AGEC 640 – Nov 15, 2018 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 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 National average NRAs by real income per capita, with 95% confidence bands Net taxation of consumers NRA>0 ≈$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 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 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 Table 1. Stylized facts of observed NRAs in agriculture Explanatory variables Model (1) (2) (3) (4) (5) Income (log) 0.3420*** 0.3750*** 0.2643*** 0.2614*** 0.2739*** Land per capita -0.4144*** -0.4362*** Africa 0.0651 Asia 0.1404*** Latin Am. & Car. (LAC) -0.1635*** High inc. cos. (HIC) 0.4311*** Importable 0.1650* Exportable -0.2756*** Constant -2.6759*** -2.8159*** -2.0352*** -1.9874*** -2.0042*** R2 0.28 0.363 0.418 0.827 0.152 No. of obs. 2,520 2,269 28,118 Notes: Covered total NRA is the dependent variable for models 1-4, and NRA by commodity for model 5. Model 4 uses country fixed effects. Results are OLS estimates, with significance levels shown at the 99% (***), 95% (**), and 90% (*) levels from robust standard errors (models 1-4) and country clustered standard errors (model 5). The omitted region is Europe and Central Asia. Source for all tables and charts: W.A. Masters and A. Garcia (2009), “Agricultural Price Distortion and Stabilization: Stylized Facts and Hypothesis Tests,” in K. Anderson, ed., Political Economy of Distortions to Agricultural Incentives. Washington, DC: World Bank. The development paradox The resource curse Some regional differences Anti-trade bias

Results: Specific hypotheses at the country level Table 2. Hypothesis tests at the country level (1) (2) (3) (4) (5) (6) (7) Total NRA for: All Prods. |All Prods.| Exportables Importables Explanatory variables Income (log) 0.2643*** 0.1234*** 0.3175*** 0.1913*** 0.2216*** 0.1142*** 0.2461*** Land per capita -0.4362*** -0.2850*** -0.4366*** -0.4263*** -0.7148*** -0.6360*** -0.4291*** Africa 0.0651 0.1544*** 0.0964** 0.2612*** -0.1071*** -0.0628 0.0844** Asia 0.1404*** 0.2087*** 0.1355*** 0.1007** -0.1791*** 0.0217 0.1684*** LAC -0.1635*** -0.0277 -0.1189*** -0.0947*** -0.2309*** -0.1780*** -0.1460*** HIC 0.4311*** 0.2789*** 0.4203*** 0.3761*** 1.0694*** 0.8807*** 0.4346*** Policy transfer cost per rural person -0.0773* Policy transfer cost per urban person -1.2328*** Rural population 1.4668*** Urban population -3.8016*** Checks and balances -0.0173*** Monetary depth (M2/GDP) -0.0310*** -0.0401*** Entry of new farmers -0.0737* Constant -2.0352*** -0.9046** -2.4506*** -1.2465*** -1.5957*** -0.4652* -1.8575*** R2 0.4180 0.45 0.437 0.294 0.373 0.397 0.419 No. of obs. 2,269 1,326 1,631 1,629 1,644 Notes: Dependent variables are the total NRA for all covered products in columns 1, 2, 3 and 7; the absolute value of that NRA in column 4, and the total NRA for exportables and importables in columns 5 and 6, respectively. For column 2, the sample is restricted to countries and years with a positive total NRA. Monetary depth is expressed in ten-thousandths of one percent. Results are OLS estimates, with robust standard errors and significance levels shown at the 99% (***), 95% (**), and 90% (*) levels. 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 Table 3. Hypothesis tests at the product level Explanatory variables Model (1) (2) (3) (5) (6) Income (log) 0.2605** 0.2989*** 0.2363** 0.3160** 0.2804** Importable 0.0549 0.0048 -0.0061 0.1106 0.0331 Exportable -0.2921*** -0.3028*** -0.2918*** -0.3614*** -0.3414*** Land per capita -0.3066*** -0.3352*** -0.3478*** -0.4738*** -0.1746** Africa 0.0553 0.1171 0.0554 0.1236 Asia 0.2828 0.2998 0.1833 0.2311 LAC -0.0652 -0.0309 -0.1426 -0.0863 HIC 0.2605* 0.3388** 0.4837* -0.0298 Perennials -0.1315** -0.1492*** Animal Products 0.2589*** 0.2580*** Others -0.1764** -0.1956** Lagged Change in Border Prices -0.0025*** Lagged Change in Crop Area 0.0083 Constant -1.8516* -2.0109*** -1.6685* -2.1625** -2.0549* R2 0.1950 0.2100 0.2240 0.3020 0.1940 No. of obs. 25,599 20,063 15,982 9,932 Notes: The dependent variable is the commodity level NRA. Observations with a lagged change in border prices lower than -1000% were dropped from the sample. Results are OLS estimates, with clustered standard errors and significance levels shown at the 99% (***), 95% (**), and 90% (*) levels. 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? 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 Table 4. Determinants of the stabilization index Explanatory variables Model (1) (2) (3) (4) (5) (6) Income (log) 5.6507*** 7.0059*** 7.4730*** 9.4113*** 8.8422* Importable 6.5568* -7.1127 -9.4289* -10.3265* Exportable 1.5545 -8.4469** -9.5703** -11.6999** Land per capita -9.8402** -9.4037** -9.6186** Income growth variation -444.8959 -547.3185 Exchange rate variation 2.0297*** 1.0391 Africa 8.2332 1.1559 Asia 15.2604** 6.2383 Latin America -4.4882 -10.931 High income countries -3.0503 -1.5757 Constant -37.7412*** 4.6606** -40.9054** -44.9126** -75.4189*** -53.9286 R2 0.029 0.005 0.035 0.047 0.032 0.055 No. of obs. 757 766 722 771 724 Dropped obs. 20 11 6 4 Notes: Dependent variable for all regressions is the Stabilization Index by country and product. Influential outliers were dropped from the sample based on the Cook's distance criteria [(K-1)/N]. Results are OLS estimates, with clustered standard errors and significance levels shown at the 99% (***), 95% (**), and 90% (*) levels. Another development paradox? Exportable crops and land-abundant countries have less stabilization Asia has more imports and less land, does this explain higher stabilization?

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 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 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 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 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 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 One widely-held view is not supported: Policy provides little price stabilization in poor countries

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. More and better research is needed! Get to work!