Effects of price and subsidy reforms

Several studies show that price changes had an important influence on the performance of the agricultural sector and in part help explain observed trends in output. Using simple measures of correlations, Macours and Swinnen (2002a) find a positive relationship (the correlation coefficient is 0.70) between changes in output and changes in relative prices across fifteen countries during the first five years of transition. Although only being used to motivate the changes, they show that output increased only in those countries in which terms of trade increased (for example, China, Vietnam, and Albania). Empirical studies using multivariate analysis on China confirm a strong impact of these price changes on output during the first years of transition (Lin 1992; Fan 1991; Huang and Rozelle 1996; Fan and

Pardey 1997). Lin (1992), for example, finds that 15 per cent of output growth during the first six years of reform came from the rise in relative prices. Huang and Rozelle's (1996) decomposition exercise for rice demonstrates that about 10 per cent of the output between 1978 and 1984 came from the price effects.2 In contrast, the multivariate estimates of Macours and Swinnen (2000a) show that around 50 per cent of the initial decline in crop output in eight Central European and Balkan countries was due to deteriorating terms of trade.

The direction of these movements is exactly as predicted in Chapter 3. When agriculture was taxed before reform, price reform led to rising inputs and outputs. In contrast, when agriculture was subsidized, price reform led to falling inputs and outputs.

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