Lotze, Hermann: Integration and Transition on European Agricultural and Food Markets: Policy Reform, European Union Enlargement, and Foreign Direct Investment - Four Essays in Applied Partial and General Equilibrium Modeling -

86

Chapter 3. New Directions in the Common Agricultural Policy: Effects of Land and Labor Subsidies in a General Equilibrium Model

3.1. Introduction

The reform of the Common Agricultural Policy (CAP) in 1992 has introduced major changes to the system of agricultural support in the European Union (EU). For the first time since the establishment of the CAP, domestic prices for some agricultural products were brought down significantly closer to world market levels, and at the same time direct compensation payments were introduced. These are first steps in a direction which has been proposed by agricultural economists for years, and some positive effects can already be observed. Intervention stocks for grains and beef have decreased and domestic grains have become more competitive in the use for livestock feed. However, there are still many inefficiencies in the current policy system as well as newly created distortions. Hence, there is an ongoing discussion in academia and politics about further reforms of the CAP.

Most observers would agree that the CAP has to be simplified and further decoupled from production in order to cut down administrative expenses, increase transparency, and remove market and trade distortions. This will be important not only with respect to the upcoming negotiations in the World Trade Organization (WTO), but also in the process of preparing for an Eastern enlargement of the EU. One way of modifying the CAP could be the introduction of uniform payments on agricultural labor and/or land as a substitute for current support measures. If designed properly, factor subsidies would be far less distorting than product-related compensation payments, they would most likely reduce administrative expenses and probably meet WTO obligations. However, some production effects can still be expected, since factor subsidies draw resources out of other sectors into agriculture and thus slow down structural changes in the farm sector.

In a recent study by Kirschke et al. (1997), the effects of direct factor payments were analyzed with a focus on farm level results in a German context. This paper covers the same policy options for the EU as a whole in a more aggregated, economy-wide perspective. An applied general equilibrium (AGE) model with an appropriate disaggre-


87

gation in agricultural sub-sectors is used for the analysis. The model not only allows for the implementation of specific agricultural policy measures, but also keeps track of resource flows into and out of agriculture under various policy options. In addition to that, a multi-regional AGE model generates results with respect to international trade and welfare.

The next section briefly evaluates the CAP after the reform in 1992. Section 3.3 provides an overview of proposals for further development of EU agricultural policies with a focus on factor subsidies. Theoretical effects of factor subsidies are analyzed in Section 3.4 . After explaining the structure of the AGE model and the policy implementation, selected simulation results are discussed in 3.6 . The final section draws some conclusions and gives further implications for modeling the CAP.

3.2. The Situation after the 1992 Common Agricultural Policy Reform

The 1992 CAP reform has achieved more than most observers would have expected from looking at earlier policy adjustments. Prices for grains, oilseeds and protein seeds have been brought down closer to world market levels. Compensation payments have been at least partially decoupled from market production. Politicians claim that the reform has solved some of the problems related to over-production, above all the high levels of government purchases (BMELF 1997, p.80-81). In 1992/93, the EU had about 33 million tons of grain in intervention stocks, whereas in 1995/96 less than 3 million tons remained. The use of domestic grains for livestock feed in the EU increased significantly from 94 million tons in 1993/94 to 106 million tons in 1996/97 (Uhlmann 1997, p.26-27).

On the other hand, there is considerable "unfinished business" in the 1992 reform (Mahé and Roe 1996, p.1). Products like milk, sugar, wine, fruits and vegetables were excluded from the 1992 reform. Output restrictions for milk and sugar are still in place and the design of current product-related compensation payments has led to new distortions between various agricultural products. Compensation payments under the new CAP are linked to agricultural land and the number of livestock per farm. They are not really decoupled from production since farmers have to produce in order to receive the compensation payments. Factors of production are now driven into those products where protection and hence profitability is still high compared to more liberalized


88

markets. This works against the pressure for structural change that could be expected from lower prices. Less efficient farms are kept in production, thus preventing new farmers from expanding their operations (Wissenschaftlicher Beirat 1997, p.2-3).

Price ratios between products within the EU are not in line with ratios prevailing on world markets, as many restrictions with respect to international trade are still in operation (Kirschke et al. 1997, p.3). Signals from world markets still do not directly affect farmers' decisions within the EU. One striking example was the case of high grain prices in 1995, when the EU introduced export taxes in order to keep grain prices at those administratively low levels that were chosen as a base for income compensation in 1992. This is clearly against the idea of internationally interacting markets, where production shortages in one region can be compensated for by other regions which prevents extreme volatility of world market prices.

Politicians still consider quantitative restrictions as an appropriate means of regulating output as well as factor markets. Production quotas on the farm level for milk and sugar were not touched by the 1992 reform. Following the Blair-House agreement, the current compensation system for oilseeds is in fact a quantitative restriction on a regional level, as e.g. in Germany the national overall quantities eligible for compensation payments have been transferred to the Federal States. Even further distribution down to the farm level is being discussed (Wissenschaftlicher Beirat 1997, p.6). On the market for agricultural land, the set-aside programs are more restrictive than before 1992. Originally, set-aside was a voluntary measure for output reduction and protection of environmentally sensitive areas, but after the reform farmers are practically forced to set aside part of their land by design of the compensation system. In many cases, highly fertile land is not utilized whereas in other regions small farmers on marginal land are exempt from set-aside requirements. This is another example of misallocation of resources. With respect to environmental goals the induced production in marginal areas might even be counterproductive.

It is very likely that the 1992 CAP reform has increased the administrative burden related to agricultural support programs. First, there is a whole variety of compensation payments linked to specific crop and livestock products which complicates their administration. Second, farmers' compliance with set-aside requirements is hard to monitor in practice and there are many incentives to circumvent the obligations. The


89

complexity of the system has initiated the use of monitoring technology via satellite in order to check set-aside requirements on every single farm. These activities are clearly a consequence of new policy incentives and are not related to real agricultural production. It seems that the implementation of the reformed CAP on the farm level has increased paper work for farmers tremendously. More time is spent applying for various government payments and finding an optimal mix of support measures for each specific farm. Such a complicated system is prone to rent-seeking activities, and a simplification would lead to a more efficient resource use.

However, apart from distortions of agricultural markets there is more external pressure for further reform of the CAP. First of all, as a consequence of shifting agricultural protection more towards direct compensation payments, EU budget expenditures on agriculture have increased from about 35 billion ECU in 1992 to about 45 billion ECU in 1996 (European Commission 1997a, p.T/102).<32> The next EU financial round will start in 1999 and the agricultural guideline, i.e. a maximum increase in the agricultural budget at 74 percent of the GDP growth rate, might come under debate. Demand for reduced protection in the farm sector combined with simplified administration and reduced expenditures can be expected. Also in 1999, the next round of negotiations in the WTO is about to start. The current system of compensation payments in EU agriculture will certainly undergo investigation again, and a further liberalization of sectors not touched by the 1992 reform is a likely scenario. Without this the EU might not be able to meet current WTO bindings with regard to subsidized exports (Tangermann and Marsh 1996, p.7-8; Kirschke et al. 1997, p.3).

Another, if not the most important, external motivation for a "reform of the reform" is the expected EU integration of several Central European countries (CEC). Even though the first new members will probably not join the union before 2003 (Agra Europe 4/1997, p.E20), some problems are already obvious. First, a significant increase in budget expenditures can be expected, if the CAP is introduced in the CEC without modification. Estimates of enlargement costs are between 3.5 and 40.5 billion ECU (Buckwell et al. 1994; Tangermann et al. 1994; Tarditi et al. 1994; Mahé et al. 1995; DIW 1996). Second, if the CEC implemented current EU levels of agricultural support, some of them would clearly violate the upper bounds for protection that were


90

agreed upon in the Uruguay Round under the General Agreement on Tariffs and Trade (GATT). From a WTO perspective an integration of the CEC would be very difficult if the level of agricultural support were not reduced by the EU-15 first (Twesten 1998).

