Exchange Rate Distortions Research Articles

The Structure of Government Intervention in African Agriculture

This article examines the determinants of various rates of agricultural subsidies (output, input, exchange rate distortions, and aggregate) using commodity-level data from eight African countries in the 1980s. Econometric results indicate that structural adjustment policies were more effective in reforming exchange rate distortions than in liberalising commodity markets. Output policies are determined within the national context while input subsidies are more responsive to commodity-specific conditions. Further-more, agricultural subsidies were strongly influenced by the degree of urbanisation and by the number of people per unit of arable land in a manner consistent with cheap food policy strategies.

Openness and industrialization in developing countries

This paper investigates the relationship between trade policy orientation and industrialization. Growth rates of manufacturing value added, rather than output growth rates, are related to index of real exchange rate distortion to establish the superiority of outward-oriented strategies in fostering industrial development. Results suggest developing countries will industrialize faster by adopting outward-oriented trade strategies than by using import substitution industrialization policies.

Host country reforms and FDI inflows: How much difference do they make?

Summary This study examines the effects of various policies on foreign direct investment (FDI) flows from the perspective of the “eclectic theory” of international investment, and hence the advantages of foreign ownership, host country location, and internationalization. Host country policies can influence FDI flows primarily through their influence on the advantages of location in the host country. Pooled cross-section and time-series data for 49 less-developed countries (LDCs) over 1970–95 are used to examine the effects of several different types of policy/institutional variables, including corporate tax rates, tariff rates, the degree of openness to international capital flows, exchange rate distortions, contract enforcement, nationalization risk, bureaucratic delay and corruption. A multivariate analysis of the effects on FDI flows of each type of policy, with and without controls for other relevant determinants is conducted. Two different sources of FDI data are employed as well as two different measures of capital controls. Although there are methodological problems in estimation, and especially collinearity problems, and relatively severe availability constraints for some of the relevant measures, the results demonstrate the relevance and importance for FDI flows of many of the policy/institutional variables under study. They also indicate that the results from panel methods yield results that differ rather significantly from those obtained from pure cross-section analysis. Because of complementarity between the various elements of a healthy investment climate, the effects of some policy reforms estimated from models which do not control for changes in other policies may overstate the effectiveness of individual policy reforms.

Rural taxation in Ethiopia, 1981–1989: a policy analysis matrix assessment for net producers and net consumers

During the period of socialist rule (1974–1991), Ethiopian agriculture was subject to an array of policy interventions. This paper uses a policy analysis matrix (PAM) approach to determine the effects of various policies on different types of households and in aggregate. The analysis extends the usual use of PAMs by including consumption requirements and by addressing the variation in the impact of specific policies through time. Household models are used to quantify the effects of government intervention on both net consumers and net producers of cereals. The analysis reveals that although cereal purchases were sometimes subsidized through overvaluation, cereal-deficit households paid high prices because of market segmentation and experienced reduced incomes due to exchange rate distortions. Households that tended to be surplus faced substantial indirect taxes through low producer prices. Results suggest that undistorted markets could enable many farms to accumulate sufficient reserves to cope with production variations, but farms with average land availabilities are not sustainable given current technologies, even with efficient commodity markets.

Do Outward-Oriented Developing Economies Industrialize Faster?

This paper investigates the relationship between trade policy orientation and industrialization. Rates of industrial diffusion, rather than per capita output growth rates, are related to Dollar's (1992) index of real exchange rate distortion to establish the superiority of outward-oriented strategies in fostering industrial development. Results suggest developing countries will have more success in their efforts ot industrialize if they adopt outward-oriented trade strategies. [F13, O4]

Financial Policy and Efficiency of Resource Utilization in Developing Countries

AbstractThis study examines the effects of selected policies on economic efficiency in 81 developing countries by pooling cross‐country data over various subperids between 1961–90. An incremental output‐capital ratio is the measure of economic efficiency, while the policy variables include: export orientation, size of the public sector, directed credit program through development bank lendings, financial depth (computed as the ratio of the flow of real value of monetary liabilities to real GDP), inflation rate, real interest rate, and real exchange rate distortion. The export‐orientation, financial depth, and real interest rate are found to promote economic efficiency, while other policy variables are found to hinder it.

The recovery of agricultural productivity in sub-Saharan Africa

This paper presents a new view of cross-country agricultural productivity in sub-Saharan Africa. For the first time, the “wheat units” approach to output aggregation is applied to Africa. This approach avoids many of the problems caused by exchange rate distortion and related problems when international output comparisons are based on agricultural value added. Measures of agricultural productivity based on the wheat unit aggregates reveal a striking recovery of growth in agricultural productivity during the mid-1980s. These results contrast sharply with those derived from standard output aggregates based on agricultural value added. This contrast is true for both partial and total factor productivity analyses. Technical change, measured by expenditures for agricultural research, and macroeconomic reform, which leads to improved economic incentives for agriculture, might account for up to two-thirds of this recovery. If this explanation is correct, it raises concerns for the sustainability of Africa's recent gains. Reduced public investment in agricultural research, for example, reduces current fiscal deficits at the expense of future growth in productivity.

