Europe and the Common Agricultural Policy
The CAP was introduced in 1962 in order to ensure that EU farmers were protected against low prices. The EU agreed to establish a minimum intervention price, meaning that should the price of agricultural produce fall below this level governments would buy farmers’ crops. Recent reforms have changed the nature of intervention, meaning that governments now subsidise farmers according to the size of their farms, rather than the number of crops that they grow. However, the economic case favours the dismantling of the CAP.
Background: How do buffer stock schemes work?
When there is an excess of supply of crops,
such as after a particularly good harvest, the price of the crops would be low.
If this price is below the minimum price set by the government, then the
government would buy these excess crops, thus increasing demand for them. This
would therefore increase the price of the crops to the minimum price.,
protecting farmers from low prices.
When there is a limited supply of crops, such
as after a natural disaster, the price of crops would be relatively higher. If
this price is above the maximum price set by the government, then the
government would sell some of the crops from its buffer stock, thus increasing
the supply of crops. This would therefore decrease the price of the crops to
the maximum price, protecting consumers from high prices.
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| Figure 2: How Buffer Stock Schemes operate |
Protecting Farmers
In order to protect the incomes of farmers,
high import taxes were levied against agricultural produce imported into the
EU. Currently, the rates are 54pc for milk, 34pc for grain and 32pc for meat. Coupled
with reduced import quotas, this helped to increase the price of agricultural
produce that was imported from outside the EU. EU farmers could sell their
crops at the intervention price, which was above the free market price for
their crops, but below price of imported agricultural produce. Thus, it can be
argued that EU farmers have benefited from the CAP as their incomes have
increased substantially. Indeed, through higher prices they have received more money
from each unit of output. As the demand for agricultural produce is relatively
income inelastic, this has also helped to increase incomes for farmers, as the
extra income earnt from higher prices has been greater than the income lost
from reduced demand for their produce due to higher prices. Moreover, farmers’ incomes have increased as
consumers have switched to purchasing more produce from EU farmers, as this
food is still cheaper than food imported from outside the EU.
Moreover, the quota on milk production, which
was implemented in 1984, has reduced the supply of milk in EU markets and so
has increased the price above the free market price. Whilst benefiting farmers,
this has led to higher prices for consumers. It is for this reason that it has
now been phased out.
However, it is important to note that
although the CAP was designed to transfer income from richer Europeans to the
poor farming community, it has not succeeded in this aim. Indeed, in the UK,
Tate and Lyle took the largest slice out of the CAP budget, amounting to £127
million.
Taxes
Moreover, EU citizens in general have
suffered from the CAP. As discussed earlier, they are faced with higher food
prices, both from EU-grown produce as well as non-EU grown produce. Also, effectively
they are funding the EU’s purchase of the agricultural produce. For example,
2005, a family of four in the UK was paying approximately £700 a year in taxes
to support the scheme. Between 2015 and 2020, it is expected that the CAP
reforms will cost British taxpayers £10 bn per year.
In addition, by 2005, expenditure on the CAP
accounted for over 40pc of the EU’s budget. However, it is important to note
that agriculture contributes to only 1.6pc of the EU’s GDP and employs only 5pc of EU citizens. Coupled with the other negative effects of the CAP, especially
its high costs and limited benefits, the CAP cannot be seen as justified. The
EU should be investing more money in technology and scientific research, rather
than subsidising this waning industry.
Productive and Allocative Efficiency
The CAP is not productively efficient. As the
EU has pledged to intervene in the market and buy crops from farmers for a
minimum price this has encouraged farmers farming on marginal land to continue
farming. However, without the CAP these farmers would have been outcompeted by farmers
from outside the EU who have more efficient production techniques. Therefore,
this would have ensured that this marginal land would have been used by another
sector of the economy, where the economic profit would have been higher,
increasing allocative efficiency. It is likely that only larger farms would
have remained, as they are able to exploit economies of scale, ensuring that
consumers receive the cheapest price possible and so increasing productive
efficiency.
However, critics would argue that whilst the
removal of the CAP would ensure productive and allocative efficiency, it would
decrease welfare, due to the fact that poorer farmers would be pushed out of
the market and so the countryside would be dominated by larger farms. Moreover,
by changing the nature of rural areas some would go even further and argue that
this would deter tourists to these countries, thus reducing the country’s
income from tourism. This would have a particularly drastic effect because
those countries in the EU who currently rely on the CAP budget the most are
also the nations which attract the most tourists each year. However, the
potential unemployment of inefficient farmers cannot be seen as adequate grounds
to keep the CAP. By ensuring that only the most profitable farmers remain, removal
of the CAP would mean that employment would shift to developing other sectors
of the economy such as manufacturing or services.
The Environment
Supporters of the CAP argue that the farming
practices of EU farmers ensures that there is minimal harm to animals, whereas
the same cannot be said for food imported from abroad. However, this argument
is not true since food that is imported into the EU needs to conform to
specific standards. Indeed, under conditions right granted by the World Trade
Organisation, the EU is able to restrict imports if she feels that animals have
been severely abused in the production process.
