Cecilia ALEXANDRI, Lucian LUCA
Institute of Agricultural Economics, Romanian Academy
ROMANIA AND CAP REFORM
The first part of this article presents a general overview of the current situation in the
Romanian agriculture emphasizing its extreme polarisation and the importance of this sector for the
economy. In the second part the emphasis falls on CAP reform. The authors seek to evaluate how the
Romanian agriculture has evolved since integration and to estimate the impact of future CAP reforms
on this sector. The paper presents the estimated impact of CAP reform on market measures, direct
payments and rural development.
The formulation of certain simplified scenarios of possible CAP reform provides the necessary
benchmarks for a brief analysis of the effects upon consumers’ and producers’ welfare, as well as
upon the rural area in general. Based on a simplified model, under some specific hypotheses, the net
welfare effect due to the price changes for the selected products is positive in both reform scenarios,
yet greater in the case of the radical reform.
Regarding direct payments, the authors’ opinion is that for the large farms, some of them
operating on thousands of hectares, cannot contribute to the objective of supporting farmers’ incomes.
Reform measures will bring in Romania’s case a good operation of agricultural markets and the
market orientation of farms, which will result in agricultural incomes based mainly upon the sale of
agricultural products rather than upon subsidies or social allocations.
As the key-problem of Romanian rural areas is poor infrastructure and the generalized poverty,
the solution for the modernization of rural areas seems to be their “urbanization”, through investments
in infrastructure, development of community services and a move away from farming to other
economic sectors. In order to achieve this, the state has to mobilize internal and external resources for
rural development rather than for agriculture. This implies a greater allocation of resources to Pillar II.
Keywords: CAP reform, agricultural markets
JEL classification: Q18, Q13
1. ROMANIAN AGRICULTURE AND THE SITUATION IN RURAL AREAS
The economic importance of the agricultural sector decreased in the last
years. The share of Gross Value Added in GDP reached 8.5% in 2005, significantly
lower than in the early transition years (1990–1996), when it had reached even
18%–21% (Graph 1).
Agricultural Economics and Rural Development, New Series, Year V, nos. 3–4, p. 161–180, 2008
162 Cecilia Alexandri, Lucian Luca 2
At the same time, the share of the population employed in agriculture related
to the total employed population remained quite high (32% in the year 2005), but it
decreased from over 40% in the period 1999–2001. In the period 1997–2000, a
massive staff rationalization took place in the mining and manufacturing industry
and many people went into farming, so that, atypically, the number of people
employed in agriculture in Romania increased. In absolute terms, 2,939,000 people
were employed in agriculture in 2005, 33.4 % of whom were over 55 years old,
agriculture being the economic sector with the oldest labour force.
% GVAA in GDP
% employed population in agriculture
Graph 1. Evolution of the share of GVAA in GDP and of the share of population employed in
agriculture related to the total employed population.
The gross agricultural output (GAO) fluctuated significantly from one year to
the other, crop production experiencing most fluctuations, both in quantitative and
qualitative terms, being very dependent upon the weather conditions. Regarding the
production structure, the crop production accounts for 60–62% of the overall
agricultural production, and this share can further increase in years with good
harvests (e.g. in the year 2004 crop production accounted for 69%). The high share
of crop production is the cause of the weather-dependent GAO and GVAA in
Key figures in Romanian agriculture
Romania has 14.7 million hectares agricultural land, being one of the
European countries with the best resources for agriculture in this regard. Most of
this land is arable land (63%), followed by pastures (22.8%) and hayfields (10.3%).
The structure of cultivated areas reveals the prevalence of cereals in the crop mix,
which accounted for 69% of the cultivated area in 2005. The main cereals are
3 Romania and CAP Reform 163
maize (about 50% of the area under cereals) and wheat (about 37–40 % of the area
under cereals). At the same time, among the other cereals, barley and two-row
barley are the most important (5–7%).
Cereal production is characterized by instability. For example, in the year
2000, it amounted to around 10.4 million tons, to reach 24.4 million tons in the
year 2004. In the last 10 years, the areas under oil crops increased, due to the special
export opportunities for oilseeds. In 2005, the oil crops covered 1.14 million
hectares; out of this area, 83% was cultivated with sunflower, 9% with soybeans
and 5% with rape. Other relatively more important crops are potatoes (3.2% of the
cultivated area), vegetables (3%) and fodder crops (8.7%).
Although Romania has large agricultural land areas, the harvests are modest
and highly unreliable, due to the weather excesses (drought or floods) and to the
non-application of adequate production technologies on large areas (Table 1). Most
of small grains and oilseeds are cultivated in the plain zone from the southern and
southeastern part of the country, where the drought risk is excessively high. At the
same time, the effectively irrigated areas are very small.
