NOT
FOR
QUOTATION WITHOUT PERMISSION OF THE AUTHORTHE M A
FOOD AND A G R I C U L W MODELFDR
THEEC:
AN OVEFWIEW
Uwe FZrber Klaus Frohberg Erik Geyskens Costas Meghir Pierpaolo Pierani
June 1984 WP-84-50
Working Papers a r e interim reports on work of t h e International Institute for Applied Systems Analysis and have received only limited review. Views or opinions expressed herein do not necessarily represent those of t h e Institute o r of it,s National Member Organizations.
INTERNATIONAL INSTITUTE FOR APPLIED SYSTEMS ANALYSIS 2361 Laxenburg. Austria
FOREWORD
Understanding t h e n a t u r e and dimensions of t h e world food population a n d t h e policies available to alleviate i t h a s been t h e focal point of the IIASA Food a n d Agriculture Program since it began in 1977.
National food systems a r e highly interdependent, and yet t h e major policy options exist a t t h e national level. Therefore, t o explore these options, i t is necessary both t o develop policy models for national economies and t o link t h e m together by trade a n d capital transfers. For g r e a t e r realism t h e models in this s c h e m e a r e kept descriptive, r a t h e r than normative.
Over t h e years models of some twenty countries, which together a c c o u n t for nearly 80 p e r c e n t of important agricultural a t t r i b u t e s such as area, produc- tion, population. exports, imports a n d so on, have been linked together t o con- s t i t u t e what we call t h e basic linked system (BLS) of national models. One of t h e models is a model European Community treated as one nation.
For analyzing a number of interesting policy issues we need a detailed model of European Community where t h e EC member countries a r e modeled separately. These national models first i n t e r a c t among themselves under t h e rules of t h e Common Agricultural Policies (CAP) of EC, and then i n t e r a c t with t h e models of o t h e r nations. This detailed model of EC can be used to replace t h e aggregated EC model in t h e BLS.
In this paper Uwe FZrber, Klaus Frohberg, Erik Geyskens, Costas Meghir and Pierpaolo Pierani present a n overview of t h e detailed model developed for t h e countries of t h e European Community. Work on this model was begun
at
t h e University of Gdttingen in 1977 with partial support from IIASA. Since 1982 t h e work is being carried o u t a t TIASA supported by a g r a n t from t h e Center for World Food Studies of The Netherlands.Kirit S. Parikh Program Leader Food and Agriculture Program
THE IlASA R)(ID AND AGRICULTURE MODEL
FOR
THEEC:
AN OYERVEW
Uwe Farber, Klaus Frohberg, Erik Geyskens.
Costas Meghir and Pierpaolo Pierani
THE IIASA FOOD AND AGRICULTURE MODEL FOR THE EC:
AN OVERVIEW*
The Common Agriculture Policy (CAP) of t h e European Community most prominently seeks to ensure a fair standard of living for the agri- cultural population, mainly through regulation of agricultural markets.
Over the past years this policy has been subject to growing criticism.
both from member countries and the outside world. The internal debate appears to revolve about the increasing costs of market intervention on t h e one hand and t h e inequal distribution of these costs over member countries on t h e other hand. For example, one frequently mentions t h a t
*This paper is a revised version of a paper presented a t the FAP Workshop "Interdependence of national agricultural policies; impact of agricultural trade liberalization", Laxenburg, January 11-13, 1084.
The EC modeling work was initiated at the Institute of Agricultural Economics nt t h e Univer- sity of Cattingen, FRG, in 1078. At that time it was financially supported by the Volkswagen Foundation in Germany. Since 1982 the work has been continued a t IIASA's Food and Agri- culture Program (FAP) and is financed by a grant of the Dutch Government to the Centre for World Food Studies, Amsterdam. The authors wo-dd like !.o thank the Advisory Committee members; Prof. M. de Benedictis, Naples, Prof. J.-M. Boussard, Paris, Prof. D. Colman, Man- cheater, Prof. H. de Haen, Mttingen, Prof. 6. de Hoogh, Wageningen, Proi. F. Polverini, Na- ples, and Prof. S. Tangermann, Qttingen, both for their steady and helpful suggestions and constructive criticism and comments. Many others who are too numerous to mention also contributed to t h e work; however, the contribution of M. Keyzer is too substantial not t o be singled out here.
t h e r e is an income transfer in t h e c u r r e n t system from t h e n e t import- ing t o t h e n e t exporting countries.
