Dr Sophia Davidova

9 MARCH 2005

  Q619Chairman: Thank you very much for coming to give evidence to us today, Dr Davidova. I should say that we are being broadcast, to the extent that this is all going into our website. What happens to it after that we never quite know, but in that sense it will all be in the public domain. Thank you for your CV and for your written evidence. Is there anything that you would like to say to us before we start asking you questions?

  Dr Davidova: I have not prepared a statement, My Lord Chairman, so I am happy to proceed with the questions.

  Q620Chairman: Thank you very much. We will take the questions in a slightly different order to that which is in the list of our draft questions, which I think we sent to you. What we would like to do is to start with the rural development issue, and then come back to single farm payments later, because I noticed that in paragraph 13 of your paper, Future Financing of the Common Agricultural Policy, you made the fairly strong comment, "In principle, a decreased spending on CAP is a positive step. However, capping the expenditure at 1 per cent for the financial perspective 2007-13 could hinder the development of the rural areas in the new Member States". Would you like to develop on that thought?

  Dr Davidova: Yes, of course. Let us start from my first statement, that "decreased spending on CAP is a positive step". For decades, we, as academics in agricultural economics, have claimed that decreased support to agriculture—gradually decreased support—might produce more competitive agriculture, and may better reflect the priorities of the wider public; because, let us be plain, the wider public in Europe now is not preoccupied with the production of more food. There are different priorities. They are the priorities of public goods in the countryside, and many of these public goods are produced by farmers. However, I do not think that to support and to increase the spending on the CAP is a step in the right direction. Let us turn to the second part. I am puzzled by some inconsistencies, let us say, in the list of Member States for the next perspective. Listening to different talks, I have the feeling that everybody agrees we need at least as much as we have, if not more money for rural development. We need to refocus very much on agri-environment. There is a huge political commitment to a new enlargement in two years' time, with one of the countries, Romania—a very large country, very agricultural, very rural—

  Q621Chairman: We will come back to Bulgaria and Romania later.

  Dr Davidova: So with all this pending during the perspective 2007-13, at the same time decreasing the ceiling from the proposal of 1.14 to 1 per cent seems inconsistent. I cannot give you a number by how much this will result in a decrease of rural development expenditure. If a cut to 1 per cent gets through, there will be implications for structural spending as well as for rural development. Bearing in mind the share of CAP in the total budget, and that Pillar 1 is more or less fixed in nominal terms, I suspect that there will be implications for rural development.

  Q622Chairman: Let us just develop from that and talk about the new Member States for a moment. I know that our next witnesses from Poland are sitting behind you, and we say welcome to them and look forward to hearing their views on these matters in 45 minutes' time. What about the new Member States? Would you say that for them rural development is more important than the single farm payments, and that that is likely to be so throughout the next financial perspective?

  Dr Davidova: This is a difficult question. If we observe the reality and the agreement that these countries decided to switch money from rural development to direct payments, we can see that, in practice, they now put the priority on the single area payment. This is in practice. It varies largely from country to country, according to the new Member State. In some countries where the farms are small, where they have a large number of very small farms, first of all, the single farm payment will not be very substantial in terms of increasing the capacity to modernise these small farms. However, making farmers happy, it will lock them into their structural inefficiencies. So I do not think that the single farm payment should be the priority. What we now observe in the eastern part of Europe are vast rural areas. In some of these rural areas they have a very low density of services; they have high unemployment; and they have agriculture as a buffer, where people stay at subsistence level. What is the priority, therefore? The priority is, if possible, to take these people out of agriculture—if possible, one person per household—and to provide some employment for them in the vicinity; and to provide for them a community life in the countryside, so that the countryside is not depopulated. From this point of view, my strong opinion is that the emphasis should be on rural development.

  Q623Lord Sewel: I wonder if we could we take this further—the contribution of rural development and policy objectives. If we look at Pillar 2 and take up the agri-environment side of Pillar 2, concentrating on conventional rural development, what is capable of being delivered in policy terms within that rural development heading?

  Dr Davidova: These are the most difficult problems. That is why, if we look at agri-environment and if we look at the debate, it is the developed members in the west of Europe which say, "This is our priority. Defra would like a threshold of 50 per cent of rural development money to be spent on agri-environment". If we look at the new Member States, they probably have different priorities, but there is a menu of these priorities. They still need some modernisation of farms; not all the countries are fully over their transitional recession; they are in these very, very small farm structures. Some of these farms at the small end were created politically by the reform process—but they are in place. So probably—and it has also been the case with SAPARD—the preference will go to the first heading, which is competitiveness. I also think that the new member states should pay more attention to the third heading, namely the rural communities which aim at creating an entrepreneurial spirit in their countryside to develop non-agricultural enterprises.

