1. IntroductionRural areas represent

more than 77 percent ofthe EU territory and hostabout half of the 500 mil-lion people who make upthe total EU population.The EU has 13.7 millionfull-time farmers who prac-tice many different pro -duction systems, from in-tensive agriculture, throughconventional to organic a-griculture. This diversityhas increased with thejoining of Central andEastern Europe countriesto the European Union. Ingeneral, these are familyfarms with an average sizeof 12 hectares.

The Common Agricultu-ral Policy (CAP) aims tosupport agriculture to en-sure food security in thecontext of climate changeand facilitate a balanceddevelopment in all rural a-reas of Europe, even in a-reas where productionconditions are more diffi-cult. At the same time, Eu-ropean agriculture must be multifunctional, since it has torespond to citizens’ concerns about food (availability, price,range, quality and safety), protect the environment and al-low farmers to live in dignity in their work.

The reform of CAP in 2003 introduced a new system ofpayments, known as the single payment scheme, whichwill no longer be linked to production aid. The single pay-

ment scheme is the lar-gest budget component ofCAP. It aims to supportthe income of farmersand in return, they under-take to meet the stan-dards of environmentalprotection, animal welfa-re and food safety and en-sure proper maintenanceof the territory. Secondly,the CAP contains measu-res which regulate theagricultural markets thatmaintain a number ofspecific payments to pro-ducts and industries thatprocess and sell them. Inthird place, regarding ru-ral development policy,the CAP aims to improveagriculture and forestrycompetitiveness whileprotecting the environ-ment and the naturalconditions and improvingthe quality of life and di-versification of the ruraleconomy. Finally, theLeader initiative provi-des funding opportunitiesto local rural develop-ment initiatives. The CAP

budget covers two types of expenses:� The income support for farmers through direct single

payment scheme is subject to compliance with the Eu-ropean standards in food safety, environmental protec-tion and health and animal welfare. These payments arefunded entirely by the EU and account for about 70 per-cent of the budget of the CAP. Market support measuresare also included, as for example, when natural disastersdestabilize agricultural markets. These payments repre-sent less than 10 percent of the CAP budget.

� Rural development measures are to help farmers to

Beyond income transfers to farmers, the macroeconomicspillover of CAP payments in Aragon (Spain), 2007-2013

Luis PÉREZ Y PÉREZ*, José Ramón MONROBEL ALCÁNTARA**,

Ana Medina LÓPEZ**

AbstractThis paper provides an assessment of the macroeconomic impact of the Com-mon Agricultural Policy (CAP) on Aragon (Spain) through a computable ge-neral equilibrium (CGE) model. During the EU programming period 2007-2013, Aragon received agricultural subsidies worth 4,055 million Euros. The-se grants are received by farmers and then redistributed through their spen-ding towards other institutional sectors. CAP funds carry in Aragon an ave-rage annual GDP growth of 2.6 % or an average annual increase of agricul-tural GVA by 19.6% among other results. This analysis is important becauseCAP is changing and resources for this EU policy are expected to be reduced.In February 2013, the European Council approved the Multiannual FinancialFramework 2014-2020 in which the overall EU budget decreases, is redistri-buted and clearly restricts allocations for agricultural policies.

Keywords: Computable General Equilibrium Model, European AgriculturalGuarantee Fund, European Agricultural Fund for Rural Development, Com-mon Agricultural Policy, Aragon.

RésuméDans ce travail, nous allons présenter une évaluation macroéconomique de lapolitique agricole commune (PAC) en Aragon (Espagne) en nous appuyant surun modèle d’équilibre général calculable (MEGC). Au cours de la période deprogrammation 2007-2013 de l’UE, l’Aragon a reçu des subventions agricolestotalisant 4,055 millions d’euros. Ces subventions ont été perçues par les a-griculteurs qui les ont ensuite redistribuées à travers des dépenses en faveurd’autres secteurs institutionnels. En Aragon, les fonds PAC génèrent une aug-mentation annuelle moyenne du PIB de 2,6% ou une augmentation annuellemoyenne de la VAB agricole de 19,6%, entre autres résultats. Cette analyses’avère être très importante puisque les objectifs de la PAC sont en train dechanger et les ressources disponibles devraient diminuer. Le Conseil Européena approuvé en février 2013 le Cadre Financier Pluriannuel 2014-2020 quicomporte une réduction du budget global de l’UE, sa redistribution et une lim-itation évidente des allocations pour les politiques agricoles.

