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Agricultural Price Distortion and Stabilization: Stylized facts and Hypothesis Tests

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  • Masters, William A.
  • Garcia, Andres F.

Abstract

This paper describes agricultural policy choices and tests some predictions of political economy theories. It begins with three broad stylized facts: governments tend to tax agriculture in poorer countries, and subsidize it in richer ones, tax both imports and exports more than nontradables, and tax more and subsidize less where there is more land per capita. We test a variety of political-economy explanations, finding results consistent with hypothesized effects of rural and urban constituents’ rational ignorance about small per-person effects, governance institutions’ control of rent-seeking by political leaders, governments’ revenue motive for taxation, and the role of time consistency in policy-making. We also find that larger groups obtain more favorable policies, suggesting that positive group size effects outweigh any negative influence from more free-ridership, and that demographically driven entry of new farmers is associated with less favorable farm policies, suggesting the arrival of new farmers erodes policy rents and discourages political activity by incumbents. Another new result is that governments achieve very little price stabilization relative to our benchmark estimates of undistorted prices, and governments in the poorest countries actually destabilize domestic prices.

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Bibliographic Info

Paper provided by World Bank in its series Agricultural Distortions Working Paper with number 50301.

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Date of creation: May 2009
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Handle: RePEc:ags:wbadwp:50301

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Related research

Keywords: Distorted incentives; agricultural and trade policy reforms; national agricultural development; Agricultural price distortions; political economy; Agricultural and Food Policy; International Relations/Trade; F13; F14; Q17; Q18; D72; D78; F11; H23;

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  1. Margaret S. McMillan & William A. Masters, 2003. "An African Growth Trap: Production Technology and the Time-Consistency of Agricultural Taxation, R&D and Investment," Review of Development Economics, Wiley Blackwell, vol. 7(2), pages 179-191, 05.
  2. Krueger, Anne O, 1974. "The Political Economy of the Rent-Seeking Society," American Economic Review, American Economic Association, vol. 64(3), pages 291-303, June.
  3. Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, vol. 81(5), pages 1146-55, December.
  4. Hillman, Arye L, 1982. "Declining Industries and Political-Support Protectionist Motives," American Economic Review, American Economic Association, vol. 72(5), pages 1180-87, December.
  5. Kym Anderson & Will Martin, 2009. "Distortions to Agricultural Incentives in Asia," World Bank Publications, The World Bank, number 2611, October.
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  7. Richard E. Baldwin & Frédéric Robert-Nicoud, 2007. "Entry and Asymmetric Lobbying: Why Governments Pick Losers," Journal of the European Economic Association, MIT Press, vol. 5(5), pages 1064-1093, 09.
  8. Anderson, Kym & Kurzweil, Marianne & Martin, Will & Sandri, Damiano & Valenzuela, Ernesto, 2008. "Measuring distortions to agricultural incentives, revisited," Policy Research Working Paper Series 4612, The World Bank.
  9. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  10. Valenzuela, Ernesto & Wong, Sara & Sandri, Damiano, 2007. "Distortions to Agricultural Incentives in Ecuador," Agricultural Distortions Working Paper 48394, World Bank.
  11. Jonathan Isham & Michael Woolcock & Lant Pritchett & Gwen Busby, 2005. "The Varieties of Resource Experience: Natural Resource Export Structures and the Political Economy of Economic Growth," World Bank Economic Review, World Bank Group, vol. 19(2), pages 141-174.
  12. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  13. Timmer, C. Peter, 1989. "Food price policy : The rationale for government intervention," Food Policy, Elsevier, vol. 14(1), pages 17-27, February.
  14. Anthony Downs, 1957. "An Economic Theory of Political Action in a Democracy," Journal of Political Economy, University of Chicago Press, vol. 65, pages 135.
  15. Beck, T.H.L. & Clarke, G. & Groff, A. & Keefer , P. & Walsh, P., 2001. "New tools in comparative political economy: The database of political institutions," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125517, Tilburg University.
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