eastern enlargement of the eu
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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 - PowerPoint PPT PresentationTRANSCRIPT
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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 31, 2003
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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
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The Common Agricultural Policy
Introduced in 1968most important part was a market
intervention system to support farm incomes with guaranteed (high) prices, import tariffs and export subsidies
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The Common Agricultural Policy
Rapidly major problems emergedHigh 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)
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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”
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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.
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Distribution of CAP budget
0
10
20
30
40
50
60
70
80
90
100
1991 1997 2006
Market Support
Direct Payments
Rural Development
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CAP in EU Budget -- 2000
Bio € % Agric % EUbudget
Market support 10.6 26 12Direct payments 25.6 63 29Rural development 4.2 10 5TOTAL CAP 40.5 100 45
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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 reviewsNew developments reinforced need for
further reforms: Food safety crises, EBA, ...
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The Pressures for Further CAP Reform
WTOOther trade negotiations (EBA, …)Eastern EnlargementFood SafetyReform + Reform = More or Less
Reform ?
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Average Tariffs in Industrial Countries (%)
0
10
20
30
40
50
1940 1950 1960 1970 1980 1990 2000 2000
Agric.
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WTO : Uruguay Round Agreement on Agriculture
(URAA)
Domestic support : 20% reduction
Export subsidies : 36% reduction
Market access : 36% tariff reduction
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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
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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
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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
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Agricultural support (PSE)
EU US
Agriculture Total 45 22Milk 57 61Sugar 43 41
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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
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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
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Eastern enlargement and WTO constraints
Production and Trade effects
EU-CEEC trade
Agricultural productivity evolutions in CEECs
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Some basic indicators 2000
Agricultural output
Employment in agriculture
Land
Billion €
% GDP Million % total Million ha
EU-15 167 2 6.8 4.3 131.6
CEE-8 11.9 3.6 3.3 18.9 38.4
%EU 7% - 49% - 29%
CEE-10 18.6 4.5 9 22 58.8
%EU 11% - 132% - 45%
Poland 5.0 2.9 2.6 19 18.2
Romania
4.6 11.4 4.9 43 14.8
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Change in GDP 1989-2001
-70
-50
-30
-10
10
30
50
1989 1991 1993 1995 1997 1999 2001
Ch
ange
in G
DP
Bulgaria
Romania
Slovak Rep
Slovenia
Czech Rep
Hungary
Poland
Russia
Ukraine
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Agricultural Output (since 1989)
40
50
60
70
80
90
100
110
1989 1991 1993 1995 1997 1999 2001
Ch
ang
e in
GA
O
Czech Rep
Hungary
Poland
Slovakia
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Cause 1: FALLING OUTPUT/INPUT PRICES IN AGRIC (1989-2001)
0
20
40
60
80
100
120
1989 1991 1993 1995 1997 1999 2001
Czech Rep.
Hungary
Poland
Slovakia
Russia
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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)
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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, …)
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CATTLE stock CEECs 1989-2001
0
20
40
60
80
100
120
1989 1991 1993 1995 1997 1999 2001
Ch
an
ge
in c
att
le s
toc
k
Bulgaria
Romania
Slovakia
Hungary
Poland
Russia
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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)
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LIVESTOCK Output CEECs vs Russia & Ukraine
0
20
40
60
80
100
120
1989 1991 1993 1995 1997 1999 2001
Ch
an
ge
in G
AO
, liv
es
toc
k
CEE
Ru & Uk
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CROP Output CEECs vs Russia & Ukraine
50
60
70
80
90
100
110
1989 1991 1993 1995 1997 1999 2001
Ch
an
ge
in G
AO
, cro
ps
CEE
Ru & Uk
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Restructuring, Productivity and Growth in CEEC agriculture
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
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Agribusiness FDI, Vertical Integration & Chain
Restructuring
Injection of capital, technology, … in chainInnovative contracting and vertical
integrationPositive spill-over effects at the farm levelTo assure guaranteed quality and quantity
: Assisting farms in access to finance and inputs is crucial with market imperfections (finance & input support programs, leasing, ...)
