provided by Research Papers in Economics
Agrarwirtschaft 56 (2007), Heft 7
Distortions in a multi-level co-financing system: the case
of the agri-environmental programme of Saxony-Anhalt
Verzerrungen durch Kofinanzierung: Das Beispiel des
Agrarumweltprogramms Sachsen-Anhalts
Dieter Kirschke, Astrid Hager, Kurt Jechlitschka and Stefan Wegener
Humboldt University of Berlin
Abstract
In this paper we analyse the impact of the EU multi-level co-
financing system on regional policy-making and priority setting
taking the case of the agri-environmental programme of Saxony-
Anhalt. The implications of several co-financing scenarios are ana-
lysed and compared to respective lump-sum transfers using an
interactive linear programming approach. The results reveal how
regional choices on agri-environmental measures are influenced by
the co-financing system leading to distortions. The extent of these
distortions depends on the specific regional preferences and re-
strictions.
Zusammenfassung
Der Beitrag untersucht den Einfluss der Kofinanzierung innerhalb
des Mehrebenensystems der EU auf die regionale Politikgestaltung
und Prioritatensetzung anhand des Agrarumweltprogramms Sach-
sen-Anhalts. Dazu wird ein interaktiver linearer Programmierung-
sansatz genutzt, mit dem verschiedene Szenarien der Kofinan-
zierung mit Szenarien verglichen werden, in denen dem Bundesland
entsprechende Pauschalbetrage zur Verfügung stehen. Die Ergeb-
nisse zeigen, dass die Entscheidungssituation durch das bestehen-
de System der Kofinanzierung beeinflusst und verzerrt wird. Das
Ausmaβ der Verzerrung ist abhangig von den spezifischen regiona-
len Praferenzen und Restriktionen.
Key words
agri-environmental programmes; co-financing; federalism; interac-
tive programming; policy-making
Schlüsselworter
Agrarumweltprogramme; Kofinanzierung; Foderalismus; interaktive
Programmierung; Politikgestaltung
1. Introduction
Within the European Union (EU), a multi-level co-
financing system for structural, agricultural and rural de-
velopment policies has been developed, sharing decision-
making and financial responsibilities at different political
levels (e.g. EU, Germany and German federal states
“Lânder”) (Mehl and Plankl, 2001: 173). From a regional
perspective this system certainly provides incentives for a
higher allocation of funds to specific policy areas. On the
other hand regional policy-making may be distorted due to
co-financing incentives.
The EU co-financing system has been criticised, in particu-
lar based on the economic theory of federalism (Mehl and
Plankl, 2001: 174; Postlep and Doring, 1996: 27). The
criticism is mainly related to the violation of the principle
of fiscal equivalence. This principle postulates that there
has to be a congruence between those who benefit from
measures and those who have to take the financial respon-
sibility (Olson, 1969: 483; Laaser and Stehn, 1996: 63).
A violation of this principle can lead to oversupply as well
as undersupply of goods or special services (Rudloff,
2002: 242; OLSON, 1986: 123). According to URFEI (1999:
237) and Rudloff (2002: 246) most of the agri-environ-
mental programmes violate the principle of fiscal equiva-
lence.
In this paper we discuss the implications of the EU multi-
level co-financing system taking the budgeting for the agri-
environmental programme in Saxony-Anhalt as a case
study. We show how the volume and the allocation of funds
for different agri-environmental measures is influenced by
this system as compared to an undistorted lump-sum trans-
fer scenario. The paper uses an interactive linear program-
ming approach, which has originally been developed for a
case study in Saxony-Anhalt (Kirschke et al., 2004a und
2004b).
2. Regional policy-making in a multi-level
system
2.1 The institutional framework
Agri-environmental programmes are funded by the EU
since the McSharry Reform in 1992 and the regulations of
the AGENDA 2000 strengthened the position of agri-
environmental policies. When the case study for Saxony-
Anhalt was carried out, the institutional framework of
the agri-environmental programmes was defined by the
“Council Regulation (EC) No 1257/1999 of 17 May 1999”.
As a consequence of the mid-term review of the
AGENDA 2000, some adaptations were realised with the
Luxembourg decisions (“Council Regulation (EC) No
1783/2003 of 29 September 2003”).
In the period considered the EU contribution covered 75%
of the expenditures for agri-environmental measures in
“objective 1 regions” and 50% in the other regions. Accord-
ing to the Luxembourg decisions the financial contribution
to agri-environmental measures has been raised to 85% in
“objective 1 regions” and to 60% in other regions.
In the federal system in Germany the institutional frame-
work for rural development additionally is subject to the
“Joint Action for Improvement of Agrarian Structures and
for Coast Preservation (Gemeinschaftsaufgabe Verbesse-
rung der Agrarstruktur und des Küstenschutzes, GAK)”.
Within the framework of the GAK, federal grants are pro-
vided for measures which are based on the “Principles of
market-oriented and locally adapted land cultivation (Markt-
297