Decoupled Payments and the Localization of Activities

Transcription

1 Decoupled Payments and the Localization of Activities Kaine Daniel Maueen Kilkenny Pape pepaed fo pesentation at the X th EAAE Congess Exploing Divesity in the Euopean Agi-Food System, Zaagoza (Spain), August 2002 Copyight 2002 by Kaine Daniel and Maueen Kilkenny. All ights eseved. Reades may make vebatim copies of this document fo non-commecial puposes by any means, povided that this copyight notice appeas on all such copies.

2 Decoupled Payments and the Localization of Activities 1 Kaine Daniel Univesité Pais I (TEAM pôle intenational) and INRA ESR Nantes - UMR EDRA - Fance Maueen Kilkenny Iowa State Univesity, Depatment of Economics - USA Abstact This aticle consides the impacts of (de)coupled fam secto suppot on the locations of faming and ago-industial activity. An economic geogaphy model is developed which has two types of egions, one with extensive agicultual poduction (ual), the othe with intensive faming that is moe densely populated (uban). The fam and ago-industial sectos ae vetically linked. A sevice secto that is not diectly linked to eithe basic industy is also explicit. We show that coupled and decoupled subsidies affect the spatial distibution of faming, industy, and sevice secto activity. Suppot that is povided to all fames egadless of cop, thus semi-decoupled, inceases spatial agglomeation. Suppot tageted to fames of paticula cops, especially ual compaative advantage cops, favos inceased faming in ual aeas but spatial agglomeation of non-fam activity still occus. This latte tageting appoach is used in the Euopean Union. Keywods : location, agicultue, economic geogaphy, decoupling Classification au JEL : R12, R58, Q18 1 This aticle is pat of a eseach pogam financed by the Commissaiat Généal du Plan (convention n ). Coesponding autho : Kaine Daniel - INRA ESR - Rue de la Géaudièe - BP Nantes Cedex 03 - Fance - Tel daniel@nantes.ina.f 1

3 Intoduction The WTO negotiations specify that suppot fo Euopean agicultue should be moe decoupled. Relative to the diect payments system established by the 1992 EU efom of the CAP, a system of subsidies to fam input uses egadless of the type of output poduced would be moe decoupled (Swinbank, Tangemann, 2001). While such payments would be popotional to, fo example, land used, they should not influence the fame s choice of which poducts to supply. We call this kind of payment semi-decoupled. This pape compaes the effects of coupled and semi-decoupled payments to fames on the location of agi-food activities. The ultimate objective of the pape is to detemine which fom suppots the most dispesion of economic activity. If decoupling pomotes dispesion, this may favo ual and egional development in the Euopean Union. To addess this issue a ual-uban economic geogaphy model is developed and applied to simulate activity locations unde the altenative policy egimes. We ae inteested in the deteminants of the location of agi-food activities between ual aeas and high population density aeas. The latte ae not uban aeas sticto sensus, but aeas that also have agicultual activity, such as Nethelands, Denmak, Luxemboug o Belgium. Some high population density aeas contibute significantly to Euopean agicultual poduct. Aeas adjacent to uban centes like the noth of Fance, the east of England, o Catalonia ae also this kind of high density aea with faming. Ou stylization of ual aeas, in contast, eflects the situations of low population density aeas whee faming is even moe impotant, like Ieland, some Fench and Spanish egions, Sweden, and Finland (Appendix 1). The peipheal low population density egions have the moe notable ual development poblems. In this context, we show the effect of the mode of allocation of diect payments to fames on the levels of land use by fams in ual and uban aeas, and on the elative concentation of all economic activity. The model distinguishes two types of egions, ual and uban, and thee types of industy: agicultue, agi-food industy, and othe activity not diectly elated to agicultue, like sevices and othe manufactuing. Fams and agi-food fims ae vetically linked. Although thee is no othe economic geogaphy model analysis of the impact of agicultual policies on the location of activities, thee ae some analyses of the impact of public policies on the location of economic activity. Tionfetti (1997) shows that geogaphically tageted public expenditues can be a dispesive foce in a coe-peiphey famewok. In that model, public suppot augments demand. The shae of public expenditues spent on domestic athe than impoted poducts is paametic. Matin and Roge (1995) show that public expenditue on infastuctue which deceases inteegional tanspot costs favos the agglomeation of activities. A eduction in tanspotation costs facilitates access to lage maket aeas. Fims tade low tanspot costs fo lage fixed costs and intenal scale economies. Extenal scale economies encouage fims to agglomeate. In the Matin and Roge model (1995), public policy doesn't diectly affect the poductivity of fims. Chalot (1999) made this choice. She analyzes the impact of geogaphically tageted public expenditues which modify fim poductivity on the location of economic activity. She showed that public expenditues which educe fixed costs ae less effective at encouaging a dispesal of activities than expenditues that educe vaiable costs. In the model pesented hee consumes have pefeences ove both geneic and vaietal poducts. This is an abstact epesentation of the situation in Euope, as opposed to the situation in the United States whee fam and food poducts ae elatively homogeneous 2

