Market liberalization and efficiency of the rice economy in Bangladesh

Although general economic theory predicts that liberalization has positive effects for agricultural market integration of developing countries, there is on ongoing scientific debate on whether market liberalization policies do yield the expected positive outcomes in developing economies. Arguments used to contradict the theoretical findings are that bottlenecks in infrastructure, poor legislation and public order situations, unpreparedness to face competition and large disparities among economic agents may undermine the expected outcomes. Literature shows that that well-functioning of markets is a pre-requisite to achieve the objectives of liberalization. To contribute to the ongoing debate this dissertation investigates the direct and indirect impact of market liberalization in Bangladesh. Liberalization has been adopted three decades ago in Bangladesh on the ground that it will enhance market and production efficiency and welfare. This dissertation uses both ex-post and ex-ante approaches and follows a theoretical framework based on Winters (2002) and McCulloch et al., (2001) but with some modifications. Three decades after their introduction time has come to quantify the impact of the reforms and to try to quantify real effect on markets, production and welfare. To be able to combine market, production and welfare effects in a single framework, the thesis analyzes first how agricultural markets are functioning. Indeed still very little evidence exists on how well the spatial and vertical markets for staple food commodities and in particular for rice have performed in the years following market liberalization in Bangladesh, even if well-functioning markets form the key translation mechanisms through which policy reforms may affect the economy (Winters, 2002). In the first empirical analysis, the dynamic relationship between the world and domestic Bangladesh rice market was investigated by using a multivariate cointegration and error correction model. The results show that there exists a long-run uni-directional equilibrium relationship which means that the domestic prices adjust to the world prices. Our results highlight that the Bangladeshi rice market is cointegrated only partially with the world market. This conclusion emphasizes the need for developing adequate policies to secure food availability in particular in years of increasing world prices. Polices should aim to reduce domestic price volatility induced by world market volatility. In a next chapter, the spatial market integration among major selected rice markets in Bangladesh is investigated in the presence of threshold effects because of the potential role of transaction cost in price adjustments. First, a full information maximum likelihood (ML) cointegration test is performed for identifying the cointegration relationship and causality. Then, Hansen and Seo (2002) threshold cointegration (using Supremum Lagrange Multiplier (SupLM)) and threshold vector error correction model are estimated to account for a neutral band representing transaction costs. Our test results confirm the presence of the threshold effect in spatially separated rice markets in Bangladesh. Results highlight the importance of directing policy goals towards reducing transaction cost to increase market efficiency in Bangladesh rice market. In the third empirical chapter, an asymmetric error correction-EG model is estimated to investigate the widely-held belief among public and consumers that rice prices are manipulated in Bangladesh. This model investigates the existence of asymmetry between wholesale and retail rice prices in Bangladesh. The results show that the wholesale-retail price relationship is asymmetric with respect to price increases and price decreases and so confirm the fear and concerns of consumers about the existence of price asymmetry in Bangladesh. It indicates that although liberalization policy induced competition among chain participants, this is not sufficient for perfect market functioning. In a fourth empirical chapter, the welfare impact of different policy interventions in the food grain markets in Bangladesh is estimated using an economic surplus approach. Results reveal that over the period of analysis, the loss in consumer surplus exceeded the gain in producer surplus plus the gain in government revenue. Therefore, the policy of interventions resulted in a deadweight welfare loss for society. In contrast, the policy of liberalization shows that the gain in consumer surplus is larger than the loss in producer surplus. So, there is a net welfare gain to society. In the fifth empirical part, a panel data stochastic production frontier model was estimated to trace the impacts of market reform policies (proxied by effective protection coefficient or EPC) on efficiency and productivity growth of rice at the farm level in Bangladesh using a unique cohort of three-period panel data. The approach is used to measure the total factor productivity (TFP), technical change (TC), and technical efficiency change (TEC) in rice production and then to investigate the impact of EPC on the TFP, TC and TEC. Results show that the TFP index has increased due to an upward shift of the technology frontier. Although TC has increased, TEC declined during the post reform period, thereby, depressing TFP growth. The market liberalization policies exerted positive impacts on TC and TFP growth but negatively on TEC. So it means that although market reforms have succeeded in delivering productivity growth, the government must now focus on reinforcing measures to improve efficiency at the farm level. The last empirical part of the thesis analyzes the impact of further liberalization and changes in world market prices of agricultural commodities as an exogenous shock on Bangladesh using a computable general equilibrium (CGE) modeling approach in a single country comparative-static framework. The results show that trade liberalization increases the welfare of all households while world market price increases tend to decrease welfare. It means that although trade liberalization generates a welfare increase for households this is dependent on the relative level of world commodity prices