CAP Expenditure and CAP Reform Path - Essay Example

? Should the CAP be Reformed, and If So Why and How? Contents 0 Executive Summary……………………………………………………..2 2.0 Introduction…………………………………………………………….. 3 3.0 Historical Account……………………………………………………...3 3.1 Share of Direct Payments and Total Subsidies In agricultural Factor Income………………………… ………....4 4.0 Understanding the CAP Policy………………………………………….4 4.1 Pillar 1…………………………………………………………...5 4.2 Pillar 2…………………………………………………………...5 5.0 Past Reforms…………………………………………………………… 5 5.1 CAP Expenditure and CAP Reform Path……………………….. 6 6.0 Various Perspectives on Proposed Reforms…………………………….6 6.1 Farmers View point……………………………………………...6 6.2 NGOs Perspective………………………………………………..7 6.3 Research Institutes and Experts’ Opinions………………………7 7.0 Does the CAP Defy Trade Theory?........................................................9 8.0 Ricardo's Comparative Advantage Theory and the CAP………………9 9.0 Heckscher and Ohlin Theory and the CAP……………………………10 10.0 Ground for Choices …………………………………………………10 11.0 Guiding Principles for Reforms……………………………………..11 11.1 Global Food Security………………………………………..12 11.2 Environment Initiatives……………………………………. 12 11.3 Targeting on Public Goods …………………………………12 11.4 Market Orientation…………………………………………..12 12.0 Recommendations………………………………………………......12 13.0 Conclusion…………………………………………………………..13 14.0 Bibliography………………………………………………………...14 Executive Summary The Common Agricultural Policy (CAP) is one of the most debatable and controversial EU policies. Currently, the most pertinent question is whether the CAP should be reformed? Initially, during ‘60s, it was formulated to increase the agricultural production and achieve food security. Since then much has changed at the global level and the world has progressed to trading in a tariff-free regime under the auspices of World Trade Organization. It has been agreed that resources are scarce and must be harnessed efficiently to enhance economic wealth of the nations within EU. The existing CAP within EU with direct payments on per hectare basis does not make any sense. The agricultural subsidies cost huge proportion of the EU budget. Providing export subsidies to produce surplus to dump it in the international market at the cost of developing countries, especially poor African countries, defy the basic probity and economic sense. Sweeping reforms are needed that can take care of environmental issues, climate mitigation, reduce water pollution, support efficient farming and rural development, provide fair international competition and encourage innovation in agriculture increasing productivity levels. Introduction This policy paper is for the attention of the Agricultural Commissioner, EU and is designed to explore whether the CAP should be reformed, and if so then in what way it should be modified to address the current issues. The paper is structured around understanding existing CAP and its relevance in reference to various economic theories that economists have proposed in last few decades to enhance the global wealth. It will look into various perspectives on proposed reforms and the available choices to address environmental issues. The paper finally provides concrete recommendations on the future CAP. Historical Account The Common Agricultural Policy (CAP) had its modest beginning in 1962. Since then a lot has changed in the ways people do agriculture. Initially, European Union began with only six members and they all were food importers. It was obvious for them to seek healthy and affordable food for their citizens. Higher agricultural productivity was one of the major aims in those days and same was achieved through concerted efforts by the EU member countries. Currently, the EU is comprised of 27 states with 14 million farmers being a part of it besides having 4 million people associated to food sector. Seven percent of all jobs come from farming and food sectors generating just 6 percent of EU GDP. On average, subsidies account for over 40 percent of agricultural income in EU-27 countries including many developed economies in the EU (The CAP, 2013). European farmers are protected to a great extent from market fluctuations. In spite, employment in agriculture has reduced significantly. Agricultural productivity has been increased at the cost of increased water pollution causing a grave threat to the rural environment (Cantor, Kennan and Sheila, 2011). Figure 1: Share of Direct Payments and Total Subsidies in Agricultural Factor Income (2009-2011 average) Source: European Commission (2013) The CAP is essentially about EU farmers with one-half population of the EU living in rural areas. Farming is the main activity in rural areas of the EU without which perhaps, it would have been difficult to keep many communities together. If farmers give up farming, a huge issue of land abandonment may crop in impacting life at countryside including the rich variety of wildlife. Farming has helped in creating and maintaining several natural habitats since several centuries. That is why it is correct to say that farming and nature are interlinked. The CAP is simply not a policy providing support to farmers but it is a sustained effort to continue with what nature has provided to mankind. With this perspective in mind, the CAP needs to be examined across its several dimensions before conducting reforming activities. Understanding the CAP Policy The CAP is an important EU policy created with the sole purpose of influencing output, prices and farmer income. Providing subsidies to farmers/agricultural community has always been a part of CAP. Currently, around 40% of total EU budgetary expenditure goes to supporting agriculture. The CAP is essentially, founded on two-pillar support structure (Cantor, Kennan and Sheila, 2011). Pillar 1 Pillar 