The Costs of the Common Agricultural Policy

Allan E. Buckwell, David R. Harvey, Kenneth J. Thomson, Kevin A. Parton

• Publisher: Routledge
• Year: 2019
• ISBN:
  9781000682328
• Edition: 1
• Topic: Biological Sciences
• Subtopic: Ecology
• Index: Biological Sciences

First published in 1982. Considerable public controversy surrounded the large amount of public expenditure devoted to agriculture under the European Community's Common Agricultural Policy (CAP). There were serious disputes over how the farm support system operated and how it was financed.

This book describes the CAP situation and summarises previous attempts to assess some of the economic and financial flows arising from its creation using a common framework of well-established economic theory and methods. The CAP turned out to have a number of 'costs', depending on the concept of 'cost' used, the alternative policies considered, and the various assumptions made.

The bulk of the book presents the structure and results of a comprehensive model of European Community agricultural markets and the associated CAP support mechanisms. This model is validated against official Community budget figures and then run to simulate a number of policy options and their consequences. This title will be of interest to students of economics, geography and agriculture.

Chapter 1

AGRICULTURE: THE PILLAR AND THE PROBLEM OF CAP

EUROPEAN INTEGRATION

During the first fifteen years of the European Community, which came into operation on January 1st 1958, enormous progress was made in building up institutions and organisations to implement the provisions of the Treaty of Rome. Whilst the Treaty contained articles for common policies in many areas, including agriculture, customs duties, competition, social provision and transport, it became apparent that progress towards other economic common economic policies would be difficult without agreement on a Common Agricultural Policy (CAP) which would level food costs in member countries and eliminate trade barriers on agricultural produce. As the six founder members gradually harmonised their own systems of agricultural support, they transferred the financial responsibilities for the agricultural policy from their own exchequers to the Community budget. Thus by the time that the CAP was in full operation in 1969 agricultural support accounted for most of the budget. That it was possible to create a common agricultural policy at all out of the disparate levels and methods of agricultural support was a testament to the ingenuity and common political will of the member states. It was thus no exaggeration to refer to the CAP as a pillar of the Community.

However, during the 1970s the founding fathers’ vision of the gradual integration of economic and social policies within the Community, and a corresponding convergence of economic activity in the member states, suffered a series of setbacks. No sooner had the original six members achieved common agricultural prices at the end of the sixties, than currency movements, following the collapse of the Bretton Woods fixed exchange rate regime, caused national agricultural price levels to diverge. Shortly after these upheavals came the 1973 oil crisis. This, and the subsequent rounds of energy problems, provided a challenge to the Community to devise a common energy policy. However, the disparate circumstances and interests of the member states have outweighed the perceived benefits of a common approach. To compound these difficulties for further integration of the Community, the enlargement in 1973 from six to nine members, and the prospective enlargement in the 1980s to twelve members, have presented both a greater need for economic convergence and at the same time many more obstacles to achieving it. Whilst the Community has been struggling to cope with the changed financial, energy and political circumstances, the world economy generally has moved into recession.

This is the backdrop against which the Community’s economic and financial difficulties of unemployment and inflation are present in all member states but to differing degrees, and governments have rather different ideas about priorities and methods to attack these problems. The result is that, despite the attempt to forge greater monetary union through the European Monetary System, the real economies of the Community show few signs of convergence. In fact governments not only show little enthusiasm for relinquishing sovereignty over economic and social policies but are being subjected to great pressures to move in the opposite direction towards nationalistic appraisal of Community policies and even towards protectionism.

THE AGRICULTURAL AND BUDGETARY PROBLEMS

There are two elements in the current financial problems in the Community; the rapid growth of the budget towards the ceiling of funds which can be raised under the existing legislation, and the alleged inequitable distribution of the burden of the budget. Since 1970 the total EC budget has grown at about 22 per cent per annum, although the current total of 16 billion (thousand million) European Units of Account (EUA) is still less than one per cent of Community GNP. If the budget continues to grow apace and if growth in Community GNP slows or even stops then the budget will soon assume a significant portion of total economic activity. Within the overall budget, the share of the European Agricultural Guidance and Guarantee Fund (known generally by its French acronym FEOGA) is currently about 75 per cent. This share has varied from year to year but has never been less than 70 per cent. The growth of the budget is almost entirely a consequence of the growth in the costs of agricultural support.

