Agricultural Economics Unit
Department of Economics and Management
University of Helsinki
Finland
Comparative study in agricultural externalities from empirical
point of view: experts’ perspectives, assessment levels, and policy
impacts
Chen Qiuzhen
ACADEMIC DISSERTATION
To be presented, with the permission of the Faculty of Agriculture and Forestry of
the University of Helsinki, for public examination in Lecture Hall 6, B-Building,
Viikki (Latokartanonkaari 7), on April 08, 2016, at 12 o’clock.
Helsinki 2016
Supervisors: Professor John Sumelius, Department of Economics and Management,
University of Helsinki, Finland
Professor Timo Sipilainen, Department of Economics and Management,
University of Helsinki, Finland
Reviewers: Professor Werner Hediger, Center for Economic Policy Research,
University of Applied Sciences / Hochschule für Technik und Wirtschaft
HTW Chur, Switzerland
Dr. Jyrki Aakkula, Research and Development Manager, Natural
Resources Institute Finland/Economics and Society, Finland
Opponent:
Dr. Floor Brouwer, Senior Research Scholar in Resource Economics,
Centre for Development Innovation LEI/ Wageningen UR, The
Netherlands
Custos:
Professor John Sumelius, Department of Economics and Management,
University of Helsinki, Finland
ISBN 978-951-51-1953-7 (nid.)
ISBN 978-951-51-1954-4 (PDF)
ISSN 1235-2241
Unigrafia Oy
Helsinki 2016
2
Abstract:
In spite of references to agricultural externalities that usually focus more on the negative
impacts of agricultural inputs on the environment, the inclusion of preferred benefit
externalities on society and the environment has been highlighted in the presence of
multifunctional agriculture. When externalities of multifunctional attributes of agriculture
are placed in “normative” contexts, research questions are raised regarding how agricultural
externalities in connection to multifunctional agriculture are understood differently in
different countries, how different agricultural and agri-environmental policies affect
agricultural inputs that crucially contribute to environmentally-negative externalities, and
what alternative approach is possible to evaluate agri-environmental externalities, given that
no comprehensive monetary assessment for the costs and benefits of externalities currently
exists.
The objectives of the study are: first to empirically present how agricultural externalities are
performed in a multiple-dimensions that include experts’ perspectives, synthetic assessment
levels, and policy impacts examined nationally, regionally and over time; second, to
demonstrate a practical understanding in diverse interpretations of agricultural-externality
components in different countries in the context of different agricultural, socio-economic,
and societal development levels. The study focuses on four specific objectives that have been
demonstrated in four articles. More specifically, Article I examines the experts’ perspectives
on agricultural externalities in terms of the perceptions of multifunctional agriculture in
China and Finland through cross-table and factor analysis methods based upon surveys with
Chinese and Finnish experts, in order to know what different highlights are given in the two
countries. Article II illustrates the evolution of policies associated with elements of
multifunctional agriculture and rural areas in the past twenty years in China and Finland, and
explains reasons for the differences in policy implementation. Article III assesses agrienvironmental externalities at the regional level in Finland through a synthetic evaluation
method with a relative index that enables the measurement of aggregated effects of several
environmental externalities generated by agricultural activities in a concise way. Article IV
investigates how measures and payments associated with Finnish Agri-environment
Schemes (AESs) performed in N application at different regions. Meanwhile, Finnish policy
3
measures on N use were compared with agricultural policies in China that stress perpetual
concern for food security by subsidizing in fertilizers to influence price-ratio of input and
output and contribute to high intensity of N use. The different goals of policy and policy
measures implemented explained the variation of application rates of fertilizer N both
nationally, regionally, and over time. Different perceptions of their profitability, efficiency,
and environmental effects implied disparity in N use.
This study reveals empirically comparative analysis on agricultural externalities, rather than
attempting to build a new theoretical framework for externalities analysis. This thesis
contributes to the development of an integrated and comparative structure to review the
commonalities and differences in perceptions of agricultural externalities and the impacts of
agricultural policies implemented on agricultural input in two countries, and interprets their
interrelationships. In addition, this thesis develops a synthetic evaluation approach by using
a relative index that stems from the fuzzy logic theory to measure the aggregated effects of
several agri-environmental externalities in a concise way. The findings demonstrate that it
is essential to have a deeper and practical understanding in different public-policy
interference orientations in different countries on the basis of agriculture, environment, and
society contexts through a comprehensive empirically comparative study.
Key words: agricultural externality, multifunctional agriculture, policy impact, synthetic
evaluation, panel data, Finland, China.
4
Acknowledgements
I would like to thank many people who have contributed to this research. Without their
support, I would still be labouring for finishing my dissertation. First of all, I would extend
my sincere gratitude to my two supervisors, Professor John Sumelius and Professor Timo
Sipiläinen (Department of Economics and Management, University of Helsinki), who have
supported and encouraged me in my studies and provided the useful guidance and valuable
advice during this process. In the initial stage of writing my research proposal, they have
given valuable comments and also written many recommendations for me to apply for
funding. In working with them, they gave me insight into this challenging and interesting
journey of pursuing the doctoral degree, and freedom to work out my own ideas as well. As
two of my co-authors of the articles, I have learned enormously from them.
My sincere thanks go to my other co-authors, Dr. Stefan Bäckman and Dr. Kyösti Arovuori
for their valuable contribution, discussion and comments. I am also grateful to Professor
Matti Ylätalo and Professor Visa Heinonen, who have taken the trouble to write helpful
recommendations for funding, which provided very important financial support. My special
thanks go to Dr. Toni Ryynänen for his help and comments in the initial stage of writing my
research proposal as well. All my colleagues at the Department of Economics and
Management have made my stay in Viikki a memorable one. They provided me with a good
working environment with a quiet and ideal research atmosphere. I would like to particularly
thank Professor Pekka Mäkinen (Head of the Department), Simo Riikonen (office manager),
and Outi Pajunen (office secretary) for their kind assistance and support.
I deeply thank my dissertation pre-examiners, Professor Werner Hediger (Center for
Economic Policy Research, University of Applied Sciences HTW Chur, Switzerland) and
Dr.
Jyrki
Aakkula
(Research and Development
Manager,
Natural
Resources
Institute/Economics and Society Finland), who both read my dissertation and gave
thoughtful and insightful comments, and constructive criticism that added value to my work
and helped finalizing it. I have benefited a lot and learned much from their thorough
feedbacks. I wish to thank Dr. Floor Brouwer (Senior Research Scholar in Resource
Economics, Centre for Development Innovation LEI/ Wageningen UR, the Netherlands) for
the honour to serve as my opponent.
5
I gratefully acknowledge the three foundations which have generously contributed to this
research: the Finnish Cultural Foundation (2012, 2013 and 2014), the Finnish Society of
Science and Letters (2015), and Dissertation completion grant from University of Helsinki
(2015). They are highly appreciated for their financial support. Chancellor's travel grants
from University of Helsinki (2013 and 2015) have made my participations to the
international conferences possible (The 137th EAAE Seminar in June, 2012, Castelldefels,
Spain, and The 5th World Sustainability Forum, September, 2015, Basel, Switzerland).
NOVA University Network funded me two study trips to Uppsala and Skara, Swedish
University of Agricultural Sciences (SLU) for participating in the PhD students’ workshops
and course, respectively in September, 2012 and in April, 2013. I enjoyed the resourceful
and thought-provoking discussion in those workshops and courses.
My warmest thanks go to my dear Chinese friends Gan Yi, Dr. Deng XiaoBao, and Dr. Li
Jing for their constant encouragement which is an inspiration for taking this academic route.
Last, but definitely not least, I take this opportunity to express my deep appreciation to my
family: my beloved husband Juha, my lovely daughter Anja, and my mother-in-law Marjatta,
for their love, trust, encouragement, and patience, for allowing me to spend more time in the
office than with them, and for bringing happiness to my life. I would like to express the most
profound thanks to my parents, brother, and sister in China for being so kind and extremely
helpful. Without their great and warm love, I would not have made it.
Helsinki, 11 February 2016
Chen Qiuzhen
6
List of original publications
This thesis is based on the following publications:
I.
Chen, Q. Zh., Sumelius, J. 2008. Empirical analysis of experts’ perspectives on the
multifunctionality of agriculture in China and Finland. International Journal of
Agricultural Resources, Governance and Ecology, Vol. 7, No. 6, pp. 469-490. DOI:
http://dx.doi.org/10.1504/IJARGE.2008.022748
II.
Chen, Q. Zh., Sumelius, J., Arovuori, K. 2009. The evolution of policies for
multifunctional agriculture and rural area in China and Finland. European
Countryside. Vol. 4, pp. 202-209. DOI: 10.2478/v10091-009-0016-2
III.
Chen, Q. Zh., Sipilainen, T., Sumelius, J. 2014. Assessment of agri-environmental
externalities at regional levels in Finland. Sustainability. Vol. 6, pp.3171-3191.
DOI:10.3390/su6063171
IV.
Chen, Q.Zh., Bäckman, S., and Sumelius, J. 2016. Nitrogen use and the integration
of environmental concerns into production. International Journal of Agricultural
Resources, Governance and Ecology, Vol. 12, No. 1, pp.53–76.
Reprints of the original articles are published with the kind permission of respective
copyright owners.
Authors’ contribution
In all four articles, the first author, Qiuzhen Chen was responsible for the building of the
theoretical framework, the methodology, data collection and analysis, computations,
reporting results, and writing of the articles draft. In article I and II, John Sumelius
contributed to interpreting the results and concluding discussion. In article II, data analysis
was performed in collaboration with the third author, Kyösti Arovuori. In article III, the
second author, Timo Sipiläinen, contributed to the methodological improvement and the
conclusion section, and the third author, John Sumelius, contributed to the concluding
discussion. In article IV, the second author, Stefan Bäckman, and the third author, John
Sumelius, contributed to develop the theoretical part of the article, and provided feedback
7
and offered suggestions on the analysis. All authors jointly contributed to revising the
articles and discussing the conclusions.
