Continued

Contents - Previous - Next

The consumption of the agricultural product responds negatively to increases in the agricultural terms of trade, while the response of the consumption of the nonagricultural product can be positive or negative. The non-agricultural imports respond negatively while there is a strong positive multiplier for agricultural exports. This is the joint effect of the positive response of agricultural production and the negative response of food demand.

Notice that the surplus responds negatively to increases in the agricultural terms of trade, and with larger absolute values of the elasticities in structurally "less developed" economies, namely in economies with large shares of agriculture in GDP.

The second set of issues relate to import tariff changes. Increasing the import tariff rate, will increase the domestic price of imports. This will reduce the domestic demand for imports, and will reduce nonagricultural production and profits. However, labour will shift to agriculture, increasing agricultural supply. Agricultural exports will increase if the domestic demand for "food" does not increase. In fact this is likely to happen as the real wage is likely to fall. To see this, notice that in Figure 3, the increase in the import tariff will imply a downward shift in the curve that represents the marginal product of labour in non-agriculture, and this will imply a lower nominal and real wage (because the domestic price of food p_a remains unchanged) with large shares of agriculture in GDP.

Table 6 exhibits elasticities of the same variables as in Table 5 with respect to the domestic price of imports, for the 20 types of stylized economies specified. The signs are all as outlined above with generally larger effects for less developed economies with larger initial shares of agriculture in GDP.

From Tables 5 and 6 it is clear that under this external regime, in order to increase the surplus of the economy, the terms of trade of agriculture must be lowered, and the rate of import tariff also must be lowered. Hence taxing agriculture and subsidizing non-agriculture is the way to generate surplus under this regime.

Table 7 presents the impact of a 10 percent increase in the agricultural export tax rate (from 0 to 10 percent). The first column indicates that the welfare of workers is improved, as the price of "food" is lowered with the increase in export taxation. The share of surplus in GDP is seen to increase substantially in all cases. For instance in the least developed economy, namely the one numbered 11, the initial share of surplus in GDP is 16 percent (cf. Table 2). When the rate of agricultural taxation is increased by 10 percent, this share increases by 12.04 percentage points, namely becomes 13.64 percent (1.6 + 12.04). The increase in the surplus with a worker improvement in welfare is largely achieved by an increased inflow of external funds. This can be seen from the table by noting first that the sum of columns (3)-(5) is equal to column (2) (the changes in the three components of the surplus equals the change in the overall surplus), and then by noting that the numbers in column 5, corresponding to the contribution of the foreign deficit, are much larger than the numbers in the other two columns.

It can be seen in Table 7 that the share of the external deficit to GDP (which originally is equal to 0 for all economies), increases substantially. For economy number 11 in fact it goes up by more than 10 percent to 10.29 percent.

Table 8 gives the same multipliers for a 10 percent decrease in the import tariff. The signs of the multipliers, with the exception of the ratios of taxes to GDP, are similar to those of Table 7. Again the larger contribution to the increase in the surplus as is from the increased external inflows.

The conclusion from this first analysis is that taxation of agricultural exports under fixed exchange rates and under the assumption that investible surplus is generated exclusively in the non-agricultural sector, will indeed generate surplus for the economy, but only if it is supported by large inflows of external finance.

Table 6 Elasticities with respect to the domestic import price

Table 7 Multipliers for a 10 percent increase in the export tax rate (all figures, except in column 1, reflect absolute changes in the ratios times 100)

Contents - Previous - Next