Total productions and average yields per hectare for the main crops (2000–2005 average)
Cereals, out of which:
Total production – thousand tones
Average yield – kg/ha
Source: Romanian Statistical Yearbook, 2006, NIS, Bucharest; 1tomatoes only
The livestock herds and meat production experienced a significant decline
starting in the 1990s, as the very large units of pig and poultry were no longer
operational; these farms were specific to the former communist period and
performed badly. This is why the livestock herds declined significantly and
currently most animals are bred on small-sized farms, which do not have the
possibility to supply the market with a stable amount of meat, in quantitative and
qualitative terms. The number of bovines, pigs and poultry increased since 2002, as
a result of support measures for livestock production adopted by the government in
2001. In 2005, the slaughtered meat production, expressed as live weight meat,
totalled 1,508,000 tons, out of which 25% beef, 40% pork, 7.5% mutton and goat
meat and 27% poultry. The domestic pork and poultry meat production is not
sufficient and Romania has to import significant amounts so as to meet its domestic
164 Cecilia Alexandri, Lucian Luca 4
consumption needs. The Romanian population’s preference is mainly directed to
pork, which covers about half of the consumption, followed by poultry and beef.
The meat consumption per capita reached 68 kg in 2005.
Milk production increased after the 1990s, reaching 60.6 million hectolitres.
Cowherds are scattered on many small-sized farms, being difficult to have an
adequate management of milk quality, hygiene and sanitary conditions. At the
same time, there is no specialization of bovines for meat production and for milk
The foreign trade with agricultural and food products experienced a deficit
after 1989, Romania being a net importer of agri-food products. In the period
2003–2005, the trade with agricultural and food products accounted for about 3%
of total exports and 6–7% of imports. The deficit of the agricultural balance of trade
increased every year, as the domestic supply became insufficient and qualitatively
inadequate, and demand became more sophisticated, mainly due to the increasing
incomes of the urban population after 2000. In 2003, the deficit of the agricultural
balance of trade was about 1 billion Euro and grew up to 1.4 billion Euro in 2005.
Regarding agri-food exports, the most important products are the agricultural
(unprocessed) products with a 59% share, out of which: live animals (20%), cereals
(14%), edible fruits and vegetables (12%), seeds, industrial crops and medicinal
herbs (11%). Among the exported processed products, we should mention the
alcoholic and soft drinks, cereal and pastry products, vegetable and fruit specialties
and animal feeds.
Regarding agri-food imports, the processed products (foodstuffs and
beverages) accounted for 68%, while the tobacco products accounted for 9% of
total agri-food imports in 2005. The most important agri-food products imported in
2005 were meat (25%), fruits (6.5%), sugar and sugar-based products (6.4%). We
mention that in the unfavourable agricultural years, the domestic wheat production
is not sufficient for the domestic consumption coverage and significant quantities
of cereals are imported. For example, in 2003 more than 2.4 million tons of cereals
and cereal-based products were imported, out of which about 1.7 million tons of
wheat. The European Union countries are the main source and destination for the
Romanian foreign trade: 68% of total exports and 62% of total imports.
The agrarian structure is extremely polarized, i.e. 55% of the cultivated area
belongs to a huge number of individual peasant household farms (4.2 million
individual holdings with an average size of 2.2 ha). The remaining 45% of the
cultivated area is operated by large agricultural units, totalling 22 000 ha in 2002,
with an average size of 274 ha. Beyond these statistics the picture is one of
extremes. Holdings of dozen thousand hectares, on which a modern type of
farming is practiced, coexist with farms smaller than one hectare with a subsistence
type of farming and a technological level that has not changed for at least a
hundred years. This situation is commonly found on the large plains from the
southern, southeastern and southwestern parts of Romania.
5 Romania and CAP Reform 165
The individual holdings with less than one hectare account for 50% of the
total number of holdings, yet they operate only 10% of the used agricultural area.
These individual holdings do not benefit from the direct payments received per
hectare (SAPS scheme), as the eligibility condition is that the farm should be at
least 1 ha and the component parcels should be larger than 0.3 ha. At the same
time, 97.5% of the land areas operated by large farms are over 100 ha on average.
Agricultural policies in the last years
The domestic agricultural policy in recent years tried to get closer to the
Common Agricultural Policy specific support forms, but this process lacked continuity
following the electoral cycle and the economic program of the government in
power. The period 2001–2004 started with support oriented to holdings larger than
100 ha or with more than 15 bovine heads. This measure was subsequently
extended to smaller-sized farms, conditioned by delivering production to agro-
processors. This was a reaction to the diminishing quantities of agricultural
products going to the agri-food chains and the increasing self-consumption.
In the general debate on the distorting character of certain state funded
support measures, the stabilization of market measures to around 40% is worth
mentioning. These measures came in the context of a global trend of decreasing
protectionism and they had a clear anti-liberalization character. A positive evolution
is the focus on supporting investments (welcome in this period of structural
transformation) and to the mountain areas (targeted by several forms of support,
which may become a Romanian asset in the long term). The maintenance of
decoupled payments (on hectare or animal head) is a positive evolution given the
introduction of single area payments in 2007. Yet, due to the delays of making
payments from EU funds, agriculture received support from the national budget in
2007, mostly assimilated to the state aids (but likely to be provided without EC
approval for a three-year transition period).
