ANNEX III. ESTIMATES OF SUPPORT TO AGRICULTURE BY COUNTRY, 1991-2001 (continued)
3. Review of selected studies on price transmission
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To conclude the section on the definition of market integration, it is worthwhile to note a fundamental point made by Barrett and Li (2002) that market integration does not equate to competitive spatial equilibrium as understood in the Enke-Samuelson-Takayama-Judge tradition. Barret and Li define market integration as a phenomenon that reflects the tradability of products between spatially distinct markets, irrespective of the existence or absence of spatial market equilibrium. Competitive market equilibrium is defined as a state in which extraordinary profits are exhausted by competitive pressures to yield efficient allocations, regardless of whether this results in physical trade flows between markets. They find that traditional spatial market analysis methods confuse these two concepts. The problem lies, to a large extent, on analysts using only price data to study spatial market relationships while to properly identify integration and equilibrium one would need information on trade flow as well as transfer costs. They claim that their analytical method (distinguishing between integration and equilibrium) and application (integration of soybean meal markets in the Pacific Rim) is the first published work using data on all three variables, i.e. prices, trade volumes and transfer costs. Although highly desirable that one uses all three variables to study market integration, most analysts are left with little choice but to use only price series for estimation due to a lack of data.
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same method as M-L as well as the same FAO data (but updated). They find that the Durbin-Watson (DW) statistics were positive and very low in all cases, indicating widespread positive autocorrelation, and which they suspect to be the key econometric problem in the M-L estimates (the M-L paper does not report DW statistics).
The Q-S paper then goes on to estimate price transmission elasticities using a dynamic, error- correction model (similar to equation A4, Annex 1). They found that there was not even a long-term relationship (co-integration) between domestic and world prices for 30 of the 78 countries. This was the case for most EC countries, as was expected, but also for several others, including developing countries. They also find that for a majority of those countries that displayed long run integration, the speed of convergence was very slow. For example, not even 50% of the price shocks would ever adjust in nine cases, while for the other 22 it would take 5 years or more to transmit 50% of the shock.
To provide a flavour of these estimates, Table 2 shows results for Asian countries reported in those papers.4 Column 3 shows that there is no long-term price relationship for Bangladesh and India (the coefficients are not statistically significant, shown in Italics). Column 2 shows relatively small values for error correction coefficients, which means that not much of the disequilibrium of the previous period is “corrected” in the current period. According to Q-S, convergence does not take place at all for Bangladesh and India, while many years are required for Malaysia, Sri Lanka, Pakistan and the Philippines. Column 1 shows that short-run elasticities are not statistically significant for Bangladesh, India, Indonesia and Pakistan, while for Thailand it is very low and negative in sign. Only for the other four countries are they of reasonable magnitude, in the range of 0.2 to 0.4.
Table 2. Transmission estimates for Asian countries from Quiroz-Soto and Mundlak-Larson studies
(coefficients not significant at 5 or 1% levels shown in Italics)
Q-S, error-correction model (ECM) Q-S, static, long-term Country Short-run
Elasticity (1)
Error-corr.
Coef.
(2)
Long-run elasticity
(3)
Elasticity (4)
D-W value (5)
M-L, static, long-term
Elasticity (6) Bangladesh
India Indonesia Korea, Rep.
Malaysia Pakistan Philippines Sri Lanka Thailand
0.00 0.05 0.21 0.27 0.18 0.03 0.24 0.37 -0.02
-0.64 -0.16 -0.32 -0.09 -0.17 -0.21 -0.35 -0.25 -0.19
0.08 -0.01
0.59 1.72 0.36 0.28 0.51 0.42 0.88
0.53 0.40 1.13 1.65 0.71 0.22 0.57 0.38 0.80
1.44 0.45 1.06 0.58 0.52 0.47 0.88 0.59 0.58
0.72 0.74 n.a.
0.93 0.86 0.74 0.80 0.81 1.02 Source: Quiroz and Soto (1996) and Mundlak and Larson (1992). Both studies used FAO producer price data (1966-91 period by Q-S and 1968-78 by M-L).
