Constructing theagricultural Tower of Babylon

A short history of the Common Agricultural Policy and other OECD policies

Jorge NunezCEU

Master course Economics

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 big traders

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 can be interpreted in a 1000 ways

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.

Engel’s law from Engel curve

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 shortageTariff

revenue

What happenedPrice

Pw

SEU

ThP

DEC

Pi

Quantity

SEU’

Strong intensification

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 ThP, 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 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)

Price impact

Price

Quantity

Pw

Dec

Seu

Price

Pw

q1

PvL

Cut in imports + subsidised exports

Pw2

q2

Demand from Europe falls

Sw

Dw

World supply curve shifts, more European production at any price

qdq’d q’’d+eq’’

d

qd+iq’d+i

Other countries cut production at lower prices, the EC ‘dumps’ the difference

After years of negotiations… EU reforms in 1992 – MacSharry reforms Intervention prices are cut to approach them to world prices: Compensation payments are introduced

Threshold 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 are still partially linked to production (you need to produce the specific product to get it) and based on historical yields. WTO not very happy due to production obligation.

EU has to make set aside land to reduce overproduction

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 declared by the Agricultural Commissioner emerges 80% of funds to 20% of farms.

Before enlargement there is a new reform. The payments are ‘decoupled’ to make WTO compatible…. But still linked to historical payment size.

The Great Swindle EU subsidises exports to candidate 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 will get EU structural and agricultural funds, but the budget needs to be kept stable. EU tries to deny payments – it fails (not compensation payments any more), but negotiates low costs with bad historical reference yields.

CAP even more regressive.

The subsidy development

CAP becomes unpopular The cost of the CAP and the regressivity of the policy 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 God given 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 are higher than under the policy support….

Data manipulation?Agricultural income statistics

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….

FOR USAthe same

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 (different with 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.

To this we have to add a shift in supply in addition