LSIRD NAPLIO CONFERENCE PAPERS

Necessity for integration of agricultural, regional and environmental policy for disadvantaged rural areas

S. Bauer & S. Mickan
Department of Project and Regional Planning at Giessen University, Diezstr.15, D-35390 Giessen, Germany

Contents

0. Abstract
1. Introduction
2. Agriculture in Rural Areas
2.1. Diversity of Locational Factors and Conditions in Rural Regions and Disadvantaged Areas
2.2. Main Driving Factors for Structural Change and Relative Decline of the Agricultural Sector
2.3. Alternative and Additional Activities of the Farming Sector
3. Environmental Effects of Agriculture
3.1. A Synoptic View
3.2. Negative Environmental Effects of Agriculture
3.3. Positive Ecological Effects of Agriculture
3.4. Private and Social Optimality of Traditional and Modern Agriculture
3.5. Aspects of Sustainability and Related Disciplines
4. Impact of the EU Agricultural Policy Reform on Regional Competition
5. Policy Conclusions
5.1. Legal Measures for Environmental Policy
5.2. Elements for an Integrated and Market Oriented Policy for Sustainability in Rural Areas
6. Conclusions
7 References

0.Abstract

This paper deals with the various policy instruments applied in rural areas. These manifold policy instruments are, however, not integrated and harmonised. This leads to conflicts and counteracting effects and low efficiency as well as to limited success for the development of rural areas.

The concept of sustainability offers a comprehensive approach to integrate environmental, economic and social needs of the society as a whole as well as of the disadvantaged rural areas. From the environmental point of view, it is important to consider the main negative and positive effects of agriculture and the various production techniques applied. As argued elsewhere, a comprehensive policy should include taxes for environmentally dangerous inputs and production techniques on the one hand and subsidies for positive environmental effects on the other hand.

Also regional policy should be re-arranged in relation to the basic needs. A new policy should include general financial compensations according to generally accepted social criteria as well as interregional compensation payments for inter-regionally occurring environmental spill over, such as positive and negative external effects. Also following the principles of a federal policy system, a reform is needed concerning the responsibilities of the financial and political decision-making process at the various political levels. At the local or regional level, the real problems are best known. Therefore, decisions on regional development strategies should be made at these lower levels, e. g. investments in local infrastructure, subsidies for direct marketing and processing, subsides for investments outside agriculture or for the creation of tourism facilities. This requires a re-arrangement of decision-making and financial responsibilities from the EU to the local and regional levels.

1.Introduction

This paper basically deals with the conditions of agriculture in rural areas, agriculture's environmental effects and the policy instruments that are already applied and those that should be applied in these areas.

As rural areas are not homogenous, it has to be asked why some of them are more and others are less advantaged and how the resulting problems could be overcome. Of course, there are not only internal or natural factors affecting the areas' situations. Instead, the agricultural sector's local people can take actions by themselves to influence their situation at least partly. Additionally, rural areas are affected by the various policy instruments applied by numerous decision-making institutions at the different political levels.

To understand the importance of an integrated agricultural, regional and environmental policy, especially for disadvantaged rural areas, it is necessary not only to pay attention to the factors affecting the regional conditions but also to take into account the various effects of the agricultural sector on its environment. Only when taking together all kinds of effects, it is possible to determine the socially optimal level of agricultural activity. Especially the concept of sustainability reflects the necessity of political integration as it is occupied with environmental, economic and social aspects at the same time.

When the current situation is analysed the present policy applications can be examined critically and suggestions for an improved integrated policy can be made.

2Agriculture in Rural Areas

2.1 Diversity of Locational Factors and Conditions in Rural Regions and Disadvantaged Areas

The rural areas differ in several aspects such as their natural and prevailing economic conditions, their geographical locations, farm structures, conditions of infrastructure, externalities as well as political constraints.

It is quite obvious and well known that the natural conditions of the regions like soil quality, climate, landscape etc. determine the possible and also profitable agricultural activities. But even if natural conditions are favourable, as can be observed in several areas of north and east Germany, agricultural and general economic activity can decrease. This is particularly true when the region under consideration lacks alternative employment opportunities outside the agricultural sector. In such a situation one has to expect further migration pressure from disadvantaged regions, resulting in an additional decline of overall conditions. Similar arguments can be applied when farmers lack proper direct marketing possibilities or a competitive access to their input and output markets. In these cases they are restrained to perform their agricultural activities in an optimal way. Thus the incentive to stop their farming and possibly to migrate to other sectors and/or regions increases, leading to the decline in regional conditions mentioned above. This shows the influence and importance of the overall economic situation on agricultural development in rural areas.

Especially in connection with these economic factors the geographical location of an area is of importance. In general, peripheral areas are likely to be disadvantaged in relation to rather centrally located regions, as the former often experience the economic shortcomings just mentioned. Whereas the pressure for in-migration and manifold uses of the land increases in the latter, especially when they are located closely to agglomerations. Therefore, already existing differences between regions can even increase over time, worsening the relative situation of already disadvantaged areas.

