Agricultural diversification and policy reform
The impact of risk on agriculture and the alternative ways of dealing with it has captured the attention of economists and policy makers for a long time. In recent years, the issue has gained renewed interest. Many countries have started policy reforms aimed at liberalizing domestic markets, removing quantitative restrictions on trade, and opening up their economies to international trade opportunities. As this process develops, producers in different region of the world will start facing increased price variability arising from world market fluctuations, as up to now, mainly due to government marke interventions, domestic producer prices have varied substantially less than international ones (Hazell et. al., 1990; Schiff and Valdes,1992). Hence, risk,and price risk in particular, will most probably be at the core of the implementation problems associated with policy reform packages. It is well known that diversification of the production mix can be a particularly efficient mechanism for diminishing the impact of risk on producers' welfare. In this regard, different public policies may help to deepen diversification in agriculture, public investment in irrigation being the most important example. However, since many of these policies entail a significant use of resources, an important policy question concerns the impact that trade and macro reform may have on risk in agricultural activities, and on the endogenous diversification response by producers. The main objectives of this paper are to: 1) review the problem of price risk in agriculture, especially in the case of domestic markets facing international price fluctuations; 2) examine the potential role for diversification as a way of diffusing price risk; and 3) analyze the interaction between the process of trade and macro reform; price risk, and agricultural diversification. It is important to mention at the outset that the risk perspective - the one adopted in this paper - is just one of the many angles from w
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