  Q624Lord Sewel: You make the point—and it is a point with which I do not disagree—that the objective ought to be to move people out of agriculture into non-agricultural activities. What is available under Pillar 2 cannot really do that, can it?

  Dr Davidova: Pillar 2 is not big. Pillar 2 is small in comparison to structural funds; but Pillar 2 can help small local initiatives which will be overlooked by structural funds. Structural funds are used for big projects. They are now building the European transport network. New member states would like to use the money to upgrade their airports, and so on. The small, local initiatives could be supported by Pillar 2. I know that it is small—although it is gradually increasing. Otherwise, nobody will carry out these initiatives very close to farmers or peasants—because in many countries there are traditional peasants—to help them and their households somehow to decrease their reliance on agriculture and to find a solution to this vicious circle of self-exploitation. They are there because they accept very low returns on their land and on their labour. I think that there is a niche for Pillar 2, in comparison to the big funding.

  Q625Lord Haskins: Lord Plumb and I saw Franz Fischler yesterday, and he was adamant that CAP reform and the CAP budget would not address the issues that you are raising. He said that those would have to be dealt with through other funds. He recognised that there was a problem, but he was adamant that what was on the table for CAP reform was decoupling and all that sort of thing, to help farmers make the transition. However, he did not address the issue of how many farmers there should be in Poland. That was somebody else's problem.

  Dr Davidova: The question is whether CAP is the right instrument. Let us take Pillar 2. I am familiar with the debate about whether we need it or whether we need one fund—one powerful fund—merging it with the structural funds, to be more efficient in management and have more money for real projects. However, if we say that CAP is not the right instrument and Pillar 2 is not the right instrument to achieve something in the countryside; I am not strongly against this, but I do have two or three reservations. Do not treat Pillar 2 only as money that has to achieve a particular objective. I treat Pillar 2 as a very important tool or avenue for further CAP reform. Farmers in Europe think that CAP is their money. Right or wrong, that is the feeling. Somehow, there is this big difficulty. They could be persuaded to transfer more money from direct payments, from the single farm payments, to Pillar 2 through modulation, but not to absorb cuts and for that money to go to funds which might support very urbanised areas. So I think that Pillar 2 serves many purposes. In fact, it is not a huge amount of money that will be involved, but it serves the purpose of moving gradually from more distortive support to less distortive support. I do not know why we are paying Pillar 1 single farm payments. It is not support to poor people. It is universal. I think that it is very important for Pillar 2 to stay within the CAP, if for no other reason than to give this avenue for future reforms.

  Q626Countess of Mar: Do you think that the infrastructure for delivering rural development projects is in place in the eastern European countries?

  Dr Davidova: The answer is no, to some extent it is not in place in some regions or some countries in the EU-15. We have two problems here. One is that the regulations, the programme in process, the monitoring, are very complex. Working on EU projects sometimes means working only on procedures. Nobody is interested in the project, in the outcome—

  Q627Chairman: I think that we might all agree with that!

  Dr Davidova: I have run two PHARE projects for the college, and I know that to get the money back we need to be strict on the procedures. It does not matter how much we would like to help the countries to build their potential. This is the problem, and it is the problem that the EU has to address. There is now some simplification in the proposal for new rural development regulation, which may save some transaction costs in not having two programmes and two software for accounting, but it is very small. One problem is this problem of procedures, which is very complex. The other problem is that the infrastructure is still not in place in the new Member States. It varies from country to country but, from what I observe, there is very good success in terms of learning by doing. We had almost no absorption of SAPARD funds by 2001; the purse-holders in Europe said 9 per cent payments only; and then gradually many of the countries managed to utilise the money. There will be delays, however, and these delays represent an opportunity cost. There definitely will be delays in absorbing the funds. We always observe delays in the EU-15 when there is a new programming period. The delays will probably be bigger in the new member states, but I think that they will gradually catch up.

  Q628Countess of Mar: Is there some cross-fertilisation between the older states and the new Member States?

