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Robbery of CAP-Part One

July 2005

The Environment and Agriculture Committee of the Council of Europe meeting in Spain this weekend voted to reform the Common Agricultural Policy and give priority to the interests of the developing world, the environment, consumers and non-farming industries.

The rapporteur for the report on the costs of the CAP, Paul Flynn MP Newport West said,’For the first time this committee has abandoned its role as a mouthpiece for agricultural big business and demanded an end to the dependance of Europe’s farmers on state charity.

The report has been before the committee for more than a year and is not connected with the debate on the British rebate. It describes subsidies as ‘unjust, self-defeating a main cause of environmental damage and poverty in the developing world.’

34 hostile amendments submitted by farmer MPs from Italy and Switzerland were debated in the meeting Santiago de Compostela this weekend. Only two were accepted. The rapporteur said he was delighted by the outcome,’European taxpayers are hit twice by the CAP with taxes and the highest food prices in the world. The cost to the average family is £16 a week. European politicians have been cowardly in buckling to the propaganda and threats of the farming lobby and resisting essential reforms.

CAP reforms will boost the European economy, liberate the developing world to compete on fair terms in their own and world markets and end the debilitating dependancy culture of European farmers.”

The report will be debated again in a plenary session of the Council of Europe in October and will then be submitted to the Council of Ministers.

Introduction

The policy was established with the aims of increasing agricultural productivity, providing a fair standard of living for agricultural producers, stabilising agricultural markets, assuring stability of supplies and ensuring reasonable prices to consumers. It was determined by the experience of post-war Europe. Above all it was based on the desire for security and self-sufficiency.

CAP established a complex system where farmers were guaranteed prices for their produce and given subsidies to guarantee supply. Support was extended to exports, and tariffs on imports from outside the EU were implemented, adding a further level of protection. CAP fulfilled its aims very quickly in guaranteeing a stable income for farmers and food supplies. It was determined by the circumstances of the time. Those circumstances have changed and it is time to reconsider CAP and the role agriculture plays. A valuable contribution to this debate has already been made by Mr. Nicolaos Floros, in his report, ‘Challenges for a new agricultural policy’ (Doc.9636).

This report will demonstrate that the policy has gone way beyond its original aims and has had negative effects. For the purposes of this report cost will be understood as a negative consequence, measured in terms of damage to the environment, financial costs to the economy and developing world. These negative effects are unintended consequences, unforeseen by the policy-makers at its inception, but today’s policy-makers are in a strong position to learn from these problems. The EU has a responsibility in its policies, not just to its farmers, but to the rest of its population and people elsewhere. Four areas will be examined to illustrate these effects, the developing world, the European taxpayer and consumer, the economy and other industries and the environment. Consideration will also be given to New Zealand, where government support for agriculture was largely removed in 1984, the United States and Switzerland.

While this report seeks to expose the negative consequences of CAP, it acknowledges that in some circumstances CAP may have benefited communities. For instance, it has been recognised as a means for the survival of minority languages in rural communities. This received some attention a debate on Mr. Floros’ report, which recognised the importance of protecting rural areas, not only for environmental reasons, but because these areas contain much of Europe’s cultural heritage including languages. Support for agriculture could play a future role in protecting Europe’s cultural heritage, while at the same time being refocused to the needs of the environment and taking into account the developing world.

Europe has over 60 indigenous or regional languages and many of those who speak these languages are based in rural areas. At the same time, a significant number of these languages are classified as being endangered and enjoy little protection or support from national governments. Rural depopulation and the decline of the farming industry is clearly a factor in this. The Council of Europe has played a prominent role in highlighting the plight of these languages and offering protection through the European Charter for Regional and Minority Languages. Any reform of CAP must recognise this as a positive aspect and seek to include it in any future policy. I believe deeply in the report’s (in discussion of document 9636) point about how precious rural life is. I speak Welsh, a language that exists in strength now only in rural areas even though it was a sophisticated, developed language 1 000 years before English came to the British Isles. That is of unique cultural importance. Our rural areas are often the places where the soul of the nation lies in its richest and purest form. Istvan Szechenyi the celebrated Hungarian litterateur said the answer to the question of where the nation lives is that the nation lives in her language.

The correlation between minority languages and rural areas can be illustrated with a few examples.

Mrs Tytti Isohookana-Asunmaa, in her report Endangered Uralic minority cultures (Doc. 8126), documented the problems of Uralic languages, often based in rural areas, but declining in tandem with the movement of young people to urban areas, often in search of employment. It highlighted the need for protective measures such as funding for education and media.

