CEU lecture 2 AG ECON new version
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Transcript of CEU lecture 2 AG ECON new version
Rich countries support agriculture Poor countries tax agriculture. The richer the country the less it is
taxed until it is subsidised. Mainly tariff barriers Small rich countries have even higher
protection than EU and US Exception: Australia and New Zeeland Main focus US and EU as these are big
traders and have a trade impact
Treaty of the EU has objectives
Since 1958 Article 39 - The objectives of the common agricultural policy shall
be:
1. 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;
2. thus to ensure a fair standard of living for the agricultural community, in particular by increasing the individual earnings of persons engaged in agriculture;
3. to stabilize markets;4. to assure the availably of supplies;5. to ensure that supplies reach consumers at reasonable prices.
The objectives are still valid… because these are open to interpretation
1. Europe 2020 strategy: support the sustainable management of natural resources and climate action; support balanced territorial development throughout Europe.
The First… disastrous decisions
Despite all of the objectives of the CAP only one policy instrument was introduced: Price support
The Commissioner of Agriculture at the time Sicco Mansholt proposed a stronger farm restructuring policy instead, which was weakened by the EC leaders.
The consequences of the price support policy are still affecting the EU today and its relationships with third countries.
Why only price support Supporting prices has been main protection tool
of OECD countries, with different mechanisms. Tariffs, import quotas, deficiency payments… but the EU stands out for its methods.
The objective 5 “reasonable prices for consumer” is and was ignored, what is “reasonable”?
Why price support? What was the problem with farm incomes?
Main concern was the Engel’s law for food products.
Price support - impacts Normal countries use tariffs… Not the EC… The EC had intervention prices and variable
levies (variable taxes) until after 1992. Intervention prices follow the ‘stabilisation of
markets’ objective. The state buys the production if the prices fall
below the intervention price. Variable levy (also called “threshold price”).
Contrary to a tariff levied on an imported good, price of good + tariff. The EC levy = price of good + whatever necessary to get to threshold price. The world price can move up and down, but has no effect.
Idea:Price
Pw
SEU
ThP
DEC
Pi
Encourages productivity?... Or
production
QuantityFarm incomes should
increase… did they?
Idea was that if in good years there is excess production, ECbuys and uses the excess in bad years to avoid prices Over ThP if there is a shortage.
Happened ONCE.Tariff
revenue
What happenedPrice
Pw
SEU
ThP
DEC
Pi
Quantity
SEU’
Strong rapid intensification in just a few years
Export subsidy
Production and costs spiral out of control
Price support does not increase farm incomes effectively, as price transmission low – OECD estimated that only 23% (land owners) and 13% (land tenants) of the price support went through.
The Agricultural Council of Ministers repeatedly increased Pi and Plv, reinforcing the spiral up in production.
The export subsidy and intervention purchasing was increasing costs strongly…. And tariff revenue (one of the main EC own revenues) fell.
EC was dumping production and destroying food
Effect on world price (see Lecture 1)
As a very big producer EU depressed world prices due to a fall in demand of the EU and an increase in world supply, (also American deficiency prices did affect Pw negatively)
Developing countries, but also Australia and New Zeeland that eliminated distorting subsides started pressurising EU.
Agriculture that was not part of GATT (General Agreement on Tariffs and Trade) entered in GATT leading to the 1992 landmark agreement (Uruguay Round)
America’s deficiency payments
The US also subsidises agriculture. It lets the internal price be set by the market,
farmers are paid a deficiency payment (based on an “ideal market price”). In addition there are export loans which are excused if export prices too low.
The value of the American Farm bill goes up to 20 billion depending on the year. In terms of population and number of farmers not much to envy Europe.
After years of negotiations… EU reforms in 1992 – MacSharry reforms Intervention prices are cut to approach them to world
prices: Compensation payments are introduced Levies prices are eliminated and normal ad valorem
tariffs are introduced Sugar and milk quotas are slowly reduced (price support is combined with quota to limit
production…. Partially failed) The payments were still partially linked to production
(you need to produce the specific product to get it BLUE BOX) and based on historical yields. WTO not very happy due to production obligation.
EU has to make set aside land to reduce overproduction
WTO had amber and green box – EU created blue box
From compensation to overcompensation
World prices increase Payments become institutionalised and linked to
farm practices – name changes to income support… then direct payments
Distribution of funds highly unequal across EU and highly regressive… a famous 20-80 relationship is presented by Agricultural Commissioner Fischler: 80% of funds to 20% of farms.
Before enlargement there was a new reform… called “mid-term review”. The payments are ‘decoupled’ to make WTO compatible…. But still linked to historical payment size.
Accession and the Great Swindle history EU subsidises exports to candidate
remained countries even after a double 0 tariff agreement. Eastern producers are put out of business, agri concerns are bought by western companies.
The EU faces a problem. New member states have bigger problems and get EU structural and agricultural funds, but the budget needs to be kept stable. EU tried to deny payments – it failed (not compensation payments any more), but negotiates low costs with bad historical reference yields.
CAP made even more regressive, more money in less farms in %.
Impact of CAP reforms since 2003 strong shift Overall positive in term of trade
relations The CAP has left main controversial
areas Now the problem is internal CAP
coherence
Here is summary of reform impacts:
The CAP today Cost to taxpayer: Commission -> Policy budgetary cost 0,5% of
GDP a year, total Producer Support Equivalent (PSE) (but TSE OECD 0,7% in 2013) + tariffs, costs of administration not included.
OECD calculates PSE, CSE, TSE. This is main instruments to calculate trade agreements. WTO uses derivate Aggregate Measure of Support
By today most production is decoupled. BUT WHAT MATTERS IS IF IT DOES WHAT IT
SAYS.
CAP becomes unpopular The cost of the CAP and the regressivity of
the policy still puts pressure for reform. BUT… EU takes advantage of the world food
crisis (high prices and shortages) to declare the CAP a world food safety policy!
It proposes a rebalancing of payments East-West (very slow, over decades)
Declares the payments again a necessary tool due to low farm incomes… but is this really the case?
From compensation to divine right?
Direct payments were supposed to compensate for a fall in incomes due to a fall in support…. But for the main crops supported prices increased to levels beyond the ones under the policy support….
But, this is income from agricultural activity….
For all purposes of life we are taxed, get social security etc based on our total income, not income from one activity. Part time farming is in many countries the norm and farm household incomes are much higher!
Bavaria: 70% part time farmers with other income, often main income.
NEW CAP RATIONALE To preserve the food production potential on a
sustainable basis throughout the EU, so as to guarantee long-term food security for European citizens and to contribute to growing world food demand, expected by FAO to increase by 70% by 2050. Recent incidents of increased market instability, often exacerbated by climate change, further highlight these trends and pressures. Europe's capacity to deliver food security is an important long term choice for Europe which cannot be taken for granted.
“There are a number of threats out there about which we cannot have absolute certainty: attacks by Martians, killer mummies from the Pyramids and dinosaurs escaping from Jurassic Parks. Serious policy makers have to analyze and weigh these risks. Food security does not pass the test; there is no reasonably discernible threat during the coming decades.” (Zahrnt, 2011: 16)