Structural Change in Demand for Cereals in Sri Lanka

Transcription

1 Tropcal Agrcultural Research Vol. 16: (2004) Structural Change n Demand for Cereals n Sr Lanka I.M. Rathnayake, N. Pryadharshane 1 and J. Weerahewa 1 Postgraduate Insttute of Agrculture Unversty of Peradenya Peradenya, Sr Lanka ABSTRACT. The purpose of ths paper s to assess the factors affectng the demand for rce and wheat n Sr Lanka. The analyss was done usng the AIDS model. Tme seres data collected for the perod from Food Balance Sheets and Central Bank Annual Reports were used for the analyss. Results show that there s a structural change n cereal consumpton and t s based towards wheat. Results also show that own prce elastcty and expendture elastcty for rce are sgnfcant after 1977 perod. Those elastcty values are sgnfcant for wheat before and after the structural change. However, cross prce elastctes for rce and wheat are not sgnfcant after 1977 perod, mplyng that rce demand s not sgnfcantly affected by the prce of wheat. Therefore, t s concluded that taxng wheat so as to ncrease the demand for rce s an neffectve strategy to ncrease the ncome of paddy producers. INTRODUCTION Snce poltcal ndependence, successve governments n Sr Lanka have consdered the achevement of food self-suffcency, especally n rce, as one of ther major objectves. A varety of strateges have been mplemented to acheve ths objectve and they nclude large scale nvestments n nfrastructure, provson of support servces, nput subsdes, consumpton subsdes on rce and floor prces to farmers (Ranaweera, 1998). As a result, paddy cultvaton productvty and the extent under paddy cultvaton ncreased sgnfcantly over the past fve decades and, at present, Sr Lanka s nearly self suffcent n rce. Despte the ncrease n domestc producton of rce, a sgnfcant ncrease n consumpton of wheat durng the past few years was observed n Sr Lanka along wth rce consumpton. Ths stuaton s consdered as a threat to the paddy market as t can lower the prce of paddy, due to a declne n demand for rce. The ncrease n consumpton of wheat s due to a number of factors. The frst factor s the lower prce of wheat based products due to the subsdy on wheat. Wheat has been subsdzed through varous measures. Untl 1994, wheat prces were normally set to cover the full cost. However, the government lowered prces of wheat flour and bread n 1994 and the cost of subsdy was Rs. 5-6 bllon a year n 1995 and 1996 (World Bank, 2003). Wheat mports are subject to a 5% tarff, whle a 25% tarff plus a surcharge was mposed on drect mports of wheat flour n 2002 (World Bank, 2003). The second factor affectng the demand for cereals s the changes n the economy after the mplementaton of open economc polces n Lfestyles of the Sr Lankan populaton have changed due to urbanzaton, workng mothers, and demand 1 Department of Agrcultural Economcs and Busness Management, Faculty of Agrculture, Unversty of Peradenya, Sr Lanka.

