Common Agricultural Policy - Essay Example

Does Common Agricultural Policy Harm or Help Developing Countries Swarnambika S Academia Research The European Union's Common Agricultural Policy (CAP) was introduced in the early 1960s. It remains largely managed by the provisions of the 1957 Treaty of Rome. With its combination of high and stable guaranteed prices, the CAP has been successful at boosting production, and also in easing the transformation of a largely rural society to an economy of manufacturing and services, limiting the human and economic cost of transition. However, the CAP has subsequently been the victim of its own success. The CAP arrangements resulted in large surpluses and budget crises in the 1980s (Harrison et al, 1995). Because of the peculiar decision making process in the European Union, the required reforms were delayed until the early 1990s. Since then, the CAP has now changed dramatically after three successive reforms, the last one taking place in 2003 and being progressively implemented. According to the Common Agricultural Policy, with regard to developing countries the EU is committed to the principle of special and differential treatment. It appeals to all developed and the wealthiest developing countries to provide significant trade preferences to developing countries and it pleads for making these trade preferences more stable and more predictable. On domestic support, the EU is prepared to accommodate concerns of developing countries on food security, rural development and rural poverty by adjusting the "green box"(Harrison et al, 1995). In this paper, we would be discussing the effect of Common Agricultural Policy on developing countries to arrive at a conclusion whether CAP helps or harms the developing countries. Literature Review When the EU was formed in 1958, two important conditions already existed. Firstly, all the countries that established the EU or joined it before 2004 had already been protecting their farmers. Secondly, these countries had signed the GATT that asked to combine agricultural protection with supply management (Polaski, 2006). The EU simply harmonized and integrated the existing farm policies of its member countries, so that one common policy was created instead of a patchwork of national policies. In doing so, it adopted a number of guiding principles. The first one was that of a unified market. Within the EU, the borders were opened. Farm products could freely move from one country to another. It was only at the outer border that import tariffs were imposed to protect EU farmers against cheap imports from the world market. The second principle was that of communitarian preference. This closely resembles the principle of food sovereignty that ECOWAS farmers and policy makers are discussing today. It meant that farm products that were consumed in the EU and that could reasonably efficiently be produced in the EU itself should come from the EU rather than from the world market. The external tariffs should be sufficiently high to ensure this. The third principle was that of parity and productivity. Parity meant that farm incomes should be equal to those in other sectors. This should partly be achieved by price support, but prices should not be too high, for affordable food prices for consumers were also important. Therefore, the productivity of agriculture should be stimulated so that farmers would be able to produce at lower cost. The fourth principle was that of financial solidarity. All costs of the common agricultural policy were financed out of a communal treasury, which in turn was filled with funds originating from import tariffs and some other government revenues. From a developing country point of view, the impact of the reformed CAP on agricultural markets has become more complex. Even though the "new CAP" still has some unwanted effects, they are less direct and more difficult to assess (Herok & Lotze, 2000). The traditional image of a "fortress Europe" that is closed to developing countries' exports, while the EU dumps considerable quantities of agricultural products on these countries, hurting local producers, no longer fully corresponds to the new CAP arrangements. This is even though EU farmers are still heavily subsidized, and some high tariffs persist. The importance of the common agricultural policy for economic development was well illustrated by Ireland. Before this country joined the EU in 1973, it was much less developed than the rest of Western Europe. Agriculture was still the largest sector, but farm-gate prices were much lower than in the EU (Gardner, 2002). Ireland's entry into the Union was followed by a miraculous growth of its agriculture and economy. Until the mid-1980s, the agricultural policy of the EU was maintained with minor adaptations. Some features were added when the entry of new member countries posed new challenges. When Britain joined the EU in 1973, it wanted to continue to provide preferential access to imports from countries from the British Commonwealth. This concurred with similar wishes of France, and one outcome was the Lom Conventions (from 2000 the Cotonou Agreement), which gave