conducted within the framework of the GATT. Launched in Punta del Este, Uruguay, in 1986 and concluded in December 1993, the final Uruguay Round agreement, signed in Marrakech in April 1994, embraces 136 participating countries (“contracting partners”) and came into effect in 1995. It is being implemented gradually up to 2000 (2004 for developing countries).

Uruguay Round Agreement on Agriculture, URAA: The terms of the URAA are contained in the section entitled the “Agreement on Agriculture” of the Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations. This text contains commitments in the areas of market access, domestic support (see AMS) and export subsidies, and general provisions concerning monitoring and continuation. In addition, each country’s schedule is an integral part of its contractual commitment under the URAA. There is a separate agreement entitled the Agreement on the Application of Sanitary and Phytosanitary Measures. This latter agreement seeks to establish a multilateral framework of rules and disciplines to guide the adoption, development and the enforcement of sanitary and phytosanitary measures in order to minimise their negative effects on trade. See also Phytosanitary regulations and Sanitary regulations.

Variable import levy: A charge levied on imports that raises their price to a level at least as high as the domestic price. Such levies are adjusted frequently (hence “variable”) in response to changes in world prices and are imposed to defend administered prices that are set above world market prices. The Uruguay Round agreement resulted in the replacement of variable levies by tariffs.

World price: See Reference price.

World Trade Organisation, WTO: The successor body to the General Agreement on Tariffs and Trade (GATT), established formally on 1 January 1995 as part of the final agreement of the Uruguay Round of multilateral trade negotiations. The main duties of the WTO are to: (i) administer trade agreements; (ii) act as a forum for trade negotiations; (iii) settle trade disputes; (iv) review national trade policies; and (v) assist developing countries in trade policy issues.

Intérêts des consommateurs

dans la Politique Agricole Commune

RÉSUMÉ EXÉCUTIF

0 Objectifs de la recherche

L’objectif de cette étude est l’évaluation de la Politique Agricole Commune (PAC) du point de vue de tous les citoyens, y compris les agriculteurs, c’est-à-dire du point de vue de la collectivité dans son ensemble. L’étude sera concentrée sur deux critères principaux d’évaluation des politiques sectorielles: efficience et équité, et en outre recommandera certaines stratégies politiques visant à corriger l’intervention publique.

Les deux sections préliminaires illustreront les critères d’évaluation utilisés dans le reste du rapport (§ 1) et les développements de la PAC pendant ces dernières années, ainsi que les perspectives futures (§ 2). D’abord nous analyserons les effets de la PAC sur l’équité, aussi bien sur les consommateurs et sur la collectivité (§ 3) que sur le secteur agricole (§ 4); puis nous analyserons les effets sur l’efficience du secteur agricole de l’Union Européenne (§ 5) et sur son ajustement structurel (§ 6). Ensuite nous analyserons les effets à plus large envergure sur l’économie de l’Union à court (§ 7) et à long terme (§ 8). Les conclusions (§ 9) évoqueront également les stratégies souhaitables de la politique des consommateurs dans le monitorage des politiques sectorielles.

1 Critères d’évaluation

Selon le Comité des Consommateurs de l’UE : « La PAC devrait être orientée, comme les autres politiques, vers l’intérêt public et non vers les intérêts particuliers d’un petit groupe de citoyens ».

Cette affirmation de base a ses racines dans les principes éthiques communément acceptés depuis Aristote et Adam Smith jusqu’aux philosophes modernes. De même, dans les déclarations des organisations supranationales, telles que l’OCDE, le GATT-WTO, où l’UE compte parmi les membres les plus importants et les plus influents, est constamment réaffirmé l’objectif d’accroître le bien-être commun des citoyens à travers une politique économique efficiente et équitable.

En cohérence avec ces finalités d’intérêt public, l’article 33 du « Traité qui institue l’Union Européenne » indique clairement l’efficience comme l’un des objectifs que la PAC doit atteindre à travers « le développement rationnel de la production agricole et une meilleure utilisation des facteurs de production ». L’objectif d’« assurer ainsi à la population agricole un niveau de vie équitable » est indiqué comme conséquence. Selon le Traité, donc, des revenus agricoles équitables devraient être obtenus à travers une meilleure répartition des ressources, c’est-à-dire en augmentant le bien-être social, aussi bien des agriculteurs que des travailleurs des autres secteurs de production, et non en engendrant des transferts de revenu de consommateurs et de contribuables vers les agriculteurs, surtout quand ces transferts impliquent d’importants gaspillages pour la collectivité toute entière et une redistribution « perverse » du revenu de consommateurs pauvres vers des agriculteurs plus riches.

Recommandations. Pour être cohérents avec les principes fondamentaux de l’éthique et de la théorie économique, avec les engagements internationaux de l’Union Européenne et avec le Traité qui l’institue, on devrait réaliser un monitorage continu de la PAC et les citoyens européens devraient être constamment informés quant à la réalisation des objectifs fixés. Ce travail de monitorage et d’information ne devrait pas être effectué par les mêmes institutions ou organisations sociales responsables des mesures de politique agricole, mais devraient être effectuées par des institutions publiques et des organisations visant le bien-être commun, comme les départements qui s’occupent de la politique des consommateurs, aux différents niveaux de l’administration publique (communautaire, national, régional, local), et les associations de consommateurs.

2 Développement de la PAC

Selon le comité des consommateurs, l’évolution de la PAC a été “largement influencée par les producteurs pour atteindre leurs propres intérêts”:

Au début des années Soixante, le tarif douanier commun pour les produits agricoles fut fixé à un niveau élevé, de façon à conserver les niveaux existants de revenu agricole. Pendant les années suivantes, des prix élevés à la production (prix de marché et aides directs) ont créé un déséquilibre persistant entre la demande de produits alimentaires en lente expansion et l’offre en rapide expansion.

Après d’énormes dépenses budgétaires employées pour se débarrasser des excédents alimentaires, après d’autres dépenses engagées pour subventionner les exportations, et après l’échec des tentatives pour limiter les dépenses publiques nettes au moyen de taxes à la production et des “stabilisateurs” du budget, on a introduit de nouvelles mesures quantitatives pour contrôler l’offre interne, telles les parts de production et la mise en jachère des terres arables, instruments beaucoup moins transparents pour les citoyens et beaucoup plus adaptés à une économie planifiée qu’à une économie orientée vers le marché.

Cette approche est encore bien présente dans le document de la Commission “Agenda 2000”, dans les décisions du Sommet de Berlin et dans les positions prises par la délégation de l’Union Européenne au WTO. Tandis que les prix communautaires seront réduits aux niveaux du marché international, le budget communautaire compensera la baisse des revenus agricoles grâce à des aides directes. Par conséquent, les prix à la production ne seront pas substantiellement réduits, puisqu’il restera la plupart des distorsions existant dans l’activité productive et, par conséquent, le gaspillage des ressources pour la collectivité. En outre, ces effets nuisibles s’étendent déjà aux nouveaux pays membres qui adaptent leurs politiques à la PAC.

Recommandations Presque tous les instruments techniques visant à réformer la PAC ont été expérimentés dans les quarante dernières années, sans aucun succès durable en ce qui concerne la réduction des transferts à l’agriculture. Par conséquent, le problème de la réforme de la PAC n’est pas technique mais politique. Il est nécessaire de mettre en place une profonde réforme institutionnelle, capable de créer un pouvoir s’opposant aux groupes de pression des producteurs de la part des organisations de consommateurs et de citoyens. Ce contre-pouvoir devrait mettre en évidence les coûts sociaux actuels et la perverse redistribution du revenu que produit la PAC, et encourager un changement dans l’approche actuelle sectorielle des différents fonctionnaires et responsables politiques qui, aux différents niveaux, prennent les décisions.

3 Impact sur le consommateur

Le poids des transferts de revenu engendrés par la PAC des familles (consommateurs et contribuables) vers le secteur agricole(producteurs et services généraux de l’agriculture) en 1998 (107 milliards d’Ecus) est partagé presque à égalité entre consommateurs (52 milliards d’Ecus) et contribuables (55 milliards d’Ecus), et est plus élevé que la contribution nette de l’agriculture à la production de biens et de services (77 milliards d’Ecus). Bien que le coût par citoyen européen (285 Ecus en 1998) et les transferts par hectare de surface agricole utilisée (796 Ecus) aient légèrement baissé en termes réels dans les années 90, le total des transferts par unité de travail équivalente à temps complet (15886 Ecus) a augmenté aussi bien à prix constants qu’à prix courants, malgré l’intention déclarée de réduire le soutien agricole et les différentes tentatives de réformer la PAC.

Malheureusement il n’y a pas de statistiques disponibles comparables entre les pays membres nous permettant d’évaluer le coût global de la politique agricole à l’échelle communautaire, nationale et régionale. Des chiffres limités à l’Italie, comprenant également les recettes budgétaires non perçues à cause des réductions d’impôts et contributions sociales à l’agriculture, indiquent une somme globale de transferts de 403 Ecus par habitant.

Le soutien des prix de marché équivaut à un impôt régressif sur les familles; en effet la part de nourriture et de boissons sur la dépense totale des consommateurs est plus élevée pour les familles ayant un revenu bas que pour celles ayant un revenu plus élevé; cette part est également plus élevée pour les pays membres plus pauvres par rapport aux pays plus riches (28% au Portugal, 14% en Allemagne).

Recommandations. Afin de réduire substantiellement ce flux de transferts, il est nécessaire que les consommateurs et les familles soient mieux représentés à tous les niveaux de gouvernement où sont prises les décisions sur la PAC. Il faut une importante activité de recherche et un réseau informatique à jour, mis à la disposition de ceux qui travaillent à la formulation des politiques sectorielles et de tous les citoyens européens.

Toute politique qui manipule les prix de marché, provoquant des transferts de la part des consommateurs devrait être soigneusement contrôlée pour vérifier si ces transferts sont justifiés en terme de bien-être général des citoyens. Les caractéristiques démocratiques de toute intervention publique sont étroitement liées à sa transparence et à la possibilité que les citoyens comprennent bien ses effets sur leur bien-être et sur la collectivité.

4 Impact sur le revenu agricole

Les transferts de revenus engendrés par la politique de soutien des prix de la PAC sont encore largement proportionnels au volume de production. Il en résulte une perverse redistribution du revenu en faveur des agriculteurs plus aisés et des propriétaires fonciers tandis que les agriculteurs plus pauvres et les travailleurs salariés non-propriétaires de terre bénéficient seulement en très petite partie du flux de revenu transféré vers l’agriculture. Approximativement, 35% des transferts liés au volume de production va en faveur de 3% des exploitations les plus grandes, tandis que 50% des exploitations de plus petites dimensions n’en reçoit que 5%.

Seulement une partie des transferts provenant du soutien des prix augmente le revenu des familles agricoles, le reste est absorbé par l’augmentation des coûts des inputs et de la basse productivité des ressources investies, en particulier dans les exploitations marginales sous-dimensionnées où l’on ne peut pas appliquer les technologies modernes sur le plan de la gestion et de la mécanisation. Ces transferts vont en grande partie augmenter les valeurs foncières qui ont atteint des valeurs très élevées dans les régions les plus fertiles et les plus irriguées des pays les plus riches.

Les transferts liés au soutien des prix ne sont pas transparents parce qu’ils ne sont pas facilement identifiables de la part des agriculteurs comme une aide publique à la production agricole et ils provoquent des équivoques sur la valeur réelle des produits agricoles pour les citoyens. En outre, actuellement, ces transferts ne visent pas des objectifs spécifiques en terme d’allocation, de redistribution, ou d’autres objectifs dans l’intérêt de la collectivité toute entière.

Recommandations. Dans l’intérêt des consommateurs et de toute la société européenne, les transferts de revenu vers l’activité agricole devraient être désaccouplés du volume de la production. En orientant les interventions publiques sur des objectives spécifiques, on pourrait améliorer sensiblement les effets de la PAC en terme d’allocation des ressources et de distribution du revenu. Les transferts de revenu seraient beaucoup plus transparents, ils pourraient être directement liés à leur impact sur l’ajustement structurel ou aux externalités positives produites par l’activité agricole du point de vue de l’environnement, du territoire, etc.

5 Impact sur l’agriculture

Les politiques de soutien des prix ont provoqué une remarquable augmentation des revenus fonciers et des revenus agricoles, en particulier dans les exploitations de grande taille et dans les régions ou pays membres où la structure productive était déjà efficiente dans les années 50, par exemple en Hollande, où le revenu disponible des familles agricoles représente plus du double par rapport au revenu disponible moyen de toutes les familles hollandaises. Ces transferts de revenu aux agriculteurs plus aisés ont augmenté les divergences dans la distribution du revenu de l’UE. D’autre part, cependant, ces mêmes politiques de soutien des prix ont ralenti la mobilité des ressources, en particulier du travail et de la superficie cultivée et ont retardé un ajustement structurel qui aurait été tout à fait nécessaire, surtout dans les régions ou dans les pays membres où la taille moyenne des exploitations agricoles est insuffisante et empêche la pleine exploitation de l’économie d’échelle et de la technologie moderne.

L’impact de la PAC sur l’efficience du secteur agricole de l’UE a été, dans l’ensemble, négatif. L’augmentation annuelle de la dimension moyenne des exploitations[116] a été seulement de 1% et a aussi été inférieure dans les pays membres méditerranéens. Bien que les dimensions moyennes des exploitations en terme de produit brut varient substantiellement entre les pays membres (elles sont 14 fois plus grandes en Hollande qu’en Grèce ), il n’y a pas eu de convergence entre les pays membres dans les années 90. Les différences sont restées inchangées ou se sont même légèrement aggravées.

