EU Agricultural Subsidies: Economic Impact and Reform

[00:00:00]visual economic Community if I were to ask you one thing then the EU spends most of its Budget on what would you think the answer would be some of you might be thinking about the aid given to less developed member countries such as Bulgaria or Romania others may think that most of the money goes to large investment projects like the Next Generation funds or if you are more Euro skeptical you might think that the biggest item on spending was to pay the salaries of politicians civil servants and bureaucrats well if you answered any of these things I am sorry but you are wrong surprising as it might seem the largest item the item that swallows 24 of the entire EU budget is the cap or common agricultural policy which is basically a supercluster of subsidies for the agricultural economy yes that's right you could say that the European Union as a whole is a political Mega conglomerate that is largely dedicated to subsidizing the primary sector in fact at the time of its conception in 1962 the common agricultural policy program devoured up to 80 of the entire budget of the European economic Community you see at that time the European continent was still divided between the eastern and western blocks regions such as Ukraine which today is considered the Bread Basket of Europe where not only much less productive than today but also traded much less with the Western Bloc and if we add to all this the fact that at the time the European economy was still damaged by the second world war then we are left with a European economic community that was very dependent on importing food from abroad in order to survive [Music] as you can imagine this left it in a geostrategically weak position in regards to the rest of the world its food supply was anything but stable and prices could Skyrocket at any moment clearly this was a problem that Europe had to solve so governments decided to get their act together and start throwing lots and lots of money into the European agricultural sector since then both wages and the European countryside's own corporate profits have been largely paid by the European macro government to give you an idea at present around 25 of Farm Workers income comes from this type of Public Aid however into the European agricultural sector has gone far beyond just subsidies since the creation of the European economic Community the internal Market has also been liberalized eliminating tariffs between member countries so that they could trade easily with each other meanwhile the European authorities did exactly the opposite placing all kinds of obstacles in the way of agricultural products from other countries and why why did Europe block the arrival of foreign products well mainly for two reasons thank you the first is that foreign competition could weaken local companies and the second is that too much foreign trade in the eyes of European politicians could create an undesirable dependence on foreign countries be that as it may the question to be asked now is did the European Union achieve its goal of boosting the European agricultural industry well the truth is that yes they did an example of this can be seen on the screen right now since the creation of the European economic Community the production of foodstuffs such as wheat has skyrocketed of course the cap can't take all the Greta from this the 1960s also saw the so-called Green Revolution which brought about a dramatic Improvement in agricultural productivity due to the invention of better pesticides and the use of better seed varieties in any case the result was that food ceased to be a problem in Western Europe in fact production increased so much that politicians began to encourage its export to the international market Europe went from being a region with food problems to being a major Global exporting power as a result of the success the cap the common agricultural policy gradually lost influence and was reformed in fact the current cap is very very different from how it was first conceived the question now then is what does the cap consist of today and is it still really necessary the current cap is based on two fundamental pillars the first pillar is direct Aid which swallows up to 75 of the entire budget its main objective is simply to raise wages to offer guaranteed purchases of chunks of the production and to give Aid to Young Farmers by the way young means up to 40 years old here in Europe This pillar also subsidizes exports in order to sell abroad at competitive prices meanwhile the second pillar focuses on the sustainable development of the rural World in addition to providing other types of aid for the protection of natural areas the protection of biodiversity and the fight against climate change regarding the latter to give you an idea by law thirty percent of the entire cap budget within each country has to go to environmental activities even so visual economic viewers the truth is that despite this apparent success and all the fine words the policy has been harshly criticized by politicians and economists alike many argue that the cap rather than providing assistance could be providing a terrible disease for European productivity and European Agriculture and this is particularly worrying giving the enormous expenditure involved however is the cap really necessary is so much agricultural AIDS Justified and what are the problems that so many critics have pointed out today on visual economic we're going to tell you all about it so let's get cracking [Music] as mentioned earlier the idea behind