House of Commons - Environment, Food and Rural Affairs

Select Committee on Environment, Food and Rural Affairs Written Evidence

Memorandum submitted by Professor D Harvey (CAP 09)

SUMMARY

Memorandum 1: Critique of the Vision: The Defra/Treasury Vision is mis-timed and ill-focused. Following the EU Budget summit and agreement in December 2005, there is very little opportunity in the near future to make any substantial changes to the CAP. The promised review of the European Budget in 2008 can be treated as being only about the budget, and not about the underlying policies. Yet the Vision makes virtually no mention of the budgetary arrangements for the CAP. This vision is not a serious option for EU agreement in the foreseeable future. Furthermore, elimination of Pillar 1 support maybe a vision to some, but to many countryside interest groups, without any transition provision it will be seen as a nightmare. This is not because the present uses and management of Pillar 1 support are sensible, effective or efficient—they are not (at least not for the UK). Elimination of market support and dedicated farmer support (unconditional direct payments) may be a worthy aspiration. But this "vision" does little to help achieve it.

Memorandum 2: An Alternative Vision: Turning aspiration into reality requires a careful explanation of the means of achievement, and a more realistic assessment of the benefits and costs than is managed here. In particular, it needs to explain more realistically how we might make progress from where we are now to where we might want to be. Incidentally, such a careful explanation and more realistic assessment also turns out to be considerably more sympathetic and sensitive to the critical interests in the countryside than the present document, and hence more likely to foster and improve debate, as a precursor to acceptance and pursuit of the ambition. But even more importantly, the alternative vision begins with the budget and financial arrangements for the current CAP, and is thus much more likely to be realisable than a vision which concentrates on the policy itself.

MEMORANDUM 1: CRITIQUE OF THE VISION

1. "This paper sets out a vision for the future of the European Union's Common Agricultural Policy. Its aim is to stimulate and help inform debate." Against these aims, this a disappointing document. There are four major grounds for this depressing judgement:

2. Firstly, contrary to the title, there is no real vision of the future here, other than a proposal to eliminate Pillar 1 support over a 10-15 year time horizon, and a rehearsal of general principles. These are little more than platitudes, hardly differing from previously agreed statements (see below). Otherwise, the "vision" consists largely of a critique of past policy and a catalogue of its well-documented shortcomings. Rather than being a vision of "where we want to be in 10-15 years time, and why" it is focused largely on where we were 10-15 years ago, and why that was so bad, which is not at all the same thing. The vision—a world without any Pillar 1 support—may well please the Treasury and the taxpayers (who would hardly notice), but it is more like a nightmare to many countryside interests, and complete anathema to many presently powerful EU voices. Its chances to being realised on the basis of this document are small—fundamentally sound though the aspiration might be.

The UK December 2005 Vision

Our vision for agriculture within the next 10-15 years is for an industry which is fundamentally sustainable and an integral part of the European economy. It should be:

— Internationally competitive without reliance on subsidy or protection.

— Rewarded by the market for its outputs, not least safe and good quality food, and by the taxpayer only for producing societal benefits that the market cannot deliver.

— Environmentally-sensitive, maintaining and enhancing landscape and wildlife and tackling pollution.

— Socially responsive to the needs of rural communities.

— Producing to high levels of animal health and welfare.

— Non-distorting of international trade and the world economy.

The EU June 1998 Vision

"All these proposals together have the aim of giving concrete form to a European model for agriculture in the years ahead. It is worth listing here what the main lines of this model should be:

— A competitive agriculture sector which can gradually face up to the world market without being over-subsidised, since this is becoming less and less acceptable internationally.

— Production methods which are sound and environmentally friendly, able to supply quality products of the kind the public wants.

— Diverse forms of agriculture, rich in tradition, which are not just output-oriented but seek to maintain the visual amenity of our countrysides as well as vibrant and active rural communities, generating and maintaining employment.

— A simpler, more understandable agricultural policy which establishes a clear dividing line between the decisions that have to be taken jointly and those which should stay in the hands of the Member States.

