OECD Agriculture Ministerial

TADAGMIN2010 › Agricultural policy reform: how to stay on the reform path

Agricultural policy reform: how to stay on the reform path

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In 1987 and 1992, OECD agriculture ministers made a commitment to policy reform that would “allow for a greater influence of market signals”.

The basis for reform was further developed in 1998, when it was agreed that the best policies to achieve shared policy objectives would be: transparent, having easily identifiable objectives, costs, benefits and beneficiaries; targeted to specific outcomes and as far as possible decoupled; tailored, to provide transfers only as necessary in order to achieve identified outcomes; and flexible and equitable.


Progress has been uneven. While for some countries the issue today is how to move from decoupled to targeted policies, other countries have barely begun to decouple support. A move away from broad-based market interventions to policies that directly address economic, social and environmental objectives is a big step.

Staying on the path to better policies requires evidence-based actions at each stage of the policy cycle:

 


 

 Make policy objectives explicit and quantifiable, and sequence them right

 

 

 

 

 

Policy objectives have evolved greatly in the past decade. While farm income is still a prominent issue, agricultural policies today explicitly address issues related to society at large, such as environmental quality, landscape, animal welfare and food safety.

Despite the diversity of policy objectives, in general they relate to equity and income distribution, or to correcting market failures. Market failures should be addressed first, thus having an effect on incomes, and only then should the remaining income issues be tackled.

Greater precision in formulating policy objectives allows for better targeted policies and helps to measure progress. For example, the relatively straightforward objective to “achieve an acceptable level of farm household income” is imprecise. A better approach would be to “achieve within a given number of years average farm household income levels that are at least as high as the average in the national economy”.

 

 Do current policies meet objectives? 


 

 

 

 


It is essential to assess the degree to which existing policies achieve their objectives and identify their desired or undesired side-effects. OECD analyses such as those in Agricultural Policy Design and Implementation suggest that policies which currently prevail in OECD countries are not always the most effective in achieving the stated policy objectives, as the following examples show.

Farm income objectives: price support is inefficient in transferring income to farmers, distorts production, and may increase world price volatility. In addition, the majority of support in OECD countries continues to be captured by the large producers.

Improving competitiveness: broad-based productivity improvements may be inconsistent with existing policies to maintain farming where it might not continue otherwise; long-standing government involvement in R&D is more justified.

Objectives related to consumers: agricultural policies in OECD countries have been successful in assuring the provision of abundant, safe and high quality food, but generally, at prices above prevailing world market levels.

Societal demands: markets may fail to provide non-commodity outputs, such as cultivated landscapes, and to limit negative externalities, such as environmental costs, but price support and unconditional income support are instruments that are not well-suited to address these issues, as shown by recent OECD studies.

 

 Decouple and target support, and look for market solutions 

 

 

 

 

 


Once the policy objectives have been well established, there may be a need to look for alternative policies. Which features should these new policies have? Agricultural support coupled to production is known to have many undesirable side-effects and a new policy set might want to minimise these by decoupling and targeting support, as well as through greater reliance on market solutions (see box).

 

How to move to less distortive, less costly and more effective policies

Shift to decoupled support…
Policies that are more decoupled from production or prices interfere less with production decisions and markets. They are generally preferable to commodity programmes because they are economically more efficient.

  • It should be clear though that any agricultural support has some impact on production and trade. Usually, the implementation of decoupled payments is linked to farm assets, such as land, with a fixed historical base. If, however, commodity production is required, or the payment is determined by current land use, instead of the historical base, policies become less decoupled.
  • A problem associated with all area-based payments is that they tend to be capitalised into existing farm assets, making it more costly for new entrants to acquire agricultural assets and discouraging exit. If based on historical entitlements, decoupling can maintain any inequities associated with production-linked support rewarding larger farms more than smaller ones.


…and target policies better
Decoupling is certainly not the end of the story. After agricultural support has been at least partially decoupled from production, additional gains can be reaped by directly targeting the specific objective and tailoring the amount of outlay to the problem at hand.

  • An optimal policy response to a specific problem, which may be of a local nature or confined to a specific portion of the population, requires appropriate intervention with targets that are as close to the desired outcome as possible. Targeting reduces leakages compared to broad market interventions and also has the potential to increase economic efficiency.
  • Targeted policies may lead to larger and more visible implementation costs. The challenge is to balance the economy-wide efficiency gains against the implementation costs associated with targeted and tailor-made policies. Implementation costs can be reduced by targeting variables and eligible recipients; use of information revealing mechanisms, such as auctions, in obtaining information about the private costs of compliance; or reliance on modern administrative techniques and technologies for managing information.


Tap into the potential of non-agricultural policies and look for market solutions.
Not all objectives can best be met by agricultural policies. Income objectives could be pursued also through general tax and social policies already in place. Problems of rural areas would be better addressed through multi-sector policies, embracing areas such as transport, education and training, while market-based mechanisms may be used to reward positive or penalise negative environmental externalities of agriculture. 


 

 Prepare the ground and design adjustment and compensation measures 

 

 

 

 

 


Policy reform and adjustment may have adverse effects on some households, sectors, or regions. Moving towards targeted policies has distributional consequences, both in terms of income and wealth. This may justify designing accompanying adjustment policies and compensation packages that should be time limited and should not impede adjustment.

The costs of these policies should not outweigh the potential benefits of the reform. Compensation should be fully portable, allowing the recipient (and the farm assets) to leave the sector.

Adjustment and compensation measures could not only prepare the ground for reform, but also facilitate its implementation. For local public goods, both decision-making and financing should be devolved to regional or local bodies.

In any reform process, governments should take into account the potential of stakeholders to adjust. There is a natural tendency for those representing vested interests to exaggerate the costs for their constituents. But governments have often underestimated the dynamism of this sector and its capacity to adjust. They should ensure that any obstacles that might get in the way of the sector’s own adjustment efforts be removed. These obstacles might relate to regulations affecting land use, transfers or sales, tax provisions, the availability of credit, or any other legal or institutional impediment to the adjustment process.

 

 Monitor and assess policies to ensure they are on the right track 

 

 

 

 

 

 

The effectiveness of policies relative to their objectives, and their efficiency, need to be monitored. Implementation and evaluation of targeted policies is particularly demanding in terms of information. Information systems should be embedded in the policy design cycle from the start, so that information is generated at each step. Economic analysis can help to disentangle the effects of policy from other factors.

 

References

For further information, visit www.oecd.org/agriculture/decoupling