In this final scenario, the domestic subsidies and import quotas were both removed and the rice market allowed to function as though it were in a free trade environment. The simulated endogenous variables in this scenario were compared with the baseline model and the results were reported in Appendix Table B.4 panels (a) to (f). The results were consistent with the outcomes in the literature where in a free trade environment, the supply decreases and imports increase.
The market price was unchanged when the domestic subsidies were removed. The reason is that the market price was based on the retail price and only the supply price dropped when the subsidies were removed. However, when the import quotas were also
141 eliminated at the same time, the market prices in this scenario dropped from those in the baseline scenario for the years where the import quotas were effective. It is interesting to note that if the government eliminated all forms of trade barriers, including subsidies, the changes in the supply of rice dropped by an average of 10.4 per cent from the baseline scenario as depicted in Appendix Table B.4 (a) Column 12. The results were consistent with the theory; elimination of a subsidy will reduce the supply. However, the small percentage changes in supply in these results suggest that providing domestic subsidies to improve production might not be effective solution. Overall, the results from this scenario suggest that removing all trade barriers, especially domestic subsidies would only slightly affect the domestic supply and the imports of rice on average increased by 15.6per cent from the baseline scenario.
In the free trade scenario, all the exporting regions showed a slight increase in their exports as shown in Appendix Table B.4 panel (b) to (d) to offset the increased imports from Malaysia. Overall, in Scenario 2 the re-allocation of 25 per cent of the subsidy funds to R&D expenditures had significant effects of reducing imports and largely achieving self-sufficiency in rice. However, in the free trade scenario, Malaysia would increase its imports compared to the current situation.
Consumer Expenditure, Producer Revenue and Consumer Surplus
The consumer expenditure, producer revenue and consumer surplus were calculated for all the scenarios53. The calculations of the consumer expenditure and producer revenue for Malaysia are presented in Appendix C. In Table 7.4, the percentage changes in consumer expenditure, consumer surplus and producer revenue from the baseline scenario for each of the four scenarios are given.
Notably, in scenarios 1 and 2, the average consumer expenditure decreased by 3.6 and 22.7 per cent respectively. The average producer revenue increased by 40.5 and 66.5 per
53
The producer surpluses were not calculated since in any given period the supply quantity was fixed and the supply response function has lagged dependent variables involved. Calculations in the case of a lagged price in the supply response has been shown in Martin and MacLaren (1976).
142 cent in scenarios 1 and 2 respectively. Interestingly, the changes in the consumer surplus in scenario 2 are the highest with an increase of 23.1 per cent from baseline scenario. These results suggest that the redirection of the government funds from domestic subsidies to R&D expenditures could make both the consumers and producers better off. The producers were better off with the removal of BERNAS (which replaced ad valorem tariffs with import quotas), however, the consumers were worse off with the average consumer expenditure increasing by 16.6 per cent from the baseline scenario. In this scenario, the consumer surplus falls by 17.97 per cent. In the final scenario, the produces were worse off compared with the baseline scenario by 22.7 per cent on average because the supply of rice dropped in scenario 4.
Based on the results given in Table 7.4, the consumers and producers were both better off in scenarios 1 and 2, in effect, because the use of funds in R&D was more effective in increasing yield than the subsidies. Thus, the re-distribution of public funds from domestic subsidies to yield improvement through R&D activities would seem to be a more effective solution for increasing production and reducing import dependency assuming these are goals of the government.
In Table 7.4, the producer revenue was based on the overall economy. What happens to the income per farmer? In 2009 there were 172,230 paddy farmers in Malaysia. Using a simple calculation, in the baseline scenario, total producer revenue in 2009 was MYR3,616.63 million and scenario 2 was MYR7,461.11 million, therefore income per worker is estimated to be as follows:
Baseline Scenario: Income per worker = MYR 3,616.63 million = MYR20,998 per year. 172,230
Scenario 2: Income per worker = MYR 7,461.11 million = MYR43,320 per year. 172,230
From the simple calculations, it is clear that farmers‟ income could be improved through yield improvements compared with providing subsidies for them.