8
Table of Contents
1. Introduction ................................................................................................................ 11
2. General background .................................................................................................... 19
2.1 Agriculture, agricultural support policies, and agri-environmental policies ............ 19
2.1.1 Finland agriculture, agricultural support policies, and agri-environmental
policies ................................................................................................................... 20
2.1.2 China agriculture and agricultural support policies .......................................... 22
2.2 Core concepts: externality, solutions to externalities, agricultural externalities, and
multifunctional agriculture .................................................................................... 25
2.2.1 Externality and solutions to externalities ......................................................... 25
2.2.2 Agricultural externalities and multifunctional agriculture ................................ 27
3. Summary of the articles ............................................................................................. 31
3.1 Empirical analysis of experts’ perspectives on the multifunctionality of agriculture in
China and Finland (Article I) ................................................................................. 31
3.2 The evolution of policies for multifunctional agriculture and rural areas in china and
Finland (Article II) ................................................................................................ 35
3.3 Assessment of agri-environmental externalities at regional levels in Finland (Article
III) ........................................................................................................................ 36
3.4 Nitrogen use and the integration of environmental concerns into production (Article
IV) ........................................................................................................................ 39
4. Conclusions and direction of further research ........................................................... 44
4.1 The main conclusions are summarized .................................................................. 44
4.2 Directions for further research ............................................................................... 47
References: ..................................................................................................................... 49
9
10
1. Introduction
An externality is a benefit or cost that affects someone who is not directly involved in the
production or consumption of a good or service (Hubbard and O’Brien 2012). The most
common classification of externalities is categorized as benefits or positive externalities
(external economies) and cost or negative externality (external diseconomies) based on the
effect generated (Mishan 1969, Holtermann 1972). Another classification is production and
consumption externalities based on whether it is caused by consuming or producing a good,
or by both processes (Ayres and Kneese 1969, Chang 1981, Liu and Turnovsky 2005).
Production externalities can be further classified as output externalities and input
externalities (Hubbard and O’Brien 2012).
Agricultural externalities can be defined as production externalities, including output
externalities and input externalities. Externalities of non-commodity outputs from
agriculture cover the environment outputs such as providing habitats for wild life,
conserving rural landscape, and carbon sequestration, and the services for the society and
culture such as socio-economic viability of rural areas, food safety, national food security,
and the welfare of farm animals together with cultural and historical heritage (Cooper et al.,
2010; Brunstad and Gassland, 2005; OECD 2001; Hediger and Lehmann, 2007; Lankoski,
2003; Randall 2002; Vatn 2002). Though there are many contributions that jointly address
positive and negative externalities from agriculture as a whole (Bromley, 2000; Lankoski
and Ollikainen, 2003; Hediger and Lehmann 2007; Hediger and Knickel, 2009), references
to agricultural externalities generally focus more on its input externalities that imply the
negative impacts of agricultural inputs on the environment. The term may be considered
more appropriate as a slightly negative connotation since agricultural chemical inputs
generate the issues of environmentally negative influences in connection to diffuse pollution,
agricultural runoff, and greenhouse gas emission (Griffin and Bromley, 1982; Harper and
Zilberman, 1989; Zilberman and Millock, 1997; Tegtmeier and Duffy, 2004; Koleva et al.,
2011). In most countries this is the case, given that the agri-environment was dramatically
degraded due to highly intensive agricultural production.
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In an effort to address environmentally-negative externality from agriculture, most countries
have used a wide range of policy measures to address agri-environmental issues, and tracked
the environmental performance of agriculture. For the majority of OECD countries,
agriculture has a significant position with respect to the environment, as it uses on average
over 40% of water and land resources, in contrast to a low share in GDP and employment
(e.g. around 2% of GDP and 4% of employment in EU-15 in 2003) and small role in the
overall economy. The fact that agricultural-commodity production-linked support remains
predominant, however, implies a contradicting directional focus compared to agrienvironmental measures. Thus, the attainment of environmental objectives became less
certain and costlier (OECD 2004). Although use of agricultural inputs and overall
agricultural nutrient surpluses have been on a constant downward trend since 1990, and the
slowdown in the growth of agricultural production over 2000s compared to the 1990s, has
decreased farm input use (nutrients, pesticides, energy, and water) and emissions from
livestock (ammonia, methane) (OECD 2008a, OECD 2013a), determining the
environmental impact of agricultural policies was complicated since specific policy
measures do not take place in isolation. For example, the overall trends of agricultural water
pollution from nitrates, phosphorus, and pesticides across OECD countries were mixed over
the period 2000 to 2010, there appeared few situations where significant improvements were
reported (OECD 2013a). The stylized agri-environmental policy impact model (OECD 2010)
was developed to capture the environmental effects of different agricultural policies at the
intensive margin (input-use intensity and production practices), the extensive margin (landuse allocation between different agricultural activities), and the entry-exit margin (land
entering or leaving agriculture) under heterogeneous conditions.
Reforms in agricultural policies in the EU entailed support decoupled from production and
more tied to certain conditions since 2005. Agricultural-support payments are subject to
environmental
cross-compliance
requirements.
Increasing
use
of
environmental
conditionality that links the support payments has been a trend towards a better integration
of environmental issues in farmers’ decision making (OECD 2008a). In Finland, one of the
EU membership countries, about 90 percent of all farms with 92 percent of the total
cultivated arable land in 2010 participated in the Finnish agri-environmental program. The
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Finnish agri-environmental payments are paid for the farmer who complied with both crosscompliance requirements and minimum requirements that include the maximum limits for
fertilizers and plant protection use. Measures with highest potential for reducing nutrient
loading on waters in Finland are related to reduced fertilization and nature management field
as well as winter plant cover. The best measures to enhance biodiversity are found to be
traditional biotopes, constructed wetland and buffer zones, and organic production (Aakkula
et. al 2011).
It is worth noting that there has been a diversity of views on agricultural externality between
countries. As such, corresponding policies and measures to response externality would vary
in countries which are characterised by different agricultural, rural, socio-economic, and
society development levels. Agriculture is of special meaning for China, as the solid
foundation for stabilized national economy development (Cheng 2011). Increased food
production to satisfy China’s large and growing population was achieved remarkably by
expanding the area of land cultivated and by increasing land productivity through higher
water, fertilizer, pesticide, and mechanical inputs (Huang et.al 2009). Given that ensuring
national food security and increasing rural incomes are always the main goals of China’s
agricultural policy (Ni 2013, OECD 2013b), this poses a policy challenge both to expand
production to meet food security demands and to decrease/increase the environmental
costs/benefits associated with agriculture simultaneously. The views from Huang (2005) and
OECD (2006) revealed that China faces no food security problem, especially from a national
self-sufficiency of grain supply point of view. As Ni (2013) illustrated, the definition of food
security for China at the current stage, a country with a population of 1.3 billion, differs from
that defined by the FAO. The former places much more focus on physical availability to
sufficient food supplies, notably the domestic grain production. Most support measures in
China’s agriculture still focus on ensuring food security, in other words, self-sufficiency of
grain supply, and improving farmers’ incomes, whereas the attention afforded to sustainable
development issues, such as environmental protection, is limited; specific measures to deal
with issues such as climate change and the protection of biodiversity are yet to be established.
Environmental protection measures remain at an exploratory stage (Ni 2013). Accordingly,
input-intensive agronomic practices have been implemented at a high cost to the
13
environment, such as nutrient and pesticide residues in soils and water, desertification, soil
erosion, grassland degradation, organic matter and fertility loss, aquifer depletion, high
levels of heavy metals, animal wastes, and loss of biodiversity (Huang et.al 2005, OECD
2006). Application rates of chemical fertilizers and pesticides in China have approximately
tripled since 1980 and ranked top one in the world in the intensity of fertilizer use in 2014
(OECD 2015). It was revealed that the average nitrogen absorption efficiency of wheat, corn
and rice are 28.3 percent, 28.2 percent, and 26.1 percent, far lower than that of 40-60 percent
in European and American countries, and even lower nitrogen absorption efficiency of only
10 percent exists in vegetables, fruits, and flowers (Nanseki and Song 2013). Beyond the
technology factor, some hypotheses may explain this. It may be that the over application of
inputs is part of a risk management strategy from some farmers. There is some circumstantial
evidence that tenure and migration issues play a role in the pattern of excess application of
chemical inputs. There is even more evidence that the government, scientific community,
plant breeders, extension agent, and input supplier have convinced farmers that “if a little bit
is good, a lot is better” (OECD 2006). With the constant decline in the Chinese agricultural
land area, growing production has exerted significant pressure on the environment through
greater use of inputs, e.g. fertilisers, pesticides, water, and intensification of livestock
operations. According to the Report on Chinese Food Safety in 2011-2012 by the Chinese
magazine Well-off and Tsinghua University, about 80% of the respondents believed there is
serious problem with food safety in China (Nanseki and Song 2013).
Despite the fact mentioned above, many decision makers are reluctant to recommend a wide
adoption of mitigation measures for agri-environmental pressure on the grounds that a tradeoff situation between regional economic growth and environmental performance may exist
(Kulshreshtha 2010). More importantly, the development of multifunctional agriculture
redefined the relationship between agriculture, environment, and society. It reflects a major
change in agricultural thinking from productivist to post-productivist model, which farmers
will take into account values of externalities that they produce as a result of the commodity
and non-commodity joint production process (Akca et.al 2005). In this case, agricultural
externalities are highlighted to encompass the preferred benefit externality on society. When
the focus shifted towards the societal objectives associated with agriculture, such as socio14
economic viability of rural areas, national food security, and cultural and historical heritage
in the various countries, externality of multifunctional attributes of agriculture was placed
in a “normative” context. Because when agriculture is said to be multifunctional or to
provide multiple outputs, it means agriculture contributes to multiple positive impacts on the
well-being of society (Canada 2000). As noted in the 2001 OECD report, one of the central
characteristics of multifunctional agriculture is the fact that some non-commodity outputs
from agriculture exhibit externalities or public goods, for which markets do not exist or
function poorly. Especially when policies in a country make agriculture more
multifunctional, assign it multiple roles, and entrust it with fulfilling certain functions in
society, positive externalities of agriculture become an objective of policy (OECD 2001).
When the importance of the degree of jointness between commodity and non-commodity
outputs was attached to them differently in each society or country, it has import implications
for policy targeting. Policy measures aimed at achieving non-commodity objectives will
affect commodity production and trade. This is why food security and rural viability as
agricultural externalities often caused a public debate and controversial discussion. As Abler
(2004) noted, public goods from agriculture should not directly link to production, but rather
to land use and agricultural structures. Multifunctional agriculture retained, however,
considerable discursive resonance in EU countries. It created space for integrative policy
framing for both the traditional pro-agriculture and pro-environment coalitions (Jokinen et.al
2009).
