agec 640 nov 19 th 2013 hypothesis tests regarding agricultural policy n.
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AGEC 640 – Nov. 19 th , 2013 Hypothesis Tests Regarding Agricultural Policy. Seven specific hypotheses regarding policy failure. Masters and Garcia test for standard explanations: Rational ignorance when per-person effects are small

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seven specific hypotheses regarding policy failure
Seven specific hypotheses regarding policy failure

Masters and Garcia test for standard explanations:

  • Rational ignorance when per-person effects are small
  • Free ridership when groups of people are large (versus more political support from larger groups)
  • Rent-seeking by unconstrained incumbents (versus checks-and-balances from institutions and markets)
  • Revenue motives for cash-strapped governments
  • Time consistency of policy when taxation is reversible but investment is not (as opposed to simultaneous choices)
  • Status-quo bias from loss aversion or conservative social welfare functions in politics
  • Rent dissipation from the entry of new farmers (as opposed to free riding among existing farmers)
results a new view of the development paradox
Results:A new view of the development paradox

National average NRAs by real income per capita, with 95% confidence bands

Net taxation of consumers

NRA>0

Tests aim to account for nonlinearity in these lines, and also dispersion around them, as well as the NRA-income relationship itself

≈$5,000/yr

Export taxes with import restrictions = anti-trade bias

NRA<0

Net taxation of farmers

(≈$400/yr)

(≈$3,000/yr)

(≈$22,000/yr)

Notes: Each line shows data from 66 countries in each year from 1961 to 2005 (n=2520), smoothed with confidence intervals using Stata’s lpolyci at bandwidth 1 and degree 4. Income per capita is expressed in US$ at 2000 PPP prices.

results a new view of policy change over time
Results:A new view of policy change over time

Average NRAs for all products by year, with 95% confidence bands

Increased taxes on consumers in 1990s

Heavy taxes on farmers in 1970s then reform

Heavy taxes on consumers in the 1980s, then reform

results a new view of policy change over time1
Results:A new view of policy change over time

Average NRAs for importables and exportables by year, with 95% confidence bands

Trend away from taxes on exports, with rising import restrictions

Heavy taxes on exports in 1970s then reform with varied import restrictions

results the stylized facts in ols regressions
Results: The stylized facts in OLS regressions

Table 1. Stylized facts of observed NRAs in agriculture

The development paradox

The

resource

curse

Some regional differences

Anti-trade bias

results specific hypotheses at the country level
Results:Specific hypotheses at the country level

Table 2. Hypothesis tests at the country level

  • More protection when per-person costs are small
  • More financial depth, less protection

Revenue Motives

Rational ignorance

Number of people(i.e. free-ridership)

Governance

  • Reject this H
  • Better governance, less protection
results specific hypotheses at the product level
Results:Specific hypotheses at the product level

Table 3. Hypothesis tests at the product level

  • Crops with more sunk costs are taxed more

Time consistency

Status-quo bias

  • Policy changes try to reverse prior year price changes
results how much stabilization is achieved
Results:How much stabilization is achieved?

Stabilization index over the 1961-2005 period, by income level

When stabilizing, SI>0

SI<0

if gov’t is destabilizing

Not much!

Many governments

actually destabilize prices(although M&G don’t have a strong counterfactual story for comparison)

results richer countries stabilize more
Results: Richer countries stabilize more

Table 4. Determinants of the stabilization index

Another development paradox?

Exportable crops and land-abundant countries have less stabilization

Asia has more imports and less land, which explains high stabilization

more results since 1995 policies have moved closer to free trade prices
More results: Since 1995, policies have moved closer to free-trade prices

National average NRAs by income level, before and after the Uruguay Round agreement

Shift to flatter curves post-Uruguay, closer to zero

low income africa taxes farmers less higher income asia taxes consumers less
Low-income Africa taxes farmers less, Higher-income Asia taxes consumers less

National average NRAs by income level, before and after the Uruguay Round agreement

Pro-farm reforms in lower-income Africa

Pro-consumer reform in higher-income Asia

there has been less improvement in e europe central asia or latin america
There has been less improvement in E. Europe-Central Asia or Latin America

National average NRAs by income level, before and after the Uruguay Round agreement

Less reform – lines are more similar

the biggest change has been in high income countries
The biggest change has been in high-income countries

National average NRAs by income level, before and after the Uruguay Round agreement

US, EU and Japan: reforms and WTO commitments

But recent events could change the pattern:

…will a return of high food prices cause policy reversals?

some conclusions
Some conclusions
  • Three stylized facts help explain policy choices:
    • A development paradox from taxing farmers to taxing consumers as incomes rise
    • An anti-trade bias from taxation of both imports and exports
    • A resource abundance effect against natural resources
  • Three mechanisms help explain the income effect:
    • Rational ignorance when per-person costs are small
    • Improved governance from more checks and balances
    • Revenue motives for import taxes when financial systems are deeper
more conclusions
More conclusions
  • Four other mechanisms help add to the income effect:
    • More people in the sector leads to more favorable policies
    • Crops with more sunk costs (perennials) are taxed more
    • Policy changes try to reverse the last year’s price changes
  • Two widely-held views are not supported:
    • Policy changes do not try to reverse changes in area planted
    • Policy provides little price stabilization in poor countries
finally
Finally…
  • Policy relationships have changed over time
    • Relative to income levels, prices are now much closer to free trade than in the past, especially in Africa, Asia and the high income countries.
  • The recent move to freer trade could be reversed
    • In particular, a return of 1970s-style food prices could easily cause a return to 1980s-style food policies.
  • Policy outcomes are far from predetermined!
    • The models explain less than half of the total variation.
and some overall conclusions on political economy
…and some overall conclusionson Political Economy
  • Theory gives us several powerful insights:
    • markets fail, so collective action can help raise incomes
      • any of the three kinds of instruments can work

(regulation, taxation or enforcement of property rights)

      • whether observed policies actually raise incomes depends on the ability to create, inform and enforce those policies…

(success or failure of policy depends on technology, local institutions)

  • The empirics reveal a few clear stylized facts:
    • observed policies typically
      • provide concentrated benefits & cause diffuse losses

(perhaps explained by rational ignorance, etc.)

      • protect against decline more than promoting growth

(perhaps explained by loss aversion, uncertainty of who would gain, etc)

    • both kinds of asymmetry contribute to what we see
      • between agriculture & other sectors
      • within agriculture