preferential access to imports from ACP countries, which include the ECOWAS countries. Other modifications were the introduction of special supports for hill farmers (also linked to the British entry) and the introduction of integrated development programs for less-favored areas (linked to the entry of Spain and Portugal in 1986). Meanwhile, a basic flaw of the common agricultural policy was the lack of supply management. All member countries had signed the GATT, thereby obliging them to combine agricultural protection with production and export controls. Nevertheless, the common agricultural policy included no effective instrument for supply management. Those member countries that had applied production controls in the 1930s had abandoned them during World War II and the EU did not reintroduce them. Only the price quota system in sugar, which was introduced at the demand of French farmers, was meant to prevent oversupply. However, sugar factories in other member countries wanted to increase their turnover. They enforced an opting out rule that allowed them to pay a 'mixed price', thereby eliminating the incentive for farmers to limit their production. As a consequence, the export surpluses of major farm products increased unrestrained (Meester & Strijker, 1985). This had serious effects on other countries. Subsidized exports of butter and milk powder hurt dairy farmers in New Zealand and in many developing countries. Growing sugar exports caused the International Sugar Agreement, which sought to stabilize world sugar prices, to collapse. After 1980, surpluses also arose in beef and cereals. Large amounts of frozen beef were dumped onto West African markets, hurting cattle farmers in the Sahel countries (Ufford & Bos, 1995). This increased dumping also resulted in increasing costs to the European treasury in the form of export subsidies or losses on exports out of public stocks. To moderate this rise in costs, EU policy makers began to lower the European support prices to reduce their distance from the lower world market prices and decrease the cost of dumping per tonne of product. However, this eroded the aim of parity incomes for farmers. Farmers protested, demanding that the costs of dumping be reduced by supply management rather than by cuts on internal prices. Responding to this pressure, a system of milk quotas was introduced in 1984. Each farmer was only allowed to produce a certain amount of milk, based on his output in a base period. This system still exists and has effectively reduced the European dairy surpluses. However, the introduction of a similar policy in cereals was impeded by the grain trade and a minority of big grain farmers. The traders wanted to expand their turnover and didn't mind that farmers would receive lower prices, while big grain farmers did not suffer from lower prices because they were the most competitive producers. As a consequence, the European cereals surpluses continued to grow unabated. The Effect of CAP on Developing Countries Non governmental organizations have been particularly vociferous when denouncing the negative effects of the CAP on developing countries (FAO, 2006). They argue that the EU continues to dump surplus production on world markets and that subsidized exports competing unfairly with local production drive producers out of business; that EU tariffs prevent developing countries exporting agricultural products; and that the move towards decoupled payments has been mainly cosmetic, given that huge subsidies still provide EU farmers an incentive to produce and therefore compete unfairly with developing countries which do not have such financial means to support their farm sector. Not all economists share this point of view. Recently, for example, Panagariya (2005) has claimed that most of the analysis of the NGOs relied on a series of fallacies, and that the agricultural policies of developed countries had, overall, little negative impact on developing countries. In some cases, the removal of these policies would even have significant negative consequences for developed countries, for example by leading to a degradation of their terms of trade. Best known was the strategy used by the United Kingdom (UK) to delay or prevent the formation of French-German trade bloc in the 1940s and 1950s. As the largest importer in the region, the possibility of improved access to the UK market was very attractive to exporters on the continent. Thus when the UK proposed a Europe-wide FTA as an alternative to deep economic and political integration among the six proposed members, many Europeans were interested precisely because the broader formation would also include preferential access to the UK market. The British-inspired proposal did undercut some of the political and economic pressure for deep integration, but the six eventually rejected it and went on to ratify the Treaty of Rome, ultimately setting up what became the EU. The UK attended the initial meeting but withdrew at an early stage (Baldwin & Wyplosz, 2006). In practice, the effects of CAP on developing countries are three-fold. First, these effects appear much contrasted across countries. By