May 12, 2008
If the CAP does not fit, get rid of it
The UK Chancellor of the Exchequer, Alistair Darling, is fighting the good fight on policy towards the EU’s agricultural sector. Effectively, he has called for the abolition of the Common Agricultural Policy, the EU’s Welfare State for Farmers - a costly, distortionary, inefficient and inequitable arrangement overdue for the scrap heap.
Darling’s proposals for dismantling the CAP focus on the two key measures required: (1) an end to all measures (tariffs, quotas, other trade restrictions) that keep EU farm prices above world prices and (2) an end to all direct support for European farmers, whether this takes the form of production subsidies, income support or any other measure.
He also proposes to end the subsidisation of the production of bio-fuels in the EU, again an eminently sensible measure. There is a case for public funds subsidising basic research (because knowledge is non-rival in use) and to a lesser extent for subsidising applied research and the development of new products and processes. This includes the subsidisation of R&D into bio-fuels. There is no case for subsidising the growing of agricultural products for bio-fuels.
It is ironic that on the same day that the benighted German farm minister, Horst Seehofer (reinforcing earlier similar calls from the comparably benighted French farm minister Michel Barnier), called for China, India and the US to be forced to adapt higher (European!) environmental and health standards if they want to export food products to the EU, there is a report in the Financial Times that European poultry producers are using a chlorine-washing process on exported chicken, although the use of the same cleaning method in the US has led to a de facto ban on American chicken sales in the EU for the past 11 years. The European Food Safety Agency has determined that chlorine washing does not raise safety concerns. The EU chicken import ban on US chickens based on the proposition that chlorine washing damages health therefore breaches WTO rules.
The hypocrisy of the EU agricultural lobby in hiding behind phony phytosanitary arguments while defending or even trying to augment protectionist barriers, is breathtaking. To wield environmental arguments in support of the agricultural sector is truly brave. Over the long sweep of human history, agriculture has been by far the most environmentally destructive sector. Agriculture in advanced industrial countries pollutes the soil, the ground water, our streams, rivers and lakes through the intensive use of organic and manufactured fertilizers. Water for agricultural use is almost always provided at a price well below its long-run marginal social cost, which depletes the water table and contributes to desertification. Agriculture contributed massively to deforestation, erosion, subsidence. Farting cows and other flatulent cattle emit methane and contribute to global warming. Modern factory-style farms spoil the landscape and are an eyesore.
Food security is best safeguarded by global free trade in agricultural products and an end to all production, export and income supports for the agricultural sector. A diversified global supply of food certainly would make me feel more secure than would dependence on the goodwill on French farmers who blockade the roads and other means of getting food to the customers, when the CAP does not provide them with the standard of living they would like to be accustomed to.
Unfortunately, stupid and collectively self-defeating food security policies are not found only in the overdeveloped world. The current export bans and inefficient government-sponsored hoarding of staple foods like rice by low- and middle-income exporting countries should also be banned under WTO rules. India’s banning of some food futures markets is a pathetic pandering to ill-informed domestic consumers and survivors from ‘Old India’ (a mixture of Fabian socialism and Gandhian self-sufficiency) by a pussilanimous government.
hat tip to you sir, for managing to use the word “phytosanitary”.
Posted by: ryan anderton | May 12th, 2008 at 4:29 pm | Report this commentAlas, pandering to agricultural lobbies is so common and well-established that I wonder whether we will ever get rid of its corrupting and distorting effects… And the people that suffer from it the most are, unfortunately, those least able to deal with the higher prices that result - the world’s poor.
Posted by: M | May 12th, 2008 at 4:51 pm | Report this commentWhat France and Germany are proposing is pure protectionism - there is no need to elaborate here on why.
Posted by: Charlie welsh | May 12th, 2008 at 4:59 pm | Report this commentWhat has always surprised me about this is why so few Europeans complain about having to divert such an unnecessarily large part of their disposable income to subsidise unproductive EU farmers. The lower disposable income contributes to the chronically weak EU levels of domestic demand which in turn exacerbates trade imbalances.
Are they willing to tolerate this in a show of support for EU integration, driven as it has been by France and Germany. Or is it just inertia?
Since agricultural policy is an exclusive EU competence, the UK government is powerless to act, and has been for many years; Parliament is neutered, unable to bring anyone to account for the operation of the CAP, still less to abandon it; and the British people are thereby disenfranchised.
What is true of agricultural policy is true of the many other areas which fall within the EU’s growing remit.
This disenfranchisement, and inability to alter policy, will continue unless and until the UK withdraws from the EU.