4 (Kilkenny, Daniel, 2000). In the economy we descibe, food poducts ae eithe geneic, o vay accoding to the fim and the souce of the aw agicultual input. These diffeentiated poducts have identifiable geogaphic oigins. We model the distance between geogaphic egions as discete and tanspot of both fam outputs and final goods is costly (as in Kilkenny, 1998). Futhemoe, we model fames as popietos of fam land. Retuns to agicultue include both the etun to fam labo and the etun to fam land. Household income is taxed to finance any fam subsidies (as in Walz, 1996). We teat all agicultual outputs as inputs to some ago-industial activity, that is, we model fam poducts as intemediate goods. Kugman and Venables (1995), and Venables (1996) intoduced vetical elations between industies in economic geogaphy models in which wokes ae not mobile inteegionally. Thus, the locations of industy ae detemined in pat by the exogenous spatial distibution of employees and the endogenous effect of spatial concentation of employes on wages. The vetical elations between industies impat an additional foce favoing agglomeation, especially when the costs of intemediate goods tanspot ae high. While the assumption that labo is geogaphically immobile is appopiate fo analyzing intenational tade, it is not applicable fo inteegional analyses (Ottaviano and Puga, 1997). In ou model, labo is costlessly mobile between fam, industy, and sevice sectos as well as geogaphically. As consumes, they spend thei income on geneic foods, local and non-local vaietial food poducts, and locally povided sevices. The vaietal poducts ae diffeentiated by the geogaphic oigin of the aw agicultual input as well as the location of the pocessing fim ae called AOC (Appellation d Oigine Contôlée). We should note that the diffeentiation of poducts accoding to thei oigin can be a maketing stategy even in the absence of AOC egulations o institutions. While we will assume that labo is geogaphically and intesectoally mobile, the facto of poduction specific to agicultue, land, is by definition geogaphically immobile. Facto immobility can undemine the potential gains fom tade: if esouces cannot eallocate, some esouces ean ents while othes may be unemployed. Since von Thunen, we have known that the facts that labo is mobile, goods ae not costlessly tanspoted, and land is immobile, leads to two fundamental spatial outcomes. One, population and footloose poductive activity concentates in cities to minimize tanspot costs. In addition, extenal agglomeation economies that attact mobile households to concentate in uban aeas can leave ual land idle and ual household income low. Two, land use values decline with distance fom population o maket centes. Places can be so distant fom maket centes that even though they may be endowed with a elative abundance of the facto used intensively in fam poduction (land) they cannot enjoy a competitive advantage in agicultue (no any othe activity). Fam land immobility povides a justification fo ual and agicultual secto policies (Boussad, 1996, Stiglitz, 2000). Helpman (1998) models a mobile wok foce elative to immobile local supplies of housing (land). In his model, ent is detemined as local expenditue on housing divided by local housing supply. He assumed that expenditue on housing is a fixed shae of local income, which includes the local population's shae of nationwide ent. In ou model, land value is the esidual shae of sectoal value-added, as envisioned by Ricado, Von Thunen, and Alonso (1964). Land ents ae highe fo high-piced poducts, high poductivity land, o land close (lowe tanspot costs) to the maket. Futhemoe, land ent accues only to fam households, in contast with Helpman (1998) o Fujita and Kugman (1995), who distibute ents equally to all citizens eveywhee. The pefect mobility of all households leads to equalization of eal income pe household income egadless of the household s egion of esidence o secto of 3

