World Bank investments in agriculture are stable at around $2 billion for FY06. This year marked a notable lending increase in the Africa region, with investments rising from $295 million in FY05 to $685 million in FY06. The increase represents the highest level of lending in agriculture since FY90 for Sub-Saharan Africa.

Strategic Priorities for Agriculture and Rural Development

The most recent strategy for agriculture and rural development, Reaching the Rural Poor, was endorsed by the World Bank’s Board of Executive Directors in 2002. Currently, a large team of Bank staff and external experts from around the world are working on the 2008 World Development Report – a Bank-wide flagship research product which will focus on Agriculture for Development. Due to be published in October 2007, the report describes the role of agriculture as an engine for growth and development across different developing countries.

Separately, another team is assessing what the Bank has done over the past four years with regard to the strategy laid out in Reaching the Rural Poor. The objectives of that strategy, selected underlying issues, and recent activities are given below.

Fostering Broad-Based and Sustainable Rural Growth On and Off the Farm

Supporting the rural investment climate. Formal commercial activity in rural areas – market linkages, access to investment capital, business advisory services, and enforcement of commercial law and regulations – is critical to facilitate private sector development and improve services.

Providing rural financial services. Rural financial services are critical to developing the rural economy and helping the rural poor build assets that can decrease their vulnerability to shocks. These investments remained around $350 million a year over the FY05 to FY06 period.

Promoting reforms. The policy and institutional environment is still distorted in many developing countries. Thus, the Bank has emphasized the need to improve policy and institutional environments for rural and agricultural development through a significant amount of lending for policy and institutional improvements.

Promoting trade in agriculture. In the last two decades, agricultural exports from developing countries actually fell, partially because agricultural protection and subsidies has remained high. The Bank continues to analyze and advocate for global agricultural trade reform by both developed and developing countries. The Bank has invested over $581 million since FY01 in agricultural trade policy reform and about $152 million to address sanitary and phytosanitary and food safety standards that directly impact access to export markets.

It is estimated a staggering $350 to $380 billion is currently allocated every year on agricultural subsidies around the world.

The Uruguay Round Agreement on Agriculture was the first time developed and developing nations addressed the issue of agricultural subsidies. The removal of agricultural subsidies depends largely in the involvement and steps taken by OECD countries (as the 23 members represent 50% of global trade and 60% of the world economy). The Convention on the Organisation for Economic Co-operation and Development (OECD) was originally signed by twenty countries in 1960 – a further ten countries have become members.

A recent report by OECD member countries indicates 30% of farmers receipts come from a combination of government interventions in markets and budgetary payments. On the other hand, China (not a OECD member country) provides its farmers with around 8 % subsidy, a far lower proportion than in most OECD countries. This is significant considering the importance of agriculture to the Chinese economy; accounting for almost 15% of GDP and providing more than 40% of all jobs. The graph below issued by the OECD provides an overview of the Average Bound MFN Tariffs by select countries on select goods.

After entering the World Trade Organization in 2001, China began exploring ways to directly subsidize farmers, who were believed to be vulnerable to foreign competition (Liu, Ouyang, and Zhang). Furthermore, as part of its entry to the World Trade Organisation in 2001, China it agreed to cap its support for its farmers at 8.5% of production.

Without a doubt, OECD member countries including the United States, Canada and France (which is the largest recipient -22% in 2004 – of the controversial part of the European Union’s Common Agricultural Policy which began operating in 1962) could learn something from China in respects to agricultural subsidies.

On 12th October 2011, the European Commission finally came up with the long-awaited proposals for reform to the EU’s Common Agricultural Policy (CAP) after 2013. The highlight of the Commission’s proposals was linking direct CAP payments to an obligation for farmers to “become green.” The resolution to reduce the environmental impacts of farming has provoked both the worries of farmers’ associations and the strong approval of the European Environment Agency (EEA).

The proposal to reform the CAP in this environmentally-friendly direction may be traced back to the adoption of the 2050 Roadmap for moving to a competitive low carbon economy by the European Commission in March 2011, aimed also at reduction of the need to purchase carbon credits from outside the EU. According to the Commission’s analysis presented in the 2050 Roadmap, the agricultural sector has the potential to significantly reduce its non-CO2 emissions.

This in turn is reflected in the CAP measures proposed by the European Commission on Wednesday. The most important element in the new green strategy is reserving a share of direct payments allocated under the CAP for green farming, that is, receiving subsidies will depend to a certain extent on adoption of practices such as crop diversification and landscape preservation. This condition, together with the proposal of capping annual payments to a single farm at €300,000, has spawned heated reactions among landowners throughout the EU.

The strongest criticism toward the proposed measures seems to be coming from the Emerald Isle, where the Irish farm minister Simon Convey was “not happy” with parts of the Commission’s proposal. Moreover, there are expectations that environmental obligations might lead to “a whole new level of bureaucracy and red tape,” as John Bryan, president of the Irish Farmers’ Association, commented on the green dimension of the new strategy.

What the proposed CAP environmental reforms mean in practice is that 30% of the direct payments will be specifically spent on the improved use of natural resources. The measures will create obligations for farmers in three different directions – to maintain permanent pastures, to cultivate at least three different crops on their arable land and to put aside 7% of their farmland as an “ecological focus area”, or, in other words, to leave the land fallow. And while the decision whether to apply such practices will be voluntary, farmers might be faced with the possibility of losing the direct payments they have hitherto been receiving.

While the proposal from the European Commission seems to come as a shock, it is a logical consequence of the 2050 competitive low carbon economy Roadmap. The goals stated in the 2050 Roadmap include 36-37% reduction of non-CO2 emissions in the agricultural sector by 2030, and 42-49% by 2050. Among the recommendations concerning agricultural practices in the Roadmap are maintaining grasslands, reducing erosion and development of forests. It is not difficult to notice that these are quite directly reflected in the CAP changes proposed by the Commission.

Tackling pollution from the agricultural sector is an approach hardly reserved for the European region. The recently adopted Carbon Farming Initiative by the Australian government gives incentive to Australian farmers and foresters to implement green practices, by providing them with the opportunity to participate on the market for carbon credits. The purpose the EU is trying to achieve is similar; however, instead of stimulating farmers with the option to generate carbon credits, the Commission has decided to bind the existing practice of payment of CAP subsidies to the obligation for “greening” measures.

On the other side of the barricade, green NGOs and environmentalists do not think that the Commission’s environmental measures go far enough, as crop rotation will not end planting of intensive monocultures that damage soil and use a lot of fertilisers. EEA’s reaction, however, is highly positive since the new measures are expected to reduce the impact that farming has on climate change.

Despite all the negative comments, the proposed measures may indirectly assist Member States in their efforts to limit their respective emissions from the agricultural sector; as it is currently not included in the EU Emissions Trading System for carbon credits, it falls under the provisions of the “Effort Sharing Decision”, which imposes annual binding emission targets to the EU Member States for non-ETS sectors, such as transport, agriculture and waste.

Even though the European Commission’s green vision on the Common Agricultural Policy does not seem to enjoy much popularity and support among European farmers and landowners so far, it is a part of the broader European perspective for moving to a competitive low carbon economy. The CAP reforms are expected to be in place as of January 2014, however, with the co-decision procedure still lying ahead, the future of EU’s greener farming is now in the hands of the European Parliament.