agricultural protectionism was as its name indicates to protect agricultural production from political ups and downs however that does come at a price you see at first glance the total cost of the cap for each European taxpayer is around about 120 euros per year but this figure only includes the direct cost of the subsidies the problem is that protecting the common industry at the cost of blocking cheaper foreign products tends to increase the price of the shopping basket as well if we add to the 120 euros the increase in food prices between one thing and the other the cost of the cap amounts to about 530 Euros per person about 1.5 of the GDP of the entire region but to solve this sound a little bit Greek to you well let's take a more concrete case [Music] a report presented to the European commission compared the price of food in the United Kingdom when it was still within the cap to New Zealand in theory they are two countries with a very similar GDP per capita however the difference is that New Zealand carried out a very extensive liberalization of its agricultural sector in the 1980s therefore it stopped paying subsidies as cap has continued to do as you can see on the screen here the results could not have been worse for European politics with the data in hand it does not seem that the cap has made access to food much easier for European families in fact it almost seems to have achieved the opposite effect now many will say that this comparison Europe with New Zealand is complicated perhaps Europe is by nature a difficult territory for this industry or perhaps the cap has been able to help improve productivity in spite of everything else even so if we are talking about productivity the truth is that we can't find very good news there either I mean check this out common agricultural productivity when we look at the productivity of the Agricultural sector in Europe what we will see is that it has increased however it has done so at a much slower rate than the productivity of the rest of the economy to give an example in the last decade agricultural productivity has increased by six percent while the rest of the economy has increased by 24 that's four times as much for this reason the added value of agriculture in other words the sexier's contribution to GDP and therefore to the generation of wealth has been stagnant for years in fact recently it actually started to fall pretty sharply that said you might well be wondering what is it that is dragging down the productivity of farming despite all the aid it receives there are several explanations for this for example some Farmers complain about environmental regulations and the prohibition of certain pesticides in fact between 2014 and 2019 the number of workers engaged in organic agriculture which among other things does not use artificial pesticides has increased from 250 to 330 000 and not surprisingly this type of Agriculture is much less productive Sri Lankan Farmers learn a lesson from the organic farming debacle the lack of Alternatives led to Sharp drops in production with rice and other crops declining this in turn stoked a severe economic crisis culminating in last year's default on 40 billion dollars in foreign debt Beyond this issue the European Union is very restrictive on the use of genetically modified foods technically they are legal but the process of getting approval is so rigorous that by 2020 only 118 products had obtained a pyramid of which only a dozen were intended for direct human consumption in any case perhaps the most relevant factor that explains the failure of agricultural productivity in Europe lies in the fact that since 2003 cap subsidies have been decoupled from production for instance a farmer receives a subsidy based on how much land he has under cultivation but not on how much he produces of course what this means is that the incentive of this policy is that farmers instead of taking advantage of every last millimeter of land to produce what they will do instead is extend their field produce very little and collect the subsidies anyway clearly decoupling aid from production was productive suicide nevertheless this decision was made for a rational reason the fact is that this previous cap policies being so large and linked to production led to the disproportionate overproduction of products that were not sold the European Union's buttermil mountains are costing taxpayers 236 million pounds the European commission yesterday pledged to buy 30 000 tons of butter this year from farmers in the 27 countries of the Union as well as 109 000 tons of skimmed milk powder perhaps the problem of over reduction was due to the subsidies being excessive a logical thing to do then would have been to cut them but going against the subsidies would have meant many strikes and great political pressure on the authorities from the agricultural sector so politicians opted for the easy way out decoupling subsidies from production and destroying productivity however the misaligned incentives of subsidies are far from being the only problem that might be weighing down European Agriculture and there is one factor that plays a very important role in all of this we're talking about corruption [Music] corruption particularly in Eastern Europe is another major problem you see the cap is designed to help particularly small and medium-sized landowners in fact large Farms receive virtually no assistance at all however as the saying goes the devil here is in the details since subsidies are granted according to the size of each Farm as long as you have many small plots of