Optimal Trade Policy for a Country With Market Power: The Case of Brazil's Coffee

Hickmann, Ernani

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Description

Title

Optimal Trade Policy for a Country With Market Power: The Case of Brazil's Coffee

Author(s)

Hickmann, Ernani

Issue Date

1980

Department of Study

Economics

Discipline

Economics

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(s)

Economics, Commerce-Business

Language

eng

Abstract

• This study has two major objectives. The first is to identify the major characteristic of the world coffee economy. The second objective is to build a dynamic normative model for the Brazilian coffee policy.
• A brief outline of the existing literature on the economics of coffee is first given. Samples of studies concerned with Brazilian interests and with price stabilization are discussed and some econometric results are summarized.
• The main facts of the coffee economy are extracted from an historical analysis of 1948-1978 period. The change in the approach of Brazilian policy, which is interpreted as evolving towards an increasing degree of collusion with other producing countries, provides the criterion for the division of the period in six sub-periods. An interval of time with a low level of intervention is followed by a solitary price support attempt on the part of Brazilian authorities in 1953-54. During the second half of the fifties Colombia joined Brazil in its effort of exercising market power. Toward the end of the decade other producing countries joined the two largest producers, while in the beginning of the sixties the major consuming countries joined the producers to form the International Coffee Agreement and established an export quota system. Brazilian coffee policy underwent a major change under the leadership of Antonio Delfim Netto, the Minister of Finance from 1967 to 1974, whose strategy seems to have been to force the other producers to share the burden of supporting prices. The "Big Frost" in Brazilian coffee producing regions in 1975, when world stocks were at a low level, initiated a new stage in the coffee economy, with a substantial increase in the exports revenues of all coffee producing countries in response to the decrease in Brazil's exports, production, and stocks.
• The major "stylized facts" that emerge from the analysis of the evolution of the coffee economy are: seasonality of production; a lag in the response of supply to decisions of production; partial irreversibility of the decisions of production; climate in Brazil as the major source of uncertainty; an export product; the market power of Brazil; inelastic demand and a secularly increasing trend in the production of some of Brazil's competitors.
• Some of the stylized facts are included into the structure of a dynamic deterministic normative model for the Brazilian coffee policy, in which the objective function is the maximization of the present value of future export revenues minus cost of production. Time is treated as a discrete variable for purposes of realism of the model but this precludes the analytical solution for realistic values for the parameters related to duration of the maturation period and the time of life of the coffee trees, because of the high degree of the difference equations involved. The effect of the existence of a lag in production is approached through the simplifying assumptions of a one period maturation time and two periods life time. The result is an unstable solution for any values for the other relevant parameters. The extension of the life time of the trees to three years to determine the effects of irreversibility is tries, yielding indeterminate analytical characterizations of the time paths of the variables. A wide range of numerical values for the relevant parameters was simulated, all rendering the model unstable.

Graduation Semester

1980

Type of Resource

text

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