WTO S TRADE LIBERALIZATION: IMPLICATIONS FOR PAKISTAN WHEAT ECONOMY

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1 Sarhad J. Agric. Vol.24, No.1, 2008 WTO S TRADE LIBERALIZATION: IMPLICATIONS FOR PAKISTAN WHEAT ECONOMY Muhammad Zulfiqar and Anwar F. Chishti ABSTRACT This study of Pakistan s wheat crop develops econometrically estimated supply and demand functions, identifies government policies and interventions, estimates welfare effects associated with existing interventions and analyses implications of the implementation of WTO s trade liberalization in the country and abroad. The study points out that wheat crop had been subjected to price tax-cum-import subsidy regime during and price support-cum-import tax regime during study sub-period. These interventions were found associated with welfare effects higher losses to consumers (Pak Rs million per year) than gains to producers (Rs million per year) during the latter period. Free trade simulation results showed greater gains to consumers than losses to producers. If trade liberalization was introduced in world market, it would have resulted in additional gains (Rs million) to consumers than losses (Rs million) to producers. Based on the analysis, the study presents the following recommendations. First, government interventions should be minimized and the trend of narrowing down gap between domestic and international prices should be kept continue till the two prices arrive at the same level. Second, supply of various fertilizers, availability at appropriate times and use on crops in recommended proportions should take prime attention in formulation of input market policy. Third, trade liberalization process should be stepped up, and more specifically, world prices should be allowed to prevail in domestic wheat market. Fourth, Pakistan should also work for implementation of WTO s induced trade liberalization on global basis and especially in major global economies of US, EU and other OECD countries. Fifth, Government of Pakistan should gradually reduce its role in trading through State Trading Enterprises (STEs). Rather it should step up its role as facilitator of trade as envisaged in the Green Box of Agreement on Agriculture and other WTO agreements. More importance should be given to research, development and out-reach areas and to the introduction and adoption of international quality standards developed by FAO/WHO s Codex Alimentarius Commission. INTRODUCTION A review of Pakistan s wheat domestic wholesale price, import price and world trade price helps reveal the types of interventions Government of Pakistan has adopted to regulate its wheat economy during last 20 years. A casual view of the data on prices (Annex Table) reflects that Pakistan s domestic wholesale price (P d ) has remained, on average, at US$ (Pak Rs ) per M. ton against the world average trade price (P w ) of US$ (Rs ) per M. ton, suggesting that Pakistan has taxed its wheat output during the study period. In addition, Pakistan has imported wheat at an annual average import price (P i ) of US$ (Rs ) per M. ton during and sold at US$ (Rs ) per M. ton in domestic market, subsidizing import at US$11.37 (Rs ) per M. ton. It thus reflects that Pakistan wheat has been subjected by price tax-cum-import subsidy regime instead of Government of Pakistan s popular claim of supporting wheat producer prices. The purpose of this paper is to study Government of Pakistan s interventions in wheat economy in detail, estimate welfare effects associated with such interventions and present an analysis of the implications of the possible implementation of WTO s Agreement of Agriculture on Pakistan s wheat economy. MATERIALS AND METHODS The objective set for this research required to engage three methodologies, namely: (a) analysis of prices and identification of government interventions; (b) computation of associated welfare effects in terms of changes in producer and consumer surpluses; and (c) analyzing implications of implementation of WTO s Agreement on Agriculture. Identification of government interventions Since the main objective of study was to analyze the effects of WTO trade liberalization, the study period ( ) was divided into two sub-periods: pre- WTO ( ) and post-wto ( ). The mean values of prices for the two sub-periods were computed, as follows. Pre-WTO period Post-WTO period ( ) ( ) Pakistan s wholesale price (P d ) US$ (Rs ) US$167.33(Rs ) World average price (P w ) US$ (Rs ) US$ (Rs ) Pakistan s import price (P i ) US$ (Rs ) US$ (Rs ) Since average P d remained at US$ per M. ton against average P w at US$ and average P i at * Kohat University of Science and Technology Kohat Pakistan. ** Department of Agricultural Economics NWFP Agricultural University Peshawar Pakistan. 131

