Cillian Fleming examines how the Common Agricultural Policy affects food prices in the European Union
Rent-seeking is perhaps one of the most important ideas in economics. While the idea is important, it is also simple: People will try gain advantages for themselves through the political process. This is another way of saying that interest groups will lobby governments to give them an economic advantage. The result is always the same: everybody else loses. Coincidentally, the idea originated concurrently with the growth of the Common Agricultural Policy.
The Common Agricultural Policy was born out of a compromise between France and Germany in drafting of the Treaty of Rome in 1958. Germany would gain access to French markets in return for subsidising French agriculture. It began its operation in 1962, growing to a point whereby in 1970 it consisted of 87% of the EU budget. Today, it costs European taxpayers €60 billion a year. It is a complex array of subsidies, quotas, and tariffs across the European Union. That said, the primary parts of the Policy are as follows:
· Levies to increase the price of food imports from world market price to the EU’s targeted price.
· Quotas to limit the amount of food that can be imported.
· An EU intervention storage scheme which is employed to maintain stable food prices.
· Direct subsidy payments to farmers.
In order to understand the policy and to fully appreciate its effects, it is important to examine each of the primary components of the policy. Import Levies are a tax imposed on goods entering a certain area. In this case, the area is the European Union. As the tax is being levied on the importer, in order to make a profit, he must pass on the cost of the tax to supermarkets that purchase his/her products in the form of an increased price. Similarly, in order to protect their own margins, supermarkets therefore pass the cost of that tax onto the consumer, also through an increase of price. The European Union does this so as to make its own agricultural produce more competitive with those of the rest of the world; however, the disastrous effect of this is that European consumers are paying 17% more than the world market price for food. This adversely affects the poorest in society, forcing those on the breadlines to pay more, so as to benefit internal food producers.
Import quotas have a similar effect to levies, in that their result is also to increase price. An import quota, put simply, is a limit on the amount of a particular good that can be imported into a particular area. This is done so as to limit competition with domestically produced goods. Otherwise, goods would fall to the market price. Therefore, the effect of quotas and levies are almost economically identical, in that they both raise the price for European consumers to a level that is almost 20% higher than the rest of the world. In addition, not only do these policies make food more expensive for everybody, poor or rich, across Europe, it also has a darker effect. As it stands currently, 70% of the developing world is dependent on agriculture to survive. By engaging in this policy, the EU is ensuring that the most vulnerable on our planet cannot have access to European markets. After all, how can the poorest countries hope to catch up with the developed world if we do not allow their economic goods a chance to compete with ours fairly?
Furthermore, so as to deny the European consumer a cheaper standard of living, the EU intervention storage scheme exists. The scheme consists of the EU buying agricultural produce when it falls below a particular price level. This is not rhetoric, polemic or exaggeration; this is the expressed goal of the scheme. Though the scheme may come from the perfectly good intention of increasing farmers’ well-being, in the process it deprives the poorest of Europeans a better chance of one.
The last central-tenant of the policy is the scheme of direct subsidy payments, funded of course by the ever-more-soaked taxpayer. In case making taxpayers pay more for food and taxing them for this privilege wasn’t bad enough, by far the largest recipients of subsidy payments are rich large landowners. That is, the richest 25% of farmers receive 80% of all the money. Included in this category are Nestlé, the British Royal Family, and Tate & Lyle. All things considered, one may be forgiven for believing that the entire Common Agricultural Policy is a system of redistribution from the rest of society, including the poor, to those who happen to work in agriculture.
What’s worse is that this policy is going to be expanded between now and 2020 under the disguise of “reform”. Were European policymakers actually interested in true reform, they could learn from New Zealand’s model. New Zealand in the 1980s removed almost all of its agricultural assistance programmes. The effect of this was that the amount of farms fell sharply, however agricultural productivity increased along with the economies of scale as the size of farms grew. A report carried out in 2006 by the OECD on the subject of Subsidy Reform in New Zealand declared that the “economic performance of farming improved”. The cost of food in New Zealand now stands almost identical to that of the world market price at 102%.
The result of the Common Agricultural Policy is to make food less affordable for the poorest in Europe, thus taking it out of the hands of many who are just barely above the breadline. The effects it has on the developing world are even more disastrous, destroying national economies and retarding development. Considering this, why is the political discourse more focused on expansion that it is on abolition? An agricultural policy that creates starvation cannot be considered anything else other than a complete failure.