Reforming agricultural policies: The case of Japan

Reforming Agricultural The Case of Japan VERNON

0. RONINGEN

Policies:

and PRAVEEN M. DIXIT

Japan’s agricultural policies are designed to ensure adequate food supplies, to stabilize domestic prices, and to provide living standards for farm households that are comparable to those of urban households. While these objectives are not very different from those of most other industrial countries, what has attracted considerable attention to Japanese policies is the high levels of protection these policies provide to the agricultural sector. Prices received by Japanese farmers in 1986 were on average three times world prices (Roningen & Dixit, 1989). The pressures on Japan to reform agricultural policies have been mounting over the last decade. With a current account surplus averaging over $80 billion during the late 1980s (since 1986), Japan is facing growing criticism for continuing to exploit an increasingly open manufacturing market while restricting agricultural imports, The pressures to internationalize Japanese agriculture can be expected to increase even more as we near the end of the Uruguay Round of General Agreements on Tariffs and Trade (GATT) negotiations, where contracting parties have agreed to “substantial and progressive reductions in agricultural support and protection over an agreed period of time” (GATT, 1989). What happens to agriculture in Japan is of great interest to the world agricultural community. Japan is one of the world’s richest countries with a gross national product (GNP) per person 8 to 10% higher than that of the United States. 1 With a population base about half that of the United States, Japan is also one of the largest consumers of agricultural products among the industrial countries. And, despite attempts to maintain self-sufficiency in basic foodstuffs, Japan is the largest national importer of agricultural products and accounts for nearly a tenth of world agricultural imports. Any change in Japanese policies can be expected to affect world agricultural markets substantially. This article addresses three specific issues that relate to Japan in an open economy: (1) What is the extent of government intervention in Japanese agriculture and how has it distorted world agricultural prices and trade? (2) What are the Vernon 0. Roningen Economic Research Service, U.S. Department of Agriculture, 1301 New York Avenue, NW, Washington, DC 20005-4788; Praveen M. Dixit Economic Research Service, U.S. Department of Agriculture, 1301 New York Avenue, NW, Washineton. DC 20005-4788. l

l

Journal of Asian Economics, ISSN: 0000-0000

Vol. 2, No. 1, 1991, pp. 87-111.

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Copyright o 1991 by JAI Press, Inc. All rights of reproduction in any form reserved.

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domestic and international costs of Japanese agricultural policies? and (3) Are there any added incentives for Japan to pursue multilateral rather than unilateral policy reform? While some of these questions have been addressed elsewhere for lower levels of support which existed in the 1970s and early 1980s (Bale & Lutz, 1981; OECD, 1987a; Tyers & Anderson, 1988), no study, to our knowledge, has attempted to answer the array of questions we pose in this study for surplus market conditions as they existed in the mid-to-late 1980~.~ This article begins by pointing out some of the basic features of Japan’s agricultural policy and provides empirical estimates of government support to agriculture known as producer subsidy equivalents (PSEs) and consumer subsidy equivalents (CSEs). It then provides a brief description of the world agricultural net trade model built to study policy reform in agriculture. The use of PSEs and CSEs as proxies to measure all agricultural policies in the modeling framework is also discussed. An analysis of the distortionary consequences of Japan’s policies and a quantification of the economic benefits of multilateral policy reform are addressed next. The article concludes with an assessment of the strengths and weakness of the analysis and conditions under which the potential economic implications could differ.

AGRICULTURAL

POLICY IN JAPAN3

The Japanese government intervenes rather extensively in the production and marketing of major agricultural commodities through a wide array of policies. Policy instruments in use include direct price and income support to producers, border measures such as quotas and tariffs, and subsidies on inputs used in agriculture. Price and income support measures are the key means of providing assistance to most major commodities, including rice, wheat and barley, soybeans, potatoes, sugar products, beef, pork, and milk. One of the more notable features of Japanese price support policies is that there is no comprehensive price policy system covering most commodities; rather, a specific regime with specific policy devices applies for each commodity. Hence, there is substantial diversification of instruments and of the degree of price support by commodity. The prices received by producers for most commodities are based on production costs and some notion of income parity. Prior to 1987, the production costs considered were the average production costs for all farmers. Since then, the system has been changed to take into account the production costs of the more efficient core farmers. This change could potentially make a substantial difference in the levels of price support. The costs of rice cultivation on farms of 0.3 to 0.5 hectares is, for instance, nearly 60% higher than those on farms larger than 3.0 hectares. Price stabilization schemes are another key element of Japanese agricultural policies. These schemes exist for a number of commodities, including beef, pork, and dairy products, and maintain domestic wholesale prices within specified price

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Policies: The Case of Japan

89

bands. Beef prices are kept within their stabilization bands by adjusting the quantity of imported beef released onto the market. For pork and dairy products, stocks are adjusted to ensure that domestic prices remain within the price bands. Price support and stabilization policies are operated in conjunction with border measures. Border measures include import quotas (beef), variable levies (pork), specific duties (sugar), tariff quotas (corn for processing), and state trading (rice, wheat, barley, and some milk products). State trading agencies are an important facet of Japanese agricultural policy. State trading agencies, such as the Japanese Food Agency, the Livestock Industry Promotion Council, and the Japanese Raw Silk and Sugar Price Stabilization Corporation, are governmental or quasi-governmental agencies which exercise monopoly power over imports. The Japanese Food Agency completely controls wheat, barley, and rice imports. Only authorized private firms that hold licenses can import, and all imports are sold to the government. Similar arrangements exist for the other state trading agencies. Besides price supports and border measures, there are a number of other forms of intervention in Japanese agriculture. Land diversion program have been used to encourage farmers to produce less rice and more of other crops such as wheat, barley, and soybeans. Nearly two thirds of soybeans and one third of wheat and barley are planted in the converted paddy fields. Other commodities for which diversion programs exist include livestock products (dairy cow buy-out scheme), and fruits and vegetables. Japan also pursues a variety of structural policies that assist agriculture. The policies carried out include measures to develop infrastructure (e.g., land and water development scheme), to facilitate effective use of farmland through leasehold (deregulation of agricultural land law), to accelerate farmer’s retirement (farmers’ annuity scheme), and to improve technology management and structures (extension and advisory services, state research, and the agricultural structure improvement scheme). Even though these programs are primarily intended to help farmers, the nonfarm sector also benefits from such programs from an improvement in transportation systems, water supply and drainage, flood controls, and other such facilities. These public works programs account for nearly 40% of the budget for agriculture. Input subsidies are another form of agricultural support. They are important in financing agricultural investments, especially infrastructure. Examples include the financing of storage and handling facilities and the financing of land improvement programs. Most of these subsidies programs are small. A number of other measures provide support to agriculture. These include a taxation system in which farmers are able to reduce their tax burdens to levels lower than those of salaried workers, the land tax system in which farmland owners pay less than 0.0001% of assessed value of their land compared with 70 to 80 times that rate for residential land (Washington Post, April 21, 1990), and the pension system, which provides farmers with a government-supported pension in addition to a national pension.

