Public Disclosure Authorized
World Bank Reprint Series: Number 290
Maginot Line of
European Farm Policies
Public Disclosure Authorized
Public Disclosure Authorized
Public Disclosure Authorized
Malcolm D. Bale and Ulrich Koester
Reprinted with permission from The World Ecal?ouii,, vol. 6, no. 4 (December 1983),
pp. 373-91. Copyrighted by the Trade Policy Research Centre, London.
World Bank Reprints
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Carl Dahlman and Larry Westphal, 'Technical Effort in Industrial Development: An
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1 -,,Ir.'..II''
Evidence from Rect B jiilian
mance: ":,'n
T':.L.'!-.
Maginot Line of European
Farm Policies
Malcolm D. Bale and Ulrich Koester
Y ALMOST any physical measure the European Community's agricultural
policy has been eminently successful. I Over the last two decades, agriculhas grown at over 3 per cent a year and exports have grown by more
output
tural
than double that amount, which means that an embarrassment of plenty now
prevails. Yet the extravagant expenditures to support farm prices (approximately
$16 billion in 1983) have alienated Community taxpayers, high food prices have
worried Community consumers, subsidised exports have angered the Community's trading partners and benefits have been deemed by Community farmers
inadequate and inequitably distributed.
As the European Community has increased its level of self-sufficiency in agriculture it has moved from being an importer of many agricultural commodities to
being an exporter. As a consequence, countries that were formerly exporters to the
Community and now find themselves competing in third markets with subsidised
exports from the Community have, over the last decade, expressed increasing
concern about the effects which Community policy is having on agricultural trade
that is conducted on a commercial basis. The countries expressing most concern
are largely the temperate-product exporters, led by the United States. More
recently, the wider repercussions of the common agricultural policy (CAP) on the
food-production systems, agricultural prices and rural development of developing
countries have become an important issue as the extent of the spill-over effects of
the CAP on agricultural development has been studied and better understood.
2
The common agricultural policy has been likened to the 'Maginot Line'. Like
that system of heavy fortifications built before World War II on the Eastern
frontier of France, in an unsuccessful attempt to prevent invasion by the Nazi
armies, the CAP is designed to defend the high support prices paid to farmers in
the European Community. The 'variable import levies' on many agricultural
V4
MALCOLM D, BALE is an Economist at the World Bank, Washington, which he joined in
1977, having taught at Massey University in New Zealand and at Montana State University and
Johns Hopkins University in the United States; and ULRICH KOESTER is Professor of Agricultural
Economics at the Institut fir Agrarpolitik und Marktlehre. University of Kiel, Federal Republic of
Germany, and a Visiting Fellow, International Food Policy Research Institute, Washington.
373
374
MALCOLM D. BALE AND ULRICH KOESTER
products are the 'Maginot Line' for agriculture in the Community since it is not
possible for would-be exporters to lower their prices in order to get under the
tariff. Foreign competition is stopped at the border while protected domestic
production flourishes.
Like the Maginot Line, however, the CAP is often breached or by-passed. The
European Community's response in such cases, in accordance with an established
tradition aimed at inhibiting short-term changes without addressing longer-term
structural adjustment, has been to plug the breach. Piecemeal policy of shoring up
the 'Maginot Line' results. Even so, such policy is not tenable because as soon as
one breach has been plugged another one opens up, such is the pressure resulting
from the excessive difference between world market prices and Community
prices. Thus, for example, the protection given to grain producers in the Community has given rise to imports of non-regulated substitute products such as
cassava pellets, corn gluten and soyabean meal.
Some people might argue that it is inappropriate to exhume such old bones as
the CAP, for it is a system that is well-tested and well-understood. But, in fact, the
CAP is poorly understood beyond the shores of Western Europe and its structure
is a dynamic one. Furthermore, there is a continuing need to recall the costliness
of such a system of protection, both to taxpayers in the European Community and
to third countries.
Yet, in order to understand the CAP, its traditions and historical background
must also be understood. Accordingly, this article is organised into four major
parts. Following this introduction, a section is devoted to the operation of the
CAP. The third section examines the implications of the CAP for developing
countries and the final section offers some concluding comments on possible
modifications of the CAP. 3 First, though, the European Community's place in
world agricultural trade will be briefly reviewed.
While the European Community is a major producer of agricultural products,
since its inception it has been the world's largest importer of agricultural commodities. Over the period 1973-78, the Community's share of world agricultural
imports was approximately 27 per cent, compared with, say, 12.5 per cent for
Japan.
The European Community is the major market for agricultural exports from
developing countries, accounting for 30 per cent of their agricultural exports in
1973-78. The value of these exports in 1979 was nearly $27 billion, compared
with a figure of less than $12 billion for the next largest importer of developingcountry agricultural products, the United States. The importance of the Community as a market for developing-country exports has declined somewhat over
the period, for exports of temperate-type products have declined to almost zero,
while exports of tropical products not produced in the Community, such as
beverages, have only increased by modest amounts. Major agricultural imports
from developing countries are tea, coffee, cocoa, sugar, tobacco and fruit. Yet
EUROPEAN FARM POLICIES
375
there are a number of products that developing countries would like to export
in larger volumes, but are prevented from doing so by the Community's
border regulations. Such products are sugar, beef, olive oil, tobacco and its
products, fruit (especially citrus) and vegetables. In addition, there are numerous
agricultural-based products, such as processed cocoa products, roast coffee beans,
coconut meal and oil and polished rice, which developing countries are capable of
exporting, but cannot because of the increasing number of restrictions which are
being impcsed to protect the Community's agro-processing industries. 5
The European Community is the world's second largest agricultural exporter
after the United States, its agricultural exports being valued at $27 billion in 1980.
Major agricultural exports are milk products, cereals and sugar - all of which are
sold at prices considerably below their domestic prices. It is not surprising, therefore, that over the period 1973-80 the Community's market share increased by
more than 10 per cent, from 9.4 per cent to over 11 per cent of the world market,
while the relative shares of other major exporters declined. The value of the
Community's agricultural exports to the developing countries came to nearly $13
billion in 1980, making it the second most important supplier of agricultural goods
to the Third World after the United States. Furthermore, the Community's share
increased from 15 to 18 per cent of developing-country agricultural imports over
the period 1973-80.
