Back Matter

Back Matter

Author(s):
International Monetary Fund
Published Date:
November 1988
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    References

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    Note: For information on the titles and availability of Occasional Papers published prior to 1986, please consult the most recent IMF Publications Catalog or contact IMF Publication Services.

    The Council referred to the international undertakings entered into at the Organization for Economic Cooperation and Development and to the 1987 summit meeting of heads of state or government of the seven major industrial countries in Venice.

    The present paper does not discuss the rationale for these objectives, assuming that supporting farmers in the EC or elsewhere is a matter of social choice.

    Market organization is the collective name of the rules and regulations adopted by the authorities to influence the supply of and demand for a particular commodity.

    For some detail on the policies pursued by individual countries prior to the adoption of the CAP, see Services des Publications des Communautés Européennes (1958). (Hereinafter referred to as Stresa papers.)

    Belgium, France, the Federal Republic of Germany, Italy, Luxembourg, and the Netherlands, hereinafter referred to as EC-6.

    The OEEC was superseded by the OECD on September 30, 1961.

    Stresa papers, p. 182 and pp. 189–92.

    Stresa papers, p. 222. English version was taken from excerpts quoted in Commission of the European Communities (1987a), p.17.

    Ibid., p. 26.

    The most commonly used nonprice support instruments are storage subsidies, which are chiefly meant to soften the impact on the market of seasonal fluctuations in production; consumer subsidies; input subsidies; and deficiency payments and production premiums of various kinds. These instruments are used in a highly selective fashion. Nonprice support also includes structural measures financed by the Community, such as irrigation schemes, reafforestation projects, and research and development. These structural measures may well be important for the future development of the Community’s agricultural sector; at present, however, they account for only a small fraction of total expenditure on the CAP. For details of the arrangements in force for individual commodities covered by the CAP, see Commission of the European Communities (1985b).

    The term “target price” is used for cereals, sugar, milk, olive oil, and grape and sunflower seeds. To reflect technical differences, “guide price” is used for bovine meat and wine, “norm price” for tobacco, and “basic price” for pork.

    The term “threshold price” is used for cereals, sugar, dairy products, and olive oil. Essentially the same concept is referred to as “sluice-gate price” in the case of pork, eggs, and poultry meat, and “reference price” in the case of fruit, vegetables, wine, and certain fishery products.

    The mechanisms adopted for the products covered by the CAP do not give agriculture full protection against foreign competition For example, to secure the acceptance of the CAP by its trading partners, the Community agreed that oilseeds and so-called cereal substitutes enter the EC without import duties or quantitative restrictions. The Community believes that the large and growing imports of cereal substitutes as fcedstuffs are partly responsible for the excess supply of dairy products.

    The computation of MCAs at different stages and the changes undergone by the system are explained in Appendix II with the help of some simplified examples.

    This still left the Federal Republic of Germany with positive MCAs, which it found impossible to dismantle because, as prices were kept roughly stable in terms of ECUs at the subsequent annual reviews, this would have called for price reductions in deutsche mark.

    Of course, MCAs for those countries that do not participate in the Exchange Rate Mechanism of the EMS, and for Italy, which has temporarily opted for larger fluctuation margins, have to be adjusted continuously.

    For a detailed presentation of the EAGGF, see Commission of the European Communities (1986b).

    There has been a co-responsibility levy for milk since 1977. with a supplementary one to penalize those who exceed the production quotas introduced in 1984. A co-responsibility levy was introduced for cereals in 1986. The revenue raised by the co-responsibility levy for milk amounted to some ECU 0.7 billion in 1986, about 3 percent of total expenditures of the EAGGF.

    Costs of intervention arise when the expenditures for intervention purchases and stockpiling are larger than the revenue from sales out of stocks.

    Unless otherwise indicated, the analysis for the EC focuses on the Community of 10, i.e., Portugal and Spain, which joined recently, are excluded.

    See Appendix III for a survey of existing studies.

    A major shortcoming of the first technique is the assumption that in the period of investigation no factors other than the introduction of the CAP influenced economic developments. The second technique rests on the equally unrealistic assumption that differences between CAP member countries and the control group result only from differences in agricultural policies.

