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The effect of price support policies under productivity shocks: evidence from an economywide model

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Abstract

Many developing countries have implemented price support policies for cereals, but their effects on production, prices, and welfare remain unclear. Using an economywide model calibrated with data from Ethiopia, we analyze the impacts of various producer and consumer price support policies in situations when agricultural productivity changes. We find that producer price support policies can stimulate output, but limit declines in consumer prices and thus work against the urban poor and rural net-buyers of cereals. By contrast, consumer price stabilization policies implemented in times of decreased agricultural productivity tend to further shrink agricultural incomes. Moreover, these policies cause a substantial reduction in domestic cereal production, further exacerbating food insecurity. Our findings suggest that price support policies could have a range of unintended economic consequences and, thus, governments should conduct rigorous ex ante policy impact assessments before their implementation.

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Fig. 1

Source: Authors’ compilation based on model results. Note: EGTEP, EGTES, EGTEE and EGTEM refer to purchase, sales, export and import of cereals by the EGTE, respectively. EGTESTK refers to cereal stocks of EGTE. Scenarios TFP1, TFP2, TFP3, TFP4, and TFP5 refer to cases of productivity gains of 5%, 10%, 15%, 20%, and 25%, respectively

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Data availability

Data used for the study can be made available up on convincing request.

Notes

  1. This is typically so in Africa, where governments most frequently attempted to support consumers without considering the negative impacts on producers (Demeke et al. 2012).

  2. Model codes including the base model and the extensions made relating to agricultural price and storage policies are provided online as supplementary information.

  3. See Rutherford (1995) and Lofgren and Robinson (1997) for more details on the application of mixed complementarity equation problem to economic analysis.

  4. For model calibration purposes, \({\mathrm{pxctar}}_{\mathrm{ctarg}}\) is set at the base level of producer prices (PXC).

  5. cothers is a set of all other commodities, agricultural and non-agricultural, demanded by the government, but exclusive of storage service commodity “cmstorage”. Equation (2.7) depicts government demand for “cmstorage” separately.

  6. Operating costs of food grains in public storage are constituent part of total economic costs of stocks, which also include procurement costs on top of operating/distribution costs.

  7. This would also mean that the ‘extra’ storage costs equal to 15% in value terms at initial prices if the initial prices were calibrated at a level of 1.

  8. This is equivalent to the average amount of yearly imports of wheat and maize in Ethiopia through the EGTE and World Food Programme for price stabilization and humanitarian purposes (see Minot and Rashid 2013).

  9. Stock change band of 10% and 25% was also assumed, but this implies a very restrictive regime on the EGTE’s interventions.

  10. Technically speaking, EV is the income change that the representative household is prepared to accept, in the new situation, to avoid the policy or exogenous change.

  11. Section 3.4 shows how economic responses deviate from those reported above when increased storage capacity is assumed.

  12. The condition for the government to first exhaust stocks (to the limit allowed) and then resort to imports is guided by two further conditions (technically as PQDTOP.EGTES and STKLO.EGTEM) locked to the two mixed complementarity problems (in equations [2.2] and [2.5]). See the online supplementary information for the technical implementation of these constraints.

  13. In addition to the 5% producer and consumer price band, we tested for responses of price and quantity variables under a strict (but unlikely) price policy of 0% band and found stronger responsiveness of various price and quantity variables as the price policies are implemented.

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Authors and Affiliations

  1. International Food Policy Research Institute (IFPRI), Washington, D.C, USA

    Emerta A. Aragie

  2. CGIAR Director, Poverty Reduction, Livelihoods & Jobs, Montpellier, France

    Jean Balié

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  1. Emerta A. Aragie
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Emerta Aragie contributes to the running the model, the design of scenarios, and interpretation of result. Jean Balie contributes to the design and refinement of the policy scenarios and writing the manuscript.

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Correspondence to Emerta A. Aragie.

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Aragie, E.A., Balié, J. The effect of price support policies under productivity shocks: evidence from an economywide model. Int Econ Econ Policy 21, 1–26 (2024). https://doi.org/10.1007/s10368-023-00576-7

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