The European Community's overall performance in agricultural trade, however, is of less concern to developing countries than is competition in third
markets. Developing countries have experienced difficulty competing in foreign
markets with products of which the Community is a major supplier. Developing
countries may be well-advised to eschew development plans based on an agricultural export strategy for products where the Community is seen as a continuing
supplier in the future, even if the developing countries possess a comparative
advantage in the production of that commodity. In the early 1980s the Community
was already the world's largest exporter of dairy products, the second largest
exporter of sugar, beef and veal and the third largest exporter of wheat and total
grains. This indicates the dominant role of the Community in many temperatezone agricultural products.
OPERATION OF THE COMMON AGRICULTURAL POLICY
In 1957, six West European countries (France, West Germany, Italy, Belgium,
the Netherlands and Luxembourg) signed the Treaty of Rome, thereby agreeing to
create a common market. The whole concept of the European Community is built
on four freedoms: the free movement of goods, free movements of workers,
freedom to exercise a trade or profession and the free movement of payments and
capital. 6 While these principles can only be achieved if all sectors of the econom-
376
MALCOLM D. BALE AND ULRICH KOESTER
ies are included in the integration scheme, it was considered of special importance
to find an adequate scheme for the agricultural sectors of the member countries.
There were several reasons for this priority.
First, agricultural policy among the member countries differed considerably as a result of different economic situations and policy objectives in the
country.
Second, it was felt that different agricultural price levels could have
significant effects on real wages and, hence, on the competitiveness of
industries.
Third, allegedly 'it was clear that France, the Netherlands and Italy would
not agree to open their markets to industrial goods if West Germany, in
particular, did not admit their agricultural exports'.'
Finally, it was hoped that the Community could gain in efficiency if the
agricultural sectors of the member countries were forced to adjust to a
pattern based on comparative advantage.
While the six member countries agreed to include agriculture in the common
market, the Treaty of Rome remained vague as to the nature of the common agricultural policy. After the Treaty of Rome was signed, it was to take nearly threeand-a-half years of argument to settle the basic principles of a common policy. It
took another three years, from 1962 to 1964, to agree on one of the key questions,
a common level of cereal prices. Another key question, a long-term agreement for
financing the CAP, was solved after a further one-and-a-half years.
The fact that agreement was reached in the face of highly divergent national
interests reflects a strong political commitment in favour of a common market by
all member countries. It was possibly due to Walter Hallstein, the first president
of the Commission of the European Community, that the price agreement was
finally settled in 1964. When the Commission submitted the proposal for the
unification of cereal prices to the Council of Ministers (of Agriculture), the
Council rejected the proposol at first and asked for a modified version which
would more closely reflect individual national interests. Dr Hallstein, a strong
personality, re-submitted the original proposal after only half an hour, stressing
the primacy of European unification over national interests. He asked the Council
of Ministers to accept the proposal unanimously or accept the resignation of the
Commission. This contributed to the feeling that a common market dominated
national interests, The Commission has never again fought national interests in
favour of Community interests so convincingly and so crucially. 8
General Features of the CAP
Most national agricultural policies in the member countries of the European
Community have been widely replaced by the CAP. The CAP is an elaborate
mechanism which supports domestic prices well above world market levels by a
EUROPEAN FARM POLICIES
377
complex system of tariffs and variable import levies. The politically determined
internal price is maintained for most agricultural products by imposing variable
levies on imports of an amount equal to the difference between the 'threshold
price' and the world market price. By this mechanism, price competition by
foreign suppliers is prevented. In some cases the intervention price is also maintai.ted by government purchases in the domestic market. In these cases, as for
wheat and certain milk products, export 'restitutions' (subsidies) financed by
Community funds are used to 'dump' the products on world markets or divert
them to inferior uses (such as animal feeds). Agricultural output in the Community
has grown far more rapidly than consumption (see Table 1). As a result of the
TABLE 1
Self-sufficiency of the European Community in Agricultural Productsa
(per cent)
Sugar
Butter
Milk fat
Barley
Rye
Wine
Poultry
Soft wheat
Beef
1967-71
1978
1982
8'
91
100
103
100
97
101
125
118
112
112
108
107
103
102
95
159
114
119
112
98
104
111
121
105
90
Source: Statistical Office of the European C mnimunity. Luxembourg.
I Quantities disposed of with the aid of subsidies are included in the internal consumption.
protective structure for agriculture, Community consumers have in certain
periods paid five times the world market price for milk powder, four times the
world market price for butter, two-and-a-half times the world market price for
white sugar and soft cheese, twice the world market price for beef and one-and-ahalf times the world market price for grains.' As a result of the CAP, then,
expenditures of Community consumers on food products are significantly higher
than they would be under many alternative policies - a contravention of the
Treaty of Rome. 10
The decision-making apparatus of the CAP helps explain what, to an outside
observer, appears to be the undisciplined and irrational nature of the policy.
Important decisions on farm prices, based on proposals prepared by the Commission of the European Community, are made by the Council of Ministers (of
Agriculture) during the annual price reviews. The Commission is supposed to
represent the overall interest of the Community while the national interests of
individual member countries are reflected by the national ministers who are
members of the Council. The Council of Ministers may accept the proposal by a
378
MALCOLM D. BALE AND ULRICH KOESTER
majority vote if none of the member countries declares that essential national
interests are at stake, in which case the Luxembourg Settlement Agreement
requires unanimous decisions. Unanimity is generally required. Ministers of agriculture are more interested in the income of the farm sector than in the economic
welfare of the Community. Some countries (food importers) even act against their
national interests. Thus the ComrmP -,ion cannot submit proposals which represent
Community interests and hope to find unanimous agreement in the Council of
Ministers. The constraint to submit acceptable proposals forces the Commission
to consider criteria which do not correspond to maximisation of Community
welfare.
