Bastien Drut
email: bastien.drut@gmail.com

Gaël Raballand
email: graballand@yahoo.com

The Impact of Governance on European Football Leagues' Competitiveness

Keywords: JEL Classification: L83 Ligue Française de Football, Deutsche Fußball Liga, football clubs, competitiveness, governance

The sharp increase in TV broadcasting rights and the liberalization of the transfer market has completely reshaped the balance of power in European football, both within and between the different leagues. A trade-off has emerged with leagues whose teams perform well in the Champions League suffering financial inequality and clubs in financial difficulty, while those leagues which are less successful in the Champions League enjoy relative financial equality and less debt. The English, Italian and Spanish leagues are in the first category while the French and German leagues are in the second category. Based on interviews with several stakeholders, this paper demonstrates that this is mainly explained by the extent of financial regulation, which depends on leagues' and clubs' governance. It also discusses the role of UEFA and assesses the impact of the introduction of the financial fair-play rule.

Introduction

The current financial crisis and Portsmouth's placement into administration is increasingly worrying the management of the European professional football leagues. The accumulated debts of some of the biggest European clubs amount to several billion Euro. Many clubs are threatened with bankruptcy. The Premier League is particularly subject to criticism (Conn 2010.1).

The sharp increase of TV broadcasting rights and the liberalization of the transfer market [START_REF] Ericson | The Bosman Case, Effects of the Abolition of the Transfer Fee[END_REF] has reshaped the balance of power, both within and between leagues. An opposition has emerged between leagues whose teams perform well in the Champions League but suffer from inequality and financial difficulties, and leagues which are less successful in the Champions League but enjoy relative financial equality and less debt. Focusing on the five big European leagues, the English, Italian and Spanish leagues come in the first category whereas the French and German leagues fall in the second. The sporting success of the former leagues is linked to debt accumulation: clubs borrow to acquire talented players and to pay them high wages. Gay de Liebana y Saludas (2009) estimates the aggregate debt of the twenty Spanish elite clubs at 3.5 billion Euro.

It is well known that the extent of financial regulation explains why Germany and France lag behind England, Italy and Spain. However, few articles explain why financial regulation has emerged in Germany and France and not in the other major leagues 4 . Based on interviews with major stakeholders in France and Germany 5 4 An attempt was done in Andreff (2007a) for the French league. [START_REF] Franck | Private Firm, Public Corporation or Member's Association Governance Structures in European Football[END_REF] focuses on Germany to explain the German league competitiveness difficulties. 5 Representatives from the football leagues, ministry of sport and media were interviewed with a semi-structured approach.

, this paper explains how league and club governance 3 has led to a certain level of financial regulation in both countries, but not in the other leagues. In particular, it highlights the role played by the State in professional football regulation.

The paper is organised as follows. Sections 2 and 3 demonstrate the increasing gap between the German and British models in terms of leagues' competitiveness and financial performance respectively. Section 4 describes the impact of league and club governance on the extent of financial regulation. Section 5 discusses UEFA's role in this context and the last part concludes.

Leagues' Competitiveness

In this section we assess the sporting performance of the five major leagues (England, France, Germany, Italy and Spain). One of the best indicators is the UEFA league ranking because it measures the outcome of games between these leagues' clubs. It is computed from the results of the leagues' representatives in the Champions League and Europa League (formerly UEFA Cup) and is used to determine the number of teams (from a league) competing in both Cups in the next season. Figure 1 indicates the trend in rankings since 1994. The same conclusions can be drawn when analyzing the number of quarter-finalists in the Champions League since 1994 (Figure 2). English clubs have represented almost a third of the quarter-finalists in the last ten years 6 6 It is worth noting that this British supremacy was rather similar in the late 70s and early 80s [START_REF] Kuper | Soccernomics, Nation Books[END_REF].

. Italian and Spanish clubs have been just behind, whereas French and German clubs have performed much worse. Moreover, England, Spain and Italy won 11 of the 13 last Champions Leagues. Since 1999, on average, only one out of eight quarterfinalists was not from a major league, illustrating their supremacy within Europe. One might conclude that the quality of French and German football players is lower than that of British or Spanish players, but this would be mistaken. There is approximately the same proportion of French and Spanish players in the poll electing the 11 best European players for the UEFA team of the year (Figure 3). Many of the best French footballers play in England, Italy and Spain. With increased labor mobility at the European level following the Bosman ruling, the many of the best players leave their own league for a more attractive one [START_REF] Ericson | The Bosman Case, Effects of the Abolition of the Transfer Fee[END_REF]. Compared to England, Italy and Spain, the French and German leagues are less attractive for the superstars. Probably for this reason, France is the second largest source of emigrant footballers in Europe after Brazil [START_REF] Poli | Le Marché des Footballeurs. Réseaux et Circuits dans l'Economie Globale[END_REF]. England, Italy and Spain have better results in Europe but their national championships are far more unbalanced than in France and Germany [START_REF] Andreff | Equilibre Compétitif et Contrainte Budgétaire dans une Ligue de Sport Professionnel[END_REF]. Since 1992/1993, only four teams have won the title in England (Manchester United, Chelsea, Arsenal and Blackburn Rovers) while eight have won the French title (Figure 4). Except for one major club each (Olympique Lyonnais in France and Bayern München in Germany), both of which have won many titles, the championship is relatively unpredictable in France and Germany. Note : because of corruption, the title was not awarded in France in 1992/1993and in Italy in 2004[START_REF] Oughton | Improving Governance: Top-Down and Bottom-Up Strategies[END_REF] In conclusion, Spanish, Italian and above all English clubs enjoy a clear sporting superiority at the European level compared to their French and German counterparts. However, their national championships are also more unbalanced. These findings are linked to the financial situation of football clubs and therefore to the extent of financial regulation, since recurrent debts can be accumulated in some countries but not in others. The relationship between the wage bill and match results is extremely robust and has been documented extensively [START_REF] Kuypers | Winners and Losers, the Business Strategy of Football[END_REF]. For these reasons, we analyze in the next section the financial performance of the major leagues.