The criticism coming from non-EC countries can be s u m m a r i z e d as follows. Developing countries complain t h a t t h e protectionism implied by t h e CAP makes i t very difficult or even impossible t o get a fair m a r k e t s h a r e within t h e EC for their products, which hinders t h e development of t h e i r agricultural sectors. The developed countries claim t h a t t h e EC dumps its surplus on t h e world m a r k e t and thereby reduces t h e i r oppor- tunities t o export. In addition, i t is claimed t h a t t h e CAP h a s a destabil- izing effect on world m a r k e t prices.
Many studies have appeared on t h e subject referring to a n u m b e r of these problems in e i t h e r a partial or a qualitative way. However, t h e
lational food a n d agriculture sectors a r e tightly interconnected a n a pol- icy decisions, whether domestically or trade-oriented, can have a n immediate and significant effect on both member countries a n d t h e rest-of-the-world. Furthermore, s t r u c t u r a l changes in t h e a g r i c u l t u r e system a n d links between t h e agricultural and nonagricultural s e c t o r s are such t h a t ignoring t h e m would mean missing an i m p o r t a n t com- ponent of t h e direct and indirect policy effects. To evaluate alternative policies we need t o account for t h e interdependence of policies and t h e s t r u c t u r a l changes in agricultural production, consumption a n d t r a d e brought about by policy alterations i n a consistent way. For this we need a model which describes t h e economies of the member countries, with special emphasis on t h e agriculture sectors, as constituent p a r t s of t h e common market.
The EC model developed a t t h e IIASA Food a n d Agriculture P r o g r a m (FAP) serves this purpose. Alternative policies about the CAP which can be explored are. for example: removal of Monetary Compensatory Amounts (MCA's) a t a g r e a t e r speed, lowering protection levels while simultaneously providing farmers with direct income support, minimiz- ing t h e costs of surplus disposal, etc.
In t e r m s of both imports and exports the EC has a substantial s h a r e of total world trade in agricultural products. Hence, t h e world m a r k e t prices which a r e an important determinant of the cost of t h e CAP a r e influenced by t h e EC policy itself.
To take this influence into account in the analysis t h e EC model is constructed as p a r t of a system of linked national agricultural policy analysis models, covering t h e world food and agricultural system, which is being developed at IIASA/FAP.
Running t h e EC model in t h e FAP model system allows one t o evalu- a t e additional policy options such as: oligopolistic strategies with respect t o surplus disposal on t h e world market, concessional t r a d e of third countries with t h e EC, participation in internat.iona1 stabilization schemes, sharing t h e burden of holding food reserves for e m e r g e n c y food aid, etc.
This paper presents an overview of the EC model, followed by a description of t h e FAP model system. The paper coricludes with possible policy scenarios for simulation.
2. AN OVERVIEW OF
THE
EC MODELIn its present form t h e EC model includes all EC countries but Greece, which joined t h e EC when t h e modeling work was already advanced. Belgium a n d Luxembourg a r e taken t o be one individual coun- try. The EC model is of a general equilibrium type suitable for policy analysis in a medium-term t i m e horizon. I t works on a 15-commodity list with 14 agricultural commodities and one nonagricultural commo- dity t o cover t h e whole economy (see Table 1).
Since t h e introduction of common price and trade policies in t h e EC, t h e exchange of commodities between producers and c o n s u m e r s no longer takes place on s e p a r a t e national markets. The common policies establish a common m a r k e t where total EC demand m e e t s total EC sup- ply a n d exchange takes place. Accordingly, the EC model has only one exchange component. The policy i n s t r u m e n t s affecting exchange a r e defined by t h e policy module which represents t h e decision process with r e g a r d to t h e CAP.
We now briefly discuss t h e different country-specific models, illus- t r a t e t h e functioning of t h e EC exchange component, a n d t h e n describe t h e EC policy module. Figure 1 gives a diagrammatic picture of t h e model's operation.
2.1. The Country-Specific Modules
For each country t h e r e is an agricultural supply component, a private demand component, a n d a macrocomponent. Although t h e func- tional forms used for a particular module a r e similar for all countries, it is important t o note t h a t t h e s e country-specific modules a r e e s t i m a t e d separately a n d t h u s may reflect t h e sometimes considerable differences between countries.