— An agricultural policy which makes clear that the expenditure it involves is justified by the services which society at large expects farmers to provide."

Source: European Commission, Explanatory Memorandum, The future for European Agriculture Agenda 2000, Agricultural Proposals, June 1998

3. Secondly, the critique of the CAP is substantially out-of-date, referring to previous rather than present policy, and ignoring future policy trajectories (see 3.c below). As such, it re-inforces popular myths and misconceptions, rather than improving understanding of the current issues and problems. The costs of the current (substantially reformed) CAP are over-stated. In particular, the OECD's estimates of Producer Subsidy Equivalents (PSE) are well known to substantially over-state the extent of policy subsidisation because they are based on current (policy distorted) world prices. As and when support and protection is reduced, world prices are expected to rise, in some cases (eg milk) very substantially (see Colman, 2002). The consequent result for producer support is then substantially reduced. The implication that these costs will persist into the future, unless radical reform is undertaken, is misleading. As a result, the contribution to genuine and constructive debate is compromised.

4. Thirdly, the premise of the "vision" is that it does "not set out a route map for getting there. (Since) That must be the subject of debate across Europe and achieved through gradual and carefully managed change to give clear signals and time for farmers to adjust their businesses, not an overnight upheaval." (ES p1). This premise is fundamentally mistaken, on three major grounds.

a. From a theoretical point of view, it is far from clear that "gradual and carefully managed change" is a sensible recipe for either efficient or effective business adjustment. The New Zealand case strongly suggests that unambiguous signals and capacity to adjust are far more important than gradual change and time to adjust. The necessary incentives and freedom to adjust are only provided in full on completion of the policy change. Until this point, any signals for adjustment are necessarily muted and very possibly noisy, resulting in inappropriate and costly adjustment. Capacity to adjust depends critically on the transition provisions. This point is further elaborated in Colman, 2002, chapter 9.

b. From a practical point of view, sensible debate and negotiation about policy options requires serious consideration of the means and processes of change. The political problem is not about where we want to be, as the general agreement on the objectives (1 above) indicates, but precisely on how to get there from here (or even whether such a nirvana is possible—see 4 below). Resistance to change is exactly that: resistance to change, not necessarily resistance to improvement or objectives.

c. Change is happening anyway, from the already agreed Single Farm Payments and associated reductions in traditional market support, to the practically inevitable changes as a consequence of current WTO negotiations under the Doha round. Although the details of these changes are not yet known, their general direction towards less market intervention is guaranteed. Ignoring these changes and their consequences reduces the relevance of the present document and further compromises its utility as a platform for debating and agreeing future policy.

5. Finally, the document ignores the critical blockage to reform of the policy: the lack of conviction among either farmers or "pastoralists" (those concerned with the rural environment, countryside, rural cultures and development) that the "vision" is achievable or desirable. Both sides of the countryside debate are far from convinced, though for apparently very different reasons, that the free market in agricultural products coupled with largely unspecified central (EU or UK) intervention can possibly meet the objectives of the vision. Farmers are generally unconvinced that they can survive in a free market. Pastoralists are frequently anxious about the potential ravages of commercial and industrial agriculture (as an apparently inevitable consequence of free trade farming) on rural environments, landscapes, animal welfare and biodiversity, or about the adverse consequences for rural development as businesses and enterprises adapt to elimination of support.

6. Any attempt to relieve these anxieties through regulation further frightens farmers, who see their capacity to compete in a free market being even more restricted. Neither major interest group is prepared to sign up to reform negotiations on this basis without a clear idea of exactly what is involved. They will be even less likely to participate on the basis of a "vision" which largely ignores the recent hard-won and substantial reforms to the policy, and hence, by implication, ignores the interests of those most concerned with earning a living from and having a life in the countryside. As the EFRA Committee announcement recognises, there are important, if not critical questions about "how the reforms proposed in the report could be achieved in practice, and how these changes relate to the ongoing debate surrounding the future financing of the CAP. What barriers might be put in the way of implementing such reforms by other EU member states?" It might have added, what resistance can be expected within the UK? We need an alternative vision to provide answers to these questions.

