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Eastern Enlargement of the EU. Implications for Agricultural Policies and the Agri-Food Sector J. SWINNEN www.prgleuven.be Hohenheim International Summer University 2003 « The Economics of EU Enlargement » July 3 1, 2003. Initial Fears. Eastern agri-food products would flood EU markets

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Eastern Enlargement of the EU


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    1. Eastern Enlargement of the EU Implications for Agricultural Policies and the Agri-Food Sector J. SWINNEN www.prgleuven.be Hohenheim International Summer University 2003 « The Economics of EU Enlargement » July 31, 2003

    2. Initial Fears • Eastern agri-food products would flood EU markets • Extending CAP to the East would • Cause explosion of the EU budget • major WTO conflicts

    3. The Common Agricultural Policy • Introduced in 1968 • most important part was a market intervention system to support farm incomes with • guaranteed (high) prices, • import tariffs and • export subsidies

    4. The Common Agricultural Policy • Rapidly major problems emerged • High support induced • oversupply, • high budget costs, and • distortions of international markets • Support system was inefficient and unfair: • 20% large farms got 80% of benefits • labour outflow continued (low transfer efficiency)

    5. Since then: CAP reforms • 1980s: production quota with high prices (eg. milk and sugar) • 1990s: price declines with compensation through “direct payments” (per ha or per animal) eg. Cereals and oilseeds in MacSharry and Agenda 2000 • 2003: “Mid Term Review”

    6. Agenda 2000 • intended to adapt the CAP to both the disciplines of the URAA and the challenge of Eastern enlargement. • Replacing price support with area and headage premiums that qualify currently as blue-box measures.

    7. Distribution of CAP budget

    8. CAP in EU Budget -- 2000 Bio € % Agric % EU budget Market support 10.6 26 12 Direct payments 25.6 63 29 Rural development 4.2 10 5 TOTAL CAP 40.5 100 45

    9. Agenda 2000 • Many commentators indicated that Agenda 2000 reforms were insufficient to address challenges for CAP in next decade (enlargement, WTO, …) • Commission seemed to agree • Compromise : Midterm reviews • New developments reinforced need for further reforms: Food safety crises, EBA, ...

    10. The Pressures for Further CAP Reform • WTO • Other trade negotiations (EBA, …) • Eastern Enlargement • Food Safety • Reform + Reform = More or Less Reform ?

    11. Average Tariffs in Industrial Countries (%)

    12. WTO : Uruguay Round Agreement on Agriculture (URAA) • Domestic support : 20% reduction • Export subsidies : 36% reduction • Market access : 36% tariff reduction

    13. URAA Domestic support rules Constraints depend on trade-distortion effects: • AMBER box: to be reduced • BLUE box: “peace clause” allows these to continue unchallenged until 2003 • GREEN box (“non- or minimally trade distorting”): unrestricted

    14. EU response to the WTO / Uruguay Round Agreement • EU has encountered difficulties in keeping within the WTO limit on subsidised exports for some products. • The EU used the Special Safeguard provision 172 times during 1995-1998

    15. New WTO Round • export subsidies = prime focus • domestic support • Peace Clause ends in 2003 • EU vs Cairns • US position : from FAIR over Emergency payments to Counter-cyclical Support ? • US position is important for EU in WTO negotiations

    16. Agricultural support (PSE) • EU US • Agriculture Total 45 22 • Milk 57 61 • Sugar 43 41

    17. Double EU WTO strategy on domestic support • As much as possible blue box payments in green box through : • DECOUPLED PAYMENTS • RURAL DEVELOPMENT SUPPORT • New approach to defend remaining blue or amber box payments: • The European Farm Model • Multifunctionality

    18. Enlargement and WTO • GATT: accession= enlargement of customs union • GATT rules only apply to tariffs • for export subsidies and domestic support: Northern enlargement as model • Export subsidies are most constraining

    19. Eastern enlargement and WTO constraints • Production and Trade effects • EU-CEEC trade • Agricultural productivity evolutions in CEECs

    20. Some basic indicators 2000

    21. Change in GDP 1989-2001

    22. Agricultural Output (since 1989)

    23. Cause 1: FALLING OUTPUT/INPUT PRICES IN AGRIC (1989-2001)

    24. Cause 2: DISRUPTIONS IN THE AGRI-FOOD CHAIN • Complete vertical integration and monopolies under Communism • Privatization and restructuring caused coordination and contract enforcement problems: • farms have problems with access to basic inputs and working capital, … • delayed payments throughout chain • processors have problems with supply (quantity and quality)