  Dr Davidova: Yes, of course there is cross-fertilisation. There is a lot of support, continuing support, for building institutions and, if you wish, to learn not only from good experience but also from mistakes. So there is a cross-fertilisation. However, new Member States are so diverse in terms of building the administrative infrastructure and the capacity for co-financing, and so there are countries in which the problems will be more acute than in others.

  Q629Chairman: Would you say that there was perhaps a parallel between some of the new Member States and the state of agriculture in France 30 or 40 years ago?

  Dr Davidova: Another difficult question. From the point of view of the reliance of the countryside on agriculture and from the point of view of something that still exists in France—a relatively very positive attitude of the general public to their farmers—yes, there are some similarities. Also, the number of farmers and—as can be observed particularly in southern France—relatively small farms. I would say yes; but in order to get from the state of France 40 years ago to this competitiveness now, it required decades. So I do not expect miracles over the next financial perspective, but gradual integration.

  Q630Lord Livsey of Talgarth: Are there significant differences between the EU-15 and new Member States in rural development priorities? Is funding targeted adequately to take account of potential differences?

  Dr Davidova: There are very clear differences. In most of the countries in the EU-15 the emphasis is now on agri-environment. The UK is a very typical example. There is an emphasis on agri-environment, natural and semi-natural habitat. This is what people and the general public would like to support. As I told you, in the new Member States the emphasis is on on-farm investments: investments in agri-food processing, marketing of agri-food products. There is a basis for differences. These are different levels of development. However, I think that the new Member States need a more balanced approach to rural development.

  Q631Chairman: How do you define "balance"?

  Dr Davidova: To use a wider menu than they normally use in SAPARD, in terms of investment on farms. They also need to use the measures for agri-environment more extensively and, as I said, measures that will benefit not farmers but the wider rural community. How do you achieve this? I think that the Commission is clever, although very much criticised in this country and in several other countries. In the new regulations they have said that there is a minimum that countries have to spend on different axes: 15 per cent on investments on farms—they are tangible, they are easy to absorb; 20 per cent for what we would like to see, namely sustainable development, land management, agri-environment, contracts with farmers—much more difficult schemes and difficult to value their outcome; and 15 per cent where farmers have to decide that not everything goes back to them. It goes to the wider community which will serve the farmers. The criticism in several countries in the EU-15 is that this decreases the flexibility, but I think that this is a very good approach in order to have the new Member States use a wider menu and also to pay more attention to the agri-environment.

  Q632Lord Livsey of Talgarth: In that menu, do you see substantial investment in marketing projects which clearly is off-farm but nonetheless encourages employment in rural areas?

  Dr Davidova: The menu is inherited and has been designed for the EU-15. Now there are small adjustments, and there is this new measure for micro-enterprises and the entrepreneurial spirit in the countryside, but this is an inherited menu. However, I think that you are perfectly right. Marketing and small-scale adding value to primary production could bring substantial results for employment there; but this is only one, and a very small measure. The menu is still much more adapted to the needs of the EU-15. This was how it was brought into life.

  Q633Lord Haskins: Do you not think that it is a lot of nonsense for the richer countries to be receiving regional aid from the CAP? When the squeeze comes on the budget, maybe that would be a route by which to reduce the amount of money pulled out of the CAP by the richer countries, in order to support the new members?

  Dr Davidova: We are all clear on this budgetary issue. Somebody has to pay for enlargement. The big question is who is paying. Is it the general taxpayers or the farming community in the EU-15, so that it is balanced somehow? Although I am a liberal economist, I do realise that we need the single farm payment for the EU-15. It is probably too generous, and I think that it is too generous. It is probably a blanket and covers everybody, but we do need it because we still do not know how the sector in the EU-15 will adjust to the decoupling; how farmers will react; how they will change their strategic decisions. We do need this, therefore. On the other hand, I would like to see Pillar 1 decreasing, as well as the farm payment gradually increasing in the new Member States. They will meet, but I would like to see them meeting at a lower level. So in this case, for a united Europe, for the enlarged Europe, the CAP will cost less; probably not less in terms of budgetary resources if more is targeted to what the European citizens would like to see—to agri-environment or to viable rural areas—but less to be put into farming. I think that, sooner or later, with this more transparent single farm payment, the European public will say, "Are we going to pay the farmers to do nothing forever?".

  Q634Chairman: We are going to come on to single farm payments in a moment. We will not leave the subject altogether, I assure you. Lord Plumb will be asking you questions.