Another reason for regional differences is the existence of varying farm structures and sizes. This can be seen very clearly when comparing the agricultural sector in west and east Germany. Different production techniques and machinery are employed depending on their applicability, thus leading to different cost and return functions as well as to miscellaneous environmental effects as will be explained in chapter 3 of this paper.

Regarding the prevailing conditions of the infrastructure, differences between regions can be observed in basically every country. Again, it is often the peripheral areas that are disfavoured by infrastructure as they are confronted with far distances of transportation for agricultural inputs and outputs. Also the quality of some infrastructures might be worse than in more advantaged or more central regions, e.g. when education facilities are very limited. It is even possible that disadvantaged areas lack some infrastructure facilities which are taken as guaranteed in other parts of the country, such as modern communication technologies. In addition, the various areas experience all different kinds of positive and negative externalities of which they benefit respectively suffer or which they pass on by themselves to other areas. These externalities can be due to e.g. environmental effects or touristic attractions such as a particular landscape.

As will be shown later, the different political levels of decision-making as well as the various decision-making institutions are not integrated yet. This again results in a large diversity of regional conditions.

2.2 Main Driving Factors for Structural Change and Relative Decline of the Agricultural Sector

Apart from the factors that lead to a diversity in rural conditions, there are also a couple of factors which are important for the structural economic change in the long run. In general, in industrialised countries a continuous increase in agricultural production can be observed with a decreasing potential of factors of production and a growing productivity. Especially during the 1960s human labour was increasingly substituted by capital and other non-human inputs. This was mainly due to the favourable relations of agricultural prices and the migration of labour to other sectors of the economy. Later, during the 1970s and 1980s, the structural change of the agricultural sector stated for the 1960s, was slowed down as the situation on the labour market declined in most European countries, resulting in a nowadays unfavourable agricultural structure. However, the development of agriculture is characterised by an increasing mechanisation using newly invented technology and an intensified production.

As the relation between wages and interest rates rose over time, mechanisation and the use of capital intensive production techniques were encouraged as well as the invention of new technologies. This also applies to the biological progress and other automation processes. All these activities aim at rising labour productivity. As the agricultural output was expanding continuously over time and thus the supply of agricultural products while the demand increase for these goods was much lower, the supply surplus was growing as well. According to Engel's law, which states that the demand for food stuff declines relatively to overall demand when per capita income rises, this development could have been expected. Therefore, the relative decline of the agricultural sector in terms of GDP could have been anticipated.

Finally, the continuous specialisation of the individual farms is another main driving force for the structural change within this sector. This is due to the changes just mentioned, such as the increasing wage-interest-relation and technological inventions. Also it has become more important to acquire and use special farming and business knowledge for securing the economic success of one's farming activities. The danger not to be economically successful anymore becomes apparent when the development of the sectors' incomes are considered. As the nominal income of the agricultural sector stagnates its real income declines, which in turn results in a widening difference between agricultural and non-agricultural incomes and thus raises the pressure on agriculture's income. Further, as long as agricultural product prices are determined basically by the market it is important to farmers to grow and produce many different kinds of farm products to balance the income risk. Now, such a necessity to diversify the farm's activities does not exist since prices for most agricultural products are stabilised by EU policy. Thus the price risk is not as immanent as it used to be. Part of this specialisation is the externalisation of particular activities from the farming sector to specialised input and processing businesses. Besides this specialisation at the farms' level a geographical concentration of specialised farms can be observed as they often exploit similar comparative advantages a region offers.

Since the agricultural sector experiences quite some pressures as a consequence of all these driving factors, it is rather evident that especially the disadvantaged areas as they were characterised above have to struggle to get through this process of structural change.

2.3 Alternative and Additional Activities of the Farming Sector

The above mentioned pressures for structural changes generally and for disadvantaged areas specifically, require adjustments of the farmers to the new conditions. So to say, it has to be searched for possibilities to reduce the negative effects of the structural change on agriculture in particular and on rural areas in general.

Traditionally the farm size was increased to realise the required income for sustaining the family's life. This was done either by an extended use of land, possibly even putting marginal or ecologically valuable land under cultivation or by intensifying land use respectively increasing stocking rates. But certainly there are limits to such an 'adjustment'. First, usually the most productive land is already under cultivation, so all additional land cultivated will be less productive. Therefore, the land constraint becomes effective at the latest when planting, harvesting and other marginal costs start to exceed the respective product prices of the land under question. Second, the demand for land increases not only in the agricultural but also in the economy's other sectors while the supply of land is fixed. Third, especially when ecologically valuable land such as moors, primary forests and wetlands are used by agriculture, large damage of the nature is very likely to occur. Once such areas are transferred from their original state to farm uses, they can never again be restored or replaced appropriately. Forth, by increasing the intensity of the land use, ecological damage is likely to be caused as the arable land or the pastures could be overused. Because of the restrictions in total land availability, individual farm growth by the means of additional land can only be achieved when other farms give up their farming activities. This is typical for the structural change of agriculture based on family farms. Particularly in rural areas, this simultaneous process of growth and giving up of farming depends very much on the labour market situation outside agriculture. As already indicated, in many countries it has been observed, that the process of structural change has slowed down with increasing unemployment problems. Correspondingly to these limits the adjustments of farm sizes mentioned are no generally suitable measure, thus other forms of adjustment have to be taken.

