Agricultural incentives in developing countries: measuring the effect of sectoral and economywide policies

The impact of sector-specific (direct) and economywide (indirect) policies on agricultural incentives for eighteen developing countries for the period 1975-84 are estimated. The direct effect is measured by the proportional difference between the producer price and the border price (adjusting for distribution, storage, transport, and other marketing costs). The indirect effect has two components. The first is the impact of the unsustainable portion of the current account deficit and of industrial protection policies on the real exchange rate and thus on the price of agricultural commodities relative to nonagricultural nontradables. The second is the impact of industrial protection policies on the relative price of agricultural commodities to that of nonagricultural tradable goods. We find that (1) in almost all cases the direct effect is equivalent to a tax on exportable goods (-11 percent on average) and to a subsidy for importables (20 percent on average); (2) the indirect effect also taxes agriculture (-27 percent on average) and dominates the direct effect (whether the direct effect is positive or negative); and (3) the direct policies for both importables and exportables stabilize domestic producer prices