Research Proposal for Master Program in Applied Economics in King Fahad

University Kingdom of Saudi Arabia.

Evaluating the Impact of EU Common Agricultural Policy Direct Payments on the

Economic Resilience of the Agricultural Sector: A Sectoral Analysis

Abstract

This study introduces an innovative method for evaluating the effect of European Union
Common Agricultural Policy (EU CAP) direct payments on the economic resilience of the
agricultural sector at a sectoral level. Resilience, in this context, refers to the ability of the
sector to maintain its primary functions. The overall impact of direct payments on sectoral
economic resilience is determined by assessing their influence on the resilience of the main
economic functions within the sector. This approach provides a comprehensive estimation of
the subsidy's impact on critical areas of agriculture and can be applied to measure the
economic resilience of other sectors as well. To empirically examine this concept, panel data
from 27 EU countries spanning the period 2005-2019 were utilized. The findings demonstrate a
positive overall impact of direct payments on the economic resilience of agriculture across the
EU-27. However, the influence of these payments varied concerning different key functions
within the sector. Notably, concerning farm efficiency, negative changes in economic resilience
were observed, which raises concerns about the sustainability of direct payments' influence on
the long-term economic resilience of the agricultural sector.

Introduction

With the rise in frequency and severity of disturbances, particularly climate-related but not
limited to it, the concept of resilience has gained prominence in discussions surrounding
sustainable development and the long-term viability of agricultural systems. Given the
agricultural sector's role in ensuring food security, rural employment, economic growth, and
stability during economic downturns, the resilience of this sector becomes crucial for
sustainable national economic growth.

While resilience in agricultural contexts has received significant academic attention, most of the
research has focused on the resilience of agro-ecosystems. In contrast, there is a scarcity of
research and fragmented understanding regarding the economic resilience of agricultural
systems. Furthermore, it is important to note that the concept of resilience in the economics
literature remains ambiguous due to its multidimensionality and the complexity of dynamic
systems, making operationalization and evaluation challenging.

An essential practical concern is how to enhance or prevent the deterioration of agricultural

resilience in the face of mounting challenges. Government policies are believed to have a
substantial impact on resilience. However, there is a lack of empirically grounded answers
regarding the extent of influence exerted by various support measures and even the direction
of their impact.

Literature Review:

The proposed research aims to evaluate the effect of EU Common Agricultural Policy (CAP)
direct payments on the economic resilience of the agricultural sector. The concept of resilience,
particularly in the face of increasing disturbances like climate change, has gained importance
for the long-term viability of agricultural systems. While there has been substantial research on
the resilience of agro-ecosystems, there is a scarcity of studies focusing on the economic
resilience of agricultural systems.

The agricultural sector plays a crucial role in ensuring food security, rural employment, and
economic stability. Therefore, understanding and enhancing the economic resilience of this
sector is essential for sustainable national economic growth. However, the concept of resilience
in the economic literature remains ambiguous due to its multidimensionality and the
complexity of dynamic systems, making it challenging to operationalize and evaluate.

One practical concern is how government policies, such as direct payments, influence
agricultural resilience. However, there is a lack of empirically grounded answers regarding the
extent and direction of the impact of different support measures. The proposed research
addresses this gap by examining the impact of direct payments on the economic resilience of
the agricultural sector.

To measure the economic resilience of the sector, an index composed of indicators

representing its main functions is utilized. These functions include the production of affordable
food and bio-based resources, farm viability, and the creation and maintenance of decent jobs.
Direct payments are expected to positively influence these functions and align with the CAP's
goals.

Existing research on the impact of direct payments on agricultural resilience is limited, with
many studies relying on qualitative methods rather than quantitative analysis. Some studies
have examined the relationship between direct payments and farm profitability, with mixed
results. The impact of subsidies on profitability indicators appears to be complex and context-
dependent.

The proposed research employs panel data from 27 EU countries covering the period from 2005
to 2019 to empirically examine the impact of direct payments on the economic resilience of the
agricultural sector. Various statistical techniques, including fixed effects models, random effects
models, and generalized method of moments (GMM), are used to analyze the data and assess
the impact on resilience indicators.