The second rather traditional form of adjustment is that of multiple job-holdings by farmers. Many farms are managed only part time so that the farmer can spend the rest of his labour hours working outside agriculture. Or sometimes some family members work on the farm while the others take jobs in another economic sector. All these kinds of multiple job-holdings make it possible for farmers to earn some steady and 'secure' income besides their farm income which depends on harvests and product prices and thus is less secure. But again, these adjustments are no unrestricted solution to diminishing agricultural returns, as can be observed looking at the prevailing difficult labour market situation.

Anyhow, there are further adjustment measures conceivable. As consumers become more and more aware of healthy nutrition, some farmers introduce ways of organic farming practices for which product prices are higher relatively to 'normally' produced agricultural goods. Especially to advertise particular product qualities farmers can increase their marketing activities. Besides these farming activities there are also possibilities to engage in environmental or local service actions, such as the maintenance of the landscape or the production of renewable resources as there is e.g. energy. Since the potentiality for raising funds for such activities is very limited in most regions and countries, the chances to earn some additional income in such a way are also quite restricted and thus no general solution.

For other farms it can be profitable to engage in tourist activities such as 'holidays on a farm' or ecology and nature oriented tours of the region. Further, they might be able to produce agricultural side products and special commodities like medicinal plants, bee honey etc. Finally, they can occupy themselves in private services and handicraft businesses depending on individual interests and talents.

As all these different examples for conceivable additional income sources reveal, they can never be generalised. Instead, these activities can only be applied in dependence of the farms' and/or regions' conditions, e.g. not every farm and region would be in a situation to attract tourists, such as those located in no special landscape but near significant industrial settlements with immanent negative externalities.

3 Environmental Effects of Agriculture

3.1 A Synoptic View

As a starting point for a more detailed analysis of agriculture's externalities, the relationships between this sector and the rest of the economy in terms of environmental interdependencies should be described. In general, these interdependencies can be clarified with the help of figure 1.

Figure 1: Environmental effects of agriculture and the rest of the economy - Source: own representation

As can be seen, both agriculture and the rest of the economy use natural resources and the environment as well as other factors of production for their production processes as inputs. Both generate some output in form of goods and side effects, such as the effects on the environment. Effects on natural resources exist in so far as they are 'consumed' by the production process and thus their stock diminishes in the case of exhaustible resources whereas the stock of renewable resources is not endangered as long as the rate of harvest does not exceed the rate of growth permanently. Regarding the environment, the negative externalities of the rest of the economy, especially those of industry, affect the agricultural sector strongly. This is due to the fact that agriculture is distinctly connected with the environment, since it depends on the use of the environment. To get hold of these problems, this sector will have to draw up its requests for the rest of the economy with respect to environmental standards, compensations etc. However, agriculture also causes negative environmental effects which can influence the rest of the economy, e.g. degradation of water quality due to an overuse of fertiliser though the water is needed for other uses in good quality as well. But in addition, agriculture also provides positive environmental effects, when e.g. preserving the landscape and the variety of species. This can result in positive outcomes on rural tourism and the research sector for instance.

These interdependencies already indicate the necessity for an integrated policy for means of the environment and disadvantaged areas, as these regions might at least in some cases suffer particularly badly of negative environmental effects of the overall economy. Anyhow, the importance of such an integration will become even more evident when the externalities of the agricultural sector are itemised and the significance of the concept of sustainability is made clear.

3.2 Negative Environmental Effects of Agriculture

The negative environmental effects of the agricultural sector basically can be put down to the technological, economical and political conditions under which this sector has to operate. In the case of negative external effects, the consumer e.g. of water suffers nitrate etc. which is accumulated in the water due to fertiliser use. Then the farmer is the cause of the damage, but he has not got to pay for it as the market mechanism does not consider such externalities. Further, there are no property rights concerning ground water, air and noise. Hence, nobody has to pay for negative externalities he causes nor does anybody get paid for positive externalities he induces. The typical agricultural effects on the environment can be characterised as in the following.

