Macroeconomic Policies and the Best Environmental-Oriented Policy
in Agricultural sector of Iran (Case of Soil Erosion)
This study investigated how the appropriate environmental
policy may change during a long-term macroeconomic planning and under
different policy weights. For this purpose, a simple general equilibrium
model has been established. Results showed that choosing the appropriate
policy is depend on preferences of government; so that when weight of
environmental factors in policy making is less than 40% (weight of economic
factors is more than 60%), lowland food production subsidies policy is
preferable policy and when weight of environmental factors is more than
40%, upland food production tax policy is appropriate policy. Base on
results of this study, as the weight of environmental and economic factors
changed in this study, one can think about changing the weight of any
of economic factors. For example, if PPI doesn`t have any importance in
policy making, it can be eliminated and if government wants to give more
attention to consumer prices than producer prices, policy maker can set
the weight of CPI more than that of PPI in ranking.
Soil is one of the important factors of agriculture production that prepares
the ground for other factors and it has a vital rule in prevention of some undesirable
social phenomena such as immigration. Soil erosion is frequently mentioned as
a major economic and environmental problem especially in developing countries
(Hosseini and Ghorbani, 2001, 2004;
Hosseini et al., 2003; Wu et
al., 2003; Ghorbani and Hosseini, 2004b; Min-Jun
and Kevin, 2004; Demeke and Coxhead, 2006; Long
et al., 2006). More than annually 100 million m2 sediment
behind dams shows the severity of soil degradation in uplands of Iran.
Soil erosion is either due to rapid and uncontrolled deforestation of slopping
uplands and their conversion to agriculture or soil-degrading and erosive agricultural
practices in uplands. While the former had been more noteworthy, the latter
is frequently mentioned as a serious problem in developing countries (Hosseini
et al., 2003; Ghorbani and Hosseini, 2004a;
Senahoun et al., 2001; Long
et al., 2006).
Whereas many analysis of soil erosion problem are looking for the solutions
in upland areas themselves, some evidence shows that macroeconomic polices such
as taxes, tariff rates and relative price changes can induce substantial changes
in both lowland and upland agricultures, even in developing countries which
dont seem to have strong market linkages (Long et al.,
2006; Coxhead and Demeke, 2004; Coxhead
and Jayasuriya, 1995).
In most of the developing countries trade and tax policies, such as trade liberalization
policies or Pigovian tax, are being implemented. The impacts of these policies
on the environment via induced changes in relative prices have important macroeconomic
policy implications and have attracted serious attention (Deal,
2004; Goodwin and Smith, 2003; Senahoun
et al., 2001; Gueorguieva, 2005). There are
arguments for and against the idea that trade liberalization could promote environmental
degradation in developing countries. Some researchers believe that environmentally
beneficial policy results could, under some circumstances, be achieved by indirect
policies-such as trade policies-as effectively as direct policies-such as Pigovian
tax policies (Coxhead and Jayasuriya, 1995). Together
with examining these conclusions for Irans situation, this study tried to pay
more attention to practical problems of such environmental policy makings. First
problem is that Iran is a relatively wide country in which there are several
provinces with different geographical and economical characteristics. These
differences prevent offering a unique policy for all the country. Second, preferences
of government between economic and environmental factors probably play a key
role in policy making. In other words, weight of economic and environmental
factors in policy making may affect choosing the appropriate environmental or
economic policy. Third, in many of developing countries like Iran, environmental
factors have a very small importance in macro-planning and increasing their
weight in policy making needs a long term planning in which government can increase
the weight of environmental factors gradually. During such long-term planning,
appropriate environmental policy may change as the weight of environmental factors
This study investigated the environmental and economic effects of four
trade and tax policies under different circumstances in Iran. Then, compared
and chose the appropriate policies under various economic and environmental
policy weights. Results of this study can help policymakers in planning
of agricultural sector in macroeconomic level and establishing plans and
projects on agricultural lands to decrease the soil erosion and move to
environmental-oriented policies and thereby, improving the productivity
MATERIALS AND METHODS
For this purpose, a simple general equilibrium model has been established.
Despite the simplicity, this model can reflect key structural and policy features
of such economies as well (Coxhead and Jayasuriya, 1995).
Under discussion policies are: tree crops export subsidy, upland food production
tax, manufacturing import tariff and lowland food production tax. While the
two first policies have a direct effect on upland use pattern, the two last
ones have an indirect effect on it.
Analysis of policy change impacts on soil erosion is standing on two
key assumptions. First, soil erosion in slopped upland areas is more than
flat lowland areas, Ceteris paribus. Second, completely different rates
of soil erosion are associated with perennial crops and annual crops in
The most important models to evaluate the impact of macroeconomic policies
on environment are input-output (I-O), econometric, Computable General Equilibrium
(CGE) and Linear Programming (LP) models. The limiting factor to utilize each
of these models is the unavailability of complete and reliable data. Aside from
data problems, each of them has other problems. I-O and LP models assume fixed
technical coefficients which may not be appropriate in several cases. Therefore,
they do not tolerate substitution of inputs and economies of scale. A limitation
of the dynamic econometric models for use in the evaluation of policy impacts
again is the unavailability of time-series data, not only for economic variables
but more particularly the environmental variables, especially in developing
countries (Israel, 1994).
