_Agric._ _Manuf._ _Serv_1_ by pptfiles


									           AGEC 640 – Nov. 15th, 2012
      Stylized Facts of Agricultural Policy
Cadot et al. (2004).

Three stylized facts of tariff protection:
1. Nominal rates of protection escalate with the degree of

2. Protection is higher, on average, in poor countries.

3. Rich countries protect agriculture more than
   manufacturers; poor countries do the reverse.
      Empirical political economy
      models of agricultural policy
Anderson (1995): “calibrated” CGE model
  • derives equations for comparative statics, and
  • computes results using representative numbers.

Cadot et al. (2004): stylized “endogenous tariffs”
  • structural model for simulations
  • compare outcomes to observed patterns

Masters and Garcia (2009): econometric tests
  • specifies implications of various explanations
  • estimates their magnitude and significance
    Anderson’s 1995 EDCC model
Anderson begins with the following motivation:
    “Why is it that price and trade policies in poor countries
    typically protect the infant industrial sector at the expense of
    agriculture, while the policy regime in rich countries typically
    favors farmers relative to industrialists? This pattern seems
    paradoxical, since the distribution of aggregate votes and
    wealth has the opposite sectoral bias.” (paragraph 1)
and he concludes that:
    “a distortion of the agricultural/industrial product price ratio
    has vastly different effects on the real incomes of different
    groups in rich as compared with poor countries. Indeed, those
    differences are so large that it seems hardly necessary to
    consider the relative costs of collective action by different
    groups as an explanation of policy choices.” (paragraph 4)
                  Cadot et al.
“Until recently, analysts explained these patterns of protection
largely by calling on the theory of second best…In poor
countries high trade taxes (including taxation of agriculture)
are justified by the revenue constraint that because of weak
fiscal administration cannot be met my less distortionary
instruments. In turn, protection of manufacturing has been
justified on infant-industry grounds.” (paragraph 2)

“While recognizing the validity of these considerations…an
equally if not more important reason for the observed pattern
of protection is rooted in … political economy
considerations…Governments are not passive executors of a
trade policy to maximize social welfare but agents interacting
with organized interest groups to maximize an objective
function in which social welfare is just one argument.”
(paragraph 3)
 Progression of research: 1995
Anderson was the first to quantitatively investigate the tariff-
protection pattern of agriculture relative to industry in poor
and rich countries.

Using a “stylized” Ricardo-Viner trade model, he showed
that support to farmers in rich countries raises their incomes
substantially, and reduces manufacturing incomes only

Conclusion based on an informal argument and stylized
results: lobbying efforts are likely to pursue concentrated
gains, and ignore diffuse losses.

The question of “Why?” is still not well developed…
 Progression of research: 2004
Cadot et al. use a “Grossman-Helpman” political game model
in which lobbies “bid for protection” (with $$$) and the
government maximizes a weighted average of social welfare
and contributions.

Lobbies are owners of specific capital (as in a Ricardo-Viner

Innovation: capital is concentrated (i.e. selfish) and labor is
mobile. Wage rate is not fixed, so “counter-lobbying” may
take place (e.g. by organized labor).

Protection arises “endogenously” in a way that is consistent
with the empirical patterns observed.
 Progression of research: 2009
Finally, Masters and Garcia approach the issue

Using data on observed features of economies and observed
rates of protection, they lay out a series of competing
hypotheses regarding the motivations for policy, and then ask
whether the observed data support or refute the hypotheses.

The innovation is partly that the researchers begin to address
the question of WHY the patterns might exist.
   Structure and implications of
Anderson’s political economy model
Start with a model in “free-trade equilibrium”…

then introduce a budget-neutral “tax-cum-subsidy”

(a tax-cum-subsidy is simply a policy that introduces either a tax or a
   subsidy to achieve some stated outcome)

The policy generates concentrated gains and diffuse losses:

   – if it favors industry in poor countries, (industry gains, farmers lose) and
   – if it favors agriculture in rich countries (farmers gain, industry loses)
Anderson’s model: three sectors, in two kinds of countries

                                       (Agric.) (Manuf.) (Serv.) (Agric.) (Manuf.) (Serv.)