    See Appendix III for a more detailed discussion of the measurement of economic welfare effects of the CAP, and the limitations of the partial equilibrium analysis.

    Several attempts have been made in the literature to estimate the effects of the CAP on economic welfare in EC countries (see Appendix III for a survey of recent studies). The models used in these studies can be characterized as cither partial or general equilibrium models. While partial equilibrium models focus on demand and supply conditions in one or more sectors of the economy and assume that other sectors are not affected by changes in agricultural policy, general equilibrium models explicitly take account of sectoral interdependencies in production.

    The model is in the tradition of so-called Johansen models and follows closely the version developed by Dixon and others (1982). A full description of the model and discussion of the simulation results are given in Appendix IV.

    The OECD estimated the protection afforded EC farmers by means of producer subsidy equivalents, defined as PSE = Q*(PdPw) + D - L + B, where Q denotes output volumes, p prices, D direct income transfers to agriculture, L fees and levies paid by agriculture, B other budgetary support, and the subscripts d and W the domestic and world market. The first term on the right-hand side of the equation measures the amount of protection given through price support.

    Real wages are generally regarded as rigid in the short run in European countries but relatively flexible in the United States and Japan. For empirical evidence for selected European countries see Klau and Miltelstädt (1986).

    This is, of course, a simplification and may lead to an overstatement of the effects of changes in support prices.

    Note that exports emerge in the model as the difference between domestic output and consumption. The analysis does not take into account stockbuilding as an alternative to exporting.

    The thrust of these results is supported by recent studies by Stoeckel and Breckling (1988) for the Federal Republic of Germany, France, Italy, and the United Kingdom, and by Dicke and others (1988) for the Federal Republic of Germany.

    Coefficients were calculated for each product and EC member country using producer prices in ECUs (excluding value-added tax) as published in Eurostat, and international commodity prices, as published in International Financial Statistics, convened into ECUs. The following prices were taken to represent the world market (i.e.. the low-cost suppliers’) prices: for beef, prices quoted in the London market; for sugar, the average of the New York spot price and London daily price, f.o.b, Caribbean ports; for butter. London prices; for maize, the Thailand price; and for wheat, the Australian price. Prices were not adjusted for transportation costs nor for quality differences that may exist between products of different origin. The resulting coefficients of protection give therefore only a broad picture of the actual protection afforded EC producers. Coefficients for the EC as a whole are arithmetic averages of country coefficients.

    The OECD treats the EC as a single entity for its computations, while the estimates on nominal protection presented in Table 5 are based on individual country and commodity data.

    These results are supported in a recent study by the U.S. Department of Agriculture (see U.S. Department of Agriculture (1987)).

    Self-sufficiency rates are calculated as the ratios of domestic production to consumption.

    It is not clear that this was entirely due to the CAP; the timing of the United Kingdom’s entry into the CAP coincided with the adoption of higher-yielding seed varieties in cereals.

    It is, however, worth noting that the data on developments in EC self-sufficiency between 1960 and 1985 tend to underestimate the increase, since from 1973 onward the figures include the United Kingdom, which is a major net importer of food.

    Also, as pointed out by Jacquemin and Sapir (1988), while the Common Market led to “trade creation” in manufactures, the CAP led to “trade-diversion” and “seems to have effectively discriminated against non-partner suppliers” (pp. 137–38).

    This reflects the book value and not the market value of stocks at resale prices, which is considerably lower.

    The EAGCJF accounts for most of the appropriations for agriculture in the EC’s common budget. Although most receipts in the EC budget stem from contributions by the members, some revenue is collected by way of import and certain agricultural levies. In addition, co-responsibility levies on milk and cereals generate revenues to finance specific expenditures. These levies are treated as measures to regulate agricultural markets; they are not recorded as revenue receipts but are subtracted from expenditures.

    Net social security benefits, however, represent subsidies to agriculture only to the extent that they exceed net benefits granted to persons employed in other sectors of the economy.

    For a detailed survey on these studies, see Appendix III.

    The results from the OECD study (1987) can be construed to be based on a simple “partial” equilibrium approach, which implicitly assumes inelastic demand for agricultural products in the EC for estimating costs to the consumers. The expenditures incurred by both the national and the EC authorities on agriculture, on the other hand, are taken in the study to represent the costs to the taxpayers.

