Rice Research Versus Rice Imports in Malaysia: a Dynamic Spatial Equilibrium Model
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COPYRIGHT AND USE OF THIS THESIS This thesis must be used in accordance with the provisions of the Copyright Act 1968. Reproduction of material protected by copyright may be an infringement of copyright and copyright owners may be entitled to take legal action against persons who infringe their copyright. Section 51 (2) of the Copyright Act permits an authorized officer of a university library or archives to provide a copy (by communication or otherwise) of an unpublished thesis kept in the library or archives, to a person who satisfies the authorized officer that he or she requires the reproduction for the purposes of research or study. The Copyright Act grants the creator of a work a number of moral rights, specifically the right of attribution, the right against false attribution and the right of integrity. You may infringe the author’s moral rights if you: - fail to acknowledge the author of this thesis if you quote sections from the work - attribute this thesis to another author - subject this thesis to derogatory treatment which may prejudice the author’s reputation For further information contact the University’s Director of Copyright Services sydney.edu.au/copyright RICE RESEARCH VERSUS RICE IMPORTS IN MALAYSIA: A DYNAMIC SPATIAL EQUILIBRIUM MODEL Deviga Vengedasalam A thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy Department of Agricultural and Resource Economics Faculty of Agriculture and Environment The University of Sydney New South Wales Australia February 2013 STATEMENT OF ORIGINALITY I hereby certify that the substance of the material used in this study is my own research and has not been submitted or is not currently being submitted for any other degree. To the best of my knowledge, this thesis does not contain any material previously published unless due acknowledgement of the sources of the material is made in the text of the thesis. (Deviga Vengedasalam) Date ii ACKNOWLEDGEMENTS Firstly, I would like to pay my tribute to the ultimate God for giving me this opportunity and to having me to realize that I can actually complete this thesis despite numerous obstacles. I am sincerely grateful to my supervisor, Associate Professor Michael Harris, for his patience and encouragement during the writing stage and his comments have gradually improved my academic writing skills. My special gratitude is to Professor Gordon MacAulay for his continuous support, patience, and invaluable time and courage to complete this research. Without him, I doubt that I would be able to be where I am today. Special thanks to him and as well to his colleagues at Grain Growers who always welcomed me at their place. I would also like to express my gratitude to Associate Professor Gregory Hertzler for his invaluable guidance in mathematical programming and Visual Basic. His help was a breakthrough in my research when I was in the middle of crisis with using the TSP software. His help and knowledge are very much appreciated. My sincere thanks go to John Mullen from Orange for his helpful comments and guidance for the R&D analysis. My special thanks also to number of people in the Department of Agricultural and Resource Economics especially Associate Professor Dr. Tihomir Ancev for advice on postgraduate matters, Dr. Shyamal Chowdury for his advice, Dr. Shauna Philips for her econometrics assistance, Associate Professor Ross Drynan for the constructive comments throughout my research and not to forget Dr. Paulo Santos for his help during my poster presentation. I would also like to thank fellow postgraduates in the Watt and Woolley buildings who have been so supportive and encouraging directly and indirectly. I also must express my sincere thanks to my sponsors, the Ministry of Higher Education in Malaysia and University Technology MARA, Malaysia for their financial support. Furthermore, I would like to take this opportunity to express my appreciation for the help obtained from various officials including Prof. Mad Nasir Shamsuddin and Prof. Dr. Fatimah Arshad from the University of Putra Malaysia, Y.M. Tengku Mohd Ariff from iii MARDI and Encik Zulkarnain from BERNAS who provided me in-depth details about the organization and the rice industry. Without these people, my data collection in Malaysia would not have been possible. Not to miss, officials from IFPRI, IRRI and Professor Kym Anderson and Signe Nelgen from the University of Adelaide who were able to provide quality data for my research. My heartiest gratitude to my family members in Malaysia, especially my parents, Vengedasalam and Lalitha for giving me moral support and continuous prayers. For my sisters and brother and their families, thank you very much for your encouragement and support. To my husband, Karunagaran, thank you very much for being so understanding and patient during my entire studies despite being a PhD student himself. I really appreciate all your sacrifices