Some arguments in favor of a Common Agricultural Policy

The European Union's Common Agricultural Policy (CAP) has been under some scrutiny for, well yeah for how long now? Over 25 years? The general mainstream economic opinion, and even the opinion of a large part of 'the left', has been that the EU should move from the current protectionist agricultural policy position towards a more open free trade policy. The arguments on which this is based are usually: it costs too much, unfair towards the developing world farmers and the developing world would profit from an open market and so would European consumers.

Neither of these arguments seem to make sense to me nor weigh up to the possible strategic role of food. I'll try to 'debunk' them by addressing first the economic realities by focussing on what would happen when a more free trade agricultural policy would be achieved. Secondly, something which most people forget, I'll address the political-economic nature of agriculture. Note that I'm arguing in favor of a Common Agricultural Policy, this doesn't mean that I consider the current policy 'amazing', there are lots of things that can and need to be changed (increases of scale, bringing down the number of small scale farmers). But what I'm trying to prove is that it makes sense to be protectionist from a strategic perspective and that it also makes sense from a leftist point of view because opening up of agricultural markets would make the developing world worse of in the longterm.

First, the economics. Current protectionism means that European farmers get higher prices than what they would get under free market conditions. The excess harvest which is the result of overproduction (which has decreased in recent years) usually gets dumped below world (and domestic) market prices in the developing world. Which also means that consumers in those countries profit from it, except the ones who work in agricultural sector (a large part of the workforce) . Now what would happen if we open up markets. There would only be a few few countries capable of being large scale export producers: Argentina, Brazil, the USA, New Zealand, Canada and Australia (because of land, technology and climate).

What would this mean vis à vis the other developing countries? Given that the current dumping prices are below market prices they would suffer from a price increase. Yes this would of course stimulate the export there too (which would be small compared to the big 6), except that would make an even larger part of the local population starve, the ones that can't afford world market prices. However this pricing fixation, which can be debated because I went over it without much caution given that its not the core of my argument, ignores the concessions the developing world would have to make at the WTO to get an agreement with the developed world. They would have to give up protectionist measures in industrial related sectors which would harm their longterm development and economic growth. So the short term gains by an increase in export would be offset by the limits on investment measures the government can take to stimulate local industry. A wiser decision would be for them to focus upon agricultural products designed for export, the ones the developed world doesn't produce itself.

What would it mean for the EU and the European consumers? Well for the latter it won't mean that much given the % of food expenditures in their overall budget. For the majority of European farmers, it would probably lead to bankruptcy. But what would it mean for the European Union as a whole? This brings me to strategic and political-economic part of agriculture. I'd wish everyone had learned a thing or two about foreign energy dependence but apparently they haven't. Since there are only a couple countries with the possibility to 'feed the world' (as the Brazilians like to say of themselves) it would make us dependent on a couple of countries. Given that Argentina has already suspended the export of beef in the past because of domestic price concerns and the Ukraine appears to do the same with its sun flower oil, it doesn't seem wise to me to be too dependent on imports when it concerns such a basic necessity as food. Which could undoubtedly be used the same strategic way as oil and gas are used today, especially if it would be in the hands of only 6 producers.

Why "on average" in econspeak is bad policy

Even libertarians are sometimes right, well almost right at least. In an opinion piece on electricity deregulation in The Wall Street Journal (text available at the CATO institute). Peter van Doren and Jerry Taylor argue correctly that "regulation certainly delivers lower prices than the market during shortages. But regulation delivers higher prices during times of relative abundance".

Regulation delivers lower prices during shortages, because the end price is a weighed average of the cost of the different producers. So when for instance natural gas prices increase, the price increase is only based on the weight of natural gas in the total production chain. In a deregulated market, the price during shortages would be based on the price charged by the most expensive plant. This price would obviously be higher than the weighed price. During the times of abundance it's the opposite.

So should policy makers let markets dictate the price or not? Well, unsurprisingly, the guys from the CATO institute argue that we should because "in sum, allowing markets to dictate electricity prices is a good thing for consumers, even if they are sometimes higher than under regulation." So according to them consumers are on average better off, because times of abundance will outweigh the shortages and this will result in a net benefit for consumers.

I disagree, there are more convincing arguments for policy makers to be in favor of regulation (I'll ignore the obvious argument of a finite resources) :

1. During market shortages the price increase under deregulation will make it impossible for people with low incomes to be able to pay for electricity (which is a basic necessity in modern day life). Besides this being bad in itself. This might result in negative publicity and a voter backlash against politicians who favored regulation.
2. The sudden rise of prices during shortages (under deregulation) will be felt throughout the population, the negative impact of this on politicians is obvious. More stable prices under regulation are to be favored.
3. Stable prises make longterm planning and investment easier for both business and private consumers. Sudden spikes in prices and an unstable energy market will put investors off.

The article further makes some interesting arguments in favor of bundling both production and transportation of electricity. Arguments I agree with. Too bad the EU has just favored unbundling and further deregulation. Why? Probably because deregulation and unbundling is a good job opportunity for consultants, free trade economists, lawyers and bankers.