Further explorations of interactions between agricultural policy and regional growth in Western Europe - approaches to nonstationarity in spatial econometrics

The work discussed in Bivand and Brunstad (2003) was an attempt to throw light on apparent variability in regional convergence in relation to agriculture as a sector subject to powerful political measures, in Western Europe, 1989 1999. We tried to explore the possibility that some of the observed specification issues in current results are rooted in neglecting agricultural policy interventions, within the limitations imposed by data available. We also attempted to use this as a case setting for evaluating the appropriateness of geographically weighted regression (GWR) as a technique for assessing coef- ficient variability, over and above for instance country dummies, but possibly reflecting missing variables or other specification problems. The present study takes up a number of points made in conclusion in that paper. Since it is possible that the non-stationarity found there is related to further missing variables, including the inadequacy of the way in which agricultural subsidies are represented, we attempt to replace the agriculture variables with better estimates of producer subsidy equivalents for the base year. We also look at ways of handling changes in agricultural policy regime occurring between years and T. This raises the further challenge of looking at both spatial and temporal dimensions at the same time, which we will discuss, but are not likely to resolve satisfactorily. On the technical side, the tests on GWR estimates also need to be more firmly established. The GWR results also need to be tested for spatial autocorrelation, and re-worked in an adaptive weighting framework, although GWR does already involve a spatial weighting of the observations themselves. The paper is therefore also an account of the development of software contributed to the R project (R Development Core Team, 2004) as packages, in particular the spdep package for spatial econometrics, and the spgwr package for GWR fitting. In particular, specific issues regarding the handling of the Jacobian in fitting spatial simultaneous autoregressive (SAR) models, and in interpreting GWR output will be discussed. These will be set in the context of on-going work on semi-parametric spatial filtering, which it is hoped to add to spdep following contributions by Michael Tiefelsdorf, so that the weaknesses and strengths of alternative approaches can be compared. Concentrating on implementations in R is justified by the preliminary nature of many of these methods requiring open source and replicable statistical research approaches, so that others can, if they wish, see how results were calculated. One such technical issue is the representation of neighbours in the various approaches, and of the impact of symmetry requirements in conditional autoregressive (CAR) models typically used in MCMC estimation using Open- BUGS and elsewhere. Indeed, in many SAR models, symmetry is also required, or at least underlying symmetry, with the weights matrix in the rowstandardised weighting scheme typically being similar to a symmetric matrix. Using the Western European regional growth data augmented with agricultural policy variables, we will try to explore how far some as-yet unresolved technical questions impede progress with substantive interpretation. We will also try to show how these questions may be handled in other software settings, and how data can be moved between software platforms for analysis. In conclusion, the paper has two threads, one focussing on the analysis of the relationships between regional growth and agricultural policy, generating models needing testing, while the other attempts to meet the software demands generated in the first thread, and to incorporate on-going research in spatial data-analytic methods to respond adequately to the potential importance of the substantive research question.

Efficiency losses in milk marketing boards – the importance of exports

A milk marketing board (MMB) is a legislatively specified compulsory marketing institution, and a common way to regulate markets for dairy products. MMBs are based on price discrimination. As price discrimination leads to unequal profitability between products, receipts from sales are pooled and farmers receive a single price adjusted for composition and quality. It is well documented that price discrimination through MMBs incurs an efficiency loss to the society. Earlier contributions, Ippolito and Masson (1978) and Serck-Hansen (1979), point to the fact that a particular high loss is incurred if export of dairy products is included in the MMB. It proves difficult to find examples where this is the case. MMB countries are either large with a low export share in dairy products (USA and Japan), have economies of scale (Australia) or exports are excluded from the MMB arrangement (Canada). We find Norway to be the only example. Using a numerical model of the Norwegian agricultural sector we show that substantial efficiency gain may be achieved by deregulating the dairy sector, mainly due to the elimination of exports. It is estimated that a transition to cost based pricing may increase the economic surplus by 1.4 billion NOK, which is 25 % of the production value. This computed gain from deregulation is far larger than for the other MMB-countries.Dairy policy; milk marketing boards; price discrimination; deregulation; numerical model.

Multifunctionality of agriculture: An inquiry into the complementarity between landscape preservation and food security

Without support, the levels of agricultural public goods will fall short of the demand in high cost countries like Norway, Finland and Iceland. However, as demonstrated in this paper using Norway as a case, the current support and agricultural activity is far out of proportions from a public goods perspective. Model simulations show that at most 40% of the current support level can be defended by the public good argument. Furthermore, the present support, stimulating high production levels, is badly targeted at the public goods in question. Since agricultural land is a major component of both food security and landscape preservation, thus giving rise to a high degree of cost complementarities between the two public goods, it would be more efficient to support land extensive production techniques, than production per se.Food security; landscape preservation; public goods; agricultural policy; numerical model.