Farmer’s support from MAFRD budget in the period 2005–2007
(on 31.12), mil. RON
(on 31.12), mil. RON
(on 1.08), mil. RON
Market support measures
Payments per area/animal
Input procurement subsidy
Source: Ministry of Agriculture and Rural Development
Historically, in the period 2000–2001 the largest part of the budgetary
funding went to the crop production sector, while in the period 2002–2004 the
166 Cecilia Alexandri, Lucian Luca 6
allocations for the livestock sector and rural development increased. The number of
crops and livestock that received subsidies decreased in 2006, under a single
program for crop and livestock production and forestry development. Support was
directed towards investments on farms (the Farmer Program). The change of
targeted objectives and the lack of consistency from one year to the other led to the
dissipation of the budgetary effort and small economic effects at farm level.
Estimates of support to agriculture (million RON)
Producer Support Estimate (PSE), of which
–market price support (MPS)
Percentage PSE (%)
General Services Support Estimate (GSSE)
Consumer Support Estimate (CSE)
Percentage CSE (%)
Total Support Estimate (TSE)
Percentage TSE (expressed as share of GDP)
–15,101 –16,233 –15,006
Source: Agricultural Policies in Non-OECD Countries, OECD, 2007–09–28
Support for agricultural producers increased in Romania, reaching 29%
(%PSE) in 2005. Out of this, 84% is provided by the market support measures and
the payments for output support (payments per hectare or animal head) (Table 3).
98% of the total support received by farmers (TSE) comes from consumers (year
2005). The relation between farmers and budget is quite well balanced, as 10% of
TSE is provided by the tax payers, but at the same time – 9% of TSE is levied by
the State Budget under different forms. The fact that TSE is almost fully provided
by consumers appears to be a negative situation, in a country where the incomes
are low and the share of food expenses remains relatively high (45.4% in 2006).
Role of agriculture in rural areas
The interdependency between agriculture and rural area stems from the
important role this economic sector has in the employment of the rural population
and finally in providing their living means. Most of the rural population is working
in agriculture (55% of the employed population in the rural area work in
agriculture) and the agricultural incomes are of utmost importance for the survival
of rural households. Rural households are producers but also consumers of
agricultural and food products. This characteristic is specific to subsistence farms.
Graph 2 reveals that among the sources of income, agriculture is an essential
activity for rural households, although its share decreased in the last years from
56% in 2001 to 43.5% in 2006.
7 Romania and CAP Reform 167
20012002 200320042005 2006
income in kind
Graph 2. Structure of rural household incomes (%).
Given the large proportion of people employed in agriculture, significant
gaps appear between incomes in rural and urban areas. Compared to reference year
1997, incomes per person increased by 54% in ten years (year 2006) in the urban
area and by only 10% in the rural area.
The incomes in kind represent the last defense line in the survival strategies
of households living under extreme poverty conditions. The subsistence farmers
are among the poorest in Romania, given that their per capita income was 35%
lower than that of the average household in 2006. Only the households of
unemployed persons have lower incomes per household member (by only 2.6%).
Contribution of agriculture to household consumption
Most subsistence farms are small-sized and their production is not delivered
to processors but goes to self-consumption (household consumption of food produced
on the household).
Food consumption continues to have a relatively high share in the household
consumption expenses, revealing the vulnerability of all households, but mainly of
the urban households, to the prices on the domestic and global markets. In fact, as
we shall see below, the rural households have a higher level of food consumption
coverage, in quantitative terms, compared to the urban households, although their
incomes are significantly lower. This is obviously due to the consumption of food
produced on their farms. On the average, in 2006, food consumption accounted for
45.4% of the total consumption expenses; this share is probably among the highest
shares in an EU member state. In rural areas, this share is even higher, yet it decreased
significantly in the last five years: from 67.1 % in 2001 to 54.7% in 2006.
168 Cecilia Alexandri, Lucian Luca 8
Structure of food expenses on households by origin sources and residence areas (%)
In cash In kind In cash In kind
Source: Living standard coordinates in Romania, Population’s incomes and consumption in
the years 2001 and 2006, NIS, 2006
Most of the food consumed on subsistence farms is produced in the household.
The proportion of self-consumption decreased in the last five years, from 62 % in
2001 to 50.3% in 2006 (Table 4). Even the urban households have a significant
self-consumption level, of over 20% of food consumption expenses. These food
products come from relatives in the rural areas or from the kitchen gardens that are
commonly found in the small towns.
In the rural households, the proportion of self-consumption is extremely high
for certain products. Thus, self-consumption accounts for 75% in fresh meat, 70%
in fresh milk, 72% in cheese, 90% in eggs, 66% in fruits and vegetables, and 74%
in alcoholic beverages. The only products for which self-consumption is low are:
sugar, beer, soft drinks, and partially fats. These are generally products that are not
usually produced on subsistence farms.
Needs of rural areas
The living conditions in the rural areas are quite seriously affected by the lack
of adequate infrastructure, as most rural households have no running water,
sewerage system, etc. In the early period of SAPARD, a statistical survey conducted1
at the end of the year 2002 revealed that the endowment of rural households was
– only 16% were connected to the public drinking water supply system, while
24% had their own running water supply system;
– only 10% were connected to the sewerage system;
– only 12% had a flushing toilet inside the house;
– only 17% had a bath tub or shower;
– only 7% were connected to the gas supply system;
– only 15% had cable TV.
