Use of producer and consumer subsidy equivalents to measure government intervention in agriculture : the case of Pakistan

The producer subsidy equivalent (PSE) is one such aggregate measure. A subsidy equivalent is a measure of the overall value to a producer or consumer of a set of policy interventions by the Government. Ideally such an amount would exactly compensate a group of individuals for the removal of all (measured) policies when their net effect is subsidizing. PSEs and consumer subsidy equivalents (CSEs) are estimated using budget figures and/or parity price comparisons. They include all relevant government policies and can distinguish the separate contribution of each to the overall effect. This study uses agricultural policies in Pakistan as an example to illustrate the application of the PSE method. The results of this study indicate that the taxing effect on producers of Pakistan"s trade and output price policies was partly offset by subsidies on inputs, particularly fertilizer, and by investment in infrastructure. Control of trade was the most important agri- cultural intervention affecting produce. Overall there was a taxing effect on producers of only about 5% of the value of production, but there were significant distortions in individual commodity prices. Consumers were strongly affected by state trading, rationing, and import duties, but on average, the effects of these policies canceled one another, leaving an insignificant aggregate CSE. The annual pattern of the individual CSEs mirrored that of the PSEs: crop CSEs were significant and had opposite signs as the respective PSEs, while livestock product CSEs were negligible. PSEs and CSEs indicate the areas in which the effects of liberalization would be felt. If world prices for its export commodities rose as a result of reductions of support, Pakistan would reap the benefits of the liberalization at a cost depending on the nature and extent of its own liberalization. Important imports like wheat, sugar, and milk, however, would become more expensive. (Author abstract)