Farm Subsidies Boost EU Agricultural Value Long-Term

A new study published in Frontiers in Sustainable Food Systems reveals that average agricultural subsidies per farm are associated with a statistically significant increase in agricultural value added in the long run across eleven European Union transition economies. The research, conducted by Mustafa Taytak and Emre Şakar from Uşak University in Türkiye, examines the period from 2013 to 2023, a timeframe that follows the major reforms of the EU’s Common Agricultural Policy (CAP). By analyzing a balanced panel dataset, the authors provide empirical evidence that while short-term adjustments to subsidy levels can have adverse effects on agricultural output, the long-term trajectory supports the notion that financial aid to farms contributes to sustained economic growth in the agricultural sector.

The study focuses on a specific group of countries that joined the EU through successive enlargement rounds, including Bulgaria, Croatia, Czechia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia. These transition economies are characterized by distinct structural features, such as varying farm sizes and institutional frameworks, which make them a critical area for understanding how a common agricultural policy generates different outcomes. The researchers argue that examining these countries provides a natural laboratory for assessing the effectiveness of CAP implementation in diverse economic and institutional settings, particularly during the post-enlargement era when agricultural policies were being integrated into the broader EU framework.

To investigate the relationships among average agricultural subsidies per farm, GDP per capita, and agricultural value added, the authors employed a sequential panel data approach that explicitly accounts for cross-sectional dependence and heterogeneity. The analysis began with cross-sectional dependence tests, which revealed that the countries in the sample are not independent but are interconnected through common policy frameworks and shared economic shocks. This finding was crucial because ignoring such dependence could lead to biased statistical inferences. The study then utilized the second-generation Pesaran CIPS panel unit root test to determine the stationarity properties of the variables, confirming that the logarithmic forms of all variables are stationary in levels, which allows for the use of specific econometric estimators without the risk of spurious regression.

The causal relationships between the variables were examined using the Emirmahmutoğlu and Köse heterogeneous panel causality test. This method allows for different lag lengths and causal relationships across countries, providing a more nuanced view than traditional pooled estimators. The results indicated a bidirectional Granger causality relationship between average agricultural subsidies per farm and agricultural value added. Specifically, subsidies were found to Granger-cause agricultural value added at the 5% significance level, while the reverse relationship was supported at the 1% significance level. This suggests that changes in subsidy support contain predictive information about future agricultural performance, and conversely, agricultural performance may influence future subsidy decisions, creating a feedback mechanism within the policy framework.

Furthermore, the study found a strong Granger causality relationship running from GDP per capita to agricultural value added at the 1% significance level. This indicates that the overall level of economic development has substantial predictive power for agricultural sector performance in these transition economies. The reverse relationship, from agricultural value added to GDP per capita, was weaker and statistically significant only at the 10% level. These findings highlight the asymmetric nature of the causal links, where macroeconomic development plays a more dominant role in shaping agricultural outcomes than the reverse, although the feedback effect of agriculture on the broader economy remains non-negligible.

The core estimation of the short- and long-run effects was performed using the Panel Autoregressive Distributed Lag–Pooled Mean Group (ARDL-PMG) estimator. This method assumes that long-run coefficients are common across countries while allowing short-run dynamics to vary, which is appropriate given the shared institutional framework of the CAP but differing national agricultural structures. The long-run results showed that a 1% increase in average agricultural subsidies per farm is associated with an approximately 0.17% increase in agricultural value added. This positive and highly statistically significant coefficient suggests that agricultural support policies can enhance the long-run performance of the agricultural sector by strengthening investment capacity and facilitating technological modernization.

In contrast, the short-run effects of subsidies were negative and statistically significant. A 1% increase in average subsidies per farm was associated with an average 0.19% decrease in agricultural value added in the short term. The authors interpret this divergence as a reflection of the time required for producers to adjust their production and investment decisions in response to changes in support levels. Structural characteristics of the transition economies, such as constraints in adopting modern technologies or reorganizing production processes, may delay the translation of financial support into immediate gains in value added. This finding underscores that the benefits of subsidies are not immediate but emerge over time as their impacts on production and productivity gradually materialize.

The error-correction coefficient was estimated at −0.833956, which is statistically significant at the 1% level. This negative coefficient indicates a stable long-run equilibrium relationship among the variables and implies that approximately 83.4% of any short-run disequilibrium is corrected within one year. The rapid speed of adjustment suggests that the agricultural sectors in these transition economies are responsive to deviations from their long-run equilibrium, quickly realigning with the underlying economic relationships defined by subsidy support and macroeconomic development.

The study also examined the role of GDP per capita as a complementary macroeconomic indicator. The long-run coefficient for GDP per capita was positive, indicating that a 1% increase in GDP per capita is associated with an approximately 0.42% increase in agricultural value added. However, this relationship was statistically significant only at the 10% level, suggesting that while economic development supports agricultural performance, the effect is less robust than that of direct agricultural subsidies. The short-run changes in GDP per capita were found to be statistically insignificant, further highlighting the long-term nature of the relationship between overall economic prosperity and agricultural value creation.

The authors acknowledge several limitations in their analysis. The relatively short time dimension of the annual dataset, covering only 11 years, increases the risk of small-sample bias in estimating dynamic relationships. Additionally, there is an aggregation mismatch in the data: while agricultural value added and GDP per capita are national-level macroeconomic aggregates, the subsidy indicator is a micro-founded average per commercial farm derived from the Farm Accountancy Data Network (FADN). This means the estimated coefficients reflect the relationship between average farm-level subsidy support and aggregate national value added, rather than the effect of total national agricultural expenditure. The FADN focuses on commercial holdings, excluding small subsistence farms, which may limit the generalizability of the findings to the entire agricultural sector.

Despite these limitations, the study provides valuable insights for policymakers. The findings suggest that agricultural support should not be viewed solely as a short-term income transfer instrument but should be designed to strengthen the long-run productive capacity of the agricultural sector. The authors recommend that CAP instruments be tailored to the structural characteristics of EU transition economies, with an emphasis on predictable, multiannual frameworks that link support to productive investments such as technological modernization and infrastructure development. By understanding the time-dependent nature of subsidy effects, policymakers can better design interventions that mitigate short-run adjustment costs while maximizing long-run economic benefits for the agricultural sector.

The research contributes to the broader literature on agricultural policy by providing updated panel data evidence on the post-2013 CAP reform period, a timeframe for which comparative country-level evidence has been scarce. By jointly employing cross-sectional dependence tests, second-generation unit root tests, heterogeneous causality tests, and the ARDL-PMG estimator, the study offers a comprehensive assessment of the short- and long-run relationships among agricultural support, economic development, and sectoral performance. The results reinforce the importance of considering both the design of policy instruments and the economic and institutional environments in which they are implemented when evaluating the effectiveness of agricultural subsidies in transition economies.

Subject of Research: Farm-level agricultural subsidies and agricultural value added in European Union transition economies: evidence from the post-enlargement period

Article Title: Farm-level agricultural subsidies and agricultural value added in European Union transition economies: evidence from the post-enlargement period

Article References: Taytak, M., & Şakar, E. (2026). Farm-level agricultural subsidies and agricultural value added in European Union transition economies: evidence from the post-enlargement period. Frontiers in Sustainable Food Systems, 10, Article 1959462. https://doi.org/10.3389/fsufs.2026.1959462

Image Credits: AI Generated

DOI: 10.3389/fsufs.2026.1959462

Keywords: Farm-level, agricultural, subsidies, value, added, European, Union, transition, economies, evidence, post-enlargement, period