3.3. The Discussion about a "Reform of the Reform"

The issues mentioned so far are a starting point for the discussion about a further reform of the CAP. Recently, the EU Commission presented an Agenda 2000 providing perspectives for the general development of the European Union at the beginning of the next millennium (European Commission 1997b). The proposals include a decrease of intervention prices for grains (- 20 percent), beef (- 30 percent) and milk (- 10 percent), the introduction of a uniform compensation payment for grains, oilseeds and voluntary set-aside as well as direct payments per animal for beef cattle and dairy cows. Furthermore, set-aside requirements are set to zero and the milk quota system is being extended until the year 2006, while there are no changes to the sugar quota. With regard to the sum of all direct payments per individual farm an upper limit is discussed in the Agenda 2000, and the EU Commission also proposes more flexibility for regional authorities such that direct payments can be linked to environmental objectives. All in all, the proposals by the Commission do not imply major changes to the current agricultural policy system. Although intervention prices for grains, beef and milk will be significantly lower, quantitative restrictions are not abolished. For dairy cows even a new direct payment is introduced which will probably lead to additional administrative costs.

Kirschke et al. (1997) provide an overview of other proposals for a reform of the 1992 CAP reform that are currently under debate. There is a wide spectrum as regards the extent of the policy changes. While e.g. the government of the German federal state of Bavaria rejects significant modifications to the current CAP and favors "appropriate" border protection (Bayrische Staatsregierung 1995), the British government suggests bold steps towards a liberalized agricultural policy (Agra Europe 3/1997, p.E1-2). The economic council at the German ministry of agriculture recently proposed further decoupling of compensation payments, reduction of border protection, abolishment of set-aside requirements and introduction of a uniform payment on agricultural land (Wissenschaftlicher Beirat 1997).


91

With respect to financing the CAP in some new concepts more financial responsibility on a national or even regional level is discussed (MAFF 1995; Bayrische Staatsregierung 1995). Uniform implementation of all CAP instruments throughout the EU is also under debate, since it is not clear whether, after an Eastern enlargement, the new members will receive all the benefits currently available from the EU budget (European Commission 1996).

Taking into consideration the future requirements for the CAP and the current discussion described earlier, six specific options for a new agricultural policy will be analyzed in this paper ( Table 3.1 ).

Table 3.1: Scenarios for a further development of the Common Agricultural Policy

No subsidies Land subsidy Labor subsidy
Partial liberalization plib_00 plib_lnd plib_lab
Complete liberalization lib_00 lib_lnd lib_lab

Source: Adapted from Kirschke et al. (1997).

Since the Agenda 2000 has been criticized for not going far enough in terms of liberalization of agricultural markets (e.g. Kirschke et al. 1998; Balmann et al. 1998), here a partial liberalization as well as a complete liberalization of the CAP will be considered in the scenarios. These basic options will then be combined with either no compensation, a uniform payment on agricultural land, or a uniform payment on agricultural labor. In the course of the 1992 CAP reform domestic prices for grains, oilseeds and protein crops have been brought down close to world market levels. In addition, the scenario partial liberalization includes the reduction of border protection for so-called "sensitive" commodities like beef, milk products and sugar by 10 percent. All set-aside requirements, compensation payments, and animal subsidies are dropped whereas the production quotas for milk and sugar remain in place. These changes will most likely cause a decrease in farm income. Land and labor subsidies are introduced for compensation. In the scenario complete liberalization all current CAP instruments (including quantity restrictions) are abolished and the same compensation payments as in the partial liberalization scenario are provided.

If the factor subsidies were independent of agricultural production, policy distortions that were created by the product-related subsidies in the 1992 reform could be reduced.


92

Whether or not factor subsidies would be "green box" compatible and, therefore, admissible in future WTO rounds primarily depends on the precise implementation. If the payments were fixed with respect to a historic base period and farmers' eligibility were limited to a certain number of years, they would be truly decoupled from actual production and would fall into the "green box". The duration of the payments could be chosen appropriately in order to enable farmers to adjust.

A considerable advantage of uniform factor payments compared to the current system would be simpler administration. Although this is not the scope of this paper it must be considered an important side-effect in the scenarios discussed below. Transfer efficiency of EU agricultural policies is very likely to be increased (Wissenschaftlicher Beirat 1997, p.9). Another issue could become more important in the case of further regionalization of the CAP. Uniform payments could be easily modified or supplemented on the regional level according to local needs and preferences, especially in combination with environmental objectives. Again, these issues are not considered here.

Having mentioned some arguments in favor of factor subsidies, potentially negative aspects should not be neglected. Although the discussed factor payments may be less distorting in general, in the case of a land subsidy crop production will certainly gain more than livestock production and vice versa in the case of a labor subsidy. Moreover, resource flows from other sectors of the economy into agriculture are likely to occur. Especially in the case of a relatively mobile factor like labor allocation effects could be significant.

3.4. Theoretical Effects of Factor Subsidies

Before turning to empirical simulations, the theoretical effects of a factor subsidy will be discussed using a model developed by Gardner (1990). In Appendix A-3.1, the effects are derived algebraically using an example with one output x and two inputs a and b. The implications of a subsidy for input a on product and factor markets are graphically demonstrated in Figure 3.1 .

There is an output market and two input markets, each with a supply curve S, a demand curve D, and prices Px, Pa and Pb. A subsidy on input a leads to an increase in the use of


93

this factor. All other factors, in this case represented by b, are reduced. Output x is also increased due to lower factor prices. The changes on the markets for x and a go in the same direction as long as the elasticities have "normal" signs. The effects on market b can be reversed in the case that the elasticity of substitution between factors is smaller in absolute terms than the demand elasticity for the output (Gardner 1990, p.109).

Figure 3.1: Price and quantity effects of an input subsidy for factor a on output and factor markets

Source: Adapted from Gardner (1990, p.110).

Prices for output and both inputs are falling. However, on the market for input a one has to distinguish between the effective market price and the factor price Pa perceived by the producer. Due to the subsidy the producer pays a price which is ta units below the market price. As can be seen in the central diagram, rising demand for factor a causes the market price for a to rise whereas the perceived producer price is falling. This is important in a general equilibrium framework where the market price for factors of production is not fixed. Factors move between sectors if their value of marginal product is changing and part of the subsidy payment may be transferred through the market to the factor owners. The size of the effect depends on the elasticities in the model.

What are the effects of land or labor subsidies on the distribution of factor income? A land subsidy paid to the farmer who is actually working the land would be a very transparent measure of support. However, bargaining between land-owners and tenants would probably drive up land rents, and the policy objective of increased farm income would not be achieved in areas with a high share of tenant farms like in Eastern Germany. In general, regional land use is likely to change under uniform land subsidies.


94

Since the payment is independent of any specific kind of production, low-input farming including forestry would become more attractive on marginal land.

A labor subsidy would have very different effects. Since agriculture in the EU has only a small share in the economy-wide labor market, probably wage levels would not be very much affected by a subsidy in agriculture. However, important decisions would have to be made with regard to the duration, transferability and precise calculation of the labor subsidy. The basis for the payment could be the calculated labor requirement for a specific farm in order to avoid moral hazard in determining the labor force. If, for example, the right for support was personally assigned to current farmers and fixed to a reference point in time, it could become a tradable permit which would then be fully decoupled from any production activity. As a consequence, the value of agricultural assets including land would probably drop severely which might cause legal disputes related to property rights and policy credibility in general (Wissenschaftlicher Beirat 1997, p.28-29).

