1. Background
Agricultural functions embody besides supplying tradable commodities such as food and fiber, also providing public goods, namely, non-commodity outputs with characteristics of externalities. The former is usually called agricultural economic function. The latter is described as environmental and social functions, which include agricultural landscapes, farmland biodiversity, water quality, water availability, soil functionality, climate stability (greenhouse gas emissions, carbon storage), air quality, as well as food security, food safety, rural viability, and farm animal welfare (Cooper et al. 2009, Brunstad 2005, OECD 2001, EC 1999, Hediger and Lehman 2003, Randall 2002, Vatn 2002).
The public goods is defined in economic theory as goods with the two characteristics: non-rivalry and non-excludability. Consumers cannot be excluded from their consumption and one’s consumption does not affect another’s.
Agriculture provides a wide range of public goods, usually called club goods and common pool resource, characterized by either non-excludable or non-rival but not both.
For public goods with positive externalities, people are not fully reimbursed for their activities or production. On the other hand, when people produce public bad with negative externalities, they do not have to carry the full costs of the damage they inflict on others. This is because the market cannot function as a resource allocation mechanism, which leads to socially optimal levels of public goods under-supplied or over-demanded. Agricultural public goods provision is no exception.
Recent and on-going agricultural support policy reforms worldwide have agricultural subsidies on a pathway that aims to rationalize payment and support to the sustainability, multi-functionality, and especially public goods of agricultural systems, which is emerging as a central rationale for future Common Agricultural Policy (CAP) support.
Since 2005, the EU's CAP has undergone significant change as subsidies have mostly been decoupled from production. The single farm payment, as main direct subsidy, was introduced, together with provisions for cross-compliance (meeting certain environmental and animal welfare conditions) and for reductions to be made from direct payments to support of rural development ("modulation").
But some critics claim that CAP distorts trade, encourages inefficiency, favors certain European countries and wipes out food markets in Africa, and spends 37% of the EU's budget on a sector that’s only 2% of the whole European economy. In addition, the subsidies are unequally distributed: more than 1,200 of the recipients received more than €1 million each year.
The current proposal by the EU commission on October 12 2011 for the CAP after 2013 sets out a payment where 30% of annual national ceiling of direct support would be for farmers following practices beneficial for the climate and the environment: crop diversification, maintenance of permanent pastures and ecological focus areas. The proposal has been called a “greening” of the CAP which is an expression of that the demand for public goods has been taken seriously. It will make more sense to divert direct payments for farmers’ income to look after nature through greening CAP.
Since 2004, China has reversed its longstanding policy of taxing farm households and instead began to subsidize them given national grain self-sufficiency and rural household incomes.
China’s support policies for agriculture, rural areas and farmers include 1) direct subsidy payments to farmers, 2) payments for rural vitality and development, 3) payments for natural resource and ecology improvement, and 4) indirect subsidies. Direct subsidies per unit of cultivated area or total amount have dramatically risen (Huang, et al 2009). However, 140.6 billion Yuan (around €15 billion) of direct subsidy in 2010 only accounts for 17% of total national financial payment budget (around €82billion) for agriculture, rural area and farmers (statistic from China year book 2010).
Different distribution of subsidies in different countries raises considerations about what standards of distribution needed to meet agricultural environmental and social objectives within ongoing agricultural support policy reforms worldwide.
This study aims to 1) examine the evolution and breakdown of farm subsidies distribution based on different items of agricultural public goods through panel data set during 1995-2010 in Finland and China, and compare which aspects of public goods are more concerned in these two countries, 2) evaluate effect of farm subsidies on provision of public goods by pooled regression model, find out the rationality and practicability of distribution of subsidies according to agricultural environmental and social criteria, i.e. public goods, in a sense, related to institutional economics. More particularly, we aim to 3) identify whether public goods relating to agriculture are valued differently in China and in Finland by agricultural experts, consumers, and farmers. By examining the perceptions of these three groups on public goods we want to explain the differences in agricultural policies carried out in China and in EU. Such a goal can bring forward useful information for the future trade-negotiation round of the World Trade Organization (WTO) which has currently failed to reach a compromise on agricultural import rules, particularly between USA, China, India and EU. Increasing understanding of these differences through economic analysis is therefore important.
2. Our previous related investigations
The specific meaning attached to multi-functionality of agriculture (MFA) seems to differ among Chinese and Finnish experts by our cross-table and factor analysis. The former consider food security and rural viability as the most important elements of MFA. The latter seem to view food safety, environmental aspects, animal welfare, and the rural landscape as the most important functions of agriculture (Chen and Sumelius 2008).
Based on interpretations of policies concerning elements of MFA and rural countryside, there are clear differences in time and frequency for food security, food safety and animal welfare related policies implemented or amended between China and Finland. Environmental protection and rural viability policies have been addressed and renewed with a similar degree of stress in the both countries (Chen, Sumelius and Arovuori 2009).
