The economist’s dilemma
Economists evaluating the Commission’s legislative proposals for the CAP post 2013 face a dilemma.
Economists work within a paradigm in which agriculture is an industry no different from any other, where markets by and large do a good job in allocating resources, and where the only justification for government intervention requires both the existence of market failures and demonstrating that governments have access to relevant information or resources which would allow them to address those market failures effectively.
This is an extremely powerful toolkit because it allows economists to distinguish between welfare-enhancing policy interventions and those which are largely about shifting resources and rents from one group to another (the distinction between PERTs and PESTs using Gordon Rausser’s terminology in his well-known 1982 AJAE paper).
Applied to the CAP, this paradigm produces unambiguous policy recommendations: eliminate support to farm incomes, confine public budgets to the purchase of environmental public goods through targeted programmes, and maintain a minimum crisis management capacity to deal with catastrophic risk. Of course, an agricultural policy of this kind assumes that appropriate accompanying competition, environment, education, research, food safety and social safety net policies are also in place. Whether these policies should be pursued at EU or national or local levels will depend on the nature of the market failure and whether the impacts are mainly local or EU-wide in scope, though sometimes EU action is welcomed because of corruption or the ineffectiveness of local administrations to take account of local interests.
It is important for economists to continue to remind policy-makers of these basic principles. But this comes with the risk that economists are then side-lined in the debate on the nitty-gritty of specific proposals for CAP reform. Attila Jambor in his recent post on the definition of active farmers illustrates the point well. He concludes that the need for this definition would not arise if basic income payments were eliminated. We know this will not happen in this CAP reform, so does this mean that economists should say nothing on ways to define an active farmer, given that policy-makers wish to restrict the receipt of direct payments to ‘undeserving’ recipients?
Thus, the dilemma for economists debating the CAP reform proposals is whether only to challenge the policy-makers’ preferences in the name of the social interest or also to work within the constraint of policy-makers’ preferences in seeking the most efficient instruments to meet those preferences, well aware this is may lead to second-best policy choices from a social interest perspective. At a minimum, economists should be clear about this tension and seek to make it explicit.
Notre Europe report
These thoughts were prompted by reading the latest contribution to the CAP post 2013 debate, Do the proposals for the CAP after 2013 herald a ‘major’ reform? published by Notre Europe. The report is written by Louis-Pascal Mahé who is Professor Emeritus at Agrocampus (Ecole d’Agronomie) Rennes. Louis Mahé along with Jean-Christophe Bureau was the author of a previous influential study on the future of the CAP also published by Notre Europe in 2008. In this study, he reviews the Commission’s legislative proposals and makes proposals to amend them.
Louis-Pascal Mahé is well aware of the first-best reforms of the CAP but also of the political economy behind the Commission proposals. He favours the gradual elimination of the basic payment given that over time it is absorbed into land prices. For greening, he prefers a system of voluntary agri-environmental contracts in return for aid linked to foregone income.
However, much of the report necessarily addresses the specifics of the Commission proposals. But it is not always clear if the measures favoured in the report are preferred as first-best solutions or proposed as the best likely to be implemented given the political constraints on which measures are likely to be feasible.
Ecological Focus Areas
The study favours the introduction of ecological focus areas (EFAs) because of their potential to bring about positive environmental benefits particularly for the one-third of highly intensive arable farms. The objection to the proposal, as for the Commission’s own proposal, is that while the costs of EFAs can be fairly readily identified, the environmental benefits are not well specified.
We know under the Water Framework Directive, for example, that some areas are much more vulnerable to nutrient run-off and that it is here that interventions should be targeted. Requiring the same effort on all agricultural land to promote biodiversity, reduce nutrient run-off and lower GHG emissions will clearly raise the cost of achieving these environmental targets very considerably.
To partly address this criticism, the report recommends that EFAs should be introduced on a grid rather than an individual farm basis (that is, the obligation would be to maintain a minimum EFA area at a higher spatial scale of between 100 to 1,000 ha).