MEMORANDUM 2: AN ALTERNATIVE VISION

The shape of an unsupported agriculture

1. What would the countryside look like without traditional (Pillar 1) CAP support? How competitive would UK or EU farming be in a free trade world? Would the UK become totally dependent on food imports? What would happen to food prices? Would farming retreat to industrial monocultures in the most favoured lands and leave the rest to become wilderness? Would intensity increase, with consequent pollution problems? Would farmers eliminate discretionary spending on the environment, or would they exploit opportunities to sell their environments, and increase their attention to such environments?

2. These are all very good questions. But none are addressed in the current "vision" document, and none admit of unambiguous or concrete answers. Since European history does not include such a condition, there is no solid evidence on which to base any answer. The New Zealand experience (which is the closest analogy) strongly suggests that agriculture would quickly adjust to become competitive and profitable, at substantially similar output levels as under support, but there are reasons to doubt the relevance to the European condition. The only alternative is to speculate on the basis of some more or less coherent understanding of the way the socio-economic world works.

3. Working from first principles, much of European commercial agriculture would be competitive and profitable in an unsupported world. We have some of the best land, blessed with some of the most favourable agro-climatic conditions, embedded within one of the richest and most populated economies on the planet. Our farm structure is good, well populated with skilled and experienced farmers, blessed with fully integrated and modern supply and marketing chains, and backed up well developed credit and legal institutions. Why would such an agricultural system not be competitive with the best in the world, especially for the home market?

4. Two major reasons are obvious. First, the shock and trauma associated with elimination of support would disrupt these favourable conditions to such an extent that it would take a generation at least to make the most of these fundamental opportunities. Second, the European population would hedge the industry with so many environmental, animal welfare, landscape, planning and employment conditions and regulations that the industry's costs of compliance would make it uncompetitive. Under either of these conditions, food supplies would fall and prices would necessarily rise, since the rest of the world cannot supply Europe with all its food needs, especially not at prices near current levels. As prices rise, so some domestic EU production would become viable and profitable. This would be greater if Europeans are prepared to pay premium prices in the market for locally produced (and quality) food. Some farming would be profitable. How much and where all depends on the evolution of the unsupported market, but the world food supply/demand balance is such that production levels would probably be close to present levels (at about 80-90% on average) and that domestic prices would be enough to make this level of production commercially viable and economically sustainable.

5. So what would the landscape and countryside look like? Lowland prairies and upland ranches and ranges (or wilderness)? Intensive feedlots and animal factories? Huge farms with no woods and hedgerows? Massive machinery? Or wasteland, derelict buildings and over-grown scrub? The answer would probably include examples of all these and more. Some argue that the 1930s depression, with large areas of British agriculture laid waste and derelict, would be the most likely outcome. But current conditions are very different from those of the 1930s. The rest of the economy is rich and prosperous, and accustomed to being very well fed with massive choice and secure supplies. Supermarkets and other food retailers would find that they needed secure supply chains to meet these demands, which require in turn viable suppliers and producers. Furthermore, plenty of people would like a place in the country. Derelict and unoccupied land is not likely to stay that way for long, unless people really don't want to live and play on it, rather than trying to make a living from it. People who want a piece of the countryside will try and make sure that it looks the way they like it. If hedges, hay meadows and stone walls are valued, then people can be expected to find ways of making sure that they are maintained and provided. In other words, elimination of pillar 1 support would not repeal the basic forces of supply and demand. These forces would operate to produce the sorts of food, landscape and rural environment that people are prepared to pay for, at prices which provide the producers and their resources with a viable living. One guess would be that the countryside would not actually end up looking very different from its present condition. At least, we might expect this to happen in the long run. The problem, as Keynes memorably said, is that in the long run we are all dead.

How might we get there—a practical vision?

