Rural development under the European CAP: The role of diversity

Abstract

Achieving optimal diversity at community level is a key in solving the rural development problem. In this essay rural development at community level and the impact of Common Agricultural Policy (CAP) reforms are analyzed in the framework of privately provided public goods models. It is shown that CAP support redistribution inducing diversification of community activities across households can potentially have important positive impact on rural development and household welfare.

Notes

1 Stavins, Wagner and Wagner (2003) provide a broader economic definition of sustainability where economy is sustainable if and only if it is dynamically efficient and the resulting stream of total welfare functions is nondeclining over time. This definition of “potential Pareto improvement”, in Kaldor-Hicks sense implies that the world is viewed as being made better off if the magnitude of gains and the magnitude of losses are such that the gainers can fully compensate the losers for their losses and still be better off themselves.

2 Here, it is not assumed that the transferred resources are tied for their use only to contributions to community development. It is assumed that recipient households allocate the transferred resources between consumption goods and contribution to community development in any way they like.

3 There is important literature related to the concept of joint production. Baumol, Panzar and Willig (1981) rely on the concept of jointness in production to explain the existence of multiproduct firms. Leathers (1991) demonstrates that jointness gives rise to cost complementarities, often referred to as “economies of scope”, among outputs. Boisvert (2001a, b) provides detailed characterization of multifunctionality of agriculture in terms of joint production.

4 Diversity and rural development are inextricably linked in accord with the Goldsmith-McKinnon-Shaw view of economic development. Our primary interest, however, is in using the framework of private provision of public goods for analysing the effects of CAP support redistribution on rural development rather than concentrating on analysis of how diversity is achieved. Peterson et al. (2002) and Vatn (2002) provide some answers to these questions within a joint production framework with transaction costs.

5 Household welfare effects of the CAP support redistribution under various conditions are analyzed in more detail in Rizov (2004).