The argument is that the grid structure would allow the exchange of entitlements and obligations within the grids so minimising somewhat the production opportunity cost of this measure. Maintaining reasonably small grids would ensure that minimum pockets of biodiversity and landscape elements would still be required in intensive farming areas. Effectively, EFA ‘quotas’ would become tradable but only within each grid.
The report asserts that the operation of tradable quotas within each grid would not require high transactions costs although it is hard to see that introducing greater flexibility would not also increase administrative costs. This is not necessarily an argument against this option, only to make the point that it should not be over-sold.
However, the report does not address the workability of this, nor the Commission’s, proposal. Under the old set-aside system, the report notes that cereal growers in the Paris basin purchased or leased land in Vendée to formally comply with set-aside obligations defined per holding. The grid system would not prevent this happening also with EFAs.
As the EFA quota must initially be assigned to each farm, the proposal would not prevent an individual farmer deciding to rent his required EFA quota in a totally different area rather than within his grid. I find it hard to see how agricultural policy alone can compel farmers to operate on a zonal rather than a holding basis. This is more a matter of environmental regulation to be implemented through national legislation, although it could be incorporated via GAEC standards into cross-compliance.
The report also comments on a range of other controversial issues in the Commission’s proposals. It concludes that Pillar 1 is the correct home for the new green payment because it concerns the provision of European public goods (climate, biodiversity, water quality) which need to be funded annually and which justify full EU financing. But it criticises the size of the green payment as over-compensation and thus likely to end up capitalised in land values.
However, it might be argued that it is precisely because environmental management requires a sustained effort over a period of years that it is better suited to the multi-annual programming in Pillar 2. Also, Pillar 1 greening measures by definition must be shallow, prescriptive, one-size-fits-all measures applied across the EU as a whole. Member states are looking for more flexibility in the green measures, for example, through a menu approach, but this only underlines the place of these schemes in Pillar 2.
The author would go further than the Commission’s proposal to maintain the permanent pasture area at farm level by also calling for the inclusion of an incentive scheme to restore former grasslands that were converted to cultivation in the past. Such schemes can be already part of Member State rural development programmes.
The study criticises the lack of targeting of the proposed aid for young farmers in Pillar 1. It points out that farm succession is rarely a problem in favourable farming areas, and aid to young farmers in these areas will only be capitalised into higher land rents. It argues that targeting and increasing aid to young farmers in remote rural areas where conditions are difficult and where abandonment is looming is much more justified and consistent with the principles of rural development and cohesion.
The study welcomes the creation of the crisis reserve and extension of the coverage of the Globalisation Adjustment Fund to farmers outside of the MFF. It envisages these as the nucleus of a Pillar III of the CAP which could eventually be associated with the market support payments in Pillar 1 and the risk management instruments in Pillar II.
The study also supports the Commission proposals to reverse the shift of bargaining power in the food chain against primary producers by permitting greater collective action through producer organisations and inter-branch organisations. Indeed, it proposes the extension to all producer organisations of the power to negotiate contracts and prices, even though it is aware that encouraging the formation of two oligopolies in the food chain could be to the detriment of consumers.
Can the Commission’s proposals be built on in later reforms?
The Notre Europe study will be a much-cited contribution to the debate on the CAP post-2013, not least because of its relatively favourable assessment of the Commission’s proposals. Although throughout the study, the tension between the first-best options for reform and the politically-constrained discussion of the Commission’s proposals (“This reform remains a positive development, undoubtedly the only window that is politically open in the economic context..” (p. 57)) bubbles under the surface.
The report’s support for the Commission’s proposals is based on the argument that they are a significant first step in redirecting the CAP towards European public goods and away from the inheritance of the past (historic payments) and that they can be built on in further reforms.
The critique of this argument is that it remains important to challenge the political constraints which prevent consideration of first-best solutions and that, even in a second-best world, it remains important not to introduce elements which create further distortions and introduce additional avoidable costs into agricultural policy.
This post is written by Alan Matthews