    This argument would be weakened if the management of stocks by the EC contributed toward stabilizing world prices. There is, however, no evidence in favor of countercyclical stock management by the EC.

    For details, see Appendix III.

    See. for example, Valdes (1987).

    There was no attempt at precise quantification in the Memorandum, but it was argued that 80 percent of all holdings were too small to keep one man fully employed because modem technology would enable him to cultivate 30–40 hectares or raise at least 40 milk cows.

    This needs mentioning because of the long discussion on a controversial proposal to tax vegetable and marine oils and fats. This proposal has now been shelved because of the opposition of several member states, who objected to its price-raising effect, as well as of foreign suppliers. Oilseeds and vegetable oils enter the Community duty free under a regime that is bound in the GATT. In the view of its proponents, the tax would be justified inter alia because, at the time of a reduction in the support to the Community’s growers, equity would call for outlets in the Community also to be made less attractive to growers from third countries. For the arguments in favor of the tax see Commission of the European Communities (1987b, Annex II).

    See Commission of the European Communities (1988b, Section IV, Part C).

    For the arguments that have been put forward in favor of the adoption of the stabilizers, see Commission of the European Communities (1987e) and (1987c).

    Real income is defined here as value added at factor cost minus rents and interest payments.

    For a definition of the green rate, see Appendix II.

    Commission of the European Communities (1987d, p. 3).

    The nature and the use made of these measures through 1984 is surveyed in Commission of the European Communities (1985c), As indicated by the title, the term “guarantee threshold” is used in a very broad sense.

    The close relationship between the two concepts is underscored by the fact that guarantee thresholds are mentioned in some reports by the Commission as instruments to implement co-responsibility.

    See Commission of the European Communities (1987c, p. 12).

    This decision was taken for a five-year period, but there appears to be good reason to assume that quotas will continue to be used after the end of the marketing year 1988/89. In a recent document, the Commission expressed the view that “the production cuts resulting from the suspension of the quotas must be consolidated” under the arrangements that will be applicable as of the marketing year 1989/90. See Commission of the European Communities (1987e, p. 14).

    For a summary of the problems facing the milk sector see Commission of the European Communities (1986a, pp. 1-10).

    See Commission of the European Communities, Bulletin, No. 12 (1986), pp. 14–15 and 85–89. and the relevant sections of Commission of the European Communities (1987b).

    See “Council Regulation (EEC) No. 1096/88 of 25 April 1988 establishing a Community scheme to encourage the cessation of farming.” Official Journal of the European Communities, L 110 (April 29, 1988), Luxembourg, pp. 1–6.

    See “Council Regulation (EEC) No. 1094/88 of 25 April 1988,” Official Journal of the European Communities, L 106 (April 27, 1988), Luxembourg, pp. 28–32.

    For a recent statement of this position, see Commission of the European Communities (1988c, p. 8).

    The Community’s position regarding the agricultural negotiations in the Uruguay Round were stated in Commission of the European Communities (1987f).

    The equation is monetary gap=(1centralrategreenrate)100.

    The calculations are based on data for the week ending on Tuesday. If a change is warranted, it becomes effective on the following Monday. More frequent changes have been ruled out in order not to hamper trade.

    Some of the secondary objectives of the CAP, such as improving the quality of food consumed, improving the distribution of income within the agricultural sector, protecting small family farms and preserving rural life styles and the natural environment, create the need for a different family of instruments that generally go under the name of guidance expenditure.

    For a discussion of the partial equilibrium welfare analysis and its advantages see: Corden (1957) and (1971); Harberger (1959); Johnson (1960); and Currie, Murphy, and Schmitz (1971), for a discussion of its limitations, in particular with respect to analyzing agricultural price support in the EC, see Buckwell and others (1982); Valdes and Zietz (1980); Matthews (1985b); and Winters (1987).

    See Tyers and Anderson (1986a) and also Tyers and Anderson (1987) and (1986b): earlier versions of the same model are used in Anderson and Tyers (1984), Chisholm and Tyers (1985), and Tyers (1985).

    The basic structure of CGE models is discussed in detail in Whalley (1984) and (1985b), Ch. 3, and Winters (1987). Whalley (1985a) outline’s some of the methodological problems that applied general equilibrium analysis still faces.