4. Estimates are reported selectively for Asian countries only. This is mainly for reason of space, but also to facilitate comparison with some fresh estimates by the author for Asian countries (section 4).
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Columns 3, 4 and 6 show long-run elasticities.5 A comparison of the long-run elasticity from the ECM (Column 3) and static regressions (Columns 4 and 6) show that the ECM estimates are generally lower than from static regressions. Since the ECM technique is superior, these numbers would be more accurate. As it often happens, not all of the Q-S estimates (not in Table 2 but in the full range of the Q-S estimates) turned out to be as expected – there were several cases where signs were wrong and even long run elasticities smaller than short-run ones, but the reasons are not explained.
The Tyers-Anderson study
Tyers and Anderson (1992) is both a book with rich analyses of distortions in world food markets as well as a model of the world food economy. A reduced form of Nerlovian lagged adjustment model was used to estimate both short- and long-run elasticities for seven basic foods and 30 countries or country groups, 11 developed and 19 developing. Although the data used were for the period 1961-83, i.e. before structural adjustment programmes were implemented, the estimated values and the policy insights that are imbedded in these numbers are still relevant for the issues addressed in this paper.
The policy core of the T-A model is a price transmission equation that incorporates two key features of each country’s food policies: (i) protection or anti-protection component, which alters the trend level of domestic prices around which price fluctuations occur; and (ii) stabilisation or insulation component, which limits price transmission. One significant implication is that the level of protection implied by the policy will drift through time. In particular, if the trend in the world market is towards lower international food prices, incomplete transmission in the long run implies growth in protection (or reduction in effective taxation) of the food sector.
Table 3 shows elasticity values for nine Asian countries from the T-A model. Note the difference in the values among the three cereals. The simple average of the short-run producer elasticity for rice, the staple food, is 0.28, which is 22% and 36% lower than for wheat and coarse grains, respectively.
These numbers indicate heavy intervention in domestic rice markets, both in absolute terms and relative to other cereals, which is not surprising. More striking is the short-run consumer elasticity for rice, only 0.11 on average, indicating not only very low transmission but also that interventions are more intense here than on producer prices. This is consistent with the widespread practice in Asia, at least in those years, of price stabilisation through border measures, stocks operations and other policies including consumer subsidies in some countries (more on this in section 4).
5. Column 5 shows D-W statistics from Q-S static regression. This is to illustrate a criticism by Q-S that the M-L estimates suffered from high positive autocorrelation, which seems to be the case although the M-L paper does not report the D-W statistics.
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Table 3. Tyers-Anderson estimates of world to domestic elasticity of price transmission
Commodit Country Short Long Short Long
Rice Banglades 0.71 0.74 0.13 0.19
China 0.35 0.58 0.05 0.40
India 0.17 0.26 0.17 0.26
Indonesia 0.20 0.60 0.05 0.40
Korea, 0.00 0.00 0.00 0.00
Pakistan 0.31 0.58 0.11 0.13
Philippine 0.07 0.15 0.06 0.08
Thailand 0.49 0.74 0.31 0.58
Other 0.20 0.80 0.15 0.50
Simple 0.28 0.49 0.11 0.28
Wheat Banglades 0.24 1.00 0.24 1.00
China 0.44 0.60 0.05 0.60
India 0.15 0.90 0.15 0.90
Indonesia 1.00 1.00 0.09 1.00
Korea, 0.17 0.35 0.50 0.10
Pakistan 0.05 0.07 0.05 0.07
Philippine 1.00 1.00 0.53 0.60
Thailand 0.10 1.00 0.40 0.60
Other 0.05 0.20 0.05 0.20
Simple 0.36 0.68 0.23 0.56
Coarse Banglades 0.60 0.85 0.60 0.85
China 0.54 0.87 0.05 0.70
India 0.14 0.80 0.14 0.80
Indonesia 0.47 0.94 0.46 1.00
Korea, 0.14 0.38 0.14 0.39
Pakistan 0.52 0.70 0.40 0.60
Philippine 0.33 0.69 0.37 0.50
Thailand 0.85 1.00 0.75 0.84
Other 0.40 0.80 0.30 0.50
Simple 0.44 0.78 0.36 0.69
All Simple 0.36 0.65 0.23 0.51
Source: Tyers and Anderson (1992), Annex Table A1.