              Why is this important?
Anderson’s results: elasticities of response

                             the payoffs
                             to capital in
                             each sector
Cadot et al. (2004)
          In Cadot et al.’s model…
Lobbies representing all sectors (indexed by j) bid simultaneously
for protection.
The “contribution” is a function of domestic price: i.e. C(p)

Where W(p) is social welfare and a is a weight that the
government attaches to social welfare.
Cadot et al.’s two propositions…
    Cadot et al.’s results (part 1)…

More protection of ag in the rich country
More protection of manuf. in the poor country
Why? Follow the specific capital…
    Cadot et al.’s results (part 2)…

With greater weight on consumers, there is less protection.
Any surprise?
      Testing political economy models
        using the Anderson et al. data
• A 3-year project at the World Bank involving 100+ researchers and
  case studies for 68 countries, 77 commodities over 40+ years
• Project results published in six books
   – Four volumes of country narratives
       • Africa (Anderson & Masters); Asia (Anderson & Martin); LAC (Anderson &
         Valdes); European Transition (Anderson & Swinnen)
   – Two global volumes
       • One with regional syntheses and reform simulations
       • One with political economy explanations for policy choices
        – Results today and next week are mostly from W.A. Masters and A. Garcia (2009),
          “Agricultural Price Distortion and Stabilization: Stylized Facts and Hypothesis Tests,” in
          K. Anderson, ed., Political Economy of Distortions to Agricultural Incentives.
          Washington, DC: World Bank.

• All available at www.worldbank.org/agdistortions
           Country coverage
          No. of          Percentage of world
         countries   Pop.        GDP     Ag.GDP
Africa      16        10          1         6
Asia        12       51           11        37
LAC         8         7           5             8
ECA         13        6           3             6
HIC         19       14           75        33
Total       68       91           95        90
                 Commodity coverage
                 (top 30 products only)

                        No. of      Percentage of world
                       Products   Production      Exports
Cereal Grains             10          84            90
Oilseeds                  6           79            85
Tropical crops            7           75            71
Livestock products        7           70            88
Total                    30           75            85
     The method: price distortions from
        “stroke of the pen” policies
• Tariff-equivalent Nominal Rate of Assistance          Pdom P free
       in domestic prices relative to free trade: NRA 
                                                                P free

• Sometimes estimated directly from observed policy:
                                                    NRA  taxes
• More often imputed by price comparison:
                      Pfree  (1  MktingCost)  ExchRate*  Pworld
• They also introduce a new “stabilization index”,
      for the standard deviations
      around trend prices:                        ˆ           ˆ
                                             sd ( Pf )  sd ( Pd )
                                         SI                         100
                                                    sd ( Pf )
                Explaining the data
The overall approach is to test for:
(1) stylized facts
 – persistent correlations with broadly-defined variables, that could
   result from many different policymaking mechanisms
(2) specific political-economy mechanisms
 – other correlations with narrowly-defined variables, as implied by
   particular theories of policymaking
 – these could explain residuals and add explanatory power to the
   stylized facts, or explain the stylized facts themselves
 – most tests are weak; only in one case do the authors have a strong
   identification strategy
             The three stylized facts
The three broad influences that are captured are:
(1) A development paradox from taxation to subsidies as
    incomes rise, as measured by real GDP per capita at PPP
(2) An anti-trade bias from taxation of both imports and
    exports, as measured by whether commodity is importable
    or exportable in each year
(3) A resource curse effect from taxation of natural resources,
    as measured by arable land area per capita (FAOSTAT)
       Seven specific hypotheses
They test for each standard theory of policy failure:
– Rational ignorance when per-person effects are small
– Free ridership when groups of people are large
  (versus more political support from larger groups)
– Rent-seeking by unconstrained incumbents (versus
  checks-and-balances from institutions and markets)
– Revenue motives for cash-strapped governments
– Time consistency of policy when taxation is reversible but
  investment is not (as opposed to simultaneous choices)
– Status-quo bias from loss aversion or conservative social
  welfare functions in politics
– Rent dissipation from the entry of new farmers (as
  opposed to free riding among existing farmers)
Next time: reviewing results of the tests of
       the seven specific hypotheses

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