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report published by the World Bank adds to the literature on modeling distortions to the agricultural sector by recommending an approach that it claims is better tailored to developing countries. The method would lay more emphasis on non-agricultural measures that distort agricultural markets than has previously been used by the OECD in its producer support estimates and consumer subsidy equivalents. These would include, for example, border protection for industrialists, which can have a negative impact on farmers.

“The incentives faced by farmers are affected not only by direct protection or taxation of primary agricultural industries but also indirectly via policies assisting non-agricultural industries, since the latter can have an offsetting effect by drawing resoures away from farming,” explain the authors,  Kym Anderson, Marianne Kurzweil, Will Martin, Damiano Sandri and Ernesto Valenzuela.  “While those non-agricultural measures may be of only minor importance in most OECD countries today ... they have been too important in developing countries over the past half-century to ignore.”

The report, “Measuring Distortions to Agricultural Incentives, Revisited”, also recommends that exchange-rate policies should be factored into the complex models used to forecast the impact of economic liberalization.

To illustrate the approach, the paper estimates nominal and relative rates of assistance to farmers in China for the period 1981 to 2005. Analysis shows that farmers were taxed by agricultural and trade policies in the early reform period, with prices for the stape foods kept well below market prices. The average taxation fell in the first half of the 1990's, but key commodities still received negative rates of assistance.

“In the 1980's, almost one-quarter of the NRAag, more than one-third of the (anti) trade bias index and one-sixth of the RRA were due to distortions to exchange rates in that decade," note the authors. "To have ignored that source of price distortion would have led to a considerable under-estimation of the adverse effect of past government policies on farmers' incentives in China.”

By the first half of 2000, however, direct taxation of agriculture settled to zero, on average. The question, say the authors, is whether China's RRA will stay at zero, or, as happened in Japan, Korea and Taiwan, will the country begin providing more support to agriculture relative to producers in other sectors.