Mots-clés: Modèle d’équilibre général calculable, Fonds européen de garantieagricole, Fonds européen agricole pour le développement rural, Politique A-gricole Commune, Région d’Aragón.

30

*Centro de Investigación y Tecnología agroalimentaria de Aragón,Zaragoza, Spain.**Universidad Rey Juan Carlos, Spain.

Jel Classification: C68, E01, Q18

NEW MEDIT N. 4/2014

modernize their farms and become more competitive,while protecting the environment and contribute to themaintenance of rural communities. These payments arefinanced by the EU and the Member States and they rep-resent about 20 percent of the budget of the CAP. Therural development measures are intended not only tosupport farmers, but also to other agents who are presentin rural areas through, inter alia, Leader programs. TheLeader initiatives are to strengthen the rural economy byencouraging local and non-agricultural actors. Current-ly, Member States must allocate at least 5 percent oftheir budget to finance Leader rural development proj-ects.

All these measures are interrelated and must be managedconsistently. For example, direct payments help ensuring astable income for farmers and get paid in return for meetingto provide environmental public goods. Similarly, rural de-velopment measures encourage additional public services,while facilitating the modernization of farms. For over 50years, the CAP has been, and still is, the most importantcommon policy of the EU although in recent years its par-ticipation in the EU budget has been declining slightly. Cur-rently, the communitarian CAP spending is financed by twofunds from the general budget of the EU:� The European Agricultural Guarantee Fund (EAGF),

which fully finances direct payments to farmers and themeasures to regulate agricultural markets. Direct pay-ments help to support farmers’ income not linked to theagricultural production. In return, farmers are commit-ted to comply with environmental protection, animalwelfare and food safety and ensure proper maintenanceof the territory. Direct payments help keep agriculturethroughout the EU to ensure a stable income for farmers.Such payments allow ensuring long-term viability offarms and make them less vulnerable to price fluctua-tions.

� The European Agricultural Fund for Rural Development(EAFRD), which co-finances rural development pro-grams of the Member States. These funds are intendedto contribute to improving the competitiveness of agri-culture and forestry, protecting the environment, impro-ving the quality of life and diversification of the ruraleconomy and funding local rural development projects.Under the CAP, rural development aims to preserve thevitality of rural areas by supporting investment pro-grams, modernization and support for agricultural andnon-agricultural activities in these areas. Member Statesshall develop and carry out their own development pro-grams and the EU co-finances a portion of its cost, ta-king into account that Member States must devote atleast 10 percent of their budget to strengthen the com-petitiveness of agriculture and forestry, at least 25 per-cent to improving the environment and landscape and atleast 10 percent to the diversification of the rural econo-my.

Aragon, meanwhile, has a total population of 1.3 millionpeople surveyed on January 1, 2013, a total area of 47,719km² and a population density of 28 inhabitants/km². It istherefore a large territory, with the majority of the popula-tion concentrated in the capital, 704,239 inhabitants in2013, and small populations spread across the rest of the730 municipalities, of which more than 600 do not get tohave a thousand neighbors.

The agricultural sector in this region has a special socialand economic relevance. According to the last agriculturalcensus, in 2009 Aragon had 2.3 million hectares of utilizedagricultural area, of which 1.6 million corresponded to ara-ble land, and the rest to permanent grassland. Total agricul-tural area was divided into 52,774 farms, with an averagesize of 45.5 hectares.

In 2012, the agricultural sector in the region generatedabout 36,000 jobs, which employed 31,300 people and ac-counted for 4.3 percent of the regional Gross Value Added(GVA). The number of food industries rounds 1,200 andthey employed more than 11,000 workers. Despite the eco-nomic crisis, agricultural income in Aragon experienced a2.3 percent increase in 2012 in current terms over the pre-vious year. The CAP support granted in 2012 amounted upto 504 million Euros, representing a third of Aragon’s agri-cultural income (Tables 1 and 2).

