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Economic Impact of the 2001 Foot and Mouth Disease Outbreak in Scotland

4. THE IMPACT ON THE SCOTTISH ECONOMY

In this section we report the results of the simulations using the model and exogenous shocks described in Sections 2 and 3 of this report. The total impact is found by summing the individual effects. This is acceptable given the small scale of the proportionate effects on the aggregate economy generated by each of the individual agricultural and tourism disturbances. It is also convenient in that it is not possible to simultaneously impose some of the efficiency adjustments required to replicate the agricultural exogenous shocks.

The overall total impact of the FMD outbreak in the initial year was to reduce Scottish GDP by between £13.6 million and £29.8 million. This is between 0.02% and 0.05% of Scottish GDP. The effect on employment is a fall of between 966 and 1554 which represents between 0.05% and 0.08% of Scottish total employment. We begin with more detail on the impact on the Scottish economy as a whole.

4.1 National results

For the national (Scottish) results we separately identify the impact of the exogenous shocks to the agricultural sectors and the tourism demand changes. These figures are further disaggregated by the individual elements of these changes. Results are given for 2001 and 2006.

4.1.1 Agricultural results

The agricultural simulation results are broken down into six separate components:

• the export ban

• the production implications of the cull of trading animals

• the compensation payments for trading animals

• the implications of the movement restrictions

• the production implications of the cull of breeding animals

• the demand implications of the restocking of breeding animals

A summary of the year-one agricultural results is given in Table 4.1. In all cases except for the production implications of the cull of breeding animals and demand-side effects of restocking, the impacts are for the year 2001. The direct effects of these shocks were wholly, or primarily, felt in the year of the outbreak. For the supply impacts of the cull on breeding animals and the demand impacts of restocking, the figures are for the year 2002.

Focusing first on the total effects, what is most striking is the very small scale of the effects when measured against the national aggregates. The negative net impact on Scottish GDP of all the first year effects is 33.88million (measured at 1999 prices). This represents 0.05% of Scottish GDP. Similarly the effects on employment are extremely small when measured in proportionate terms.

Table 4.1: Year one (2001) results of Agriculture simulations - national level

Note: By year one we imply the first year that the measure is in operation. For most of the measures this is 2001 but for the Cull of Breeding Animals and Restocking Demand-shock effects will begin in 2002.

We now consider the individual measures in turn. The export ban generated an estimated fall in Scottish total GDP and employment of 23.66 million and 1416 jobs. The fall in total employment is greater than the fall in agricultural employment, which is estimated as 913. This is primarily because the ban affects "Meat Processing" exports so that there are significant job losses in this sector also. The direct incorporation of the "Meat Processing" sector in this ban plays a part in the relatively high GDP impact here.

The supply impact of the cull of breeding animals is to reduce GDP, total employment and agricultural employment. In this case agricultural employment is hit the hardest, with a much smaller reduction in total employment. The smaller fall in the total employment is a consequence of the easing of the labour market and the implied income effects on unaffected farms of reduced supply from farms subject to the cull.

We treat the compensation payments as a demand shock: that is to say, the government purchases the animals that have to be culled. This has a sizeable impact on employment, particularly in agriculture. This treatment captures the payments to intermediate inputs and wages that would be made for these animals that fail to reach the market. This has an implied positive impact on GDP of 3.88million and leads to an increase in agriculture employment by 1343.

Movement restrictions are the third effect that would operate in the first year (2001). These have a negative impact on Scottish GDP of 3.66 million. However, the reduced efficiency produces an increase in agricultural employment. This is the expected result if the demand for labour is inelastic, which is often the case for individual sectors in the short run. The reduced efficiency requires more intensive use of labour but also higher costs. The net effect is therefore the impact of offsetting factors. There is some crowding out of employment in other sectors so that in total the increase in employment in Scotland as a whole is very small.