A thorough study to apportion the increase in agricultural support costs amongst its contributory causes has not been carried out, but a few general points can be made. First, the volume of agricultural output has grown rapidly, primarily as a result of technical improvements in crop and animal yields rather than increases in the areas of land utilised or livestock numbers. In turn, yields per animal and per hectare have increased because of the adoption of improved varieties and breeds, the increased mechanisation of agriculture and the greater use of purchased inputs. This technical progress has not been a purely self-motivated phenomenon from within the farming sector but to a large extent has been stimulated by the Common Agricultural Policy itself. When society indicates that it wishes to transfer income to the farming sector through a continuing and open-ended system of price supports for the output of the sector, it is no surprise that the industry and the associated businesses up and down-stream should try to take the maximum advantages of such largesse by investment in fixed capital, research and development so as to increase output. The important point is not so much that real agricultural prices have actually risen, rather that farmers have been led to expect that their costs can be recouped and their incomes preserved regardless of the volume of output they jointly produce. Whilst the pace of technological advance undoubtedly has been stimulated by the price support system of the CAP, this is not the only factor. Member countries have their own nationally financed investment aids which have further contributed to this trend. Two of the stated objectives of the CAP in the Treaty of Rome were concerned with improving agricultural productivity¹ and providing stability in the market. That these have been achieved is beyond doubt. The costs of achieving them, however, have been rather high.

The issue of whether the burden of the Community budget has been inequitably distributed amongst the member countries was the centre of considerable argument during 1979 and 1980. From the point of view of understanding the real causes of the problem and moving towards a real cure, it is unfortunate that the debate has often been conducted as simply a budgetary problem, and at times, as a purely British budgetary problem. It was known at the time of United Kingdom entry in 1973 that an agricultural support policy based on subsidising exports, storing surplus production and taxing imports was likely to result in little direct budgetary expenditure in the United Kingdom, which is a net importer of most temperate zone agricultural produce. This is precisely what has happened, although the effect of the commodity price boom of 1972-74 did delay its onset until the last few years of the 1970s. What was not generally expected at the time of entry was that the offsets to the budgetary cost to Britain of the CAP would not materialise. Whilst this is not the place to discuss the success or failure of U.K. balance of trade in manufactures with the EC, it is reasonable to point out that it was not generally predicted that the agricultural fund would grow at such a pace that it would swamp the development of other funds in the Community budget, nor that a severe recession would dampen the urge and reduce the ability to pay for further common economic and social policies.

ASSESSING THE COST OF AGRICULTURAL POLICY

It is important to realise that any common Community policies will, and indeed should, involve inter-country transfers. Within a single country, if it is judged that the free operation of the market in any sector of the economy does not result in the desired level of output, incomes or prices, then policies are often introduced to steer the sector to the required position. Such policies will inevitably involve transfers between different groups within the country, usually from some group outside the sector to a group inside the sector. When the policy is supra-national, then unless the protected sector of each country is of similar size and suffers disadvantages to a similar degree, there will result inter-country transfers. If such transfers did not occur then there might be little point in the common supra-national policy. In the case of agriculture, with wide divergences between the relative size and structure of the sector in each member state, it is inevitable that inter-country transfers will arise from any common agricultural policy. The important point is therefore whether the transfers are having the desired effects and whether they are being effected in the most efficient manner. In more concrete terms, the relevant question is not to do with whether one member country is paying a disproportionate amount of the agricultural support cost, but whether the method of support used is the most effective way of transferring income to the target groups.

It is most important to realise that there is not just one measure of the cost of the common agricultural policy. The political debate of the last two years has focussed almost entirely on the net budgetary costs to particular member states. This ignores the cost to consumers throughout the Community who pay more for their food than they might do under a different policy. It also ignores the cost of the misallocation of resources resulting from the overexpansion of agricultural output. The elaborate exercise in market regulations represented by the CAP sets up enormous transfers between groups (consumers, taxpayers and producers) within each member state and between the member states. In order to agree the most desirable direction for change in the CAP it is necessary to consider all of these transfers and not just a small subset of them.

Whichever measures of cost are considered to be relevant, it should be realised that the magnitude of the cost measured depends on the alternative policy specified. This is a fundamental point and yet it has received virtually no attention throughout the fierce debate on the costs to Britain of participation in the CAP.

It is a basic proposition in economics that the cost of any activity can only meaningfully be measured in relation to some alternative activity. If there really is no alternative then in one sense there is no cost from continuing the status quo. In the context of the CAP this means that if it is desired to measure the balance of payments cost to Britain of the current arrangements for agricultural commodities, then this can only be calculated with reference to some specified alternative set of arrangements. Too often this kind of calculation is done by comparing the situation with the policy to that without any policy at all – that is, under a completely unrestrained market. In doing so it is not often spelt out that this is the comparison being made; neither is it argued that the free market is the most preferred state.