2 Structural Change n Demand for Cereals n Sr Lanka for convenence food etc. As a result, among the cereals, consumers may now have a hgher preference towards wheat and wheat based products, as they are easy to prepare when compared wth rce. The thrd factor s the change n ncome levels and the fourth s the change n own prces that tend to be hghly nelastc. These factors lead to structural change n cereal demand. Gven ths context, the purpose of ths study s to assess the factors affectng demand for cereals n Sr Lanka. It estmates demand for rce and wheat usng the Almost Ideal Demand System (AIDS) model and assesses the mportance of structural change n explanng the demand for cereals. The paper s organzed as follows. The next secton provdes the trends n consumpton of rce and wheat n Sr Lanka. Whch s followed by revew of the past studes s presented next. The next two sectons provde the model and data. Results are presented next and the paper ends wth conclusons and polcy mplcatons. TRENDS IN CONSUMPTION OF RICE AND WHEAT Rce stll remans as the staple food and the major calore and proten source for both rch and poor n Sr Lanka. Consumpton of rce was nfluenced by successve governments snce ndependence through varous polces. The unversal rce-ratonng scheme was ntated n 1942 to ensure equtable dstrbuton of avalable food resources. The amount of rce raton and the nomnal prce of a unt of ratoned rce were changed alternatvely durng ts mplementaton. The ncome tax payers were excluded from the raton scheme n 1972 due to the hgh fscal burden to the government. In late 1979 a food stamp scheme was ntroduced. The scheme provded food stamps wth a fxed nomnal value. The food stamp scheme was replaced by the Janasavya program n 1989 where benefcares were provded food along wth the assstance to mprove ther sklls. In 1994 the Samurdh program was ntated wth some modfcatons to the exstng program (Ratnayake, 1998). Consumpton needs of rce n Sr Lanka were met through local producton as well as through mports. Fgure 1 shows the trends n per capta avalablty of rce and wheat durng perod a gradual reducton n rce mports. However, there was a gradual reductons n rce mports over the same perod (Fgure 2). As llustrated n fgure 3 the real prce of rce has decreased over the years wth an ncrease n the level of producton durng the same perod. Smlarly, the real prce of wheat also has decreased over the perod of The fact, provded by these fgures does not provde any causalty between changes of prces of rce and wheat on changes n consump ton of rce and wheat over the perod of Therefore an econometrc analyss s necessary to fnd out the extent to whch rce and wheat consumpton s affected by prces, ncome levels and structural change. The followng secton presents some studes, whch were conducted n the past on ths ssue. 293

3 Rathnayake, Pryadharshane & Weerahewa Per Capta Avalablty of Rce and Wheat (kg/head/year) Year Per Capta Avalablty of Rce (kg/h/year) Per Capta Avalablty of Wheat (kg/h/year) Fg. 1. Trends n per capta avalablty of rce and wheat Source: Food Balance Sheets, Varous years. Total Paddy Producton and Rce and Wheat Imports ('000 Mt) 3,000 2,700 2,400 2,100 1,800 1,500 1, Rce Imports ('000 Mt) Wheat Imports ('000 Mt) Total Paddy Producton ('000 Mt) Year Fg. 2. Trends n total paddy producton and rce and wheat mports. Source: FAO, Food Balance Sheets, Varous years. 294

4 Structural Change n Demand for Cereals n Sr Lanka Real Prces of Rce and Wheat (Rs/kg) Year Real Prce of Rce (Rs/kg) Real Prce of Wheat (Rs/kg) Fg. 3. Trends n real prces of rce and wheat. Source: Central Bank, Varous years. PAST STUDIES A number of authors attempted to econometrcally estmate the demand for dffe rent food tems ncludng rce and wheat n Sr Lanka. Jogaratnam and Poleman (1969) estmated expendture elastctes for twelve food categores usng sem -log functonal form. Data on expendture and consumpton obtaned from Consumer Fnance survey n 1963 were used for the analyss. Results revealed that the demand for non-starchy food ncreases wth an ncrease n levels of ncome. Alderman and Tmmer (1980) estmated prce and expendture elastctes for eght major food commodtes for three exp endture groups. The analyss was conducted usng a double log quadratc functonal form. Data on consumpton and expendture durng were used for the analyss. The results revealed that although expendture elastcty for wheat s constant wth a the rse n ncome levels, t decreases for rce wth an ncrease n ncome. Bogahawatte and Kalasapathy (1986) estmated prce and expendture elastctes for proten and calore sources usng a quadratc form. They have used tme seres data on expendture and consumpton from 1965 to The results ndcated that the consumers were more responsve to changes n the prce of rce than that of wheat. Ngel and Bogahawatte (1990) estmated a demand system for food types usng cross sectonal data from urban, rural and estate sectors n Badulla dstrct durng 1987/1988. They have used the lnear verson of the Almost Ideal Demand System (AIDS) to estmate prce and expendture elastctes. The results revealed that the consumers consdered the cereals other than rce and wheat as nferor commodtes. 295