Leagues' Financial Performance

In the last decade the revenues of the five major football leagues dramatically increased (see Figure 5), reaching 7.9 billion Euro for the season 2008/2009 (a 90% rise since the season 1999/2000). They overshadow other European leagues such as Netherlands, Belgium and Scotland. The sharpest increase took place in the Bundesliga (130% rise) and the smallest in Seria A (57% rise). The English Premier League strongly dominates the other leagues while the French Ligue 1 lags behind.

While the revenue structure differs somewhat among the leagues, the surge in TV broadcasting rights explains the bulk of the boom. According to Deloitte (2010), on average they now account for 31 % (Bundesliga) to 60% (Seria A) of total club revenues. However, the absolute sums depend on each league's attractiveness: TV channels spend more to broadcast games with superstars. This phenomenon is clearly self-reinforcing, since leagues with higher revenues are able to attract superstars because of high wages. This is a key explanation of the league ranking presented in Section 2. However, there are large inequalities within leagues. The ratio of the 4 largest club budgets to the 4 weakest (Figure 6) is highest in Spain (6) and Italy (4.2), where TV broadcasting rights are sold individually. By comparison, the French and German leagues do not have extreme budget inequalities, while the Premier League stands in the middle. The way TV broadcasting rights are shared plays a major role in the competitive balance at the national level.

In aggregate terms, German, Italian and Spanish clubs benefit from roughly the same revenues (Figure 5), but the breakdown is far more unbalanced in Italy and in Spain than in Germany. This helps explain why top clubs in Italy and Spain are more competitive at the European level than in Germany. While clubs' revenues are obviously crucial to sporting performance, the extent of spending is even more important. This depends on the preferences of club owners. In Europe it is generally recognised that most club owners are more interested in playing success than in profit [START_REF] Késenne | League management in professional team sports with win maximizing clubs[END_REF][START_REF] Késenne | Revenue sharing and competitive balance in professional team sports[END_REF][START_REF] Késenne | The win maximization model reconsidered, Flexible Talent Supply and Efficiency Wages[END_REF][START_REF] Garcia-Del-Barro | Goal ! Profit Maximization Versus Win Maximization in Soccer[END_REF]. In recent years, most major clubs have spent most of their revenue to hire the best players [START_REF] Franck | Private Firm, Public Corporation or Member's Association Governance Structures in European Football[END_REF]; and many have borrowed heavily to finance what may be considered overspending on wages and players' transfers. Figure 7 displays the aggregate operational profit, while Figure 8 shows net profits. However, the picture differs when we look at net profits, i.e. after taking into account the trading of players. The gap between operating profit and pre-tax profit is more important in England because the value of players' contracts in the balance sheet is much higher 7 So a large part of sporting success by British, Italian and Spanish clubs can be explained by rising debt, along with sponsorship from wealthy individuals. French and German clubs perform better financially than English, Spanish and Italian clubs, but worse on the field.

This can be translated in to a win maximization model without constraint for English, Spanish and Italian clubs. However, the model is different for French and German clubs which are, de facto, not allowed to create recurrent debts.

The next section shows why clubs' economic model differs in the two countries.

The Impact of Governance on Leagues' Competitiveness

The Common Pattern of the German and French Leagues

Although league and club governance differs in a number of respects in France and Germany, the main common feature is that both leagues exert financial control over clubs.

Financial control deters clubs' owners from adopting a win maximization model, which may (but not necessarily) bring profits but at the expense of competitiveness in the Champions league.

In theory, the Italian and German models for financial regulation are relatively similar (see Table 1). However, only the German model enables to limit overspending and create indebtedness. The Spanish system places little emphasis on financial regulation, while the English approach appears relatively ineffective with the FA theoretically in charge of enforcing financial regulation. At the other extreme, the France is the only country where financial regulation is effectively enforced (which does not mean that clubs do not go in to the red). In France, the "Direction Nationale du Contrôle de Gestion" (DNCG), the financial watchdog of the professional football clubs, may impose recruitment limits and even relegation to a lower division for clubs with a recurrent deficit. This gives clubs a strong incentive to avoid deficits and borrowing [START_REF] Gouguet | The French Exception[END_REF] since going to Ligue 2 means on average an 80% loss of revenue.

Three main reasons may explain why the DNCG has become the most important tool to limit clubs' debts: a. the French attitude towards professionalism, which has given power to amateurs and unions to run the League governing body and limits club owners' power to adopt a win maximization approach, b. strong involvement of public authorities (including local authorities), which pushed for financial regulation, after they stopped financing football clubs, c.

the ruling of the supreme administrative court, the Conseil d'Etat, which confirmed the DNCG decision to relegate Bordeaux in 1991 (Revue Juridique et Economique du Sport, 1991 and [START_REF] Gouguet | The French Exception[END_REF].

However, German and French governance contexts are different which explains some of the differences in league management and how leagues instill changes.

Governance of the French league

Although the first professional league dates to the early 1930s in France, professional football was severely criticized for several decades and almost disappeared during WWII.

Aversion to professionalism in France could explain why the ruling institution of the Ligue Française de Football, the LFP board, is so unusual among the major leagues. The LFP board is mainly driven by unions' representatives, whereas club owners (Ligue 1 and 2) are in a minority. Of the 25 seats on the board, owners have only 11 (to which one seat can be added 8 , see Figure 9). Following public mediation games resumed, but club owners had to accept most of the players unions' demands in the Sport Charter (1973) and started to manage the league with unions' representatives. This can be explained by the fact that, contrary to most sectors in France, 70-80% of professional players are unionized, which makes the main union very representative. A system of common management of the league was established called the "social dialogue".

