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Measuring the impact of trade policy reform in Ireland:

an analysis of household impactsMiller, C., Boysen, O., Matthews, A., Donnellan, T. and O’Donoghue, C.Department of Economics and Institute for International Integration

Studies, Trinity College DublinRural Economy Research Centre, Teagasc, Athenry

122nd European Association of Agricultural Economists Seminar

Evidence-Based Agricultural and Rural Policy MakingMethodological and Empirical Challenges of Policy Evaluation

February 17th – 18th, 2011, Ancona (Italy)

associazioneAlessandroBartola studi e ricerche di economia e di politica agraria

Centro Studi Sulle Politiche Economiche, Rurali e AmbientaliUniversità Politecnica delle Marche

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122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Motivation

Potential of Irish agrifood sector to contribute to economic recovery..

… but vulnerable to policy shocks – CAP reform, trade liberalisation, climate change policy

Desirable to take economy-wide view of policy impacts…

…but also to account for increasingly differentiated policy instruments

…and to describe distributional outcomes

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122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Paper contribution and objectivesPresents a single country CGE model with

disaggregated agri-food sector and disaggregated households as a tool for ex-ante policy impact analysis

Reports results of a Doha Round trade liberalisation agreement

Contributes to the limited literature using single country CGE models for policy analysis in the EU

Highlights the treatment of CAP subsidies

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122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Database – the 2005 Irish AgriFood SAMThree-step process

– Construction of a 55 sector macro SAM based on 2005 Irish input-output tables (one ag, one food industry sector)

– Disaggregation of the agri-food sector– Disaggregation of the household sector by

explicit incorporation of all households in the Household Budget Survey into the SAM (linked to National Farm Survey sample)

Features of agri-food disaggregation– Separate accounts for calves (linking milk and

cattle production) and fodder production– Valuation of family-owned resources

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122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

The CGE database and model

SAM aggregated to 10 agricultural activities, 10 food industry activities, 1 manufacturing and 1 services activity

3 production factors (labour, capital and land used only in agriculture and forestry, no differentiation of labour or land by quality)

2 external accountsHouseholds aggregated to 9 representative

householdsModel is a modified form of the IFPRI

standard model

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aTreatment of the CAP

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122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Treatment of CAP subsidies

SFP treated as a coupled payment in 2005, in addition to carryover of coupled payments from 2004

The two other big subsidies (REPS agri-environment payments and DACAS less favoured area payments) are also currently treated as payments coupled to activities

Milk quotas not explicitly modelled – if positive quota rents in 2005, then this underestimates size of milk sector assuming quotas removed

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122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Closure rules

In current model version:– Factors including land assumed fixed in supply– Factors perfectly mobile across sectors (long-run

equilibrium)– Government savings are allowed to change as the

government expenditure is a constant share of total absorption and the tax rates in the model are (largely ) fixed

– The current account is balanced by changes in the exchange rate keeping foreign savings constant

– The marginal propensities to save of households and enterprises are assumed to adjust to the changes of the domestic value of the rest of the world savings and price changes of investments to keep investment a constant share of total absorption  

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122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Simulation scenarios

Pre-experiment (SFP simulation)– Coupled subsidies including SFP payments

treated as coupled in 2005 are paid to households as lump-sum payment

Trade policy experiment– Mimics successful Doha Round agreement based

on Chairmen’s modalities 2008– Irish agricultural tariffs reduced by 70%,

manufacturing tariffs and export subsidies removed

– No change in agricultural subsidies; agricultural subsidies held constant by varying subsidy rates

– Rest of world shocks (shifts in export prices and quantities, import prices) taken from Doha study by Balzer et al (2008)

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122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Linking the model to global shocksFollows approach recommended by Horridge and

Zhai (2006)The aim is to allow the single country model to

determine export supply behaviour and to use the changes in demand by the rest of the world as presented in the global model

The shift in the export demand curve facing Irish exports is derived from the expression

fp = p + q/(elasticity of substitution among imports)where p is percentage change in export prices and q is percentage change in export quantities

Vertical shifts in import supply proxied by the import price shocks taken directly from the global model

