A General Equilibrium Analysis of Agricultural Exports Growth on the Western Australian Economy

Transcription

1 A contrbuted paper 48 th Annual Conference of the Australan Agrcultural and Resource Economcs Socety February 2004, Melbourne, Australa A General Equlbrum Analyss of Agrcultural Exports Growth on the Western Australan Economy Nazrul Islam Department of Agrculture Western Australa 3 Baron-Hay Court, South Perth, WA 6151 Phone Fax E-mal: nslam@agrc.wa.gov.au Ths paper s based on the Lvng Standards and WA Agrculture, a collaboratve research project carred out at the Economc Research Centre, Unversty of Western Australa. The research was jontly funded by the Department of Agrculture Western Australa and the Australan Research Councl under t s SPIRT scheme. I would lke to thank Ken Clements and Helal Ahammad for ther help n modellng the problem addressed n ths paper and Peter Coyle for hs comments on the early draft of the paper. 1

2 Abstract The paper analyses the economy-wde mpact of agrcultural export growth n Western Australa by applyng a computable general equlbrum model for WA agrculture. The analyss ndcates that agrcultural exports growth lead to ncrease the gross state product (GSP), total employment, total exports and commodty prces. The mpact of the export growth n processed agrcultural commodtes on these macroeconomc components s sgnfcantly hgher than that of the prmary agrcultural commodtes. Combned growth of agrcultural processed commodty account for 80 percent of the GSP ncrease. Except the mnng, and the forestry, loggng and fshng ndustres, all the major ndustry sectors expand. Keywords: CGE Analyss, Export growth, Western Australan Agrculture. 2

3 1. INTRODUCTION Western Australan farms produce far beyond domestc demand for many crops. On the other hand, n recent years, food and agrcultural systems operate n a hghly compettve global context, and Western Australa (WA) s a very mnor player n these markets. Its share for agrcultural goods averages around 0.6 percent only (Islam, 1999). Hence, the mantenance of a compettve agrcultural system and t s ncreased growth n food and agrcultural products t s crtcal to ensurng contnued growth n exports of ths sector. In 1998, the Department of Agrculture WA set an $8 bllon food and agrcultural export target (n 1996/97-dollar term) for 2007/2008 wth a vew to develop polcy strateges for the achevement of ths target and help mantan the economc vablty of the State s food and agrculture ndustres. Snce wthn WA s domestc economy the agrculture sector s lnked wth other sectors through producton processes and domestc consumpton, the target growth of agrcultural exports not only would affect the agrcultural sector but are also lkely to affect other exportng and non-exportng ndustres and busnesses. Indrect effects flowng through the lnkages often tend to be substantal but n general, those effects reman unknown and are therefore overlooked n decson-makng processes. Formulaton of polces and decsons wthout takng those effects nto account may have detrmental effects on the whole economy and the agrculture sector n partcular. Ths s partcularly true for the State and regonal levels where data and modellng scarcty restrcts nformed decson-makng. To some extent, the present study ams to fll ths nformaton gap for WA agrculture by estmatng the drect and ndrect mpacts of exports growth n WA agrculture on the State s economy. Consderng an economc envronment of demand drven scenaro a computable general equlbrum (CGE) model for WA agrculture called WAG 1 s appled to smulate the mpacts of the targeted export growth. Ths paper contnues wth an overvew of the man features of WA agrculture n Secton 2. Usng hstorcal data for the 1990s, WA s agrcultural export growth performance s assessed by classfyng them nto prmary and processed groups n Secton 3. Export growth for the next decade s also assessed n ths secton based on an overvew of world agrcultural outlook and WA s major export destnatons. In Secton 4 the WAG model s brefly ntroduced 1 The WAG s an economy-wde model, developed by the Economc Research Centre, Unversty of Western Australa n collaboraton wth the Department of Agrculture Western Australa. 3

4 and ts smulaton desgn s dscussed. In Secton 4 the smulaton results of the model under the economc envronment of demand drven scenaro are presented. Further results of senstvty analyss are also presented n the secton. The paper s summarsed and concluded n Secton MAIN FEATURES OF WA AGRICULTURE: AN OVERVIEW Qute often nadequaces n avalable nformaton at the State level force WA agrcultural planners and polcy makers to make ther decsons on the bass of natonal averages. Snce, as wll be revealed n ths secton, the economc and agrcultural structures of WA are sgnfcantly dfferent from those of the rest of the Australan (ROA) States, mplcatons of a change n events, ether of the State or the country or of the world, are lkely to be dfferent on the WA economy as compared to the rest of Australa. In ths secton an overvew of dstngushng characterstcs of WA agrculture s hghlghted wth a vew to demonstrate the relatve mportance of growth n WA agrcultural exports. Agrculture s one of the few sectors n WA whose contrbutons to the natonal counterparts far exceed the State s average. More specfcally, WA comprses about 10 percent of the natonal gross domestc product (GDP), whereas ts agrculture accounts for about 15 percent of natonal agrcultural output (Islam, 1999). In the frst half of 1990s WA agrculture accounted for about 5 percent of WA s gross state product (GSP), 17 percent of the State s overseas exports and 6 percent of the total employment (Islam, 1999). It grew at a rate of 6 percent p.a. n ths perod (Islam, 2000), contrbutng about 6 percent to the growth of WA s GSP (Ahammad, 2000a). In terms of economc structure, whle the dfference can be attrbuted largely to the sgnfcantly larger role of the mnng sector n WA than the other states, the relatvely large contrbuton of agrculture to WA s demonstrated n Ahammad and Greg (2000). Fgure 1 reveals that WA s gross value of agrcultural producton (GVAP) 2 s domnated by grans and wool producton compared to that of the ROA. Between 1977/78 and 1999/2000 the total factor 2 GVAP refers to the prmary agrcultural commodtes only. 4

