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

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

How EU support stacks up AMS limit /99 Notification

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

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

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

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

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

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

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

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

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