Economic Policy Review ISSN 1313 - 0544

This year again we will pay agricultural tax*

Author: Svetla Kostadinova / 09.09.2008
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Usually, if a producer operates at a loss for three - four months he simply goes bankrupt and is out of the business. However, the situation is different if this producer has been promised a subsidy regardless of being successful or not. This situation seems absurd. The agricultural producers and processors in Bulgaria and generally in the EU would say differently, since they are the main participants in the Common Agricultural Policy pf the EU and as they profit from it, in recent times, it seams that they are losing more.

The mass protests in Germany, France and in our country during the last few months define schematically the following specifics of the agricultural sector. 

Firstly, it is relatively difficult for the public to understand who exactly is getting subsidies, what happens with them and how much actually they are. In other words, there is a complex system of relations in this sector and the real funds which are redirected from the budget are not easy to identify by the public. This allows very easy protesting, because the normal people sympathize with every one who claims that the situation is tragic and they would have to kill the livestock. Whether or not that is true is difficult to prove to the public, particularly when facing the angry producers.

Secondly - the barriers to entry - to become a milk producer, for example, the EU gives subsidies and requires specific quantity and quality (quotas) and if you do not enter the system you can not produce. Thus, all who are protesting at present or are considering such actions are actually inciting for subsidies only for specific groups in the society, being certain that the other companies do not have a chance to use them.  In the reverse case, where the government satisfies every request for more money from the budget, even with the cost of sanctions from the EU and there are no barriers of entry, every sensible entrepreneur would move into the sector in order to get the subsidies. That would mean more competition for customers until a point is reached when the subsidies would not be sufficient for the normal existence of many companies due to the insufficient number of customers.

Thirdly, agriculture is a sector with diminishing functions. It has a negative contribution to the country's economic growth during the last two years, in spite of getting a large number of subsidies and assistance both from the State budget and the EU. A positive relation between the money put into the sector and its economic development could not be established. If it is the reverse and the agricultural sector was developing dynamically and simultaneously there were strong barriers to entry that would not be a deterrent for the willing to enter - they would simply use all means to overcome the barriers (official and unofficial), would get the subsidy and in the fast developing sector would quickly get back their initial expenses.  Thus, it is logical that they are looking for privileges and additional subsidies for a slowing sector as the agriculture. 

Lastly are in general the promises, which are given for subsidies and which are the only way for all to survive. Once given it is very difficult not to keep them. And while in the process of promising every thing is OK, i.e. you are elected, than when you have to keep them becomes complicated, particularly when financially it is possible to do it - a large budget surplus. In such situation it is difficult for the Government to have a winning move, particularly in a year before elections. 

The above characteristics are excellent premise for organizing protests and blocking roads - a slowing down sector, with a few participants, difficult access, expected great benefits from the subsidies, almost non existent competition from abroad and the most important - budget surplus, from which to ask for the payments. This situation is an excellent opportunity for politicians with different desires to put pressure. And they are doing it. The important facts, however, are the following: 

1) The granting of credits, subsidies, assistance etc. indicate that the Government considers the agricultural producers incapable of standing alone and enable to find financing for their activities. Apparently the State, the Bulgarian and European bureaucrats know how much and what should be produced. The problem is that production is planned without knowledge whether or not the produce could be sold and at what prices.

2) The agriculture is still viewed as sector which must produce some quantities of some products, regardless of prices and market demand. The fact that someone is producing more pears, milk or potatoes does not mean at all that someone else would like to buy them.   It is particularly important to know that the statements like "we would die from hunger" are simply speculations. Similar clams were made in the passed years, when a number of traditional for the Bulgarian economy sectors were dying, when the factories were being closed. It must be clear that we are an open economy and for a number of products and goods is much more profitable to import them; the consumers chose imported goods with high quality, greater choice and lower prices

3) If the state again gives out additional compensations from the State budget (as it happened for the drought, floods, etc.) that would mean that the taxpayers would be burdened additionally with "agriculture" tax, i.e. part of the taxes would be directed again to the agricultural sector.

4)  The State does not want to make the normal conclusions, that when you give money to a dying out sector it would continue to ask for more, would become more ineffective and dependent and would be convenient instrument for the politicians.  

Let us go back a few years and remind ourselves what had happened every year immediately after the harvest - from July to September. During 2003 the harvest was low due to bad weather. The agricultural producers asked for compensations from the State; while the bread producers and stock-breeders - requested Government intervention in order to reduce prices.   As a result the export restrictions were introduced for grain and flower. During 2004 the harvest was good, the supply was increased and prices were falling down. The average buying price was about 50% lower than 2003 and the state intervened in order to raise the prices and was buying through the State Reserves grain at a higher price than the average for the period.  During 2005 due to the pouring rains a significant part of the harvest was lost and the agricultural producers in the affected regions asked for compensations. The State Reserve was buying grains at a higher than the average market price in order to raise the prices. During 2006 the harvest is good and the price of grains was falling. The agricultural producers protested and threatened to block the roads due to the low prices. They asked the State to increase the subsidies, while the State Reserve to purchase thousands of tons of grains. During 2007 the harvest was had due to the drought, snow less winter and the subsequent floods during the summer months. The proposals of the buyers at the commodity exchanges reached unseen high prices per ton. The agricultural producers get compensations for the bad harvest. The bread producers and the stock-breeder insist on Government intervention in order to reduce the prices. This year the harvest is good and it is clear what we could expect. It is apparent as well that the Government would decide again to intervene even with the risk of sanctions.  And all of us would continue to watch with indifference, because there is no way to protest against the striking producers. But it might be useful. 

The best that could be done in this situation is to abstain from any additional payments for the agriculture and to give a clear signal that where there is no profit there should be no production, what is more to spend our money.

* This article was published originally in the newspaper 24 hours on 29th of August 2008.