Mac Sharry Reforms (and Agenda 2000)
The main notes left you with these Questions -
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What did the MacSharry reforms actually do?
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How can we represent this policy change on Figure 4?
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Why did this step take so long to happen?
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Why did it happen at all?
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Why did it happen when it did?
MacSharry reforms (1992) & Agenda 2000: [details of this can
be found in Ritson & Harvey, and other references] essentially changed
the cereals regime (policy) by reducing the internal (intervention) price
from 155ecu/tonne to (effectively) 90 ecu/tonne, and replacing the support
with fixed area payments and the requirement that any farmer claiming the
area payments should also comply with any set-aside restrictions (where
the set-aside areas also attracted area payments). Some slight moves in
this same direction were also included for beef and sheep - replacing price
support with headage payments. Agenda 2000 pursues this logic, further
reducing the intervantion prices for cereals and oilseeds, and going further
down this road for beef and sheep. Milk, however, remains much as before,
though with some reduction in support prices- with quotas in place till
2006. Pig and poultry support prices are reduced to reflect the lower prices
for cereal feeds.
This is a major reform (at least for cereals, which is the cornerstone
of farm policy, since cereals are an input into livestock farming and thus
support of cereal prices has to be reflected in support for livestock prices.
The major reform is to shift the burden of support from the consumer (purchaser
of the commodity) to the taxpayer (who pays the compensation payments -
the area and headage payments). This will alter the pressures for support
payment fixing and continuation of the policy of support.
How can we represent this change?
Figure 5 illustrates the basic principles of the reforms:
If, in fact, the reforms had simply exactly substituted a compensation
payment (in £s per tonne) for the previous gap between the EU support
price and the world price, then there would only be a change in the gainers
and losers, (with an important but probably small overall gain of area
a
above,
small because demand is typically inelastic) but not in the market situation.
There would have been a major increase in EU budgetary spending on the
CAP to replace the gains in lower user prices.
However, the reform was not quite like this. In fact:
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the support price equivalent of the area payments are not Tp, but
Tpa.
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The new consumer price is not Wpa, but closer to Wpe (so in fact
there is still some intervention and some export refunds - which you should
make sure you can identify on a diagram like this - they are not shown
here, but would apply a refund of Wpe minus Wpa to the new excess supply
(supply at Tp less demand at Wpe)
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There are quantity restrictions on the compensation payments - the areas
and head of stock on which these payments are made are fixed as the base
year levels (shown in exagerated form here as Qr rather than Sg. In the
case of cereals, there is the added complication of set-aside - which restricts
the planted area but which pays compensation for the set-aside area as
well - not illustrated on this diagram (see below)
So, the increase in budget spending was not actually a large as might have
been implied by a complete substitution of market price support with compensation
payments.
However, after 1992, world prices actually increased from their previous
levels (Wpa), and were increased even more in the UK by the weakness of
sterling relative to the ecu. As a result, the actual rulling prices in
the UK (especially, but not only) were above Wpe - the price used in calculating
the compensation payments. So farmers were over-compensated for the change
- a difficulty for the taxpayers and the EU budget.
As a result, Agenda 2000 deliberately sets the compensation payments
at rather less than the difference between the pre 2000 support price and
the post 2000 price - to avoid future overcompensation.
Notice - these payments are still a problem for the rest of the
world - they still result in over-production in the EU and hence depress
world prices (see later in these main notes). Farmers still need to grow
their base areas of crops (including set-aside), or keep their base levels
of livestock. Thus production is still encouraged above and beyond the
levels which would rule under free trade. In the jargon of the WTO, these
payments are not de-coupled from production (though they are from
the final products).
Why did this step take so long to happen?
There seem to be two major reasons.
First and most obviously, the additional cost to the EU budget was bound
to cause difficulties with a budget which (in spite of popular myth) is
actually very small compared with national government budgets. The reform
package was obliged to remain within a tight budgetary guideline - the
total EU spend must be within 1.4% of EU GDP (c.f. national budgets which
are more like 30% - 40%), while agricultural spending is supposed to remain
within a specified fraction of this total (about 65% and falling over time).
Hence, the ability of the EU to change from a policy of high consumer prices
to one of simple (and more efficient) direct subsidy to farmers is considerably
restricted without limiting the compensation payments (from full compensation
for price reductions) or limiting the extent of price reductions themselves.
Second, there is clearly a strong inertia in policy - there is resistance
to change in the basic mechanisms - which tends to lead to greater complexity
in the policy as it is modified to cope with market and policy pressures
- as the MacSharry reforms did. Instead of completely replacing market
intervention with direct subsidy payments, we now have both systems operating
together.
Why did it happen at all?
The reforms happened at all because the pressures on the old CAP were
finally too strong to resist. There are three major pressures which can
account for the change.
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the continual escalation of the gap between domestic (EU) production and
consumption (especially as supply shifts to the right). In the case of
milk, this had finally prompted the introduction of milk production quotas
in 1984. For cereals, though, the problem was more difficult than milk.
Quota restriction would be very difficult to impose on cereal production
- it would have to be a restriction on areas. Furthermore, how can one
continue to support domestic market prices with a limit on domestic production
(area)? without substantially upsetting the balance between corn and horn
(grain and livestock)? You can't. If grain production were restricted,
then farm resources (including land) would be switched from grain to livestock
production, and instead of grain surpluses the EU would have greater surpluses
of livestock products (which are even more expensive to dump on world markets
than grain). The reforms of the cereal sector were predictable on this
basis alone, and the budget spending would have to be increased in the
end, simply to put a brake on the otherwise ever-growing spend under the
old policy.
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Building pressure from the major exporting countries and the US in the
Uruguay Round of multilateral trade negotiations under the GATT (General
Agreement on Tariffs and Trade), begun in 1986, and continually stalled
since then
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The collapse of the Berlin Wall in 1989, and the unification of Germany.
Unification meant that the impoverished eastern Lander of Germany needed
some sustainable economic support and assistance. The major resource of
the eastern Lander which is capable of earning a decent living in competition
with the west is the agricultural land (and the people increasingly dependent
on it as manufacturing plants were closed as uneconomic). But neither Germany
nor the rest of the EU could afford to provide unlimited price support
for the potential production of these lands (and the implicit commitment
to provide similar levels of support to the other Central European Countries
as and when they sought entry to the EU). So something more economically
justifiable had to be done - the MacSharry reforms can be seen as a step
in this direction.
Eventually, the combination of these pressures became too strong to resist.
Why did it happen when it did?
It could be argued that no one of these major pressures would have been
sufficient on its own to trigger the change in policy, and that the change
required the conjunction of all three - which culminated at the end of
the 80s. Given the time necessary for the pressures to actually result
in a policy proposal and eventual agreement within the European Council
of Ministers, the timing of the change (with the considerable benefit of
hindsight) seems near inevitable.
For some further detail on economic analysis of aspects of the CAP,
including quotas, co-responsibilty levies and set-aside, see
these notes (pdf file of 8pages). See, also, Ritson & Harvey.
Back to main notes.
Comments and questions to DRH