Agricultural Subsidies in the Economy of Ecuador – An Assessment of Impact Through CGE Modelling

Abstract

Many countries use agricultural subsidies to support their farmers, with the aim of fostering the rural economy, supplementing farm income, increasing productivity, and many other aims. However, different types of subsidies have diverse effects, and certain types can have a detrimental impact on the economy, on international trade, as well as on the environment.

Numerous researchers and international organizations have made recommendations on how to reform agricultural support in order to curtail or eliminate these adverse effects. Often, different types of minimally distorting “green box” subsidies are suggested as an alternative to highly distorting, environmentally adverse “amber box” subsidies.

Using the power of Computable General Equilibrium (CGE), we construct a model of the economy of Ecuador, which we use to simulate the alternate application of two different types of subsidies. We then analyze and compare the effects that each of them has on agricultural production activities, on the production factors, on agricultural output, on the income of farmers’ households, on foreign trade, and on GDP, taking into consideration the specific characteristics of Ecuador’s agricultural economy and subsidy structure, as well as the limitations of the model.

In Scenario 1, three types of subsidies (output, input and land factor subsidies) are provided at a level corresponding to a weighted average of all OECD countries. This experiment produced mixed effects in terms of prices and output, depending on the specific sector. It also produced negative effects on the trade balance, but gave positive results for GDP and farm income. The subsidy with the strongest effect was the land factor subsidy.

In Scenario 2, the target was the level of farm income produced by the subsidies in Scenario 1, but only through green box subsidies, specifically decoupled land payments. Direct payments were not the most economically efficient, causing important decreases in allocative efficiency and national GDP. On the other hand, price and output effects were also more generally positive, with increase of exports and improvement of the trade balance.

Targeting of subsidies to small and medium producers is recommended.

About the author

Gabriela García Merchán