encouraging agricultural production in the EU, the CAP clearly hurts some developing countries that are net exporters and that would, otherwise, supply a larger share of the EU or world market (FAO, 2006). However, the situation is less clear for net food importing developing countries. Second, the distortions on world market generated by the CAP are now much smaller that the ones that resulted from the CAP in the 1980s, because of the reforms that have taken place. Third, the reforms of the CAP have gone together with an improvement of market access, even though this access remains very uneven across commodities and across would-be exporters. Because of the reforms that have taken place since 1992, support to farmers in the EU now mainly takes the form of direct payments, which rely on historical entitlements and have therefore less impact on production than they had before. Decoupled payments are much less distorting than the former market price support and output subsidies. However, in the EU the decoupling is only partial, and the new Single Farm Payment remains conditional on the maintenance of the land in good agricultural condition, even though it does not require actual production. More generally, payments are only truly "decoupled" if the capital market is perfect, and if private consumption decisions are separable from the production side of the household (Van Der Meer, 1989). Economy theory suggests that to give a sum of money, even unconditionally, to a farmer necessarily influences the amount produced. In reducing the risk of insolvency, even decoupled payments encourage higher production or riskier cultivation. There is often an implicit anticipation that cultivated areas will be used as a reference in the next reform which keeps land in cultivation. Developing countries complain about the indirect distortions generated by "decoupled payments." There are few solid quantitative results on the effect of such aid on production. A recent study by Abler and Blandford (2005) suggests that the effects on the quantities produced are limited. Their survey of the econometric results in the literature suggests that developing countries can expect only small gains even from a large reduction in these direct payments. However, this conclusion is subject to uncertainty regarding the proper way to model these payments, which parallels the imperfect knowledge of their economic impact (Gohin, 2005). It remains to be seen whether the SFP will actually lead to an observable decrease in yields, or a diminution of EU production. If it is not the case, this could mean that, indeed, the shift towards more decoupled payments will have introduced only minor changes in the distortions that the CAP brought to world markets. The EU is still reluctant to lower tariffs for the agricultural products that benefit from a common market organization, since they are necessary for maintaining the whole intervention system. Because of the large number of developing countries that benefit from preferences, the impact of the border protection component of the CAP is very uneven. Basically, the developing countries that benefit only from the regular GSP obtain a very limited access to the EU market in sectors such as beef, dairy and sugar, which are not (or only very partially) covered by the preferences. There is little evidence of the impact of EU export subsidies on the economies of developing countries, except for some anecdotal cases highlighted by non governmental organizations. Overall, it is likely that EU subsidized exports have distorted competition with local producers in particular sectors and in particular locations (Wallace & Wallace, 2005). Nonetheless, the CAP's many critics have not been silenced. They point out that the CAP is costly for both taxpayers and consumers, does not do enough to protect the environment, and hurts farmers in developing countries. The CAP hurts developing countries and their rural poor in two ways (Pelkmans, 2001). First, it undermines producers in developing countries by dumping subsidized goods on their local markets. Second, it reduces the potential for developing countries to export farm produce to European and other markets. Before the reforms of the 1990s, the CAP was based largely on 'price support' mechanisms that fixed a minimum guaranteed market price for EU farmers. This was usually higher than the world market price. If the EU wanted to sell its farmers' produce on the world market, it had to provide export subsidies to refund the difference to traders selling the product at (or often below) world market prices (Ray, Ugarte & Tiller, 2003). Thus EU goods could be sold at levels well below the cost of production. World market prices reflect supply and demand and, in times of surplus, can fall below the production costs of even the cheapest producer. Despite CAP reform, the EU accounts for 90 per cent of the world's export subsidies. Although the amounts have been declining, the EU spent 2.14 billion on export subsidies in 2001 (FAO, 2006). (Export subsidies apply only to agricultural products.) EU officials at the WTO argue that some CAP subsidies are worse for