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QUANTIFYING

AGRICULTURAL

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SUPPORT

2(l), 1991

IN JAPAN

The policies and programs used to support agriculture in Japan are complex and diverse across commodities. A major practical step in understanding these measures has been the development and acceptance of a measurement methodology in the form of producer subsidy equivalents (PSEs) and consumer subsidy equivalents (CSEs) (see Appendix A for measurement methodology). A PSE is the level of subsidy that would be necessary to compensate producers for the removal of government programs affecting a particular commodity (Josling, 1981). It represents the value of government support or gross subsidy, including the effects of both direct government spending on agricultural programs and the effects of policies such as quotas that transfer incomes from consumers to producers. The PSE for a particular commodity is positive when the net effect of all programs affecting the commodity in a country is to increase the incomes of producers over what they would be in the absence of these programs. It is negative when the net effect of all programs reduces incomes. Details on the limitations of this measure are given in OECD (1987a) and USDA (1987).4 A CSE is the level of subsidy that would be necessary to compensate consumers for the removal of government programs. The CSE for a particular commodity is negative when the net effect of all programs affecting that commodity in a country is to increase the price consumers pay for food. It is positive when consumers pay less for food than they would in the absence of the program. Figure 1 shows the extent of government protection to the agricultural sector in Japan as represented by the producer subsidy equivalents. The weighted average PSE for all commodities (66%) indicates that nearly two thirds of total producer income is generated by transfers from government policies. The PSEs are highest for wheat, coarse grains (barley), and rice, followed by sugar and livestock products. Because imports of corn and soybeans are relatively free, government support for these two commodities is virtually nonexistent.

Figure I.

Rates of support to agriculture in Japan, 198611987.

Reforming Agriculfural

Policies: The Case of lapan

91

Percent

Figure 2.

Rates of support to agriculture across commodities,

1986/1987.

The share of assistance across commodities reflects both the size of the commodity sector in total production and the levels of assistance. Nearly 60% of total support to producers ($36 billion) goes to rice, which accounts for roughly 40% of the value of agricultural production. Given these high and disproportionate levels of assistance to rice producers, it is understandable why assistance to Japanese rice producers has been such a contentious issue in the Uruguay Round. The costs of agricultural support have to be borne either directly by domestic consumers through higher food prices or by taxpayers through increased government expenditures. Policies that artificially raise prices (tax) to consumers account for nearly three fourths of the support to the agricultural commodities. Consequently, the CSEs are relatively high (35%), indicating that the costs of policies to Japanese consumers represented about a third of consumer expenditure on the commodities considered. How do Japan’s PSEs and CSEs compare with those of other countries? Figure 2 (and Appendix B) indicates that the extent of government intervention in Japan is highest among the industrial market economies. It is more than twice that of the European Community and the United States and nearly six times that of Australia and New Zealand. Also, the source of support in Japan varies considerably from that in the United States and Australia. Whereas policies that transfer income from the consumer to the producer form the primary basis of Japanese agricultural support, countries like the United States and Australia rely more on direct government budget support. Although the PSEs and CSEs for 198611987 indicate that the level of agricultural support in Japan is rather high in absolute terms and relative to those of other countries, it is also important to point out that Japan has become more protective over the decade. From 1979 to 1981, the average PSE for Japan was 59% (GECD, 1987a). By 1988, the levels had risen to 74% (OECD, 1989). By contrast, the PSEs in the European community increased from 43% to only 46% in those years.

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THE MODELING

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FRAMEWORK

Summary measures of protection such as the PSEs and CSEs are good indicators of the support to agriculture but do not incorporate the supply and demand responses to such policies. They therefore have little to say about the consequences of such protection on commonly used indicators of economic performance such as output and income of the sectors being supported or their effects on world agricultural markets. This requires a framework that would allow for economic responses. The analysis of the economic implications of agricultural policy reform in Japan is done with the Static World Policy Simulation (SWOPSIM) modeling framework (Roningen, 1986). A SWOPSIM model is characterized by three basic features: (1) It is a nonspatial price equilibrium model; (2) it is an intermediate-run static model that represents world agriculture in a given year; and (3) it is a multicommodity, multiregion partial equilibrium model. To use this static, nonspatial, price equilibrium model to describe world agricultural trade, we make the following assumptions: (1) World markets are competitive-countries operate as if they had no market power; (2) domestic and traded goods are perfect substitutes in consumption, and importers do not distinguish commodities by source of origin; and (3) a geographic region, possibly containing many countries, is one marketplace. The economic structure of SWOPSIM models includes constant-elasticity domestic supply and demand equations and summary policy measures. For each region i and each commodity j in the model, demand and supply functions are modeled as D, = D,(CP,, S, = S,(PP,,

CP,,

Sib)

PPi,, or CP,)

(1) (2)

where CPU and PP, are domestic incentive prices facing consumers and producers, respectively, of commodity j in country i. CP, and PP,, are consumer and producer prices of commodities closely related to commodity j in either consumption or production, respectively. CP, in the supply function accounts for the use of commodity k as an intermediate input in the production of commodity j. PP, in the supply function represents substitution possibilities for the producer. S, in the demand function accounts for the derived demand for the product as an intermediate input for the production of S,. Sib is typically a livestock quantity which enters into demand functions for feed. Trade is the difference between domestic supply and total demand (absorption). Tij = S, - D, The policy structure is embedded in equations linking domestic and world prices. Domestic incentive prices depend on the level of consumer and producer support (modeled in terms of consumer and producer price wedges CSW, and PSW,) and on world prices denominated in local currency

Reforming Agricultural

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Policies: The Case of Japan

CP, = CSW,

+ F(E,*WPj)

(4)

