Agriculture Reference
In-Depth Information
ESTABLISHING A CREDIBLE PRICE BAND
. Arguably the public sector has a
role to play in price support and stabilization even at later stages of develop-
ment, when diversification and commercialization are proceeding at a brisk
pace. The country case studies suggest that, compared to the world market, all
countries reviewed in this topic have been successful in stabilizing foodgrain
prices. However, the levels of stability (compared to international parity), ap-
proaches to achieve them, and the distribution of benefits (or costs) have varied
widely among the countries. In India, while rice prices have almost always been
below international prices, wheat prices were supported above international
prices until 1989, below international prices during 1990-98, and above inter-
national prices during 1999-2002. During the 1980s and 1990s, Pakistan's wheat
prices were below, Philippine's rice and corn prices were above, and Indone-
sia's rice prices were stabilized around the international parity. Yet the conclu-
sions based on the measures of price stability, the coefficients of variations, have
been similar in all countries—that is, prices were stable.
These findings have three important implications for price policies. First,
the narrower the band, the thinner the cost range will be in which the private
sector can operate, and the larger the burden on the government in terms of the
costs of price stabilization. Furthermore, narrower price bands can hinder the
development of alternative price stabilizing institutions, such as futures mar-
kets and warehouse receipt systems. Second, the international prices of com-
modities are valuable references for efficiently allocating resources. In Indone-
sia, which stabilized around international parity, stabilized prices have raised
the growth rate of Indonesia by about 16 percent in 1969-74, 14 percent for
1974-79, and 4 percent in 1989-91 over what it would have otherwise been
(Timmer 1997). Finally, the fact that the countries with heavy agricultural tax-
ation (such as that of Pakistan on wheat and India on rice) achieved productiv-
ity growth suggests that the growth was technology-driven and could have been
higher in the absence of stabilization policies based on taxation.
The lesson that emerges from these experiences is that prices should be
stabilized around a band that leaves enough room for private traders to cover all
marketing costs, including the opportunity costs of human and physical capi-
tal. The potential benefits of stabilization around a band are high. It provides
much more flexibility than stabilizing around a point, can reduce the costs, en-
courage private sector investments, and potentially defuse powerful interest
groups—such as farmers and ration-card holders in India—as likely protesters
of reforms. Note that wider price bands do not necessarily mean higher market
prices. Higher arbitrage opportunities from wider bands (and withdrawal of
pretation of the breakdown of the Cancun Round of the WTO negotiations is that the developing
countries did not want to make the commitments required of them to benefit from tariff reforms,
and they also did not want other countries to negotiate such reforms and therefore gain benefits, to
their detriment.