Friesian, spoken in the Netherlands and small areas of Germany by 600,000 people, has suffered a downward trend in its use as a result of rural depopulation. Two thirds of Friesian speakers live in rural areas, where 8% of the population is employed in agriculture, compared with only 3% for the rest of the Netherlands.

Breton, spoken in North-Western France in the regions of Brittany and Loire-Atlantique, is concentrated in rural areas. Agriculture and fisheries are predominant in the local economy, but these areas are losing their Breton-speaking population. “The strongest Breton speaking areas are also the poorest agricultural land in Brittany,” leading to emigration. In addition, these areas tend to have the most committed Breton speakers.

Welsh, spoken by an estimated 500,000 people, has its greatest concentration in rural areas. According to the 2001 Census, out of 8 local authority areas with more than 40,000 people with one or more skills in the Welsh language, 5 are largely rural. For example, in the areas of Carmarthenshire and Ceredigion, farming accounts for 10.5% of the working population. 106,440 people have more than one skill in the Welsh language in Carmarthenshire and 44,635 people do in Ceredigion. A decline in agriculture naturally impacts upon the language spoken in rural areas.

Reform has become necessary to take into account the effects of CAP. The most recent reforms can be welcomed and go some way to break the link between subsidies and production and link farming practices to environmental protection with a single payments scheme, but the damage to the developing world and the environment has already been done. Any concern that reform could damage the EU’s self-sufficiency has been dismissed by the OECD. The EU is more than self-sufficient and this is no threatened by reform. The reforms are a tentative step in the right direction, but critically have not altered the overall amount transferred to farmers. It is estimated that the budget for CAP will remain stable in spite of the introduction of single payments. Giving the focus to the environment is a popular way to repackage CAP, without addressing its real costs and is largely in response to pressure from a powerful farming lobby. A leading Economic Advisor notes, “I am very cynical about this switch to (environmental) funding – it’s a way of keeping the subsidies.”

Consumer organisations have also been critical of the reforms, suggesting that consumers will see little difference. “I fail to see the purpose of a reform which allows payments to continue more or less as they are, with the same amounts of money going to the same people, irrespective of need, forcing poorer families to subsidise better-off farmers.” The vested interests of the farming lobby mean that real progress is stalled and concessions had to be made in order to achieve any reform at all. NGOs working in the developing world have criticised the reforms for being of little assistance to poorer farmers and reform to parts of the policy such as sugar is only now being considered. A critical examination and reform of CAP should not be viewed as a threat to agriculture in Europe, more as a recognition of the problems and need for change, which benefit everyone, including the farmers.

However, this report will not attempt to analyse each new round of reforms, but concentrate on highlighting the negative consequences of CAP and the need for a rethink of agriculture policy in the EU. By its own admission, the aims of the European Union have changed. At the European Council in March 2000 in Lisbon a new ten-year objective was set for the European Union to become, “the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion.”

Trends in agriculture

To set CAP in context, it is important to see what contribution farming makes to the economy of the EU.

There is a general trend of long-term decline in the agricultural sector in the EU. Employment in agriculture has declined dramatically and the structure of the workforce has changed. Fewer people are farming and fewer younger people are engaged in agriculture. The contribution agriculture makes to the EU economy is dwarfed by industry and the service sector.

The change in age structure of the agricultural workforce in the EU suggests an ageing industry. Claude Vidal’s overview of the workforce found that in 1995, workers aged 55 or more represented 38% of the permanent labour force. It is becoming more difficult and less attractive for young people to commit themselves to the industry.

Although there is a trend to farm larger areas for the benefits of economies of scale, 58% of agricultural holdings in the EU-15 are under 5 hectares, while 54% of holdings (of a total of 6.8million holdings) are in less favoured or mountain areas.

Cost to the developing world

When CAP was established little thought was given by policy-makers to producers elsewhere in the world, although concessions were granted to former colonies or members of the Commonwealth. In recent years, there has been a realisation that what happens within the EU has a significant effect on other countries. While it is easy to appreciate why the EU acts in the interests of its own farming industry, as one of the wealthiest regions of the world, it has a responsibility to consider those who are in a less fortunate position. It is also important to point out that there are other powerful factors as work in trapping developing countries into a cycle of poverty including debt and the way world trade operates. A report published by the Commission for Africa in March 2005 underlines the role EU policy plays in determining conditions for trade elsewhere. According to the report, Africa is unlikely to reach the Millennium Development Goals and one of the reasons for this is, “the disgraceful protectionism facing it in the markets of the developed world, and the need to compete with heavily subsidised developed country exports.” It goes on to add, “These barriers and subsidies are absolutely unacceptable; they are politically antiquated, economically illiterate, environmentally destructive, and ethically indefensible. They must go.” CAP also has a knock-on effect on countries bordering the EU, who cannot compete against subsidised goods from their nearest neighbours. For instance Russian representatives have highlighted this as a problem they experience with products originating in Finland. This does nothing to help the much-needed development of Russia.