The basic motivations of this study stem from differences on how agricultural externalities
is understood in connection to multifunctional agriculture in different countries, as well as
differences in the evolution of agricultural policies to mainly target environmental and social
externalities and the effect of different agricultural and agri-environmental policies on
fertilizer inputs that crucially contribute to environmental negative externalities. Moreover,
given that the value of externalities generated by agriculture is likely to be substantial, but
no comprehensive monetary assessment of these costs and benefits currently exists, an
alternative analytical approach is attempted to evaluate the provision of agri-environmental
externalities. A relative index is developed to enable the description of the aggregated effects
of several environmental externalities from agricultural activities in a concise way.
15
The objectives of this study are to empirically present how agricultural externalities
performed in a multiple-dimensional way, where experts’ perspectives, synthetic assessment
levels, and policy impacts were taken into account nationally, regionally and over time.
Further, this work demonstrates a practical understanding of diverse highlights and
interpretations of agricultural-externality components in different countries in the context of
different agricultural, socio-economic, and societal development levels. This study has
selected Finland and China as the target countries for comparative analysis of agricultural
externalities. Finland is a member of the EU, where Finnish agricultural policy is under the
framework of the common agricultural policy (CAP) of the EU, and its agricultural
production has no comparative advantage due to its location at the northernmost area with
adverse natural conditions and high cost of production. Yet, agri-environmental conditions
of land, air, and water, and food quality systems in Finland have remained in a rather high
position. China, comparatively, is a developing country with a large agricultural sector
where smallholder economy has dominated, but is facing the severe challenges of
accelerating agri-environment degradation and its diffuse pollution.
The study focuses on four specific issues that have been demonstrated in four articles. They
specifically include: 1) the experts’ perspectives on agricultural externalities in terms of the
perceptions of multifunctional agriculture in China and Finland were examined through
cross-table and factor analysis methods based upon surveys with Chinese and Finnish
experts, in order to know what different highlights that agricultural externalities in
connection to multifunctional agriculture are given in two countries; 2) a timetable was
applied to illustrate the evolution of policies over the past twenty years in China and Finland
based on interpretations for elements of multifunctional agriculture and rural areas, with the
purpose of explaining reasons for the differences in policy implementation relating to
economic development, the supply of food products, the demand for environmental services,
income level and values, and policy-making structures; 3) a synthetic evaluation method was
used to assess agri-environmental externalities at the regional level in Finland, with a view
to develop a relative index that enables the measurement of the aggregated effects of several
environmental externalities generated by agricultural activities in a concise way; and 4) an
empirical analysis of panel data at regional level in Finland was carried out to investigate
16
how measures and payments associated with Finnish Agri-environment Schemes (AESs)
performed in N application at different regions. Meanwhile, Finnish policy measures on N
use were compared with agricultural policies in China that stress perpetual concern for food
security by subsidizing fertilizers to influence price-ratio of input and output and contribute
to high intensity of N use. The different goals of policy and policy measures implemented
explained variation of application rates of fertilizer N both nationally, regionally, and over
time. Different perceptions of their profitability and efficiency and environmental effects
implied disparity in N use.
This study focuses on empirically comparative analysis between Finland and China, rather
than attempts to build a new theoretical framework for externalities analysis. Although each
article answers separate research questions, the concerns raised in each article are related to
each other, because their core issues are rooted in the relationship between externalities and
public policy interference. The thesis contributes to the existing literature in several ways,
three of which are noted as follows: first, it develops an integrated and comparative structure
to review the commonalities and differences in perceptions of agricultural externalities and
agricultural policies implemented in two countries, and interpret their interrelationships.
More specifically, the investigation of externalities regarding multifunctional agriculture is
based on normative approach and the investigation results are analysed through using the
principal component method of factor analysis to find out common factors for all perceptions
and evaluations. Second, this thesis contributes a synthetic evaluation approach by using a
relative index that stems from fuzzy logic theory to measure the aggregated effects of several
agri-environmental externalities in a concise way. Thus, to some extent, it can probably be
regarded as an alternative solution to reflect relative assessment of the value of externalities
generated by agriculture. Third, this thesis adopts a panel data model to examine the effects
of agri-environmental policy measures on chemical inputs that play a key role in causing
agri-environmental negative externalities, in such a case, data analysis that pools time series
and cross-sectional data has the ability to deal with the omitted explanatory variable problem,
since the use intensity of agricultural chemicals depends not only on key drivers such as
policies, markets, and management practices, but also on technology and environmental
conditions (e.g. soils, weather) that factors are usually adopted with difficulty. The findings
17
demonstrate that it is essential to have a deeper and practical understanding in different
public policy interference orientations in different countries on the basis of agriculture,
environment, and society contexts through a comprehensive empirically comparative study.
The thesis is organized as follows: section two presents the background information on
Chinese agricultural support policies and Finnish agricultural and agri-environmental
policies. Meanwhile, theoretical background for core concepts such as externality and
multifunctionality are outlined. Section three displays the summary of four article
investigation results and the descriptions of the data and methodology adopted. The
concluding remarks and suggestions for further research are given in the last section.
18
2. General background
2.1 Agriculture, agricultural support policies, and agri-environmental policies
The study has selected Finland and China as the target countries for comparative analysis on
agricultural externalities for the following brief reason.
Finnish agricultural production lacks comparative advantage since it is located in the
northernmost area with severe and adverse natural conditions, and the average length of the
growing season is only about 180 days or even less in some regions. Finnish agriculture is
uncompetitive compared to the high production costs. However, Finland is capable of
producing most of the food it needs, and the self-sufficiency rates of barley, oats, and wheat
exceed 100 percent. More importantly, the land, air, and waters in Finland have remained
pure in this remote and sparsely populated area. The solid and persistent food quality system
has not only guaranteed safe food, but also improved environmental protection and animal
welfare. Most Finnish farms are committed to meet the requirement of environmental
concerns with respect to reducing the loading of waters and biodiversity loss under the
Finnish agri-environmental program (MMM 2011).
In contrast, China is a developing country with a large agricultural sector featuring
smallholder economy. Agriculture in China can be largely described as subsistence
agriculture, while it has played very important role in national food security, the alleviation
of poverty in the rural population, and a buffer against the economic recession (Tian et al
2003, He et al 2003, Ni 2013). The basic self-sufficient supply of major agricultural products
has been achieved in this most populous country. Nevertheless, nowadays China is the
largest and most intensive user of fertilizers and pesticides in the world (FAOSTAT 2014).
Nearly 60-70 percentage of chemical fertilizers and 60 percentage of pesticides are emitted
to the surrounding environment (Sun 2008, Hou et al 2010). In addition, with the rapid
growth in animal husbandry nationwide, livestock manure has become another problem in
environment pollution. Agri-environmental degradation resulting from excessive use of
agricultural chemicals and livestock manure runoff face an urgent challenge in China.
Apparently, from the perspective of normative analysis approach in agricultural externalities,
social and environmental external impacts from agricultural production vary considerably in
19
these two countries. This is why the two target countries were adopted as the subjects of this
comparative study.
2.1.1 Finland agriculture, agricultural support policies, and agri-environmental
policies
Finland is the northernmost country in the world and also a sparsely populated country. The
share of agricultural value added in GDP is about 2 percent and the share of the employment
in agriculture is about 3.5 percent (EC 2015). The utilized agricultural area in Finland is
about 2.3 million hectares, which is 7.5 percent of the land area (Finland Yearbook of Farm
Statistics 2013). The proportion of the agricultural area is very small compared to the average
value in EU.
Agriculture in Finland is not very competitive. Grain yields per hectare are about a half of
the yield level in central Europe. Productivity levels in agriculture are low compared to
relatively high production costs (MMM 2011).
The number of farms in 2013 was about 57600, with a decreasing rate of 2-3 percent annually
during 1995-2013. The average farm size has grown to 39.6 ha in 2013 from 22.8 ha in 1995.
The main reason for the growth in farm size is due to the growth in leasing land. For example,
about 765800 ha cultivated arable area (almost 34 percent of the total cultivated arable land)
in 2013 was leased (MTT 2014).
Finnish farms are dominated by family farms. Livestock farms account for 25 percent, of
which the dairy husbandry proportion is 15.7 percent, beef production is 6.1 percent, pig
husbandry is 2.7 percent, and poultry production is 1 percent (in 2013), and most of these
are located in eastern and northern Finland. About 69 percent of farms are crop farms, most
of which are in southern Finland (Yearbook of farm statistics 2014). The majority of the
cereal species are barley, oats, wheat, and rye. About a quarter of the cultivated area is under
grass, where the silage and hay are produced as feedstuff for livestock production. Peas,
carrots, onions, cabbages and certain other vegetables are grown outdoors, while tomatoes,
cucumbers, potted lettuce and herbs are grown in greenhouses year round (MMM 2011).
20
Forest is an integral part of Finnish farms. Most of the farms derive additional income from
forests. In 2013, the average forest area of farms was 51 ha (MTT 2014).
Finnish agricultural support policy is under the framework of the common agricultural policy
(CAP) of the EU, i.e. direct payment funded by the EU, less-favoured area (LFA) payment
and agri-environmental payment co-funded by the EU and Finland, and national aids
supplemented by Finland (MMM). Direct payment is paid through the single farm payment
scheme decoupled from production levels. It is has been applied in Finland since 2006 as the
regional hybrid model that consists of a regional flat-rate payment and farm-specific top-ups
for milk, beef, and sugar production until 2016 (MMM 2011). According to the crosscompliance conditions adopted in the direct CAP subsidies, the arable lands must be kept in
good farming condition and meet the minimum requirements for the state of the environment.
From 2015 onwards, farmers must have at least two or three crops in cultivation and 5
percent of the cultivation area as ecological focus area in order to be eligible for the direct
payment received (EC 2013). Nonetheless, the current agricultural support with direct
payment still aims to ensure domestic food production and its development, especially the
increase of protein self-sufficiency, in the face of the new challenges, such as growing food
demand and climate change. Together with national aids comprising the northern aid,
national aid for southern Finland, national top-ups to the LFA payments, and certain other
national aid, the targets of agricultural production support is to facilitate the preconditions
that vary in regions and sectors in agricultural production and help maintain the profitability
of production, given the context that agricultural production costs in Finland are
considerably higher than the EU average level and it would be impossible to continue to
produce in the internal EU market and international market without support instruments.