6. A realistic vision needs to envisage how we might minimise the difficulties of and maximise the opportunities for such a potentially radical transition. The first and most obvious difficulty is that elimination of support would bankrupt a substantial fraction of the present farming businesses, perhaps as many as 50%. These people have paid prices for the land and capital (live and deadstock) which presumes a continuation of support. Remove the support and capital and land values (based on farming) collapse. The present farmers see their pension funds, and their capacity to weather commercial difficulties or develop their businesses, evaporate. They can be expected to make every effort to resist such a prospect—which provides the current CAP support with its most resilient defence. Never mind that the most indebted ones would probably survive quite well—banks are unlikely to foreclose on half or more of their farming clients when the realisable value of their assets has just collapsed, so they would take steps to minimise their losses, often writing off debts and helping existing farmers stay in business (the New Zealand experience). The farmers who would really suffer are those without debts, whose wealth would be severely reduced (the real point of the Defra/Treasury observations on the effects of support). It is politically impossible, as well as being morally questionable, to eliminate Pillar 1 without some form of compensation.

7. Compensation: The implicit compensation offered in the "Vision" document is simply continuation of single farm payments and other support for a finite, limited time (10 or 15 years), presumably gradually reducing each over this period. This is of little comfort or help to farmers. They need a lump sum, once-and-for-all payment—to protect their investment value and provide them with the capacity to adjust, either by changing their business systems or by leaving and letting someone else do it. Furthermore, they need to know what the new unsupported market will look like as soon as possible. Gradual change is much more likely to generate the boiling frog syndrome—drop a frog into a pot of boiling water and it will jump out; put it in cold water and bring it slowly to the boil and the frog will die. Sudden, but reliable change will induce rapid and viable responses; gradual change is much more likely to produce mal-adaptations and responses. This is even more likely when there is strong political resistance to the changes anyway, and every effort being made to slow them down or reverse them. Even assuming that we could persuade the EU to agree to elimination in the first place.

8. European Level Agreement? Four central facts strongly suggest a solution to the present European impasse on CAP and its funding.[9]

i. Fact 1: The CAP is the only European policy that is both mandatory and 100% funded from the EU budget. All other policies are subject to member state contributions. When the CAP was invented, this made sense, but not now.

ii. Fact 2: Decoupled single farm payments, with environmental compliance, are a radical change from the traditional CAP, with much lower social costs and market distortion. Neither the values of environmental care, nor the costs of providing for it, are uniform across the Union—there is no logic other than historical precedent requiring payments to be the same, or that they be commonly financed. The historical legacy of mandatory spending, exclusively financed from the EU budget, is no longer either legitimate or sensible.

iii. Fact 3: The Central European countries, with large farming populations and low incomes, have joined the CAP on very unequal terms—their farmers are only paid 25% of the payment rates to their richer and more fortunate western cousins, though this proportion is set to rise in the future. There is neither logic nor justice in this glaring inequity.

iv. Fact 4: The British rebate is only justified (if at all) on the grounds that Britain contributes a lot to EU funds (being a large economy), but gets relatively little back through the CAP (being a densely populated and small agricultural country). Other, less glaring, budgetary inequities will persist so long as the EU maintains its present CAP financing system, which absorbs 40% of an already pitifully small European budget for the support of farmers.

9. An answer can be distilled from these facts: let the EU budget pay only a fraction (say 25%) of the costs of the current CAP, instead of the present 100%. Make member states separately responsible for the balance for their own farmers, as they so wish, up to the budgetary ceiling already agreed. Member states would then be free to decide whether and how to make these payments, subject to European and international competition and trade laws and agreements, and subject to the European freedom of movement of (farm) labour and capital. If we wanted to provide limited lump sum compensation, we could. How can France sustain objection? If she wants to continue the CAP, she can (but at her own rather than our expense). Some policy competition between member states would be a good thing—to test different options. At the very least, such a solution might provide some relief from the otherwise destructive British political battle about the EU, giving the UK (and other member states) more discretion and control over their own local policies, in the true spirit of subsidiarity.