Les niveaux de soutien des prix ne sont pas liés de façon positive aux niveaux moyens de revenu agricole. A long terme, le soutien des prix, au lieu d’augmenter les revenus agricoles, tend à maintenir le travail agricole dans des exploitations petites et au rendement insuffisant. Par conséquent, une large part du revenu transféré des consommateurs et des contribuables à travers le soutien des prix n’augmente pas le revenu de la population agricole mais va simplement compenser les coûts majeurs de production dus à des structures productives inefficientes et sous-dimensionnées.

Les effets des politiques contenues dans la « boîte verte » devraient être évalués individuellement pour chaque projet ou plan régional. Actuellement, des analyses et des évaluations de type coûts-bénéfices sociaux sont très rarement effectuées et en outre, une large part des financements publics au développement rural a déjà été attribuée au secteur agricole par les règlements communautaires ou nationaux. Cela empêche une meilleure allocation des ressources au niveau local, où souvent il existe déjà un excès de ressources investies dans l’agriculture.

De toute façon, dans son ensemble, les dépenses de la section garantie du FEOGA provoque une redistribution du revenu positive parmi les pays membres, favorisant les pays et les régions les plus pauvres ainsi qu’une plus grande cohésion dans l’UE.

La délégation communautaire au WTO propose de remplacer le soutien des prix par des aides conditionnées par des limitations de la production (plus de 18 milliards d’Euros contenus dans la « boîte bleue »). Il faudrait rappeler que ces politiques sont : a) en plein conflit avec l’objectif d’améliorer l’efficience productive, puisqu’elles réduisent la mobilité intra- et inter-sectorielle des facteurs de production, b) neutralisent les effets de la réforme des prix de 1992 sur l’ajustement structurel, c) impliquent d’énormes coûts administratifs pour la gestion des programmes et le contrôle des fraudes, d) augmentent l’aspect bureaucratique de l’activité agricole avec des pertes de temps de la part des agriculteurs, e) pénalisent les meilleurs agriculteurs qui voudraient augmenter leur production à des coûts moyens plus bas, tandis qu’elles favorisent les agriculteurs inefficients qui gèrent leur exploitation, souvent non productive, avec des coûts moyens de production élevés.

Recommandations. Si l’on veut effectivement réaliser « une réduction substantielle et progressive du soutien agricole », les politiques actuellement classées dans la « boîte bleue devraient être contenues dans la « boîte orange » et par conséquent devraient être sujettes à réduction, tandis que les compensations aux agriculteurs pour la perte de revenu dérivant de la réduction du soutien des prix devraient être dégressives et limitées dans le temps pour favoriser l’ajustement structurel, et être réalisées de la façon la plus équitable et efficiente possible.

Les compensations ne devraient être garanties que pour une période de temps limitée; un montant équivalent de titres de crédit pourrait être émis par l’UE afin de diluer dans le temps sa charge financière et de permettre aux agriculteurs un emploi plus flexible des compensations. Ils pourraient encaisser ces titres de crédit chaque année ou les vendre sur le marché financier et utiliser la valeur capitalisée afin d’améliorer leur propre structure productive. D’autres agriculteurs pourraient vendre leur exploitation à leurs voisins au cas où celle-ci ne serait pas économiquement vitale, et utiliser le capital pour commencer une activité non agricole ou bien transformer ce capital en plan de rente viagère.

Ces modalités de compensation favoriseraient un rapide ajustement structurel sans créer de distorsions. Les compensations auraient une influence seulement sur le niveau de richesse des agriculteurs sans modifier les prix de marché. La réforme de la PAC devrait être moins sujette aux pressions sectorielles et, augmentant son efficience et son équité, pourrait être effectivement réalisée dans l’intérêt général et des agriculteurs.

6 Effets sur l’ajustement structurel

Les emplois dans le secteur agricole dépendent du rapport entre la demande et l’offre de produits alimentaires à long terme ainsi que des politiques économiques réalisées, en particulier dans le secteur agricole et dans le marché du travail. Le problème fondamental n’est pas tant de maintenir les emplois à un niveau élevé dans le secteur que d’augmenter « le revenu individuel des personnes employées dans l’agriculture » comme l’établit l’art. 33 du traité qui institue la Communauté Européenne.

Le soutien des prix et les récentes mesures de gestion de l’offre (quotas de production et mise en jachère des terres arables) ont augmenté les revenus fonciers et ont réduit la mobilité intra- et inter-sectorielle des ressources. La mise en jachère des terres arables, tout en réduisant certaines distorsions provenant du soutien des prix, a provoqué un gaspillage de ressources économiques. En 1998-1999, les contribuables ont payé 1200 milliards d’Ecus pour convaincre les agriculteurs à ne pas utiliser 4,2 millions d’hectares de terres arables pour une valeur foncière estimée à plus de 30 milliards d’Ecus, cela afin de réduire l’offre de produits agricoles sur le marché intérieur servant à maintenir élevés des prix de marché payés par les consommateurs communautaires. Les citoyens européens soutiennent donc, en tant que contribuables, une lourde charge financière afin d’augmenter le prix des produits qu’eux-mêmes achètent en tant que consommateurs, et pour obtenir ce beau résultat, ils doivent également stériliser un montant considérable de ressources économiques. Il est difficile de pouvoir croire que cette politique est réalisée dans l’intérêt des consommateurs et de la société dans son ensemble.

Selon les décisions prises par la Commission Européenne au début des années 60, au moins 30% des dépenses agricoles communes aurait dû être orienté vers des politiques structurelles qui résolvent les problèmes en améliorant les structures productives et en réduisant les coûts de production, tandis que les politiques de soutien des prix maintiennent et souvent aggravent les problèmes existants de productivité et de revenu agricole. En opposition avec cette décision, la section Orientation du FEOGA a dépensé en moyenne beaucoup moins de 10% du budget agricole, et les dépenses pour les investissements ont été très basses, environ 2,5% du FEOGA. Si l’on inclut les dépenses nationales, l’assistance à l’ajustement structurel estimée par la Commission Européenne arrive maintenant à 7,5% seulement du soutien à l’agriculture.

De toute façon, il est presque impossible de réaliser avec succès une réforme structurelle si les prix agricoles à la production sont fortement altérés comme le sont les prix actuels. Si l’on accorde des financements pour des améliorations structurelles dans les exploitations agricoles, les agriculteurs investiront ces ressources financières dans les activités les plus profitables, qui coïncident souvent avec les activités où le soutien des prix est le plus élevé. Par conséquent, ou l’on augmente les excédents ou l’on entre en conflit avec les nombreuses contraintes que la politique de gestion de l’offre a mises à l’expansion de la production. Ce financement public constitue ainsi un avantage pour les exploitants agricoles particuliers mais représente une perte nette pour la collectivité dans son ensemble, qui se voit contrainte à se débarrasser des excédents alimentaires ou à faire face à une moindre productivité des investissements.

Recommandations Pour aider les producteurs à développer leurs entreprises et à faciliter l’entrée de nouveaux agriculteurs, dans l’intérêt des exploitants les plus efficients et de la collectivité, les barrières actuelles à la mobilité inter- et intra-sectorielle des ressources devraient être rapidement abattues. Parallèlement, il faudrait instituer une politique efficace qui favorise une plus grande information sur les possibilités de travail dans les zones rurales.

Au lieu de réduire les terres arables, en laissant la surface agricole inutilisée, avec une perte nette de bien-être de la collectivité dans son ensemble, une politique favorisant la mobilité de la force travail vers des activités plus productives non seulement éviterait cette perte de bien-être social mais augmenterait la production globale ainsi que le bien-être social, en déplaçant les travailleurs d’une condition de basse productivité agricole, soutenue en permanence par l’aide publique, vers des activités non agricoles beaucoup plus productives en termes sociaux.

Pour réformer la PAC avec succès, il serait très utile que les hommes politiques, les agriculteurs et les citoyens sachent quelle est la part de revenu agricole qui peut être attribuée à la production de biens et de services agricoles (y compris les rémunérations des externalités positives) évaluée sur la base des prix de marchés non altérés, et le montant de la part complémentaire de leur revenu, provenant directement ou indirectement de l’aide publique, qui devrait être réduite graduellement, au fil du temps. Les citoyens et les agriculteurs eux-mêmes ont le droit de savoir quelle est la part « réelle » du revenu agricole actuel, productive pour la collectivité dans une économie de marché, et quelle est la part « d’assistance », dépendante du soutien public, grosso modo équivalente à une indemnité de chômage.

7 Effets sur l’économie

Le soutien des prix, obtenu à travers la protection extérieure et les politiques de gestion de l’offre, produit des coûts sociaux pour l’économie de l’UE, souvent peu visibles, contrebalancés uniquement par des avantages très modestes. Les coûts de stockage et de destruction des excédents agro-alimentaires étaient très élevés avant la réalisation des politiques de gestion de l’offre, surtout si l’on considère que l’agriculture constitue actuellement 1,5% seulement du PIB de l’Union. Dans les 24 dernières années, le budget communautaire a dépensé plus de 80 milliards d’Ecus pour stocker et détruire les excédents, et plus de 150 milliards d’Ecus pour les aides à l’exportation, chiffres comparables ou même supérieur au produit intérieur net en 1998 de certains pays membres, comme l’Irlande (84 milliards d’Ecus), le Portugal (110 milliards d’Ecus) ou la Grèce (127 milliards d’Ecus).

Pour réduire ces excédents sans abaisser le soutien des prix, on accorde des aides aux agriculteurs pour baisser leur niveau de production en utilisant des techniques moins productives ou en laissant inutilisées des ressources disponibles. Par conséquent le concept même d’efficience économique impliquant une meilleure allocation des ressources dans le but d’augmenter la production de biens et de services à l’usage des consommateurs est renversé par l’intervention publique. En outre le soutien des prix produit une vaste distorsion dans l’allocation des ressources disponibles aussi bien au niveau de la production qu’au niveau de la consommation.

La croissante bureaucratisation de la PAC qui a suivi l’introduction des politiques de gestion de l’offre comporte d’autres coûts sociaux pour la collectivité. Des ressources économiques sont nécessaires à la fois pour percevoir les impôts qui suffisent à financer les dépenses agricoles budgétaires, et pour l’administration des programmes d’intervention en agriculture à l’échelle communautaire, nationale, régionale et locale. En outre, pour réaliser ces programmes administratifs, il y a un gaspillage de temps et d’autres ressources de la part de l’agriculteur qui pourraient être utilisées dans une activité plus productive. Une plus grande intervention du secteur public dans l’activité productive est également liée à l’augmentation des fraudes aux différents niveaux administratifs.

Au niveau macro-économique, l’augmentation des prix agricoles comporte une augmentation de l’indice des prix à la consommation et réduit le revenu disponible réel des consommateurs ainsi que la demande globale. Cette réduction de la demande, ajoutée aux gaspillages de ressources économiques cités et à une augmentation des salaires réels après la hausse des prix alimentaires, réduit les profits et les investissements dans le système économique, avec par conséquent une baisse du stock de capital et de la productivité du travail qui débouchent sur une baisse des postes de travail et du taux de développement économique.

Inversement, les effets d’une réduction des prix agricoles prévue par le rapport de la Commission « Agenda 2000 » sont véritablement positifs. Selon les résultats d’une étude menée par la Direction Générale pour les Affaires Economiques et Financières de l’UE, une réduction des prix d’intervention des cultures arables (-15%), de la viande bovine (-20%) et des produits laitiers (-15%) prévue par « Agenda 2000 » augmenterait de manière significative le PIB de l’UE, la consommation et les investissements, ainsi que le commerce international et l’emploi. Malheureusement, les impôts nécessaires pour financer les paiements agricoles contenus dans la « boîte bleue » neutraliseront en grande partie ces effets positifs.

Recommandations. Les politiques de soutien des prix ne résolvent pas les problèmes agricoles actuels mais en retardent et souvent en aggravent la solution. Au cours de ces presque 40 années de PAC, le Conseil et la Commission ont toujours délégué la solution des problèmes de politique agraire aux départements ou ministères agricoles, dont les décisions ont été systématiquement altérées en faveur des intérêts à court terme des producteurs agricoles. Une solution efficace aux problèmes agricoles n’est possible que si l’on peut mettre en place un monitorage permanent des politiques sectorielles en identifiant tous les coûts micro- e macro-économiques soutenus par la collectivité.

8 Effets sur le développement économique

Sur le plan macro-économique, la réduction des prix des produits agricoles augmenterait le revenu réel des consommateurs et la demande de produits agricoles et non agricoles, réduisant en même temps le coût soutenu par les entreprises en salaires réels. Les effets sur les investissements et sur le taux de développement seraient positifs.

Si dans les années soixante, après les propositions présentées par le commissaire hollandais à l’agriculture Sicco Mansholt, on avait réalisé une réforme structurelle efficace, l’actuelle distribution des exploitations européennes par classes de grandeur serait aujourd’hui beaucoup plus efficiente, par exemple, beaucoup plus semblable à l’actuelle distribution des exploitations en Hollande. Si, dans l’UE, nous avions aujourd’hui cette distribution d’entreprises, la productivité moyenne du travail agricole serait beaucoup plus élevée et, pour atteindre la production finale agricole actuelle, il nous suffirait d’avoir environ la moitié des emplois existant actuellement dans l’agriculture. Le revenu brut standard par unité de travail à temps complet serait de 30% supérieur au revenu actuel même sans le soutien des prix.

De 1975 à1998, la section garantie du FEOGA a dépensé 733 milliards d’Ecus à prix constants 1998 pour le soutien des prix agricoles, une valeur 9 fois supérieure au budget de l’UE en 1998, ou bien correspondant à 109.000 Ecus par travailleur agricole équivalent à temps complet. Si ces ressources budgétaires avaient été dépensées en réformes structurelles, augmentant ainsi la mobilité inter- et intra-sectorielle du travail, par des mesures visant la protection de l’environnement et le développement d’activités non agricoles dans des zones désavantagées, la productivité et le revenu provenant du travail agricole seraient aujourd’hui beaucoup plus élevés. Dans les 25 dernières années, les citoyens européens n’auraient pas payé des prix agricoles élevés, épargnant un montant de ressources économiques probablement supérieur aux dépenses budgétaires communautaires précédemment citées. En outre, les ressources de travail libérées par le secteur agricole auraient eu un effet bénéfique sur les activités économiques non agricoles. Même en prenant une basse productivité de ces ressources de travail, les augmentations annuelles du PIB de l’UE auraient été considérables.