PP, = PSW,

+ G(E,*WPj)

(5)

where Ei is the exchange rate of i with respect to the U.S. dollar, and WPj is the world reference price of j measured in U. S . dollars. Functional relationship F( > and G( ) allow a specification of world to domestic prices to be less than or equal to 1. If equal to 1, then 100% of a world price change is transmitted domestically. A value of less than 1 indicates that the government intervenes to cushion domestic producers and/or consumers from experiencing the full change. World markets clear when net trade of a commodity across all regions sums to zero: i i=l

T,=

i i=l

s,-

iD,=O

(6)

i=l

The version of SWOPSIM that we use for this study (ST86) is based on 1986/1987 marketing year data. The world is divided into 11 regions. Seven represent the industrial market economies, three characterize developing countries, and one describes the centrally planned economies. Twenty-two agricultural commodities representing mostly temperate-zone products are included in the model. Tropical products, which account for a substantial proportion of agricultural trade of developing countries, are not included. Because ST86 is a synthetic model (Gardiner & Dixit, 1987), we do not estimate elasticity parameters. Rather, we use parameters from other empirical studies to build the model. This procedure would typically imply a breach of a theoretically valid behavioral relationship. We have attempted to overcome this limitation of synthetic models by imposing symmetry and homogeneity restrictions from demand theory to ensure consistency among own- and cross-price effects and restrictions based on multiproduction theory for modeling joint products (Haley, 1988). This procedures is similar to the application of theoretical constraints in computable general equilibrium models. However, we have closed only agricultural sectors of the economy rather than the economy as a whole. The model constructed for this exercise contains summary support measures for all regions except the centrally planned economies. However, commodity-specific price transmission elasticities which limit the passage of world price signals to their regions constrain the interactions of the centrally planned economies’ domestic sector in the world market. The centrally planned economies are assumed to have a price transmission of 0.2, indicating that only 20% of the changes in world prices are transmitted to the domestic economy. A price transmission elasticity of 0.5 is used for developing countries when the industrial market economies liberalize their own policies. For industrial countries, a price transmission elasticity of 1 is used. This implies that any multilateral removal of support would also remove any insulation of domestic markets from world price movements.

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Since PSEs reported in USDA (1988) do not incorporate costs of required supply control associated with farm programs, such as acreage reduction programs in the United States and the paddy-field reorientation program in Japan, these PSEs, in effect, exclude some of the production-offsetting elements of policies. Such policies, therefore, are incorporated directly as volume shifters when modeling the sector. Additional information on supply management programs and their treatment in the modeling framework can be found in Herlihy, Johnston, and Haley (in press). This article presents the results of experiments using the ST86 model in which new equilibrium solutions are obtained by removing PSEs and CSEs. The new solution represents an approximation of the resulting adjustments in production, consumption, trade, and prices of agricultural commodities expected after five years, with the important proviso that all other conditions remain the same as in the base year, 1986/ 1987. This permits the analysis to isolate and identify the differences between the new solution and the initial or reference solution and to attribute them to the removal of distortionary agricultural policies.

ELIMINATING

AGRICULTURAL

INTERVENTION

IN JAPAN

We used the model and the aggregate measures of government intervention to simulate conditions that would exist if Japan unilaterally eliminated all agricultural policies as they existed in 1986/ 1987. From this we deduced the distortions in world prices and trade and the annual economic welfare costs of such policies. Effects on World Commodity

Prices

Japanese agricultural policies have, on average, depressed world commodity prices by 4% by encouraging uneconomic production and inhibiting consumption (Figure 3). In other words, if Japan were to abandon its policy of supporting agricultural producers and taxing consumers, its production would contract and con-

Figure 3.

World price effects of unilateral Japanese liberalization.

Reforming Agricultural

Policies: The Case of Japan

Figure 4.

Comparing

95

world price effects of unilateral policy reform.

sumption would expand. As a result, world commodity prices would be higher. About 45% of this increase in world price would emanate from the liberalization of Japanese consumer demand. How do the effects of Japan’s policies on world agricultural markets compare with those of other countries? Roningen and Dixit (1989) showed that policies of industrial market economies taken together have, on average, depressed world commodity prices by 22% (Figure 4 and Appendix C). This suggests that policies of Japan account for nearly one fifth of the depression of world prices. Only policies of the European Community (11%) and the United States (6%) contribute more to aggregate world prices changes than does Japan’s policies. The world price implications of Japan’s policies are especially dramatic for rice. Japan’s policies have depressed world rice prices (20%) more than the combined effects of all other industrial market economies’ policies (6%). This reflects both the high levels of assistance to Japanese rice producers as well as the relatively small proportion (4%) of global rice production that is traded in the world market. In fact, were it not for the price-enhancing effects of China’s policies, world rice prices in 1986/ 1987 would have been an additional 15% lower (Dixit & Webb, 1989). Indeed, if Japan and China were simultaneously to liberalize their rice policies, the effects on world rice price would be rather negligible. The distortionary implications of Japanese rice policies are moderated somewhat by the Paddy Field Reorientation Program (PFRP), which has restricted acreage expansion that would have occurred with high domestic prices. Our results indicate that had it not been for the PFRP, the world rice price would be depressed 2% further because of Japanese policies. The PFRP has, therefore, helped curtail excess rice production and reduced the distortion in international rice trade to some extent. Despite high levels of protection, the price-distortionary implications of Japanese policies are not all that consequential for most other commodities. Japanese policies depress world sugar price by 6% and livestock product prices by only 2 to 4%. The size of the country in global production and trade, rather than the levels of

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support, appears to be the dominating distortion.

