The impact of trade openness on technical efficiency in the agricultural sector of the European Union

Abstract

The aim of this study is to analyse the impact of trade openness on technical efficiency of the European Union’s (EU) agricultural sector. There are no systematic theories linking trade policy to technical efficiency; hence, the relation between trade liberalization and technical efficiency is fundamentally ambiguous. Stochastic frontier analysis is used to model the relationship between EU’s production resources and agricultural output, as well as the importance of trade openness on technical efficiency of a country. The data for 16 of the 28 EU members were available for the period 1980–2007 including land, capital, fertilizer, labour, agricultural GDP, foreign direct investments (FDI), exports and import data. Results indicate that trade openness has an immediate, negative impact on efficiency in the EU agricultural sector. Over time, however, trade openness does increase efficiency. The FDI outflows increase efficiency. This suggests that an initial reduction in capital supply forces EU nations to utilize other factor inputs more efficiently. However, there is the unexamined potential that over time the depletion of capital results in a decrease in efficiency. Finally, formerly communist member-countries of the EU are found to have the lowest technical efficiency scores whereas Southern European nations have the highest efficiency.

Keywords:

• trade openness
• technical efficiency
• foreign direct investments
• agricultural sector
• European Union

JEL Classification:

• F14
• Q17
• D24