AGRICULTURAL PRICE POLICY for DEVELOPING COUNTRIES Other Books Published in Cooperation with the International Food Policy Research Institute
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AGRICULTURAL PRICE POLICY FOR DEVELOPING COUNTRIES Other Books Published in Cooperation with The International Food Policy Research Institute: Agricultural Change and Rural Poverty: Variations on a Theme by Dharm Narain Edited by John W. Mellor and Gunvant M. Desai Crop Insurance far Agricultural Development: Issues and Experience Edited by Peter B. R. Hazell, Carlos Pomareda, and Alberto Valdes Accelerating Food Production in Sub-Saharan Africa Edited by John W. Mellor, Christopher L. Delgado, and Malcolm J. Blackie Agricultural Price Policy for Developing Countries edited by JOHN W. MELLOR and RAISUDDIN AHMED Published for the International Food Policy Research Institute THE JOHNS HOPKINS UNIVERSITY PRESS Baltimore and London © 1988 The International Food Policy Research Institute All rights reserved. Published 1988 Printed in the United States of America Second printing, 1989 The Johns Hopkins University Press 701 West 40th Street Baltimore, Maryland 21211 The Johns Hopkins Press Ltd., London The paper used in this publication meets the minimum requirements of American National Standard for Information Sciences—Permanence of Paper for Printed Library Materials, ANSI Z39.48-1984. Library of Congress Cataloglng-in-Publicatlon Data Agricultural price policy for developing countries / edited by John W. Mellor and Raisuddin Ahmed, p. cm. "Published for the International Food Policy Research Institute." Bibliography: p. Includes index. ISBN 0-8018-3586-0 (alk. paper) 1. Food prices—Government policy—Developing countries. 2. Agricultural prices—Government policy—Developing countries. I. Mellor, John Williams, 1928- . II. Ahmed, Raisuddin, 1932- HD9018.D44A367 1988 338.1'8'091724—dc!9 87-26862 CIP Contents LIST OF TABLES AND FIGURES Vll PREFACE xi Introduction 1. Agricultural Price Policy—the Context and the Approach 1 Raisuddin Ahmed and John W. Mellor 1. The International Environment for National Price Policies 2. Trends in Cereal Supply, Demand, Trade, and Stocks 13 Leonardo A. Paulino 3. Changing Patterns of Variability in Cereal Prices and Production 27 Peter B. R. Hazell II. Domestic Market Intervention 4. Pricing Principles and Public Intervention in Domestic Markets 55 Raisuddin Ahmed 5. Public Stock Management 81 Ammar Siamwalla 6. Risk and Uncertainty in Domestic Production and Prices 94 Peter B. R. Hazell 7. Foreign Trade Regime, Exchange Rate Policy, and the Structure of Incentives 103 Alberto Valdes and Ammar Siamwalla 8. Relative Prices in the People's Republic of China: Rural Taxation through Public Monopsony 124 Bruce Stone vi Contents 9. Determination of Administered Prices of Foodgrains in India 155 J. S. Sarma HI. Production Response, Technology, and Commercialization 10. Capital Accumulation, the Choice of Techniques, and Agricultural Output 171 Yair Mundlak 11. Technological Change, Production Costs, and Supply Response 190 C. G. Ranade, Dayanatha Jha, and Christopher L. Delgado 12. Policy for Rapid Growth in Use of Modern Agricultural Inputs 204 Gunvant M. Desai 13. Government Credit Programs: Justification, Benefits, and Costs 219 Mark W. Rosegrant and Ammar Siamwalla TV. Consumers' Welfare 14. Food Subsidies: Consumer Welfare and Producer Incentives 241 Per Pinstrup-Andersen 15. Implications of Food Aid for Price Policy in Recipient Countries 253 Joachim von Braun and Barbara Huddleston Conclusions 16. Agricultural Price Policy for Accelerating Growth 265 John W. Mellor and Raisuddin Ahmed REFERENCES 293 APPENDIX 313 CONTRIBUTORS 315 INDEX 321 Tables and Figures Tables 2.1 Growth trends of world cereal production, 1961-80, 1961-70, and 1971-80 15 2.2 Trends in world consumption of cereals, 1961-65 to 1978-82 17 2.3 Trends of world cereal trade, 1961-65 to 1978-82 20 2.4 Index of world cereal prices, 1961-85 24 3.1 Changes in the coefficients of variation of world and national cereal prices, 1961-71 to 1974-81 29 3.2 Intercountry correlations between wheat prices, 1961-71 and 1974-81 30 3.3 Intercountry correlations between rice prices, 1961-71 and 1974-81 32 3.4 Intercountry correlations between maize prices, 1961-71 and 1974-81 33 3.5 Intercountry correlations between maize and rice prices, 1961-71 and 1974-81 35 3.6 Intercountry correlations between rice and wheat prices, 1961-71 and 1974-81 36 3.7 Intercountry correlations between maize and wheat prices, 1961-71 and 1974-81 38 3.8 Changes in the mean and variability of world cereal production, 1960/61-1970/71 to 1971/72-1982/83 41 3.9 Changes in the mean and variability of total cereal production by major countries, 1960/61-1970/71 to 1971/72-1982/83 44 viii Tables and Figures 3.10 Variability of world cereal production around linear trend for different periods 46 3.11 Disaggregation of the components of change in the average of world cereal production, 1960/61-1970/71 to 