5 productvty (TFP) n WA agrculture grew at an average annual rate of 4.8 percent p.a. compared to that of the natonal average of 3.7 percent p.a. (Islam, 2002). In the frst half of 1990s WA agrcultural exports grew at a faster rate (12 percent p.a.) compared to that (6 percent p.a.) n the ROA. In the same perod the WA gross value of agrcultural producton (GVAP) growth was 6 percent p.a. (Islam, 1999). Snce domestc demands for agrcultural commodtes n WA reman more or less constant, ncreased growth n producton of ths sector means more than proportonate ncreases n the domestc surpluses. Unless the ncreased surpluses are exported the commodty prces and farm ncomes may declne and subsequently, the State economy may be adverse effected. FIGURE 1 DIFFERENCES IN GVAP SHARES OF AGRICULTURAL COMMODITIES BETWEEN WA AND ROA 31 Percentage pont dfference Grans Meat Wool Dary Hortculture Others Notes: 1. A postve dfference mples that the share of a commodty n WA s GVAP s larger than ts share n the ROA s GVAP. The data are averages over the fve years endng 1996/ Grans nclude both cereal and pulses & olseed crops; and meat ncludes both lvestock anmals and poultry. Note that except dary all other commodtes are unprocessed prmary goods. Source: Islam (1999). 5

6 WA agrculture has an extremely hgh level of export orentaton. In 1997/98, the export shares of the producton of major agrcultural commodtes range between 94 and 21 percent wth an overall export share of 80 percent (Table 1). It s therefore mportant to understand the effects of change n the growth of agrcultural exports on the State economy, and the agrculture sector n partcular. Such knowledge wll help dentfy constrants to and scopes for the expanson of agrcultural exports and thereby help develop approprate polcy measures to mantan the WA agrculture sector s global compettveness and sustan hgher farm ncomes. TABLE 1 SHARE OF EXPORTS IN WA AGRICULTURAL PRODUCTION, 1997/98 Commodty groups 1 Export share In percent Cereals 93 Pulses & ol seeds 78 Meat 72 Wool 94 Dary 21 Hortculture 37 New Industres 63 Total 80 $ mllon Value of Total producton 4,710 Note: 1. All the major commodtes nclude both prmary and processed commodtes. The commodty classfcaton s based on the ndustry development programs of Agrculture WA. 2. Cereals nclude wheat, barley, oats and other cereal crops; Pulses & ol seeds ncludes canola, lupns and other gran legumes; Meat ncludes lve and slaughtered beef-cattle, sheep, pgs and all other lvestock anmals; and Hortculture ncludes fresh vegetables, fruts and florcultural commodtes. Source: AGWEST (1998) 6

7 3 ECONOMIC ENVIRONMENT FOR THE MODEL SIMULATION To what extent growth n food and agrcultural exports are lkely to affect the State s economy wll depend on the consderaton of an economc envronment nto a computable general equlbrum (CGE) model under whch they could be generated n the future. Two alternatve economc scenaros are generally consdered to stmulate export growth. One s the demand drven scenaro where export demands for WA agrcultural commodty ncreases and the other s supply drven scenaro where domestc polcy reforms nduce the supply of WA agrcultural commodtes to be effcent and nternatonally compettve and thereby ncrease ther exports. The export growth under these two economc scenaros s lkely to effect the economy dfferently and have two dfferent mplcatons 3. In ths paper we deal wth the economy-wde mpact of the demand drven export growth scenaro only. Before proceedng to the model smulaton and results dscusson we begn ths secton wth a smple graphcal llustraton to conceptualze the mpact of the demand drven scenaro frst and then we provde a bref descrpton of the WAG model followed by the model smulaton and result dscussons. Export demand scenaro Snce Western Australa s share n the global agrcultural market s extremely nsgnfcant t has no nfluence on world market prces (Islam, 2000). Therefore, one way to acheve ncreased exports s to have a favourable change n the world economc envronment that boosts foregn demand for WA agrcultural commodtes. The lkely mmedate effects of ncreased export demand are that the export prce wll ncrease. In response to that prce ncrease domestc producers and consumers prces wll also ncrease, as a greater proporton of the exstng producton wll be exported leavng a lesser quantty avalable for domestc consumpton. Subsequently, producton wll ncrease and thereby ncreasng the prces of lmted nput resources due to ncrease n ther demand. Under ths economc scenaro, the effects of 3 In realty however, a combnaton of both the scenaros would affect WA agrcultural commodty exports. 7

8 agrcultural export growth on domestc demand, output and exports of an endogenous agrcultural commodty n the WAG model s llustrated n Fgure 2. FIGURE 2 EFFECTS OF INCREASE IN FOREIGN DEMAND ON DOMESTIC DEMAND, OUTPUT AND EXPORTS Prce D d D f D D S d D f P P e P* G E A F X C B 0 Q d Q d Q f Q Q* Q e f Quantty The ntal domestc and foregn demand curves of a WA commodty are represented by D d and D f respectvely wth the aggregate demand (.e. the horzontal addton of D d and D f ) denoted by D and S d denotes the domestc supply curve. The market s ntally n equlbrum at pont X wth prce P * and output Q *. The total ntal sales of the commodty are gven by OQ * of whch OQ d s the domestc sale (at pont E on the D d curve) and OQ f s the exports (at pont A on the D f curve). Under ths economc scenaro the D f curve shfts horzontally to D f and therefore, the aggregated demand curve D also shfts to D. At the exstng level of output Q * the prce receved for the commodty wll be P at pont C. In response to the rsng prce from P * to P the 8