• Especially during the 1960s and 1970s many measures of land clearing were applied. As a result, ecologically valuable land got lost and the natural landscape was changed. This development was very much due to the relatively high price level of agricultural products, which again let to high property prices. Thus, formerly uncultivated land was put under agricultural use as even less productive land became profitable. Even though already cultivated areas are set aside at present, those environmentally valuable areas that were lost during these land clearing measures cannot be restored appropriately.
• As already mentioned in chapter 2.2., agricultural production was intensified by means of an expanded use of factors of production. This was mainly caused by a favourable change of the ratio between input and output prices, resulting in a high level of inputs used and the development of new technologies. This development has caused many problems, particularly from an ecological point of view, as residues of fertilisers etc. arose in the ground, soil, water, air and even in food commodities. Furthermore, as another result a decrease in the variety of species could be observed, leading to not reversible environmental damage.
• Also the increasing specialisation of farm's activities and the rising regional concentration mentioned above induce quite some negative environmental externalities, such as high levels of animal waste, soil erosion, a less diversified crop rotation and a changing landscape. Further, it is very likely that the use of fertilisers and pesticides is increased, and that more animal medicines are used than in a more diversified agricultural system. These problems become the more serious the higher the concentration of similarly specialised farms in a region, as the landscape becomes more uniform and thus leads to a diminishing variety of species when the natural variety of landscape elements disappears.
• Finally, the increasing level of mechanisation and use of more and more modern agricultural technology is not without environmentally important effects. Concerning crop production, mechanisation is associated with soil deformation, rising farm sizes, larger farming plots and faster operation times of planting, fertilising and harvesting. At least partially, this is accompanied by massive problems for flora and fauna, as e.g. there are less protection and withdrawal possibilities for animals. The technological progress in animal production has resulted in larger livestock which in turn has negative consequences as overstocking and manure problems occur.

3.3 Positive Ecological Effects of Agriculture

In general, it can be said that agriculture traditionally has to produce in harmony with the environment, as the environment is the main factor of agricultural production. In the past, agricultural activities have led to an increasing variety of flora and fauna as well as it has given cause to the rise of new ecological subsystems such as heaths, pastures etc.

Though today's agriculture can induce negative externalities when specialisation, mechanisation and the other factors mentioned are applied too strongly, it can also bring about several positive ecological effects, especially when it keeps producing in harmony with the nature. One important task of agriculture in terms of such effects is the production of oxygen and the clearing of the air. That way, agriculture also serves the protection of the climate. Others are the preservation of soil fertility and stability as well as the conservation of good ground water quality and a sufficient supply of ground water. By implementing hedges etc. on farming plots, the variation of the landscape can even be increased affecting biodiversity positively.

As can be seen by the points listed in the last two chapters, agriculture can have both, positive and negative effects on the same elements of the environment. Whether agriculture affects the environment in one way or the other, depends very much on the way in which agricultural activities are carried out. However, positive externalities of agriculture are usually neither considered by the market mechanism nor by agricultural policy. Instead, they are taken as a matter of course by the society. Often they are regarded as side products of agricultural activities that arise automatically and which are not rare and can thus be used as free goods. The market leads to an insufficient supply of public goods, because these goods can be consumed without payment and also because the producers are not paid. Therefore, it is not amazing that the supply of such goods by the agricultural sector has decreased substantially during the last decade, especially when the structural and technological changes occured. Instead, this decline is sometimes taken as a negative externality for which the farmers shall pay by internalising these effects.

3.4 Private and Social Optimality of Traditional and Modern Agriculture

It is quite often argued that the transition from profit oriented to some ecologically oriented agriculture should be made. But such postulates do not accomplish such transformation as long as the way this can be achieved is not made explicit. Considering the limited success of Christian religions' attempts to change the peoples' attitudes and behaviour for more than 2000 years, it seems that this change will not come about simply because of moral appeals. In addition, environmental problems seem to become more and more serious year by year. Nevertheless, organic farmers are as profit oriented as conservatively producing farmers though they generate more ecological output respectively less negative environmental effects. The difference between these two kinds of farmers is, that they work with different techniques and produce miscellaneous goods' qualities. Also the former have to be profit oriented, otherwise they would not be able to earn sufficient income and provide social security for their families. The profit oriented behaviour of these farms in combination with their way of production aims at a long run survival and at realising sustainability. Therefore, it can be concluded that individual profit maximisation behaviour should be accepted as the basic rule for policy concepts. It has to be analysed whether private and social optima diverge and how it is possible to overcome the difference.

Figure 2: Private and Social Optima of Traditional and Modern Agriculture

Source: own representation

Figure 2 shows two different transformation curves. The dotted prolongations of these curves aim to demonstrate that at a very low level of ecological performance income can only be increased by raising the ecological performance as well and vice versa. As the same income level along the dotted curve can be realised with a higher ecological output as well, these points are not efficient. The same applies with respect to the ecological performance. Thus each curve as a whole can be regarded as the respective possibility curve of production, whereas the drawn through part of the curve represents the transformation curve which equals the efficient production points. While the relation between the two kinds of output is complementary along the dotted part of the curves, both outputs are incomplete substitutes along the drawn through transformation curves.