However hard the Commission of the European Community has tried to find
agreeable proposals, it has never quite succeeded. It often takes several months for
the Council of Ministers to agree on a ,nodified version of the first proposal. The
typical ritual in the negotiations is that a delegate of a certain country argues that
the proposal neglects essential national interests. Special modifications and concessions must be made if the country is expected to agree. The first objection to
the initial proposal is equivalent to blowing the horn for hunting. The delegates of
the other member countries ask in turn for modifications of the proposal in order
to meet their national needs. These preferences are then taken into consideration
in the second proposal of the Commission. "
This procedure virtually guarantees that the final decision is inconsistent with
European Community welfare. But national ministers of agriculture are mainly
interested in farmers' income and not in national welfare. Thus the Commission
is forced to respond mainly to this objective. Obviously it is quite easy to find an
acceptable proposal if the costs of the decision have to be borne by those consumers and taxpayers - who cannot articulate their interests during the negotiations. This is usually the case and, accordingly, agricultural prices increase
The short history of the CAP illustrates the importance of externalisation in
making decisions. In the first few years of the CAP, the European Community was
an importing region for nearly all agricultural products. Hence it was possible to
raise agricultural prices without significant negative effects on the budget. Consequently, it was much easier to find unanimous decisions in the Council of Ministers. The surpluses on nearly all Community agricultural markets in recent years,
however, have changed the effectiveness of decisions on price policies. A price
increase in the Community widens the gap between the Community and world
market prices and results in higher payments of export restitutions. Consequently,
it is now much more obvious how the interests of taxpayers and consumers are
neglected in raising agricultural prices in order to help farmers. In recent years it
is the budgetary effect, in particular, which imposes a constraint on policy decisions in Brussels. Such a binding constraint was not effective in the early years
of the CAP. Member countries had to pay the amounts to the Community budget
which were needed to finance the common policy. Gradually, the Commission has
EUROPEAN FARM POLICIES
379
got access to more 'own resources', funds which are directly under Community
control, and now has to limit its expenditure to the funds available. The Community's 'own resources' are composed of revenues from tariffs and levies
imposed on Coimmnunity imports and up to 1 per cent of the harmonised valueadded tax base of member countries.
Derogation of tle CAP since 1964
Concerning formal aspects, the intearation of national agricultural policies has
made remarkable progress. Common market organisations have been established
for nearly all agricultural products. In 1981 more than 90 per cent of agricultural
production was included in common market organisations and the European Community rccei.ved access to 'own resources'. In spite of the integration of national
agricultural policies, though, agricultural markets within the Community may be
less integrated today than before the Community was established; and agricultural
production may be more distorted than ever.
While a complete litany of the economic objections to this extraordinary trading
system cannot be given in such a short space, several particularly conspicuous
points may be noted.
First, prize harmonisation between national agricultural markets is nonexistenit. Pric es on ssomc markets have differed more in recent years than before
the European Community was established. 12While, in the spirit of a customs
union, the CAP sets uniform prices within the Community, expressed in terms of
European currency units (ECUs), this does not mean that agricultural prices are
uniform across member countries. The 'green' rates of exchange for agriculture
ensure this result. Thus the price of wheat converted from ECUs to American
dollars at official rates of exchange was $180 per tonne in France and $213 per
tonne in West Germany and the price of sugar was $390 per tonne in Britain and
$511 per tonne in West Germany. '1 The green rate is intended to compensate
producers from member countries differently. In order to assure that intraCommunity trade will occur at a common price in spite of the apparent different
producer prices, a system of monetary compensatory amounts (MCAs), approximately equal to the difference between the official and green rate of exchange for
each country, is administered. Thus a member country with a strong currency
receives a positive MCA for each unit of agricultural output which it exports and
a member country with a weak currency incurs a negative MCA for its agricultural
exports. Agricultural imports within the Community are affected in the same way.
Since rates of exchange change daily, a series of bizarre rules, complex provisions
and numerous exceptions prevail. The administration of these rules, the monitoring of trade and the rates of exchange and the negotiation of the MCAs and rules
are cumbersome, time-consuming and costly activities. The MCAs are really
internal customs duties or import subsidies, depending on the country, which are
380
MALCOLM D. BALE AND ULRICH KOESTER
intended to negate the need for adjustment to market forces. They are perhaps the
most eloquent example of a deviation from the spirit of price harmonisation which,
at the same time, appears to safeguard the letter of price harmonisation.
Second, regional integration has not increased efficiency in production in the
European Community, for common prices were set at higher levels than the
average prices of member countries. The strong farmer bias in annual price decisions in the Community, virtually neglecting world market prices, has broken a
fundamental relatioinship - the nexus between Community prices and world
market prices. In this respect the CAP has frozen or slowed down structural adjustment in the agricultural sectors of Community countries and it has not contributed to smoothing out regional disparities in income that would be expected from
economic integration.
Third, there is the divisive problem of the unequal method by which the costs
and benefits of the budget are distributed among member countries and among
products within countries. Rates of protection are much higher for products which
are mainly produced in the northern part of the European Community, such as
cereals, milk and sugar, than for Mediterranean products, such as fruit and
vegetables. The equity question, to do with which farmers and which regions will
benefit, stimulates lengthy debates in the Council of Ministers. Some countries, in
effect, view their contributions as transfer payments to the agricultural sector of
member countries whose production is often surplus to Community needs. The
problem is concentrated in the dairy sector, which has received between 40 and 45
per cent of the entire agricultural expenditure in most years, and to a lesser extent
in the grain and sugar sectors, which each receive around 26 per cent of the agricultural budget.
Fourth, the administrative complexity of the CAP mechanisms, such as calculating the grain content of livestock for the purposes of import levies, the setting
and monitoring of green rates of exchange and the daily determination of fruit and
vegetable prices in order to monitor whether reference prices are respected and
differentiated by product, season and quality, are extremely cumbersome and
expensive to maintain.
Summing up, the economic performance of the CAP is much less convincing
than the progress in formal integration. This can be explained by the fact that
decisions in the European Community have not been dominated by Community
interests. Instead, compromises between diverging national producer interests, as
politically determined, have dominated. While in each country there are counterinterests that might argue against producer interests, these interests are themselves
compromised in negotiations where producer interests are held paramount.
Producer interests in the CAP do not diverge from country to country only because
of different economic conditions and policy objectives; the institutional framework of the Community also contributes to the divergence 14 The principle of
'financial stability' has led to a common financial system which allows individual
EUROPEAN FARM POLICIES
381
member countries to externalise the costs of national policies. Thus the establishment of a common financial system, and the associated 'negotiated' green rates of
exchange, is a major contributory factor to the lack of economic integration of
Community agriculture.
IMPLICATIONS OF THE CAP FOR DEVELOPING COUNTRIES
What of the impact of the CAP on different groups of agricultural exporters and
food importers in the Third World?
Exporters of Cereals
The high protection of the European Community's grain economy causes
production of cereals to be higher than with a liberalised grain economy. Estimates
indicate that the Community might produce about 39 per cent less wheat, maize
and barley if its grain trade were liberalised. It follows that world market prices
for cereals are depressed due to the protectionist grain policy of the Community.