1 support is aimed at providing direct payments to farmers. Direct payments constitute nearly 80 percent of the CAP expenditure. EU reimburses paying agencies on a yearly basis. Pillar 1 policies apply to entire EU. Pillar 2 Support is aimed at improving the environmental issues related to agriculture with rural development at its centre. Co-financed by the EU and all Member States, it is further segregated into three axes as per the following. Pillar 2 Components Objectives Axis 1 Focuses on improving the agriculture and forestry competitiveness through various practices such as farm modernisation, initiating programmes to enhance food quality and value addition to agriculture and forestry products. Axis 2 Aimed at improving the environment and rural areas. Axis 3 Aimed at enhancing quality of life at rural areas by encouraging diversification to the rural economy in non-agricultural activities with the focus on conserving rural heritage. Past Reforms As the economy progresses, any policy matter needs to undergo reformation to address multitude issues that develop overtime due to changes in structure and added objectives. Accordingly, the CAP has also undergone several reforms over these years. The major reforms began in early 1992 when under the MacSharry reforms process direct payment support system was introduced loosening its association to the market price support. The establishment of The World Trade Organization (WTO) in 1995 also compelled the countries to reduce agricultural support in terms of subsidies and relax trade barriers. In the 2003 reform process, the direct payments to farmers were further reduced by at least 5 percent dissociating payments to the specific product (Cantor, Kennan and Sheila, 2011). In the 2008 reform process, farmers were asked to comply with EU Directives and Regulations aimed at protecting environment; animal welfare; and plant and animal health. Currently, decoupled direct payments to farmers are available regardless of whether they produce from their land or not (Cantor, Kennan and Sheila, 2011). Figure 2: CAP expenditure and CAP Reform Path (2007 constant Prices) Source: European Commission (2013) Various Perspectives on Proposed Reforms Last year, the current Agriculture Commission launched a public debate among general public, EU stakeholders and think tanks discussing the various issues pertaining to CAP. Along with many other questions, one of the pertinent questions remained, “Why reform the CAP” (European Commission, 2013)? Various stakeholders replied to the issues regarding CAP reform and from this debate the following points emerged regarding further CAP reforms. Farmers Viewpoint Farmers' organisations do not feel any need to continue with any further CAP reforms. Instead, they view that more money need to be spent under Pillar one. Stakeholders, in general, want coherence among EU policies and significant numbers want a balanced distribution of support money among member states and among farmers (European Commission, 2013). NGOs Perspective NGOs are more concerned with CAP contradiction that on the one side, aims at following market-dependent policies eliminating smaller less-efficient farms from farming and on the other hand, it promotes a traditional way of farming that is far from efficient. Many suggest that farmers must subsist from market prices without any payment from EU with its role be limited to correcting only price volatility and many do not want public money to be spent on supporting low-quality stuff but advocate rewarding only those farmers that work for public goods (European Commission, 2013). Research Institutes and Experts’ Opinions Many research institutes and experts also provided their viewpoints quite elaborately and the same can be summarised as per the following (European Commission, 2013). On Economic Efficiency As per experts, on broader economic sense, the CAP resources are not properly used but wasted. The CAP also distorts decision-making on EU budget financing and expenditures. They also opine that transparency and simplification should be brought in. On Global Competition While comparing EU farmers with farmers of the developing world, experts and research institutes believe that formers are at a considerable disadvantage due to the need of complying with EU environmental laws and animal welfare rules. The third world farmers are immune to these regulations. They see all logic in providing some kinds of protection to the EU farmers such as direct payments. According to them, EU farmers do provide public goods and they need to be adequately compensated. They also feel that fair-trade conditions need to be established on the international food market (European Commission, 2013). CAP and the Developing World Experts also believe that the CAP acts against global food security. Export subsidies and EU tariffs bring down world food prices. Nelson et al. (2011) argues that this impacts not only the farmers but also the less-skilled labourers of the developing world lowering their wages. Thus, the CAP also acts against poverty alleviation programmes in the third-world countries. On Market Management Some research institutes and thinkers take position that is quite in line with the viewpoints expressed by some of the stakeholders on market management issue. They opine that the concept of free trade has not worked well in agriculture and maintaining food supply. In short, 'free market' concept cannot guarantee adequate food for all or for that matter fails to achieve all the objectives earmarked in the original objectives of the CAP (European Commission, 2013). On Environmental Issues Many environmentalists believe that the CAP has failed on environmental issues. A little is spent on improving efficient environment-friendly agricultural