The Price Competitiveness of Rice Production in Vietnam: Effects of Domestic Policies and External Factors

Abstract

This article develops a measure for Vietnam's most important crop, examines its evolution during the recent period of economic reforms, and investigates the relative importance of the following components of the observed changes in competitiveness: (I) changes in foreign of rice and fertilizer; (2) changes in the real exchange rate; and (3) changes in nominal protection for rice and fertilizer. The most significant determinant of the observed decline in for rice during 1989-95 is shown to be the large appreciation of the real exchange rate, for which macroeconomic policies were chiefly responsible. 1. Introduction In its transition to a economy, Vietnam is moving to a system of allocating resources and products through markets by liberalizing prices, decentralizing economic decision making, and expanding private-sector participation in the national economy. The country's ambitious programme of renovation (doi moi) was launched in 1986, and three years later the economic reform process was accelerated. Specific measures included abandoning the collectivization of agriculture and effectively establishing family farms, decontrolling the of food and most other commodities, unifying and devaluing the exchange rate, raising interest rates above the rate of domestic inflation, and improving other aspects of macroeconomic policy. Price liberalization is a major aspect of economic reform in Vietnam. Before 1989 a dual pricing system existed, requiring producers to sell to the state at prices that were much lower than the market prices prevailing in the non-state sector. Price reform formally removed the distinction between official and prices. The importance of this reform measure is most evident for rice producers. In 1988 the of rice was nine times the official (450 dong/kg versus SO dong/kg). With the rise in the official of rice to the level, rice production in 1989 increased [by] 12 per cent over the 1988 level (Riedel and Comer 1995, p. 12), and by a further 14 per cent in the next three years. Rice production is of course not determined solely by the nominal rice price. More generally, individual producers make decisions on what and how much to produce based, at least in part, on relative profitabilities of alternative patterns of production (or output mixes). The latter in turn are a function of relative output and input prices. In rice production, the most important material input is fertilizer. Accordingly, the measure of price competitiveness used in the present study includes the domestic of rice and fertilizer. The domestic relative of any tradeable good in a given period is the outcome of both policy and non-policy influences. Included in the latter category would be the international more specifically, border - of the product (in foreign currency). Government pricing policies, on the other hand, can be differentiated into sector-specific and economy-wide, which have direct and indirect effects, respectively, on the product price. A relevant consideration is that the domestic relative of a tradable good is influenced by the real exchange rate. The latter can be affected not only by economy-wide or macroeconomic policies but also by the country's external terms of trade (see below), which is outside the control of policymakers. In the case of rice, a significant export crop in Vietnam since 1989, the more important sectorspecific policy instrument is not the direct taxation of exports (since the export tax rate for rice is only 1 per cent) but quantitative export restrictions, which create the disparity between foreign and domestic (i.e. the implicit export tax). The total amount of rice exports is determined by the central government based on projected production and consumption. Export quotas are then allocated to state and provincial enterprises. …