5 employment. Since a potion of fam household income may be land ent, the etun to fam labo can be less than the etun to labo in othe sectos. Only total labo supply, egional land endowments, pefeences, tanspot cost ates, and technology paametes ae pedetemined o exogenous. The model is a Walasian geneal equilibium system that is solved numeically. It pemits us to conduct compaative static analyses of altenative stable, asymmetic spatial equilibia, in contast with the majoity of economic geogaphy models based on Kugman (1991a, b). This is paticulaly appopiate fo analyzing ual development policy. Mainsteam new economic geogaphy models elying on ad hoc closue ules geneate eithe symmetic o fully concentated equilibia (see, fo example, Fujita, Kugman, and Venables, 1999). Next, we pesent ou hypothetical model of the spatial allocation of economic activity between two egions that stylizes the uban/ual dichotomy and agi-food sectos in the Euopean Community (2). The model is applied to analyze the effect of the mode of fam subsidy povision on the distibution of economic activity, and ual development. We compae the effects of payments tageted to fames accoding to geneic poducts (e.g. coupled payments to maize o wheat fames) to the effects of payments pe fame iespective of thei poduct (semi-decoupled) (3). 1 The Model Vetical elations between sectos The model is designed to detemine the equilibium sectoal and geogaphic distibution of population and economic activity acoss two egions, ual and uban, given consume pefeences, technology, and egional land endowments. 2 Fist we pesent ou assumptions about endowments, the ole of space and distance, and consume pefeences. Then we show how poduction and the vaious discete choices, such as whee to live, whee to wok, and whose poducts to buy, ae fomalized. The community is composed of two egions with unequal endowments of land and population. The ual egion has eighty pecent of the county's aable land (ϕ ual = 0.8). Thee ae five types of industy (i o j) in each egion: two fam sectos (geneic o specific), two ago-industial sectos (geneic food commodities o AOC food), and a sevice secto. Geneic faming (i = fg) in egion () employs land (T g ) and labo (L g ). The secto supplies aw mateials to geneic pocessing (i = mm). That industy uses fam poduce fom any egion. Specific faming (i = fs) employs land and labo to supply aw inputs into AOC pocessing (i = ma) in the same egion only. This latte industy poduces final consume goods called "AOC" fo this eason. The vetical links between sectos ae pesented in Figue 1. The sevice secto (i=sev) employs labo at constant etuns to scale to supply a homogeneous non-tadeable output (fo local consumption only). Thee ae ten types of households, distinguished by thei egion of esidence (ual o uban) and the sectoal souce of thei income (geneic o specific faming o manufactuing, o sevices). 2 Agicultue is potentially pesent in uban aeas. Thus, by uban we mean aeas with lowe popotions of the wokfoce in faming and highe population densities. 4

6 Figue 1 : Vetical elations between egional sectos Rual Uban Industy AOC (ma) Industy Geneic (mm) Industy Geneic (mm) Industy AOC (ma) Agicultue specific (fs) Agicultue geneic (fg) Agicultue geneic (fg) Agicultue specific (fs) Tanspot costs ae incued on agicultual and pocessed poducts shipped fom one egion to the othe. Thee is no cost of tanspot within egions. Tanspot costs ae modeled in a fom simila to the «icebeg» appoach of Samuelson. This is fomalized by the assumption that some of the poduct (labo) is used up in tansit, so that the quantities deliveed (QD i, ) ae less than the quantities supplied (QS i, ) by the cost of tanspoting the poduct i fom egion to egion at the ate (0 θ i, 1) QD i, =QS i, (1-θ i, ) (1) This implies that deliveed pices (DP) must exceed mill pices (P) (ex. Beckmann and Thisse, 1986). DP i, =P i / (1-θ i, ) (2) The numeaie is the uban specific agicultual poduct. Not only does this imply a "stable uban food pice" monetay policy, it also is most tactable mathematically, since agicultue is a constant-etuns-to-scale industy. Also, uban AOC poducts will always be demanded (given pefeences shown in equation (5) below). Finally, mateial balance equies an equation of quantity poduced (Q i ) to the quantities supplied (QS i, ) to all egions: Q i, = QS i, (3) And since the maket fo sevices is stictly intenal to each egion: Q sev QSsev,, = (4) Household pefeences ae fomalized by a Cobb-Douglas utility function ove geneic foods (c= mnf), AOC foods fom thei own egion o impoted (c = aoc aocm), and sevices (c=sev) (5). Households ae indexed by egion and secto (hh) as explained above. αc U, hh = c Cc, hh (5) Each type of final good (C c ) is a CES composite of manufactued poducts fom the i food pocessing fims in the sectos whee fim poducts ae diffeentiated. Regional pices of final goods ae detemined by maket cleaing. The mateial balance equations in each egion equate the sum of each households' final demands (C c,hh ) to 5