The SAPARD Program began its project funding activity in 2002, the Rural
Infrastructure Development and Improvement being one of the measures approved
for that year (Measure 2.1). The public funds used from the Community and
1 Euro Rural Barometer, co-financed by the European Union, 2002.
9 Romania and CAP Reform 169
national sources totalled 1.3 billion Euro, 10 measures being funded in total for the
2000–2005 period. 645 million Euro was allocated for infrastructure and the
absorption rate was 93.4%.
A mid-term evaluation of the SAPARD Program, carried out in the period
October 2005 – September 20062, analysed the financial and technical efficiency of
the Program up to that moment. It revealed low levels for these indicators (except
for measure 2.1) and proposed measures for increasing the absorption level of
funds and a better correlation between the needs, absorption capacity, objectives
and costs. At the same time, it revealed that the delayed adoption of measures 4.2
(Technical assistance) and 4.1 (Improving vocational training) did not allow a
sustained information campaign for the rural areas regarding the opportunities of
The Program had also good results, being appreciated as a relevant and
coherent program compared to other national and EU intervention methods. It
resulted in increased turnover for the beneficiaries who invested with financial
support from SAPARD (through measures 1.1 and 3.1 in particular), in the
creation of new jobs (about 45,000 new jobs, out of which 17,000 for women) as
well as driving effects at Romanian economic level (as long as investments
generated a demand of goods and services on the Romanian market with a value of
425 million Euro, i.e. 48% of total investments).
This evaluation also underlined the success of Measure 2.1 (Rural infra-
structure development and maintenance) where the allocated financial resources
were used up shortly after the measure was accredited, the financial efficiency
being 100%. Additional funds were allocated for this measure. The number of
applications was three times larger than the allocated resources, which confirms the
need for investments in rural infrastructure in Romania. At the same time, the
dependence of infrastructure investments upon the financial support provided by
the SAPARD Program is highlighted. In the absence of this program, 2/3 of
investments would not have been possible, as the amounts necessary for
infrastructure investments are huge compared to the local community budgets.
Another problem that was noticed throughout the program was the lack of co-
financing sources. For most measures (except for measure 1.1 – Processing and
marketing of agricultural and piscicultural products), most of the funds for co-
financing came from the beneficiaries’ own private savings, followed by the
banking credits and to a lesser extent from foreign direct investments. In these
circumstances, until this mid-term evaluation, the banks played a relatively small
role in co-financing the projects, the main source being the personal savings of
2 The evaluation was achieved by the consortium, including Kvistgaard Consult/DDH Consulting,
in association with a number of local and international experts, in the period October 2005–
170 Cecilia Alexandri, Lucian Luca 10
Overall, this mid-term evaluation highlighted the significant contribution of
SAPARD to the economic growth of the beneficiaries, the creation of new jobs in
the primary and processing sectors and the creation (although modest) of jobs in
off-farm activities. Also, beneficiaries have become more aware of EU standards
with regard to food quality and safety, environmental problems and animal welfare.
The SAPARD-funded infrastructure projects had the following output
(SAPARD Monitoring Tables, September 2006):
– modernization and improvement of 2,058 km of roads;
– enlargement of the drinking water supply network by 4,341 km, serving
– enlargement of the sewerage system by 857 km, for 335,005 inhabitants.
In 2007, the rural infrastructure situation still precarious continues to have a
negative effect upon the quality of life in rural areas, hindering economic
For these reasons, we question the allocation of funds through the present
National Strategy Plan for Rural Development (NRDP) 2007–2013, containing
20 measures grouped under 4 axes and a financial allocation of 3.1 billion Euro
(Table 5). The most significant financial support is allocated to Axis 1, i.e. to
support activities in the agricultural and forestry sector, accounting for 42% of total
allocations (Table 5).
Financial resources of Rural Development Program (indicative allocations)
Axis 1: Improving the competitiveness of the agricultural and forestry sector
Axis 2: Improving the environment and the countryside
Axis 3: The quality of life in rural areas and rural economy diversification
Axis 4: Implementation of the Leader approach
Contribution to CNDPs
Source: National Strategy Plan for Rural Development 2007–2013
This distribution of funds focuses mostly on increasing the competitiveness
of the agricultural and forestry sector, thus actually promoting the development of
certain activities in the primary sector of the rural economy. This sector is
generally characterized by a very low capital marginal efficiency. Thus, there is a
risk that the current economic and income gaps between the urban and rural areas
will increase further if most of the funds are directed towards the development of
agriculture, forestry and other activities from the primary sector. The counter-
argument offered by decision-makers is based upon the fact that agriculture is still
11 Romania and CAP Reform 171
the main economic activity and the main income source for the rural households.
However, agriculture imposes a great inertia on the rural world, which thus
becomes less involved in the economic dynamism manifested in the last years and
does not benefit from Romania’s general economic growth. In our opinion, an
equal distribution of rural development funds of 35% between Axis 1 and Axis 3
would be much more beneficial for generating economic growth in the rural areas.
