TY - BOOK

T1 - Agricultural producer support estimates for developing countries

T2 - Measurement issues and evidence from India, Indonesia, China, and Vietnam

AU - Orden, David

AU - Cheng, Fuzhi

AU - Nguyen, Hoa

AU - Grote, Ulrike

AU - Thomas, Marcelle

AU - Mullen, Kathleen

AU - Sun, Dongsheng

PY - 2007

Y1 - 2007

N2 - This report provides an analysis of the evolution of agricultural policies from 1985 to 2002 and presents empirical estimates of the degree of protection or disprotection to agriculture for India, Indonesia, China, and Vietnam. In all four countries - as in many other developing countries with smallholder-dominated agricultural sectors and weak market infrastructure and institutions - government interventions were initially pursued, in lieu of reliance on market forces, to achieve the twin goals of self-sufficiency and low food prices for consumers. The policy reform processes pursued in these countries during 1985-2002 differ in many details yet display similar characteristics. In each country there has been a movement from an autarkic and state-led setting to a more deregulated market environment with greater integration into the world economy and a new and larger role for the private sector. The agricultural reform process has often lagged reforms in other parts of the economy; it has not been uniform over time or across the countries; and it has been marked in each case by policy reversals and setbacks. However, it has been two decades since agricultural reforms began in China and Vietnam and over ten years since India extended its broad-based economic reforms into agriculture. Indonesia too has recently included agriculture more fully in its policy reform process. After a brief introduction, we describe the conceptual and measurement issues that arise in assessing agricultural protection or disprotection among developing countries, where most of the effects arise from the gap between domestic and international output or input prices, not direct subsidy payments. Next we provide a brief overview of the general economic situation in each country since the 1980s; of the pivotal role of the agricultural sector in output, employment, and trade; and of the international trade and domestic policy regimes for agriculture. With this background, we report our key results about agricultural protection or disprotection. for both specific commodities and the agricultural sector as a whole. We describe the specific coverage of commodities and budgetary expenditures by country and other unique aspects of each analysis. We present commodity-specific results and the total producer support estimate (PSE) measure computed for each country. For India and China we extend the analysis to examine the effects of exchange rate misalignment on the measures of agricultural support. Our key findings can be summarized as follows. For India, our results, based on eleven main commodities, indicate that support for agriculture has been largely countercyclical to world prices. Agricultural support has increased when world prices were low (as in the mid-1980s and the period 1998-2002) and decreased when world prices were high (as in the early and mid-1990s). The results demonstrate an increased level of budgetary payments for input subsidies to agriculture over the period of study. Yet in the aggregate, taking into account both price support and budgetary costs, the countercyclical dimension of agricultural policy dominates a clear trend from disprotection toward protection over the period 1985-2002. By using different variants of market price support (MPS) and PSEs, we also extend earlier analyses for India in several dimensions. We find that, when trade volumes are relatively small, as occurs with India pursuing a self-sufficiency policy for important commodities, the standard procedure of computing the MPS through a comparison of the domestic price to an adjusted international reference price based on the direction of observed trade can lead to a misleading conclusion about the level of support provided. Under the approach we adopt to address this reference price issue (following that of Byerlee and Morris 1993), the level of protection or disprotection is based on a counterfactual reference price (import, export, or autarky) chosen according to economic criteria as the price that would exist domestically in the country if the policy interventions were removed. We also