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FDI in Agri-Food Sector:Example: The Sugar Sector (2001)
Country % Processing Plants withForeign Investment
% Production Capacity withForeign Investment
Bulgaria n.a. n.a.Czech Republic 70 90Hungary 100 100Lithuania 100 100Poland 12 n.a.Romania 50 85Slovakia 86 95Slovenia 100 100
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CASE STUDY: Sugar Company in SlovakiaOutput & productivity of company & farms
0
50
100
150
200
250
1990 1991 1992 1993 1994 1995 1996 1997
Year
Ind
ex
es
Yield Sugar Content Sugar Production Contract Hectares Output prices/Input prices
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YIELD changes in Central Europe1989 - 1999
-35
-30
-25
-20
-15
-10
-5
0
5
10
15
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Cha
nge
in y
ield
s (%
)
Sugar Beet
Milk
Coarse Grain
Oilseed
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Changes in yields in NIS-3Russia, Ukraine, Kazakstan (avg)
-60
-50
-40
-30
-20
-10
0
10
20
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Cha
nges
in y
ield Milk
Barley
Sunflowerseed
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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
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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
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STANDARDS & QUALITY
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 share2000 19 400 5 %2001 25 320 8 % 35 %
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Case study: North Poland % extra class milk , 1996-2001
0
10
20
30
40
50
60
70
80
90
100
1996 1998 2001
Sha
re o
f E
xtra
Cla
ss M
ilk in
Tot
al (
%)
Mlekpol
Mleczarnia
Kurpie
Mazowsze
ICC Paslek
Warmia Dairy
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Share of 2nd and 3rd class milk in total (%), 1996-2001
0
10
20
30
40
50
60
1996 1998 2001Sha
re o
f 2n
d an
d 3r
d C
lass
Milk
in T
otal
(%
)
Mlekpol
Kurpie
Mazowsze
ICC Paslek
Warmia Dairy
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Investments and Loans of Small Dairy Farms in North Poland 2001
# cows per farm
Invests (% of total)
Uses loan to invest (% of A)
Uses dairy loan
(% of B)
Uses bank loan
(% of B)
Uses dairy loan
(% of A)
Uses bank loan
(% of A) A B C D E F
1-5 52 54 41 50 21 26 6-10 78 51 43 70 22 36 >10 92 74 43 75 31 54 ALL 76 58 43 69 25 40
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Investments and Loans of Small Dairy Farms in North Poland 2001
Investments Total Loans Dairy loans Bank loans % by type % investm. % by type % by type % by type
Cows 14 37 14 30 9 Cooling tank 20 55 30 56 20 Stall 24 30 20 3 26 Land 9 46 11 0 14 Fence 11 2 0 2 0 Other 23 38 24 9 30 TOTAL 100 36 100 100 100
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QUALITY & STANDARDS
Improvement due to combination of public and private initiatives :
FDIDomestic company replicationsIncreased government standards
Domestic reasons EU enlargement
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QUALITY & STANDARDS
Future :Key role of Retail Sector Multinational Retail Companies are
investing heavily in Eastern EuropeExperience from other regions
suggest potentially major implications for farmers and food companies
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TRADE
Most of CEEC trade is now with EU-15Post-1995 re-discovery of Russian market
was interrupted by 1998 Russian crisis
AGRI-FOOD TRADE :Only Hungary, Bulgaria are net exportersIncreased strongly in both directionsNet export balance positive for EU
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EU - CEEC Agri-Food TRADE 1988 - 2001
-2000
-1000
0
1000
2000
3000
4000
5000
6000
7000
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
To
tal a
gri
cu
ltu
ral t
rad
e (
mio
€)
Export
Import
Balance
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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
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YIELDS in CEEC & EU Sugar Beet (tons/ha)
0
1
2
3
4
5
6
7
1989 1991 1993 1995 1997 1999 2001
Su
ga
r b
ee
t y
ield
s (
ton
/ha
)
EU
CEC-4
Bu-Ro
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Coarse Grain Yields in EU & CEEC :
Change 1989-2001
40
50
60
70
80
90
100
110
120
130
1989 1991 1993 1995 1997 1999 2001
Ch
an
ge
in c
oa
rse
gra
in y
ield
s
EU
CEC-4
Bulgaria
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Milk Yields in EU & CEEC : 1989-2003
0
1
2
3
4
5
6
1989 1991 1993 1995 1997 1999 2001 2003
Milk
yie
lds
(to
n/h
ea
d)
EU
Poland
Romania
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POLICIES: Enlargement & the Common Agricultural Policy
Effect of imposing the CAP is moderate compared to changes of past 10 years
Initial predictions of dramatic CAP effects were driven by large price gap between CEECs and EU
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Enlargement & the Common Agricultural Policy
Price gap between CEECs and EU has diminished significantly Macro-effects (exchange rates) CAP reforms (MacSharry, Agenda 2000) Agricultural support in CEECs Quality improvements
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CEEC-EU Price Gap Wheat 1991 - 2001
-70
-60
-50
-40
-30
-20
-10
0
10
20
30
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Pri
ce G
ap (
%)
EU
CEEC
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CEEC-EU Price Gap Milk 1991 - 2000
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
10
1990 1991 1992 1993 1994 1995 1996 1997 1998 19992000(e)
% p
ric
e g
ap
Czech RepublicEstoniaHungaryPolandSloveniaEUWorld
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Agricultural support in CEECs(PSEs total and milk, 2001)
3
1310 10 11
17
12
24
40
35
21
9
2016
11
2319
31
45 45
40
51
0
10
20
30
40
50
60
Bu Est Ru Po Sk Cz Hu Ro Sn EU USA
PSE total
PSE milk
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Enlargement & the CAP
ACCESSION EFFECTS on prices & production smaller than
expected initiallyprimarily driven by productivity changes in
CEECs rather than CAP implementationnot dramatic since productivity increases
are lagging behind in “larger” CEECs (Poland, Romania) due to structural constraints (small farms, …)
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Enlargement & WTO : Conflict ?
