Exchange Rate Policies & Agriculture

Ashok Gopala-Rao
Arec404 Spring 2009

Impacts of price and exchange rate policies on pesticide use in the Philippines
Jessica D. Tjornhom George W. Norton Victor Gapud 1998

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 measures effect on firms activities

Takes entire tariff structures into account

direct tax policies
exchange rate effects

Calculating ERP
Formulated Technical

BPF=Border price PPF= wholesale domestic price t=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 rate Avg. 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, and agricultural pricing policies in the Philippines

Adolfo Sturzenegger 1990

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

 The nominal rate of protection from direct price

Measures of Intervention

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)

Results
(percent)

CROP Rice Corn

Sugar Coconut

NPRD 8 39
-18 -12

NPRST -13 12
-37 -33

NPRLT -17 6

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

Comparison

My Thoughts

Questions