Posted by: Tim Skinner | May 12th, 2008 at 5:19 pm | Report this commentMany Europeans, esp. the Brits, want food to be as cheap as possible and so, with no concern about their health, they subsist on fast food produced on assembly lines which may save time, but is not cheap. In fact, many Swiss farmers are doing extremely well out of producing bio-fruits and vegetables and this market segment is growing fast. The retail sector in Switzerland is dominated by a duopoly (Migros and Coop) both are cooperatives. Each covers al the market segments from cheap thru Bio-Swiss, to gourmet lines, leaving no room for Carrefour (who pulled out of CH).
When there was a motion at the Migros AGM some years ago to take the organization public, that was turned down, although every member of the public who has a Migros card would have received free shares.
P.S. Some Swiss vignerons produce bio-wines, and I have met a few of them. Lord Norman Foster (GB architect) has bought the Chateau de Vincy, a wine-producing chateau overlooking Lake Geneva. It produces Chasselas, Salvagnin and some Chardonnay.
Posted by: J.J. | May 12th, 2008 at 6:57 pm | Report this comment[…] Financial Times May 12, 2008 […]
Posted by: politicalOBSERVER » Blog Archive » If the CAP does not fit, get rid of it | May 12th, 2008 at 8:18 pm | Report this commentWith a few breaks for an occasional war, in the western world it was assumed agricultural commodity prices would deflate forever, as they had done more-or-less since Jethro Tull invented the corn drill and published his ideas in ‘The New Horse Houghing Husbandry’ in 1731. Now all of a sudden, food price inflation is headline news across the world as it bites with a vengeance. But I’m just not sure agricultural protectionism is one of the reasons for this inflation. You could argue that protectionism has delayed what has now occurred by encouraging overproduction and therefore price deflation.
Posted by: Denis Buckley | May 12th, 2008 at 9:26 pm | Report this commentI cannot resist to congratulate. It is great to read such common sense. Look back in the FT for my In the Pink article, ‘Don’t cry for farmers’ and ‘Mad Politicians Desease’. But they are probably too old to be in the computer archives. Here in NZ Lake Taupo is being ruined by the run-off from fertisers. A ‘fart tax’ was proposed but laughed out of court.
Keep up the good work, Willem
Brian Reading
Posted by: Brian Reading | May 13th, 2008 at 4:13 am | Report this commentSurely no hat tip for spelling “pusillanimous” incorrectly
Posted by: A | May 13th, 2008 at 9:13 am | Report this commentThe problem with the whole CAP subsidies thing is a collective action problem. Especially the small ineffient French farmers suckin of europe’s bossom (both of them). It serves the french gov. no to upset the status quo and the farmers are rationally resitent to change because they are getting a fantastic (though suboptimal in aggregate welfare terms) deal. There is no easy way out of this though, because commodities (big agri crops) are an industry that requires a low cost base to be competitive, fat chance of that happening in Europe.
Posted by: Study War No More | May 13th, 2008 at 9:29 am | Report this commentProfessor Buiter,
I do agree with you that such subsidies do more harm than good. I can assume you would also be in favor “of an end to all direct support for” nuclear power, “whether this takes the form of production subsidies, income support or any other measure”?
Given the energy inflation in the air (cost of packaging, transportation and capital rising), I wouldn’t get too excited about the “security” of a “diversified global supply of food”; as locally grown and supplied food is becoming increasingly more logical for each and everyone one of us.
Posted by: Doug Wolkon - Author of The New Game | May 13th, 2008 at 10:00 am | Report this commentTo A: Ouch! Must have been thinking of my cats…
Posted by: Willem Buiter | May 13th, 2008 at 10:01 am | Report this commentRe A, Willem Buiter:
Dirty minded economists…
Posted by: Chris Cowell | May 13th, 2008 at 10:49 am | Report this commentThere seems to be a blithe assumption by many economists that the CAP is subsidising farmers and growers. I argue that it has subsidised consumers, allowing food to be sold for many years at below the cost of production. Consumers have grown used to paying less and less for their food and as soon as there is a price-hike because of input inflation they bleat that farm subsidies are to blame. Anti-protectionists will contend that if farmers cannot compete they should shape up or get out and allow the country to rely on imports. Do they worry about the look of the countryside? If there are no animals there will be no grass because there will be no economic use for it and no hedges because they are redundant. How much value do the population of UK and, indeed, Europe put on the look of the countryside? The CAP, as presently operated, endeavours to compensate growers for managing the countryside. They receive no direct subsidy for production as that would be in breach of WTO rules. They are required to comply with quite stringent management conditions or risk losing some or all of their Single Farm Payment. In exchange for additional payments and even more stringent restrictions on use, they can elect to enter into short-term agreements to manage their land in an environmentally sustainable fashion, with consequent reduction in production.
