Rent Seeking and International Commodity Agreements: The Case of Coffee

Abstract

Although quotas are known to create opportunities for rent seeking, such effects have not been examined in the context of international commodity agreements. We hypothesize that export quotas imposed by the International Coffee Agreement (ICA), by creating quota rents in coffee-exporting countries, encourage directly unproductive (DUP) behavior by domestic groups seeking to capture such rents.' Such behavior can cause substantial economic waste and undesirably alter income distribution. The allocational and distributional effects of even moderate rent-seeking behavior could be sufficient to transform a coffee-exporting country's expected welfare gain from ICA quotas into a welfare loss. An understanding of these effects and a measure of their magnitude is crucial to any evaluation of the ICA. The classic analyses of international commodity agreements have focused on how such agreements affect the commodity terms of trade and export revenue instability.2 Surprisingly little work exists on the welfare effects of commodity agreements within exporting countries, particularly on the income-distribution effects or DUP activity the agreements might engender.3 The papers by G. McMahon and H. Dick and colleagues are partial exceptions.4 McMahon shows that Kenya's response to ICA quotas (the government banned new coffee plantings in an effort to control output) was inefficient and had regressive income effects. Dick and colleagues compare the effects of buffer stocks and export quotas on a domestic economy using a general equilibrium model and find that quotas are better because they shift resources from