Who really benefits from rice protection?

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.