It has been a long accepted principle of English Law that compensation should be paid where landowners are deprived of economic rights for the public good. What is the nationalisation of land use, but a form of compulsory purchase which should be compensated from the public purse?
As far as I can see the rise in cost of food and all other commodities is simply based on the rise in the cost of energy. Food is more expensive to produce because of higher input costs (animal feed, fertiliser, diesel etc). This is compounded by higher transport costs. Every time the world faces economic crisis the cause is an increase in the cost of energy. As soon as we can find a means of economically capturing and storing enough energy from the sun for the world’s needs, and then distributing it to its point of use, we shall solve the problem for as long as it keeps shining. So let’s try to shape the CAP to fit this need: it’s not perfect but it’s not as bad as many people suggest.
Posted by: Ceebee | May 13th, 2008 at 2:28 pm | Report this commentSubsidising seas of plastic in Spain under which
unnaturally large and tasteless courgettes, peppers, aubergines, tomatoes are grown, tended by often illegal immigrants living in unsanitary conditions in shacks, behind which are piled empty drums which previously contained
chemicals to ensure that the a.m. vegs become unnatural in their largeness, and not forgetting the horrid hard dark red huge and tasteless strawberries which are also produced under the same conditions, should not qualify for subsidies. Imo.
On the other hand, producing bio-food, crops of all kinds, keeping animals for the production of meat according to regulations for bio-food production, should qualify for subsidies. Generally, farmers in Switzerland fulfil several functions apart from producing food: they keep the landscape neat and tidy, on the national borders they are ready to repel an enemy, on the 1st of August (National Day) they open up their farms and organize “Brunch on the Farm” all over the country for a very reasonable charge.
In winter they often double up as operators of the ski lifts, and keep the roads clear of snow.
I am happy to subsidize such farmers directly by paying more at the check-outs, and of course in summer every housewife makes several pies a week as the farmers produce mountains of plums and apricots.
Farming is a way of life and happy cows, hens and rabbits are a part of it.
Posted by: J.J. | May 13th, 2008 at 4:43 pm | Report this commentI think the article reflects the general attitude towards the CAP. In truth, people invest little time thinking about the consequences of abolishing the CAP.
Posted by: Ben | May 13th, 2008 at 5:25 pm | Report this comment1. How many European farmers would be able to compete with African agricultural goods which are not subject to environmental or minimum wage legislation? (I believe very few to none). So are those that advocate the abolishment of CAP happy to see farming disappear from the European continent with the effects that that would have for the sustainability of the countryside? (see comment by Ceebee)
2. How many African farmers would sell their crop on the local market if they can sell it for a multiple on the European markets? Especially in times of extreme climates, ending food production in those parts of the world where it has become uneconomic (i.e. Europe) would not only endanger our own food security but aggregavate the already existing food crisis in the 3rd world.
I think we should start talking about the real economic impact rather than repeat the old stereotypes about French farmers (in fact, British farmers are also subsidised by the CAP not just those ‘evil’ French farmers).
These 2 arguments (EU food standards are bad for trade and the CAP is expensive) are not very convincing.
The EU sets standards for all kinds of products. Because of the size of the EU market these standards are often de facto world standards. Chinese products sold in California or Brazil are made to EU standards. I don’t hear much complaining about the cost of these Chinese products. For Chinese producers it is often cheaper to deal with 1 set of rules (even if these rules are strict) then with many. I have little doubt that EU food standards will help free trade. One set of rules will level the playing field. Chinese farmers will react no different to EU regulation then Chinese toy producers.
A free market is no safeguard against U boats as the UK discovered during WWII (or against the Home Fleet as the Germans discovered during WWI). Food security costs money (just as energy security does cost money). Of course the CAP is about more then food security but for me the knowledge that whatever happens there will always be food on the table is worth a few Euros every year.
Posted by: Von Hohenheim | May 13th, 2008 at 8:11 pm | Report this commentRe gentech foods. Gentech is banned in Swiss agriculture and the Swiss government has just
Posted by: J.J. | May 14th, 2008 at 1:00 pm | Report this commentprolonged its ban (due to run out in Nov 2010) for a further 3 years, in order to continuing observing the effects of gentech crops/foods in countries where they are permitted.