Subsidies and the income inequality in the Hungarian wine sector

From Firenze University Press Journal: Wine Economics and Policy

Imre Ferto, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences

Stefan Bojnec, University of Primorska

Reducing in farm income inequalities is one of the agricultural and farm policy challenges. The available public financial resources and the restructuring of budgetary expenditure patterns create additional challenges for the reduction of farm income inequality. Outside the European Union (EU), attempts have been made to address the situation by amending the regulatory and institutional frame-works and strengthening market orientations, mean-while, the goal is to reduce or eliminate income inequal-ity between farmers [1,2]. The impact of the agricultural policy measures applied may vary depending on whether the payments are decoupled [3], on the share of mar-ket income and direct payments within the total farm income [4] as well as the size of farms and their market positions [5]. The effect of market income remains sig-nificant while its share in total income decreases or is unstable [6,7]. In addition to subsidies, agricultural and farm income inequalities, social factors can lead to an increase in the farm income of farmers [8]. Due to agri-cultural policy regulations, the concentration of direct payments is observed in several countries. Small number of farms can receive most of the direct payments, while many small farms share the remaining part of the sub-sidies [9,10,11]. Regional differences in economic, agri-environmental, and competitiveness conditions [12,13] and the regional needs to support regional-level deci-sion-making can also influence the effects of reducing income inequality through direct payments [14,15]. The level and distribution of farm incomes and their poten-tial inequality have been topics of the highest political and economic importance [16,17].Earlier literature has developed and empirically applied the concept and context of the decomposition of the Gini Coefficient to the structure and evolution of farm income [1,14,18,19,20,21]. These papers focus on the impact of Common Agricultural Policy (CAP) reform on farm income inequality. While there may be heterogene-ity in results across EU member states and their regions, most studies report that CAP subsidies have reduced farm income concentration and thus also farm income inequality. Keeney [18] finds that direct payment poli-cies have reduced farm income concentration in Ireland — particularly, the compensatory allowances awarded to farmers in areas faced with natural production handicaps — which are at the greatest risk of having low farm income. Allanson [6] and Allanson et al. [22] for Scot-land, Allanson and Rocchi [23] in a comparative study of Scotland and Tuscany (Italy), El Benni et al. [24] and El Benni and Finger [14] for Switzerland, and Severeni and Tantari [19,20,21] and Cilierti and Frascarelli [25] for Italy have reported that agricultural support, espe-cially direct payments (within the EU’s CAP Pillar 1) have reduced income concentration and thus reduced farm income inequality within the agricultural sector. Hanson [26] carried out a panel-level assessment of the redistributive impact of the 2013 CAP reform. The negative impact of direct payments has been shown for the largest beneficiaries, while the redistributive effect on small farms is significant. Bojnec and Fertő [27] find that subsidies from Pillars 1 and 2 reduce farm income inequality in Slovenia, especially for less-favoured area (LFA) farms. In short, empirical evidence suggests that farm subsidies may reduce farm income inequalities in the investigated European countries.This paper contributes to the analysis of the impact of CAP reform on wine farm income inequality. The EU geographic concentration of wine farms is in Medi-terranean, South-East, Central and Eastern European countries. The European Commission [28] provides an overview of a synthetic presentation of EU wine policy in the framework of CAP. In addition, Pomarici and Sar-done [29] present the evolution and post-2020 challenges of EU wine policy in the framework of the CAP. While the performance indicators to support firm/farm-level decision-making in the wine sector [30] and the effects of agricultural policy on farm income inequality are well documented for Western European countries and for other developed countries, there have been limited simi-lar studies for Central and Eastern European countries, except [27] for Slovenia and [31] for Hungary. This paper represents a rework of previous research [27,31] using a different dataset in terms of the types of farms and time span. In this paper, the time period is updated from the period 2007–2015 for all farm types in Hungary [31] to the period 2013–2019 for the wine farms in Hungary, thus covering the most recent CAP changes in the EU wine sector [32]. An adjusted Gini Coefficient decomposition is applied to deal with negative income values in two ways: first, by substituting negative income values with zeros, and second, by omitting the observations with negative income values [33].Hungary is an interesting example to investigate the issues of farm income inequality in wine sector. Hungary has a more than 1,000-year wine tradition. 2021, Hunga-ry was 16th among the world’s wine producers with 2.59 million hectoliters, 16th in exports with 1.14 million hectoliters, 25th in wine consumption with 1.83 million hectoliters and 70th in imports 79 thousand hectoliters. These data show that Hungary is self-sufficient in terms of wine production, with a low volume of imports. The aver-age annual wine consumption has been decreasing since 2010 and is currently around 22.0 litres per capita. Finally, the Hungarian wine sector can be characterised by a dual production structure.

DOI: https://doi.org/10.36253/wep-14091

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