The impacts of a CAP budget reform on the world economy: A CGE assessment

Abstract

European agricultural market support and direct payments amount to 44 billion Euros in 2012 – of which farm subsidies represent 40 billion euros. Rural development measures add 13 billion Euros to the European Union (EU) budget devoted to the Common Agricultural Policy (CAP). As a total, roughly 40 per cent of the EU budget aims at funding this sector-based policy. Whereas a CAP reform is expected for the period post-2013, an agreement on the 2014-2020 EU financial framework shall be reached before then. This paper attempts to capture the implications for the EU and third countries of resource reallocations in the CAP budget provision for the period 2014-2020. It employs a sophisticated dynamic variant of the GTAP model, known as the Modular Applied General Equilibrium Tool (MAGNET) model. Given the focus on agri-food markets, a number of additional modelling features are incorporated to capture the peculiarities of agricultural factor markets (e.g. endogenous land supply, heterogeneous land usage; agricultural/non-agricultural factor split) and agricultural policy (e.g. decoupled payments, rural development support). Of particular importance to this study is the comparatively detailed treatment of the CAP budget, with coverage of first and second pillar, where the latter explicitly characterises between five distinct rural development measures (i.e. physical investment, human capacity, agri-environmental, less favoured areas, and wider rural development). Finally, the 'own resources' component of the European budget is also modelled, with associated rebate mechanisms, in order to consider the political economy of European budgetary reform.