Funding programs for regional economic developmenthave been an important support for agricultural income

NEW MEDIT N. 4/2014

31

Table 1 - Aragon´s agricultural sector macromagnitudes. (Figures in Million € and thousands of people)

2010 2011 2012

Agricultural Final Production 1,184 1,291 1,214

Livestock Final Production 1,639 1,860 2,121

Agrarian Final Production 2,918 3,247 3,437

% Agrarian GVA/Total GVA 4.19% 4.29% 4.29%

Net Value Added (revenue) 1,435 1,507 1,543

Employees 34.5 32.1 31.3

Sources: Department of Agriculture, Livestock and Natural Environ-mental of the Government of Aragon, General Treasury of the SocialSecurity and the National Statistics Institute (INE).

Table 2 -CAP funds in Aragon during 2007-2013.

(Figures in Euros)

Year EAGF EAFRD EAFRD + Total CAPNational

Payments

2007 456,241,849 20,413,402 51,541,797 507,783,646

2008 442,632,364 72,250,273 187,372,603 630,004,967

2009 451,533,371 48,735,783 138,229,799 589,763,170

2010 471,650,696 54,586,135 137,527,499 609,178,195

2011 462,451,885 58,382,626 135,981,943 598,433,827

2012 459,781,660 44,411,263 100,331,853 560,113,512

2013 (*) 459,781,660 44,411,263 100,331,853 560,113,512

Total 3,204,073,484 343,190,745 851,317,346 4,055,390,830

Source: European Agricultural Guarantee Fund (EAGF). (*) Estimated Data.

from the origins of the EU in the middle of last century.Agricultural aids represent around 7,240 million Euros forSpain as a whole, according to recent data referring to 2012(FEGA, 2013). Such a figure implies almost a third offarms income or 0.7 percent of GDP for that year.

The macroeconomic effects of CAP expenditure in a re-gional economy can be analyzed in detail through a Com-putable General Equilibrium (CGE) model. The economicimpact is the result of the comparison between the follo-wing alternative scenarios:� The benchmark equilibrium refers to the Aragonese eco-

nomy prior to receiving EU agricultural funds in the per-iod 2007-2013.

� The simulated equilibrium considers the balanced figu-res through the model once Aragon has received theCAP support.

Among these types of models developed in Spain wemight particularly note the work of Lima and Cardenete(2007), where, at regional level, the model is applied toanalyze the impact of European Structural Funds for theperiod 2000-2006, evaluating their effects on production,prices and rent in Andalusia. Furthermore, mention must bemade, on the one hand, of the work by Monrobel et al.(2013), which develops a model for the economy of Madridin order to estimate the impact of the European RegionalPolicy for this region in the period 2007-2013 and, on theother, of the work by Cardenete and Delgado (2013), whichassesses the impact of the hypothetical abolition ofEuropean Funds in Andalusia during the period 2007-2013.Finally, Cámara et al. (2014) synthesize SAM and CGEmodels developed at the regional level in Spain.

After this introduction, the paper is organized in two co-re sections and final conclusions. The second section of thispaper presents the methodological development of the CGEmodel, describing its main features and formulation, theinteraction in the economy between factor markets andcomposition of goods and the data specification for calibra-ting the model. The third section analyses the macroecono-mic effects of CAP aids in Aragon along the period 2007-2013. Finally, main results and discussion are detailed.

2. Material and methods2.1 The CGE model

The effects of these agricultural aids on recipients and ontheir subsequent redistribution, through spending to otherproductive activities and institutional sectors, can be analy-zed through a CGE Model. A CGE model is a system ofnonlinear equations which includes the equilibrium condi-tions of an economy, the functioning of markets and thelinkages between sectors and institutions, assuming a ra-tional and optimizing behavior of different agents.

One of the most important utilities of these simulationmodels is the ability to quantitatively assess the macroeco-nomic effects of certain economic policies, through the va-riation of the exogenous variables representing the policymeasures analyzed.

This type of analysis through model simulation is onlypossible if a Social Accounting Matrix (SAM) is availablefor the economy under analysis. A SAM represents the eco-nomic structure studied and it is used as the database whichreplicates the initial benchmark equilibrium in the model inthe base year.

The aim of a CGE model is to make an empirical repre-sentation of the real characteristics of the economic struc-ture to be analysed. The calculation of the equations isobtained through its theoretical formulation. This beginswith the specification of the goods and services and theagents that make up the economy, with the determination ofthe conditions of the functioning of markets for goods andfactors and based on the rational optimizing behavior of allagents.

The formulation of this CGE model for Aragon includesfive types of institutional sectors involved in the economy:producers, households, companies, public sector andforeign sector. More detail on the properties of theseinstitutional sectors can be found in Pérez y Pérez andMonrobel (2012).