Enlargement effects further constrained by tough CEEC quota (milk, sugar, …)
Uncertainty remains (world prices, €/$ rate, CEEC supply & demand, ...)
But more dependent on outcome of new round
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Enlargemen & the Budget
Outcomes from the 2002 Brussels Summit :
• Phase in DPs in CEECs : 25% in 2004, 35% in 2006, and 100% in 2013. • This makes enlargement “fit” the Berlin FF.
• 2007-2013 : Total expenditures in EU-25 on market interventions and direct payments (Pillar I)
• below 2006 figure in real terms; • in nominal terms : below 2006 figure increased by 1% per cent per year.
• No limits on rural development spending
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CAP Expenditures and Enlargement
The 2002 Copenhagen Summit :
• Phase in DPs in CEECs faster and earlier
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Copenhagen summit decision on DPs
From EU budget
From nat. budget
(“top-up”)TOTAL
2004 25 30 552005 30 30 602006 35 30 652007 40 30 702008 50 30 802009 60 30 902010 70 30 1002011 80 20 1002012 90 10 1002013 100 0 100
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CAP Expenditures and Enlargement
The 2002 Copenhagen Summit : Phase in DPs in CEECs faster and earlier
• BUT : • financing comes from “national top-ups” • EU Budget under Pillar 1 is unaffected.
• Restrictions on top-ups:• from national funds or EU rural development • only for 2004-2007 period, afterwards only national• RD funds need co-financing at 20%• RD funds are limited for this use
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CAP and the Budget after Enlargement
Even if enlargement “fits” in the 2000-06 FF, without reform, CAP expenditures after 2006 will conflict with budget
Independent estimates of the cost of extending the CAP to the CEECs when DP=100% :
CEEC-8 : € 10 million CEEC-10: € 14-16 million
Of which: DP = 60% Market = 20% Rural Dev = 20%
Hence : Pillar I expenditures : 10.5 billion € by 2013.
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Brussels Summit CAP Expenditure Limits
2006 2007 2013
EU-25 in 1999 prices 39.4 39.4 39.4
EU-25 in 2006 prices 45.3 45.3 45.3
In current prices, using 1.0 % deflator
EU-15 (as in Berlin) 42.8
CC-10 (as in Berlin) 2.5
EU-25 Ceiling Brussels
45.3 45.7 48.6
Ceiling increase 0.5 3.3CC-10 direct aids 1.6 2.0 5.0
Margin 2.0 1.4 0.8
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The Budget will be back on the Agenda
Independent estimates : Pillar I expenditures : 10.5 billion € by 2013. DP expenditures : 7-8 billion € by 2013 (1999 prices !)
Brussels Council : DP expenditures : 5 billion € by 2013 (in nominal prices !) Based on minimalistic assumptions, and not including cost of Bulgaria and Romania joining.
Hence: “reform” of DPs remains needed – even without dairy or sugar reforms
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Some final reflections
CEECs have gone through amazing set of changes: Eg Productivity and quality changes
Initial fears did not materialize partly because based on misunderstanding of CEEC
situation and institutions partly because of policy changes in anticipation
Agenda 2000 Copenhagen budget and quota agreement
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Some final reflections
No doubt important problems will have to be dealt with, but convergence and integration is progressing
More complicated decision-making in EU ahead, including on CAP
Poland will become an important player in CAP politics
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Some final reflections
Let us not forget that, by far, the most important result is that fifteen years after the fall of the Berlin Wall eight Eastern European countries will join the EU
Anybody who would have suggested in 1988 that the Baltics would be part of the single European market by 2004 would have been looked upon with more than just a frown.
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