Zin.publikācijas

Moldelling Government Policy for Agricultural Markets in Transition

William H. Meyers and Natalia Kazlauskiene report in Finnish-Baltic Joint Seminar, Vilnius, Lithuania, published in 'State Regulation of Agricultiral Production' (1992) Agricultural Economics Research Institute, Finnland, ISBN 952-9538-24-3, ISSN 0788-5393, pages 69-76 Oriģinālajā salikumā lasāms PDF fails pielikumā

1 Introduction
As the Baltic States of Estonia, Latvia and Lithuania enter the transition to a market
economy in food and agriculture it is necessary to consider and evaluate alternative
mechanisms that may be used in the regulation or stabilization of prices and incomes in
the food and agricultural industry. In principle, governments of the Baltic states want to
deregulate food and agricultural markets but are faced with continuing pressure from
consumers to control price inflation and from farmers to increase prices. These are the
same pressures faced by govemments ali over the world, so the new Baltic states can learn
from the experiences of other countries, while considering the special conditions in these
transition economies.
Modelling transition economies is especially difficult because the underlying structures
of production and distribution are changing in ways that cannot always be foreseen, and
historical data is of limited value in estimating the behavior of economic agents during
and after the transition. Thus greater reliance on stylized models, synthetic behavioral
parameters, and expert approaches are necessary.
This paper reviews the initial conditions in these transition economies, describes a few
altemative policy approaches that are used on other market economies, proposes an
analytical framework for evaluation of policy options for food and agricultural markets,
and provides results of one such option for Lithuania.
2 Initial Conditions
The purpose here is to review briefly the conditions in the former command economy
during the Soviet period and the recent changes in the economic system so that altemative
policy issues can be identified and related to modelling approaches.
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2.1 Production Sector
The production sector in the Soviet system was characterized by subsidized and centrally
allocated inputs, subsidized output prices, and production quotas for delivery to the
govemment processing and distribution system. Since investment decisions, production
plans, and quotas were not generally driven by economic optimization, output for any
particular commodity could be higher or lower than what would occur in a market
economy.
In 1991 and 1992 the govemments of the Baltic states removed many of the regulations
and constraints that existed during the Soviet period. While these cannot be truly called
free market policies, virtually ali of the govemment subsidies and many of the govemment
constraints on producers have been removed. Input prices are rising rapidly toward world
market prices, and output prices are generally rising in response to these higher costs. The
structure of production is only now beginning to change in response to economic
incentives, land reform, and privatization measures. Producers are generally free to sell
wherever they wish, but in reality have limited options due to the still poorly developed
marketing infrastructure. The Lithuanian govemment still purchases up to 60 percent of
some commodities to provide supplies for state institutions and export agreements.
2.2 Intermediate Sector
The processing and distribution of food and agricultural products was also subsidized in
the Soviet system. These subsidies supported large inefficiencies in this sector as well.
The inefficiency costs include poor equipment, high energy use, and wastage and spoilage
in the handling of raw materials and processed products. In the absence of subsidies, the
inefficiency of this sector causes higher consumer and lower producer prices than would
occur in a well functioning market economy. This situation leads to greater political
pressures on governments from producers and consumers to continue subsidies or controls.
It also reduces the competitiveness of products in world markets.
As of now there has not been sufficient time for the kind of restructuring and efficiency
gains that would reduce processing costs. Most of the processing is still state owned, but
little if any budget support is provided to the sector. Nor has there been time for significant
competition to emerge that would push processing firms to cut costs.
2.3 Consumption Sector
In some cases, consumers in the Soviet system benefitted from subsidies that exceeded
processing costs. That is, the retail price of food was even below the producer price of an
equivalent unit of the good. The low food prices combined with the lack of alternative
goods, led to food consumption levels and dietary pattems that approached those of
consumers in the West, where much higher incomes exist. Actual rationing and/or lengthy
queuing at food shops was not uncommon under these policies.
