Endogenous supranational policy decisions: The Common Agricultural Policy of the European Community

The analysis of the supranational EC decisions on the CAP indicates that they are endogenous and could largely be explained by past income growth and the development of budgetary expenditures prevailing at the time of the price decisions. The empirical results corroborate the hypothesis that Monetary Compensatory Amounts are integral part of Common price decisions. Agricultural income growth could be explained by past price policy decisions whereas budget expenses are determined by U.S.$ world market prices and the exchange rate of the ECU against the U.S.$ If the CAP were to be a national agricultural policy the results obtained would not be very surprising. The decision making process with respect to the Common Agricultural Policy, however, is supranational in character. Apparently the same forces that one might expect to determine national agricultural policies underlie CAP decisions, too. A question that immediately rearises is this context is, what are the determinants of the behavior of the agents involved in the decision making process? As already mentioned, the approach based on the (expected) behavior of voters is not likely to contribute to an explanation of CAP decisions because on an average the portion of agricultural voters is low in the EC. Moreover, empirical analyses for the Federal Republic of Germany did not find significant interrelations between price policy decisions or agricultural incomes and the popularity of the government on the side on agricultural voters (Haase, 1983). Finally, the Council of Ministers is not elected by the voters of the European Community as a whole; the ministers are members of the respective nationally elected governments. To what extent the behavior of bureaucrats and the behavior of pressure groups contribute to the observed CAP decisions is difficult to judge and even more difficult to analyze empirically because presumably the most important factors influencing the supply of (bureaucracy) and the demand for price support (pressure groups) are identical, namely agricultural income and budgetary expenditures (Beusmann and Hagedorn, 1984). The model developed in this paper could contribute to avoiding misinterpretations of EC price policy decisions as occurred around the turn of the last decade. The comparatively low growth rates of guaranteed prices during that time were not symptoms of a policy change but a consequence of relative budget scarcity and comparatively high income growth due to high price increases in the past. Once there had been a budget relief and relatively low agricultural income growth the growth rate of support prices increased again. As has been shown, price policy decisions are not completely determined by past income growth and thus by past decisions on market regime prices. The growth rate of budget expenses is also an important determinant of price decisions. The growth rate of budget expenses is (among other things) also affected by changing exchange rates (ECU vs. U.S.$) and U.S.$ world market prices. This allows some interesting additional insights into some international determinants of CAP decisions. While it could be argued that the impact of the world market prices and the exchange rate (ECU vs. U.S.$) via EC budget expenses is quantitatively less important than the effects of past price decisions these international aspects must not be overlooked. The following may help to illustrate such interrelationships. The present comparatively high value of the U.S.$ against the currencies which form the ECU reduces the EC price support in terms of the ECU, i.e., it reduces the difference between domestic prices and the ECU world market prices and thus eases the budget situation which in turn contributes to relatively higher increases of the support prices. The arguments with respect to world market prices in U.S.$ are quite similar; comparatively high U.S.$ prices on the world market (caused e.g., by the 1983 drought in the USA or the U.S. PIK program) reduce export refunds per unit and thus the EC budget expenses. Although the quantitative effects are, as yet, unknown, lines of argument such as the following one appear to be plausible. The comparatively high value of the U.S.$ against the ECU during the last couple of years has c.p. eased the EC budget situation and thus contributed to comparatively high increases in support prices. As the large country assumption holds for EC agriculture the increased surplus production of the EC has caused relatively lower world market prices and thus contributed to agricultural income problems in other countries and/or additional income measures there. Assuming that these other countries are not small in economic terms, and that they introduce measures which in essence reduce their supply of agricultural commodities (such as a PIK program), then it become obvious that such a policy in turn contributes to relatively high growth rates of agricultural support prices in the EC. Copyright Martinus Nijhoff Publishers 1986