Exchange Rate Policies & Exchange Rate Policies & AgricultureAgriculture

Ashok Gopala-RaoAshok Gopala-RaoArec404Arec404

Spring 2009Spring 2009

Impacts of price and Impacts of price and exchange rate policies on exchange rate policies on

pesticide use in the pesticide use in the PhilippinesPhilippinesJessica D. TjornhomJessica D. TjornhomGeorge W. NortonGeorge W. Norton

Victor GapudVictor Gapud19981998

Main Purpose To assess the net effects of government

policies on the degree of subsidy or tax faced by pesticide producers and users.

Pesticides Pesticides contribute to sizable productivity

gains

Integrated pest management (IPM)

Import tariff on pesticides 3-5% for technical pesticides

10% for formulated pesticides

60:40 import ratio

Exchange Rate Philippine peso overvalued ~24%

Effects of overvaluation Subsidy for imports

Tax on exports

How does this subsidy relate to import tariffs on pesticides?

Effective Rate of Protection (ERP)

Measures the percentage by which a country's trade barriers increase the value added per unit of output. “net” protection

measure’s effect on firms activities

Takes entire tariff structures into account direct tax policies

exchange rate effects

Calculating ERPFormulated Technical

BPF=Border price PPF= wholesale domestic pricet=Nominal Tariff E0=market exchange rate

Calculating ERP

Then recalculate using E* ( free-trade equilibrium exchange rate) in place of E0

This shows ERP without:

Tariffs or quotas on imports (tm)

Export taxes (tx)

12-25% avg. rate of disprotection

Cymbush was only formulated pesticide

Lannate price error

Negative Divergence indicated overvalued exchange rateAvg. overvaluation = 17.7%

Results For all pesticides, using the equilibrium exchange

rate increases the level of disprotection Meaning that the direct tax (tariffs) is being

mitigated by the overvaluation of the exchange rate

The overvalued exchange rate more than offsets the tariff effects Some level of net subsidy

Greater quantity consumes at a lower price

Cost of producing pesticide is reduced by more than the price reduction

Policy Conclusions Net subsidies are relatively low for pesticide

Very little deterrent for adoption of IPM

If pesticide tariffs reductions occur, policy tools will likely be needed to offset the resulting increased pesticide subsidy.

Trade, exchange rate, Trade, exchange rate, and agricultural pricing and agricultural pricing

policies in the policies in the PhilippinesPhilippines

Adolfo SturzeneggerAdolfo Sturzenegger19901990

Main Purpose To assess the net effects of government

policy on the degree of subsidy or tax on agricultural outputs.

Direct price interventions Price controls or subsidies

Explicit or implicit exports

Taxes on imports or domestic products

Indirect price interventions Industrial protection

Manipulation of the exchange rate

Introduction Four dominant agricultural crops examined:

Rice

Corn

Sugarcane

Coconut

Analysis under assumption of the Philippines being a small open economy

Measures of Intervention

The nominal rate of protection from direct price interventions (NPRD)

The nominal rate of protection from direct and indirect price interventions in the short run (NPRST)

The nominal rate of protection from direct and indirect price interventions in the long run (NPRLT)

ResultsCROP NPRD NPRST NPRLT

Rice 8 -13 -17

Corn 39 12 6

Sugar -18 -37

Coconut -12 -33

(percent)

Taking peso overvaluation into account, rice protection went from positive to negative.

All crops had increased levels of disprotection when taking peso overvaluation into account.

Conclusions Despite direct subsidies on several of the

commodities, all exports were heavily taxed due to the overvalued exchange rate (with some exceptions to corn and rice in some periods)

Eliminating peso overvaluation would: Increase producer prices of rice, corn, sugar,

and coconut about 20%

Help the Philippines improve their agricultural terms of trade

ComparisonComparison

My ThoughtsMy Thoughts

QuestionsQuestions