Directory UMM :Data Elmu:jurnal:A:Agricultural Systems:Vol63.Issue3.Mar2000:

Assessing the expected welfare e€ects of

biotechnological change on perennial crops

under varying economic environments: a

dynamic model for cocoa in Malaysia

N. Gotsch

a,

_{*, R. Herrmann}

b

a_{Agricultural Economics, Swiss Federal Institute of Technology (ETH), CH-8092 Zurich, Switzerland} b_{Agricultural Policy and Market Research, University of Giessen, Senckenbergstr. 3, D-35390 Giessen, Germany}

Received 1 July 1999; received in revised form 8 October 1999; accepted 16 February 2000

Abstract

A dynamic model is developed for the ex ante measurement of research bene®ts resulting from the adoption of biotechnological innovations for perennial crops. It is implemented empirically for cocoa in a large producer country, namely Malaysia, and all other countries as an aggregate. The sensitivity of the model is investigated with regard to variations of exo-genous factors (growth rate of supply, wages, discount rate). The price and quantity e€ects resulting from the adoption of new cultivars in Malaysia are relatively small. Malaysian pro-ducers and consumers gain, whereas the fact that propro-ducers' losses are more or less o€set by consumers' gains in the Rest of the World illustrates the distributive e€ect of Malaysia's adoption of improved cultivars. The most sensitive reaction is exhibited by an increase in the

supply growth rate in the Rest of the World.#2000 Elsevier Science Ltd. All rights reserved.

Keywords:Economic surplus; Supply shift; Vintage model; Biotechnological progress; Cocoa

1. Introduction

Biotechnology has become the major source of technological progress in agri-culture and its greatest impact will be felt in production (Buckwell and Moxey, 1990) where it will lead to an enhancement of the productive potential of plants and animals

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and a reduction of production losses attributable to pest and disease attack. Although our knowledge regarding the economic impacts of research-induced supply shifts has improved signi®cantly over the last decade (Alston et al., 1995), the economic impact of agricultural biotechnology on both producers and society has not been elaborated in detail for individual crops and countries. In particular, this applies to developing countries. Given this background, the ®rst objective of this paper is to investigate how the introduction of modern crop biotechnology on one major export market of developing countries, i.e. cocoa, a€ects consumers, producers and the society in an innovating developing country and the Rest of the World (ROW) as an aggregate.

Some hypotheses are already available concerning likely impacts of agricultural biotechnology on producing countries. Improved resistance of plants and animals to pests and diseases may lead to a reduction of expenditures on purchased inputs. Another aspect is that many developing countries rely almost exclusively on agri-cultural exports as a source of foreign exchange. Kalter and Tauer (1987) expect that the development and adoption of biotechnological advances will further aggravate the long-term decline in real agricultural prices owing to enhanced physical output. Possible impacts resulting from the adoption of these technologies must be antici-pated in order to prevent potentially socially undesirable consequences.

Alston et al. (1995) describe a comparative-static model for the quanti®cation of welfare e€ects resulting from research-induced supply shifts of competitive indus-tries. This paper addresses the dynamic aspects of supply response. The standard welfare approach of Alston et al. (1995) is adjusted to account for the time path after initial adoption and then applied to the speci®c requirements of perennial crops. The model is implemented empirically for Malaysia, on the one hand, and all other countries (that are not in a position to adopt the same technology) as an aggregate, ROW, on the other hand.

Producers and consumers in Malaysia bene®t as a general economic e€ect of their country's adoption of improved planting material. The losses su€ered by producers in the ROW are approximately o€set by consumers' gains as real prices fall. The sensitivity analysis reveals that the most sensitive reaction is exhibited by an increase in the supply growth rate of the ROW.