  Dr Davidova: But what I would like to say is that I do not think that the countries—and I know that my Polish colleagues will probably disagree—needed the level of payments in the EU. This will have even worse consequences for structural reform. We need to see more dynamics in changing farm structures there. If you give money to farmers, they will stay. So I think that it is unfair on the one hand but, economically, it will probably benefit the new Member States.

  Q635Baroness Maddock: An issue which exercises some people in England is their perception that there is a lot of fraud in Europe. Could you tell us, particularly in the rural development area, whether you think there are difficulties arising because of fraud? If there are, what can we do about it?

  Dr Davidova: Apart from reading here and there, I do not really have evidence for fraud. The question is in terms of how we use public money and whether we waste public money. I think the problem is that it is not always used effectively and efficiently, and this is waste. I will give you some experience with SAPARD. For example, SAPARD money for diversification went to companies or farms that had diversified before, which had had these diversified activities. Money went for the development of rural tourism to destinations that had been quite well-known as tourist destinations. So they did not give additionality. I am therefore much more afraid of this ineffective use of money than I am about fraud. In terms of fraud and what we can do about it, the usual political response is, "Let's tighten the procedures". There is a point after which the tight procedures will mean that this money cannot be properly used. There should therefore be a proper balance. Over recent years, we have more and more tightening by the Commission of the procedures; but this is not the response. It probably means an even greater waste of money, as it cannot be used efficiently.

  Q636Lord Plumb: Can I ask you whether you agree, since you have mentioned the importance of balance several times, that the real balance has to be one between sound and sensible agriculture and the proper use of the money coming from Pillar 2 in environmental and in development terms? In that sense, I think that you will find no one in this room who disagrees with you on the importance of that part of it. However, on the first part, accepting that farmers themselves have to be much more market-orientated and therefore have to concentrate on the market price for their products, accepting also that export subsidies will be reduced if not eliminated in the not-too-distant future—and there will therefore be a cutback in expenditure related to the money spent in Pillar 1—do you see this as a permanent feature of the reform package? And let us accept that it is a radical change from what we have had in the past. Do you believe that this is something that is permanent or something that should be reduced, to be eliminated in the not-too-distant future, say in 10 or 15 years?

  Dr Davidova: If we read literally what the Commission said in the Mid-Term Review, they have said that these new payments have a central role for the living standards and well-being of the agricultural community. If we read it in that way, the feeling is—at least, my feeling—that the Commission thinks of the new payments as a permanent feature. I have debated that it is not real income support, because it is not means-tested. I treat these payments as new adjustment payments—adjustment to the new conditions of the CAP. To me, they have been introduced as a permanent feature, but I think that they should be temporary and decreasing. It is difficult for this argument to be accepted by agricultural interests, but I think that over a period of several years—as you said, 10, 15, 20 years—they have to be phased out, in order to use payments to farmers for the production of public goods which cannot be produced by the market.

  Q637Chairman: That cannot be produced by . . .?

  Dr Davidova: The market. There is no market for a nice landscape, or for the protection of birds. This is where we have to pay them.

  Q638Lord Plumb: So you see this as a continuing process, in order to try to keep the market reasonably stable? In other words, a safety net.

  Dr Davidova: Yes. I do not think in terms of full phasing-out of the payment. There will be some safety net. We know that the safety net could be at a very low level, so that it is really a safety net and guaranteeing some stability. In agriculture, prices and incomes are volatile, and some stability, some safety net, will always be necessary. But do we need to pay as much as we do now? That is the question.

  Q639Lord Plumb: You said earlier—and it makes a farmer flinch to hear it—that the taxpayer will not support money paid to farmers for doing nothing. While the farmer might flinch, he knows that is absolutely correct and he does not want to occupy land that is doing nothing. The set-aside programme, of course, was done deliberately to try to reduce the volume of product, because that was more expensive than the set-aside. It is very difficult to explain this to the taxpayer; nevertheless, that is the situation. Under this scheme, some of this land will be used in a much more environmentally friendly way—which is really part of the whole package. I do know that farmers themselves are now beginning to take a much greater interest in the use of Pillar 2 than Pillar 1.

  Dr Davidova: You are perfectly right if you speak for this country or if you speak for Sweden. If you move to France, southern Italy or Greece, the picture may change. However, there is a big farming interest in northern Europe in environmental schemes. They do not want to intensify further. There is this understanding.