TCS Daily

Scrap the CAP

By Waldemar Ingdahl - July 20, 2005 12:00 AM

Quick, name the world's largest socialist economy. No, it is not China; it is the EU's Common Agricultural Policy, the notorious CAP.

Today, 44 percent of the EU's budget is spent on the CAP, costing European tax payers about €48 billion, for a sector that employs less than 5 percent of the population of the member states. The EU spends seven times more on the CAP than it does on research and development.

Recently, thanks to the EU's failed budget process, Britain's Prime Minister Tony Blair has brought reform of the CAP to the top of the bloc's agenda. He wants to dramatically alter the system, and re-negotiate it before the year 2013. This was vigorously opposed by Mariann Fischer Boel, the EU's agriculture commissioner, in a recent speech.

But the Commission as a whole favors reform, considering the possibility of using its upcoming CAP review process to reduce subsidy payments to individual farmers. Instead, the Commission proposes increasing payments for regional rural development, and introducing a limit of €300,000 for CAP payments. If approved, money will flow east to the poorest part of Europe. CAP reform seems inevitable, even if will be slow in coming. Nonetheless, the proposals are being fought and stalled by France, which receives some €10 billion in CAP subsidies every year.

How did this system come to be? The CAP is a great case study for how regulations and market distortions, once introduced, will outlive their initial objectives.

The roots of the CAP lie in the tariff0protected agriculture of the 1930s, when many European farmers grew accustomed to state intervention against imports. After the devastation of World War II, governments were faced with famine in Europe. Back then the political consensus for a rational and efficient business meant planning, and thus a comprehensive system of price controls and guarantees was created and even made one of the key points of the European project. Not surprisingly, building up agriculture took significantly longer than rebuilding industry and shortages remained in many countries for years.

Many farms were simply too small to be productive if they did not concentrate on specialized crops or livestock. But productivity was improved by the introduction and application of new farming techniques. In the 60s and 70s agriculture went from a small scale business to an industry.

In 1960, food production outstripped food demand for the first time. Still, the then six members of the EEC (the European Economic Community- the organization that preceded the EU) employed a sizeable 20 percent of their workforce in agriculture.

The production increase worried European leaders; feeling the competition from the US, they saw a steep drop in food prices. Not being able to predict the effect of the changes brought on by technology, and distrusting the changes brought on by market forces, they sought to maintain incomes for such a large sector of the workforce. They based their reasoning on the premise that the "special circumstances" of agriculture, built on the family farm, would induce "market failures".

They also knew that leaving agriculture in the hands of the national governments, prone to protectionism of their own (particularly France), would undermine the free movement of goods, labor and capital

In 1962 the general orientations of the CAP were set

  1. to increase productivity by promoting technical progress and ensuring the optimum use of the factors of production, in particular labor;
  2. to ensure a fair standard of living for the agricultural community;
  3. to stabilize markets;
  4. to secure availability of supplies;
  5. to provide consumers with food at reasonable prices.

In practice the solution was to increase protectionism by maintaining artificially high prices, and import restrictions at the expense of producers from outside the EU. The ever-growing complexity of the various controls in order to maintain the CAP made it a bastion of bureaucracy, mismanagement and increasingly outright fraud.

Europe's agricultural output increased enormously, creating vast surpluses that were exported with the help of further subsidies, thus severely affecting the exports and agriculture of Third World countries and creating trade conflicts with the world's other major agricultural nations. European consumers also had to bear the burden of the CAP, as food prices in Europe's stores are significantly higher than on the world market.

By 1992 the CAP consumed more than 66 percent of the EU's budget, before reforms managed to downsize it somewhat. By then the workforce employed by agriculture in the EU-15 countries had fallen to under 2 percent, mainly working in large commercial farms.

Regulations addressing one problem often create new problems in other regulated areas. The new farm subsidies introduced this year aimed to decrease overproduction by separating the subsidies from production. European farmers are now paid to not produce; not surprisingly this penalizes innovation and improvement even further. When half of the farmer's revenues comes from various types of subsidies, outside of their control, the farmer has effectively lost both the control and the responsibility of his business. What a terrible fate for what was once such a proud profession.

The CAP's disincentives to innovation have also kept the technological level of European agriculture lower than it could be. The third generation of genetically modified organisms (GMO) could signify a real revolution for European farmers, eclipsing the effects of the previous technological improvements. Plant production of non-food applications gives value to small farmers immediately. Plant-derived renewables like bioplastics are degradable and cheap. In- plant production of edible vaccines, antibodies and blood proteins could provide an road in for agriculture to the pharmaceutical industry. But a lifting of the ban against GMOs proposed by the Commission was blocked by the member states' ministers of agriculture in June this year and some of the reasons given were connected to the CAP.

The majority of the EU's farm subsidies are now handed out to the richest and largest farmers, those that are able by their political clout to secure the largest amounts of subsidies. The CAP thus now also works against smaller farms in less affluent areas, and raises food prices for the consumers on an unstable "market". Precisely the opposite of its stated objectives.

"It's not future oriented to go for the CAP, a policy... that is connected with the Second World War," said Sweden's Prime Minister Göran Persson. One could not agree more; it is time to scrap the CAP.


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