2. Calculation of the research-induced supply shift for perennial crops

2.1. The new planting decision

Signi®cant adjustment costs are incurred by changes in tree stock in general and the technical change represented by new planting material in particular. Long-run responses include changes in capacity and are more complicated. One source of dif-®culty is the need to make assumptions on how much signi®cance economic agents attach to their expecte d future earnings in their decision-making. Burger and Smit (1997a) provide an overview of the central issues in the theory of replanting perennial crops. However, no study on perennial crop supply has explicitly surveyed the farm-ers on their expectations. It has generally been assumed that there is a relationship

between prices and costs in the recent past, or in the present and those expected to prevail in the future. While the same approach is pursued, it is also determined which of the past prices appears most informative. Actual net presents values (NPVs) are used incorporating technical information for each tree age group with regard to bene®ts and costs and for two types of planting material. The NPV, with a suitable discount factorr, indicates the present value of an investment, in our case of new planting 1 ha of cocoa. In addition, anticipated prices determine the lengths of the life-cycles. This permits the application of the same function to a situation where a new technology becomes available.

Burger and Smit (1997a) stress the importance of the time-frame to be considered in the analysis. They propose that not merely one cycle of trees of agei(i=1,. . .,I) should be considered for the calculation of the NPV but an everlasting series of

cycles, each lastingIyears. If the decision-maker considers growing the crop, it will

be replanted at the age that is felt to be the most advantageous and this continues in all future cycles. INCi,tis de®ned as the net income fromi-year-old trees, as expected

in yeart,and ageIas the age for replanting. In this case, the NPV due to the net

income from 1 ha of cocoa in yeartforonecycle ofIyears duration amounts to:

NPVONEI;t

XI

iˆ0 INCi;t

…1‡r†i …1†

To convert NPVONEI,t into the NPV of an expected net income from an

ever-lasting series of I years, NPVINFI,t, NPVONEI,t is divided by 1ÿ1/(1+r)I which

The decision rule with regard to the optimum tree age for replacement is that tree

age I is preferred to tree age Iÿ1 if the NPV of an expected net income from an

everlasting series of trees replanted at ageIis higher than the NPV of an expected

net income from an everlasting series of trees replanted at age Iÿ1. In particular,

NPVINFMAXI,t is the NPV of that tree ageI for which the expected net income

from an everlasting series reaches its maximum. This stipulates that, in order to

calculate NPVINFMAXI,t, the expected net incomes fromi-year-old trees in yeart

for all tree ages i must be known. These are di€erent for old and new planting

material and amount to the di€erence between the expected revenue and the total

production costs per hectare fromi-year-old trees in yeart. The expected revenues

are obtained by multiplying the corresponding normal yields for each tree ageiby

the corresponding producer price in year t when old and new planting material is

2.2. Research-induced supply shift

In the case of cocoa, which is used as an example of a perennial crop in our model, an expert survey by Gotsch (1997) has demonstrated that new planting material with improved resistance to insects, pests and diseases may be available to producers in about 25 years. After this research lag, research bene®ts are calculated in the model for a period of 30 years, which means that the total time horizon of the model is 55 years.

Changes in supply function parameters due to the adoption of a new crop o€ering both higher yields and lower costs per hectare are calculated. The relative change in

yields is given by EYtand the relative change in costs is given by EACt. Dividing

EYt by the supply elasticity"converts EYtinto a relative gross reduction in

mar-ginal cost per ton of output with new planting material, EMCt. Dividing EACtby

(1+EYt) yields the relative change in production costs per ton of output with new

planting material, ECIt. Subtracting ECIt from EMCt yields the relative net cost

change per ton of output in year twith new planting material, ENCt. Multiplying

ENCtby the initial producer price yields the downward supply shift on a per-unit

basis induced by the adoption of the new planting material,kt. Once the technology

is available, it is assumed that all farmers will be aware of it and adopt it in their new planting decision. This is a logical consequence of the decision rule. Nevertheless, it will be a long time before the technology is fully adopted because many farmers will only plant when their present stand is exhausted.

