Essays on the inefficiency of Norwegian agricultural policy

Abstract

Paper V: Modelling farmers’ labour supply in agricultural models:Micro-based research on farm households’ allocation of time suggests that farm labour ispartially sector-specific, i.e., that reallocation of farm labour as a response to change in the relative wage between on-farm and off-farm work is sluggish. This evidence is rarelyreflected in numerical models aimed at policy evaluation which most commonly assumeeither perfectly mobile or totally sector-specific farm labour. To overcome these restrictivemodel assumptions, a constant elasticity of transformation (CET) function can be adopted.The CET approach to represent farm household preferences for on-farm work, or specifictaste for farming, is in this paper demonstrated and interpreted. Using the Norwegianagricultural sector as an example, the paper clearly shows that farmers’ preferences for onfarmwork are of vital importance as to how a liberalisation of farm policy affects farm outputand farmers’ income. The results depend on technology, i.e., to what degree costs can bereduced by replacing hired labour, capital and other factors with cheaper family labour.

Paper III: A better targeted policy on environmental services may lead to a larger relative PSE: aparadox illustrated by the case of Norway.Co-authored with David Blandford, Rolf Jens Brunstad and Erling Vårdal.Revise and resubmit in European Review of Agricultural Economics:The producer support estimate calculated by the OECD is widely used as an indicator ofdistortions created by agricultural policies. When considering conventional agricultural policygrounded on production subsidies, the relative (percentage) PSE and inefficiencies are highlycorrelated. However, we demonstrate that this is not necessarily the case if policy is targetedto correcting externalities associated with agricultural activity. In particular, a welfareenhancing reform involving a shift from production subsidies to payments for the supply ofpublic goods may result in a lower absolute PSE and lower trade distortions but a higherrelative PSE.

Paper I: Efficiency losses in milk marketing boards – the importance of exports.Co-authored with Rolf Jens Brunstad and Erling Vårdal.Published in Nordic Journal of Political Economy: A milk marketing board (MMB) is a well known instrument for regulating the markets fordairy products. MMBs are based on price discrimination, and receipts from sales are pooledso that the farmers receive a single price adjusted for composition and quality. Using anumerical model, we find that the economic welfare cost of the Norwegian MMB, is as muchas 26.3% of the milk production value. This computed cost is far larger than for the othercountries with MMBs. The main reasons are that exports are a major ingredient of theNorwegian system, and that production costs are very high.

Paper II: Multifunctionality of agriculture: An inquiry into the complementarity betweenlandscape preservation and food security.Co-authored with Rolf Jens Brunstad and Erling Vårdal.Published in European Review of Agricultural Economics:Without support, the levels of agricultural public goods like food security and landscapepreservation would fall short of demand in high-cost countries. However, as demonstrated byNorway as a case study, the current level of support is disproportionate from a public goodsperspective, and the policy instruments are badly targeted at the public goods in question.Because agricultural land is a major component of both food security and landscapepreservation, giving rise to a high degree of cost complementarity between the public goods,it would be more efficient to support land-extensive production techniques than production per se.

Paper IV: Agriculture versus fish – Norway in WTO.Published in Food Policy:The Norwegian agriculture is highly protected and subsidised. The opposite is the case forfisheries and fish farming which suffer from foreign market restrictions. Using acomputational general equilibrium model, the gain for Norway of a complete elimination offood subsidies and tariffs is estimated to be in the range of 1.2 - 2.7 per cent of GDP. Most ofthis gain stems from domestic farm sector liberalisation. The gain from free market access forseafood is estimated to 4.4 per cent of the seafood export value. Consequently, Norway hasmuch to gain from offering other countries market access for agricultural products. Bypursuing such a policy, Norway may also strengthen the case for fisheries and fish farming intrade talks.