The Common Agricultural Policy: a drag on productivity?

Giovanni Caccavello, Research Fellow at EPICENTER // 10.11.2016

Since the 1992 “MacSharry” Reform, which – among other things – scaled down price support to farmers and replaced it with direct payments, the total cost of the European Union’s Common Agricultural Policy (CAP) has been broadly stable, costing to EU citizens some €50-60 billion per year. At the same time, as illustrated in the graph below, CAP expenditure as a share of the EU budget has decreased sharply over the last three decades, from 73% in 1985 to 39% in 2014.

However, despite some significant improvements, the CAP remains today “not only the EU’s most expensive policy […], but also its most complex and interventionist programme” (Rickard, 2016: 10).

 

Graph 1: CAP expenditure from 1985 to 2015 – European Commission (April 2016)

 

a

 

 

While in some specific areas the EU regulatory policy has been beneficial in helping to convince farmers of the importance of environmental protection and animal welfare, nowadays there is growing concern amongst industry participants and scholars that EU agri-food regulations have become too burdensome, intrusive and inefficient. Moreover, as a recent paper by Sean Rickard for the Institute of Economic Affairs argues, EU agricultural policy  is damaging productivity growth in Europe by discouraging efficiency-enhancing expenditure and promoting the continuation of marginally profitable, sometimes even uneconomical, farming.

 

Official data from the Directorate-General for Agriculture and Rural Development (DG-AGRI) illustrate this negative effect by showing how Total Factor Productivity (TFP) in EU agriculture  has stagnated. The figures below focus on the period 1995 to 2011 (Haniotis, 2013). They clearly demonstrate how, in the first decade of the 21st century, the EU-27’s TFP stagnated (Croatian data are not included, as the country only officially joined the EU on July 1st, 2013).

 

Graph 2: TFP Growth in EU Agricultural Sector – AD AGRI data (Haniotis, 2013)

 

b

 

On one hand, the DG AGRI data underscore a certain degree of convergence between the “old” 15 Member States and the “new” twelve central and eastern European countries following the 2003 Fischler Reform. On the other hand, they also highlight how – contrary to TFP growth expectations based on past trends – the EU-15’s TFP growth averaged only 0.3% per annum between 2002-2003 and 2011. Moreover, some EU countries – namely, Ireland, Italy and Spain – report negative TFP growth during the decade.

 

Graph 3: Average annual TFP growth in EU Member States – DG AGRI data (Haniotis, 2013)

 

c

 

The DG-AGRI findings confirm the fear voiced by industry participants, academics and  European policy-makers such as Dutch MEP Jan Huitema  about the negative effect of subsidies and excessive regulation on productive efficiency in EU agriculture.

 

In fact, as a range of studies reveal, Europe agricultural TFP has constantly under-performed over the last few decades. According to Coelli and Rao (2005), who investigate agricultural productivity growth in 93 countries over the period 1980-2000, Europe agricultural TFP grew only 1%, substantially below to the average for the whole 93 countries, which recorded annual growth of 2.1%.

Timmer et al. (2010) examine why European growth has substantially decreased since the 1990s, while American productivity growth has sped up. Providing a detailed analysis of the sources of growth from a comparative industry perspective, the authors argue that EU productivity levels in agriculture are less than half those of the United States.

 

Rightly, these studies – in line with Sean Rickard’s argument – highlight the central role played by technological improvements as the main driver of productivity advancements. Given the steadily decreasing level of TFP growth within the EU agricultural sector, the findings summarised above suggest that EU authorities should focus more on innovation and alternatives technologies, rather than subsidies and other inefficient interventionist policies.

 

Contrary to the European Commission’s frequent claims, EU agricultural policies are neither market-friendly nor market-oriented. Far from current discussion on future reforms of the EU Common Agricultural Policy, “what is needed is a CAP that will allow market forces much greater influence over the behaviour and rewards for farm businesses” (Rickard, 2012: 13).

 

Thus, to put it bluntly, the current paradigm of EU “agricultural exceptionalism”, based on strong state support, a growing regulatory burden and the increasing power of non-farming interest groups, must be replaced by greater reliance on the dynamic ability of markets to improve resource efficiency and productive potential of European agriculture. Both the uncertainty generated by the EU doubtful “precautionary approach” and the constrains associated with the existence of nonsensical regulations harm farmers, discourage the research of new technologies and are an overall drag on productivity growth.

 

The post is based on our publication ‘Ploughing the Wrong Furrow‘ by Séan Rickard.

 

References:

 

Coelli, T. and Rao, D. (2005). Total factor productivity growth in agriculture: a Malmquist index analysis of 93 countries, 1980-2000. Agricultural Economics, 32 (s1), pp.115-134.

 

Haniotis, T. (2013). Agricultural Productivity: Introductory Comments. 1st ed. [ebook] Sevilla: 2013 IATRC Symposium.

 

Rickard, S. (2012). Liberating Farming From the CAP. 1st ed. [ebook] London: Institute of Economic Affairs.

 

Rickard, S. (2016). Ploughing the Wrong Furrow. The Cost of Agricultural Exceptionalism and the Precautionary Principle. 1st ed. [ebook] London: Institute of Economic Affairs-EPICENTER.

 

Timmer, M., Inklaar, R., O’Mahoni, M. and van Ark, B. (2010). Economic growth in Europe. Cambridge: Cambridge University Press.

 

 

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