Two different kinds of processing activities are defined. Processing demand for inputs which are nontradable (set pr_in1; only raw cotton in the current version) is defined according to equation (5.11) above. Processing demand for tradable inputs (set pr_in2; three oilseeds in the current version) is defined as:
(5.43) el_popr_in2, pr_out2 el_pipr_in2
pr_in2 pr_in2 pr_out2 pr_in2
pr_out2
= • •
P_DEM int_pd
∏
P_WS P_WS .Explanatory variables are wholesale prices for processing inputs and outputs.
The intercept (int_pd), as well as the elasticities of processing demand with respect to output prices (el_po) and input prices (el_pi), are exogenous parameters, the former calibrated according to base data. Equation (5.43) is restricted to be homogenous of degree zero in all input prices (price elasticities with respect to inputs other than oilseeds are taken into account, see Section 6.3.4).
Processing supply is defined as processing demand multiplied by the respective extraction factor:
(5.44) PR_SUPpr_out = PR_DEMpr_in • exfpr_out. 5.7 Demand Model
Human demand is modeled for income quintiles according to equation (5.45).
(5.45) i,inc i,inc el_hdj i,j,inc el_inci,inc j
= • • • pop
H_DEM int_hd
∏
P_WS income .Explanatory variables are own and cross prices. Income group-specific elasticities of demand with respect to own and cross prices (el_hdi,j,inc), and to income (el_inci,inc), as well as income and population shifters (income, pop) and the intercept, are exogenous parameters, the latter calibrated according to the base data set. Elasticities are based on own estimates, literature, and plausibility considerations (see Sections 6.3.1 and 6.3.2) and are composed such that nonpositivity of the own price effect and homogeneity of degree zero of demand functions in compensated price elasticities hold globally and symmetry of cross price effects, as well as the adding up condition, hold locally.
Processing demand and feed demand are explained in Subchapters 5.4 and 5.5 above. Seed demand is defined according to equations (5.13) and (5.14) and total demand according to equation (5.15) above.
5.8 Welfare Calculations
Welfare effects under each simulation scenario are evaluated as welfare changes compared to a reference simulation. In the current TURKSIM version, the status quo scenario simulating a situation with unchanged agricultural policies at the end of the projection period, is chosen as the reference scenario. Welfare effects are calculated at farm level, at the level of human consumption, and at the level of the processing industry, and, together with budgetary effects, are summed as total welfare effects.
5.8.1 Welfare Changes at Farm Level
If only a single price change of one input or output is considered, the change in producer surplus measured as the definite integral of the supply function from p0 to p1 is the correct measurement for the change in producer welfare (JUST et al.
1982, pp. 55 ff.). For the evaluation of welfare changes in TURKSIM, however, multiple simultaneous price changes must be taken into account. Consider, for example, the case of two substitutes whose prices change simultaneously as presented in Graph 5.3:
Graph 5.3: Welfare Changes with Simultaneous Price Changes
If the price for wheat (left hand panel) rises from Pw0 to Pw1 and wheat supply rises, the supply curve for barley (Sb), a close substitute, shifts left as more area is allocated to wheat and the barley price increases due to lower barley supply.
The increasing barley price, in turn, results in the wheat supply curve shifting left. For a correct determination of the resulting welfare change, price changes must be evaluated stepwise. First, the change in producer surplus for one product must be evaluated under the original supply curve (e.g. the grey shaded area in the left hand panel), and second, the price change for the next product is evaluated under the new supply curve for the product concerned (e.g. the grey shaded area in the right hand panel). This sequential approach can be extended to input prices and the results are not dependent on the path of integration if cross effects are symmetrical.47 As a result, welfare changes at the producer side are determined:
(5.46)
where Pi is the price of product i, SUPi is the supply function of product i, Wj is the price for input j, and FDj is the factor demand function for input j.
47 For an algebraic deduction see JUST et al. (1982, pp. 338 ff).
Pw1 Pw0
Wheat quantity
Sw1 Sw0
Pb1
Pb0
Barley quantity
Sb1
Sb0
i j
i j
1 1
n m
i j
i=1 0 j=1 0
P W
• dP - ,FD • dW
SUPi j
P W
∑ ∫ ∑ ∫
In TURKSIM, supply functions for plant products include product prices as independent variables only. Therefore equation (5.46), with abbreviations as used in TURKSIM, reduces to:
(5.47) .