The inner transformation curve represents the situation of traditional agriculture. Here agricultural income and ecological output are highly correlated. This is anything but extraordinary. As was said before, agriculture used to carry out its activities in harmony with the nature since the environment was the irreplaceable basic factor of production. Because the individual farm aims at maximising their income, P₀ represents the individual optimum, without considering any public subsidies or compensation payments. Anyhow, when the social utility function is represented by the indifference curve I₀, then the social optimum will be in Q₀. As can be seen, both optima are very close together. Therefore, in this case the social loss is relatively small when the market mechanism results in the private optimum. In the case of the outer transformation curve, which represents modern agriculture, these two optima diverge much more leading to a higher loss of social welfare when the private optimum P₁ is realised.

Due to mechanisation and technological progress etc. the transformation curve shifted outward. Over time it became possible to produce more agricultural as well as ecological output. However, another effect of modern techniques is that the nature as the basic factor of production could be substituted at least partially more and more by modern inputs such as relatively resistant and/or high yielding varieties, fertilisers, pesticides etc. To avoid the resulting loss of social welfare, ways have to be found to internalise the positive externalities of agriculture on the environment. As the individual behaviour aiming at profit or income maximisation cannot be changed, these externalities must be internalised in the market price to minimise the loss of social welfare. This internalisation has to be done by the means of market oriented policy instruments, since they are the only way of providing economic incentives to farmers for the production of ecological output. These incentives have to compensate for the income loss caused by the forgone agricultural output.

3.5 Aspects of Sustainability and Related Disciplines

Lately the concept of sustainability has become increasingly famous though until now no clear and unique definition of the term 'sustainable development' exists. Basically, the discussion about this term started in 1972 when the Club of Rome revealed that economic growth is limited by the stock of natural resources. Later on, the original concepts of sustainability were expanded, so that this term nowadays refers to a balanced relation between ecological, economical and social goals. This is reflected by the shaded area in figure 3, where all three dimensions intersect. As soon as only two dimensions intersect, it cannot be spoken of a sustainable economy anymore according to this widest definition of sustainability.

The ecological dimension of sustainability aims at maintaining the environmental quality. This does not mean that the environment should not be used at all or be left to its own devices, instead the accumulation of pollutants should not overcompensate the nature's absorption ability.

In terms of economic aspects efficiency is to be realised. Ecologically, this aim can be justified, as only sufficiently profitable activities can survive the economic competition. If they are not able to such a performance, the economic activities will not be helpful for the realisation of environmental aims either.

The social aspects of sustainability refer to the justice in the society. Any political measures that favour particular groups of the society while discriminating others are inconsistent with sustainability, since such a policy certainly leads to social tensions in the long run. Therefore, similarly to the economic aspects, such policies cannot help to realise environmental sustainability, even if environmental aims are central to the policy measures, as these measures have to be stopped sooner or later when social injustice and tensions become too great.

Figure 3: Aspects of sustainability

Source: own representation

With regard to all these three aspects the complexity becomes clear. Hence, sustainability cannot be measured easily with simple criteria. But it is a positive concept in as far as it wants to influence future developments positively referring to the chances that should be taken, such as new technological innovations, the use of renewable resources etc.

Concerning European agriculture, a policy concept was developed by agricultural scientists of different disciplines in 1991. Based on the fundamental problems of agriculture and environment and the future requirements, basic policy principles for an integrated environment oriented agricultural policy were developed. According to this concept, the term 'sustainable agriculture' refers to environmental protection as well as to the realisation of a reasonable income for efficient and non-polluting farmers. But it also includes budget control, stable markets and international trade agreements in its aims.

These points make clear, how important it is to include economic aspects in the sustainability concept. As already indicated, economic profitability is a prerequisite for carrying out economic activities. This becomes evident when looking at organic farming activities. This kind of farming is sustainable only because of the similar per capita income that can be realised through relatively high producer prices in comparison to conventional agricultural commodities. In general, it can be said that today's environmental policy mainly operates with legal restrictions which usually do not meet the requirements of sustainability, especially as these restrictions normally are not related to economic efficiency at all. Therefore, similarly to the other sectors of the economy, sustainable development of farms can generally only be obtained, if the economic and political framework is adjusted to environmental objectives. These conditions that have to be newly created have to make sure, that a non-polluting behaviour along a farm's sustainable development path becomes more profitable than conventional farming. Basically, these new conditions should lead to a substitution of capital and energy by relatively labour intensive new technologies. This would also aim at the social component of the sustainability concept as such a partly substitution of capital by labour might also help to solve today's high unemployment.

4. Impact of the EU Agricultural Policy Reform on Regional Competition

The reform of the EC's agricultural policy from 1992 has not integrated environmental and landscape problems of European agriculture into a comprehensive agricultural and environmental policy concept. It is difficult, to find elements of the reform, which are in line with the available conceptual framework of sustainable agriculture, in opposite, the reform itself does not seem to be sustainable, since the discussion about the 'reform of the reform' has started shortly after this reform was carried out.

As the main driving force for the reform, one can very clearly identify the traditional agricultural policy problems and the actual financial and international trade problems.

