Reforming Hungarian agricultural trade policy : a quantitative evaluation

The authors quantitatively assess the consequences of Hungary for three types of policies: removing quantitative import restraints in agriculture, both for all of agriculture and for each of five separate agricultural products; removing the export subsidy program in agriculture; and adopting a European Community type common agricultural policy (CAP) system in Hungary. The authors estimate the consequences of all policies by using a small open economy computable general equilibrium model for Hungary, calibrated to the year 1990. They estimate the tariff equivalent of the import licenses through a detailed study of price comparisons, the first of itskind for Hungary. Imposing a CAP system they find, would be a costly step backward for Hungary, especially as the long run trend in Hungarian agricultural policy has been toward less intervention and more reliance on the market. A CAP system would significantly increase the government's fiscal problems. Import protection and export subsidies are costly, inefficient policies. The most important policy conclusion they contend, has to do with the piecemeal sequencing of reforms in the presence of both export subsidies and import licenses. Removing import licenses while export subsidies remain would generate byproduct distortions in the export market and little gain in welfare. The piecemeal removal of export subsidies, however, would not generate byproduct distortion, so substantial gains could be expected - but at the expense of greater adjustment costs. To facilitate understanding of this commonly used type of general equilibrium model, the authors explain the results by using supply and demand style graphs of the agricultural sector.