Modelling Pillar II in CAPRI Wolfgang Britz Institute

Modelling Pillar II in CAPRI Wolfgang Britz Institute for Food and Resource Economics, University Bonn

Content q q q Data General approach Implementation Running a scenario Result analysis Britz: CAP post 2013 – Quantitative Analysis with CAPRI

Underlying data Assembled by team of Janet Dwyer, from DG-AGRI sources, huge investment especially ex-post q Different definitions: • Planned spend planned allocation of budget to different measures • Actual spend q Spenders (“matching funds”, co-financing with fixed shares depending on region and measure) • EU budget • National co-financing • Private (e. g. in case of investment aid) q Britz: CAP post 2013 – Quantitative Analysis with CAPRI

Underlying data q Data on € spend on certain measures by year and NUTS 2 Britz: CAP post 2013 – Quantitative Analysis with CAPRI

Underlying data q Data now in GDX after final cleansing by Torbjoern: Britz: CAP post 2013 – Quantitative Analysis with CAPRI

General idea Existing data only provide a very rough idea how the money was spent q Impossible (at least for us) to get detailed information how the measures are exactly implemented in the different MS and regions q CGEs are rather aggregated (only one agricultural sector), detailed modeling is thus not possible => Develop a list of “shocks” which can be seen as archetypical for Pillar II interventions: q Britz: CAP post 2013 – Quantitative Analysis with CAPRI

General idea q Janet, Ben Allen, Peter, Kazia and other have assigned the RD measures to these shocks (http: //www. ilr. uni-bonn. de/agpo/rsrch/caprird/docs/d 3. 1. 2. pdf) …. Shocks will change parameters in the model: q behavioral parameters of government or parameters in the production function q tax rates q Size of shock is proportional to the money spent and relative to what is shocked (e. g. amount of land subsidies related to return to land) q Britz: CAP post 2013 – Quantitative Analysis with CAPRI

Human capital agriculture q Good example for the overall logic: 1. Where does the money end? 2. What is the effect of spending the money? Britz: CAP post 2013 – Quantitative Analysis with CAPRI

Human capital rest Exercise: • Make a small flow chart showing how that type of shock affects the different elements of the CGE q Similar: q Britz: CAP post 2013 – Quantitative Analysis with CAPRI

Investment in agriculture q Increase capital stock in agriculture …. and assume that new capital is more productive … Britz: CAP post 2013 – Quantitative Analysis with CAPRI

Human capital rest q Exercise: • As before: make a small flow chart showing how that type of shock affects the different elements of the CGE Britz: CAP post 2013 – Quantitative Analysis with CAPRI

Increase gov demand for construction q … and the implementation of the shock Britz: CAP post 2013 – Quantitative Analysis with CAPRI

Land subsidies for agriculture q And the shock implementation Note: these measures are modeled in CAPMOD, so if the PE_LINK is used, no shock in CGE … Britz: CAP post 2013 – Quantitative Analysis with CAPRI

Land subsidies for agriculture q But the story is more complex …. If the shocks becomes to large, the model might freak out … Britz: CAP post 2013 – Quantitative Analysis with CAPRI

Land subsidies forestry q Shock implementation is identical to agriculture Britz: CAP post 2013 – Quantitative Analysis with CAPRI

Subsidies to service sector q Straightforward: reduction of production taxes … Britz: CAP post 2013 – Quantitative Analysis with CAPRI

Downstream subsidies q Expand capital stock: Britz: CAP post 2013 – Quantitative Analysis with CAPRI

Downstream subsidies q and/or decrease tax rate q Plus some vintage effect (more productive new capital) Britz: CAP post 2013 – Quantitative Analysis with CAPRI

Capital subsidies agriculture and forestry q Same story as for downstream industries: • Part expands capital stocks • Remaining part subsidizes investments • Vintage effects Britz: CAP post 2013 – Quantitative Analysis with CAPRI

Income subsidies q Effect not clear … and only one household type Britz: CAP post 2013 – Quantitative Analysis with CAPRI

Shock logic Beware, normally, in a CGE, there are only two ways to make society better off • Technical progress => produce more from given endowments • Remove distortions which reduce allocational inefficiencies q Our shock logic links certain government actions (= which require taxes to be financed and thus are distortive) directly to a TFP change depending on the size of the TFP multiplier, government intervention can be beneficial => some leeway for wishful thinking, welfare analysis can be dubious q Britz: CAP post 2013 – Quantitative Analysis with CAPRI

Reporting and shock logic The SAM does already comprise the measures …. • e. g. : land taxes / subsidies for agriculture as reported in the SAM comprise the single farm payment, LFA, land taxes … • That is different from the CAPMOD logic where we define all the premiums q That means for the CGE, a no change in policy means no shock … and we simulate the effect of Pillar II by removing it … q Britz: CAP post 2013 – Quantitative Analysis with CAPRI

Running a scenario An existing scenario Selection of MS Britz: CAP post 2013 – Quantitative Analysis with CAPRI

Running a scenario Definition of the baseline of CAPRI used Britz: CAP post 2013 – Quantitative Analysis with CAPRI

Running a scenario Closure rules and other settings Britz: CAP post 2013 – Quantitative Analysis with CAPRI

Reporting Britz: CAP post 2013 – Quantitative Analysis with CAPRI

Own analysis q q q Run for DK: • cge_no_shock (= baseline calibration shock) • Cge_rd_minus 100 (= remove pillar II) Load the results in the interface Report the key changes in policies (budget, main measures) What happens to the agriculture sector (factor use, output, price)? Welfare analysis Britz: CAP post 2013 – Quantitative Analysis with CAPRI