The protests of dairy farmers and the decision the Government is about to take to provide them with additional funds once again showed how an organised group could be politically strong, even if their demands are against taxpayers' interests.

One thing is certain: meeting the dairy farmers' demands will mean the European Commission imposing a financial sanction on Bulgaria that will be twice as much as the 60 million leva the farmers are asking for.

Even the Minister of Agriculture Valeri Tsvetanov, who asked the Cabinet for the 60 million leva in aid, disagrees with this policy. He was quoted as saying to the Bulgarian-language Sega daily at the time: "I understand what I am doing, but dairy farmers keep on asking for the money and the protests are getting stronger."

This raises an interesting issue. If Tsvetanov feels pressurised by the demands of several hundred dairy farmers, what might happen if chicken breeders, grain producers and other agricultural industries start asking for subsidies by arguing that, since the dairy farmers got them, why shouldn't they?

Judging from past experience this argument will become more and more legitimate and stronger in advance of next year's general elections.

Questions remain as to how much taxpayers' money should go on fines, and whether taxpayers should pay anything, especially since the sector is showing no signs of improvement precisely because of state-aid and Government's interventions. It is a classic example of how a Government can interfere with the market economy and prevent the economy from successfully restructuring a sector.

A trend
Bulgaria is not by far the only country having problems with its agriculture industry. Protectionist measures for the sector are a hot topic of discussion all over the world.

Recent negotiations at the World Trade Organisation failed because of lack of consensus on customs duties and protectionist measures for agricultural products. Now the issue is firmly on the Bulgarian agenda.

Objective economic analysis, however, clearly shows that agricultural subsidies have a negative effect on the economy because such aid dooms the small and inefficient agricultural producers to slow bankruptcy. They become dependent on state-aid and obstruct the growth and development of the entire sector, making them a burden for everyone. In this situation it is consumers who lose most.

Numbers talk
Ministry of Agriculture statistics say that the average number of cows in a Bulgarian dairy farm is 2.8. By contrast, in Denmark the average is 85, in the UK 74, The Czech Republic 63, Germany 38, Canada 66, the US 128, Australia 280 and New Zealand 350.

The data also says that the number of cow farms in Bulgaria is 124 900. This means that the average cow farm would get 500 leva of requested additional funds. It is not yet clear how many of the registered farms would get subsidies but in all cases large farms would get more, while smaller ones, with just a few cows in their barns, would get significantly less.

The problem is that while farmers are getting money from the Government based on new market economy logic, dairy farmers will have no incentive to develop, take risks, form alliances and invest in making production more efficient.

According to a ministry report at the start of the year, the money it had already allocated to the stock breeding sector was 58 million leva. Of the total, 10.8 million leva was allocated to 1652 farmers - 6538 leva on average a farmer - for improving the quality of milk. Another 41.75 million leva was allocated to 10 895 stock breeders or an average of 3832 leva a farm. These amounts do not include the low-interest loans provided by the State Fund Agriculture for the purchase of fodder.

Ministry data says that relatively few registered farms get millions of leva in aid. But such a practice should be stopped because the benefits are unclear while, by contrast, the damage caused will be very clear when the EC imposes fines on the country.

New Zealand is a good example of how to address this problem. In 1987 the country stopped providing generous assistance to its farmers. Until then 40 per cent of their income came from subsidies. Decisive measures were taken and now just one per cent of farmers' income comes from the state. Against expectations the new policy did not destroy the country's agricultural sector. New Zealand farms became more productive and more responsive to market trends and consumer demands.

The VAT issue
The Bulgarian Food and Drink Industry Association insists on reducing VAT on food products to 10 per cent. If this happens this would also be a form of Government assistance, because food producers themselves claim they had no intention of reducing their prices. Differentiated VAT rates, however, are contrary to the idea that all sectors should be treated equally in terms of taxation. After all, the state exists to create an environment that allows competition and a reduction to impediments for entry into any sector. The state as a rule should not define which sectors of the economy "deserve" to get assistance. Everything else is known as centralised planning and belongs to a long-gone era.

In this situation the right thing for the Government to do is to resist the pressure applied by dairy farmers and food producers. Otherwise meeting their demands would cause a chain reaction in all other sectors of the economy. The problem is that, in light of next year's general elections, the Government will find it more and more difficult to say "no".