The Changing Public Role in a Rice Economy Approaching Self-Sufficiency: The Case of Bangladesh

Bangladesh, which has been a country of chronic food deficits, now appears to be nearing self-sufficiency in rice. Production of rice, the major food staple of the country, grew at a rate of 2.7 percent in the 1980s, while population grew at a rate of 2.0 percent. The gap between production and the foodgrain requirements of the population is clearly narrowing, although the need to import wheat will continue for the rest of this decade (Figure 1).

The sustained and increasingly stable growth of rice production during the 1970s and 1980s is closely related to the introduction of high-yielding varieties, mainly the winter boro rice crop, which rose from 21 percent of total rice production in 1972/73 to 35 percent in 1989/90. The two main rice crops, aman and boro, tend to have contrary patterns of production increase and decrease within a given year. Now that boro rice has a larger share in total production, this intrayear compensation affords a more regular flow of production and a changed pattern of seasonality characterized by smoother price fluctuations (Figures 2 and 3).

Effects of Production Growth

The growth of production was accompanied by an increasing reliance on the market process. Various reforms in the foodgrain sector removed numerous controls and actively promoted the development of markets. In some cases, attempts to both liberalize and privatize markets were made. For example, domestic and international trade of foodgrains and of agricultural inputs such as fertilizers and irrigation equipment were largely opened to the private sector. The process of liberalization was accompanied by a remarkable growth in rice production. At the same time, numerous food subsidies were eliminated. Ration prices of rice increased from 71 to 88 percent of market prices during the 1970s and 1980s, while the increase for wheat ration prices was from 85 to 93 percent of market prices.

During this period, the growth of rice production and market development was characterized by relatively stable foodgrain prices. Both interyear and intrayear price variability decreased substantially. The decline in variability of domestic prices was partly paralleled by a decline in variability of border prices and international prices. The year-to-year variability of domestic prices declined much more than that of international prices. However, this does not imply a complete isolation of international prices from domestic prices. Both domestic prices and border prices of rice and wheat were found to be co-integrated, implying a long-term relation between the two series.

During the same period, the incidence of poverty and malnutrition decreased. According to the Bangladesh Bureau of Statistics, the percentage of people whose diet was less than 80 percent of required calories declined from about 50 percent in 1981/82 to about 30 percent in 1988/89. Among the many factors that explain the poverty decline, prices and income are the most important ones. Moreover, rice price is one of the most important prices that affect the well-being of the poor, as rice contributes more than 70 percent of the calorie intake of the poorest half of the population. As a consequence of higher yield in rice production, harvest prices of rice declined at a rate of 1.5 percent, with beneficial effects in reducing poverty.

Commercialization of the foodgrain sector grew tremendously in this period, from about 15 percent of total production in 1972 to about 50 percent in 1990. At the same time, public distribution of foodgrains decreased from about 78 percent of total marketed supply in the 1970s to about 36 percent in the 1980s. And the country is now in a better position to finance the import of foodgrains. While the value of foodgrain imports represented about 54 percent of total foreign receipts in the 1970s, it declined to 22 percent in the 1980s, implying a reduced dependency on food aid.

Role of the Public Foodgrain System

Many of the reasons given in the past for the existence of the public foodgrain system now seem less urgent. Past interventionist policy seems to have given way to a more proactive role for the government in promoting market development. The changing environment characterized by sustained rice production and market liberalization calls for a redefinition of the role of the public foodgrain system in the decade of the 1990s.

To accomplish this redefinition, it is necessary to understand several aspects of foodgrain markets in Bangladesh. Distrust of grain merchants has been well entrenched in both the general population and the public administration for a long time. Until recently, this was the rationale for several interventionist policies such as the antihoarding laws. The activity in rice markets clearly communicates signals of future scarcity. Private storage decisions have proven fairly efficient in using expectations about future prices to move commodities over time in the attempt to maximize profits, thus smoothing consumption over lean seasons. Moreover, grain merchants have proved to be efficient processors of information, without destabilizing prices. Finally, the concern that markets may react in a very disordered way, generating excessive price variability once the government withdraws its stabilization policy, does not appear to be justified.

Domestic markets are fairly well integrated spatially. Only a negligible number of segmented markets (those that are more than 250 kilometers apart and not interdependent) are found in a sample that includes weekly coarse rice prices for the 64 districts (zilas) of the country. In most of the remaining markets, prices have a long-term stationary relationship, even after common trends and seasonality are removed. An average of about 60 percent of the price adjustment of an economic shock is transmitted to integrated markets. This transmission takes about 2.6 weeks. Road infrastructure is a major structural determinant of market integration. The effects of price stabilization policy on market integration are more complex. While stabilization policy has reinforced comovement of prices at markets located in different districts, it has slowed down the dynamic process of price transmission.

Notwithstanding the encouraging developments in markets and production, many problems remain. Poverty is widespread in the country, with too many people still lacking assured access to adequate food, even though the country is moving toward self-sufficiency in rice. The official estimate of people in extreme poverty was about 30 million in 1988/89. The government can assist these people through a set of well-targeted distribution programs such as subsidies, transfers, and employment schemes. However, subsidies under the rationing scheme have increasingly come under attack in recent years because of the large leakages to nonbeneficiaries. Direct, self-targeting transfers to the poor, such as food-for-work programs and vulnerable-group feeding programs, have been considered more appropriate than broad programs such as food subsidies and price stabilization.

Policy Implications

In the past, price stabilization was viewed as a desirable goal of food policy in Bangladesh. Programs to support prices through domestic procurement during the harvest months and programs to put a downward pressure on prices during the lean season have both had a negligible effect on prices. The effect of price stabilization on the economic welfare of producers and consumers would be limited. The total benefit of complete price stabilization to producers as a percentage of initial income would be less than 2 percent. Price stabilization would also have a negligible effect on poverty. Stabilization of rice prices does not reduce either the number of poor or the average gap between their calorie intake and requirements. Only the distribution of poverty could be affected, eliminating the extreme deviations below the poverty level. The implementation of efficient price stabilization, however, is complex, and its cost may well outweigh the limited benefits. Finally, even though the contribution of policy to the decline in price variability has been important--about 40 percent of the total reduction--the remaining 60 percent has been the result of various other factors, such as technological change leading to a more balanced intrayear rice crop production and development of efficient markets, in which the useful function of private storage to moderate price fluctuations has played an important part.

Based on a simulation model used to examine the prospects for continuous growth in rice yields, there is a moderate prospect of a rice surplus in year 2000. On average, only 157,000 metric tons of rice surplus would result if current prices prevail. The benefit to the poor, however, would be an important increase of about 10 percent in foodgrain consumption per capita. If prices were allowed to adjust, only a negligible price decline would result. That is also the case in a more favorable scenario of high growth of rice yields. Domestic demand would be capable of absorbing the increased rice surplus without an appreciable decline in price. An analysis of the proposal to support rice prices through procurement of domestic production shows that even massive increases of domestic procurement would result in very small price increases, while at the same time causing serious storage-capacity and budgetary problems for the government.

The prospects for exporting rice are more interesting. Even though rice traded internationally is only a small share of world production, and international prices are very volatile, the major exporters have been able to improve their share of world exports. In the 1980s, Bangladesh showed a growth in rice production that was superior even to the top five world exporters, and high qualities of Bangladeshi rice have a comparative advantage over various comparable varieties of rice produced domestically and internationally. In the case of swap arrangements whereby high-quality rice is traded in exchange for wheat in international markets, the export of moderate quantities of high-quality rice could have a positive effect on total foodgrain consumption, without compromising the food security of the poor.