9 producton of the commodty wll ncrease. As supply ncreases the prce decreases untl a new equlbrum s acheve at pont B. In the new equlbrum both output and prce of the commodty have ncreased from Q * to Q e and P * to P e respectvely. Exports have ncreased to OQ f (at pont F on the D f curve) but domestc sales have decreased to OQ d (at pont G on the D d curve). Note that the llustraton s a hghly smplfed partal equlbrum analyss. The degree of effects on domestc demand, output and exports depends on the levels of own and cross prce elastctes of demand and supply. Snce WAG s a general equlbrum model t takes account of a few less drect effects of the export growth such as: 1. shfts n domestc agrcultural ndustres supply curves due to ncreases n wages and the cost of ntermedate nputs; 2. shfts n domestc demand curve for ntermedate nputs; and n domestc nvestment, household and government demand curves due to changes n actvty levels; and 3. effects of domestc sales due to substtutons by purchases between domestc and mported sources of supply. Moreover, when export growth for a number of commodtes are smulated smultaneously the resultng effects for a partcular commodty may not be the same as llustrated. In addton, snce WAG s a general equlbrum model for the WA economy wth only a partal equlbrum treatment of the rest of the world ncludng rest of Australa, the model results need to be used n consderaton of these factors whch are not modelled. Wth these lmtatons, the effects of future export growth n WA agrcultural commodtes are smulated n ths secton. The WAG model 4 The WAG (short for WA agrculture) s an economy-wde CGE model for the WA economy wth a specal focus on the State s agrcultural sector. It s a sngle-regon mult-sectoral model. The model s smlar to that of ORANI (Dxon et al. 1982) n ts theoretcal structure, except that ORANI s a sngle-country model for Australa. As a CGE model, WAG captures the lnkages among WA ndustres n some detal. It explctly ncorporates producers and 9

10 consumers decsons, takes nto account government polces and consders the constrants such as lmted supples of the prmary factors of producton that the economy faces. The nnermost parts of the WAG are: (a) ndustres demands for nput and ther supples of commodtes, (b) demands for commodtes by households and governments and (c) the foregn trade sector, whch comprses mports nto and exports from WA. The WAG s an extenson of the prevous WA model WAM (see Clements et al., 1996, Ye, 1998). The specal feature of the WAG compared to WAM s that the State s agrculture sector s gven more detaled coverage by sgnfcantly dsaggregatng the prmary agrcultural commodtes. Whle the theoretcal structure between the WAM and WAG models remans the same, the dfference between the two n terms of the specfcaton of the producton technology of the agrculture sector and the ndustry/commodty classfcatons and coverage, are substantal (see Ahammad, (2000b) for detal). The model specfes 113 broadly defned commodtes produced by 105 broad ndustres (see Table A1 n the Appendx A). Of the 105 WAG ndustres, two are agrcultural: Broadacre agrculture (henceforth Agrculture for short) and Dary. The ndustry Agrculture produces nne commodtes: Sheep meat, Wool, Cereals, Pulses & olseeds, Beef cattle, Pgs, Poultry, Hortculture, and New ndustres & other agrculture. The jont-producton nature of Agrculture dstngushes t from the non-agrculture ndustres. 5 The three-level nested producton technology for Agrculture (see Fgure A1), descrbed n detal n Ahammad (2000b), entals a three-stage decson makng process by farms whereby they choose a combnaton of nputs and outputs to maxmse profts. As regards the non-agrculture ndustres, each of them produces a sngle commodty usng materals, labour and captal as nputs so as to mnmse costs subject to a nested producton technology. Each of the materal nputs s separable from the others, as well as from prmary nputs. Substtuton takes place between the prmary factors. All commodtes are dstngushed accordng to ther sources of supply, WA and non-wa. Followng Armngton (1969), locally sourced commodtes are treated as an mperfect substtute for mports of the same statstcal category. WAG specfes consumers who own prmary factors, and a consoldated government that collects revenue and spends on consumables. Household 4 The contents of ths sub-secton are mostly reproduced from Ahammad (2000). The model s developed at the Economc Research Centre, Unversty of Western Australa n collaboraton wth Agrculture Western Australa under the SPIRT project jontly funded by Australan Research Councl and Agrcultural WA. 5 The jontness s consdered here to mean jontness n nput quanttes and to mply that decsons about producton of one commodty are dependent on those about the producton of other commodtes. Note that one farm producng many outputs does not necessarly mean jontness n nput quanttes. 10

11 consumpton demand s based on the assumpton of preference ndependence and utlty maxmsaton. WAG can be vewed to comprse the followng man buldng blocks: equatons descrbng the fnal demands for consumpton, nvestment and government expendture; equatons descrbng demands for ntermedate nputs and prmary factors by ndustres and ther output supples; equatons specfyng the zero pure proft (.e. total revenue equals total costs) condtons, as mpled by compettve markets; equatons settng out market-clearng condtons for locally produced commodtes and prmary factors; and mscellaneous equatons defnng prces, revenue from taxaton, gross state product, total consumpton and total trade. Smulaton of the model The targeted levels of export growth for prmary and processed agrcultural commodtes are presented n Column 2 of Table 2. As llustrated n Fgure 2 above, we assume that these sets of growth can be acheved n the economc envronment of ncreased export demand.e. wth hgher export prces. Gven the export demand equatons and elastctes used n the WAG model we can calculate these hgher ntal prces based on the export demand equaton of the model (see Appendx B) 6. These hgher ntal ncreases n prce are presented n column 3 of Table 2. Note that nstead of usng export growth we used these export prce changes as shfters of the export demands for the export commodtes. Followng Hggs (1986) these values are used as nputs nto WAG for smulatng the effects of ncreased export demand curves for WA agrcultural commodtes. In other words, they are used n ths secton as an exogenous shock to the model for smulaton and the export varables for these commodtes are treated as endogenous (see Table B1 for economc closer of the WAG Model). 6 The techncal detals on the specfcaton the demand shfters are gven n Appendx B. 11

12 TABLE 2 SHIFTS IN FOREIGN DEMAND FOR AGRICULTURAL COMMODITIES IN THE WAG MODEL Exogenously shocked export commodtes (1) Growth (percent p.a) (2) Model Shocks 1 (3) Prmary commodtes In percent Sheep meat (lve) Wool Grans Pulses & olseeds Beef cattle (lve) Pgs Hortculture New Industres & other agrculture Processed commodtes Meat & meat products Dary products Ols & fats Flour mll products & cereal foods Beer & malt Wne & sprts Leather & leather products Overall growth Note: 1. The values are calculated by dvdng the values of export growth provded n Column 2 wth a chosen export elastcty value of 20 for all the commodtes (see Appendx B). 2. Export share weghted growth. 4 SIMULATION RESULTS Effects on prces For the conformty of the smulated results wth the graphcal llustraton n Fgure 2, we frst examne the mpacts on export prces and quanttes and also on domestc producton. In Table 3 the effects on export quanttes and prces, and on producton quanttes are presented for 12