In TURKSIM, changes in producer surplus are calculated according to (5.47) with prices changed sequentially. The respective definite integrals are multiplied by 1-(seedpl_nq/yieldpl_nq). This is because seed production is assumed to stay at the farm. Therefore welfare changes should not be calculated for this part of production, as the farmer is also the consumer.
Initially, price changes are introduced and definite integrals are calculated for all nonquota products. As a final step, welfare changes for quota products are calculated (only sugar in the current TURKSIM version). Starting from a situation in which the quota is binding (scenario s_quo), i.e. the shadow price is below the effective farmgate price for sugar, there are different possibilities for the resulting welfare effects. Should the quota system be abolished, the calculation of the welfare effects depends on whether the new price is below or above the shadow price of the reference scenario (see Graph 5.4).
Graph 5.4: Welfare Changes Resulting from an Abolition of a Quota System
The left hand panel of Graph 5.4 shows a situation where the new price is above the shadow price of the reference situation. The resulting welfare effects are composed of a loss in quota rent (area "-") and a gain in producer surplus due to
P0
the expansion of production (area "+"). Area "+" is determined in TURKSIM by taking the definite integral of S between P1 and P_SH0 and subtracting area "a".
The right hand panel of Graph 5.4 shows a situation in which the new price is below the shadow price of the reference situation. In such a case the welfare effect is composed of the loss in quota rent resulting from the market price decreasing until it reaches the level of the shadow price (upper rectangle "-"), and the loss in producer surplus resulting from a further decreasing market price (lower area "-"), that is, the definite integral of S between P_SH0 and P1.
In the case of a binding quota in the new situation, possible effects are also manifold. Graph 5.5, as an example, shows a situation where a welfare loss due to a decreased market price (area "-") is combined with a welfare gain due to an expanded quota quantity (area "+").48
Graph 5.5: Welfare Changes Resulting from a Change in the Quota System
Welfare changes which result from production on newly irrigated areas (see Section 5.3.1.1) are linearly approximated by multiplying the price change by the average supply quantity on the newly irrigated area:
(5.48) (P_EFpl, sc_wf - P_EFpl, s_quo) • (ad_ha •SHAREpl, s_quo • YIELDpl, s_quo / 1000 + ad_ha •SHAREpl, sc_wf • YIELDpl, sc_wf / 1000)/2.
48 The automatic calculation of welfare effects in a scenario with a binding quota for all possible combinations of price and quota changes is not yet programmed in TURKSIM.
The CU scenario is the only scenario for which the change in producer surplus is calculated with the quota system maintained, and the respective calculation is included in the code.
P0 P1
Supply S
P_SH0
-Price
+
Q0 Q1
Welfare changes for animal producers are also calculated by introducing changes in product prices sequentially and summing up the definite integrals below the supply curves. Welfare changes of changing feed prices are taken into account by linear approximation (multiplying the change in FCI by the average feed quantity). This is for computational simplicity as feed demand functions for individual components, following from equations (5.40), (5.41), and (5.42) are rather complex:
(5.49)
The sequential introduction of price changes for the evaluation of welfare effects means that results for individual products cannot be interpreted and compared properly. This is because the size of the welfare change for individual products depends on how many cross prices have already been changed, and thus on the path of integration. Therefore welfare changes in TURKSIM are also calculated as definite integrals under supply and demand curves with only the own price changing. These results cannot be used to evaluate the total welfare change, as cross prices are not considered, but it allows for the comparison of welfare changes for individual products due to own price changes.
If supply and demand functions are derivatives of a profit/indirect utility function, the resulting cross effects are automatically symmetric, as they are second derivatives of the same function. This is not the case for the systems of supply and demand functions applied in TURKSIM, as they are not derivatives of any profit/indirect utility function. For this reason, symmetry can be introduced only locally. Symmetry, however, is required for the path independence of the sequential approach of analysis of the welfare effect in case of multiple price changes applied in TURKSIM (JUST et al., 1982, p. 340). A sensitivity analysis with respect to the path of integration was therefore applied.
Maximal changes in total consumer welfare or producer surplus due to a change in the path of integration were found to be 0.4 percent. This is significantly below the deviation of the results of the nonsequential approach from the sequential approach, which was up to 3 percent of the compensating variation and the change in producer surplus. As a result, the nonsequential approach was found to overestimate the welfare gains from liberalization by about 18 percent whereas the welfare gain under the liberalization scenario according to the
( )
sequential approach differed no more than 2.7 percent with respect to the path of integration. Therefore, the results of the sequential approach are used as the indicator of choice for total welfare effects throughout this study even if they are not completely unequivocal.