observe that, in the standard PSE approach, the MPS measured for the covered commodities is often scaled up based on the share of these commodities in the total value of agricultural production. When the commodity coverage is less than complete, the scaling-up procedure leads to a total MPS of greater absolute value than the MPS for the covered commodities, a result that is only appropriate when MPSs for the two sets of commodities are similar. Taking these and other measurement issues into consideration, the support estimates we derive confirm that Indian agriculture was disprotected in the 1990s. More recently, high levels of subsidies were required for India to export the key food grains of rice or wheat during 2000-02, a conclusion reached by several other studies. However, we report less disprotection of Indian agriculture in the 1990s, and less protection at the end of the decade, than in earlier assessments. This difference is partly explained by the modified procedure for choosing a reference price. A large component of this difference can be accounted for by whether or not the scaling-up procedure is invoked. For Indonesia we evaluate agricultural support for four imported commodities (rice, sugar, maize, and soybeans) and two exported commodities (crude palm oil and natural rubber). The MPS and PSEs show that, in spite of the reforms, the government of Indonesia has consistently subsidized agriculture since 1990, although not uniformly across commodities. Support was interrupted briefly by the Asian financial crisis of 1997-98, but it subsequently reverted to precrisis levels and increased during 2000-02 for some crops and in the aggregate. For China our analysis is limited to the years 1995-2001. Over this short period, China's agricultural policies are estimated to have been nearly neutral (neither protection nor disprotection), although domestic prices lagged the run-up in world prices in 1996, creating negative protection for that year. For China and also for India, we evaluate the effects of exchange rate disequilibrium on the MPS and PSE measures of agricultural support. Our results show that the indirect effect of exchange rate misalignment can either amplify or counteract the direct effect from sector-specific policies. In India the indirect effects are relatively small after the macroeconomic reforms undertaken in the early 1990s. In China the exchange rate under-valuation since the end of the 1990s has had a greater impact than the direct policies, serving to subsidize agricultural output prices. Finally, Vietnam has followed China in moving from a centrally planned economy toward a market-oriented economic system under a communist political regime. Our results, covering more than 70 percent of the value of agricultural output, show that most agricultural products were taxed in Vietnam from the mid-1980s until the mid-1990s. Domestic economic reforms have opened up the economy since the early 1990s, and there has been a policy shift from an import substitution strategy toward export promotion, with decreasing disprotection changing to positive protection overall. Taken together, our measures of support and disprotection of specific crops and agriculture in total provide a reasonable basis for assessing the agricultural policies of India, Indonesia, China, and Vietnam. Our attention to measurement issues provides a form of sensitivity analysis, and the results we report are indicative of the range of outcomes likely to be found more broadly among developing countries. Starting with a regime of heavy intervention in agricultural markets, each of the four countries in our study has undergone a substantial reform process that has reduced government involvement and created opportunities for economic activities within the private sector. Nevertheless, the outcomes in terms of levels of support show clear differences. Indonesia has provided the most consistent support for agriculture, particularly food crops. India has supported agriculture when world prices are low but has disprotected key grains, including rice and wheat, as well as agriculture overall, during many years. In these two economies, the reform process does not seem to have fundamentally changed the pattern of support levels observed over the period 1985-2002. China and Vietnam, in contrast, have transitioned from communist disprotection of agriculture to providing net support to the sector.

