Select Committee on European Communities Thirteenth Report


  37.    In our view, the subsidy of tobacco production in the European Community is a scandalous waste of taxpayers' money. The entire system of premium payments is designed to sustain production at costs which the market is not prepared to meet. Far from solving the social and economic problems of the areas which it purports to assist, it keeps small scale tobacco growers in poverty and isolation and makes no attempt to help them discover more satisfactory employment opportunities. The tobacco sector is a hole in the ground into which money is being poured with no thought for the long-term prospects of those involved in it. The tobacco regime needs fundamental reassessment.

  38.    We recognise fully the case for support of rural communities in less developed, disadvantaged regions. We acknowledge the part played by tobacco subsidies in propping up incomes from small farms which would not otherwise be economically viable. But such a prop is not a long-term solution. If those areas are to thrive in the future, then their economies must be set on a more sustainable and defensible foundation. Transition may be painful, but solutions which would be unthinkable if implemented overnight become feasible if introduced sufficiently gradually.

  39.    Our view has not been greatly coloured by considerations of the harm done by tobacco to human health. Of course there is an apparent anomaly between Community support for tobacco production and Community attempts to discourage smoking, and the Community's message about smoking would be clearer if subsidies to tobacco growers were discontinued. But cutting Community production would not affect levels of consumption either inside or outside the Community, since demand would simply be met by supplies from elsewhere. Indeed to expect otherwise is tantamount to denying the action of the market. Nevertheless, considerable political will will be required if radical reassessment of the tobacco regime is to be achieved and sensitivity to the public health arguments - no matter how ill-founded - could assist in creating it.

  40.    We welcome the Commission's thorough and honest assessment of the state of tobacco production in the Community. The proposal to introduce an element of responsiveness to the market is attractive, in a sector which has hitherto been insulated from market pressures. Proposals to encourage producers to leave the sector voluntarily are also attractive, and innovative. The bond proposal is particularly welcome, since it is an approach consistent with the diverse circumstances of those in the industry.

  41.    But the Commission's proposals stop a long way short of what is necessary, and will not provide a sustainable system for the future. For example, they take insufficient account of factors external to the tobacco regime. They make no provision for response to likely future pressures from the WTO for decoupling of subsidies. They ignore the implications of likely enlargement of the Community, with no suggestion of how tobacco production in potential new Member States would be assimilated into the regime. Even if the regime is modified now in the way the Commission proposes, it is clear that it will need further, and more substantial, revision in the early years of the next century.

  42.    The only external factor which the Commission seeks to accommodate is that of changing markets for tobacco, and the increase in high quality/low cost production in developing countries. But encouragement to Community producers to switch to better quality varieties does not address the question of competitiveness. There is no reason to expect that Community producers could grow those better varieties more competitively than producers elsewhere, particularly on their small and fragmented holdings and while, with high levels of subsidy, there is no incentive to invest in more efficient methods of production, where possible.

  43.    Nor does the Commission consider fairly the possibility of gradual disengagement from tobacco subsidy. Its description of the implications of such a development relates to an abrupt cessation of support, with no account taken of the possibility of an extended period of adjustment. Such a presentation makes disengagement appear politically unrealistic. That is not a fair conclusion.

  44.    In discussing the possibility of converting holdings from production of tobacco to other crops, the Commission describes tobacco as a "crop that generates high gross profit margins per hectare" (page 30). Since some 80 per cent of the revenue to producers from tobacco is accounted for by subsidy, this is an astonishingly misleading statement, and puts an unfair slant on considerations of alternative economic activities. The reality is that tobacco production in the Community is only sustainable on the back of massive subsidies, and it is necessary to ask whether they represent the best way of attaining the Community's objectives. We think not.

  45.    Another reason which the Commission puts forward for rejecting disengagement from tobacco subsidy is that the Community market organisation in tobacco might be replaced by national organisations. We, on the contrary, can see merit in such a development. A solution which allows Member States to take their own action, within a framework of structural measures set down by the Community, has many attractions and is, moreover, one which the Commission itself has put forward in other areas.