2.3. Calculation of the variables de®ningkt

According to Akiyama and Trivedi (1987), long-run responses for perennial crops in the form of changes in capacity require an intrinsically dynamic supply theory which is embodied in the so-called vintage production approach. A so-called vintage matrix indicates age distribution of an area under cocoa according to the age of the

trees and over a period of years. The rows of the matrix represent tree ageistarting

with yeari= 0 (year in which the trees are planted) and ending with agei=l. The

columns represent years. The values in each cell represent the area under cocoa per tree age and year. The discarding of cocoa is taken into account in the vintage matrix by means of a discarding fraction which is related to the age of the tree. The fraction

disc(i)of the remaining acreage of ageiwhich is being discarded is represented by:

disci

1ÿeÿr1

1‡erÿi

where is the age at which discarding reaches half the maximum share, and r

represents the speed at which discarding increases as trees grow older (Burger and Smit, 1997b). In order to obtain the proportionate yield change resulting from the

adoption of the new cultivar, EYt, and the proportionate change in production costs

per hectare in yeartat that speci®c adoption level, EACt, the total area of old and

new planting material in the yeartmust be calculated for each tree age iand each

yeart. The next step involves the calculation of the proportionate yield change per

hectare for each yeart in which new planting material is adopted. Average yields depend on the yield pro®le of old and new planting material (per hectare yield of

tree-age i) and on the fractions of various tree-age classes on the total area

culti-vated. The yield pro®le of cocoa is re¯ected in the model by means of the so-called normal yield. Normal yields for old planting material are obtained from statistical sources such as the International Cocoa Organisation. Normal yields for the new planting material must be derived with the help of expert surveys. So-called ``normal production'', i.e. the production capacity in a speci®c year, is obtained by multi-plying the normal yield of a speci®c tree age by the area of that tree age in a speci®c year and adding up for all tree ages. The total production costs per hectare is

cal-culated for each tree agei in yeart. The next step is to derive average production

costs per hectare when all new plantings are undertaken with old planting material and average production costs per hectare when new planting material is available. The proportionate change in production costs per hectare due to the adoption of new planting material is then calculated. The formulae for the calculation of all these parameters are presented in Gotsch (1999).

The remaining elements of the model for the measurement of the economic surplus of research bene®ts are in line with Alston et al. (1995, Section A5.1.2) for a parallel shift of the supply function. The modi®cations which must be made to the model when a pivotal rather than a parallel shift of the supply function is assumed are descri-bed in Gotsch (1999). Supply and demand are linear functions of the producer price and the consumer price, respectively. The slopes for supply and demand are assumed to be constant for all time periods, whereas the intercepts may change over time to re¯ect underlying changes in supply caused by changes in the vintage structure and growth in demand. The parameters of the supply and demand equations are de®ned by beginning with initial values for quantity demanded, quantity produced, producer price, consumer price, elasticity of supply and elasticity of demand (Table 1). Market clearing is established in that the sum of quantities supplied by the countries included in the model equals the sum of quantities demanded.

3. Results

This section contains a presentation of the empirical implementation of the model for Malaysia. Table 1 shows the initial parameterisation and initial values of the market model for the year 1995, while production costs and yields for di€erent tree ages of old and new planting material are presented in Table 2. A more detailed description of production systems, production costs and market data is provided by Gotsch (1999).

3.1. New plantings

In this subsection, the explanatory power of di€erent models for the estimation of

the area newly planted as a function of NPVINFMAXI,tis tested. The calculations

NPVINFMAXI,t are calculated by de¯ating input costs and bean prices by the

consumer price index as indicated in IMF's International Financial Statistics (IMF, various volumes). A di€erent de¯ator for wages is chosen as no time series data on real wages were available, except for the 1995 wages for hired labour and opportu-nity costs for family labour as provided by experts. Hence, as a proxy for real wages, it was assumed that wages develop proportionately to the gross domestic product (GDP) per capita. Forecasts of absolute values for GDP/capita in Malaysia are obtained from Burger and Smit (1997c) and converted to relative values (1995=100).

Table 3 shows the results of six models estimating the area newly planted with cocoa as a function of the natural logarithm of the NPV of the maximum stream of

net income from an investment in 1 ha of cocoa of tree age I. Semi-logarithmic

functional forms are chosen because they provide better estimates than linear or double-logarithmic models. The distinction between the various models lies in the di€ering assumptions regarding the time horizon relevant for expectation formation and also with respect to the discount rate. The investment decision is based on the expected net income resulting from an investment made on the basis of cost and