The reform can basically divided into the following elements: Firstly, those that changed agricultural prices and market regulations, and secondly, additional programs and payments for afforestation, environment protecting production practices etc. Though these last measures seem to be more environmentally oriented, in fact they are not. Also the financial volume spent for these measures is rather limited. Since the supplementary measures are used only partly, the reform does not guarantee a non-polluting agriculture in the European Union at all. However, there are further criticisms that can be summarised as follows:

• The reform leads to additional bureaucratic and administrative elements within the agricultural policy system. The reform has added new elements to the system without abolishing any existing instruments, leading to a rising dependency of the farmers upon bureaucrats. Instead of introducing more market oriented elements, the EU's agricultural policy system is moving more and more towards a planned system.
• The massive transfer payments are basically meant to preserve the priorily existing income distribution, instead of an orientation on generally accepted social or ecological criteria. This leads to a high inefficiency of spending public money from taxpayers and will therefore lead to a very low acceptance in the society, especially as this policy does not seem to be sustainable in the long run.
• The set aside program neither makes much sense from the economic nor from the ecological point of view. Payments given for setting aside the principally scarce factor land is a waste of resources and does not fit with the principle of an efficient and environment oriented use of resources. Obviously, the politicians, who argued for world market prices in the EU do not believe very much in the market mechanism in agriculture. In addition, those areas or plots set aside are not necessarily the ecologically most valuable but usually the least productive ones.
• From the regional and landscape point of view, the reform, particularly the compensation payments, will lead to some stabilisation of marginal areas. Many calculations show, that in marginal areas the effect of decreasing agricultural prices will be overcompensated by the transfer payments. This means, that the withdrawal of agriculture from marginal areas will be slowed down. This positive effect from the regional point of view and also from an environmental and landscape perspective is, however, coupled with relatively high income transfers. But as it is expected, that these transfers are reduced drastically in the medium term, an extreme change of the land use in marginal areas is going to occur, resulting in economic, social and ecological problems of the respective regions. Therefore, also from this point of view, the reform is not sustainable, even though it involves some positive short term effects in marginal areas.
• Finally, the reform neither solves the ecological problems involved by intensification, specialisation and regional concentration in agriculture, nor does it stop the tendencies observed in the past.

That is, why the Common Agricultural Policy has been criticised primarily by environmentalists as well as by economists. In fact, it is difficult, to find out a clear orientation of the reform on the fundamental long-term problems of the agricultural sector. From this global point of view, the reform turns out as a very narrow and short term oriented superficial compromise. Since all affected interest groups can find some positive aspects within the reform package, they have more or less accepted the compromise without analysing the relevant long term consequences. However, the reform's inconsistency and the missing long term orientation also reflect the dilemma of agricultural policy, since on the one hand its knowledge of ecological interdependencies is incomplete but on the other hand the sensitivity and uncertainty of the population increases.

The change regarding the relative situation of the different areas, especially with respect to the shift of average land returns, can be explained by means of figure 4.

Figure 4: Impact of the EU's agricultural policy reform on regional competition

Source: own representation

If the horizontal axis represents the land quality in the sense that the further one moves to the right of the origin the more productive the land and thus the higher average productivity and if the vertical axis depicts the respective average returns of the land per hectare, then the average land rent will increase continuously as the land quality rises. This original situation can be characterised by the rather steep curve T₀T₀. However, if agricultural product prices are lowered, as was done by the reform under question, where at least some prices were adjusted to the world market level, then this steep curve turns downwards and becomes T₀T₁ (without considering production costs), as the average income effect increases with average land productivity. In other words, the higher the land quality the higher the average output per hectare, and thus the higher the forgone income per hectare. Consequently, this leads to a relatively lower income loss per hectare for less arable land. At the same time, farmers receive some compensation payments per hectare land, without distinguishing between the price effects on the average output explained above. These general payments can be represented by the upward shift of the T₀T₁ curve to T₂T₂. In comparison to the original situation, this leads to a decrease of income per hectare for all areas with a land quality higher than Q^*, whereas that of the lower quality land is increased. As can be seen from this figure, does even more land become profitable, since the average return of low quality land, such as marginal land or disadvantaged areas is increased considerably.

Though this policy relieves the income pressure of farmers in disadvantaged areas, still, this reform is not any more than an alleviation and hence cannot be a general solution as can be seen at the various problems already mentioned.

5. Policy Conclusions

5.1. Legal Measures for Environmental Policy

Environmental objectives are more and more considered in many areas of politics. This is reflected in the preamble to quite a lot of laws, decrees and legal guidelines, where at all political levels claims and expectations regarding the environment are made clear. Also in the agricultural report of the German federal government, one of the four main objectives of federal agricultural policy refers to environmental conservation. From the ecological point of view it is gratifying to see that environmental objectives are considered similarly as other legal aims. Most laws and decrees are comprehensive and with regard to the future, aiming at sustainable development. Basically, to a large extent there seems to be mutual consent within society as well as between different political groups about the necessity of considering environmental conservation. However, this mutual consent does not go as far as it would be essential for the formulation of definite environmental policy strategies.

