Analysing the effects of subsidies on Eastern European agriculture

In light of recent reforms to the European Unions (EU) Common Agricultural Policy (CAP), this study investigates the effect agricultural subsidies have had on seven Eastern European nations total factor productivity (TFP). In particular, the effect decoupling reform has had on the TFP of these nations. This reform meant farmers would receive an income support payment, which would be based on particular environmental, animal welfare and food safety standards, rather than receiving subsidies based on the type of agricultural product they produced. This thesis utilises the Rizov et al. (2013) methodology, which was modified from Olley and Pakes (1996) to model unobserved TFP and to directly consider the effects of subsidies in the estimation equation. Using panel data from the Farm Accountancy Data Network (FADN), the effect decoupled subsidies have had on Eastern European agricultural is observed. The results are consistent with previous literature (Goodwin and Mishra, 2006; Rizov et al., 2013; Mary, 2013) that decoupling reform has more positive effects on TFP, when compared to the full sample, which includes coupled subsidies. A spearman rank correlation coeffcient is used to determine whether subsidies and TFP can be described as a monotonic function. The spearman correlation results indicate that decoupling reform has had positive, statistically significant effects (to the 10% level) on four of the seven nations respective TFP index, and on two nations TFP growth. This is consistent with the results from Čechura (2012), Rizovet al. (2013), Mary (2013), and indicates that decoupling reform may have less distortionary impacts on farm behaviour, leading to increased productivity.