What Price Pride? On the Hidden Costs of Economic Illiteracy
By Anthony de Jasay
See the Editor’s Introduction to this article.
After the Uruguay Round, it is now the turn of the Doha Round. To obtain the participation of the less developed world, the European Union and the United States had to agree radically to reduce their farm subsidies in exchange for more liberal trade mainly in services.
The Brussels Commission must negotiate the Doha Round on behalf of the European Union, and it cannot do so unless it manages to get the member states to agree to a thorough reform of the famous, and infamous, Common Agricultural Policy (CAP). However, last October in a daring pre-emptive move, France obtained Germany’s agreement to a freeze of the CAP until 2006 in exchange for capping CAP expenditure at the 2006 level until 2013. France is the chief beneficiary of the CAP and Germany the chief paymaster, so that both parties thought to have done a nice enough deal. The other member states acquiesced.
Despite the Franco-German move to postpone CAP reform till 2006, the Commission must under the Doha commitment try and press on with it. It is therefore once again putting forward, in a slightly modified form, a plan that was far too sensible and sophisticated to be acceptable last year.
Stripped of its complex details, the essence of the plan is that farm subsidies should no longer be linked to farm output. Instead of benefiting from price supports on grain, dairy products, wine and olive oil, farmers would get roughly equivalent payments in recognition of their putative contribution to keeping the countryside inhabited and looked after. They would get these payments even if they greatly reduced the output of their farms—something they would almost certainly do as farm prices fell and it became uneconomic to farm intensively with high inputs of chemical fertilizers, weed-killers and pesticides and brought-in animal feed.
Total value added by agriculture in the EU at the last count was 146 billion euros,2 produced on 6 million farms by a labour force, including owners, of 14.7 million. (Many of the “farms”, especially in Spain, Portugal, Italy and Greece, are very small, under 1 hectare [Editor: 1 hectare equals 2.47 acres] and do not provide full-time occupation). Value added includes the reward of labour, rent, debt interest and profit (if any). On this basis, the average annual income of farmers and farm workers appears to be 10,000 euros. Needless to say, this average conceals many six-figure incomes in Britain, France and Northern Germany. Nevertheless, it is clear that it is quite insufficient to keep up the farm population, stop the drift to the towns and the abandonment of marginal farms.
However, in addition to what appears in the statistics as the value they produce, farmers also get EU subsidies of 42 billion euros a year, which makes the lot of the average farmer look a little less grim. Since these subsidies are linked to production, in order to earn them he engages in intensive farming. European consumers spend about 800 billion euros a year on food at retail prices. The on-farm value of this food, allowing for net exports, is of the order of 350 billion euros, which exceeds value added in agriculture by about 200 billion euros. This, then, is the cost of the inputs European agriculture buys from the chemical and farm machinery industries, from overseas producers of feed grains and from service providers of all kinds. Though such estimates are hazardous, it is a fair guess that at least half of this expenditure serves only to earn the 42 billion of production subsidies and would be uneconomic if subsidies were stopped or decoupled from production—which is precisely what the CAP reform proposes.
Merely by shifting the farm subsidies from a pro rata to a lump sum basis, perhaps 100 billion euros of wasted inputs could be saved. Admittedly, realising the saving would require adjustments in the pattern of industrial output and in foreign trade, with an increase in both industrial exports and food imports, but such adjustment would be perfectly feasible.
Or rather, it would be feasible if farmers had no pride and politicians had no incentives to excite their pride to fever pitch. Farmers, notably in France, Spain and Ireland now swear that the switch from production subsidies to lump sum payments will take place over their dead bodies—and the dead bodies of many riot policemen.
The subsidy on cereals, dairy products or meat, they angrily exclaim, is an act of justice pure and simple; what it does is to bring the farmer’s receipt for his produce up to his cost of production, which—as everyone must see—is only fair. It would be monstrous to expect farmers to make Europe self-sufficient in food and be out of pocket for doing so. Many politicians repeat, as a self-evident truth, that Europe must be able to feed itself if it wants to safeguard its independence. The man in the street cannot be bothered to think too hard about whether this is really self-evident. He also accepts, without a second thought, that farmers must get prices that will cover their costs of production.
It takes a little economic literacy to see that costs of production are as high as they are because prices, topped up by farm subsidies, are what they are. It should be obvious that grass-fed cattle costs less to fatten than cattle stuffed full of Brazilian soybeans, fish meal, hormones and vitamins.
The force of the farmers’ argument, and the driver of their present fury, is that they find the CAP reform proposals humiliating. From producers, they feel they would be reduced to national pensioners, recipients of alms, with only a lame face-saving function as keepers of the countryside. Much of that function, they shrewdly foresee, would be sheer make-believe.
Much of their concern is understandable. It is doubtful, though, whether it weighs enough to justify the extravagant cost of dressing up their subventions as rewards for much-needed production. The saddest aspect of this whole inglorious dilemma is that public opinion is almost completely oblivious of the hidden cost that must be paid to comfort the farmers’ pride.
entre d’etudes prospectives et d’informations internationals (CEPII), Paris, February 2003. URL http://www.cepii.fr/anglaisgraph/news/accueilengl.htm.
This and subsequent data are taken from Annuaire Eurostat 2002. URL http://www.datashop.org/en/publications/yearbook2.html.
The State is also available online on this website.
For more articles by Anthony de Jasay, see the Archive.