2 Muhammad Zulfiqar, et al. WTO s trade liberalization: implications for Pakistan wheat economy 138 US$ during the pre-wto period, the price tax-cum-import subsidy regime (Figure 1) seemed to have been in practice during the pre-wto period. However, situation during post-wto period appeared entirely different as average P d had remained higher (US$167.33) than P w (US$158.69), suggesting practicing of price-support. In addition, P i had remained lower than P d, which means import had been taxed during post-wto period. Hence, a regime of price support-cum-import tax (Figures 2) was exercised during post-wto period. Computation of welfare effects Welfare effects of the existing situations (pre- and post-wto), measured in terms of changes in producer and consumer surpluses ( PS & CS), along with computed import subsidy (IS) or import tax (IT) were estimated for arriving at net social welfare gains or costs (NSWG/C) of the two policy regimes identified earlier. Pre-WTO situation: The welfare effects of price tax-cum-import subsidy regime remained in practice during pre-wto period may best be depicted as per Figure 1. I s = I d (11a) (P d ) = P i (11b) Since P d /EXR = P i or P d = P i *EXR, replacing P d in above equation (11b): (P i )(EXR= ) = P i ( ) = ( ( * )P i = ( ( ))P i = P i P if = US$ per M. ton (11c) Substituting value of P if = given in (11c) in I s function given in equation (9) I sf = (P i = ) (12a) = thousand M. ton (12b) Equating I sf = with I d function given in equation (7) I sf = I df (13a) = P d (13b) P d = ( ) P df = Rs. Per M. ton (13c) After computing P if and P df in equations (11c) and (13c), the pre-wto scenario s welfare effects specified in model (1) to (4) were estimated, as follows. The associated welfare effects were captured using the following model. ) (14b) With the exception of Pakistan free market prices (P df or P if ) and wheat supply S(P) and demand D(P) functions, all other abbreviations have already been explained. The wheat supply and demand functions estimated by Zulfiqar (2007; p.85) were adopted; these were. S d = P d (5) D d = P d (6) I d = P d (7) P i = P w (8) I s = P i (9) = P w (10) For arriving at free market price (P if ), import supply (I s ) and import demand (I d ) were equalized, as follows. (15b) IS = - (P i P d )I d (16a) = - ($ $ )* = - US$ 49041thousand = - Rs thousand = - Rs million (16b) NSWG/C = PS + PS + IS (17a) = - Rs thousand = - Rs million (17b) Post-WTO situation: In contrast to the price taxcum-import subsidy regime practiced in earlier period, Pakistan exercised price support-cum-import tax during post-wto period (Figure 2).

3 Sarhad J. Agric. Vol.24, No.1, The associated welfare effects were captured using the following model. IT = (ghij) = (P i P d )I s (20) NSWG/C = PS + CS + IT (21) As per previous case, the following supply and demand functions adjusted for the post-wto period ( ) were adopted from Zulfiqar (2007; p.87). S d = P d (22) D d = P d (23) I d = P d (24) P i = P w (25) I s = P i (26) = P w (27) Free market prices (P df and P if ) were computed using identity condition: I s = I d (28a) (P d ) = P i (28b) Since P d /EXR = P i or P d = P i *EXR, replacing P d in above equation (28b) we get: (P i )(EXR= ) = P i = ( ( ))P if P if = US$ per M. ton (28c) Putting value of P if = given in (28c) in I s function (26) I sf = (P if = ) (29a) = (29b) Equating I sf = with I d given in equation (24) I sf = I df (30a) = P df (30b) P df = (30c) After estimating P if and P df in equations (28c) and (30c), the post-wto scenario welfare effects specified in model (18 21) were estimated, as follows. = Rs thousand = Rs million (31b) = - Rs thousand = - Rs million (32b) IT = (P i P d )I d (33a) = US$ = Rs thousand = Rs million (33b) SWG/C = PS + PS + IS (34a) = Rs thousand = Rs million (34b) Implications of WTO s trade liberalization Implementation in domestic economy: The major theme of WTO s Agreement on Agriculture is to gradually reduce domestic support, import tariffs and export subsidies and eliminate/abolish all such protection/support policies over a specified period. Other WTO s agreements, particularly GATT 1994, also advocate reduction of protection and introduction of liberalization (WTO website: This means that WTO in general aims at introducing and implementing free trade. If we refer to the way how we estimated the welfare effects of existing policy regimes in previous section, we would recall that welfare effects of existing policies were estimated comparing those with free trade situation. In case no government interventions were existed, free trade price P df = Rs would have prevailed instead of existing domestic price P d = Rs per metric ton during the pre-wto period (Figure 1). Consequently, there would have been no losses to the producers, no gains to the consumers and no cost of import subsidy borne by the treasury. Hence, the effects of implementation of free trade would have been as detailed below. PS = Rs million (35) CS = - Rs million (36) IS = Rs million (37) SWG/C = Rs million (38) In similar token, welfare effects of free-trade scenario for post-wto period would have been, as follows. PS = - Rs million (39) CS = Rs million (40) IT (import tax) = - Rs million (41) SWG/C = - Rs million (42) Implementation of WTO trade liberalization in International Markets: Implementation of Agreement on Agriculture and other WTO agreements is expected to produce similar trade liberalization effects in other countries. As a consequence, world prices would rise. FAO (2005, p.57) has found that impacts of trade liberalization on world commodity prices would be positive; it reports a 4 percent and 19 percent increase in wheat prices and 11 percent increase in all cereal prices for a market price support phase-out and all support phaseout trade reform program, respectively. Another study

