Eastern Enlargement of the EU

Implications for Agricultural Policies and the Agri-Food Sector

J. SWINNEN

www.prgleuven.be

Hohenheim International Summer University 2003« The Economics of EU Enlargement »

July 31, 2003

Initial Fears

Eastern agri-food products would flood EU markets

Extending CAP to the East would Cause explosion of the EU budget major WTO conflicts

The Common Agricultural Policy

Introduced in 1968most important part was a market

intervention system to support farm incomes with guaranteed (high) prices, import tariffs and export subsidies

The Common Agricultural Policy

Rapidly major problems emergedHigh support induced

oversupply, high budget costs, and distortions of international markets

Support system was inefficient and unfair: 20% large farms got 80% of benefits labour outflow continued (low transfer

efficiency)

Since then: CAP reforms

1980s: production quota with high prices (eg. milk and sugar)

1990s: price declines with compensation through “direct payments” (per ha or per animal) eg. Cereals and oilseeds in MacSharry and Agenda 2000

2003: “Mid Term Review”

Agenda 2000

intended to adapt the CAP to both the disciplines of the URAA and the challenge of Eastern enlargement.

Replacing price support with area and headage premiums that qualify currently as blue-box measures.

Distribution of CAP budget

0

10

20

30

40

50

60

70

80

90

100

1991 1997 2006

Market Support

Direct Payments

Rural Development

CAP in EU Budget -- 2000

Bio € % Agric % EUbudget

Market support 10.6 26 12Direct payments 25.6 63 29Rural development 4.2 10 5TOTAL CAP 40.5 100 45

Agenda 2000

Many commentators indicated that Agenda 2000 reforms were insufficient to address challenges for CAP in next decade (enlargement, WTO, …)

Commission seemed to agree Compromise : Midterm reviewsNew developments reinforced need for

further reforms: Food safety crises, EBA, ...

The Pressures for Further CAP Reform

WTOOther trade negotiations (EBA, …)Eastern EnlargementFood SafetyReform + Reform = More or Less

Reform ?

Average Tariffs in Industrial Countries (%)

0

10

20

30

40

50

1940 1950 1960 1970 1980 1990 2000 2000

Agric.

WTO : Uruguay Round Agreement on Agriculture

(URAA)

Domestic support : 20% reduction

Export subsidies : 36% reduction

Market access : 36% tariff reduction

URAA Domestic support rules

Constraints depend on trade-distortion effects:

AMBER box: to be reduced

BLUE box: “peace clause” allows these to continue unchallenged until 2003

GREEN box (“non- or minimally trade distorting”): unrestricted

EU response to the WTO / Uruguay Round Agreement

EU has encountered difficulties in keeping within the WTO limit on subsidised exports for some products.

The EU used the Special Safeguard provision 172 times during 1995-1998

New WTO Round

export subsidies = prime focus

domestic support Peace Clause ends in 2003

EU vs Cairns

US position : from FAIR over Emergency payments to Counter-cyclical Support ?

US position is important for EU in WTO negotiations

Agricultural support (PSE)

EU US

Agriculture Total 45 22Milk 57 61Sugar 43 41

Double EU WTO strategy on domestic support

As much as possible blue box payments in green box through : DECOUPLED PAYMENTS RURAL DEVELOPMENT SUPPORT

New approach to defend remaining blue or amber box payments:

The European Farm Model Multifunctionality

Enlargement and WTO

GATT: accession= enlargement of customs union

GATT rules only apply to tariffs

for export subsidies and domestic support: Northern enlargement as model

Export subsidies are most constraining

Eastern enlargement and WTO constraints

Production and Trade effects

EU-CEEC trade

Agricultural productivity evolutions in CEECs

Some basic indicators 2000

Agricultural output

Employment in agriculture

Land

Billion €

% GDP Million % total Million ha

EU-15 167 2 6.8 4.3 131.6

CEE-8 11.9 3.6 3.3 18.9 38.4

%EU 7% - 49% - 29%

CEE-10 18.6 4.5 9 22 58.8

%EU 11% - 132% - 45%

Poland 5.0 2.9 2.6 19 18.2

Romania

4.6 11.4 4.9 43 14.8

Change in GDP 1989-2001

-70

-50

-30

-10

10

30

50

1989 1991 1993 1995 1997 1999 2001

Ch

ange

in G

DP

Bulgaria

Romania

Slovak Rep

Slovenia

Czech Rep

Hungary

Poland

Russia

Ukraine

Agricultural Output (since 1989)

40

50

60

70

80

90

100

110

1989 1991 1993 1995 1997 1999 2001

Ch

ang

e in

GA

O

Czech Rep

Hungary

Poland

Slovakia

Cause 1: FALLING OUTPUT/INPUT PRICES IN AGRIC (1989-2001)

0

20

40

60

80

100

120

1989 1991 1993 1995 1997 1999 2001

Czech Rep.