CAP creates a double cost for the countries of the developing world in the dumping of surplus goods on their markets causing great damage to agriculture and trade restrictions preventing the export of goods. More money is spent on supporting agriculture in the EU, with negative consequences for developing countries, than is spent on aid used to deal with problems created in part by CAP.

Consider the contrast between what Europe spends on its cows and the lot of many people in the developing world.

In the EU, the average cow now receives total support from EU governments of €1.68 (US $2.20) a day, more than the income of half the world’s population

EU governments spend enough money on the CAP every year to fly all their 21 million dairy cows around the world, stopping off in places like Hong Kong and San Francisco, and still able to give them over €573 (£400) spending money each.

Clearly this would not be such a significant problem, if the developing world was not so reliant on agriculture, but it is an inescapable fact that for many it is the main source of employment. It has been estimated that 50% of people in developing countries are employed in agriculture, while this increases to 60% or more in less developed countries. The developing world has an advantage in most types of crop production, because land and labour is cheaper and environmental conditions suit crop growth. In a report prior to the WTO meeting in Cancun, the Committee stressed the importance of agriculture to these economies, “agriculture is the backbone of the economy,” and “the establishment of a prosperous agricultural sector is one of the keys to development and economic growth.” This compares strikingly with Table 1 on levels of employment in the EU.

CAP has two significant effects on these countries. Firstly, dumping, meaning the dumping of surplus goods, produced in Europe for a guaranteed price, on markets in the developing world. This means that prices of the same goods produced in the developing world are depressed and farmers suffer as a result.

Secondly, restrictions on exports from the developing world. Many goods, for example sugar, as we will see later on, face restrictions on access to the European market. Some countries enjoy preferential status, but Mozambique, a large sugar producer, faces these restrictions. If the poorest nations of the world increased their share of world exports by 5%, they would reap an extra €268.2bn ($350 billion) a year, seven times what they currently obtain from aid. Using this, a projection has been made that suggests that for every 1% increase in the share of world exports achieved by developing countries, the number of people in extreme poverty would decrease by 128 million. Agriculture has the potential to contribute to poverty reduction, but is constrained as a result of CAP and the behaviour of developed countries. It can contribute to increasing wages and the creation of jobs in related sectors. However, it is important to avoid damage to habitats and the overuse of pesticides. A report by the International Development Select Committee on the Department for International Development’s (DFID) agricultural policy notes that, “DFID cites a correlation between a 1% increase in agricultural productivity and a reduction by between 0.6% and 1% in the proportion of people living on less than €0.76 ($1) a day.” No equivalent correlation exists for manufacturing or service industries, demonstrating the importance of agriculture to the developing world.

In another twist, the EU devotes part of its budget to overseas development aid, ironically to tackle some of the problems caused by its own agricultural policies. This is not to suggest that the EU’s development programmes do not make an important contribution in developing countries, simply that there is an irony in giving in one hand and seeming to take with the other.

Another factor which will have an impact on agriculture and food supply in both the developing world and developed world is pressure on water supplies. Demand on water supply for intensive farming in the developed world is already making large inroads into aquifers that will not be replenished. This situation is likely to be exacerbated by climate change. A recent report highlighted that those living in developing countries are more likely to suffer directly from the effects of climate change. Work carried out by the Earth Policy Institute demonstrates the gravity of demand for water outstripping supply and creating a crisis for future generations. The Institute estimates that 1000 tons of water is required to produce 1 ton of grain. The water balance in the North China Plain has an annual deficit of 37 billion tons of water, enough to produce grain to feed 111 million Chinese at their current level of consumptions. “In effect, 111 million Chinese are being fed with grain produced with water that belongs to their children.” The focus of agricultural and environmental policy has to be moved towards considering these looming crisis away from trying to satisfy the interests of a powerful farming lobby.

EU Sugar regime

An examination of the case of the EU sugar regime will be used to demonstrate the effect of CAP. It will also reveals costs to the taxpayer, consumer and the economy in the EU.

“In a bizarre reversal of geography, Europe is the world’s largest exporter of white sugar even though it costs twice as much for European producers to grow the stuff than farmers in poor countries.”