    25. Cause 2: DISRUPTIONS IN THE AGRI-FOOD CHAIN • massive slaughtering of livestock • farms refuse to deliver to processors : • shift to other activities • direct marketing of products • (basic) on-farms processing • barter( 80% of exchanges in Russia) • Some of these problems continue today (eg low quality, supply problems, …)

    26. CATTLE stock CEECs 1989-2001

    27. Recovery in Eastern Europe starts in mid 1990s • Key = REFORM POLICIES • Large differences between countries : • Better performance where necessary reforms have been faster and more powerful • Policies reflected in • Productivity & Growth • Foreign investment (FDI)

    28. LIVESTOCK Output CEECs vs Russia & Ukraine

    29. CROP Output CEECs vs Russia & Ukraine

    30. Initial output fall is disruption & price/subsidy driven Recovery (if any) is largely productivity driven Agribusiness restructuring and and foreign investment are key factors in productivity gains Private sector (Food Industry) plays very important role in restructuring of CEEC agriculture Restructuring, Productivity and Growth in CEEC agriculture

    31. Agribusiness FDI, Vertical Integration & Chain Restructuring • Injection of capital, technology, … in chain • Innovative contracting and vertical integration • Positive spill-over effects at the farm level • To assure guaranteed quality and quantity : Assisting farms in access to finance and inputs is crucial with market imperfections (finance & input support programs, leasing, ...)

    32. FDI in Agri-Food Sector:Example: The Sugar Sector (2001)

    33. CASE STUDY: Sugar Company in SlovakiaOutput & productivity of company & farms

    34. YIELD changes in Central Europe1989 - 1999

    35. Changes in yields in NIS-3Russia, Ukraine, Kazakstan (avg)

    36. Impact of EU Enlargement • General institutional and macro-economic effects • EU standards for quality, hygiene, health requirements (!!) • reduction of transaction costs: good for CEEC exports • investments required: constrain production and exports • Imposition of CAP on CEECs

    37. EU Integration is ongoing • General institutional and macro-economic conditions • Agri-food sector: • Convergence in STANDARDS & QUALITY • Convergence in PRICES • Convergence in POLICIES • Growing TRADE integration • Growing EU INVESTMENTS in CEECs

    38. Milk with minimum EU hygiene standard : Hungary 80 % Czech 90% Poland 25-30 % in 1999 but 65 % in 2000 Dairy processors certified for EU export - Poland: No Total Share Market share 2000 19 400 5% 2001 25 320 8 % 35 % STANDARDS & QUALITY

    39. Case study: North Poland % extra class milk , 1996-2001

    40. Share of 2nd and 3rd class milk in total (%), 1996-2001

    41. Investments and Loans of Small Dairy Farms in North Poland 2001

    42. Investments and Loans of Small Dairy Farms in North Poland 2001

    43. QUALITY & STANDARDS Improvement due to combination of public and private initiatives : • FDI • Domestic company replications • Increased government standards • Domestic reasons • EU enlargement

    44. QUALITY & STANDARDS Future : • Key role of Retail Sector • Multinational Retail Companies are investing heavily in Eastern Europe • Experience from other regions suggest potentially major implications for farmers and food companies

    45. TRADE • Most of CEEC trade is now with EU-15 • Post-1995 re-discovery of Russian market was interrupted by 1998 Russian crisis AGRI-FOOD TRADE : • Only Hungary, Bulgaria are net exporters • Increased strongly in both directions • Net export balance positive for EU

    46. EU - CEEC Agri-Food TRADE 1988 - 2001

    47. Agri-Food Trade • Past EU export growth mostly in processed products • Quality, hygiene, health requirements key • CEEC export growth mostly in low processed and labour intensive products (eg.fruits and vegetables) • This is likely to change in future as institutions improve with investments in food industry

    48. YIELDS in CEEC & EU Sugar Beet (tons/ha)

    49. Coarse Grain Yields in EU & CEEC : Change 1989-2001

    50. Milk Yields in EU & CEEC : 1989-2003