Novel Indicators of the Trade and Welfare Effects of Agricultural Distortions in OECD Countries

Transcription

1 Publc Dsclosure Authorzed Publc Dsclosure Authorzed Publc Dsclosure Authorzed Publc Dsclosure Authorzed Polcy Research Workng Paper 5404 Novel Indcators of the Trade and Welfare Effects of Agrcultural Dstortons n OECD Countres The World Bank Development Research Group Agrculture and Rural Development Team August 2010 Kym Anderson Johanna Croser WPS5404

2 Novel Indcators of the Trade and Welfare Effects of Agrcultural Dstortons n OECD Countres Kym Anderson Unversty of Adelade kym.anderson@adelade.edu.au and Johanna Croser Unversty of Adelade johanna.croser@adelade.edu.au Keywords: Dstorted ncentves, agrcultural prce and trade polces, trade restrctveness ndex JEL codes: F13, F14, Q17, Q18 Author contact: Kym Anderson School of Economcs Unversty of Adelade Adelade SA 5005 Australa Phone Fax kym.anderson@adelade.edu.au Ths s a product of a World Bank research project on Dstortons to Agrcultural Incentves (see The authors are grateful for helpful comments from referees, and for nvaluable assstance wth data complaton by Esteban Jara, Maranne Kurzwel, Sgne Nelgen and Ernesto Valenzuela. Fundng from World Bank Trust Funds provded by the governments of the Netherlands (BNPP) and the Unted Kngdom DfID), and from the Australan Research Councl, s gratefully acknowledged. Vews expressed are the authors alone and not necessarly those of the World Bank or ts Executve Drectors.

3 2 Novel Indcators of the Trade and Welfare Effects of Agrcultural Dstortons n OECD Countres Emprcal ndcators of farm support by governments and ther effects on consumer prces, called Producer and Consumer Support Estmates (PSEs and CSEs), have been estmated n a consstent way snce 1986 by the Secretarat of the OECD (2009) for ts 30 member countres. The ndcators provde polcy transparency, contrbute to a better understandng of the varous dmensons of agrcultural support measures n hgh-ncome countres, and have been used extensvely as nputs nto economc models of agrcultural markets. The OECD (2006) has also released PSEs for Brazl, Chna and South Afrca, as well as for several East European countres; and t wll soon add them for Chle. A recent global World Bank study (Anderson 2009) complements and extends the OECD s efforts by provdng smlar estmates for a longer tme perod (back to 1955) and for ndvdual member countres of the European Unon. It also has comparable estmates for 45 other countres at dfferent stages of economc development and ncludes a tme seres of rates of assstance to producers of nonagrcultural goods, to compare wth agrcultural dstorton estmates. The OECD and World Bank measures for each product are aggregated usng the value of producton and consumpton as weghts to obtan an annual average PSE and CSE for each country. That tradtonal aggregaton method provdes a reasonable ndcator of the average prce dstorton across that country s product set, but t s not necessarly a good ndcator of the dstorton to the volume of trade n farm products because that depends also on the responsveness of domestc supply and demand to prce changes (that s, prce elastctes), and on whether there are any negatve PSEs that are offsettng postve ones n the aggregatng process. It s an even poorer ndcator of the natonal welfare cost of that country s farm prce and trade polces, because for each product that cost s related to the square of the rate of prce dstorton and so the total cost depends on the extent of dsperson n product PSEs and CSEs.

4 3 Certanly one can use the OECD or World Bank prce dstortons as nputs nto natonal partal or general equlbrum models to estmate the trade- and welfarereducng effects of a country s agrcultural polces. However, such models are computatonally ntensve, and the results can be contentous f there s no consensus on what model specfcaton and parameters such as elastctes to use. Even more problematc s that typcally they are calbrated only for a partcular past year and so are not able to provde a tme seres of estmated economc effects. An alternatve s to use the raw data n the OECD and World Bank studes to calculate ndexes of the trade- and welfare-reducng effects of polces. Anderson and Neary (2005) specfy a smple, elegant and theoretcally meanngful methodology to provde such measures as a supplement to aggregate PSEs and CSEs. The goal of ths paper s to demonstrate how the Anderson-Neary methodology can be appled usng no more nformaton than that assembled already to generate prce dstorton estmates for OECD member countres. The method may have been gnored to date because t was tradtonally thought that prce elastcty estmates were necessary to estmate such ndces. However, t has recently been shown by Lloyd, Croser and Anderson (2010) that by assumng domestc prce elastctes of supply are equal across commodtes wthn a country, and lkewse for prce elastctes of demand, the ndex number formulae smplfy to a share-weghted functon usng shares of producton and consumpton as weghts. The resultng measures thereby can be generated as supplements to the current polcy montorng ndcators generated by the OECD Secretarat wthout havng to tackle the contentous questons assocated wth the sze of prce elastctes (such as whether they refer to the short or long run) and wthout havng to contnually update a sector or economywde model. Drawng on the Anderson and Neary framework, we estmate two ndexes whch go by the precse descrptors of a trade reducton ndex (TRI) and a welfare reducton ndex (WRI). The TRI and WRI are each computed from sub-ndces of the producton and consumpton sdes of the market (the Producer and Consumer Dstorton Indexes, PDI and CDI), whch are derved from nomnal rate of assstance (NRA) and consumer tax equvalent (CTE) estmates for ndvdual products,

