Comparative advantage and policy incentives for wheat production in Ecuador

Abstract

During the last decade wheat production in Ecuador has decreased sharply at the same time that consumption has been increasing rapidly. As a result wheat imports have grown at 12 percent annually from 1970 to 1982 and Ecuador now imports over 90 percent of the wheat consumed. Wheat is now the most important staple food in Ecuador. These trends raise three questions; a) why has wheat production in Ecuador fallen and imports increased so rapidly, b) is it an efficient use of its resources for Ecuador to produce wheat locally, and c) if it is efficient to produce wheat, what combination of policy incentives and technological change are needed to promote domestic wheat production. The broad objectives of this study were to analyze these questions with particular attention to the effects of government policies on wheat production and the implications for INIAP's (the National Agricultural Research Institute) program of wheat research. The framework of comparative advantage and policy incentives was used as the basis of the analysis. Comparative advantage was measured by calculating the profitability to the nation, treasured by the contribution of wheat and carpeting enterprises to national income. Locally produced wheat was valued at the equivalent price of imported wheat while imported inputs were also valued at their import cost with appropriate adjustments for internal transport and marketing margins. Labor and capital were valued at their returns in alternative uses within Ecuador. By conducting similar calculations for competing crop and livestock enterprises, the returns to the nation of land used in wheat were compared with alternative uses of that land. Economic returns calculated by this method often differ substantially from farmers returns because of the effects of policy interventions. Government policies which set the price of wheat or subsidize inputs lead to differences between the import equivalent price and the price the farmer receives or pays. Similarly interest rates paid by farmers may be quite different from the opportunity cost of capital. In fact the difference between famers' profitability and national profitability is a measure of the total effect of policy - that is, whether policy is providing incentives or disincentives for wheat production.