Assessing dynamic impacts of CAP reform on technological change, knowledge development and rural pro

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Assessing dynamic impacts of CAP reform on
technological change, knowledge development and
rural professions

• How to assess dynamic impacts of agricultural
  policies when knowledge is a fundamental factor
  of production?
• Presentation in Workshop New approaches to
  Agricultural Policy Development in EU25, Riga,
  Latvia June 30 2003
• Dr. Heikki Lehtonen MTT Agrifood Research
  Finland, Economic Research

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Contents

• Technological change in agriculture What does it
  mean for farmers and rural community?
• Some impacts of CAP reform
• Challenges for policy evaluation and design
• How to evaluate policy impacts on
• sustainable development
• farmers skills and knowledge
• Conclusions

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The role of technology in agriculture

• Facilitates large efficient farms and low labour
  costs
• Efficient production management is not possible
  without efficient high capacity production
  technology
• Agricultural development is increasingly
  knowledge and technology intensive
• Case Try to use any new agricultural machine
  fully equipped with electronics, computer based
  steering and control systems
• Not even experienced engineers can do it without
  a manual!

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Inter-linked technological and economic change

• Economic development is knowledge intensive
• Learning is cumulative ?
• Economic development is cumulative
• Path dependencies in economics sensitivity to
  initial conditions or to exogenous shocks,
  especially in early phases of development
• Change can be best promoted in early phases of
  development
• Spread of information and knowledge of
  alternative techniques affects technology choices
• Information and knowledge is also related to
  uncertainties of alternative techniques this
  affects investments as much as profitability

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Technological change needs a sufficiently large
farm size

• Capital is substituted for labour only if it is
  profitable, i.e. efficient production techniques
  are expensive and the investment should pay back
  itself
• Farm size growth is often a slow and difficult
  process
• Agricultural development is linked to social and
  institutional factors
• it is difficult to break social and institutional
  barriers
• Big farms which are already at the front of
  technological change have an advantage

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Technological change in agriculture is about...

• Skills and knowledge needed to use and apply
  modern technology
• Change of production management on (a large)
  farm including logistics and design of
  production facilities changing routines is
  usually more difficult than expected
• Specialisation in production develop your
  core-competencies, buy other services from a
  network of various sub-contractors (this contains
  practical and legal aspects). Using a
  sub-contractor you also get the benefits of
  efficient technology and skills of a specialist
• Developing upstream and downstream industries
  physical inputs and services of sufficient
  quality must be available in right quantities in
  right time
• Contracting and networking, as well as supply
  chain integration, lowers the threshold in
  changing to new inputs and products, like new
  crop varieties (GMO)
• Changes in regional rural economy change since
  agriculture itself employs less people, but
  requires educated professional in upstream and
  downstream industries and services input supply
  chains and trade of intermediate products may
  change, as well as money flows in regional
  economies

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Technological change in agriculture is also
about...

• Risk management Efficient technology and large
  scale production systems imply that losses can be
  considerable if something goes wrong
• Business skills Selling and buying skills (since
  quantities of inputs and products are large)
  networking with the right clients hedging with
  financial derivatives
• Paper work and wrestling with bureaucrats
• Multifunctionality A large farm must be able to
  show environmental benefits, production of public
  goods and reduced environmental harm due to new
  production technology
• CAP reform has effects on each of these 10
  points!

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Some impacts of CAP reform

• By de-coupling support from production and hence
  weakening the incentives for investments CAP
  reform gives a relative advantage to farms which
  are already large
• Small farms, which need to grow in order to be
  profitable, will be in a weaker position than
  before the reform
• If a farm size structure is dominated by small
  farms, the on-going growth of farms may
  decelerate or even cease for a while
• The cease in the growth of farms will also slow
  down the spread of knowledge of new technology in
  the population of farmers ? the diffusion of new
  technology becomes slower, especially in
  countries which are dominated by small farms
• Such a change may have far reaching consequences
  in all 10 points mentioned above!
• Self-inforcing patterns of technical change, as
  well as the effects of retardation in the
  critical phase of the development, can be
  illustrated using a mathematical agricultural
  sector model in which the interplay of
  technological and economic change is modelled
  using a model of technology diffusion

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Simulation experiment CAP reform is likely to
cease dairy investments in Finland...
Investments on dairy farms 19951
The simulation model DREMFIA is developed by MTT
Agrifood Research Finland
Base No changes in Agenda 2000 (agreed in
Berlin 1999) MTR 16 CAP Reform agreed in June 26
2003 assuming milk price reduction -16 MTR18
milk price -18 MTR20 milk price -20 MTR22
milk price -22
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because dairy farm structure is dominated by
small farms
Production capital (billion euros) on dairy farms
in base scenario
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Investments on big farms increase in base
scenario...
Gross investments on dairy farms billion
euros/year
Includes replacement investments, not only
investments in new facilities
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but decrease in MTR -scenario (milk price -20)
Gross investments on dairy farms billion
euros/year
Includes replacement investments, not only
investments in new facilities
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Dairy capital and production decrease drastically
in MTR
Production capital on dairy farms 19951
Base No changes in Agenda 2000 (agreed in
Berlin 1999) MTR 16 CAP Reform agreed in June 26
2003 assuming milk price reduction -16 MTR18
milk price -18 MTR20 milk price -20 MTR22
milk price -22
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Challenges for policy evaluation and design

• Policy makers should realise that the incentives
  for agricultural investments and farm size growth
  have far reaching consequences on
• technological change and the knowledge of farmers
  
• ecological, economic and social sustainability
• Problem there are no easy ways to take different
  aspects of sustainability into account in policy
  design and evaluation
• How to find the best available knowledge
  concerning each aspect, and link them?