7 deliveed industy supplies (QD c, ) whee L hh is the numbe of households in each secto and each egion, ς i,c, aggegates the industial goods into final goods, and N i is the (endogenous) numbe of fims in each industy : ρc Cc, hhl hh ς i, c, N iqd i, hh i 1 ρc = (6) Agi-food fims that pocess geneic poducts opeate at constant etuns to scale so thee is only one fim in each egion in that secto (N=1). The AOC fims poduce vaieties in a monopolistically competitive maket. The numbe of fims (N) is endogenous given the optimal size of the fims (Q). The fixed cost of poduction (K) is the eason fo intenal inceasing etuns to scale in the AOC secto and L ma =Q ma +K, o Q ma = L ma -K. Feedom of enty implies zeo economic pofits. The optimal fim size is an exogenous function of fixed costs (K), the degee of substitutability between AOC vaieties (ρ), and the input-output coefficient epesenting the technology of tansfoming aw agicultual inputs into AOC food poducts (ψ), (7) 3 : * K, = (7) ρ ρψ ψ Q ma Consequently, optimal employment in each AOC fim (L*) is : * K L = K + (8) ρ ρψ ψ Note also that the elasticity of substitution, σ= 1/1-σ,is associated with the poduct, not the consume. Thus both local and impoted AOC vaieties have the same elasticity of substitution. Given those pefeences, the demand fo AOC poducts facing each AOC fim is QD = m DP -σ whee m is any positive constant and DP is the deliveed pice (secto and egion subscipts dopped fo simplicity). This means that in zeo-pofit equilibium, all AOC fims eveywhee use the same mak-up ove maginal cost, and will be the same size eveywhee. Poduction technology in both agicultual sectos (i = f; f = fg o fs) is fomalized by a Leontief function. This is a simplification compaed to the situation whee agicultue also enjoys etuns to scale (Daniel, 2001). Q f = min( L f, T, f ) (9) One unit of labo and one unit of land (by pope choice of units) is needed to havest one unit of fam poduct. Fo example, one fam family on one 10 hectae fam poduces one ton of gain. Thus, the maginal cost of poduction in fam sectos is the sum of the local fam wage (w f ) and the local fam land ent (v f ). The assumption that agicultual makets ae competitive implies that the pice eceived by the fames (P) is this maginal cost when thee ae no subsidies(10). w f + v f =P f (10) 3 If thee wee no intemediate goods (ψ=0) the classic mak up ove labo costs would obtain hee. 6

8 Equation 10 also implies that land ents (v f ) ae the esidual of fam secto value-added at mill pices (subtacting tanspot costs) that is not distibuted to mobile labo. Rents can also ise if land demand exceeds land supply in the egion, but we do not assume the full employment of land. Whee T is the total amount of land in the community, and ϕ is (as defined above) the shae of land in each egion, land demand is constained to be less than o equal to egional land available: f T, ϕ T (11) f Wages ae detemined by local labo maket cleaing(12). Households that supply labo ae, as discussed peviously, intesectoally and inteegionally mobile. We abstact fom egional undeemployment issues to focus on egional migation and thus agglomeation o dispesion. LS, i = L i (12) Fam household income is compised of wages and ents, while non-fam household income consists solely of wages. Those non-fam wages also include the etun to capital (K) in AOC sectos. If fam land ents ae non-zeo in a fam secto and egion, etuns to fam labo in that egional secto ae lowe than the etuns to othe labo in the egion (by the amount of land ents). Whee N i denotes the numbe of fims (o fams), w denotes the wage, and LS=L denotes the employees pe fim, household income YH i is : [ w LS v T ] YH i N i i i + f f = (13) Fims in the ago-alimentay industies employ labo and intemediate agicultual inputs (I) in constant popotions AOC fims also need labo to epoduce fixed costs (K). One unit of aw fam poduct is equied to make (1/ψ) units of pocessed food poduct, so I fg,mm, =(1/ψ)Q mm and I fs,ma, =(1/ψ)Q ma. Given the input-output coefficient ψ, the poduction functions fo geneic and AOC foods ae : Q mm = min( L mm, ψ I fg, mm, ) and Q ma = min( L ma K, ψ I fs, ma, ) (14) Total costs (CT) in each geneic ago-alimentay fim ae: CT mm = w mm Q mm +(1/ψ) Q mm IP fg (15) whee IP fg denotes the deliveed pices of geneic fam inputs (a weighted aveage of the local and coss-hauled pices). The maginal costs (Cm) ae Cm mm =w mm + (1/ψ) IP fg (16) The pofit-maximizing levels of output ae those that equate maginal evenue at mill pices (which is equal to Pρ fo AOC pocessos, but is paametic fo geneic pocessos) to maginal cost : P ma = w, ma + P, fs and P mm = w, ma + IP, fg (17) ρ ψ ψ Since geneic fam inputs ae pefect substitutes in geneic ago-alimentay industy, pocessos will use whicheve egion's fam poduct is cheape o both egional poducts if thei deliveed pices ae the same. This is fomalized pasimoniously by a modified Kuhn- Tucke condition fo inteio o cone solutions (c.f. Kilkenny, 1998): QD fg, ( DP fg, DP, fg, ) 0 (18) Thus, the geneic fam output fom egion will be demanded by fims in egion (QD g, >0) if its deliveed pice is less than the deliveed pice of the local geneic fam 7

