Exchange Rate Misalignment and Its Effects on Agricultural Producer Support Estimates: Empirical Evidence from India and China
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.
|Date of creation:||2005|
|Contact details of provider:|| Postal: 555 East Wells Street, Suite 1100, Milwaukee, Wisconsin 53202|
Phone: (414) 918-3190
Fax: (414) 276-3349
Web page: http://www.aaea.org
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Joannes Mongardini, 1998. "Estimating Egypt’s Equilibrium Real Exchange Rate," IMF Working Papers 98/5, International Monetary Fund.
- John Cady, 2003. "The Equilibrium Real Exchange Rate of the Malagasy Franc; Estimation and Assessment," IMF Working Papers 03/28, International Monetary Fund.
- Claudio A Paiva, 2001. "Competitiveness and the Equilibrium Exchange Rate in Costa Rica," IMF Working Papers 01/23, International Monetary Fund.
- Morris Goldstein, 2004. "Adjusting China's Exchange Rate Policies," Working Paper Series WP04-1, Peterson Institute for International Economics.
- Hinkle, Lawrence E. & Monteil, Peter J. (ed.), 1999. "Exchange Rate Misalignment: Concepts and Measurement for Developing Countries," OUP Catalogue, Oxford University Press, number 9780195211269.
- Bojnec, Stefan & Swinnen, Johan F. M., 1997. "The pattern of agricultural price distortions in Central and Eastern Europe," Food Policy, Elsevier, vol. 22(4), pages 289-306, August.
- Valerie Cerra & Sweta Chaman Saxena, 2002.
"What Caused the 1991 Currency Crisis in India?,"
IMF Staff Papers,
Palgrave Macmillan, vol. 49(3), pages 1-5.
- Sweta Chaman Saxena & Valerie Cerra, 2000. "What Caused the 1991 Currency Crisis in India?," IMF Working Papers 00/157, International Monetary Fund.
- 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).
- 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.
- 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.
- Krueger, Anne O & Schiff, Maurice & Valdes, Alberto, 1988. "Agricultural Incentives in Developing Countries: Measuring the Effect of Sectoral and Economywide Policies," World Bank Economic Review, World Bank Group, vol. 2(3), pages 255-271, September.
- Agenor, Pierre-Richard, 1998. "Capital inflows, external shocks, and the real exchange rate," Journal of International Money and Finance, Elsevier, vol. 17(5), pages 713-740, October.
- John Williamson, 1994. "Estimating Equilibrium Exchange Rates," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 17, November.
- Johan Mathisen, 2003. "Estimation of the Equilibrium Real Exchange Rate for Malawi," IMF Working Papers 03/104, International Monetary Fund.
- Virginie Coudert & Cécile Couharde, 2005. "Real Equilibrium Exchange Rate in China," Working Papers 2005-01, CEPII research center.
- 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.
- Ibrahim A. Elbadawi & Raimundo Soto, "undated". "Real Exchange Rates and Macroeconomic Adjustment in Sub-Sahara Africa and Other Developing Countries," ILADES-Georgetown University Working Papers inv093, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
- 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.
- Mullen, Kathleen & Orden, David & Gulati, Ashok, 2005. "Agricultural policies in India," MTID discussion papers 82, International Food Policy Research Institute (IFPRI).
- 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.
- Elbadawi, Ibrahim A. & Soto, Raimundo, 1994. "Capital flows and long-term equilibrium real exchange rates in Chile," Policy Research Working Paper Series 1306, The World Bank. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:ags:aaea05:19121. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.