With price liberalization that has occurred in 1991 and 1992, virtually ali of the
consumer subsidies are gone. This has led to very large price increases, which have to some
extent been offset by wage increases and direct income transfers. Varying degrees of
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rationing and queuing still exist for a few basic foods and the availability of non-food goods
has not increased significantly. The portion of household income spent on food has
increased substantially.
2.4 Trade
State trading was the norm in the Soviet period, so the level of trade did not generally reflect
the excess demand and supply conditions. Exports could be subsidized by the state to
generate hard currency, and imports could be restricted to conserve hard currency. The
result could be seen in further rationing of domestic consumption.
Although there appears to be few import barriers, there is still a significant degree of
export control for the purpose of protecting the domestic market and moderating price
increases. Govemments still engage in state trading, but enterprises have more freedom
to conduct direct trade with enterprises in the former Soviet Union or other extemal
markets. Export licensing is used to a considerable extent as a mechanism to control food
and agricultural exports, but these requirements are gradually being softened or eliminated
so that enterprises have more incentives to export.
2.5 Conceptualization of Initial Conditions
The conditions during the Soviet period and the current period are compared in Figure 1.
This figure assumes constant supply and illustrates why consumer prices have to rise so
much during the transition from the Soviet system to a market economy when input and
product subsidies are removed. In a well functioning market economy, processing costs
would be lower, reducing the gap between farm and retail prices. Comparisons of current
intemal prices to world market prices are still obscured by uncertainty about the exchange
value of the ruble. However, since the prices of imported inputs from both East and West
are approaching world market prices, output prices are also moving closer to world market
levels.
3 Policy Options
As the govemments of Estonia, Latvia, and Lithuania proceed with the early stages of
transition to market economy systems, there are differing ideas about what kind of policy
regime should be developed for the future. Should farm price supports or input subsidies
be used to insure adequate farm incomes? Should import or export restrictions or border
tariffs be used to protect the domestic market? Should free trade be the basis for pricing
inputs and domestic products? These are difficult choices faced by governments and
citizens in all market economies.
Democratic govemments around the world have chosen different lcinds of policy
regimes. Frequently, higher income countries have adopted various forms of support or
protection for farm prices and incomes, while lower income countries have tended to
subsidize consumers at the expense of farmers. Measures to support farm prices or
incomes with government intervention lead to either high consumer prices, high govemment
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Direct
Pa ments
Finland Old New 40R/$ 70R/$ 100R/$
EC 8,000 Rubles/mt
Price Supply
PF
PFO
PRo
Farm
Demand
Retail
Demand
Quantity
Figure I. Price impacts of removing input and product subsidies.
400
300
200
100
$/mt
Figure 2. Comparison of Barley Price Policies.
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budget costs, or both. Thus, during the last decade economic pressures and budgetary
problems have led to a moderation of many of these price and income policies; and further
liberalization reforms are continuing to occur in many countries.
As an illustration of differing policies, Figure 2 compares support prices for barley in
Finland, EC, and US to the world market price and a Lithuanian support price of 8000
rubles/ton at different exchange rates. Three types of policy regimes are illustrated by the
different approaches of Finland, EC, and US. Finland uses support prices which lead to
very high food prices to consumers. The EC also has used support prices but lower than
those of Finland. Because of rising surpluses, EC policies have lead to high export subsidy
costs to the govemment as well as high food prices. In May of 1992 EC agriculture
ministers approved a new policy regime which lowers support prices and compensates
farmers with direct payments. The United States uses direct payments to support most crop
farmers, while livestock producers and consumers face prices close to world market levels.
The US and new EC policies also use land set asides to reduce surplus production.
4 Modelling Policy Options
The approach used is a short-run model of agricultural commodity markets in transition
in order to provide a simple, partial equilibrium framework built on supply and use data.
This model can be used to generate short-run market outlook projections and evaluate the
impacts of altemative structural changes and altemative policy regimes.