2. ASSESSMENT OF THE IMPACT OF POSSIBLE CAP REFORM
SCENARIOS ON ROMANIAN AGRICULTURE
At EU level, the debates on the agricultural policies focused upon the
medium-term issues related to the improvement of policy implementation (health-
check) and to the continuation of the 2003 reform (sugar, wine, fruit and vegetables
market reform). The long-term perspective must also be considered, regarding the
future of CAP after 2013, under the pressure of the Doha Round within WTO and
of EU budget reform.
Different reports and positions of EU Member States contributed to the
vision upon the future of CAP. For a long-term perspective the UK Vision Paper of
2005 is worth mentioning and for a medium-term perspective (focusing on
implementation) the French Memorandum of 2006. The Vision of the UK on the
future agricultural and rural development policy has at its core the concept of
sustainable agriculture patterns, focusing on competitiveness, environment protection,
decreasing import tariffs and the removal of any subsidies for production or
consumption. Agricultural expenses should focus upon the present Pillar II. In the
last part of 2007, the French President Sarkozy’s position opens the way to a bolder
CAP reform than in the previous French Memorandum, by assuming a stronger
market orientation of European farmers.
In Romania no formal official political reactions to the UK Vision were
signalled out. At academic level, the radical reform proposal was received with
interest (Alexandri, 2006), the liberal economic perspective being highlighted; in
the long term this approach is likely to prevail, even though currently it would not
obtain a consensus from all the member states. Romania’s short-term interest might
negatively influence its long-term strategy, and a sceptical position with regard to
radical reform is likely. Romania gave an indirect unfavourable signal towards the
UK Vision by associating itself with the French Memorandum of 2006 that
proposed focussing on the implementation issue and considering challenges such as
food security and the access to natural resources (water, arable land).
Helped by his previous position as Prime minister, a coherent vision upon the
future of agriculture and the rural area in Romania was proposed by a politician
(Nastase, 2006). The key-problem that he identified was the huge gap between
rural and urban areas, mainly due to poor infrastructure and the generalized
poverty. The proposed solution for the modernization of the rural area is represented
172 Cecilia Alexandri, Lucian Luca 12
by its “urbanization”, through great investments in infrastructure, development of
community services and the change of the inhabitants’ life style. The approach
would be based on public funding of rural infrastructure and services from national
funds supplementing the EU funds, subsidizing the consumption of rural public
services and the development of a program for increasing the income of the rural
population through the creation of non-agricultural employment opportunities. In
this approach, modernization of agriculture will result from the modernization of
the rural area, the state shifting its internal and external resources towards rural
development rather than for agriculture.
It should be mentioned that in Romania in the last century and a half, the
ambitious investment programs have not been generally successful in reaching
their objectives to increase productivity and closing the gap between Romania and
the developed countries of Europe. The special focus on funding activities that are
not directly productive does not make this approach necessarily better, but its
chances of success could be enhanced by Romania’s EU membership. However it
is expected that the large farmers’ lobby will make such modernization program
difficult to impose on the public agenda; an opportunity would be to include this
approach in the electoral offer in future elections and to legitimate it by vote.
International context: globalisation pressures
For Romania, the EU accession and adoption of CAP represent the opportunity
of going beyond the policy inconsistencies generated by the electoral changes. This
could be the beginning of a period of consolidation of the agricultural sector based
upon the stability of agricultural markets and the generous support provided both to
agriculture and to the rural areas in general.
CAP will be faced with growing pressures caused by globalization and
internal pressures for a more equitable use of the resources allocated to this
common policy. The need to continue CAP reform is once again highlighted in a
recent OECD study (Economic Survey of the European Union, 2007) which
concludes that the EU should proceed with the diminution of its agricultural
subsidies and with the opening of its markets.
The reform of agricultural policy represents an older concern of the OECD.
Given that Romania intends to become a member of this organization, the OECD
position should be taken into consideration. The need to reform the agricultural
policies of the OECD member states has been officially recognized since 1987, and
the emphasis of reform was placed on allowing the market to influence production,
through the gradual diminution of the agricultural support. That is why it is
recommended to provide income-related support to farmers rather than support
through guaranteed prices or other production-related measures. The principles for
policy reform, established in 1998, proposed a greater market influence, as well as
the protection of natural resources and strengthening food security worldwide.
13 Romania and CAP Reform 173
According to the OECD, the reform had to focus upon the diminution of
producer support and of producer protection, the main recommendation being to
provide a decoupled support form. The experience of reform processes in the last
ten years shows that agricultural reform is difficult because of the complex links
between farmers and politicians in defining the sectoral priorities. Farmers are
fearful of change, exaggerating estimations of negative effects. Politicians over-
estimate their dependency on the farmers’ votes. The OECD recommendation for
following the reform path is the consultation of and communication with all the
stakeholders, by presenting the arguments on which the proposals are based and
providing decoupled compensatory measures for a limited period of time. The
reform results indicate that it is more difficult to reduce the level of support than
changing its structure, by using less distorting support forms.