land dedicated to agricultural activities you will be able to receive numerous subsidies and if you only have a large Estates well don't worry then either you can always divide it into smaller pieces that you need and then you put each plot and the names of your cousins and you are all set to live on the subsidies that you will get with this scheme it is not unusual to see news stories like this one 29 September 2016 the queen Saudi Aristocrats and princes among recipients of farm subsidies and if you thought we were finished the truth is that we have left one of the most criticized issues for last it is more than likely that the cap is affecting developing countries very neg this is a phenomenon that could be occurring for two reasons first of all do you remember how the cap subsidized exports thanks to this Aid Europe is able to sell its agricultural products abroad below the market price I don't know what might you know you might be thinking but how can it hurt to prove our country if they are able to buy cheaper food in the short term it seems all positive however on this channel we have already told you several times how giving away things in these types of countries could destroy their local industry it creates an unfair competition to the industry of poor countries and agriculture is no different at the same time the high tariffs on non-eu countries and the protectionism mentioned above reduce the benefits of small and medium-sized producers in poor countries that are looking to trade with Europe fortunately there have been relevant advances in this regard and under the everything but arms law the European Union has a free trade agreement with 49 of the least developed countries even so countries as important as China and India along with Latin American countries are left out and depend on bilateral treaties that often do not go ahead in any case and having said all this is there no way to support Farm Workers protect the rural environment and not burden the productivity of Europe and other countries is farming doomed to be a public money leech that destroys its own competitiveness well the answer is no there are alternatives a possible change but it's complicated let's be clear here being a developed country is not at odds with having a productive agricultural sector there are cases of New Zealand Singapore Israel or even the Netherlands which itself is within the European Union we have told you about all these cases both on this channel and on our sister Channel visualpolitik check out in general these countries stand out for devoting a significant part of their aid to the agricultural sector an investment and r d rather than directly subsidizing workers in the sector nevertheless Europe moving to a similar system would be very very expensive and we are not only talking about the political costs but above all about the human cost of leaving an entire sector that depends to a large extent on agricultural workers without Aid fortunately there is one scheme that could lead to a painless transition tangerman bonds proposed by Economist Stefan tangerman along with other economists specialized in the sector this proposal would consist of changing the current direct aid for a kind of bonus [Music] under the system the European Union would give a piece of paper to each Aid recipient this slip of paper would entitle him or her to receive annually a similar amount of money to what he or she is receiving now and even a little more for a period of say 15 to 20 years this should be done in compensation for the promises made but making it very clear that at a certain time most of the aid would be cut especially those that have nothing to do with financing public goods so then what's the difference with the current model well this Bond could be sold to anyone else in this way Bond recipients would have three options firstly if their activity was already profitable without Aid they could continue with it as usual hence there wouldn't be much change however the interesting thing comes into play when those workers and owners who are not productive enough continue without public subsidies they could sell part of their bond and have the money all at once in order to invest in their project for example for buying more efficient Machinery or for adapting their land to more profitable crops it would be something like receiving the subsidies for the next 20 years all at once in order to be able to invest them and thus gain competitiveness on the other hand if the investment opportunity were not clear workers could simply leave their jobs and look for a new job thanks to the buffer that the bonus would give them the idea is that thanks to their bonuses and the sale of their agricultural properties they would have a large enough financial cushion to move and look for a new job with peace of mind even taking time for training if they really needed it in this way we could make the transition to a Freer and more competitive market without leaving the most vulnerable behind but now it's over to you do you think that the cap has benefited Europe in the long run what other problems could its incentives produce would tangerman bonds be a good way to transition to a more efficient system you can leave me your answers in the comments below and as always don't forget the here on visual economic we release new videos every week subscribe to this Channel and hit the little bell button down there so you don't miss any of your updates if you like this video please like it so we know all the best I hope you enjoyed it and I'll see you next time [Music]