4 Muhammad Zulfiqar, et al. WTO s trade liberalization: implications for Pakistan wheat economy 140 (Anderson, Martin and Mensbrugghe, 2006) estimated the impact of removing all trade related distortions inclusive of agricultural subsidies and found that a move to free merchandise trade would increase farm employment, the real value of agricultural output and exports, real returns to farm land and unskilled labor, and real net farm incomes in developing countries. In the absence of exact estimates of how much increase in world prices would occur, we assumed a 5 percent rise in world prices (P w ) and examined its effects on Pakistan s domestic economy. Pre-WTO Scenario: Using equation (10) and substituting 5 percent-enhanced value of P w (1.05P w ): I s = (P w =159.85) (43a) = thousand M. tons (43b) Equating I s = with I d given in (7) and solving for P d I s = I d (44a) = P d (44b) P d = Rs. per M. ton (44c) Hence the 5 percent-enhanced P w would generate more volumes of import supplies (I s ), which would cause domestic price to decrease from its original level P do = to new level P df = The associated welfare effects would be: = - Rs million (45b) = Rs million (46b) SWG/C = PS + PS (47a) = = Rs million (47b) It appears that the trade liberalization in the world market would benefit Pakistan s wheat economy to the tune of Rs million; this would happen as a result of an increase of Rs million in consumers surplus and a decrease of Rs million in the producers surplus per year. Post-WTO Scenario: Using the same procedure, the 5 percent-enhanced world price P w would cause domestic price to decline from the existing level of P d0 = Rs to new level of P df = Rs. Rs , and the associated welfare effects would be measured as: = - Rs million (48b) = Rs million (49b) SWG/C = PS + PS (50a) = = Rs million (50b) RESULTS AND DISCUSSION Due to prevalence of domestic wheat price (US$ per M.ton) at much lower level than the world average price (US$ per M.ton), Pakistan s wheat producers suffered losses in their producer surpluses to the tune of Rs.3102 million per year along with a cost of Rs.1122 million per year borne by the government in the form of import subsidy during pre-wto period ( ). The low prices helped consumers to gain Rs.3463 million per year in their consumer surpluses, but this gain to consumers could not balance out the total costs (to producers and government), and the society suffered a net loss of Rs.762 million per year. The domestic prices increased during post-wto period ( ) and remained higher (US$ per M.ton) than world average prices (US$ per M.ton), which helped producers to gain Rs.919 million per year along with an income to the treasury to the tune of Rs.267 million per year in the form of import tax. The high domestic prices caused losses of Rs.978 million per year to consumers, which however remained lower than the gains (to producers and government treasury); consequently, a net social

