|The political economy of the common market in milk and dairy products in the European Union. (FAO Economic and Social Development Paper - 142) (1997)|
No attempt will, or need be, made at a comprehensive survey of the extensive and growing literature on the modem institutional approach to the analysis of economic policy. A few remarks, however, may help to put this study and the Sandiford and Rossmiller paper into perspective and draw out the distinction particularly between public choice theory and the traditional marginalist approach.
The orthodox approach to economic policy concerns itself with the maximisation of economic welfare which is said to be optimised by free-market forces in a position of general equilibrium. In the real world, market failures and imperfections occur, such as sharp fluctuations in prices, which give wrong signals to producers, and externalities, which are costs that individual producers impose on the rest of the economy but that play no part in their output decisions. The intervention in the real world by a benevolent government is assumed to be able to correct or improve matters through the use of policy instruments at its disposal -taxes and subsidies, tariffs, intervention buying, expenditure on research, etc. These are instruments that can be employed only by governments and should be designed to do the least possible damage to non-beneficiaries whilst moving the economy as a whole towards maximum gross domestic product (GDP) and optimum economic welfare.
The above description of the working of the market mechanism and the functions of government sets the scene for the tasks of economists and government advisers. Their job is conceived as offering impartial advice to politicians that will minimise any damage to those adversely affected through interference with the market whilst at the same time maximising the benefits to immediately interested parties and secondary groups. The policy is to be judged as efficient in so far as its costs (e.g., to tax payers and-other damaged parties) are minimised whilst the benefits of increased net income overall are maximised.
This kind of thinking as a method of analysis is recognisable as one applied by most practising economists and also as one that politicians for their part have come to expect of their advisers. The technical literature is extensive, and some of it familiar, and need not therefore be quoted as it is associated with the writings of well-known names in economics - Pigou, Pareto, Samuelson and many others.
An alternative approach to economic policy and complementary to that of Sandiford/Rossmiller is contained particularly in the writings of Professor James Buchanan. In his book The Limits of Liberty - Between Anarchy and Leviathan  he puts forward a contractarian theory of public choice. Subsequent articles elaborate and refine the approach (Buchanan [1975a],  and ). Buchanan does not quarrel with maximising models in economics for the analysis of the firm and consumer behaviour. He argues, however, that it is inappropriate to extend this approach to policy acts or what he calls social organisation. This is a bridge which economists should never have crossed and has created major intellectual confusion. (Buchanan [1975a]).
The main message is that policy making has to be viewed as a continuous process rather than as single acts. The analysis, therefore, distinguishes between the constitutional contract, which governs the whole process of law and policy making, and individual instances of policy making within the constitution. The constitution sets the general expectations of action by the regime within which interest groups can work. It also sets limits within which individual policies can be prescribed.
Constitutions and the rules they lay down for individual acts change very slowly and thus are generally incomplete. They define individual rights and in economic terms give rise to the existence of property. They define and also limit rights of enforcement by the state. Individual policy acts, however, have to complement and fill gaps in the constitution, and to this extent the distinction between the constitutional contract and individual policy acts is often blurred since the policy act may provide a wide measure of interpretation of parts of the constitution. The lesson for would-be economic advisers to be taken from Buchanan is that in almost no circumstances will they start with a clean sheet to correct some example of market failure. Economists, therefore, should consider the economic problems of governments not as agents seeking to maximise economic welfare but as arbitrators, seeking to work out compromises between conflicting claims. Many economic principles will still apply, but it becomes necessary to go inside the process of policy making and delivery to examine the reactions of all the agents within the process and study their motivation.