With respect t o agricultural supply i t is hypothesized t h a t t h e n u m e r o u s decisions m a d e by f a r m e r s during a year t o determine o u t p u t can be reduced t o only two decision stages. Based on expected prices f a r m e r s in t h e first s t e p decide on the aggregate output of livestock a n d crop sectors a n d on t h e i n p u t of such factors a s labor, buildings a n d machinery, and land. This is followed by a decision on t h e allocation of t h e s e factors and o t h e r i n p u t s (fertilizer, feed), a n d thereby f a r m e r s d e t e r m i n e t h e output of t h e various individual commodities.
Private demand is described by a complete demand system, includ- ing t h e demand for t h e nonagricultural commodity. The specification used is t h e Linear Expenditure System (LES).
The macro-component c u r r e n t l y defines, among o t h e r things, exo- genously nonagricultural supply, government consumption, nonagricul- t u r a l investment.
2.2. The exchange component
Under t h e CAP t h e EC nations first i n t e r a c t with e a c h o t h e r a n d t o g e t h e r then trade with o t h e r nations a t t h e world market. Their interaction on t h e i n t e r n a l markeL is described in t h e exchange corn- ponent. In this module EC prices, demand arid trade flows adjust, given total supplies from t h e different member countries a n d given world
r - - -
I 1
I International Exchange
EC Exchange
,
SUPP~Y A+
Given-
Supplied quantities - Demand behavior-
EC policiesEC
) -
World pricesPolicy
-
EC trade deficitSolve for
-
Common prices ) supply B+ -
EC demand-
EC tax rateDemand Demand
I
behavior behavior
I
A B
[-I
Module0
Outcome of Module r--18 Exogenous or linkage to FAP Model System
L -
F'igurc 1. A Sr!herr~at.ic Outline of I.fir: P:C Motlel (Sirr~plified for I.wo c o u n t r i e s ) .
m a r k e t prices, until all EC markets a r e cleared. The outcome of this process is affected by t h e policy instruments as defined by the policy component. The CAP is financed by an endogenously determined tax on EC value-added. Thus t h e model ensures common prices and common financing within t h e Common Market, and i t also ensures t h a t t h e EC m e m b e r countries t r a d e with third countries as one unit with respect t o trade policies.
The solution of t h e EC exchange component implies domestic equili- brium for each of t h e member countries; national accounts, supply bal- a n c e sheets and prices a r e then calculated.
The information for setting next year's EC policy instruments is obtained from t h e s e different domestic equilibria. The policj. instru- m e n t s related t o production become effective a t various stages of next year's supply module of each country.
2.3. The EC
Policy ModuleWe now t u r n t o a more detailed discussion of t h e EC policy module, which characterizes t h e way in which t h e various policy instruments a r e set.
Under t h e p r e s e n t working of CAP the EC Council and Commission s e t for most commodities threshold and intervention prices. The EC regulations a r e s u c h t h a t the market price cannot fall below t h e inter- vention price nor r i s e above t h e threshold price. These price bounds are defined in the policy module, taking specific market regulations into account. In determining policy prices for t h e different commodities, t h e model uses a two-step approach.
In t h e first s t e p a normative increase of CAP prices a t EC level is determined. Assuming t h a t the Council's principle objective t o maintain t h e relative income position of the agricultural population is more or less bounded by t h e EC budget, a normative increase of t h e common price level could be determined as a function of
-
t h e difference in t h e increase in the costs of agricultural production a n d productivity ( t h e "objective m e t h o d is mainly based on this aspect)-
t h e income parity between t h e agricultural and t h e nonagricultural sector-
t h e situation on t h e world market-
t h e EC budget situation.In t h e second s t e p t h e differentiation of t h e normative price increase across commodities takes place. To what extent this normative price increase will actually be applied in the price decisions on t h e various commodities depends on t h e s t r u c t u r e s of the different m a r k e t regimes and on t h e c h a r a c t e r i s t i c s of the respective commodity markets. The general assumptiorl is t h a t for any CAP commodity this nonnative price increase is t h e maximum possible policy price increase, which for commodity-specific reasons will not always be applied fully. These commodity-specific e l e m e n t s a r e modeled in the EC policy module according to t h e individual market regulations like quota systems, co- responsibility levies, intervention policies, world m a r k e t influences,
stockholding policies, e t c . with a built-in flexibility for m a j o r changes in policy.
Moreover, t h e policy component derives green r a t e s f r o m given m a r k e t exchange r a t e s a n d calculates MCA's based on t h e divergence of t h e two. Thereby t h e policy module can provide policy prices for e a c h country separately in national currencies.