ProducersThe model consists of 26 regional production sectors or

industries, compiled according to the Regional Accountspublished by the National Statistics Institute (INE). It isconsidered that they produce and sell goods and serviceswith the goal of maximizing their benefits.

The total production of each of them is a three level nes-ted production function. Under the assumption that goodsfrom different countries or regions are imperfect substitu-tes, in the first production level domestic production, Yj, iscombined with the imports of sector Mj through a Cobb-Douglas function to obtain the total production function:

[1]

At the second level, domestic output of each sector ofproduction is obtained by combining the use of intermedia-ry goods and a primary factor composite, value added, infixed proportions by means of a Leontief-type function:

[2]

Finally, at the third level, to allow substitution amongstcapital and labour, the value added of each sector of pro-duction is incorporated through a Cobb-Douglas functionwith constant returns to scale:

[3]

The goal of each producer is to maximize their benefits,considering constant returns to scale, resulting in the mini-mization of production costs, given their technologicalfunction. Therefore, the model equations that determine the

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various values of the variables are obtained by solving theoptimization programs, so that the producer´s behaviorconsists in minimizing costs on each of the three levels ofnesting. That is, they minimize total and domestic produc-tion costs and value added costs.

At the first nesting level, with the minimization of totalproduction costs optimal, the levels of domestic productionand imports are obtained:

[4]

[5]

At the second nesting level, the choice of inputs, interme-diate consumption and value added are independent of pri-ces, due to the Leontief technology chosen. Therefore, theminimization of the costs of domestic production leads tooptimal utilization of intermediate consumption and valueadded, represented by the following functions of demandfor goods and value added:

[6]

[7]

At the third nesting level and with the assumption thatproducers minimize the cost of the value added given theirtechnological restrictions, we obtain the amount of capitaland labour demanded by each sector:

[8]

[9]

Introducing constant returns to scale in the production si-de on the three levels, their marginal costs coincide, at eachlevel, with average costs. Therefore, the production unitaryprices coincide with the minimum average cost, a costwhich is obtained by substituting the optimal values of theinput in the respective cost objective functions.

Regarding taxes, social contributions paid by employershave been disaggregated. It is also considered that the finalconsumer price of each good is taxed by a single indirecttax rate. This tax (TIP

J ) groups the taxes on production, pro-ducts, import taxes and VAT.

[10]

HouseholdsIn this CGE model, households are represented by a sin-

gle private consumer, considering that all households have

the same preferences. The decisions on consumption andsavings are determined assuming an optimizing behavior oftheir welfare. This welfare is represented by maximizing aCobb-Douglas utility function which depends on demandfor consumer goods and savings, subject to householdsdisposable income (YD).

[11]

Where Cj represents the consumption of the producedgood j and CAH the part devoted to savings.

Therefore, the equations of the model that determine thelevel of consumer demand for each consumer good andhouseholds’ savings are obtained from the previous optimi-sation program:

[12]

[13]

Families devote their income, YD, to current consumptionof the different goods produced and to savings for futureconsumption, after deducting the paid taxes and assumingthat the Public Sector taxes such income at a constant rate(TD ). Income available for consumption and savings istherefore determined as follows:

The gross household income is obtained, on the one hand,from the productive sector, by selling its production factorslabour and capital for which it will receive compensationwages and returns on capital, respectively. And, on theother hand, by transfers received from other institutionalsectors: public sector transfers are related to unemploymentpayments (TDES) and other benefits (TSPH); transfers fromcompanies (TSOH) and those from foreign sector (TRMH).Although the latest transfers and so factor endowment areconsidered constant (exogenous), households’ income isendogenously determined by variations in wages and re-turns on capital.

CompaniesThe model considers that companies are the direct mana-

gers of the productive activity sectors or mere intermedia-ries between production sectors and the rest of institutionalsectors, households, public sector and foreign sector.

Gross operating income of these industries come from theirreturns on capital, KSO, being r their marginal price, so theypay taxes on them at a tax rate, TSO. Besides, they make nettransfers to other institutional sectors, public sector (TSPSP),households (TSOH) and the rest of the world (TSORM). Thebudget constraint of industries will be balanced by their sav-ings amount AHSO, according to the following equation:

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[14]

[15]

Public SectorIn this CGE model, the public sector represents all public

administrations and its main role is to act as a consumer ofgoods and services and as tax collector, although its incomecomes from different sources: reported income from itsown capital, r · KSP; different taxes collected and the in-come received from the net transactions carried out in therest of the world (TRMSP).