143 Table 7.4 Changes in consumer expenditure, producer revenue and consumer surplus, 1982-2009
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Sensitivity Analysis on the R&D coefficients
A sensitivity analysis was conducted to test the effects of changes in the R&D coefficient on the key variables; supply, demand, imports and market prices for all the scenarios. The actual aggregate R&D coefficient of 0.033was increased and decreased by one per cent. The averages of the variable data from 1982-2009 are reported in the first half of Table 7.5. The percentage changes in the key variable responses relative to a percentage change in the R&D coefficients can be expressed as elasticity and these are presented in the second half of Table 7.5.
From Table 7.5, it is interesting to note that a one per cent change in the R&D coefficient leads to a 0.004 and a 0.006 percentage change in the average supply in Scenarios 1 and 2 respectively. In both these scenarios, higher allocations of R&D expenditures were used and that could be one of the reasons for the higher response towards an increase in the R&D coefficient. The import responsiveness towards changes in the R&D coefficient was also higher for both scenarios compared with other scenarios. Overall, the R&D coefficients respond in the same way for all scenarios.
145 Table 7.5 Sensitivity analysis with R&D coefficients
Item Average Supply Average Demand Average Import Average Market Price Aggerate R&D = 0.0333 Baseline 1.300 1.812 0.529 1032.601 Scenario 1 1.867 1.815 0.228 992.088 Scenario 2 2.686 1.834 0.014 791.506 Scenario 3 1.303 1.791 0.508 1215.284 Scenario 4 1.165 1.813 0.611 1014.054 Aggerate R&D (+1%) = 0.0336 Baseline 1.302 1.810 0.528 1030.161 Scenario 1 1.875 1.814 0.227 991.068 Scenario 2 2.701 1.832 0.014 791.343 Scenario 3 1.305 1.791 0.507 1213.305 Scenario 4 1.167 1.813 0.611 1012.718 Aggerate R&D (-1%) = 0.0329 Baseline 1.298 1.814 0.529 1034.931 Scenario 1 1.860 1.817 0.229 993.165 Scenario 2 2.670 1.835 0.015 791.669 Scenario 3 1.301 1.792 0.509 1217.167 Scenario 4 1.163 1.814 0.612 1015.279 Aggerate R&D (+1%) = 0.0336 Baseline 0.0014 -0.0009 -0.0013 -0.0024 Scenario 1 0.0040 -0.0007 -0.0035 -0.0010 Scenario 2 0.0059 -0.0007 -0.0327 -0.0002 Scenario 3 0.0015 -0.0002 -0.0017 -0.0016 Scenario 4 0.0017 -0.0003 -0.0013 -0.0013 Aggerate R&D (-1%) = 0.0329 Baseline 0.0014 -0.0009 -0.0013 -0.0023 Scenario 1 0.0040 -0.0008 -0.0035 -0.0011 Scenario 2 0.0059 -0.0008 -0.0327 -0.0002 Scenario 3 0.0014 -0.0002 -0.0018 -0.0015 Scenario 4 0.0017 -0.0004 -0.0012 -0.0012
a Note rounding errors give slightly different values for the 1% increase compared to the decrease Average data for sensitivity analysis (1982-2009)
146 Concluding Remarks
In this chapter, the econometrically estimated recursive spatial equilibrium model was used to analyse the impact of government policies in the Malaysian rice industry. This included the re-allocation of public funds from domestic subsidies to R&D expenditure focused on rice yields. To evaluate the impact of R&D expenditures, various length of lag and lag structure were tested in the yield function. It was found that the gamma distribution with a 16-year lagged period and δ=0.6 and λ=0.8 was the most appropriate form of distribution. It was also found that the R&D elasticities, which fell in the range of 0.10 to 0.13, agreed well with the R&D elasticities in the available literature.
The baseline scenario was based on the actual situation with existing subsidies, R&D expenditures and import quotas. Four scenarios were simulated and compared with the baseline scenario. The results from scenario 2, where 25 per cent of the subsidy funds were re-allocated to R&D expenditures, was found to move Malaysia close to self- sufficiency in rice production with zero import quantities. Furthermore, the consumer expenditure reductions and producer revenue gains in this scenario were significant compared with the baseline scenario. Sensitivity analysis was used to assess the effect of changes in the R&D coefficients on key variables in the model. The results suggest that supply is particularly sensitive to changes in the coefficients.
147