To explain how t h e s e policies have been i m p l e m e n t e d in t h e model, we describe t h e m for a single commodity. Figure 2 illustrates t h e vari- able import/export levy a n d refund policy of t h e EC. Independently of c u r r e n t world m a r k e t prices,!the EC sets t h e prices a t which t h e m e m b e r countries will t r a d e with t h e r e s t of t h e world: for imports t h e upper price
6
h a s t o be paid a n d for exports t h e lower pricep
Only if t h e t r a d e of t h e EC with t h e r e s t of t h e world is zero m a y t h e price lie between t h e lower boundE
a n d t h e u p p e r boundF,
t h e equilibrium price will t h e n depend o n t h e position of t h e EC n e t demand curve.The example above c a n be looked a t a s if realization of t r a d e t a r g e t s is given a higher priority t h a n realization of price t a r g e t s . The price first adjusts t o defend a t r a d e t a r g e t a n d only when t h e price hits a bound is trade allowed t o adjust. If a single commodity is subject t o more t h a n one policy i n s t r u m e n t
-
for example, t h e combination of t h e variable import/export levy and refund policy with a stock policy-
t h e r e will be a chain of priorities. In this case, t h e price first adjusts t o defend a stock t a r g e t , a n d t h e n s t o c k adjusts, t h e price remaining a t i t s r e a c h e d bound. Next, price a d j u s t s again between t h e previously r e a c h e d bound a n d a wider bound t o defend t h e trade t a r g e t , stock remaining a t one of i t s bounds. Finally. t r a d e adjusts.e- e x p o r t s zero i m p o r t s + EC t r a d e
Figure 2. The variable import/export levy a n d refund policy.
The policy model h a s been flexibly s t r u c t u r e d a n d c a n therefore easily a c c o m m o d a t e changes in policy rules. Special attention h a s been given t o t h e i n t e r f a c e of t h e EC with t h e world market. Here t h e imple- m e n t a t i o n allows EC prices t o become partially o r completely dependent on world m a r k e t prices.
3.
THE PAP
MODEL SYSlEMThe FAP model s y s t e m consists of national a n d regional models which have t h e s a m e s t r u c t u r e a s t h e EC model. They i n t e r a c t with one a n o t h e r t h r o u g h t r a d e a n d capital flows, a n d respond t o national govern- m e n t policies a n d t o international agreements, a s well. Examples of t h e l a t t e r a r e t h e introduction of a buffer stock agency, compensatory financing a g r e e m e n t s , b a r t e r t r a d e a g r e e m e n t s a n d economic unions.
The FAP model s y s t e m solves for world m a r k e t prices t h a t clear t h e world m a r k e t .
The c o u n t r i e s included in FAP's model system a r e listed in Table 2.
Together t h e y make u p a b o u t 80 p e r c e n t of t h e world's population, agricultural production, l a n d a r e a a n d exports a n d imports of food. The s y s t e m is closed by including a n aggregate model for the "rest-of-the- world". At t h e i n t e r n a t i o n a l level t h e model distinguishes between eight agricultural food commodities, one nonfood agricultural commodity a n d one aggregate n o n a g r i c u l t u r a l commodity, t h u s covering t h e whole economy (see Table 1).
In t h e description of t h e EC model i t was assumed t h a t t h e world m a r k e t prices were given. This assumption c a n be dropped once t h e model is linked with t h e FAP system. In this way t h e EC policies c a n be analyzed i n a global context. I t becomes possible to take i n t o account policy i m p a c t s b o t h on o t h e r c o u n t r i e s and on world m a r k e t s and, vice versa, t o a s s e s s t o what e x t e n t EC m a r k e t s a n d policies a r e influenced by t h e global food situation.
Table 1. Commodities in EC Model a n d in FAP Model System EC Commodity List IIASA/FAP Commodity List
1. wheat 1. wheat
2. coarse grain 2. coarse grain
3. rice 3. rice
4. bovine
+
ovine m e a t 4. bovine+
ovine m e a t5. dairy 5. dairy
6. p o r k , p o u l t r y , e g g s )
7. fish ; 6. other animals
8. protein feed 7. protein feed
9. oilseeds 10. sugar
11. fruit 8. other food
+
beverages12. vegetables
13. beverages and resid. other food
14. nonfood agriculture 9. nonfood agriculture
15. nonagriculture 10. nonagriculture
Table 2. Countries included in t h e FAP model system.