This tax collection is disaggregated between those deri-ved from taxes on production and VAT, (RTP), the social se-curity contributions by employers, (RTCS), corporate taxes,(RSO), and finally, the income tax imposed on consumers,(RD).

The public sector uses these revenues to finance expendi-ture on consumer goods, which is considered constant, al-though its expenditure may vary as a result of changes inprices. That is, consumption in each of the assets by the pu-blic sector is considered to be exogenous variables, CSP

j . Inaddition to the consumption of goods, the public sector per-forms various transfers to the rest of institutional sectors: tothe foreign sector (TRMSP), to companies (TSPSO) and tohouseholds in the form of social benefits (TSPH) and unem-ployment benefits (TDES).

Therefore, the public deficit or surplus is endogenouslydetermined as the difference between income minus publicexpenditure and transfers mentioned, which are weightedby a consumer price index, and are intended to complementprivate savings to finance their investment.

Foreign SectorThe foreign sector appears as the only aggregated account

in the model, which buys and sells goods and services toAragon’s producers, in addition to making various transfersto private and public agents.

Under the assumption that the regional economy of Ara-gon is a small open economy, import supply is perfectlyelastic and the price of goods in international markets is as-sumed to stay on the same levels. Regarding export levelsconsumer goods, these are considered to remain constant(exogenous). Thus, the trade balance of the regional econo-my by the foreign sector will be determined endogenouslyas:

[17]

Markets of factorsThe model has introduced two inputs. With regard to la-

bour, it comes from a representative consumer who is assu-med to have a constant working capacity (LH). That is, la-bour supply is inelastic. On the other hand, it is consideredas moving between different productive branches of the re-

gional economy, but still to and from the foreign sector. Itis also assumed that salaries are flexible and, therefore, theyare considered as an endogenous variable of the model. Fi-nally, the model incorporates the imbalance in the labourmarket not to consider full employment. Therefore, it in-cludes an unemployment rate (u), an endogenous variablewhich underestimates households labour endowment withrespect to the demand for this factor by the productive sys-tem in Aragon.

[18]

With the assumption that capital is not internationallymobile but is perfectly flexible to changes between region-al productive sectors, and taking into account that the sup-ply of capital comes from the different institutional sectors,the market clearing condition of this factor is determinedunder these conditions:

[19]

EquilibriumTaking into account the conditions described on model

agents behavior, along with the equations of the emptyingof goods and equality between savings and investment andmacroeconomic closure, the model formulation is comple-ted with the introduction of the concept of equilibrium ge-nerally used.

2.2. Model calibrationAfter describing the model specification and once the

concept of the theoretical equilibrium is defined, it is nowpossible to perform an analysis of the impact of differenteconomic policies. For such objective it is necessary to de-termine the numerical values of all the coefficients of func-tions and exogenous variables. That is, it is necessary to ca-librate the model (Mansur and Whalley, 1984). It is there-fore essential to have a Social Accounting Matrix (SAM) ofthe studied economy, which can provide the data requiredfor the calculation of the parameters and the values of theexogenous variables.

In this CGE model for Aragon, the calibration has beenperformed using the SAM database of Aragon by base year2005 (Pérez y Pérez and Cámara, 2010). As this originalSAM was valuated at basic prices, in order to transform it in-to one valued at acquisition prices, an adjustment of the submatrix of intermediate and final consumption by the Cross-Entropy Minimization method was performed using the lastInput-Output Framework available in the region (Pérez y Pé-rez and Parra, 2009). This method has been previously ap-plied to update SAM matrices, among others, by Robinson etal.(2001), Cardenete and Sancho (2006) or Monrobel et al.(2013). Nevertheless, the modifications performed do notchange the initial data matrix. Such a fact only represents anadjustment into the model variables changing their valuationfrom basic prices to acquisition prices.

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[16]

As a result of these adjustments, a new SAM was obtai-ned valued at acquisition prices which serves as thestraightforward database for the formulation of the ARA-GON-CGE model and constitutes the starting point for itsinitial calibration. This matrix, used as the database for themodel, is structured in a total of 37 accounts.

