Tuesday, February 23, 2010

Lit in review: 2 of 7 on Food Prices

(2) Coady, Dorosh, and Minten (2009), "Evaluating Alternative Policy Responses to Higher World Food Prices: The Case of Increasing Rice Prices in Madagascar," August, 711-22, ungated

Rice prices increased 43% in 2004 just as Madagascar devalued its currency. The import parity price for rice increased 113% in the first half of 2004. This study compares the welfare effects of reducing the 20% import tariff and/or the 21% ad valorem tax (total: 45% tax). A partial equilibrium model. Taxes are transferred to households lump-sum. People are weighted in a utilitarian social welfare function either as the ratio of their income to a representative households (ie - if I have half the income, I get twice the weight), or as that ratio raised to the 5th power (if I have half the income, I get 32 times the weight - high inequality aversion!).

Decreasing the tariff decreases prices, redistributing income from net producers to net consumers. 90% of the poor (bottom 3 income deciles, consumption less than ~45k francs) are rural. 87% of urban households and 66% of rural households are net consumers. Smallholders have less than 0.25 ha of rice land. Only large landholders (39% of households) are net sellers.

They conclude that, because the upper-half of the income distribution consumes a lot more rice, they capture almost 98% of the welfare gains from lowering rice prices. "Lower rice tariffs essentially involve a redistribution of welfare from higher-income net producers to higher-income net consumers, with little absolute impact on lower-income groups... ." Depending on how large imports are, however, smallholder rice farmers stand to gain a lot from efficiency gains with lower taxes.

How does it affect transfers? They estimate that 20-30% of each transfer dollar gets to a poor person. That's ... rather more than 2%.

If the efficiency gains are low, transfers are a more efficient way to help the poor than lowering tariffs. As inequality aversion increases, the case for transfers improves. They disagree that one conclusion is to increase tariffs - other taxes would be less distortionary. The case for transfers over tariff reductions as a poverty alleviation policy would be improved, they argue, if reducing tariffs also reduces unskilled wages or employment. A dynamic analysis that includes longterm improvements in efficiency would push the analysis the other way, at least somewhat.

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