The LFA payments and agri-environmental supports are program-based supports that are
based on Finland’s Rural Development program. The EU contributes about a quarter of
foregoing payments, the rest is paid from national funds. The purpose of LFA payments is
to ensure the continuation of agricultural production in the northern area with the adverse
climate condition, keep economically viable farms active, and ensure rural areas remain
populated. Finnish agri-environmental support has been introduced since 1995. The support
scheme was comprised of the basic, additional, and special measures. More than 90 percent
21
of the Finnish farms and the total cultivation land are committed to meet the condition for
environmental payments (Aakkula et al 2011). The purpose is to reduce nutrient loading on
waters, mitigate the air emissions, and protect rural landscapes and biodiversity. The most
adopted measures include limitation of the maximum fertilization, accurate nitrogen
fertilization, calculation of nutrient balances, management of field margins, filter strips,
riparian zones, wetlands, plant cover in winter fields, and nature management fields
concerning perennial grassland and biodiversity fields. Organic farming as a special measure
contracted with agri-environmental support has gained about a 9-percent share of the total
cultivation land. A target share of 20 percent by 2020 was set in the new rural development
for the year 2014-2020 (MMT 2014). From 2015 onwards, the agri-environmental scheme
with three types of measures will be replaced by a parcel-specific system. In the new scheme,
Finnish farmers adopt a start-up package including the follow-up of soil fertility, and comply
with plant and soil-type specific values set for nitrogen and phosphorus fertilization. Parcelspecific measures cover plant cover in winter fields, utilization of manure and recycled
nutrient, and the conservation of biodiversity.
2.1.2 China agriculture and agricultural support policies
Agriculture in China accounted for 10 percent of GDP and 33 percent of employment –
including part-time agricultural labor – in 2012 (China Rural Statistical yearbook 2013).
China feeds 21 percent of the world’s population with about 9 percent of the world’s arable
land. Agricultural land in China is owned by village collectives, where farm households have
usage rights of farmland with a renewable contract term of 30 years. When Household
Contract Responsibility System was implemented in 1984, agricultural land was contracted
to individual households for 15 years. The renewal of land-use contracts was extended in
2000 for an additional 30 years until 2028. Average farm size nationwide is very low
compared with other countries, for example, in 183 million rural households in 2009, the
scale of production on average was 0.66 ha farmland per household. This varies among
regions from about 3 ha in the northeast and nearly 1 ha in northern China to 0.5 ha in
southwest China and 0.2-0.3 ha in the south (Huang et al 2009, Ni 2013, and OECD 2013b,
2015). With increasing encouragement from the central government and new instruments,
the transferring of household operating rights of farmland has steadily risen, for example,
22
from the transferring rate 8.3 percent in 2008 to 26 percent in 2013 (Sina 2014, Xinhua 2014).
The farmland policy that allows farmers to lease their contracted farmland or transfer their
land-use rights, to some extent, contributes to the development of the appropriate economies
of scale, accelerate agricultural surplus labor forces to be transferred, and substantially
increased land revenue and farmer income.
The core goals at this stage for China’s agricultural support policy are to ensure food security
and to increase farmers’ income (Cheng 2011, Ni 2013). The basic self-sufficient supply of
major agricultural products is the primary goal and farmers’ income growth is the
fundamental purpose for agricultural support policy. They are determined by the
development characteristics of agriculture and rural area in China, since most agricultural
production is still subsistence agriculture that is dominated by smallholders with low income
level. Furthermore, it was argued that the core goals of agricultural support policies depend
on the political economics characteristics of China’s grain (Cheng 2011). First, the total
grain trade volume worldwide is only equivalent to 50 percent of grain consumption in China;
especially rice trade volume is less than 20 percent of China’s domestic consumption. If
China complements deficiency in domestic output by imports, it would exert dramatic
pressure on both China and global grain supply and price. Second, China grain demand is
mainly for direct consumption rations which means grain processing and conversion rate
was relatively low. The higher direct consumption ratio, the lower the alternative of grain
consumption, the more challenges food security faces. Third, grain price volatility has a
strong conductive and amplified effect on the entire agricultural market instability. In
addition, due to the relatively high share of food prices out of China’s consumer prices index
(CPI), rising food prices is considered to be a precursor of inflation that would affect the
national macro-economy. Therefore, grain market supply and price stability is directly
related to social harmony and stability. Regarding the ultimate long-term goals for
agricultural support policy, they aim to achieve the sustainable development of agriculture
targeting the environment, climate change, and biodiversity. However, the proposed
objectives are not specific enough and lack explicit implementation methods.
The main agricultural support measures in China at the current stage cover the following
categories:
23
First, price support measures include the three main ways as follows: the minimum
purchasing price for grain has been applied to rice and wheat in the major grain-producing
areas since 2004. The minimum purchasing price is issued before sowing season. The system
of purchasing and stockpiling maize, soybean, canola seeds, and sugar on an ad hoc basis
has been implemented since 2008. The program of purchasing and stockpiling port meat for
frozen has been mobilized since 2009 when the price ratio of port to feed declined to 5:1.
Second, the four kinds of direct payment measures coupled with production include direct
subsidies for grain producers since 2004, comprehensive subsidies for agricultural inputs
since 2006, subsidies for improved crop varieties since 2002, and for improved breed
varieties since 2005, and subsidy for farm machinery purchase since 2004. The total amount
of four kinds of direct payments has markedly increased to more than 160 billion Yuan in
2013 from 51 billion Yuan in 2007, of which comprehensive subsidies for agricultural inputs
accounted for about 70 percent, direct subsidies for grain producers accounted for near 10
percent, and the remaining subsidies for improved varieties and farm machinery purchase
(China rural statistic yearbook 2014).
Third, direct payment measures decoupled from production include compensation for the
conversion of farmland to forest in certain environmentally fragile and ecologically sensitive
areas since 1999, and payments for returning grazing land to grassland since 2003.
Fourth, general service support measures mainly constitute agricultural infrastructure
services such as farmland irrigation, building up regional and large-scale commercial grain
production centres in contiguous areas, extension and advisory services, pest and disease
control, and the program of formula fertilization after soil testing.
According to the investigation by Cheng (2011), the structure of producer support estimate
(PSE) in agricultural production constitutes, for example in 2010, 58 percent from price
support, 33 percent from the coupled payments (including 18 percent from agriculture input
subsidies and 15 percent by the coupled with production amount), and 9 percent from the
payments of the decoupled from production.
24
2.2 Core concepts: externality, solutions to externalities, agricultural externalities, and
multifunctional agriculture
2.2.1 Externality and solutions to externalities
Externality refers to situations where the effect of production or consumption of goods and
services imposes costs or benefits on others, which are not reflected in prices charged for the
goods and services being provided (Rhemani and Shapiro OECD 1993). An “external cost”
implies costs incurred by individuals uninvolved in the production or consumption of a good
or service and results when the private costs to the producers or purchaser of a good or
service differs from the total social costs. An “external benefit” indicates benefits received
from a good or service by consumers who do not pay for it, and results when the private
benefits to the producers or purchaser differs from the total social benefits. External cost and
benefits are jointly known as externalities, with external costs called negative externalities,
and external benefits called positive externalities (Krugman and Wells 2012).
The external portion of the costs or benefits will not be reflected in determining the market
equilibrium prices and quantities of the goods or services involved. Thus normal market
incentives for the buyer and seller to maximize the private economic profits will lead to the
over- or under-production of goods or services, rather than the socially optimal level of
production. Goods or services with a positive externality will be under-produced from the
point of view of society as a whole, while goods or services with a negative externality will
be over-produced. This outcome is referred to as market failure and economic inefficiency.
In the 1960s, Economist Ronald Coase pointed out that the private sector could deal with all
externalities, and an economy could reach an efficient solution even without government
intervention, provided that transaction costs were sufficiently low and property rights could
be clearly assigned. In addition, in the presence of externalities, the private parties would
arrive at an economically efficient outcome regardless of the initial allocation of property
rights, because externalities were fully internalized. This is so-called the Coase theorem for
private solutions to externalities.
Individuals cannot always internalize externalities, however. In reality, transaction costs are
too high to make efficient deals for externalities through private actions due to a large
25
number of the interested parties involved that caused the high costs in communication,
making legally binding agreements, and time-consuming bargaining. As noted by Krugman
and Robin (2012), tens of millions of people were adversely affected by acid rain in the
1960s, yet it would be prohibitively expensive to try to make a deal among all those people
and all those coal-burning power companies that released sulphur dioxide and nitric oxide
into the atmosphere and caused acid rain. Therefore, the Coase theorem’s applicability
caused an enormous amount of controversy and discussion (Medema, 1999, and Medema
and Zerbe, 2000) mainly due to the fact that transaction costs are rarely low in many
situations. In addition, the extortion problem was also central to the critiques of the Coase
theorem in the literature involved (Medema 2015). Although other types of privation
solutions to externalities exist -- such as moral codes and social sanctions that guide
individuals’ behaviours as is the case for littering, charities that limit individuals’ behaviour
in negative externalities or promote behaviours in positive externalities, and business
mergers or contracts that make both parties better off (Rama Rao, 2011) -- dealing with
externalities depend mainly on government solutions through public policies and measures,
especially in some circumstances of an enormous amount of the interested parties and high
transaction costs involved.
Government taxes and subsidies intended to bring about an efficient level of output in the
presence of externalities are called Pigouvian taxes and subsidies. Particularly for Pigouvian
subsidies, such a subsidy is a general term for policy of supporting industry that is supposed
to yield positive externalities. In addition, the government has more often used a commandand-control approach. For example, environmental standards for controlling pollution came
into widespread use as the main policy tools in almost all countries in the past or even
currently, and were considered as successful measures in reducing pollutions (Krugman and
Wells 2012). In general, economists believed that Pigouvian taxes and tradable emission
permits are more efficient ways at lowering costs than environmental standards that are
generally inefficient. This is applicable to the limiting case of perfect information only,
where a Pareto-optimal pattern of resource use is reached. Alternatively, information
requirements for the use of the first-best differentiated instruments are vast, which results in
increased administrative costs outweighing the gains, resorting to second-best solution such
26
as semi-uniform or uniform policy instruments would be justified (Baumol and Oates, 1988;
Lankoski and Ollikainen, 2003).