means and ways; instead, considerable amount is spent on deleterious farming practices that include inappropriate irrigation practices along with drainage of wetlands. Increased water pollution and climate change mitigation polices are not adequately addressed. Environmentalists believe that these are parts of public goods and the CAP needs to be redirected in these areas. Eligibility criteria for support payments to farmers and distribution of the funds among member states should take into account these aspects (European Commission, 2013). Does the CAP Defy Trade Theory? Trade theory explains that it is beneficial for a country to participate in international trade even for goods that it can produce for itself because someone else can produce those goods more efficiently (Nello, 2012). While scrutinizing trade theory aspect, Matthews (2013) argues that total factor productivity (TFP) in case of Nordic countries such as Finland, Sweden and Denmark, and countries in north-west Europe such as Belgium, Netherlands and Ireland have been found to be negative from the year of their accession in EU until 2008. The finding also reveals that decoupled subsidies after 2005 has failed to bring any significant positive effect on productivity levels in the majority of EU-15 nations. Figure 3: Average Annual Productivity Growth Rates, EU-15 countries Source: Capreform.eu Ricardo's Comparative Advantage theory and the CAP Adam Smith a way back, advocated absolute advantage theory of free trade; however, the world has since then moved towards Ricardo's Comparative Advantage theory. The theory says that even less efficient country has a basis for mutually beneficial trade based on labour and capital resource availability (Nello, 2012). If Ricardo’s comparative advantage theory is applied then there is no sense to promote agriculture through subsidy regime at least in the developed economies as mentioned above because resources can be better utilized in knowledge based or capital intensive industries where comparative advantage lies. Heckscher and Ohlin Theory and the CAP Heckscher and Ohlin theory does not endorse diverting scarce labour force for labour intensive agriculture (Nello, 2012). Developed EU States can take advantage of economies of scale and embark upon capital intensive industries to register higher economic growth by diverting existing labour in agriculture to sophisticated high-tech manufacturing industries. The developed nations within the EU such as France, Germany, the UK, Belgium, Denmark, Sweden and others are not endowed with a large pool of labour. The basic question still remains why EU agricultural policy should provide subsidy to farmers promoting agriculture in these countries. It would be much better if the subsidy is reserved for only those new EU entrants that yet do not have strong industrial base. This is how farmers in less developed EU states will be able to take advantage and increase their income. Ground for Choices In a study done by Netherlands Scientific Council for Governmental Policy “Ground for Choices”, it is revealed that with 50 percent less agricultural land, food security for EU can be achieved (Netherlands Scientific Council, 1992). Less land means less pesticide uses and huge cost reduction is possible. This would help reduce nitrates in the surface water improving water pollution and thereby a reduction in green house gases. When this study was done EU was made up of 15 countries and subsequently expanded into 27 countries with many more to be added; the need to check water pollution has increased. When scientifically proven technical and environment-friendly means of agriculture are employed, it is obvious that labourers needed to do the farming for same output get reduced. NSCGP study also reveals that the strong export position of the agricultural produce is attributed to the marked protection provided to the farmers through subsidies (Netherlands Scientific Council, 1992) that goes against the basic tenets of trade theory. In changed circumstances, the pertinent question is why CAP should not be reformed further. In the current times, income guarantees to the farming community undermines change that is necessary. Productive and efficient agriculture with fewer farmers is need of the time. In a truly globalized world when World Trade Organisation is putting all its efforts to usher the member countries into a tariff-free regime, it becomes equally important that farmers in developing countries are assured of a fair deal by EU. The CAP did serve the purpose of integrating diverse countries of Europe but with more participating countries it has now become a matter of great debate and dispute. Experts strongly recommend abolishing export subsidies and the farm payments that do not ask for production in return (Zahrnt, 2010). Rabbinge (2009) argues that it is high time that the CAP is reformed further for the simple reasons that it has failed to fulfill some of the societal objectives described as per the following. 1. Climate protection and biodiversity enhancement issues are not properly addressed. 2. Water quality improvement is not addressed properly. 3. Fair competition in the internal market has not been restored. 4. Efficient Farming is not stressed upon under current policy regime. 5. Innovation is not encouraged in the current CAP policy measures. 