Table 1

Initial parameterisation and initial values of the model for the year 1995

Parameter Malaysia ROW

World market pricePB

1995($/MT)a 1433.3

Cocoa bean exports (1000 MT)b _52.5 Cocoa bean imports (1000 MT)b _39.7 Quantity demanded QDB

t (1000 MT)c 92.2 2638.9

Quantity supplied QSB

t (1000 MT)d 105.0 2626.1

Elasticity of supply"(relative)e 0.57 0.35

Elasticity of demand(relative)f ÿ0.47 ÿ0.27

Population growth rate (relative)g _{0.026 0.017}

Income growth rate (relative)h _{0.062 0.029}

Income elasticity (relative)i _{0.30 0.49}

Growth rate of demand (relative)j _{0.045 0.031}

Growth rate of supply (relative)k _0.020

a _{ICCO (1995).} b _{ICCO (1996).}

c _{Malaysian demand: di€erence between supply minus exports plus imports. Demand of the ROW:} di€erence between total demand (ICCO, 1996) minus demand in Malaysia.

d _{Malaysian supply: Burger and Smit (1997b); supply in ROW: di€erence between total world supply} (ICCO, 1996) and the supply in Malaysia.

e _{Burger and Smit (1997b) for Malaysia; Evans et al. (1992) for ROW.} f _{ICCO (1993) for Malaysia; Evans et al. (1992) for ROW.}

g _{UNDP, DGVN (1994).}

h _{Average annual GDP per capita growth rates are used as a measure of future income growth rates. It} is assumed that growth rates for the period 1980±93 (World Bank, 1995) will continue in the future.

i _{ICCO (1993).}

j _{The growth rate of demand equals the population growth rate plus the product of income elasticity} multiplied by income growth rate (Alston et al., 1995).

k _{Burger and Smit (1997b).}

price data from the preceding year (Model 1), the year when the investment takes place and the preceding year in the case of Model 2, or on the average of several preceding years (2 years in Models 4±6 and 3 years in Model 3). The sensitivity analysis (see below) requires a variation in the discount rate (Models 5 and 6). If it is assumed that the discount rate amounts to 4%, the di€erences between the models are quite small, apart from a clear superiority of using lagged prices rather than current prices. Therefore, all results that are discussed in this paper are based on new plantings estimated with the help of Model 4, with the exception of the sensitivity analysis of a variation in the discount rate which is increased to 6 and 8% in Models 5 and 6, respectively. The statistical reliability (signi®cance level of parameter

esti-mates) of Models 4 and 5 is comparable. The explanatory power (R2) diminishes

slightly when 6% is assumed. Both the explanatory power and statistical reliability decrease when an 8% discount rate is assumed in Model 6. The application of the concept of discounting in the context of our model means that the present value of an expected return on an investment in new plantings for a speci®c time in the future ¯uctuates in response to the discount rate. A higher discount rate assigns a lower present value to a particular expected return the farther in the future this return accrues. The regression results indicate that Malaysian cocoa producers attach more importance to gains on investments in a nearer future than in the more distant future. The sensitivity of the model to an increase in the discount rate will therefore be investigated in the last subsection using an alternative discount rate of 6%.

Table 2

Yield pro®le (kg/ha) and production costs ($/ha and year) for old and new planting material at di€erent tree ages

Table 3

Regression results for the area newly planted (t= 1980±94), as a function of the expected net present value (t-values in parentheses)a

Model 1 2 3 4 5 6

Years relevant to expectation formation (t=year when new plantings are carried out)

tÿ1 [t+(tÿ1)]/2 [(tÿ1)+(tÿ2)+(tÿ3)]/3 [(tÿ1)+(tÿ2)]/2 [(tÿ1)+(tÿ2 )]/2 [(tÿ1)+(tÿ2)]/2

Discount rate r(%)

4.00 4.00 4.00 4.00 6.00 8.00

73.14 (5.12) Estimated value

b(1000 ha)

14.39 (5.86) 16.90 (5.77) 18.57 (4.64) 17.33 (5.59) 15.31 (5.38)

Estimated value constanta(1000 ha)

ÿ17.99 (ÿ2.15) ÿ26.14 (ÿ2.65) ÿ36.92 (ÿ2.66) ÿ29.92 (ÿ2.81) ÿ18.22 (ÿ2.03) ÿ7.41 (ÿ1.00)

F-value 34.38 33.31 21.54 31.21 28.97 26.23

R2(%) 71.97 71.31 65.12 71.57 69 .98 67.77

Durbin±Watson coecient

2.43 2.54 2.24 2.52 2.46 2.38

a _{The regression equation is given as:plant}B

t ˆa‡bln…NPVINFMAX1†.