The findings from the data analysis reveal a positive overall impact of direct payments on the
economic resilience of agriculture across the EU-27. However, the influence of direct payments
varies concerning different key functions within the sector. Notably, negative changes in
economic resilience were observed in farm efficiency, raising concerns about the long-term
sustainability of direct payments' influence on the sector.

Theoretical Background

The increasing frequency and severity of disturbances, particularly climate-related, have

elevated the importance of resilience in discussions surrounding sustainable development and
the long-term viability of agricultural systems. The agricultural sector plays a critical role in
ensuring food security, rural employment, economic growth, and stability during economic
downturns, making its resilience crucial for sustainable national economic growth.

While there has been significant academic attention to resilience in agricultural contexts, most
of the research has focused on the resilience of agro-ecosystems, leaving a scarcity of research
and fragmented understanding regarding the economic resilience of agricultural systems.
Additionally, the concept of resilience in the economics literature remains ambiguous due to its
multidimensionality and the complexity of dynamic systems, posing challenges for
operationalization and evaluation.

A pressing practical concern is how to enhance or prevent the deterioration of agricultural

resilience amidst mounting challenges. Government policies are believed to have a substantial
impact on resilience, but there is a lack of empirically grounded answers regarding the extent of
influence exerted by various support measures and even the direction of their impact.

In terms of measuring the economic resilience of the agricultural sector, an index composed of
indicators reflecting its main functions can be used. Three key socio-economic functions of the
agricultural sector are identified: the production of affordable food and bio-based resources,
ensuring farm viability, and creating and maintaining decent jobs. These functions are expected
to be positively influenced by Common Agricultural Policy (CAP) direct payments, which align
with CAP goals of ensuring sufficient income for farmers and a safe, healthy, and quality food
supply.

However, research on the impact of direct payments on the economic resilience of agriculture
is scarce, with many studies relying on qualitative rather than quantitative methods. While
there are numerous studies analyzing the impact of direct payments on various agricultural
indicators, the empirical results suggest an ambiguous impact. For example, studies have
examined how direct payments influence changes in farm profitability (e.g., farm income,
gross/net, margin, return on assets, return on equity, farm net value added) or the variability of
farm income. The findings reveal that direct payments can have both positive and negative
effects on farm profitability. Some studies find a positive relationship between direct payments
and farm income, while others observe variations among different regions or countries.
Additionally, there is evidence of farmers using direct payments to increase income and reduce
income volatility in some cases, while in others, payments are substituted for production.
Overall, the relationship between subsidies and profitability indicators is complex and context-
dependent.

Methodology

The objective of this study is to evaluate the impact of direct payments on the actual resilience
of the agricultural sector. Resilience was measured using an index composed of variables
representing the core functions of the sector, namely the delivery of affordable agricultural
goods, assurance of farm viability, and creation and maintenance of decent jobs. The indicators
for each function were adapted from a previous study by Volkov et al. [47], with some
modifications. The foreign trade balance of agricultural and food products was replaced with
the output value of agricultural goods to better reflect the function of delivering affordable
agricultural goods.

Due to data limitations, access to credit was not included in this study. However, indicators
related to farm viability were supplemented with an expense-to-income ratio indicator to
provide a more comprehensive view. The indicators for the function of creating and
maintaining decent jobs were modified to focus only on salaried employment, as overall
employment levels in agriculture, which often include unproductive and small self-employed
farmers, can have negative economic consequences and hinder sectoral competitiveness and
resilience. The indicator of labor productivity was also added to reflect the quality of
employment.

To assess the impact of direct payments on the growth of resilience indicators, fixed effects (FE)
and random effects (RE) models, as well as a one-step system using the generalized method of
moments (GMM), were employed. Panel diagnostics were conducted, including F-tests,
Breusch-Pagan tests, and Hausman tests, to determine the adequacy of the models. Log
transformations were applied to skewed data to approximate normality. Non-linearity tests
using squared terms were also conducted. Model fit was assessed by examining normal
distribution, autocorrelation, cross-sectional dependence, and heteroscedasticity using panel-
robust standard errors when necessary.

Overall, this methodology aims to comprehensively evaluate the impact of direct payments on
the growth of resilience indicators in the agricultural sector, considering various statistical
techniques and panel diagnostics to ensure the robustness and validity of the findings.