3.5. Implementation of Policy Scenarios in the Applied General Equilibrium Model

A multi-region AGE model seems to be an appropriate tool for the analysis of the policy options discussed earlier. It does not only focus on the agriculture and food sector, but allows for linkages to other parts of the economy. Resource flows between sectors induced by policy changes can be modeled more realistically than in a partial equilibrium setting. The model also covers international trade flows between regions which makes world market prices endogenous instead of keeping them fixed for a certain region. When unilateral policy changes are analyzed the implications for other regions are taken into account. By looking for a new price vector after a policy change the model assures equilibrium trade flows between regions.<33>

Structure of the model

The AGE model used in this paper was developed by the Global Trade Analysis Project (GTAP) at Purdue University.<34> It is a global trade model that can be tailored according


95

to specific needs by changing the aggregation of regions and sectors. In this case, the model aggregation covers 10 regions, each with 10 sectors in the economy. There is only one output per sector. The model regions are Australia/New Zealand, Canada, USA, Japan, EU-12, Austria/Finland/Sweden, EU-associated countries in Central Europe (CEC-7)<35>, the Former Soviet Union, Asia, and the Rest of the World.<36>

The following sectors are distinguished in the model:<37>

The model structure on the production side, a so-called nested structure, is shown in Figure 3.2 .

Figure 3.2: Production structure in the GTAP model

Source: Adapted from Hertel and Tsigas (1997, p.56).

Land, labor and capital as the primary factors of production are combined to a primary aggregate input using a constant-elasticity-of-substitution (CES) function. The same applies to domestic and imported intermediate inputs which are combined to an intermediate aggregate. The two aggregates then contribute to final output via a Leontief function. Capital and labor in the standard model are perfectly mobile between


96

sectors, but the total endowment with these factors within a region is fixed. Land is only used in primary agriculture and in the primary products (opp) sector. Mobility of land between these sectors is limited by an elasticity of transformation.

Main assumptions of the standard model are perfect competition on all markets as well as profit and utility maximizing behavior of producers and consumers, respectively. In modeling international trade flows the so-called Armington assumption is applied (Armington 1969). It is assumed that there is product differentiation by regions. This implies that for a certain product trade flows between two regions can always go in either direction at the same time and there is no net trade flow. The Armington assumption fits nicely with regularly observed discrepancies between world market prices for the same commodity at different locations. The change in world market prices in the GTAP model is calculated as a weighted average price index using bilateral trade flows as weights. The Armington assumption has also been criticized by many authors as it is not very flexible and does not endogenize aspects of imperfect competition and industrial organization into international trade. However, it still seems to be a reasonable compromise as detailed information on the competitive situation for various sectors is currently not available on a global basis (Hertel and Tsigas 1997, p.21-22). The macroeconomic closure of the model is accomplished by a "global bank" which assures an equilibrium of savings and investments between the model regions. In the standard closure used here, the regional shares in global investments are fixed. This closure rule is basically neoclassical, but it allows for some adjustment in the mix of investment on a regional level (Hertel and Tsigas 1997, p.28-30).

In the model, policy instruments such as taxes and subsidies can be implemented at various levels. Government intervention in the GTAP model principally works in the same way as discussed in the previous section. For the policy scenarios under consideration here, three instruments are used in particular: the degree of border protection, determined by the ratio between domestic price and world market price; product-related subsidies and direct payments, modeled as the ratio between domestic market price and effective producer price<38>; and finally, subsidies related to factors of production, calculated as the ratio between the market price and the perceived factor price by the producer.


97

The GTAP model in its standard version is comparative-static. All equations are in percentage change form.<39> In a simulation experiment one or more variables in the model are shocked exogenously by a certain percentage. After determining a new equilibrium, the changes in all endogenous variables are also expressed in percentage changes. The model is solved using the GEMPACK software package (Harrison and Pearson 1996).

Database

The GTAP project has developed a comprehensive database using information from numerous international sources (McDougall 1997). The base year for the data is 1992. However, for further development of the CAP the reference scenario should be the situation in 1996 when the changes of the 1992 reform were supposed to be fully implemented. In order to update the database for the simulations in this paper, the changes of 1992 were implemented in the EU-12, i.e. price decreases for grains, oilseeds, protein seeds and meat products in connection with a set-aside program and direct compensation payments. Austria, Finland and Sweden were also integrated by creating the EU-15. The situation after these updates in 1996 was taken as a reference for modeling the new policy options as defined in Section 3.3 .

Policy scenarios

The technical implementation of the new policy measures in the GTAP model is shown in Table 3.2 . The corresponding command files for the GEMPACK software are provided in Appendix A-3.2.

In the scenarios dealing with a partial liberalization of the CAP, all product-related direct payments are abolished. This includes compensation payments, set-aside payments and animal subsidies. The level of border protection in the GTAP database for non-grain crops (ngc), meat products (met) and milk products (mil) is reduced by 10 percent.<40> Actually, government intervention occurs primarily on the markets for sugar,


98

beef and milk. However, since the sector disaggregation in GTAP does not explicitly cover sugar and beef, the policy change is implemented in those sectors that include these products.

Table 3.2: Model implementation of the scenarios

 

plib_00

plib_lnd

plib_lab lib_00 lib_lnd lib_lab
Direct subsidies a

 

 

 

 

 

 

wht

Abolishment

of all

product-related

subsidies

Abolishmentof allproduct-relatedtaxes andsubsidies
gro
ngc
olp
met

 

mil

 

ofp

 

Border protection b

 

 

 

 

 

 

wht

 

 

 

Abolishmentofborderprotection
gro

 

 

 

ngc

- 10 %

- 10 %

- 10 %

olp

 

 

 

met

- 10 %

- 10 %

- 10 %

mil

- 10 %

- 10 %

- 10 %

ofp

 

 

 

Land subsidy c

 

 

 

 

 

 

wht, gro, ngc, olp

 

75 %

 

 

75 %

 

Labor subsidy c

 

 

 

 

 

 

wht, gro, ngc, olp

 

 

14 %

 

 

14 %

a Compensation payments, set-aside payments and animal payments
b Measured as the ratio domestic price/world market price; a reduction of border protection by 10 percent is equivalent to a reduction of the ratio by 10 percent.
c Direct factor payments, in percent of the relevant factor price

Source: Kirschke et al. (1997); own calculations.

The level of new factor subsidies related to land and labor has been calculated as follows. The estimated budget expenditures on compensation payments, set-aside payments and animal subsidies in the EU in 1996 were about 18.7 billion ECU. This amount has been reduced by 10 percent and then divided by the value of agricultural land as well as the value of agricultural labor in the GTAP database for the EU-15.<41> This yields the level of factor subsidies in relative terms, i.e. the necessary policy


99

shocks to be implemented in the model. In scenario plib_00, no factor subsidization occurs. In scenario plib_lnd a land subsidy is applied at 75 percent of the factor price. The labor subsidy in scenario plib_lab is determined at 14 percent.

In the scenarios covering a complete liberalization of the CAP, all border protection measures in agriculture and food products that remain after the reform in 1992 are abolished. Furthermore, all domestic output taxes and subsidies still in place in the food industry are taken away. In scenario lib_00 no compensation is provided for these policy changes. In the remaining scenarios lib_lnd and lib_lab the subsidization of land and labor is modeled in the same way as already described for the partial liberalization cases.

With respect to land as a production factor one also has to take into account the changes in set-aside regulations. Since set-aside requirements are set to zero in the policy scenarios covered here, the amount of land available for production is increased by about 5 percent. This is equivalent to the real share of the set-aside area in total agricultural land between 1992 and 1996 in the EU.

3.6. Selected Model Results

Output

In Table 3.3 , the percentage changes in output are shown for various sectors in the EU. The introduction of a pure land subsidy has hardly any production effects compared to the no-subsidy scenario. This issue will be discussed below in more detail. In order to avoid redundancy, in the following sections the scenarios without any compensation are only discussed separately if their results differ significantly from plib_lnd and lib_lnd.