Applying this approach to the European Union, it can be said that the Treaty Establishing the European Community (Rome 1957) and the Treaty on European Union (Maastricht 1992), and the various amending Treaties together provide the constitution of the Union for making individual acts of common policy (in the form of Regulations, Directives or decisions of the Council of Ministers or decisions of the European Court). Complexity, however, arises in the EU in that member states themselves have a diversity of political constitutions ranging from the Westminster system of the United Kingdom to different types of written constitution in other states and all of these have long histories and traditions surrounding them. Whilst the Treaties require national legislation to be harmonised so as not to impede the establishment of the Common Market (largely completed by 1992), the implementation of policy within member states still depends on governments and agencies that are dependent on the traditions of past policies and the national legislation of member states. There can be no doubt that in the implementation of the common dairy policy these differences have played a part. Pressure from the centre, i.e., from the Commission in Brussels, has not always been successful in preventing some divergences, although it can be said that the continuous process of policy making seeks to reduce divergence whenever it is practical.
It might be said that the paper of Sandiford and Rossmiller, whilst welcoming the context-specificity of the new institutional economics, which they say is refreshing and encouraging for us as policy practitioners, is also suggesting and inviting the development of a partial integration with aspects of marginalism in their discussion of performance criteria - the four Es, effectiveness, efficiency, enforceability and equity. Some discussion of each of the four Es is necessary.
Effectiveness Effectiveness for Sandiford and Rossmiller is a sine qua non of performance criteria, in their words a top level criterion; a necessary even if not a sufficient criterion to which the others are to be seen as second level. One could just agree and pass on. If a policy does not achieve agreed objectives then it clearly would not matter whether it is efficient in any sense that could be found. In the European Union matters may not always be so straightforward. As a collection of member states, the degree of commitment to the objectives of a particular policy will almost certainly vary, and even compromise of objectives may be sought between members in both ex ante and ex post discussion. Clarity, therefore, in analysis of objectives of a policy needs to go hand in hand with analysis of the political process and the kind of priority which member states are likely to give to one policy compared with another. Obviously ex post assessment will be highly dependent on information systems set up at the beginning (or information already collected on a continuing basis), but such material is not costless, and when separate agreement is necessary for its collection this also becomes a test of the commitment to the objectives. Information can often (indeed should) alter the position of parties with strong, weak or little commitment to the objectives, and they are likely to act accordingly in the defence of their interests.
Efficiency Sandiford and Rossmiller argue that a clear distinction has to be made between the costs of the policy itself and the costs of delivering the policy. The former can be taken to be the total cost of the policy in terms of its cost effects on all gainers and losers in the economy as a whole. The costs of delivery would be the implementation costs of all agencies in the delivery system affected by the policy and might include inefficiencies through mismanagement, fraud or leakages often not set out in official costs. Economists normally assess costs of a policy comparatively, that is to say the costs of a policy might be assessed in relation to the market ideal or in relation to an alternative policy to achieve the same objectives and the results it might be assumed to deliver. With alternative policies one can consider efficiency in terms of the ratio of benefits to the intended recipients over the total cost to the community as a whole. The policy where this ratio is shown to be highest is then judged the most efficient. Most economists are used to this form of argument and presentation, but it has to be admitted that it is never straightforward and is subject to a wide area of judgement and conjecture.
The new institutional approach to industrial economics and industry organisation makes use of the concept of transaction cost first introduced into economics by Professor RH Coase . In a now very well-known article the reason for the existence of the firm is ascribed as being due to the avoidance of transaction costs inherent in the market mechanism itself. Within the firm, resources are allocated and output levels decided by the co-ordinating decisions of the entrepreneurs but without the costs of contract and marketing. Changes in industrial structure are thus regarded as the result of extending the avoidance of transactions costs and carrying out more co-ordination within an organisation without reference to the market. For many years Professor Coases idea was neglected, at least as a research agenda. In recent years (especially following Buchanans work and recent attention to the writings of RH Coase) the literature has grown. (A good textbook source on modem industrial organisation theory is Hay and Morris  and a collection of seminal articles can be found in Buckley and Michie .)