D’autre part, le soutien des prix de la PAC a eu un effet positif sur la distribution interrégionale du revenu en augmentant la cohésion, aussi bien entre les régions de l’UE qu’entre ses états membres. Puisque l’agriculture est plus développée dans les régions pauvres et moins peuplées par rapport aux régions riches et urbanisées, les transferts des consommateurs et des contribuables vers le secteur agricole réduisent, en général, les différences entre régions riches et régions pauvres. Néanmoins, dans la plupart des cas, des politiques régionales ciblées auraient cependant pu avoir les mêmes effets sur la distribution interrégionale du revenu avec une dépense publique inférieure et avec des effets à long terme plus positifs sur le développement économique des régions les moins développées.

L’écoulement des excédents agricoles de l’UE sur les marchés internationaux a contribué à la baisse des prix internationaux des produits agricoles et alimentaires, par conséquent à court terme les pays importateurs nets en ont tiré un bénéfice. D’autre part, on a retardé le développement agricole dans les pays tiers, lésant en particulier les pays les moins développés où l’agriculture constitue une ressource importante et une des rares activités, avec un avantage comparé à échelle internationale. Des prix internationaux plus bas ont favorisé des secteurs non agricoles, en particulier dans les pays nouvellement industrialisés, et ont augmenté leur compétitivité internationale. Globalement, les secteurs non agricoles de l’UE ont subi un préjudice des effets internationaux de la Politique de soutien des prix de l’UE.

L’effet négatif le plus grave du soutien des prix sera probablement soutenu par les nouveaux pays membres de l’Europe Centrale et Orientale (PECO) qui devront accepter la PAC comme partie de l’acquis communautaire. Leurs consommateurs devront soutenir l’équivalent d’un impôt régressif sur les produits agro-alimentaires, qui abaissera en particulier les niveaux de vie des retraités et des familles nombreuses. Bien qu’une partie substantielle des coûts budgétaires soit soutenue par les citoyens de l’actuelle UE à 15 membres, les budgets nationaux des PECO devront détourner des ressources économiques des investissements productifs dans des secteurs économiques en expansion pour les destiner au maintien de prix agricoles élevés. D’autre part, les agriculteurs recevront une importante augmentation de leurs profits, difficilement justifiable en terme de politique économique, qui augmentera les différences de revenu à l’intérieur du système agricole et à l’intérieur de sa société dans son ensemble. Une partie de ces augmentations de revenu sera capitalisée en valeurs foncières, retardant l’ajustement structurel vers une dimension optimale des exploitations et retardant la mobilité inter- et intra-sectorielle de la terre et du travail. Des structures agricoles moins productives et des revenus fonciers plus élevés augmenteront les coûts moyens de production et réduiront la compétitivité du secteur agricole. Des effets négatifs du soutien des prix agricoles analogues aux effets déjà cités pour l’Europe à 15 membres réduiront la compétitivité intérieure et internationale dans les secteurs non agricoles des pays PECO, ainsi que le taux de développement économique et le total des emplois.

Dans l’histoire économique européenne, on n’a probablement jamais pris de décision de politique sectorielle capable de produire une si grande réduction du bien-être social des citoyens européens.

Recommandations. Pour tenir compte des intérêts des consommateurs dans la PAC, en plus d’une réduction du soutien des prix à la production, on devrait éliminer toutes les mesures qui freinent la mobilité inter- et intra- sectorielle du travail. En outre, dans les zones rurales on devrait formuler des politiques spécifiques ayant pour but la re-qualification professionnelle et la mobilité intersectorielle du travail. Cela produirait une augmentation de la productivité moyenne du travail, un meilleur ajustement structurel du secteur agricole, une augmentation de la compétitivité internationale des secteurs agricoles et non agricoles de l’UE ainsi qu’une augmentation générale des emplois.

De par sa dimension économique et son influence politique, l’UE a une grande responsabilité dans les négociations multilatérales de l’Organisation Mondiale du Commerce (OMC). Elle devrait revoir sa politique et jouer un rôle efficace allant dans le sens de la libéralisation du commerce international des produits agricoles, en accord avec les principes énoncés par le Traité et avec les engagements pris dans les organisations internationales et dans l’intérêt des consommateurs et de la société de l’UE toute entière.

Afin d’éviter que ne se produisent chez les nouveaux membres de l’UE, par effet de l’acquis communautaire, des distorsions et des pertes de bien-être analogues à celles déjà réalisées chez les quinze membres actuels, les politiques contenues dans la « boîte bleue » devraient être contenues dans la « boîte orange » et réduites avant ou pendant l’élargissement de l’UE aux PECO.

9 Synopsis et conclusions

Le coût global pour les familles de l’UE, qui comprend les transferts au secteur agricole, les coûts sociaux soutenus par les consommateurs et les coûts administratifs, correspond à un total de 123 milliards d’Ecus. D’autre part, tous les transferts provenant des familles, cités dans les paragraphes précédents (107 milliards d’Ecus), ne peuvent être considérés comme un bénéfice net pour les travailleurs du secteur agricole. Si l’on exclut les pertes de bien-être économique dues au soutien des prix en terme de coûts de production plus élevés, liés à la structure inefficiente de la production et à la distorsion des prix aux producteurs, plus les ressources perdues dans le stockage et l’écoulement des excédents de production, dans les fraudes et dans les tâches administratives effectuées par les agriculteurs, le bénéfice net pour les personnes qui travaillent dans le secteur agricole peut être estimé à 58 milliards d’Ecus.

La part du bénéfice net pour le secteur agricole sur le total des coûts soutenus par les familles de l’UE se réduit à 47%, pourcentage qui peut être considéré comme un indicateur de l’efficacité du transfert de ressources économiques au secteur agricole à travers l’actuelle PAC, basée sur la politique de soutien des prix. En outre, ce transfert net pour le secteur agricole ne va pas encore entièrement au bénéfice des agriculteurs. Un effet de dispersion pour les personnes qui approvisionnent les agriculteurs de biens et de services, ou bien qui sont concernées par le commerce local des produits, réduit ultérieurement le bénéfice net que les agriculteurs reçoivent en conséquence de la politique des soutiens des prix.

Parmi les composantes non quantifiées du bien-être social, il faudrait considérer comme positives les conséquences du soutien des prix sur la sécurité des approvisionnements et sur le développement des zones les moins favorisées; d’autre part nous devons enregistrer les effets difficilement quantifiables mais globalement négatifs au niveau macro-économique et du point de vue de l’impact sur l’environnement.

Le célèbre aphorisme : « Donne un poisson à un affamé : tu le nourriras un jour, apprends-lui à pêcher : tu le nourriras toute la vie », s’adapte bien à l’évaluation de la PAC. Dès son institution, le Conseil des Ministres de l’Agriculture de l’UE a été très sensible aux demandes des organisations agricoles en termes de transferts vers le secteur agricole afin de freiner la tendance à la baisse des prix dans le temps, due à la lente expansion de la demande de produits alimentaires et à l’augmentation plus rapide de l’offre comme conséquence du progrès technologique. Au lieu de favoriser une mobilité physiologique intersectorielle du travail et d’enseigner aux agriculteurs comment adapter la taille de leur exploitation ainsi que les techniques productives aux préférences des consommateurs et aux exigences du développement économique, la PAC a fourni des transferts annuels de revenu de dimensions approximativement égales à la valeur ajoutée agricole, maintenant de nombreuses exploitations non vitales du point de vue économique ainsi qu’une grande quantité de chômage caché.

En termes généraux, les politiques économiques devraient être justifiables aussi bien du point de vue de l’augmentation de l’efficience (par exemple, lorsqu’elles sont caractérisées par un taux élevé de rendement intérieur des investissements publics), que lorsque les bénéfices pour la collectivité dans son ensemble sont évidents par rapport à d’autres composantes du bien-être social, comme une meilleure protection de l’environnement ou des progrès dans la sécurité des citoyens européens. Après le travail d’analyse qui vient d’être effectué, nous devons conclure que le coût du soutien des prix de la PAC est très élevé, supérieur au budget total de l’UE tandis que son taux marginal de rendement est presque certainement négatif et qu’aucun autre effet positif sur le bien-être des citoyens européens est assez grand pour pouvoir justifier le coût élevé soutenu par les familles.

Recommandations. Même si elles n’ont jamais été pleinement réalisées, les corrections nécessaires de la PAC ont été maintes fois mentionnées dans plusieurs documents de la Commission de l’UE et du Conseil des Ministres, tandis que les modifications de fond se trouvent dans les engagements internationaux signés à Marrakech. Pour synthétiser: (a) abolition de la « boite bleu » et réduction des politiques contenues dans la « boîte orange » qui altèrent les prix de marché à la consommation et/ou à la production, (b) amélioration des politiques contenues dans la « boîte verte » orientées vers l’intérêt général de la collectivité et non seulement vers des intérêts privés, (c) affectation de compensations désaccouplées (transparentes, décroissantes, et limitées dans le temps) destinées aux réductions de revenu agricole causées par la réforme.

Stratégie des consommateurs

Une grande partie des informations les plus importantes sur la PAC est directement ou indirectement influencée par les organisations agricoles et par des responsables politiques qui travaillent dans les institutions agricoles ou sont l’expression d’un électorat agricole, et est souvent déformée par une vision sectorielle des problèmes existants. Il est important de créer un système « opposé » d’information et de recherche qui évalue les problèmes existants du point de vue des consommateurs de l’UE et de toute la société. Il serait donc possible de fournir aux citoyens européens, aux responsables politiques, aux consommateurs et aux organisations agricoles des informations complètes et non sujettes à distorsion sur les effets prévisibles de la PAC et d’autres politiques sectorielles de l’UE.

Ce système d’informations devrait être basé sur un réseau permanent de monitorage qui comprendrait au moins : (a) une évaluation annuelle des transferts intersectoriels et des coûts sociaux engendrés par la PAC, intégrant les chiffres existants (par exemple ceux de l’OCDE) y compris des analyses des marchés agricoles et des projections sur l’impact des politiques actuelles et de celles qui sont proposées; (b) une analyse analogue devrait être effectuée pour les nouveaux pays membres de l’UE afin de mesurer l’impact prévisible de l’élargissement aussi bien sur les pays de l’UE que sur les nouveaux membres; (c) une analyse des flux interrégionaux engendrés par la PAC, de façon à aider les organisations des consommateurs à mieux comprendre l’impact de la PAC sur les consommateurs, les contribuables et les agriculteurs de chaque région; (d) une analyse structurelle à échelle européenne, nationale et régionale qui calcule le chômage caché, créé ou maintenu par la Politique Agricole. Des calculs de la situation de l’emploi sont normalement plus concrets et plus facilement compréhensibles pour les citoyens, les responsables politiques, les organisations agricoles et les consommateurs que ne le sont des concepts plus abstraits tels que le « soutien des prix de marché » ou bien « bien-être social ».

Si elles sont opportunément diffusées, mises à jour et disponibles sur l’Internet, ces recherches et informations devraient permettre une évaluation de la PAC du point de vue des consommateurs et stimuler un débat transparent entre les associations de consommateurs et les responsables politiques.

La stratégie des consommateurs, dont le but est de rendre la PAC plus cohérente avec les intérêts de la collectivité toute entière, comme l’indique le Comité des Consommateurs, devrait aussi se baser sur un monitorage permanent et sur une forte participation des associations de consommateurs dans le processus des décisions de la PAC à tous les niveaux: communautaire, national, régional, local.

Changements institutionnels

Les institutions sectorielles devraient être réformées afin de favoriser un marché politique compétitif capable de garantir une vaste participation dans le processus des prises de décisions, où tous les intérêts concernés seraient équitablement représentés.

La Communauté Economique Européenne intégra les pays membres avec succès parce qu’elle n’affronta pas immédiatement les thèmes centraux de la politique macro-économique et monétaire, mais commença à intégrer, de la périphérie, les politiques sectorielles dont la politique agraire qui représenta dans les années Soixante le succès le plus important. Malheureusement, durant les années suivantes, cette approche sectorielle favorisa des intérêts particuliers et des coûts économiques et financiers pour la collectivité.

Toutes les décisions de politique économique, comprenant l’attribution d’une allocation intersectorielle de ressources, ne devraient pas être prises par des institutions sectorielles (ministères, directions générales, départements de régions, etc.). Il est important que le processus de décision se développe dans un contexte dépourvu de distorsions.

Les politiques commerciales des produits agricoles devraient être décidées principalement par le Conseil des Ministres du Commerce Extérieur, au lieu du Conseil des Ministres de l’Agriculture. Si ces conditions s’étaient réalisées dans le passé, il est probable que l’UE ne serait pas devenue le bastion du protectionnisme agricole dans les négociations du GATT et ne retarderait pas encore aujourd’hui à l’échelle internationale l’évolution vers la libéralisation des marchés agricoles.

Les politiques de développement rural devraient plus relever de la compétence du Conseil des Ministres des Politiques Régionales que du Conseil des Ministres de l’Agriculture. Si par le passé il y avait eu ces conditions, les financements communautaires en faveur du développement rural n’auraient pas été si fréquemment pré-assignés à l’agriculture. A l’échelle régionale, les financements publics auraient pu être destinés à des activités plus productives en terme de bien-être social au lieu de concourir à l’augmentation des ressources investies dans l’agriculture dans les zones rurales.