The cull of breeding animals as a result of FMD produces a reduction in the capital stock in agricultural sectors and a resulting fall in Scottish GDP of 9.30 million. The fall in capital stock reduces the physical marginal product of labour product and generates a fall in agricultural employment of 123. The decline in total Scottish employment is greater at 181. However, restocking produces a major demand boost to the agricultural sector, increasing agricultural employment by 770, and total Scottish GDP by 1.42 million. The total increase in Scottish employment is smaller at 603 implying some crowding out. The restocking effects begin to operate in 2002. They produce a net boost to the economy in that year. Broadly the net combined impact on employment and GDP of all the agricultural shocks in the year 2001 is negative but will be positive when the restocking effects begin to take place.

The compensation policy and the restocking of breeding animals produce significant positive employment effects, but these are not large enough to offset the combined effect of the export ban and the cull so that a year one reduction of 1307 in "Agricultural" employment and 896 in total employment is recorded.

Table 4.7 below shows the results from some sensitivity analysis applied to the export ban. The central estimate took the reduction in exports from the "Meat Processing" sector to the rest of the world to be 55%. Here we give the results from a low estimate and a high estimate of the reduction in exports to the rest of the world being 45% and 65% respectively. These results show a large variation in GDP and total employment between these limits.

Table 4.7: High and low year one estimates of the impact of the export ban

Table 4.2: Results for the Agricultural simulations by 2006 - national level

Note: The Restocking Supply-side and Restocking Demand-side results for year five are for the fourth year of operation.

Year 5 simulation results are given in Table 4.2. This is the impact in 2006, against the counterfactual of what would have occurred if the FMD outbreak had not taken place. Recall that most of the direct effects only apply in the years 2001 and 2002, with even the restocking of breeding animals subsequent to the cull mainly occurring in 2002. The only continuing direct impact of FMD is a small reduction in capital stock due to incomplete replacement of breeding animals. However, there are capital stock and population adjustments that will continue over time, so that there is some persistence in effects (but note that these are very small).

4.1.2 Tourism results

The period 1 results for the individual tourism shocks are given in Table 4.3. Again the central point to emphasise is the very small proportionate changes at the national level. Overall, the simulations identify a 2,134 fall in employment in Hotels and Catering, which is a 1.9% reduction in this sector. However, the total employment fall is very small, at 305. There are two reasons for the relatively small number. First, as the demand for labour falls in the Hotels and Catering sector as a result of the fall in tourist expenditure, there will be a weakening in the labour market and some crowding in of employment as the wage rate falls. Second, some of the fall in expenditure on Scottish tourism in Scotland and on daytrips will be replaced by general consumption expenditure. This expenditure shifting is one of the factors producing the positive GDP impact.

Table 4.3: Year one (2001) results of the Tourism simulations - national level

If we look at the individual columns in Table 4.3, it is useful to initially separate out the tourist expenditure from daytrips. For tourist expenditure, the impact on total employment is greatest for the reduction in Scottish Tourism in Scotland, then RUK Tourism and finally ROW Tourism. The same ordering applies to the impact on Scottish GDP, where again the reduction in domestic tourism has the biggest negative impact. However, we need to remember that reduced Scottish Tourism in Scotland will be at least partly offset by increased general (non-tourist) consumption expenditure as frustrated domestic tourists spend their income on other commodities and services. This is incorporated as part of the expansion in household expenditure.

The result for Daytrips is the least straightforward. Although the estimated reduction in expenditure is large, its commodity composition is very different from the other tourism categories. The daytrips expenditure pattern is much less concentrated on "Hotels and Catering" and more focussed on the "Retail and Wholesale" and "Business and Communications" (essentially transport) sectors. There is therefore a relatively small fall in employment in Hotels and Catering, but accompanied by a much larger fall in "Retail and Wholesale" and a small rise in GDP.

To derive the net impact of the changes in expenditure on Scottish Tourism in Scotland and Daytrips, the impact of the expenditure displaced to other types of consumption should be added. Summing the employment results in these three columns - Scottish Tourism in Scotland, Daytrips and Displaced Household Consumption - reveals an employment surplus. The employment impact of the Displaced Household Consumption is greater than that of the reduced expenditure on Scottish Tourism in Scotland and Daytrips ⁹. There is a sizeable positive GDP effect as well.

The sectorally disaggregated impact of the displaced Household Consumption is shown in Table D.2 in Annex D. Generally the sectors which benefit are primarily Wholesale and Retail and Recreation.