Figure 5 aims at giving an overview over the different areas of policy responsible for actions with respect to rural development and the environment in the European Union and in Germany. Horizontally ordered are the different political areas, whereas the various political levels are listed vertically.

Rural development, and thus also that of disadvantaged areas, depends on all these different levels and areas of politics. Especially in terms of the fulfilment of rural areas' interregional functions and the use of natural resources, these levels' measures have to be co-ordinated as environmental, economical and social concerns are affected. As can be seen by the large number of political areas and levels and the resulting huge number of legal measures, it is quite difficult to co-ordinate all these measures firstly within one level and secondly also across all different policy levels.

• Figure 5: Important political areas and levels of decision-making for the environment and rural areas
  
  Source: according to Bauer, S., Abresch, J.-P., Steuernagel, M., 1995,"Gesamtinstrumentarium zur dauerhaft umweltgerechten Entwicklung ländlicher Räume", Gutachten für den Sachverständigenrat für Umweltfragen, in: Materialien zur Umweltforschung, Heft 26, Stuttgart, p.91.
  
  Figure 6 indicates how environmental goals were implemented in legal actions in the past. The immense increase in the number of environmental laws and other legal guidelines over the last 25 years is incredible. During this period the number of legal actions multiplied manifold, whereas this number has been relatively stable for the 100 years before. But the success of all these regulations is rather limited and therefore must be evaluated very critically. In addition, the large number of these regulations involves bureaucratic and administrative problems and increases the restrictions for individual enterprises and households. Instead of this presently ever increasing number of legal regulations, systems offering economic incentives could have been much more efficient.
  
  Figure 6: Development of the number of environmental laws and other legal regulations
  
  Source: according to Willig, M., 1993, Die Umweltakademie Fresenius
  
• 5.2. Elements for an Integrated and Market Oriented Policy for Sustainability in Rural Areas
  
