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Production Impact of Green and Near Green Policies James Rude November 15-6, 2001.

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Presentation on theme: "Production Impact of Green and Near Green Policies James Rude November 15-6, 2001."— Presentation transcript:

1 Production Impact of Green and Near Green Policies James Rude November 15-6, 2001

2 Outline Distribution of domestic support Distribution of green box support Production effects of compensatory payments When green isn’t green

3 How EU support stacks up AMS limit 72 1998/99 Notification

4 Pieces of Green 1998/99 Notification: Total Green 19.2 Billion Euro

5 Blue on Blue FOC: equal compensation payments, s c =s o cancel out  neutrality absence of compensation payments from MVP x equations  input use, and yields, are independent of payments

6 Blue on Blue (continued) Do comparative statics on this system of equations Jointness caused by shared fixed input, H,  crops are strong substitutes. Crop specific subsidies may off-set each other or at least reduce the impact. Compensatory payments are partially decoupled (yield yes; area no) with off-setting effects on substitute crops

7 Blue Man Group Several studies examine the empirical impact of per hectare compensation payments on crop mix – Guyomard, Baudry, and Carpentier (1996) France Similar approach but uses dual with restricted profit function  analytical results similar ( s ’s may cancel) Evaluate impacts on basis of crop specific profit functions estimated for pre-CAP reform period –supply response small due to off-setting cross effects and fixed total area – Oude Lansink and Peerlings (1996) Netherlands Estimation with pre-CAP reform data –25% reduction in area payments  16%  cereal and oilseeds area

8 Blue on Blue (continued) – Moro and Sckokai (1999) Italy Similar estimation approach Post CAP reform data Professional Producers Low responsiveness to compensatory payments –cross elasticities with respect to compensatory payments are negative and small

9 Heart Ache on Heart Ache Even if the s ’s cancel each other out, they still represent a direct transfer to agriculture Are these transfers production neutral if the recipient can not affect the size of the pay-out? – idea of lump sum transfers When isn’t a direct payment neutral? –Wealth effects reduce risk aversion –Transfer reduces the variability in income –Wealth transfer relaxes debt constraints –Expectation effect: increase base in anticipation of new pay-out related to this new higher base –Long Run entry and exit decisions

10 Till the End of Time 1% Decoupled programs: agri-monetary aids 26% General Services: –research, pest and disease control, extension, inspection, market promotion, infrastructure services –public good arguments  optimal value of service too little worse than too much what is public good: non-rival/non-exclusive

11 Desperate Measures 0.1% public stock holding - surplus reduction 1% domestic food aid - surplus reduction 1% disaster assistance - low slung safety net 6% retirement program - structural adjustment -direct payments - unintended consequences

12 A Redder Shade of Green 28% Investment Aids - where is market failure? - economy wide macro structural adjustment -OK - infrastructure? 26% environmental aids - direct payments compensating for compliance - can design these programs to transfer a lot of money or little money and get same result 11% regional development - where is the market failure? - AoA contradicts the SCM

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