100

Table 3.3: Changes in output in the EU under various policy scenarios, in percent

plib_00

plib_lnd

plib_lab

lib_00

lib_lnd

lib_lab
wht

- 4.9

- 4.9

- 3.7

- 4.4

- 4.4

- 3.1
gro

- 4.8

- 4.8

- 3.1

- 3.8

- 3.7

- 1.8
ngc

- 34.8

- 34.8

- 31.4

- 46.6

- 46.5

- 43.6
olp

- 4.7

- 4.7

- 3.5

- 5.3

- 5.3

- 4.0
met

- 4.5

- 4.5

- 3.6

- 5.8

- 5.8

- 5.0
mil

- 4.7

- 4.7

- 4.2

- 13.7

- 13.7

- 12.2
ofp

- 2.8

- 2.8

- 2.1

5.7

5.7

6.3
opp

0.4

0.4

0.5

1.1

1.1

1.2
mnfcs

1.6

1.6

1.3

2.1

2.1

1.8
svces

0.7

0.7

0.6

0.6

0.6

0.6

Source: Own calculations.

In scenarios plib_00 and plib_lnd, production of wheat and other grains is reduced by about 5 percent. Non-grain crops are reduced even more by 35 percent, which is mainly due to the abolishment of specific subsidies for oilseeds and the price reduction for sugar. Livestock production and food industry products drop slightly between 3 and 5 percent. Other sectors' output rises very little, but it has to be kept in mind that these sectors in the model are very large compared to agriculture and food. Consequently small relative changes might imply large changes in volumes and vice versa. A labor subsidy in plib_lab causes a smaller output reduction in agricultural and food products.

Under a complete liberalization, the output reduction in non-grain crops is even stronger than in the previous scenarios at 44 to 47 percent. The additional drop is caused by the complete liberalization of the sugar sector. For grains the changes are slightly less than under a partial liberalization, since, as already mentioned, after the 1992 CAP reform there was hardly any border protection left and these sectors benefit from the sharp reduction in non-grain crops. The increase in production in other food products is caused by the removal of existing taxation in the reference situation.

Trade

Due to output changes, trade volumes between the model regions are also altered. The Armington assumption implies changes in exports as well as imports for all products. In order to avoid confusion, only the overall changes in the trade balance for aggregated


101

sectors of the economy are shown, i.e. agriculture, the food industry and other sectors ( Figure 3.3 ).

It is obvious that the net trade position for agriculture worsens significantly in all scenarios. As could be expected, in the case of a complete liberalization this effect is strongest. Net trade in food products is affected only to a minor extent, while other sectors, mainly manufactures, improve their trade position. The sum of the sector trade balances is close to zero which is in accordance with the macroeconomic closure of the model. The current account can only change in proportion to the changes in overall savings and investments.

Figure 3.3: Changes in trade balance in the EU under various policy scenarios, in Mill. 1992 ECU

Source: Own calculations.

According to the model results, the EU might be able to fulfill WTO requirements with respect to subsidized export quantities in all scenarios. Under plib_lab, the scenario with the smallest export reductions, quantities for crop products fall by - 34 percent (wht), - 17 percent (gro) and - 75 percent (ngc), while milk and meat products are reduced by - 32 and - 38 percent, respectively. All figures are higher (in absolute terms) than the WTO requirements for export quantity reductions (IATRC 1994; AID 1997). However, the results for commodity aggregates in the model cannot simply be compared with real WTO obligations for single products, since WTO rules generally do


102

not allow aggregation over various commodities. Hence, the model results only allow an approximate judgement in this respect.

World market prices

The changes in world market prices that correspond to the model results in output and trade are listed in Table 3.4 . Again the results for the scenarios without subsidies and with land subsidies do hardly differ. In plib_00 and plib_lnd, price increases occur for agricultural products between 3 and 6 percent, except for non-grain crops where the world market price rises by 12.5 percent. Prices for meat and milk products increase by 7 and 9 percent, respectively. These effects are slightly smaller in plib_lab.

Table 3.4: Changes in world market prices under various policy scenarios, in percent

plib_00

plib_lnd

plib_lab

lib_00

lib_lnd

lib_lab
wht

5.6

5.6

3.9

5.8

5.8

4.0
gro

2.8

2.8

1.9

3.3

3.3

2.3
ngc

12.5

12.5

10.9

14.7

14.7

13.1
olp

5.3

5.2

3.3

4.2

4.2

2.3
met

6.9

6.9

5.8

20.1

20.1

18.7
mil

9.0

9.0

7.7

26.7

26.7

25.2
ofp

1.6

1.6

1.3

- 2.6

- 2.6

- 2.9
opp

0.2

0.2

0.2

0.3

0.3

0.2
mnfcs a

0.0

0.0

0.0

0.0

0.0

0.0
svces a

- 0.1

- 0.1

- 0.1

0.0

0.0

0.0

a Minor changes are rounded to 0.0.

Source: Own calculations.

Under a complete liberalization the strongest price effects can be found for meat and milk products. This is caused by the removal of still high protection after the 1992 CAP reform. Prices rise depending on the policy scenario by about 19 to 20 percent for meat and 25 to 27 percent for milk. The price decrease for other food products can be explained by the output increase after abolishment of the initial level of taxation in the database.

Welfare

The production and price effects already discussed correspond to changes in resource allocation that have positive welfare impacts within the EU and the world as a whole


103

( Table 3.5 ). In the GTAP model, the overall change in welfare for a region is calculated as the Equivalent Variation (Just et al. 1982, Chapter 6). This is possible on the basis of an underlying explicit utility function for each region (Hertel and Tsigas 1997, p.35). The major share in global welfare gains from a further CAP reform accrues to the EU itself. Compared to the reference situation the scenario lib_lab is the welfare maximizing option for the EU. In this case, agricultural markets are even less distorted than the rest of the economy and labor is drawn into this sector by the subsidy. In the complete liberalization scenarios, a global welfare gain of about 30.5 billion 1992 ECU is achieved which is about 25 percent higher than under partial liberalization. With the exception of Canada, Japan, and the Former Soviet Union all other model regions gain significantly from CAP liberalization, especially Latin America and Africa, i.e. the Rest-of-the-World region.

Table 3.5: Welfare changes (Equivalent Variation in million 1992 ECU) under various policy scenarios

plib_00

plib_lnd

plib_lab

lib_00

lib_lnd

lib_lab
EU-15

17034

16977

17169

20202

20154

21691
Australia/New Zealand

664

664

560

1621

1621

1490
Canada

108

109

82

- 17

- 17

- 47
USA

924

924

746

1246

1245

1023
Japan

- 105

- 105

- 125

- 1184

- 1184

- 1189
CEC-7

75

75

32

696

695

628
Former Soviet Union

- 215

- 212

- 186

- 200

- 197

- 187
Asia

881

880

744

1019

1019

864
Rest of the World

3204

3209

2614

7080

7083

6244
World total

22571

22521

21634

30463

30418

30517

Source: Own calculations.

Factor markets

An important advantage of an AGE model as compared to partial models is perhaps the possibility of tracing factor movements between sectors and consequently factor price changes. Changes in factor use can also explain output and trade effects. Table 3.6 provides an overview of the change in land use in the EU under various scenarios.


104

Table 3.6: Changes in land use in the EU under various policy scenarios, in percent

plib_00

plib_lnd

plib_lab

lib_00

lib_lnd

lib_lab

wht

21.1

21.4

19.9

27.9

28.4

26.8

gro

21.2

21.6

20.6

29.0

29.5

28.5

ngc

- 6.8

- 6.5

- 5.6

- 13.9

- 13.6

- 12.5

olp

14.8

15.1

13.7

19.6

20.0

18.5

opp

29.7

- 33.7

32.8

41.6

- 27.6

44.9

Source: Own calculations.

In the case of partial liberalization without a subsidy, land use decreases in non-grain crops and increases in other agricultural sectors. More land is also used in the primary products sector, e.g. in forestry. In scenario plib_lnd land moves out of the primary products sector (- 34 percent) into agriculture, while a subsidy on labor shifts land use in the other direction. The scenarios covering a complete liberalization show a similar pattern, but with stronger changes in land use.

While looking at the percentage changes it has to be mentioned, though, that in the reference situation non-grain crops and livestock products (ngc and olp) account for about 90 percent of land endowment in the EU, since they are aggregates consisting of several products. The primary products sector, on the other hand, has a relatively small share in overall land use. Relatively small percentage changes for ngc in Table 3.6 correspond to comparatively large absolute numbers, and vice versa for opp .