Moreover, supporters of the CAP argue that
farmers help to maintain the countryside, ensuring that future generations are
able to enjoy the rural environment. However, this cannot be seen as a reason
to protect the CAP. Firstly, some would counter this claim and argue that the
farmers pollute the environment as cattle release methane, and this is the
largest greenhouse gas. Also, the majority of farmers use fertilisers and
pesticides, and this could lead to bioaccumulation, as can be seen by the
drastic effect of DDT on egg shell thinning of marine animals. Furthermore,
although we can debate the effects of farming on the environment, the positive
effects of the CAP on the environment cannot be seen to provide sufficient grounds
to ensure its survival. There are other methods to ensure that farming
continues.
Recent Reforms
In 1992, the MacSharry reforms introduced the
‘set-aside’ scheme. The EU paid
farmers for ‘setting aside’ part of their farmland. This was in order to reduce
the supply of crops, as farmers had previously grown “mountains” and “lakes” of
crops, which the EU had to purchase, and then dumped on Third World Countries. However,
this has had negative effects on the consumer who has not only experienced
higher cereal prices as a result of the reduction in the supply of cereals, but
also had to pay taxes in order so that the EU could subsidise farmers.
Moreover, the MacSharry reforms also
introduced the concept of ‘decoupling’.
The idea behind decoupling was to pay farmers for the size of their fields,
rather than for the quantity of their produce. Therefore, the free market would
determine the price of the agricultural produce. The reform hoped that this
would act as an incentive for marginal farmers to stop growing crops, as they
would not be able to gain a reasonable profit from it. However, the subsidy
actually served to act as an incentive for marginal farmers to grow more crops,
because they felt that they could afford to grow crops that gave them lower
returns as they were guaranteed a fixed income in any event. In the same vein,
the 2013 CAP reforms also introduced the Basic Payment Scheme (BPS),
effectively stating that farmers would be paid on the number of acres of land
that they own, provided that they implement ‘green’ strategies.
However, these reforms do seem to have been
effective in reducing the volume of food bought by the EU and so reducing the
volume of food being ‘dumped’ in developing nations. This can be seen by the
fact that there was a sharp drop in the volume of crops purchased by the EU
between 1990-1991 and 1992-1993, after the reforms were instigated. For
example, the EU’s purchase of maize fell from 33 million tonnes in 1990, to 17
million tonnes in 1992 to 2 million tonnes in 1994. A similar pattern is
apparent with rye, barley, wheat and other cereal crops.
Third World Countries
However, there is a strong case to support
the notion that the CAP has caused greater losses globally, and this outweighs
the gains for EU farmers. Farmers in the EU have responded rationally to the
‘minimum price’ floor by cultivating more land and growing more crops. Since
the forces of supply and demand won’t lower the price of their crops, should
they produce too little, this has increased incentives for all farmers to grow
more crops, as they are guaranteed to be purchased by the EU. However, this has
therefore led to a misallocation of scarce resources. However, as agricultural
produce cannot be stored for extensive periods of time, this has resulted in
the EU in engaging in controversial practices to deplete its buffer stock. The
EU has been ‘dumping’ the crops into
Third World countries, effectively selling the crops below their cost of
production. These prices are lower than the domestic prices in the Third World
countries, meaning that poor farmers in these nations have seen a decrease in
demand for their own produce and a reduction in income, hindering their journey
out of poverty. Indeed, fervent critics of the CAP have argued that the CAP has
the cause of the increase in global poverty.
This has been exacerbated by the high import
tariffs against food produced outside of the EU. Indeed, the import tariff on sugar cane is 300%! This has meant
that aggregate demand for food produced in developing nations is lower than the
free market demand, due to these market distortions which price European grown
food more cheaply. Further adding to depressed demand is the fact that the
‘decoupled’ payments act as an incentive for EU farmers to grow more crops, as
explained earlier. This therefore means that developing countries are still
flooded with crops below the market value from EU nations, although admittedly
less so than before. A reduction in these subsidies to farmers would ensure
that farmers in developing countries would see an increase in aggregate demand
both domestically and from EU countries, thus increasing their incomes and GDP.
Indeed, Costa et al estimate that the CAP costs Africa $560 million a year.
Although this may appear to be a small amount, it is when considering that
Africa is largely a developing continent.
The Future
The aim of the CAP was to increase the
livelihood of farmers in the EU by ensuring stable prices for their produce. However,
the negative implications of the scheme have outweighed the potential benefits.
The costs to the tax-payer are too high to justify the small contribution that
agriculture has on the EU’s GDP. Indeed, the policy is neither allocatively nor
productively efficient. Farmers in developing countries have also suffered from
reduced revenues due to ‘dumping’. There are other methods that the EU should
adopt in order to increase the livelihood of farmers whilst ensuring that EU
taxpayers and farmers in developing countries do not suffer to such a great
extent. Such a scheme that the EU should promote is the branding and processing
of commodities by farmers, ensuring that they increase their revenue. Make sure
to visit soon as my next blog post discusses the benefits that such a scheme
has already had in Brazil.
http://www.odi.org/sites/odi.org.uk/files/odi-assets/publications-opinion-files/7279.pdf
Figure 1: http://media.economist.com/sites/default/files/cf_images/20080216/D0708EU0.jpg
Figure 1: http://media.economist.com/sites/default/files/cf_images/20080216/D0708EU0.jpg