Table 4.4: Results of the tourism simulations by 2006 - national level

Table 4.4 gives the impact of the changes in tourist expenditures related to the FMD outbreak on the Scottish economy in 2006. Again it is important to remember that this is against the counterfactual of the operation of the economy without FMD. Also, in this case there are no continuing exogenous impacts on tourist expenditure after 2001. While evidence on tourism expenditure in Scotland appears to indicate that there has generally been a return of aggregate tourism activity to levels similar to before the FMD outbreak, current regional results suggest that some regions have gained at others expense. As can be seen in the table, the changes in "Hotels and Catering" are, by 2006, very small. Any impact on the economy is coming from persisting capital stock and population adjustments. It is perhaps appropriate to mention also that if firms and individuals thought that the FMD outbreak would only imply a temporary shock to the economy, the 2006 results would be even smaller.

4.2 Regionally-disaggregated results

4.2.1 Agriculture results

The regionally-disaggregated employment impacts in year one are given in Table 4.5. The infected rural region is hardest hit by the impact of the cull of trading animals and the supply implications of the cull of breeding animals. Also, whilst this region benefits most from the compensation payments it does not experience the positive demand stimulus received from restocking. There are employment gains associated with the agricultural disturbances linked to FMD coming primarily from the spillover effects from the cull of trading animals and the restocking of breeding animals.

Table 4.5: Scottish employment changes as a result of Agriculture shock

Table 4.6 shows the regionally-disaggregated year one GDP impacts for agriculture. The negative GDP impacts are clearly skewed towards the infected rural regions. Apart from benefiting from cash injections via compensation payments for trading animals, all the other elements associated with the impact of FMD on agriculture generate a negative GDP change in the rural infected regions. The uninfected rural region experiences an increase in GDP overall as a result of the agricultural elements of the FMD outbreak.

Table 4.6: Scottish GDP changes as a result of Agriculture shock (£, millions)

4.2.2 Tourism results

Table 4.7 gives the total employment change, broken down by region and tourism type, generated by the tourist adjustments in Scotland following the outbreak of Foot and Mouth disease. This is for the year 2001. In aggregate there are employment losses in the two rural regions, but a significant employment gain to the urban region. The explanation is that if we simply consider the tourism changes, that is the RUK, ROW, Scottish Tourism in Scotland and Daytrips, then the net impact in all regions is negative. However, the impact on urban region is small, reflecting gains from crowding-in in the labour market in that region. However, once the impact of increased displaced household consumption is included, there is a net benefit to the urban region. What is evident is the large relative negative impact on the non-infected rural region. This is due to the high initial incidence of tourism and daytrip expenditure in this region.

Table 4.7: Scottish employment changes as a result of Tourism shock

Table 4.8 presents the same information except for changes in GDP. In this case urban and the infected rural area is identified as receiving an increase in GDP. This comes from adjustments in the composition of output as well as the overall level of activity. Again the uninfected rural regions experience a fall in GDP.

Table 4.8: Scottish GDP changes as a result of Tourism shock (£, millions)

It needs to be understood that a degree of imprecision is associated with all modelling work, particularly of this scenario type. However, in this case we also had difficulty in accurately determining the direct external shock to the model associated with the impact of FMD on tourist expenditure. It was difficult to disentangle the various influences on tourism, including the fall out from the September 11 ^th terrorist attack. We therefore have given explicit high and low estimates for the GDP impacts - the magnitude of which are shown in Table 3.8.

Results using low estimates of the direct exogenous shock to tourism expenditure are shown in Table 4.9 below. With lower direct losses from all forms of tourism spending, and thus lower positive displaced household consumption, the overall impact on GDP is smaller than for the central estimate, but remains positive.

Table 4.9: Year one (2001) results of the Tourism simulations - national level - low estimates

Table 4.10: Year one (2001) results of the Tourism simulations - national level - high estimates

For the high estimate, the larger shock to both Scottish Tourism in Scotland and Daytrips leads to larger displaced consumption, resulting in a positive shock to GDP of 14.6 million. Overall, employment change remain very small at the national level, but households' increased spending on consumption at the expense of tourism spending leads to a fall in employment in the "Hotels and Catering" sectors of 2500, or 2.2% of employment in this sector.

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