218

N.

Gotsch,

R.

Herrmann

/

Agricultura

l

Systems

63

(2000)

3.2. The impact of new cultivars with increased yield

In this subsection, the e€ects of the adoption of new planting material with improved resistance to insects, pests and diseases, resulting in a 10% yield increase and reduced crop protection requirements, are compared with the situation when no such planting material is available. No spillover of resistant cocoa varieties to other producer countries is assumed since many cocoa diseases occur at a regional level only. In Malaysia, for instance, the cocoa pod borer and vascular streak dieback are the most important cocoa pathogens. They do not occur in South America or Africa. The sensitivity of the model is investigated with regard to variations in exogenous factors such as the growth rate of supply, wages and the discount rate.

Fig. 1 shows that the annual area newly planted with cocoa when only old

plant-ing material is available (Old low) increases continuously from approximately 16 000

ha in the ®rst year of the simulation period to roughly 33 000 ha in the last year.

When new planting material is available (New low), the annual areas newly planted

increases from about 24 000 ha in the ®rst year to approximately 35 000 ha in the last year. The continuing increase of area newly planted over time is due to steadily

increasing producer prices, depicted asOld lowandNew lowin Fig. 2 which, in turn,

can be explained by the fact that the demand for cocoa in the ROW grows faster than cocoa supply (3.1% compared to 2%; see Table 1). This price increase is in line with the forecast made by other authors (e.g. ICCO, 1993).

From Fig. 3, it can be seen that when old planting material (labelledSupply old

low) is used, cocoa supply in Malaysia increases from about 89 000 MT in the ®rst

year to 306 000 MT in year 30. This increase is even more pronounced when new

Fig. 2. World market prices with old planting material (old) and new planting material (new) at lower growth rates in supply in the Rest of the World (ROW) (low) and higher growth rates in supply in the ROW (high).

Fig. 3. Supply (supply) and demand in Malaysia (demand) with old planting material (old) and with new planting material (new) at lower growth rates in supply in the Rest of the World (ROW) (low) and higher growth rates in supply in the ROW (high).

planting material is available, when the supply rises from 87 000 to 315 000 MT in

the period under consideration (Supply new low). Malaysia remains a net importer of

cocoa for 8 years of the simulation period with new planting material and for 10

years with old planting material (the years after which the demand functionDemand

lowintersects the supply functions in Fig. 3). If the vintage model approach were also

applied to the ROW, instead of constant supply growth rates, an adjustment of pro-duction capacity may be expected as a reaction to increasing producer prices in the ROW too. This would lead to a cyclic movement of the world market price as reported, for instance, by UNCTAD (1991).

Basically, one purpose of the model is to quantify the welfare e€ects generated by the adoption of new cultivars among di€erent social groups in the innovating country and the ROW. The calculation of net present values was suggested as a means of aggregating annual bene®ts. The ®rst horizontal block of Table 4 (``Reference'') shows that over all bene®ts amounting to $87.2 million are calculated for producers in Malaysia. The corresponding aggregate losses for producers in the ROW are $131.1 million. The second column shows the aggregate gains for con-sumers. The changes in total surpluses are obtained by adding up welfare e€ects for producers and consumers in each country. In the case of Malaysia, a signi®cant gain amounting to $92.9 million is calculated. On the other hand, the total surplus for the ROW is only slightly above zero, due to the fact that consumers' welfare gains o€set the welfare losses su€ered by the producers. Since these losses/gains represent roughly the same amount, this implies a redistribution of welfare from producers to consumers with only negligible net gains.