5 4 respectvely, from the World Bank s database. 1 NRAs to producers and CTEs to consumers dffer whenever there are domestc subsdes or taxes on producton or consumpton n addton to border measures. Thus the ndexes capture n a sngle scalar number the aggregate trade- or welfare-reducng effects of all polces drectly affectng consumer and producer prces of farm products from all measures n place. Non-product-specfc dstortons are not captured n the ndces, whch by constructon aggregate only product-specfc data. However, we attempt to gauge the mportance of ths lmtaton n the fnal secton of the paper. The present paper s amed at encouragng not only the OECD to add these ndexes to ther current set of ndcators calculated each year, but also developng country governments or polcy thnk-tanks to generate them so as to be able to montor each year the trade and welfare effects of ther natonal polces. A new FAO/OECD project, funded by the Bll and Melnda Gates Foundaton and gettng under way n 2010, ams to estmate agrcultural polcy ndcators for a large sample of poor Afrcan countres over the next few years. Snce many of those countres do not have a sector or economy-wde model of ther economy, the two ndcators outlned n ths paper could provde at least a partal equlbrum ndcaton of the effect of natonal polces n reducng agrcultural trade and natonal economc welfare. They could then be compared wth those provded n the present paper for hgh-ncome countres. The paper begns wth a presentaton of the methodology for computng partal-equlbrum trade and welfare reducton ndexes. It then outlnes the data n the World Bank s database, whch are used for computng the ndces. Next, the ndex results are presented and dscussed, followng whch s a secton addressng several caveats. The paper concludes wth lessons learned and areas for further research. Methodology There s a growng lterature that dentfes ways to measure the trade- and welfarereducng effects of nternatonal trade polcy n scalar ndex numbers. Ths lterature serves a key purpose: t overcomes aggregaton problems (across dfferent 1 NRAs and CTEs are smlar to PSEs and CSEs, except they are expressed as a percentage of the undstorted prce whereas PSEs and CSEs are expressed as a percentage of the dstorted prce (and the CSE has the opposte sgn to the CTE).

6 5 nterventon measures and across ndustres) by usng a theoretcally sound aggregaton procedure to answer precse questons regardng the trade or welfare reductons mposed by each country s agrcultural or trade polces. The goal of the lterature s to generate a sngle ndcator that captures the overall trade or welfare effect of an ndvdual country s regme of prce dstortons n place at any tme, and to trace ts path over tme and make cross-country comparsons. The poneerng work n the lterature s by Anderson and Neary (summarzed n ther 2005 book). Feenstra (1995) smplfed the methodology to a partalequlbrum framework. These two authors defne a Trade Restrctveness Index as the ad valorem trade tax rate whch, f appled unformly across all tradable agrcultural commodtes n a country, would generate the same reducton n welfare as the actual cross-product structure of dstortons. They also defne a Mercantlst Trade Restrctveness Index (MTRI) as the ad valorem trade tax rate whch, f appled unformly across all tradable agrcultural commodtes n a country, would generate the same reducton n nternatonal trade as the actual cross-product structure of dstortons. In recent years, several emprcal papers have provded varous seres of partal-equlbrum estmates of scalar ndex numbers for ndvdual countres. Irwn (2010) uses detaled tarff data to calculate the Trade Restrctveness Index for the Unted States n 1859 and annually from 1867 to Kee, Ncta and Olarreaga (2009) estmate a seres of ndces for trade polces of 78 developng and developed countres for a sngle pont n tme (md-2000s). Lloyd, Croser and Anderson (2010) modfy the Anderson/Neary TRI and MTRI methodology to make t more applcable to agrcultural polces, and show how t can be greatly smplfed f certan assumptons about elastctes are adopted. Croser and Anderson (2010) buld on that to develop a methodology for computng scalar ndex measures for ndvdual polcy nstruments, whch can be compared across nstruments to see the relatve contrbutons of dfferent polcy nstruments to overall reductons n trade and welfare. In addton to beng useful to summarze polcy n an ndvdual country, the Anderson-Neary scalar ndex measures has been adapted to measure the trade- and welfare-reducng effects of polcy n a regonal or global commodty market (Croser, Lloyd and Anderson 2010). In ths paper we utlze the methodology n those latter three studes to generate a seres of ndcators of the trade- and welfare-reducng effects of agrcultural polces n OECD countres over the past half century.

7 6 The remander of the methodology secton outlnes the method for constructng three types of ndexes: the Anderson-Neary type ndexes for ndvdual countres; nstrument level ndexes for ndvdual countres to gauge the mportance of dfferent polcy measures n the overall degree of agrcultural polcy dstortons of OECD countres; and commodty market ndexes for that group of countres. Country level trade and welfare reducton ndexes To capture dstortons mposed by each country s border and domestc polces on ts economc welfare and ts trade volume, we adopt the methodology from Lloyd, Croser and Anderson (2010). These authors defne a Welfare Reducton Index (WRI) and a Trade Reducton Index (TRI), each of whch can be estmated by consderng separately the dstortons to the producer and consumer sdes of the economy (whch can dffer when there are domestc measures n place n addton to or nstead of trade measures). As ther names suggest, the two ndexes respectvely provde a sngle emprcal ndcator of the (partal equlbrum) welfare- or trade-reducng effects of dstortons to consumer and producer prces of farm products from all agrcultural and food polcy measures n place. The Lloyd, Croser and Anderson (2010) methodology requres data on the producton and consumpton sdes of the economy separately. Snce PSE and CSE nformaton s avalable from the OECD on an annual bass, ths methodology s well suted to focusng on the trade and welfare effects of agrcultural and trade polcy n OECD member countres. Indeed t provdes somethng closer than the PSE or CSE to what a sector or economy-wde computable general equlbrum model can provde n the way of estmates of the trade and welfare (and other) effects of prce dstortons, whle havng the advantage of provdng an annual tme seres. The dervaton of the measures n Lloyd, Croser and Anderson (2010) for n mport-competng sectors leads to the expressons n Box 1 for the TRI and WRI for the mport-competng sector of a country. The mport-competng TRI and WRI are constructed from approprately weghted averages of the level of dstortons of consumer and producer prces. The same weghts are used to construct both ndexes, but the TRI s a mean of order one measure, whle the WRI s a mean of order two. Because the WRI s a mean of order two, t better reflects the welfare cost of dverse agrcultural prce-dstortng polces than the PSE or CSE snce t captures the dsproportonately hgher welfare costs of peak levels of assstance or taxaton. The

