Agricultural Expenditure Priorities - An EU Perspective

1. Agricultural Expenditure Priorities - An EU Perspective Professor Gerry Boyle National Uiversity of Ireland, Maynooth Agricultural Policy Workshop, Chisinau, June 14th 2006

2. Outline of presentation • Lessons from EU and Irish experience • EU profile of and trends in agricultural expenditure • The benefits of strategic public expenditure policies

3. Lessons from EU and Irish experience … • Agricultural policies only play a (small) part in the enhancement of growth capacity • Sound macroeconomic, public finance, public infrastructure, regulatory and competition policies, etc. are more important • Producer subsidies will not generate sustainable growth – a costly lesson learned by the EU • Moldova can avoid the errors of the EU (and others) by progressively eliminating such subsidies

4. Structure of EU agricultural expenditure … • Producer Supports – supports that are received directly by producers • General Services Supports – supports that are received indirectly by producers

5. Components of producer supports … • Market price supports (MPS) – transfers from consumers via market interference • Output payments • Area planted/animal numbers • Historical entitlements – NEW to EU SAPS • Input use & Input constraints • Farm income payments • Miscellaneous Note items 2-7 are funded via transfers from taxpayers

6. Components of general services supports … • Research and development (R&D) • Agricultural education • Inspection services • Infrastructure • Marketing and promotion • Public stockholding • Miscellaneous Note these items are typically funded via taxpayer transfers but may also be funded via producer levies (e.g. R&D)

7. Broad trends in EU agricultural supports

8. Features of broad EU trends in agricultural expenditure … • Overall tranfers to sector declining significantly in relative terms • Major shift in structure of Producer Supports from consumer to taxpayer transfers – support now more transparent and politically sensitive • Major shift in structure of Producer Supports from Market Supports to other forms • Stable trend in General Services Supports

9. Details of EU PSE trends % PSE

10. Features of EU PSE trends • Shift from highly market-distorting policies to less market-distorting area and animal based payments – partial decoupling • Single Area Payment Supports (SAPS) will grow substantially in relative terms– full decoupling • SAPS to decline in absolute terms –their rationale lies outside of realm of agricultural policy (environment and social policies)

11. Details of EU general service supports % total

12. Features of EU general service supports trends … • A third of EU general service supports now accounted for by expenditures on “marketing and promotion” • Big shifts towards increasing share of general services in respect of R&D, agricultural education, and infrastructure • Big decline in expenditure on public stockholding

13. Key messages for Moldova • Moldova should not repeat the costly lessons of the EU but … • Moldova is increasing producer supports when EU is decreasing such supports • Moldova producer supports are highly coupled to production activity whereas EU supports are decoupled • Moldova discriminates against smaller producers whereas EU supports attempt to be progressive • Moldova supports’ eligibility criteria are not sufficiently transparent (e.g. tractor subsidies) unlike EU

14. Strategically driven public expenditure policies … • Taxpayer resources must be used where they create the greatest impact on economy-wide growth • Public expenditure should not substitute for private expenditure • Public expenditure must address clear market failures, e.g. provision of public goods/services (R&D, education, etc.); address externalities • Producer subsidies do not address market failures and inhibit the sustainable enhancement of growth

15. The evidence supports more spending on general services • Compelling evidence from a recent World Bank study by Allcot et al • “ … a reduction in the share of [producer] subidies in rural expenditures … by 1 standard deviation can increase agricultural GDP per capita by 5%” • Example – R&D can general substantial returns …

16. International estimates of internal rates of return to agr. R&D %

17. Well managed R&D investment can pay handsomely … • Typically the rates of return to well managedR&D activities fall in the range 40%-50% • This level of return is 8 to 10 times higher than what might be considered an “acceptable” return on “ordinary” capital investment • The Irish experience indicates broadly similar findings across diverse research areas …

18. Rates of return % for some Irish agricultural research activities

19. Concluding remarks … • EU [and OECD generally] trends in agricultural policy expenditure indicate a growing share of General Service Supports in total support • The evidence on the potential impact of this structural shift in terms of achieving sustainable improvements in rural incomes is compelling • The Government of Moldova should give very serious consideration to a similar structural shift in its agricultural spending policies

20. Concluding remarks contd. • But caution needed … just because some policies have the potential to be highly productive (e.g. R&D, education,etc.) very careful evaluation is required before additional resources are committed … • A complete revamp of the Modova system of public expenditure planning, management and evaluation is needed to accompany the proposed structural shift in spending priorities Thank you