The main interest in Coases general idea and approach for present purposes is its extension in the political sphere. (A study of the transaction cost concept applied to politics is contained in A.K. Dixit .) A policy might be judged as totally efficient in benefiting a targeted group when all parties are likely to vote for it. When the unanimity rule is applied to voting for a policy and the policy is accepted, the presumption is that there are no losers. Conversely, when unanimity breaks down there is assumed to be inefficiency. On the surface at least this is a very simple position which might easily be extended a step further to say that the more unanimity breaks down and the lower the majority required in a decision-making rule, the more inefficiency there is likely to be (for detailed discussion see Buchanan [1975 ch.3] where it is argued that the cost of a unanimity rule is often extremely high or prohibitive which makes a qualified unanimity rule necessary for practical decision-making).
Any application of this approach to policy in the European Community and especially to the dairy industry needs great care. It will be found that policies in the dairy business which do not give rise to much controversy between beneficiaries and other parties in some member states of the EU do, nevertheless, give rise to considerable controversy in other member states.
Enforceability The examples used in the Sandiford/Rossmiller paper are all of policies being applied in a single State. In the ultimate, compliance in a single State depends on the ability of the State to punish citizens for non-compliance. Punishment for recalcitrants has to be seen to be sufficient to provide effective deterrent. The punishment for government, on the other hand, is either rebellion or loss of control if a sufficient number of its citizens refuse to comply, or in a mature democracy, in which the rule of law is accepted by the vast majority, the removal of the government from office and the reversal of policy over time.
The problem of international enforceability of policies in groupings of States with Treaty arrangements is less clear-cut. The issue is, nevertheless, crucial for international organisations to which member states have accepted treaty obligations. The European Communitys experience in the co-ordination of economic policies (especially in difficult areas like milk) is therefore of wide interest.
First, it should be noted that the European Unions main institutions, the European Parliament, the Council, the Commission, the Court of Justice and the Court of Auditors, do have wide powers that are defined in the Treaties. The Council can legislate on a proposal from the Commission (after advice) by qualified majority voting to obtain information. The Commission has wide powers to obtain information from member states to issue opinions (Article 169) on matters of infringement and to take member states to the Court of Justice. Member states may take other member states to the Court if they think an infringement has affected their interests (Article 170). If the Court finds on a referral that there has been an infringement, it has unlimited powers of fine within the proportionality limits of the case. The ability to obtain information to expose an infringement thoroughly and to do so reasonably quickly could be said to be the first necessity for enforceability. The power of the Court to fine means, moreover, that the penalty is directly targeted at the transgressor in the Community, unlike agreements that simply permit retaliatory action by a wronged party which then has side effects on others.
Quick exposure and fines proportionate to the damage done are sufficient means of enforcement for nations observing the international rule of law and the contract of the Treaty. Why should there not be a parallel in the extreme case between governments of the citizens rebellion? The answer to this question must rest on the principle of reciprocity. If rebellion by a member state on one policy puts in danger the Treaty arrangements as a whole, the losses involved become much greater than the losses for a particular group from complying with an unpopular policy. The European Union has no procedure for withdrawal, and the negotiation of withdrawal would certainly be very tough for an individual nation. Break-up of the EU would seem difficult to conceive unless its larger members were in agreement and were then to conclude bilateral arrangements with one another. Given, however, that the EU is also part of the GATT (now WTO), the practical difficulties would be of gigantic proportions if descent into anarchy is to be avoided. Ultimately, therefore, enforceability rests on the fear of the damage that would be done to all nations in a situation of anarchy, or the damage done to a single nation if it were isolated from the international community.
The rules provide for moving forward as much by agreement as possible, and the EU seeks to do so. The Council may act on a qualified majority as laid down in the weighted voting rights and majority rule set out in the Treaty (Article 148). However, under what is known as the Luxembourg Convention of 1966, when member states have declared a policy to affect their vital interests, they have been able to exercise at least a temporary right of veto. This position was established by France after the so-called empty chair period in the latter half of 1965 in a dispute between the Commissions first President, Walter Hallstein, and the French government. The Luxembourg communique in January 1966 placed the onus on the Commission to seek discussion and modification of its proposals until members vital interests are met. Whilst vital interests are not defined, the use of such devices certainly does not avoid conflict, but does help to avoid decisions that are likely to become unenforceable. Perhaps a key practical outcome of the dispute was that for more than 20 years the Commission tended not to take important political initiatives to be settled in Council by qualified majority voting, but to put forward such matters only after prior consultation with the governments of member states.