OF ASIAN

ECONOMICS,

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the extent of trade

Implications for Global Trade One would expect that the existence of protectionist Japanese policies has led to a contraction in agricultural trade volumes. Indeed, model results indicate the world agricultural trade volume, in the aggregate, has been nearly 20% lower (value weighted) than it would have been in the absence of Japanese protection (Figure 5). The contraction in global trade has been especially large for rice and pork (nearly 40%). The reduction in world trade for other commodities has been rather small. Global trade in coarse grains, on the other hand, has expanded by 4% because of subsidies to the Japanese livestock sector. Perhaps the most contentious issue concerning Japanese agricultural policy is the import restriction on rice (Table 1). Our model results indicate that such policies have prevented nearly 9.2 million metric tons (mmt) of rice from entering Japan annually. Hence, whereas there are virtually no imports of rice into Japan presently, imports would be about two thirds of total consumption in a liberalized environment. Imports of other products, especially dairy and sugar, have also been affected by import restrictions, but their magnitudes are not large. The United States and Australia have been in the forefront of international efforts in pressurizing Japan to liberalize its beef import policies (Coyle & Dyck, 1989). In response, Japan has recently agreed to eliminate all import quotas on beef by 1991 and replace them with higher ad valorem tariffs. How much increase in imports can we expect from a liberalization of the Japanese beef market? Estimates from our model indicate that Japanese imports of beef would be two to three times higher than base levels-an increase of 416,000 metric tons annually-if all border restrictions were eliminated. Nearly half of the additional imports would originate from the United States, with the rest coming from Australia, the European Community, and South America. 5 Alston, Carter, and Jarvis (1989) contested this view and Percent

50,

-4 -10

’ BeeI

Port

D.Wy products

Figure 5.

Wheat

coarse gra,ns

Rice

sugar

All products

Changes in world trade volumes from unilateral Japanese liberalization.

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97

TABLE 1. Changes in Japanese Trade from Unilateral Agricultural Policy Reform, 1986/1987

Commodity Beef Pork Dairy products Wheat Corn Rice sugar Totalb

Volume

Value

Thousand metric tons

Million dollars

-416 -617 -299 -1233 3735 -9156 -959

-897 - 1496 -663 -161 326 -2301 -152

NA

-5914

0 A minus sign indicates decreases in net trade (exportminus imports) b Includes all commodities in the modeling framework.

argued that countries such as Australia would gain greater market shares because of the elimination of “discriminatory import quotas” that have favored U.S. beef. By denying access to their markets, Japan’s agricultural policies cost other countries $5.9 billion in export earnings. Nearly 40% of the loss in earnings occurs because of support to rice producers. Import restrictions on beef and pork account for the rest. Interestingly enough, little international attention has been devoted to the loss in export earnings arising from Japanese pork import barriers. This may reflect, to some extent, the relatively minor role of export earnings in the incomes of European Community and U. S . pork producers. The United States and the European Community have been losing $1 billion annually as a result of Japanese agricultural policies (Figure 6). The costs to most other industrial countries, including Australia and New Zealand, have been rather small.

Figure 6.

Changes in agricultural balance of trade from liberalization.

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Developing countries are also affected by Japanese protectionist policies. Such policies cost them nearly $2 billion in trade revenues annually, mostly in the rice market. While losses to developing-country exporters like Indonesia and Thailand occur because of restrictions on market access, developing-country importers like Iran and Iraq face higher food import costs because of the decline in domestic production brought about by depressed world prices. Production

and Consumption

Patterns

Japanese agricultural policies have generated a considerable amount of excess capacity in agriculture by attracting resources from other sectors of the economy. Our results indicate that agricultural production in Japan in the aggregate would be one third less if these policies were not in effect (Figure 7). Cereal (rice) production has been affected the most, having nearly doubled because of the presence of government support. Other crops and livestock production have expanded an additional 15 to 20% because of subsidies. Because support to agriculture has been financed through policies that tax consumers, such policies have reduced consumption considerably. Rice consumption is estimated to have decreased by 3.9 mmt (37%) because of policies pursued. Similarly, beef consumption would increase by 40% if policies that tax consumers were eliminated. Given that annual consumption of beef per person in Japan was only 11% of the average in the United States, the European Community, and Australia (ABARE, 1988, p. 196), per capita beef consumption in Japan would be considerably lower than that in the Western world even at the higher liberalized level. Dietary patterns in Japan have not kept pace with growth in incomes (Hayami, 1988, p. 116). This is partially explained by policies that support producers through consumer taxation.

Figure 7.

Changes in Japanese production

and demand from unilateral policy reform.

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Policies: The Case of Japan

99

Economic Welfare Implications of Policy Reform Agricultural support policies in Japan have reduced national income by encouraging inefficient usage of resources. They have also transferred resources from consumers and taxpayers to agricultural producers and from the nonfarm to the farm sector. Our study shows that less than 70% of the costs to consumers and taxpayers in Japan are transferred to producers (Table 2). The rest ($8.6 billion) represents deadweight (income) losses to society arising from misallocated resources. In other words, Japan’s policy of providing support to agricultural producers is inefficient because the costs to consumers and taxpayers of disto~iona~ policies are considerably more than the benefits to producers. For every $1 .OO that producers in Japan gain because of protectionist agricultural policies, consumers and taxpayers lose $1.48. These transfer costs are even higher for sugar ($5.11) and wheat ($2.00). Consumers and taxpayers in the United States, by contrast, forfeit only $1.38 in transfers for every dollar gained by producers.6 Japanese consumers have had to shoulder much of the burden of domestic agricultural support poticies. Model results indicate that each consumer spends an additional $230 annually on food to maintain agricultural support. This is nearly twice the per capita costs that consumers in the United States and the European Community have had to bear to support their agricultural sectors. Our analysis also indicates that consumer expenditures on food items would be 53% Iower if domestic food were available at international prices. A study by the Japanese Economic Planning Agency concluded that the average Japanese family’s monthly food costs would fall by 52% (Yomiuri Shimbun, 1987) under similar circumstances. Moreover, because farm population accounts for a small proportion of total population (I 6%) in Japan, the nonf~m sector ends up providing a large share of the assistance that goes to the agricuhural sector. Mode1 estimates indicate that it annually costs each nonfarm household over $900 to maintain agricultural support. This burden of agricultural support is considerably higher in Japan than in the United States or the European Community (Table 2). Opponents of trade reform often point to the losses in producer incomes as an argument against liberalization. Indeed, our results indicate that producer surplus losses from unilateral policy reform would be about $23 billion, or just over 80% of total (net) agricultural incomes in 1986/ 1987. Rice producers would shoulder about 70% of this loss, while most of the other remaining losses wouId accrue to beef and pork producers. While these losses may appear large, consider the following. In 1986, agricultural income provided only about 2% of household income for the 40% of farm households with 0.5 hectares or less of cultivated land, and less than 8% of household income for the 28% of farm households with 0.5 to 1.O hectares of cultivated land (ABARE, 1988). Therefore, for nearly 70% of farm households, even a considerable drop in farm income as implied by our results would have little effect on their living standards. This is especially true given that average income of farm house-

36.9

63.1

12.4

95.4

b Total cost is the sum of producer benefits (+I. consumer costs (p). and taxpayers costs (-) Source: Results from SWOPSIM ST86 simulations.

