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Policy dilemmas in India: The Impact of changes in agricultural prices on rural and urban poverty

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  • Sandra Polaski et al

    ()
    (Carnegie Endowment for International Peace
    Indira Gandhi Institute of Development Research)

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    Abstract

    Trade policy reforms which lead to changes in world prices of agricultural commodities or domestic policies aimed at affecting agricultural prices are often seen as causing a policy dilemma: a fall in agricultural prices benefits poor urban consumers but hurts poor rural producers, while a rise yields the converse. Poor countries have argued that they need to be able to use import protection and/or price support policies to protect themselves against volatility in world agricultural prices in order to dampen these effects. In this paper, we explore this dilemma in a CGE model of India that uses a new social accounting matrix (SAM) developed at the Indira Ghandi Institute of Development Research (IGIDR) in Mumbai. The SAM includes extensive disaggregation of agricultural activities, commodity markets, labor markets, and rural and urban households. This SAM includes 115 commodities, 48 labor types and 352 types of households, (classified by social group, income class, region, and urban/rural). The CGE model based on this SAM can be used to explore the linkages between changes in world prices of agriculture and the incomes of poor rural and urban households, capturing rural-urban linkages in both commodity and factor markets. The results indicate that the inclusion of linkages between rural and urban labor markets is necessary to fully explore, and potentially eliminate, the dilemma. A fall in agricultural prices hurts agricultural producers, lowers wages and/or employment of rural labor, and in some cases spills over into urban labor markets, depressing wages and incomes of poor urban households as well. In these cases both rural and urban poverty increases. The paper explores the strength of these commodity and factor market linkages, and the potential spillover effects of policies affecting agricultural prices.

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    Bibliographic Info

    Paper provided by Indira Gandhi Institute of Development Research, Mumbai, India in its series Indira Gandhi Institute of Development Research, Mumbai Working Papers with number 2008-012.

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    Length: 52 pages
    Date of creation: Jun 2008
    Date of revision:
    Handle: RePEc:ind:igiwpp:2008-012

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    Keywords: Doha negotiations; India trade policy; World prices; Labour market; CGE model;

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    References

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    1. Steve Boucher & J. Edward Taylor, 2006. "Subsistence Response to Market Shocks," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 88(2), pages 279-291.
    2. Devaragan, Shantayanan & Lewis, Jeffrey D. & Robinson, Sherman, 1990. "Policy lessons from trade-focused, two-sector models," Journal of Policy Modeling, Elsevier, Elsevier, vol. 12(4), pages 625-657.
    3. Thomas Hertel & Jeffrey Reimer, 2005. "Predicting the poverty impacts of trade reform," The Journal of International Trade & Economic Development, Taylor & Francis Journals, Taylor & Francis Journals, vol. 14(4), pages 377-405.
    4. Hertel, Thomas & Keeney, Roman & Ivanic, Maros & Winters, Alan, 2007. "Why Isn’t the Doha Development Agenda More Poverty Friendly?," GTAP Working Papers 2292, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
    5. Ravallion, Martin & Lokshin, Michael, 2004. "Gainers and losers from trade reform in Morocco," Policy Research Working Paper Series, The World Bank 3368, The World Bank.
    6. Petia Topalova, 2007. "Trade Liberalization, Poverty and Inequality: Evidence from Indian Districts," NBER Chapters, National Bureau of Economic Research, Inc, in: Globalization and Poverty, pages 291-336 National Bureau of Economic Research, Inc.
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    Cited by:
    1. John Gilbert, . "Agricultural Trade Reform and Poverty in the Asia-Pacific: A Survey and Some New Results," MPDD Working Paper Series, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) WP/08/01, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).
    2. John Gilbert, 2008. "Trade Policy, Poverty, and Income Distribution in CGE Models: An Application to SAFTA," Working Papers, Utah State University, Department of Economics 2008-02, Utah State University, Department of Economics, revised 19 Dec 2008.
    3. Gilbert, John & Banik, Nilanjan, 2010. "Socioeconomic Impacts of Cross-Border Transport Infrastructure Development in South Asia," ADBI Working Papers, Asian Development Bank Institute 211, Asian Development Bank Institute.

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