    The effect of domestic policies on international price stability is also analyzed in Bale and Lutz (1979a), Blandford (1983), and Berck and Schmitz (1984), Koester (1982) compares alternative price support policy packages against their (de)stabilizing properties.

    Buckwell and others (1982, Ch. 3), Australia, Bureau of Agricultural Economics (1985, Ch. 6), and Whalley (1985b, Ch. 3) offer a brief discussion of the problems of counterfactual equilibrium analysis.

    Note, however, that both in the 1986 and 1987 studies the base period for the estimates was 1980–82, The results reported for 198? are merely “scaled up” results For 1980–82 and do not take into account the major macroeconomic and supply shocks that occurred between 1980 and 1985.

    A value of zero implies no pass-through of changes in the world prices to the domestic prices; a value of one implies complete pass-through.

    These are the “gross” costs of (he CAP and not comparable with the “net” costs, or deadweight losses, reported in Table 37.

    Tyers (1985) and Matthews (1985b) estimate the effects of liberalization in a multicommodity model with and without cross-effects. In both studies the models without cross-effects produce estimates 20 to 100 percent higher than the models with cross-effects. This difference is most noticeable in coarse grains, wheat, and nonruminant meat, where the removal of channels for market interaction roughly doubles the calculated effects of liberalization.

    In line with the estimated larger price effects of liberalization, the authors report a higher loss to developing countries in their more recent study.

    To assess the effects of the CAP alone, the results reported by Loo and Tower could be scaled using estimates of the effects of the CAP on agricultural world market prices provided in Table 43.

    The choice of the measure is important: the standard deviation, for example, depends on the level of the mean (in this case, the price level) and, therefore, even if prices remain equally stable after liberalization, the standard deviation will be different. Koester (1982, pp. 53–54), discusses at length the different measures of variability. It turns out that even the coefficient of variation is not unbiased. Koester suggests correcting the coefficient of variation by the explanatory power of the trend regression to obtain a better measure of variability.

    It is worth noting that, even by the most pessimistic estimate, the losses of the developing countries from a unilateral Liberalization in the EC are only around 70 percent of the official development assistance actually disbursed in 19H5 by the seven largest EC members, excluding Greece, Ireland, and Luxembourg (in 1980 U.S. dollars; see World Bank (1986, Statistical Appendix)).

    OECD (1982) discusses the issue of multilateral liberalization in detail. There is also a large body of empirical evidence on this: Chisholm and Tyers (1985), Tyers and Anderson (1986a), Whalley (1984), Whalley (1985b), and World Bank (1986, and the references therein).

    See Appendix III for a survey of existing studies.

    The simulation results reported later in the appendix depend to a significant extent on the presence of classical unemployment in the economy, which seems to be the case for most European countries.

    93

    Note that only agriculture (sector I) uses land as a factor of production.

    Table 48 has a “government sector” which creates the goods used by government. This sector is contained in the nontraded services sector of the mode).

    In a recent study by the OECD (OECD (1988)) the average producer subsidy equivalent for the EC was estimated at 37 percent in 1979–81. Of this, 70 percent was accounted for by agricultural pricing policies under the CAP. Thus, abolition of the CAP was assumed to reduce the producer subsidy equivalent by about 26 percentage points, which translates into a 20 percent reduction in the average duty and subsidy ratio.

    The model, as described above, contains 84 endogenous variables that are explained by the same number of equations. The specification of the equations ensures that the solution of the model is unique.

    For agriculture it was assumed that 50 percent of gross value added in the base year covered labor costs, while the remainder was evenly distributed on capital and land. For all other sectors, labor costs in the base year were represented by total wage costs, while the rest of gross value added was assumed to constitute the cost of capital utilization.

    Using the relationship between per capita GDP and w estimated by Lluch, Powell, and Williams (1977, p. 248).

    Recall that this translates into a 20 percent reduction in the subsidy/duty ratio for agricultural products.

    The alternative possible solution, a fall in stocks, is not incorporated into the model. The drop in exports may seem large, but in 198U exports accounted for only 7¾ percent of domestically produced agricultural goods.

    Note that the expenditure elasticity of households for this product group is greater than one.

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