Who really benefits from rice protection?

Abdul Bayes, The Daily Star, Asia News Network, Dhaka

Few persons would, perhaps, favor a forthright liberalization of rice trade. The reasons are not far to seek. Rice is the staple food crop in most of the Asian countries -- in fact 90 percent of world rice is grown in this continent. In these countries, more often than not, politically pointed "pro-poor" ramifications tend to reign over economics as far as any decision pertaining to rice is concerned.

That is why -- despite a history of taxing agricultural sector -- many of them insulate their domestic rice markets from the international ones. Ipso facto, rice prices tend to remain substantially above the current world price levels, allegedly, resulting in high effective rates of protection. But suspicion looms large whether the protection accorded to rice actually helps or hurts the poor.

In a recent research paper, David Dawe of the Social Sciences Division of IRRI confronted the issue of rice trade protection. He argues that the protection to rice in the Philippines, in fact, goes to benefit the rich farmers at the cost of the poor. Although he directs his pen at the Philippines, I presume, the observations made and the conclusions reached could cover, more or less, some other countries in this region that have a firm faith on an inward looking strategy for rice to propagate a pro- poor policy.

Rice is the single most important commodity in the Philippines accounting for 40 percent of calories intake, 30 percent of protein and nearly one-third of total agricultural area harvested. On average, half of the farm household income originates from rice and roughly one-fifth of the expenditure of bottom one-fourth in the income distribution hovers around rice. The ratios are, admittedly, lower compared to Bangladesh where, I guess, roughly more than two-thirds of calories come from rice and it costs more than half of the budget of the lower deciles.

For the last two decades or so, domestic rice prices in the Philippines, reportedly, ran much above the prices in other countries or world markets. The domestic retail prices often reach levels higher than 100 percent than would be the case under an unrestricted regime.

David Dawe succinctly summarizes the considerations.

First and the foremost perhaps, is that the driven edge resulting from the price incentives, drives towards the production of more rice and little of other crops. In economic jargon, it is called "deadweight" loss to the economy since more valuable crops could be grown in the absence of distortions. Second, it transfers income from rice consumers to producers.

The triangle in the imaginary diagram, depicting producers' surplus, gets bigger while that of the consumers' surplus suffers a squeeze. Whether the losers in the battle are poor or not is an important empirical question and several authors have addressed this on theoretical as well as empirical plane pertaining to individual countries.

The third effect of higher rice prices is reduced employment. Higher rice prices (or any food items) prompt workers to raise hue and cry for higher wages (since unions in the Philippines reportedly have a say in setting wages). And in the face of fiery demands for increased wages, irritant investors invariably respond by laying off the workers. "The higher wages do reduce employment, however, creating a larger pool of unemployment than would exist if food prices were lower".

And finally, as rice is the dominant crop, very high price is likely to put a pressure on land values making it more difficult to go for land reforms. "If rice prices were to fall substantially, the government would probably have to pay less to purchase the land and transfer it to someone with less or no land".

A pertinent question props up: Would the poorest of the poor necessarily benefit from lower rice prices even if they were net buyers? David Dawe -- drawing upon another prominent researcher M. Ravallion -- devotes a part of his paper on the evidence from Bangladesh. Ravallion argues that many of the poor consumers eke out a living from wages from other farms. High prices of rice results in increased production and hence demand for labor and that in turn pushes up wages.

Thus, the net effect would hinge on their net consumption position in rice on one hand and the effect of rice prices on wages -- the main source of their income -- on the other.

David Dawe's data show that "the poorest of the poor in the Philippines are net consumers of rice, not net producers". There are four categories of them. First, urban poor with one-fourth below the poverty line and accounting for 30 percent of the poor in the country. Second comes rural landless "who are often overlooked in many popular discussions of the rural sector".

Various surveys show that the head of an agricultural labor household in the Philippines earns 22 percent lower than that of farm household and two decades back, the difference was devastatingly higher (47 percent). The third group comprises non- rice farmers and the most recent agricultural census shows that almost half of all farmers grow no rice at all.

Other than rice, common crops in this country are coconut and maize -- also far behind rice earnings but upfront on pervasive poverty. And the final group comes from small rice producers who do not produce enough rice for family consumption.

How would a regime of more imports and consequent lower rice prices affect these various groups? According to the researcher, lower rice prices (with a surge in imports) would put up upward pressure on the wages of unskilled labor.

The effect on wages tends to be the function of land markets, the arbor intensity of alternative crops to rice, and the influence of urban sector wage to rural wage. "With lower prices, rice farming must remain profitable for those farmers who continue to grow rice.

For farmers who cannot restore profitability in the face of lower prices, must necessarily give up rice farming and use the land for some other purpose". Profitability can only be restored through adjustment in input prices especially of nontradable land and labor prices. Pesticides and fertilizers -- tradable inputs -- could cast little impact in terms of cost minimization.

Arguably, lower rice prices would lower rental prices for land (and increase land tenancy). Farmers might go for diversification and make up the loss by growing maize for which demand growth surpasses that of rice. Both use similar quantities of labor per hectare to arrest any decline in labor demand as a result of the shift.

By and large, lower rice prices are unlikely to cause a fall in wages as espoused by the critics of liberalization. First, land market will absorb some of the shocks through lower land rents. Second, alternative crops grown e.g. maize and vegetables would take care of a part of the problem and finally, given an integration of rural and urban sector, agricultural wages are unlikely to face adverse effects.

The writer is a Professor of Economics at Jahangirnagar University.