The OECD Approach
In a series of papers (OECD 1990, 1993), the OECD has taken an increasingly broad approach to the analysis of direct income payments (DIPs) as an alternative means of raising farm incomes in member countries. As well as measures to achieve structural adjustment, income stabilisation and minimum income guarantees, the OECD has added environmental public goods and externalities to its list of policy areas where DIPs might be relevant (OECD 1990, p52). DIPs cover all those payments to farmers made directly from public authorities' budgets to individual farmers that have the effect of increasing farmers' incomes. OECD exclude budget payments intended to improve the performance of the sector as a whole, such as payments for research and infrastructure, and farmer-based schemes that are entirely self-funding. They also take a wider view of compensation than in the recent GATT negotiations.
These payments provide transfers indirectly to producers through budget-financed framework measures or general services, and include research and development, extension and inspection services and rural infrastructure (OECD 1990, p45). Most of these measures provide assistance collectively to the agricultural sector, rather than to individual producers. In some cases there are direct benefits to consumers, such as R&D and inspection services. These measures may be broadly considered as lowering the costs of agricultural activity to the sector as a whole but not as providing farm income support.
This broad approach is justified in terms of the OECD's mandate to study how direct income support could replace price guarantees and other trade distorting measures in supporting farm incomes in member countries. The stress should be on possible measures that assist structural adjustment and encourage rural development including environmental aspects. The relevant policy areas are identified as.
- structural adjustment (to facilitate factor mobility within agriculture and to other sectors);
- income stabilisation and disaster relief (to reduce large fluctuations in income and to reduce asset loss due to natural disasters);
- minimum income guarantees (to relieve poverty);
- and environmental public goods and externalities (to increase the provision of environmental public goods and positive externalities) (OECD 1990, pp 5l-53).
The environmental goods and externalities are included because farmers are likely to be increasingly in receipt of government funded payments as remuneration for providing environmental goods and services that cannot be marketed to consumers in the usual way. The essence of such payments is to correct for the failure of markets to reward farmers for producing socially-valued outputs. Such payments should be designed and monitored to ensure that they do not contain any element of subsidy to agricultural production (ibid p52).
The key function of DIPs is to uncouple farm income assistance from production and factor inputs. OECD distinguishes between 'pure' DIPs and 'less economically distorting' DIPs. Pure DIPs are unrelated to past and future levels of output and factors of production as well as present levels and are free of any conditions or constraints on recipients. Less economically distorting DIPs include measures that impose conditions on recipients or may be linked to inputs, outputs or income levels, providing they are neutral with respect to current and future production levels (ibid p45). Since the latter may be more common than the former, it is important for member countries to aim at minimising distorting effects rather than concentrate on pure DIP measures.
The OECD is a western oriented forum where major issues can be discussed without political commitment. Nevertheless the same factors which held up the GAIT negotiations are present in Paris too. For example, there was extensive discussion of compensation payments well before the MacSharry proposals were adopted. The most recent OECD approach is to examine each of the four policy areas of structural adjustment, income stabilisation, minimum income guarantees and environmental public goods, and identify suitable criteria and guidelines for the implementation of DIP measures (OECD 1993). During 1993, 'criteria' was replaced by 'characteristics' arid 'guidelines' was replaced by 'recommendations'. Thus the general characteristics of DIPs were identified as:
they should be directly financed by taxpayers;
the size of direct income payments should either be fixed or, if related to an agricultural production variable, be outside the farmer's control; and
the size of the payment should not be determined by the volume of current or future production of specific agricultural commodities or the levels of specific inputs used.
General recommendations were identified as:
participation in programmes should normally be voluntary; and
particular policy objectives should be implemented in such a way that negative effects on other policy aims are minimised and that duplication of targeting is avoided.
The OECD has worked out details of guidelines or recommendations for the four major policy areas as a guide to member countries. As they are somewhat repetitive we have included a summary of them in Annex 1 of this paper.
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