2.2.2 Agricultural externalities and multifunctional agriculture
Many studies of agricultural externalities have almost entirely stressed negative
environmental externalities, such as non-point source pollution, soil erosion, and associated
nutrient runoffs.
The term nonpoint externality was noted in the early 1980s by Griffin and Bromley (1982)
as agricultural runoff externality in terms of theory development. Two of three categories of
the economic problem of agricultural runoff involved externalities, except for one category
that considered runoff as a loss of resources to the individual farmer. Non-point externalities
include temporal externality that implies soil resource at more depletive rate than socially
optimal for the individual farm, and spatial externality that involves the loss risk in the
conservation of mass due to water as the primary transport media for the pollutants from soil,
nutrient, and agricultural chemicals.
The societal costs of agricultural production, defined as the neoclassical economics concepts
of “market failure” and “externalities”, usually implied the adverse impacts of agrofood
systems on human health, environmental quality, the welfare and livelihoods of social
groups (Buttel 2003). The major origins of the societal costs generated were often derived
from the impacts of agricultural practices resulting in both non-point and point sources of
pollution, and the social and environmental impacts of particular new technologies such as
precision farming, genetically modified crops, and use of antibiotics as feed additives in
livestock farms. Regarding livestock production, Innes (2000) illustrated the three attendant
environmental effects from livestock waste that include spills from animal waste stores,
nutrient runoff due to the application of manure to croplands, and direct ambient pollution.
On the contrary, Schneider et al (2007) demonstrated the potential role of agricultural
greenhouse gas mitigation efforts (positive externalities) through the implementation of a
variety of agricultural practices, such as reduced tillage, reduce fertilization, improved
manure management, and energy crop plantations.
27
Environmental externalities from agriculture discussed above are examined from the
perspectives of the effect of individual farmer decision on society. In addition, agricultural
spatial externalities have a different micro-level structure because the externality effects
emanate from one parcel land use to the neighbour land choice between agricultural users
(Lewis and Barham 2008). Spatial externalities in agriculture can affect the land-use
decisions that contribute to both economic welfare and environmental sustainability (Belcher
et al 2005; Parker and Munroe, 2007). As Tisdell (2009) identified the three types of
spillovers affecting agriculture as externalities from non-agriculture industry, for example,
adverse impacts on agriculture by airborne and water pollution from industry emissions and
wastes, the spillovers from agriculture such as sustaining landscapes favoured by the public
and agricultural runoffs resulting in watercourses eutrophication, and the spillovers within
agriculture. Most studies have paid more attention to the spillovers or external effects from
agriculture to the society and surrounding environment, instead of external impacts on
agriculture. Agricultural spatial externalities can be perceived as the spillovers within
agriculture.
In modern societies, there is a growing awareness of the positive effects of agriculture
beyond commodity production, and governments are increasingly looking for ways to
provide those positive effects that the non-commodity outputs of agriculture correspond in
quantity, composition and quality to those demanded by society (OECD 2001). Noncommodity outputs by agriculture are defined as the environmental outcomes of agriculture,
such as shaping rural landscape, the preservation of biodiversity and the conservation of soil
and water quality, and the social impacts, such as socio-economic viability of rural areas,
food safety, national food security and the welfare of production animals together with
cultural and historical heritage (OECD 2001, Randall 2002, Vatn 2002, Hediger and
Lehmann 2007, Lankoski 2003). Those non-commodity outputs, in general, converged on
the term multifunctional agriculture, although the concept of multifunctionality has been not
well defined and prone to different interpretations (OECD 2001).
It was clear that the term multifunctional agriculture has a slightly positive connotation and
may highlight its positive external effects more, in particular, the multiple non-commodity
outputs with public goods characteristics and negative externalities associated with
28
agriculture were separated into two facets for policy analysis (OECD 2003, 2005b);
examples are the analyses by Lankosky and Olikainen (2003) as well as Hediger and
Lehmann (2007) who propose policies with positive and negative externalities. Nevertheless,
the three main different elements, jointness, market failure, and public goods of
multifunctional agriculture are proposed to be key elements needed to define optimal
strategies for policy makers, which are not based exclusively on efficiency criteria but also
other concerns including equity, stability and international spillovers (OECD 2003). It
should be noted that in line with multifunctional agriculture, the terms of non-commodity
outputs from the OECD (2001), the non-trade concerns from the WTO (Uruguay Round
Agreement on Agriculture), and the role of agriculture from the FAO (the project of Role of
Agriculture since 2000) capture the main commonality that acknowledges the existence of
multiple non-food benefits of agricultural activities in society (Caron et al., 2008a; Hediger
and Knickel, 2009; FAO, 2007), although these organizations have different value positions
and objectives which are based upon different epistemological foundations (Hediger and
Knickel, 2009). Moreover, multifunctional agriculture has first been recognized at an
international level in the Rio Declaration on sustainable development in 1992 and, as an
analytical and empirical concept, is considered to be a way towards sustainable development
and to be consistent with the objective of promoting sustainability (Caron et al., 2008a,
2008b; Hediger and Knickel, 2009).
Special attention is given to its policy implications in different countries through the
normative approaches in most studies of multifunctional agriculture. When a farmer is
provided incentives to integrate landscape concerns into the production decision, in such a
case multifunctional agriculture is used in a “normative” context. This can be proved by one
of the adopted policy principles in the 1998 OECD Ministerial Communique, which
recognized that “beyond its primary function of supplying food and fibre, agricultural
activity can also shape the landscape, provide environmental benefits such as land
conservation, the sustainable management of renewable natural resources and the
preservation of biodiversity, and contribute to the socio-economic viability of many rural
areas”. It can also be confirmed by the goals of the CAP in EU, which stated that agricultural
development orientation in EU “preserve and strengthen the multifunctional character of
29
agriculture”. Consequently, the European Commission’s conception of multifunctional
agriculture underlines the variety of agricultural function that contribute to society’s welfare
and that deserve public support (Caron et al., 2008a). Additionally, in Switzerland, a
European country but not a member of the EU, multifunctional agriculture is one of key
principles on which local agricultural policies rely, thereby policy measures encompass a
normative element that agriculture may accomplish its multifunctional tasks (Hediger, 2006).
As such, policy implication explicitly reflects the normative content of the multifunctional
agriculture concept (Caron et al., 2008b). Likewise, although the FAO in the role of
agriculture project started in 2000 did not use the term multifunctional agriculture, the search
for efficient ways of improving agricultural functions to meet social needs and deriving a set
of policy recommendations for developing countries clearly involved a normative stand
(Caron et al., 2008a). Therefore, in this sense, multifunctional agriculture is interpreted as
an objective rather than a characteristic.
The social demand for non-commodity outputs of multifunctional agriculture varies between
countries and regions (Freshwater 2008). Moreover, the externalities of the same noncommodity outputs are viewed differently among countries from a policy perspective. For
example, the socioeconomic viability of a small rural village in Japan or Norway is more
highly concerned than that in the US (Goda 2008). The relationship between commodity
outputs and non-commodity outputs are complementary in some cases but competing in
other cases, in addition to being dynamic. This case also applies to the correlation within
non-commodity outputs (OECD 2008b). Since there is a wide range of regional
heterogeneity within a country with respect to agricultural conditions, no mention across
countries, it is inappropriate to make a one-size-fits-all approach to regional development
regarding non-commodity outputs of agriculture. Due to the difference between agriculturedependent rural regions and non-agriculture-dominated rural regions, the extents of jointness
between agricultural production and rural development are different. Thus, the appropriate
level of government to address non-commodity outputs are suggested to be not necessarily
at the national level (Hodge 2008, Sinabell 2008, and Flurry et al 2008).
30
3. Summary of the articles
This section is to summarize the analysis methods adopted and the results obtained in each
article, to present conclusions drawn and the contributions of each article to the state of the
art, and the connections between the individual articles. The theoretical framework
underlying the analysis of these four articles recognizes that output externalities and input
externalities from agricultural production activity coexist and that those externalities are
regarded as the sources of market failure, thereby constituting theoretical backups for
government intervention from the neoclassical economics perspective. On one hand,
externalities from agricultural non-commodity outputs cover the environmental benefits and
the services for the society and culture, in other words, providing public goods with positive
externalities. In this sense, it corresponds to a synonym of multifunctional agriculture. On
the other hand, agricultural input externalities refer more to the negative impacts of
agricultural inputs on the environment. The concept of externality arising from welfare
economics is essentially descriptive, yet when a society attempts to promote joint public
goods and positive externality from agriculture on the basis of multiple expectations or
requirements of the society towards agriculture by the means of public policies or
institutional arrangements, as such, agricultural externality would involve a prescriptive
dimension. The existence of recognition of the normative dimension in agriculture
externalities constitutes a paradigm for agricultural policies to be implemented, in turn,
different policy measures or institutional arrangements will bring about variation in
agricultural alternative values of non-commodity public goods with externalities.
3.1 Empirical analysis of experts’ perspectives on the multifunctionality of
agriculture in China and Finland (Article I)
A variety of conceptualizations that define multifunctional agriculture revealed some
controversies with respect to the content involved. A wide scholarly debate has been
documented in several articles, books, projects, and seminars (e.g., FAO, 1999; EAAE, 2004;
OECD, 2001), and has been well described in van der Ploeg (2000), Brouwer (2004), Potter
(2004), Caron and Le Cotty (2006), and Aumand et al. (2006). Some controversies relate to
various research disciplines (economics, agronomy, sociology, environmental science), and
others have more to do with the political agenda in international trade negotiations (Le Cotty
31
et al., 2005). Diaz-Bonilla and Tin (2004) found that multifunctionality has evoked to justify
agricultural support in developed countries, whereas the FAO (1999), Bresciani et al. (2004),
and Bonnal et al. (2004) pointed out that non-market services from multifunctional
agriculture play an important role in many developing countries. Such services include
environmental externalities, food security, agriculture’s role in poverty alleviation, reduced
pressures on urban areas because of less migration and the cultural contributions of
agriculture. However, these indirect contributions to welfare and their mechanisms are not
well understood, are seldom analyzed in the context of development, and are rarely reflected
in national and rural development policy strategies (FAO, 2007). One may conclude that the
perceptions of multifunctional agriculture in developing countries have not been very clear,
and that multifunctionality is a main concern of industrialized countries. It is claimed that
roles of agriculture rather than multifunctional agriculture in developing countries, such as
China, embody positive externalities in terms of rural viability, rural employment, and a
buffer role in an economic slump, but negative externality for the rural environment; the
marginal output of the non-commodity of food security is small and the demand for the
externality of the rural landscape and cultural heritage is insufficient (Zhu et al., 2003; Ni,
2003; Lv et al., 2004; Zhang, 2005; Yang et al., 2005).