4.1 Production Sector
Even if farm structure remains the same, the removal of govemment controls and
subsidies, the adoption of new technology, changing management and incentives systems,
etc. will have significant impacts on production. Given the possibility of substantial
changes in the ownership and management structure, the potential changes are even
greater. Thus the price effects in a typical supply equation are likely to be overwhelmed
by structural and technology changes taking place during the transition period. Therefore,
the supply equation needs to contain structural and technology shift variables that can be
manipulated to generate altemative supply scenarios.
4.2 Intermediate Sector
Representation of the handling and processing margin and its evolution over time is
important in linking the production and consumption sectors. The level of any govemment
subsidies to processing or distribution should be included in this relationship. If a detailed
model of this sector is not needed, simple linkage equations between farm and retail prices
could be constructed with explicit variables for the processing margin and govemment
subsidies. Scenarios on the time paths of these costs or subsidies could be used to trace
the impacts of reducing subsidies and processing costs. Processing costs in similar sectors
of existing market economies could be used as a benchmark in this analysis.
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4.3 Consumption
In ali of these countries household expenditure data have been routinely collected,
although the quality of the data is questionable. It may be feasible to estimate demand
systems with this data while also designing improved data collection methods. An
alternative is to construct demand systems with subjective parameters while awaiting
better quality data.
4.4 Price Determination and Policy
Alternative policy regimes will detennine how prices and trade are represented in the
model. As examples, four policy options are listed below along with specifications of price
detennination that would be appropriate:
If producer prices are fixed, the model is recursive and net exports or net imports are
the residual.
If free trade is assumed, an exchange rate assumption is needed as well as the internal
cost of handling commodities between the border and the farm gate. Prices are determined
by the world market, and net exports or net imports are the residual.
With fixed tariffs, domestic prices move with world market prices of tradable goods
but with a price wedge detennined by the tariff rates. Prices are detennined by the world
market plus the wedge, and net exports or net imports are the residual.
If the domestic market is protected by import and expon quotas, trade levels are fixed;
and the model must solve for equilibrium internal prices.
5 Analytical Example
A model of the type described above was developed for Lithuania by Kazlauslciene,
Devadoss and Meyers(1). More recently it was updated and revised by Kazlauskiene and
Klimavichiute (2) to evaluate a scenario for 1992. The motivation for the scenario is that
the difficult trade relations with the East have led to a decline in markets for meat and dairy
products and the necessity to import feed ingredients from the West. Thus, except for
limited grant assistance from the West, feed imports require hard currency, which is very
scarce. Moreover, domestic consumption of meat and dairy products is declining; and new
markets in convertible currency areas will be difficult to develop in the short run.
The assumptions of the scenario are that imported feed grains are not available, and
livestock numbers and production must decline to the level that can be sustained by
domestically produced feeds. Prices are assumed to increase from 1991 to 1992 at the same
rate as inflation.
The results of the analysis indicate that under these conditions Lithuanian meat
production and exports would decline from 1991 to 1992 by 18.3 percent and 47.3 percent,
respectively. Milk production would decline by nearly 22 percent, and the export of milk
and milk products would decline by 57 percent. Feed use would decline by 17 percent,
and the only grain imports would be for human consumption--a decline in grain imports
of over 60 percent. While this result is not a forecast of what would happen without
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imported feed grains, it does provide an internally consistent outcome that would achieve
the assumed policy objectives.
6 Conclusions
There are many problems and limitations to be encountered in the modelling of food and
agriculture in transition economies such as Estonia, Latvia, and Lithuania. It may not be
possible to model the transition process itself, but modelling the transition at various stages
and evaluating alternative policy impacts does seem feasible and useful. Such simple and
stylized models will provide useful tools for analysis and for learning about market
behavior in these economies.
References
KAZLAUSKIENE, N., S. DEVADOSS, and W. H. MEYERS. "An Adaptive Policy Simulation
Model to Analyze Price Reforms for Lithuanian Food and Agricultural Products,"
Technical Report 91-TR-20, Center for Agricultural Development, Iowa State University,
Ames. June 1991.
KAZLAUSKIENE, N., and RAUINTA KLIMAVICIUTE. "Lithuanian Agriculture: Wishes and
Reality," Lietuvos Aidas, "May 26, 1992.