Iowa State University Capstones, Theses and Retrospective Theses and Dissertations Dissertations 1989 The consequences for Argentina of alternative US and Argentine trade and agricultural policies Patrick Charles Westhoff 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 Westhoff, Patrick Charles, "The onc sequences for Argentina of alternative US and Argentine trade and agricultural policies " (1989). Retrospective Theses and Dissertations. 9252. https://lib.dr.iastate.edu/rtd/9252 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. It has been accepted for inclusion in Retrospective Theses and Dissertations by an authorized administrator of Iowa State University Digital Repository. 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University Microfilms International A Bell & Howell Information Company 300 North Zeeb Road, Ann Arbor, Ml 48106-1346 USA 313/761-4700 800/521-0600 Order Number 8920197 The consequences for Argentina of alternative U.S. and Argentine trade and agricultural policies WesthoflF, Patrick Charles, Ph.D. Iowa State University, 1989 UMI SOON.ZeebRA Ann Aibor, MI 48106 The consequences for Argentina of alternative U.S. and Argentine trade and agricultural policies by Patrick Charles Westhoff 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 Approved: Memoers/tof the Committee.: Signature was redacted for privacy. In Charge of Ma^r Work Signature was redacted for privacy. Signature was redacted for privacy. For the Major Department Signature was redacted for privacy. For the Graduate "'College Iowa State University Ames, Iowa 1989 ii TABLE OF CONTENTS Page CHAPTER I. INTRODUCTION 1 CHAPTER II. LITERATURE REVIEW 7 Background 7 Policy Issues 12 Models and Modeling 20 CHAPTER III. THEORETICAL FRAMEWORK 38 Domestic Prices 39 Crop Supplies 56 Domestic Demand, Stocks and Trade 67 Livestock Sector 82 Aggregate Measures 89 CHAPTER IV. MODEL ESTIMATION 95 Equations in ASMA 99 Model Elasticities 150 Alternative Specifications 164 CHAPTER V. MODEL VALIDATION AND BASELINE PROJECTION 170 Simulation Statistics 171 Historical Simulation 176 Post-Sample Performance 195 Baseline Projection 203 CHAPTER VI. EVALUATION OF ALTERNATIVE SCENARIOS 219 Maintaining U.S. Prices at 1984 Levels 220 10-Percent Devaluation 231 Elimination of Export Taxes 237 10-Percent Devaluation and Elimination of Export Taxes 241 CHAPTER VII. SUMMARY AND CONCLUSIONS 258 The Model 258 Empirical Results 260 Concluding Comments 262 ill ACKNOWLEDGMENTS 272 APPENDIX; ACTUAL AND BASELINE VALUES OF 61 ENDOGENOUS VARIABLES 273 1 CHAPTER I. INTRODUCTION Argentine farmers operate in a complex, unstable and generally adverse policy environment. Macroeconomic policies often result in triple-digit inflation rates that make planning difficult. Overvalued exchange rates and high export taxes discourage agricultural exports. New political regimes often decree profound changes in policy. Meanwhile, important competing countries subsidize production and exports, depressing world market prices. The complexity and instability of policies affecting Argentine agriculture also make life difficult for the policy analyst. High and variable rates of inflation mean that nominal prices, exchange rates, and price indices should be treated carefully, especially when they are reported as annual averages. Frequent policy changes make it difficult to identify the relationship between world and domestic Argentine prices. Major shifts in policy which occur after military coups or democratic elections may change the structure of policy enough to make time series analysis difficult or even inappropriate. In spite of the difficulties, farmers continue to farm and analysts continue to analyze. This study will address two problems. The first is concerned specifically with Argentina, while the second is more concerned with the nature of policy analysis; 2 1) What are the consequences for Argentina of alternative U.S. and Argentine trade and agricultural policies? An econometric model of Argentine agriculture is developed to examine a number of policy scenarios for the period 1985-1995. The baseline projection assumes a continuation of current policies in both the United States and Argentina. One alternative scenario is designed to obtain an estimate of the impacts on Argentina of the U.S. Food Security Act of 1985. Other alternatives are designed to examine the impacts of several measures Argentina could take to counteract the effects of the U.S. legislation. 2) How does one maximize the utility of a policy model, subject to data, time, budget and other constraints? Any model is necessarily an abstraction of reality, better equipped to examine some issues than others. While the model developed here is general and flexible enough to consider a variety of issues, it has important limitations. The study points out some of these limitations, discusses how they might be overcome, and explains why the model takes its present form. Thus, the Argentine model is treated as a case study to examine the broader question of how one develops models which are appropriate to the problem at hand. This study is motivated, in a number of different ways, by work performed at the Center for Agricultural and Rural Development (CARD). CARD maintains commodity trade models for wheat, feed grains and soybeans. Even though Argentina is an 3 important exporter in ail three markets, the Argentine sub- sectors of the CARD trade models were not well developed before work began on this study (e.g., Meyers et al. 1986, Bahrenian et al. 1986, Devadoss et al. 1986). Particularly problematic were equations linking domestic prices in the United States and Argentina, and equations determining the area harvested of each commodity. This study developed out of work done to correct some of those deficiencies (Westhoff 1986). The Food and Agricultural Policy Research Institute (FAPRI) is comprised of researchers from CARD and the Center for National Food and Agricultural Policy (CNFAP). FAPRI analysis of the effect on U.S. agriculture of various policy options (e.g., FAPRI 1986, 1987) also helped inspire this study. While FAPRI focuses on the consequences for U.S. agriculture, many of the policies examined by FAPRI also have major consequences for other trading countries, like Argentina. The Food Security Act of 1985 (FSA-85) is a prime example. The net effect of the FSA-85 is to substantially lower world prices for a number of agricultural commodities. This benefits importing countries, but imposes severe hardships on competing exporters, such as Argentina. Just as FAPRI analysis attempts to quantify some of the costs and benefits of alternative policies for U.S. agriculture, this study attempts to quantify some of the effects for Argentine agriculture. 4 A final way in which this study is motivated by work done at CARD concerns the general question of developing models appropriate for policy analysis. Participation in the development and operation of various policy models encourages a healthy skepticism concerning the value of such models. If a model is to yield the most useful and believable results, it should be developed in a manner consistent with the best available economic and econometric theory. Experience, however, indicates that models developed according to the best theory sometimes yield results that violate common sense, making them less useful for policy analysis. This study argues that theory cannot and should not be disregarded. However, a policy model is of value only if it can be used to "tell a story" that is generally plausible. Given time, data and other constraints,