86 96 71

1.16 1.05 1.42 564

68 72 61 69 82

Producer share qf transfers (percent)

130 223

1.48 1.38 1.65 1.45 1.21

Per dollar lost by producers

and includes transfers to other groups, for example, quota holders.

49

0

by the countries or regions.

6 3

.I

1.1 .5

-.5 -.2

.6 .2

902 459 136 485 1073

71 38 92 46 58

8.6 9.2 2.4 14.9 1.9

5.1 30.3 3.8 15.6 6.3

21.1 6.0 2.3 32.6 4.3

22.6 26.3 3.7 33.3 8.8

a Estimates based on unilateral liberalization

Industrial market economies

Japan United States Canada EC Other Western European countries Australia New Zealand

Totalb

Taxpayer costs

Consumer costs

Per nonfarm household (dollars)

Per capita (dollars)

Producer benefits

Net economic costs (billions of do&u-s)

Country or region

___

3.65

7.22 23.00

3.90 3.95 2.57 3.23 5.71

Ratio of transfers to income loss

and Taxpayers

Tran.sjer benefits to producers

TABLE 2. The Annual Benefits of Agricultural Support to Producers and Costs to Consumers in Industrial Market Economies, 1986/1987a

IS

b E

Reforming

Agricultural

states

Figure 8.

101

Policies: The Case of Japan

CD”“tlleS

cO”ntrieD

Costs of Japanese agricultural policies to producers

in other countries.

holds in 1986 was nearly 30% higher than average income of other households.7 It should, however, be noted that because the size of an average farm household (4.53) is much larger than that of urban households (3.00), the difference in income, when expressed on a per capita basis, is less than 15%. The domestic costs of distortionary policies represent a part of the welfare costs of such policies. Japan’s policies not only affect producers, consumers, and taxpayers within the country but also those in other countries (Figure 8). While Japanese policies raise producer incomes by $22 billion, they cost producers in other countries nearly $10 billion because of their price-depressing effects. Rice producers in developing countries bore more than one third of these costs. Most of the remaining producer costs are incurred by beef, pork, and dairy producers in the United States and the European Community. The major foreign beneficiaries of Japanese policies are consumers in lowincome food-deficit countries who benefit from lower world prices for food, es-

ltlet Total

Figure 9.

benefits:

net

t?ene,its

mcost

0, others’

DOllCfeS

benefitst aflsettlngcosts (benellIs]

Costs and benefits of agricultural support to producers,

1986/1987.

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pecially rice. Our results indicate that consumers in these countries have saved $3.5 billion annually because of such policies. However, in most developing countries, since the net buyers of food are relatively affluent urban consumers rather than the rural poor who are net sellers of staple foods, income distribution in the poorer countries has most likely been worse because of policies that depress world prices. Finally, do policies of other countries have much of an effect on Japanese agriculture? The answer appears to be no. Our estimates indicate that policies of other countries, including those of the United States and the European Community, cost Japanese producers only $1.5 billion in the aggregate (Figure 9 and Appendix D). In contrast, more than 40% ($11 billion) of the support to U.S. farmers merely offsets the losses created by policies of other industrial market economies.

MULTILATERAL

LIBERALIZATION

AND JAPAN

Our results imply that Japan’s agricultural policies have imposed considerable costs on its domestic economy. This suggests that if Japan were to undertake unilateral policy reform, the income and efficiency gains from liberalization could be sizable. It is unlikely that a protectionist regime like Japan would unilaterally liberalize all its agricultural policies as has been analyzed in this article. The domestic pressures for agricultural reforms are mounting but still minimal, and questions of food security and price stability have overshadowed any concerns about consumer costs (Anderson & Hayami, 1986). What is perhaps more realistic is that Japan, in conjunction with a host of other industrial market economies, could multilaterally liberalize its agricultural policies over a specified period of time in the spirit of the midterm agreement of the Uruguay Round of GATT. What are the economic consequences for Japan of entering into a multilateral agreement to liberalize agricultural trade? To examine this, we used our model to simulate conditions that would exist if agricultural policies in the United States, the European Community, other Western Europe countries, Canada, Australia, New Zealand, and Japan were all eliminated (Roningen & Dixit, 1989). Our results indicate that the economic consequences for Japan from multilateral agricultural liberalization are similar to those from unilateral liberalization of its policies. Consider changes in farm income, for instance. The producer surplus losses from multilateral liberalization ($21.8 billion) are nearly identical to that from unilateral liberalization ($22.6 billion). This, in turn, suggests that the extent of compensation that could be required to ease the adjustment toward free trade would not be very different. Indeed, if the rationale for entering into multilateral policy reform is to minimize the adjustment costs to the protected sector, then the incentives for multilateral agricultural reform are not very strong for Japan. Other economic indicators of change tend to corroborate the story: The allocative efficiency gains from multilateral reform ($8.6 billion) are only marginally greater than those under unilateral reform ($5.7); the costs of agricultural imports are

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only slightly lower; and self-sufficiency ratios-one of Japan’s major concerns-are nearly identical. In other words, the gains to Japanese agriculture from an increase in world prices as a result of liberalization by other industrial market economies are simply not there. Indeed, from a purely agricultural perspective, there are not many additional incentives for Japan to join forces with other industrial market economies in undertaking agricultural policy reform. Japan can virtually achieve all the allocative efficiency benefits of agricultural reform from unilateral action. This may partly explain why Japan has remained fairly passive in the agricultural negotiations in the GATT except for voicing its traditional commitments to food security and self-sufficiency concerns. Japan may view multilateral reforms in agriculture as a vehicle to obtain trade concessions in other areas.