8 7 WRI s postve regardless of whether the government s agrcultural polcy s favorng or hurtng farmers. The TRI and WRI can be readly extended to accommodate dstortons to exported and nontradable agrcultural goods (Lloyd, Croser and Anderson 2010). Separate sub-ndces for each sub-sector are computed, and aggregated usng sector values of producton and consumpton at undstorted prces as weghts. Dstortons to exportable ndustres enter the TRI aggregatons as negatve values because a postve (negatve) prce dstorton n an exportng ndustry has a trade expandng (reducng) effect, and thus should decrease (ncrease) the TRI. Dstortons to nontradable ndustres are assumed to be zero n the TRI aggregaton because a domestc prce dstorton n a nontradable sector s assumed to have nether a trade expandng nor trade reducng effect because of the presence of hgh trade costs. 2 Elastctes of supply and demand are requred to compute the TRI and WRI expressons n Box 1. However, f one s wllng to assume that prce elastctes of supply (demand) are equal across commodtes wthn a sub-sector or sector of an economy, then the elastctes n the numerator and denomnator of the ndex weghts cancel. Ths powerful smplfyng assumpton gves an expresson for the TRI or WRI whch s smply an approprately weghted aggregate of dstortons on producton and consumpton sdes of the market. It s found by aggregatng the change n consumer (producer) prces across commodtes and usng as weghts the sector share of each commodty s domestc value of consumpton (producton) at undstorted prces. That s, wth ths elastcty assumpton, these ndexes are attanable wth the same nformaton used to estmate the PSE and CSE (or NRA and CTE, whch are smlar except expressed as a proporton of the border prce rather than the dstorted domestc prce). Yet they provde a better ndcaton of the trade- or welfare-dstortng effects of those producer and consumer prce measures. A second assumpton s made n the emprcal part of the paper when aggregatng across all OECD countres. It s to assume that the margnal responses of a country s supply and demand to a prce change are the same n aggregate for the sector. More precsely, we assume (see Box 1) that a=b=0.5, where the weght a (or b) s proportonal to the rato of the margnal response of domestc demand (or 2 Ths s consstent wth the partal equlbrum nature of the ndexes beng generated here. In a general equlbrum model there could be ndrect trade effects va the mpact of dstortons to nontradables on factor markets.

9 8 supply) to a prce change relatve to the margnal response of mports to a prce change. Other trade and welfare reducton ndexes The country level TRI and WRI measures reported below aggregate the trade- and welfare-reducng effects of a wde range of polcy measures. The varables s and r n Box 1, as domestc-to-border prce ratos, can theoretcally encompass dstortons provded by all trade tax/subsdy measures and quanttatve restrctons on trade, plus domestc prce support measures (postve or negatve), plus drect nterventons on nputs; and, where multple exchange rates operate (as n numerous developng countres n the past), the measures can encompass an estmate of the mport or export tax equvalents of those dstortons. Whle t s desrable to have a country level ndcator that encompasses all of these dstortons, agrcultural polcy analysts are sometmes nterested n the relatve contrbuton of dfferent polcy nstruments to reductons n trade or welfare. To provde ths nsght, t s possble to use the Anderson-Neary framework to construct ndcators of polcy dstortons at the nstrument level and compare ndces across nstruments. 3 Croser and Anderson (2010) defne an Instrument Welfare Reducton Index (IWRI) and an Instrument Trade Reducton Index (ITRI), whch can be estmated by consderng the dstorton from a sngle polcy nstrument to the producer and consumer sdes of the economy. They develop ther methodology for four types of border dstortons (mport taxes and subsdes, and export taxes and subsdes) and for a seres of domestc dstortons n the form of producton, consumpton and nput taxes and subsdes. One of the lmtatons of the ITRI and IWRI n the context of OECD countres s that, by constructon, non-product-specfc measures are not ncluded n the estmates because such supports are not reported at the product level. However, nonproduct-specfc measures are clearly mportant for the overall story of agrcultural polcy n some OECD countres (reported below), as a result of a move n recent 3 Ths ssue s not one that has been explored n the exstng lterature because most of the Anderson- Neary type ndexes are estmated for sngle polcy nstruments. Irwn (2010), for example, uses only mport tarffs. Kee, Ncta and Olarreaga (2009) report two seres of ndces, one based on tarffs only and the other on tarffs plus non-tarff mport barrers. Whle they may be the domnant nstruments for non-farm products, the agrcultural sectors of OECD countres have been subject also to numerous domestc and export subsdes; and, n developng countres, agrcultural producton and export taxes also have been used.

