In the rudimentary policy analyses featured in introductory economics textbooks, problems are portrayed as arising in an isolated fashion and remediable by a single action on the government’s part. Under these circumstances, policy reform is a fairly straightforward exercise. Provided that, for the most part, markets function well, there is little doubt that deregulating a price here or taxing pollution there makes good sense.
If the simple problems emphasized in textbooks occur anywhere in the real world, they are the exception to the rule in the Dominican Republic, the second largest country in the Caribbean. In the name of food security, the national government long has pursued a policy of self-sufficiency in the production of rice, which is the staple food crop (Greene and Roe, 1992; Valdés et al., 1995). To keep imports out of the country, a 40 percent import tariff and other trade barriers have been applied, which has driven up internal market values. In 1994, domestic producers received RD$3.26/pound while the border price was RD$1.86/pound (JAD, 1994). Meanwhile, the average retail value was RD$4.24/pound and rice purchases accounted for 17 percent of total consumer food expenditures (JAD, 1994). Since low-income households spend a lot of their income on food and since rice is a very important part of that group’s diet, the poor have sacrificed much for the sake of self-sufficiency –and in the name of food security.
There are environmental consequences as well. Rice production requires large amounts of water, which is scarce in the Dominican Republic both because of climatic conditions and because the upper reaches of the country’s watersheds are largely deforested and heavily eroded (USAID, 1992; World Bank, 1994). Protected from foreign competition, domestic rice growers use too much water. At the same time, favorable treatment for rice production discourages the switch to other crops (e.g., tobacco, fruits, and vegetables) that are less water-intensive and in which the Dominican Republic holds a comparative advantage.
Another, and more important, cause of inefficient water resource development is irrigation subsidies. The prices paid by farmers amount to approximately 1 percent of the operating, maintenance, and amortized capital costs of delivering water to their fields (IICA, 1999). As a result, incentives to adopt on-farm conservation measures are negligible. At the same time, the Dominican Institute of Water Resources (INDHRI), which builds and operates irrigation projects, lacks money for maintenance. Between farm-level inefficiencies and the losses that occur in primary, secondary, and tertiary canals, only 20 percent of the water diverted to irrigation projects actually ends up contributing to agricultural production (World Bank, 1994).
To be sure, self-sufficiency in rice production and selling irrigation water far below cost have had pervasive economic impacts. By the same token, reforming these two policies is bound to affect virtually every Dominican household. For the poor, who spend a large share of their meager earnings on rice, the benefits of price declines resulting from freer trade are especially important. But lower prices also diminish the incomes of rice producers, who comprise an important segment of the farm population. Farmers also bear much of the burden of decreased irrigation subsidies, although consumers are affected as well inasmuch as food prices are driven up because of higher production costs.
Clearly, a partial equilibrium framework does not suffice for analyzing the economy-wide impacts that result when market forces are given freer rein. In this study, a computable general equilibrium (CGE) model is used to assess the consequences of reducing irrigation subsidies and eliminating the tariff on rice imports. The model’s structure allows for examination of the varied effects of price changes on upper-, middle-, and lower-income groups in urban as well as rural areas. Likewise, the CGE model’s design allows for analysis of the reallocation of water resources in the agricultural economy resulting from more efficient pricing of water and rice.