The global tendency to reduce trade barriers for agricultural products favours
further reforms. The EU tariff level is still considered high resulting in higher
prices on EU markets compared to the world market, which is a source of world
trade distortion. Romania had a privileged situation during the Doha Round
negotiations, mainly due to the Uruguay Round results, but once the EU accession
negotiations were completed, Romania fully adopted the EU position.
The possible successful completion of the Doha Round negotiations would
bring radical changes for the EU farmers regarding the diminution of the agricultural
market protection (state of negotiations September 2007): a 50% average reduction
of customs duties for agricultural products, a 70% decrease of subsidies that distort
trade and the removal of all export subsidies by 2013. The position of the
Commissioner for Agriculture is that a possible agreement in the Doha Round can
be reached only through a balanced agreement within the agricultural section of
negotiations, as well as between the agriculture, services and industrial goods
Romania’s experience regarding agricultural reform has positive lessons to
offer. Before 1997, the protection level of Romanian agriculture was very high,
with an average of 75% of applicable customs tariffs, which resulted in a quasi-
generalized inefficiency of the agri-food sector. Nevertheless, the large farms most
of them in state ownership received relatively high direct subsidies. In those
circumstances, the absence of competition from imports, combined with the
defective management of the agri-food enterprises and the controlled prices led to
the almost generalized bankruptcy of the large production units. Thus, the 1997
reform (supported by the ASAL Program of the World Bank) revealed that the
reduction of tariff protection, mainly for the agricultural sector that needed urgent
adjustment, did not result in the collapse of the sector. It can be argued that this laid
the basis for a solid development of the agricultural sector, in correlation with the
adoption of certain decoupled support methods.
The results of the Doha Round are mixed for Romania: given the relatively
low level of support received by farmers from the national budget until accession
174 Cecilia Alexandri, Lucian Luca 14
(through payments decoupled from production, in case of crops, and partially
coupled in case of livestock), the shock of the expected reduction of distorting
subsidies after accession would be absorbed relatively easily. However, the
reduction of tariff protection could negatively influence the agricultural production,
as the most competitive Romanian exports are the lightly processed products, with
low value added. Thus Romanian producers will have to face the competition of
the products coming from the developing countries whose access to the EU market
would be liberalized. An analysis of the competitiveness of Romanian food
products traded with EU states over 1999–2004, based on the indicators of
competitive advantage, considers that the following products are competitive:
livestock, seeds and fruits, industrial and medicinal plants, edible roots and
tubercles, animal grease and vegetable oils. The conclusion of that analysis is that
Romanian food products are, generally speaking, at disadvantage, because the food
industry is not competitive.
The Health Check and the future of CAP
The Commission is trying to find the equilibrium between the proposals for a
radical CAP reform, including the drastic reduction of strictly agricultural expenditures
of the EU budget, and those for a moderate reform, seeking to maintain an
agricultural policy as close to the present principles as possible.
Thus, the speeches of the Commissioner for Agriculture and Rural Development
integrated most of the proposals from the Member States, although being mainly
oriented towards the completion of the 2003 reform, i.e. the policy implementation
improvement. The “CAP Health Check” is the internal exercise that should
evaluate if the CAP objectives following the 2003 reform are reached with the
highest possible efficacy, efficiency and facility. The reform evaluation is
approached not only from the perspective of agri-food production but also from the
perspective of climate change and rural development.
Fully decoupled direct payments, as one of the priorities of adjusting CAP
under the pressure of Doha Round negotiations, is an objective assumed by the
Commission. In Romania, several payments assimilated to state aids (that do not
need the Commission’s approval) are also affected; these payments made in 2007
were circumstantial, given the delay in implementing IACS that would have
allowed providing direct payments under the SAPS scheme. It is expected that with
the introduction of SAPS payments, these measures will no longer be necessary. As
regards the complementary national payments, these are partially decoupled from
Another foreseeable proposal of CAP reform is increasing the level of
compulsory modulation. Currently, Romania as a new member state is exempted
from this type of funds transfer from Pillar 1 to Pillar 2. Compulsory modulation
15 Romania and CAP Reform 175
should be supported by Romania, taking into consideration that it will negatively
affect, from the moment of its application, only a small number of farms (the large
ones), but it will complete the necessary funds for rural area modernization.
The examination of the operation of “cross-compliance, the application of
which is investigated in the recent Commission Report, will probably lead to the
simplification of certain provisions. Romania will certainly benefit from any
simplification in controlling the application of “cross-compliance”(GAEC).
However, complying with these conditions should represent a strategic objective of
Romania’s agriculture, given that agricultural land is one of Romania’s most
important natural resources.
Regarding market instruments, mainly those for managing supply, it seems
that their disappearance is inevitable in the context of world agricultural trade
liberalization. The Commission will also analyze the procurement-based intervention,
the milk quotas and the set-aside obligation. The signals obtained so far reveal an
acceleration of their elimination: the maize intervention will cease in 2009, the
obligatory set-aside was suspended for the year 2008; regarding the milk quota
many voices are in favour of their elimination after 2015. From an administrative
stand point Romania should favour the removal of these instruments as soon as
possible, taking into consideration the difficulty to set them in operation.
