Trade and agricultural development in developing countries - China, India

China, India

Dr Ashok Gulati
Phone: 1 202 862 5600
Fax: 1 202 467 4439
Email: a.gulati@cgiar.org

$150,000

01/06/2004 - 31/12/2005

Dr Ray Trewin

Assessing agricultural policies and levels of protection or disprotection for selected Asian developing countries, particularly India and China, since the inception of the WTO Uruguay Round negotiations in 1985, will help refine approaches to ensuing WTO benefits agriculture. The conceptual and empirical issues that arise when calculating such measures as market price support (MPS) or producer support estimates (PSEs) for developing countries need to be more clearly understood. Two reports have been produced (Mullen, Orden and Gulati, Agricultural policies in India: PSEs 1985-2002, http://www.ifpri.org/divs/mtid/dp/papers/mtidp82.pdf; Cheng and Orden, Exchange rate misalignment and its effects on agricultural PSEs: empirical evidence from India and China, http://www.ifpri.org/divs/mtid/dp/papers/mtidp81.pdf).

The results presented in the two papers have increased knowledge about the policies that have caused protection or disprotection of agriculture in India and China, and the magnitudes of these effects. The results have been presented at conferences in China, Pakistan, at FAO, and at meetings of the American Agricultural Economics Association, and will be presented in other professional settings and in discussion with policy-makers.

Two reports, in paper and electronic form, were the main project outputs:
Mullen, Kathleen, David Orden and Ashok Gulati. Agricultural Policies in India: Producer Support Estimates, 1985-2002, MTI Discussion Paper 82, International Food Policy Research Institute, Washington D.C., February 2005, 128 pages.
Cheng, Fuzhi and David Orden. Exchange Rate Misalignment and Its Effects on Agricultural Producer Support Estimates: Empirical Evidence from India and China, MTI Discussion Paper 81, International Food Policy Research Institute, Washington D.C., February 2005, 82 pages.
These papers can be found on the IFPRI web page and are accessible at:
http://www.ifpri.org/divs/mtid/dp/papers/mtidp82.pdf
http://www.ifpri.org/divs/mtid/dp/papers/mtidp81.pdf
The report on agricultural policies in India reviewed the substantial economic policy reforms undertaken since 1991. The protection and support versus disprotection of agriculture were evaluated by examining market price support for 11 crops (accounting for nearly half of agricultural production value) and budgetary expenditures for fertiliser, electricity and irrigation subsidies. Key domestic and international cost adjustments are incorporated into the analysis by drawing on the extensive price-comparison data sets and assessments developed previously by Ashok Gulati and his co-authors, often using disaggregated analysis for representative surplus and deficit states.
Results indicated that support for agriculture in India has been counter-cyclical. Support for agriculture rises when world prices are low (as in the late 1980s and 1998-2002) and falls when world prices strengthen (as in the early and mid 1990s). Budgetary payments (for input subsidies) have increased in recent years. Yet for key commodities and in the aggregate, when incorporating both price support and budgetary expenditures, the counter-cyclical dimension of agricultural policy dominates a clear trend from disprotection toward protection over the period 1985-2002.
The counter-cyclical pattern of support for agriculture in India has an important interpretation in the context of the WTO Doha Round agriculture negotiations. India has used border protection to insulate its farmers from low world prices in a manner and timing that corresponds to the increased subsidies provided in the USA and other developed countries when world prices fall. Disciplines on both of these instruments will be required to achieve an agreement that is effective at increasing world trade opportunities and stabilising world price levels.
The researchers also found that the standard procedure of computing the MPS through a comparison of the domestic price to an adjusted reference price based on observed imports or exports was problematic when trade volumes were relatively small. In such a scenario, a reference price based on observed imports or exports can lead to misleading conclusions. To address the reference price issue, they adopted an approach of computing the level of protection or disprotection based on a counterfactual reference price chosen on economic criteria, i.e. the adjusted reference price that would exist in the country if the policy interventions were removed. The researchers applied this modified procedure for six crops in India (wheat, rice, corn, sorghum, sugar and groundnuts) - the choice of the crops was dictated by the fact that India has been near self-sufficiency and there have been changes in the direction of trade over the period of analysis.
The magnitudes of estimated support for agriculture recorded in the first paper are important for several additional reasons. The estimates confirmed that high levels of subsidy (in the range of 35-50 per cent) were required for India to export wheat or rice in recent years, a conclusion reached by several other studies. However, the authors reported less disprotection of Indian agriculture in the 1990s than in earlier published studies. Part of this difference is explained by the differences in their approach, such as the modified procedure for choice of a reference price.
In the second paper, on exchange rate misalignment and its effects on PSEs, modem time series econometric techniques were used to identify determinants of the equilibrium real exchange rates for India and China. Findings showed that, due to poor external sector performance and depletion of foreign exchange reserves, the real exchange rate of the Indian rupee was overvalued in the years leading up to the financial crisis in 1991, but since then has moved closer to the equilibrium. The Chinese Yuan also experienced periods of misalignment, which mostly consisted of undervaluation. Rigid nominal exchange rates, low inflation rates and strong economic fundamentals in recent years have widened the gap between the actual and equilibrium value of Chinese currency, causing an undervaluation of about 20 per cent.
The nominal equivalents of the equilibrium real exchange rates were applied to the calculations of MPS and PSEs to determine the effects of exchange rate misalignment on agriculture. Drawing on the India study, and initial work on the agricultural policies in China by Dr. Dongshen Sun of CASS, results (from 1986-2002 for India and from 1995-2001 for China) showed that the 'indirect' misalignment effects have either amplified or counteracted the direct effect on agriculture from sector-specific policies. In India such indirect effects are relatively small, especially since the 1991 economic reforms, and are mostly dominated by the direct effects. But in China, especially in recent years, the indirect effect from exchange rate undervaluation has been quite substantial.
The results presented in these two along with analyses developed for Indonesia and Vietnam, have been presented at conferences in China (in Beijing, December 2003, and Nanjing, December 2004), Pakistan (March 2005), at the FAQ (October 2003) and at two annual meetings of the American Agricultural Economics Association (August 2004 and July 2005).