9 poduct, o if the deliveed pices ae equal. The amounts demanded sum to the amount needed: I fg, mm, = QD fg, (19) Similaly, households will wok as popietos in a egional secto as long as they can obtain at least as high utility fom the income they ean in that secto and location as they could elsewhee. This mobility is costless. The implication is fomalized by anothe modified Kuhn-Tucke condition: ( U U ) 0 LS (20) i i j As explained ealie (5), household utility is deived fom the consumption of geneic food, local AOC food, impoted AOC food, and sevices. Given the budget shae α, household income YH, deliveed composite goods pices CP, and the numbe of wokes pe household type (L=LS), the demand fo each composite good (C) is detemined by: α (21) c, YH hh = Cc, hhcpc, L, hh To veify that the solution of this system of simultaneous equations is a Walasian equilibium, one maket-cleaing equation must be solved implicitly. Fo example, in the following simulations, the maket-cleaing equation fo the numeaie good, uban AOC, is dopped. The solutions shown below satisfy Walasian geneal equilibium conditions 4. 2 Diect Payments, land use, and the location of activity The model above is completed by fomalizing public policy and govenment finance. Govenment expenditue is financed by lump-sum taxes (g) on the entie woking population, L. Agicultual subsidies (S i ) ae povided pe unit land used (T i ). Given the labo foce and the level of subsidy, the tax ate is endogenously detemined to balance the govenment budget : g L = S i T, i (22) i Since households pay head taxes, effective demand fo consume goods is educed: α (21 ) c, ( YH hh g. L, hh ) = Cc, hhcpc, L, hh Agicultual policy is defined accoding to the mode of payment distibution and the amounts. The ates of subsidy ae pe-detemined by the political pocess (exogenous to the economic model). We conside two modes of distibution. In the fist case, only geneic fam poduct poduces ae subsidized (scenaio 1). The objective of this policy is to suppot pimay poduces of basic commodities to maintain low pices to consumes on necessities. The diect payments (S fg ) to geneic poduces ae povided pe fame in fam secto fg. This is equivalently pe unit output o pe unit land used, given the fixed popotions poduction function. The subsidy aises the unit evenue eceived by fames above the pice paid by the 4 The assumptions of the baseline scenaio as ae follows. Thee ae 100 units of labo and 20 units of aable land in the whole community (L =100, T =20). The ual egion has 80% of the fam land. Fou units of aw fam poduct ae needed pe unit of pocessed food output (ψ=4). Inteegional tanspot costs ae 10% pe unit shipped (θ =0,1). Fixed costs in the AOC secto (i=a) ae K=0.1. Consume pefeences ae such that 50% of thei budget is spent on sevices, (α se =0,50), 25% on geneic food (α mnf =0,25), 16% on local AOC vaieties, and 9% on non-local AOC food. The degee of substitution between AOC vaieties is a elatively low σ aoc =2. Between local and nonlocal geneic foods it is σ mnf =4. All othe vaiables ae endogenous and shown in the Social Accounting Matix (Appendix 3). 8