5 Rathnayake, Pryadharshane & Weerahewa Thudawe (2002) estmated food demand parameters usng the lnear verson of the Almost Ideal Demand System (AIDS) for eleven food groups. In addton to prces and expendture/ncome, household characterstcs were also ncluded n the model. In order to fnd out the trend n changes n elastctes between 1990/91 and 1995/96 perods, a two-sample t test was performed. Data used n ths study was from the Household Income and Expendture Surveys conducted n 1990/91 and 1995/96. The results revealed that the responses for changes n prces and ncome are dfferent among hgh, mddle and low-ncome groups and n urban and rural sectors for dfferent food tems. Further, a comparson of the coeffcents for rce between each ncome group and each sector n the two study perods showed that, except for the hgh-ncome groups, for all the other categores the coeffcents for 1990/91 were sgnfcantly dfferent from these for 1995/96. Furthermore, the study showed that expendture/ncome s more mportant n ncreasng rural consumpton of rce whereas n the urban sector lower prces are more effectve n enhancng household rce consumpton. The evdence on elastctes from these studes are mxed due to dfferences n methodologes and the data used, eventhough all of them addressed the mpact of prces and level of ncome on the change n demand for rce and wheat. Studes reported above however, do not explctly address the mpact of structural change on demand for cereals n Sr Lanka, though smlar studes have been conducted elsewhere. Huang and Bous (1996) assessed the mportance of structural change on pattern of consumpton n Tawan and Chna usng the lnear verson of the AIDS model and found that structural factors accounted for 73 percent of the declne n rce consumpton between 1981 and Moschn and Melke (1989) used the AIDS model wth an addtonal structural change parameter to capture the varatons n demand for meat before and after structural change. The present study uses a lnear verson of the AIDS followng Moschn and Melke (1989) to assess the structural change n cereal demand n Sr Lanka. MODEL In order to fnd out the factors affectng demand for cereals and to assess the mportance of structural change, the analyss was performed usng the lnear verson of the AIDS (Deaton and Muellbauer, 1980 and Moschn and Melke, 1989). Ths model dffers from the model used by Thudawe (2002), who also made an attempt to model structural change, as t ncorporates an addtonal tme path n order to fnd out changes n the parameters to be estmated before and after structural change. The model uses tme seres data and hence t can allow all the parameters of the model to change over tme. The lnearty of the AIDS model s an attractve feature for the econometrc analyss of structural change. The demand system ncludes only two commodtes, rce and wheat to represent the two major cereals used n the Sr Lankan dets, as the consumpton of other cereals such as maze and mllet n Sr Lankan dets s neglgble. Furthermore, data on prces and demand on other cereals s lmted. It was mplctly assumed that the utlty of cereal consumpton s weakly separable from the utlty derved from other commodtes. The algebrac form of AIDS 296

6 Structural Change n Demand for Cereals n Sr Lanka s presented below (Deaton and Muellbauer, 1980). The AIDS n budget form s expressed as: w = a + c ln ( E / P ) + b 1 ln P 1 + b 2 ln P 2 + g t + ε (1) where w s the budget share of the th commo dty, E s total consumpton expendture on rce and wheat, P s the prce of th commodty, t s the trend varable, ε I s the stochastc error term and P s the prce ndex defned by ln P = a + k a k ln Pk k j b jk ln Pk ln P 0 j, (2) Deaton and Muellbauer (1980) suggest approxmatng the prce ndex P by the Stone geometrc prce ndex, as shown below. ln P = w ln P (2 ) The addng up restrctons for the demand system requres, Σ a =1, Σ c = 0, Σ b j = 0, and Σ g = 0. (3.1) The homogenety restrcton s Σ j b j = 0, (3.2) and the cross-equaton symmetry restrctons can be mposed as b j = b j for j (3.3) Under the hypothess of no structural change the set of parameters n equaton (1) gves a full representaton of underlyng utlty maxmzaton process. In ths analyss the tme path d 1 was used to represent the perod n order to capture the structural varatons that occurred after ntroducng open economc polces to Sr Lanka. Structural change can be characterzed by allowng those set of parameters to change over tme. Gven the cross equaton restrctons n (3.1), (3.2) and (3.3) structural change s lkely to affect all equatons smultaneously, so that a common tme path for all parameters can be assumed (Moschn and Melke, 1989). If ths path s gven by d 1, equaton (1) can be reparameterzed as, w = a + γ d 1 + (c + δ d 1 ) ln( E/ P) + (b 1 + δ 1 d 1 ) lnp 1 + (b 2 + δ 2 d 1 ) ln P 2 + (g + δ t d 1 ) t + ε wth the propertes of homogenety, addng up, and symmetry requrng the followng addtonal parametrc restrctons: Σ? =0, Σ d = 0, Σ d j = 0, and Σ d t = 0 (3.1 ) Σ j d j = 0 (3.2 ) d j = d j (3.3 ) and a, c, b j, g, γ, δ, δ j, and δ t are the parameters to be estmated. Ths system has two equatons to be estmated. However, due to theoretcal restrctons t s suffcent to estmate only one equaton and other parameters can be calculated usng theoretcal restrctons. In ths study expendture share for rce was estmated and parameters of the wheat equaton were calculated usng theoretcal restrctons gven n (3.1 ), (3.2 ) and (3.3 ). In ths study, bas n terms of the expendture share on rce and wheat was measured n order to llustrate effects of structural change on quantty demanded of rce and wheat whle prces and expendture were held constant. The measure of bas s 297 (1)