Multifunctionality of Agriculture: An Inquiry Into the Complementarity Between Landscape Preservation and Food Security

Without support, the levels of agricultural public goods will fall short of the demand in high cost countries like Norway, Finland and Iceland. However, as demonstrated in this paper using Norway as a case, the current support and agricultural activity is far out of proportions from a public goods perspective. Model simulations show that at most 40% of the current support level can be defended by the public good argument. Furthermore, the present support, stimulating high production levels, is badly targeted at the public goods in question. Since agricultural land is a major component of both food security and landscape preservation, thus giving rise to a high degree of cost complementarities between the two public goods, it would be more efficient to support land extensive production techniques, than production per se.food security, landscape preservation, public goods, agricultural policy, numerical model, Food Security and Poverty, Land Economics/Use,

Efficiency losses in milk marketing boards - the importance of exports

A milk marketing board (MMB) is a well known instrument for regulating the markets for dairy products. MMBs are based on price discrimination, and receipts from sales are pooled so that the farmers receive a single price adjusted for composition and quality. Using a numerical model, we find that the economic welfare cost of the Norwegian MMB, is as much as 26.3% of the milk production value. This computed cost is far larger than for the other countries with MMBs. The main reasons are that exports are a major ingredient of the Norwegian system, and that production costs are very highMilk marketing boards, Norwegian dairy policy, price discrimination

Optimal agricultural policy and PSE measurement: an assessment and application to Norway

The producer support estimate calculated by the OECD is widely misused as an indicator of distortions created by agricultural policies. In this paper we demonstrate rigorously that a change in the relative (percentage) PSE is not an accurate indicator of the implications of policy reform for domestic welfare or for trade distortions. If there are positive externalities linked to agricultural inputs (e.g., land), we demonstrate that replacing output subsidies by optimal Pigouvian subsidies may result in an increase or a reduction in relative PSE depending on the parameters of the production function. Using the example of Norway we show that an increase in the relative PSE is likely if the focus of agricultural policies shifts from income support to the provision of public goods.Agricultural policy; trade distortion; domestic support; producer support estimate PSE).

Optimal agricultural policy and PSE measurement : an assessment and application to Norway

The producer support estimate (the successor to the producer support equivalent) calculated by the OECD is widely used as an indicator of distortions created by agricultural policies. In this paper we demonstrate that changes in the relative (percentage) PSE are not an accurate indicator of the implications of policy reform for domestic welfare or for trade distortions. We demonstrate that it is important to consider the implications of changes in both the level and the form of support in evaluating the impact of policy reform. Using a model of Norwegian agriculture we show that reforms indicated towards the provision of public goods, while apparently leading to an increase in relative support, are actually superior to existing agricultural policies or to a policy aimed at eliminating subsidized exports both in terms of reducing trade distortions and increasing domestic economic welfare

Regional growth in Western Europe : detecting spatial misspecification using the R environment

The work discussed in Bivand and Brunstad (2003) was an attempt to throw light on apparent variability in regional convergence in relation to agriculture as a sector subject to powerful political measures, in Western Europe, 1989–1999. The present study takes up a number of points made in conclusion in that paper. Since it is possible that the non-stationarity found there is related to further missing variables, including the inadequacy of the way in which agricultural subsidies are represented, we attempt to replace the agriculture variables with better estimates of producer subsidy equivalents. It is also sensible to check that agricultural support is not masking or masked by other variables, for example human capital. The paper is also an account of the development of software contributed to the R project (R Development Core Team, 2005) as packages, in particular the spdep package for spatial econometrics. New functions generously contributed by researchers will be presented and compared. We find that agricultural support does impact regional economic growth after human capital is taken into consideration, and that we can show that apparent non-stationarity is alleviated by adding these variables. We further find that the moderated remaining spatial autocorrelation can best be represented by a substantive spatial lag model

Optimal provision of public goods : implications for support to agriculture

This paper summarises a decade of research by the authors into the welfare economic foundations for agricultural policy. The main results are that the levels of support to agriculture in rich developed countries like Norway are way out of proportion with what could conceivably be defended by welfare theoretic arguments. However, the present debate on the multifunctional role of agriculture points to valid arguments for agricultural support. In terms of welfare economics these arguments are found in the links between agriculture and public goods like landscape amenities and food security. This paper offers a modest attempt to quantify the Pigouvian subsidies that could be derived from these arguments