10 geneic pocessing industy. The unit evenue eceived by poduces of specific fam outputs (fs) continues to eflect maginal cost: Scenaio 1 w fg + v fg = P fg + S fg w fs + v fs =P fs (10-1) The altenative policy scenaio consists of a subsidy to any fame egadless of agicultual poduct, also pe fame unit output, o unit of land in cultivation. Relative to the fist scenaio this policy is moe decoupled because it does not alte elative etuns to fam land in diffeent uses. This subsidy also aises unit evenues eceived by all fames (f=fg,fs) above the unit pices paid by ago-alimentay industies: Scenaio 2 w f + v f =P f + S f (10-2) These two policy scenaios will lead to diffeent spatial equilibia. They do not have the same effects on fam land use. A compaative static analysis of each scenaio is conducted in efeence to the base scenaio without public intevention. 2.1 Suppot Coupled to Geneic Faming In this scenaio suppot payments ae tageted to geneic faming. The level of suppot is modeled to povide about 40% of the goss evenue to poduces, which is 0.4 pe unit (S fg =0,4) (Table 1: P g = 0.998). The head tax necessay fo govenment budget balance fo this policy is found to be g= The tageting of aid to geneic fam poduction has chaacteistics of geogaphically-tageted aid. This is because all geneic faming occus in the ual egion (none in the uban egion) in the initial no-policy baseline scenaio (Table 1). This policy leads to a 6.7% incease in the numbe of pesons engaged in geneic faming in the ual egion. Also, employment in the geneic pocessing industies in both egions expands. The policy does not lead to any initiation of geneic faming in the uban egion. Rual wages ise (Table 2), so that egion becomes less attactive to non-fam employes in both the AOC ago-alimentay and sevice sectos. The net effect of the incease in the ual fam population and the decease in the ual non-fam population is that the total ual population falls slightly. Land used fo the poduction of geneic poducts inceases, exclusively in the ual egion. AOC poduction falls acoss the community because that fam secto (and the pocessing secto linked to it) becomes less competitive fo land and labo elative to geneic faming (and its pocessing secto). 9

11 Table 1: Scenaio 1: Subsidy tageted to geneic faming: Geogaphic and sectoal distibution of labo and land (pecent change fom no policy baseline) Rual Uban Population and labo foce LO L L% LO L L% Faming Manufactuing Geneic Specific Geneic AOC Sevices Total Land TO T T% TO T T% Faming Geneic Specific idle Total 80% 20% Household utility with the policy, howeve is slightly lowe oveall than without the policy (Table 2). This is because othe than the existence of idle fam land, thee wee no othe maket failues in the efeence scenaio. And, the fee maket mix of goods bought moe utility than the mix made available unde govenment subsidy. Note also that while moe land is bought into poduction, geneic fam poduction in the uban egion neve becomes competitive with ual geneic fam poduction, and about two thids of the uban land emains idle. Table 2 : Wages and Utility Subsidy W0 W W% U0 U Rual Uban The coupled subsidy leads to a 8-9% eduction in the maket pice of geneic foods consumed by households (Table 3), and a 36-40% eduction in the maket pices of geneic fam outputs. This indicates that consume suplus captues about 100% of the suppot, given the subsidyinduced supply expansion. This esult undescoes that in the context of a mobile wokfoce and suplus o idle land, fames do not captue the benefits of subsidies because they do not hold claims on a elatively fixed facto of poduction. Instead, taxpayes get back what they paid, less the utility lost due the distotion of the mix of goods available. All households pay equal taxes to finance the subsidies, and all households benefit equally fom the lowe food pices. Table 3. Scenaio 1: Aid Coupled to Geneic Faming: Pices (pecent change elative to no policy baseline) Faming Industy Rual Uban P0 P P% P0 P P% geneic specific manufactuing AOC Sevices