Les politiques de protection de l’environnement dans les zones rurales devraient être pour la plupart décidées par les Ministres de l’Environnement plutôt que par les Ministres des Politiques Agricoles. Si cela avait été ainsi par le passé, le principe de « qui pollue doit payer » serait appliqué dans l’agriculture aussi et les agriculteurs qui polluent paieraient des taxes au lieu d’être payés pour ne pas polluer, comme cela se produit actuellement.

Malheureusement, ces distorsions sectorielles en faveur des producteurs agricoles ne se produisent pas seulement à l’échelle communautaire, des distorsions en faveur des producteurs sont aussi fréquentes dans les institutions nationales et régionales, là où les intérêts agricoles prédominent fréquemment.

Les commissions parlementaires et gouvernementales qui s’occupent des problèmes agricoles ne devraient pas être composées par une écrasante majorité de membres concernés par le soutien de la production agricole. Si par le passé cela s’était produit, dans certains pays membres les producteurs agricoles n’auraient pas été largement exemptés du paiement des impôts, les marchés intérieurs auraient été moins sujets à distorsion et la structure actuelle de la production agricole aurait été plus efficiente et moins tributaire d’un soutien public permanent.

Les mêmes problèmes institutionnels sont souvent répandus à l’échelle régionale et locale. Si cela ne s’était pas produit par le passé, la basse productivité des investissements publics en agriculture, par rapport aux autres activités économiques qui s’y développaient, aurait été comprise et corrigée; en outre on aurait observé l’impossibilité de contrôler l’application de certaines mesures concernant l’agriculture et l’environnement, telles que les indemnités accordées pour réduire l’usage des fertilisants, améliorant aussi l’efficience de l’utilisation des financements publics.

Guérir du « mal européen »

Les interférences des intérêts particuliers dans les politiques publiques sont fréquentes et répandues dans tous les gouvernements; mais il est assez évident que cette cause de mauvais fonctionnement du processus de décision politique est beaucoup plus enracinée et étendue dans le gouvernement de l’UE que dans le gouvernement d’autres pays développés. Cela est probablement dû à l’évolution historique particulière des institutions européennes, contraintes dans leur enfance et dans leur adolescence à suivre des chemins étroits de développement et encore sujettes à suivre des approches sectorielles dans les Conseils des Ministres où tous les membres partagent les mêmes intérêts sectoriels, qui évidemment finiront par émerger. En outre, l’endroit où l’on prend les décisions politiques à Bruxelles n’est pas le lieu idéal pour arriver à des décisions non altérées. Plus de trois mille groupes de pression différents avec plus de dix mille employés travaillent pour atteindre des objectifs très souvent sectoriels tandis que des groupes sociaux qui défendent l’intérêt général comme les associations de consommateurs sont très faibles.

L’UE a désormais suffisamment grandi pour guérir de ce « mal » de son système politique. Sa guérison est la condition nécessaire, même si probablement cela ne suffit pas, pour résoudre les grands problèmes de la Politique Agricole Commune. En outre, cette guérison est désormais très urgente, surtout en vue de l’élargissement aux pays de l’Europe centrale et orientale.

Interessi dei consumatori nella

Politica Agricola Comune

Riassunto Esecutivo

0. Obiettivi dello studio

Obiettivo di questo studio è la valutazione della Politica Agricola Comune (PAC) dal punto di vista di tutti i cittadini inclusi gli agricoltori, cioè dal punto di vista della collettività nel suo complesso. Lo studio si concentrerà su due principali criteri di valutazione delle politiche settoriale: efficienza ed equità, raccomanderà inoltre alcune strategie politiche per correggere l’intervento pubblico.

Le due sezioni preliminari tratteranno i criteri di valutazione utilizzati nel resto del rapporto (§1) e gli sviluppi della PAC negli anni scorsi, unitamente alle prospettive future (§2). Inizialmente verranno analizzati gli effetti della PAC sull’equità sia sui consumatori e sulla collettività (§3) che sul settore agricolo (§4), verranno quindi analizzati gli effetti sull’efficienza del settore agricolo della Unione Europea (§5) e sul suo aggiustamento strutturale (§6). Successivamente si analizzeranno gli effetti a più ampio raggio sull’economia dell’Unione sia nel breve (§7) che nel lungo termine (§8). Le valutazioni conclusive (§9) accenneranno anche le auspicabili strategie della politica dei consumatori nel monitoraggio delle politiche settoriali.

1. Criteri di valutazione

Secondo il Comitato dei Consumatori dell’UE: “La Pac dovrebbe essere orientata, come le altre politiche, verso l’interesse pubblico e non verso i particolari interessi di un piccolo gruppo di cittadini”.

Tale affermazione di base è radicata nei principi etici comunemente accettati da Aristotele ad Adam Smith, ai moderni filosofi. Anche nelle dichiarazioni delle organizzazioni sopranazionali, come OCSE, GATT-WTO, ove l’UE è tra i più importanti e influenti membri viene ripetutamente ribadito l’obiettivo di aumentare il benessere comune dei cittadini attraverso una politica economica efficiente ed equa.

Coerentemente con queste finalità di interesse pubblico, l’articolo 33 del “ Trattato che Istituisce l’Unione Europea” tra gli obiettivi della PAC indica chiaramente l’efficienza come primo obiettivo da raggiungersi attraverso “lo sviluppo razionale della produzione agricola ed un impiego migliore dei fattori di produzione”. L’obiettivo di “assicurare così un tenore di vita equo alla popolazione agricola” è indicato come conseguenza. Secondo il Trattato quindi, redditi agricoli equi dovrebbero essere ottenuti attraverso una migliore allocazione delle risorse, cioè aumentando il benessere sociale sia degli agricoltori che degli addetti agli altri settori di produzione, e non generando trasferimenti di reddito da consumatori e contribuenti verso gli agricoltori, soprattutto quando tali trasferimenti implicano ingenti sprechi per l’intera collettività ed una ridistribuzione del reddito “perversa” da consumatori poveri verso agricoltori più ricchi.

Raccomandazioni Per essere coerenti con i principi fondamentali dell’etica e della teoria economica, oltre che con gli impegni internazionali dell’Unione Europea e con il Trattato che la istituisce, si dovrebbe realizzare un monitoraggio continuo della PAC ed i cittadini europei dovrebbero essere costantemente informati sul raggiungimento degli obiettivi perseguiti. Questo lavoro di monitoraggio ed informazione non dovrebbe essere realizzato dalle stesse istituzioni od organizzazioni sociali responsabili delle misure di politica agricola, ma dovrebbero essere realizzate da istituzioni pubbliche e organizzazioni orientate al benessere comune, come i dipartimenti che curano la politica dei consumatori ai vari livelli dell’amministrazione pubblica (comunitario, nazionale, regionale, locale), e le organizzazioni dei consumatori.

2. Sviluppo della PAC

Secondo il comitato dei consumatori l’evoluzione della PAC è stata “ largamente influenzata dai produttori per raggiungere i propri interessi”

Nei primi anni Sessanta, la tariffa doganale comune per i prodotti agricoli fu fissata ad un livello elevato, in modo da mantenere i livelli esistenti di reddito agricolo. Negli anni seguenti, alti prezzi alla produzione (prezzi di mercato e sussidi diretti) hanno creato uno squilibrio persistente tra la domanda di prodotti alimentari in lenta espansione e l’offerta in rapida espansione.

Dopo ingenti costi di bilancio spesi per disfarsi dei surplus alimentari, altri costi sostenuti per sussidiare le esportazioni, e dopo il fallimento del tentativo di limitare la spesa pubblica netta per mezzo di imposte sulla produzione e degli “stabilizzatori” del bilancio, si sono introdotte nuove misure quantitative per controllare l’offerta interna, come le quote di produzione e la messa a riposo dei seminativi, strumenti molto meno trasparenti per i cittadini e molto più congeniali ad un’economia pianificata che ad un’economia orientata al mercato.

Questo approccio è ancora ben presente nel documento della Commissione “Agenda 2000”, nelle decisioni del Summit di Berlino e nelle posizioni prese dalla delegazione dell’Unione Europea in sede WTO. Mentre i prezzi comunitari verranno ridotti verso i livelli del mercato internazionale, il bilancio comunitario compenserà il calo dei redditi agricoli con sussidi diretti. Di conseguenza i prezzi alla produzione non verranno sostanzialmente ridotti, mantenendo la maggior parte delle distorsioni esistenti nell’attività produttiva ed il conseguente spreco di risorse per la collettività. Inoltre questi effetti deleteri già si estendono ai nuovi Paesi Membri che adattano le loro politiche alla PAC.

Raccomandazioni Quasi tutti gli strumenti tecnici per riformare la PAC sono stati sperimentati negli ultimi quaranta anni, senza un successo duraturo nel ridurre il sostegno all’agricoltura. Di conseguenza il problema di riformare la PAC non è tecnico ma politico. E’ necessaria una profonda riforma istituzionale, capace di creare un potere contrapposto ai gruppi di pressione dei produttori da parte delle organizzazioni dei consumatori e dei cittadini. Questo potere contrapposto dovrebbe mettere in risalto gli attuali costi sociali e la perversa ridistribuzione del reddito generata dalla PAC, incoraggiando un cambiamento nell’attuale approccio di parte che hanno vari funzionari ed operatori politici che operano ai diversi livelli decisionali.

3. Impatto sul consumatore

L’onere dei trasferimenti di reddito generati dalla PAC dalle famiglie (consumatori e contribuenti) al settore agricolo (produttori e servizi generali all’agricoltura) nel 1998 (107 miliardi di ECU) è diviso quasi ugualmente tra consumatori (52 miliardi di ECU) e contribuenti (55 miliardi di ECU), ed è più elevato del contributo netto dell’agricoltura alla produzione di beni e servizi (77 miliardi di ECU). Sebbene il costo per cittadino europeo (285 Ecu nel 1998) ed i trasferimenti per ettaro di area agricola utilizzata (796 Ecu) siano leggermente diminuiti in termini reali negli anni ’90, i trasferimenti totali per unità lavoro equivalente a tempo pieno (15886 ECU) sono aumentati sia a prezzi costanti che a prezzi correnti, nonostante l’intenzione dichiarata di ridurre il sostegno agricolo ed i vari tentativi di riformare la PAC.

Purtroppo non sono disponibili statistiche comparabile tra i paesi membri che ci permettano di valutare l’onere complessivo della politica agricola a livello comunitario, nazionale e regionale. Stime limitate all’Italia, che includono anche le mancate entrate di bilancio dovute alle agevolazioni su tasse e contributi sociali, indicano trasferimenti complessivi di 403 Ecu per abitante.

Il sostegno dei prezzi di mercato equivale ad una tassa regressiva sulle famiglie, infatti la quota di cibo e bevande sulla spesa totale dei consumatori è più alta nelle famiglie a basso reddito che in quelle a reddito più elevato, questa quota è anche più alta nei paesi membri più poveri rispetto a quelli più ricchi (28% in Portogallo, 14% in Germania).

Raccomandazioni

Al fine di ridurre sostanzialmente questo flusso di trasferimenti è necessario che i consumatori e le famiglie siano meglio rappresentati a tutti i livelli di governo dove si prendono decisioni sulla PAC. E’necessaria una consistente attività di ricerca ed una rete informatica di aggiornamento a disposizione di chi lavora nella formulazione delle politiche settoriali e di tutti i cittadini europei.

Ogni politica che manipola i prezzi di mercato generando trasferimenti dai consumatori dovrebbe essere accuratamente controllata per verificare se questi trasferimenti sono giustificati in termini di benessere generale dei cittadini. Le caratteristiche democratiche di ogni intervento pubblico sono strettamente correlate alla sua trasparenza ed alla possibilità che i cittadini capiscano bene i suoi effetti sul proprio benessere e sulla collettività.

4. Impatto sul reddito agricolo

I trasferimenti di redditi generati dalla politica di sostegno dei della PAC sono ancora largamente proporzionali al volume di produzione. Ne risulta una perversa ridistribuzione del reddito a favore degli agricoltori più abbienti e dei proprietari fondiari mentre gli agricoltori più poveri e i lavoratori salariati non proprietari di terra beneficiano solo in minima proporzione del flusso di reddito trasferito all’agricoltura. Approssimativamente il 35% dei trasferimenti correlati al volume di produzione va a favore del 3% delle aziende più grandi, mentre il 50% delle aziende di più piccole dimensioni ne riceve solo il 5%.

Solo parte dei trasferimenti generati dal sostegno dei prezzi aumenta il reddito delle famiglie agricole, il resto è assorbito dall’aumento dei costi degli inputs e dalla bassa produttività delle risorse investite specialmente in aziende marginali sottodimensionate dove non si possono applicare le moderne tecnologie sul piano della gestione e della meccanizzazione. In buona parte vanno ad aumentare i valori fondiari che hanno raggiunto livelli molto alti nelle regioni più fertili ed irrigue dei paesi membri più ricchi

I trasferimenti legati al sostegno dei prezzi non sono trasparenti perché non sono facilmente identificabili da parte degli agricoltori come un sussidio alla produzione agricola e generano equivoci sul valore reale dei prodotti agricoli per i cittadini. Inoltre attualmente questi trasferimenti non sono mirati a specifici obiettivi di natura allocativa, ridistributiva, o ad altri obiettivi nell’interesse dell’intera collettività.

Raccomandazioni. Nell’interesse dei consumatori e dell’intera società europea, i trasferimenti di reddito verso l’attività agricola dovrebbero essere disaccoppiati dal volume della produzione. Orientando gli intervento pubblico verso obiettivi specifici si potrebbero migliorare sensibilmente gli effetti della PAC in termini di allocazione delle risorse e di distribuzione del reddito. I trasferimenti di reddito sarebbero molto più trasparenti, potrebbero essere direttamente correlati al loro impatto sull’aggiustamento strutturale o alle esternalità positive prodotte dall’attività agricola sul piano ambientale, territoriale, ecc.

