Written evidence submitted by Professor
Alan Swinbank
SOME MISCONCEPTIONS ABOUT REQUIREMENTS FOR
THE POST-2013 CAP
SUMMARY
This submission addresses a number of issues that
arise from the European Commission's latest Communication on the
form a reformed CAP should take after 2013. In particular it challenges
the presumption that the post-2013 CAP should retain a universal
"income support" such as the existing Single Payment
Scheme (SPS). The SPS is flawed in that it does not target support
on those in need, but instead raises asset (particular land) values;
it encourages marginal farmers to remain in business, thus perpetuating
the farm income "problem"; it is not designed to encourage,
and reward, the provision of public goods; and it may be incompatible
with the EU's longer-term commitments in the WTO. In short, it
represents poor value for taxpayers' money and should be phased
out.
Global Food Security, particularly in the context
of a possible world population of nine billion by 2050, is one
of the critical policy concerns that deserves global attention;
but it is best addressed by increasing the earnings (or subsistence
food production) of the world's poor and destitute, whilst ensuring
that world food supplies grow to match the increase in overall
demand. This is a formidable task, but substantial investment
in agricultural R&D (particularly in developing countries),
a greater willingness to embrace challenging new technologies,
and a more open and liberal trade regime for agricultural products,
are likely to be important ingredients in a successful policy
mix. Most EU citizens are not food insecure, and although
EU agricultural has an important part to play in producing global
food supplies it is a fallacy to believe that the CAP has much
influence on European food security.
INTRODUCTION
1. There have been fundamental changes to the
common agricultural policy (CAP) over the last 20 years. A succession
of courageous Commissioners for Agriculture—Ray MacSharry,
Franz Fischler, Mariann Fischer Boel—recognised the need
for reform and, often facing stiff opposition from the farm lobby,
ensured that the CAP became a more rational policy framework in
which entrepreneurial and adequately-resourced farm businesses
could grow. The CAP now has fewer adverse consequences for the
environment, Europe's taxpayers and consumers, and the international
trading community. That process of policy reform must continue.
The environmental challenges the world faces—loss of biodiversity,
global warming, a human population of nine billion by 2050, for
example—are daunting; many of the EU's trading partners
believe that CAP subsidies still distort world trade; taxpayer
costs remain high (although significantly reduced in real terms
over the last 20 years); and policy mechanisms hinder the efficient
restructuring of the industry. Unfortunately, on the evidence
of the Commission's latest thinking on CAP reform—The
CAP towards 2020: Meeting the food, natural resources and territorial
challenges of the future—the present Commissioner for
Agriculture and Rural Development Dacian Cioloº
(along with ministries for agriculture in a number of member
states, and many members of the Committee on Agriculture and Rural
Development in the European Parliament) has yet to recognise the
need to follow the lead of his reforming predecessors.
2. This submission focuses on just three aspects
of the many issues raised by the Commission's Communication and
recent debates about the future of the CAP: (i) justifications
for the Single Payment Scheme (SPS), (ii) food security, and (iii)
the compatibility of the EU's SPS expenditures with its World
Trade Organization (WTO) commitments.
WHAT IS
THE SINGLE
PAYMENT SCHEME
(SPS) FOR?
3. Direct payments form the largest share of
EU public expenditure on the CAP (see Table 1). At a time when
governments across Europe are scrutinising their national budgets
in the wake of the banking and Sovereign Debt crises, it is difficult
to understand how the CAP might be excluded from this review.
Thus a series of questions arise, for example: what is the Single
Payment Scheme for, and is taxpayer money well spent?
Table 1
CAP EXPENDITURE IN THE COMMISSION'S ORIGINAL
DRAFT BUDGET FOR 2011
| Payment Appropriations
€ million
| % of total budget |
| SPS and SAPS (ex Chapter 05.03) | 35,726.0
| 27.5 |
| Other direct aids (remainder of Chapter 05.03)
| 4,185.1 | 3.2 |
| "Interventions in Agricultural Markets" (05.02)
| 3,491.8 | 2.7 |
| Rural Development (05.04) | 13,401.1
| 10.3 |
| Total Draft Budget | 130,136.0
| 100.0 |
SAPS: The Single Area Payment Scheme applied in most of the new
Member States
Source: European Commission (2010a)
4. In 1992, when arable area payments (and enhanced headage
payments for beef animals) were introduced into the CAP, their
purpose was to compensate farm businesses for the implied
revenue loss stemming from reductions in the level of market price
support (Cunha and Swinbank, 2011: 77). It was these area and
headage payments, in the main, that in the 2003 reform formed
the core of the SPS; but now relabelled "an income support
for farmers" (Article 1, Regulation 1782/2003). This concept
of "income support" reappears in the Commission's Communication
(p 8), where it is stated: "The future of direct payments…could
be based on the following principles", including "Basic
income support through the granting of a basic decoupled direct
payment, providing a uniform level of obligatory support for all
farmers in a Member State (or in a region)."
