Helping European Agriculture to Adjust — A Proactive Approach to Agricultural Policy

In the European Union the next five to ten years are likely to witness continued pressures for agricultural policy reform. If cost-effective ways of dealing with adjustment issues can be identified, reform may be less difficult to achieve. This article looks at the economic, equity and political arguments for providing adjustment assistance to farmers. Compensation for changes in policy has a role to play, but if poorly designed can inhibit structural change. A review of how farmers have reacted to policy reform in a number of OECD countries concludes that their ability to adapt is often under-estimated, but that two characteristics are particularly important in facilitating change. The first is effectively functioning factor markets, particularly the market for land, and the second is the quality of human capital. These characteristics should be the primary focus of public policy to facilitate adjustment. The policies we propose would satisfy the Green Box requirements of the WTO that payments to farmers be minimally production and trade distorting. By establishing the conditions under which adapting to change is made easier, agricultural policy becomes sustainable, since adjustment is a process that is not limited to any single round of policy reform.