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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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  2. Anderson, Kym, 1993. "Lobbying Incentives and the Pattern of Protection in Rich and Poor Countries," CEPR Discussion Papers 789, C.E.P.R. Discussion Papers.
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  12. Timmer, C. Peter, 1989. "Food price policy : The rationale for government intervention," Food Policy, Elsevier, vol. 14(1), pages 17-27, February.
  13. 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.
  14. Hillman, Arye L, 1982. "Declining Industries and Political-Support Protectionist Motives," American Economic Review, American Economic Association, vol. 72(5), pages 1180-87, December.
  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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