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Price shocks in a small open economy: the role of insurancetrade policy
We now consider the case of a small country with exogenous and volatile international prices. To do this, we will develop the general framework along the lines of Eaton and Grossman (1985). Explicit functional forms are not given, which gives more generality to the reasoning than the previous model. However, proofs are more complicated so in this chapter we will only present the model and the results (detailed computations are developed in Eaton and Grossman (1985)).
Unlike the Newbery-Stiglitz-Shy framework, uncertainty stems from world prices and not from domestic productivity shocks. We assume that international prices in sector x are normalized to 1. Agricultural prices in sector y are volatile and depend on the state of the world i. They are denoted P yi.
There are no nancial markets to insure workers against price and income risk. To correct this, a tax on imports of good x denoted ti is implemented. Hence the domestic price of good x in state i is P xi = 1 + ti. Labor is mobile ex post but capital must be invested before knowing the price which means that the wage is equalized between sectors wi = wxi = (1 + ti)FLxi(Kx; Lxi) = wyi = P yiFLyi(Ky; Lyi).
Marketing boards in developed countries
Most marketing boards in developed countries are in a situation of monopoly. Some aim at main-taining high and stable income for farmers. Some also deal with brands or labels to sell their products such as the Irish Dairy Board, the Egg Marketing Board or the Milk Marketing Board in the United Kingdom. Some tend to encourage cartels for producers, processors and distributors. Among other things, marketing boards can negotiate minimum prices for producers and other con-ditions for sales (total volume, date of delivery, quality, etc.), x prices, regulate production and marketing via quotas, lead or subsidize research activities, di use information or promote products, buy and sell goods, etc.
Since the 1980s marketing boards in developed countries have undergone reforms and most of them are now partially deregulated. Barrett and Mutambatsere (2008) observe that \where reforms have been widespread and successful, marketing boards have vanished or retreated to providing public goods, such as strategic grain reserves or insurance against extraordinary price uctuations ». The Canadian Wheat Board and the Australian Wheat Board are among well-known marketing boards. Their impact as exporters on the international wheat market led to a number of studies about the distortions created by STEs. Despite similar goals, their characteristics and functions are very di erent which is representative of the diversity of STEs that exist nowadays.
The Canadian Wheat Board is o cially owned by the state. It was created in 1935 to provide stable prices after the great depression (Barrett and Mutambatsere, 2008). It was a mandatory producer marketing system for some areas that had monopsony power for domestic procurement, monopoly for exports and partial monopoly for domestic sales (McCorriston and MacLaren, 2005a). The Bill C18 ended its monopsony powers in August 2012. In 1995, it represented 14,9% of world wheat exports2 and still 12 % in 20093.
Unlike the Canadian Wheat Board, the Australian Wheat Board is not the property of the state. From its creation in 1939 to 1999 the main objective of the Australian Wheat Board was to increase and stabilize income for producers (McCorriston and MacLaren, 2005a). Following the Wheat Marketing Act of 1989, the exclusive rights of the Australian Wheat Board on domestic procurement were replaced by a single desk status only on exports. In 1999 the marketing board was privatised and it entered the Australian Stock Exchange in 2001. Now it only has a monopoly on exports and competes with private rms on domestic markets. In 1995, it represented 13,3% of world wheat exports and still 13 % in 2009.
Japan possesses another signi cant STE in developed countries and is a key player in the Doha negotiations. The Japan Food Agency used to have exclusive rights on domestic procurement and on imports with an orientation towards producers (McCorriston and MacLaren, 2012). It has been reformed like many other marketing boards and since 2002 it competes with private rms. In 1995, it represented 6,4% of world wheat imports.
Marketing boards in developing countries
Marketing boards in developing countries are rather monopsonistic (one buyer facing many sell-ers) which allows for control over consumer prices. They can be granted many rights: purchase of domestic production, exclusivity over trading activities, control of prices (production and con-sumption), subsidies for input purchases, subsidies for the consumption of agricultural products, stocks, processing, etc.
Historically, marketing boards in developing countries were created in the XXth century in colonies to stabilize prices or to ensure reliable exports at low prices towards Europe. In Africa for example, marketing boards were inherited from colonial times to stabilize prices for European consumers and colonial producers and to protect larger producers in Europe from competition (Young, 1999). They were kept after the decolonisation by local governments, but they su ered from massive ine ciencies and de cits. For example Barrett and Mutambatsere (2008) report that the de cit of the marketing board in Mali reached 80 millions dollars in 1980.
Marketing boards as they existed before the 1980s often incurred signi cant losses due to their practices and some ine ciencies, which explains the broad willingness to reform those institutions. This argument has been used in the 1980s-1990s, leading to a number of reforms implemented mainly in the context of the structural adjustment programs of the International Monetary Fund and the World Bank. The objective of those programs was to liberalize markets by letting the private sector take upon the activities previously done by marketing boards.