12 Thus we have shown that subsidies coupled to geneic fam poduction, which was lagely ual ex-ante, suppots ual fam activity (but not ual population) expansion ex post. Subsidies that do not diffeentiate between types of fam output will suppot a moe geogaphically even expansion of fam activity. Butas we show next, the two types of policies have the same oveall effect on the locations of population and economic activity. 2.1 Subsidies Not Diffeentiated by Fam Land Use In this scenaio, subsidies ae allocated to all fames egadless of what they poduce. Both types of fames eceive diect payments. The total amount spent by the community on agicultual suppot is set at the same level as the amount spent in Scenaio 1. Thus, the subsidy pe unit land used (pe fam o pe unit output) is loweed to 0.28, (S f =0.28) which is about 30% of the initial goss evenue pe unit. The budget neutality of this scenaio elative to scenaio 1 implies that the pe head tax necessay fo govenment budget balance emains at g= The subsidy aises fam wages (Table 5) because ents emain zeo (the oppotunity cost of idle land) and fam maket pices (Table 4) do not change. This is because Uban AOC is the numeaie good its pice is fixed at unity to identify the pice level in the Walasian system, so wages (and o land ents) in Uban AOC poduction ise by the full amount of the subsidy. Labo mobility means all wages ise by the same amount o else the labo will out-migate. Thus, geneic fam wages also ise by the full amount of the subsidy, while all aw fam poduct pices emain unchanged fom thei initial levels (Table 4.) And the maket pices of all final goods ise elative to the numeaie good, Uban AOC, because they now face highe costs of labo. Faming Industy Table 4. Scenaio 2 (Semi-decoupled) Pices (pecent change elative to no policy baseline) Rual Uban P0 P P% P0 P P% Geneic ,233 0 Specific Manufactuing AOC Sevices Table 5. Scenaio 2 (Semi-Decoupled) : Wages and Utility (pecent change elative to no policy baseline) Subsidy W0 W W% U0 U Rual Uban The change in nominal wages is slightly highe in the ual egion than in the uban egion (Table 5). This contibutes to the localization of the geneic food pocessing industy in the lowe labo cost uban egion. Futhemoe, given the lage budget shae of consume spending on local AOC, the concentation of population in the uban egion is matched by an incease in the level of uban AOC faming, pocessing, and sevice secto activity (Table 6). 11

13 The subsidization of agicultue and its expanded employment also leads to a eduction in employment in the secto that is neithe diectly no indiectly linked to agicultue, the sevice secto. This mode of subsidy, in the context of vetically linked fam and manufactuing sectos, expands all except sevice secto activity. Land use expands in both egions (Table 6). The oveall incease in facto use not accompanied by a distotion in the mix of available goods leads to highe household utility, community-wide (Table 7). The semi-decoupled policy also favos the same amount of population agglomeation in the uban egion as the coupled policy. Table 6 : Scenaio 2 (Semi-Decoupled) Sectoal and Geogaphic Redistibution of Labo and Land Use (pecent change elative to no policy baseline) Rual Uban Population and wok foce LO L L% LO L L% Faming Geneic Specific Industy Manufactuing AOC Sevices Total Land TO T T% TO T T% Faming Geneic Specific Idle Total 80% 20% This mode of subsidy bings moe land into poduction eveywhee. But because it does not change the elative etuns between the taditional ual geneic fam activity and the specific faming which occus also in ubanized aeas, so it does not countevail against uban agglomeation. Conclusion The model has povided asymmetic equilibium geogaphic and sectoal distibutions of fam land use, fam labo and non-fam labo that depend on the mode of agicultual subsidy. All agents ae geogaphically and sectoally mobile. The model is paticulaly elevant fo the analysis of ual economic development. The explicit geneal equilibium appoach ovecomes the tendency in most economic geogaphy models to simulate the phenomena of total concentation of all economic activity in one egion. Given the pospects of inceased decoupling of diect payments to agicultue, the simulations show the effects of moe and less coupled payments. Suppot tageted o coupled to fames of taditionally ual cops geneates inceased specialization acoss ual and uban aeas. Both types of policies allow food pices to fall elative to non-food pices, in eal tems. Subsidies tageted to geneic fames, howeve allow those pices to fall elatively moe. Ex ante, since geneic fam outputs have been poduced in ual aeas, suppot tageted to geneic fames is geogaphically tageted suppot. At the same time, thee is a isk that such coupled suppot may encouage geneic faming in aeas whee it has not occued befoe. Coupled suppot of extensive faming also encouages agglomeation of population and 12