10 9 decades to forms of support at least somewhat decoupled from producton. Notwthstandng ths lmtaton, below we estmate the trade- and welfare-reducng effects of ndvdual polcy nstruments. We assume that border measures are appled frst, and ths may be supplemented by addtonal domestc dstortons. Ths allocaton assumpton provdes an upper-bound on welfare losses from border measures and a lower bound on welfare losses from domestc measures. An attempt s made n the emprcal secton below to gauge the potental mportance of non-product-specfc support measures whch are excluded from the formal ITRI and IWRI measures. We also report commodty level TRI and WRI ndexes below, whch gve the aggregate trade- and welfare-reducng effects of OECD member country polces to ndvdual commodty markets. These ndces are computed usng a methodology smlar to that n Box 1, but where dstortons are summed across countres for an ndvdual commodty, nstead of across commodtes for an ndvdual country. Croser, Lloyd and Anderson (2009) provde a detaled exposton of the methodology as t apples to ndvdual commodty markets globally. Below we provde them for the subset of countres that are OECD members. Data Ths study makes use of data from the World Bank s Dstortons to Agrcultural Incentves database (Anderson and Valenzuela 2008). For hgh-ncome countres that database drew on the OECD s PSE and CSE seres (OECD 2009) for the perod snce 1986, but extended the tme seres back to 1955 for many countres. In the case of the European Unon, whose membershp expanded several tmes over the past half century, the World Bank study provdes dstorton estmates by country on the assumpton that the estmated EU-wde PSE and CSE for each product appled n each member country (see Joslng 2009). Dfferences across EU countres n the overall sector dstorton ndcators are thus due to dfferng commodty shares n sector producton and consumpton. We focus on a subset of OECD and other countres n the World Bank database (hereafter called the focus countres): 15 Western European countres, all of

11 10 whch are OECD member countres; 4 13 of Europe s transton economes, fve of whch are OECD member countres; 5 and sx other hgh-ncome OECD member countres: Australa, Canada, Japan, New Zealand, the Republc of Korea, and the Unted States. The OECD member countres that are not ncluded n the focus countres sample are Belgum, Greece and Luxembourg (for whch NRA estmates are not avalable and Mexco (a recent and much poorer member). The database contans annual estmates of nomnal rates of assstance (NRAs, postve or negatve) and consumer tax equvalents (CTEs) for key farm products. The NRA and CTE estmates n the database are at the commodty level and cover a subset of 39 agrcultural products n the OECD. These so-called covered products account for around three-quarters of total agrcultural producton over the perod studed. The database dentfes the extent to whch each commodty n each country each year s mport or export dependent or a nontradable (whch may change over tme). For the 34 focus countres, the database contans around 16,000 consstent estmates of annual NRAs to the agrcultural sector and the same number of CTEs between 1955 and Snce not all countres have estmates for the 1950s, we report estmates below startng from The range of polcy measures ncorporated n the NRA estmates n the database s wde. By calculatng domestc-to-border prce ratos, the estmates nclude assstance provded by all tarff and nontarff trade measures at each country s border, plus any domestc prce support measures (postve or negatve), plus an adjustment for the output-prce equvalent of drect nterventons on nputs. Where and when multple exchange rates operated, estmates of the mport and export tax equvalents of that dstorton are ncluded as well. The range of measures ncluded n the CTE estmates ncludes both domestc consumer taxes and subsdes and trade and exchange rate polces, all of whch drve a wedge between the prce that consumers pay for each commodty and the nternatonal prce at the border. Analytcal narratves of agrcultural polces for the last fve decades n the 34 OECD countres are provded n Anderson (2009). Ths book reports on the data n the Dstortons to Agrcultural Incentves database, and contans case studes for specfc regonal groupngs. The book reports on measures such as unweghted and 4 Austra, Denmark, Fnland, France, Germany, Iceland, Ireland, Italy, Netherlands, Norway, Portugal, Span, Sweden, Swtzerland and the UK. 5 Bulgara, Czech Republc, Estona, Hungary, Latva, Lthuana, Poland, Romana, Russa, Slovaka, Slovena, Turkey and Ukrane (OECD member countres n bold).

12 11 weghted mean NRAs, standard devatons of NRAs, weghted mean NRAs for exportable versus mport-competng covered products, measures of the trade bas of the agrcultural sectors covered plus non-covered tradable products, and relatve rates of assstance. Joslng (2009) provdes an analyss of agrcultural and trade polcy dstortons n Western Europe over the past 50 years. The analyss covers 18 countres, usng data that has been dsaggregated n some nstances from regonal aggregates. The aggregate NRA and CTE results from ths study are reported at the country level n Tables 1 and 2. (Appendx Table 1 lsts the changng membershp of the regonal EU and EFTA blocs.) It confrms that Western European agrcultural polcy s characterzed by hgh levels of assstance throughout the postwar perod, albet wth declnes for some countres snce the md-1980s. The latter s largely due to some re-nstrumentaton of agrcultural polcy away from mport protecton for specfc commodtes toward drect payments that are supported for socally responsble farmng. Anderson and Swnnen (2009) summarze agrcultural polcy n 18 of Europe s transton economes, drawng on ther more-detaled book (Anderson and Swnnen 2008). Despte the heterogenety of reform experences, they note some overall patterns. In the early 1990s, when relable data for these regons are frst avalable, support to agrculture s at reasonably low levels. Ths s because many trade and prce dstortons were removed throughout the regon at the start of the reform perod n the early 1990s. Snce that tme, changes n agrcultural polcy have tended to be characterzed overall by stop-go phases, and sometmes reversals of prevous reforms. In , NRAs were on average hgher than they were n the decade of the 1990s. Honma and Hayam (2009) provde a study of agrcultural polcy n Northeast Asa over the past 50 years, llustratng the dramatc growth that can occur n dstortons to agrcultural ncentves as real ncomes grow. Dstortons n these two countres are currently at hgh levels, drven by border protecton for mport-competng food products. North Amerca s and Oceana s lower levels of agrcultural polcy dstorton contrast wth those of Europe and Northeast Asa. In the US and Canada, real spendng on agrcultural support has not dmnshed greatly over tme (Gardner 2009). By contrast, n Australa and New Zealand, there was a rapd dsmantlng of