LIMITATIONS

OF THE ANALYSIS

The economic implications of trade liberalization are likely to differ depending on the period under analysis. The year 1986/1987 saw depressed world commodity prices and a strong yen, suggesting that support to producers and taxation on consumers was unusually high. The Japanese and world economies have undergone a number of changes since then. The most significant of these changes is the pursuit of a more liberal agricultural trading environment. Japan eliminated quotas on beef and citrus on April 1, 1991. Tariffs on oranges will remain: Those on beef have been raised from 25% to 70% in 1991 and will be reduced to 50% by 1993. Also, the number of agricultural product groups granted import quotas will have fallen from 19 in 1988 to 9 by 1992. If these policy changes are taken into account, the economic implications of liberalization could be different. Our model provides a rather naive interpretation of the world agricultural market in that it does not fully recognize the substantial product differentiation among the broad commodity aggregates we use. Japonica rice produced and consumed in Japan is, for instance, far different in quality to Thai rice traded in the world market. To overcome this problem, we used PSEs and CSEs that were computed using trade prices for the appropriate variety of the product. The PSEs and CSEs for Japonica rice, therefore, are based on the price of California medium grade rice, adjusted for ocean freight, rather than the Thai export price or the Hongkong import price of rice. Such an approach ensures that the levels of protection to Japanese rice producers in the model are not exaggerated and that the supply and demand responses from policy reform would not be very different from those obtained when Japonica rice is modeled separately. The true benefits to society from multilateral liberalization are likely to be underestimated in a model like ours. For example, our costs do not include the expenses incurred by groups lobbying to support farmers; nor are the greater instability of international prices generated by distortionary policies taken into ac-

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count. As shown by Tyers and Anderson (1988), the instability costs could be substantial for some commodities. Our results are generated from a partial equilibrium intermediate-run model which assumes that factor prices are fixed. This assumption implies that the agricultural sector faces an infinitely elastic supply of factors. While this assumption may hold for capital, it is less likely to be true for labor, especially in the short run, and land. A general equilibrium model could examine resource shifts between agriculture and the rest of the economy and could provide greater insights about the effects of agricultural trade liberalization on other sectors, factor markets, and balance of payments. These effects, as has been shown for a number of countries (Stoeckel, Vincent, & Cuthbertson, 1989), could be substantial. In addition, the long-term effects of liberalization on economic efficiency are not fully captured in our study. The gains we reported are primarily medium-term gains. In the longer run, investment and research efforts can be redirected and technology changed. The rate and extent to which factors of production can move between alternative economic activities would be critical in determining the long-run efficiency gains from liberalization. Finally, there is also the Lucas critique. Lucas (1976) argued that models estimated using data under past policy regime may not be relevant to current or future conditions. This issue is of special concern when large shocks like trade liberalization occur. Should policy regimes change drastically, as would be the case with trade liberalization, a model based on historical parameters may not give the correct story.

CONCLUSIONS Our objective in this study was to examine the distortionary costs of Japanese agricultural policies and to evaluate the incentives for Japan to enter into agricultural policy reform. We conclude from this study that Japanese policies impose some distortion in their domestic economy. Consumers, rather than taxpayers, have had to bear most of the burden of this distortion. We indicate that it costs consumers and taxpayers nearly $1 SO to provide one dollar of support to producers. Support of agricultural producers in Japan has often been justified as a means to maintain parity between farm and nonfarm incomes and to provide an assured quantity of food. However, because incomes of those in agriculture are nearly 30% higher than those of urban dwellers, the commitment to continue support to agriculture at past levels can be questioned. Moreover, given that agriculture contributes less than 8% of total household incomes for nearly 70% of farmers, even a substantial drop in agricultural incomes as surmised in our study would not greatly affect living standards of most farm families. There are, of course, those who earn a substantial proportion of their incomes from agriculture, and any agricultural policy reform could affect them adversely. For

Reforming Agricultural

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105

them-mostly large farmers who are less reliant on nonagricultural incomescompensation schemes may need to be devised. These compensation schemes could either be some sort of adjustment assistance (decoupled income) programs or changes in policy that would facilitate farming. Land reform programs that allow for larger holdings could, for instance, permit farmers to exploit economies of scale and reduce average production costs. In addition, compensation schemes may also be required to help facilitate agricultural adjustments if changes in existing policies create substantial changes in employment and factor prices. Trade liberalization, as we pointed out earlier, could result in considerable reductions in the value of agricultural assets, especially land. Changes in the value of agricultural land could have far-reaching consequences for the Japanese economy given that many have used land as collateral to purchase stocks. 8 Food security is of legitimate concern to the Japanese populace and policy makers. However, the legitimacy of the argument is in question because of the existence of policies that apparently contradict food security aspirations. High prices of domestic commodities created by support to agriculture have, for instance, resulted in the relocation of some food-processing facilities outside Japan, causing food security to decline. Similarly, the existence of policies that limit size of holding have encouraged farmers to maximize their income through off-farm activities instead of double-cropping. High levels of domestic production are not the only means of providing food security. Stockpiling of food to survive critical shortages is another alternative. Such an approach could be used not only to provide assured supplies of food but also to overcome income and price stability concerns. These programs, in turn, could be supplemented by long-term bilateral trade agreements or investments in overseas agricultural operations. If there is a brighter side to Japanese agricultural protectionism, it is simply that the costs of distortionary policies at the international level are perhaps much less than has often been surmised.9 The one exception to this is the rice market. Japanese rice policies distort world prices more than the combined distortion of all other industrial market economies. In the other markets, including beef and sugar, because Japan accounts for a small share of world trade, the distortions in international trade are relatively small despite high levels of protection. What incentives are there for Japan to pursue multilateral agricultural policy reforms? Our results indicate that there may not be many. The income gains from liberalization are limited, the budgetary costs of agricultural programs are not as constraining as in the U.S. and the European Community, and the costs borne by consumers have not been an overriding source of domestic concern. Moreover, the benefits from multilateral reform are not much different than that from unilateral reform. Perhaps the only incentive that Japan may have to enter into multilateral negotiations on agricultural policy reform is to respond to international pressures and to

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obtain trade concessions $80 billion

in other areas. With a trade surplus

in the last few years,

Japan

may no longer

2(l), 1991

that has averaged

over

be able to be a free rider in

international trade, exploiting the increasingly free trade regime in manufacturing and yet preventing agricultural imports from entering. The challenge for Japanese policy makers is to design a system that is acceptable to the GATT and at the same time meets legitimate domestic food policy concerns.

