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And Now Subsidy Entitlements!


Probably drawing inspiration from the influential work of Nobel laureate Amartya Sen, European Union is using the same principles to reform its notorious Common Agricultural Policy (CAP). While Sen’s entitlement theory focuses on the socio-economic relationship with food, the CAP reforms uses the entitlement approach to protect the massive agricultural support it doles out to its miniscule farming population.

The CAP reforms initiated in 2003, with its implemented slated to begin from 2005, have therefore ensured that the overall level of subsidisation of Europe’s farm producers will not change. The amount of subsidy that a farmer receives in the reference period 2000-2002 becomes his personal entitlement. For the next ten years, till 2013, farmers are entitled to receive the same amount of subsidy. All that he must do is to ensure that he keeps the land, and if he sells or rents a part of the land to another tiller, an equal proportion of subsidy also goes to the new cultivator.

The World Trade Organisation (WTO) will have little, if any, control over taming these subsidies. Decoupling the subsidies from production to single farm payments means that the EU is justified in shifting the subsidies from the blue box to the green box. Further to ensure that the EU doesn’t have to make any drastic reduction commitments in blue box subsidies, the recently agreed framework (also called July framework) explicitly states: “In cases where a Member has placed an exceptionally large percentage of its trade-distorting support in the Blue Box, some flexibility will be provided on a basis to be agreed to ensure that such a Member is not called upon to make a wholly disproportionate cut.”

As if this not enough, the EU has received another waiver to keep the subsidies intact. Spelling out the criteria for direct payments to farmers, Article 14 of the Framework for Establishing Modalities in Agriculture (Annex A) of the July framework agreement states: “Any new criteria to be agreed will not have the perverse effect of undoing ongoing reforms.” Thank to the wisdom and analytical skill of the developing country negotiators at WTO, Europe’s CAP reforms have for all practical purposes become sacrosanct.

Before we try to understand the implications of CAP reform on developing country agriculture, it is important to see what it means to small farmers in Europe. In 1999, 56 per cent of all EU agricultural expenditure was in the form of direct payment to farmers. Like elsewhere, it is the big industrial farms that continue to receive bulk of the direct payments. Not more than 2.2 per cent of the 4.5 million farms in Europe receive 40 per cent of the total payments. This small but influential group of farmers receive more than 50,000 euros every year. For reasons that remain unexplained by proponents of free market economy, these 2.2 per cent of the farmers will continue to receive the same level of direct payments year after year till 2013.

The richest man in the United Kingdom, the Duke of Westminster, who owns about 55,000 hectares of farm estates, receives an average subsidy of 300,000 pound sterlings as direct payments, and in addition gets 350,000 pounds a year for the 1,200 dairy cows he owns. Under the CAP reforms, his subsidy entitlement will remain intact except that the subsidy he receives for the cows will now be shifted the grasslands that he maintains. The reforms therefore have helped the economists and EU trade officials to justify the efforts they are making in making European agriculture WTO-compatible without making any appreciable subsidy reduction.

Interestingly, EU Commission proposal to cap the direct payments at 300,000 euros in single farm payments every year met with such a stiff opposition that it had to be withdrawn. The opposition came from a mere 2,000 farmers (0.04 percent of all farms), a majority of them living in eastern Germany (1260) who receive more than the stipulated ceiling. These are the farms which are industrially managed and feed the large agribusiness companies. In other words, these direct subsidies go indirectly to the agribusiness companies.

For the small farmers, the direct support does not exceed 5,000 euros a year. Such farmers constitute 78.6 per cent of the European farm holdings. While the subsidy entitlements of small farmers may be justified considering the socio-economic context they are farming in, it is obvious that a handful of rich farmers in Europe are holding the global trade negotiations on agriculture to ransom. These farms are located in prosperous areas, and depending upon the industrial lobby whose commercial interests are paramount the political lobbying becomes intense.