  46.    As noted in paragraph 21 above, the Commission acknowledges that solutions to the socio-economic problems of tobacco producing areas will need to be found outside agriculture. But this is not followed by any consideration of what those solutions might be, or even how they might be identified. This is a serious weakness in the Commission's report, and one which we would hope to see rectified. It seems likely that this arises from the rigidity of structure in the Commission which, as we have noted on previous occasions[8], makes it difficult for different policy areas to be integrated. This is a serious impediment to rational policy-making.

  47.    As we have said, the Commission's proposals for specific changes contain some welcome elements. But even here there are weaknesses. The stated purpose of the modulated premia is to force resources which are at present used uneconomically to shift to more productive uses, in this case the growing of better tobacco varieties. But the Commission intends that the fixed portion of the premia should continue to provide a satisfactory minimum income. This will inevitably impede the process of shifting resources, since the incentive to switch varieties will be modest.

  48.    The Commission's proposal to pay modulated premia through producers' groups is not clearly developed. Although its stated aim of simplifying administration is to be welcomed, we perceive likely difficulties. The Commission acknowledges that the "amount of aid received by each producer will depend on the mean price calculated for his own group" (page 36). It is possible therefore that the incentive to join the right group will be at least as great as the incentive to switch to a better variety of product. We are also concerned at the Commission's complacency that scope for fraud would be limited to "a zero sum game in which the producers would be cheating each other" (page 35). The Commission cannot absolve itself so lightly of its responsibility to prevent fraud in the distribution of Community resources.

  49.    The most forward-looking elements of the Commission's proposals are those designed to encourage tobacco growers to leave the sector. But the idea of strategic local development plans is not much developed, nor is the proposed use of Structural Funds for Objectives 1 and 5(b). Most important, there is no indication of how these ideas can be reconciled with a policy which continues to provide incentives, in the form of premia, to remain in tobacco production. This contradiction explains why, as the Commission notes, previously enacted early retirement measures for producers[9] have had a low take-up rate.

  50.    It is also not clear from the Commission's report how much money will be available to fund the proposals on leaving the sector. Since quota and premia are to remain unchanged, it seems unlikely that sufficient funds will be available to make much impact.

  51.    Our preferred solution would be to combine the Commission's proposals with a gradual reduction in both premia and quota. Phasing out gradually over a period of perhaps 10 years would prevent the worst effects of cutting off aid, and would permit diversion of increasing levels of funding to those elements of the policy which can be expected to achieve more long-term benefits than do subsidies. The best mechanism in our view would be the saleable bonds contemplated by the Commission. Such a programme would assist those who could identify economic opportunities outside the tobacco sector, while providing a continuing floor over a substantial period for those for whom alternative income-producing activities were least available.

  52.    A satisfactory new regime for tobacco must be keyed into the social security system and the provision of pensions. It would also need to be underpinned by carefully worked-out regional development programmes, including the provision of infrastructure, training and access to information technologies, and the encouragement of value-added activities in agriculture.

  53.    We recognise that encouraging tobacco growers to leave that sector will be likely to result in the transfer of some resources into other agricultural products. But we do not share the Commission's anxiety about the problems that this will create in those other commodity areas. Those problems should be addressed by adjustment of those other CAP regimes, rather than being used as an excuse to resist reform of the tobacco regime. We have set out in a previous Report[10] our recommendations for reform of the fruit and vegetable regime, which is a sector into which some tobacco growers might be likely to transfer.

  54.    We recognise that implementing changes in the tobacco regime will not be easy, and that transition may well be painful. But it must be better to seek to modernise and develop the economies of the tobacco-growing areas, than to ensure the continuing dependence of producers on subsidies. Moreover, since external factors make it inevitable that sooner or later subsidies will have to stop, the process of change must begin now if the Commission's predictions of doom for tobacco-growing regions (page 29) are not to be fulfilled.

8   See, for example, 3rd Report, Session 1996-97, Third Country Fisheries Agreements, HL Paper 28. Back

9   Regulation 2079/92. Back

10   1st Report, Session 1995-96, Reform of the EC Fresh Fruit and Vegetable Regime, HL Paper 18. Back

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