5. Impatto sull’agricoltura

Le politiche di sostegno dei prezzi hanno causato un notevole aumento delle rendite fondiarie e dei redditi agricoli specialmente nelle aziende di larghe dimensioni e nelle regioni o nei paesi membri dove la struttura produttiva era già efficiente negli anni ’50, per esempio in Olanda, dove il reddito disponibile delle famiglie agricole è più che doppio rispetto al reddito disponibile medio di tutte le famiglie olandesi. Questi trasferimenti di reddito agli agricoltori più benestanti hanno aumentato le divergenze nella distribuzione del reddito della UE. D’altro canto però, le stesse politiche di sostegno dei prezzi hanno rallentato la mobilità delle risorse, specialmente del lavoro e della superficie coltivata e hanno ritardato un aggiustamento strutturale che sarebbe stato molto necessario, specialmente nelle regioni e nei paesi membri dove la dimensione media delle aziende agricole è insufficiente e impedisce lo sfruttamento pieno delle economie di scala e della tecnologia moderna.

L’impatto della PAC sull’efficienza dell’agricoltura dell’UE è stato, nel suo complesso, negativo. L’aumento annuo della dimensione media delle aziende[117] è stato solo dello1% ed è stato anche inferiore nei paesi membri mediterranei. Benché le dimensioni medie aziendali in termini di prodotto lordo varino sostanzialmente tra i paesi membri (essendo 14 volte più grandi in Olanda rispetto alla Grecia) negli anni ’90 non c’è stata convergenza tra i paesi membri. Le differenze sono rimaste immutate o sono addirittura leggermente peggiorate.

I livelli di sostegno dei prezzi non sono correlati positivamente ai livelli medi di reddito agricolo. Nel lungo termine il sostegno dei prezzi, anziché aumentare i redditi agricoli, tende a mantenere lavoro agricolo in imprese piccole ed inefficienti. Di conseguenza una larga parte del reddito trasferito dai consumatori e contribuenti attraverso il sostegno dei prezzi non aumenta il reddito della popolazione agricola ma va semplicemente a compensare i maggiori costi di produzione dovuti a strutture produttive inefficienti e sottodimensionate.

Gli effetti delle politiche incluse nella “scatola verde” dovrebbero essere valutati individualmente per ogni progetto o piano regionale. Attualmente analisi e valutazioni del tipo costi-benefici sociali vengono effettuate molto raramente e inoltre una larga quota dei finanziamenti pubblici allo sviluppo rurale è già assegnata al settore agricolo dai regolamenti comunitari o nazionali. Ciò impedisce una migliore allocazione delle risorse a livello locale, dove spesso già esiste un eccesso di risorse investite in agricoltura. In ogni modo, nel suo complesso, la spesa della sezione garanzia del FEOGA genera una ridistribuzione del reddito positiva fra i paesi membri, favorendo i paesi e le regioni più povere ed una maggiore coesione nella UE.

La delegazione comunitaria al WTO propone di sostituire il sostegno dei prezzi con gli aiuti condizionati a limitazioni della produzione (oltre 18 miliardi di Euro inclusi nella “scatola blu”). Si dovrebbe ricordare che queste politiche: a) sono in pieno contrasto con l’obiettivo di migliorare l’efficienza produttiva, riducendo la mobilità intra- ed inter-settoriale dei fattori di produzione, b) frustrano gli effetti della riforma dei prezzi del 1992 sull’aggiustamento strutturale, c) implicano ingenti costi amministrativi per la gestione dei programmi ed il controllo delle frodi, d) aumentano il livello burocratico dell’attività agricola con perdite di tempo da parte degli agricoltori, e) penalizzano gli imprenditori migliori che vorrebbero espandere la loro produzione a costi medi più bassi, mentre premiano gli agricoltori inefficienti che gestiscono imprese spesso non vitali con alti costi medi di produzione.

Raccomandazioni Se si vuole effettivamente realizzare “una sostanziale e progressiva riduzione del sostegno agricolo”, le politiche ora classificate nella “scatola blu” dovrebbero essere incluse nella “scatola arancione” e di conseguenza dovrebbero essere soggette a riduzione, mentre le compensazioni agi agricoltori per le perdite di reddito conseguenti la riduzione del sostegno dei prezzi dovrebbero essere degressive e limitate nel tempo per favorire l’aggiustamento strutturale, ed essere realizzate nel modo più equo e meno distorcente possibile.

Le compensazioni dovrebbero essere garantite solo per un periodo limitato di tempo ed un equivalente ammontare di titoli di credito potrebbe essere emesso dalla UE al fine di diluire il proprio onere finanziario e permettere agli agricoltori un’utilizzazione più flessibile delle compensazioni. Essi potrebbero incassare questi titoli di credito ogni anno o venderli tutti sul mercato finanziario e usare il valore capitalizzato al fine di migliorare la propria struttura produttiva. Altri agricoltori potrebbero vendere la loro azienda ai vicini qualora non fosse economicamente vitale, ed usare il capitale per iniziare un’attività non agricola oppure trasformare questo capitale in uno schema di pensione vitalizia.

Queste modalità di compensazione favorirebbero un rapido aggiustamento strutturale senza creare distorsioni. Le compensazioni influirebbero solo sul livello di ricchezza degli agricoltori senza distorcere i prezzi di mercato o altri incentivi alla produzione. La riforma della PAC dovrebbe essere meno soggette a pressioni di parte e, aumentando efficienza e equità, potrebbe essere effettivamente realizzate nell’interesse generale e di un’attività agricola più efficiente ed equa.

6. Effetti sull’aggiustamento strutturale

L’occupazione agricola dipende dall’andamento della domanda e dell’offerta di prodotti alimentari nel lungo termine e dalle politiche economiche realizzate, specialmente nel settore agricolo e nel mercato del lavoro. Il problema fondamentale non è tanto il mantenere un’alta occupazione nel settore quanto l’aumentare “il reddito individuale delle persone addette all’agricoltura” come stabilito dall’art. 33 del trattato che istituisce la Comunità Europea.

Il sostegno dei prezzi e le recenti misure di gestione della offerta (quote di produzione e messa a riposo dei seminativi) hanno aumentatole rendite fondiarie e hanno ridotto la mobilità intra- ed inter-settoriale delle risorse. La messa a riposo dei seminativi, pur riducendo alcune distorsioni generate dal sostegno dei prezzi, ha generato uno spreco di risorse economiche. Nel 1998-99 i contribuenti hanno pagato 1200 miliardi di Ecu per convincere gli agricoltori a non utilizzare 4,2 milioni di ettari di seminativi per un valore fondiario stimato in oltre 30 miliardi di Ecu, tutto ciò al fine di ridurre l’offerta di prodotti agricoli sul mercato interno necessaria per mantenere elevati prezzi di mercato pagati dai consumatori comunitari. I cittadini europei sostengono quindi, come contribuenti, un alto onere finanziario al fine aumentare il prezzo dei prodotti che loro stessi acquistano come consumatori, e per ottenere questo bel risultato debbono anche sterilizzare un ammontare considerevole di risorse economiche. Risulta difficile poter credere che questa politica sia realizzata nell’interesse dei consumatori e della società nel suo complesso.

Secondo le decisioni prese dalla Commissione Europea all’inizio degli anni ’60, almeno il 30% della spesa agricola comune avrebbe dovuto essere orientata verso politiche strutturali che risolvono i problemi migliorando le strutture produttive e riducendo i costi medi di produzione, mentre le politiche di sostegno dei prezzi mantengono e spesso peggiorano i problemi esistenti di produttività e di reddito agricolo. In contrasto con questa decisione la sezione Orientamento del FEOGA ha speso mediamente molto meno del 10% del bilancio agricolo, e la spesa per investimenti è stata molto bassa circa il 2,5% del FEOGA. Se si includono le spese nazionali l’assistenza all’aggiustamento strutturale stimata dalla Commissione Europea sale ora solo al 7,5% del sostegno all’agricoltura.

In ogni modo è quasi impossibile realizzare con successo una riforma strutturale se i prezzi agricoli alla produzione sono fortemente distorti come quelli attuali. Se si concedono finanziamenti per miglioramenti strutturali nelle imprese agricole, gli imprenditori investiranno queste risorse finanziarie nelle attività più convenienti, spesso coincidenti con le attività dove il sostegno dei prezzi è più elevato. Di conseguenza o si aumentano le eccedenze o si è in contrasto con i numerosi vincoli posti all’espansione della produzione dalla politica di gestione dell’offerta. Questo finanziamento pubblico costituisce quindi un beneficio per gli imprenditori agricoli privati ma rappresenta un a perdita netta per la collettività nel suo complesso che si vede costretta a disfarsi delle eccedenze alimentari o a fronteggiare una minore produttività degli investimenti.

Raccomandazioni. Per aiutare i produttori a sviluppare le loro imprese e facilitare l’ingresso di nuovi agricoltori nell’interesse degli imprenditori più efficienti e della collettività, le attuali barriere alla mobilità inter- ed intra-settoriale delle risorse dovrebbero essere rapidamente smantellate. Parallelamente si dovrebbe istituire un’efficace politica che favorisca una maggiore informazione sulle opportunità di lavoro nelle aree rurali.

Invece di ridurre i seminativi mantenendo inutilizzata la superficie agricola con una perdita netta di benessere della collettività nel suo complesso, una politica che favorisca la mobilità della forza lavoro verso attività più produttive non solo eviterebbe questa perdita di benessere sociale ma aumenterebbe la produzione complessiva ed il benessere sociale spostando i lavoratori da una condizione di bassa produttività agricola permanentemente sostenuta dalla mano pubblica verso attività non agricole molto più produttive in termini sociali.

Per riformare con successo la PAC, sarebbe molto utile che gli operatori politici, gli agricoltori ed i cittadini conoscessero qual è la quota di reddito agricolo che può essere attribuita alla produzione di beni e servizi agricoli (includendo le remunerazioni delle esternalità positive) valutata in base a prezzi di mercato non distorti, e l’ammontare della quota complementare del loro reddito, generata direttamente o indirettamente dall’intervento pubblico, che dovrebbe essere ridotta gradualmente col passare del tempo. I cittadini e gli stessi agricoltori hanno il diritto di sapere quale quota dell’attuale reddito agricolo è “reale”, produttiva per la collettività in un economia di mercato, e qual è la quota “assistenziale”, dipendente dal sostegno pubblico, grosso modo equivalente ad un sussidio di disoccupazione.

7. Effetti sull’economia

Il sostegno dei prezzi, ottenuto attraverso la protezione esterna e le politiche di gestione dell’offerta, genera costi sociali per l’economia della UE spesso poco visibili, controbilanciati solo da benefici molto modesti. I costi dell’immagazzinamento e distruzione di eccedenze agro-alimentari era molto elevato prima della realizzazione delle politiche di gestione dell’offerta specialmente se consideriamo che l’agricoltura costituisce ora solo l’1,5% del PIL dell’Unione. Negli ultimi 24 anni il bilancio comunitario ha speso oltre 80 miliardi di ECU per immagazzinamento e distruzione di eccedenze ed oltre 150 miliardi di ECU per sussidi alle esportazioni, cifre comparabili o addirittura superiori al prodotto interno netto nel 1998 di alcuni paesi membri come l’Irlanda (84 miliardi di Ecu), il Portogallo (110 miliardi di Ecu) o la Grecia (127 miliardi di Ecu ).

Per ridurre queste eccedenze senza abbassare il sostegno dei prezzi, si concedono sussidi agli agricoltori per abbassare il loro livello di produzione utilizzando tecniche meno produttive o lasciando inutilizzate risorse disponibili. Di conseguenza lo stesso concetto di efficienza economica che implica una migliore allocazione delle risorse al fine di aumentare la produzione di beni e servizi ad uso dei consumatori viene capovolto dall’intervento pubblico. Inoltre il sostegno dei pezzi genera un ampia distorsione nell’allocazione delle risorse disponibili sia a livello della produzione sia livello del consumo.

La maggiore burocratizzazione della PAC conseguente l’introduzione delle politiche di gestione dell’offerta comporta ulteriori costi sociali per la collettività. Sono necessarie risorse economiche sia per raccogliere le tasse sufficienti a finanziare la spesa agricola di bilancio che per l’amministrazione dei programmi di intervento in agricoltura a livello comunitario, nazionale, regionale e locale. Inoltre, per realizzare questi programmi amministrativi è necessario uno spreco di tempo e di altre risorse da parte dell’agricoltore che poterebbero essere utilizzate in attività più produttiva. Il maggior intervento della mano pubblica nell’attività produttiva è anche correlato all’aumento delle frodi ai vari livelli amministrativi.

A livello macroeconomico l’aumento dei prezzi agricoli comporta un aumento dell’indice dei prezzi al consumo e riduce il reddito disponibile reale dei consumatori e la domanda complessiva. Questa riduzione della domanda, unitamente agli sprechi di risorse economiche citati e ad un aumento dei salari reali conseguente l’aumento dei prezzi alimentari, riduce i profitti e gli investimenti nel sistema economico, con un conseguente abbassamento dello stock di capitale e della produttività del lavoro che sfociano in un minor livello di occupazione ed in un minor tasso di sviluppo economico.

Inversamente, gli effetti di una riduzione dei prezzi agricoli prevista dal documento della commissione “Agenda 2000” sono decisamente positivi. Secondo i risultati di una ricerca condotta dalla Direzione Generale per gli affari economici e finanziari della UE, una riduzione dei prezzi di intervento dei seminativi (- 15%), della carne bovina (- 20%) e dei prodotti lattiero-caseari (- 15%) prevista da Agenda 2000 aumenterebbe significativamente il PIL della UE, i consumi privati e gli investimenti, unitamente al commercio internazionale e all’occupazione. Purtroppo le tasse necessarie a finanziare i pagamenti inclusi nella “scatola blu” neutralizzeranno in gran parte questi effetti positivi.

