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Effects of Exchange Rate Agricultur in Pakistan

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Effects of Exchange Rate Agricultur in Pakistan RESEARCH : RH AR HREPORT j8 4 EFFECTS OF EXCHANGE RATE AND TRADE POLICIES ON AGRICULTUR IN PAKISTAN Paul Dorosh Alberto Valds De i ,0*S p.Y The International Food Policy Research Board of Tkustees Institute was established in 1975 to identify and analyze alternative national no inter- Gerry Helleiner national strategies and policies for meeting Chairman, Canada food needs in the world, with particular em- Harris MUtio Mule phasis on low-income countries and on the Vice Chairman, Kenya poorer groups in those countries. While the l esearch effort isgeared to the precise objec- Sjarifuddin Baharsjah tive of contributing to the reduction of hII- Indonesia ger and malnutrition, the factors involved are many and wide-ranging, requiring analy- Anna Ferro-Luzzi sis of underlying processes and extending Italy beyond a narrowly defined f.'od sector. The Institute'- research program reflects world- Ibral m Saad Ahmed Hagrass wide interaction with policymakers, adminis- gypt trators, and others concerned with increasing Yujiro Hayami food producdinn and with improving the Japan equity of its distribution. Research results are published and distributed to officials and lames Charles Ingram others concerned with national and intfra- Aust alia tional food and agricultural policy. Roberto Junguito The Institute receives support as a constitu- Colombia eat of tne Consultative Group on Interna- Dharma Kumar tional Agricultural Research from a nrmbe, India of donors including Australia, Belgium, Canada, the People's Republic ot China, Theodore W. Schultz the Ford Foundation, France, the Federal U.S.A. Republic of Germany, India, Italy, Japan, [eopoldo Solis the Netherlands, Norway, the Philippines, Mexico the Rockefeller Foundation, Switzerland, the United Kingdom, the United States, and M. Syeduzzaman the World Bank. In addition, a number of Bangladesh other governments and institutions contrib- Charles Valy Tuho ute funding to special research projects. C6te d'lvoire Just Faaland, Director Ex Officio, Norway EFFECTS OF EXCHANGE RATE AND TRADE POLICIES ON AGRICULTURE IN PAKISTAN Paul Dorosh Alberto Valdes Research Report 84 International Food Policy Research Institute Decenjber 1990 Copyright 1990 International Food Policy Research Institute. All rights reserved. Sections of this report may be reproduced without the express permission of but with acknowledgment to the International Food Policy Research Institute. Library of Congress Cataloging­ in-Publication Data Dorosh, Paul Anthony, 1958- Effects of exchange rate and trade policies on agriculture in Pakistan / Paul Dorosh and Alberto Valdds. p. cm. - (Research report /International Food Policy Research Institute ;84) "December 1990." ISBN 0-89629-088-3 Includes bibliographical references. 1. Produce trade-Government policy- Pakistan. 2. Agricultural prices-Government policy-Pakistan. 3. Foreign exchange problem- Pakistan. 1.Vald6s, Alberto, 1935- . 11.Inter­ national Food Policy Research Institute. Ill. Title. IV. Series: Research report (International Food Policy Research Institute) ;84. HD9016.P22D67 1990 90-27234 382'.14'095491-dc20 CIP CONTENTS Foreword 1. Summary 9 2. Introduction 12 3. Trade Policy in Pakistan 15 4. Effective Exchange Rates for Im­ ports and Exports 23 5. The Real Exchange Rate 30 6. Effects of Trade and Exchange Rate Policies on Agricultural Prices 44 7. Modeling the Real Effects of Price Changes 58 8. Real Effects of Changes !i Price Incentives: Simulation Results 67 9. Conclusions 83 Appendix 1: Supplementary Tables 86 Appendix 2: Method for Calculating Nominal Rates of Pro­ tection of Agricultural Commodities in Pakistan 91 Appendix 3: Methodology for Effec­ tive Rates of Protection 97 Appendix 4: Modeling World De­ mand for Basmati Rice 100 Appendix 5: Simulation Results 102 References 111 TABLES 1. Importance of agriculture in 15. Direct and total effects of trade Pakistan, selected years 12 and exchange rate policies on 2. Production of the main agricul- agricultural production and con­ tura, commodities and shares of sumption, 1961-71 and 1972-87 69 agricultural value added, selected 16. Direct and total effects of trade years 13 and exchange rate policies on 3. Effective protection rates on agricultural trade, 1961-71 and manufactured goods as estimated 1972-87 70 in three studies, selected years 19 17. Effects on agricultural income 4. Effective protection rates on in- of simulated policy changes, dividual products, selected years 20 1961-87 71 5. Equivalent tariff calculations, 18. Effects of sift alated policy changes 1980/81 25 on the balance of trade and on 6. Average inport taxes and equiv- world basmati rice prices, 1961­ alent import tariffs, 1977-87 26 87 72 7. Real exchange rate regressions, 19. Net transfer to agriculture from full-period sample, quarterly direct price and nonprice-related data, 1960-87 35 transfers for five commodities, 8. Real exchange rate regressions, based on model simulations, reduced sample, quarterly data, 1973-87 74 1972-87 36 20. Net transfer to agriculture from 9. Calculation of