Welfare effects of a
change in the trade
policy regime for rice
in Costa Rica
Carlos E. Umaña-Alvarado
 Author: Carlos E. Umaña-Alvarado, Academia de
Centroamérica
Author and
policymaker
 Policymaker: Henry Benavides, Ministry of Foreign
Trade of Costa Rica, Agriculture policies
 Rice is an essential staple in the Costa Rican diet,
particularly for the poorest.
Why to focus
on rice?
 Costa Rica has implemented a mix of policies:
tariffs, a performance requirement for imports of
paddy rice – which links import permissions to an
obligation to first purchase rice from domestic
producers – and a price-fixing mechanism for all
stages of the rice production chain.
 These policies have created significant rents for
importers and rice millers who have been
benefiting from the difference between low
international prices and high domestic prices.
Why this
topic?
 These measures have resulted in an increase in
domestic paddy rice prices to double that of
international prices. Consumers in Costa Rica have
therefore been paying a high price for a key
commodity in their daily consumption basket.
Why this
topic?
 Costa Rica is also in breach of its WTO
commitments. By providing a subsidy to producers
in the form of a minimum price, the country has
been exceeding the maximum level of authorized
annual support to its agriculture.
 CAFTA-DR will eliminate import quotas and
provide unlimited duty-free access to imports from
the United States – Costa Rica’s main supplier of
rice – by 2025.
Objectives of
the study
 What will be the effects of the CAFTA-DR on riceconsuming Costa Rican households as a
consequence of a reduction in rice prices due to
cheaper imports?
 Will the CAFTA-DR be an opportunity to effectively
reduce rice prices in the domestic market and thus
improve the welfare of consumers?
 Estimation of non-parametric regressions of the
welfare effect on Costa Rican households due to a
price decrease of rice following the phasing out
period for the CAFTA-DR.
Methodology
 Following Deaton (1989), welfare effects from a
price change can be assessed using budget
(consumption) and income (supply) shares of the
good on household income.
 Assumption: direct link between the tariff phasingout process from CAFTA-DR and a price reduction
of rice in the internal market.
 Costa Rica’s 2004 National Income and Expenditure
Survey provides information on:
Data
a)
Education level, employment, income, and
transfers of household members.
b)
Household characteristics, e.g. type of dwelling,
number of rooms, persons who receive
government aid, household incomes.
c)
And household expenditures by product.
Welfare
changes in
the 2025
scenario
compared to
2009–2012,
at the
national level
and by urban
and rural
areas
Welfare gains will be positive for urban and rural
households.
The poorest households will benefit the most (1% in 2025)
from a decrease in the price of rice.
Welfare
change in
the 2025
scenario
compared to
2009–2012,
by region
The highest welfare increases (at least 0.5%) are found in
Chorotega, Huetar Atlántica, and Brunca Regions which
have consistently had high poverty levels.
Welfare
change in
the 2025
scenario
compared to
2009–2012,
by
household
size
The largest households (6 or more members) would enjoy
the most significant welfare effects.
Those households are concentrated in districts with a
higher incidence of resource gaps, based on the unmet
basic needs approach.
Welfare
change in
the 2025
scenario
compared to
2009–2012,
by education
level
Households whose heads have not received an education
show the largest increase in welfare from a reduction in
the price of rice.
 Assumption: perfect pass-through of tariff
reductions. Results are an upper-bound
estimate of the benefits of the phasing-out of
tariffs under the CAFTA-DR.
Caveats,
limitations
 Estimation of pass-through may face factors
that influence the internal price that are
exogenous (political decisions).
 International prices may not accurately explain
evolution of internal rice prices in Costa Rica:
prices paid to producers are based on a cost
structure that includes the value of inputs.
 Analysis only considers consumption effect, not
income effect: reduced number of domestic
producers precludes running a complete analysis
of producer welfare.
Caveats,
limitations
 Other channels for the impact of price changes
on welfare: workers in rice-related sectors (e.g.
retail and industrialization), since this source of
income may be substantial in parts of the
country.
Policy
recommenda
tions
 The phasing-out schedule under the CAFTA-DR
will progressively reduce the relevance of the
performance requirement and the import
quota since industries will no longer need to
purchase domestic paddy rice in order to be able
to import duty-free from the USA. This might
serve
as
an
automatic
price-control
mechanism:
rice
imports
becoming
progressively cheaper.
 However, for this to take place, institutions in
charge of defending the interests of consumers,
and those that supervise the functioning of the
domestic market must develop an active stance
towards surveillance of price behaviour for the
imported product, in particular after 2016
(starting phasing out process outside quota).
Policy
recommenda
tions
 Large producers, which are also millers, may
have an incentive to import most of the paddy
rice they will process. If large producers have
better business opportunities by importing most
of their rice and reducing their own production,
this may require an active policy of stocks and
safety nets to address international market
price spikes.
Policy
recommenda
tions
 The CAFTA-DR may also increase pressure on
local producers to reduce their prices to avoid
losing market share. The local rice sector will
face the challenge of improving its
competitiveness, in areas of productivity,
capacity building, improved and cheaper access
to inputs, and strengthening of credit
mechanisms.
Policy
recommenda
tions
 Costa Rica has to continue its efforts to comply
with its commitments to the WTO. A
continuous dialogue between producers, millers
and the government is needed to enhance
productivity levels, avoid the application of
trade-distorting policies, and prevent welfare
losses for consumers.
 The possibility of fixing prices should not be
politicized. Even if the internal law allows the
government to regulate prices of goods and
services in exceptional situations, the need for
such a measure has to be properly established
and justified, and applied only temporarily.
 Use most recent Survey of Income and Expenses
of households in Costa Rica (2013-2014), not
available at the moment of the research.
Possible
future
directions of
the work
 Is there a possibility to develop a reasonable
pass-through estimate between price of
imported rice and price at the internal market?
 Depending on availability of information, try to
estimate income effects for producers and
workers in rice-related sectors.
Welfare effects of a
change in the trade
policy regime for rice
in Costa Rica
Carlos E. Umaña-Alvarado
carlos1.cr@gmail.com
(506) 8707-5083