It is also worth noting that both referees' representatives and players sit on committees where, for instance, sanctions are adopted. The multiplicity of narrow interests sometimes makes achieving a consensus difficult.

The major role of unions in managing the LFP also explains why the mandate of the LFP is broader than in any other major league9 . A major part of LFP activities concerns labor law: the LFP checks and authorizes contracts10 and also mediates between club owners and players when disputes arise. Commercial activities are just one of the LFP's activities among others,11

Even more interestingly, the Government set this model in stone with a decree on professional leagues, and included the model in the sports code (2002) whereas in the DFL, Premier League and Calcio models, they are the raison d'être for these institutions.

12 Financial regulation in France also derives from the importance attached to financial equality and redistribution between clubs since WWII, but also from public intervention. In the . Therefore, in France, there is a rigid framework for any professional league, and players' unions play a major role in decision making. According to [START_REF] Frick | Crisis? What Crisis? Football in Germany[END_REF], the financial criterion prevents clubs from overspending on wages/transfers. [START_REF] Dietl | Governance failure and financial crisis in German football[END_REF] highlight the fact that in practice the licensing system is weak and may lead to creative accounting to inflate assets and hide liabilities.

Nevertheless, the extent of financial problems in Germany is not comparable to that of English or Italian clubs.

The system is illustrated in Figure 10.

Figure 10 : The German Licensing System Process

Financial regulation in Germany can partly be explained by the strong role of amateurs in professional football (albeit to a lesser extent than in France) and the aversion of clubs to takeovers by financiers. Indeed, the licensing system was introduced by the national football 14 Not to the same extent as in France. There is no independent body from the DFL to impose sanctions. association (DFB) in cooperation with the clubs. Moreover, associations (Verein in German) holds 50% plus one voting rights of any football club company (Kapitalgesellschaft), which limits the power of clubs owners [START_REF] Dietl | Governance failure and financial crisis in German football[END_REF] 15

The Common Pattern of the English, Spanish and Italian Leagues

. Interestingly, associations are managed by representatives elected by members.

One of the main problems of this peculiar governance is that, because associations are non-profit organizations, there is no incentive for them to make profits and reinvest operational gains. However, despite their potential weaknesses, [START_REF] Franck | Private Firm, Public Corporation or Member's Association Governance Structures in European Football[END_REF] argues that a vereindominated club is unlikely to accumulate debts over a long period (especially since its indebtedness capacity is low).

In England, Spain and Italy, there are no strict financial control rules enforced by leagues (even though the football association or regulatory authority may be in charge of such controls) 16Why has financial regulation not emerged in these three countries? Part of the answer lies in the fact that, contrary to France, the State has not played a major role in football regulation in these countries

. Football clubs operate as normal commercial companies, free to borrow, which explains the above financial inequality and competitive imbalance. regulations [START_REF] Walters | Corporate Governance in the English Football Industry: The Regulatory Role of the Football Authorities[END_REF]. [START_REF] Michie | New Mutualism -A Golden Goal?[END_REF] shows how ineffective the FA's monitoring is. FA rule 34 imposes a maximum dividend payout and outlaws payments to club directors. However, this rule has completely been circumvented and the FA is unable to enforce it. In both France and Germany, despite alleged conflicts of interest, financial regulation is ensured by the leagues themselves. Among the big leagues, there is no example of a football association implementing such controls itself. In England, this can be due to the fact that the FA draws most of its revenues from football leagues and is not in a position to impose rules on large clubs.

When State regulation is not possible the German model, with amateurs/non-profit organizations having a majority of club ownership, seems to limit overspending 18 . In a similar vein [START_REF] Oughton | Improving Governance: Top-Down and Bottom-Up Strategies[END_REF] and others have tried to promote the establishment of a bottom-up approach with the introduction of "supporters' trusts" (ST) to give supporters voice, and improve governance and corporate social responsibility. They advocate including ST representatives on club boards 19 Another reason why financial regulation is so weak in England, Spain and Italy could be the fact that 2 or 3 powerful clubs . This would certainly enhance club governance, but may have limited impact on overspending because -unlike the German case -the club owner remains the main person able to decide how much to spend. 20 18 To a certain extent, it is also the Barcelona model with "socios". have dominated championships and captured power in the leagues. Clubs such as Real Madrid in Spain (backed by the Spanish royal family), Juventus Turin (the Agnelli family), AC Milan (Silvio Berlusconi) are effectively in a situation of moral hazard due to the assurance that they will be bailed out if their debts accumulate; they are not therefore in favor of financial regulation, which would ultimately limit their sporting dominance [START_REF] Aglietta | Bourse et football[END_REF].

Since pressure for financial control has been weak in England, Spain and Italy in recent years, UEFA, under the leadership of its president, Michel Platini, has become increasingly involved in trying to limit indebtedness and hence financial inequality (at least for the clubs involved in UEFA contests). But can it be succeed in the current context?

Can UEFA help limit financial inequality?

UEFA was founded in 1954 by twenty national associations. Today it comprises more than fifty associations.

Aware of the impact of large clubs' overspending on UEFA cup results, UEFA has developed a mechanism (through the licensing system) to limit the indebtedness of large clubs and the gap between the budgets of large and small clubs. This is expected to lead to more unpredictable results and thereby increase the attractiveness of UEFA competitions.

