Comparative Advantage in Agriculture in the Newly Independent States: Discussion

Abstract

costs are compared with prices, updated to include data for 1988, and extended to include and equipment, grain, and meat. These comparisons are taken to suggest that there was unrealised comparative advantage in machinery and equipment relative to agricultural products. Second, he offers a conceptual examination of the effects of a complete liberalisation of the pre-reform distortions. These include a demand effect, due to the revival of consumer sovereignty, and a supply effect representing improvements in technical and allocative efficiency which might be expected when firms and agents within them are permitted to respond independently to market signals. Third, he discusses evidence, independent of the cost estimates offered previously, that waste and technical inefficiency were more serious in the machinery and equipment sector than in agriculture. This is seen to confirm that the reformed FSU economy will tend to export manufactures and agricultural products. Finally, he reports results from an analysis using the partial equilibrium SWOPSIM model of world agriculture. These results tend to confirm the earlier expectation that the reformed FSU agricultural sector would be import-competing, although excess supplies could develop in a few products, such as wheat, the consumption of which was heavily subsidised by the pre-reform policy regime. The first issue for comment concerns the author's use of import cost ratios as measures of unrealized comparative advantage. Since these divide the marginal or average cost in each industry, measured using the Bergson adjusted-factor-cost approach, by the marginal cost of corresponding imports, they are a type of domestic resource cost (Schydlowsky). Indeed, when divided by the nominal exchange rate, they are closest to Fane's DRC(P) which, if all goods were traded, would be equivalent to the effective rate of protection. To be a good measure of unrealized comparative advantage, however, it is necessary that the measure be based on shadow prices of all nontraded factors and inputs, as well as of foreign exchange. Domestic prices recorded by the Soviet regime are of no help in this. Incentive prices (those at which the same number of price-taking firms would maximize their profits by choosing the observed output) are needed. Official statistics do not provide estimates of such prices, though they can be approximated where parallel private markets exist.1 In the absence of these, the author's ICRs must serve as the best that can be done for the