The effects of decoupled subsidies on agricultural production in the EU – A literature review

Abstract

The MacSharry reforms in 1992 started a transformation in the Common Agricultural Policy as subsidy types were radically changed. The reform introduced new subsidy types that had no linkages to the current production levels and again in 2003, a significant step forward was taken as almost all subsidies were decoupled from production and member states implemented the changes mainly in 2005/06 but some states also postponed the change to year 2007. This thesis reviews the literature regarding how decoupled subsidies have affected agricultural production in the EU. In this thesis, production could mean, for example, productivity and investment decisions. As decoupled subsidies should not have a direct effect on production levels or decisions, potential channels have been found in the literature through which decoupled subsidies have production effects. Studies have found mixed estimates about the effects and they vary between countries and agricultural sectors. However, the general view is that decoupled subsidies have less market distorting effects than subsidies that have links to current production.