An empirical analysis of global agricultural price distorting policies: 1960 to 2007.

Abstract

Economists have long been interested in measuring the extent, effects and causes of agricultural price and trade policies. The topic has drawn attention because agricultural trade between countries has almost never been free, and yet it is widely accepted that trade policy distortions affect the incentives of producers and consumers and cause a redistribution of resource use in the economy. Traditional aggregations of agricultural price and trade distortions can be poor guides to the economic effects of agricultural price and trade policies. Measures without theoretical foundation — such as simple- or trade-weighted average price distortions — may introduce biases in analysis. Recent decades have seen improvements in aggregation theory in the form of scalar index numbers of the trade- and welfare-reducing effects of price and trade policies. Despite the new theory, however, analysts have continued to use less satisfactory measures in practice. This thesis calculates partial-equilibrium versions of trade restrictiveness indices from the Anderson-Neary family of indices for agricultural policy distortions in 75 developed and developing countries over a period 1960 to 2007. The data for the empirical work are from the recently released World Bank Distortions to Agricultural Incentives database. The thesis calculates indices at the country level for the sample countries. Two partial-equilibrium indices are calculated — a Trade Reduction Index (TRI) and a Welfare Reduction Index (WRI).¹ The TRI (WRI) is the uniform trade tax that yields the same loss in trade volume (welfare) as the structure of disaggregated distortions. The results of the country-level estimates show that standard weighted averages of price distortions understate the extent of global distortion from agricultural policies. One manuscript of the thesis focuses in particular on the trade restrictiveness of agricultural policy in Sub-Sahara Africa, and finds that weighted averages greatly understate the extent of regional distortion from agricultural policy by netting out offsetting distortions in exportable and import-competing sectors. The thesis also calculates indices of agricultural policy distortions for individual commodity markets. Whereas all previous work within the trade restrictiveness indices literature has focused on constructing index numbers of distortions from the perspective of a single country, this thesis proposes taking a global view instead for individual commodity markets. Indices are estimated for 28 key agricultural commodities. Generally, the indices are well above weighted-averages of price distortions. The most distorted global markets are the milk, sugar and rice markets. The thesis also employs the Anderson-Neary framework to consider the trade- and welfare-reducing effect of individual policy instruments. The aim of the work is to determine the relative contributions of different policy instruments to reductions in global trade and welfare over time and across countries. The most significant result empirically is the importance of export taxes pre-1990s and their substantial contribution to the fall in global trade- and welfare-restrictiveness of agricultural policy over the past two decades. Finally, the thesis examines the extent to which the Protection for Sale Model (PFS) of Grossman and Helpman (1994) holds for agricultural sectors at different stages of development. The test uses a new methodology proposed by Imai, Katayama and Krishna (2008). The Distortions to Agricultural Incentives dataset is used for the analysis. The PFS model is estimated in a cross-country setting, which allows for examination of the role of different government institutional factors in PFS framework. ¹ The definition of the acronym TRI in this thesis is different to that used by Anderson and Neary and several others who have adopted their definition.