Compensation Payments (OECD)
The OECD includes compensation payments in the range of measures that governments should consider in removing price support policies. Such payments might be made to compensate producers for the withdrawal of price support during the transition to lower total assistance levels or as a more permanent part of a restructuring package of support measures intended to produce less distorting consequences.
When assistance levels are permanently reduced expectations of lower future income streams are translated into a fall in market values of land and other fixed production assets. There is also a devaluation of farmers' human capital. Agriculture is characterised by self-employed and family businesses so that the same family bears both the capital and the income loss.
Such changes create pressures for government action to provide compensation for the losses incurred where the effect is directly linked to government action. Such payments might be justified if they made it easier for policy makers to implement effective reform programmes. There has also been a form of a social contract in the past to provide assistance to these groups. Nevertheless the OECD argues that payments of this son, if used by member countries, should have the characteristics and meet the recommendations for other direct payments discussed above (OECD 1993, p32).
There is some debate on the relative merits of annual and one-off payments. An annual payment lends itself more readily to compensating the farmer for the loss on all owned assets including human capital for which there is no asset market. One-off capitalised payments however deal with all the effects at once and leave the farmer free to decide what to do. A flexible combination of the two options might be a transferable bond which entitled the farmer to an annual payment for a certain period. The bond could be sold at any time at its current capitalised value. Such a scheme would spread the cost to governments while providing recipients with significant lump sums
Discussion
There is no doubt that the GATT Agreement is a significant change in the conditions of world trade and domestic agricultural policy. The arrangements for reductions in subsidies and alternative methods of support have pointed world trade in a new direction. It seems reasonable to assume that the momentum toward further direct income payments will play a significant role in the move away from production support. Individual countries will need to adjust their domestic agricultural policies to the new environment.
The GATT Agreement has now been put in place albeit with the domestic support exemptions considerably weakened. The MacSharry proposals were essential to obtain the co-operation of BC Ministers hence this was probably the price to be paid for international agreement. The levels of reduction in the AMS for the BC are disappointing, as it looks as though these have already been achieved in reforms introduced since 1986.
At the same time, the criteria adopted in Article 6, para 5(a) offer an opportunity to adjust the desired reduction on the base level of support in 1986-88. Payments calculated on 85 percent on the base level could be brought down to a lower figure and so on. Greater restrictions could also be placed on qualifying areas, yields and headages. It remains to be seen how other countries are going to react to the restrictions on direct income payments that were negotiated for the BC's benefit.
In contrast, the OECD discussions are positive in support of more targeted and specific assistance policies:
'Direct income payments have a useful role to play in the context of agricultural policy reform because of their lower distortionary potential and their capacity for targeting a wide range of policy variables and particular groups of farmers. Direct income payments that are designed to have the characteristics and satisfy the recommendations determined in this analysis would be more efficient instruments for transferring income in pursuit of given policy objectives than market price support, and hence their relative attractiveness in a context of greater market orientation and reduced overall support' (OECD 1993, p38).
The OECD documentation offers a broader definition of direct income payments especially with its emphasis on environmental public goods. There is some evidence of compromise in the wording and categories employed as might be expected in a forum of members with different attitudes to price support in the past. The alignment with GATT is fairly close with respect to government services, income support and income insurance (including relief from natural disasters). The GATT document does not spell out in any detail the environmental policies that would meet its exemption conditions. The OECD has drafted a series of recommendations in each of the four areas, structural adjustment, farm income stabilisation and disaster relief schemes, minimum income guarantees, and environmental goods, that do offer guidelines to member countries of what could be called 'GATT consistent' domestic assistance policies (see Annex 1).
The next step is for countries to examine their domestic agricultural policies and to move towards less production and factor distorting frameworks. With the Uruguay Round agreement, countries will also have to commence tarrification of their existing assistance measures. Countries will also need to assess their priorities in giving agricultural assistance and investigate whether declared objectives can be met in other ways. This will involve investigation of social welfare measures in particular as previous forms of agricultural assistance will be phased out.
It remains a problem to distinguish between temporary and permanent changes in economic conditions. The general rule seems to be that temporary assistance is warranted in cases of disaster and economic distress, but longer term assistance is unwarranted. The GATT rules do not seem to cover this situation but OECD does specify that programmes for agriculture should be transitional.
Welfare assistance (direct income support) is oriented to financial need and is normally targeted to defined groups. In the New Zealand case, only those programmes introduced for relief in the 1986 economic downturn could be said to be substitutes for earlier production support incentives in the sense that while guaranteed minimum product prices were in place, a special assistance scheme for farmers would not be needed. Previous to the introduction of government price support in 1978, farmers could only be compensated in economic downturns from buffer funds held in the Reserve Bank and managed by the marketing boards.
Under the current NZ policy compensation to farmers who Social Welfare
Department
framework, existing schemes provide only limited are adversely affected by natural
disasters. Indeed the regards adverse events family support and special assistance as
subsidies to farming as they believe the conditions are more generous than for other
sectors and employers. At present (see Annex 2) the schemes available are expressly
defined in terms of universal benefits and not sectoral ones,
The GATT Agreement clearly specifies how direct income payments will be treated (the green box). Many infrastructural measures are exempt and will clearly continue to be provided. Research and development expenditure, and pests and disease expenditure appear to be at the borderline of permissible exempt status as they clearly confer some sectoral benefits,
The OECD has attempted to specify how agricultural reform measures could be introduced in member countries. They offer guidelines or recommendations in the areas of structural adjustment programmes, farm income stabilisation schemes and disaster relief measures, minimum income guarantees, and for environmental goods. While compromise is evident in their specifications, the broad thrust of their discussions is positive and likely to help countries meet the proposed tarrification rules for domestic agricultural assistance measures.
There is clearly a relationship between a high level of price support assistance for the rural sector and a low level of welfare payments. Evidence from countries with high levels of price assistance would be useful in this regard. Equally, welfare assistance cannot replace the bonuses and incentives provided by price support. In the new scheme of things, the agricultural sector has to find its own level of output and factor employment consistent with food security and international trade trends. Positive adjustment measures will be needed to reach this objective.
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