5. It is a curious anomaly, stemming back to the original
Treaty of Rome in 1957, that agriculture is the only economic
sector that qualifies for EU-funded "income support";
but also an indictment of the CAP's failure to redress any real
or perceived income gap. Whilst the income situation in the rural
areas of the central and eastern European states that joined the
EU in 2004 and 2007 warrants concern, it is difficult to accept
without qualification the Commission's claim (p. 5) that agricultural
income is "significantly lower…than in the rest of the
economy". There are big farms, and small farms, in all Member
States, and small farms are often run on a part-time basis, combined
for example with other business activities. Comparing like with
like is difficult, and generalisations about "farm income"
can be misleading. One dimension of the diversity of circumstances
in an individual Member State is the distribution of direct payments
to farmers in the UK in 2008 (see Table 2).
6. Whilst multiple claims per farm business cannot be excluded,
the data does suggest that over 30% of claimants received €2,000
or less, and it is unlikely that most of these were full-time
farm businesses relying upon the SPS for income support. On the
other hand, nearly 10% of claimants received €50,000 or more,
scooping more than 50% of the funds disbursed in the UK in 2008.
Despite being called "income support", the income (or
wealth) of the recipient is not a criterion in determining
payment: there is no targeting of support on low-income households.
With the regionalised system of payments, support is instead linked
to the area farmed (which is likely to be positively correlated
with income). Mindful of such concerns, the Commission (p 8) has
suggested that if basic income support through direct payments
is to be maintained, then "an upper ceiling for direct payments
received by large individual farms ('capping') should be considered
to improve the distribution of payments between farmers".
Capping has been proposed before—for example, by Franz Fischler
in 2002, at €300,000 (Cunha and Swinbank, 2011: 132)—and
rejected, in part because of opposition from the UK. But a €300,000
cap on "income support" would probably be seen as quite
generous by most taxpayers.
Table 2
DIRECT AIDS TO PRODUCERS IN THE UK, FINANCIAL YEAR 2008
(ALL DIRECT PAYMENTS UNDER REGULATION 1782/2003)
| Payment band (€) | % of Recipients
| % of Payments |
| = 0 and < 500 | 12.93 |
0.17 |
| = 500 and < 1,250 | 11.54
| 0.51 |
| = 1,250 and < 2,000 | 6.84
| 0.58 |
| = 2,000 and < 5,000 | 14.33
| 2.53 |
| = 5,000 and < 10,000 | 12.56
| 4.87 |
| = 10,000 and < 20,000 | 14.12
| 10.94 |
| = 20,000 and < 50,000 | 17.45
| 29.66 |
| = 50,000 and < 100,000 | 6.88
| 25.15 |
| = 100,000 and < 200,000 | 2.26
| 16.10 |
| = 200,000 and < 300,000 | 0.37
| 4.76 |
| = 300,000 and < 500,000 | 0.15
| 2.94 |
| = 500,000 | 0.05 | 2.46
|
Excludes net repayments, and so totals do not round to 100%
Source European Commission, Indicative Figures on the Distribution
of Aid, by Size-Class of Aid, Received in the Context of Direct
Aid Paid to the Producers According to Council Regulation (EC)
No 1782/2003 (Financial Year 2008), at:
http://ec.europa.eu/agriculture/funding/directaid/distribution_en.htm
7. If there is still a farm income "problem" among
the generality of European farmers, despite the CAP's 40-year
history, why is this? Throughout this period (and probably well
into the future) productivity improvements have meant that an
ever decreasing farm population has been capable of delivering
the food and other agricultural raw materials that Europe's population
requires. As jobs are shed, and farms enlarged, farm families
often experience severe adjustment problems, and marginal farms
suffer low incomes. The "old" CAP of market price support,
and the "new" CAP based on direct payments (such as
the SPS), were both as incapable of arresting these major economic
forces as King Canute was unable to stop the advancing tide. Support
has meant that more farm families have been "encouraged"
to remain in agriculture, hoping against hope their situation
might improve, whilst the bulk of the benefits of farm support
have gone to existing landowners. Tenant farmers are unlikely
to be long-term beneficiaries; and new entrants certainly do not
benefit if they have to pay inflated land prices or rents (as
they will) to enter the subsidy treadmill.
