Agricultural Policy and Multifunctionality

The objectives of the agricultural policy van be categorized into two groups. One of them contains the equity or income distribution related issues, and related to the income position of the agricultural households. The other addresses market failure related challenges, cases when the market is not able to produce the necessary results expected by the society (e.g. environment protection, soil and water management, security and food-safety, etc.)

Non-commodity outputs that are necessary, occasionally even indispensable, for human life are called public goods or public services. The market usually does not measure and does not recognize their value, therefore the society does not pay for them, though they do have real economic value. Among others, this phenomena is also called market failure. The evaluation of public goods (and positive externalities) is of vital importance however in rural development, if, in case of market failure, we want to determine the necessary extent of the state intervention. When analyzing the multifunctional agriculture we also should decide if the production of agricultural products can be separated from production of the most important non-commodity outputs

In the center of economic (and agricultural) policy we frequently find the exchange relation between equity and efficiency. This means that for the sake of greater equity, efficiency partly is to be given up. The question is the extent of efficiency loss that can be undertaken for the sake of decreasing inequality. Is equity or efficiency more important for the society? Debates concerning economic policy often reflect the differences in thinking about these two factors. According to the general point of view efficiency should be improved, meaning that the maximization of national income is the main goal, since every members of the society would benefit from the greater wealth. Under certain circumstances (e.g. due to an economic policy program the situation of the rich and the poor deteriorate, while the position of the middle class improves parallel the to national income increase) even this concept could be misleading, as it is rather hard to determine whether efficiency or equity grows or decreases on the whole (Stiglitz, 2000).

Preserving and supporting agricultural household income is a generally accepted principle in the majority of the OECD member states. It is manifested in political declarations, and of course, the several decades long past of the agricultural support programs aimed to improve agricultural incomes also testifies about it. States interventions refer to market failures if market signals themselves cannot contribute to the optimal structure of production and consumption. The major reasoning for state intervention is generally about externalities and public goods, thus market failures.

The nature of externalities is that the side effects of the decisions (concerning production, consumption and sale) of one actor collides the interest of the other. For example, farms use to much nitrogen and pesticides (negative externality) or produce surpluses. On the other hand, the same farms can contribute to the protection of the environment and to aesthetics (positive externality). It can occur that in market relation the output is not efficient, since the market does not pay for the costs of externalities (non-commodity output) or does not give compensation for the social benefit of externalities.

The topic of multifunctionality has been argued for years. In March 5-6, 1998 the agricultural minister of the OECD member states acknowledged that beside its primary function – food production and the production of raw materials for the industry – agriculture contributes to land scape and environment protection, to the production of renewable natural resources, to the preservation of biodiversity, and to the socio-economic viability of the rural areas. These values, products and services are called non-commodity outputs.

The agricultural ministers emphasized however, the primary importance of the market oriented agricultural production and multilateral trade system. This means that the multifunctional (multi-task) agricultural production cannot distort production and trade. In addition, the reduction of agricultural production supports and trade barriers lead to efficiency improvement in resource utilization (Pareto improvement).

Traditional agricultural policy is production oriented, while multifunctionality focuses on the natural resources. In recent years the variety of non-trade concerns has been growing. Beside the collective notion of multifunctionality these concerns also include domestic food-security, food-safety, food quality, animal-welfare, and rural development. The population maintaining capacity of the rural areas can be improved by creating domestic food-security, or by maintaining a certain level of domestic agricultural production. These concerns however are related directly to the operation efficiency of the existing markets, so we cannot talk about lack of markets or market failures. So these concerns cannot belong to the group of clear public goods. Contrary to them, public goods inherently carry the possibility of market failure. The relation among the two categories of

non-trade concerns (public goods and others) is, that both can be influenced by the free(er) international trade’s impact on domestic production.

There are two main directions of the debates concerning multifunctionality and free trade. According to some opinions, supports related to multifunctionality distort free trade, according to the others, free trade endangers the production of public goods.

