The effects of domestic rice market interventions outside business-as-usual conditions for imported rice prices

Abstract

The Philippine government intervenes in the domestic rice market through the imposition of import tariffs and the provision of producer and consumer subsidies. While policymakers are aware that these programmes come with allocative efficiency costs, they justify the programmes on the grounds that they insulate the domestic economy from unexpected price spikes in the international rice market. An interesting matter for policy evaluation is to quantify the insulation benefit that the programmes provide in circumstances of sudden severe import price spikes. To examine this question, we undertake a dynamic computable general equilibrium (CGE) simulation in which the Philippines is subject to an external rice price shock. We find that the insulation benefit of the support programmes under a 2008-like event is worth approximately 0.10% of real consumption. However, the cost of insuring against these price spikes is significant. We estimate the annual cost of the rice market interventions at approximately 0.40% of real consumption.

Keywords:

• food security
• food subsidies
• rice tariff
• rice market
• price insulation

JEL Classification:

• C68
• Q18
• H12
• H21

Notes

¹ The Philippines is not alone in equating support for domestic rice production with food security. As Alavi et al. (2012) note, the position is held widely in Southeast Asia.

² PHAGE stands for Philippines Applied General Equilibrium model. The model is solved using the GEMPACK economic modelling software (Harrison and Pearson, 1996).

³ We base our estimates of these proportions on the study of Mataia and Francisco (2010), the Census of Philippine Agriculture of NSO (2002) and land data from BAS (2012).

⁴ For detailed description of land modelling in PHAGE, see Mariano and Giesecke (2014).

⁵ CRESH: constant ratios of elasticities of substitution, homothetic (Hanoch, 1971). Modelling of each disaggregated food type follows the Armington assumption of CES aggregation over imported and domestic varieties.

⁶ The remaining broad groups are modelled as follows. Fruits and vegetables are a CRESH composite of vegetables, pineapple, other annual crops, coconut, banana, mango, citrus and other perennial crops. Meat and fish are a CRESH composite of hog, poultry, other livestock, fish and processed meat and fish. Other foods are a CRESH composite of sugar, coffee and other processed foods.

⁷ This is consistent with the macroeconometric model of the Central Bank of the Philippines, in which changes in employment under various simulations are largely eliminated after 5 to 7 years (see Majuca, 2011).

⁸ In the ‘without support’ scenario, rice market support policies are removed in 2013. By imposing the temporary rice price spike shock in 2016, we have allowed the rice market 3 years to adjust resource allocation in response to the permanent removal of the rice market support policies.

⁹ As described in Mariano and Giesecke (2014), the right-hand side of Equation 3 measures the contributions to the deviation in real GDP at market prices of changes in activity across tax bases carrying different rates of indirect taxation. Ignoring the division by VGDP (which simply rebases all terms as a proportion of GDP), a typical right-hand-side element of Equation 3 is [VTAX/XB]*(XP−XB), where VTAX is the baseline value of indirect tax collections on the relevant activity, and XP and XB are quantities of the relevant activity in the policy case and baseline, respectively. [VTAX/XB] measures the per-unit gap between the market price and the basic price of the activity in question, and (XP−XB) measures the policy-induced change in activity. Movements in (XP−XB) affect real GDP at market prices by reallocating resources across activities for which there are gaps between marginal willingness to pay for the activity and the basic price of the activity.

¹⁰ The percentage deviation in foreign debt interest payments is very small in the impact year (−0.010%) and tends towards zero in the long run. The policy effect on foreign income transfers is also small (−0.003% deviation in the impact year).

¹¹ Equation 6 is an extension of the real consumption Equation (E10) of Giesecke and Tran (2010). The full derivation of Equation 6 is available from the authors on request.

¹² As explained in Giesecke and Tran (2010), this relative price effect arises from Equation 6 assumption of a fixed nominal consumption share in GNDI. Under this assumption, ceteris paribus, a rise in the investment price relative to the consumption price must raise real consumption and lower real savings.

¹³ Note that and differ because they are tailored to measure the allocative efficiency effects of two different simulations. Our first simulation (Section IV) is about the spike in the price of imported rice. This shock affects all rice and paddy transactions (i.e. production, consumption, investment, exports and imports). Hence, the tax bases related to these transactions appear on the right-hand side of our calculation of . Our second simulation (Section V) is about the removal of four types of tax/subsidy: (i) rice import tariff, (II) rice price subsidy to consumers, (iii) paddy price subsidy to producers and (IV) seed input subsidy to paddy farmers. The calculation of includes only those tax bases related to these policy-specific transactions, that is, (i) rice import purchases by households, (II) rice purchases by the household sector, (iii) paddy purchases by the rice milling sector and (IV) seed purchases by the paddy sector.