DP7971 Novel Indicators of the Trade and Welfare Effects of Agricultural Distortions in OECD Countries

Author(s): Kym Anderson, Johanna L. Croser
Publication Date: August 2010
Keyword(s): agricultural price and trade policies, Distorted incentives, trade restrictiveness index
JEL(s): F13, F14, Q17, Q18
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7971

Agricultural markets in OECD countries have long been highly distorted by government policies. Traditional weighted average aggregates of the price distortions involved, such as producer and consumer support estimates (PSEs and CSEs), can be poor indicators of the trade restrictiveness and economic welfare losses associated with them, especially if a country?s support estimates vary a lot across the product range. Certainly estimates of trade and welfare effects of price supports can be obtained from sectoral or economywide models using price elasticity estimates, but the results can be contentious if there is no consensus on what model specification and elasticity parameters to use. This paper shows that, if there is a willingness to accept simple assumptions about elasticities, it is possible to generate indicators of the welfare and trade restrictiveness of agricultural policies using no more than the price and quantity data needed to generate PSEs and CSEs. These new indexes thus provide an attractive supplement to the current policy monitoring regime developed by the OECD Secretariat.