The Impact of Oil Price on Food Security in the Algeria, Iran, and Saudi Arabia
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Iowa State University Capstones, Theses and Retrospective Theses and Dissertations Dissertations 1994 The impact of oil price on food security in the Algeria, Iran, and Saudi Arabia: cointegration, vector-error correction model, dynamics, and causality analysis Ahmad Yazdanpanah Iowa State University Follow this and additional works at: https://lib.dr.iastate.edu/rtd Part of the Agricultural and Resource Economics Commons, and the Agricultural Economics Commons Recommended Citation Yazdanpanah, Ahmad, "The impact of oil price on food security in the Algeria, Iran, and Saudi Arabia: cointegration, vector-error correction model, dynamics, and causality analysis " (1994). Retrospective Theses and Dissertations. 10662. https://lib.dr.iastate.edu/rtd/10662 This Dissertation is brought to you for free and open access by the Iowa State University Capstones, Theses and Dissertations at Iowa State University Digital Repository. 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Ann Arbor, Ml 48106-1346 USA 313/761-4700 800/521-0600 Order Number 9424277 The impact of oil price on food security in the Algeria, Iran, and Saudi Arabia: Cointegration, vector-error correction model, dynamics, and causality analysis Yazdanpanah, Ahmad, Ph.D. Iowa State University, 1994 UMI 300 N. Zeeb Rd. Ann Arbor, MI 48106 The impact of oil price on food security in the Algeria, Iran, and Saudi Arabia: Cointegration, vector-error correction model, dynamics, and causality analysis by Ahmad Yazdanpanah A Dissertation Submitted to the Graduate Faculty in Partial Fulfillment of the Requirements for the Degree of DOCTOR OF PHILOSOPHY Department: Economics Major: Agricultural Economics Signature was redacted for privacy. IA Charge of M^oiTWork Signature was redacted for privacy. For the Major Department Signature was redacted for privacy. For the Graduate College Iowa State University Ames, Iowa 1994 "He who has knowledge but no acts is like a bee without honey". Saadi 13 th century Iranian poet This work is dedicated to the memory of my late mother, who often sacrificed her food to feed us, and was my first teacher in economics with her act. To my motherland, Iran, may this piece of work contribute in its sufficient availability and affordable accessibility of food to all people, that someday no one will have to sacrifice their share in order to feed her people. iii TABLE OF CONTENTS CHAPTER L INTRODUCTION 1 Importance of the Study 1 The Objectives of the Study 4 Organization of the Dissertation 5 CHAPTER IL FOOD SECURITY ; AN OVERVIEW 6 Food Security: A Conceptual Framework and Preview 7 The concept of food security 8 Review of Previous Studies: Cases and Effects 10 Analysis of the effects of food security 15 The Macro-economy Environment and Food Security 15 Factors affecting the food security of a specific country 16 Food self-sufficiency and food security 17 Oil prices and agricultural sector 20 CHAPTER IIL THE AGRICULTURAL POLICY IN AN OIL EXPORTING COUNTRY; AN OVERVIEW 25 Constraints and Agricultural Situation in the Region 25 Food Consumption and Availability in Early 1980's 34 iv Food Consumption and Availability: 1981-1993 44 Algeria; Physical Features and Natural Resources 48 Agricultural Development 50 Algerian Agricultural Policies: Review 53 Agricultural and Economic Plans 55 Agricultural Policies and Food Security Crisis 57 Analysis of failure in agricultural policies 59 Shortages of investment for agricultural development 59 Asymmetry of sector 60 Pricing policies 62 Iran: Physical Features and Natural Resources 64 Agricultural Development 67 Agricultural Policies in Development Plans 70 The Third Development Plan (1963-67) 72 The Fourth Development Plan (1968-72) 75 The Fifth Development Plan (1973-77) 77 Agricultural Policies in Post-revolution Development Plans 85 Saudi Arabia: Physical Features and Natural Resources 94 Agricultural Development 97 Agricultural Sector in the Development Plans 101 V First Plan (1970-75) 102 Second Plan (1975-80) 103 Third Plan (1980-85) 104 Fourth Plan (85-90) 105 Fiflh Plan (1990-95) 106 Strategies and Tactics: Subsidies and Support 107 Petroleum Earnings and Agriculture 109 