It has also been described by the think tank Agra Europe as, “the most protectionist, market rigging and expensive of common market organisation for agricultural products.” The European Commission is equally critical of the regime. In a statement as part of an announcement of reforms it said, “The current system has come under fierce criticism for misallocating consumers, hampering competition, harming developing countries and giving consumers, taxpayers and the environment a raw deal.” In a written reply to a Parliamentary question, the Secretary of State for International Development in the UK stated, ‘The EU’s CAP regime for sugar is a heavily regulated, highly protected and discriminatory one. It is also extremely costly to the consumer and taxpayer. Most of the countries in Africa and Asia who are sugar producers are currently denied preferential access to the EU market. Reform of the regime is both necessary and desirable, and long overdue.’ Echoing this statement, the Chancellor of the Exchequer Gordon Brown MP remarked in a speech that, “We the richest countries agree to end the hypocrisy of developed country protectionism by opening our markets, removing trade-distorting subsidies and in particular, doing more to urgently tackle the scandal and waste of the Common Agricultural Policy – showing we believe in free and fair trade.” He intends to make this the focus of the G8 in 2005.

The regime operates on two levels. Firstly, subsidising the producers of raw sugar, which is then exported and secondly imposing high import tariffs (with some countries given preferential treatment).The EU produces a surplus of €8.6m (£6m) tonnes a year, which equates to 20% of annual exports of all other countries. Producing sugar in Europe is not cheap and requires intensive methods of cultivation. A study by the Netherlands Economic Institute recorded that it costs Europe around €673 to produce one tonne of white sugar, compared to €286 for competitive countries like Brazil and Colombia.

Secondly, when it reaches the market its price can be set lower than its competitors, depressing the price for cheaper producers in the developing world. The biggest beneficiary of the regime at the moment is the sugar industry itself and some of the richest areas of the EU, dominated by a handful of large companies who record substantial profits. According to Oxfam, British Sugar receives €123m a year in support, accounting for half of the company’s profits and helping it maintain a profit margin of 20%. See page 14 for list of subsidies received.

“Europe’s most prosperous agricultural regions, such as Eastern England, the Paris Basin, and northern Germany – are amongst the biggest beneficiaries of sugar subsidies.” Holdings with sugar beet are larger than the EU average and enjoy a higher income. Statistics from the European Commission confirm that the average size is more than 120 hectares. A simple comparison of European sugar farms and their counterparts in Mozambique illustrates this. European sugar farms can earn €86,021 (£60,000) a year in subsidies for producing sugar, while the average wage in Mozambique is €215 (£150) a year.

Mozambique is one of the world’s poorest countries with 70% of its population living below the poverty line. It is able to produce sugar very cheaply, but with current trade restrictions, less than ten per cent of its production reaches the EU and US. If Mozambique could export more of its sugar, it would be a major step towards tackling poverty. As the leader of Mozambique’s national sugar workers’ union explains, “We are a totally agricultural country and if we had the market, we could triple production and improve conditions.”

A recent report by Oxfam offers greater insight into the situation in Mozambique by estimating the cost of EU on sugar imports. By calculating what Mozambique would have gained if exports to the low-priced world market had been transferred to the EU at current prices since 2001, Oxfam reports that Mozambique could have expanded its exports by over 80,000 tonnes earning €29.1m ($38m) or the equivalent to total government spending on rural development. The potential of sugar to create jobs can be seen in the example of Sofala province. In the late 1990s, the province had unemployment of 19%. Since the reopening of two large sugar estates, employment figures have doubled. This has coincided with the dramatic reduction in poverty. From being the province with the highest poverty headcount in 1996-97, the province now has the lowest incidence of poverty in 2002-03. The table below offers further comparison.

South Africa also feels the effects of the sugar regime. A study by CAFOD found that it costs between €191 ($250) and €229 ($300) to produce one tonne of sugar in South Africa, while in Europe it costs €459 ($600). 140,000 people in South Africa are employed in the sugar industry from growing sugar through to processing, but South African Sugar Association estimates that over the past decade, the EU has depressed the world sugar price by 20 to 40%, forcing many farmers out of business.

Due to import restrictions, consumers in the EU pay substantially more for sugar. It is estimated that as a result of the regime, the cost to British consumers is €860m (£600m). Manufacturers of products using sugar, who employ 80,000 people in the UK, have suffered from high prices, estimating that as many as 10,000 jobs have been lost in the UK during the last five years. The manufacturers are not competing on a level playing field with companies outside of the EU.

Any reform of the sugar regime will have to consider carefully a myriad of different interests. A balance will have to be struck between protecting jobs in the EU and the welfare of developing countries. Radical reform could do more harm than good, but it would be difficult to argue for maintaining the status quo. Research commissioned by the European Commission ‘Reforming the EU’s sugar policy’ examined three options for reform. If full liberalisation were to be adopted, global prices for sugar would rise by 30% and consumers in the EU would pay substantially less for sugar. It is important to note that some NGOs suggest caution in considering full liberalisation, as it could have damaging effects on some industries in the developing world.