Take the case of maize. It never got any price support but continues to attract a large chunk of the agricultural subsidies. It now attracts the highest price support among cereals, 475 euros per hectare compared to 323 euros for wheat. The reason being that maize is a crop that benefits the industry the most. Approximately, 1600 million euros are distributed as direct payment to maize growers in mainly three countries – Germany, Italy and France. At the same time, direct payments are also provided to consolidate diplomatic control over the developing countries through the supply of improved livestock breeds. France, for instance, supplies purebred rabbits for breeding purposes to Caribbean (and also to India), subsidising each rabbit to the tune of 60 euro.

The subsidy benefit does not percolate to all farmers. It is so designed that it benefits the sector where the EU countries have more commercial interests. The direct payments are therefore loaded in favour of beef and veal whereas poultry and pigmeat does not receive the same level of support. Take beef for example, the EU policy encouraged dairy farmers to also rear a bull to become eligible for subsidy. Why bulls, because the government was so far protecting the interest of the slaughter houses. In other words, it was a subsidy to the slaughter houses. Under the reforms, a dairy farmer is not expected anymore to slaughter a bull to claim subsidy but instead maintain the grassland under cultivation.

Huge subsidies also go to ‘milk and milk products’. Bulk of the milk subsidies have so far gone to the milk retailers for producing skimmed powder and products like ice-creams. The reforms will reduce the intervention prices thereby lowering the domestic prices for milk and milk products. This will result in lower production of skimmed milk powder but the world prices are not expected to make any appreciable jump. For the dairy farmer, the subsidy will move from the number of cows he keeps to the area under grasslands. The overall milk quota will however remain stagnant till 2013 and therefore the reforms process is unlikely to make any meaningful impact for international trade.

For the majority of the farmers, the CAP reform does not provide any cut under the planned ‘modulation’ that reduces direct payments to foster rural development. For the remaining, the direct payments have to cut in an arithmetic proportion by a nominal 3 per cent in 2005, 4 per cent in 2006 and 5 per cent in the following years. Two-third of Europe’s farmers will therefore continue to receive the same subsidy entitlement of 5000 euros every year during the period of the reform. The resulting distribution of funds among the member countries will therefore differ based on its farm structure and composition. In Germany, for instance, 61.7 per cent farmers receive less than 5,000 euros. In Portugal, this exemption will benefit 96 per cent of the farmers (as they receive less than 5000 euros in 2002).

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Box 1: Retirement Benefit for Farmers !

 

It certainly is a dream world for farmers. There is not only subsidy to attract young people to the farms, compensatory payments are provided at the time of quitting or suspending production. For those who are growing old there are retirement benefits.

A farmer couldn’t have asked for anything more. After all, these subsidies have not to be pruned or phased out under the framework agreement of the World Trade Organisation (WTO) arrived at on July 31, 2004. These are part of the structural adjustment assistance that the farmers will continue to receive through resource retirement, investment aids and producer retirement programmes, and therefore fall under the infamous (and legally justified non-trade distorting) ‘green box’ payments.

In 1999-2000, European farmers seeking retirement at the age of 55 received huge compensatory payments. Such retirement benefits totalled a whopping 793 million euros. In terms of Indian rupees, it comes to a staggering Rs 4,362-crore. In simple words, the retirement subsidy that EU provided to its farmers quitting agriculture equalled almost the total subsidy that India shells out for its 600 million farmers. These subsidies may be shifted under the category of retirement fund in the days to come. India provides annually Rs 5,000-crore subsidy for agriculture, all of it indirectly in the form of cheap inputs.

 

The early retirement programme has been in existence for ten years. In 2002, the share of budgetary support for early retirement was relatively smaller.

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Behind the complexities of the CAP structure and the reform process, the real intention is only to pacify the growing anger of the tax payers. With mounting outrage, tax payers have begun to ask uncomfortable questions about the necessity to maintain farm support. The entire exercise in the name of reforms is to make certain adjustments that hoodwinks the tax payers to believe that farming is multifunctional and also performs the important role of environmental protection. The subsidies are therefore being shifted from production to environmental protection. In reality, the EU Commission is not making any meaningful change in the farming systems that becomes more sustainable and environmentally safe.

