DIRECTORATE FOR FOOD, AGRICULTURE AND FISHERIES COMMITTEE FOR AGRICULTURE Working Party on Agricultural Policies and Markets THE INCIDENCE AND INCOME TRANSFER EFFICIENCY OF FARM SUPPORT MEASURES

AGR/CA/APM(2001)24/FINAL 2 Foreword Governments in OECD countries intervene in agriculture with a view to achieving a wide range of economic and social objectives, in particular the improvement of farm household incomes. This study investigates how efficient some of the most commonly used policy interventions — referred to as the transfer efficiency of support measures with respect to income — are in achieving this objective. Executive summary Governments in OECD countries intervene in agriculture with a view to achieving a wide range of economic and social objectives. One of the most cited reasons for intervention is to improve the income position of farm households. Although largely a legacy of concern with the economic plight of farm families in earlier times, the belief that government intervention is needed to ensure adequate income levels for farm families is widespread. This paper investigates how efficient some of the most commonly used policy interventions are in increasing the income of farm households. This concept is referred to as the transfer efficiency of support measures with respect to income. Broadly speaking, governments help farmers earn more income than the market would otherwise provide them by either a) imposing tariffs/granting export subsidies that drive up the prices consumers pay producers in the domestic market or b) supplementing market receipts with payments drawn directly from budgetary funds. With perfect transfer efficiency (which exists only in theory) every dollar of the extra money consumers pay through higher prices and every dollar of the extra money taxpayers pay to fund direct payments would find its way directly into the income of the intended beneficiaries, i.e. farm households. In reality, however, the greater share of that money ends up in the pockets of others. Farmers can capture only that part of the support that remunerates the factors of production they themselves own. This is typically a rather small share of the total consisting mainly of their land and family labour. Farmers buy most farm inputs from outside the farm and, as a result, input suppliers capture some, usually significant, share of the benefits of support. Similarly, if farmers rent rather than own the land, some of the benefits of support will accrue to the landowners. Moreover, a significant proportion of what consumers and taxpayers pay to support farmers disappears in dead weight losses, the resource allocation distortions caused by the support. The estimates of transfer efficiency reported here suggest that across …