Hungary

Poland

Slovakia

Russia

Cause 2: DISRUPTIONS IN THE AGRI-FOOD CHAIN

Complete vertical integration and monopolies under Communism

Privatization and restructuring caused coordination and contract enforcement problems: farms have problems with access to basic inputs

and working capital, … delayed payments throughout chain processors have problems with supply (quantity

and quality)

Cause 2: DISRUPTIONS IN THE AGRI-FOOD CHAIN

massive slaughtering of livestock

farms refuse to deliver to processors : shift to other activities direct marketing of products (basic) on-farms processing barter( 80% of exchanges in Russia)

Some of these problems continue today (eg low quality, supply problems, …)

CATTLE stock CEECs 1989-2001

0

20

40

60

80

100

120

1989 1991 1993 1995 1997 1999 2001

Ch

an

ge

in c

att

le s

toc

k

Bulgaria

Romania

Slovakia

Hungary

Poland

Russia

Recovery in Eastern Europe starts in mid 1990s

Key = REFORM POLICIES

Large differences between countries : Better performance where necessary

reforms have been faster and more powerful

Policies reflected in Productivity & Growth Foreign investment (FDI)

LIVESTOCK Output CEECs vs Russia & Ukraine

0

20

40

60

80

100

120

1989 1991 1993 1995 1997 1999 2001

Ch

an

ge

in G

AO

, liv

es

toc

k

CEE

Ru & Uk

CROP Output CEECs vs Russia & Ukraine

50

60

70

80

90

100

110

1989 1991 1993 1995 1997 1999 2001

Ch

an

ge

in G

AO

, cro

ps

CEE

Ru & Uk

Restructuring, Productivity and Growth in CEEC agriculture

Initial output fall is disruption & price/subsidy driven

Recovery (if any) is largely productivity driven

Agribusiness restructuring and and foreign investment are key factors in productivity gains

Private sector (Food Industry) plays very important role in restructuring of CEEC agriculture

Agribusiness FDI, Vertical Integration & Chain

Restructuring

Injection of capital, technology, … in chainInnovative contracting and vertical

integrationPositive spill-over effects at the farm levelTo assure guaranteed quality and quantity

: Assisting farms in access to finance and inputs is crucial with market imperfections (finance & input support programs, leasing, ...)

FDI in Agri-Food Sector:Example: The Sugar Sector (2001)

Country % Processing Plants withForeign Investment

% Production Capacity withForeign Investment

Bulgaria n.a. n.a.Czech Republic 70 90Hungary 100 100Lithuania 100 100Poland 12 n.a.Romania 50 85Slovakia 86 95Slovenia 100 100

CASE STUDY: Sugar Company in SlovakiaOutput & productivity of company & farms

0

50

100

150

200

250

1990 1991 1992 1993 1994 1995 1996 1997

Year

Ind

ex

es

Yield Sugar Content Sugar Production Contract Hectares Output prices/Input prices

YIELD changes in Central Europe1989 - 1999

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Cha

nge

in y

ield

s (%

)

Sugar Beet

Milk

Coarse Grain

Oilseed

Changes in yields in NIS-3Russia, Ukraine, Kazakstan (avg)

-60

-50

-40

-30

-20

-10

0

10

20

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Cha

nges

in y

ield Milk

Barley

Sunflowerseed

Impact of EU Enlargement

General institutional and macro-economic effects

EU standards for quality, hygiene, health requirements (!!) reduction of transaction costs: good for CEEC

exports investments required: constrain production

and exports

Imposition of CAP on CEECs

EU Integration is ongoing

General institutional and macro-economic conditions

Agri-food sector: Convergence in STANDARDS & QUALITY Convergence in PRICES Convergence in POLICIES Growing TRADE integration Growing EU INVESTMENTS in CEECs

STANDARDS & QUALITY

Milk with minimum EU hygiene standard :Hungary 80 % Czech 90% Poland 25-30 % in 1999 but 65 % in 2000