To Offset the Cost of Regulation?
8. The SPS is sometimes justified as a reimbursement of the
cost of regulation. Thus the Commission's Communication (p 7)
suggests that "European farmers face competition from the
world market whilst also having to respect high standards relating
to environmental, food safety, quality and animal welfare objectives
requested by European citizens". This comment is overly simplistic
and ignores two important facts. First, in high-income economies,
most industries are likely to have to respect stiff environmental
standards: it is simply the cost of doing business there. But
second, unlike most economic sectors which "face competition
from the world market", many agricultural products are protected
by high tariff barriers which will remain significant even if
the sweeping tariff reductions proposed in the Doha Round are
implemented. To have both high tariff protection and direct
payments to compensate for the cost of regulation seems overly
generous.
9. Animal welfare standards can be problematic if citizens
as consumers do not show the same concerns they express as voters,
and international acceptance of appropriate labelling schemes
would be helpful (Swinbank, 2006). But the suggestion that European
farmers face import competition because of the lower food safety
standards of imported products is a serious charge. Is it suggested
that the food industries wilfully and illegally import unsafe
food; and if it is not illegal to import unsafe food, why so?
Multifunctionality?
10. Multifunctionality—the notion that farming provides
a range of desirable environmental and cultural public goods that
are not rewarded by the market—is not a term used in the
Commission's Communication, or other recent documents (probably
because of sensitivities in the WTO). Multifunctional agriculture
was however praised in the recent Franco-German declaration arguing
for a "strong common Agricultural Policy beyond 2013",
and the concept still lurks in Commission thinking. Its Communication
(p. 4), for example, states that "Decoupled payments provide
today basic income support and support for basic public goods
desired by European society". Apart from Pillar 2 (Rural
Development) measures, there are however no mechanisms in place
to ensure that farm businesses deliver public goods (other than
the cross compliance and Good Agricultural and Environmental Condition
(GAEC) provision of the SPS regulation), or that the SPS payment
to any particular farm reflects the cost of provision (a WTO requirement)
or the value society places on the public good.
11. The Commission has however suggested that more might be
asked of recipients, to enhance "the environmental performance
of the CAP" for example "through a mandatory 'greening'
component of direct payments by supporting environmental measures
applicable across the whole of the EU territory". But, as
with existing provisions, there is no attempt to link payments
to cost of provision, or benefit to society. It would be more
efficient to pursue these objectives through targeted policy mechanisms
in Pillar 2.
FOOD SECURITY
12. The Commission reports (p 2) that one of the concerns
expressed in its consultations was the need to "preserve
the food production potential on a sustainable basis throughout
the EU, so as to guarantee long-term food security for European
citizens and to contribute to growing world food demand….Europe's
capacity to deliver food security is an important long term choice
for Europe which cannot be taken for granted". Although not
specifically endorsed, the reader is left with the impression
that the Commission believes that a strong CAP, "structured
around its two pillars", is important for Europe's food security.
But what is "food security", and can it be promoted
by the CAP?
13. Aside from natural disasters, and the breakdown of distribution
systems in times of war, civil strife, or financial collapse (for
all of which governments need to plan, and make emergency provisions),
a household's food security rests upon its ability to purchase
enough food. Thus most (but not necessarily all) of the EU's citizens
are "food secure", because of their purchasing power,
and regardless of the volume of food raw materials supplied by
Europe's farmers. If shortages occur, sadly it will be the poor
and destitute in much poorer parts of the world who will go hungry.
It would require a major increase in retail food prices (and hence
much higher increases in farm-gate prices) to convince us to change
our diet (eat less meat for example), waste less food, or feed
fewer cats and dogs. The only effective way of improving the food
security of the poor and destitute is to increase their earnings
(or subsistence food production), whilst ensuring that world food
supplies grow to match the increase in overall demand. Quite whether
and how this can be done through to 2050 is uncertain, but substantial
investment in agricultural R&D (particularly in developing
countries), a greater willingness to embrace challenging new technologies,
and a more open and liberal trade regime for agricultural products,
are likely to be important ingredients in the policy mix. Despite
the urgent need to combat global warming, promotion of first generation
biofuels is probably not a good idea. Europe's farmers do of course
make an important contribution to world food supplies, but it
is a delusion to believe that there is a magic level of "self
sufficiency" that guarantees our food supplies. It is food
in the supermarket that matters, rather than raw materials on
farms, and the CAP as we know it plays little role in that.