Raccomandazioni. Le politiche di sostegno dei prezzi non risolvono i problemi agricoli attuali ma ne ritardano e spesso peggiorano la soluzione. In questi quasi 40 anni di PAC, il Consiglio e la Commissione hanno sempre delegato la soluzione dei problemi di politica agraria ai dipartimenti o ministeri agricoli, le cui decisioni sono state sistematicamente distorte a favore degli interessi a breve termine dei produttori agricoli. Una efficace soluzione ai problemi agricoli è possibile solo se si potrà realizzare un’effettiva Politica dei Consumatori, dotata di istituzioni adeguate ed in grado di realizzare un monitoraggio permanente delle politiche settoriali identificando tutti i costi micro- e macro-economici sostenuti dalla collettività.

8. Effetti sullo sviluppo economico

Sul piano macroeconomico la riduzione dei prezzi dei prodotti agricoli aumenterebbe il reddito reale dei consumatori e la domanda sia di prodotti agricoli che non agricoli, riducendo nel contempo il costo sostenuto dalle imprese in salari reali. Gli effetti sugli investimenti e sul tasso di sviluppo sarebbero positivi.

Se negli anni Sessanta, dopo le proposte presentate dal commissario olandese all’agricoltura Sicco Mansholt si fosse realizza una efficace riforma strutturale, l’attuale distribuzione delle aziende europee per classi di ampiezza sarebbe ora molto più efficiente, per esempio, molto più simile alla attuale distribuzione delle aziende in Olanda. Se nella UE avessimo ora questa distribuzione di aziende la produttività media del lavoro agricolo sarebbe molto più alta e, per raggiungere l’attuale produzione finale agricola, basterebbe circa la metà dell’occupazione attualmente esistente in agricoltura. Il reddito lordo standard per unità di lavoro a tempo pieno sarebbe del 30% superiore a quello attuale anche in assenza di sostegno dei prezzi.

Dal 1975 al 1998 la sezione garanzia del FEOGA ha speso 733 miliardi di Ecu a prezzi costanti 1998 per il sostegno dei prezzi agricoli, un valore 9 volte superiore al bilancio dell’UE nel 1998, oppure corrispondente a 109.000 Ecu per equivalente addetto agricolo a tempo pieno. Se queste risorse di bilancio fossero state spese in riforme strutturali, aumentando la mobilità inter- ed intra- settoriale del lavoro, in misure volte alla protezione dell’ambiente ed allo sviluppo di attività non agricole in aree svantaggiate, la produttività ed il reddito da lavoro agricolo sarebbero ora molto più alti. Negli ultimi 25 anni i cittadini europei non avrebbero pagato prezzi agricoli elevati risparmiando un ammontare di risorse economiche probabilmente superiore alla sopracitata spesa del bilancio comunitario. Inoltre le risorse di lavoro liberate dal settore agricolo avrebbero avuto un effetto benefico sulle attività economiche non agricole. Anche assumendo una bassa produttività di queste risorse di lavoro gli aumenti annui del PIL della UE sarebbero stati considerevoli.

D’altro canto il sostegno dei prezzi della PAC ha avuto un effetto positivo sulla distribuzione interregionale del reddito aumentando la coesione sia fra le regioni della UE che fra i suoi stati membri. Poiché l’agricoltura è più sviluppata nelle regioni povere e meno popolate rispetto a quelle ricche ed urbanizzate, i trasferimenti da consumatori e contribuenti verso il settore agricolo in linea di massima riducono le differenze tra regioni ricche e povere. Ciò nondimeno, nella maggioranza dei casi, politiche regionali mirate avrebbero però potuto avere gli stessi effetti sulla distribuzione interregionale del reddito con una spesa pubblica minore e con effetti a lungo termine più positivi sullo sviluppo economico delle regioni meno sviluppate.

Lo smaltimento dei surplus agricolo della UE sui mercati internazionali ha contribuito all’abbassamento dei prezzi internazionali dei prodotti agricoli e alimentari, di conseguenza nel breve periodo i paesi importatori netti ne hanno tratto un beneficio. D’altro canto si è ritardato lo sviluppo agricolo nei paesi terzi danneggiando in particolare quei paesi meno sviluppati dove l’agricoltura costituisce una risorsa importante ed una delle poche attività con un vantaggio comparato a livello internazionale. Prezzi internazionali più bassi hanno favorito settori non agricoli specialmente nei paesi di nuova industrializzazione e hanno aumentato la loro competitività internazionale. Complessivamente i settori non agricoli della UE sono stati svantaggiati dagli effetti internazionali della Politica di sostegno dei prezzi della UE.

L’effetto negativo peggiore del sostegno dei prezzi sarà probabilmente sostenuto dai nuovi paesi membri della Europa Centro Orientale (PECO) che dovranno accettare la PAC come parte dell’ acquis communautaire. I loro consumatori dovranno sostenere l’equivalente di una tassa regressiva sui prodotti agroalimentari che peggiorerà in particolare gli standard di vita dei pensionati e delle famiglie numerose. Benché una parte sostanziale del costo di bilancio sia sostenuta dai cittadini della attuale UE a 15 membri, i bilanci nazionali dei PECO dovranno distogliere risorse economiche dagli investimenti produttivi in settori economici in espansione per orientarle verso il mantenimento di alti prezzi agricoli. D’altro lato gli agricoltori riceveranno un grosso aumento dei loro ricavi, difficilmente giustificabile in termini di politica economica, che aumenterà le differenze di reddito all’interno del sistema agricolo e all’interno della sua società nel suo complesso. Parte di questi aumenti di reddito verranno capitalizzati in valori fondiari ritardando l’aggiustamento strutturale verso dimensioni aziendali ottimali e ritardando la mobilità inter- ed intra- settoriale della terra e del lavoro. Strutture agricole meno efficienti e rendite fondiarie più alte aumenteranno i costi di produzione medi e ridurranno la competitività del settore agricolo. Effetti negativi del sostegno dei prezzi agricoli analoghi a quelli già citati per l’Europa a 15 membri ridurranno la competitività interna ed internazionale nei settori non agricoli dei paesi PECO, unitamente al tasso di sviluppo economico ed all’occupazione totale.

Nella storia economica europea con ogni probabilità non è mai stata presa una decisione di politica settoriale capace di generare una cosi grande riduzione del benessere sociale dei cittadini europei.

Raccomandazioni. Per tenere conto degli interessi dei consumatori nella PAC, oltre alla riduzione del sostegno dei prezzi alla produzione, si dovrebbero smantellare tutte le misure che rallentano la mobilità inter- ed intra- settoriale del lavoro. Inoltre, nelle aree rurali si dovrebbero formulare politiche specifiche volte alla riqualificazione professionale ed alla mobilità intersettoriale del lavoro. Ne risulterebbe un aumento della produttività media del lavoro, un migliore aggiustamento strutturale del settore agricolo, un aumento della competitività internazionale dei settori agricolo e non agricoli della UE ed un aumento complessivo dell’occupazione.

In conseguenza della sua dimensione economica e della sua influenza politica la UE ha una grande responsabilità nei negoziati multilaterali della Organizzazione Mondiale del Commercio (WTO). Dovrebbe rivedere la sua politica svolgendo un ruolo efficace volto alla liberalizzazione del commercio internazionale dei prodotti agricoli in sintonia con i principi enunciati nel Trattato e con gli impegni presi negli organismi internazionali oltre che negli interessi dei consumatori e della intera società della UE.

Al fine di evitare che negli nuovi membri della UE, per effetto dell’ acquis communautaire si generino distorsioni e perdite di benessere analoghe a quelle già realizzate nei quindici membri attuali, le politiche incluse nella “scatola blu” dovrebbero essere incluse nella “scatola arancione” e ridotte prima o contemporaneamente all’allargamento della UE ai PECO.

9. Sinossi e conclusioni

Il costo complessivo per le famiglie della UE includendo i trasferimenti al settore agricolo, i costi sociali sostenuti dai consumatori ed i costi amministrativi ammonta a un totale 123 miliardi di Ecu. D’altro lato non tutti i trasferimenti dalle famiglie citati nelle sessioni precedenti (107 miliardi di Ecu) possono essere considerati un beneficio netto per gli addetti al settore agricolo. Se escludiamo le perdite di benessere economico dovute al sostegno dei prezzi in termini di maggiori costi di produzione connessi alla struttura inefficiente della produzione e alla distorsione dei prezzi ai produttori oltre alle risorse perse nell’immagazzinamento e smaltimento delle eccedenze di produzione, nelle frodi e nelle pratiche amministrative fatte dagli agricoltori, il beneficio netto per le persone che lavorano nel settore agricolo può stimarsi in 58 miliardi di Ecu.

La quota del beneficio netto per il settore agricolo sul costo totale sostenuto dalle famiglie della UE si riduce al 47%, percentuale che può essere considerata un indicatore dell’efficienza del trasferimento di risorse economiche al settore agricolo attraverso l’attuale PAC basata sulla politica di sostegno dei prezzi.

Inoltre non tutto questo trasferimento netto verso il settore agricolo va a beneficiare gli agricoltori. Il beneficio netto che gli agricoltori ricevono in conseguenza della politica dei sostegni dei prezzi è ulteriormente ridotto da un effetto dispersivo verso le persone che approvvigionano gli agricoltori di beni e servizi, o sono coinvolte nel commercio locale dei prodotti. Fra le componenti di benessere sociale non quantificate si dovrebbero considerare positive le conseguenze del sostegno dei prezzi sulla sicurezza degli approvvigionamenti e sullo sviluppo delle aree meno favorite, d’altro canto dobbiamo registrare gli effetti non facilmente quantificabili ma nel complesso negativi registrati a livello macroeconomico e per quanto concerne l’impatto ambientale.

Il noto aforisma : “Dai un pesce a un affamato: lo nutrirai per un giorno, insegnagli a pescare: lo nutrirai per tutta la vita”, si adatta bene alla valutazione della PAC. Fin dalla sua istituzione il Consiglio dei Ministri agricoli della UE è stato molto sensibile alle richieste delle organizzazioni agricole in termini di trasferimenti verso il settore agricolo al fine di contrastare la tendenza al calo dei pezzi nel tempo dovuta alla lenta espansione della domanda di prodotti alimentari ed all’aumento più rapido dell’offerta dovuto al progresso tecnologico. Anziché favorire una fisiologica mobilità intersettoriale del lavoro ed insegnare agli agricoltori come adeguare le dimensioni delle loro aziende e le loro tecniche produttive alle preferenze dei consumatori ed alle esigenze dello sviluppo economico, la PAC ha fornito trasferimenti annui di reddito di dimensioni approssimativamente uguali al valore aggiunto agricolo, mantenendo nel settore numerose aziende non vitali sul piano economico unitamente ad una grande quantità di disoccupazione nascosta.

In termini generali le politiche economiche dovrebbero essere giustificabili sia in termini dell’aumento di efficienza (per esempio quando sono caratterizzate da un elevato saggio di rendimento interno degli investimenti pubblici), oppure quando i benefici per la collettività nel suo complesso sono evidenti in termine di qualche altra componente del benessere sociale come una migliore distribuzione del reddito, una migliore protezione dell’ambiente o miglioramenti nella sicurezza dei cittadini europei. Dopo il lavoro analitico eseguito dobbiamo concludere che l’onere del sostegno dei prezzi della PAC risulta essere molto alto, superiore la bilancio totale della UE mentre il suo saggio marginale di rendimento è quasi certamente negativo e nessun altro effetto positivo sul benessere dei cittadini europei è così grande da giustificare l’alto costo sostenuto dalle famiglie.

Raccomandazioni

Anche se non sono mai stati pienamente realizzate, le necessarie correzioni della PAC sono state ripetutamente menzionate in vari documenti della Commissione della UE e del Consiglio dei Ministri, mentre le modifiche di fondo sono incluse negli impegni internazionali firmati a Marrakech. In sintesi: (a) abolizione della “scatola blu” e riduzione delle politiche incluse nella “scatola arancione” che distorcono i prezzi di mercato a livello del consumo e/o della produzione, (b) miglioramento delle politiche incluse nella “scatola verde” orientate all’interesse generale della collettività e non solo a interessi particolari, (c) erogazioni di compensazioni disaccoppiate (trasparenti, decrescenti, e limitate nel tempo) per le riduzioni di reddito agricolo dovute alla riforma.

Compensazioni una tantum, finanziate con l’emissione di titoli dell’Unione Europea potrebbero essere molto flessibili nell’adattarsi a criteri di efficienza ed equità evitando distorsioni nei prezzi . Immediatamente dopo la riforma i prezzi di mercato non sarebbero distorti e i nuovi paesi membri non potrebbero richiedere compensazioni per ridurre il loro sostegno dei pezzi. Si risolverebbero così importanti problemi connessi all’adesione dei paesi PECO all’Unione Europea.