developing countries than others. Export subsidies are bad, because they directly encourage dumping on world markets; direct payments to farmers, giving money directly to farmers to produce, are not quite as bad as export subsidies; payments not linked to production (de-coupled payments), they argue, do not distort trade at all. The Organization for Economic Cooperation and Development estimates that in the six years after the wheat reform, the EU will export nearly 40 per cent more wheat than before. The European Commission argues that the CAP should move to a system where payments to farmers are entirely unrelated to what they grow, and that this will end the dumping problem. But annual EU support runs at 11,400 a farmer (FAO, 2006). However this is paid, it enables farmers to sell their crops at lower prices than they otherwise would have done, leading to the dumping of EU produce on the world market. Dumping will continue as long as such levels of subsidy prevail. Conclusion The current position of CAP provides certain facts about its future. Reduction of price support under the Common Agricultural Policy will continue, otherwise the reduction of export subsidies is not sustainable and increasing imports cannot be absorbed. Direct payments as part of a production limiting program will continue, they may even increase. Direct payments will shift to support of rural development programs. Standards on food safety will be more demanding and labeling will spread. The overall impact of these facts on developing countries is expected to be good. Developing countries would have improved market access for competitive exporters. There would be less artificial incentives to export to the EU because of high domestic prices and less competition from subsidized exports. There would be less competition from subsidized domestic production as support shifts. Under CAP, the developing countries need to cope with higher food safety standards and labeling requirements. The beneficiaries due to the Common Agricultural Policy in developing countries will be the main agricultural exporters who are organized in the Cairns group as they will benefit from more stability of trade because of less export subsidies and better access for their products. On the whole, the developing countries will be able to sell high quality products, in particular processed products. The losers in this game would be those developing countries who are unable to meet the increasing quality requirements. Thus we could conclude that the Common Agricultural Policy helps the developing countries. But the progress is very gradual. References Abler D. and Blandford D. 2005. A Review of Empirical Studies on the Production Impacts of PFC and MLA Payments under the U.S. FAIR Act. Consultants report, Organization for Economic Cooperation and Development, Paris. Baldwin, R. and Wyplosz, C. 2006. The Economics of European Integration, 2nd Edition. McGraw Hill. 1st Edition, 2003. FAO, 2006. Towards appropriate agricultural trade policy for low-income developing countries, FAO Trade Policy Technical Notes no.14, Rome. Gardner, B. 2002. North American agricultural policies and effects on western hemisphere markets since 1995, with a focus on grains and oilseeds, Department of Agricultural and Resource Economics draft working paper, pp.2-12, University of Maryland. Gohin A. 2005. "Assessing the impacts of the 2003 CAP mid Term Review: How sensitive are they to the assumed production responsiveness to Agenda 2000 direct payments" Paper presented at the 8th Conference on Global Economic Analysis, Lubeck, Germany, June 9-11, 2005. Harrison, G.W., Rutherford T.F.& Wooton.I. 1995. "Liberalizing Agriculture in the European Union," Journal of Policy Modeling, 17(3), pp.223-55. Herok, C.A. & Lotze.H. 2000. "Implications of an EU Eastern Enlargement under a New Common Agricultural Policy," Journal of Policy Modeling, 22(6), pp.661-90. Meester, N & Strijker, D. 1985. Het Europese landbouwbeleid voorbij de scheidslijn van zelfvoorziening's Gravenhage, pp.4-5. Panagariya A. 2005. Agricultural liberalization and the developing countries: debunking the fallacies. Mimeo, Columbia University. Forthcoming in World Economy. Pelkmans, J. 2001. Methods and Economic Analysis. Second Edition. Prentice Hall, pp.25-30. Polaski, S. 2006. Winners and losers: impact of the Doha Round on developing countries, Carnegie Endowment for International Peace, Washington D.C. Ray, Ugarte & Tiller. 2003. "Rethinking U.S. Agricultural Policy: Changing course to secure farmers livelihoods worldwide,"pp.12-15. Ufford, Quarles van P & Bos, Klaasse A. 1995. "Distorted beef markets and regional livestock trade in West Africa: Experience from the central West African corridor," vol. 10, pp. 5-19. Van der Meer, C.L.J., 1989. "Agricultural growth in the EC and the effect of the CAP," In Agriculture and governments in an interdependent world, Proceedings of the twentieth international conference of agricultural economists held at Buenos Aires 24-31 August 1988, Darmouth, pp.140-152. Wallace, H and Wallace, W. 2005. Policy Making in the European Union. Oxford University Press, pp.21-22. Read More