10. But what about the environment?[10] Pastoralists, however, complain (with some justification) that the free market will not provide the right levels of environmental conservation. They often argue that biodiversity, landscape quality, and environmental amenity need government intervention, regulation and support. Continued single farm payments, or something like them, with cross-compliance conditions about conserving the environment and natural resource, seem like a practical and effective way of providing the proper level of care (conservation, amenity, recreation and environmental) goods and services.

11. Markets for conservation, amenity, recreation and environment (care) goods and services fail because the people responsible for providing them (farmers) cannot get their necessary reward from the people who are willing to pay for them (pastoralists). The transaction and negotiation costs are too high. In addition, many of these countryside care goods are "public" rather than private—once we have a pretty landscape or diverse wildlife for one person, it is available for all, regardless of whether or not they pay for it. We end up with less care than we are actually prepared to pay for, because it is in peoples' self-interest to free-ride on other peoples' contributions. An answer is to force people to pay (through the tax system) and for government to be responsible for the care of the countryside.

12. But this answer—implicit but not explicit in the "Vision"—misses the essential point of the market failure—the difficulties of getting the beneficiaries of the countryside care to put their money where their mouths are, and of getting these payments, and their associated care requirements and demands, to the people responsible for managing the countryside (the farmers and land users). The care markets don't work because the effort required is not worthwhile. But, as we get richer, so the benefits of getting care markets to work increase, and they do emerge. Voluntary contributions to the RSPB, the National Trust and wildlife trusts pay land users to do the right things with their land. But there are free riders. There would be more and greater voluntary contributions if we could each be sure that everyone who valued the countryside was making their full contribution to its care and maintenance. We could encourage this by a) allowing such voluntary contributions to be deductible (within limits) from tax bills (rather than simply allowable against tax); b) making ex gratia payments from the Treasury to the care trusts to make good the free-rider shortfall on a pro rata £ for £ basis at some centrally agreed rate. The trusts would then be responsible for reflecting the demands and requirements of their members directly to the land users. Variety and diversity of demands and supplies would be catered for through the diversity of trusts. If a trust is doing a good job, it will be supported. If not, its donation flow will dry up. The consumers/users/enjoyers of the countryside will be directly connected to the people needed to provide and sustain it.

13. The alternative of government intervention, regulation and payments to farmers separates the people willing to pay from the people who need payment to provide the care by a maze of procedures, rules, forms and disinterested bystanders and bureaucrats, which is neither effective nor efficient, and does nothing to integrate society. It fails for the same reason that all central planning fails—it is not capable of reflecting the real diversity of the market and it is too rigid to adapt and adjust to changing and differing circumstances. It fails because it fails to address the fundamental problems associated with externalities and public goods. In the end, it threatens to undermine peoples' faith in government itself.

CONCLUSIONS

14. The "vision" offers limited hope of genuinely advancing debate or agreement about the future of the CAP and its funding. This is a pity, because there is a sensible alternative. The authors of the "vision" might complain that the devil is in the detail. But, for the problems of the CAP, the devil is in the conception.

15. We need to reform and develop appropriate policies to improve the match between those trying to make a living from and those trying to have a life in the countryside. We need to remove the existing policies which are not helping and which are costing more than they deliver. The reforms, however, need to work with market forces, and not seek to replace or repeal them. The "vision" presumes that the market will work for food and farming, but ignores the transition, which in practice is what much of the policy division is about. It assumes that government intervention will continue to be necessary for the environment and rural development, but fails to explore the sorts of intervention that might work. 60 years ago, policy makers assumed that government intervention was necessary to secure food supplies and domestic farming. We are now picking up the pieces of that assumption. We should be careful that we are not sowing the seeds for yet another policy rescue problem in the future. At least the alternative outlined here offers the opportunity for UK governments to avoid the counter-productive squabbles about the role and place of the EU in the affairs of the UK, by offering the chance of tailoring our own policy to our own needs and circumstances.



© Parliamentary copyright 2007	Prepared 24 May 2007