The "financial fair play", as it is called, will prohibit the participation of indebted clubs in European competitions in future 21 . The rules are designed to move clubs towards break even from the season 2011-12. Clubs will be allowed to record maximum total losses over the following three years of €45m, termed an "acceptable deviation" computed on a three-year period 22 . From 2014 to 2017, the overall permitted loss will fall to €30m. After that, UEFA hopes that clubs will genuinely break even 23

21 It is based on the German licensing system concept. 22 Clubs can be subsidized by an owner but only if he/she invests the money permanently in return for shares, not by lending it. This is only allowed if such excess is entirely covered by contributions from equity participants [START_REF] Müller | Financial Stability is Financial Fair Play[END_REF]. 23 Infrastructure costs, youth development activities and community scheme expenses are not included in expenses for the computation of break-even (Müller 2010).

. Platini described the need to staunch overspending as "a question of survival for our sport", adding: "the clubs will comply," "or they will not play." According to Platini, "all the clubs were in favor. The biggest clubs were in favor because their owners do not want to keep overspending. And the smaller clubs realized it was good for them, too." (Conn, 2010.2).

Several clubs, particularly English clubs, have yet to comply. However, is it realistic to think that UEFA is going to exclude Chelsea, Manchester and Real Madrid from the Champions League for several years? Based on the DNCG, UEFA probably needs to exclude some major clubs and then have its decision confirmed by the European Court of Justice. If this is not possible, this measure may seem more symbolic than truly effective [START_REF] Raballand | Football Européen et Régulation -Une Question de Gouvernance des Instances Dirigeantes[END_REF].

Moreover, it will be difficult to take such bold decisions since in the last decade UEFA has enjoyed major commercial success with the Champions League and the boom in TV broadcasting rights (see Figure 11). UEFA currently generates large revenues through the Champions League, of which a substantial part is retained.

UEFA faces a trade-off, therefore: either it sanctions large clubs, with the risk of losing revenues and creating major tensions with these clubs, or it retains the present system at the risk of growing discontent from fans over predictable results and the possible bankruptcy of some clubs. UEFA runs the risk that the largest clubs will create their own competition if financial control is enforced (which was a major threat in the early 2000s). It is more financially attractive for UEFA to have a final between Barcelona and Chelsea than between Donetsk and Borisov, but a Barcelona -Chelsea final every year may have a negative impact on the competition in the long term (in terms of reputation and audience)).

Conclusion

Based on multiple interviews of stakeholders in France and Germany, this paper explains how league and club governance in France and Germany has enabled financial regulation to emerge and therefore a second "model" to exist. It highlights the key role played by the State and other institutional factors. There is currently a trade-off between leagues enjoying playing success in the Champions League, but also financial inequality and clubs in the red (England, Spain and Italy), and leagues with weaker Champions League results but relative financial equality and limited debt (Germany and France).

In the last five years, the gap between the leagues and clubs' vulnerability has been growing to the point that the EU and UEFA are now trying to regulate and limit overspending.

However, how realistic/likely is it that UEFA will impose meaningful sanctions on the most famous clubs in Europe? The answer is critical. If UEFA goes ahead and implements recent measures, a degree of equalization of results could be seen (although the dominance of large clubs will not disappear). If not, the gap between a handful of big European clubs and the rest will probably continue to grow.

Figure 1 :

 1 Figure 1 : UEFA leagues coefficient, 1994-2010.

Figure 2 :

 2 Figure 2 : Number of quarter-finalists of the Champions League from 1994/1995 to 2001/2002 and from 2002/2003 to 2009/2010

  Figure 3 : Percentage of players in the UEFA team of the year by nationality from 2001 to 2009.

Figure 4 :

 4 Figure 4 : Lorenz curves of the number of titles won in function of by the number of clubs from 1992-1993 to 2009-2010.

  Figure 5 : Major leagues' revenues from 1999/2000 to 2008/2009

Figure 6 :

 6 Figure 6 : Ratio of the 4 largest to the 4 smallest revenues in the five major leagues, 2008

  Figure 7 : Aggregate operating profits (in hundreds of million of Euro), 1999/2000 to 2008/2009

  Figure 9 : LFP Board Members

  1970s, several clubs went bankrupt and local councils had to do bail them out. In a context of increased legal mandates following decentralization(in 1982-83) and limited revenues, local councils became increasingly reluctant to finance excessive spending. Therefore, a consensus was found and the DNCG was established in 1984. It took several years for it to gain credibility but, following the relegation of Bordeaux and Marseille in the early 1990s, a strong signal was sent and a wide consensus seems to exist in France on the need for financial regulation (as well as for collective bargaining of TV rights and the importance of redistributing TV rights to small clubs and to amateur institutions) 13Governance of the German league . This was given legal power when the supreme administrative court in France, the Conseil d'Etat, confirmed that the sanction to relegate Bordeaux to Ligue 2 was legitimate and not disproportionate (Revue Juridique et Eocnomique duSport, 1991). Therefore, without enthusiasm, club owners had to respect DNCG rules and the win maximization model was not an option anymore in France.Licensing requirements for German clubs are specified in the DFL (Deutsche Fußball Liga) status. Among the requirements for a license, there is a financial criterion in the § 8 and annexes VII and IX of the status. A club has to submit the following documents by 15 March each year: balance sheet, profit and loss statement and profit and loss forecast for the next season. All documents have to be audited by an independent auditor and are then examined by the DFL.The German licensing process dates from the late 1960s. Financial requirements have become increasingly rigid over time. 14 Source: Müller (2010).

17

  In England, for instance, in 2003 the Football Association (FA) set up a Financial Advisory Committee with a mandate to monitor the overall financial health of clubs. A Football Regulatory Authority was created in 2005 to enforce clubs' compliance with financial .