The assumption is set in this article that the multifunctional roles of agriculture in developing
countries contribute to the subsistence functions of agriculture, providing employment and
food security, whereas in industrialized countries, the environmental dimension is quite
likely to be more emphasized since starvation and hunger are not perceived as real threats
by the citizens. Therefore this article is to empirically analyze the differences in expectations
on multifunctional agriculture in two particular countries (Finland and China) with divergent
political agendas with regard to agriculture. The empirically comparative studies clarify the
variation in highlights of externalities associated with multifunctional agriculture from the
perceptions of the experts.
Cross-table analysis is used for the investigation results through paired comparison method
to rank the importance of the elements of multifunctional agriculture, and the principle
component method of factor analysis is used for the evaluation of multifunctional agriculture
to extract the underlying common factors beneath the variables. Cross-table and factor
32
analyses were performed by using SPSS software. In order to determine the perceptions and
evaluations of multifunctional agriculture from the experts in the fields of agriculture and
environment, a structured questionnaire was used to collect the associated data from a panel
of agricultural experts. The primary data were collected from 38 valid responses out of more
than 50 questionnaires sent to Chinese experts in a way that telephone interviews were
carried out first and subsequently questionnaires were sent out through e-mails. The
investigation period lasted three months. Expert sampling used to collect the data is a specific
subcase of purposive sampling. The sampling criteria are as follows: 1) the respondents are
researchers and professors in the field of agricultural economics, 2) the respondents are from
different institutes or universities relevant to agriculture in different parts of China that vary
in research levels in agricultural economics. They include China Agriculture University, the
Institute of Agricultural Economics of China Agriculture Academy, two top institutes in the
field of agricultural economics, located in the northern part of China; Huazhong Agriculture
University, located in the central part of China; Guangxi University, the Council of
Nationality Affairs of Guangxi Autonomous Region, Sichuan Agriculture University, and
Southwestern University of Finance and Economics, located in the western part of China;
and the Animal and Plant Quarantine Administration of the Chinese Ministry of Agriculture,
located in the eastern part of China. The questionnaire presents the paired comparison table
with open-ended questions. Owing to the variation in the knowledge on multifunctional
agriculture, some background information is provided in the first part of the questionnaire.
On the other hand, the interview results of 24 Finnish experts who were asked for their
insights on multifunctional agriculture in a study by Arovuori and Kola (2005) are adopted
as the second-hand data to be collected. Meanwhile, their original data are further processed
for this study need. The principle component method of factor analysis was used to extract
the underlying common factors that may describe an observed phenomenon of experts’
evaluations on the elements of multifunctional agriculture. In factor analysis, the observed
variables are modelled as linear functions of a smaller number of unobservable factors
(Tryfos 1997, Cornish 2007). Factor analysis usually proceeds in three stages. First, one set
of factor loadings is calculated which yields theoretical variances and covariance that fit the
observed ones as closely as possible. The principle component method is most widely used
to determine a first set of loadings, which bring the estimate of the total communality nearly
33
to the total of the observed variances. The communality of a variable is the part of its variance
that is explained by the common factors. The larger this part, the more successful the
postulated factor model is supposed to explain the variable (Tryfos 1997, Cornish 2007).
Communalities can be used to assess the adequacy of a factor model. Second, factor rotation
is accomplished through orthogonal and oblique rotation. The most common orthogonal
method is called varimax rotation, which seeks the rotated loadings that maximize the
variance of the squared loadings for each factor in order to make some of these loadings as
large as possible, and the rest as small as possible in absolute value. Finally, the final factor
scores are determined through the number of eigenvalues over 1 and the scree plot of
eigenvalues. It is noted that there is considerable subjectivity in determining the number of
factors and the interpretation of these factors. There are several methods for obtaining first
and rotated factor solutions, and each such solution may give rise to a different interpretation
(Cornish 2007).
The results of empirical analysis confirmed the presumption previously set. The conclusion
was drawn that agricultural sector in developing countries plays an important role in poverty
and hunger alleviation and economic development in general. Agricultural externalities in
China are stressed in the economic function of food security. In Finland, the rural landscape,
biodiversity, and animal welfare dimensions are given a higher priority. In the philosophy
of deep ecology formulated by Naess (1981), the value of ecosystems and non-human forms
of life is not dependent on human beings, in other words, bio-centric egalitarianism holds
that biota have equal intrinsic value. Although this kind of environmental philosophy has
raised debates especially in the normative status of deep ecology and has elicited robust
critiques (Callicott and Frodeman, 2008), the notion of deep ecology may be more easily
accepted at the stage of a highly developed economy and society. This is consistent with a
hypothesis developed by the roles of agriculture project of the FAO (2007) that the indirect
roles of agriculture including environmental service are perceived to vary in the course of
different stages in economic development of a country in particular.
The investigation results of the elements of multifunctional agriculture in this article based
on prescriptive approach reflect the identification of the degree of jointness and linkage
between the commodity and non-commodity outputs. Consequently, agricultural policy
34
measures in the commodity sector will affect the non-commodity outputs, vice versa,
measures aimed at achieving non-food objectives will have implications for commodity
production and trade. Policy interferences from the perspectives of multifunctional
agriculture result in changes in commodity production and trade that would raise controversy
across countries. As argued by some researchers, official attitudes towards and positions on
multifunctional agriculture in different countries are dependent on whether national
agriculture has a comparative advantage and also have a significant correlation to the degree
of commitment constraint in national support policy. Nevertheless, the variation in
externalities associated with multifunctional agriculture should be taken into account in the
international debate on the role of agriculture. It will help to bridge a gap that agricultural
externalities are understood differently in different economic, cultural, and developmental
contexts.
3.2 The evolution of policies for multifunctional agriculture and rural areas in china
and Finland (Article II)
Comparative analysis has been conducted in article I regarding the perceptions of the experts
on externalities associated with multifunctional agriculture, which may reflect future targets
in agricultural support policies nationwide and possible trends in agricultural development.
The conclusion indicated that multifunctional agriculture is given a somewhat different
content in China and Finland. Therefore article II used the method of documentary reviews
to see the changes of implemented agricultural support policies that are associated with
externality elements of multifunctional agriculture and rural areas over time in these two
countries.
This article initially gave interpretations of the realized agricultural policies related to food
security, rural viability, food safety, animal welfare, and environmental protection in Finland
and China, and then clarified their differences. On the basis of the investigation that how and
when the policies related to these five elements listed above have been implemented in both
countries, a timetable matrix was developed to illustrate the schedule of implementation of
policies. Specifically speaking, the issues relating to food security in Finland, e.g. selfsufficiency in food commodities and securing farmers’ incomes, have been emphasized from
the 1950s to the 1980s. In contrast, food security in China has become a top priority since
35
the 1990s and was further developed in the early 2000s, even up to now. As for food safety,
the frequency of food safety policies implemented in Finland is much higher than that in
China. In addition, several specific policies on animal welfare and biodiversity conservation
have been implemented in Finland, especially in recent years, while no agricultural policies
explicitly target the aspect of animal welfare yet, and insufficiently specific measures are
tailored for biodiversity in China. On the other hand, the environmental protection aspects
have become concerns since the early 1980s in the two countries. Meanwhile, it is clear that
both countries have paid more attention to issues of rural viability. Accordingly, in a sense,
it is found that the conclusions in the articles I and II are consistent and connected to each
other.
Finally, the reasons for the differences between the policy foci of both countries were
discussed. It concludes that the different emphases in agricultural policies can partly explain
why different countries have different standpoints on multifunctional agriculture in
international trade negotiations.
3.3 Assessment of agri-environmental externalities at regional levels in Finland
(Article III)
Given that the conclusions from both articles I and II that the environmental externalities
dimension is given a high priority in Finland, and the views that many researchers in Finland
have examined the Finnish agri-environment situation in terms of water quality, agricultural
nutrient runoffs, ammonia emissions, greenhouse gas emissions, rural landscape and
farmland biodiversity, yet there has been relatively few studies about overall assessment,
article III attempted to use a synthetic evaluation based upon the theoretical framework of
multi-objective decision-making and fuzzy logic to estimate the provision of agricultural
environment public goods across regions.
The synthetic evaluation aggregated the agri-environmental indicators into one synthetic
value through the transformations of original indicator values and weightings based on the
evaluations of experts with an aim to obtain a vector of the regional synthetic index in a
concise way. The method of synthetic evaluation is derived from the theory framework of
multi-objective decision-making and fuzzy logic. Fuzzy set theory is best suited for
situations in which the parameters being measured involve the use of uncertain and
36
ambiguous information. Thus, the method can interpret the uncertainties of real situations in
which the data belong to by ascribing characteristic values with partial degrees of
membership. The continuum of membership values lies between zero (full non-membership)
and one (full membership) in a fuzzy membership function. Multi-objective fuzzy synthetic
evaluation has been widely used to deal with decision-making problems involving multiple
criteria evaluation or the selection of alternatives. Since it is difficult to monitor its
environmental performance with a comprehensive monetary assessment system due to the
lack of adequate information, although it could appear that the value generated by agriculture
is likely to be substantial. Therefore, an alternative analytical approach via a relative measure
of synthetic evaluation index can probably be regarded as one complementary tool to
evaluate the provision of agri-environmental public goods and externalities. In addition, with
a view to identify the differences of agri-environmental externalities among regions over
time, the truncated regression adopted applies to the scenario where the synthetic index was
a dependent variable that had a value range of between zero and one, whereas the categorical
variables of region and year were independent dummy variables. The synthetic evaluation
was carried out with Microsoft Excel and the truncated regression was performed using the
program Stata 11.