13 12 agrcultural polcy support from the 1980s, whch has resulted n Oceana havng the lowest levels of dstorton among OECD countres (Anderson, Lattmore, Lloyd and MacLaren 2009). The country level aggregate measures n Tables 1 and 2 hde the degree of varaton n commodty NRA and CTE estmates wthn countres. The case studes n Anderson (2009) report standard devatons around weghted mean NRAs for covered products n each country, showng that varaton to be sgnfcant and not declnng. One ndcaton of the extent of varaton between groups of products s provded by a comparson of the average NRA for mport-competng and exportable product groups. The extent of ths varaton s shown n aggregate for EU countres and the 34 focus countres n Fgure 1. There s a sgnfcant gap between the average NRA for mport-competng and exportable products over the perod shown, whch reflects the extent of anttrade bas that has also perssted through tme except for the most-recent perod when nternatonal agrcultural prces were rsng. Notwthstandng the valuable contrbuton of the measures reported n the case studes n Anderson (2009), sector averages of NRAs can be msleadng as ndcators of the aggregate extent of prce dstorton wthn the sector as t affects trade and welfare. They can also be msleadng when compared across countres whch have varyng degrees of dsperson n ther NRAs for farm products. Hence the need for supplementary TRI and WRI seres for the addtonal nsghts these measures can provde. TRI and WRI Estmates Table 3 reports the TRI estmates for all covered farm products from 1960 to 2007 for all 34 focus countres and sx regonal groupngs. For all of the regonal aggregatons except Oceana, agrcultural polcy overall was trade-reducng, wth Northeast Asa and Western Europe experencng the largest reductons n trade. The regonal aggregatons hde some of the country level varaton n agrcultural polcy, however, and there were even some decades n whch polces were trade expandng n some countres, for example Fnland, Sweden and several transton economes n addton to Australa and New Zealand. The TRI tme seres for the focus countres and the EU group are shown aganst the NRA tme seres n Fgure 2. The most strkng observaton for these

14 13 groupngs s the close correlaton between the TRI and NRA seres. Ths result s drven by the domnance of the mport-competng sector n each of these two aggregatons. The close correlaton between the two seres need not always result, however. Oceana provdes a counter example, where the TRI has the opposte sgn to the NRA aggregates, ndcatng that trade polcy overall n Oceana was trade expandng despte postve NRA aggregates, because there was postve assstance to Australa s (and n some tme perods New Zealand s) domnant export sub-sector. Another example of where the correlaton between the TRI and NRA breaks down s n the tme perod to The NRA s ncreasng for 34 focus countres, from around 40 to 60 percent, whle the TRI falls n ths perod by a smlar amount. Agrcultural polces n the focus countres were on aggregate becomng less trade restrctve n ths perod (even though the NRA s ncreasng) because assstance was ncreasng for exportable products, n the form of export subsdes. The WRI results reveal that over the perod shown the aggregate NRA measure greatly understates the extent of welfare losses from agrcultural and trade polces (Fgure 2 and Table 4). Fgure 2 shows that for EU countres the extent of understatement s greatest n the 1970s, and for the 34 focus countres the understatement s greatest n These large gaps concde wth world prcespkes. The perod s when a downward prce spke resulted n mportcompetng products beng more dstorted relatve to export products, and conversely for the perod. The fall n the WRI for EU countres s dramatc followng the peak n the early 1980s, and more dramatc than the fall n the EU s aggregate NRA over the same tme perod (Fgure 2). From the peak n , there s a fall n both the weghted mean and the weghted varance of producer (consumer) dstortons. Thus, the two elements of the WRI are fallng, resultng n a steeper declne n the WRI than the NRA. Ths shows one of the benefts of generatng a WRI: t provdes a better sense of welfare mprovements from polcy reforms that reduce assstance to covered farm products. It should be noted, however, that from the md-1980s, OECD members moved towards a re-nstrumentaton of agrcultural polcy, whch s not fully reflected n the WRI and TRI estmates presented n Fgure 2 (see next secton). The ndvdual country WRI results are presented n Table 4. They are necessarly always above the TRI and the average of the NRA and CTE measures, and are always postve because they are means of order two. There s consderable

15 14 varaton n the extent of welfare reductons n polcy over the perod shown. In Western Europe, most countres have seen a decrease n ther WRI n recent decades. For some countres ths comes after a peak n the 1980s such as n France, Ireland and Italy whereas for other countres there has been more of a contnual declne, as for example n the Unted Kngdom, Germany, Netherlands and Sweden. Norway, Swtzerland and Iceland stand out among Western Europe countres for ther exceptonally hgh WRIs, although these countres have experenced the steepest declnes n recent decades. Canada s WRI seres s notable for ts large ncrease above the NRA aggregate n the 1980s (when there was a large ncrease n the dsperson of ts NRAs around the weghted mean). The country-level WRI measures, whch are derved usng an overall measure of the dstorton to producer and consumer prces n ndvdual sectors of the 34 focus countres, masks the contrbuton of dfferent polcy nstruments to welfare losses n each country. Fgure 3 reports the decomposton of the overall country WRI by polcy nstrument for the 6 key regonal groups. The decomposton s found by estmatng WRI seres for ndvdual polcy measures, and then apportonng the shares of these seres to the overall WRI. In our 34 focus countres as a whole, border measures whch dstort both producer and consumer prces are by far the most sgnfcant of the dstortng polcy nstruments. They account for upwards of 90 percent of the welfare losses n all 6 sub-regons over tme, wth the proporton beng above 97 percent n most nstances. The decomposton of border measures n Fgure 3(a) shows that mport tarffs are the domnant measure of dstorton n terms of market prce support n most regons. In the European Unon and Northeast Asa, n partcular, mport taxes domnate border supports. In EFTA countres, mport tarffs also domnate but these countres together also have sgnfcant export subsdes. Oceana has sgnfcant export subsdes n , but they are reduced over tme along wth other reductons n polcy dstortons n those countres. Data are avalable only from 1992 for Eastern Europe s transton economes. In , ths sub-regon has a range of dstortonary polcy nstruments n use: mport taxes domnate, but export taxes and subsdes are also present. The fnal perspectve from whch to consder the trade- and welfare-reducng effects of polces n our 34 focus countres s at the commodty market level, for ndvdual commodtes. Fgure 4(a) shows that rce s the most dstorted commodty

