Bridging Micro- and Macro-Analyses of the EU Sugar Program: Methods and Insights

findings of the EC Commission (2004). The low costs in the Netherlands and the UK are perhaps
more surprising. But they are in line with Van der Linde et al, and could be explained by the scale of
the plants in the processing sector (see Van der Linde, et al 2000, Figure 14.2). We also estimate the
supply elasticity to a change in the net in-quota price. These estimates are rather low for Northern EU
countries and larger for Southern countries. The weighted average elasticity is 0.23, in line with
previous estimates (Bureau et al 1997).

Table 1. Production costs and aggregate supply response estimates

4. The simulation framework

The GE model. The modeling of EU sugar sector is included in a larger GE framework in order to
assess the effect of trade liberalization and policy reforms on the EU economy. At first glance, this
may seem an "overkill" strategy, since the sugar sector is unlikely to be large enough to have
significant macroeconomic effects. However, there is no serious obstacle to including a more detailed
sector within a broader framework. The GE framework is appropriate for modeling multi-output
production, consistent with the fact that sugar is always produced in combination with other crops. In
addition, proper modeling of the EU sugar response to policy changes requires that one takes into
account the interaction of the farm sector with both the processing sector (refineries) and the food
sector that uses sugar, an issue better dealt with in a GE framework. GE also makes it possible to
assess some particular effects of reforms, such as the impact on employment. Welfare effects are also
more easily addressed within a GE framework in the case of second best equilibria (see Gohin and
Moschini, 2006). Finally, GE approaches impose an internal coherence because of accounting
equalities. This, for example, makes production costs more consistent with prices and rents than in
many partial equilibrium approaches (Hertel, 2002). Because production costs play a significant role
in the characterization of sugar supply, a proper endogenization of returns to primary factors
accounting for intersectoral linkages is an asset.

The model focuses on the agricultural and food processing sectors of the EU. Other countries and
sectors are treated in a much less detailed way. The model used this paper is static, with perfect

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