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Effects of a Mix of Taxes and Subsidies on the Mix of Products: Substitution vs. Endowment Effects Applied to the Agricultural Sector in Sub-Saharan Africa

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  • Rakotoarisoa, Manitra A.

Abstract

Decision making often relies on understanding the interactions among and effects of a mix of policies. I reviewed the primal and dual solutions of a multi-input multi-output model and introduced policy distortions as separate from price parameters to estimate the cross-effects and, more important, the substitution and endowment effects of policies on the mix of production. The model is applied on a detailed yet unbalanced dataset of agricultural taxation and subsidies during 1960-2005 in eighteen SubSaharan African countries. The commodities were split into cash commodity, importable food and nontradable food categories. Results showed that changes in the ratio of taxes on two commodities led to substitution through cross-effects. The cross-effects were, however, counterintuitive and distributed unevenly. A higher increase in taxation on cash commodities relative to importable food caused relatively more harm to the production of importable food than to the production of cash commodity, as the former is more price- and distortion-elastic. I also found that distortion’s impact through substitution among crops was relatively small; the rest of the impact, about 60-to 70% of the total effects on output level, was attributed to the endowment effects. These results have several implications for diversification and food security. In a mixed output system, the relative level of assistance or taxation in comparison with subsidy or tax on other commodities matters. The priority before targeting any subsector for assistance should be to increase the amount of and access to resources to the whole agricultural sector; reshuffling resources without increasing them may provoke unintended consequences, as the crops have different policy responses. Reducing taxation on cash crops may well help reduce food insecurity, and lump-sum subsidies would be preferable to direct price supports.

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  • Rakotoarisoa, Manitra A., 2013. "Effects of a Mix of Taxes and Subsidies on the Mix of Products: Substitution vs. Endowment Effects Applied to the Agricultural Sector in Sub-Saharan Africa," Conference papers 332423, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:332423
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