Dairy processors certified for EU export - Poland: No Total Share Market share2000 19 400 5 %2001 25 320 8 % 35 %

Case study: North Poland % extra class milk , 1996-2001

0

10

20

30

40

50

60

70

80

90

100

1996 1998 2001

Sha

re o

f E

xtra

Cla

ss M

ilk in

Tot

al (

%)

Mlekpol

Mleczarnia

Kurpie

Mazowsze

ICC Paslek

Warmia Dairy

Share of 2nd and 3rd class milk in total (%), 1996-2001

0

10

20

30

40

50

60

1996 1998 2001Sha

re o

f 2n

d an

d 3r

d C

lass

Milk

in T

otal

(%

)

Mlekpol

Kurpie

Mazowsze

ICC Paslek

Warmia Dairy

Investments and Loans of Small Dairy Farms in North Poland 2001

# cows per farm

Invests (% of total)

Uses loan to invest (% of A)

Uses dairy loan

(% of B)

Uses bank loan

(% of B)

Uses dairy loan

(% of A)

Uses bank loan

(% of A) A B C D E F

1-5 52 54 41 50 21 26 6-10 78 51 43 70 22 36 >10 92 74 43 75 31 54 ALL 76 58 43 69 25 40

Investments and Loans of Small Dairy Farms in North Poland 2001

Investments Total Loans Dairy loans Bank loans % by type % investm. % by type % by type % by type

Cows 14 37 14 30 9 Cooling tank 20 55 30 56 20 Stall 24 30 20 3 26 Land 9 46 11 0 14 Fence 11 2 0 2 0 Other 23 38 24 9 30 TOTAL 100 36 100 100 100

QUALITY & STANDARDS

Improvement due to combination of public and private initiatives :

FDIDomestic company replicationsIncreased government standards

Domestic reasons EU enlargement

QUALITY & STANDARDS

Future :Key role of Retail Sector Multinational Retail Companies are

investing heavily in Eastern EuropeExperience from other regions

suggest potentially major implications for farmers and food companies

TRADE

Most of CEEC trade is now with EU-15Post-1995 re-discovery of Russian market

was interrupted by 1998 Russian crisis

AGRI-FOOD TRADE :Only Hungary, Bulgaria are net exportersIncreased strongly in both directionsNet export balance positive for EU

EU - CEEC Agri-Food TRADE 1988 - 2001

-2000

-1000

0

1000

2000

3000

4000

5000

6000

7000

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

To

tal a

gri

cu

ltu

ral t

rad

e (

mio

€)

Export

Import

Balance

Agri-Food Trade

Past EU export growth mostly in processed products

Quality, hygiene, health requirements key

CEEC export growth mostly in low processed and labour intensive products (eg.fruits and vegetables)

This is likely to change in future as institutions improve with investments in food industry

YIELDS in CEEC & EU Sugar Beet (tons/ha)

0

1

2

3

4

5

6

7

1989 1991 1993 1995 1997 1999 2001

Su

ga

r b

ee

t y

ield

s (

ton

/ha

)

EU

CEC-4

Bu-Ro

Coarse Grain Yields in EU & CEEC :

Change 1989-2001

40

50

60

70

80

90

100

110

120

130

1989 1991 1993 1995 1997 1999 2001

Ch

an

ge

in c

oa

rse

gra

in y

ield

s

EU

CEC-4

Bulgaria

Milk Yields in EU & CEEC : 1989-2003

0

1

2

3

4

5

6

1989 1991 1993 1995 1997 1999 2001 2003

Milk

yie

lds

(to

n/h

ea

d)

EU

Poland

Romania

POLICIES: Enlargement & the Common Agricultural Policy

Effect of imposing the CAP is moderate compared to changes of past 10 years

Initial predictions of dramatic CAP effects were driven by large price gap between CEECs and EU

Enlargement & the Common Agricultural Policy

Price gap between CEECs and EU has diminished significantly Macro-effects (exchange rates) CAP reforms (MacSharry, Agenda 2000) Agricultural support in CEECs Quality improvements

CEEC-EU Price Gap Wheat 1991 - 2001

-70

-60

-50

-40

-30

-20

-10

0

10

20

30

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Pri

ce G

ap (

%)

EU

CEEC

CEEC-EU Price Gap Milk 1991 - 2000

-90

-80

-70

-60

-50

-40

-30

-20

-10

0

10

1990 1991 1992 1993 1994 1995 1996 1997 1998 19992000(e)