13 the overall prmary and processed agrcultural export commodtes 7. As llustrated n Fgure 2, the model results reveal that the ntal ncreases n export demand have ncreased the prce and quantty of exports as well as the quantty of producton. However, at the new equlbrum the prce becomes less than the ntal ncrease. Smlar s the result we get n Table 3. The level of the overall ncrease n the smulated export prce (0.34 percent) s less than the ntal overall ncrease of 0.51 percent (see the last entry n column three of Table 2). TABLE 3 A TYPICAL-YEAR EFFECT OF CHANGE IN EXPORT DEMAND ON EXPORT PRICE AND QUANTITIES, AND PRODUCTION (Percent change) Exogenously shocked export commodtes Export prce Export volumes Producton (1) (2) (3) (4) Prmary commodtes Processed commodtes Overall Note: 1. Share-weghted sum of the exogenous shocked exported commodty components. Source: WAG smulaton. Table 4 presents the mpact on the prces of 10 broad sectors 8. The results ndcate that ncreased agrcultural export demand leads to the ncrease n both producers and consumers prces of agrcultural as well as non-agrcultural sectors. In general, the mpact on producers prces s relatvely hgher than on the consumers prces. The most notceable mpact s on the prces of Agrcultural servces and the Dary ndustry. 7 The detal of the changes n prces and producton quanttes for the exogenously shocked commodtes are gven n Table C2 of Appendx C. 8 Table C2 of Appendx C presents more detaled results and the composton of the broad sectors. 13

14 TABLE 4 TYPICAL-YEAR EFFECTS OF EXPORT GROWTH IN WA AGRICULTURAL ON SECTORAL PRICES 1 (Percent change) Sector Effects of export growth (1) (2) Producers prce Agrculture.36 Dary.96 Servces to agrculture.60 Forestry, loggng & Fshng -- Mnng -- Agrculture processng.33 Other manufacturng.01 Trade and transport.04 Fnancal and busness servces.04 Other servces.03 Total.05 Consumers prce 2 Agrculture.25 Dary.49 Servces to agrculture.58 Forestry, loggng & Fshng -- Mnng -- Agrculture processng.23 Other manufacturng.01 Trade and transport.03 Fnancal and busness servces.03 Other servces.07 Total.07 Notes: 1. The percentage changes are relatve to 1994/95 (the base year) levels. Tables C2 of Appendx C presents more detaled results and composton of the agrcultural sector. 2. Refers to the composte prce of a good from both local and mported sources. The consumers prce for locally produced commodtes ncludes sales taxes on the top of the correspondng producers prce. -- Imples that the number s less than Source: WAG smulatons. 14

15 Ahammad (2000a), n hs study by applyng the WAG model, found that ncrease n WA agrcultural producton ncreases the prce of Servces to agrculture. Snce ths ndustry ncludes, nter ala aeral seedng, crop and pasture dustng or sprayng servces, wool shearng servces, packagng servces, farm rrgaton servces and veternary servces expanson n agrcultural producton drves the expanson of ths sector. In Table 4 we fnd that both the producers and consumers prces for ths sector are also among the hghest. Ths s because, gven the ntal stock of ts supply ncreased agrcultural producton due to ncrease n exports nduces ncreased demand for ths sector and thereby ncreasng ts prce. Snce the Dary-cattle ndustry s closely lnked wth Beef-cattle and Meat & meat products n terms of the supply of steers and calves, export growth n these two commodtes ncreases demand for Dary-cattle thereby ncreasng ts prce. We fnd n Table 4 that both the producers and consumers prces have ncreased although the former has ncreased more than the latter. Macroeconomc effects Table 5 presents the mpact on major macroeconomc ndcators. The results ndcate that the State s real GSP (at market prce) ncreases by 0.05 percent. In the WAG model the change n real GSP at market prce s measured as the dfference between the changes n the GSP at nomnal prce and the CPI. Wth the overall ntal export growth of 8.4 per cent n WA agrculture (both prmary and processed), the overall export demand shfts upward by 0.51 percent 9 whch ndcates a rse n overall agrcultural export prce. Ths shft n export demand gves rse to the overall agrculture export to ncrease by 1.24 percent (see the last row and column 3 of Table 3 above). The drect and ndrect mpact on the GSP can be measured n the followng way. Snce an overall 0.51 shft n export demand has ncreased agrcultural exports by 1.24 percent and thereby ncreasng GSP by 0.05 percent and snce WA agrcultural exports 10 n the WAG model 9 The overall upward shft of the composte exports demand curve for the WA agrcultural commodtes can be calculated at 0.51 percent. Ths s calculated by takng the sum of the share weghted export growth of ndvdual commodtes deflated by the export prce elastcty of 20. The followng formula s used to calculate. α (β g η) where; α s the overall export demand shfter; β s the export share; g s the export growth; η s the export prce elastcty; and s the th commodty. 10 Note that n ths study agrcultural exports nclude both the prmary and secondary agrcultural commodtes. = n 15