The belief underlying the present study is that both the growth of the Community budget and the distribution of the benefits and burden arising from the budget are inextricably linked to the Common Agricultural Policy. Solutions to these problems, if they exist at all, will not be found in changes in the budgetary mechanism but only in changes in the CAP itself. The danger of ignoring this point is that temporary modifications to the budgetary mechanism (as were made arising out of the summit conference in Dublin in 1975 and by the Council of Ministers in Brussels in May 1980) only complicate the negotiating position of member states and delay attention being given to the underlying problem, allowing it to grow in magnitude and complexity.

The defenders of the CAP often claim that, as it is the most significant agreed common policy, it represents a vital pillar in the whole Community structure. If true, this does not augur well for the future of the Community because the pillar contains some deep cracks and flaws. Descriptions of these flaws abound and there are also many published discussions of general alternatives to the present CAP.² However, apart from the rather narrow studies of the balance of payments costs to Britain of the current CAP compared to no Common agricultural policy at all^*, there are few systematic studies of the nature and size of transfer payments between consumers, producers, taxpayers and nations of a range of alternative changes to the CAP.

This study is intended as a step in that direction. The next two chapters respectively review the development of the CAP and its current plight, and set out an analytical framework for examining the impact of changes to CAP. Chapter 4 discusses the literature to date on assessments of the costs of CAP showing how there are a great many alternative estimates of even a relatively narrow definition of the cost. Chapters 5 to 8 present, an outline of the method used in this study, discussion of four alternative policies used in the analysis, and results by commodity groups and by country. Chapter 9 considers in more detail the distributional impacts of – policy changes and also compares the efficiency of policies in achieving particular objectives. Chapter 10 summarises the main findings of this study.

NOTES

1. In this context improving agricultural productivity is interpreted as increasing the volume of agricultural output.

2. See for example: (A) Professors Uri Koester and -Stefan Tangerman, ‘Supplementing Farm Price Policy by Direct Income Payments’, European Review of Agricultural Economics, 4 (1), 1977, pp. 7–13. German economists who discuss direct income support. (B) Professor John S. Marsh, UK Agricultural Policy within the European Community, Centre for Agricultural Strategy, Reading, 1978, who favours abandoning common prices except for trade purposes; the suggestion by: (C) E. Pisani, ‘European Socialists Demand CAP Reform’, Agra-Europe Weekly, Vol. 869 (1980), E1-E2, for a scheme of digressive pricing beyond a given level of output; and (D) the Commission of the European Communities, Reflections on the Common Agricultural Policy, COM (80) 800, Brussels, 1980, which favours a general extension of producer co-responsibility as a way of improving the budget position.

* These studies are reviewed in Chapter 4.

Chapter 2

THE COMMON AGRICULTURAL POLICY

There are numerous reviews¹ of the Common Agricultural Policy (CAP), and it is not the purpose in the present chapter to provide a comprehensive treatment. Rather, the discussion will concentrate on specific details relevant to the remainder of this study. The chapter commences with a description of the development of the CAP, its objectives, and the instruments which are applied in the pursuit of these objectives. The method of financing the CAP is examined to show how the budgetary transfers of the policy arise. The final part of the chapter describes a projection from the current situation to identify the likely future pressures on the CAP.

THE DEVELOPMENT OF THE CAP TO 1970

The process of post-war European integration is based on a number of international agreements commencing with the Treaty of Paris in 1951. This treaty involved only the coal and steel industries, but reflected a general desire in the countries concerned for greater co-operation in economic, social and political issues.

The Treaty of Rome established the European Economic Community in 1957. For the six signatories – West Germany, France, Italy, the Netherlands, Belgium and Luxembourg – the first significant step was to establish a common market by the removal of barriers on intra-Community trade. For industrial products,...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Contents
• List of Tables
• List of Figures
• Acknowledgements
• Chapter 1. Agriculture: The Pillar and the Problem of Cap
• Chapter 2. The Common Agricultural Policy
• Chapter 3. An Economic Framework
• Chapter 4. Survey and Synthesis of Previous Work
• Chapter 5. A Market/Budget Model of the Cap
• Chapter 6. Policy Comparisons
• Chapter 7. Commodity Effects of Policy Alternatives
• Chapter 8. Country Effects of Policy Alternatives
• Chapter 9. Distributional Effects and Policy Efficiency
• Chapter 10. Conclusions
• Index