7 Rathnayake, Pryadharshane & Weerahewa a b B = w w (4) a where, w s the th b commodty share after structural change and w s the same commodty share before structural change. When the expendture shares are evaluated at the sample mean of the exogenous varables (such that P =0, (E/ P )=0 and t=1) ths measure can be reduced to ( d ) B = γ + δ t 1 (4 ) Structural change wll be based aganst the th commodty f t resulted n a lower demand for ths good, whch would be mpled by B <0. Conversely, B >0 mples that structural change s based n favour of the th commodty. The expendture (? x ), own prce (? ), and cross prce (? j ) elastcty values are derved as follows.? = (b + d j )/w (c + d ) 1 (5.1)? j = (b j + d j )/w (c + d )* (w j /w ) (5.2)? x =(c + d )/ w +1 (5.3) If d 1 equals to zero, γ and δ too become zero and t gves the demand elastcty values for perod or before structural change, and hence two sets of demand elastctes were calculated,.e. before and after 1977 perod. The parameters were estmated usng the two stage Least Square Estmaton procedures n TSP verson 4.4 (TSP Internatonal, 1997). DATA Tme seres data on per capta avalablty and prces of rce and wheat, GNP and populaton were gathered for the perod In addton, data on the rce raton ncludng the amount of raton per person and nomnal prce of ratoned rce were also gathered (Annex). Per capta avalablty of rce and wheat was obtaned from the Food Balance Sheets publshed by the Food and Agrcultural Organzaton of the Unted Natons. Retal prces of rce and wheat were obtaned from Statstcal Abstracts publshed by the Central Bank of Sr Lanka. Data on populaton, GNP and consumer prce ndex were obtaned from the annual reports publshed by the Central Bank of Sr Lanka. Nomnal per capta GNP and nomnal prces were deflated usng the consumer prce ndex n order to obtan the real ncome and prces. Estmaton of the equaton (1 ) for rce was performed usng weghted prces of rce for the perod n order to ncorporate the effects of the rce raton scheme on the prce of rce that prevaled durng ths perod 2. Furthermore, t was assumed that per capta avalablty of rce and wheat was equal to per capta consumpton of rce and wheat. RESULTS AND DISCUSSION The analyss was performed usng the AIDS model n order to fnd out the factors affectng the demand for rce and wheat. In order to llustrate the effect of structural change on consumpton patterns of rce and wheat, a bas parameter was estmated usng 298