3.3. The impact of faster growth rates in supply on the ROW

The continuing price increase in the preceding subsection was explained by the fact that cocoa demand in the ROW grows faster compared with cocoa supply. This

Table 4

Net pres ent values of producer, consumer and total surpluses in Malaysia and the Rest of the World (ROW) arising from the adoption of new planting material (million $)

Country/region Producer surplus Consumer surplus Total surplus

Reference

Malaysia 87.2 5.7 92.9

ROW ÿ131.1 132.0 0.9 Faster growth of supply in the ROW

subsection therefore investigates the sensitivity of the model to a relatively brisk growth of supply in the ROW, for instance as a result of rapid expansion of the area newly planted with cocoa. It becomes evident from Fig. 1 that this increase in the growth rate of supply causes a dramatic reduction in the areas newly

planted in Malaysia. When only old planting material is available (Old high), new

plantings decrease from 23 000 ha in year 3 of the simulation period to 15 000 ha in

year 30. The adoption of improved planting material (New high) slows down this

reduction: in year 3 of the simulation period 26 000 ha are newly planted at 2% growth rate of supply and these new plantings decrease to roughly 20 000 ha in year 30.

With reference to Fig. 1, an explanation must be furnished for the upward kinks in the lines representing areas newly planted at higher growth rates of supply in year 11 of the simulation period for old planting material and in year 16 for new planting material. They are due to the fact that, in the model, the development of bean yields and input requirements are constant for a number of tree ages, as can be seen from Table 2. Consequently, expected net incomes for di€erent tree ages do not change smoothly but stepwise, which means that the optimal age for replacement also pro-gresses in steps when the ratio between factor prices and revenue changes. This speci®c implementation of the decision rule for new plantings results in a change of the optimal tree replacement age and, consequently, in a jump in the NPV of expected net incomes from investment and areas newly planted.

The higher growth rate for supply in the ROW causes supply expansion in that region, inducing a decrease in world market prices. Bean prices amount to approxi-mately $2600/MT in year 30 at a 2% growth rate, whereas they only reach roughly $1680/MT at a 3% growth rate of supply. Fig. 2 illustrates this development in world market prices. It also describes the minor e€ect generated by the adoption of improved planting material on world market prices, as already mentioned before. This is due to the fact that Malaysia's share of total global supply is relatively small. Lower world market prices reduce the incentive for new plantings in Malaysia. The reduction in areas newly planted in Malaysia lowers its production potential and hence the actual supply, as shown in Fig. 3. Malaysia's pattern of supply over time is

S-shaped and amounts to 173 000 MT in year 30 with old planting material (Supply

old low) and to 181 000 MT with new planting material (Supply new low). As dis-cussed in the preceding subsection, Malaysia remains a net importer of cocoa for 8 years of the simulation period with new planting material and for 10 years with old planting material assuming a growth rate of supply of 2% in the ROW. In contrast, the country remains a net importer at a supply growth rate of 3% in the ROW for the entire period of simulation, which can also be seen in Fig. 3, where the demand

curve (Demand high) lies above the corresponding supply curves (Supply old high

andSupply new high). This means that even the availability of cocoa cultivars with considerably enhanced agronomic and economic characteristics does not suce to render Malaysia a competitive actor on the world cocoa market when the interna-tional market (price level) does not favour nainterna-tional cocoa production. While low prices have a supply-decreasing e€ect on Malaysian cocoa production, they induce an increase in demand. It can be concluded that the quantity and price e€ects of the

adoption of new cultivars in Malaysia are much less pronounced than the impact of changes in the growth rate of supply in the ROW.

Malaysian producers' welfare gains sustain the strongest impact from a higher growth rate of supply (see ``Faster growth of supply in the ROW'' in Table 4). Their aggregate welfare gains are cut by approximately one-third to $57.7 million. Chan-ges in aggregate welfare losses for producers in the ROW and welfare gains for consumers in the ROW and in Malaysia are only marginally in¯uenced when a higher growth rate of supply in the ROW is assumed. This is due to the fact that a

higher growth rate of supply actually in¯uences absolute price and quantity levels

but has only a minor in¯uence on price and quantitydi€erencesbefore and after the

adoption of improved planting material. The latter are relevant for the calculation of changes in welfare.

