Transcript AGEC 640 * Explaining Policies - Purdue Agricultural Economics

AGEC 640 – Nov. 13th, 2014
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
processing.
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
• specify implications of various explanations
• estimate 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 by 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 tariffprotection pattern of agriculture relative to industry in poor
and rich countries.
Using a “stylized” Ricardo-Viner trade model (AKA a
specific-factor model) he showed that support to farmers in
rich countries raises their incomes substantially, and reduces
manufacturing incomes only slightly.
The conclusion, based on an informal argument and stylized
results is this: 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” (growth via
innovation) political game model in which lobbies “bid for
protection” (with $$$, i.e. “protection for sale”) and the
government maximizes a weighted average of social welfare
and contributions.
Lobbies are owners of sector-specific capital
(as in the Ricardo-Viner model).
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
econometrically.
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.
Their innovation is partly that they begin to address the
question of WHY the observed 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-with-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
Compare
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
16
Pop.
10
GDP
1
Ag.GDP
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
Africa
Commodity coverage
(top 30 products only)
Cereal Grains
No. of
Products
10
Percentage of world
Production
Exports
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:
sd ( Pˆ f )  sd ( Pˆd )
SI 
sd ( Pˆ f )
100
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
prices
(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)
Still to come…
tests of the seven specific hypotheses