Peculiarities of Agriculture

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CAP
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Lecture Structure

• Paradoxes of CAP
• Status of AP/EU
• Development of CAP
• Distinctiveness of agriculture (pol/econ)
• CAP economic/ political objectives
• How CAP works (and not)
• Reform difficulties

CAP is the single most idiotic system of
economic mismanagement that the rich western
European countries have ever devised (FT 2000)
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Paradoxes of CAP
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Changing status of agriculture/ EU
EU
CEEC/10

• 1955
• 22.1
• 11.9
• 14

• 1995
• 7.5
• 2.5
• 33

• 22.5
• 7.0

• Share of agriculture as
• of labour force
• Share of agriculture as of national GNP
• of farms larger than 20 hectares

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Development of CAP

• EEC system of common prices, single internal
  market
• 1968 Mansholt Plan (reform plan with little
  effect)
• 1988 agricultural support limitations (budget
  crisis)
• 1992 CAP reform (GATT Uruguay round)
• 1999 Agenda 2000 (enlargement)
• 2002 direct payments strategy

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Distinctiveness of agriculture (econ)
What makes CAP so special?

• economic vulnerability (import)
• price instability (inflation)
• labour market
• social sector
• environment
• food health and safety
• linked to many other economic sectors

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CAPs functions

• Musgrave 1959 Three functions of public
  expenditure
• Allocation
• Redistribution
• Stabilisation of macro-economy

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Distinctiveness of agriculture (pol)
Remember oil crisis 1973

• Political vulnerability
• Politcal influence and power of farmers
  (electoral weight)
• agricultural organisations
• unity of interests
• farmers ability to direct action
• weak opposition
• tradition

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CAP - Economic Objectives (ToR Art. 39)

• equalization of food prices
• Increase agricultural productivity
• To ensure a fair standard of living for
  agricultural sector workers
• To stabilise markets
• To guarantee regular supplies

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CAP - political Objectives

• Ensure domestic food production
• Secure local agricultural structure
• Social and democratic integration of farmers
• Unite politically against political pressure from
  USA

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The Price-Support System
Couch farmers

• EU pays for non-production (quotas)
• EU subsidises agricultural export
• Big farms are privileged
• Example for positive integration
• CAP became a farmers welfare system

Milk price 2002 EU 2000 EURO WM 1214 EURO
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Levy and refund system
Levy
EU market price
Import
World price
EU market price
Export
Refund
World price
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Production of Milk in the UK and Denmark Before
and After EU Accession
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Distributional Effects of the CAPFrom taxpayers
to farmers
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CAP spending per person
EURO

• Denmark 224
• Portugal 110
• Austria 119
• Belgium 88
• Sweden 94
• Finland 131
• Luxemburg 70

• France 164
• Germany 78
• Spain 154
• Italy 85
• Britain 75
• Greece 277
• Ireland 474
• Netherlands 88

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Problems of CAP

• Planned Economy
• Environmental problems
• Overproduction of food
• Hurt producers in the third world
• Became untenable in 1990s
• EU favoured free trade in GATT
• But levied imports subsidised exports
• Why are 50 per cent of the EUs budget spent on
  CAP so that prices for food are 100 per cent
  above world market prices?

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Why has CAP been so difficult to reform?

• Close relationships between producers and
  decision makers
• The iron triangle national ministries,
  commision, well organised agricultural lobby
• Landowners gained from price rises in
  agricultural land
• Electoral weight of farmers is still very
  significant in some states
• Farmers have many friends

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Why has CAP been so difficult to reform?

• Agricultural policy initially seen as a uniting
  force
• No strong "anti-farming" organization diffuse
  payments, concentrated benefits (Olson)

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Olson Logic of Collective Action

• Citizens are rational (optimal means for given
  objective, costs benefits)
• Most of the time, better do nothing
• Own contribution makes no difference for
  collective action (but for you!)
• Cant be excluded if collective action successful
  (collective good)
• Normally, no collective action for common good
• Much easier to organise small groups with very
  specific interests

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The CAP in the 21st century

• Financial framework until 2013
• a single farm payment (decoupling)
• linking payments to environmental, food safety,
  animal welfare, health and occupational safety
  standards, (cross-compliance")
• Reduced direct payments ("degression") for bigger
  farms
• Compared to 1970s, CAP spending massively reduced

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Outlook The CAP in the 21st century

• CEEC freezing of overall expenditure long
  transition periods
• Farmers from the 10 states that joined in 2004
  began by receiving subsidies at 25 of the rate
  they are paid to farmers in the other 15 EU
  countries. That rate rose to 30 in 2005.
  Equality will be attained by 2013

news.bbc.co.uk/1/hi/world/europe/2543711.stm
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Class Questions

• What were the main obstacles to CAP reform?
• To what extent have these been overcome?
• What are the new challenges posed by the huge
  agricultural sectors of the applicant countries?