Producer and consumer subsidy equivalents

The PSE is an indicator of the value of the transfers from domestic consumers and taxpayers to producers resulting from a given set of agricultural policies, at a point in time.

Thus the PSEs are aggregate measures of the total monetary value of the assistance to output and inputs on a commodity-by-commodity basis, associated with agricultural policies. Five categories of agricultural policy measures are included in the OECD calculations of PSEs:^m i. All measures which simultaneously affect producer and consumer monetary values

(Market Price Support);

ii. All measures which transfer money directly to producers (Direct Payments) without raising monetary values to consumers;

m Organization for Economic Co-operation and Development, 2004.

53  iii. All measures which lower input costs (Reduction in Input Costs) with no distinction

being made between subsidies to capital and those to other inputs;

iv. Measures which in the long term reduce costs but which are not directly received by producers (General Services);

v. Finally, other indirect support (Other), the main elements of which are sub-national subsidies (i.e. measures funded nationally by Member states in the case of the EC or regionally in the case of other nations) and taxation concessions.

Market price support policies provide support through consumer- making available transfers which create a lock between local and world market monetary values and are estimated as the difference between these two sets of monetary values, multiplied by the amount that is subject to those indicators. In most OECD nations, market values are increased by these policies, but the discussion can be the case from time to time, particularly in undeveloped nations.

All other measures provide assistance by budget-delivered transfers and do not create a wedge between local and world market monetary values. The value of production can be estimated at local values (as in the OECD calculations) or at world prices.

The exposure of these transfers as total, per unit or percentage quantities relies on the type of judgment being made. Clearly, the total PSE for a commodity and country will reflect not only the rate of support but also the amount of agricultural production.^l

The per unit PSE, when expressed in an ordinary currency exchange, permits comparisons between nations and within a time frame of the rate of support to a single commodity.

In algebraic form, where the level of production is Q, the domestic market price is Pd, the world price is Pw, direct payments are D, levies on producers are L and all other budgetary-financed support is B, the PSE expressions, as measured by OECD, are:

54  Total PSE (TPSE) = Qp* (Pd - Pw) + D - L + B

Total unit PSE = TPSU/ Qp

Percentage PSE = 100 (TPSE) / [Qp(Pd) + D - L] (at domestic monetary values)

Measured at world prices, Pd in % PSE would be replaced by Pw.^u

The CSE is a measure of the value of transfers from local consumers to producers and taxpayers arising from a known set of agricultural policies at a point in the timeline. The CSE assessment, in the OECD computations, is not planned to capture all policies that affect utilization from consumers but is restricted to the effect on consumers of agricultural policies only. Particular consumer subsidies from government funds, paid in applying agricultural policies, partially counterbalance consumer taxes. In an algebraic expression, this can be defined as follow:

Total CSE (TCSE) = - Qc * (Pd - Pw) + G Per unit CSE = TCSE/ Qc

Percentage CSE = 100 (TCSE) / [Qc (Pd)] (at domestic monetary values)

Policies normally engage both consumer and taxpayer transfers to producers. This is clearly seen in those policies which guarantee a local market value for a commodity above world market values, the domestic value being preserved by restraining supplies to the local market. In the case of an exporter, this is achieved by subsidizing export sales.

In both cases, the consumer typically pays a monetary value which enables the domestic producer monetary value to be preserved over that on world markets. Although, in the case of an exporter, there is a budget outlay (export subsidy) whereas in the case of an importer, there is a budget inflow (import tax receipt) or an additional transfer to importing agents and export suppliers.^a

In Figure 4, production is Q1, consumption is Q2, the supported domestic price is Pd and the world price is Pw. The difference between Pd and Pw involves several factors that can

55  be barriers to commerce, competitive differences, and logistic procedures among others. The Area A is the transfer to producers (Total PSE), the area A+B is the transfer from consumer prices to domestic producers price and the area B is the transfer from consumers to budgets (import tax) or to importer agencies/export suppliers (import quota, VRA). The area A+B is the consumers’ payments over the world price due to import tariff or other non-tariff barriers from consumers (Total CSE). Whether the country is an importer of the commodity in question (as shown in the Figure 4), or an exporter, the market price (Pd) is the monetary value received by producers and paid by consumers and Pw, is the world price. The rate of PSE (the monetary value gap Pd-Pw) is the same, whereas the total PSE depends on the relevant quantities. The budget effects are also radically different between the importing (budget inflow) and exporting (budget outlay) cases. In the case of agricultural support through deficiency payments, (Figure 5) consumers pay the world price Pw, while producers are guaranteed with the domestic price (Pd). If the country is either an importer or an exporter of the commodity, area A is the transfer to producers (total PSE) provided by budgets and there is no area B provided by consumers (CSE is zero).^e

Figure 7: Market price support in an importing country. Source: Abel, M. 1989.

56  Figure 8: Deficiency payments in an exporting country

From the preceding examination, the level of transfers from policies that sustain producer monetary values over the level on the world market can, in theory, be resulting from either the dimension of the domestic/world monetary value gap or from budgetary data. The monetary value gap, multiplied by the levels of production and utilization, outcome in the total PSE and total CSE correspondingly, arising from market price support policies. The budget expenditure on export subsidies, divided by the amount exported, result in the equivalent monetary value gap. The budget revenue derived from import taxes for an importing country, divided by the amount imported, also results in an equivalent monetary value gap.^e