In the simulated scenarios also major shifts in labor use across sectors can be found ( Table 3.7 ). When interpreting these results one has to take into consideration that an AGE model with perfect factor markets by definition always achieves full employment of all factors. Total labor use in agriculture decreases as a consequence of further liberalization. The strongest effects occur for non-grain crops. Although the change in total labor use is reduced through a direct subsidy, still labor moves out of agriculture, on average by about 20 percent in plib_lab (compared to 24 percent in plib_00 and plib_lnd) and 27 percent in lib_lab (compared to 31 percent in lib_00 and lib_lnd). Moreover, under a partial liberalization there is also a decrease in total labor use in the food industry by about 4 percent, whereas under complete liberalization no change occurs. The reduction in milk and meat products is compensated by other food products.


105

Table 3.7: Changes in labor use in the EU under various policy scenarios, in percent

plib_00

plib_lnd

plib_lab

lib_00

lib_lnd

lib_lab

wht

- 7.5

- 7.5

- 4.1

- 7.1

- 7.1

- 3.6

gro

- 7.7

- 7.7

- 3.6

- 6.8

- 6.8

- 2.8

ngc

- 37.5

- 37.5

- 32.5

- 49.3

- 49.3

- 44.9

olp

- 7.1

- 7.1

- 3.5

- 8.1

- 8.1

- 4.5

met

- 9.5

- 9.4

- 9.4

- 14.8

- 14.7

- 13.5

mil

- 4.6

- 4.6

- 4.6

- 13.5

- 13.5

- 13.0

ofp

- 2.6

- 2.6

- 2.6

5.9

5.9

6.5

opp

0.6

0.6

0.5

1.4

1.4

1.3

mnfcs

1.7

1.7

1.4

2.2

2.2

1.9

svces

0.9

0.9

0.7

0.9

0.9

0.7

Source: Own calculations.

Finally, changes in factor prices will be briefly discussed. In Table 3.8 changes in market prices (Pm) as well as the perceived producer prices (Pp) for land and labor are given.

Table 3.8: Changes in factor prices in the EU under various policy scenarios, in percent

plib_00

plib_lnd

plib_lab

lib_00

lib_lnd

lib_lab
Land (Pm)a

- 38.4

143.9

- 41.1

- 48.8

102.4

- 51.1
Land (Pp) a

- 44.0

- 43.9

- 46.4

- 53.9

- 53.9

- 55.9
Labor (Pm)

- 1.4

- 1.4

- 1.4

- 1.4

- 1.4

- 1.1
Labor (Pp)

- 1.4

- 1.4

- 15.0

- 1.4

- 1.4

- 15.0

a Pm = market price; Pp = perceived producer price.

Source: Own calculations.

In the scenarios without any factor subsidies, market prices and perceived producer prices change in the same way, small differences between Pm and Pp for land are due to the removal of set-aside requirements. Since output prices are falling after further liberalization the value of marginal product for land also drops in all scenarios. This translates within the model into a decrease in the market price for land, i.e. the land rent. The strongest decrease is about 51 percent in scenario lib_lab. However, a land subsidy causes an increased demand for land in agriculture which can only be met by a very inelastic supply from the small primary products sector.<42> Rising demand together with the imperfect mobility of land drives up the market price heavily in pliblnd and liblnd


106

as shown in Table 3.8 . On the other hand, the land subsidy effectively lowers the perceived producer price such that the overall change in Pp is very close to the scenarios without any subsidies. This also explains the fact that there are hardly any additional output effects in plib_lnd and lib_lnd as compared to plib_00 and lib_00 ( Table 3.3 ).

The substitutability between primary factors also affects the demand for land and consequently the price changes. In the GTAP database, the default value for the elasticity of substitution between primary factors in agriculture is 0.56. A sensitivity analysis has been conducted in order to evaluate the influence of this parameter on the land price. When the elasticity of substitution was increased to 0.8 the market price for land in plib_lnd rose by 182 percent. In the opposite case, when the elasticity was set at 0.3, the price increase was 67 percent. Apparently, the model results are fairly sensitive with respect to this parameter in this specific setting. In any case, the simulation results support the theoretical effects that were discussed earlier: a high proportion of the land subsidy is transferred to land-owners who benefit from higher market prices.

Labor, on the other hand, can move freely between sectors in the model. Hence, in all scenarios the equilibrium price is only slightly below the reference situation. Since labor supply for agriculture is almost perfectly elastic and therefore the market price is almost fixed, a labor subsidy of 14 percent is fully translated into a lower producer price for labor. However, the assumption of perfect labor mobility is probably not very realistic in agriculture and the results might be affected if labor were more sector specific.

3.7. Discussion and Further Implications

The simulation results support the view that after the CAP reform in 1992 there is still considerable potential for further welfare gains from EU agricultural policy reform, especially in the areas of non-grain crops and animal products. In case of complete liberalization of the CAP, production and exports fall quite heavily whereas imports are rising. For meat and milk products world market prices would increase by 20 to 27 percent. Global welfare gains range from about 22 billion ECU under partial liberalization to about 31 billion ECU under complete liberalization, even though the scenarios covered in this paper only describe unilateral policy reform on the side of the EU. However, the GTAP model only calculates the changes in overall regional welfare, but it does not provide a specific indicator for changes in producer income such as


107

producer surplus. Implications of the presented policy scenarios for farm income were analyzed in the study by Kirschke et al. (1997), based on linear programming models on the farm level for Germany. The authors conclude that even under a partial liberalization many farms could not survive without any compensation. Even in more productive locations most farms run into cash flow problems.

In some respect the subsidy payments proposed in this paper are less distortionary than current payments, as they are related to land or labor and discriminate less between specific agricultural products. However, a land subsidy is certainly biased towards crops whereas a labor subsidy is more favorable for livestock production. Moreover, if factor subsidies are only paid in the case of actually occurring production, there are significant shifts of resources from the rest of the economy into agriculture, especially in the case of a labor subsidy.

In summary, there are only minor differences in the model results between the scenarios with land and labor subsidies. Land as a production factor is almost exclusively used in agriculture. Changes in supply are only possible through reduced set-aside and, to a minor extent, shifting land from other primary products (e.g. forestry) into farming. Although the subsidy lowers the perceived producer price for land, increased demand also causes strong increases in the market price for land. Hence, the subsidy on land is partly transferred to the owners of land. To what extent the increases in land rents can be transferred from farmers to land-owners depends on the regulatory details of the policy measure. In any case, it cannot be excluded that new farmers would face barriers to entry due to higher land rents as a consequence of the subsidy. Labor use in agriculture is heavily reduced in all scenarios discussed in this paper. Although the movement of labor force out of agriculture slows down if labor is directly subsidized, output changes are only slightly affected compared to the other scenarios.

For both kinds of government support presented here, the details of regulation and administration have to be further discussed and analyzed, i.e. upper bounds related to a specific reference year or gradual reduction over time. For these purposes farm-related models would probably be more appropriate than an AGE approach (e.g. Balmann et al. 1998). Nevertheless, the model results in this paper provide some initial insights into the medium-term effects of the proposed policy instruments.


108

Based on the model calculations the likely effects on the EU budget can be estimated ( Table 3.9 ). Since the GTAP model does not explicitly provide government expenditures and the tariff equivalents in the database also include non-tariff barriers, some side-calculations have to be done in order to relate the model results to the real EU budget in the reference situation. Therefore, the relative changes in government intervention from the model calculations are applied to the official data on the EU budget in 1996. With respect to other budget expenditures that are not directly affected by the calculations, e.g. market interventions and structural funds, some additional assumptions are necessary as to how they change under the various scenarios. These are partly taken from Kirschke et al. (1997).

