Abolish the CAP, let food prices tumble

Imagine there was a Food Tax which had the effect of raising food prices by, say, 17% on average. The tax revenue was collected centrally, and then disbursed to agricultural producers. That tax would be incredibly unpopular, especially in times of rising food prices. The Food Tax would be too obviously recognisable as an instrument of redistributing money from sales assistants and cleaners to wealthy landowners.  

The Food Tax is no fiction, of course. Ultimately, the Common Agricultural Policy (CAP) has precisely that effect. It differs from my hypothetical Food Tax only insofar as it is infinitely more complex, consisting of literally hundreds of different support instruments. There is a complex array of tariffs, quotas, and subsidy streams, each of which can, again, be subdivided into lots of different subcategories. Take subsidies. There are different types of subsidies for different types of agricultural outputs, for different types of agricultural inputs, for different types of agricultural capital goods, and for different types of services related to agriculture. Some subsidies depend on a farm’s total farmland area, others depend on the farmland area currently under cultivation, others on the farm’s livestock, others on the farm’s revenue, and yet others on farmers’ income. The OECD’s ‘PSE Manual’ [PSE = Producer Support Estimate], a basic overview of the most important categories of support instruments, has 178 pages.

Working out the net effect of all these policies is impossible on this basis. However, there is a simple measure of the CAP’s total net effect on food prices, at least in a static perspective: the difference between wholesale food prices in Europe and world market prices. On this basis, we are paying 17% more for food than we would under market conditions.

It is not like that everywhere. Food prices in New Zealand and Australia are virtually identical to world market prices (see table below). The reason is simply that agricultural producers in these countries are largely left to their own devices. In Europe, an average farmer owes more than a quarter of their revenue to various state support measures. In New Zealand and Australia, they have this weird, market-fundamentalist notion that farmers should make their revenue by selling stuff that people want to eat.

Author’s calculation based on data from the OECD and the World Bank

They do what every supporter of the status quo would assure you could never work (‘the world is not as simple as your Economics textbook suggests’), and it seems to work rather well. These two countries have some of the largest and most productive agricultural sectors in the world. That has a number of economic benefits – without the removal of state support, New Zealand might never have grown its now world-famous Sauvignon Blanc export sector – but it is also an extremely cost-effective way of raising the living standards of low-earners. So surely the poverty industry is already on the case?

Of course not. They publish a lot on food prices, but they have only four policy recommendations in this field:

1. Raise benefits,
2. make millions more children eligible for free school meals,
3. raise benefits,
4. raise benefits some more.

Here’s a better alternative: the CAP should be abolished lock, stock and barrel – and not for its economic costs. A functioning economy can afford a few wasteful policies, and low food prices are not a prerequisite for a high GDP. However, a policy which allows food bills to tumble is an efficient anti-poverty policy, which is also free of all the nasty side-effects that our current so-called anti-poverty measures suffer from. What’s not to like?

Kristian Niemietz is the author of Redefining the Poverty Debate: Why a War on Markets is No Substitute for a War on Poverty.