16 comprse 5.12 percent of the GSP the drect contrbuton of the export ncrease would be about ( ) By deductng ths amount from the total GSP ncrease of 0.05 percent (.e ) we get -.01 percent as the ndrect contrbuton. The mplcaton of ths result s that the export growth n agrculture contracts growth n some non-agrcultural sectors that are hghly export orented. For example, the Mnng and Forestry, loggng & fsheres sectors 11. We explaned earler the reasons for ther contracton. TABLE 5 MACRO ECONOMIC IMPACT OF EXPORT GROWTH IN WA AGRICULTURE (Percent change 1 ) Macro-economc varables (1) effects of export growth (2) Consumers Prce Index (CPI) 0.07 GSP 2 at market prce 0.05 Total consumpton (real) 0.04 Aggregate employment 0.10 Total mports 0.09 Total exports 0.12 Notes: Source: 1. The percentage changes are relatve to 1994/95 (the base year) levels. 2. GSP s gross state product, equvalent to gross domestc product (GDP) WAG smulatons. The total mpact of commodty specfc ncrease n export demand on the GSP s gven n Table 6. Although nsgnfcant, the result reveals that wool; beef-cattle and pgs have negatve mpacts on the GSP. Ths s due to ther relatvely small shares n total agrcultural exports and the GSP, and ther cross prce elastctes of supply wth grans beng small and negatve n the WAG model. However, t s nterestng to note that all the processed agrcultural commodtes have postve mpact on the GSP and ther combned shares add to a total of more than 80 percent 11 The reason for ths contracton s explaned below n the mpact on economc structure sub-secton. 16

17 of the GSP ncrease. Whle the combned effect of the ncreased demand for lve anmal (.e. Sheep, beef-cattle and pgs) exports on GSP s negatve the relatve effect of the ncreased demand for meat and meat products on the GSP s sgnfcantly hgh. Ths result ndcates that WA economy wll be better off by exportng meat and meat products as opposed to exportng lve anmals. By analysng the mpact on total consumpton we fnd that the overall consumpton has ncreased by 0.04 percent (Table 5). But for most of the prmary ndustry commodtes the mpacts are negatve (Table 6). The ratonale for the negatve mpact s that, the ncrease n output prces results n a hgher producers ncome but producers spend a relatvely hgher proporton of ther addtonal ncome for the consumpton of non-agrcultural commodtes. On the other hand, a rse n consumpton prces s lkely to reduce consumers demand for the prmary commodtes. Therefore, gven the commodty export shares and ther demand and supply elastctes 12 n the WAG model, on balance ncreased export demand for most of the prmary commodtes have negatve mpacts on consumpton and on the CPI (Table 6). In Table 5, t s revealed that the CPI ncreases by 0.07 percent due to overall ncreases n the export demands for WA agrcultural commodtes. Ths ncrease n CPI means wth a base of 100, the extent of general prce ncrease only as a result of agrcultural export growth. For example, f n the absence of export growth nflaton were to rse by say, three percent, then wth the growth, nflaton would rse by 3.07 percent. In other words, a rse n agrcultural export demand would add 2.3 percent (.e., (.07 3) 100) to the State nflaton rate. 12 In the WAG model, the supply elastctes estmated by Ahammad and Islam (1999) for the WA agrcultural commodtes are used. The own-prce elastctes for Beef-cattle and Wool are sgnfcantly smaller than the Grans and Sheep & lamb. Then agan, the cross-prce elastctes between the Beef-cattle and Grans, and Beef-cattle and Sheep & lamb are negatve. 17

18 TABLE 6 MACRO ECONOMIC IMPACT OF EXPORT GROWTH IN WA AGRICULTURE (DECOMPOSED IN PERCENT SHARE 1 OF COMMODITY COMPONENTS) (Percent) Prmary commodtes Processed commodtes Macro-economc varables Sheep meat (lve) Wool Grans Pulses & olseeds Beef cattle (lve) Pgs Hortculture New Industres & other agrculture Meat & meat products Dary products Ols & fats (MIXED) Flour mll products & cereal foods Beer & malt Wne & sprts Leather & leather products Total (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) Consumers Prce Index GSP 2 at market prce Total consumpton (real) Aggregate employment Total mports Total exports Notes: 1. The percentage shares are based on the fgures n Table C3 of Appendx C. 2. GSP s Gross State Product, equvalent to Gross Domestc Product (GDP). 18

19 To understand more clearly about the ways the CPI ncreases the followng analyss n some detal would be helpful. For smplcty, let us consder for the tme beng that all agrcultural exports as one composte export commodty and assume that domestc demand for t s completely nelastc. Hence, the ntal mpact s the upward shft of the foregn demand curve for the WA composte commodty to cause ts local prce to ncrease by the same amount 13. Snce we have used a multproduct nature of WA agrculture, the lnkages between commodty specfc world prce ncrease and the CPI wll be subtler. The ncrease n the domestc prce of one commodty wll nduce producers of other commodtes to change ther output mxes n favour of the commodty at the expense of the producton of other commodtes. Ths reducton n output of other commodtes wll cause ther domestc consumpton prce to ncrease. If a few of these other commodtes sgnfcantly domnate the ndex of consumer prces ther rse n domestc consumpton prce wll ncrease the CPI. By decomposng the CPI change nto commodty specfc contrbutons we can dentfy whch ndvdual commodty component domnates the overall CPI changes due to changes n ther ntal export growth. Table 6 reveals that processed commodtes are the major contrbutors (more than 50 percent) to the CPI changes. In general, compared to the prmary commodty exports, all the processed commodtes have postve contrbutons to the CPI change. The exports of the processed commodtes contrbute more than 80 percent of the CPI change. From among the processed commodtes, the meat & meat products (41 percent) and the dary products (18 percent) and from the prmary commodtes cereals (21 percent) are the major contrbutors. As explaned above, wth the ncrease n export demand for these commodtes ther consumpton prce ncreases (see Table C2 of Appendx C) and hence the CPI. However, although nsgnfcant, t s nterestng to note that other than grans (ncludng pulses & olseeds), most of the prmary commodtes have negatve contrbutons to the CPI (Table 6). The reason for negatve contrbutons of these prmary commodtes to the overall CPI can be explaned n two ways. One, n terms of ther share n the domestc consumpton bundle that s used to measure the CPI and the other, n terms of changes n the producton mx due to changes n prces. Snce most of the prmary commodty (such 13 Hggs (1986) n hs study for Australan agrculture has explaned how the CPI ncreases due to an ncrease n domestc prce through the farly drect mechansm of nput-output lnkages. 19