It has been estimated that wheat prices are depressed by about 10 per cent, maize
prices by 2 per cent and barley prices by 14.3 per cent as a result of the CAP, while
the variability of world market prices is 20 per cent higher than what it would be
in the absence of the CAP. 15 Consequently, developing-country exports of cereals
would be 12.4 per cent higher by volume, or 20 per cent higher by value, if the
Community's grain trade were liberalised.
The effects would be the most significant for high-income developing countries
of North Africa and the Middle East. The export volume of these countries would
be about 260,000 tonnes higher, a change of 13 per cent. But some low-income
developing countries would be considerably better off. Exports of low-income
countries of Sub-Saharan Africa could increase by 24,770 tonnes (13.8 per cent)
and those of low-income countries of Asia could increase by 15,530 tonnes (50.1
per cent).
While it is clear that exporters of cereals lose due to the present grain policy of
the European Community, the welfare loss is quite small as a percentage of gross
national product (GNP). All developing countries lose about 0.04 per cent of
GNP. Bangladesh is the only country which might lose as much as 1.2 per cent of
GNP.
Exporters of Close Substitutes
Depressed grain prices on the world market due to the European Community's
grain policy affect world market prices of some other agricultural products which
are closely related to grain prices. This is due to substitution in production and/or
consumption. From the developing countries' point of view the most significant
382
MALCOLM D. BALE AND ULRICH KOESTER
effects are on the market for vegetable oils, for cassava and corn gluten feed, for
grain-fed animal products and for grain-processed products. The effect of the
Community's grain policy on world market prices for vegetable oil is particularly
interesting.
The European Community imports more than 50 per cent of world imports of
soyabean and of soyabean meal, but it imports only 12-13 per cent of world
imports ( soyabean oil. Soyabeans and soyabean meal are subsitutes for feedgrains but Ilot for vegetable oils. Under a more liberalised grain trade, Communit.y
demand for grains would increase, while the demand for soyabeans and soyabean
meal would be reduced through substitution. This, in turn, would decrease the
world demand for soyabeans and soyabean meal. As a result, soyabean production
would decline and thus the production of soyabean oil (a joint product of soyabean
meal) would also decline. Since there has been no change in demand for vegetable
oils, the price of substitute "egetable oils would rise. Therefore the current grain
policy of the Community lowers the price of vegetable oils. This presumably
benefits developing countries that are edible-oil importers, such as India and
Singapore, but causes a loss of revenue for developing countries that are edible-oil
exporters, such as Malaysia, the Philippines and Indonesia. Since, on balance,
developing countries are edible-oil exporters, the impact of the Community grain
policy on them is negative.
The development of cassava imports is also interesting. High protection for the
grain economy of the European Community has created a new market for cassava.
Since the Community's market organisations were mainly designed to improve
farm income, they were only established for commodities produced within the
Community. The founders did not consider that domestic users might switch to
substitute products not grown in the Community. Cass.va, also known as manioc
and tapioca, is a case in point.
There were no imports of cassava into the European Community in 1970,
nearly 6 million tonnes in 1978 and almost 11 million tonnes in 1982. The protection of domestic grain has created a new market for imported cassava. Exporters
of cassava (mainly Thailand) gain from the Community's grain policy. But since
these exports are at the mercy of policy decisions within the Community, it is risky
to invest in production and marketing facilities for these products. This has been
the lesson learned by Thailand, Indonesia and Brazil which in May 1983 signed
'voluntary' export-restraint agreements (VERs) limiting their exports of cassava
to the Community. Such bilateral agreements are typically made under duress of
more severe market access if exporters fail to accede.
Exporters of Fruit and Vegetables
For some developing countries, fruit and vegetable exports as a share of
merchandise trade is very high. Many of them, namely those located in the
EUROPEAN FARM POLICIES
383
Mediterranean region, are strongly influenced by the CAP for fruit and vegetables. Some examples of these countries and the importance of fruit and vegetables in their total exports are Turkey (34 per cent), Cyprus (26 per cent), Jordan
(23 per cent), Morocco (22 per cent), Lebanon (16 per cent) and Israel (11 per
cent).
Over the last decade, trade in fruit and vegetables within the European Community has grown far more rapidly than trade with third countries, especially
developing countries (2.4 per cent a year versus 0.7 per cent a year for fresh fruit).
This is in part caused by increasingly restrictive regulation of imports into the
Community. Unfortunately, no comprehensive study exists which estimates in
disaggregated form the protective effect of the Community policy on fruit and
vegetables for developing-country exports. One aggregate study and a few
product-specific or country-specific studies exist, however, from which the
general direction and size of the protective effect of the Community's restrictions
on imports of fruit and vegetables can be gauged. 16 General conclusions that arise
from the analyses indicate the following. (i) A strong supply response has resulted
from production subsidies for certain fruit and vegetables in the Community which
have, in turn, displaced imports. (ii) The reference price system often has a
prohibitive effect on trade. (iii) Trade in fruit and vegetables is becoming further
restricted over time as more types of fruit and vegetables are subjected to the
reference price system and seasonal restrictions are extended. (iv) Export prices
for fruit and vegetables over the next decade will decline as a result of increases
in production and enlargement of the Community. (v) Some developing countries
will bear a disproportionate burden of the impacts. Morocco, Israel, Tunisia,
Egypt and Turkey (in descending order) will be the most seriously affected
countries, the products of concern being tomatoes, citrus fruit, olives and olive
oil, early potatoes and other fresh fruit and vegetables. 17
ACP Exceptions under the Lome Convention
The Lom6 Convention is intended to be an economic cooperation agreement
between the European Community and those countries in Africa, the Caribbean
and the Pacific (ACP), mostly ex-colonies of Community countries, which first
signed the convention in 1975.
The, Lome Convention provides (i) exceptions or preferential concessions to
impolts from ACP countries to the European Community, (ii) an arrangement for
stabiLising ACP export earnings (Stabex) and (iii) specific quotas for sugar and
beef from certain ACP countries. 18
Taken together, the concessions are not particularly generous for agriculture.
Waiving common customs tariffs is not relevant for agricultural products where
border regulations always contain other duties and the Stabex arrangement has not
increased trade - and was never intended to do so.