the equilibrium direct and indirect price and non­ real exchange rate using the price-related transfers, adapted omega approach, 1960-87 38 from Nabi, Hamid, and Nasim 10. Equilibrium exchange rates (1987), 1973-87 75 using an elasticities approach, 21. Net transfer to agriculture from 1960-87 41 direct and indirect price and non­ 11. Equilibrium nominal exchange price-related transfers, adapted rates and purchasing power from Qureshi (1988) for five parity, 1960-87 42 commodities, 1973-87 76 12. Direct and total nominal protec- 22. Output price intervention effects tion rates to producers of agri- based on three estimations, cultural commodities, 1961-87 47 1973-87 78 13. Measures of direct and total effec- 23. Net transfer to agriculture from tive rates of protection to agricul- direct and indirect price and tural producers, 1961-87 56 rionprice-related transfers for 14. Coefficients of variation of pro- five commodities, based on ducer prices, 1961-87 57 model simulations, 1973-87 79 ILLUSTRATIONS 24. Estimates of transfers into and I. Import quotas and equivalent out of agriculture, based on Nabi, import tariffs Hamid, and Nasim 24 87 (1988), 1960­ 80 2. Overall 87 trade policy bias, 1960­ 27 25. Direct and total price and non- 3. Devaluation episodes and evolu­ price-related transfers as a per- tion of effective exchange rates, centage of GDP, for five com­ modites, 1973-87 81 1960-87 28 26. Tariffs and effective exchange 4. Real effective exchange rate in­ rates, 1960-87 86 dices, 1960-87 31 27. Equivalent tariff calculations, 5. Nominal exchange rates, 1960­ 1963/64 87 87 39 28. Equilibrium exchange rates using 6. Equilibrium exchange rates, 1960-87 43 a modified elasticities approach, 1960-87 88 7. Wheat prices, 1961-87 48 29. Domestic supply (area and yield) 8. Basmati rice (paddy) prices, elasticities 89 1961-87 49 30. Price and income elasticities of 9. Ordinary rice (paddy) prices, demand 90 1961-87 50 3 1. Indices used in computing border 10. Seed cotton prices, 1961-87 5 1 prices for specific commodities, 11. Vegetable oil prices, 1961-87 52 1961-88 92 12. Sugarcane prices, 196 1-87 53 32. Indices of nonagricultural prices, 1961-87 99 13. Maize prices, 1961-87 54 33. Data used in the regression on 14. Fertilizer prices, 1961-87 55 world demand for basmati rice, 1972-87 101 34. Agricultural production (simula­ tion 1) 102 35. Consumer prices, consumption, and trade (simulation 1) 104 36. Agricultural production (simula­ tion 2) 106 37. Consumer prices, consumption, and trade (simulation 2) 108 ii FOREWORD This report on Pakistan is one of a series of country studies undertaken by the International Trade and Food Security Program at IFPRI on traae and macroeconomic policies. Other studies in this series include research reports on Colombia, Argentina, Nigeria, Zaire, and the Philippines, and collaborative work with the World Bank on this topic in several other countries in Asia, Africa, and Latin America. The findings from this research have vividly shown the need to analyze the effects of policy interventions in agriculture in developing countries in an economy-wide framework. There is now an overwhelming body of evidence showing that trade and exchange rate policies have, in most countries, had a far greater impact, generally adverse, on agricultural incentives than policies that are specific to agriculture. Through their influence on incentives vis-a-vis the nonfarm sector, these indirect and usually implicit price interventions influence private investment and labor employment in agriculture and induce substantial income transfers from agriculture to the rest of the economy. This research report examine:, the Pakistan experience from the early I960s until 1987. It attempts to quantify the effects on the agricultural sector of both sectoral policy interventions and the indirect effect of economy-wide trade and macroeconomic policies. The empirical findings are analyzed in a broad policy context, and the authors draw some implications for development strategy in Pakistan. Just Faaland Washington, D.C. December 1990 ACKNOWLEDGMENTS The methodology for this study is based on three works: by Anne Krueger, Maurice Schiff, and Alberto Vald~s; by Alberto Vald~s, Herndn Hurtada, and Eugenia Muchnik; and by ljaz Nabi, Naved Hamid, and Anjum Nasim. Romeo Bautista, A. R. Kemal, Yair Mundlak, Anjum Nasim, Thomas C. Pinckney, and Jorge Quiroz also offered helpful comments. Special thanks go to Marcelle Thomas for her work as a research Finally, assistant. the authors wish to thank the U.S. Agency for International Development Mission in Islamabad, who provided financial support for this research under Project Number 391-0491-C-00-5033-00. 1 SUMMARY Although price policies play an important role in determining returns to agriculture, trade and macroeconomic policies can also have a large impact on the agricultural sector. By changing the relative prices of importables, exportables, and home goods, trade and exchange rate policies alter the structure of incentives throughout the econ­ omy. The indirect effects on agriculture can be especially pronounced, since many major agricultural commodities are internationally tradable goods.
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