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Problems and solutions

• How to find a driving force of agricultural
  development?
• The difficulty is that agricultural policy
  changes affect investments in a dynamic framework
  and in a heterogeneous population of farmers
  economic models are weak in this
• Such a modelling takes time and one cannot be
  sure about success
• Expert views may be inconsistent and mutually
  contradictory

• Main driver might be economic rationality, also
  changing consumer preferences, environmental
  values and advances in technology can be
  logically included
• New simulation models trying to capture both
  dynamics and heterogeneity in the interplay of
  economic and technical change
• It takes time to develop such models, but it
  provides an excellent learning process and
  consistency check
• Expert views and Foresight learning circle are
  needed

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Agricultural development depends on social
structures and traditions of learning and
entrepreneurship

• Farmers need specialised technical and biological
  experts and sub-contractors when expanding farm
  size and production and when specialising on
  certain phases in the production process
• Farmers, specialists and sub-contractors are not
  taken from nothing but need to be trained and
  selected from rural population
• Development needs people who are able to develop
  core competencies needed in the supply chain
• Entrepreneurial traditions and spirit is needed,
  one has to be able to take risks such attitudes
  cannot be created from scratch

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Example from Finnish agriculture Regional
agricultural development

• Production has concentrated in specific regions
  in the last 5-10 years
• For example, dairy production has gone up in some
  individual areas in recent years, while in the
  neighbouring areas production has been on
  constant decline
• Such changes cannot be explained by changes in
  agricultural supports, difference in farm size,
  or any tangible factors of production, like land
  availability

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Three explanations have been proposed

• Traditions of a entrepreneurship in some area has
  provided farmers with many examples of success.
  In other regions there may be few such
  entrepreneurial traditions and examples
• Lack of alternatives to agriculture results in a
  strong commitment in agriculture which may
  explain increased production volumes in some
  remote and sparsely populated areas
• Alternatives outside agriculture may result in
  decreasing production even in areas which are
  traditionally strong in production.
• For example, 2-3 successful firms offering good
  careers may make agriculture less attractive for
  young people. This makes it very difficult to
  forecast future regional development in
  agriculture

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How to promote technological change and integrate
technological, economic and social aspects of
agricultural development?

• It depends on the relative importance between the
  three aspects
• Example Is the promotion of technological and
  economic futures the first priority (A), or
  should we integrate social and technological
  aspects, and shape societal futures (B) ?
• If A, incentives for investments, knowledge
  development as well as institutional and social
  structures facilitating progress are in key
  roles focus on enlarging farms!
• How to find optimal incentives for farm size
  growth, investments, and learning, given various
  constraints and budget limits?
• Probably a combination of farmers opinions,
  researcher insights, and views of upstream and
  downstream experts yields a better understanding
• If B, one needs views of a heterogeneous
  population of farmers on the possible directions
  and rates of technical change, emphasising social
  dimension.
• Farmers views can be compared to views of
  various public and private sector experts, who
  know institutional and social structures,
  feasibility of specific agricultural
  technologies, and various environmental effects
  of agriculture based on existing research
  findings
• Such exercises exists SUSAGFU project
  (emphasising sustainability and policy support)
  http//www.vyh.fi/eng/research/projects/susagfu/su
  sagfue.htm

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Some special needs

• A framework to construct a consistent big picture
  of many individual expert views is needed
• Expert views may not be always consistent since
  the effects of policy changes are often context
  specific and expert may have different premises
  which affects the evaluation
• Formal analytic models may serve as a consistency
  check
• A framework or analysis tool which truly
  integrates technological, economic and social
  aspects needs to be developed!

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Conclusions

• Technological change in agriculture is a
  multi-dimensional process including
  technological, institutional and social aspects
  and interactions knowledge is a dominant factor
  of production
• CAP reform favours farms which are already large
  impacts may be considerable in countries where
  agriculture is dominated by small farms CAP
  reform may slow down the farm size growth and
  diffusion of new technology
• Evaluating impacts of policy changes on
  agriculture and rural communities requires
  methods which take into account the role of
  knowledge and diffusion of new technologies, as
  well as incentives to invest
• Consistent interdisciplinary framework is needed
  when evaluating policy impacts on economic,
  social and ecological aspects of sustainable
  development. Formal simulation models could
  provide some insights in this when used
  interactively with experts and stakeholders
• One needs fresh methods to truly integrate
  technological, economic and social aspects farm
  size growth and technological change depends on
  institutional and social structures
• Use of methods depends on policy goals and
  priorities