Title: Assessing dynamic impacts of CAP reform on technological change, knowledge development and rural pro
1Assessing 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
2Contents
- 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
3The 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!
4Inter-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
5Technological 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
6Technological 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
7Technological 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!
8Some 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
9Simulation 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
10because dairy farm structure is dominated by
small farms
Production capital (billion euros) on dairy farms
in base scenario
11Investments on big farms increase in base
scenario...
Gross investments on dairy farms billion
euros/year
Includes replacement investments, not only
investments in new facilities
12but decrease in MTR -scenario (milk price -20)
Gross investments on dairy farms billion
euros/year
Includes replacement investments, not only
investments in new facilities
13Dairy 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
14Challenges 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?
15Problems 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
16Agricultural 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
17Example 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
18Three 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
19How 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
20Some 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!
21Conclusions
- 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