These reforms have led to better market access, but state intervention has remained very strong in developing countries. In several Asian countries such as China, South Korea or Indonesia, reforms were carried out successfully and marketing boards are now competing with the private sector. As a consequence, marketing activities have reduced their margins and producers’ incomes have increased. In China, COFCO (China National Cereals, Oil and Foodstu s Import and Export Corporation) manages both maize exports and wheat imports for China, with a bias towards producers’ income (McCorriston and MacLaren, 2010). When China joined the WTO in 2001, COFCO’s exclusive rights were removed. Quotas are now delivered for competing private marketing rms. In 1995, COFCO represented 10% of world wheat imports. In South Korea, the ministry of Agriculture and Forest tries to support income for producers and supply low prices food to urban consumers (Young, 1999). There are 8 marketing boards with legal rights on imports that coexist with the private sector. In 1995, those boards represented 2,4% of world wheat imports. In Indonesia, a marketing board was created in the 1930s by the Dutch to control imports and to stabilize prices during the colonial period (Rashid et al., 2007, Young, 1999). Indonesian marketing boards evolved after the decolonisation and the actual marketing board, BULOG, was created in 1967. It manages a major bu er stock in Indonesia while competing with private traders. It also bene ts from a monopoly on imports which was shortly suppressed in 1998 and re-instated in 2002. Where reforms have been less successful, the general weakness of the marketing system was high-lighted when some marketing boards were removed. In Africa, the reforms have had a negative impact on the availability of agricultural inputs, including credit, as the private sector did not fully take over all activities (Barrett and Mutambatsere, 2008). Private rms entered in low en-try barriers sectors but marketing boards kept control over a signi cant part of food markets in those countries. Jayne and Tschirley (2009) show that marketing boards have irregular but some-times high shares of the market. After a period of low activities for the STEs in the 1990s, there was a resurgence of the development state in Eastern and South Africa in the last decade, with marketing boards intervening sometimes even more than before the structural adjustments pro-grams (Jayne and Tschirley, 2009, Jayne et al., 2006, Mather and Jayne, 2012). For example in Kenya, the National Cereals and Produce Board is involved in imports, procurement of domesti-cally produced maize and inventory management. The Agricultural Development and Marketing Corporation (ADMARC) in Malawi and the Food Reserve Agency in Zambia maintain a strong presence in the market. However, contrary to before the adjustment programs, most marketing boards now compete with the private sector.
The presence of both marketing boards and private rms give rise to a dual marketing system that often increases the fragility of the market. Jayne and Tschirley (2009) show how marketing boards operations and the discretionary use of trade policies can lead to more volatile prices when there is no coordination between the public and private sector. Maize price increase in 2001-2002 is an example of such coordination issues (Jayne et al., 2006). In 2001 production of maize in Malawi was 8% under the ten-year mean. To prevent price spikes, the marketing board for cereals (ADMARC) announced in September a xed price for sales that it would defend by importing maize from South Africa. But the ADMARC price was considered too low, so private traders stopped importing. Government imports arrived too late and in limited quantities. When it became clear that the o er could not meet demand, private buyers resumed importing, but shortages lasted several months and prices often exceeded 500 $ per tonne at the beginning of the year 2002. Minot (2012) observes that in Eastern and South Africa, the countries that maintained reserves and tried to stabilize prices through marketing boards (Kenya, Malawi, Zambia, Zimbabwe) su ered from a higher price volatility than neighbour countries that did not intervene actively. One interpretation is that the e orts to stabilize prices are counter-productive and cause private traders to withdraw from the market, reducing the e ect of temporary arbitrage in smoothing prices over time.
State Trading Enterprises in the Doha round
STEs are included in the current round of WTO negotiations, the Doha Round, because they are accused of anti-competitive practices on international markets. The previous round of negotiations, the Uruguay Round, did not impose new disciplines on STEs but paved the way for a stricter regulation of their activities. It has provided an Understanding on the Interpretation of Article XVII of the GATT 1994 which imposes that member states notify their STEs. The Uruguay round has also introduced agricultural products in the WTO negotiations, with the Agreement on Agriculture (AoA). While this agreement does not directly deal with STEs, it imposed a stricter regulation on agricultural trade. As most STEs are concerned with agricultural products, this opened the way for negotiations about state trading.
The criticisms about STEs are focused on price manipulation through market operations (monopoly power, monopsony power, market segmentation, price pooling, income pooling), through regulation (setting consumer prices, the level of production, limits to cultivated areas or to the quantities sold) or through direct aids. Indeed STEs in both exporting and importing countries potentially have important distorting e ects on trade (McCorriston and MacLaren, 2002) and tend to reduce market access4. Importing STEs can be shown to be equivalent to an import tax as they tend to limit imports, while exporting STEs are similar to export subsidies that increase exports. Both contribute to decrease world prices, but only exporting STEs are on the Doha agenda (Abbott and Young, 2004, McCorriston and MacLaren, 2006). In developing countries, marketing boards are not large enough to in uence markets so their trade distorting e ect is lower than in developed countries. Many countries are in favour of a wider deregulation of STEs. The United States have argued against the Canadian Wheat and Dairy Boards and the European Union is willing to negotiate export subsidies only if STEs are included in the negotiations. Other countries have already started a partial deregulation of their STEs through privatisation or loss of monopoly powers in some markets, such as Canada, Australia, China, Japan or Indonesia.
