Issues relating to Agricultural Pricing Policies and their Analysis in Developing Countries

Agricultural pricing policies in developing countries are often the result of complex interactions between producer, consumer and merchant groups and their relative effectiveness in influencing government decision making. Even within governments, various ministries often have opposing views. In this environment one of the contributions a policy analyst can make is to attempt to quantify the effects of different policy options. This permits a more informed discussion which hopefully leads to better decision‐making and an improved incentive environment. Many analyses of agricultural pricing policies have used the standard partial equilibrium analysis where no linkages between commodity markets were considered. In this paper we have considered cross‐price effects. Also, we have discussed issues relating to other adjustments/refinements of the standard method so that a practitioner not familiar with the various methods can form an opinion of what the options are and what adjustments may be appropriate for a particular case in question. The adjustments relate to overvaluation of currencies, input price distortions, differences in the degree of distortions between producers and consumers, and variability of border prices. The inclusion of cross‐price elasticities was important for assessing production, consumption and trade effects for Argentina, but for the other countries it resulted in only somewhat improved accuracy. The adjustment for exchange rates had a large impact in Egypt and was important for other countries as well. This underlines the importance of exchange rates as key variables for agricultural pricing policies in general. The numbers show that the traditional taxation policies of agricultural products in the sample of developing countries is somewhat less widespread than in the past. These policies, however, continue to favor consumers over producers, with significant losses for some of the latter. The large size of welfare losses, especially compared to efficiency losses, highlights the importance of correcting distorted prices that adversely affect the poorest sections of society. Also, the usual government objective of taxing producers to raise revenues is frequently defeated by the large subsidies provided to consumers. For the partitioner, for whom time is often of the essence, the assessment of welfare effects using the partial equilibrium method may provide reasonably good ‘first cut’ estimates of the order of magnitude of the impact of distortions. But often, these 'base case estimates' can and should be adjusted for a number of possible factors. The analyst needs to determine how important accurate estimates of key variables are to the policy makers; he or she then needs to compare the costs involved in generating or gathering the data and doing the calculations with the benefits of a broader and more accurate analysis of the distortionary effects of the particular case in question.