Country Model E ~ Y pt
Kenya Nigeria Bangladesh
China India Indonesia
Pakistan Thailand Turkey Atgen tina
Brazil Mexico
Australia
*
Japan New Zealand
Canada
USA m
Country Model
Austria ¤
EC Belgium Denmark
France
FRG
Ireland Italy Netherlands
UK
F ~ n l a n d Portugal
Sweden CMEA Bulgaria Czechoslovakia
GDR Hungary
Poland Romania
USSR
*Indicates t h a t t h e model was developed a t FAP.
d n k c a t e s t h a t the model was developed elsewhere.
4. SIMULATION
OF
ALTERNAm POLICESThe EC model is quite suitable for generating t h e information needed t o evaluate different policy options in a sensible way. In any simulation r u n for each of t h e eight countries which together constitute the EC model and for e a c h year of t h e simulation period supply- utilization accounts for t h e 15-commodity list as well a s national accounts and consumer a n d producer prices a r e generated. At t h e EC level the costs of CAP a r e also calculated.
Some examples of policy options which c a n conceivably be simu- lated with t h e EC model a r e mentioned here:
-
trade liberalization; with o r without direct income support for t h e farmers; e i t h e r differentiated by commodity or not-
removal of MCA's a t g r e a t e r speed or complete abolition of these-
policies which seek to dispose of surpluses a t minimal cost, taldng into account t h e trade-off between disposal on t h e internal ~ a r k e t (e.g. through denaturation of food t o feeds) and disposal on t h e world market-
stabilizing t r a d e flows by using buffer stocks-
partial opening of t h e EC m a r k e t in order t o help absorb shocks from the outside world; internal prices would be allowed to follow price movements a t t h e world m a r k e t in a dampened way.-
preferential t r a d e a r r a n g e m e n t s-
enlargement of t h e EC-
food aid policies-
EC's contribution t o international stabilization schemesA s already mentioned before, t h e EC model c a n be r u n on its own or within t h e FAP model system. In t h e first case a s e t of world m a r k e t prices has to be provided exogenously, whereas within t h e world-wide framework results a r e obtained with endogenous world m a r k e t prices.
Not all of the examples mentioned above can be r u n in a stand-alone mode, but some might if one i s prepared t o a s s u m e t h a t t h e policy a t hand will not affect world m a r k e t prices noticeably. The examples a r e m e a n t t o give only a flavor of t h e variety in policies which c a n be simu- lated with the EC model within or outside of t h e FAP model system.
The EC model and t h e FAP model system a r e transferable, t h a t is they can be implemented on o t h e r computers t h a n t h a t in u s e a t IIASA.
Other institutions a r e given t h e opportunity t o use these models for pol- icy analysis. The U S Department of Agriculture. for example, continues developing t h e U S model a n d u s e s a copy of t h e FAP model system a s a tool for evaluating policy options.
REFERENCES
Abkin, Michael H. (1982) "Concepts Behind IIASA's World Food a n d Agricul- t u r e Model and t h e National Model of the United States." IIASA WP- 82-29. Laxenburg, Austria: lnternational Institute for Applied Sys- tems Analysis.
de Haen, H. (1978) "The Food and Agricultural Model of the International Institute for Applied Systems Analysis." IIASA RM-78-24. Laxenburg, Austria: lnternational Institute for Applied Systems Analysis.
de Haen, H., J.V. Schrader and S. Tangermann (1978) "Modelling t h e EC Agricultural Sector: Problem Assessment, Policy Scenarios and Model Outline." IIASA RM-78-23. Laxenburg, Austria: International Institute For Applied Systems Analysis.
Farber, U.,
K.
Frohberg,E.
Geyskens, P. Pierani and P. Veenendaal (1984)"The Structure of t h e Agricultural Modules of the EC Model." IIASA WP, forthcoming. Laxenburg, Austria: International Institute for Applied Systems Analysis.
Fischer, G. and K. Frohberg. (1980) "Simplified National Models: The Con- densed Version of the Food and Agriculture Model System of the lnternational Institute for Applied Systems Analysis." IIASA WP-80-56.
Laxenburg, Austria: lnternational Institute for Applied Systems Analysis.
Keyzer, M.A (1981)
77W
International Linkage of @en Ezchange Economies. Doctoral Dissertation. Free University of Amsterdam.Parikh, K.S. and Ferenc RBbar (1981) Food for All in a Sustainable World:
77W
ILASA Fbod and Agriculture P r o g r a m . IlASA SR-81-2. Laxenburg, Austria: International Institute for Applied Systems Analysis.Parikh. KS. (1981) "Exploring National Food Policies in an International Setting: The Food and Agriculture Program of IIASA." IIASA WP-81-12.
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