16 15 market across the 34 focus countres. Ths s followed by a group of vegetable products, whch are heavly protected n Japan and Korea. The sugar, olseed, mlk, beef and cotton markets are the next most heavly dstorted markets. The results for just the EU market ndcate that sugar and lvestock products are most heavly dstorted n that regon. Caveats and Senstvty Analyss Some mportant caveats need to be mentoned, because the paper s two man ndexes have been calculated wth the help of a number of smplfyng assumptons. One key assumpton s that each country s own-prce elastcty of supply (and also of demand) for a partcular product s the same as that for every other product, and that cross-prce elastctes are zero. It s not uncommon for modelers of the global market for partcular farm products to adopt these assumptons, for want of relable or agreed econometrc estmates of those elastctes for each country (an early global example beng Valdés and Zetz 1980). Anderson and Neary (2005, p. 293) observe that prce elastctes are not very nfluental n affectng trade restrctveness ndces because elastctes appear n both the numerator and denomnator of the ndces (see Box 1). In the present case, too, ths assumpton s expected to have only a small effect on the results. Kee, Ncta and Olarreaga (2009) show that Anderson-Neary type ndces can be decomposed nto three elements: the weghted mean of dstortons, the weghted varance of dstortons, and the covarance between each dstorton and ts relevant elastcty scaled by the weghted average relevant elastcty. In emprcal work, Kee, Ncta and Olarreaga (2009) note that the contrbuton of the covarance term to ther estmated trade restrctveness ndexes s very small n practce. Irwn (2010) n hs study for the Unted States smlarly shows that the covarance s a very small factor relatve to the average tarff and varance of the tarff. Notwthstandng those expectatons, to gauge the potental mportance of not allowng dfferental prce responses, we re-compute our two country-level ndexes usng country- and commodty-specfc own-prce elastcty of supply and demand estmates avalable for 27 key farm products from wdely cted sources (Ronngen 2001; Tyers and Anderson 1992). A comparson n Table 5 of those results wth the earler estmates made wth the smplfyng elastcty assumpton reveals some dfferences n the overall ndcatons of dstortons. The bggest dvergences are for

17 16 Korea and Japan, where the average WRI across countres usng the elastcty data s between 6 and 46 percentage ponts lower than estmates wthout elastcty data. It should be noted, however, that ths s off a hgh base of WRI averages of over 100 percent n many nstances. The Western European countres also have a farly sgnfcant change n ther TRI and WRI estmates. The elastcty values for ths regon reveal that lvestock products tend to have a hgher (absolute) elastcty of supply and demand, whle grans and tropcal crops have elastctes lower than the average. 6 As such, ncludng elastcty estmates results n lvestock products n the EU havng a hgher weghtng than grans and sugar. There s lttle dvergence n the results wth and wthout the smplfyng elastcty assumpton for North Amerca and Oceana, whch have relatvely low TRI and WRI estmates. Despte the dfferences reported n Table 5, t s clear that n all cases, the ndex trends over tme are much the same under ether set of elastcty assumptons, and they gve a better ndcaton of the trade reducton and welfare losses from agrcultural polces than standard weghted aggregates of NRAs and CTEs. Our other assumpton that the aggregate margnal response of domestc demand to a prce change s the same as the aggregate margnal response of domestc supply mght also have an mpact on the results. We re-compute our two ndexes assumng that demand was nstead twce, or half, as responsve as supply. Despte that wde range, the estmates were almost unchanged at the aggregate level across the sx regonal groups. Ths bengn result s due to the emprcal fact that the producer and consumer dstortons are smlar, reflectng the domnance of border measures n the polcy nstrument mx. A thrd caveat on the results for the TRI and WRI by polcy nstrument s the excluson of non-product-specfc (NPS) dstortons n the estmates. In the Anderson and Valenzuela (2008) database, NPS assstance can be a sgnfcant component of overall agrcultural sector dstortons n some OECD countres. NPS s reported n three forms n the database: general NPS assstance, nput subsdes that are not 6 Thus the sze and rankng of the commodty ndexes for the OECD country group, summarzed n Fgure 4, also would be affected somewhat by usng dfferental elastcty estmates. Croser, Lloyd and Anderson (2010) examne ths at the global level for eght major agrcultural products and fnd that, f the elastctes found n Tyers and Anderson (1992) are used, there s lttle dfference n the overall ndcatons of dstortons: the ndex averages usng the elastcty estmates are 5 percentage ponts lower than the estmates usng the smpler elastcty assumptons for one decade, but are between just 0 and 3 ponts lower for the other seven decade averages shown. Not surprsngly the dfferences are largest for the product wth the most dverse NRAs, namely rce. In all cases, the global commodty ndex trends over tme are much the same under ether set of elastcty assumptons.