  Figure 11: UEFA revenues trends

Table 1 : Financial Regulation and its Enforcement in the Five Major Leagues

 1

		Existence of	Which institution is in	Has any major
		financial criteria in	charge of monitoring	club	been
		the licensing	financial criteria?	sanctioned	on
		system		this ground?
	France	Yes	League	Yes
	Germany	Yes	League	No
	England	Yes	Federation	No
	Italy	Yes	League	No
	Spain	No	N/a	No

  19 Most Premier League clubs now have STs.20 Manchester United, Liverpool, Arsenal (and recently Chelsea) in England; Real Madrid and Barcelona in Spain (which have always been in the first Liga since its creation in 1930); and Juventus Turin, AC Milan and Inter Milan in Italy.

  Indeed, this reform is credible only to the extent that some clubs would be excluded from the contest. One of the first victims of the licensing system has been the exclusion of the Spanish club Real Mallorca from the 2010/2011 Europa League because of a debt accounting for 85 million euro (30 million of which is due to the public treasury).

	In the Premier League,
	Chelsea, Manchester City, Liverpool and Manchester United have all sustained substantial losses
	in recent years 24

24 Three-quarters of Premier League clubs will need to reduce significantly their spending on players' wages if they are to qualify for European competitions

(Conn 2010.2)

.

. The Premier League argued that clubs should be allowed to be continually subsidized by owners. However, it was overruled, with UEFA insisting it wanted to steer clubs across Europe towards a more sustainable existence. A Premier League spokesman stated that: "we envisage a difficult period of adjustment for our member clubs who play, or aspire to play, in European competitions"

(Conn 2010.2

). UEFA's general-secretary, Gianni Infantino, explained that if Manchester United or Manchester City qualify for the Champions League as a result of vast overspending, they will ultimately be excluded from European competitions, although "there may be intermediate measures" in the short term. "We would have to ask why, maybe there would be a warning first, but certainly, we would have to bar clubs in breach of the rules from playing in the Champions League or the Europa League. Otherwise, we lose all credibility."

The only league with major responsibilities in supervising players' contracts is the Liga.

6000 documents a year are checked and issued. ISO 9001 was issued to the legal department of the LFP for its involvement in clubs contracting of players.

Financial regulation is another important activity of the LFP, along with disciplinary procedures and managing referees.

Article R132-4.

It is worth noting that neither in France or Germany is financial regulation extremely rigid. It does not guarantee that clubs will not face financial difficulties (See Andreff 2007b for the case of France and Dietl and Franck for Germany).

The notable exceptions are Wolfsburg, owned by Volkswagen, and Leverkusen, owned by Bayer.

It is also worth noting that, except for Spain, these leagues have a limited commercial mandate.

Growing concerns by politicians in England could change the situation in future. Andy Burnham, former Secretary of State for Culture, Media & Sport, asked the FA and the Premier League to review several rules related to financial regulation in England(Walters and Hamill 2008).


David Guerreiro
email: david.guerreiro@u-paris10.fr

On the impact of US subsidies on world cotton prices: a meta-analysis approach. 

Keywords: Méta-analyse, Mixed Effect Size (MES), Coton, Subventions, Agriculture. Classification au JEL : Q17, Q18, C82 Meta-Regression Analysis (MRA), Mixed Effect Sizes (MES), Cotton, Subsidies, Agriculture. JEL Classification: Q17, Q18, C82

Malgré l'abondante littérature traitant de l'impact des subventions sur le prix mondial du coton, il n'existe pas de consensus sur la quantification de cet impact. Le but de cet article est de contribuer à ces recherches par la mise en oeuvre d'une méta-analyse. Cette méthode nous permet : (i) d'identifier les principales sources d'hétérogénéité entre les études de base, (ii) de donner certaines pistes pour améliorer la modélisation, (iii) de fournir une estimation fiable de l'effet de la suppression des subventions sur les cours mondiaux du coton. Basés sur l'estimation de différents modèles, nos résultats montrent que la suppression des subventions américaines entrainerait une augmentation des cours mondiaux d'environ 10%.

Introduction

During the 2003 Cancun summit, four Western and Central Africa countries addressed a resolution to WTO arguing that the large subsidies granted by the US and the EU to their cotton growers led to a collapse of world cotton prices. For a long time, Western and Central Africa is specialized in cotton production, and the ongoing fall of world prices (from 0.91$/lb in 1994/1995 to 0.42$/lb in 2001/2002) triggered a serious crisis in that sector inward the region.

From a theoretical viewpoint, the consequences of the subsidies are well known: the more the support is coupled to production and price, the more it is trade-distorting1 ; and the greater are the amounts, the greater are the distortions. The US and the EU are the main subsidizers in the world (Table 1). While in 2004/2005, the export cotton market was estimated at 8 billion dollars, the amount of US and EU subsidies reached 5.5 billion. Also, even if a revision of the Common Agricultural Policy (CAP) in 2004 led to more decoupled subsidies in the EU, most of the US subsidies are still counter-cyclical, as set in the Farm Bill and in the FSRI Act (2002). From an empirical perspective, the quantification of the impact of subsidies is more difficult and results are not clear-cut. It is however a key issue to quantify these effects for at least two reasons. First, it is of a great interest to assess the economic consequences of subsidies on some less advanced countries which are very dependent from cotton. Second, it is interesting to calculate the compensations for countries that have complained to WTO2 .

Our aim in this paper is to contribute to this literature by implementing a meta-analysis to the empirical findings regarding the impact of subsidies on world cotton prices. Derived from experimental sciences, the meta-analysis is "a quantitative form of research synthesis that aims to extract useful generalizations from a large body of diverse literature" [START_REF] Longhi | A Meta-Analytic Assessment of the Effect of Immigration on Wages[END_REF]. In our view, this statistical method is not only able to set a fair quantification of the impacts of subsidies, but also to reveal the sources of heterogeneity between studies, which could, at least, give some suggestions to improve the modeling.