The direct payments are not linked to environmental protection. Payments are made without any consideration of the environment relevance of these crops, mainly in the arable lands which are under intensive and industrial farm practices. Except for a small set of ‘rural development’ measures that will bring in an additional diversion of 1.2 billion euros every year, the entire focus of European farming remains highly skewed and unsustainable. In fact, given the groundwater contamination and the destruction of soil structure and fertility, Europe’s agriculture tops the global chart in environmentally unfavourable and highly unsustainable farming systems.

No wonder, EU support for environmental programmes is increasing. In 1998-99, EU made available 4,965 million euros under various environmental programmes, which increased to 5,458 euros the next year. Environment subsidies alone are more than seven times what the Indian farm sector gets as state support. EU makes the highest provision for environmental protection programme, followed by Japan, Switzerland and USA. Interestingly, a significant proportion of these subsidies (especially in Germany) are provided under the MEKA programmes. Talking to German farmers, it becomes apparent that these subsidies are in reality a bonus payment. Farmers are not even sure of purpose of these subsidies and are utilising these to write-off the expenses under other heads. In short, it is an additional income support that is being doled out to farmers.

Whatever be the impact of CAP reforms on domestic agriculture in Europe, the fact remains that the entire exercise is to reinforce the protective ring around European agriculture. Whether these subsidies are socially and environmentally justified is a matter of internal debate for the EU member nations but when such highly subsidised agriculture is linked to international trade, it brings in glaring inequalities in the trade regime negatively impacting the farmers in the developing world. EU agriculture subsidies (including the environmental subsidies) provide a cushion for the European farmer that insulates them from the volatility of the commodity markets. Whether the international prices fall or rise, European farm income remains largely unaffected.

On the other hand, the fate of the developing country farmer swings violently along with the price fluctuations. Sen’s entitlement theory does not examine the complex scenario of the politics of agriculture. It had however successfully argued that war and politics diverts supplies of food that should have otherwise reached vulnerable groups. What we know for sure is that the complete impact on human lives – women and children in particular – and the resulting loss in livelihood security and thereby the accelerated march towards hunger and destitution cannot be easily quantified. Surging food imports have hit farm incomes and had severe employment effects in many developing countries. Unable to compete with cheap food imports, and in the absence of any adequate protection measures, income and livelihood losses have hurt women and poor farmers the most.

A true reform in agriculture is only possible when the global community accepts the guiding principle that food for all is an international obligation. It can only be achieved when the need for national food self-sufficiency becomes the cornerstone of the Agreement on Agriculture. It can only be put into practice when the developed and the developing countries refrain from a battle of food supremacy to reorient efforts to bring equality, justice and human compassion in addressing the mankind’s biggest scourge – chronic hunger and acute malnutrition.

Since the developing countries cannot provide an equal amount of subsidy entitlements to its estimated three billion farmers, it is imperative to seek restoration of quantitative restriction and appropriate tariff structures to prevent deluge of cheaper food and agricultural products and thereby protect their exchange entitlements. It will be a betrayal of the national interests if the developing countries allow any further progress on the contentious Agreement on Agriculture without first correcting the gross imbalance that has been brought about by the rich and industrialised countries through the subsidy entitlements.

The entitlement relation ‘connects one set of ownerships to another through certain rules of legitimacy’. The crux of Sen’s theory of famines is that fairly rapid changes in the economy (especially the agricultural sector) plunge certain of the poorer vulnerable groups in a society into an exchange entitlement situation characterised by insufficient purchasing power to buy enough food. This can happen by the collapse of a person’s endowment through loss of production in events of cheaper imports thereby increasing the vulnerability of the poorer groups in society. The loss of livelihoods resulting from an import surge or the collapse of the farm prices as a result of huge subsidies being paid to agriculture in one part of the world also affects the entitlements of those who have to grow and also purchase food. If I may be allowed to interpret the theory in the context of international trade in agriculture, the subsidy entitlement of one class of producers (in Europe) affects another farmer’s exchange entitlement in the developing countries thereby exposing the later to hunger and starvation. #

(Devinder Sharma is a New Delhi-based food and trade policy analyst. Responses can be emailed to: [email protected])

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