WTO COMMITMENTS
14. An important factor underpinning the CAP reforms of the
past two decades has been the pressures and constraints imposed
by first the Uruguay Round of GATT (General Agreement on Tariffs
and Trade) negotiations, second the new world trade regime with
its revised Dispute Settlement procedures under the WTO, and third
negotiations in the as yet unfinished Doha Round (Daugbjerg and
Swinbank, 2009). The decoupling of support, first with the area
and headage payments in 1992, and then with the creation of the
SPS in 2003, has been central to this.
15. The EU has claimed that, as a result of the 2003 and subsequent
reforms, the bulk of CAP support has been shifted from the so-called
amber and blue boxes into the green box. Amber box support is
trade distorting, and the amount of amber box support the EU can
give its farm sector is limited by the Uruguay Round Agreement
on Agriculture. Although this constraint is not binding for the
moment, it will bind tightly once the new disciplines envisaged
in a Doha Round agreement are applied (Josling and Swinbank, 2011).
Green box measures are deemed to have little impact on production
and trade, and consequently there are no expenditure constraints
on green box support, although tightly defined criteria have to
be met (outlined below). Little change is expected as a result
of Doha. Blue box support is an in-between category, of partially
decoupled payments, which housed the area and headage payments
of the MacSharry reforms, and is currently subject to no expenditure
limits. A Doha agreement would impose tight, and binding, constraints
on blue box support. Thus, although the CAP might have some problems
with the envisaged cuts in import tariffs, the Fischler and subsequent
reforms appear to have made the CAP more-or-less compatible with
the likely constraints on domestic support in a Doha agreement.
This has allowed the EU to adopt a far more proactive stance in
the Doha Round than was possible in the Uruguay Round.
16. The EU's claim that expenditure on the SPS sits securely
in the green box could, however, be challenged. If the WTO's Dispute
Settlement Body were to rule that the SPS is not a green box policy,
then the payments would revert to the amber or blue boxes. For
the moment that would not be a problem, but with new amber and
blue box constraints in place after a successful conclusion of
the Doha Round such a conclusion would result in the EU being
in breech of its domestic support commitments.
17. There are two ways in which the EU's classification might
be challenged in a WTO dispute. First, it might be argued that
the scheme does not meet the detailed criteria set out in Annex
2 to the Agreement on Agriculture: this was a problem the United
States faced when Brazil challenged its subsidy schemes for Upland
Cotton (Daugbjerg and Swinbank, 2009: 117-9). Second it might
be argued that the SPS flouts the overarching criterion that green
box measures should "meet the fundamental requirement that
they have no, or at most minimal, trade-distorting effects or
effects on production".
18. The detailed, policy-specific, requirements for decoupled
income support in Annex 2 include the requirements: (i) that "Eligibility
for such payments shall be determined by clearly-defined criteria
such as income, status as a producer or landowner, factor use
or production level in a defined and fixed base period";
(ii) "The amount of such payments in any given year shall
not be related to, or based on, the factors of production employed
in any year after the base period"; and (iii) "No production
shall be required in order to receive such payments".
19. However the SPS is an annual scheme under which SPS entitlements
are only activated by matching them with eligible agricultural
land at the farmer's disposal. Thus it might be said that payments
are based on "factors of production employed"
in particular years after the base period, violating the green
box criteria.
20. Furthermore the Commission is caught between the European
Court of Auditors and the WTO. SPS recipients must be farmers,
and as the Court of Auditors (2009: paragraph 5.47) has pointed
out: "In order to be eligible for aid, farmers must carry
out an agricultural activity. An agricultural activity is defined
to mean the production, rearing or growing of agricultural products
including harvesting, milking, breeding animals and keeping animals
for farming purposes, or maintaining the land in good agricultural
and environmental condition (GAEC)." However (paragraph 5.49)
it "found shortcomings concerning the Member States"
definition of what is required to maintain land in GAEC such that
certain beneficiaries are paid aid…without doing anything
with the land concerned." The Commission, in response, pointed
out that "national criteria should not create an obligation
to produce which would not be compatible with the WTO requirements"
(in Court of Auditors, 2009, paragraph 5.49); but in its recent
Communication (p 9) it has suggested that "changes in the
design of direct payments should go hand in hand with a better
definition and targeting of support to active farmers only,
responding to the criticism of the European Court of Auditors."
