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On the justification for direct payments

Despite the numerous critiques of direct payments expressed in the vast majority of the professional literature analysing the future of the CAP, the European Commission seems to maintain them in the future. In order to justify the decision, the EC has found out a new slogan for saving this ineffective policy instrument –  the provision of public goods.

However, this is not the first time in history when the Commission searches for justifications in order to save direct payments. Founded in 1992, the original idea behind direct payments was to compensate farmers for the price cuts of the MacSharry reform. This can be treated as an economic justification for the instrument as farmers, at least to the Commission, will be better off with this support than without them.

By the beginning of the 21st century, it turned out that direct payments have many problems like unequal distribution by members and farmers, the dissipation of these payments to input suppliers and landowners, etc. Moreover, the internal pressure of the high share of direct payments inside the CAP budget together with the external pressure of the WTO and the possible accession of several new member states also called for a reform. However, as farmers have become dependent on, if not addicted to, continued support, the Commission has found out a new justification – direct payments are not compensation anymore but income support to farmers, thereby creating a social policy from an economic policy. As Single Farm Payments (SFP) are decoupled from production, a farmer need not even produce to receive a fixed income, meaning that direct payments have become social rights.

Based on the various critiques of the profession on the functioning of direct payments, after 2008, the EC has found itself again in an ongoing debate on why do we need this policy instrument. However, instead of elaborating a strategy of phasing them out completely, the Commission has found a rationale for the third time, calling for the ‘enhanced provision of environmental public goods’ via the ‘greening component’ of direct payments. Invoking the evergreen topic of the conservation of the environment, the EC now seems to justify the need for direct payments on environmental grounds, thereby creating an environmental policy from a social policy.

However, this new idea also has many deficiencies. Besides the need for significant institutional and administrative support for the management of this new concept, the Communication seems to neglect the fact that one of the biggest problems with the provision of environmental public goods in agriculture lies in the insufficiency of measurement methods.

The CAP is still spending 70-75% of its budget to direct payments and it seems that it continues to do so after 2014. Direct payments have already been justified on an economic and social basis and now appear to be saved again on an environmental basis. I wonder what else might justify the continuation of this ineffective policy instrument.

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2 Replies to “On the justification for direct payments”

  1. The author keeps repeating that DPs are “ineffective”, but besides mentioning a few problem areas, does not elaborate on what he exactly means by this ineffectiveness; and even if we accept it to be true, how would this justify the complete abolition of DPs. As for DPs becoming social rights, I find this a sloppy argument, especially on a specialist blog – surely you know that DPs are not paid without some conditions being met by the farmers. The money-for-nothing line of argument is also moot I think because of the fact that in most places it pays to use the land for production, and so farmers and companies do farm besides collecting their subsidies. It is all too easy to find examples of DPs going to odd recipients like royals and big businesses, but it should also be kept in my mind that a lot of these payments actually go to whom they should – individual farmers and farming businesses who use it to keep up with the advance of technology and environmental requirements. (Yes, land-owners and technology suppliers do get their share too.)

    Also, while it may be true that measurement methods are insufficient to assess the value of public goods provided by agriculture, it could hardly be be denied that these goods do exist. So I think it’s a bit harsh to dismiss this line of justification as a fraud.

    I would also argue that direct payments are not “ineffective” and that they actually fulfill their intended role quite well, though not without problems of course. They are probably one of the most reliable sources of income in the whole world, and so they manage to keep agriculture in Europe relatively attractive both for capital investment and for small-medium sized businesses (and yes, this could be done much better, especially to help young farmers getting in etc.).
    As long as there is a single French farmer alive, direct payments will be part of the CAP, and as it greatly helps in keeping the whole of agribusiness ticking with an arguably very low cost to European customers, getting rid of them would harm many interests without clear benefits to the customer.
    Also, please do remember that Europe is probably the best place in the world regarding food security and food safety, especially the latter. If direct payments are part of the price for this (with CAP spendings around or below 40% of the EU budget), I personally think it’s not a very bad deal.

    So, while I would agree that the amount of DPs could be reduced and distribution could be vastly improved, getting rid of them would solve nothing.

    1. It is very strange to hear such arguments after many years of massive criticisms of direct payments appeared in various high level forums. You are right in stating that I have not elaborated the background of my arguments for which the only simple reason is that it has been elaborated so many times that I do not find it appropriate to use this blog for repeating what we already know. It seems that you are not aware of such arguments so without going very much into detail, I would highlight the most important ones:

      1. Agricultural employment has been decreasing for many years despite large and increasing direct support. Why should we pay direct payments if the share of the whole sector is decreasing (at least in developed countries)?
      2. The distribution of support is very uneven amongst farm sizes (and types and regions), with those perhaps most deserving or needing support receiving the least. It is 80% of farms receiving 20% of these payments and vice versa as well as there is a huge inequality in distribution of these payments among member states. I would also draw your attention that this system is based on the circumstances of 1992.
      3. The majority of this support is dissipated to input suppliers and landowners, since payments are based on historical rights and linked to land use. It actually raises land prices, the costs of production and goes to other market actors as these also want to have their share of the increased ‘wealth’ of a farmer. So using your wording, these payments do not ‘go to whom they should’.
      4. Cross compliance is either largely ineffective or impossibly expensive as a means of paying for agriculturally-related public goods. Cross-compliance requirements are not hard to be met and provides just basic services for which the amount spent on direct payments are not justifiable. Moreover, I did not say that public goods do not exist – I just have serious doubts how the ‘green’ system of direct payments would work in practice if we can not properly measure public goods provision.
      So the conclusion here is that they are not effective for many reasons and we should spend our taxpayers’ money to more effective instruments and thus should abolish this system. I also have serious doubts about your logic saying that direct payments are for making the whole sector more attractive. Is it really what we should pay 40 billion euro each year? And if you say that this 40 billion is ‘very low cost’, what would be a high cost?

      I would also draw your attention that direct payments have nothing to do with food security. As the current system of decoupled direct support suggests, a farmer need not even produce to receive a fixed income. If a farmer does not produce agricultural commodities, it is hard to imagine how he or she contributes towards ensuring food security. Consequently, stabilising farmers’ incomes does not necessarily mean guaranteeing food security, despite the fact that food security still remains the Commission’s major reason for maintaining farm income support. By seeking to stabilise all farmers’ incomes, current direct payments seem to focus on social issues instead of focusing on enhancing the competitiveness of farmers.

      On the whole, I think it is quite evident that direct payments are well past their sell-by-date and but, as I have written, the Commission always finds a reason to save them.

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