The statistical data in relation to agri-environment at regional level in Finland are the main
data sources. More specifically, article III selected representative indicators related to water
quality, farmland biodiversity, greenhouse gas emissions, ammonia emissions, and soil
function to evaluate agri-environmental externalities. The statistical data for nitrogen and
phosphorus balances (kg/ha), the densities of cattle and pigs, proportions of permanent
grassland and fallow area, and organic farming areas in 15 regions of Finland during the
2000–2009 inclusive period were studied. Regional division is based on the Employment
and Economic Development Centers (TE centers) in Finland. Data were made available from
the Yearbook of Farm Statistics by the Information Centre of the Ministry of Agriculture
and Forestry (TIKE), Agricultural Statistics (Matilda), Statistics Finland, Finnish Food
Safety Authority (Evira), and the MYTVAS3 report.
Agricultural activities impact upon environment, such as soil function, water and air quality,
landscapes and biodiversity, resulting in either positive externalities (public goods) or
37
negative externalities (public bad). However, it can be argued that many more negative
environmental externalities can be identified than positive externalities, because the current
intensive agricultural production systems generate nutrient loading, ammonia emissions,
greenhouse gas emissions, and biodiversity loss to the environment.
The evaluation results indicated that the relative provisioning of public goods varies amongst
the regions: intensive animal production was one of the main drivers for low provision levels.
Intensive animal production typically led to high nutrient balances and a low level of
extensive land use. The highest relative measures of provision obtained were for Uusimaa,
which is the most densely populated region in Finland. High provision levels of public goods
are related to the structure of the production systems. When agricultural production is
dominated by crops and the common practice of leaving some fields fallow, nutrient
balances for crop production also had fewer surpluses than for livestock farming.
Accordingly, the findings demonstrate that such data provide possible empirical evidence
for the future discussion on whether regionally or locally targeted agri-environmental
schemes could be useful as a replacement for the current uniformly applied area-based
scheme. It should be noted that the study failed to consider the trade-offs between the value
of conventional agricultural products and agri-environmental goods provision. Therefore,
the provision levels alone cannot be ranked according to their true eco-efficiency values.
Moreover, social irreversible costs or benefits from environmental degradation or
improvement should also be taken into consideration for cost-effective measures, but this is
not included in the model, either.
The main contribution of this article was to develop a synthetic evaluation approach by using
a relative index that stems from the multi-objective decision-making and fuzzy logic theory
to estimate the aggregated effects of several agri-environmental externalities in a concise
way. Thus, to some extent, it can probably be regarded as an alternative solution to reflect
relative assessment of the value of externalities generated by agriculture. We are unaware of
earlier attempts that have applied the use of the fuzzy logic concept for measuring the
provision of agri-environmental public goods. When analyzing several parameters
numerically that describe various agri-environmental aspects, their data can be condensed
38
into a single value that describes the overall combined level of provision, i.e., into one
relative measurement index.
3.4 Nitrogen use and the integration of environmental concerns into production
(Article IV)
In three previous articles, the relevant studies in agri-environmental externalities have been
examined emphatically. The aim of this article is further to address the problem with policy
measure impacts on agricultural fertilizer inputs that play a key role for agri-environmental
negative externalities. The study attempts to explain how nitrogen (N) fertilizer application
rates respond to policy goals and measures implemented nationally, regionally and over time.
This response is set against the background of the different perceptions of profitability,
efficiency, and environmental effects in different countries. A comparison was made
between N input intensity and its use efficiency in terms of fertilizer N rate, the partial factor
productivity (PFP) of the applied N, and N recovery/uptake efficiency (RE) between China
and Finland. The findings demonstrated that fertilizer N application rate in Finland remained
a much lower mean usage level than that of China, that the indicator PFP N shows slightly
higher use efficiency values in Finnish cereals production than those obtained from China,
and that the REN in Finland has a higher value than that in China. A high RE N value implies
less nitrogen nutrient runoffs to soil and water. Meanwhile, the positions among
economically optimal N rate, constraint N rate, and actual N use rate both in China and
Finland are clarified. This is because the economically optimal N rate has been widely
adopted as a reliable benchmark for estimating the fertilizer needed in crop production, given
that the complexity of the ecologically optimum N rate recommended due to the difficulty
in estimating environmental costs. It was confirmed that the extent to which N loss was
serious when the actual N use rate exceeded the site-specific economically optimum N rate.
The results revealed that during 2004-2012, the actual N use rates have been close to the N
economically optimal rate except for the year 2008 when there was a spike in the price of N
resulting in optimal rate to go down and the year 2010 when optimal rate went up as a result
of the declined N price in Finland. Moreover, the actual N rates have been less than the N
constraint limits since 2007. In contrast to this, the mean of the actual N usage rates in rice
and wheat during 2006-2012 exceeded those of the economically optimal rate by 31.8
percent and 4.3 percent in China. The largest difference between the economically optimal
39
N application rate and the greater levels of the actual application rates was found for rice
production. This seemingly irrational behaviour of excessive N use can only be explained
by inaccurate fertilizer spreading timing and low levels of technology used for spreading
fertilizer.
Beyond spatial heterogeneity such as geography, climate, soil types, crop cultivation
varieties, and structures, and customary management models that have impacts on the rates
of N applied and the N use efficiency, each country has different components and drivers in
its markets and policy measures that also influence N usage. For example, virtually all
farmland (98 percent) in Finland had been enrolled within the Agri-environmental Schemes
(AESs) (Piha 2007), and the agricultural nutrient load potentials were decreasing constantly,
mainly because of the reduction in the use of synthesized (artificial) fertilizers (MYTVAS
3, 2007-2013). In contrast, greater food security in China is a major driver for the high rates
of N use in Chinese agriculture, which is brought about by manipulating price-ratios of
inputs and outputs through direct and indirect subsidies on fertilizers.
In theory, a market mechanism of agricultural inputs determines the negative correlation
between the demand for an input and the price of that input. When the N price increases, the
input amount is supposed to decrease or level-off and this is why it was argued that
increasing the production cost of N is an option for mitigating the diffuse pollution from
agriculture. Similarly, the price-ratio of N to cereals in a given year is supposed to affect the
N input-intensity in the year that follows. However, if some policy measures interfere with
the prices of inputs and outputs, then the economically optimal N rate will be influenced as
a consequence. Additionally, agri-environmental policy measures, such as controlling
chemical fertilizer usage, proper manure application, organic farming, or leaving the land
fallow, could be targeted at environmentally beneficial farming, and such measures would
be expected to have direct impacts on N use.
Data in this study covered all of the following: chemical fertilizer N application rate, cattle
and pig densities, manure N application rate, the organic farming area proportion, fallow
area proportion, grassland areas proportion, and the areas of main cereals, farm sizes, farm
incomes, agri-environmental payments received, N price indices, price-ratios of N to cereals
40
during the six-year period 2004-2009 in 15 regions of Finland. The statistical data were made
available in the MYTVAS3 report, Yearbook of Farm Statistics by the Information Centre
of Ministry of Agriculture and Forestry (TIKE), Agricultural Statistics (Matilda), and
Statistics Finland, and Finnish Food Safety Authority (Evira). Meanwhile, the statistical data
that involved the Chinese policy of intervention in fertilizer pricing and usage, such as
chemical fertilizer price index, price–ration of nitrogen to cereals, fertilizer subsidy rate, are
collected from China Rural Statistical Yearbook, National Farm Product Cost-benefit
Survey in China, and the subsidy distribution report of Ministry of Finance of China.
Additionally, the prices of the crops of spring wheat, winter wheat, barley, oats, turnip rape,
oilseed rape, and silage, in addition to the prices of N during 2004-2012 in Finland, were
obtained from the farmers for calculating the production costs annually in pro-Agria of
Finland. Both inorganic and organic N data were based on statistical data obtained for the
years 2004-2012 from yearbooks of farm statistics in Finland. The maximum quantity limit
value for N fertilizer was obtained from the regulations set for each type of crop during the
second (2000-2006) and the third phases (2007-2013) of the Finnish Agri-environmental
Program. In contrast, the annual prices of rice, wheat, maize, and fertilizer N during 20062012 for calculating economically optimal N rate were derived from the Provincial Farm
Product Cost-benefit Survey in Jiangsu province, Hebei province, and Henan province
respectively, where the three main cereals of rice, wheat, and maize are produced with
distinctly regional distribution.
Building upon the panel data model that pools time series and cross-sectional data has the
ability to deal with the omitted explanatory variable problem, we applied it to identify the
relationship between N use and policy measures, given that the use intensity of agricultural
chemicals depends not only on key drivers such as policies and markets, but also on
technologies, management practices, and the changes in environmental conditions (e.g. soils,
weather) that would be somewhat unobserved or unmeasured. According to the diagram
summarized by Dougherty (2012), in the presence of regression analysis with panel data,
whether fixed effects estimation is preferred to random effects estimation or not depends on
that either of the two preconditions for using random effects is violated. One precondition is
that the observations can be described as being drawn randomly from a given population.
41
Apparently, random effects estimation is not applicable when the units of observation in the
panel data set covered definitely all regions within a country. The other precondition is that
the unobserved effect should be distributed independently of the explanatory variables
through the implementation of the Durbin–Wu–Hausman test. Meanwhile, the Wooldridge
test for autocorrelation (Drukker 2003) with STATA command xtserial and Modified Wald
test for group-wise heteroscedasticity in fixed effect model with the STATA command
xttest3 are conducted to test autocorrelation and heteroscedasticity. If the Wooldridge test
results for autocorrelation indicate no first-order autocorrelation, the residuals are assumed
to be heteroskedastic only, then in order to obtain a more robust estimation, the STATA
command xtreg, fe vce (robust) are used to perform FE (within) regression with Driscoll and
Kraay (1998) standard errors, otherwise the command xtreg, fe cluster is applicable (Hoechle
2007). The estimates correction could adjust robust standard errors and statistical
significance levels (Wooldridge 2001, Hsiao 2003, Verbeek 2004, and Greene 2011).