Quite how this can be done without further compromising the SPS's
green box claims is unclear.
21. The Commission is well aware that it cannot say that direct
payments (eg the SPS) result in a larger volume of agricultural
output in Europe than would otherwise be the case, for it knows
that any such statement would flatly contradict the EU's claim
that, as genuine green box payments, they meet "the fundamental
requirement that they have no, or at most minimal, trade-distorting
effects or effects on production". Its discussion of food
security in its Communication, however, comes close to implying
that direct payments do result in more EU food production.
Furthermore, an earlier—leaked—draft of its Communication[16]
had said of reform option 3 (which was there labelled "abolished
market and income support"; p 11) that: "Those requesting
a more radical reform of the CAP advocate moving away from
income support and most market measures, and focussing entirely
on environmental and climate change objectives. This alternative
could have the advantage that it would allow for a clear focus
of the policy. However, this would lead to a significant reduction
in production levels, farm income, and the number of farmers for
the most vulnerable sectors and areas, as well as cause land abandonment
in some areas…." As both versions of the Communication
had earlier assured the reader that "to a large extent the
market measures, which were the main instruments of the CAP in
the past, today provide merely a safety net only used in cases
of significant price declines" (p 4 of the official text,
with similar wording on p 3 of the leaked text), it is difficult
to avoid the conclusion that the Commission does believe
that direct payments do have some impact on production.
CONCLUSIONS
22. Food Security, particularly the global food security of
potentially 9 billion humans by 2050, is an important policy concern;
but fiddling with the CAP is not an appropriate policy
response to this formidable challenge and will do little to change
the availability of foods in European supermarkets.
23. A major part of existing CAP expenditure is devoted to
direct payments, particularly the Single Payment Scheme (SPS).
There is little evidence to suggest that this taxpayers' money
is well spent. It is not targeted "income support";
the bulk of the payments are received by larger farm businesses;
and it results in inflated asset prices, and complex rental arrangements,
discouraging structural adjustment. Whilst multifunctionality
might well be a desired attribute of European agriculture, the
SPS is an inappropriate policy instrument to cost-effectively
deliver public goods. Moreover, the SPS might not be a
green box measure within the WTO, and could be challenged in the
future. Its antecedents were compensation payments for
the 1992 reforms: 20 years later it is time to phase-out the SPS
and focus on other, more pressing, priorities.
December 2010
REFERENCES
Court of Auditors (2009), "Annual Report on the Implementation
of the Budget", Official Journal of the European Union,
10 November.
Cunha, Arlindo with Alan Swinbank (2011, forthcoming),
An Inside View of the CAP Reform Process: Explaining the MacSharry,
Agenda 2000, and Fischler Reforms (Oxford University Press:
Oxford).
Daugbjerg, Carsten and Alan Swinbank (2009), Ideas, Institutions
and Trade: The WTO and the Curious Role of EU Farm Policy in Trade
Liberalization (Oxford University Press: Oxford).
European Commission (2010a), Statement of estimates of
the European Commission for the financial year 2011 (Preparation
of the 2011 Draft Budget), SEC (2010) 473, May (European Commission:
Brussels).
European Commission (2010b), The CAP towards 2020: Meeting
the food, natural resources and territorial challenges of the
future, COM(2010)672 (European Commission: Brussels).
French and German Governments (2010), Franco German position
for a strong Common Agricultural Policy beyond 2013—New
challenges and expectations for food, biomass and environment,
14 September: http://agriculture.gouv.fr/IMG/pdf/100914_position_commune_FR-DE_anglais_.pdf
(last accessed 30 November 2010).
Josling, Tim and Alan Swinbank (2011, forthcoming),
"European Union", in David Orden, David Blandford and
Tim Josling (editors), WTO Disciplines on Agricultural Support:
Seeking a Fair Basis for Trade (Cambridge University Press:
Cambridge).
Swinbank, Alan (2006), "Like Products, Animal Welfare
and the WTO", Journal of World Trade, 40(4): 687-711.
16
Available, for example,
at: http://dl.dropbox.com/u/11261695/DraftDocumentCAP.pdf (last
accessed 30 November 2010). Back
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