Social welfare-optimal policy rules : application to the Zimbabwe corn industry

Graduation date: 1989Government intervention in food grain markets is a common feature of most LDCs. Inasmuch as liberalizing markets is difficult for some of these governments, researchers have offered suggestions to reduce detrimental affects of intervention. The general advice for pricing policy has been for governments to set prices at c.i.f. or f.o.b. border prices. In countries where c.i.f. and f.o.b. prices are very different and the countries are marginally self-sufficient, this advice is inadequate. Analysis on which this general advice is based fail to take this and government motivations explicitly into account. This thesis develops a more flexible model that rationalizes controlled price and stock policy making and takes into account the case of marginally self-sufficient economies. In the framework used, government is assumed to set policy levels as a result of optimizing the expected weighted sum of social incomes to consumers, producers, and taxpayers. Resulting from this optimizing are revealed preferences. Assuming Zimbabwe was optimizing such an objective function from 1954 to 1986, these revealed preference functions were estimated using policy levels and exogenous factors affecting policy for this period. Estimation of the model on Zimbabwe showed that the government set price and stock policies with the expectation of future exports. Results also show that Zimbabwe has, on average, fully adjusted its producer prices to world prices during the 1954 to 1986 period. Wholesale prices have only partially adjusted to world prices. The government in addition was influenced by supply and demand conditions. Estimates also show that government held stocks in order to speculate on world prices and that stocks were influenced by previous years' net domestic supply. The model estimated also allowed for recovery of implicit weights the government has accorded the different economic groups in policy making. Results show that the Zimbabwe government has weighted consumer, producer, and public sector interests roughly in proportions 0.30, 0.35, and 0.35. Since these differ little, results seem to indicate on the average the government has been setting prices to maximize long-run efficiency. Tests showed the model was not very sensitive to small changes in demand and supply slopes. A number of simulations were conducted to determine effects of exogenous factors and alternative weighting schemes on income distribution and social income stability. Weighting all groups equally resulted in Z$3.13 million more social income than had the optimal solution. However, it reduced stability of incomes in the face of varying exogenous shocks such as in world prices, prices of substitutes, and wage-income. It also reduced total production and exports. Reduction in production was not enough to convert the country from a net exporter to net importer. Thus, intervention has helped growth in the corn industry and stabilized incomes. Also tested were the scenarios in which economic groups are weighted on the basis of populations and the scenario in which government exercises full monopoly power. The former resulted in less total income and more instability in social income and export earnings. The later resulted in maximal revenue to the government agency but reduced production far enough that corn self-sufficiency gave way to net imports