8 Structural Change n Demand for Cereals n Sr Lanka the parameters obtaned from the AIDS model (Table 1). The bas parameter provdes the effects of structural change on quantty demand of rce and wheat whle prces and expendture remaned constant. As ndcated earler, the dfference between the expendture shares of rce and wheat before and after structural change provdes the bas and f t s greater than zero t can be concluded that structural change s based n favour of rce or wheat. If the bas s less than zero, t mples that structural change s based aganst the commodty consdered. Accordng to the calculatons, the bas for rce and wheat are negatve and postve respectvely. Ths shows that structural change s based aganst rce and n favour of wheat. Although the own prce elastcty for rce before structural change (evaluated at 1974) s not sgnfcant, t s negatve and sgnfcant after the structural change (evaluated at 1989) at 5% sgnfcant level (Table 2). These results ndcate that rce consumpton became prce senstve only after the structural change. However, own prce elastctes for wheat before and after structural change are sgnfcant at 5% sgnfcant level and show the expected negatve sgns. These results show that when own prce of wheat ncreases the reducton n demand for wheat s sgnfcant durng both perods. Furthermore, the own prce elastcty values for rce and wheat after the structural change show that wheat s more prce responsve. Table 1. Parameters estmated n the AIDS model. Independent Varable Rce Wheat Intercept d 1 = * (2.8231) d 1 = (2.9961) Prce of rce d 1 = * (0.0728) d 1 = (0.0913) Prce of wheat d 1 = * (0.0000) d 1 = (0.0000) Expendture d 1 = (0.5769) d 1 = * (0.6111) Trend d 1 = (0.0106) d 1 = (0.0108) Standard errors are n parenthess * Sgnfcant at 10% level * (2.8231) (2.9961) * (0.0728) (0.0913) * (0.0000) (0.0000) (0.5769) * (0.6111) (0.0106) (0.0108) 299

9 Rathnayake, Pryadharshane & Weerahewa Table 2. Elastctes estmated n the AIDS model evaluated before (evaluated n 1974) and after (evaluated n 1989) the structural change. Elastcty Perod Rce Wheat Own prce Before (0.5592) After ** (0.2165) Cross prce Before * (0.0885) After (0.0745) Expendture Before (0.7012) ** (0.6098) ** (0.2955) * (0.4113) (0.2111) * (1.1362) After ** (0.2724) ** (0.7713) Standard errors are n parenthess ** Sgnfcant at 5% level * Sgnfcant at10% level The cross prce elastctes for rce and wheat before the structural change are negatve and statstcally sgnfcant at 10% sgnfcant level. However ths result s not consstent wth prevous fndngs (Bogahawatte and Kalasapathy, 1986). However, those values are not sgnfcant after the structural change. These results show that there s no effect of prce of wheat on the demand for rce and vce versa after the structural change. Though the expendture elastcty estmated for rce before structural change s not statstcally sgnfcant, t s postve and sgnfcant at 5% sgnfcant level after the structural change. Those elastctes estmated for wheat are postve and sgnfcant before and after the structural change mplyng that both rce and wheat are normal goods. CONCLUSIONS AND POLICY IMPLICATIONS Accordng to the results of the AIDS model, the demand for rce has declned whle the demand for wheat has ncreased after the structural change,.e. durng perod. These mply that the consumers are movng away from rce towards wheat after the structural change. The elastcty estmates show that the cross prce elastctes for rce and wheat are not statstcally sgnfcant after the structural change ndcatng that there s no effect of prce of wheat on demand of rce and vce versa after 1977 perod. The own prce elastctes of both rce and wheat are statstcally sgnfcant after Hence t can be concluded that the changes n demand levels n rce and wheat are not due to the cross prce effects but ether due to the structural change or own prce effects specally after 1977 perod. Therefore taxaton or removal of subsdy on wheat may not help to 300

