News and notes

News and notes

IFPRI research report

Brazilian wheat policy: Its costs. benefits, and effects on food consumption

The Brazilian government has intervened extensively in Brazil's wheat sector over the years. These interventions raise questions about possible negative effects on resource allocation, expenditures on foreign exchange, and the drain on the public budget. In Brazilian Wheat Policy: Its Costs, Benefits, and Effects on Food Consumption. Geraldo M. Calegar and G. Edward Schuh examine these questions in the light of the effects of these interventions on welfare, income distribution, and trade. The issues addressed are particularly important in view of Brazil's need to earn large sums of foreign exchange to service its foreign debt and to deal with the recurrent public deficits that lead to the massive printing of money and thus to rampant price inflation.

Brazil has long had a policy of being self-sufficient in the production of wheat. In fact, this is the only part of the agricultural sector in which Brazil has adopted policies of import-substitution - policies that it has pursued extensively in the industrial sector.

The persistent overvaluation of the cruzeiro (Cr$) in foreign-exchange markets has resulted in implicit subsidies to consumers. In the face of the dramatic surge in international wheat prices in the early 1970s. Brazil adopted explicit consumer subsidies to isolate its consumers from these high prices. What started as a temporary measure, however, soon became a permanent feature of economic policy.

Brazil's wheat policies are an interesting example of well-intentioned measures that ultimately take on a life of their own. Moreover, they illustrate the failure of policies to reach their specified objectives and the contradictions that arise over time.

 

Both producers and consumers are subsidized

Brazilian wheat policy has been motivated by a number of frequently articulated national goals: self-sufficiency in wheat supply, control of inflation, provision of cheap food for the urban population, and improvement in the distribution of income. To implement its policies, the central government has maintained both a monopolistic and a monopsonistic role in the wheat market, thus making it the only seller and buyer of both imported and domestically produced wheat. Moreover, the government has maintained fairly rigid control over prices at the producer, wholesale, and retail levels.

On the producer side, guaranteed prices have been used to stimulate domestic production since 1938. These prices have almost consistently been set significantly above (often double) border price levels evaluated at official exchange rates. To avoid the frauds that characterized earlier periods, the Bank of Brazil was named the sole direct buyer of domestically produced wheat in 1962. In addition to guaranteed prices, resources have also been provided for the development of marketing facilities, including co-operatives for supplying inputs. the Bank of Brazil for purchasing the output. and the Brazilian Storage Company for storing and distributing the production to mills throughout the country.

On the consumption side, consumers have benefited throughout most of the post-World War II period from the persistent overvaluation of the cruzeiro. Wheat is the major food item imported by Brazil, with imports accounting for approximately 70 per cent of domestic consumption over the last two decades. In 1972 an explicit wheat subsidy was introduced, with the government making up the difference between what millers had to pay for wheat and the price at which they had to sell their flour on the market. These subsidies on the consumption side work counter to the government's goal of attaining self-sufficiency in production.

 

Which subsidy is dominant?

The guaranteed producer price keyed to the cost of production has not been as effective in attaining self-sufficiency as one would expect given the general tendency of these prices to be above border prices when evaluated at the official exchange rate. The problem is that producer prices tend to be below border price levels when the distortion (overvaluation) in the exchange rate is taken into account by using a shadow exchange rate. Consequently, in only 4 years of the period 1965-1982 was the level of production higher than it would have been if free market forces had prevailed, and in 13 years it was lower.

Prior to the introduction of the explicit consumption subsidy in 1973, the effect of the consumption subsidy due to the overvalued currency was less than the effect of the production subsidy. In the period the production subsidy reduced net imports. In the period starting in 1977, however, when the explicit consumption subsidy prevailed. consumption effects were much larger than production effects, and thus net imports were larger than they would have been in the absence of implicit and explicit subsidies to producers and consumers. In reality, the import-substituting production policy was swamped by the consumer subsidies.

Taking the distortion in the exchange rate into account, the social cost of the production policy is estimated to have been about Cr$2.9 billion in 1977 cruzeiros for the period 1966-1982. The total cost of the consumption subsidy for the period, also taking into account the distortion in the exchange rate, was 1977 Cr$150 billion. Consumers as a whole captured a maximum of 86 per cent of this subsidy, but low-income consumers. the purported target group. received only 19 per cent of the total.

The production policy, again taking into account the distortion in the exchange rate, increased foreign exchange costs by Cr$16 billion, completely contrary to its avowed intent. The effect of the consumption subsidy has been to increase foreign-exchange expenditures by Cr$54 billion, with the result that total foreign-exchange expenditures have increased by Cr$70 billion. This is a large and significant effect of the policies.

 

Who benefits?

Distributional effects on the consumption side are analysed with data that refer to Belo Horizonte, a city of more than a million population, and the rural areas of the states of Minas Gerais and Espírito Santo. Because wheat products play a smaller part in the diets of rural consumers, an analysis of energy consumption shows that consumption policy clearly discriminates against this group. The consumption of wheat is highly correlated with income in both rural and urban consumption groups. Consequently, in both groups much of the benefit of the consumption subsidy is captured by medium- and high-income groups, contrary to the avowed aim of the subsidy. Thus, the cost-effectiveness of these subsidies is probably quite low.