5.8.2 Welfare Changes at the Consumer Level
At the demand side, welfare changes should not be evaluated as definite integrals below the ordinary demand curves, as this measure would, for superior goods, underestimate welfare losses and overestimate welfare gains as the income effects are not adequately treated. A correct measure, instead, is the calculation of the compensating variation which is the definite integral below the compensated demand curve (LAYARD and WALTERS, 1978, p. 146). In case of multiple simultaneous price changes, welfare changes should be evaluated with the stepwise introduction of price changes as has been described for the supply side above (LAYARD and WALTERS, 1978, p. 147). Therefore welfare changes at the human demand level are calculated in TURKSIM according to
(5.50)
with prices changes being introduced sequentially and H_DEM_Ci being the compensated demand curves. The respective compensated demand curves are calibrated based on compensated demand elasticities (see Chapter 6), and based on prices after introduction of each sequential price change.
5.8.3 Welfare Changes at the Level of the Processing Industry
Welfare changes for the processing sector are evaluated only for that part of the processing industry for which processing demand varies according to the processing margin (equation 5.43; oilseed crushing industry) and thus not for cotton gins. Price changes for inputs and outputs are introduced sequentially and definite integrals are taken of the respective processing demand (5.43) and processing supply functions (5.44) which are derived from processing demand functions (5.43). The resulting welfare changes are calculated as the sum of definite integrals according to (5.46) for each processing industry.
5.8.4 Budgetary Effects
Budgetary outlays are calculated for each scenario as tariff revenue minus budgetary outlays for export subsidies and producer premiums. Welfare effects are calculated for each scenario as the difference between the budget of the respective scenario and the reference scenario.
6 B
EHAVIORALP
ARAMETERS 6.1 Basic ApproachAs all behavioral functions are of the isoelastic type, only supply and demand elasticities enter the model code as exogenous parameters, intercepts are calibrated from base data. The systems of supply and demand elasticities used in TURKSIM are synthetic in the sense that they are not estimated as systems, but individual elasticities stem from various sources such as literature, own estimates, and expert interviews. Nonetheless they are composed such that they have system character as they fulfil most of the requirements of economic theory that apply to interdependent equations, e.g. symmetry of cross price effects and the adding up condition.
Several reasons contributed to the decision not to estimate the full sector model.
First, the workload required exceeded the time available for this study as the main focus was on building a simulation model. Second, many estimates, single equations, and supply or demand systems are documented in the literature. This study can partially draw on existing work. Third, the estimation of complete supply or demand systems requires high quality data. In the area of supply analysis, however, data quality in Turkey is limited due to extremely high inflation (around 100 per cent in many years), very limited availability of some data (e.g. input prices and quantities), and political instability influencing production decisions.49 This is especially problematic in the case of simultaneous estimation of supply systems, as any shortcomings of the data do
"distribute" through the whole model because of interdependency of supply equations. Even when the available data is of relatively high quality, this can lead to implausible parameter estimates in many cases. For an example of such a case see GRINGS (1985, pp. 188-95).
Many of the data shortcomings at the supply side apply on the demand side, too.
This is the case especially for the inflation problem and the political environment. In addition, no time-series data on consumption is available for Turkey. The solution is to generate a time series of demand quantities by adding production and imports minus exports. This data is readily available from the SIS. Changes in stock levels as well as postharvest losses, however, are thus not accounted for and cause distortions. A possible way to include these positions would be to use estimates from FAO commodity balances, which explicitly cover stock changes and losses. Another potential source for distortion of
49 The political instability in south-east Anatolia has contributed heavily to declining ruminant flocks (USDA GAIN Report TU 1034, 21.08.2001, p. 2).
consumption data generated in such a way is border trade not covered by official statistics. Especially for trade with former Soviet Union countries, observers estimate this effect to be significant for some products.
Two budget surveys for 1987 and 1994 (SIS, 1990, 1997) are the only available data sets on consumption, which can be used to estimate a set of income elasticities. Because the sample method, classification of income groups and product aggregation are vastly different in these two surveys, they cannot be integrated into one time series. Therefore, no complete demand system including price elasticities can be estimated due to missing time series data. An alternative approach would be the estimation of a linear expenditure system (LES) based on cross section data, for which only one parameter would need to be chosen in order to determine the missing parameters from the income elasticities for the ratio between consumers’ excess income and the income necessary for a minimum consumption basket (TAYLOR, 1979, pp. 220-1). This approach, however, seems questionable when one considers that the level of this parameter is arbitrary and differs heavily among different income groups (PHLIPS, 1983, p.
