The Impact of CAP Reform Using a General Equilibrium Model Disaggregated at the Regional Level Stefania Lovo, Riccardo Magnani, Eleonora Matteazzi, Federico Perali _______________________________________________________________ Pavia, October 22 2007

The Micro-Macro Link as a Research Program

The Micro-Macro Link Exact aggregation theory: a micro-fundated macro model (the regional farm-househld models are inserted in the macro model). The micro (macro) level is obtained by zooming in (out) the macro (micro) level: an encompassing approach One single source of information feeds both the micro and macro behavioral model: the ISMEA survey about the socio-economic conditions of Italian Agriculture was designed ad hoc to construct the micro/macro link and to support a collective approach to the theory of the household.

Regional Model We regionalize the macro general equilibrium model including the production /consumption technologies specific to the North, Centre and South of Italy We do this by incorporating the SAM specific to each Italian region and corresponding household type in the macro model The model is updated to year 2003 Includes all CAP programs (also tobacco and beets).

The Regional SAMs

A Partition of the North SAM Table 1. SAM (PROPORZIONI) macroregione 1: NORD   sector1 sector2 sector3 sector4 sector5 sector6 1 frumento tenero 0.713 2 frumento duro 0.017 3 riso 0.999 4 mais e altri cereali 0.751 5 foraggi umidi 0.35 6 foraggi secchi 0.857

A Mixed Complementarity Framework: why is important Objective: to include a feature typical of mathematical programming within a CGE Production Inputs (less relevant in our context) Interregional Trade: regional demands, endogenous transportation costs (regional prices)

Simulation CAP reform Full decoupling Are there regional differences?

Macro Impact: Production Crops North Centre South Prices Soft Wheat 2.02 -24.19 -69.63 Durum Wheat -10.69 -19.59 Rice -3.82 -13.02 Corn 2.94 5.69 0.43 -5.33 Fodder 16.47 5.53 1.48 -14.57

Macro Impact: Factor Prices   % Change of Factor Prices Dependent Labor 0.04 Farm Labor 0.01 Agricultural Capital 0.03 - Agricultural Capital - North -9.57 - Agricultural Capital - Centre -12.76 - Agricultural Capital - South -4.49 Non Agricultural Capital 0.02 Land 14.85 - Land - North 14.46 - Land - Centre 15.54 - Land - South 14.87

Macro Impact: Welfare Farm household - North region 0.747 0.803 0.831   EV % Change available income % Change consumption % Change leisure % Change consumption prices Farm household - North region 0.747 0.803 0.831 0.555 -0.048 Farm household - Centre region -0.764 -0.765 -0.766 -0.756 -0.047 Farm household - South region -0.074 -0.125 -0.150 0.013 -0.043 Rural household 0.095 0.152 0.180 0.003 -0.081 Urban household - low income 0.049 0.102 0.129 0.009 Urban household - middle income 0.059 0.105 Urban household - high income 0.075 0.120 0.143 0.006 -0.054

A Consideration The push to emarginate the farms already at the margins of agriculture is quite strong especially in the South. However, these “non agricultural” farms are not the object of interest of AGRICULTURAL policy but more properly of RURAL policy, which, curiously NOT enough, can be financed by the modulation of agricultural policy. What is relevant is then COUPLING agricultural with rural policies accounting for regional differences.

Macro and Micro: Are They Consistent? If not, why? Is the micro level of analysis complementary?

Conclusions I The regionalization makes the macro model more REAL. Still needs to include interregional trade and corner production choices. Entry/exit decisions must be analyzed at the micro level for each farm-household There is micro-macro consistency in terms of activity patterns and land prices but large differences in factor use (and related environmental impact), and income effects but still highly complementary Decoupling gives efficiency but equity considerations at the micro level demand that agricultural policy be coupled with rural policy accounting for regional differences but with a caveat.

Conclusions II Agricultural, rural (at the European level) and welfare policies (at the national level) need not overlap. Farmers in fact can have access to: Agricultural Policy (region specific objectives) Right of being farmer (professional farm hh) Rural Policy (region specific objectives) Right of being peasants (non professional) Welfare policy (especially in the Centre) Right of citizenship (both prof and non prof) Keeping in mind that farmers may be income but not wealth poor, these aspects are crucial if EU ag support is to be used properly.