A comparative analysis suggests that the same subsidy applied to rice would be more cost-effective in redistributing income to low-income groups, but not enough to justify a subsidy on either commodity.

The effects on nutrition of the consumption policy applied to both wheat and rice are also evaluated. In both cases the effect of a consumption subsidy is relatively small - equivalent to less than 1.5 per cent of per capita calorie consumption. Thus the use of price policies to improve the nutrition of the population is relatively ineffective. This is because the price elasticities of demand for both commodities are relatively low. In effect, consumption subsidies, by means of distortions in consumer prices, act in the case of these two commodities more as income transfers than as an instrument to stimulate consumption directly. Any indirect effect on consumption as a result of the income transfer is small because the consumption of these commodities is a relatively small part of total consumption expenditures.

A rudimentary analysis of alternative consumption policies, made as part of the study, suggests that a targeted programme such as food stamps would be far more effective than a general subsidy that distorts prices to attain consumption policy goals. The expenditures for a targeted food-stamp programme would be much less, and a larger share of the benefits would go the targeted groups.

 

Policy implications

Brazil has long pursued what has been articulated to be an import-substituting policy toward the production side of the wheat sector. It has done this by setting producer prices significantly above border prices evaluated at official exchange rates. despite the fact that Brazil obviously does not have a comparative advantage in wheat. Given the large and chronic overvaluation of the cruzeiro, however. this policy might better be described as an effort to offset some portion of the discrimination against wheat producers as a consequence of the distortion in the exchange rate. In only 4 of the 17 years covered by this study was there a net subsidy to producers.

Consumer policies are equally misguided. By operating through the price system and making prices to consumers lower than they otherwise would be, these policies provide subsidies to all consumers of wheat - upper- and lower-income groups alike. Because the poor consume very little wheat in Brazil, the benefits of these subsidies go largely to middle- and upperincome groups.

There is another important lesson from the consumption policy. When world prices of wheat soared in 1973, the explicit consumption subsidy was introduced as a temporary measure to protect domestic consumers. Once this subsidy was in place, however, it proved difficult to phase out. In fact, the costs of the programme burgeoned out of control, and significant vested interests grew up around its continuation. This subsidy has incurred large foreign-exchange costs just when Brazil needs foreign-exchange to service its international debts and to finance its economic development.

 

The Pacific Island Food Composition Programme

The Pacific Island Food Composition Programme (PIFCP) is a project administered by the South Pacific Commission, an international and regional intergovernmental non-political technical assistance organization, which provides programmes of technical advice, training, assistance, and dissemination of information in social. economic, cultural, and scientific fields to 22 island governments and administrations of the Pacific region. Altogether, the countries have approximately six million people scattered over some 30 million square kilometres, of which less than two per cent is land.

PIFCP falls within the South Pacific Commission's nutrition programme and is funded by extra-budgetary support from the US Agency for International Development. It has as its major objectives the production, management, and dissemination of up-to-date and comprehensive data on the nutrient composition of Pacific foods. These objectives were adopted at the First Technical Workshop on Pacific Food Composition Tables, held in Suva, Fiji, in February 1986.

There is no adequate collection of nutrient data on the foods of the South Pacific. The existing food composition tables, produced in Fiji in the 1950s, are generally recognized as inadequate in their coverage of foods and nutrients; and the source of the data is not known in most cases, and hence their origin and quality cannot be determined. Good quality, comprehensive nutrient data are badly needed in the Pacific to assist with regional programmes such as epidemiological research into diet-related diseases, nutrition education, therapeutic dietetics, increasing agricultural self-sufficiency through promotion of consumption of local foods, food and nutrition policy and planning, development of food regulations, and food service management.

The Programme's objectives will be fulfilled by a number of activities, initially in the next five years. The activities include reviewing existing published and unpublished nutrient data on Pacific foods, identifying gaps in the information, canvassing users for nutrient and food priorities to guide the production of new data, carrying out a programme of analyses of regional foods, establishing a nutrient data bank, and disseminating data in print and computerized formats.

PIFCP hopes, in the course of achieving its stated objectives, to improve and expand regional facilities for nutrient analyses of foods and to update the skills of regional data users, thus contributing to technical development in the Pacific.

In 1987 PIFCP was able to provide funds for equipment purchase to two regional laboratories that will be involved in the analytical work, the National Agricultural Chemistry Laboratory, Department of Agriculture and Livestock, Port Moresby, Papua New Guinea, and the Institute of Natural Resources, University of the South Pacific, Suva, Fiji. In 1988 staff at these laboratories have received on-site training in the analytical methods required by the programme and begun some pilot analytical work.

PIFCP is actively seeking submissions of published and unpublished analytical data on the nutrient composition of Pacific foods. In addition, interested persons are requested to provide their views about foods and nutrients in need of inclusion in the analytical programme. A periodic PIFCP newsletter is produced by the South Pacific Commission: those interested in receiving copies are invited to register for the mailing list. Limited copies of the proceedings of the Fiji workshop which set up the framework for PIFCP are available.

Contact person: Dr. Heather Greenfield, Food Composition Co-ordinator, South Pacific Commission, PO Box D5, Noumea CEDEX, New Caledonia.