The rest of the paper is organized as follows. Section 2 presents the primary studies, the data and the methods used in our meta-regression. Section 3 is dedicated to our results. Section 4 summarizes our main findings and concludes the paper.

Primary studies, data and methods

Presentation of the primary studies and their results

Our sample is made of twelve studies3 that deal with the impact of subsidies on cotton prices (Table 2). While all these studies agree with the fact that subsidies have a depressive effect on cotton prices, the amplitude of the value of this effect is large, even within a same study. Indeed, as reported in Table 2, the mean effect size varies from 1.87% to 22%. These heterogeneous results may come from the existence of many differences between the studies. The aim of the meta-regression analysis (MRA) is to explicitly account for these differences and transform them into explanatory variables in order to quantify their impact on the effect sizes.

Database

We present here all the variables that we have constructed. Note that some of them have been excluded from our regressions because of colinearity problems. We group the explanatory variables in six categories. Some of them are dummy variables (first part of Table 3); others are quantitative (second part of the table ). One of the main limits of the MRA comes from the lack of information in some primary studies. In our case, due to data unavailability, we do not include an explanatory variable replicating the pass-through between world and domestic prices.

Econometric methods

According to [START_REF] Florax | Accounting for Dependence among Study Results in Meta-Analysis: Methodology and Application to the Valuation and the Use of Natural Ressources[END_REF], the two main issues when implementing a MRA are: (i) the heterogeneity among studies, and (ii) the dependence between studies.

 Heterogeneity As displayed in Table 2, there are important disparities among studies regarding the values of the effect sizes. To implement a MRA, one has to determine if the differences between effect sizes are "true" heterogeneity (e.g. explainable by a set of explanatory variables), or only sampling errors which do not require particular regression techniques. The usual test to assess that problem is the homogeneity test of [START_REF] Cochran | The combination of estimates from different experiments[END_REF] 4 . Unfortunately it requires the knowledge of the standard errors associated to the effect sizes, an information that is not provided by the studies that constitute our sample. Nevertheless, as [START_REF] Longhi | A Meta-Analytic Assessment of the Effect of Immigration on Wages[END_REF] emphasize, the larger are the number of effect sizes, the higher is the probability that the homogeneity test decides heterogeneity, even if differences between effect-sizes are very small. Since we have 98 effect sizes, we think that our MRA is relevant. [START_REF] Nelson | The Use (and Abuse) of Meta-Analysis in Environmental and Natural Resource Economics: An Assessment[END_REF] make a typology of the different kinds of heterogeneity and the way to model them. As they argue: "it is not reasonable to expect that a meta-regression can explain all of the variation present in the data, either due to observables, or because the estimates are drawn from a distribution of population effects". On the whole and based on these arguments, we consider that heterogeneity is partially explainable and model it through relying on the Mixed Effect Sizes (MES) methodology. In what follows, we estimate the equation:

γ ij = α 0 + β 1 x 1ij + β 2 x 2ij + …+ β 1 x Kij + u i + ε i (1)
where:

γ ij are the effect sizes estimated by each study; -α 0 is the mean between studies; -x 1ij , x 2ij , …, x Kij are the explanatory variables; -u i are the random-effects; -ε i is the sampling estimation error; -i is the study index and j the study result index.

As seen in Table 2, our panels are unbalanced since the studies have not the same number of effect sizes. Thereby, our results are automatically heteroskedastic [START_REF] Baltagi | Econometric Analysis of panel data[END_REF], affecting the estimations of the parameters' variance [START_REF] Nelson | The Use (and Abuse) of Meta-Analysis in Environmental and Natural Resource Economics: An Assessment[END_REF].

 Dependence Dependence between effect sizes arises for three main reasons [START_REF] Nelson | The Use (and Abuse) of Meta-Analysis in Environmental and Natural Resource Economics: An Assessment[END_REF]:

-they share some common observable features, such as data or modeling approaches; -they share some common unobservable features, such as the pass-through between world and domestic prices; -studies provide more than one effect size. The first problem can be easily solved thanks to the explanatory variables we set in Table 3. The two others are much difficult to deal with and create multidimensional autocorrelation.

In order to correct our model from heteroskedasticity and cluster correlation, we use an extension of the Huber-White estimator consistent with within-cluster correlation in our random-effect regressions5 .

Models and results

Before proceeding to the estimations, we correct our effect size from outliers by applying the Hadi's method [START_REF] Hadi | Identifying Multiple Outliers in Multivariate Data[END_REF][START_REF] Hadi | A Modification of a Method for the Detection of Outliers in Multivariate Samples[END_REF]. We find that the last estimate of Sumner ( 2006) is an outlier. We thus drop this observation from our sample which is now composed by 97 observations.

Models

We estimate three models (Table 4). This allows us to investigate different ways to account for elasticities, and also to conduct a sensitivity analysis in order to test the robustness of our results. The Breusch-Pagan test is used to determine if the model is well specified (i.e. random individual effects are significantly different from 0), or if the Fixed Effect Sizes (FES) modeling would have been used. The p-values indicate that random individual effects are significant, meaning that our equations are well specified. Some variables (OTHER, ESSUB, and ESNSUB) have been dropped due to multicolinearity problems.

Results

Model (1) considers average price-elasticities of supply and demand. Model (2) tests the assumption made by [START_REF] Araujo Bonjean | L'impact des aides américaines et européennes sur le marché international du coton : résultats d'un modèle d'équilibre partiel dynamique[END_REF] that increases in cotton price are higher in the following cases: (i) subsidizer countries present price-elasticites near |1|, and (ii) nonsubsidizer countries present price-elasticities near 0. Finally, model (3) focuses on the priceelasticities of one of the most important country in cotton market, namely China. Despite these differences, our results appear to be globally robust since coefficients and their significance are largely stable. They have a good overall explanatory power (R 2 > 0.6), even if they better explain inter study differences (with R 2 around 0.7) than intra study (R 2 = 0.41).