3.4. The impact of constant instead of increasing real wages in Malaysia

All the results presented so far are based on real costs and prices. Labour costs are the biggest item in total cocoa production costs in Malaysia (Gotsch, 1999). There-fore, developments in wages can be expected to have a decisive in¯uence on the future competitiveness of Malaysian cocoa production. In this subsection, we investigate the e€ects of wages remaining at a constant 1995 level instead of under-going a relative increase by the factor of approximately 2.8 which has been assumed so far up until year 30. Since no time series data are available for wages, it is assumed that real wages develop proportionately to the GDP per capita. Based on GDP and population forecasts for Malaysia by Burger and Smit (1997c), the relative development of GDP per capita in the simulation period is calculated. All the results presented in the preceding subsections are based on this development. For example, when constant wages are assumed, total production costs in year 30 of the simula-tion period are 33±49% lower than with increasing wages.

Fig. 4 shows the development of areas newly planted with old planting material (old) and with new planting material (new) at increasing (increasing) and constant (constant) wages. From year 3, annual new plantings with both old and improved planting material grow faster at constant wages than at increasing wages. This is due to the fact that labour costs decrease continuously compared with the reference situation.

It is interesting to note that, although there are signi®cant quantity and price e€ects, the aggregate welfare e€ects of constant rather than increasing wages are small, with the exception of the e€ect on producer surpluses in Malaysia (compare ``Constant real wages in Malaysia'' in Table 4 with ``Reference''). This is due to the fact that constant (rather than rising) wages in¯uence absolute price and quantity levels, as discussed in the preceding paragraph, but have only a minor impact on price and quantity di€erences. Additional gains for producers in Malaysia can be explained by the fact that the supply at constant wages with old planting material is considerably higher than the supply with old planting material at rising wages and this value enters the quantity term for the calculation of producers' welfare gains.

3.5. The impact of a higher discount rate

Alston et al. (1995) suggest that the discount rate should correspond to a long-term, risk-free rate of return, for instance from long-term government bonds which in many cases fall in the range of between three to 5%. They further suggest a sensitivity ana-lysis to assess the e€ects of alternative assumptions regarding the discount rate on the NPV of research bene®ts. Therefore, the e€ect of a discount rate of 6% is investigated in this subsection instead of the discount rate of 4% used so far.

The simulation results show that more new plantings are carried out at a 6% dis-count rate than at a rate of 4% in spite of the fact that world market prices are higher with a 4% discount rate. Net present values of expected net incomes are lower at a 6% discount rate inducing less new plantings; NPVs of expected net incomes at 4% are higher and thus encourage more new plantings. This may seem contradictory. However, it can be explained by taking into account that higher

Fig. 4. Areas newly planted with old planting material (old) and new planting material (new) at increasing wages (increasing) and constant wages (constant).

discount rates not only reduce NPVs of expected net incomes but simultaneously also modify the parameters of the regression estimates for areas newly planted (compare Models 4 and 5 in Table 3).

The only substantial impact of a higher discount rate a€ects the aggregate research bene®ts for the di€erent social groups. Comparison of ``Six per cent dis-count rate'' of Table 4 with ``Reference'' shows that NPVs for producers and con-sumers in Malaysia and the ROW are cut by more than half at a discount rate of

6%. This can be explained by the fact that annual bene®ts in yeartare divided by

(1+r)t_{whereris the discount rate. All other the e€ects of higher discount rates, for}

example, on the development of areas newly planted, quantities supplied and demanded, world market prices and annual changes in producer and consumer bene®ts, are less important.

4. Areas of future research

This paper has concentrated on the introduction of agricultural biotechnology and focused on its e€ects on the cocoa market from the perspective of consumers, pro-ducers and society in a country which adopts this innovation, and the ROW. There are many other important issues which could be addressed in future studies. The dynamic model suggested here could be applied to other important export markets for perennial crops which are of interest to developing countries. Furthermore, the dynamics of competition between producing countries in introducing agricultural biotechnology could be investigated within a game-theoretical framework, either for cocoa or other perennial crops. Redistributive implications will depend crucially on who participates in the new technology and who gets ®rst-mover advantages.