6. Landscapes preservation does not get any priority. Guiding Principles for Reforms Many agricultural economists from across EU such as Social and Economic Council in the Netherlands, the Scientific Advisory Council of the Federal Ministry of Food, and Agriculture and Consumer Protection in Germany have also stressed upon a need to make some drastic policy changes in CAP. Decision makers at EU so far not have been able to take substantive reforms. At times, they prefer to maintain the status quo. Experts recommend four basic guiding principles to promote all reforms on CAP as per the following (Reform the CAP, 2010). Global Food Security The EU needs to promote global food security based on an open trading system. They need to work toward climate change mitigation and preserve own sustainable production capacity. They also need to support agricultural productivity in developing countries besides encouraging public investment in agriculture research and development activities. Environment Initiatives CAP needs to focus on sustainable land use policies. Biodiversity needs to be encouraged. Maintaining Water purity and its proper management needs to be stressed upon. Targeting on Public Goods The provisions of public goods should be the basis for all subsidies. That means subsidies based on Single Farm Payments should be done away with. Rural poverty alleviation cannot and should not be a function of agricultural policy rather it should be a social objective. Market Orientation In the globalized world, innovative and competitive farm sector can be developed through a market orientation and not perennial state intervention. It is necessary to ascertain that subsidies do not distort production and prices of the agricultural produce. It is required that all export subsidies are abolished. Recommendations The following measures are recommended to reform the existing CAP. 1. Huge subsidy that is currently spent as direct payments on Pillar 1 should be diverted to Pillar 2 in improving rural economy through non-agricultural activities as aimed in Axis 2 and Axis 3. Time being, direct payments should be reserved only for agrarian states in EU with lesser per capita income and for those who do not have much industrial base; however, that needs to be done away with overtime as their economy transit from agriculture to service and manufacturing sectors. 2. Using the CAP for producing surpluses and then dumping on developing countries taking benefit of the export subsidies should be done away with. Export subsidy on such deals should not be a part of the future CAP at all. Market orientation should be part of the new CAP. 3. On the other essential steps necessary to reform the existing CAP are: protecting biodiversity and the environment; reducing water pollution, developing and sustaining rural economy conserving the countryside. 4. Innovation and research to increase yield based on organic farming in the potential sectors of EU agriculture should be strongly promoted and supported in the new CAP. Conclusion More than 50 years have passed since the CAP was implemented first time. Resources are always scarce and economists across all parts of the world strongly support trade theory for the benefit of all in enhancing the wealth of nations. Keeping this perspective in mind, the world has transformed into a global village and therefore it is high time on part of the EU to take a U-turn making radical reforms in the CAP as recommended above. Bibliography Cantore, N.; Kennan, J.; Page, S. (2011). CAP Reform and Development. Overseas development Institute. [Online] Available from http://www.odi.org.uk/sites/odi.org.uk/files/odi-assets/publications-opinion-files/7245.pdf [Accessed 24 April 2013] The CAP (2013). A Partnership between Europe and Farmers. [Online] Available from http://ec.europa.eu/agriculture/cap-overview/2012_en.pdf [Accessed 24 April 2013] European Commission (2013). The Common Agriculture Policy after 2013: Public Debate. [Online] Available from http://ec.europa.eu/agriculture/cap-post-2013/debate/report/summary-report_en.pdf [Accessed 24 April 2013] Matthews, A. (2013). Impact of CAP subsidies on productivity. capreform.eu. [Online] Available from http://capreform.eu/impact-of-cap-subsidies-on-productivity/ [Accessed 24 April 2013] Nelson, M.; Halderman, M.; and Leonard, D. (2011). Will the Common Agricultural Policy be Reformed to Accommodate the Interests of Poor Livestock producers in the Developing World? [Online] Available from http://www.fao.org/ag/againfo/programmes/en/pplpi/docarc/LL22.pdf [Accessed 24 April 2013] Nello, Susan (2012). The European Union: Trade & the EU. [Online] Available from http://ec.europa.eu/trade/ [Accessed 4 May 2013] Netherlands Scientific Council for Government Policy (1992). Ground for Choices. [Online] Available from http://www.wrr.nl/fileadmin/en/publicaties/PDFRapporten/Ground_for_choices_four_perspectives_for_the_rural_areasin_the_European_Community.pdf [Accessed 24 April 2013] Rabbinge, R. (2009). The CAP needs radical reform, not tinkering. [Online] Available from http://www.europesworld.org/NewEnglish/Home/Article/tabid/191/ArticleType/articleview/ArticleID/21314/Default.aspx [Accessed 24 April 2013] Reform the CAP (2010). For an Ambitious Reform of the Common Agricultural Policy. [Online] Available from http://reformthecap.eu/declaration [Accessed 24 April 2013] Zahrnt, V. (2010). Greening the CAP, and pruning it too. Europe's world. [Online] Available From http://www.europesworld.org/NewEnglish/Home_old/Article/tabid/191/ArticleType/articleview/ArticleID/21663/language/en-US/Default.aspx [Accessed 24 April 2013] Figures Figure 1: Share of Direct Payments and Total Subsidies (2013). European Commission.[Online] Available from http://ec.europa.eu/agriculture/cap-post-2013/graphs/graph4_en.pdf [Accessed 24 April 2013] Figure 2: CAP expenditure and CAP Reform Path (2013). European Commission. [Online] Available from http://ec.europa.eu/agriculture/cap-post-2013/graphs/graph2_en.pdf [Accessed 24 April 2013] Figure 3: Average Annual Productivity Growth Rates, EU-15 countries. [Online] Available from http://capreform.eu/impact-of-cap-subsidies-on-productivity/ [Accessed 24 April 2013] Read More