In the context of giving up market instruments, it is expected that on medium
term Pillar I will include only (decoupled) direct payments. The most interesting
issue for all the states is related to the methods of receiving these direct payments
although the level of payments is also a concern for farmers in Member States.
Experience so far shows that while it is possible to transform the type of support
provided to farmers, the diminution of this support is much more difficult to
Romania, starting from a low support level compared to the old member
states, is likely to adapt more easily to the diminution of subsidies provided under
Pillar I. This adaptation process will be easier if farmers are informed in advance
about the new form of this Pillar after 2013.
The long-term equilibrium (2020) between the two CAP pillars can be
considered as the core of the debate on the future of CAP. The transfer of funds
from Pillar I to Pillar II has been and still remains the main tendency of CAP
reform. However, the measures for speeding up this transfer, beyond the success of
the 2003 reform, were limited to the proposal of a voluntary “modulation” that
should reach up to 20% of Pillar I funds. This new instrument of supplementing the
funds allocated under Pillar II does not seem to be favoured by the member states
(UK is an exception in this respect). The European Parliament is considering it
rather a form of CAP re-nationalization.
176 Cecilia Alexandri, Lucian Luca 16
Romania could gain in the long term from a greater allocation of resources to
Pillar II, taking into consideration the development gap between Romanian rural and
the urban areas and the even greater gap between Romanian and Western rural
areas. The scenarios in the table below define the possible features of the future CAP.
Likely effects of reform scenarios on Romanian agriculture and rural areas
The formulation of certain simplified scenarios of possible CAP reform, from
the perspective of the Romanian concerns regarding agricultural policy provides
the necessary benchmarks for a brief analysis of the effects of reform upon
consumers’ and producers’ welfare, as well as upon the rural area in general. The
scenario named “Current CAP” implies the completion of the reform envisaged in
2003. On the other part, the “Moderate Reform” scenario would have as objective
the drastic diminution of market interventions, while the “Radical Reform” would
imply not only the removal of interventions, but also the phasing out of direct
Given the complexity of its economic and social effects, CAP reform will
affect several categories of stakeholders in Romania. Taking into consideration the
high share of food expenses in the total expenses of a Romanian family, the fact
that reform will lead to cheaper food is welcome. On the other hand, the diminution
of prices of agricultural products will affect the small farmers who are not able to
reach higher productivity levels. These are among the poorest category of people in
the Romanian society by no accident.
Another opposition that can be identified is the one between the taxpayers
and the beneficiaries of direct payments and subsidies. In the favourable context of
economic growth in the last years, this problem has not had an important place on
the public agenda. The currently deteriorating economic performance will bring it
to attention. The administrative costs of European subsidies will have to be
analyzed as well, as they cannot be considered insignificant, falling entirely into
the responsibility of the national administrations.
Analyzing the effects of the complete or partial removal of supply control
mechanisms should start from the specificity of the Romanian agricultural market.
Although the European Union is Romania’s main commercial partner in agri-food
products, the price differentials between Romania and other EU Member States
shows the clear market segmentation phenomenon. Thus, for most agricultural
products, the prices on the national market are different from those of other large
EU agricultural markets.
The case of wheat is typical: while in Germany the producer price throughout
the period 2000–2004 was slightly higher than 11 Euro/100 kg, in Romania the
annual average price for 100 kg fluctuated between 12 and 17 Euro in the same
17 Romania and CAP Reform 177
period. In general the price level in Romania was higher than in Germany, yet the
price fluctuations have been much greater, also as a result of the absence of an
intervention mechanism. In 2005 the price decreased by less than 2 Euro in
Germany, while in Romania it was higher than 4 Euro per 100 kg. The situation on
the maize market is almost identical, the prices falling from 16 Euro/100 kg in
2004 to 12 Euro in 2005 in Romania. In the case of potato market, a commodity
that is less suitable for long-distance commercialization, the segmentation is even
stronger. In Romania the prices are quite high (around 20 Euro/100 kg) and the
variations are sometimes quite spectacular (from 22 Euro/100 kg in 2005 to
34 Euro in 2006), unlike in Germany, where the prices and the price variations are
lower (prices range from 6.5 to 9.2 Euro/100 kg).
Regarding the livestock sector, the evolutions are also atypical. In Romania
the producer price for live weight calves is generally half the price of the traditional
European producers: about 90 Euro/100 kg in Romania compared to 250 in Austria
and 200 in Hungary or Poland. The price of live weight pigs is relatively high: in
most years over 100 Euro/100 kg, compared to about 80 Euro in Denmark. The
variations are also high in the case of pigs; for example, in 2004–2005 prices
increased by 30 Euro/100 kg, and in 2003–2002 prices decreased by 40 Euro/100 kg.
The producer price in the case of poultry (live weight price) experienced a collapse
in Romania in 2004 (and the presence of the avian influenza in 2005 maintained
the prices low) to less than 100 Euro/100 kg, compared to over 200 Euro in 2003.
By comparison with constant prices throughout the period of about 70 Euro/100 kg
in Germany or about 35 Euro in Portugal, it is obvious that a certain market
distortion takes place, as a consequence of segmentation and commercial regime.