384
MALCOLM D. BALE AND ULRICH KOESTER
The duty-free quotas on sugar, however, are important to those few ACP
countries that receive them. The privileged countries are allowed to export, duty
free, 1.3 million tonnes of white sugar to the European Community each year.
Since Community prices are normally considerably higher than world market
prices, the preferred countries receive a product-tied transfer of income equal to
the difference between Community prices and world market prices multiplied by
the exported quota. The transfers which individual developing countries receive
are completely arbitrary and do not correspond to any official objective of Community development policy. But, except for India, the transfers are generally
sufficient to compensate these exporters for the effect of depressed world market
prices for sugar due to the Community's protectionist sugar policy. A particular
irony of the sugar 'protocol' is that the Community already produces more sugar
than it consumes. Hence sugar imported under the protocol must be exported, in
addition to the Community's export surplus, at the lower world market price. This
indicates the extent of the distortions in the world sugar economy which arise from
the CAP and this agreement.
The operation and effects of the beef protocol are completely analogous to those
of the sugar protocol. Both agreements reflect pent-up demand for access to the
European Community created by the highly protectionist CAP. While these agreements helped the Community to buy goodwill for its protectionist agricultural
policy by compensating preferred countries, non-preferred countries are worse off
by such agreements and world agricultural trade is even more distorted. 19
While supporters of the CAP interpret the Lome Convention as indicative of the
flexibility and concern of policy makers in the European Community for developing-country interests, others view it with a more jaundiced eye. In particular,
their concern is that only the signatory countries to the convention are eligible for
concessions while non-signatories are excluded from exporting certain products to
the Community. Rather than an attempt to liberalise agricultural trade, it is viewed
as a further example of managing trade under a Maginot Line mentality.
Food-importingDev,eloping Countries
Since the European Community has become one of the most important foodproducing regions, its decisions on agricultural policy have an impact not only on
the Community food economy but also on the world food economy. In general,
developing countries are better off if world food production is higher due to a
specific policy in a large producing country.
Table 2 shows the effects of liberalisation of the European Community's grain
trade, Community grain production would drop considerably - up to 40 per cent
for wheat - and grain production in the rest of the world would increase slightly.
The total net effect would be slightly negative. Consequently, the present protectionist grain policy of the Community contributes marginally to an improvement
EUROPEAN FARM POLICIES
385
of world food availability and keeps grains cheaper for importing developing
countries. Production of grain in developing countries is somewhat lower and
their consumption is somewhat higher due to the protectionist Community policy.
But liberalisation of the European Community's grain trade would have significant effects on the pattern of world trade in grain. Calculations presented in Table
3 indicate that imports of grain by developing countries would decrease by nearly
7 million tonnes and exports would increase by about 2 million tonnes. Consequently the net grain imports of developing countries would be reduced considerably. Higher world market prices for grain would induce a more balanced world
grain trade, but this at the cost of less grain available in developing countries,
especially for low-income countries in Asia.
The other less tangible effect of the CAP is on the extent of international price
variability from year to year. Particularly damaging are the global de-stabilising
TABLE 2
Changes in Grain Production caused by a Liberalisation of Grain Trade
(per cent)
Wheat
Maize
Barley
Wheat, maize and barley
European
Communnirv
Major
exporters
Rest of
the world
-40.0
-40.0
-36.8
-38.8
9.0
2.0
14.3
6.3
3.6
0.8
0.6
2.5
Total
-0.02
-0.00
-3.30
-0.90
Source: Ulrich Koester, PoL cv Options for the Grain Economv of the European Community:
Implicationsfor
Developing Countries, Research Report No. 35 (Washington: International Food Policy
Research Institute,
1982) Table 12.
effects of widely fluctuating prices that arise when the European Community
intermittently dumps its surpluses. Theoretical studies have shown that of a variety
of policy instruments designed to protect domestic agriculture, variable import
levies have the largest impact on price variability in the rest of the world and
empirical studies show that instability of world market prices is higher as a result
of the Community's policies towards grain marketing and stockpiling. 20 In short,
through its variable import levies, the Community is stabilising its prices while
transmitting all the price instability to the rest of the world. This would not be a
problem if price instability had no role in farmers' output decisions or in macroplanning. But the fact is that it does, especially in developing countries. Riskaverse farmers are likely to produce less and to switch to crops that display more
stable price behaviour. Planners of the macro-economy must make provision for
sufficient foreign exchange to cover food imports at an unknown price and therefore must remain more liquid than they would at more stable prices or they must
386
MALCOLM D. BALE AND ULRICH KOESTER
maintain higher levels of stocks. There is an opportunity cost in having funds tied
up for food-security purposes.
Net Welfare Effects on Dev,eloping Countries
The European Community's agricultural policy affects the welfare of developing countries in three ways: (i) by the effect on the level of world market prices,
(ii) by the effect on the variability of world market prices and (iii) by the effect of
preferential trade agreements.
Literature cited earlier has shown that world market prices for agricultural
products are depressed as a result of the CAP. Consequently, countries which
export those products for which the European Community acts on world markets
are worse off. The present pattern of world trade in agricultural products, however, reveals that the Community and developing countries only compete to a
limited extent on world markets. Tradle liberalisation by developed countries, so
TA1LE 3
Effects on World Trade in Grain of a Reduction of the European Communitys Tariffs
Chlatnge, in ex.prts
Cliange in imports
(thouvsand
tonnes)
Developed countries
Developing countries
Sub-Saharan Africa
Low income
High income
Asia
Low income
High income
North Aftica/Middle East
Low income
High income
Latin America
Low income
High income
%
(ri/.'Uou
tonnes)
-986.19
-6,828.49
-4.2
-- 19.8
17,506.69
1,889.13
17.2
12.4
-93.41
-65.24
-9.9
-5.4
24.77
1.80
13.8
20.0
-3,157.62
-386.31
-39.1
-7.9
15.53
22.92
50.1
1.1
-373.26
-1,640.63
-11.2
-26.9
3.63
261.39
5.3
130.7
-4.11
-1,105.90
-4.9
-11.1
1,764.01
14.0
Source: Ulrich Koester, Policv Options for the Grain Economy of the E'uropean Communitv: Implications for
Developing Countries, Research Report No. 35 (Washington: International Food Policy Research Institute,
1982) Table 11. The calculations were based on data and the model developed in Alberto Valdes and Joachim
Zietz, Agricultural Protection in OECD Countries: its Cost to Less Developed Countries, Research Report No.
