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Exchange Rate Misalignment and Its Effects on Agricultural Producer Support Estimates: Empirical Evidence from India and China

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  • Cheng, Fuzhi
  • Orden, David

Abstract

There have been different degrees of exchange rate disequilibrium in the developing countries during transition or reform periods. The level of the exchange rate and its misalignment can have significant impacts on agricultural policy measures such as Producer Support Estimates (PSEs). In the conventional PSE analysis, however, the actual (nominal) exchange rates are used. There is general agreement that the use of actual exchange rates may introduce a bias in the PSE calculations, and that this bias can be substantial in some cases. But there is less agreement on the most appropriate alternative. In this study, we utilize various time series techniques to derive estimates of the equilibrium exchange rates in India and China as determined by real economic fundamentals from the 1950s to the 2000s. The relevance and usefulness of the equilibrium exchange rates in the calculation of PSE for the two countries are then discussed. Drawing on the data sets and analyses developed earlier by Mullen, Orden and Gulati (2005) and Sun (2003), we find that agricultural support levels measured by the PSEs (from 1985-2002 for India and from 1995-2001 for China) are sensitive to alternative exchange rate assumptions. Specifically, exchange rate misalignments have either amplified or counteracted the direct effects from sectoral-specific policies. In India, such indirect effects are relatively small and mostly dominated by the direct effects. But in China, especially in recent years, the indirect effect from exchange rate misalignment (undervaluation) has been quite substantial. Results from this study also show that the effect of the exchange rate depends on the relative importance of different PSE components. The increasing share of budgetary expenditures in India's total agricultural support in recent years has resulted in more pronounced exchange rate effects measured by commodity-specific percentage "PSEs" that use the value of production at international prices as the denominator compared to those measured by commodity-specific percentage Market Price Support (MPS) with the same denominator. For China, the exchange rate effects are more similar between the PSE and the MPS measures because budgetary expenditures have been relatively small. The exchange rate effect when the PSE is "scaled up" from covered commodities to an estimate for the total agricultural sector is also demonstrated. Since the commodity coverage in both countries tends to be incomplete and the scaling-up procedure leads to a total MPS of greater magnitude, larger exchange rate effects are found in the scaled-up than the non-scaled-up version of total PSEs. The impact of scaling-up on the indirect effect is proportional to the share of covered commodities in the total value of agricultural production.

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Bibliographic Info

Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2005 Annual meeting, July 24-27, Providence, RI with number 19121.

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Date of creation: 2005
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Handle: RePEc:ags:aaea05:19121

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Keywords: International Relations/Trade;

References

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  1. Sweta Chaman Saxena & Valerie Cerra, 2000. "What Caused the 1991 Currency Crisis in India?," IMF Working Papers 00/157, International Monetary Fund.
  2. Baffes, John & Elbadawi, Ibrahim A. & O'Connell, Stephen A., 1997. "Single-equation estimation of the equilibrium real exchange rate," Policy Research Working Paper Series 1800, The World Bank.
  3. Mullen, Kathleen & Sun, Dongsheng & Orden, David & Gulati, Ashok, 2004. "Producer Support Estimates (PSEs) for agriculture in developing countries," MTID discussion papers 74, International Food Policy Research Institute (IFPRI).
  4. Elbadawi, Ibrahim A & Soto, Raimundo, 1997. "Real Exchange Rates and Macroeconomic Adjustment in Sub-Saharan Africa and Other Developing Countries," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 6(3), pages 74-120, Supplemen.
  5. Mullen, Kathleen & Orden, David & Gulati, Ashok, 2005. "Agricultural policies in India," MTID discussion papers 82, International Food Policy Research Institute (IFPRI).
  6. William M. Liefert & David J. Sedik & Robert B. Koopman & Eugenia Serova & Olga Melyukhina, 1996. "Producer Subsidy Equivalents for Russian Agriculture: Estimation and Interpretation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(3), pages 792-798.
  7. Johan Mathisen, 2003. "Estimation of the Equilibrium Real Exchange Rate for Malawi," IMF Working Papers 03/104, International Monetary Fund.
  8. Hinkle, Lawrence E. & Monteil, Peter J. (ed.), 1999. "Exchange Rate Misalignment: Concepts and Measurement for Developing Countries," OUP Catalogue, Oxford University Press, number 9780195211269, October.
  9. John Williamson, 1994. "Estimating Equilibrium Exchange Rates," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 17, July.
  10. Matthew Harley, 1996. "Use of the Producer Subsidy Equivalent as a Measure of Support to Agriculture in Transition Economies," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(3), pages 799-804.
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  13. Morris Goldstein, 2004. "Adjusting China's Exchange Rate Policies," Working Paper Series WP04-1, Peterson Institute for International Economics.
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  16. Shick, Olga, 2002. "Adjustment of Conventional PSE's Methodology for Economy in Transition," 2002 International Congress, August 28-31, 2002, Zaragoza, Spain 24780, European Association of Agricultural Economists.
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  19. Claudio Paiva, 2001. "Competitiveness and the Equilibrium Exchange Rate in Costa Rica," IMF Working Papers 01/23, International Monetary Fund.
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Citations

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Cited by:
  1. Jongwanich, Juthathip, 2009. "Equilibrium Real Exchange Rate, Misalignment, and Export Performance in Developing Asia," ADB Economics Working Paper Series 151, Asian Development Bank.
  2. Hewitt, Joanna, 2008. "Impact evaluation of research by the International Food Policy Research Institute on agricultural trade liberalization, developing countries, and WTO's Doha negotiations:," Impact assessments 28, International Food Policy Research Institute (IFPRI).
  3. repec:pra:mprapa:25503 is not listed on IDEAS
  4. Demirdöğen, Alper, 2011. "Tarımsal Korumacılık, Korumacılığın Ölçümü ve Türkiye
    [Agricultural Protectionism, Its Measurement and Turkey]
    ," MPRA Paper 35083, University Library of Munich, Germany.

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