Starting from the specific situation of these main markets, an evaluation of
the effects of certain future reform measures in the period after 2013 is not easy at
all. In order to provide a certain coherence to the comparison between the two
reform scenarios (moderate and radical), we predicted that in the 2008–2013
period, Romania’s agriculture would reach the stage of an almost full integration in
the EU markets for each product and the comparison is made between the situation
at that moment (“Current CAP” Scenario) and each of the two reform scenarios.
The hypothesis that define each scenario are synthetically expressed by the price of
the respective product.
In these conditions, the effects upon the producer welfare will be obviously
negative, while the effects upon the consumer welfare will be positive. The question
is whether the positive effects exceed the negative ones, in each of the two reform
scenarios. Furthermore, which of the two scenarios produces the desired outcome
for the decision-makers? The change in producer welfare for the 6 selected
products (wheat, maize, potatoes, pork, poultry and beef) is negative. The producers
lose as a result of CAP reform, in both of the scenarios, yet the loss is greater in the
case of the radical reform scenario. Consumers gain in welfare in both scenarios,
and the overall gain is higher than the producers’ loss, which result in a net positive
178 Cecilia Alexandri, Lucian Luca 18
effect (at the level of the whole economy). Net welfare is higher in the radical
reform scenario than in the moderate reform scenario, which means that a radical
reform would be desired if the situation of producer welfare loss could be well
Moderate reform versus radical reform in the direct payments case
In Romania the number of farms that are to receive direct payments
(registered in the Farm Registry) is about 1,230,000; these farms operate a total
area of about 9.5 million hectares. 32% of this area is operated by farms with 100–
1,000ha, 26% by farms under 5ha and 17% by farms over 1,000 ha.
The direct payments paid from EU funds will gradually increase, from about
400 million Euro in 2007 to about 1600 million Euro in 2016.
In order to see how the direct payments would operate under CAP reform, we
made a few simple calculations, on the basis of three scenarios, referring to the
– Scenario 1 (Current CAP): the situation in which direct payments continue
according to the current CAP, to reach 100% of the payments foreseen for
Romania by the year 2016.
– Scenario 2: (Moderate reform) assumes that starting with 2014, the level of
direct payments will be reduced according to the current Health Check
proposal. Payments to farms will be reduced by 10% if the amounts exceed
100,000 Euro, by 25% for amounts that exceeds 200,000 Euro and by 45%
for amounts that exceed 300,000 Euro.
– Scenario 3 (Radical reform) assumes that the level of direct payments per
hectare will be reduced compared to the level of direct payments in 2013:
by 10% in the year 2014, by 20% in the year 2015 and by 30% in the year
The direct payments in the three scenarios are presented in Graph 3.
200720082009 2010 201120122013 201420152016
Graph 3. Evolution of direct payments funded from EU funds.
19 Romania and CAP Reform 179
The reduction of direct payments per hectare, according to the current
proposal in Health Check, would have minor effects. The farms that would exceed
the direct payment ceilings proposed in Health Check are the farms with over 1000
hectares. The average size of farms from this category is 2040 ha, and a farm
would receive direct payments of over 100,000 Euro in the period 2008–2011, over
200,000 Euro in the period 2012–2014 and over 300,000 in the period 2014–2015.
According to the moderate scenario, in 2016, an amount of about 15 million Euro
would be saved. This would represent 1% of the direct payments that would be
received in the same year under Scenario 1. We consider that this diminution is not
significant, although it could lead to dissatisfaction among farmers who receive
diminished payments. At the same time, the transfer of this amount to the measures
under Pillar 2 will not bring a significant change in funding the rural development
Scenario 3 (Radical), which proposes the annual reduction by 10% of the
direct payments for all the farms, has much more spectacular effects. For example,
the level of direct payments in 2016 under this scenario is half the level in scenario 1
for the same year. If we follow Scenario 3, in 2023 the direct payments per hectare
will be totally removed. If the funds that are saved in this way are redirected to
rural development measures, the funding under Pillar 2 could make a significant
Can Romania benefit from a larger allocation for Pillar II?
Within the HC debate, Romania’s initial reaction was against compulsory
modulation, although the development gap between the Romanian rural area and
the rural areas of EU 15 would justify an immediate increase of funds for Pillar II.
The reason for this was the skepticism regarding the absorption of funds as
the National Rural Development Program (NRDP) for 2007–2013 had been
approved as late as February 2008. Certain changes compared to the SAPARD
Program could result in uncertainties regarding the potential beneficiaries’ interest
or financial power. In fact a decision of allocating part of the funds from Pillar II
for direct payments had been already made, in effect an approval of reversed
modulation that seems unjustified. Hopefully, this was the only a short-term option.
On long-term Romanian decision makers could support a radical reform of CAP
which would mean a gradual transfer of funds to Pillar II while direct payments are
phased out (after 2013), if the experience of the current financial programming
reveals that the rural infrastructure can efficiently absorb the allocated funds.
180 Cecilia Alexandri, Lucian Luca 20 Download full-text
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