Equity However a majority voting system is constructed in a free society, when there is a strong dissenting minority decisions might often be regarded as provisional or subject to modification as majority and minority groups change over time. Whilst a firmer consensus can sometimes emerge, it is the case that strong underlying ethical and equity considerations rooted in the EU in the history of national development of policies can make convergence difficult. A prime ethical consideration, for example, that has influenced the development of the Common Agricultural Policy from the very beginning is that it is based on the family farm. The guiding principle on which the original Six were able to agree upon unanimously was that, in the words of Sicco Mansholt, the Dutch Commissioner for Agriculture at the time, when speaking to the Stresa Conference in 1958, .... sound.... family farms, really constitute from both the technical and the economic angle and naturally from the political angle too, the essential foundation of agriculture in Western Europe. Whilst the Treaty of Rome itself in spelling out the objectives of the Common Agricultural Policy (Article 39.1) does not mention the family farm, there is no doubt that the needs of the family farm have been seen as paramount to the harmonious development of economic activities.... continuous and balanced expansion.... (and)....accelerated raising of the standard of living.... (Article 2) that the Treaty was brought into being to promote. As the original Community expanded, and particularly with the entry of the United Kingdom in 1973, the unspoken ethical base of Community thinking on agricultural policy was not unanimously accepted. The objectives of Article 39 were of course part of British legislation (in very similar words), but it is fair to say that policy for family farms had been almost peripheral to British agricultural policy rather than central to it. In British thinking on agricultural and trade policy the needs of the consumer have always been paramount. In any trade-off, therefore, between equity and efficiency in agricultural policy, the outlook of the original Six and the United Kingdom has been very different. Britain and the other member states of the Union have lived with this fundamental difference in outlook for more than two decades. But in more recent debate over closer union of European nations, it has begun to emerge how different are attitudes to many of the aspects of social security policies and hence priorities in provision for health care, unemployment pay, pensions etc. Provision varies enormously and priority differences lie deep in national consciousness and the history of established rights. Such differences are now giving rise to acute problems in harmonising government finance, debt management, etc, necessary to the achievement of monetary union which the revision of Article 2 in the Maastricht Treaty sets as the Communitys revised task.
Making this fundamental point about the ethical notions of fairness behind policy is not to deny that there are other aspects that we need to consider in relation to equity as a performance criterion for agents in the policy delivery system. In the EU, with its support price mechanisms, it may be considered whether prices to farmers across the Community are reasonably similar or whether part of the cost of support is being creamed off by unintended beneficiaries? Whilst this might be partly an efficiency matter, it is also a matter of equity if detailed rules adopted work differently in different areas and therefore deny access to intended benefits under the policy. Equity is also concerned with consistency and impartiality of agents in the system, which in a very large area like the EU is more difficult to achieve than in a smaller union.
In examining the European dairy policy from the perspective of the theory discussed in this section and in the Sandiford/Rossmiller paper, the subject will be broken up into parts. After an outline of the EU policy-making procedures and an analysis of the policy objectives for agriculture and the milk sector, the price support policy for milk will be summarised as it currently stands. A summary will then follow of other policies for the milk sector to complete the single milk market and to control surplus. The paper will then consider the detailed implementation of the policy in the milk sector across the Community and in the countries used as case studies. This will be followed by an economic analysis of the policy within the framework of theory in the Sandiford/Rossmiller paper. Finally, an attempt will be made to draw some conclusions and pointers for dairy policy in the future in an enlarged European Union and the world as a whole.