AB - This report provides an analysis of the evolution of agricultural policies from 1985 to 2002 and presents empirical estimates of the degree of protection or disprotection to agriculture for India, Indonesia, China, and Vietnam. In all four countries - as in many other developing countries with smallholder-dominated agricultural sectors and weak market infrastructure and institutions - government interventions were initially pursued, in lieu of reliance on market forces, to achieve the twin goals of self-sufficiency and low food prices for consumers. The policy reform processes pursued in these countries during 1985-2002 differ in many details yet display similar characteristics. In each country there has been a movement from an autarkic and state-led setting to a more deregulated market environment with greater integration into the world economy and a new and larger role for the private sector. The agricultural reform process has often lagged reforms in other parts of the economy; it has not been uniform over time or across the countries; and it has been marked in each case by policy reversals and setbacks. However, it has been two decades since agricultural reforms began in China and Vietnam and over ten years since India extended its broad-based economic reforms into agriculture. Indonesia too has recently included agriculture more fully in its policy reform process. After a brief introduction, we describe the conceptual and measurement issues that arise in assessing agricultural protection or disprotection among developing countries, where most of the effects arise from the gap between domestic and international output or input prices, not direct subsidy payments. Next we provide a brief overview of the general economic situation in each country since the 1980s; of the pivotal role of the agricultural sector in output, employment, and trade; and of the international trade and domestic policy regimes for agriculture. With this background, we report our key results about agricultural protection or disprotection. for both specific commodities and the agricultural sector as a whole. We describe the specific coverage of commodities and budgetary expenditures by country and other unique aspects of each analysis. We present commodity-specific results and the total producer support estimate (PSE) measure computed for each country. For India and China we extend the analysis to examine the effects of exchange rate misalignment on the measures of agricultural support. Our key findings can be summarized as follows. For India, our results, based on eleven main commodities, indicate that support for agriculture has been largely countercyclical to world prices. Agricultural support has increased when world prices were low (as in the mid-1980s and the period 1998-2002) and decreased when world prices were high (as in the early and mid-1990s). The results demonstrate an increased level of budgetary payments for input subsidies to agriculture over the period of study. Yet in the aggregate, taking into account both price support and budgetary costs, the countercyclical dimension of agricultural policy dominates a clear trend from disprotection toward protection over the period 1985-2002. By using different variants of market price support (MPS) and PSEs, we also extend earlier analyses for India in several dimensions. We find that, when trade volumes are relatively small, as occurs with India pursuing a self-sufficiency policy for important commodities, the standard procedure of computing the MPS through a comparison of the domestic price to an adjusted international reference price based on the direction of observed trade can lead to a misleading conclusion about the level of support provided. Under the approach we adopt to address this reference price issue (following that of Byerlee and Morris 1993), the level of protection or disprotection is based on a counterfactual reference price (import, export, or autarky) chosen according to economic criteria as the price that would exist domestically in the country if the policy interventions were removed. We also observe that, in the standard PSE approach, the MPS measured for the covered commodities is often scaled up based on the share of these commodities in the total value of agricultural production. When the commodity coverage is less than complete, the scaling-up procedure leads to a total MPS of greater absolute value than the MPS for the covered commodities, a result that is only appropriate when MPSs for the two sets of commodities are similar. Taking these and other measurement issues into consideration, the support estimates we derive confirm that Indian agriculture was disprotected in the 1990s. More recently, high levels of subsidies were required for India to export the key food grains of rice or wheat during 2000-02, a conclusion reached by several other studies. However, we report less disprotection of Indian agriculture in the 1990s, and less protection at the end of the decade, than in earlier assessments. This difference is partly explained by the modified procedure for choosing a reference price. A large component of this difference can be accounted for by whether or not the scaling-up procedure is invoked. For Indonesia we evaluate agricultural support for four imported commodities (rice, sugar, maize, and soybeans) and two exported commodities (crude palm oil and natural rubber). The MPS and PSEs show that, in spite of the reforms, the government of Indonesia has consistently subsidized agriculture since 1990, although not uniformly across commodities. Support was interrupted briefly by the Asian financial crisis of 1997-98, but it subsequently reverted to precrisis levels and increased during 2000-02 for some crops and in the aggregate. For China our analysis is limited to the years 1995-2001. Over this short period, China's agricultural policies are estimated to have been nearly neutral (neither protection nor disprotection), although domestic prices lagged the run-up in world prices in 1996, creating negative protection for that year. For China and also for India, we evaluate the effects of exchange rate disequilibrium on the MPS and PSE measures of agricultural support. Our results show that the indirect effect of exchange rate misalignment can either amplify or counteract the direct effect from sector-specific policies. In India the indirect effects are relatively small after the macroeconomic reforms undertaken in the early 1990s. In China the exchange rate under-valuation since the end of the 1990s has had a greater impact than the direct policies, serving to subsidize agricultural output prices. Finally, Vietnam has followed China in moving from a centrally planned economy toward a market-oriented economic system under a communist political regime. Our results, covering more than 70 percent of the value of agricultural output, show that most agricultural products were taxed in Vietnam from the mid-1980s until the mid-1990s. Domestic economic reforms have opened up the economy since the early 1990s, and there has been a policy shift from an import substitution strategy toward export promotion, with decreasing disprotection changing to positive protection overall. Taken together, our measures of support and disprotection of specific crops and agriculture in total provide a reasonable basis for assessing the agricultural policies of India, Indonesia, China, and Vietnam. Our attention to measurement issues provides a form of sensitivity analysis, and the results we report are indicative of the range of outcomes likely to be found more broadly among developing countries. Starting with a regime of heavy intervention in agricultural markets, each of the four countries in our study has undergone a substantial reform process that has reduced government involvement and created opportunities for economic activities within the private sector. Nevertheless, the outcomes in terms of levels of support show clear differences. Indonesia has provided the most consistent support for agriculture, particularly food crops. India has supported agriculture when world prices are low but has disprotected key grains, including rice and wheat, as well as agriculture overall, during many years. In these two economies, the reform process does not seem to have fundamentally changed the pattern of support levels observed over the period 1985-2002. China and Vietnam, in contrast, have transitioned from communist disprotection of agriculture to providing net support to the sector.

UR - http://www.scopus.com/inward/record.url?scp=34547125101&partnerID=8YFLogxK

U2 - 10.2499/9780896291607RR152

DO - 10.2499/9780896291607RR152

M3 - Project report/research report

AN - SCOPUS:34547125101

SN - 9780896291607

SN - 089629160X

T3 - Research Report of the International Food Policy Research Institute

BT - Agricultural producer support estimates for developing countries

ER -