Countries that produce agricultural goods expensively with high support usually think that present agricultural support programs should be continued for providing public goods. Low cost producers argue that supports (product specific supports) are not the appropriate instruments for the optimal level provision of public goods.

The WTO Agreement refers to the non-trade concerns with the consideration of food-security and environment protection. It warns the developed member states to avoid any measures that would have a negative impact on the reforms of the poorest and net food importer developing countries. Several supports (Green box) are provided on the basis of non-trade considerations. Public storage and domestic food-aid serve food-security purposes. Direct income support, support of the payments to revenue insurance programs (e.g.

the Canadian whole farm income insurance), indemnity payments for disasters, on the other hand relate to rural development objectives.

Pursuing food-security cannot hinder the agricultural trade liberalization. The biggest issue for developing countries is whether the developed countries would be willing to support their adjustment to the free(er) trade environment, and whether net food exporter countries would be trustworthy partners in satisfying the food demand of the developing countries. Net food importer developing countries draw attention to food-security issues.

Rich countries can afford to import food; at most there will be some inconvenience in purchasing them, especially for the poorer customers. The main issue is whether rich countries would be allowed to support their domestic production to ensure a certain level of self-sufficiency, and if so, what forms of supporting should be acknowledged.

Animal-welfare is not directly linked to the notion of public goods (services). The quality of animal products is only slightly affected by the livestock farming practices, but from a moral and ethical point of view they still can influence the well-being both of consumers and non-consumers.

The non-trade concern related support of rural development is based on the assumption that agriculture is a major part of the rural economy. In most developed states agriculture represent only a fraction of GDP and employment. If the importance of agribusiness (input producing industry, agriculture and distribution) is considered, then its share of national income and employment is much higher. In the USA the agribusiness represents roughly 12 percent of the national income and 16 percent of the active population, but about two-third of the latter live in cities. This is not at all surprising if you happen to know that according to the OECD reports the employment rate of agribusiness rarely exceeds 20 percent even in rural regions. An ever increasing part of the (agricultural) household incomes derives from agricultural activities. The development and extension of non-agricultural activities in rural areas is a central issue, but unfortunately the process is hindered by the difficult access to new technologies (e.g. internet). The role of agriculture in the rural areas is much more important in developing countries, therefore if agricultural production was reduced due to the trade liberalization in these countries, we could count on serious consequences (Popp, 2004).

When we analyze the non-commodity outputs of the agriculture, we should consider its social values that are not acknowledged (rewarded) by the market. In determining the importance of multifunctionality, comparative analyses of non-commodity and commodity outputs is required. It is however not at all that simple: how can we evaluate non-commodity outputs and how can we determine the impacts of inputs on non-commodity outputs?

It is a frequent assumption that with the production of agricultural products multifunctional services are linearly produced. If that was true, then of course the declining production (due to the trade liberalization) would be associated with decreasing non-commodity output and social wealth. The above mentioned examples, however, prove that the relationship between commodity and non-commodity outputs is rarely directly proportional. The actual agriculture related output of public goods (services) is affected by the combination of utilized inputs and produced outputs and by the price ratio. The provision of public goods is much more affected by land use than by the agricultural activity or agricultural policy. The traditional agricultural policy tools, such as income support, specific product support or price support only incidentally contribute to the protection of the environment, to the production of public goods. The Conservation Reserve Program (CRP) of the US, for example, serves much rather income support objectives (and the planning and controllability of the agricultural budget), than the cause of environment protection (Popp, 2002).

The question is which farmer is the most efficient in providing non-commodity outputs, and that these NCOs to what extent can be considered public goods. Once the public good nature of the non-commodity output has been established, then the most efficient intervention and finance (market or state) methods also can be determined. The support of multifunctional agricultural production includes different administrative transaction costs as well, that also affect the final choice of different regulatory options.

3.3. The Strength of Jointness Between the Production and Other Functions of