While there are some problems (such as data availability, theoretical problems
and computational difficulties) with general equilibrium models, they are more
appropriate for present purpose-analyzing environmental and economic impacts
of macroeconomic policies. Choosing the general equilibrium approach in our
analysis has several reasons. First, the incentives which affect resource allocation
in the uplands can be significantly influenced by policies whose direct impact
is on another sector, such as a tariff on manufactured goods (Table
1). Second, policies which are supposed to reduce soil erosion must be evaluated
also in terms of their impact on other sectors and targets (such as GNP growth
and inflation rate). Third, practical and adequate solutions for environmental
problems of developing countries, where there are different distortions, usually
are second-best instruments instead of first-best Pigovian taxes. General equilibrium
models are relevant approaches for policy evaluation in such circumstances (Coxhead
and Jayasuriya, 1995).
This study demonstrates a model of a stylized, small, open, developing
country with tariff-distorted prices. This model shows how the policy
changes affect the allocation of upland land between annual food crops
and perennial tree crops. These crop pattern changes give the environmental
(here soil erosion) impact of policy changes. Price and output changes
are chosen as economic indexes of policy change impacts. Third part shows
our database, numerical simulation results of policy changes and choosing
the best policy in different policy weights. Last section is allocated
to conclusions and the policy implications. This study used the macro-economic
data of agricultural sector of Iran and is done in 2007-2008.
||Data base for simulations
RESULTS AND DISCUSSION
Results of sensitivity analysis of 14 different elasticities, which were
used in simulations, show that choosing the preferable policy is severely
dependent on amount of elastisities. In addition, in some circumstances
a policy has well economic and unfavorable environmental (soil erosion)
effects and vice versa. Therefore, choosing the policy which is probably
most adequate in different situations, policies were ranked using 6 economic
and one environmental factor. Ranking of policies is presented in Table
2 as an example of ranking of all 15 various situations.
The policy which decreases the land use in upland food more than the other
policies (or increase it less than others), gets 4 points and the policy which
decrease the land use in upland food less than the other policies (or increase
it more than others), gets 1 point. Ranking the policies for economic factors
is exactly same as what explained above for soil erosion factor. After ranking
the policies in all 15 situations, points of each policy in all 15 situations
were added. Result of ranking for base situation is presented in the first row
of Table 3. According to first row of Table
3, lowland food production subsidy policy is probably the most adequate
policy in various situation of the country. This conclusion can cast doubt because,
as shown in Table 2 the ranking is on the basis of only one
environmental factor, but 6 economic factors. That is, weight of economic factors
in ranking is six times larger than weight of environmental (soil erosion) factor.
Resolving this problem, the weights of environmental and economic factors in
ranking were changed and results of ranking in different policy weights are
shown in Table 3.
As shown in Table 3, when the weight of environmental
(soil erosion) factor is less than 40%, lowland food production subsidy
policy is probably the most adequate policy in different situations of
the country. Increasing the ratio of environmental factors weight to
economic factors weight, preference of lowland food production subsidy
policy compared to upland food production tax policy decreases. So, that,
when soil erosion factors weight exceeds 40%, upland food production
tax policy prefers to lowland food production subsidy policy. It means
when policy makers give more importance to environmental factors compared
to economic factors, the probability of upland food production tax policy
to be the most adequate policy increases. Therefore a long-term planning
in which weight of environmental factors is primarily low and gradually
increases may be begun with an indirect policy, which has favorable economic
effects and be continued with a direct policy which pays more attention
to environmental factors.
|| Ranking the policies in basic situation
|| Choosing the best policy under different policy weights
Comparing the two trade policies shows that the difference between points of
tree crops export subsidy policy and tariff reduction in manufacturing policy
stays fixed in various policy weights, though the difference is very small.
That is, whether environmental factors have more importance or economic factors
have more importance, tree crops export subsidy policy is superior to tariff
reduction in manufacturing policy. The most similar study to this study belongs
to Coxhead and Jayasuriya (1995), but they only estimated
and analyzed the results of one of our 15 different situations, which confirmed
present results and didnt proceed to choose appropriate policies under different
policy weights or in a long-term planning. As far as writers know, no other
related study in soil erosion literature has accomplished to knowledge up to
Trade taxes such as import tariff and export tax are important fiscal
policy instruments. Also, they are important components of Structural
Adjustment Programs (SAPs) that are established to reduce allocative inefficiency.
While there are common fears about the negative relationship between SAPs
and environment quality, results of this study show trade liberalization
policies such as import tariff reduction can establish in a long-term
macro-planning and improve the quality of environment, at least in case
of soil erosion.
As the weight of environmental and economic factors changed in this study,
one can think about changing the weight of any of economic factors. For
example, if PPI doesnt have any importance in policy making, it can be
eliminated and if government wants to give more attention to consumer
prices than producer prices, policy maker can set the weight of CPI more
than that of PPI in ranking.
All over the above conclusions the reader mustnt forget the importance
of economic and political costs of implementing a policy, which can play
a key role in accepting a policy by government. Thus, all the policy recommendations
in this study are severely dependent on the pressure of policies on treasury
and political problems of implementing the policies. Since evaluating
this kind of costs and problems is dependent on extent of policy implementation
and some geographical and economic parameters of subject region, this
study was unable to do it, while it seems to be necessary doing these
evaluations before implementing such policies.
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