Literature review on MFA in EU was summarized as quantitative evaluation (e.g. SPA and RPA) of MFA value, comparison between MFA and Agri-environmental scheme, joint production of MFA. Literature review MFA in China focus on different attitudes to the MFA among countries, the links between MFA and non-trade concerns (NTC) and the evaluation methods of MFA value (Chen and Sumelius, 2007).
3. Methodological approach
Examine the evolution and breakdown of farm subsidy during 1995-2010 in China and Finland to analyze distribution of farm subsidies on agricultural public goods items through panel data set, and compare which aspects of public goods are more concerned in these two countries.
Evaluate effect of farm subsidy distribution on provision of public goods through pooled regression model with pooled time series and cross sectional data.
Use experts’ scoring of the farming systems and practices to assess the extent to which they provide environmental public goods in Finland and China.
The agricultural public goods are valued through Contingent Valuation Methods by consumers (public goods demand side).
The various agricultural support policies are evaluated by farmers (public goods supply side), and Ordered Probit Models will be built to analyze determinants of evaluation on agricultural environmental and social public goods from public consumers and farmers respectively.
Using in-depth interview of qualitative research method is to know the understanding and perception of the provision of agricultural public goods and distribution of subsidies from the individual farmer at village level in Finland and China. Farmers’ different educational background, personal income level, age, gender, as well as village’s geographical and nature environmental feature, economic and social development level will be chosen as characteristic of observations in these purposeful samples.
Firstly, the study starts with the concept of agricultural multi-functions, which focusing on its environmental and social functions, subsequently derives the concept of agricultural public goods in terms of their supply and demand, as well as theory evidences for agricultural public goods and externality. Thereafter the study gives hypothesis that different concerned items of agricultural public goods in Finland and China exist, based on my previous investigation that different elements of multi-functionality are concerned in these two countries.
Then it follows by the main public goods provided by agriculture such as environmental public goods and social public goods. In the light of the initial classification of farming systems and farming practices in the EU (Cooper et al. 2009), the study will use those EU eight farming practices and two farming systems mentioned, which may be seen as currently particularly beneficial for providing environmental public goods, to calculate how much subsidies input into those farming systems and practices in Finnish context. Meanwhile, try to use the foregoing method of experts’ scoring of the farming systems and practices in EU to assess the extent to which they provide environmental public goods in China, and draw up a list of farming system and farming practices which provide most of environmental public goods, and calculate how much subsidies they receive.
Secondly, the agricultural public goods are valued through Contingent Valuation Methods by public consumers (public goods demand side), and the various agricultural support polices are evaluated by farmers (public goods supply side). Because the foregoing evaluations fall into the scope of discrete choice model, Ordered Probit Model is applicable to be built to analyze determinants of evaluation on agricultural environmental and social public goods from public consumers and farmers respectively, which intends to explain the reasons for the gap between the supply and demand sides of agricultural public goods.
Thirdly, the main part of this study is to 1) examine the evolution and breakdown of farm subsidies during 1995-2010 in China and Finland by using panel data, in order to analyze farm subsidy distribution based on the different items of agricultural public goods and compare which aspects of public goods are concerned in the two countries, 2) evaluate the effect of farm subsidies on provision of agricultural public goods through pooled regression model. Provision of agricultural public goods will be measured by the area size of two farm systems: extensive mixed arable/ pastoral and extensive outdoor livestock and silvo-pastoral systems, because they have the largest number of beneficial farming practices across the largest range of public goods (Cooper et al. 2009). Yit = a + Xit 'b +eit, i = 1, 2, …, N; t = 1, 2, …, T, where Yit is the dependent variable, provision of agricultural public goods, the Xit are observed explanatory variables, subsidies on the different items of public goods.
Fourthly, the above sections concentrate quantitative analysis on the distributions of farm subsidies in terms of agricultural public goods items in the two countries. There is a need to apply in-depth interview of qualitative research method as a supplement to further know the understanding and perception of the provision of agricultural public goods and distribution of subsidies from the individual farmer viewpoints at village level in Finland and China. The purpose is to examine whether the demand or requirement for agricultural support policies based on the provision of public goods is in line with the results of foregoing quantitative analysis. Farmers’ different educational background, personal income level, age, gender, as well as village geographical and nature environment feature, economic and social development level will be chosen as characteristic of observations in these purposeful samples.
Finally, we attempt to find out tentative classification and distribution standards based on agricultural environmental and social criteria, i.e. public goods, under the principle of institutional economics, according to the foregoing quantitative and qualitative analysis, instead of estimates of subsidies by OECD domestic support and border measures and WTO Amber box and green box support.
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