Strategia dei consumatori

Una larga parte delle informazioni più rilevanti sulla PAC è direttamente o indirettamente influenzata dalle organizzazioni agricole e da operatori politici che lavorano in istituzioni agricole o sono espressione di un elettorato agricolo, ed è spesso distorta da una visione settoriale dei problemi esistenti. E’ importante creare un sistema “contrapposto”di informazione e ricerca che valuti i problemi esistenti dal punto di vista dei consumatori della UE e dell’intera società. Sarebbe quindi possibile fornire ai cittadini europei, ai operatori politici, ai consumatori ed alle organizzazioni agricole informazioni complete e non distorte sui prevedibili effetti della PAC e di altre politiche settoriali dell’UE

Questo sistema informativo dovrebbe essere basato su una rete permanente di monitoraggio che includa almeno: (a) una stima annuale dei trasferimenti intersettoriali e dei costi sociali generati dalla PAC, che integri le stime esistenti (ad esempio quelle dell’OCSE) includendo analisi dei mercati agricoli e proiezioni sull’impatto delle politiche attuali e di quelle proposte; (b) una analisi analoga dovrebbe essere realizzata per i nuovi paesi membri dell’UE al fine di valutare l’impatto prevedibile dell’allargamento sia nei paesi dell’UE che nei nuovi membri; (c) un’analisi dei flussi interregionali generati dalla PAC, in modo da aiutare le organizzazioni dei consumatori a percepire meglio l’impatto della PAC sui consumatori, contribuenti e agricoltori della propria regione; (d) un’analisi strutturale a livello europeo, nazionale e regionale che stimi la disoccupazione nascosta creata o mantenuta dalla Politica Agricola. Valutazioni del livello di occupazioni sono di norma più concrete e facilmente percepibili dai cittadini, operatori politici, organizzazioni agricole e dei consumatori di quanto non lo siano concetti più astratti come “sostegno dei prezzi di mercato” oppure “benessere sociale”.

Se opportunamente diffuse, aggiornate e rese disponibili su internet, queste ricerche e informazioni dovrebbero permettere una valutazione della PAC dal punto di vista dei consumatori stimolando un dibattito trasparente fra organizzazioni dei consumatori agricoli ed operatori politici.

La strategia dei consumatori, volta a rendere la PAC più coerente con gli interessi dell’intera collettività come suggerito dal Comitato dei Consumatori, dovrebbe anche essere basata su un monitoraggio permanente e su una forte partecipazione delle organizzazione dei consumatori nel processo decisionale della PAC a tutti i livelli: comunitario, nazionale, regionale, locale

Cambiamenti istituzionali

Le istituzioni settoriali dovrebbero essere riformate al fine di favorire un mercato politico competitivo capace di garantire una larga partecipazione nel processo decisionale, dove tutti gli interessi coinvolti siano equamente rappresentati.

La Comunità Economica Europea ebbe successo nell’integrare i paesi membri perché non affrontò immediatamente i temi centrali della politica macroeconomia e monetaria, ma cominciò dalla periferia con l’integrazione delle politiche settoriali tra cui la politica agraria costituì negli anni Sessanta il maggior successo. Sfortunatamente nei decenni successivi questo approccio settoriale favorì interessi di parte e costi economici e finanziari per la collettività.

Tutte le decisioni di politica economica dove è coinvolta una allocazione intersettoriale di risorse non dovrebbero essere prese da istituzioni settoriali (ministeri, direzioni generali, dipartimenti regionali, ecc.). E’ importante che l’intero processo decisionale si sviluppi in un contesto privo di distorsioni.

Le politiche commerciali dei prodotti agricoli dovrebbero essere decise principalmente dal Consiglio dei Ministri del Commercio Estero, anziché dal Consigli dei Ministri Agricoli. Se queste condizioni si fossero verificate in passato, con ogni probabilità l’UE non sarebbe diventata il bastione del protezionismo agricolo nei negoziati GATT ed ora non ritarderebbe ancora a livello internazionale l’evoluzione verso la liberalizzazione dei mercati agricoli.

Le politiche di sviluppo rurale dovrebbero essere maggiormente di competenza del Consiglio dei Ministri delle Politiche Regionali anziché del Consiglio dei Ministri Agricoli. Se in passato si fossero verificate queste condizioni i finanziamenti comunitari a favore dello sviluppo rurale non sarebbero stati cosi frequentemente pre-assegnati all’agricoltura. A livello regionale i finanziamenti pubblici avrebbero potuto orientarsi verso le attività più produttive in termini di benessere sociale anziché concorrere ad aumentare le risorse investite in agricoltura nelle aree rurali.

Le politiche ambientali nelle aree rurali dovrebbero essere decise prevalentemente dai Ministri dell’Ambiente, anziché dai Ministri delle Politiche Agricole. Se cosi fosse stato in passato, il principio “chi inquina paga” sarebbe applicato anche in agricoltura e gli agricoltori che inquinano pagherebbero tasse anziché essere pagati per non inquinare come accade ora.

Sfortunatamente queste distorsioni settoriali a favore dei produttori agricoli non si verificano solo a livello comunitario, distorsioni a favore dei produttori sono frequenti anche nelle istituzioni nazionali e regionali dove gli interessi agricoli prevalgono frequentemente.

Le commissioni parlamentari e governative che trattano problemi agricoli non dovrebbero essere composte da una stragrande maggioranza di membri interessati al sostegno della produzione agricola. Se ciò si fosse realizzato in passato, in alcuni paesi membri i produttori agricoli non sarebbero stati largamente esentati dal pagamento delle tasse, i mercati interni sarebbero stati meno distorti e l’attuale struttura della produzione agricola sarebbe più efficiente e meno bisognosa di un sostegno pubblico permanente.

Gli stessi problemi istituzionali sono spesso diffusi a livello regionale e locale. Se cosi non fosse stato in passato, la bassa produttività degli investimenti pubblici in agricoltura relativamente alle altre attività economiche sviluppate nelle aree rurali sarebbe stata percepita e corretta, inoltre si sarebbe evidenziata l’impossibilità di controllare l’applicazione di alcune misure agroambientali, come i sussidi concessi al fine di ridurre l’uso dei fertilizzanti, migliorando l’efficienza dell’utilizzazione dei finanziamenti pubblici.

Guarire dal “male europeo”

Le interferenze degli interessi privati nelle politiche pubbliche sono frequenti e diffuse in tutti i governi; comunque è abbastanza evidente che questa causa del cattivo funzionamento del processo decisionale politico è molto più radicata ed estesa nel governo dell’UE che nel governo di altri paesi sviluppati. Ciò è probabilmente dovuto al particolare sviluppo storico delle istituzioni europee costrette nelle loro infanzia ed adolescenza entro stretti sentieri di sviluppo e ancora soggette a seguire approcci settoriali nei Consigli dei Ministri dove tutti i membri condividono gli stessi interessi settoriali, che evidentemente finiranno col prevalere. Inoltre l’ambiente in cui si prendono le decisioni politiche a Bruxelles non è ideale ai fini di raggiungere decisioni non distorte. Oltre tre mila gruppi di pressione di vario tipo con oltre 10 mila impiegati lavorano per raggiungere obiettivi molto spesso settoriali mentre gruppi sociali a difesa dell’interesse generale come le organizzazioni dei consumatori sono molto deboli.

L’UE è oramai cresciuta abbastanza per guarire da questo “male” del suo sistema politico. La sua guarigione è condizione necessaria, anche se probabilmente non sufficiente, per risolvere i grossi problemi della Politica Agricola Comune. Inoltre questa guarigione è ora molto urgente specialmente in vista dell’allargamento verso i paesi dell’Europa centrale ed orientale.

[1] The Consumer Committee, the consultative committee of the European Commission entrusted to represent the interests of consumers, adopted two opinions on the reform of the Common Agricultural Policy (CAP) on 8 December 1998 and on 14 June 1999 (see appendix 10-3)

[2] The Euro currency unit will be used also with reference to years before 1999, when the currency was the ECU.

[3] Expressed in European Size Units: 1 UDE = € 1200.

[4] Opinion of the Consumer Committee adopted on 8 December, 1998 on the reform of the CAP, accessible on the Commission web site:

http://europa.eu.int/comm/consumers/policy/committee/cc06_en.html

[5] Some issues and some frames in this report are taken from previous works on the subject: Tarditi, S. 1996, 1999, 2000.

[6] Opinion of the Consumer Committee (8-12-1998): 1. Introduction

[7] Aristotle, Vol. XXI Politics, Harvard University Press, 1932. (1932) p. 207.

[8] Monarchy for example may degenerate into tyranny if it is pursuing the personal interests of the king, aristocracy may degenerate into oligarchy if pursuing the personal interests of the few people ruling the country, and even democracy may degenerate if it pursues only the private interests of the poorest people to the damage of the whole society (dictatorship of the majority).

[9] Harsanyi, J. C. (1991), Morality and incentives. In Ethics and Economics. Universitá di Siena, International School of Economic Research. Vol. I.

[10] Issued in the meeting of the Council of OECD at Ministerial level on 26-27 March 1997, while equity concerns are indicated in point “21.e”.

[11] WTO (1995) p. 17

[12] Corresponding to article 39 of the Treaty of Rome.

[13] Opinion of the Consumer Committee (8-12-1998): 1. Introduction

[14] Opinion of the Consumer Committee (8-12-1998): 2. Appraising the CAP

[15] These policy measures may be grouped as follows. A) Production subsidies (e.g. deficiency payments); B) Input subsidies (e.g. subsidies on fertilisers, tax exemption on fuel, etc.); C) Border protection (e.g. import levies, export subsidies, non-tariff trade barriers); D) Government surplus buying in order to support domestic prices; E) Production quotas (in conjunction with border protection); F) Land set-aside (in conjunction with border protection)

[16] May be classified these instruments into seven main groups.

a) Measures to stabilise markets and incomes (public stockpiling of products for food security; public participation in producer insurance programmes).

b) Compensation for damage from natural disasters, food aid.

c) General services (research, training, knowledge-sharing, technical assistance, market infrastructure).

d) Income support measures (direct payments decoupled from the quantities produced).

e) Structural adjustment assistance (investment aid, retraining assistance, early-retirement programmes).

f) Agri-environmental programmes (subsidies for measures to protect, conserve and improve the environment).

g) Agri-regional programmes (subsidies related to regional policy measures in rural areas).

[17] Article 19 of the Treaty of Rome: “… duties in the Common Custom Tariff shall be at the level of the arithmetic average of the duties applied in the four customs territories comprised in the Community.”

[18] In order to guarantee a pre-determined price level in the domestic market, import levies were varied weekly, or even daily, according to the difference between external prices and a “threshold price” at the border, directly related to the “target price” guaranteed to farmers. This system of “variable levies” was dismantled in 1994 GATT negotiations in favour of a system of fixed tariffs.

[19] Import tariffs equally depress world market prices and distort international trade; however, as they are often accepted in terms of domestic food security, they are not considered too “unfair” trade measures.

[20] An example of manifest resource misallocation was the case for skimmed milk powder sold at subsidized prices, as a surplus-reducing device. It was then profitable for farmers to use it for feeding calves with re-generated milk, while increasing their sales (and EU surpluses) with the milk previously sucked by calves.

[21] For example production aids were granted to olive oil producers and to oilseed producers, rather than implementing a price support policy, in order to avoid a wide price difference on the domestic market between olive oil and seed oil, which was imported duty-free as were oilseeds. A collapse of domestic consumption of olive oil was then prevented.

[22] In the last decades, domestic demand for agricultural products increased by an average 0.5% per year, while domestic supply increased by 2% per year.

[23] Usually monopolists fix either the price (or the quantity) on markets under their control. As a consequence quantities sold (or market prices) are determined by the existing consumer demand. In the dairy sector, EU Ministers of Agriculture decide both the domestic market price and the quantities to be produced, as in planned economies. Any market imbalance is paid by EU consumers through higher prices or by EU taxpayers via the Community and national budgets. Social costs due to the large misallocation of resources are paid by society as a whole, usually without perceiving them.

[24] Greater detail on this subject in S. Tarditi (2003) Impact …

[25] According to estimates made during the GATT Uruguay Round, in 1995 the liberalisation of OECD and developing country food policies, assuming incomplete price transmission in developing countries, would have generated a 33% increase in the international price of food. (Goldin and Knudsen, 1990, p. 65, 67, 70).

[26] Contracting parties signed commitments for the implementation over the period 1995-2000 on:

a) Market access: Non-tariff trade barriers have to be converted into customs tariffs. Import tariffs have to be reduced by at least 36% on average, 15% as a minimum. Minimum market access is also granted by means of Tariff Rate Quotas (TRQs). “Special safeguard” provision against excessive instability of world markets

b) Export competition: Export subsidies reduced by 36% in value and at least 21% in volume (commitments are based on actual 1986-90 support subsidies).

c) Domestic support: Total public support of agricultural production had to be reduced by at least 20%, relative to the situation in force at the beginning of the GATT negotiations (commitments are based on actual support 1986-88).

Phytosanitary barriers to international trade have to be justified on scientific grounds. Not all public support has to be reduced, only measures included in the “amber-box”, clearly distorting international prices. Green box policy measures are exempt from reduction, as they have none or a minimal impact on market price distortions and on consumer expenditure.

[27] Mainly in order to reduce the existing market distortions in the international trade of cereal substitutes. Before 1992, due to high domestic prices for cereals, a large amount of duty-free cereal substitutes was imported into the EU and used as feed. As a consequence EU consumers had to pay high prices both for cereals used for human consumption and for animal products (especially meat and milk), while EU taxpayers had to pay export subsidies for both commodities, animal products and cereals, whose utilisation as feed was reduced by high domestic prices.

[28] The EU Commission estimated such overcompensations as costing over € bn 11.

[29] Opinion of the Consumer Committee (8-12-1998): 1. Introduction

[30] Opinion of the Consumer Committee (8-12-1998): 2. Appraising the CAP, Equity

[31] In 1970 this proportion reached 85%. (Commissione Europea, Vade-mecum di bilancio, 1999, p. 37)

[32] OECD (v.y) Agricultural Policies, Markets and Trade in OECD Countries - monitoring and evaluation, Paris.

[33] For example, for a net importing country if the border price of a commodity is € 80 and the border tariff is € 40, the domestic market price is likely to be raised up to € 120. The level of protection is always € 40 in absolute terms, but in relative terms this level of protection may be labelled a 50% level of domestic “assistance” (40/80*100) or a 33% level of domestic “support” (40/120*100). The same level of protection may also be indicated by means of an “assistance coefficient” (120/80) i.e. 1.5 in our example. Such formal definitions, although equivalent in arithmetical terms, are not totally neutral in psychological terms. In the EU, where negative levels of support are very rare, the relative (percent) “support” is always lower than percent “assistance”, as the denominator of the ratio is usually higher (the domestic price is higher than border price). Moreover, making reference to the domestic price decided by the Council of Agricultural Ministers is implicitly giving a certain legitimisation to that price, which is decided on political grounds.