131). Furthermore, inferior products cannot, due to functional form, be estimated in the LES. Against the background of the high consumption of wheat, especially among the poorer population, a negative income elasticity for wheat seems plausible for lower income groups. In addition, the incapability to represent complementary relations between goods and the linear relationship between income and consumption are disadvantages of the LES (SADOULET and
DE JANVRY, 1995, p. 42).
In order to provide some empirical backbone for the framework of demand elasticities, with a view to the crucial importance of the size of income elasticities for projection results over a period with high income growth, a set of demand elasticities with respect to income is estimated based on the 1994 cross section data (see Section 6.3.1). Price elasticities of demand used in TURKSIM are based on literature, plausibility considerations, and the implementation of theoretical requirements (see Section 6.3.2).
For some products, limited transmission of border prices to domestic wholesale prices is included in TURKSIM (see Section 5.2.2 above). The estimation of the respective price transmission elasticities is documented in Subchapter 6.4.
6.2 Supply Side 6.2.1 Plant Products
A matrix is built containing price elasticities of area allocation for all plant products covered by TURKSIM with respect to all prices for plant products covered by TURKSIM, the price of the aggregate of all other plant products, and
to the price of variable inputs. This matrix fulfils the symmetry condition and the condition of supply for each product being homogeneous of degree zero in all prices. The price elasticities with respect to the price of other products and with respect to the input price are not used in TURKSIM as they are not variables in the respective area allocation equations (see Subchapter 5.2). Their inclusion in the process of building elasticity matrices, however, is necessary in order to check for fulfilment of the homogeneity condition which applies to all output and input prices.
Own and cross price elasticities of area allocation and yield in TURKSIM are derived according to the following steps:
1. Own price elasticities of area allocation (el_arpl,pl,reg) and of yield (el_yipl,reg) are determined based on literature, expert interviews, and plausibility considerations.
2. Supply elasticities with respect to the price level of variable inputs (el_inpl,reg) are determined for each product based on the cost shares of variable inputs.
3. Plant products are divided into groups of more or less close substitutes.
4. Allen elasticities of substitution (σpl,pls), which are measures for the degree of technical substitutability of products, are determined for each pair of products based on the classification above (3) for one region such that the homogeneity condition of supply is fulfilled for all products:
(6.1) ((el_arpl,pl,reg +1) • (el_yipl,reg +1) – 1) + ∑pls≠pl el_arpl,pls,reg + el_inpl,reg = 0, with
(6.2) el_arpl,pls,reg = σpl, pls • vpls,reg,
and vpls,reg being the value share of plant product pls in the respective region.
This step is done simultaneously for all products as the homogeneity condition restricts the overall size of Allen elasticities of substitution per product.
5. The resulting Allen elasticities are then transformed into cross price elasticities for the other eight production regions by multiplication with the respective value shares.
6. In case of the homogeneity condition (6.1) being negatively affected, all Allen elasticities for the respective region and product are scaled up or down uniformly in relative terms.
Based on this approach, cross elasticities differ among regions only due to the different value shares of the respective products. Further information on differing possibilities of technical substitution among production regions could be introduced in elasticity matrices, but is not included in the current TURKSIM version.
6.2.1.1 Determination of Own Price Elasticities and Cost Shares of Variable Inputs
Table 6.1 presents the own price elasticities, the cost shares of variable inputs, and the resulting supply elasticities with respect to the price of variable inputs.
Own price elasticities used in TURKSIM are between 0.22 for tea and 1.73 for several vegetables. Underlying sources and assumptions for the determination of own price elasticities are listed per product below.
Cereals: Elasticities for wheat are long run elasticities taken from the FAO World Food Model (WFM) and are roughly in line with estimates from KASNAKOGLU and GURKAN (1986), BAYANER and HALLAM (1996), and KOC et al. (1998) as well as with elasticities from the SWOPSIM database (USDA,
Cereals: Elasticities for wheat are long run elasticities taken from the FAO World Food Model (WFM) and are roughly in line with estimates from KASNAKOGLU and GURKAN (1986), BAYANER and HALLAM (1996), and KOC et al. (1998) as well as with elasticities from the SWOPSIM database (USDA,