Our key finding is that a withdrawal of US subsidies will increase the world cotton price by about 10%. Let us now pay a special attention to the explanatory variables effects.

 Cotton market modeling

This category is what Stanley and Jarrel (1989) calls "the selected characteristics of the authors of the primary literature". The assumptions made by the authors on the cotton market to construct their modeling are not the same. The principal differences we set are the (non) inclusion of stocks, the (non) existence of a substitute to cotton, and the price of model calibration. We try to control for the inclusion of stocks and the existence of a substitute by two dummy variables: STOCKS and SUBSTITUTE. Our findings show that they have antagonist effects. In (1), stocks modeling increases the effects of US subsidies removal by 3.8 points, whereas taking into account the existence of a substitute lower it by about 2.3 points. In (2), SUBSTITUTE is not significant anymore, and STOCKS is significant only at the 10% level. In (3), both STOCKS and SUBSTITUTE are significant (at the 1% significance level). The impact of eliminating the US subsidies on world cotton prices is increased by 5.8 points according to STOCKS, and lowered by 3.2 points regarding SUBSTITUTE. PRICE is a quantitative variable accounting for discordances in price calibration. Most of the studies forecast the impacts of subsidies. In order to do so, the authors must previously forecast cotton prices to calibrate their models. These forecasted prices differ across studies. The effects are quite the same in all models. We notice that when the forecasted price increases by one dollar, world cotton prices decrease approximately by 0.123%. The higher are forecasted prices, the lower is the increase in world cotton prices.

 Data

The data may be an important source of differences between studies. It belongs to the "specification variables" category [START_REF] Stanley | Meta-Regression Analysis: A Quantitative Method of Literature Surveys[END_REF]. Our data category is composed by a single variable (ICACUSDA) and a family variable (US/EU/WORLD) where US is the omitted. ICACUSDA specifies the origin of data, and the family variable US/EU/WORLD models the subsidies amounts: subsidies level evolves according to the amounts granted by each country. Since this information was not provided by primary studies, we choose to classify subsidies by provenience. ICACUSDA is significant at the 1% level in all the models and induces an increase of 4.9 points in (1), 4.8 points in (2), and 4.2 points in (3). EU and WORLD variables have the expected signs, and the coefficients are equivalent between the models. If only European subsidies are accounted for, the effects comparing to US subsidies withdrawal fall by 5.1 points in ( 1) and ( 2), and 5.3 points in (3). If world subsidies are accounted for, then effects are increased by 6.5 points in (1), 4.8 points in (2) and 7.6 points in (3).

 Type of subsidy distortions

As mentioned in Section 1, the more the subsidies are coupled to price or production, the greater are the distortions they induce in international trade, and then in world prices. However, several studies do not report the way they account for the distortions. This category aims to control that lack. Our models show that when the type of distortions induced by subsidies is not reported, the increase in world price is lowered by 5.3 points in (1), 5.7 points in (2), and 5.6 points in (3).

 Econometric model

As data or subsidy provenience, this category can be classified in "specification variables". It is composed by a family variable where P-E is the omitted. Unfortunately, we could not include the explanatory variable OTHER in any model because of colinearity problems.

Compared to E-P, EDM seems to have an increasing effect. Indeed, the impact of removing the US is increased by approximately 3 points when primary studies employ an equilibrium displacement model.

 Elasticities

Unlike PRICE, elasticities are quantitative variables. In model (1), the elasticity of supply is not significant. On the contrary, the demand elasticity is significant and has a positive sign. At first sight, this relation may appear wrong, but we have to remember that the values of the elasticity of demand are negative. It makes sense that an increase of 1% of the elasticity of demand (i.e. a decrease of the sensitivity of demand relating to the price) leads to an increase of world cotton price of 0.066%. In model (2), we could not test Araujo's assumption because of problems of colinearity. In model (3), China's supply and demand elasticities are significant. A one percent increase of China's supply elasticity (i.e. a rise of supply sensitivity relating to the price) leads to an appreciation of world cotton price of 0.011%, and a one percent increase in China's demand elasticity (i.e. a decrease of demand sensitivity relating to the price) leads to an appreciation of world cotton price of 0.088%.

The explanatory variables study indicates that the main sources of heterogeneity are found in (i) "the selected characteristics of the authors of the primary studies", (ii) the data, and (iii) the values of supply and demand price elasticties.

Conclusion

The aim of this paper was to investigate the effects of US subsidies on world cotton prices. To this end, we rely on a meta-regression analysis, which allows us to quantify these impacts.

Using various models to derive robust conclusions, our findings show that a withdrawal of US subsidies would increase the world cotton price by around 10%. There is however some heterogeneity across studies regarding the value of the effect sizes. Our results indicate that this heterogeneity comes from three main sources. The first one is the data: the amount of subventions set by the ICAC is higher than that announced by WTO, showing that, despite the juridical definition proposed by WTO6 , it is very difficult to classify the support. The second source comes from "selected characteristics", and we think that future studies dealing with the impact of subsidies on cotton prices must account for the stocks modeling and the existence of a substitute. Finally, the last source relies on price-elasticity values, especially those of major actors.

Table 1 . Amount of US and EU Subsidies between 2000 and 2008 (in Millions of Current Dollars).

 1

		2000/01	2001/02	2002/03	2003/04	2004/05	2005/06	2006/07	2007/08
	US support	NR	3706	3336	1722	4484	NR	3599	1185
	European	675	720	820	963	1060	NR	NR	NR
	support

Note: NR: not reported. Sources: ICAC (website, 2008) and DG AGRI.

