Pre-Congress Symposium XIIth EAAE Congress

Gent, 26-29 August, 2008

EU PROJECTEU PROJECTTERA TERA

FINAL CONFERENCE

Territory and rural development in six European countries

EU PROJECTEU PROJECTTERA TERA

(CT 2005-006469) (CT 2005-006469)

[T]erritorial aspects of [E]nterprise [T]erritorial aspects of [E]nterprise developmentdevelopment

in [R]emote Rural [A]reasin [R]emote Rural [A]reas

Main Findings of the TERA Project

Demetris PsaltopoulosUniversity of Patras

• Afternoon Session of the Symposium: model design, data collection model construction

• Next presentation by Prof. Kola: interpretation of results link to territorial factors policy implications and recommendations

IntroductionIntroduction

• Aim of this presentation: To present an overview of the main findings of the TERA modeling work.

• Results of the three modeling approaches: CGE Models (bi-regional; rural/urban) NEG model (“No Taxation without Infrastructure” paper by Marattin) New-NEG model (multi-region multi-sector model of inter-regional trade by Mion)• Comparison of these results

IntroductionIntroduction

1. Labour and Migration: +/- 10% in labour supply; +20% unskilled labour; -20% skilled labour2. Changes in Trade: +1% in the price of all exports/imports; +10% in the export price of agriculture; +10% in the price of hotels and restaurants; +10% in the export price of most important manufactured commodities3. Agricultural Policy: -30% of coupled subsidies; full decoupling; 100% transfer of Pillar 1 subsidies into Pillar 2 (Axis 3); 20% modulation – 80% SFP4. Transport Infrastructure: +20% in the productivity of the transport sector; -20% in transportation costs

Common CGE Simulation ScenariosCommon CGE Simulation Scenarios

Basic Analysis

+10% in labour supply: increase in GDP (4.6% Greece to 8% Italy)

-10% in labour supply: similar negative GDP effects

Rural GDP effects: +2% (Greek area) to +9% (Italian area)

Urban GDP effects: +5% to + 8%

Increase in labour supply: wage reduction (2-15% skilled labour; 2-13% unskilled labour)

Labour and MigrationLabour and Migration

-20% skilled labour

Considerable losses in output (-5% Greece/Finland to –13% Czech area)

Reduction in tax revenue

Urban areas and secondary sectors worst hit

Increase in skilled labour wages

+20% unskilled labour

Income gains (+1% Czech area to +5.8% Finland)

Decrease in unskilled labour wages

Very small effects on producer and consumer prices

Change in skilled labour results into higher GDP effects compared to changes in unskilled labour

Labour and MigrationLabour and Migration

Basic Analysis

+1% in world export prices: small effect on GDP (-0.4% Finland to +1.7% Czech area); increase in regional exports (+1% Greece to +11% Scotland)

+1% in world import prices: small negative effects on regional income; reduction of private consumption (-0.34% Italy to -6.55% Czech area) and imports (-0.8% Greece to -21% Scotland)

Wages: Increase when export prices rise – decrease when import prices rise

Changes in TradeChanges in Trade

+10% in world export price of “agriculture”

Considerable rural/urban differences (much larger rural GDP effects)

Positive GDP effects (except Finland), especially for the primary sector

Large shift in factor incomes/rents towards agricultural sectors of the study areas

+10% in the world export price of “hotels and restaurants”

Very small GDP impacts

Possibly explained by the “Dutch-disease” literature

Changes in TradeChanges in Trade

-30% in coupled agricultural support

Marginal negative effects on GDP (-0.004% Italy to -0.8% Latvia) with the exception of the Finnish area (slight gains)

GDP losses concentrate in rural areas

Marginally positive effects on urban GDP: increases in allocative efficiency

Losses in rural unskilled jobs (mostly primary sector)

Very marginal effects on consumer prices; agricultural products prices increase much higher than changes in non-farm products prices

Decline in household consumption (especially agricultural households)

Agricultural PolicyAgricultural Policy

Full Decoupling

Higher negative GDP impacts compared to SC1, due to significant negative projections for the primary sector (-1% Greek area to -28.6% Czech area)

Rural economies affected more negatively and urban economies more positively compared to SC1

Pillar 2

Mixed impacts: Higher negative impacts (compared to SC1 and SC2) for Italian, Scottish and Greek areas; more positive impacts for the Latvian, Italian and Czech areas

Main loser is the rural primary sector but rural manufacturing and services rather gain

Positive urban impacts, especially for the secondary sector

Agricultural PolicyAgricultural Policy

Increase in the productivity of the transport sector

Short-run: gains in (especially urban) GDP (+1% Italy to +3.6% Latvia); tertiary sector benefits most

Long-run: Higher (compared to S-R) total impacts in the Italian, Scottish and Latvian areas, lower (still positive) in the rest

Long-run benefits directed towards rural parts of the study areas

Increase in both indirect taxes and income tax earnings

S-R: Marginal increase in the prices of all commodities; decrease in the price of transport (-3.5% Scotland to -20.2% Greece). Notably higher price increases in the L-R

Transport InfrastructureTransport Infrastructure

Decrease in transportation costs

Short-run: Very marginal re-distribution of economic activity; losses for secondary sectors