18 17 attrbutable at the product level, and decoupled payments. Recall that the ITRI (or IWRI) s defned as the ad valorem trade tax rate whch, f appled unformly across all tradable agrcultural commodtes n a country, would generate the same reducton n trade (or same economc welfare loss) as the actual cross-product structure of NRAs and CTEs for that country. A smple assumpton to ncorporate NPS measures s that all of the NPS dstortons s enjoyed by producers and that they have no mpact on consumer prce dstortons. Ths assumpton allows us to provde, n Fgure 3(b), an upper bound on ther potental effect on the Producer Dstorton Index (PDI) component of the ITRI or IWRI. 7 Fgure 3(b) shows the results of addng n ths way all NPS assstance to the Producer Dstorton Index. On the one hand, decoupled support and general NPS support f equvalent to an ncrease n product prces for farmers would make up almost one-thrd of dstortons n EFTA and EU countres n , and only slghtly less n North Amerca. On the other hand, f those forms of support were truly decoupled and had no mpact on farmers ncentves, the PDI would be unaffected and hence the WRI would be as n Table 4. The potental mportance of NPS for the WRI s thus somewhere n that range. The WRI and TRI seres need to be nterpreted n the lght of the uncertanty assocated wth ther omsson of NPS measures. Conclusons Ths paper presents a case study of the applcaton of new theory-based polcy ndcators to montor the changng extent of polcy nterventons that reduce nternatonal trade and natonal economc welfare n OECD countres. It reports estmates of the ndcators for each OECD country over the past half century as a way of llustratng the prospectve use of ths methodology as a supplement to the annually released PSE/CSE ndcators of the OECD. The paper also shows that the methodology can be used to gan better nsght nto the trade and welfare reductons n ndvdual commodty markets across OECD countres, and those reductons by ndvdual polcy nstruments. 7 For example, f the IWRI of all border measures s 30 percent, and the country also gves farmers decoupled payment support of 20 percent, t s ncorporated by assumng an overall country WRI of 50 percent.

19 18 In the past, trade and welfare reducton ndcators have not been reported as part of the OECD regular montorng actvtes. Ths may have been because t was thought that economc models and elastcty data would need to be agreed upon, whch would rase techncal and poltcal problems. The measures we estmate n ths paper are such that one can avod the need to select a par of prce elastcty estmates for each product of each country. As such they could provde an attractve and poltcally uncontroversal supplement to the current polcy montorng ndcators generated by the OECD, and by other multlateral nsttutons such as the FAO, UNCTAD, World Bank and the WTO. The mportance of TRIs and WRIs wll also be relevant for a new FAO/OECD project, funded by the Bll and Melnda Gates Foundaton and gettng under way n 2010, whch ams to estmate agrcultural polcy ndcators for a sample of Afrcan countres over the next few years. In Afrcan countres, dfferent polcy nstruments operate such that the TRI could have a dfferent sgn n some years to the NRA aggregate (because of, for example, export taxes). Furthermore, f there s no economy-wde model for some of the Afrcan countres n the FAO/OECD project sample, the TRI and WRI can provde at least partal equlbrum ndcators of the effect of natonal polces n reducng agrcultural trade and natonal economc welfare. References Anderson, J.E. and J.P. Neary (2005), Measurng the Restrctveness of Internatonal Trade Polcy, Cambrdge MA: MIT Press. Anderson, K and J.L. Croser, (2009) Natonal and Global Agrcultural Trade and Welfare Reducton Indexes, 1955 to 2007, World Bank, Washngton DC, database avalable at Anderson, K. (2009), Fve Decades of Dstortons to Agrcultural Incentves, Ch. 1 n K. Anderson (ed.), Dstortons to Agrcultural Incentves: A Global Perspectve, , London: Palgrave Macmllan and Washngton DC: World Bank.

20 19 Anderson, K. and E. Valenzuela (2008), Global Estmates of Dstortons to Agrcultural Incentves, 1955 to 2007, database avalable at Anderson, K. and J. Swnnen (2008) (eds.), Dstortons to Agrcultural Incentves n Europe s Transton Economcs, Washngton DC: World Bank. Anderson, K. and J. Swnnen (2009), Eastern Europe and Central Asa, Ch. 6 n K. Anderson (ed.), Dstortons to Agrcultural Incentves: A Global Perspectve, , London: Palgrave Macmllan and Washngton DC: World Bank. Anderson, K., R. Lattmore, P.J. Lloyd and D. MacLaren (2009), Australa and New Zealand, Ch. 5 n Dstortons to Agrcultural Incentves: A Global Perspectve, , London: Palgrave Macmllan and Washngton DC: World Bank. Croser, J. and K. Anderson (2010), Changng Contrbutons of Dfferent Agrcultural Polcy Instruments to Global Reductons n Trade and Welfare, CEPR Dscusson Paper 7748, London, March. Croser, J.L., P.J. Lloyd and K. Anderson (2010), How Do Agrcultural Polcy Restrctons to Global Trade and Welfare Dffer Across Commodtes? Amercan Journal of Agrcultural Economcs 92(3): , Aprl. Feenstra, R (1995). Estmatng the Effects of Trade Polcy, n G. Grossman and K. Rogoff (eds.), Handbook of Internatonal Economcs, Vol 3, Amsterdam: Elsever. Gardner, B. (2009), Unted States and Canada, Ch. 4 n K. Anderson (ed.), Dstortons to Agrcultural Incentves: A Global Perspectve, , London: Palgrave Macmllan and Washngton DC: World Bank. Honma, M. and Y. Hayam (2009), Japan, Republc of Korea, and Tawan, Chna Ch. 2 n K. Anderson (ed.), Dstortons to Agrcultural Incentves: A Global Perspectve, , London: Palgrave Macmllan and Washngton DC: World Bank. Irwn, D. (2010), Trade Restrctveness and Deadweght Losses from U.S. Tarffs, , Amercan Economc Journal: Economc Polcy 2: , August. Joslng, T. (2009) Western Europe, Ch. 3 n K. Anderson (ed.), Dstortons to Agrcultural Incentves: A Global Perspectve, , London: Palgrave Macmllan and Washngton DC: World Bank.