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aShock parameters

Own import tariffs- Ag -70%- Man -100%

Own export subsidies – 100%

EU demand shift

ROW demand shift

EU import price change

ROW import price change

Base import tariff

Milk -0.77 -0.20 -0.87 -0.06 32.9Cattle -0.58 1.12 -0.44 0.68 12.2Sheep -0.58 1.12 -0.44 0.68 15.9Pigs -0.62 -0.45 -0.53 -0.13 15.8Poultry -0.62 -0.45 -0.53 -0.13 15.7Cereals -7.77 6.52 -0.49 0.40 15.4Hort -2.44 4.33 -0.59 1.55 8.2Potatoes -0.43 0.11 -0.18 0.47 8.3Other crops -0.44 0.13 -0.18 0.32 15.4Forestry 0.00 0.00 0.00 0.00 1.9Fish -1.15 2.15 -0.74 -0.05 10.7Beef -2.93 3.45 -0.57 0.18 39.9Pigmeat -0.92 4.21 -0.40 -0.77 13.3Poultrymeat -0.92 4.21 -0.40 -0.77 13.1Sheepmeat -2.93 3.45 -0.57 0.18 21.6Fish processing -1.15 2.15 -0.74 -0.05 10.8Fruits and vegetables -1.15 2.15 -0.74 -0.05 29.2Dairy -1.10 4.29 -0.60 0.55 34.1Animal feed -1.15 2.15 -0.74 -0.05 10.0Other food -1.20 2.20 -0.83 -0.12 16.4Manufactures -0.27 0.13 -0.18 0.03 0.6Services -0.10 0.04 -0.17 0.09 0.0

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Output changes

Base €mSFP vs Base

Doha vs SFP Base €m

SFP vs Base

Doha vs SFP

Milk 1,446 -0.6% -7.9% Fish 444 -0.4% -0.7%Cattle 1,759 -37.1% -3.2% Beef 2,563 -40.1% -6.5%Sheep 207 -46.2% -0.6% Pigmeat 856 0.7% 4.5%Pigs 384 0.7% 3.8% Poultrymeat 433 -8.3% 0.0%Poultry 226 -9.9% 0.3% Sheepmeat 322 -23.9% -5.7%Cereals 177 -57.3% -2.4% Fish processing 306 0.3% -0.5%Hort 266 -0.6% -0.4% Proc fruits/veg 153 1.3% -2.3%Potatoes 90 3.0% -1.2% Dairy 2,910 2.7% -6.0%Other crops 180 3.1% -10.1% Animal feed 892 -4.3% 0.2%Fodder crops 891 -18.2% -1.5% Other food 7,100 -0.8% -2.4%Forestry 356 2.5% 0.1% Manufactures 131,691 0.7% 0.1%

Services 170,236 0.5% 0.2%

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Macroeconomic impactsBase €m SFP vs base Doha vs SFP

Domestic absorption 142,231 0.4% -0.1%Private consumption 72,107 0.4% 0.0%Fixed investment 44,217 0.4% -0.2%Stock changes 825 0.0% 0.0%Govt consumption 25,081 0.3% -0.3%Exports 131,404 0.0% 0.2%Imports 111,620- 0.0% 0.0%GDP market prices 162,015 0.3% 0.1%Net indirect taxes 20,995 3.5% 0.8%GDP factor cost 141,020 -0.1% 0.0%

Base €m SFP vs base Doha vs SFPLabour returns 65,468 -0.4% 0.2%Land returns 784 -85.0% -16.7%Capital returns 74,768 0.0% 0.2%

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Impacts on households’ real consumption

Household type Base SFP vs Base Doha vs SFP€m % %

Urban 52,642 -0.22 -0.03Rural Nonfarm 16,678 -0.18 0.00Dairy 668 2.15 -0.72Dairy + Other 362 22.90 -0.79Cattle 675 32.00 -0.56Cattle + Other 468 4.89 -0.57Sheep 407 8.58 -0.59Tillage 136 21.82 -0.85Other farms 71 16.30 -0.21

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122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Reflections on the results

Results from a single country CGE simulation for a trade policy shock very dependent on quality of multilateral results

Long-run closure modelled does not reflect policy-makers’ concerns regarding impact effects of trade liberalisation on agriculture– Better to adopt more short-run closure with

imperfect or zero substitution between agricultural and non-agricultural factors

Improve treatment of CAP subsidiesHousehold incomes affected by changes in factor

returns plus changes in transfer incomes – leaves challenge of modelling targeted payments