1971/72-1982/83 47 3.12 Disaggregation of the components of change in the variance of world cereal production, 1960/61-1970/71 to 1971/72-1982/83 48 4.1 Comparison of domestic and world prices of foodgrains, selected countries, average 1978-80 59 4.2 Degree of self-sufficiency in foodgrains, developing countries, 1976-80 60 4.3 Public distribution of foodgrains under various categories, Bangladesh, 1973-83 65 4.4 Regional and producer-consumer price spreads, selected countries of Asia and Africa, various years, 1975-80 67 4.5 Spreads in seasonal prices in selected countries various years, 1975-80 73 5.1 Calculation of implicit subsidy on storage, Indonesia, 1979/80 86 8.1 PRC wheat and rice prices, 1980 146 8.2 Growth in foodgrain yields and chemical fertilizer application surrounding the 1979-85 policy reforms, 1975-86 147 8.3 International trade in foodgrains, sugar, cotton, and chemical fertilizers, 1950-85 149 8.4 State budgetary revenues and expenditures and state food consumption subsidies and their recipients, 1974-81 150 9.1 All-India procurement prices of cereals recommended by the Agricultural Prices Commission and those announced by the government, 1975-76 to 1985-86 160 9.2 Procurement of foodgrains, 1985 (calendar year) 162 11.1 Costs and returns in wheat equivalents for wheat, Punjab (India) 191 11.2 Costs and returns per hectare of cropped area in wheat equivalents and changes in crop mix, Punjab (India) 192 11.3 Relative costs and returns per hectare in sorghum equivalents for cotton cultivation, western Burkina Faso, 1961-64 to 1975-79 194 Tables and Figures ix 11.4 Financial and economic returns to smallholder sorghum cultivation, Niger, 1982/83 197 11.5 Impact of technological change on supply elasticities 199 11.6 Response of output, area, and yield to changes in price of wheat, Punjab (India), 1952-53 to 1979-80 200 11.7 Commodity agricultural wages in West Africa compared to India 201 13.1 Masagana 99 total country program, phases I-XI, Philippines, 1973-79 227 13.2 Prices of nitrogen and phosphorus fertilizer (p/kg) for rice and export crops and subsidies, Philippines 230 13.3 Estimated increases in input use, yield, and income due to credit program and fertilizer subsidy, 1973/74 and 1977/78 231 13.4 Total financial cost to the government and total subsidies to financial institutions and farmers, Masagana 99, phases I-XI, Philippines, 1973-79 234 15.1 Implications of food aid for selected variables under different price and market policies 261 Figures 2.1 Actual world cereal production and trend estimates, 1961-82 16 2.2 World cereal utilization, 1978-82 (percent) 18 2.3 World cereal stock levels, 1961-85 (million metric tons) 22 2.4 Index of world cereal prices, 1961-84 (1977-79 = 100) 24 8.1 Index of shifting supply and demand constraints in the Chinese cotton sector (1978 = 100) 126 8.2 Nitrogen to paddy price ratios associated with preferred farm producers, 1952-85 134 8.3 Nitrogen to wheat price ratios associated with preferred farm producers, 1952-85 135 10.1 A convex combination of two techniques 173 10.2 The appearance of a new technique and the transformation curve 175 10.3 Product composition under capital accumulation and coexistence of techniques 176 10.4 Choice of techniques under Hicks neutral technical change in the modern technique 180 x Tables and Figures 10.5 Average labor productivity and the choice of techniques 182 10.6 Index of private tubewells, electricity consumption in agriculture, and fertilizer usage in Punjab, India, 1960-79(1967 = 1.00) 183 13.1 Credit supply and demand as a function of interest rates in informal and institutional markets, with and without modern production technology 222 13.2 Flow chart of farm decisionmaking model 229 15.1 Fluctuations in food aid and response in commercial imports, 89 countries, 1964-78 258 Preface The weight of agricultural prices in political debate, their searing impor- tance to the poor, and their common association with unusually low agri- cultural output levels often lead to policies that focus directly on prices at the expense of other underlying economic relations. In contrast, our objec- tive is to focus explicitly on agricultural price policy in the context of eco- nomic growth and, more specifically, of technological change. In the recent past, and in some cases even now, developing countries have followed foreign trade, exchange rate, and domestic policies which have so grossly distorted agricultural prices as to call for a singleminded focus on removing those gross distortions. We note such circumstances and their causes but look beyond "once-and-for-all" price adjustments to the process of technological change and the institutional changes that go, paripassu, with technological change. Agricultural price policy is impor- tant to those processes, and it is that interaction to which we constantly return. Although our subject is agricultural price policy, we give particular at- tention to food crops produced for domestic consumption.