Price transmission mechanism in the FAO World Food Model
In the version of the WFM prior to 1994, domestic and world prices were linked with constant elasticity specification (equation 7) for all countries modelled.
Pdt = Pdt-1 ( Pwt/Pwt-1 ) ………. (7)
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where, Pdt and PwtDUHGRPHVWLFDQGZRUOGSULFHVDQG LVWKHHODVWLFLW\RISULFHWUDQVPLVVLRQ:RUN was undertaken in 1994 to specify trade policies in preparation for the impact assessment of the Uruguay Round Agreement on Agriculture (FAO 1995). The result was the linear price linkage equation (8) with explicit trade policies. This specification was used for 57 countries that were assumed to undertake trade liberalisation (e.g. tariff reduction) while (7) applied to the rest of the 89 countries in the model.
Pdt = Pdt-1>^ 7spet + (1+ Tadvt) * ( Pwt `^ 7spet-1 + (1+ Tadvt-1) (Pwt-1 `@¨((««
where,
• Tspet and Tadvt are specific and ad valorem tariffs for period t;
• UHSUHVHQWVGLUHFWDQGLQGLUHFWVXSSRUWQRWGLUHFWO\UHODWHGWRPRYHPHQWVLQZRUOGPDUNHWSULFHV (defined as structural or natural protection);
• LV D SULFH ZHGJH WKDW PDLQO\ UHIOHFWV WUDQVSRUWDWLRQ FRVWV WKH YDOXHV XVHG DUH QHJDWLYH IRU exporters and positive for importers); and
• ∆EE represents price effects of export subsidies.
On the features of the specification (8), first of all note that this is an expression of the price transmission process and there is no explicit transmission elasticity – the elasticity is “implicit” in the H[SUHVVLRQ7KHSULFHZHGJHWKH term) was meant mainly to reflect transportation costs – hence the values used were negative for exporters and positive for importers. This has the desirable effect of higher transmission on exports and lower on imports. In the current version, the price wedges apply to major importers and exporters only; for the vast majority of other countries these values are zero. The ad valorem and specific tariffs used are bound rates (bound base and bound final) from WTO country Schedules. The model uses reduction rates (e.g. 6% per year) to reduce these tariffs during the implementation period. Specific tariffs were used where it was clear that only this form of border measure is applied; otherwise, ad valorem rates were used. There were not many instances of specific tariffs on cereals.
7KH QDWXUDO SURWHFWLRQ SDUDPHWHU SOD\V DQ LPSRUWDQW UROH LQ HTXDWLRQ (8). Since the number of countries with specific tariffs is far fewer, it is this parameter that acts as a constant in the linear equation to dampen proportional price transmission. These numbers were derived in different ways.
For WTO members for whom there were PSE estimates, the constant term was estimated by fitting linear equation and should capture direct payments and indirect transfers. For most other countries, these values were “calibrated” based on the constant elasticities used previously in the WFM so that the price transmission elasticity resulting from the linear equation was as close as possible to the constant elasticity value. The calibration process also involved a good deal of judgement of FAO commodity specialists.
The constant transmission elasticity values used in the WFM are mostly on the lower side. For cereals, they range between 0.2 and 0.5, with simple average of 0.27. The values are similar for producer and consumer prices, although different values that reflected domestic policy interventions would have been better, as was done in the T-A model.
In the case of the transmission elasticities resulting from the linear expression (8), these values are, on the whole, somewhat higher than the constant elasticity values used previously in the WFM. This was a deliberate decision in order to better reflect the fact that with the UR reforms in general and the tariff-only regime in particular, price transmissions should be stronger.
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