APPENDIX

A: CALCULATING SUBSIDY

THE PRODUCER EQUIVALENTS

AND CONSUMER

The producer subsidy equivalent (PSE) measures the income transfers to farmers resulting from government policies, including the effect of both direct government spending on agricultural programs and the effect of policies such as import quotas that transfer income from domestic consumers to producers. The consumer subsidy equivalent (CSE) similarly measures the net transfer, to consumer, as a result of government programs. Algebraically, PSEs and CSEs can be expressed as

PSE, z1 {(PD, - PW,)*OS, + Bi + Ci + Di} PD,*O$ + Cj CSB, = {(PCD, - PW,)*ODi I PCDi*ODi

+ Ei)

where Bi = net subsidies on primary

Ci Di Ei PCD, PD, PW, OSi ODi

= = = = = = = =

inputs (capital, labor, land), output policies which do not affect PD,, long-term structural program costs for the ith good, income and other assistance to consumers not related to PCD,, domestic consumer price, domestic producer price, undistorted world price, domestic quantity produced, domestic quantity consumed.

PSEs and CSEs are based on partial equilibrium assumptions; universally accepted conventions for calculation do not exist yet. Several versions of the PSEs and CSEs, differing primarily according to policy coverage, have been computed. Par this analysis, we define PSE to match the USDA (1988) convention.

-33% -19 -42 -48 -15 -72 0 -29 0 -35%

94 87 20 74 0 66%

66% 32 67 91

Japan

-1% -2 -15 -14 -12 -4 0 -47 0 -8%

48 67 7 79 33 26%

11% 11 29 59

United States

-1% 3 -35 -15 -1 0 0 -9 7 -15% -20% -15 -14 -41 -42 -36 1 -28 0 -17%

47 70 28 47 50 33%

22 25 59

40 0 13 53 -21 27%

40%

6 42 40

EC

10%

Canada

-26% -23 -14 -45 -45 0 0 -37 0 -20%

49 0 0 66 0 47%

30 53 52

50%

0% 0 0 0 0 0 0 0 0 0%

2 13 0 14 1 12%

0 29 15

4%

Australia

0% 0 0 0 0 0 0 0 0 0%

0 0 0 0 0 10%

8% 0 12 0

New Zealand

-14% -9 -17 -36 -27 -69 0 -33 0 -17%

47 85 14 56 35 35%

29% 20 32 55

Average

9 Ruminant meat (beef, mutton, and lamb); nonruminant meat (pork, poultry meat, and eggs); dairy products (milk, butter, cheese, and powder); coarse grains (corn and other c~arse grains); oilseeds and products (soybeans, soymeal, other oilseeds, other oilmeals, and other oils); other crops (cotton and tobacco). Producer and consumer subsidy equwalent averages are weighted by base production and consumption values. Sources: USDA, 1988; Roningen and Dixit, 1989.

Coarse grains Rice Oilseeds and products sugar Other crops Average Consumer subsidy equivalent: Ruminant meat Nomuminant meat Dairy products Wheat Coarse grains Rice Oilseeds and products sugar Other crops Average

Producer subsidy equivalent: Ruminant meat Nonruminant meat Dairy products Wheat

Commodity group”

Other Western European Countries

APPENDIX B: PRODUCER AND CONSUMER SUBSIDY EQUIVALENTS BY COUNTRY OR REGION AND COMMODITY GROUPS, 1986-1987

5

5 G II. fi‘ __ a ;; R n 8CD * = x 3

a. P F;

23 q s 3 3 09 k

13.5% 5.8 19.1 31.6 11.5 3.2 7.9 18.6 3.3 10.6%

removed their agricultural support. Source: SWOPSIM ST86 simulations.

0.2% 0 0 .5 0 0 0 0 0 .l%

21.0% 12.4 36.7 65.3 26.3 26.2 6.4 52.7 7.7 22.0%

Multilateral liberalization by industrial market economies

market economies simultaneously

New Zealand

1986-1987

mean that all mdustrnl

0.2% .I 1.6 .I .2 .2 0 1.1 .7 .3%

Australia

liberalization

1.5% 1.0 1.6 6.2 1.5 .2 .2 3.3 .I 1.4%

EC

means that each country removed its support while others maintained theirs. Multilateral

0.4% .5 4.1 4.1 2.2 .4 .5 .4 0 1.2%

3.8% 3.0 10.6 23.5 11.6 2.9 -2.6 22.8 4.0 5.9%

1.8% 2.3 2.5 4.5 .6 19.6 .4 6.4 .7 3.6%

Ruminant meat Nonruminant meat Wheat Dairy products Coarse grains Rice Oilseeds and products sugar Other crops Average

u Unilateral liberalization

Canada

United States

Japan

Commodity group”

Other Western European Countries

Unilateral liberalization”

APPENDIX C: WORLD PRICE EFFECTS OF LIBERALIZATION,

-.2 -.l -11.3

0 0 -1.5

-.l 0 -2.7

3.7 -1.6 -.2

-0.1 -.I

Canada

-.3 -.l -12.5

-1.2 33.3 -1.7

-2.0 -1.2

EC

0 0 -2.5

-.2 -1.2 8.8

-0.2 -.8

Other Western European Countries

.2 -2.0

0

-.l -1.1 -.l

-0.1 -.5

-.l 0 -5.3

-.2 -2.4 -.3

-1.3 -1.1

Developing exporters

-.l 0 - 10.9

-.6 -4.9 -.7

-1.9 -2.1

Centrally planned economies

0 0 -.5

0 -.2 0

-0.2 -.l

New industrial Asia

-.2 0 -12.6

-.6 -5.2 -.6

-2.9 -3.2

-.9 -.l -64.0

-3.8 -26.1 -4.8

- 10.3 -17.4

Total costs to to others

1986-1987”

Developing importers

SUPPORT TO PRODUCERS,

scenarios of countries or regions on left. All figures represent billions of dollars

.6 0 -2.3

-.I -1.2 -.l

-0.2 -.6

Australia

New Zealand

OF AGRICULTURAL

0 Benefits (+) of support defined as lost producer surplus from unilateral liberalization Source: SWOPSIM ST86 simulations.

-.I -8.1 -1.1

-.l -.8 -.l

Canada EC Other Western European countries Australia New Zealand Total costs of others’ policies

-1.2 26.3

22.6 -.5

Japan

United States

Japan United States

From policies of country or region

APPENDIX D: COSTS AND BENEFITS

* B 3

6 R %

2

::

;: i.

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Acknowledgments: We would like to thank Richard Hooley, Bill Coyle, Brad McDonald, and two anonymous referees for several helpful comments. Views expressed in this article are those of the authors and not necessarily those of the U.S. Department of Agriculture.