21 20 Kee, H.L., A. Ncta and M. Olerreaga (2009), Estmatng Trade Restrctveness Indexes, Economc Journal 119(534): Lloyd, P.J. (1974), A More General Theory of Prce Dstortons n an Open Economy, Journal of Internatonal Economcs 4(4): , November. Lloyd, P.J., J.L. Croser and K. Anderson (2010), Global Dstortons to Agrcultural Markets: New Indcators of Trade and Welfare Impacts, 1960 to 2007, Revew of Development Economcs 14(2): , May. OECD (2006), Agrcultural Polces, Markets and Trade n the Central and Eastern European Countres and the New Independent States: Montorng and Outlook, Pars, OECD. OECD (2009), Producer and Consumer Support Estmates (onlne database accessed at for estmates; and OECD fles for estmates usng an earler methodology for Ronngen, V.O., VORSIM verson 5, Serra, T., D. Zlberman, B. K. Goodwn and A. Featherstone (2006), Effects of Decouplng on the Mean and Varablty of Output, European Revew of Agrcultural Economcs 33(3): Tyers, R. and K. Anderson (1992), Dsarray n World Food Markets: A Quanttatve Assessment, Cambrdge and New York: Cambrdge Unversty Press. Valdes, A. and J. Zetz (1980), Agrcultural Protecton n OECD Countres: ts Cost to Less Developed Countres, Research Report 21, Internatonal Food Polcy Research Insttute, Washngton DC, December.

22 21 Box 1: TRI and WRI expressons TRI T { Ra Sb}, wth WRI W R a S b 2 2 1/2 { }, wth n R ru and S 1 where n 1 sv n R' 1 2 r u 1/ 2 and *2 C *2 C * * u p dx / dp / p dx / dp ( p x ) / ( p x ) *2 P *2 P * * v p dy / dp / p dy / dp ( p y ) / ( p y ), *2 C *2 p n S ' 1 *2 P *2 a p dx / d / p d m / dp, and b p dy /d p / p d m /dp. 2 s v Varable defntons: T Trade Reducton Index; W Welfare Reducton Index; R weghted-average consumer prce dstortons; S weghted-average producer prce dstortons; R Consumer Dstorton Index (CDI); S Producer Dstorton Index (PDI); s the rate of dstorton of the producer prce n proportonal terms; r rate of dstorton of the consumer prce n proportonal terms; u weght for each commodty n R and R, whch s proportonal to the margnal response of domestc consumpton to changes n nternatonal free-trade prces and can be wrtten as a functon of prces, demand quanttes and domestc prce elastcty (at the protected trade stuaton) of demand ( ); v weght for each commodty n S and S, whch s proportonal to the margnal response of domestc producton to changes n nternatonal free-trade prces and can be wrtten as a functon of prces, supply quanttes and domestc prce elastcty (at the protected trade stuaton) of supply, ( ); p * P border prce; p = p * C (1 + s ) dstorted domestc prce; p = p * (1 + r ) dstorted domestc consumer prce; C P x x( p ) quantty of good demanded (as a functon of own domestc prce); y ( ) y p quantty of good suppled (as a functon of own domestc prce); a (b) weght of consumpton (producton) n the WRI or TRI, whch s proportonal to the rato of the margnal response of domestc demand (supply) to a prce change relatve to the margnal response of mports to a prce change. 1/ 2 Source: Authors complaton from Lloyd, Croser and Anderson (2010).

23 22 Table 1: Nomnal rates of assstance, OECD countres, all covered products, 1960 to 2007 (percent) Western European Countres European Unon EFTA Austra Denmark Fnland France Germany Iceland Ireland Italy Netherlands Norway Portugal Span Sweden Swtzerland UK Europe's transton economes 9 18 Bulgara Czech Republc Estona 0 20 Hungary Latva 5 28 Lthuana 2 27 Poland Romana Russa 1 12 Slovaka Slovena Turkey Ukrane North Amerca Canada US Japan & Korea Japan Korea Oceana Australa New Zealand Source: Authors calculatons based on data n Anderson and Valenzuela (2008)

24 23 Table 2: Consumer tax equvalents, OECD Countres, all covered products, 1960 to 2007 (percent) Western European Countres European Unon EFTA Austra Denmark Fnland France Germany Iceland Ireland Italy Netherlands Norway Portugal Span Sweden Swtzerland UK Europe's transton economes 0 15 Bulgara Czech Republc Estona Hungary Latva Lthuana 1 25 Poland 3 22 Romana 5 34 Russa Slovaka Slovena Turkey Ukrane North Amerca Canada US Japan & Korea Japan Korea Oceana Australa New Zealand Source: Authors calculatons based on data n Anderson and Valenzuela (2008)

25 24 Table 3: Trade reducton ndexes, OECD countres, all covered products, 1960 to 2007 (percent) Western European Countres European Unon EFTA Austra Denmark Fnland France Germany Iceland Ireland Italy Netherlands Norway Portugal Span Sweden Swtzerland UK Europe's transton economes 9 11 Bulgara 10 8 Czech Republc -7 7 Estona 11 4 Hungary Latva Lthuana 22-5 Poland Romana Russa Slovaka 3 3 Slovena Turkey Ukrane North Amerca Canada US Japan & Korea Japan Korea Oceana Australa New Zealand Source: Authors calculatons based on data n Anderson and Valenzuela (2008)

26 25 Table 4: Welfare reducton ndexes, OECD Countres, all covered products, 1960 to 2007 (percent) Western European Countres European Unon EFTA Austra Denmark Fnland France Germany Iceland Ireland Italy Netherlands Norway Portugal Span Sweden Swtzerland UK Europe's transton economes Bulgara Czech Republc Estona Hungary Latva Lthuana Poland Romana Russa Slovaka Slovena Turkey Ukrane North Amerca Canada US Japan & Korea Japan Korea Oceana Australa New Zealand Source: Authors calculatons based on data n Anderson and Valenzuela (2008)