to follow me to Sydney. Last but not least, to my dearest son, Arvend, for your understanding that Mummy is always busy and not paying much attention to you. I am sure to spend more quality time with you and thanks for being with me always. iv DEDICATION To my husband, Karunagaran and my lovely kids, Arvend and Sreyaa v ABSTRACT Rice is the main staple food, besides wheat, in many countries in the world. For the purpose of food security, many countries protect their rice industry through various mechanisms such as domestic subsidies, import/export tariffs, price ceilings and other mechanisms. Malaysia is one of the rice importing countries, which spends millions of Malaysian Ringgit from the public funds to protect the rice industry and at the same time invests in research and development (R&D) activities to increase rice production. However, in the past 30 years, the production of rice was still not sufficient to meet the domestic demand. The purpose of the present study is to examine the impact of the reallocation of public funds from domestic subsidies to R&D expenditures. Furthermore, the present study also examines the impact of removing BERNAS, the sole importer, and removing all the trade barriers in the Malaysian rice industry. An econometrically estimated dynamic spatial equilibrium model was developed to analyse the impact of policy changes in the Malaysian rice industry. The rice trade model in this study incorporated six regions of Malaysia, Thailand, Vietnam, Pakistan, Indonesia and the Rest of the World. In the present study, there are two main parts: econometrics and simulations. For each region, there were four stochastic equations; namely, consumption demand, stocks demand, area harvested and yield and the supply function was constructed as an identity comprising of area harvested, yield and the conversion rate of paddy to rice. The time series data used for the stochastic equations from the period of 1980 to 2009 were tested for stationarity using the Augmented Dickey Fuller test. The area harvested equation was estimated using ordinary least squares and the other stochastic equations were estimated using two-stage least squares. In the cases with autocorrelation, the equations were re-estimated using a first-order serial autocorrelation correction. The econometric results were consistent with a priori expectations and as represented in the equations the decision-making agents appeared to be well behaved according to theory. vi An R&D expenditure variable was incorporated into the yield function for Malaysia. To select the most appropriate yield function including the R&D expenditure variable, eight alternatives of R&D lags of different lengths and shapes were tested. Two lag lengths, 16 and 35 years and three shapes: trapezoid, inverted “V” and gamma distributions were used and the most preferred model was the gamma distribution with δ=0.6 and λ=0.8 with a lag of 16 years. The R&D elasticities in the range of 0.10 to 0.13 were computed for the Malaysian rice industry and these were found to be consistent with the R&D literature. As there seemed to be no other estimates of R&D elasticities for Malaysian agriculture previously published, these estimates are seen as a contribution to knowledge about the effects of R&D expenditure in Malaysia. The coefficients of all the exogenous variables from the econometric estimation were collapsed into the intercept and then these collapsed demand and supply equations were included in the spatial equilibrium model. The spatial equilibrium model was formulated using a primal-dual approach in a mathematical programming model. The model was simulated dynamically from 1982 to 2009 using the Lemke algorithm written in Visual Basic in Microsoft Excel. Both statistical and graphical methods were then used to validate the historical data with the simulation values. The simulated endogenous variables were found to replicate the historical values quite closely. Four historically based policy simulations were developed to analyse policy changes in Malaysia. In the first two scenarios, 10 per cent and 25 per cent of the rice subsidy funds were reallocated to R&D expenditures. In the third scenario, the sole importer status of BERNAS was removed and replaced with import tariffs and in the fourth scenario the free trade environment was represented. The results from the simulations in scenario 2 showed that if the government had allocated 25 per cent of the subsidy funds into R&D expenditures in the 1980s, self-sufficiency in rice could have been achieved 25 years earlier. Furthermore, both the consumers and producers would be better off if these changes had taken place back in 1980s. vii Findings that emerged from this study have some important policy implications for the Malaysian rice industry. The findings suggest that the government interventions, such as providing domestic subsidies to farmers to increase the production of rice and the use of a marketing board to control imports do not necessarily protect the industry.