  
• It is certainly not realistic to expect noticeable adjustment of the political decision-making institutions to the prerequisites of sustainability in the short run. Instead, the traditional areas of politics have to be adapted firstly to the new requirements before all environmentally relevant areas can be integrated to improve the co-ordination of the already existing political instruments.
  However, the necessity for legal measures in the future depends very much on the extent to which the subsequently proposed market oriented policy instruments are integrated in future environmental policy. Since experiences demonstrate that legal guidelines alone cannot promote and realise environmental goals when they contradict the market mechanism and therefore oppose an efficient allocation, also market based activities have to be utilised. Nevertheless, to some extent also legal actions are always needed, even if the other policy instruments work efficiently. In other words, accepting a market economy as the basic means of allocation all measures for environmental conservation should be compatible with the market mechanism. This means, the state has to provide an appropriate legal framework within which prices adjust accordingly to market processes and without government interventions. At the same time, prices have to be directed by the market in a way to internalise environmental externalities and to realise an efficient allocation of resources.
  With respect to an environment oriented agricultural policy it is important to analyse whether the ecological objectives are in harmony with the economic and the agricultural objectives or not. In addition to the so far mentioned environmental and economic concerns, the new agricultural policy should also be based on generally accepted policy principles concerning social aspects, accordingly to the broad concept of sustainability. In general, the social policy component should take care of people who are under the pressure of income and social security. This policy has to be oriented on individual criteria, as e.g. living conditions and individual problems. To avoid distortions of the market mechanism because of social policy, it should provide only for a specified minimum living standard for everybody. Above this level the income distribution has to be set up by the market mechanism. Moreover, the basic orientation of a market oriented policy for sustainability in rural areas also has to include corrections for environmental purposes and public goods. To actually realise this market oriented policy, the basic orientation including social and environmental aspects has to be transformed into a number of policy measures to be adopted.
  The first market oriented measure that seems to be particularly important is that of taxes on environmentally dangerous inputs and production techniques. These taxes should be applied to internalise the negative external effects of agriculture at the EU level and thus provide the European farmers with a new economic framework and uniform conditions of competition. As was made clear in chapter 2.2., many of these effects can be put down to a high and ever increasing use of modern inputs, such as fertilisers, pesticides, energy etc. In general, a tax on such inputs can decrease their use and thus lead to a more closed farm based material circle also resulting in declining pollution. In the long run, the research for technical progress would be directed towards relatively input saving technologies as far as the taxed inputs are concerned. The positive adjustments of such a tax system on the environment can be summarised as follows. Firstly, the intensity of agricultural production declines having a positive impact on biodiversity. Secondly, due to relatively high input prices farms would start to lower their level of specialisation. Thirdly, also regional concentration could decrease when it becomes less profitable to produce agricultural commodities in large concentrations, as the necessary inputs become more expensive. This would actually lead to comparative advantages for less favoured areas, as their production possibilities become more important when other areas are not used as intensively as before. And fourthly, especially energy taxes provide incentives for the development and the use of energy saving technologies.
  In addition, input taxes seem to have advantages in comparison to legal measures in terms of administrative costs as the realisation and control of the former appears to be less difficult. Also the adjustment possibilities of a tax system are greater and easier to accomplish than those of legal guidelines.
  Another main instrument is that of payments for ecological output to internalise the positive externalities of agriculture. In general, farmers are not paid for their ecological output at all. Therefore, since farmers are as profit oriented as any other entrepreneur, they have no incentive to produce such an output besides some complementary environmental goods which arise automatically with agricultural production. Because of the rising substitutive relations between agricultural and ecological output replacing the formerly complementary connection, as was explained in chapter 3.4., the problem of diminishing ecological output has accelerated during agricultural development in all industrialised countries. Hence, a price for specific positive externalities has to be introduced to obtain a new private optimum that is more in line with the social optimum. By paying the farmers a certain subsidy, which should be calculated according to specific ecological criteria, the positive externalities are internalised in the farmers' profit maximisation. The criteria should provide incentives for the different positive externalities in dependence of the regional shortage and importance of the respective effects, thus differentiating the payment regionally. Giving the farmers market oriented incentives to produce environmental goods by paying them, generally leads to a much more efficient allocation rather than realising the production of such goods by legal measures.
  However, until now many practical problems concerning implementation, adminstration and control of such subsidies are not solved, as it is not settled yet which ecological elements are of distinctive importance for a sustainable development. It is also difficult to measure and value ecological effects monetarily so far. Thus, quite some research and case studies have to be done before farmers can be paid for the positive environmental effects they generate.
  The third main policy to be introduced in this context is that of interregional monetary transfers in relation to social criteria as well as infrastructural and environmental spill-over. This is important in so far as the regions have different functions to fulfil and their resources are used by various means. Hence, it is neither possible nor reasonable to expect that the common objective of even living conditions in all regions is realised in a way that all environmental and material circumstances are completely equal in all regions. Instead, this general objective has to be obtained with the necessary regional differentiation. Therefore, it makes sense that regions which generate interregional or nationwide negative environmental externalities have to make payments to other regions which might have to bear these effects. Such a transfer system could give incentives to the regional administration for respective allocation decisions especially with respect to regional environmental investments. With the help of such interregional payments it might become profitable for a region to support environmental activities rather than an industrial area.
  However, these political steps by themselves are not likely to solve or at least to stabilise the typical problems of rural areas. A comprehensive regional policy as well as additional measures of economic policy are also needed to avoid further migration of rural inhabitants and trade businesses from these areas. Therefore, it is essential to preserve a minimum population and infrastructure, as otherwise the social and ecological functions of rural areas cannot be guaranteed, whereas the problems of towns rise further with more in-migration. Additionally, more infrastructure measures have to be taken as well as new employment opportunities have to be brought about in rural areas using regional chances and comparative advantages.
  Especially with respect to disadvantaged areas, it must be recognised that particularly the lower political levels have the necessary knowledge about specific regional conditions and problems. Hence, despite the immense need for political integration, one has to remember the necessity for following the principle of subsidiarity.
  
• 6. Conclusions
  
  
• From this paper's analysis, it can be concluded that rural regions in the EU as well as in most member countries are characterised by a high level of diversity. This regional diversity can be put down to different natural conditions, various locational factors, miscellaneous historical developments and policies and divers development opportunities.
  In contrast, most of the policies applied are highly centralised at the EU or national level and therefore quite uniform not taking into account regional differences. This is especially true for regional and agricultural policies, but also for environmental policy. The specific problems are often not tackled by such policies and the most suitable development strategies are frequently not implemented. As experiences show, in many cases regional politicians and other key persons would like to follow development strategies other than those supported by the EU and national governments. As a result of this and of the segmented way in which regional, agricultural and environmental policies are carried out with a very low level of integration, the efficiency of the policies affecting rural areas turns out to be relatively low.
  As a conclusion of this analysis, a reorientation of 'rural policies' should consider the following basic elements and principles:

• The market mechanism has to be regarded as the basic and most efficient driving force for an efficient factor allocation and for structural and regional changes in the economy's and society's development (market economy).
• From the social point of view, there are good reasons for financial compensations and transfers between individuals as well as between regions in Europe. However, these transfers should be based on clear social and income criteria (social market economy).
• From the environmental point of view, regional spill-over exist in the sense of positive and negative externalities between regions. Also because of this reason, adequate financial compensations and incentive systems should be developed and implemented (social-environmental market economy).
• Finally, there are other public goods besides the environment with unbalanced regional burdens and utilities, as for example cultural and educational institutions, which also require financial compensations.
  

• These principles for a reorientation of rural policies can guarantee an adequate co-ordination of regional policies including economical, environmental and social necessities. At the same time, such a policy reorientation would allow for more decentralised political decision-making and financial responsibilities at the regional level, where the real problems are best known.
  
  References
  
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