4.8.1 Relevant exercises
Although governments may have clearly defined objectives when market, price and trade policies are initially implemented, the overall policy framework may lack coherence. Different measures may be introduced at different times, some (or even most) of which may no longer be justified. For political reasons, it is often difficult, if not impossible, to modify or abandon an existing policy. Again, different government institutions may be responsible for different measures, with the result that the overall policy package is inconsistent. Two general principles should be observed:
· The number of policy measures should be kept as small as possible. The larger the number of measures, the greater the likelihood of inconsistency. Thus, before a new measure is introduced, it is important to determine whether existing measures can be adapted to achieve the same objectives. Ironically, new measures are often introduced to counter the negative effects of existing policies. Instead, it may be better to abandon an existing measure than to introduce a new one.
Box 4.7: The case of Alphabeta.
In Alphabeta, beef is illegally slaughtered and traded. This problem could possibly be solved by imposing fines or by exercising greater control over marketing. However, instead of introducing these new measures, it would seem more sensible to tackle the cause of the problem by changing the operations of the MMC, thereby removing the incentive to trade illegally.
Measures which have a direct bearing on quantities and prices should be controlled by the smallest possible number of institutions. In addition, there must be close co-operation among the different institutions involved. Particular care should be taken to reconcile domestic with border measures and to ensure that consumer policies are in harmony with those applied to producers.
Box 4.8: The case of Alphabeta.
In Alphabeta, the number of institutions involved in marketing is too large: five ministries and eighteen statutory boards. Moreover? border measures for beef appear inconsistent with domestic marketing interventions.
· Policy instruments should be continually under review. Long-term objectives and effects must always be carefully considered during such reviews, for the danger is that they will be eclipsed by short-term exigencies, such that the original intentions of the policy are lost. To avoid this, the direction of a domestic price policy might, for example, be monitored by regular comparison of the administered price with the equivalent border price (using a 3-year moving average).
Changes in commodity price relationships should also be monitored. Marginal price changes which move the prices of closely-related commodities in opposite directions can have more serious consequences than a distortion resulting from broad-based price protection for the whole sector. Again, it should be emphasised that price ratios in international trade will normally provide the most reliable basis for domestic pricing decisions.
Exercise 4.4: Group exercise: Market, price and trade policies. Read the relevant sections of the central case study.
Question 1. Calculate the NPC at the producer level for any one year of your data set.
Question 2. Estimate how this protection may have affected production, government budget and foreign exchange earnings. If estimates of supply elasticity are not available, make reasonable assumptions. Justify your assumption for supply elasticity in qualitative terms.
Question 3. What government policies may have caused this protection? Were these policies appropriate, given the country's overall objectives for the livestock subsector? What better market, price and trade policies could have been applied? Why would they have been better?
Important points (4.7-4.8)
· Government interference with market, price and trade policies is generally motivated by certain national objectives such as stability, equity and efficiency.
· Two major concerns of a government, in terms of stability, are to avoid abrupt changes in prices and/or quantities offered on the domestic market, and to maintain equilibrium in balance of payments.
· Price stabilisation policies should ensure that domestic prices move In the same direction as international prices.
· Equity concern,; may lead a government to formulate price policies aimed at income redistribution between producers and consumers. Such interventions affect the distribution of income within the community and the structure of production and consumption.
· Alternative ways of affecting income distribution should be sought in place of price policies with negative side effects,
· Price policies or market interventions intended to reinforce economic efficiencies may be justified in order to introduce new production technology, transfer resources into alternative activities, stimulate market entry and the like. However, protection offered in the farm-price policies to encourage such incentives becomes difficult to abandon even after achieving its initial purposes.
· Effective implementation of market, price and trade policies depends on the existence of efficient institutions. The major problem in implementation of these policies is the lack of' coherence in the overall policy framework, Two important principles to remember are:
- The number of policy measures and institutions administering them should be kept as low as possible and effective communication should be maintained within existing institutions.
- Policy instruments should be frequently reviewed.