% p

ric

e g

ap

Czech RepublicEstoniaHungaryPolandSloveniaEUWorld

Agricultural support in CEECs(PSEs total and milk, 2001)

3

1310 10 11

17

12

24

40

35

21

9

2016

11

2319

31

45 45

40

51

0

10

20

30

40

50

60

Bu Est Ru Po Sk Cz Hu Ro Sn EU USA

PSE total

PSE milk

Enlargement & the CAP

ACCESSION EFFECTS on prices & production smaller than

expected initiallyprimarily driven by productivity changes in

CEECs rather than CAP implementationnot dramatic since productivity increases

are lagging behind in “larger” CEECs (Poland, Romania) due to structural constraints (small farms, …)

Enlargement & WTO : Conflict ?

Enlargement effects further constrained by tough CEEC quota (milk, sugar, …)

Uncertainty remains (world prices, €/$ rate, CEEC supply & demand, ...)

But more dependent on outcome of new round

Enlargemen & the Budget

Outcomes from the 2002 Brussels Summit :

• Phase in DPs in CEECs : 25% in 2004, 35% in 2006, and 100% in 2013. • This makes enlargement “fit” the Berlin FF.

• 2007-2013 : Total expenditures in EU-25 on market interventions and direct payments (Pillar I)

• below 2006 figure in real terms; • in nominal terms : below 2006 figure increased by 1% per cent per year.

• No limits on rural development spending

CAP Expenditures and Enlargement

The 2002 Copenhagen Summit :

• Phase in DPs in CEECs faster and earlier

Copenhagen summit decision on DPs 

From EU budget

From nat. budget

(“top-up”)TOTAL

2004 25 30 552005 30 30 602006 35 30 652007 40 30 702008 50 30 802009 60 30 902010 70 30 1002011 80 20 1002012 90 10 1002013 100 0 100

CAP Expenditures and Enlargement

The 2002 Copenhagen Summit : Phase in DPs in CEECs faster and earlier

• BUT : • financing comes from “national top-ups” • EU Budget under Pillar 1 is unaffected.

• Restrictions on top-ups:• from national funds or EU rural development • only for 2004-2007 period, afterwards only national• RD funds need co-financing at 20%• RD funds are limited for this use

CAP and the Budget after Enlargement

Even if enlargement “fits” in the 2000-06 FF, without reform, CAP expenditures after 2006 will conflict with budget

Independent estimates of the cost of extending the CAP to the CEECs when DP=100% :

CEEC-8 : € 10 million CEEC-10: € 14-16 million

Of which: DP = 60% Market = 20% Rural Dev = 20%

Hence : Pillar I expenditures : 10.5 billion € by 2013.

Brussels Summit CAP Expenditure Limits

  2006 2007 2013

EU-25 in 1999 prices 39.4 39.4 39.4

EU-25 in 2006 prices 45.3 45.3 45.3

In current prices, using 1.0 % deflator

EU-15 (as in Berlin) 42.8    

CC-10 (as in Berlin) 2.5    

EU-25 Ceiling Brussels

45.3 45.7 48.6

Ceiling increase   0.5 3.3CC-10 direct aids 1.6 2.0 5.0

Margin 2.0 1.4 0.8

The Budget will be back on the Agenda

Independent estimates : Pillar I expenditures : 10.5 billion € by 2013. DP expenditures : 7-8 billion € by 2013 (1999 prices !)

Brussels Council : DP expenditures : 5 billion € by 2013 (in nominal prices !) Based on minimalistic assumptions, and not including cost of Bulgaria and Romania joining.

Hence: “reform” of DPs remains needed – even without dairy or sugar reforms

Some final reflections

CEECs have gone through amazing set of changes: Eg Productivity and quality changes

Initial fears did not materialize partly because based on misunderstanding of CEEC

situation and institutions partly because of policy changes in anticipation

Agenda 2000 Copenhagen budget and quota agreement

Some final reflections

No doubt important problems will have to be dealt with, but convergence and integration is progressing

More complicated decision-making in EU ahead, including on CAP

Poland will become an important player in CAP politics

Some final reflections

Let us not forget that, by far, the most important result is that fifteen years after the fall of the Berlin Wall eight Eastern European countries will join the EU

Anybody who would have suggested in 1988 that the Baltics would be part of the single European market by 2004 would have been looked upon with more than just a frown.