[34] Common wheat, Durum wheat, Barley, Oats, Maize, Rice, Other grains, Sunflower, Rapeseed, Soybean, Sugar, Milk, Beef&veal, Sheepmeat, Pigmeat, Poultrymeat, Eggs.

[35] Updated estimates are produced in Perugini C., D. Sarri, A. Nucifora (2001).

[36] Market Price Support for non PSE commodities is variable year by year, however on average in the past decade was estimated at about 50% of PSE commodities. Our estimate of total EU Market Price Support is € mn 52721, while OECD estimate is € mn 62973.

[37] A comprehensive survey was carried out in the early eighties, but was not repeated (European Commission DG-6, Public expenditure in agriculture, study P 229, November 1984).

[38] In the nineties. Such assumption has been changed in the most recent years.

[39] A lower border protection would reduce EU supply and net exports, while dismantling production quotas and land set-aside would have the opposite effect of expanding EU supply and net exports.

[40] The “Standard Gross Margin” is a parameter used in farm surveys. It is approximately equivalent to the Gross Value Added at factor cost (GVAfc). In 1995 in the EU-15 the GVAfc was estimated at € bn 141, while the SGM was estimated at ESUmn 116.5, (see footnote 41 ) equivalent to ECUbn 140 (Source: Eurostat NewCronos). (/theme5/eurofarm/ef_main/farm)

[41] One ESU corresponds to € 1200 of Standard Gross Margin per year.

[42] Source: European Commission (1999) The Agricultural Situation in the Community, table 3.3.8

[43] A more detailed analysis of different ratios between SGM and farm revenues in various farm types and regions would be very useful.

[44] See for example econometric analyses by Palaskas, T. B. (1995).

[45] EU Commission, The agricultural situation in the European Union, various years, table 3.4.1. Such estimates of the cost of the CAP is also diffused in brochures concluding that, after all, the cost per citizen per day is equivalent to a few cigarettes (EU Commission (1996) How does the European Union manage agriculture and fisheries?, Europe on the Move. Office for Official Publications of the European Communities, Luxembourg).

[46] The EU notifications to the WTO estimate the aggregate measure of support (AMS), corresponding to the amber-box measures, at a lower level (the difference is less than 7% in 1997, but 28% in 1998). This is largely due to the use of reference prices for the world market different from those chosen by the OECD, to a different estimate of some tariffs and to the exclusion of part of the budgetary expenditure, especially at national and regional level.

[47] Under the usual assumptions of perfect competition, transport and other transaction costs are not considered for sake of simplicity.

[48] In Frame 5‑2 we refer to closed markets in order to analyse the likely impact of price support of commodity Q on prices of other commodities. If markets were open, the shifts in supply or demand would not affect prices but would be mainly reflected in changes in foreign trade. The land market is a closed market, the mobility of agricultural labour is rather low, while numerous purchased inputs are traded at international level.

[49] As a result of such a policy measure:

a) consumers (or users) pay a higher price for a reduced amount of purchased commodity, (the extra cost is DP*Qd’)

b) producers increase their production and benefit from a higher price on sales, (the extra benefit is DP*Qs’)

c) taxpayers, via the public budget, pay the burden of the export subsidy for the amount exported (DP*(Qd’-Qs’)

The gross gain of producers equals the gross loss for consumers and taxpayers.

However in the short term, in order to increase production, producers meet decreasing returns due to the constraints generated by fixed factors of production (farm size, labour, etc.). This increased cost of the use of resources is indicated by the triangle under the supply function (O.5*DP*DQs). On their side consumers have been induced by higher prices to reduce the amount consumed of commodity Q, their loss of welfare is indicated by a similar triangle under the demand function (O.5*DP*DQd). These two losses for producers and for consumers result in a net social loss to society as a whole due to the price distortions generated by the export subsidy (Frame 5‑2)

[50] Such shifts are not indicated in Frame 5‑2 for the sake of simplicity.

[51] Soil and climatic conditions may be different as well among agricultural areas. Such differences, external to the firm, may be taken into account by different long-term cost curves (envelopes).

[52] Market price equals marginal revenue if the demand for a single firm may be considered infinitely price-elastic.

[53] The lowest possible level of short-run costs for each firm size is limited by the long-term cost curve indicated by the bold line “enveloping” all short-term cost curves.

[54] This could be the case of large farms in CEECs (e.g. Estonia) where markets were liberalised in the early nineties.

[55] In order to distinguish these rents generated by government policies from the classical “Ricardian” rent due to natural causes (e.g. more fertile and productive land in the plains as compared to hilly land, etc.) they are called quasi-rents.

[56] The windfall gains enjoyed by Spanish olive oil producers when entering the EU and benefiting from high producer prices were not justifiable on any efficiency or equity grounds. The same will happen to CEECs producers of various commodities if the present acquis communautaire is implemented without first reforming the CAP.

[57] For example in Italy 24% of people employed in farming are over 55 years old (against 7% in industry and 11% in services, Frame 5‑5), the majority of these people are entrepreneurs on their own farms.

[58] Such an indicator is the algebraic sum of the annual rate of change of SGM per holding and of AWU, the last being usually negative. It describes the increase of productivity, taking into account changes in farm labour. If the number of farms decreases at a higher rate than the labour force, average farms are likely to increase their endowment not only of land but of labour as well.

[59] Or too large, particularly in some Central and Eastern European countries.

[60] In 1997. EU Commission, the Agricultural situation …table 3.5.1.4.

[61] The correlation is negative but not very high if domestic market prices are used (R²=0.1), it is much more apparent if SGM are computed using border prices (R²=0.5).

[62] European Commission (1999) Indicators for monitoring and evaluation: an indicative methodology, Methodological working paper n.3

[63] Net transfers are defined as the difference between the actual financial flows received by each country and its contribution to the EU budget (pro quota with reference to FEOGA-guarantee expenditure).

[64] Proposal for comprehensive long-term agricultural trade reform (US), WTO G/AG/NG/W/15, 23 June 2000.

[65] EU proposal, the blue box and other support measures to agriculture. WTO G/AG/NG/W/17, 28 June 2000

[66] OECD (1999) A matrix approach to evaluating policy: preliminary findings from PEM pilot studies of crop policy in the EU, the US, Canada and Mexico. Paris

[67] EU Commissioners for Agriculture repeatedly stated that compensatory payments could not be permanent.

[68] The trade and welfare effects of a production subsidy constrained by a ceiling for an exporting country already implementing a price support policy are indicated in Frame 10‑8.

[69] Such an approach is described in Marsh J., B. Green, B. Kerney, S. Tangermann, S. Tarditi (1991) The Changing Role of the Common Agricultural Policy, Belhaven Press, London

[70] For example OECD 1999.

[71] See the extensive literature on the “second best”.

[72]…… to ensure a fair standard of living for the agricultural community, in particular by increasing the individual earnings of persons engaged in agriculture…..(section 1.4, page 23)

[73] In the EU-15, year 2000, the agricultural share of GDP was 1.7, while the share in the employed civilian working population was 4.3 (EU Commission (2002) Agriculture in the EU…..table 2.0.1.2.)

[74] About 28% of the EU agricultural Value Added at market prices. The long-term land set-aside classified in the green-box policy measures as “Structural adjustment assistance: producer retirement programmes” is not included.

[75] For the sake of simplicity, in the diagram indicating the market of Commodity Q the shift back of the supply function is equal to the previous shift to the right generated by the price support policy. In this case the land set-aside policy fully offsets the previous increase in domestic production of commodity Q.

[76] For example, commodity J could be totally imported and not be a substitute for commodity Q at production level.

[77] The shift in supply of commodity K depends on the result of contrasting effects on production costs: reduced costs for labour and purchased inputs, increased opportunity cost of land use.

[78] Such a reduction may be not as large as expected due to the fact that at least for some years farmers tend to invest part of these factors of production in the share of land which is not set-aside, increasing the per ha amount of labour, fertilisers, etc.

[79] In Frame 6‑6 such deadweight losses are indicated in the panel relative to the land market by the rectangle (L’-L)*Pl (Pl indicates the annual rent), and in the panel relative to commodity Q by a share (grid area) of the rectangle (Qs’-Qs)*Pw. This rectangle indicates the cost of production of the extra amount of supply Qs’-Qs, assuming market prices were not distorted.

[80] Such opinions were repeatedly expressed in the late fifties in the conferences of Messina and Stresa, the latter convened to discuss the features of the future CAP.

[81] Regulation EEC 25/62 on the financial sources of the CAP.

[82] Council Regulations 1442/88, 2328/91, 2066/92, 3950/92, 2187/93, 2505/95, 2727/95.

[83] Especially if productivity in agriculture is evaluated in social terms, using non-distorted prices.

[84] Economic costs for EU commodities in year 1998, according to the assumed elasticity of demand or supply.

[85] Hageman et al. (1988) in OECD (1995) p. 22.

[86] Clark C. (1988) p. 105

[87] Provinces examined are Grosseto, La Spezia, Latina, Lecce, Potenza Siena, Taranto and Torino.

[88] Agrisole, 7-13 May 1999. The farmers’ union is the “Confederazione Italiana Coltivatori”.

[89] Tutt (1988) Europe on a fiddle, Helm, London . p. 100. Klaus Tiedemann is Director of the Institut fuer Kriminologie und Wirtschaftsstrafrecht at the University of Freiburg, Germany.

[90] Ruimshotel D. (1994) The EC budget: Ten per cent fraud? – A policy analysis. European University Institute, Fiesole, Florence, Italy. The EU Commission estimates a figure for fraud of only 0.73% of the FEOGA –Guarantee expenditure (EU Commission (1999) Protecting the Community financial interests and fight against fraud – annual report 1998). However, such an estimate was strongly criticised by the Court of Auditors (Special Report n.8/1998) and by the European Parliament (Bosch Report, C5-0058/2000) for being too low.

[91] This issue is extensively discussed in Luciani, R. (1999) Le frodi agroalimentari nell’Unione Europea. Università di Siena, Facoltà di Economia. Dissertation.

[92] EU Commission (2000) The macro-economic effects of the CAP reform. In Agenda 2000 – CAP reform decisions, impact analyses. CAP Reports, Office for official publications, Luxembourg

[93] Reform for arable crops and beef starting for dairy products starting in year 2006.

[94] Equivalent to € 1200 of Standard Gross Margin per year.

[95] In less developed regions.

[96] See section 6.5 of this report.

[97] Or at least fully adapted to the former members of the EEC and in course of reform for recent Member Countries.

[98] In years before the 1992 CAP reform, the consumers’ share of the total cost of the CAP borne by households was higher than the taxpayers’ share.

[99] In the EU-15 in 1998, annual work units in agriculture were 6.731 million.

[100] Their output should be valued at border agricultural prices rather than at domestic prices

[101] Costs equivalent to rectangles qc*(Pc-Pw) or qd*(acD-Pw) in Frame 5‑4

[102] Described in a background paper to the EU first Commission Report on Cohesion, Tarditi S., and Zanias, G. (2000)

[103] Source: Tarditi, S. and Zanias, G. (2001) The impact of the common agricultural price policy on the cohesion of the European Union. In Hall, R., A. Smith, L. Tsoukalis, (eds.), Competitiveness and Cohesion in EU policies. Oxford University Press. Columns 1994a and 1994b refer to alternative approaches to the 1992 CAP reform.

[104] For example in the Italian regions Lombardia and Emilia Romagna

[105] For example in numerous poor Greek islands whose economy is based mainly on tourism.

[106] Variable levies, now dismantled, were largely responsible for such an increase in world price volatility.

[107] Goldin and Knudsen, 1990, p. 65, 67, 70

[108] Comparable statistical information for other countries is not available.

[109] Mahé, L. (1999) CAP and the countryside – Proposal for food production and the rural environment. Economic Policy, April, p. 89-130.

[110] This figure is both a transfer to producers (direct payment for setting-aside arable land) and an assumption of extra costs for society due to the non-utilisation of such arable land as an economic resource.

[111] As compared to a pure price stabilisation policy.

[112] The remaining ECUbn 8 are transferred to “general services” according to the OECD classification.

[113]Frame A shows the results of an enquiry on the opinions of farmers and of public at large on the costs and benefits of the CAP carried out by Eurobarometer in 1998, when the Guarantee section of FEOGA was still accounting 60% of the EU budget and transfers from households as a consequence of price support were higher than the budgetary cost. A considerable share of people interviewed (about 20% on the whole) did not have a definite opinion on the subject, moreover the prevalent opinions expressed both by the public at large and by the sample of farmers are rather surprising: “the CAP would benefit consumers and not benefit farmers”

Frame A Opinions on the costs and benefits of the CAP

[114] Original data sources are written in bold letters

[115] OECD (2000) Agricultural Policy Measures in OECD Countries – Monitoring and Evaluation, OECD, Paris. Pp 257-

[116] Exprimées en Unitè de Dimension Européenne : 1 UDE = 1200 Ecus

[117] Espresse in Unità di Dimensione Europea: 1 UDE = 1200 Ecu

About the report

About the author

to Professor Secondo Tarditi, University of Siena

Acknowledgments

OECD

Measures under reduction commitment

Measures not under reduction commitment

Border Protection

Export subsidies

Intervention buying

Production aids

Production quotas

Land set-aside

Slow structural adjustment in the nineties

Commodity-specific impact of price support

9. Synopsis and conclusions

Transparency

Impact on the environment

Impact on food safety

Impact on food security

10. Appendices

Variables

Sources (EU)

Sources (IT)

Databases on line

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