«PATRICK A. MESSERLIN 1/ August 2002 INTRODUCTION WTO negotiations in agriculture have embarked on a wild roller-coaster. In accordance with Article ...»
Demographics A first source of heterogeneity comes from demographics. Farmers now represent a tiny portion of the total labor force in most industrial OECD countries–for instance, less than 3 percent in the three more important EC member-states. Moreover, this population is rapidly ageing, with large shares of farmers being more than 55 years old (in Normandie, the third best endowed farm region of France, half of the farms have no heirs willing to run them).
These broad evolutions are well known, but they should be more publicized–particularly, their essential consequence that keeping constant support to agriculture is equivalent to increasing support to the remaining farmers. They should be completed by good information on the farmers’ share in rural areas because the relations between farmers and rural areas largely determine farmers’ remaining political influence in developed countries. For instance, most European politicians are convinced that rural areas still heavily depend on agriculture. But, the share of farmers in rural areas is also declining. For instance, French farmers would represent only 17 percent of the French rural population in 1999, even if one assumes that all farmers are living in rural areas (an overestimate thus since a noticeable number of farmers is living in towns large enough to not be included in rural areas). A related issue is the share of income from non-farm activities in the total income of farm households. Table 6 presents the figures available on “non-farm activities,” and it shows how important they are in many OECD countries. But, there is little information on the extent to which these non-farm activities are related or not to farm activities–that is, to which extent there are really complementary or substitutes to each other.
All these evolutions converge to a very substantial decline of farmers’ political influence. For instance, farmers are regularly loosing seats in the French Senate–the fortress of the French rural population in the French constitutional framework (in the 2001 senatorial elections in which only one third of the seats was renewed, the share of farmers’ seats has further declined from 11 to 9 percent). The campaigns for the 2002 German elections have revealed a policy shift in Bavaria–one of the traditional bastions of German agriculture–with the Bavarian Minister-President Stoiber (and candidate to the Federal Chancellery) openly criticizing the EC CAP and praising hi-tech industries (though later, with the elections becoming closer, he has adopted a negative tone with respect to Commission’s proposals for the Mid-Term Review). The OECD member where the farmers’ political influence may be the most stable is the U.S., with an over-representation of the farm states in the U.S. Senate due to the federal structure of the country (see below).
Small vs. large farmers A second major source of heterogeneity–probably the most important in the few years to come–is the distinction between small and large farmers. As is well known, farm trade policies of most OECD countries are strongly biased against small farmers, and in favor of large farmers. Table 7 summarizes these differences in public support, farmers’ revenues and wealth in the U.S. and in the EC. Current farm policies have begun to take into account this aspect by “capping” public support. For instance, the 1999 Berlin Council has introduced a “modulation” scheme, and the 2002 U.S. Farm Bill as well as the recent European Commission’s proposals for the Mid-Term Review include some caps on the level of subsidies which could be granted to very large farms.
All this suggests a more systematic examination of the past experiences, and of the potential virtues, of a “two-track” farm policy which would fully subject large farmers to liberalization (subsidy reductions and tariff decreases, possibly accompanied by a safety net depending from the magnitude of the liberalization) but which would keep unchanged the existing protection for small farmers (but, by granting them direct income support).
The “small-large farmers” distinction should not raise problems in the WTO forum because small farmers tend to produce locally-oriented products or sophisticated goods which are not subject to high protection rates (by the usual standard of farm protection). In other words, they represent only a marginal source of trade distortions. This feature suggests that keeping subsidies granted to small farmers as they are– or even to increase them conditionally to adopting a pure income support scheme–should not be a source of big worries and difficulties.
In Europe, a two-track farm policy based on the “small-large farmers” distinction has many specific charms. First, it meets increasingly less hostility from small European farmers which are becoming more favorable to pure income-based supports. Second, it is compatible with the existence of integrated European farm markets within the current EC (that is not the case of re-nationalized CAP subsidies which will inevitably create intra-EC barriers as well as extra-EC barriers). Lastly, it is the only policy to provide to the enlargement problem a solution both fair and economically sound. It allows to give an unique–hence fair– definition of the income support to be granted to all European small farmers. For instance, it could be the same percentage of the average income or wage of the member-state in question. In the enlarged EC context, this unique definition in percentage of domestic average income will lead to different levels of farm support (in currency units) among EC member-states–hence reducing the costs of the whole system on a fair and objective basis. Even more importantly in the long run, this definition will keep incentives for small farmers in the CECs (once member-states) to modernize their farms (by contrast, EC-wide based subsidies will tend to be too high, hence eliminating such incentives, and accelerating the rural exodus of small CEC farmers for the great benefit of “Western” farmers who will buy CEC land).
