Vertical and horizontal decomposition of farm income in equality in Greece

Abstract

AbstractPolicy makers intervene in agriculture aiming to achieve a wide range of socioeconomic objectives, one of which is concerned with the improvement of farm income. Despite continuous reforms in agricultural policies, concern about inequality remains very strong given both the highly skewed income distribution and the heterogeneity among farms. This paper aims to empirically examine the distributional implications of CAP reforms on farm income in Greece, estimating Gini coefficients and Generalized Entropy measures to explain inequality through vertical and horizontal decomposition. The results show that disparities are linked to structural factors such as size, specialization and region, owing mainly to subsidies tied to output.Key words: Income inequality, Agricultural policy, Micro Analysis of Farm Firms(ProQuest: ... denotes formulae omitted.)IntroductionPolicy makers intervene in agriculture aiming to achieve a wide range of socioeconomic objectives, one of which is concerned with the improvement of farm income. The dispersion of government support benefits across farmers essentially affects distributional goals of maintaining an adequate standard of living for farmers and minimizing income disparities. Despite continuous reforms in agricultural policies, concern about inequality remains very strong given both the highly skewed income distribution and the heterogeneity among farms.The early stages of the Common Agricultural Policy (CAP) in the European Union, intended to establish high price levels at domestic markets with trade measures, have been criticized due to the regressive distributional effects of such policies on farm income. Market price support payments are considered relatively ineffective in income transfer efficiency terms, allowing a large share of government support to be directed to unintended recipients (OECD, 1996). Transitional direct payments were proposed as a viable alternative to mitigate these shortcomings, whereas the range of concern has been expanded to new issues such as the environment, sustainability and rural development. However, government support continues to leave agricultural income distributions within Europe more or less unchanged. Recently, fully decoupled payments were introduced, as they are expected to correct market outcomes according to politically determined objectives through more effective income transfers to farmers. This type of support is anticipated to minimize economic distortions and distributive leakages, since the effects on production decisions are minimal (OECD, 2003).Despite the profound CAP reforms and the renewed interest in the welfare aspect of the CAP, the unequal distribution of income and government support is continuously considered an essential reason for CAP' s reduced effectiveness. Government support is unequally distributed among farms and often concentrated on a small number of commodities, in certain regions and on larger farms, thereby alleviating income disparities (OECD, 2003). For instance, in Ireland, the distribution of farm income appears to have altered substantially over the MacSharry CAP reform period, owing to the partial substitution of market price support by direct payments. The distribution of direct payments has actually become more unequally distributed since then (Keeney, 2000). In Scotland, the same effect is observed introducing direct payments, and the Fischler CAP reform seems to have no effect on the given redistribution of farm income (Allanson, 2003). Moreover, Mediterranean farming is discriminated compared to continental farming, due to the fact that smaller and more labor intensive farms are disadvantaged in the CAP framework (Mora and San Juan, 2004). Overall, most studies looking at the distributional effects of the CAP conclude that, in the EU, poorer farms benefit more from government support than richer one, but larger (and high income) farms get more direct payments than smaller ones. …