Policy issues have been excluded here. Given the long-run horizon of the dynamic model, the paper started from the free-trade assumption which is the target of the trade-liberalisation debate, and concentrated on impacts for consumers and produ-cers in the welfare analysis. It is known, however, that agricultural policies in developing countries are still extremely unfavourable for agriculture, in particular on the question of export crops (Schi€ and ValdeÂs, 1992). This also applies to cocoa (Gotsch et al., 1996). It would be an interesting exercise to include the implications of given distortions in cocoa policy in this model and to elaborate the welfare implications of agricultural biotechnology for individual cocoa-exporting countries within the existing policy framework. In addition, the normative question remains for future research, i.e. whether governments in developing countries should promote the introduction of agricultural biotechnology or not.

5. Conclusions

crops. For this purpose, an expectation-formation model based on NPV calculations resulting from an investment in new plantings was integrated in the model so that annual areas newly planted are determined endogenously within the simulation procedure. The empirical implementation of this model for Malaysia exhibits a comparatively high explanatory power and the parameter values are of considerable statistical reliability. Di€erences in parameter values when the time horizon for expectation formation and the discount rate are varied indicate that land owners in Malaysia base their new planting decisions on a rather low discount rate and on relatively recent information on product and factor prices.

The integration of biological characteristics of perennial crops into the welfare± economic model is yet a further contribution of the research described in this study. Due consideration is given to the e€ects of the gestation lag, variations in tree pro-ductivity over time on supply and the shifts of the supply function when improved cultivars are adopted. An important result of the empirical analysis are the relatively small price and quantity e€ects resulting from the adoption of new cultivars. The sensitivity analysis reveals that the most sensitive reaction exists with respect to an increase in the supply growth rate of the ROW. This leads to a considerable increase in supply and demand in the ROW and causes a dramatic reduction of the areas newly planted in Malaysia. In addition, it transforms the country from a net expor-ter into a net imporexpor-ter, irrespective of the type of planting maexpor-terial available. This means that even the availability of cocoa cultivars with considerably enhanced agronomic and economic characteristics does not suce to render Malaysia a com-petitive actor on the cocoa world market when the national economic environment and the international market do not favour national cocoa production.

The assumption of constant rather than increasing wages for Malaysian cocoa production also has a signi®cant e€ect on the simulation results. These induce sub-stantial additional new plantings. The additional production potential resulting from more new plantings causes a moderate increase in Malaysian bean supply which is not signi®cantly in¯uenced by the type of planting material. Again, the wage level in Malaysia has a greater e€ect on the global market than the adoption of new cultivars. In spite of marked quantity and price e€ects, the welfare e€ects of constant rather than increasing wages are small, with the exception of the impact on producer surpluses in Malaysia.

The only substantial impact noted when the discount rate is varied a€ects aggre-gate research bene®ts for the di€erent social groups, which are more than halved at a discount rate of 6% compared with 4%. All other e€ects are less important.

Malaysian producers and consumers gain as a general economic e€ect from their country's adoption of improved planting material. However, producers' losses are approximately o€set by consumers' gains in the ROW which illustrates the dis-tributive e€ect of Malaysia's adoption of improved cultivars. When evaluating the policy implications of the adoption of improved cocoa cultivars for the economic development of producer countries, it must be borne in mind that consumers are mainly cocoa processors, chocolate producers and consumers in the economically well-developed northern hemisphere. Thus, the latter group of countries may well bene®t from a considerable share of the welfare gains generated by this biotechnological

progress, partly at the expense of producers in countries which do not immediately adopt improved cultivars.

Acknowledgements

Valuable comments and suggestions made by Michael Wohlgenant, North Car-olina State University, were very much appreciated as was the support provided by Kees Burger, Free University Amsterdam. The empirical implementation of the theoretical model was possible thanks to the numerous cocoa production system experts who completed the questionnaires for the collection of agronomic and eco-nomic data on cocoa production systems in Malaysia. The remaining errors are the authors' responsibility. The study represents part of a research project funded by a 3-year research grant from the Swiss National Science Foundation, Bern, Switzer-land, for which the ®rst author wishes to express his sincere gratitude. Helpful comments of two anonymous referees of this journal are greatly appreciated.

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