21 (Washington: International Food Policy Research Institute, 1980).
a study of member countries of the Organisation for Economic Cooperation and
Development (OECD) has shown, would largely affect export commodities of
developing countries which are not grown under temperate conditions. But a few
commodities, such as sugar, beef and tobacco, which are grown in both temperate
EUROPEAN FARM POLICIES
387
and tropical climates, are export commodities that would benefit greatly from
trade liberalisation by OECD countries. ' Some sugar-exporting countries incur
a significant welfare loss as a result of the Community's sugar policy. In 1979
Cuba lost $69 million and the Philippines and Thailand each lost $42 million. The
welfare effects of beef-exporting countries are probably of less importance, but
they are important for some countries. For example, while beef is the most affected export commodity for Kenya and Tanzania, they only exported 112 and 27
tonnes, respectively, in 1980. World market prices for beef would increase by
about 12 per cent under a liberalised CAP which means that gains for these two
countries would be quite small until their beef exports were considerably larger. '2
The depressing effect on world market prices of the CAP are beneficial for most
developing countries which import temperate-zone agricultural products. Only a
few perhaps of the present importing countries would be exporters if world market
prices were higher. Not all of them, though, would be better off with higher world
market prices. The outcome depends on the magnitude of price changes and
domestic reactions of supply and demand with respect to price changes.
In short, the effect of the CAP on the level of world market prices is unevenly
distributed across developing countries, it having positive effects for some
countries and negative effects for others. Furthermore, the CAP increases the
variability of world market prices and raises the uncertainty for exporting and
importing countries alike. Developing countries are less capable of bearing additional uncertainty and consequently have to implement policies to deal with it.
It is questionable how effective and how equitable are the preferential trade
agreements. As far as the European Community's sugar protocol is concerned, all
but one of the preferred countries are over-compensated. Non-preferred
countries, however, are worse off and trade patterns are frozen because of the
preferred rights to import.
POLICY OPTIONS FOR THE CAP
Many economists and observers have adopted a critical attitude towards the
CAP because of the apparent absurdities of many of its elements, because of the
burdensome administrative details and associated costs of it and because of its
apparent ability to seal the domestic market completely from foreign competitive
pressures. But each part of the CAP has a history and an explanation can be
advanced on how and why it came into existence. 24 Whatever is decided within the
European Community, the CAP serves the interests of some group, otherwise it
would not have been implemented.
In 1980, however, a fundamental change in the sources of criticism occurred.
Prior to that time, the CAP was faulted by outsiders, such as academics, 'public
388
MALCOLM D. BALE AND ULRICH KOESTER
interest' groups and the press. But beginning in 1980 those actually formulating
the policy and setting price levels, such as the Commission of the European
Community and the Council of Ministers, began to reconsider the CAP under the
pressure of the threat of a budgetary crisis in the Community. CAP expenditures
have grown much faster than the sources of funding, but increasing the finanlcial
resources of the CAP by increasing 'own resources' is unlikely to be a solution,
for all national governments must approve such a change and all national governments must ratify it before it can become operable.
While a reform of the CAP would be desirable from an economic point of view
and is urgently required from a budgetary one, none of the proposals to reshape
the CAP seem to be politically acceptable. 5 Any reform that alters the present
delicate 'equilibrium' in the distribution of the benefits of the CAP anong nimembfher
countries could not receive the unanimous vote of the Council of Ministers. Thus.
in accordance with tradition, the most likely outcome is marginal changes in the
CAP in the direction of further regulation and protection of the European Community's agricultural sector,
A Commonwealth Group of Experts, drawing on the economic inaxim that the
least harmful way to achieve income-support objectives is through direct transfers, has shown that if subsidies for grain, sugar and beef replaced existing interventions in West Germany, France and the United Kingdom, such that incomes of
farmers were left unchanged, then commodity prices would fall to world market
levels, global price instability would be reduced, agricultural imports (mainly
from developing countries) would increase by about 70 per cent, food consumption in the European Community w ould increase and budget expenditures on Community farm programmes would decline - all in all, a very provident outcome.Y'
A change in the milk-market regime is the most pressing issue from the budgetary standpoint, given the proportion of the budget which it absorbs. While
economists agree that policies to curtail excess milk production are needed,
politicians are loathe to adopt a policy the t could reduce the income of farmers.
Proposals based on a restrictive dairy-price policy with farmer-tied direct income
transfeirs have been made and the potential gains in welfare are remarkable. Gains
for West Germany could amount to 0.3 per cent of GNP, a gain larger than almost
any othei single decision within the existing framework. 27 Yet in spite of the fact
that in West Germany the Council of Economic Advisers to the Ministry of Food,
Agriculture and Forestry proposed such a restrictive milk-price policy and tied
income transfers over an adjustment period, it is unlikely that the proposal will be
adopted. Farmers' unions and some member-country governmenlts oppose direct
support payments because of their visibility to the public which, in turn, would
stimulate a more enlightened debate on the merits of income-support policies. In
the dairy industry, for example, direct payments would make it immediately
obvious that Italian consumers are subsidising farmers in France (and other
EUROPEAN FARM POLICIES
389
countries). The Commission of the European Community favours more dirigiste
solutions to the CAP problem, such as a production quota system for the milk
market, Such a policy would have the side-effect of increasing the supply of beef
and veal and would thus lower their prices on the world market which, in turn,
would decrease the export receipts of beef-exporting countries.
Another proposal of the Commission is to restrict imports of non-grain feedstuffs which now enter the European Community at near-zero rates of duty. The
VERs of Thailand, Brazil and Indonesia, mentioned earlier, are an initial step. But
if such agreements are limited to a few exporters of a specific commodity, then
substitution of products and countries occurs, which means that the effect on the
Community is almost negligible. 28 But VERs and further restrictions on imports
of cereal substitutes do affect developing countries and the world economy at
large. First, world production patterns are forced to diverge even further from
those indicated by comparative advantage, in order to circumvent the agreement.
Second, VERs can be viewed as just the first step along the road to serfdom to the
CAP. A typical evolution of trade-restrictive instruments is from VERs to formalised import quotas to more restrictive quotas to tariff quotas and so on. Each time
it is argued that the next step is merely a further formalisation of the status quo.
