Saturday, January 8, 2011

AEA Session: Agricultural Export Bans

The final AAEA session at the AEA meetings in Denver discussed the agricultural export bans put in place in eight countries (plus export tariffs in many more) during the food price crisis a couple years ago. The major contribution was to consider the political economy explicitly and its impact on food prices. My major complaint about previous studies trying to measure the effect of biofuel prices on the food price spikes ignored this essential factor, and then claimed biofuels did most of the work.

The bottom line: the export bans and import tariff drops alone caused at least 40% of of the price change, and likely a lot more.

Government actions were responsible for more if you include growing stockpiles, offers to buy up a lot more than usual at prices above already inflated prices, and account for large-country effects. On that last point, rice export bans in Brazil don't matter much because they don't export much rice. The ban in India makes a much larger difference. Similarly, Russia's current export ban doesn't matter: they've moved to being an importer of wheat this year so the official ban is just a nice photo-op (or as Martin put it, a chance for Mr. Putin to show off his hairy chest).

The papers will be coming out next January. Until then, my notes are below the fold
Martin and Anderson – Export restrictions & price insulation during booms

            Russia’s export ban does nothing than photo op: Russia is importing.
            S. Asia rice: nominal rate of assistance vs. world price correlation -.754; and it works. Some countries don’t succeed.
            If exporters and importers offset each other, world price rises yet further. World price rises, and they all get the same price. Those who don’t move get worse prices. Collective action problem that doesn’t do anything. Importer insulation just as destabilizing of real incomes.
            Price transmission as deviation from an extended welfare function [Grossman-Helpman model with quadratic costs in price deviation]
            In Asia: International rice price in 74 rose while producer prices rose very little; wheat a little less insulation; compare size of price spikes – 2008 much smaller. Insulation differs by region: S. Asia highly insulated, Latin America less, Africa much less.
            Estimates are likely underestimates – they don’t include changes in stocks.
            The one encouraging sign: less price insulation in high-income countries than in 1973. Rice was 45%, now 8%; wheat was 28%, now 12%.
            40% of price spike in 2008 may have come from trade insulation.

Abbott – Export restrictions as stabilization responses to food crisis
I agree Martin's estimates are underestimates.
Why did some governments NOT impose restrictions? Windfall gains to farmers shared with governments; long supply chains protect consumers; dietary composition; political economy history replayed.
Export restrictions may be “beggar thy neighbor”, but free trade is not optimal. Large country cases matter and have largely been forgotten.
Stabilization affects not only welfare issue, but distributional and stakeholder issues are important.
One of the gains to exporters is affecting terms of trade and effectively collect tax revenue from importers. Export restrictions are optimal for large exporters.
“weights” on economic actors differ and they change over time. As prices increase, the weights on consumers go up and the weights on producers go down.
Countries that restricted trade were much more susceptible to inflation.
Unless China, India and other open borders, there will be insufficient global price stability
In answer to questions: Brazil banned exports of rice, but it doesn’t export rice. So we have a lot of uncertainty about what the real policies are.

Liefert, Westcott, and Wainio – Alternative policies to ag export bans that are less market-distorting
The goal is to get the same consumer surplus as an export ban, while allowing farmers to ship at world prices so we don’t lose the deadweight loss. This would also stabilize world prices relatively.
Answer: domestic sales quota. He uses a fascinating supply-demand graph to demonstrate the effects that would be wonderful for clearing out an overfull class. If you are a large country, you get a little bit larger of a benefit to producers than if you are a small exporter – more exports and increases world price if not by as much as with a ban.
Answer: Export licenses given away when they meet the quota. Eg. for each unit you sell domestically at P1, you get a license for 1/3 of a unit of exports. You can use a simple model to identify the demand curve to identify the number of licenses that need to be issues. But at that level of licenses, the market price will be 0. So print just a few fewer to make the licenses worth something, give them to the low-cost producers who sell them to the high-cost producers. World market power increases the incentives the policies will work and will create a market price greater than 0 even if they print the full number of licenses.
The main challenge is identifying the quota. It’s better to undershoot than overshoot. If you overshoot, you underincentivize production and have no exports. If you undershoot, you are closer to free trade.
In answer to questions: These are second-best outcomes, but they prevent worse. If they don’t work, they will be abandoned.

We need to expand the models to include traders, MNCs, and who is really doing the exporting and gaining the benefits.
The question is if these impacts will induce countries to push the WTO to tighten export regulations.
Q: Kazakhstan did not ban export of flour, only wheat. That is important.

My comment is that Leifert et al.’s idea sounds a lot like how China expanded food production. Rather than just opening up the markets one sunny day, they said farmers still had to make their quotas, but anything above the quota could be sold at market prices. Production boomed, hunger dropped, and the Chinese economic miracle was begun. Note that while this is not a great place to go from free trade (they admit this is second-best at best), it’s a great please to go from outright export bans.

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