The biggest share in budget savings results from the removal of product-related payments in all scenarios as well as the abolishment of export subsidies in the case of a complete liberalization of the CAP. On the other hand, new outlays arise for direct factor payments. In scenarios plib_lnd and plib_lab, budget savings sum up to about 7 billion ECU, i.e. 17 percent of current expenditures in 1996. In the case of a complete liberalization with a labor or land subsidy, savings would be at about 17 billion ECU which is equivalent to 42 percent of the current budget.

Table 3.9: Budget effects of various policy scenarios in the EU, in Mill. 1992 ECU

Status
quo 1996

plib_00

plib_lnd

plib_lab

lib_00

lib_lnd

lib_lab
Direct paymentsa 18 677

 

 

 

 

 

 

Export subsidies 7 060

3 774

3 775

3 925

 

 

 

Import tariffs - 864

- 1 191

- 1 191

- 1 119

 

 

 

Land subsidies

 

 

16 511

 

 

16 511

 

Labor subsidies

 

 

 

16 779

 

 

16 779
Subtotal 24 873

2 582

19 095

19 585

 

16 511

16 779
Other expendituresb 19 174

17 257

17 257

17 257

8 300

8 300

8 300
Other revenuesc - 1 287

- 644

- 644

- 644

 

 

 

Total 42 760

19 195

35 708

36 198

8 300

24 811

25 079

a Compensation, set-aside and animal payments from the 1992 CAP reform.
b Market intervention and structural funds.
c Sugar levies.

Sources: Kirschke et al. (1997); European Commission (1997a); own calculations.

If all the conditions and restrictions surrounding a Common Agricultural Policy in the future are taken into account, it is very difficult to come up with consistent policy


109

prescriptions in favor of a specific scenario on the basis of the presented model results. The budget savings effect is largest in case of a complete liberalization. However, political viability of this option within the EU seems to be questionable at least. With regard to meeting current WTO obligations the model results indicate that even partial liberalization by the EU would be sufficient. Whether or not factor subsidies would be WTO compatible remains unclear and depends on the specific policy design.

Two arguments in favor of a land subsidy can be mentioned: very small output enhancing effects and, most likely, easier administration. In addition to that, a land subsidy seems to make sense with respect to the situation in potential new EU member countries in Central and Eastern Europe. In case of an Eastern enlargement, regional differentiation of subsidy levels should probably be considered and could be easily implemented. Finally, it can be assumed that environmental standards related to agriculture, once they are introduced, could be easily linked to a direct subsidy on agricultural land. The payment could be supplemented on a regional level if certain location-specific environmental criteria are met by farmers.

The model simulations covered in this paper are certainly incomplete and there is wide scope for improvement and further analysis. First, the assumption of perfect mobility of labor between agriculture and the rest of the economy can be questioned, since this is right at the core of the debate about farm income disparity in agriculture. Modeling restricted labor mobility could be a starting point for further simulations. This would certainly modify the implications of a labor subsidy. A further step would be the simulation of an EU Eastern enlargement under the proposed policy options.

3.8. References

Agra Europe (1997): No. 3/97, 4/97. Bonn.

Armington, P.A. (1969): "A Theory of Demand for Products Distinguished by Place of Production. " In: IMF Staff Papers 16, p.159-178.

AID (Auswertungs- und Informationsdienst für Ernährung, Landwirtschaft und Forsten) (1997): Agrarmarktordnungen in der Europäischen Union und Agrarmärkte in Deutschland. In Zusammenarbeit mit der Zentralen Markt- und Preisberichterstattungsstelle (ZMP). Bonn.


110

Balmann, A.; Lotze, H.; Noleppa, S. (1998): "Agrarsektormodellierung auf der Basis "typischer Betriebe" - Teil 2: Auswirkungen der "Agenda 2000" auf die Landwirtschaft in den neuen Bundesländern. " In: Agrarwirtschaft 47 (6), p.251-258.

Bayerische Staatsregierung (1995): Memorandum der Bayerischen Staatsregierung zur Neuausrichtung der Agrarpolitik der Europäischen Union. Bayerisches Staatsministerium für Ernährung, Landwirtschaft und Forsten. München.

Brockmeier, M. (1995): Neuere Entwicklungen der Angewandten Allgemeinen Gleichgewichtsmodelle im Agrar- und Ernährungsbereich. In: Großkopf, W.; Hanf, C.-H.; Heidhues, F.; Zeddies, J. (eds.): Die Landwirtschaft nach der EU-Agrarreform. Münster-Hiltrup, p.77-92.

Buckwell, A.; Haynes, J.; Davidova, S.; Courboin, T.; Kwiecinski, A. (1994): Feasibility of an Agricultural Strategy to Prepare the Countries of Central and Eastern Europe for EU Accession. Study for DG I of the European Commission. Brussels.

BMELF (Bundesministerium für Ernährung, Landwirtschaft und Forsten) (1997): Agrarbericht. Bonn.

DIW (Deutsches Institut für Wirtschaftsforschung) (1996): Die wirtschaftliche Integration der assoziierten Länder Mittel- und Osteuropas in die Europäische Union: außen-und binnenwirtschaftliche Auswirkungen im Hinblick auf eine künftige EU-Mitgliedschaft. Gutachten im Auftrag des Bundesministeriums für Landwirtschaft. Berlin.

European Commission (1996): The CAP and Enlargement: Economic Effects of the Compensatory Payments. Brussels.

European Commission (1997a): The Situation of Agriculture in the European Union: Report 1996. Brussels.

European Commission (1997b): Agenda 2000. DOC/97/6. Brussels.

Gardner, B.L. (1990): The Economics of Agricultural Policies. New York.

Harrison, W.J.; Pearson, K.R. (1996): "Computing Solutions for Large General Equilibrium Models using GEMPACK. " In: Computational Economics 9 , p.83-127.

Hertel, T.W.; Tsigas, M.E. (1997): Structure of GTAP. In: Hertel, T.W. (ed.): Global Trade Analysis: Modeling and Applications. Cambridge, Massachusetts, p.9-75.

IATRC (International Agricultural Trade Research Consortium) (1994): The Uruguay Round Agreement on Agriculture: An Evaluation. Commissioned Paper Number 9. Minnesota.


111

Just, R.E.; Hueth, D.L.; Schmitz, A. (1982): Applied Welfare Economics and Public Policy. Englewood Cliffs, New Jersey.

Kirschke, D.; Hagedorn, K.; Odening, M.; von Witzke, H. (1997): Optionen für die Weiterentwicklung der EU-Agrarpolitik. Kiel.

Kirschke, D.; Odening, M.; Doluschitz, R.; Fock, T.; Hagedorn, K.; Rost, D.; von Witzke, H. (1998): Untersuchungen zur Weiterentwicklung der EU-Agrarpolitik aus Sicht der neuen Bundesländer. Kiel.

Mahé, L.P.; Cordier, J.; Guyomard, H.; Roe, T. (1995): L’agriculture et l’élargissement de l’Union européene aux pays d’Europe centrale et orientale: transition en vue de l’intégration ou l’intégration pour la transition? Study for DG I of the European Commission. Brussels.

Mahé, L.P.; Roe, T.L. (1996): The Political Economy of Reforming the 1992 CAP Reform. Paper presented at the AAEA Meetings, July 28-31, San Antonio, Texas.

McDougall, R.A. (ed.) (1997): Global Trade, Assistance, and Protection: The GTAP 3 Data Base. Purdue University, West Lafayette, Indiana.

MAFF (Ministry of Agriculture, Fisheries and Food) (ed.) (1995): Europäische Landwirtschaft: Argumentation für radikalere Reformen. Schlußfolgerungen der vom Minister für Landwirtschaft, Fischerei und Ernährung eingesetzten Gruppe zur Überprüfung der gemeinsamen Agrarpolitik. London.

Tangermann, S.; Josling, T.E.; Münch, W. (1994): Pre-accession Agricultural Policies for Central Europe and the European Union. Study for DG I of the European Commission. Brussels.

Tangermann, S.; Marsh, J. (1996): Enlargement and the CAP. Working Document prepared for the Land Use and Food Policy Inter-group at the European Parliament. Brussels.

