Economic Policy Review ISSN 1313 - 0544

No to the protests of the milk producers

Author: Adriana Mladenova / 09.09.2008
Rate This Article:

The milk producers protests and the decision which the Government is about to make for providing additional funds from the budget for subsidies, show again that an organized group of people could be very strong on the political scene, even if their demands are against the interest of the net taxpayers in the country.  It is certain that meeting the demands of the milk producers will lead to a fine by the European Commission (EC), which would double the size of the subsidies. Even the Minister of Agriculture Dr Valeri Tzvetkov, who asked the Council of Ministers for 60 million levs, gave a clear signal that he disagrees with this policy: „I understand what I am doing, but the farmers continuously ask for the amount in question and the protests are getting stronger"[1]. If the Minister feels under pressure by the demands of several hundred milk producers, than what is going to happen when the chicken breeders, the grain producers and all the remaining sectors demand subsidies with the argument: "the milk producers got subsidies why should not we!" This argument would become more and more legitimate and stronger in a pre-election situation. How many fines we would have to pay, we the taxpayers in the country and for what reason? The agriculture is not showing any signs of improvement exactly because of the assistance and Government interventions, which interfere with the natural market processes and the successful restructuring of the sector under the conditions of market economy.

Is it a must to give subsidies?

It seems that the protectionist measures for the agricultural producers are one of the most difficult topics on a global scale. After the previous week, when the negotiations of the World Trade Organization (WTO) failed because consensus could not be achieved about the custom duties and protectionist measures for agricultural products, now the subsidies for the agricultural producers are on the agenda in Bulgaria.

The objective economic analysis, however, clearly shows without any doubt that the subsidies are detrimental. In reality, the small and none effective agricultural producers are doomed to slow bankruptcy. They become dependent on the State and obstruct the increase of the effectiveness of the entire sector. Thus the consumers are the losers.  In Bulgaria the average number of cows in a milk farm is only 2.8. In contrast, in Denmark the average is 85 cows, in the UK - 74, Check Republic - 63, Germany - 38, Canada - 66, the US - 128, Australia - 280 and New Zeeland - 350. 

According to the data of the Ministry of Agriculture and Foods the cow farms in the country are 124.9 thousand.   That means that the average farm would get 500 levs of the requested additional funds. Naturally it is not clear how many of the registered farms would get subsidies. In all cases the large farms would get more, while the small farms with a few cows would get significantly less. But while they get ready money from the Government they do not have sufficient stimuli to develop, to join forces and to invest in more productive farms.

According to a report of the Ministry of Agriculture from the beginning of the tear they have given out already 58 million levs just for the stock breeding sector. Of these 10.8 million levs are divided as a subsidy for improving the quality of milk to 1652 farmers or 6538 levs on the average per farmer and in addition are paid out 41.75 million levs as assistance to 10895 stock breeders or on the average 3832 levs per farm. Here we do not even mention the low interest credits to purchase fodder for the livestock, which are given out by the State Fund "Agriculture".

According to the data of the Ministry it seems that a relatively small part of the registered farms get millions of levs in assistance. It is time that this redistribution is stopped because the benefits are more than unclear, while the damages become more noticeable in the form of fines. During 1987 New Zeeland terminated the generous assistance for the farmers.  Until than the stock breeders got about 40% of their income from the Government in the form of subsidies. After the decisive measures, however, only 1% of the farmers' income comes from State assistance at present. This policy did not lead to a failure of the agricultural sector on the green island, quite the opposite. The farms became more productive and more open towards the market trends and consumer demand.

What about reducing the VAT on foods?

Another organized group (The Bulgarian Association of food and drink industry) is asking for reduction of VAT on the food staff down to 10%. This also would be a form of Government assistance, because the producers themselves stated that they do not intend to reduce the end user prices of their products. The differentiation of the tax rates however is against the idea of neutrality of the sectors with respect to the tax treatment and equality of the tax subjects. 

The role of the state should be to create conditions for the presence of competition, to reduce the impediments for entry in the sector not to define which sectors of the economy "deserve" to get assistance. Since the latter is called central planning.    

What should (not) be done?

In this situation most sensible and correct would be if the Government should not yield to the demands of either of the two groups. Since, if this happens it would cause a chain reaction to other sectors and interest groups. And in a situation before elections it is becoming more and more difficult to say "no".

The net taxpayers would be triple losers because the subsidies come from their pockets, again from there must be paid the sanctions of the EC and at the end of the day to bear off the negative consequences from the biased market signals and ineffective distribution of the resources in the economy.



[1] Newspaper "Sega", 7th of August 2008