The danger foreseen with the VERs on cassava is that they, too, will follow this
path. Proposals by the Commission to include restrictions on other cereal substitutes, specifically corn gluten and citrus pulp pellets imported from the United
States, and to introduce a tax on vegetable oils, of which the United States is a
major exporter, also pose a threat to developing countries. Not only does it increase the level of uncertainty for traders but also a trade war could break out
which could ultimately precipitate a global man-made food crisis.
It is claimed that the European Community, as one of the two 'pillars' of the
Western political and economic system, has a special global responsibility for the
functioning of the international trading system. But the Community is failing to
uphold this responsibility and thus represents a crumbling pillar of the international trading system. 29 It is tempting to argue that the CAP is the adolescent
offspring of a mixed marriage and that political exigencies prevent its rehabilitation. This has clearly been the attitude within the halls of Community decision
making in the past. But the recent experience of the CAP limping along from one
crisis to another, with various creative stop-gap measures put into place to tide it
over the crisis, is scarcely tenable in the long run and it is forcing the Community
to re-examine this position. They may well conclude, as have numerous West
European scholars, that the CAP no longer serves the interests of Community
agriculture or its political relations with the rest of the world. It is expensive and
cumbersome to operate. Protection is too high and unbalanced. Commodity
expenditures are poorly allocated and their redistributive effects aggravate inequalities. In the final analysis, rather than being a unifying institution within the
390
MALCOLM D. BALE AND ULRICH KOESTER
Community, the CAP in its present form threatens the political equilibrium of the
Community and endangers the international trading system.
1. The authors acknowledge helpful comments on an earlier draft from Martin Wolf and Stefan
Tangermann, neither of whom are responsible for remaining errors. The opinions and interpretations in the article are those of the authors and should not be attributed to the World Bank or its affiliated organisations.
2. The metaphor was first used in this context by M. Mahe and M. Roudet in 'La Politique
Agricole Fran,aise et "l'Europe Vent": Impasse ou Revision', L'Economie Rurale, January 1981.
3. The most comprehensive and recent desLription of the CAP is Simon Harris. Alan Swinbank
and Guy Wilkinson, 7he Food and Farm Policies of the European Communitiy (Chichester and New
York: John Wiley, 1983).
4. The shares are taken from The Common Agriculture Policy and the EEC's Trade Relations
in the Agriculture Sector (Effects on the Developing Countries) (Brussels: Commission of the
European Community, 1982).
5. The European Community, of course, is not alone in maintaining a tariff structure that
escalates as the value added increases.
6. Rosemary Fennel, The Common Agricultural Policv of the European Communiit
(Montclair, New Jersey: Allanheld Osmun, 1979) p. 6.
7. Murray Tracy, Agriculture in Western Europe: Challenge and Response - 1880-1980
(Montclair, New Jersey: Allanheld Osmun, 1982) p. 268.
8. For more on this aspect, see Kurt Eisenkraemer, 'Gibt es politisch realisierbare Alternativen
zur der Zeitigen EG-Agrarpolitik?', in Alternativen zur EG-Preispolitik,Loccumer Protokolle Heft
5/1980 (Loccum: Evangelische Academie, 1980) pp. 50-69.
9. These figures are based on 1976-78 data from the Commission of the European Community
and from Malcolm D. Bale and Ernst Lutz, 'Price Distortions in Agriculture and their Effects: an
International Comparison', American JournalofAgricultural Economics, February 1981, pp. 8-22.
10. For further cofmmodity-specific details of the operations of the CAP and critical comments
on them, see Ulrich Koester and Bale, 7he Common Agriculture Policy of the European Communitiy:
a Blessing or a Cursefor Developing Countries?, World bank Staff Working Paper (Washington:
World Bank, forthcoming).
11. For a more detailed explanation of this mechanism, see Eisenkraemer, loc. cit., p. 59.
12. See Koester and Bale, op. cit.
13. The figures are taken from Bale and Lutz, 'Price Distortions in Agriculture and their Effects:
an International Comparison', loc. cit.
14. This point is explained in Koester, 'The Redistributional Effects of the Common Agricultural Financial System', European Review of Agricultural Econlomnics, December 1977, pp.
321-45.
15. The figures on grains that are used in this section come from Koester, Policv Optionsfor the
Grain Economy of the European Community: Implications for Developing Countries, Research
Report No. 35 (Washington: International Food Policy Research Institute. 1982) and Alexander H.
Sarris and John Freebaim, 'Endogenous Price Policies and International Wheat Prices', American
Journal of AgriculturalEconomics, May 1983, pp. 214-24. See, also, Table 3 below.
16. The aggregate study is Sarris, 'European Community Enlargement and World Trade in Fruit
and Vegetables', American JournalofAgriculturalEconomics, May 1983, pp. 235-46. Examples of
product-specific or country-specific studies are as follows: Reimar von Alvensleben, 'Probleme der
EG Marktpolitik bei Obst und Gemiise', in Harnen Storck (ed.), Gegenwvartsfragender Gartenbauekonomie, Forschungsberichte zur Okonomie im Gartenbau Heft 36 (Hannover: Institut fur Gartenbauokonomie, 1981) pp. 181-205; Wilhelm Elfring and von Alvensleben, 'Possible Effects of the EC
Production Subsidy on the Market for Tomato Concentrates'. Acta Horticulturae, May 1979, pp.
277-86; and Dieter M. H&rmann, Export-orientedHorticulturein Developing Countries: Morocco,
Arbeitsbericht Heft 34 (Hannover: Institut fur Gartenbau6konomie, 1981).
EUROPEAN FARM POLICIES
391
17. Koester and Bale, op. cit., and von Alvensleben, 'The EEC Agricultural Policy and World
Trade in Fruit and Vegetables', Institut ffir Gartenbauokonomie, Hannover, mimeograph, August
1982.
18. For an explanation of the conditions and operation of the Lomd Convention, see Harris, 'The
Community's External Policies in the Lome Convention and the Common Agriculture Policy',
Commonwealth Economic Papers, No. 2, 1978, pp. 16-26.
19. Two important references on the sugar and beef protocols are Koester and Peter Schmitz,
'The EC Sugar Market Policy in Developing Countries', Euiropean Review of Agricultural Economics, May 1982, pp. 183-204, and Schmitz, 'Praferenzabkomnen der EG', in E.P. R6ckenhoff
(ed.), Landwirtschaft unter verdnderten Rahmenbedingungen (Munster-Hiltrup: Landwirtschaftsverlag, 1982) pp. 405-21.