The Durbin-Wu-Hausman test failed to reject the null hypothesis that 𝑋 and 𝛼 were
uncorrelated, and Breusch and Pagan Lagrange multiplier test demonstrated that the OLS
regression was unsuitable. The Wooldridge test results for autocorrelation revealed no firstorder autocorrelation. It makes sense that the panel data covered only the six-year time series
dimension, which means micro panel data with short time series. The results of Modified
Wald test for group-wise heteroscedasticity in fixed-effect regression model rejected the null
hypothesis that there are no individual specific effects. The presence of heteroscedasticity in
𝜀 may invalidate the standard errors and resulting tests. In order to obtain a more robust
estimation, the estimates correction was carried out to adjust robust standard errors and
statistical significance levels.
The regression results illustrated that the organic farming measure and price-ratio of N to
cereals in Finland have an inverse relationship with chemical fertilizer N rate, whereas the
share of grassland area has a positive association with it at significant level. Chinese policy
interventions on fertilizer that comprise incentives for fertilizer producers, fixed maximum
limits for factory prices and for retail prices of fertilizers, and a fertilizer subsidy for grain
producers, on the other hand, show that the N price in China has remained relatively stable
or even shown a slight decline when compared to the considerably pronounced upward trend
42
of N price and compound fertilizer price index in Finland. More importantly, the increasing
price of cereals has contributed to improving farmers’ incomes, thus the price ratios of N to
cereals have been somewhat in decline. The mean value of the price ratio was greater than
10 for Finnish agricultural production during 2004-2012, whereas the corresponding value
was around 2 to 3 in China, and its trend has been downward. Additionally, China has not
yet adopted an explicitly agri-environmental mandatory program such as the Finnish AESs
to regulate the overuse of fertilizers or to contribute to the conservation and quality of water,
soil, biodiversity, and landscape in agricultural land; nor has China adopted any other special
measure. Accordingly, we recommend that the Chinese government should abolish the
incentives it gives to the fertilizer manufacturers and revoke the limits for fertilizer retail and
factory prices, and that the market mechanism instead should determine price-ratio of input
to output. In such a way, along with agri-environmental mandatory measures involved,
fertilizer N input intensity could decline and it is a key step in controlling the degradation of
the agri-environment in China. In contrast, the effectiveness of agri-environmental payments
and the efficiency of manure use in Finland could be improved in order to further reduce
chemical fertilizer N use intensity in Finland.
43
4. Conclusions and direction of further research
The objectives of the study aim to empirically present the results: (1) of how agricultural
externalities are performed in multiple ways; (2) that experts’ perspectives, synthetic
assessment levels, and policy impacts were taken into account nationally, regionally and
over time; and (3) to demonstrate a practical understanding in diverse highlights and
interpretations of agricultural externalities’ components in different countries in the context
of different agricultural, socio-economic, and societal development levels. More precisely,
the experts’ perspectives on agricultural externalities in terms of the perceptions of
multifunctional agriculture are distinguished in order to know what different highlights of
agricultural externalities are given in China and Finland; the evolution of policies associated
with elements of multifunctional agriculture and rural areas may be explained by the reasons
that the differences in policies implementation mainly are attributed to economic
development, the supply of food products, the demand for environmental services, income
level and values, and policy-making structures; agri-environmental externalities generated
by agricultural activities are measured in a concise way by developing a relative index;
investigation of how policy measures impact on N application is carried out to reveal that
the different goals of policy and policy measures implemented could explain variations of
application rates of fertilizer N both nationally, regionally and over time, which play a key
role, at least partly, in causing agri-environmental negative externalities.
4.1 The main conclusions are summarized
The detailed understanding in terms of agricultural sector policies, institutional settings, and
agro-ecological contexts should serve as the basis for systematic exploration of agricultural
externalities. In correspondence with this, there is a substantial divergence when agricultural
externalities come to policy implications which need to be treated differently for
industrialized and developing countries. For the latter, as food security is a fundamental
concern and a priority to be addressed, its social externality generated by agriculture brought
about an awareness that domestic policies should target for food security and poverty
alleviation purposes. Food security has usually been defined in terms of national security,
i.e. access to a sufficient amount of food in national or international crises. If global food
security faces the challenge, rich countries will normally have enough purchasing power in
44
world markets to secure a sufficient share of world production (Brunstad et al., 2005).
Therefore, ensuring enough domestic food production in developing countries can help
alleviate against disruption in imports caused by the spike in food price worldwide, blockade
(e.g. war and embargo), and other international events. In this sense, securing food security
is also essential for sustainable development. However, food security as social externality
from agriculture often caused a public debate and controversial discussion. It is argued that
it is used for protectionist excuse due to price and income support measures often adopted,
and has been understood as a device manipulated for subsidizing agriculture and protecting
it from international competition. As such, this kind of domestic objective is not compatible
with trade liberalization. More importantly, policy measures that serve for this priority and
concern have been widely regarded to be contributors to nonpoint agricultural pollution as a
result of more intensive use of environmentally harmful agriculture inputs. Accordingly, the
evolutions of agricultural intensive practices and inputs and the environmentally destructive
impact of intensive agriculture generated by the support system as a whole give rise to the
need for policy changes and the necessity to underscore ecological considerations.
Additional attention should be given to the direct correlation between food security and the
level of production needs to be carefully examined. As noted by Romstad et al. (2000), the
linkage between food security and production intensity was described as a bell-shaped curve.
It implies that food security may increase with production level to a certain threshold point,
and then decrease, on the grounds that food security in the long-run may depend on
production capacity. It becomes clear that production capacity no longer increases when
agri-environmental conditions tend to decline, such as deteriorated quality and reduced
availability of water, desertification, soil erosion, and climate change. Instead, production
capacity may be maintained or enhanced by low intensity farming that could partly serve as
a long-term food security strategy.
As a strong re-orientation made of the CAP of EU, an alliance of industrialized countries, it
clearly expresses the increase of societal expectation on the agricultural sector with regard
to delivering new regulating functions that cover the environmental protection, the sustained
viability of rural communities, food safety, and other consumer concerns, e.g. animal welfare.
Despite the new challenges of growing food demand and climate change, the focus is no
45
longer on the quantitative aspects of food production which had been the primary objective
of the CAP since its inception. As a consequence, the priorities of policy are assigned to
environmental concerns, territorial or rural development, and production methods through
the usage of less intensive techniques and the implementation of environmentally friendly
measures. In order to ensure a positive relation between agricultural production and
environmental quality, the imposition of new environmental, health and animal welfares
norm, and the accent on alternative ways of production (e.g. organic farming), are required
or recommended. A common emphasis was put on environmental quality, wildlife
biodiversity conservation, and landscape conservation through various agri-environmental
schemes in the EU member countries that are usually voluntary and generally compensate
farmers for certain management practices to reduce negative externalities from agriculture.
As multifunctional agriculture retained considerable discursive resonance in EU countries,
this kind of policy framing created space for integrating both the traditional pro-agriculture
and pro-environment coalitions (Jokinen et.al 2009).
Although food security and environmental concerns are revealed to some extent to have
trade-off interaction as the two complementary and even conflicting dimensions of
agricultural development process in the short-term, their ultimate consequences are
consistent and are bound together for good or ill in the long-term. The complex
interrelationships between economic, social, and environmental aspects have been
developing over time, as such, were not present to the same extent in the policy debate in
the certain period. This variation largely reflects the diversity of economic, cultural, and
political contexts as well as agricultural production structure. In spite of this complexity it
appeared in WTO negotiations and successively evolved a political paradigm. Nevertheless,
the main orientation and target should be sustainable development in social, economic, and
ecological dimensions. In other words, to the end of achieving sustainable development, a
paradigm shift from underlining agriculture sectoral support to rewarding the more
integrated considerations on both environmentally-respectful production encompassing a
concern for reducing negative externalities and for increasing positive externalities and
cohesively territorial development is an irresistible trend. In such a case, this dominant vision
46
that the agricultural externalities should correspond in quantity, quality, and composition to
those demanded by society would become a priority concern and to be justified.
4.2 Directions for further research
Agriculture has an inherently profound impact on environment and society. On the one hand,
the negative environmental effects of agriculture are well documented, such as pollution and
eutrophication in watercourse caused by agricultural chemical inputs, contamination in the
atmosphere by methane, nitrous oxide, and ammonia, soil erosion due to intensive farming
practices, and climate change due to greenhouse gas emission. On the other hand, some
studies reveal positive environmental externalities, including biodiversity conservation,
creating and shaping rural landscape with aesthetic value, recreation and amenity, nutrient
recycling, soil formation, and carbon sequestration. In addition to this, it is claimed that
agricultural positive social impacts consist of providing employment in rural area, enhancing
rural viability, and guaranteeing food security nationwide, while these issues have been
debated questions.
All of the above constitute a framework to formulate the evaluation of trade-offs among
those different impacts and convince of the existence of externalities from agriculture. The
question of whether and to what extent those agricultural externalities can justify
government intervention and of what implication those externalities have for national
agricultural policies should be further examined. The issues of the existing policy reorientation and the new policy formulation in developing countries, e.g. China, should be
taken into considerations, given that sustainability of public policies in relation to three
dimensions of economy, society, and environment will serve as a guide for the policy reform.
More precisely, policy instruments attempt to contribute to how to promote agricultural
sector competitiveness and efficiency, how to meet a great variety of society demand and
objectives, and how to sustain agri-environment institutional settings for both economic
efficiency and political acceptability.
Therefore, a prerequisite for policy re-orientation and justification would be quantitative
assessment on the external costs and benefits from agriculture from a descriptive point of
view. One content of further research relates to evaluation of positive social externalities
47
from agriculture through the commonly used method that the contingent evaluation of the
stated preference reveals the willingness to pay for the existence of positive effects. The
second content of the further research involves monetary value estimates on the abatement
cost, treatment cost, and administration cost to eliminate or reduce the negative
environmental externalities from agriculture through assessing the abatement costs of
reducing agricultural chemical inputs (Sumelius et al 2005, Helin et al 2006), the treatment
and prevent costs of cleaning up the environment, and the administration and monitoring
costs at the aggregation level nationwide (Pretty et al 2001). The third content concerns the
opportunity cost to produce the positive environmental externalities through calculating the
shadow value of positive externalities at the least cost (Sipilainen and Huhtala 2013). The
fourth content involves the different policy options and its effectiveness comparison in terms
of the three categories of policy measures that generally comprise advisory measures,
regulatory and legal measure, and economic instruments in a country over time.
48
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