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

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

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

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

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

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)

Broad trends in EU agricultural supports 1986-88 2002-04 Total €m. 106,372 113,401 Total % GDP 2.82 1.24 Taxpayer transfers % Total 24.2 48.5 General services % Total 9.1 8.2 % PSE 41 34 Market Supports % PSE 86.9 54.6

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

Details of EU PSE trends % PSE 1986-88 2002-04 Market supports 86.9 54.9 Output payments 4.9 3.5 Area/animal payments 2.6 28.2 Historical entitlements - SAPS 0.0 0.6 Inputs 8.0 Input constraints 0.7

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)

Details of EU general service supports % total 1986-88 2002-04 Res. & Devel. 11.0 17.2 Agr. Educ. 1.0 10.1 Inspection 1.6 4.6 Infrastrcuture 11.6 23.1 Marketing & Promotion 25.1 33.4 Public stockholding 49.4 9.9 Miscellaneous 0.4 1.5

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

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

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

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 …

International estimates of internal rates of return to agr. R&D % Number of studies Average return Modal return Median return All studies 1708 82 49 38 Field crops 916 74 40 44 Live-stock 233 121 14 53 Source: Alston et al, 2000

Well managed R&D investment can pay handsomely … Typically the rates of return to well managed R&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 …

Rates of return % for some Irish agricultural research activities Potato breeding 9 Milking machine technology 44 Silage fodder 46 Malting barley – planting date 95 Pig breeding 74 Phosphorus ferilizer use 69 Mushroom growing 47 Source: Boyle et al (2002)

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

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