But the Doha negotiations have not yet resulted in concrete disciplines. One explanation is the lack of studies about the real impact of STEs on domestic and international markets. This is rooted in a scarcity of information about the function and activities of STEs. Indeed, the obligation to notify STEs to the WTO is poorly complied with, which prevents implementation of stricter rules. Another issue of these negotiations is the case of developed countries in which STEs are still widely used. As noted above, market imperfections and food security explain the need for public intervention but few STEs have so far reached their objectives.
Commitment at the national level without international cooperation
Without international cooperation, the maximization problem takes the foreign policy t and the repartition of labour as constant. As previously, governments move rst by chosing and an-nouncing a tax level t (t for the foreign government) that maximizes ex-ante expected utility of their agents. Then agents choose the allocation of labour that equalizes expected utilities across sectors. Consistently with the previous section, we consider the one-step game where governments choose simultaneously t; and under the constraint that must equalize expected utilities. In this game however, trade policies at home and abroad do not result from cooperation but are in-stead a Nash equilibrium between the two states: countries maximize their domestic agents’ welfare taking both the foreign tari and the workers allocation abroad as given. We focus on a symmetric equilibrium, i.e. t = t and = 0.
We consider the case where revenues from trade restrictions are fully collected by farmers, i.e. = 0. Incomes IH and IL are still given by (3.3) but with pL = (1 + t)pH and T = tM pH . The country with a negative productivity shock (state L) imports: M = b (1 + at)pH a(1 ) LpL (3.6).
Table of contents :
I State Trading Enterprises and price volatility
1 Framework for the analysis of policy instruments
1.1 Introduction .
1.2 Model .
1.3 Production shocks in a large economy
1.4 Price shocks in a small open economy: the role of insurance-trade policy
1.5 Comparison of the two approaches
1.6 Conclusion .
2 State Trading Enterprises
2.1 Introduction .
2.2 Marketing boards in developed countries
2.3 Marketing boards in developing countries
2.4 State Trading Enterprises in the Doha round
2.5 Related literature .
3 State Trading Enterprises And Price Stabilization
3.1 Introduction .
3.2 The model .
3.3 Trade policies .
3.4 Discussion .
3.5 Conclusion .
II Food price volatility and agricultural production decisions under imperfect information
4 Literature review on dispersed information and application to farmers’ production decisions
4.1 Introduction .
4.2 Formation of expectations
4.3 Introduction to models of dispersed information
4.4 Models with discrete decision sets
4.5 Models with continuous decision sets
4.6 Applications to agriculture
4.7 Conclusion .
5 Food price volatility and farmers’ production decisions under imperfect information
5.1 Introduction .
5.2 Model .
5.3 Applications .
5.4 Discussion .
5.5 Conclusion .
6 Crop variety choice under imperfect information
6.1 Introduction .
6.2 Model .
6.3 Production and price volatility
6.4 Uniqueness and multiplicity
6.5 Conclusion .
7 Acreage allocation in two countries with overlapping crop calendars
7.1 Introduction .
7.2 Related literature .
7.3 Overlapping crop calendars
7.4 Strategic externalities with a subset of the population
7.5 Sequential decision problem
7.6 Total production .
7.7 Expected prots .
7.8 Conclusion .
III Food price spikes and trade policies under imperfect information
8 Food price spikes and trade policies
8.1 Review of past crises .
8.2 Consequences of food price spikes
8.3 Causes of food price spikes
8.4 Export restrictions .
8.5 How to prevent future crises?
9 Herding models and trade policies during food price spikes
9.1 Introduction .
9.2 Cascades and herds: denitions
9.3 Basic model of herding
9.4 Informational and payo externalities
9.5 Factors that reduce the occurrence of crises
9.6 Conclusion .
10 Export restrictions during food price spikes explained by informational cascades
10.1 Introduction .
10.2 Model .
10.3 Bounded information structure
10.4 Gaussian information structure
10.5 Discussion .
10.6 Conclusion .
A Proof of proposition 3.1
B Proof of proposition 3.2
C Proof of Proposition 3.3
D Technical appendix about normal distributions and ane information structures
E Details of equation (5.1)
F Proof of proposition 5.1
G Proof of proposition 5.2
H Proof of corollary 5.5
I Condition for the existence of an equilibrium
J Proof of the condition for a unique rationalizable strategy
K Conditions for the existence of an equilibrium with trade
L Equilibrium with a bounded signal
M Public information with a bounded signal