Of course, the two-track farm trade policy approach has an intrinsic weakness: large farmers will have strong incentives to find ways to circumvent this approach–by dividing their farms in smaller (probably less efficient) units, by getting partial exemptions for spouses or other reasons (as already observed in the first attempts to introduce such a policy in the U.S.), etc. The deeper the liberalization will be, the stronger these incentives will be.12/ As a result, research should carefully investigate the pros and cons of such a distinction between small and large farmers–particularly by spotting the instruments least sensitive to it, and by taking into account its different impact on the various EC and U.S. member-states.
Member-states and other sub-national entities In federal countries (the U.S. and the EC in this matter) farm policies are defined at the “central” level–be the U.S. Congress or the EC Council of Agriculture Ministers (and the European Council of the Heads of State). This level of member-states (or more generally subnational entities) introduces a third source of heterogeneity, with farmers from some states more able to drive “federal” policies than farmers from other /This problem is conceptually similar to the problem of how to treat entrants in the farm business (be existing farmers’ heirs or genuine new farmers) in OECD countries. Logically, entrants should not be entitled to the same regime of subsidies than existing farmers. In particular, they should not receive subsidies “compensating” for price decreases and income losses–they know that markets will be liberalized. Granting them subsidies perpetuate the existing distortions.
member-states. It is estimated that the 2002 U.S. Farm Bill will mostly benefit Iowa (the Chairman of the Senate Committee in charge of agriculture being a senator from Iowa), Illinois, Minnesota, Texas and Nebraska. France is the most often cited country among the opponents of CAP reforms.
In this context, it is critical to assess the impact of liberalization not only on the “federal” entity, but on its individual member-states. For instance, a largely ignored impact of the CAP is that EC subsidies tend to protect farmers from less efficient member-states against farmers from more efficient member-states (and of course, foreign farmers). Opening the EC to foreign competition by decreasing EC subsidies will have the effect of opening the least-efficient member-states to the most efficient member-states as well as to the rest of the world (if reduced EC trade barriers still remain substantial, this evolution could maintain substantial trade diversion). With this perspective, a better knowledge of the different production costs in the various memberstates of the two dinosaurs could reveal wider farm export interests than those perceived nowadays–allowing a change in balance between protectionists and free-traders within each dinosaur. Similarly, a different concentration of large farmers in the various member-states should be taken into account when designing a two-track policy.
3. Which other actors?
In Europe, a very special actor has been involved in farm policies during the last thirty years: the Finance Ministers of the member-states. So far, their role has been rather ambiguous: important for capping the overall amount of subsidies, but non-existent for promoting structural reforms. Capping is now widely accepted. But it is ineffective to the extent that the number of farmers is decreasing, so that increased subsidies per farmer do not induce the remaining farmers to cut costs and to look for the most appropriate set of farm products to their comparative advantages. As a result, the role of the Finance Ministers may be even more marginal in the future.
Their role can even become negative if they support “renationalizing” farm subsidies. Leaving each member-state responsible for determining farm subsidies may reduce the amount of subsidies at the European level, but it is likely to create fifteen CAPs in Europe. For instance, Germany will no more pay for French farmers, but she will be eager to subsidize her own farmers at least as much as before, hence not allowing more efficient non-German farmers (French or non-EC) to enter German markets. Meanwhile, France will be likely to compensate for missing German funds.
The only way to make EC Finance Ministers more involved in the structural changes of the EC farm policy (and not only in a mere cost-containment approach) would be to focus on the low transfer efficiency of the current farm support regimes. Finance Ministers would then be induced to develop pure income-support programmes.
During the last decade, another group of actors has emerged in the debates on farm policies–the nongovernmental organizations (NGOs). There are two main kinds of NGOs. First, there are NGOs with a well defined objective–such as environmental sustainability, rural development, food safety, animal welfare, etc.
While raising key issues, these NGOs tend to be easily captured by OECD farmers, at great risk for their credibility. The main issue at stake is thus the strengthening of the independence of these NGOs, as briefly illustrated with environmental and food safety NGOs.
During the last decade, several environmental groups (EGs) have been instrumental in underlining the wasteful and environment-detrimental effects of farm policies. In this respect, they are natural allies of economically sounder farm policies. But many EGs have also a strong pro-interventionist bias for a wide range of reasons–doubts about the ability of science to solve emerging problems, desire to impose their own views without compromise, will to act rapidly, etc. They tend to distrust market-based tools for finding the right balance between farm production and environment, and to ignore the wide range of possibilities offered by combining market incentives and social regulations. They end up hostile to freer trade, which makes them an easy prey for OECD farmer lobbies–hence the unholy alliances between “greens” and farmers which has been observed all over Europe.