Rice research versus rice imports in Malaysia: A dynamic spatial equalibrium model

Abstract

Rice is the main staple food, besides wheat, in many countries in the world. For the purpose of food security, many countries protect their rice industry through various mechanisms such as domestic subsidies, import/export tariffs, price ceilings and other mechanisms. Malaysia is one of the rice importing countries, which spends millions of Malaysian Ringgit from the public funds to protect the rice industry and at the same time invests in research and development (R&D) activities to increase rice production. However, in the past 30 years, the production of rice was still not sufficient to meet the domestic demand. The purpose of the present study is to examine the impact of the reallocation of public funds from domestic subsidies to R&D expenditures. Furthermore, the present study also examines the impact of removing BERNAS, the sole importer, and removing all the trade barriers in the Malaysian rice industry. An econometrically estimated dynamic spatial equilibrium model was developed to analyse the impact of policy changes in the Malaysian rice industry. The rice trade model in this study incorporated six regions of Malaysia, Thailand, Vietnam, Pakistan, Indonesia and the Rest of the World. In the present study, there are two main parts: econometrics and simulations. For each region, there were four stochastic equations; namely, consumption demand, stocks demand, area harvested and yield and the supply function was constructed as an identity comprising of area harvested, yield and the conversion rate of paddy to rice. The time series data used for the stochastic equations from the period of 1980 to 2009 were tested for stationarity using the Augmented Dickey Fuller test. The area harvested equation was estimated using ordinary least squares and the other stochastic equations were estimated using two-stage least squares. In the cases with autocorrelation, the equations were re-estimated using a first-order serial autocorrelation correction. The econometric results were consistent with a priori expectations and as represented in the equations the decision-making agents appeared to be well behaved according to theory. An R&D expenditure variable was incorporated into the yield function for Malaysia. To select the most appropriate yield function including the R&D expenditure variable, eight alternatives of R&D lags of different lengths and shapes were tested. Two lag lengths, 16 and 35 years and three shapes: trapezoid, inverted “V” and gamma distributions were used and the most preferred model was the gamma distribution with δ=0.6 and λ=0.8 with a lag of 16 years. The R&D elasticities in the range of 0.10 to 0.13 were computed for the Malaysian rice industry and these were found to be consistent with the R&D literature. As there seemed to be no other estimates of R&D elasticities for Malaysian agriculture previously published, these estimates are seen as a contribution to knowledge about the effects of R&D expenditure in Malaysia. The coefficients of all the exogenous variables from the econometric estimation were collapsed into the intercept and then these collapsed demand and supply equations were included in the spatial equilibrium model. The spatial equilibrium model was formulated using a primal-dual approach in a mathematical programming model. The model was simulated dynamically from 1982 to 2009 using the Lemke algorithm written in Visual Basic in Microsoft Excel. Both statistical and graphical methods were then used to validate the historical data with the simulation values. The simulated endogenous variables were found to replicate the historical values quite closely. Four historically based policy simulations were developed to analyse policy changes in Malaysia. In the first two scenarios, 10 per cent and 25 per cent of the rice subsidy funds were reallocated to R&D expenditures. In the third scenario, the sole importer status of BERNAS was removed and replaced with import tariffs and in the fourth scenario the free trade environment was represented. The results from the simulations in scenario 2 showed that if the government had allocated 25 per cent of the subsidy funds into R&D expenditures in the 1980s, self-sufficiency in rice could have been achieved 25 years earlier. Furthermore, both the consumers and producers would be better off if these changes had taken place back in 1980s. Findings that emerged from this study have some important policy implications for the Malaysian rice industry. The findings suggest that the government interventions, such as providing domestic subsidies to farmers to increase the production of rice and the use of a marketing board to control imports do not necessarily protect the industry. The findings indicate that if the government had chosen to eliminate domestic subsidies and the sole importer status, consumers would be better off even though the farmers‟ revenue would be affected in such a free trade environment. The findings in the present study also suggest that the income per farmer could increase by about double if the government invested 25 per cent of the subsidy funds into R&D expenditure. The key recommendation from this study is that the government should remove the domestic subsidies and other trade barriers and use the limited public funds for R&D related activities and both the consumers and producers will be better off than in the current situation.