20 as wool and beef-cattle lve) shares n the domestc consumpton are ether zero or hghly nsgnfcant, an ncrease n ther consumpton prces due to ncrease n ther export demand are nadequate to have postve mpact on the CPI. The overall mpact on the aggregate employment s postve 0.1 percent. However, the combned ncrease n export demands for lve anmal ndustres (.e. sheep-meat (lve), wool, beef-cattle and pgs) have negatve mpact on the States total employment. The reason for ths s that the prce elastcty of demand for labour n the producton of WA beef-cattle and other lve anmals n the model s negatve percent. The export of gran crops contrbuted postvely on the State s employment. Nonetheless, overall, the processed agrcultural commodty export contrbutes more than 75 percent to the State s employment ncrease of 0.1 percent. On the total exports the overall mpact s 0.12 percent. Except for the beef-cattle, pgs and hortculture both the prmary and processed commodtes have postve mpacts (Table 6). Snce the cross prce elastctes of supply and the relatve shares n producton and exports of these commodtes are negatve and small compared to sheep (lve) and grans, the ncrease n the prces of sheep (lve) and grans due to ther export ncrease more than offset the ntal ncrease n exports of beef-cattle, pgs and hortculture. Therefore, on balance they have negatve contrbutons to total exports. Smlar s the result wth respect to the mpact on total mports (Table 6). Because of the ncrease n the prces of nputs from domestc source, compettve mports of these nputs have ncreased for most of the commodtes. However, the comparson between the mpact on exports and mports reveals that the State s balance of trade moves to surplus by ncreasng exports of most of the commodtes. Impact on economc structure An analyss of the mpact on producton n Table 7 reveals that ncreased demand for agrcultural exports has benefted both agrcultural and non-agrcultural sectors n terms of ther ncreases n producton. The exceptons are however the Mnng and Forestry, loggng & fshng sectors. Snce these two sectors are hghly export-orented they 14 See Ahammad and Islam (1999) for ther estmated labour prce elastctes of demand for major agrcultural commodtes n WA. 20

21 suffer a contracton. Ahammad (2000a) mentoned n hs study that ths type of contracton s a reflecton of the reverse Gregory effect (Gregory, 1976). That means, when the hghly export-orented agrcultural sector further expands from ts ncreased exports the exchange rate n real terms apprecates and thus hurts these export-orented sectors. In general, agrcultural exports boost substantal growth n sectoral producton partcularly for the sectors that are lnked wth agrculture. It s nterestng to note that the agrcultural processng sector expands twce as much as the agrculture sector. TABLE 7 TYPICAL-YEAR EFFECTS OF EXPORT GROWTH IN WA AGRICULTURAL ON SECTORAL PRODUCTION (Percent change) Sectors Effects of export growth (1) (2) Agrculture 0.25 Dary 0.31 Servces to agrculture 0.30 Forestry, loggng & Fshng Mnng Agrculture processng 0.56 Other manufacturng 0.01 Trade and transport 0.06 Fnancal and busness servces 0.04 Other servces 0.03 Notes: Source: Total The percentage changes are relatve to 1994/95 (the base year) levels. Table C2 of Appendx C presents more detaled results and composton of the agrcultural sector. WAG smulatons Other major benefcares are the Dary-cattle and Servces to agrculture sectors. As explaned earler, an expanson of agrcultural producton ncreases the prce of Servces to agrculture. A substantal ncrease n ts prce (see Table 4) stmulates a substantal expanson of ths sector. In the same ven the expanson of the Dary ndustry can also be explaned. 21

22 Senstvty analyss In the above smulatons we have used an export demand elastcty 15 of 20 for each of the exogenously shocked commodtes. To examne the robustness of the above results we run another smulaton of the model wth a dfferent set of elastctes. These elastctes and shocks are gven respectvely n column 4 and 6 of Table 8. Note that among the 15 exogenously shocked commodtes only four (Wool, Cereals, Pulses & olseeds and Meat & meat products) of them are changed wth new elastcty values. These values are taken from Hggs (1986). Snce relable estmates of export demand elastctes for other commodtes are not avalable we left ther orgnal elastctes unchanged. We notce that the elastcty for wool used by Hggs (1986) s about 15 tmes lower and the remanng three are about half of those we used n the WAG orgnal database. In smulatng the model we used the same economc envronment of export demand ncrease as llustrated n Fgure 2 and appled the same approach to calculate the new set of demand shfters to shock the model. The new shock values 16 are gven n column 6 of Table 8. Instead of analysng commodty specfc results n detals, the macroeconomc mpact s analysed based on the new smulaton results presented n column 3 of Table 9. For the purpose of comparson the prevous macroeconomc results are reproduced n column 2 of the table. Wth lower elastcty of export demand the mpact on all the macroeconomc varables have ncreased. However, the percentage ncrease s not the same across the varables. Column 4 shows that the total consumpton ncreases the most (62 percent) followed by the total exports (40 percent). On the other hand total mport ncrease the least (16 percent). From ths analyss t s dffcult to ndcate exactly whch of the new elastctes s the most senstve. Smulaton of the model for each ndvdual commodty wth the new elastcty would have provded some ndcaton. 15 Export demand elastcty of 20 means f the export prce of a commodty ncreases by one percent the export demand for that commodty wll declne by 20 percent. 16 These values are calculated by deflatng the export growth n column 2 wth ther correspondng elastctes n column 4 of Table 8. 22