Table 2 . Primary Studies and Effect Sizes. Authors Number of Effect Sizes Subsidies Time Period Effect Sizes Minimum Maximum Mean Araujo-Bonjean et al. (2007)

 2

		26	USA, EU	2002/2003 and	0.39%	16.7%	3.81%
				2003/2004
	FAPRI (2005)	2	ALL	2001/2002	2.93%	11.4%	7.18%
	Gillson et al. (2004)	4	USA, EU,	2001/2002	18%	28%	22%
			CHINA
	Goreux (2003)	15	USA, EU,	1997/2002	5.2%	15.2%	10.32%
			CHINA
	Plastina (2007)	6	USA, EU,	2005/2006	0.7%	10.3%	3.43%
			OTHERS
	Pan et al. (2005)	2	USA	Simulation	0.45%	3.87%	2.1%
	Pan et al. (2006)	9	USA	1999/2008	1.9%	2.05%	1.97%
	Poonyth et al. (2004)	10	USA	1996/2000	2.3%	11.4%	6.18%

Reeves et al. (2002)

		2	ALL	2000/2001	2.2%	2.3%	2.25%
	Sumner (2003)	9	USA	1999/2008	7.74%	17.7%	11.58%
	Sumner (2006)	10	USA	1999/2009	5.36%	19.74%	10.65%
	Tockarick (2003)	3	ALL	2000/2001	0.8%	2.8%	1.87%
	Whole	98	-	-	0.45%	28%	6.6%

Table 3 . Meta-Independent Variables.

 3

	Category	Variable	Feature		Frequency
	Cotton market	STOCKS	1 if a study models cotton stocks.		57.1%
	modeling	SUBSTITUTE	1 if a study models a substitute to		37.8%
			cotton.
	Data	ICACUSDA	1 if a study uses ICAC and USDA		75.6%
			data.
		US	1 if a study tests removal of US		41.3%
			subsidies.
		EU	1 if a study tests removal of EU		15.3%
			subsidies.
		WORLD	1 if a study tests removal of world		36.7%
			subsidies.
	Type of subsidy	DNR	1 if a study doesn't report the type of		14.4%
	distortions		distortion.
	Econometric model	P-E	1 if a study uses partial equilibrium		64.3%
			models.
		EDM	1 if a study uses an equilibrium		12.2%
			displacement model.
		OTHER	1 if a study uses another model than P-		23.5%
			E and EDM.
				Mean Max Min	SD
	Elasticity supply	ES	Weighted by exporting country.	0.70	2.4	0.05 0.46
		ESSUB	Weighted by subsidizer.	0.68	3	0.15 0.54
		ESNSUB	Weighted by non-subsidizer.	0.59	3.33	0.15 0.64
		ESCHINA	China's supply elasticity.	0.55	3.6	0.14 0.71
	Elasticity demand	ED	Weighted by importing country.	-0.33 -0.05 -0.82 0.21
		EDSUB	Weighted by subsidizer.	-0.30 -0.05 -0.81 0.19
		EDNSUB	Weighted by non-subsidizer.	-0.25 -0.05 -0.75 0.14
		EDCHINA	China's demand elasticity.	-0.35 -0.05	-1	0.28
	Cotton market	PRICE	Reference price for the calibration of	0.58 0.692 0.418 0.06
	modeling		the econometric model.

Table 4 :

 4 Meta Regressions.

	Category	Variable	(1)	(2)	(3)
	Cotton market modeling	STOCKS	0.038***	0.03*	0.058***
			(0.015)	(0.016)	(0.009)
		SUBSTITUTE	-0.023***	-0.022	-0.032***
			(0.011)	(0.014)	(0.001)
		PRICE	-0.123**	-0.122**	-0.122**
			(0.061)	(0.061)	(0.061)
	Data	ICACUSDA	0.049***	0.048***	0.042***
			(0.001)	(0.001)	(0.007)
		EU	-0.051***	-0.051***	-0.053***
			(0.008)	(0.008)	(0.007)
		WORLD	0.065***	0.068***	0.076***
			(0.016)	(0.015)	(0.019)
	Type of subsidy	DNR	-0.053**	-0.057**	-0.056**
	distortions		(0.028)	(0.03)	(0.028)
	Econometric model	EDM	0.03***	0.028***	0.03**
			(0.008)	(0.009)	(0.013)
		OTHER	dropped	dropped	dropped
	Elasticity supply	ES	0.003	-	-
			(0.005)
		ESSUB	-	dropped	-
		ESNSUB	-	dropped	-
		ESCHINA	-	-	0.011***
					(0.002)
	Elasticity demand	ED	0.061***	-	-
			(0.016)
		EDSUB	-	0.03***	-
				(0.005)
		EDNSUB	-	0.042***	-
				(0.008)
		EDCHINA	-	-	0.088***
					(0.01)
	Intercept	C	0.1***	0.108***	0.103***
			(0.038)	(0.038)	(0.036)
	Random individual	U	0.087	0.062	0.026
	effects
	R 2	WITHIN	0.41	0.41	0.41

See Araujo-Bonjean et al. (2007) among others.

As Brazil in 2003.

Initially there were fifteen studies, but we remove: (i)[START_REF] Shepherd | The impact of US subsidies on the world cotton market : a reassessment[END_REF] because we could not recover the supply and demand elasticities, (ii)[START_REF] Valderrama-Becerra | The World Cotton Market: Prices and Distortions[END_REF] and[START_REF] Traoré | L'impact des subventions américaines sur le prix mondial du coton : une approche par les modèles vectoriels autorégressifs Bayésiens[END_REF] because some key-data were missing.

See Chèze (2007) for more explanations on the Cochran's test.

See Froot (1989) for a presentation of the estimator.

The green, amber, and red boxes.

 This article is an extension of a former work (Guerreiro, 2009