Data

The study analyzed data from 27 EU countries, including the United Kingdom, for the period
between 2005 and 2019. Croatia, which joined the EU in 2013, was excluded from the analysis.
Various indicators related to the function of delivering affordable foods, farm viability, and
creation of decent jobs were examined.

Results

Regarding the function of delivering affordable foods, the agricultural output exhibited a
positive trend despite its volatility. The ratio of food retail prices to the retail prices of all
consumption goods showed a slight increase, indicating a relatively faster growth in food prices
compared to other goods.

In terms of farm viability, indicators remained relatively stable over the analysis period, but a
slight decrease in farm profitability and farm expense-to-income ratio was observed.

For the creation of decent jobs, wages for agricultural workers steadily increased throughout
the period. Employment of hired employees experienced a slight decrease from 2007 to 2011
but then started growing again until 2016, followed by a slight decrease. Labor productivity
showed a steady and significant increase, nearly doubling since 2005.

The average level of direct payments (DPs) in the EU-27 rose during the research period.
However, different tendencies were observed between old member states (OMS) and new
member states (NMS), with DPs decreasing in OMS and increasing in NMS.

Conclusions
Based on the data analysis, it can be concluded that agricultural output showed a positive
tendency, although it was volatile. The slight increase in the ratio of food retail prices suggests a
moderate rise in food prices compared to other consumption goods. Farm viability indicators
remained relatively stable, while wages for agricultural workers increased, and labor
productivity demonstrated consistent growth.

The findings provide valuable insights into the state of the agricultural sector in terms of
delivering affordable foods, farm viability, and job creation. However, further analysis and
examination of additional indicators are needed to obtain a comprehensive understanding of
the sector's overall performance.

References
1. Morkūnas, M.; Volkov, A.; Pazienza, P. How Resistant is the Agricultural Sector? Economic
Resilience Exploited. Econ. Sociol.
2018, 11, 321–332. https://doi.org/10.14254/2071‐789x.2018/11‐3/19.
2. Paas, W.; Coopmans, I.; Severini, S.; van Ittersum, M.K.; Meuwissen, M.P.M.; Reidsma, P.
Participatory assessment of sustainability
and resilience of three specialized farming systems. Ecol. Soc. 2021, 26, 2.
https://doi.org/10.5751/ES‐12200‐26020.
3. Marinov, P. Index of localization of agricultural holdings and employees in the rural areas of
the South‐Central Region for
Bulgaria. Bulg. J. Agric. Sci. 2019, 25, 464–467.
4. Sertoglu, K.; Ugural, S.; Bekun, F.V. The contribution of agricultural sector on economic
growth of Nigeria. Int. J. Econ. Financ.
Issues 2017, 7, 547–552.
5. Wang, S.L.; Ball, V.E.; Fulginiti, L.E.; Plastina, A. Productivity Growth in Agriculture: An
International Perspective; Fuglie, K.O.,
Wang, S.L., Ball, V.E., Eds.; CABI: Oxfordshire, UK, 2015.
6. Matsushita, K.; Yamane, F.; Asano, K. Linkage between crop diversity and agro‐ecosystem
resilience: Nonmonotonic agricultural
response under alternate regimes. Ecol. Econ. 2016, 126, 23–31.
https://doi.org/10.1016/j.ecolecon.2016.03.006.
7. Chavas, J.P.; di Falco, S. Resilience, Weather and Dynamic Adjustments in Agroecosystems:
The Case of Wheat Yield in England.
Environ. Resour. Econ. 2015, 67, 297–320. https://doi.org/10.1007/s10640‐015‐9987‐9.
8. Birthal, P.S.; Hazrana, J. Crop diversification and resilience of agriculture to climatic shocks:
Evidence from India. Agric. Syst.
2019, 173, 345–354. https://doi.org/10.1016/j.agsy.2019.03.005.
9. el Chami, D.; Daccache, A.; el Moujabber, M. How Can Sustainable Agriculture Increase
Climate Resilience? A Systematic Review.
Sustainability 2020, 12, 3119. https://doi.org/10.3390/su12083119.