23 TABLE 8 ALTERNATIVE SHOCKS BASED ON SELECTIVE CHANGES IN PRICE ELASTICITIES OF EXPORT DEMAND Exogenously shocked export commodtes Export growth 1 Elastcty of export demand Shocks 4 PRIMARY AGRICULTURAL COMMODITIES (In percent) WAG database 2 Hggs (1986) Prevous New (1) (2) (3) (4) (5) (6) Sheep meat (lve) (MP) Wool (WP) Grans (CP) Pulses & olseeds (POP) Beef cattle (lve) (MP) Pgs (MP) Hortculture (HP) New Industres & other agrculture (NI) SECONDARY AGRICULTURAL COMMODITIES Meat & meat products (MP) Dary products (DP) Ols & fats (POP & MP mxed) Flour mll products & cereal foods (CP) Beer & malt (CP) Wne & sprts (HP) Leather & leather products (MP) Notes: 1. Taken from column 2 of Table 2. Note that these growth rates are based on $8 bllon strategc export target set by the Department of Agrculture WA (Agrculture WA, 1998). 2. Taken from the WAG database. These elastctes are used n the prevous smulaton. 3. The shaded entres only are the new elastctes taken from the study of Hggs (1986), p 17. The export demand elastcty of 12.5 used by Hggs for wheat s used for both the Cereals and Pulses & olseeds n ths smulaton. 4. The shock levels n columns 5 and 6 are calculated respectvely by dvdng the entres n column 2 wth the correspondng entres n columns 3 and 4. 23

24 TABLE 9 MACRO ECONOMIC SENSITIVITY TO CHANGE IN AGRICULTURAL EXPORT DEMAND ELASTICITIES Macroeconomc varables Prevous 1 New 2 Dfference 3 (1) (2) (3) (4) Percent change In percent Consumer Prce Index GSP 2 at market prce Total consumpton (real) Aggregate employment Total mports Total exports Notes: 1. Taken from column 2 of Table Based on the model shocks gven n column 6 of Table The dfference s the percent change from column 2 to column 3. 5 SUMMARY AND CONCLUSIONS Western Australan agrcultural sector s producton has been ncreasng sgnfcantly over the last decade. However, gven the small sze of the State s domestc market, sustenance of ths producton growth depends on the growth of ts agrcultural commodty exports. The objectve of ths study was to nvestgate the mpact of growth n the exports of Western Australan agrcultural commodtes on the State s economy by applyng a computable general equlbrum model called, WAG (short for WA agrculture). The WAG s an economy-wde model for Western Australa wth specal focus on the State s agrcultural sector. The model s developed jontly by the Economc Research Center, Unversty of Western Australa and the Department of Agrculture Western Australa. 24

25 The export growths were estmated n ths study for 15 agrcultural commodtes, havng them classfed nto prmary and processed groups. The growth s estmated based on the export targets set by the Department of Agrculture, Government of Western Australa. These growths are smulated nto the WAG model consderng an economc envronment where the export demand s drven by a favourable external economc envronment. Secton 2 presents an overvew of the dstngushng features of the WA agrcultural sector, whch hghlghts that the sector has an extremely hgh level of export orentaton. The export shares of the producton of major agrcultural commodtes range between 94 and 21 percent wth an overall export share of 80 percent. Secton 3 provdes a bref descrpton of the WAG model and ts smulaton desgn and Secton 4 deals wth the smulaton results of the economy-wde mpact of the demand drven export growth n WA agrculture. Secton 4 also presents some results of senstvty analyss. The analyss suggests that ncrease n the demand for agrcultural export lead to the ncreases n gross state product (GSP), total employment, total exports and commodty prces. Dary-cattle and Servces to agrculture sectors become the most postvely effected sectors. Both prces and producton of these sectors ncrease sgnfcantly compared to other sectors. However, some non-agrcultural sectors that are hghly export-orented such as Mnng and Forestry, loggng & fsheres, contract. Ths happens because of the real exchange apprecaton due to ncrease n exports n one sector of the economy, whch s also hghly export-orented. Consequently, the net ncrease n GSP becomes less than the drect contrbuton of agrcultural export growth. For agrcultural commodty specfc mpacts on the state economy the results are mxed. Whle most of the agrcultural ndustry expands due to ther respectve export growth but ther ndvdual contrbuton to the macroeconomc components become dfferent when they smultaneously compete for lmted land and captal. However, all the processed agrcultural commodtes have postve mpacts on the GSP and ther combned contrbutons account for 80 percent of the GSP ncrease. Interestngly, the results suggest that WA economy becomes better off by exportng meat and meat products as opposed to exportng lve anmals. 25

26 The results of a senstvty analyss suggest that wth lower elastcty of export demands for wool, cereals and pulses and ol seeds, the mpacts on GSP, total employment, total exports and prces becomes greater. In concluson, the demand drven scenaro ncreases n the demand for agrcultural exports are benefcal to the WA economy as well as to the prmary and processng agrcultural sectors. Snce the demand drven scenaro s beyond the control, the effects of supply drven scenaro as an alternatve to enhance WA agrcultural exports needs to be examned to help n the development and mplementaton of approprate domestc polces and strateges. 26