Exchange Rate Distortion and Economic Growth in Ghana

This paper investigates the effects of exchange rate distortion on economic growth in a Less Developed Country (LDC)-Ghana. Using time series data from Ghana and a five equation simultaneous model, we find that exchange rate distortion, as measured by the black market premium, has a deleterious effect on economic growth rate. The negative effect is imparted through reduced investment and a constriction of international trade. The results imply that liberalized exchange rate policies will enhance the growth prospects of LDCs, especially those in Sub-Saharan Africa. [F 31,O 55]

Livestock pricing policy in sub‐Saharan Africa: objectives, instruments and impact in five countries

ABSTRACTLivestock pricing policies in many developing countries are often instituted without a good appreciation of the consequences of such policies for allocative efficiency, output and trade. This paper evaluates, in a comparative cross‐country context, the objectives and instruments of livestock pricing policy in five sub‐Saharan African countries: Ivory Coast, Mali, Nigeria, Sudan and Zimbabwe during the period 1970‐86. It assesses the extent to which pricing policy objectives have been attained, and also estimates the effects of price interventions on output, consumption, trade and government revenues in order to draw out lessons for the future.The empirical results indicate that in comparison with real border prices, a certain degree of success was achieved in stabilising real domestic producer prices in the study countries. The results also show that since the early 1980s, there has been a gradual shift away from taxation of producers. However, consumers still appear to gain as much as producers in three of the study countries, with negative consequences for foreign exchange earnings and government revenues. The analysis reveals the importance of domestic inflation and exchange rates as key variables for livestock pricing policies and highlights the need to address the macroeconomic imbalances that cause exchange rate distortions and high domestic inflation at the same time that direct price distortions are being tackled.

Livestock pricing policy in sub-Saharan Africa: Objectives, instruments and impact in five countries

Livestock pricing policies in many developing countries are often instituted without a good appreciation of the consequences of such policies for allocative efficiency, output and trade. This paper evaluates, in a comparative cross-country context, the objectives and instruments of livestock pricing policy in five sub-Saharan African countries: Ivory Coast, Mali, Nigeria, Sudan and Zimbabwe during the period 1970–1986. It assesses the extent to which pricing policy objectives have been attained, and also estimates the effects of price interventions on output, consumption, trade and government revenues in order to draw out lessons for the future. The empirical results indicate that in comparison with real border prices, a certain degree of success was achieved in stabilising real domestic producer prices in the study countries. The results also show that since the early 1980s, there has been a gradual shift away from taxation of producers. However, consumers still appear to gain as much as producers in three of the study countries, with negative consequences for foreign exchange earnings and government revenues. The analysis reveals the importance of domestic inflation and exchange rates as key variables for livestock pricing policies and highlights the need to address the macroeconomic imbalances that cause exchange rate distortions and high domestic inflation at the same time that direct price distortions are being tackled.

Multi-Country Evidence on the Effects of Macroeconomic, Financial and Trade Policies on Efficiency of Resource Utilization in the Developing Countries

This study examines the effects of selected policies on economic efficiency in 81 developing countries by pooling cross-country data over various subperiods between 1961-90. An incremental output-capital ratio is the measure of economic efficiency, while the policy variables include: export orientation, size of the public sector, directed credit program through development bank lendings, financial depth, inflation rate, real interest rate, and real exchange rate distortion. The export-orientation, financial depth, and real interest rate are found to promote economic efficiency, while other policy variables are found to hinder it.

Food subsidies and exchange rate distortions in Mozambique

In response to acute food shortages in Mozambique induced by civil war, drought and policies that favoured state farms and restricted private trade, the government introduced a food rationing system in the two largest cities, Maputo and Beira. The primary function was to assure an equitable distribution of the limited food available, but it has evolved into an untargeted income-support programme as the crisis that led to its inception has abated. This article emphasizes the need to transform the subsidy, which at present is financed implicitly through exchange rate distortions, into an explicit and targeted subsidy. This would be consistent with the long-term objectives of Mozambique's economic recovery programme in which liberalization of commodity markets and exchange rate realignment are key policy reforms.

The Effect of Exchange Rate Distortions on Grain Export Markets, The Case of Argentina

The growth of agricultural trade in the 1970s and the strong dollar and depressed commodity prices in the 1980s have increased awareness of the vulnerability of agricultural markets to economic forces outside the agricultural sector. Some of the recent agricultural developments are attributable to changes in exchange rate movements that transmit macroeconomic forces to a trade-dependent agricultural sector. Under the flexible exchange rate system, exchange rate volatility has increased (Artus and Young) because exchange rates adjust to balance external accounts for an independent level of money supply across countries. Volatility has also increased because asset markets and adjustments on the capital side of the balance of payments determine the exchange rate in the short run (Dornbush). Regardless of the sources of exchange rate movements, exchange rate changes can affect terms of trade and international competitiveness as long as they affect relative prices between traded and nontraded goods (Krueger). Even if exchange rate changes primarily adjust price levels between countries for a given level of the money supply, there are terms of trade changes in the short run. However, recent evidence indicates that exchange rate changes are greater than can be attributed to changes in domestic price levels across countries (Frenkel, Stockman).

Protectionism, Exchange Rate Distortions, and Agricultural Trading Patterns

It is an apparent paradox of modem economic history that the world has focussed on liberalizing trade in manufactures and failed to react to apparently increasing distortions in trade in agricultural commodities. Among international economists and others concerned with a generally efficient allocation of world resources, attention has been centered on trade and barriers to trade in manufacturers, on the one hand, and the functioning of international capital markets on the other. As an economist whose primary focus has been on patterns of trade and protection in the international economy, I found myself somewhat embarrassed by a paucity of specific knowledge about barriers to agricultural trade when asked to give this paper. If I were asked what the average tariff rate was for a given two-digit category of manufactures in one of the major Organization for Economic Cooperation and Development (OECD) countries or in a major developing country, I could probably hazard a fairly accurate guess as to the height of the tariff and the ranking of the industry's protection. If asked to enumerate barriers to financial capital flows in a particular OECD (or developing) country, again, I could probably give a rough estimate of the relative restrictiveness of that country's policies.