Saturday, July 18, 2009

European farm subsidy distortions

Across the world, farm subsidies have proved to tbe hardest to tackle. The European Union's Common Agricultural Policy (CAP) has been at the forefront of any global debate to address this issue. The CAP doled out more than $71 bn in agriculture subsidy in 2008, forming more than half EU's annual budget.

NYT has a nice article that points to the nuerous distortions that bedevil CAP, including the fact that the largest recipients of the subsidy are not farmers and not even those involved with farming - "German gummy bear manufacturers, luxury cruise ship caterers and wealthy landowners ranging from Queen Elizabeth II of England ($778,812 in 2008 for her 20,000 acre Sandringham Farms in England) to Prince Albert II of Monaco (€507,972 in 2008 for his wheat farms in France)". The graphic below captures some of these anomalous subsidies.

Though the supporters point to the fact that most of the cash finds its way to farmers, these subsidies, which are not means-tested, have considerable distortionary effects on global trade in agriculture (and even value-added farm produce) trade. Massive sums are paid to farmers who have been outsourced the production of agriculture produce, and poultry and meat products by large multi-nationals like Cargill (at least €10.5 million in 2008, collecting subsidies in eight EU countries), Danone and Groupe Doux. These subsidies, often paid as the differential between the prices paid to these farmers by their buyers (both within Europe and outside) and the prevailing global market prices, enable these multi-nationals to pay less than the market price for their procurements.

They end up dumping agriculture produce at subsidy-driven lower prices in the global markets, thereby depressing world prices and undercutting poor farmers outside Europe, whose incomes are damaged. Further, over the years, these subsidies have expanded to other rural development activities, as local governments have sought to incentivize farmers away from agriculture.

Update 1
The five-decade long 55 bn euro CAP subsidy, which is typically based on land size, suffers from numerous distoritons and wastages, and 80 percent of beneficiaries receive about 20 percent of the payment. Though they are scheduled for elimination by 2013 and moves are alreadcy afoot to retain them.

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