NOTES 1. Even though per capita GNP in Japan is higher than in the United States, the purchasing power of Japanese consumers has been about 30% less than the purchasing power of U.S. consumers (OECD, June 1988, p. 177). 2. Agricultural policies of the U.S. and the European Community are designed to support farm incomes in surplus periods. Hence, the most relevant and compelling analyses of trade reform are in periods of large surpluses and low prices. 3. Our description of Japan’s policies relies on information presented in a number of publications, especially OECD (1987b) and ABARE (1988). 4. Schwartz and Parker (1988) provide a detailed comparison of the PSE with other measures of protection, such as the nominal rate of protection (NRP) and the effective rate of protection (ERP). The key distinction between the PSE and the other two measures of support is that while the former emphasizes income transfers to farmers, the latter measures stress trade protection. 5. Our analysis assumes that phytosanitary regulations are not used as impediments to imports. 6. The inefficiency of Japanese policies vis-a-vis those of the U.S. may be overstated in that countries which place the burden of agricultural policies on taxpayers instead of consumers incur additional inefficiencies in raising the revenue necessary to pay the subsidies. 7. While this is true for an average farm household which derives about 15% of its income from agriculture, full-time farm households make only 85% of the average urban household income (Hayami, 1990, p. 206). 8. Some argue that elimination of subsidies to agriculture would not lower land prices given the high demand for other land-related urban activities (Financial Times, September 21, 1990). 9. Japanese policy makers are also quick to point out that, despite high levels of agricultural protection, Japanese markets are not as closed as they appear given that food self-sufficiency in their country is lower than in most net-importing industrial countries (Hayami, 1990).

REFERENCES Alston, Julian M., Carter, Colin A., and Jarvis, Love11 S. 1989. “Japanese Beef Trade Liberalization: It May Not Benefit Americans,” Choices, 4(4):26-30. Anderson, Kym, and Hayami, Yujiro. 1986. The Political Economy of Agricultural Protectionism. North Sydney, Australia: Allen and Unwin. Australian Bureau of Agricultural and Resource Economics (ABARE). 1988. Japanese Agricultural Policies: A Time of Change. Canberra, Australia: Australian Government Publishing Service. Bale, M.D., and Lutz, E. 1981. “Price Distortions in Agriculture and Their Effects: An International Comparison,” American Journal of Agricultural Economics, 63:8-21. Coyle, William T., and Dyck, John. 1989. “Japanese Beef Trade Liberalization: It Will Benefit American Agriculture,” Choices, 4(4):27-3 1. Dixit, Praveen M., and Webb, Shwu-Eng H. 1989. Government Support to Agriculture in China: Effects on World Markets. Paper presented to the Association of Comparative Economic Studies, Allied Social Science Convention, Atlanta, GA. Financial Times. 1990. “Japanese Land Prices Soar, But Tokyo’s Fall,” September 21.

Reforming

Agricultural

Policies: The Case of Japan

111

Gardiner, Walter H., and Dixit, Praveen M. 1987. Price Elasticity ofExport Demand: Concepts and Estimates. FAER-228, U S Department of Agriculture, Economic Research Service. General Agreement on Tariffs and Trade (GATT). 1989. Mid-term Declaration on the Uruguay Round. Geneva, Switzerland. Haley, Stephen L. 1988. Joint Products in the Static World Policy Simulation (SWOPSIM) Modeling Framework. Staff report AGES881024, U.S. Department of Agriculture, Economic Research Service. Hayami, Yujiro. 1988. Japanese Agriculture Under Siege. New York: St. Martin’s Press. Hayami, Yujiro. 1990. “Japan, ” in Fred H. Sanderson, ed., Agricultural Protectionism in the Industrialized World. Washington, DC: Resources for the Future. Herlihy, Michael T., Johnston, Brian, and Haley, Stephen L. (in press). Assessing Model Assumptions in Trade Liberalization Modeling: An Application to SWOPSIM, Staff report, U.S. Department of Agriculture, Economic Research Service. Josling, Timothy. 198 1. Intervention in Canadian Agriculture: A Comparison of Costs and Benefits Among Sectors. Stanford, CA: Food Research Institute, Stanford University. Lucas, Robert E. 1976. “Econometric Policy Evaluation: A Critique,” in K. Bruener and A.H. Meltzer, eds., Amsterdam: North Holland Publishing Co. Organization for Economic Cooperation and Development. 1987a. National Policies and Agricultural Trade. Paris, France. Organization for Economic Cooperation and Development. 1987b. National Policies and Agricultural Trade: Country Study Japan. Paris, France. Organization for Economic Cooperation and Development. 1988. Main Economic Indicators. Paris, France. Organization for Economic Cooperation and Development. 1989. Agricultural Policies, Markets and Trade. Paris, France. Roningen, Vernon 0. 1986. A Static World Policy Simulation (SWOPSIM) Modeling Framework. Staff Report AGES860625, U.S. Department of Agriculture, Economic Research Service. Roningen, Vernon O., and Dixit, Praveen M. 1989. Economic Implications of Agricultural Policy Reforms in Industrial Market Economics. Staff report AGES 89-36, U.S. Department of Agriculture, Economic Research Service. Schwartz, Nancy, and Parker, Stephen. 1988. “Measuring Government Intervention in Agriculture for the GATT Negotiations,” American Journal of Agricultural Economics, 70: 1137- 1145. Stoeckel, A., Vincent, D., and Cuthbertson, S. 1989. Macroeconomic Consequences of Farm Support Policies. Durham, NC: Duke University Press. Tyers, Rod, and Anderson, Kym. 1988. “Liberalising Agricultural Policies in the Uruguay Round: Effects on Trade and Welfare,” Journal of Agricultural Economics, 30(2):197-216. U S Department of Agriculture (USDA), Economic Research Service. 1987. Government Intervention in Agriculture: Measurement, Evaluation, and Implications for Trade Negotiations. FAER-229. U.S. Department of Agriculture (USDA), Economic Research Service. 1988. Estimates of Producer and Consumer Subsidy Equivalents: Government Intervention in Agriculture, 1982-86. Staff Report AGES880127. Washington Post. 1990. “Japanese Are Facing up to Land Inflation and Soaring Costs for Real Estate,” April 21, pp. Ell-12. Yomiuri Shimbun. 1987. “Food Costs Too Much, Families Pinched: EPA,” Yomiuri Shimbun, Tokyo, May 26.

Received

May 1990, revised November

1990.