It is assumed that the economic reality reflected in theSAM corresponds to the equilibrium levels of the Aragone-se economy described in the model. Solving the system ofequations represented by the model leads to the calculationof the endogenous accounts. This implies that it replicatesthe overall equilibrium which is reflected in the SAM solu-tion obtained as the initial equilibrium values. Later on thisequilibrium will have to be compared with those obtainedby introducing or changing the values of the variables af-fected by certain economic policies.

Once the model has been formulated and calibrated, it isan ideal tool for evaluating the impact that certain economicpolicies would have on the regional economy. Simulationsare introduced in the model as variations in some of its exo-genous variables and/or the equation coefficients. Specifi-cally, in this paper we analyze the effects of CAP on theAragonese economy. Macroeconomic effects are analyzedin Aragon of the total aid coming from the European Agri-cultural Guarantee Fund and the European AgriculturalFund for Rural Development (co-financed by the Spanishpublic administrations) received during the period 2007-2013. The model has been solved using the GAMS softwa-re with its CONOPT solver.

3. ResultsOnce the benchmark equilibrium without funds is set, the

model is ready to perform various simulations by changingsome parameters or some exogenous variables, obtainingnew balances. The simulated rebalancing must collect theincorporation of CAP support in the Aragonese economy.Thus, changes in the exogenous variables of the modelshould reflect both the amount of the aid and its distributionbetween the productive sectors of Aragon.

The resources allocated by the EU through CAP to Ara-gon have been introduced in the CGE model as a variable,denoted by FRM, which represents the foreign sector spen-ding. This investment modifies the model equation withrespect to foreign sector balance set out in equation [17].

Along with resources coming from the EU, CAP funds inAragon are completed with internal investment (Table 2).Variable FSP represents such an investment in the modeland it is considered as a public sector spending which hasbeen included in the equation that determines the deficit.

According to data collected in Table 2, the total amountinvested by EAGF and by EAFRD in Aragon during theperiod 2007-2013 is estimated at 3,547.2 million Euros andnational funding at 508.1 million Euros. Therefore, the exo-

genous variables of the model, FRM and FSP, which in theinitial equilibrium were null, will be increased up to the to-tal sum of such amounts in the simulation.

According to Monrobel et al (2013), the CAP and theinternal funds in Aragon have been incorporated as a posi-tive shock over the regional final demand materialized inthe increase of the Fj variables which have been introducedin the model in an ad hoc manner. These Fj variables mea-sure the shock in the demand for the corresponding good tothe j-th branch of production as a result of receiving CAPfunds directly. Thus, the demand increase in monetaryterms will be determined by, p'jFj being that p'j is the finalsale price of the good. Consequently, the amount of moneyreceived by each productive industry matches the total re-gional funds coming from the CAP.

[21]

In conclusion, by increasing the representative CAP fundsvariables, a new solution to the model has been obtainedwith a new equilibrium of the regional economy “with CAPfunds”. This first study has assumed that all of the CAPsupport is received directly by the “Agriculture, livestockand fishing” account.

The effects of CAP support in Aragon during 2007-2013are obtained by comparing the benchmark scenario “wi-thout funds” and the simulated scenario “with CAP funds”.This makes it possible to analyze the effects of CAP, to ob-jectively quantify the multiplier effects resulting from inter-dependencies between the productive and other institutio-nal sectors when incorporating the CAP funds to the regio-nal circular flow of income through the model simulation.

3.1. Effects on the regional productive sectorAragon received from CAP an estimated total amount of

4,055 million Euros between 2007 and 2013. This repre-sents an increase on the total demand in the region of 0.65percent on annual average. The CAP funds represent a di-rect push of 1.14 per cent per year on the regional value ad-ded. In particular, for the agriculture sector, as the only onereceiving this aid, CAP funds represent annually about 29per cent of its value added. Considering the circular flow ofincome, the CAP subsidies involve a 2.4 percent increaseper annum out of the regional value added (Table 3).

It must be emphasized that all productive sectors of theeconomy benefit from the CAP aids showing an increase intheir respective value added. Notable increase of 137 per-cent in value added can be observed in the “Agriculture, li-vestock and fishing” sector, being the only one that receivesdirect aid. However, emphasis must be given to the valueincreases above 20 percent, in sectors such as “Wholesaleand retail trade” (28.6 percent), “Electricity, gas and watersupply” (24.6 percent) and “Food, beverage and tobacco in-dustry” (21 percent), although these three branches haveimportant links with agriculture in terms of intermediateconsumption (Figure 1). By contrast, “Metallurgy and ma-

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[20]

nufacture of metal products”, “Electrical, electronic and op-tical equipment” and “Education” have increased their va-lue added by less than 3.2 percent, due to their little linka-ges with agriculture.

