The Malaysian rice policy: Welfare analysis of current and alternative programs

In Malaysia, government intervene in the rice market using quota/tariff to effect the level and mix of consumption. The programs are known to be costly and generate economic allocative inefficiencies. The objective of this study is to contribute to the understanding of government intervention policies and welfare impacts on related interest groups. The impact of current and alternative policy options are evaluated using an inter-commodity linkage model.The econometric model developed for the study consists of six equation--a domestic supply equation, two demand equations, an import equation and two identities. The partial adjustment-adaptive expectation (PAAE) was used to investigate the supply equation. The results of the diagnostic test suggest that partial adjustment model is the preferred specification. The demand equations were estimated using the SUR model with demand restrictions imposed. In addition, both the supply and demand equations were tested for functional form and autocorrelation.Several important conclusions emerged from the supply and demand equations. First, both the short and long run price elasticities are low. Second, wheat has acquired an important position in the Malaysian diet. Third, the income elasticities are negative and positive for rice and wheat. The results of the regression analysis from the import equation suggest that the Malaysian government sets the level of imports according to the supply in the previous period, income level and domestic prices of rice and wheat.This study employed the Marshallian concepts to quantify the welfare changes due to price change. The welfare analysis shows that ignoring the substitution leads to sizeable errors in the cost of the program if the substitution effect is ignored. The analysis suggests that the net societal cost would be lower if the current program is replaced by deficiency payments. In terms of market participants, it is clear from the analysis that consumers will prefer either deficiency payments or free trade option rather to the existing quota system. Producers would be hurt under free trade. The taxpayers must bear the cost of the program with deficiency payments.U of I OnlyETDs are only available to UIUC Users without author permissio