Tarditi, S.; Senior-Nello, S.; Marsh, J.; Blaas, G.; Kelly, L.; Nucifora, A.; Thiele, H.; Bastiani, A. (1994): Agricultural Strategies for the Enlargement of the European Union to Central and Eastern European Countries. Study for DG I of the European Commission. Brussels.

Twesten, H. (1998): Implikationen der WTO-Verpflichtungen der Visegrad-Staaten für den Beitritt zur Europäischen Union. In: Heißenhuber, A.; Hoffmann, H.; von Urff, W. (eds.): Land- und Ernährungswirtschaft in einer erweiterten EU. Münster-Hiltrup , p.125-133.


112

Uhlmann, F. (1997): "Die Märkte für Getreide, Ölsaaten und Kartoffeln. " In: Agrarwirtschaft 46 (1), p.15-31.

Wissenschaftlicher Beirat beim Bundesministerium für Ernährung, Landwirtschaft und Forsten (1997): Zur Weiterentwicklung der EU-Agrarreform. Angewandte Wissenschaft, Heft 459. Bonn.


113

Appendix A-3.1 Derivation of the Theoretical Effects of an Input Subsidy

The numerical effects of an input subsidy as illustrated in Figure 3.1 can be derived using a model of an agricultural sector with one output and two inputs. The derivations are explained in detail in Gardner (1990, Chapter 4). Although this model is very simple compared to the AGE model used for policy simulations in this paper, the principal reactions caused by an input subsidy are similar.

The structure of the model is given by the following six equations:

(1)

Production function

(2)

Value of marginal product for a = factor price for a

(3)

Value of marginal product for b = factor price for b

(4)

Factor supply for a

(5)

Factor supply for b

(6)

Product demand

with output quantity x and price Px , input quantities a and b and prices Pa and Pb , and partial differentials fa and fb .

The underlying assumptions are perfect competition in input and output markets, profit maximizing producers and identical firms throughout. The production function is assumed to be twice differentiable and concave. This implies a linear homogeneous industry production function. The elasticities of x with respect to inputs a and b are equal to their factor shares and the value of output equals the sum of factor receipts (xPx=aPa+bPb). If an equilibrium exists one can find it in the model by solving the above system of six equations in six endogenous variables.

In order to derive comparative static effects the above system is totally differentiated:

(1')

(2')


114

(3')

(4')

(5')

(6')

with single subscripts denoting first derivatives and double subscripts denoting second derivatives.

The total derivatives can be converted into percentage changes and rearranged into the following equations:

(1'')

(2'')

(3'')

(4'')

(5'')

(6'')

with Ka and Kb being the relative shares of a and b in total costs, sigma the Allen elasticity of factor substitution, ea and eb the elasticities of factor supply and eta the elasticity of product demand.

In order to analyze an input subsidy on factor a an exogenous policy instruments needs to be introduced. In equations (1'') through (6'') is substituted for . The exogenous variable ta is the policy "wedge" between price and marginal cost on the input market a. Finally, equations (1'') through (6'') can be divided by the change in the


115

policy instrument and the equations can be solved for the endogenous variables. This yields solutions in elasticity form, i.e. the percentage change of an endogenous variable caused by a percentage change in the policy instrument.

(1''')

(2''')

(3''')

(4''')

(5''')

(6''')

with .

With given values for the parameters Ka , Kb , ea , eb , eta and sigma, the comparative-static effects of a change in the input subsidy can now be calculated. In the "normal" case one would assume that ea , eb and sigma are positive, and eta is negative.


116

Appendix A-3.2 GEMPACK Command Files for Policy Scenarios

This appendix lists the command files for implementing the policy scenarios discussed in Section 3.3 in the GEMPACK modeling software. The first file (plib_00.cmf) is completely provided, while the details for the other command files are only given where they differ from the first scenario.





!_____________________________plib_00.cmf______________________________!

! This GEMPACK command file simulates partial liberalization without

! compensation

!______________________________________________________________________!

!

! Which model

auxiliary files = tp1010eu;

!

! Solution method information.

method = euler ;

steps = 10 20 30;

!

! files

file gtapSETS = set3-03a.har;

file gtapPARM = par3-03.dat;

file gtapDATA = eu3int1.upd;

!

! The data file "eu3int1.upd" includes EU-12 enlargement to EU-15 and

! implementation of the 1992 CAP reform from previous simulations

!

! Next is necessary if reusing pivots is to succeed in multistep simulation iz1 = no ;

!Equations File  = TP3-03 ;

          model = TP1010eu ;

          version = 1 ;

          Identifier = GTAPEU15.TAB with 10x10 data ;

!

Verbal Description =

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

 Model TP1010eu                            

 Experiment "plib_00": Partial liberalization without compensation

 Solution Method: euler 10 20 30                 

+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++;

!

! Closure rule

!Exogenous pop

           psave

          saveslack govslack incomeslack

          profitslack endwslack tradslack cgdslack

          ao af afe ava atr

          to tms txs tx tm tf

          qo(endw_comm,reg)       ;

Rest Endogenous ;





! Shocks for plib_00

! NOTE: "select from file xxx" in all cases means complete reduction from

! initial values

! Removal of set-aside requirements (These have been introduced before in

! the 1992 CAP reform)


117

Shock qo("land", EU15) = uniform 5.26 ;

Shock tf("land", "wht", EU15) = select from file tfeu15a.shk ;    

Shock tf("land", "gro", EU15) = select from file tfeu15a.shk ;    

Shock tf("land", "ngc", EU15) = select from file tfeu15a.shk ;    





! Cereals

Shock to("wht", EU15) = select from file toeu15a.shk ;

Shock to("gro", EU15) = select from file toeu15a.shk ;

! Oilseeds

Shock to("ngc", EU15) = select from file toeu15a.shk ;





! Sugar

Shock txs("ngc", EU15, NON_EU15) = uniform -10 ;

Shock tms("ngc", NON_EU15, EU15) = uniform -10 ;





! Beef

Shock txs("met", EU15, NON_EU15) = uniform -10 ;

Shock tms("met", NON_EU15, EU15) = uniform -10 ;





! Milk

Shock txs("mil", EU15, NON_EU15) = uniform -10 ;

Shock tms("mil", NON_EU15, EU15) = uniform -10 ;





! Animal premia

Shock to("olp", EU15) = select from file toeu15a.shk ;

!

! Output File Specification (they are experiment dependent)

!

Save Environment File   plib_00 ;

Solution         File = plib_00 ;

Log              File = plib_00.LOG ;

!

! Updated data files

!

Updated file gtapSETS = set3-03a.upd;

Updated file gtapPARM = par3-03.upd;

Updated file gtapDATA = plib_00.upd;

!

Display file = tp3-03.dis ;

!

! Other Options

!

Extrapolation accuracy file = YES ;

CPU = yes ;

!___________________________End of Command file.__________________






118





!_________________________plib_lnd.cmf_____________________________________!

! This GEMPACK command file simulates partial liberalization with land 

! subsidy.

!__________________________________________________________________________!

!





[...]





! Shocks for plib_lnd

! NOTE: "select from file xxx" in all cases means complete reduction from

! initial values

! Removal of set-aside requirements (These have been introduced before in

! the 1992 CAP reform) PLUS land subsidy 

Shock qo("land", EU15) = uniform 5.26 ;

Shock tf("land", "wht", EU15) = uniform -79.17 ;    

Shock tf("land", "gro", EU15) = uniform -79.17 ;    

Shock tf("land", "ngc", EU15) = uniform -78.26 ;    

Shock tf("land", "olp", EU15) = uniform -75 ;    





! Cereals

Shock to("wht", EU15) = select from file toeu15a.shk ;

Shock to("gro", EU15) = select from file toeu15a.shk ;





! Oilseeds

Shock to("ngc", EU15) = select from file toeu15a.shk ;





! Sugar

Shock txs("ngc", EU15, NON_EU15) = uniform -10 ;

Shock tms("ngc", NON_EU15, EU15) = uniform -10 ;





! Beef

Shock txs("met", EU15, NON_EU15) = uniform -10 ;

Shock tms("met", NON_EU15, EU15) = uniform -10 ;





! Milk

Shock txs("mil", EU15, NON_EU15) = uniform -10 ;

Shock tms("mil", NON_EU15, EU15) = uniform -10 ;





! Animal premia

Shock to("olp", EU15) = select from file toeu15a.shk ;





[...]

