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Modelling the Effects of Agricultural and Rural Policy

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  1. Psaltopoulos1 D., Balamou1 E., Roberts2 D. and Pouliakas2 K. 1. Department of Economics, University of Patras, Greece 2. University of Aberdeen Business School, Scotland TERA Final Conference As a pre-Congress Symposium of the European Association of Agricultural Economists - XIIth Congress, Gent (B), August 26-29, 2008 Modelling the Effects of Agricultural and Rural Policy

  2. Introduction • CAP has undergone a “fundamental reform” within the 2003/04 “Mid-Term Review” • CAP and its reforms are influencing the development of rural areas in EU (positive and negative effects) • Concerns are raised on the economic effects of the new CAP, and more specifically on the risk (in specific areas) of production disruption and abandonment due to decoupling. Several studies have dealt with this issue. • However, studies have not explicitly addressed the rural-urban effects of the recent CAP reform. So the issue here is “how are these effects distributed between rural and urban space?”

  3. Introduction Objective: Assess the nature and magnitude of (both rural and urban) economic effects associated with a change in the levels and nature of agricultural policy (likely future policy-directions) in each of the study regions Four Policy Scenarios: • 30% decrease in coupled support for agriculture • Full Decoupling: coupled support becomes full decoupled • Switch of Pillar 1 funds into Pillar 2 • Increased Modulation: decoupled SFP support to agricultural HHS is  by 20% and transferred to Pillar2

  4. The Modeling Framework The Modeling Framework The Modeling Framework • The Bi-Regional CGE Model • IFPRI CGE model (Lofgren et al., 2002) modified to allow specific characteristics of the study areas and moreover RURAL-URBAN INTERACTIONS The Bi-Regional SAM • Rural/ Urban Regions • Spatial distinct for: Activities, Factors, HHS • Non-spatial commodities

  5. The Modeling Framework The Modeling Framework The Modeling Framework • The Bi-Regional CGE Model • Production – (based in rural or urban part) maximise profits • Consumers – maximise their well-being (have demand curves) • Model Closure rules – assumptions on how markets operate: 1. Labour  Neoclassical: segment by labour skill levels 2. Government balance  GSAV.Flx and DirTax.Fx 3. External balance  FSAV.Flx and Exch.Rate.Fx 4. Savings-Investment Balance  Savings Driven

  6. The Study Areas • Scottish Study Area Rural East Highlands: • Population: 69.386 1991-2001:  2.3% • Agriculture: Mixed (plus forestry) • Secondary: Construction, Food Manufacturing • Tertiary: Trade-Tourism Urban: Inverness • Population: 43.340 1991-2001: 8.6% • attract new sectors (pharmaceuticals- knowledge-based activities ) • Greek Study Area Rural: Archanes Population: 4.548 1991 – 2001: 6.3% • Agriculture: Vine/ Olive • Secondary: SMEs (proc. of agric. products) • Tertiary: Trade - Tourism Urban: Heraklion • Population: 137.711 1991 – 2001: 14.2% • Large number of industries and modern tertiary sector

  7. Table: GDP of the two study areas

  8. Agricultural Policy Scenarios and Causal Mechanisms Scenario 1:-30% in coupled support for agriculture  Net Indirect Activity Tax of Agricultural Sector  • Value Added of Agricultural Sector  • Activity of the Agricultural Sector  Domestic Production of Agricultural Products • Labour is free from agriculture   PCap.& PLand  Agricultural is linked with the other Rural/Urban Sectors  Second-order Production, Price, HHS Income Effects ()  AGGREGATE AND NET RURAL/ URBAN EFFECT DEPENDS ON COMPETING FORCES

  9. Agricultural Policy Scenarios and Causal Mechanisms Scenario 2: Full Decoupling  Direct Income Transfers from GOV to Agr. HHS   Income and Spending of Agr. HHS  • Good Produced in the study regions •  • Factor and Goods Prices  Production Leak towards the RoW  Second-order Production, Price & HHS Income effects () TOTAL EFFECT DEPENDS ON INTERACTION OF THE TWO MECHANISMS

  10. Agricultural Policy Scenarios and Causal Mechanisms Scenario 3: Switch of Pillar1 funds into Pillar2-Axis 3  Exogenous Investment Demand of the Construction Commodity  • Demand of Composite Good and Imports of the Construction Commodity   Activity of the Construction Sector  Construction is linked with the other Rural/Urban Sectors  Second-order Production, Price, HHS Income Effects ()  AGGREGATE AND NET RURAL/ URBAN EFFECT DEPENDS ON COMPETING FORCES

  11. Agricultural Policy Scenarios and Causal Mechanisms Scenario 4: Increased Modulation • 80% Direct Income Transfers from GOV to Agr. HHS  20% Exogenous Investment Demand of the Construction Commodity TOTAL EFFECT DEPENDS ON INTERACTION OF THE THREE MECHANISMS

  12. Results

  13. Results

  14. Conclusions • Spread of CAP impacts from rural to urban areas • Coupled price support is important for the rural economies  removing them results in losses but these do not seem drastic • Coupled price support seems to constrain economic activity in the urban regions • Cutting coupled price support “hurts” others than just farmers  agricultural linked sectors (especially processing sectors of agricultural products) seem to experience hard times

  15. Conclusions • Pillar 2 scenario leads to higher negative effects • Transfer of SFP funds to the income of Agricultural HHS rather “improves” the situation but “improvements” are rather marginal  household spending leaks from the region more than agricultural production “spending” • Should agricultural households chose to use their extra income to support production rather than consumption (as assumed in the model), the magnitude and distribution of impacts would be more similar to those of AGPCUT scenario

  16. Conclusions • Impacts of Modulation Scenario: a bit worse than Pillar 2 but better than Full Decoupling • Differences of results between the study areas: • Stronger links between agriculture and processing sectors • ownership of agricultural factors by urban residents • Results suggest that other wider effects may be in force as price and income effects work their way around regional economies and across rural and urban boundaries, but that these wider effects will be region-specific.

  17. Conclusions • However results suggest that there may be a case (and opportunities) for intra-regional targeted compensation to lessen the negative effects of CAP reform while promoting the positive effects of a move towards a less distorting policy environment. • Further modeling and analysis is required to explore this further.

  18. THANK YOU FOR YOUR ATTENTION!