20. Bale and Lutz, 'The Effects of Trade Intervention on International Price Instability',
American Journal of Agricultural Economics, August 1979, pp. 512-16; and Koester, Policv
Optionsfor the Grain Economy of the European Community: Implicationsfor Developing Coountries,
op. cit., p. 29.
21. See Alberto Valdes and Joachim Zietz, AgriculturalProtectionin OECD Countries: its Cost
to Less Developed Countries, Research Report No. 21 (Washington: International Food Policy
Research Institute, 1980).
22. This information is taken from Koester and Schmitz, loc. cit., Schmitz, loc. cit., Koester and
Stefan Tangermann, Alternativen derAgrarpolitik (Munster-Hiltrup: Landwirtschaftsverlag, 1976)
and Tangermann and Wolfgang Krostitz, Protectionism in the Livestock Sector with Particular
Reference to the International Beef Trade, Gottinger Schriften zur Agrarokonomie Heft 53
(G6ttingen: Institut fir Agrarokonomie, 1982).
23. Two examples of apparent absurdities in the agricultural support system are where vegetable
farmers receive above-free market prices for tomatoes which are so much in surplus that they are
ploughed under, so providing manure for next year's tomato crop, and where farmers receive
*ubsidised dried milk as an ingredient in the formula feed, some of which is fed to dairy cows which
then produce more surplus dairy products (including dried milk).
24. Tangermann, 'Financial Pressure on the European Community and its Consequences for the
Future of the Common Agriculture Policy', paper presented at the Conference of the Agricultural
Economics Society of Ireland in October 1982.
25. Possible reforms of the CAP are discussed in T.E. Josling, Mark Langworthy and Scott
Pearson, Options for Farm Policy in the European Community, Thames Essay No. 27 (London:
Trade Policy Research Centre, 1981).
26. Protectionismn:Threatto InternationalOrder- the Impact on Developing Countries, Report
by a Group of Experts (London: Commonwealth Secretariat, 1982).
27. See Koester and Tangermann, op. cit.
28. The speed and ingenuity with which exporters can adjust to VERs is described for the case
of footwear imports into the United States in John Mutti and Bale, 'Output and Employment Changes
in a "Trade Sei-sitive" Sector: Adjustment in the US Footwear Industry', Weltwirtschaftliches
Archiv, Vol. 117, No. 2, 1981, p. 355, An analogous example is the case of the grain embargo
imposed on the Soviet Union by the United States which had very little influence on the ability of the
Soviet Union to acquire grain. See Animesh Ghoshal, 'Going against the Grain: Lessons of the 1980
Embargo', The World Economy, June 1983.
29. Martin Wolf, 'The European Community's Trade Policy', in Roy Jenkins (ed.), Britainand
the European Community (London: Macmillan, for the British Association for the Advancement of
Science, 1983).
'He uses statistics as a drunken man uses lamp-posts
illumination'
-
-
for support rather than
attributed to Andrew Lang (1844-1912)
No. 274.
Ron Duncan and Ernst Lutz, "Penetration Of IndLu,strial Counltry NMarkCls by Agricultural Products from Developing Countries," Vll Develtopmtelnt
No. 275. Malcolm D. Bale, "Food Prospects in the Developing Couintries: A Qualified
Optimistic View," 'Flte,Amierican Fconomic Rcview (with Ronald C. Duncan) and
'X'Orld Agrictuliiral Trade anid Food Security: Emerging Patterns and Policy Directions," I istt n..in neiterntioatial Law4; Journa:1 (with V. Roy Soiitht orlb
No. 270. Sweder van AVijnbergen, "Interest Rate Nhnagenu'nt in LDCs," Journal- ot( A%
loinetariy
Ecoinomics
No. 277. Oli Havrylyshyn and Irad; Alikhani, "Is There Cause for Export Optmism7 An
Inquiry into the Existence of a Second Generation of Successful Exporters." IA!Iwirlscattliiches AIrchiv
No. 278. Oli Havryl'shyn and Mtlartin WVolf, "Recerit Trends in Trade among Developing
Countries," Eurtopeani Ectniomiiic Rev,iew,
No. 2 -.
Nancy Birdsall, "Fertility and Economic Change in Eighteenth and Ninelee llh
Century Europe: A Comnment," -i''
,,itia
andl Del'-elhJ 'cilli Reviewi
No. 280. Walter Schaefer-Kehnert and Johrn D. Von Pischke, "Agricultural Credit Policy in
Developing Countries," translatedL from HItnf1t' rli tier Landwirtschlaff itli Ernihrwng
in dte Eiita'ickhin'imm I
includes original German text)
No. 281. Bela Balassa, "Trade Policy in leXic0,"`'V,rlil Dezelo)pwmenif
No. 28 Ia. Bela Balassa, "'La politica de comercio exterior de IMk\ico," Ctonercito ELxe'rior
No. 282. Clive Bell and Shantayanan Devarajan, "`Sh1a1dowV PlikeS for Project \.1luJation0
\
under
Alternative Macroeconomic Specifications," The(f' Qiu,irlcr'li
h
tlti 1ECoiIs
No. 283. Anrne 0. Kr-ueger. "Trade Policies in Developing Comunl rie:." Iltmdbook 1uh7uf i, l
Econ1()o1mics
No. 284. Anne 0. Krueger and Baran Ttuncer, 'An Empirical Test of the Infant Indul.dr
Argument," American 1z,nonu, Rezview
No. 285. Bela Balassa, "Economic P'olicic-i in Portugal," EconoLmllia
No. 28o. F. Bourguignon. G. Michel, and D. Miqueu, "Short-min Rigidities and Lonig-mn
Adiustments in a Computable General Equilibrium N T\odcl of Income Distribution
and Development," Join rnmal of Dc
; mmmLmI
Ecoiznolics
No. 287. Michael A. Cohen, "The Challenge of Replicability: Towvard a New Pir1 ligril for
Urban Shelter in Developing Countries," Regionatzl 1'h'j'm''cmmitl Dcc
ito',sZue
No. 26 . [iollis B. Chenery, "Interaction between Theory and Observation in Dt1'vlo)piC0
nl'11
t'lhI
I
Dev,elotipieiif
N'i. 289. 1. B. !Kriiohi and R. f-I. Sabot, "EtdLati ,,'nl Expanisioni and the Kuznets Effect," lite
,-lneri anl Econom;)}Jit Revu'wtt
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