27 APPENDIX A TABLE A1 WAG S COMMODITIES AND INDUSTRIES WAG commodty WAG ndustry 1 Sheep meat 2 Wool 3 Cereals 4 Pulses & olseeds 5 Beef cattle 1. Agrculture 6 Pgs 7 Poultry 8 Hortculture 9 New ndustres & other agrculture 10 Dary 2 Dary 11 Servces to agrculture; huntng & trappng 3 Servces to agrculture; huntng & trappng 12 Forestry & loggng 4 Forestry & loggng 13 Commercal fshng 5 Commercal fshng 14 Coal 6 Coal 15 Ol & gas 7 Ol & gas 16 Iron ore 8 Iron ore 17 Non-ferrous metal ore 9 Non-ferrous metal ore 18 Other mnng 10 Other mnng 19 Servces to mnng 11 Servces to mnng 20 Meat & meat products 12 Meat & meat products 21 Dary products 13 Dary products 22 Frut & vegetable products 14 Frut & vegetable products 23 Ols & fats 15 Ols & fats 24 Flourmll products & cereal foods 16 Flourmll products & cereal foods 25 Bakery products 17 Bakery products 26 Confectonery 18 Confectonery 27 Other food products 19 Other food products 28 Soft drnks, cordals & syrups 20 Soft drnks, cordals & syrups 29 Beer & malt 21 Beer & malt 30 Wne & sprts 22 Wne & sprts 31 Wool scourng 23 Wool scourng 32 Textle fbres, yarns & woven fabrcs 24 Textle fbres, yarns & woven fabrcs 33 Textle products 25 Textle products 34 Knttng mll products 26 Knttng mll products 35 Clothng 27 Clothng 36 Footwear 28 Footwear 37 Leather & leather products 29 Leather & leather products 38 Sawmll products 30 Sawmll products 39 Plywood, veneer & fabrcated wood 31 Plywood, veneer & fabrcated wood 40 Other wood products 32 Other wood products 41 Pulp, paper & paperboard 33 Pulp, paper & paperboard 42 Paperboard contaners & other paper products 34 Paperboard contaners & other paper products 43 Prntng & servces to prntng 35 Prntng & servces to prntng 44 Publshng; recorded meda & publshng 36 Publshng; recorded meda & publshng 45 Petroleum & coal products 37 Petroleum & coal products 46 Fertlsers 38 Fertlsers 47 Other basc chemcals 39 Other basc chemcals 48 Pants 40 Pants 49 Soap & other detergents 41 Soap & other detergents 50 Medcnal, pharmaceutcal & chemcal products 42 Medcnal, pharmaceutcal & chemcal products 51 Rubber products 43 Rubber products 52 Plastc products 44 Plastc products 53 Glass & glass products 45 Glass & glass products 54 Ceramc products 46 Ceramc products (contnued on next page) 27

28 TABLE A1 (contnued) WAG S COMMODITIES AND INDUSTRIES WAG commodty WAG ndustry 55 Cement & lme 47 Cement & lme 56 Concrete slurry 48 Concrete slurry 57 Plaster & other concrete products 49 Plaster & other concrete products 58 Other non-metallc mneral products 50 Other non-metallc mneral products 59 Iron & steel 51 Iron & steel 60 Basc non-ferrous metals & products 52 Basc non-ferrous metals & products 61 Structural metal products 53 Structural metal products 62 Sheet metal products 54 Sheet metal products 63 Fabrcated metal products 55 Fabrcated metal products 64 Motor vehcles & parts 56 Motor vehcles & parts 65 Shps & boats 57 Shps & boats 66 Ralway equpment 58 Ralway equpment 67 Arcraft 59 Arcraft 68 Photographc & scentfc equpment 60 Photographc & scentfc equpment 69 Electronc equpment 61 Electronc equpment 70 Household applances 62 Household applances 71 Other electrcal equpment 63 Other electrcal equpment 72 Agrcultural machnery 64 Agrcultural machnery 73 Mnng & constructon machnery & equpment 65 Mnng & constructon machnery & equpment 74 Other machnery & equpment 66 Other machnery & equpment 75 Prefabrcated buldngs 67 Prefabrcated buldngs 76 Furnture 68 Furnture 77 Other manufacturng 69 Other manufacturng 78 Electrcty supply 70 Electrcty supply 79 Gas supply 71 Gas supply 80 Water supply; sewerage & dranage servces 72 Water supply; sewerage & dranage servces 81 Resdental buldng constructon 73 Resdental buldng constructon 82 Other constructon 74 Other constructon 83 Wholesale trade 75 Wholesale trade 84 Retal trade 76 Retal trade 85 Accommodaton, cafes & restaurants 77 Accommodaton, cafes & restaurants 86 Road transport 78 Road transport 87 Ral, ppelne & other transport 79 Ral, ppelne & other transport 88 Water transport 80 Water transport 89 Ar & space transport 81 Ar & space transport 90 Servces to transport; storage 82 Servces to transport; storage 91 Communcaton servces 83 Communcaton servces 92 Bankng 84 Bankng 93 Non-bank fnance 85 Non-bank fnance 94 Fnancal asset nvestors 86 Fnancal asset nvestors 95 Insurance 87 Insurance 96 Servces to fnance, nvestment & nsurance 88 Servces to fnance, nvestment & nsurance 97 Ownershp of dwellngs 89 Ownershp of dwellngs 98 Other property servces 90 Other property servces 99 Scentfc research, techncal & computer servces 91 Scentfc research, techncal & computer servces 100 Legal, accountng, marketng & management servces 92 Legal, accountng, marketng & management servces 101 Other busness servces 93 Other busness servces 102 Government admnstraton 94 Government admnstraton 103 Defence 95 Defence 104 Educaton 96 Educaton 105 Health servces 97 Health servces 106 Communty servces 98 Communty servces 107 Moton pcture, rado & televson servces 99 Moton pcture, rado & televson servces 108 Lbrares, museums & the arts 100 Lbrares, museums & the arts 109 Sport, gamblng & recreatonal servces 101 Sport, gamblng & recreatonal servces 110 Personal servces 102 Personal servces 111 Other servces 103 Other servces 112 Sales by fnal buyers 104 Sales by fnal buyers 113 Complementary mports CIF 105 Complementary mports CIF Source: Ahammad, (2000a) 28

29 FIGURE A1 PRODUCTION TECHNOLOGY FOR WAG AGRICULTURE Maxmsed value of profts Normalsed quadratc Top level Composte output 1 (Grans) Composte output 3 (Agrculture nec) Sheep meat ( = 1) Wool ( = 2) Materals & servces Labour Composte fxed factor CET CET Leontef CES Second level 13 Component 1 (Cereals) ( = 3)... Component R(1) (Pulses & olseeds) ( = 4) Component 1 (Hortculture ) ( = 8)... Component R(3) (New ndustres & other agrculture ) ( = 9) Component Component g Land Fxed captal CES CES Thrd level Locally sourced Imported Locally sourced Imported Notes: 1. The nne WAG commodtes lsted n Table 4.1 are denoted by = 1,, At the top panel, the dotted lne for the composte fxed factor denotes that the factor, unlke other netputs at the top level, s fxed n supply n the short run and not determned n the farm s proft maxmsaton process. Source: Ahammad (2000a) 29