3.2. Effects on key macroeconomic aggregatedfigures

CAP funds represented to Aragon an average increase of2.68 percent of regional GDP per year in the period 2007-

2013 (Table 3). On the income side, it is estimatedthat salaries in this period have grown, as a resultof the aid, by 2.0 percent per year while the GrossSurplus of Exploitation or corporate profits havegrown by 4.4 percent per year. Meanwhile, nettaxes on production and imports fell by 0.14 per-cent per year, a clear example of the importance ofpublic subsidies, especially in the agricultural sec-tor.

On the demand side, the CAP drives privatehouseholds’ consumption to a 2.16 per cent in-crease per year, while collective consumption ma-kes it only by 0.83 percent. Besides, Gross CapitalFormation, a magnitude that incorporates theamount of funds received, achieves a growth of upto 7.34 percent per year, while foreign trade has anegative balance; exports increased by 0.8 percentand imports by 2.12 percent per year.

3.3. Effects on prices of goods productionReferring to changes in prices of goods as well

as in other price indices of the model, it should be noted thattheir variations after the model simulation are to be consi-dered as related to wages, given that this price has beenfixed as the numeraire of the model.

Regarding changes in prices of goods that are producedthanks to CAP, it should be noted that “Agriculture” is notthe only one experiencing the greatest increase in its price.We find “Electricity, gas and water supply” with an increa-se of 14.6 percent, a sector that is closely linked to the pri-

mary sector, and also “Real estateand business services” with a simi-lar increase in prices. While thisbranch is not directly related to far-ming, its large increase may be dueto the importance that the housingmarket still had, in the beginning ofthe programming period, both inthe Spanish and in the Aragoneseeconomy (Figure 2). On an overallbasis, the effect of includingAragon in the CAP program wouldimply, on average, a 9.5 percent in-crease of their Consumer Price In-dex.

3.4. Effects on labour marketFinally, we would like to high-

light the impact of CAP on salaries,in terms of the variation of labourdemand by different economic sec-tors after incorporating the CAPfunds in the model.

When analyzing variations in sa-laries and taking into account theeffects of CAP funds, it must be in-

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Table 3 - Effects of CAP on GDP.(Figures in Thousand EUR)

Source: Own elaboration.

2,5%

3,6%

4,0%

4,8%

4,9%

5,6%

6,2%

7,6%

7,7%

7,8%

8,1%

9,2%

10,1%

12,2%

12,3%

12,6%

13,1%

14,0%

14,6%

15,4%

15,6%

16,2%

18,4%

21,1%

22,6%

59,1%

0,0% 10,0% 20,0% 30,0% 40,0% 50,0% 60,0%

R23 Education

R24 Health and veterinary services; social services

R6 Manufacture of wood and cork

R11 Metallurgy and manufacture of metal products

R13 Electrical, electronic and optical equipment

R22 Public administration

R9 Manufacture of rubber and plastic products

R5 Textile and clothing; leather goods and footwear

R14 Manufacture of transport equipment

R10 Other non-metallic mineral products

R12 Machinery and mechanical equipment

R15 Miscellaneous manufacturing industries

R16 Construction

R7 Paper industry; printing and publishing

R8 Chemical industry

R20 Financial intermediation

R26 Private households with employed persons

R2 Metal ores extraction, other mining and quarrying

R25 Other social work and personal activities

R18 Hotels, restaurants and catering

R19 Transport and communication

R21 Real estate and business services

R4 Food, beverage and tobacco industry

R3 Electricity, gas and water supply

R17 Wholesale distribution, retail trade and repair

R1 Agriculture, livestock and fishing

Figure 1 - Increase in the value added of productive sectors in 2007-2013.(Figures in percentages)

Source: Own elaboration.

dicated that such funds involvemore than half of the salary ofAragon’s agricultural sector. Inaddition to such a direct benefitof the CAP, the funds representa demand rise over 20 percentin “Wholesale and retail trade”and “Electricity, gas and watersupply”. In summary, we cansee in Table 4, after the incorpo-ration of the CAP funds in theregional economy, that they re-present a 12.3 percent of wagesand salaries in Aragon.

