An ex-ante analysis of distributional effects of the CAP on western German farm incomes Andre Deppermann, Harald Grethe (Universität Hohenheim) Frank Offermann (von Thünen-Institute) Presentation at the 122 th EAAE Seminar ‘Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation’ Ancona February , 2011

2 Outline of Presentation 1)Introduction and problem statement 2)Methods a)Modeling Approach b)Measuring Redustributional Effects 3)Results c)Liberalization d)Nonfarm Income 4)Conclusion

3 Agricultural policy among other motives often is justified as income support to farm households. Does the CAP reduce income gaps in the agricultural sector? What kind of distributional effects has a further liberalization of the EU agricultural sector? Introduction: - Distributional Effects of the CAP

4 State of the Art Prominent methods of microanalysis of income distribution applied to agricultural policy: 1)Decomposition of income inequality by single income sources - e.g. Keeney (2000) 2)Comparison of pre- and post-support income distribution and splitting up the overall effect of redistribution - e.g. Allanson (2006, 2007, 2008)

5 Our Approach Modelling system [partial equilibrium model and a programming model] Results Analysis of redistributional effects [Comparison of pre- and post-support income distribution] 12

6 Modelling Approach Fully integrated interface between the European Simulation Model (ESIM) and the Farm Modelling Information System (FARMIS) –ESIM: quantification of effects of agricultural policies at the European level –FARMIS: Measurement of impacts on intra- sectoral income distribution among German farmers

7 Modelling Approach ESIM: - Comparative static partial equilibrium multi-country model for the agricultural sector -Isoelastic supply functions (separate for yield and area) and demand functions FARMIS: - Comparative-static process-analytical programming model for farm groups - Representing the German agricultural sector - Main database: German Farm Accountancy Data Network (FADN)

8 Scenarios Baseline: Current state of the CAP until 2015 Liberalization Scenario: Abolishment of all price policies Cut in direct payments by 50% Support: Difference between income in Baseline and Liberalization Scenario

9 Data -Indicator: Family Farm Income (FFI) -357 homogenous farm groups (western Germany) -grouped by region, type and size -weighted with an aggregation factor -Due to grouping  information loss on inequality -2015: Analysis of changes in distribution among farm groups

10 Analyzing redistributional impacts Kakwani (1986): R = Gx − Gy = (Gx − Cy) + (Cy − Gy) = V + H Overall effect of redistribution Gini in base situation Gini in new situation Concentration Index of income in the new situation Re-ranking effect Vertical component

11 Analyzing redistributional impacts 0 100% Cumulative % of units Cumulative % of income Source: Aronson and Lambert (1994)

12 Results Relative inequality (scale invariant) Liberalization Scenario Gini coefficient of baseline incomeGxGx Gini coefficient of scenario (after policy change) GyGy Concentration coefficient of scenario CyCy Average rate of support (support/base income) s0.70 Total redistributive effectR Index of re-rankingH Index of vertical equityV Decomposition of changes in relative income inequality

13 Nonfarm income Relative inequality (scale invariant) FFI FFI + nonfarm income Gini coefficient of baseline income Gx Gini coefficient of scenario Gy Concentration coefficient of scenario Cy Average rate of support (support/base income) S Total redistributive effect R Index of re-ranking H Index of vertical equity V Decomposition of changes in relative income inequality for FFI and FFI plus nonfarm income

14 Conclusions Liberalization of the EU agricultural sector leads to a more unequal distribution of FFI among western German farms in relative terms. Significant re-ranking effects occur  inefficiency of redistribution The unequalizing effect is reduced significantly when taking into account nonfarm income.

15 Thank you for your attention !