Agricultural Policies and Food Security 111 CHAPTER IV. EMPIRICAL INVESTIGATION 114 Methodology and Models 114 Identification 117 The Properties of the Data 120 Cointegration and Error Correction Models 123 The Impulse Response Function 126 Forecast Error Decomposition 130 Empirical Results 132 Model specification 132 Error (shock) structure 133 Testing of properties of data 135 vi Stationarity test (unit root test) 135 Lag length test 140 Testing for cointegration 143 The causality test and error correction model 149 Forecast error variance decomposition 151 Impulse response 156 CHAPTER V. OIL PRICE AND AGRICULTURAL DEVELOPMENT: IRANIAN CASE 162 Oil Price and Wheat Gap 167 Agricultural Price Policy in Iran: Wheat Case 177 Oil Price, Wheat Production, and Wheat Imports in Iran: A Causality Analysis 186 Operationalization and testing 188 Empirical Evidence 190 Conclusion 196 CHAPTER VI. CONCLUSION AND SUMMARY 199 Empirical contribution 205 Suggestion for further research 206 vii REFERENCES 207 ACKNOWLEDGMENTS 217 1 CHAPTER I. INTRODUCTION Importance of the Study The Middle East and North Africa (MENA) comprise 20 countries, most of which do not possess the agronomic capacity or environment to efficiently produce enough food to meet the demand generated by population and income growth (Kurtzig et al., 1988). As a result, the region in general and oil exporting countries in particular are heavily dependent on food imports. In 1992, MENA agricultural imports were estimated at $29 billion (about 10% of global agricultural imports). The ability to import sufficient food to meet domestic requirements is largely a function of the economic development level and export earnings. On the one hand, the oil-rich economy of Saudi Arabia allows financing of food import needs from export earnings, while Egypt on the other hand, heavily dependent on food import subsidies, is primarily financed by external borrowing. The region's agricultural imports increased dramatically in the 1970s, commensurate with higher oil price and export earnings, but slowed as income gains weakened in the early 1980s. Due to increasing oil prices and a continuing population growth rate of 3 percent per year, agricultural imports recovered in the late 1980s. During the last 20 years food imports have become critical to the food security programs of MENA countries. With the exceptions of Turkey, Morocco, 2 and Iran, all countries in the region import at least half their food supply. In 1990, the cereal self-sufficiency rate (domestic production's share of total supply) of the major MENA food importers ranged from 22 percent in Algeria to 99 percent in Turkey. For all oil exporting countries, oil export earnings are the primary engine of economic growth and the major source of foreign exchange earnings to finance food imports. The share of oil, as a percent of total exports, ranges from well over 90% in Iraq, Oman, and Saudi Arabia, to over 65% in Iran, Egypt, Kuwait, the United Arab Emirates and Libya in the 1986-88 period. Even in Algeria where natural gas is a major export commodity, the share of oil in total exports was 46% in the same period. The region's countries hold nearly 70 percent of the world oil reserves and over 30 percent of its natural gas reserves. The middle East exports over 70% of its oil output, while North Africa exports about 60%. Given the limitation in agricultural resources and unfavorable climate, food security strategies are at the forefront of national development plans in the region. A typical policy goal is the provision of an uninterrupted supply of cheap foodstuff "for all people in all time" particularly the low-income sector of the population. The availability of a cheap and steady food supply largely depends on oil prices. However, oil prices have a high variation in the short run; hence, oil is not necessarily a reliable source for development and food import financing. Furthermore, since oil is a non-renewable resource, it can not be depended for 3 sustained food supply in the long-run. For example, the uncertainty ranges for oil prices based on oil price of 1990 are projected to be 16.00-25.30, 17.90-31.80, and 22.60-40.20 in 1995, 2000, and 2010, respectively (the actual price in 1991 was $18.40 per barrel) (Fried and Trezise, 1991).