Long-run: Marginal gains for Scotland and Greece; marginal gains elsewhere

Benefits for unskilled rural labour and skilled urban labour

Marginal increase in commodity prices; decrease in the price of transport

Short-run: Increase in household consumption; higher long-run effects

Benefits directed towards urban parts of the study areas

Transport InfrastructureTransport Infrastructure

Aim: To explore region-specific issues raised in the context of interviews with local stakeholders and policy makers (WP7: TF and structural policies; policy implications and recommendations)Here we (indicatively) present the results of the following 4 region-specific simulations: Investment (Italian area): +10% investment in innovative sectors + 10% skilled labour demand for urban manufacturing Soft Modulation (Scottish area): Pillar 2 spending not only in Construction (as in SC4), but split between Construction, Education, Business Services and Public Administration -10% on employers social security payments (Finnish area) +30% in land prices and rents of the rural part of the study region (Greek area)

Some Additional Region-Specific CGE SimulationsSome Additional Region-Specific CGE Simulations

+ 10% in innovative investment

Very slight decline in domestic activity (-0.02%), household consumption (-0.20%) and imports (-0.04%)

Very marginal increase in exports

+ 10% in skilled labour demand

Notable positive effects: +1.7% GDP; +1.5% HHS Consumption; +2.4% Exports; +0.72% Imports

Important to note here that an equivalent increase in investment in Construction generates positive impacts for the Italian area

Investment Simulation (Italy)Investment Simulation (Italy)

GDP losses marginally lower than “Hard Modulation” (-0.15% compared to -0.19%); losses remain for the rural area (-0.63% to -0.64%), but the urban area gains (+0.17% to -0.11%)

Further decline in private consumption (-1% to -0.2%) and exports (-0.41% to -0.34%)

Gain in investment (+3.39% to -0.39%)

Wages of skilled workers fall by less than in HM, but the decrease in the wages of unskilled workers almost doubles

The decline in urban rents is reversed

The large fall in the value of agricultural land persists

Soft Modulation Simulation (Scotland)Soft Modulation Simulation (Scotland)

Small increase in investment, private consumption, exports and imports

Very marginal decline of GDP, but benefits for the secondary sector

Positive impact on demand for blue-collar workers; negative for demand for white-collar workers

Marginal decrease of factor incomes

Increase in the income of working households – decrease for other households

Cut in Employers’ SSP Simulation (Finland)Cut in Employers’ SSP Simulation (Finland)

Notable GDP decline (-0.36%), especially for rural area (-5.3%), rural primary (-9.4%) and secondary (-4.2%) sectors

Slight decline in urban GDP (-0.13%)

Decline in private consumption and exports

Highly negative effects for rural skilled and unskilled employment: Indicatively unskilled rural jobs in the primary & secondary sectors decrease by 8%; rural skilled jobs by almost 6%

Marginal gains for urban jobs

Significant increase in the price of primary goods (+6.25%)

Household income declines, especially for rural and (mostly) agricultural households

Rural Land Prices Simulation (Greece)Rural Land Prices Simulation (Greece)

Tax rate simulation

+2% / +4% in the urban region tax rate

+2% / +4% in the rural region tax rate

Main findings

Increase in urban tax rates decreases production differentials especially in Latvia, Greece and Italy

The economy is less hit if the initial tax rate is high

Real wage differentials increase (taxes finance infrastructure development which in turn, promotes economic activity concentration)

Increasing rural tax rates increases production differential (i.e. the periphery is hit)

Real wage differentials decrease very marginally

NEG model (Marattin)NEG model (Marattin)

Labour force simulation

+5%/+15% in the urban area labour force (third region / rural region)

+5% / +15% in the rural area labour force (third region)

Main findings

Increase in urban LF increases production differentials

In the case of outside-migration, effects are higher where the rural region is large in size (IT, SC, FI)

The bigger the periphery, the greater the increase of production differentials in favour of the urban region

Production differentials decrease if the labour force of the rural region increases (especially if the periphery is bigger)

Real wage differentials increase if the urban labour force increases and vice-versa

NEG model (Marattin)NEG model (Marattin)

Inter-regional trade simulation (rural area + 5 adjacent areas)

Inter-regional trade barriers reduced by 5% (further trade integration)

Main findings

Notable gains in average productivity (4.8% Greece – 0.5% UK)

Significant gains for rural areas in Czech Republic, Scotland, Finland; smaller gains for Greece, none for Italian and Latvian areas

Adjacent urban areas have little to gain

Gains vary substantially across sectors

New-NEG model (Mion)New-NEG model (Mion)

Population increase simulation (rural area + 5 adjacent areas)

Population increases by 5% in the area where the study area is located

Main findings

Remote rural record sizeable gains if population and market size increase.

Impacts do not display a significant industry heterogeneity

For East Highlands, Plain Po and Latgale an increase in local market size is more beneficial than market integration

New-NEG model (Mion)New-NEG model (Mion)

Three different approaches have been used to analyse rural development and the role of policy in remote rural regions of Europe

Our findings would be clearer and more robust if results from different approaches lead to the same direction

Labour Simulations

An increase in labour supply clearly benefits the study regions (according to results from all 3 approaches); there are considerable positive effects on economic growth

The direction of immigration is a key issue

Also, the New-NEG approach shows considerable gains in productivity

Last, but not least….Last, but not least….

Infrastructure Simulations

CGE (increase in transport sector productivity; decline in transportation costs); NEG (impact of taxation utilized to build infrastructure); New-NEG (reduction in trade costs)

Results are mixed and much less univocal than those related to the migration simulations

In some cases (e.g. Italy), the New-NEG approach indicates no gains from trade integration; this rather contradicts the direction of the CGE and NEG findings

In other cases (e.g. Scotland, Greece), results suggest regional benefits in terms of productivity (New-NEG) or GDP (CGE); on the other hand, NEG results show a significantly positive correlation between urban-tax increase and real wage differentials

Last, but not least….Last, but not least….

THANK YOU FOR YOUR ATTENTION!