Trade Adjustment Costs in Developing Countries: - World Bank ...

Compensation Payments in EU Agriculture 36710 Eastern European countries, which still had a relatively high share of agriculturalproduce in total production and employment, would have unsustainablebudget implications if the CAP was not reformed. Second, without additional reformsthe EU would not fulfill the commitments made under the GATT UruguayRound Agreement on Agriculture (URAA). The combined result of the MacSharryand Agenda 2000 reforms implied, at least for the sectors concerned, a majorshift from support through price and market interventions to farm supportthrough direct payments.The relative share of the EU agricultural budget in the total EU budget has declinedsomewhat (Figure 24.3). However, Table 24.4 shows that the total amountof support to agriculture has not declined. Moreover, some argue that support toagriculture has increased more than indicated by the numbers in Table 24.4, becausecompensation through direct payments was based on gross revenue declines,while net incomes have declined much less. 1Figure 24.4 also indicates the growth in expenditures on rural development. TheAgenda 2000 decisions imply the consolidation of the EU rural development policyunder the CAP (Ahner and Scheele 2000). While the budgetary allocations remainmoderate compared to the other expenditures; the growing importance of rural developmentfollows from the official reference to it as the ‘second pillar of the CAP’.Figure 24.3: EU Agricultural Budget as a Percentage of the Total EU BudgetSource: European Commission1 For example, OECD calculations on transfer efficiencies of OECD agricultural policies suggest thatthe average net income gains from market and price support in OECD countries was only 20 per cent(OECD 1997). This means that, after factor markets and so on have adjusted to the new situation, agross income decline, of say, €100 is causing a smaller net income decline. Hence compensationbased on gross income decline is overcompensating, the extent of which depends on the transfer efficiencyof direct payments, which are also less than 100 per cent.