Agricultural price policy in Bangladesh : general equilibrium effects on growth and sectoral income distribution

Abstract

Bangladesh grew very slowly when it was a part of Pakistan and its growth scarcely accelerated after independence in 1971. Poor overall performance reflects poor agricultural productivity, for agriculture is still the dominant economic sector, providing livelihood for some 80 per cent of the population. This study is concerned with the reasons for the low growth of agriculture and the economy more generally. Since farmers in Bangladesh, like farmers in most countries, are responsive to the prices that face their production and consumption decisions, the study evaluates the effects of indirect (macro and trade) and direct (sectoral) prices on agricultural development and economic development more generally. The evaluation is carried out in a general equilibrium context. A 25-sector and 35-commodity computable general equilibrium model, with a single representative private consumer, is used to analyse the impact of price policies. Aggregate disposable income accruing to the representative household is divided into two components: farm income and non-farm income. The model is essentially neo-classical with some adaptations to represent the structural and institutional features of the Bangladesh economy. Particular care has been taken to model production technology in agriculture. An econometric study using a system approach was carried out to determine the technology structure in agriculture and estimate the output supply and input demand elasticities of farmers. The experiments which simulate technological growth in agriculture also emphasise the role of agriculture in the overall economic development of Bangladesh. Increased investment in rural infrastructure, especially water control and transportation, brings about marked improvement in the choice of crops and production techniques, and hence in the agricultural sector as well as the economy as a whole. The constraining effect of inappropriate indirect (macro and trade) policies currently prevents the transfer of resources into agriculture. When trade reforms are simulated so that scarcity premia and tariffs are removed/reduced, agricultural performance improves as production costs fall. If the currency is depreciated agricultural and other export profitability rises, also attracting increased investment into these sectors. Not unexpectedly, short-run simulations of policy reforms show less impressive growth than long-run simulations. In both the short and the long run,in accordance with the results of other studies of the agricultural sector in many developing countries, indirect policies appear to have a greater impact on agricultural productivity and output than direct policies. Direct policies do not offset the bias against agriculture created by indirect policies, but their removal would exacerbate the problems faced by agriculture if indirect policies were not reformed. In the short run, public investment in agricultural infrastructural facilities would be needed if the indirect and direct reforms were to be fully utilized. The budgetary expenditure at present expended on agricultural subsidies could be used for such public investment. In the long run, rising agricultural profitability would then be likely to attract private capital to the sector.