5 Sarhad J. Agric. Vol.24, No.1, gain of Rs.218 million per year accrued to the society. The government interventions in Pakistan wheat economy caused net social welfare cost in the earlier period and net social welfare gains during the latter period; the said costs and gains occurred when import subsidy cost and import tax revenues associated with such interventions during the two periods were taken into account. However, such subsidy costs or tax earnings concealed what actually happened to the welfare of producers and consumers. Such subsidy costs and tax earnings would vanish in case trade was liberalized and producers and consumers surpluses would remain for a comparative evaluation of welfare effects. Hence, if the motive is to see the effect of trade liberalization on producers and consumers, then changes in producers and consumers surpluses should particularly be looked into. With this understanding, if welfare effects of existing policies to producers and consumers are compared, then gains in consumers surplus had been greater (Rs million per annum) than losses in producers surplus (Rs million per annum) during pre-wto period. In case of post-wto period, losses to consumers had been higher (Rs million per annum) than gains to the producers (Rs million per annum). If trade liberalization was introduced in the domestic economy during pre-wto period, it would have incurred greater losses to wheat consumers (Rs million) than gains to producers (Rs million). However, in case of post-wto period, gains in consumers surplus (Rs million) would have been higher than losses in producers surplus (Rs million per annum). In case of trade liberalization in world wheat markets, Pakistan s wheat economy would have been benefited to the tune of Rs million per annum during pre-wto period, as a result of an increase of Rs million in consumers surplus and decrease of Rs million in the producers surplus. During post-wto era, wheat economy would have been benefited by Rs million, due to an increase of Rs million in consumers surplus and decrease of Rs million in the producers surplus per year. CONCLUSION AND RECOMMENDATIONS Based on the analysis carried out and discussions thereon, the following recommendations are in order. The intensity of government policy interventions appears to have been lessened during latter period as reflects from relatively lower gaps between Pakistan s domestic price and world price than that of pre-wto period. This trend of lowering gap between domestic and international prices should continue till the two prices arrive at the same level. The estimated welfare effects of existing domestic policy interventions in terms of producers and consumers surpluses revealed heavier losses than gains during recent (post-wto) period. Trade liberalization simulations worked out for domestic economy for post-wto period reflected that consumers gains would have been higher relative to losses to producers if trade was liberalized. Hence, Pakistan should implement trade liberalization as per procedures set by WTO. Trade liberalization simulations worked out for world market reflected higher consumers gains than losses to producers. Pakistan should therefore step up its efforts for implementation of WTO s induced trade liberalization on global basis and especially by the major global players like US, EU and other OECD countries. Government of Pakistan should gradually reduce its role in trading through State Trading Enterprises (STEs). Rather it should step up its role as facilitator of trade as envisaged in the Green Box of Agreement on Agriculture and other WTO agreements. More importance should be given to research, development and out-reach areas and to the introduction and adoption of international quality standards developed by FAO/WHO s Codex Alimentarius Commission (

6 Muhammad Zulfiqar, et al. WTO s trade liberalization: implications for Pakistan wheat economy 142 D d S d P df =Rs P d = Rs a f e b c d P i =$ P if =$ P d =$ g j I d h i I s Pakistan s Domestic Market World Market Fig. 1 Welfare effects of price support-cum-import tax regime practiced during post-wto period ( ) D d S d P d =Rs P df =Rs a f b e c d P d =$ P if =$ P i =$ g j I d h i I s Pakistan s Domestic Market World Market Fig. 2 Welfare effects of price tax-cum-import subsidy regime practiced during pre-wto period ( )

7 Sarhad J. Agric. Vol.24, No.1, Table Pakistan s wheat prices for (prices per M. ton) Pakistan Domestic Wholesale Price Year Pak Rs. US$ World Trade Price (US$) Pakistan Import Price (US$) Average Source: FAO ( Statistical database) REFERENCES Ackerman, K. Z. and P. M. Dixit (1999). An introduction to state trading in agriculture. Agricultural Economic Report No Market and Trade Economics Division, Economic Research Service, U.S. Department of Agriculture. Anderson, K., Martin W. and D.V.D. Mensbrugghe. (2006). Incidence of trade and subsidies policies on developing countries welfare, export and debt sustainability. The World Bank, Washington DC. Ashfaq, M., G. Griffith and K. Parton (2001). Welfare Effects of Government Interventions in the Wheat Economy of Pakistan. Pakistan Journal of Agricultural Economics. Agricultural Prices Commission 4(1): FAO (2005). The State of Food and Agriculture: Agricultural Trade and Poverty. FAO Agriculture Series No.36. Food and Agriculture Organization of the United Nations, Rome Government of Pakistan. (2007). Economic survey of Pakistan. Ministry of Finance, Economic Adviser s Wing, Finance Division, Islamabad. Government of Pakistan. (various issues). Agricultural statistics of Pakistan. Ministry of Food, Agriculture & Livestock, Islamabad. Government of Pakistan. (2006). Economic survey of Pakistan. Ministry of Finance, Economic Adviser s Wing, Finance Division, Islamabad. Cornelisse, P. and B. Kuijpers. (1987). A policy model of the wheat and rice economy of Pakistan. Pakistan Development Review 25(4): Daneswar, P., A. Sarris, and R. Sharma. (2004). The impact of domestic and trade policies on the world cotton market. Commodities and Trade Division, FAO, Rome. FAO website: Gujarati, N. D. (2003). Basic econometrics. Fourth Edition. McGRAW HILL, New York, USA. Maddala, G. S. (2002). Introduction to econometrics. Third Edition. John Wiley & Sons, Ltd, New York. WTO website: Zulfiqar, M. (2007). WTO s trade liberalization: Implications for Pakistan s crop sector. PhD thesis submitted to Department of Agricultural Economics, NWFP Agricultural University Peshawar.

8 Muhammad Zulfiqar, et al. WTO s trade liberalization: implications for Pakistan wheat economy 142