14 activity in moe uban aeas whee faming is intensive. On the othe hand, it induces an incease in cultivated land use in ual aeas. The povision of subsidies egadless of fam poduct, called semi-decoupled hee, also goes initially to ual aeas, since that is whee the majoity of faming activity occus. This policy also fails to stem the agglomeation of non-fam activities in uban as opposed to ual aeas. The wage inflation associated with this policy appeas to suggest that it favos uban egions. Howeve all households in all egions ae bette off in eal tems, including fames, unde this policy than unde the moe coupled policy. One objective of egional development policy is to eallocate o dispese economic activity acoss the community. Accoding to ou analyses, neithe coupled no semi-decoupled agicultual suppot policies appea to achieve that objective. In contast, if the objective is to incease land use in ual aeas, subsidies tageted to taditionally ual fam sectos can be effective. Bibliogaphy Alonso, W., (1964), Location and land use. Cambidge, Mass, Havad Univesity Pess. Beckmann, M.J., Thisse, J.F. (1986), «The location of poduction activities» Chapte 2 Nijkamp, P., Ed. Handbook of egional and uban economics volume 1, Elsevie pp Boussad, JM., (1996), «Faut il encoe avoi des politiques faming?» Revue politique et palementaie n 985, octobe décembe, pp Chalot, S., (1999), Economie géogaphique et coissance égionale : Le ôle des infastuctues publiques. Thèse de doctoat, Univesité de Bougogne. Daniel, K., (2001), Politique agicole et localisation des activités dans l'union euopéenne, une analyse en économie géogaphique, Thèse de doctoat de l'univesité Pais 1 Sobonne. Fujita, M., Kugman, P., (1995) «When is the economy monocentic? Von Thünen and Chambelin unified», Regional Science and Uban Economics vol 25, pp Fujita, M. Kugman, P. Venables, JA. (1999), The Spatial Economy : Cities, Regions and Intenational Tade, MIT Pess, Cambidge. Helpman, E., (1998), «The size of egions», Chapte 2, in Topics in public economics, theoitical and applied analysis, Pines, D., Sadka, E. and Zilca, I., Eds. Cambidge Univesity Pess. Kilkenny, M. (1998) «Tanspot costs and ual development», Jounal of Regional Science 38(2), pp Kilkenny, M., Daniel, K., (2000) «The effect of intenational agifood tade and policy on intanational development, pat one : County models», contibuted pape RSAI wold congess, Lugano, Switzeland, May, 15 p. Kugman, P., (1991a), Geogaphy and tade. Leuven, Belgium Univesity Pess. Kugman, P., (1991b), «Inceasing etuns and economic geogaphy», Jounal of Political Economy, 99, pp Kugman, P., Venables, A. (1995), «Globalisation and the inequality of nations», Quately Jounal of Economics, 110(4), pp Matin, P. J., Roges, C.A., (1995), «Industial location and public infastuctue», Jounal of Intenational Economics, 39(3-4) pp Ottaviano, G.I.P., Puga, D., (1997), «Agglomeation in the global economy : a suvey of the new geogaphy», Cente fo Economic Pefomance, Discussion Pape n 356, August. Stiglitz, J.E., (2000), Pincipes d économie modene, taduction de la deuxième édition améicaine, De Boeck Univesité Edition. Swinbank, A., Tangemann, S., (2001), «The futue of diect payments unde the CAP : A poposal», Euochoices, Sping, pp

15 Tionfetti, F. (1997), «Public Expenditue and Economic Geogaphy», Annales d Economie et de Statistiques, n 47, pp Venables, A. (1996), «Equilibium location and of veticaly linked indusies», Intenational Economic Review, 37(2), pp Walz, U., (1996) «Long un effect of egional policy in an economic union», The Annals of Regional Science 30(2), pp Appendix 1 14

16 Appendix 2. Equilibium Fim Size (AOC Secto) The fist ode condition fo the poblem of pofit maximization is that maginal evenues equate with maginal costs. Total costs (CT) and total evenues (Rev) ae: Rev=P ma Q ma and CT= w L + P fs I whee L denotes labo w denotes wages, P fs is the pice pe speicif fam input, and I is the amount of specific fam input used. The amount of labo is given by the poduction technology, given the need to epoduce fixed costs (K): L= Q ma + K Given input-output coefficient ψ, the amount of inputs used is: I = (1/ψ)Q ma Thus P ma = (1/ρ)(w + (1/ψ)) P fs P ma Q ma = w Q ma + w K+ w (1/ψ) Q ma (1/ρ) (w + w/ψ) Q ma = w Q ma + wk + (w/ψ) Q ma Q ma ((1/ρ)( w + w/ψ)-w-(w/c))= wk * K Q, ma = 1/ ρ + 1/ ρψ 1/ ψ 1 Also, given: * Q, ma = L* K we have : L * K = K + 1/ ρ + 1/ ρψ 1/ ψ 1 Appendix 3 : Social Accounting Matix (Base Scenaio Solution) Rual fg Rual fs Rual mm Rual ma Rual sev Rual hh Uban fg Uban fs Ub. mm Uban ma Ub. sev Uban hh Total Rual fg Rual fs Rual mm Rual -ma Rual-sev Rual hh Uban fg 0 Uban fs Ub. mm Uban ma Ub. sev Uban hh Total