Download Dear Jon and Johanna,

Dear Jon and Johanna,
apologies for taking some time to reply; in fact we discussed at length among ourselves.
Please find in the attached file three examples, one for an imported product, one for an
exported product and one for a non-traded product.
On names, our proposal – which is also in the spreadsheet - is the following:
Benchmark price to indicate the CIF price for imported products, the FOB for exported
products; a substitute or an implicit price for products which are not traded internationally.
Border price to indicate the benchmark price translated into local currency.
Landed price to indicate the border price plus tariffs or taxes.
Observed price to indicate the price observed in domestic markets;
Adjusted refers to quality adjustment.
Reference price to indicate the border price plus normal (efficient) marketing costs up to the
wholesale or farm gate level; the difference between the observed price and the reference
price gives the total wedge, which is made of two parts: a policy wedge and a market
development wedge. Depending on the information available, one of the two wedges will
necessarily be exogenous, and the other will be a residual.
As an alternative, we may follow Mullen et al (2007): they call “Reference price” what we
call “Benchmark price”; and “Adjusted Reference price” what we call “Reference price”. We
just need to choose one criterion and stick to it.
As for products which are not traded internationally, the spreadsheet is pretty similar to the
one for imported and exported products; the difference is in the benchmark price, where
credible information needs to be inserted. In this respect, we thought of two alternatives:
1. Where a close substitute is available, the benchmark will be the price of the substitute,
adjusted for technical equivalence; this is the case of imported gaz in the example of
firewood.
2. Where there is no close substitute, an implicit price will need to be built from shadow
factor prices; for the time being, we thought of leaving this outside this spreadsheet in
(however the VCA software easily accommodates it, along with the rest).
As for the choice of a volume of production for goods which are traded to a limited extent
in local markets and largely own-consumed -- cassava and other roots being typical examples
– we believe there are again two alternative strategies.
1. Where a close substitute is available, the entire volume of production should be taken
into account. The worksheet for non traded goods could still be used, and the price of
the substitute will be the benchmark price.
2. Where there is no close substitute (is this a likely case?) probably we should ignore
cross price effects – as we do for most products – and take into account only the
volume of production which is traded in the market. The assumption here would be
that any implicit price of such product would not be significantly affected by what
happens to other products.
In both cases the “context chapter” may elaborate on the details and maybe monitor the
evolution of the marketed share in total production.
Discussions on the exchange rate took us some time. As you know in the literature on PSEs
and similar measures for developing countries many exchange rates different from the
nominal (or official) have been employed. Usually these are adjusted (shadow, or
equilibrium) rates arising from over and under-valuation, which entail protection. We noticed
that Tsakok (Agricultural Price policies. Cornell, 1990) when calculating NPCs, adopts
Shadow Exchange Rates (SER). Krueger Schiff e Valdes (1988) adjusted their measures for
Equilibrium Exchange Rates (EER) which "would have prevailed in absence of [tariff-tax]
interventions”. Orden et al (IFPRI, 2007) do something similar. And Anderson in the recent
Distortion study adjusts exchange rates where foreign currency is rationed. We understand
that the extent to which this adjustment is required is somehow related to the “state of the
world” assumed for the calculation of our reference prices. If the assumption is that in that
“state of the world” not only the commodity-specific policy interventions but also all the other
border policies and institutional factors are removed, an adjustment to take into account the
re-allignment of relative prices of tradables versus non-tradable goods should be made.
Indeed, it appears that under such “state of the world” the price ratio of tradables versus nontradables (as well as the price ratio between agricultural and non agricultural goods) most
likely is not any longer the observed one.
We should probably discuss – now and at the workshop – how we want to take this
component of the incentive and disincentive measures into account, that is, which exchange
rate(s) to consider. In the meantime, we just left two different cells for the exchange rate in
the spreadsheets, to allow for the inclusion of an “adjusted’ exchange rate.
We look forward to your comments.
Piera, Lorenzo and Piero.