!___________________________End of Command file.__________________






119





!________________________plib_lab.cmf______________________________________!

! This GEMPACK command file simulates partial liberalization with labor

! subsidy.!__________________________________________________________________________!

!





[...]





! Shocks for plib_lab

! NOTE: "select from file xxx" in all cases means complete reduction from

! initial values! Removal of set-aside requirements (These have been introduced before in

! the 1992 CAP reform) 

Shock qo("land", EU15) = uniform 5.26 ;

Shock tf("land", "wht", EU15) = select from file tfeu15a.shk ;    

Shock tf("land", "gro", EU15) = select from file tfeu15a.shk ;    

Shock tf("land", "ngc", EU15) = select from file tfeu15a.shk ;    





! Cereals

Shock to("wht", EU15) = select from file toeu15a.shk ;

Shock to("gro", EU15) = select from file toeu15a.shk ;





! Oilseeds

Shock to("ngc", EU15) = select from file toeu15a.shk ;





! Sugar

Shock txs("ngc", EU15, NON_EU15) = uniform -10 ;

Shock tms("ngc", NON_EU15, EU15) = uniform -10 ;





! Beef

Shock txs("met", EU15, NON_EU15) = uniform -10 ;

Shock tms("met", NON_EU15, EU15) = uniform -10 ;





! Milk

Shock txs("mil", EU15, NON_EU15) = uniform -10 ;

Shock tms("mil", NON_EU15, EU15) = uniform -10 ;





! Animal premia

Shock to("olp", EU15) = select from file toeu15a.shk ;





! Labor subsidy

Shock tf("labor", "wht", EU15) = uniform -33 ;    

Shock tf("labor", "gro", EU15) = uniform -33 ;    

Shock tf("labor", "ngc", EU15) = uniform -33 ;    

Shock tf("labor", "olp", EU15) = uniform -33 ;    





[...]

!___________________________End of Command file.__________________


120





!_____________________lib_00.cmf__________________________________________!

! This GEMPACK command file simulates complete liberalization without

! compensation.

!_________________________________________________________________________!

!





[...]





! Shocks for lib_00

! NOTE: "select from file xxx" in all cases means complete reduction from

! initial values





! Removal of set-aside requirements (These have been introduced before in

! the 1992 CAP reform) 

Shock qo("land", EU15) = uniform  5.26 ;

Shock tf("land", "wht", EU15) = select from file tfeu15a.shk ;    

Shock tf("land", "gro", EU15) = select from file tfeu15a.shk ;    

Shock tf("land", "ngc", EU15) = select from file tfeu15a.shk ;    





! Complete liberalization in all agriculture and food sectors

Shock to(AG_FOOD, EU15) = select from file toeu15a.shk ;

Shock txs(AG_FOOD, EU15, NON_EU15) = select from file txseu15a.shk ;

Shock tms(AG_FOOD, NON_EU15, EU15) = select from file tmseu15a.shk ;





[...]

!___________________________End of Command file.__________________





!_______________________lib_lnd.cmf_______________________________________!

! This GEMPACK command file simulates complete liberalization with land

! subsidy.

!_________________________________________________________________________!

!





[...]





! Shocks for lib_lnd

! NOTE: "select from file xxx" in all cases means complete reduction from

! initial values

! Removal of set-aside requirements (These have been introduced before in

! the 1992 CAP reform) PLUS land subsidy

Shock qo("land", EU15) = uniform  5.26 ;

Shock tf("land", "wht", EU15) = uniform  -79.17 ;    

Shock tf("land", "gro", EU15) = uniform  -79.17 ;    

Shock tf("land", "ngc", EU15) = uniform  -78.26 ;    

Shock tf("land", "olp", EU15) = uniform  -75 ;    

! Complete liberalization in all agriculture and food sectors

Shock to(AG_FOOD, EU15) = select from file toeu15a.shk ;

Shock txs(AG_FOOD, EU15, NON_EU15) = select from file txseu15a.shk ;

Shock tms(AG_FOOD, NON_EU15, EU15) = select from file tmseu15a.shk ;

[...]

!___________________________End of Command file.__________________


121





!_______________________lib_lab.cmf________________________________________!

! This GEMPACK command file simulates complete liberalization with labor

! subsidy.

!__________________________________________________________________________!

!





[...]





! Shocks for lib_lab

! NOTE: "select from file xxx" in all cases means complete reduction from

! initial values! 

Removal of set-aside requirements (These have been introduced before in

! the 1992 CAP reform)

Shock qo("land", EU15) = uniform  5.26 ;

Shock tf("land", "wht", EU15) = select from file tfeu15a.shk ;    

Shock tf("land", "gro", EU15) = select from file tfeu15a.shk ;    

Shock tf("land", "ngc", EU15) = select from file tfeu15a.shk ;    





! Complete liberalization in all agriculture and food sectors

Shock to(AG_FOOD, EU15) = select from file toeu15a.shk ;

Shock txs(AG_FOOD, EU15, NON_EU15) = select from file txseu15a.shk ;

Shock tms(AG_FOOD, NON_EU15, EU15) = select from file tmseu15a.shk ;





! Labor subsidy

Shock tf("labor", "wht", EU15) = uniform -33 ;    

Shock tf("labor", "gro", EU15) = uniform -33 ;    

Shock tf("labor", "ngc", EU15) = uniform -33 ;    

Shock tf("labor", "olp", EU15) = uniform -33 ;    





[...]

!___________________________End of Command file.__________________


Fußnoten:

<32>

This is, of course, partly due to the integration of Austria, Finland and Sweden.

<33>

For an overview of AGE applications to agricultural and food sectors see Brockmeier (1995).

<34>

A detailed description of the model is given in Hertel and Tsigas (1997) or at the internet site http://www.agecon.purdue.edu/gtap.

<35>

These are Bulgaria, Czech Republic, Hungary, Poland, Romania, Slovakia, Slovenia.

<36>

The Rest-of-the-World region consists mainly of Latin America and Africa.

<37>

Acronyms for the sectors are in brackets.

<38>

This is also called the agents' price in the GTAP terminology.

<39>

See Hertel and Tsigas (1997) for a detailed discussion of the model structure.

<40>

The level of border protection is determined by the ratio of the domestic price to the world market price. If, for example, in the initial situation the domestic price is 50 percent above the world market level, the ratio is 1.5 . A reduction of border protection by 10 percent is equivalent to reducing the ratio to 1.35 . If the world market price were exogenous this would exactly cause a 10 percent drop in the domestic price.

<41>

The reduction in expenditures by 10 percent was chosen arbitrarily, since it was assumed that some degree of budget reduction will be likely in any further CAP reform.

<42>

About 95 percent of the total endowment of land in the model belongs to the agricultural sector and is therefore eligible for the subsidy.


[Titelseite] [Widmung] [Danksagung] [1] [2] [3] [4] [5] [6] [Abkürzungsverzeichnis] [Selbständigkeitserklärung]

© Die inhaltliche Zusammenstellung und Aufmachung dieser Publikation sowie die elektronische Verarbeitung sind urheberrechtlich geschützt. Jede Verwertung, die nicht ausdrücklich vom Urheberrechtsgesetz zugelassen ist, bedarf der vorherigen Zustimmung. Das gilt insbesondere für die Vervielfältigung, die Bearbeitung und Einspeicherung und Verarbeitung in elektronische Systeme.

DiML DTD Version 2.0
Zertifizierter Dokumentenserver
der Humboldt-Universität zu Berlin
HTML - Version erstellt am:
Wed Apr 26 13:12:53 2000