4. DiscussionThe importance of the use of

CGE models for the analysis ofthe CAP is based on the possi-bility to analyze not only the ef-fects of agricultural aids on re-cipients productive sectors, butalso to deduct all the inducedeffects in the rest of productiveand institutional sectors of aspecific regional economy aswell as in its main macro-mag-nitudes. When evaluating the

results of this European policy it can be seen thatCAP funds represented to Aragon an average in-crease of 2.68 percent of regional GDP per yearover the period 2007-2013. In terms of income,wages and salaries have increased at an averageannual rate of 2.01 percent, which shows thestrong dependence of the agricultural sector andthe Aragon regional economy as a whole on Euro-pean aids. Aragon’s GDP responds significantly tothe agricultural subsidies and it should seek to re-duce the dependence on European agriculturalsubsidies and improve the competitiveness of itsproducts in domestic and European markets.

When comparing the simulated results of GDPby the supply side, we can emphasize that the a-gricultural sector is the main beneficiary in termsof the value added, being the direct recipient sec-tor of CAP funds. The results of this study high-light the importance of agriculture as a sector witha major role within the economy, for the effectsover other sectors are significant, as a result of thecircular effects of the incorporation of the funds.The increase in value added in the services sectoris smaller than in agriculture. This difference be-tween the two sectors is consistent with the lowerweight that the industrial sector has in the region-al economy.

This work has added a new method, so far not

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0,0%

2,0%

4,0%

6,0%

8,0%

10,0%

12,0%

14,0%

16,0%R3 Electricity, gas and water supply

R25 Other social work and personal activities

R1 Agriculture, livestock and fishing

R17 Wholesale distribution, retail trade and repair

R18 Hotels, restaurants and catering

R20 Financial intermediation

R19 Transport and communication

R16 Construction

R7 Paper industry; printing and publishing

R22 Public administration

R4 Food, beverage and tobacco industryR10 Other non-metallic mineral

products

R6 Manufacture of wood and cork

R12 Machinery and mechanical equipment

R5 Textile and clothing; leather goods and footwear

R14 Manufacture of transport equipment

R8 Chemical industry

R2 Metal ores extraction, other mining and quarrying

R9 Manufacture of rubber and plastic products

R24 Health and veterinary services; social services

R11 Metallurgy and manufacture of metal products

R13 Electrical, electronic and optical equipment

R23 Education

R26 Private households with employed persons

Increase in the Consumer Price Index of the Productive Sectors (CPI)=9,5%

Figure 2 - Price index variation in productive sectors during the period.

(Figures in percentages)

Source: Own elaboration.

Total 8,951,034.23 10,211,671.77 12.3%

Table 4 - Effects of the CAP funds on the labour factor.

Source: Own elaboration.

used for economic policy analysis in Aragon and many otherMediterranean regions, revealing the importance of the CAPin Aragon and its very significant role played, not only in theAgricultural sector, but in the regional economy as a whole.

On one hand, it is of great importance to defend suchfunds by the regional and state governments when facingthe forthcoming programming periods, as a part of the Eu-ropean Union. On the other hand, given that future cuts inagricultural EU funds are not discardable and they wouldaffect several European regions in the future, this analysisis crucial to predict the macroeconomic effects resultingfrom the next EU agricultural policy.

In sum, to improve regional agricultural efficiency andlessen environmental problems, and to ensure uninterruptedfood supply and sustainable growth, national and regionalgovernments should continue to incorporate and exploremore efficient and cost-effective agricultural practices, inparticular supporting those good quality agrarian productswhich are more competitive in international markets andless dependent on European public aids.

Lastly, this work poses some limitations that must be ta-ken into account and constitute further research avenues onthe topic. Future research should include the examination ofthe relationship between agricultural production and subsi-dies to determine which agricultural subsectors are moredependent on subsidies. One might also consider the emer-gence of new food chains reflecting the spectrum of sensi-tivities to food, and the need to adopt a position of greaterefficiency and equity in times of crisis. It should not be for-gotten the social and economic situation of rural society andadaptation strategies in particular changing times. Finally,other limitation is that the analysis had been only conduct-ed in the Mediterranean region of Aragon in Spain and re-sults must take into account this geographical coverage.Further research extending the analysis to other Europeanregions should be done.

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