Funding agencies/Institutions | Project / Grant |
Hungarian and Slovenian Research Agencies | N5-0094 - Impacts of agricultural policy on the regional adjustment in agriculture: A Hungarian-Slovenian comparison |
The traditional objective of the Common Agricultural Policy (CAP) of the European Union (EU) has been to increase agricultural income and to ensure an adequate level of farm income. Historically, different policies and measures have been used to achieve this objective. During the last two decades, the CAP of the EU has substantially shifted away from favouring market price supports to focusing on Pillar 1 and later Pillar 2 measures for increasing and/or stabilizing the incomes of farmers, with a crucial role for subsidies as a form of budgetary government support. These policy shifts and the growing pressure to reallocate EU budget funds to larger societal and global issues have increased attention on the potentially distortive and perverse effects of CAP subsidies as they account for 37% of the EU budget (
This paper contributes to the analysis of the impact of CAP reform on farm household income inequality in Slovenia, which on 1
st
May 2004 acceded to EU. The novelty of the research is threefold. First, while similar studies have been conducted for old EU member states (
A range of indices is used in the literature in describing the income inequality (
where Rk is the 'Gini correlation' between income component
The concentration of coefficients of the
Ck = Rk * Gk (2)
The 'proportional contribution to inequality' of the
Pk = Rk * Gk * Sk/G (3)
and the Gini coefficient rate of change with respect to the mean of the
The Gini coefficient as a measure of income inequality leverages a scale of 0 to 1 to derive deviation from perfect income equality. The Gini coefficient of 0 would imply perfect income equality, while the coefficient of 1 would imply complete income inequality. The Gini coefficient has a number of limitations (
The Slovenian Farm Accountancy Data Network (FADN) for the period 2007-2013 was used as a data source to evaluate the impact of CAP reform and economic recession on farm income in Slovenia. The comparable FADN data for Slovenia were available from the year 2004, while in the analysis was included the rural development programming period 2007-2013. In addition, price indices as deflators obtained from the Statistical Office of Slovenia were used to transform current euro values into constant euro values using 2010 as the base-year. Total farm income is comprised of two potential components: 1) income components, which can contain market income and off-farm income, and; 2) subsidy components, which can contain subsidies from Pillars 1 and 2. Pillar 2 support includes subsidies related to agri-environmental measures, LFAs and other rural development measures.
The empirical results are presented in two steps. First, we present the evolution of farm household income structures in constant value terms and as relative shares. Second, the farm household income inequalities for farms located in LFAs and non-LFAs with the applied Gini coefficient decompositions were compared.
Most income was received by farms in LFAs (
High volatility can be seen for market income evolution for farms located in non-LFAs (
The Gini coefficients for the whole sample according to the different farm income sources remained rather stable over time, except with market income (
Market income plays a crucial role in terms of its proportional contribution to farm income inequality (
Most farms in Slovenia are located in LFAs. Consequently, results between all farms (
While market income played a crucial role in terms of its proportional contribution to farm income inequality, it slightly declined (
The correlation coefficients in the changes in the Pseudo-Gini coefficients of the different income sources above 0 (
The changes in the Gini elasticities of the different income sources on farm income distribution show that increases in market income increased the inequality of total farm income, while other income sources - off-farm income and subsidies from Pillars 1 and 2 - decreased inequality (
There were considerable differences in the evolution, structure and sources of income inequality between LFA and non-LFA farms. Gini coefficients for the different non-LFA income sources were more volatile over time, particularly for market income (
Market income plays the crucial role in terms of its proportional contribution to income inequality for non-LFA farms, but underwent cyclical oscillations followed by a period of stability after 2010 (
The correlation coefficients in the changes in the Pseudo-Gini coefficients of the different income sources were above 0, but underwent cyclical oscillation (
The Gini elasticities of the different income sources for income distribution ranged between more than 0 and less than 0.2 for market income, while they were less than 0 for off-farm income and subsidies from Pillars 1 and 2. While market income was the main income source that increased total income inequality measured with the Gini coefficient, subsidies from Pillar 1 were the main income source for reducing total income inequality for non-LFA farms in Slovenia.
The aim of the LFA scheme is to improve the environment and the countryside by supporting sustainable land management. Naturally handicapped areas with associated LFA payments are located in hilly and mountain areas or in other areas with natural handicaps (
Aid to farmers in LFA for maintaining the countryside where agricultural production or activity is more difficult because of natural handicaps is classified according to criteria for agricultural areas suffering from natural handicaps such as steep slopes in mountain areas, difficult climatic conditions, or low soil productivity in other LFAs. These handicaps on farming significantly increase the risk of agricultural land abandonment and thus the potential for loss of biodiversity, desertification, forest fires and the loss of highly valuable rural landscape. To mitigate these risks and preserve the farmed landscape and the habitats and attractiveness of rural areas, the LFA payment scheme is an important tool, albeit non-compulsory.
Slovenia is a country with a very high share of farms in LFAs whose evolution in terms of level and structure of farm income and contribution to income inequalities over time were compared in this research with farms in non-LFAs. The research findings have important policy implications in general for other EU member states, but particularly for new EU member states and candidate countries. First, market income explores volatility over time, a phenomena which has been studied in some depth in the past (
In summary, the research described in this paper investigated the development of income inequality in Slovenian agriculture over the period 2007-2013 using FADN data from farmers located in LFA and non-LFA areas. A shift in CAP policy and related measures has determined the evolution and structure of farm incomes. A special focus of the analysis was its comparison of LFA and non-LFA farm income. LFA subsidies were designed to contribute to maintaining naturally handicapped countryside areas in order to support agricultural production. While subsidies could distort production activities and agri-food markets and postpone farm restructuring, they could also reduce farm household income inequality.
Our calculations highlight the importance of subsidies in Slovenia and indicate that the role of subsidies in farm incomes increased during the period of analysis. This could be explained by the existence of small-sized farms and poor natural conditions for agricultural production. CAP reform in rural development policy during the period 2007-2013 contributed towards the stabilization of farm incomes which were different at LFA and non-LFA farms. As LFA subsidies are very important in Slovenia, the focus was on making a comparison between LFA and non-LFA farm income structures, which are also different. LFA farm incomes to a greater extent depend on subsidies from Pillars 1 and 2. One striking finding is that subsidies from Pillars 1 and 2 reduce farm income inequality, while subsidies from Pillar 2 increased farm income concentration for LFA farms.
Among the limitations of the research, the applied methodological approach of the Gini coefficient decomposition does not provide evidence of a cause-effect relationship. In addition, we accept that the investigation of the evolution and structure of Slovenian farm income in general and independently for LFA and non-LFA farms would be improved by incorporating consideration of the type of farming and other potential farm characteristics and the exact role of specific CAP measures.
Policy modelling of farm income diversification and the role of subsidies on farm incomes and income inequalities across different farm structures is of significant scientific and policy relevance for improving understanding of the impacts of CAP on different income structures and their associated income inequalities on farms and in rural areas with implications for policy development to reduce undesired greater income disparities. Such findings will be important inputs to CAP in the current period until and after 2020 in terms of improving the management of farm income distribution, agricultural sustainability and international competitiveness.