10 Structural Change n Demand for Cereals n Sr Lanka ncrease the demand for rce. Snce, rce s a normal good an ncrease n ncome through ncome transfer programs may help to ncrease the demand for rce n Sr Lanka. REFERENCES Alderman, H. and Tmmer, P. (1980). Consumpton Parameters for Sr Lankan Polcy Analyss. Sr Lanka Journal of Agraran Studes, (2): 1-3. Bogahawatte, C. and Kalasapathy, K. (1986). Consumpton of Food n Sr Lanka. Agrcultural Systems, (22): Central Bank of Sr Lanka, Varous years. Annual Report, Central Bank of Sr Lanka, Colombo. Central Bank of Sr Lanka, Varous years. Statstcal Abstract, Central Bank of Sr Lanka, Colombo. Deaton, A.S. and Muellbauer, J. (1980). An Almost Ideal Demand System. The Amercan Economc Revew. 70 (3): FAO, Varous years. Food Balance Sheets, (On lne, January 2004), Avalable Huang, J. and Bous, H. (1996). Structural Changes n the Demand for Food n Asa, 2020 Vson Bref 41, Internatonal Food Polcy Research Insttute, Washngton D.C.. Jogaratnam, T. and Poleman, T.T. (1969). Food n the Economy of Ceylon, Cornel Insttute of Agrculture Development Bulletn, No. 11, New York. Moschn, G. and Melke, K.D. (1989). Modelng the Pattern of Structural Change n U.S. Meat Demand. Amercan Journal Agrcultural Economcs, 71(2): Ngel, J. and Bogahawatte, C. (1990). Demand Systems of Food Usng Cross-Sectonal Data: Evdence from Badulla Dstrct, Sr Lanka. Tropcal Agrcultural Research, 2: Ranaweera, N.F.C. (1998). Ffty Years of Agrculture n Sr Lanka. pp In : Indraratna, A.D.V. de S. (Ed). Ffty Years of Sr Lanka's Independence: A Soco Economc Revew, Sr Lanka Insttute of Socal and Economc Studes, Colombo. Ratnayake, R.M.K. (1998). Poverty n Sr Lanka: Incdence and Poverty Reducton Strateges. pp In : Indraratna, A.D.V. de S. (Ed). Ffty Years of Sr Lanka's Independence: A Soco Economc Revew, Sr Lanka Insttute of Socal and Economc Studes, Colombo. 301

11 Rathnayake, Pryadharshane & Weerahewa Sanderatne, N. (2002). The Rght to Food n Sr Lanka. Unpublshed Manuscrpt. Postgraduate Insttute of Agrculture, Unversty of Peradenya, Sr Lanka. TSP Internatonal (1997). Verson 4.4. USA. Thudawe, I. (2002). Food Demand and Energy Adequacy: Implcatons for the Poor. Sr Lanka Economc Journal, 2(2): World Bank, (2003). Sr Lanka Promotng Agrcultural and Rural Non-farm Sector Growth, Man Report, Volume 1, Rural Development Unt, South Asa Regon, The World Bank. 302

12 Structural Change n Demand for Cereals n Sr Lanka ANNEX Table 1.1. Tme seres data used for the analyss. Year Per Capta Avalablty of Rce * (kg/h/year) Per Capta Avalablty of Wheat * (kg/h/year) Retal Prce of Rce ** (Rs./kg) Retal Prce of Wheat ** (Rs./kg) Per Capta GNP ** (Rs.) Populaton ** (Mllon) CCPI ** (1952=100) ,018 10, ,008 10, ,091 10, ,282 10, ,617 11, ,750 11, ,888 11, ,242 11, ,752 12, ,613 12, ,559 12, ,694 12, ,598 13, ,847 13, ,572 13, ,207 13, ,082 13, ,964 14, ,340 14, ,862 14, ,772 14,847 1, ,385 15,196 1, ,349 15,417 1, ,314 15,603 1, ,169 15,842 1, ,339 16,127 1, ,301 16,373 2, ,433 16,599 2, ,038 16,825 2, ,827 17,015 2, ,748 17,767 2,815.8 Source: * FAO, Varous years and ** Central Bank, Varous years. 303

13 Rathnayake, Pryadharshane & Weerahewa Table 1.2. Nomnal Prce and the amount of rce raton: perod. Year Amount of rce raton (Measures * ) Nomnal Prce of ratoned rce (Rs./ Measure) * 1 Measure = 2 lbs Source: Sanderatne,