A study of supply response of jute in Bangladesh

Abstract

Jute has a historical prominence in the economy of Bangladesh. It is the second most important crop after rice and the main cash crop of the farmers. About 90 per cent of the population of Bangladesh living in rural areas are directly or indirectly dependent on agriculture. Out of 9 million rural families the fate of 5 to 6 million families, mostly small cultivators and rural labourers, is directly associated with jute. Some 50 thousand people are engaged in various phases of jute trade. Jute processing and manufacturing is the largest industry of Bangladesh giving employment to almost one half of the industrial labour force and contributes one third of the industrial value added. About 85 per cent of the export earning of Bangladesh comes from jute and jute-goods exports. Thus future development of Bangladesh, and a considerable number of rural poor people at large, depend, largely, on the future of jute. Moreover, Bangladesh is the World's largest supplier of jute contributing more than 30 per cent of the world production and 40 per cent of the world's exports. So the world jute industry is dependent to a significant extent on what happens in Bangladesh. Jute faced a major market penetration by synthetic substitutes starting from the mid-sixties and is facing difficulty to compete with synthetic fiber. Attempts are being made at national and international levels to improve the competitive position of jute and maintain its production at desired levels following different policies. For such policy analysis, the necessity of an empirical knowledge of the supply responsives of jute farmers in Bangladesh is established. Under the recent conditions of increased productivity of rice, which directly competes with jute land and other resources, and falling prices due to competition from synthetics, an up to date study is attempted here to estimate the short-run and long-run elasticities of the supply of jute. A secondary objective of the study has been to use the results obtained from the supply responsiveness study to analyse the causes of income instability of jute farmers in Bangladesh. A survey of the previous studies on jute supply response in Bangladesh is made indicating the major deficiencies in inadequate specification of models in terms of appropriate price variables and types of lags and the treatment of the statistical problems involved. A discussion of the theoretical issues in conceptualization and estimation of supply response is followed by a statistical analysis of aggregate acreage response to price changes over the period 1947-48 to 1977-78. Considering the jute situation in Bangladesh, a geometrically declining distributed lag model,the Nerlovian adaptive expectations model,is postulated and estimated. A number of statistical problems associated with the estimation of adaptive expectations model are discussed while evaluating the model. Following the notion that assumption of lags both in price expectations and acreage adjustment, conforms more to the reality, the more general model (partial adjustment and adaptive expectations model) is attempted to estimate but is ultimately rejected because its estimate produced unreal roots for the coefficients of adjustment and expectations The short-run acreage elasticity of supply of jute with respect to relative price of jute in terms of paddy price is found to be between 0.4 to 0.5 and the long-run elasticity almost double that. In the analysis of income instability to growers, use of some recently suggested methodology is made. Variation in price is found to account for more than 80 per cent of the variation around the long term trend for jute income. The price of rice is also found to fluctuate widely. This leads to the conclusion that a jute price stabilisation along with a rice price stabilisation scheme could reduce the fluctuations in jute income to the growers. It is found that a major source of price fluctuation is probably the stochastic fluctuation in supply of jute, which suggests the buffer stock scheme to be a plausible measure for stabilizing the jute economy. Finally, a summary of the observations made and conclusions drawn in the study is made with a discussion of limitations and suggestions for further research.