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WESIS

, _LlBRARY
106,,\ Michigan lgnate
Unrversrty

 

This is to certify that the
thesis entitled

THE IMPACT OF THE COMMON EXTERNAL TARIFF (GET)
ON JAMAICA’S BEEF SECTOR

presented by

Eric B Bailey

has been accepted towards fulfillment
of the requirements for the

MS degree in Agricultural, Food and
Resource Economics

 

 

 

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7. “Hm“..E _ V...

THE IMPACT OF THE COMMON EXTERNAL TARIFF ON JAMAICA’S BEEF
SECTOR

BY

Eric Burham Bailey

A THESIS

Submitted to
Michigan State University
In partial fulfillment of the requirements
For the degree of

MASTER OF SCIENCE
Agricultural, Food, and Resource Economics

2008

 

ABSTRACT

THE IMPACT OF THE COMMON EXTERNAL TARIFF ON JAMAICA’S BEEF
SECTOR

By

Eric B. Bailey

In the context of liberalization of international trade, the governments of
CARICOM countries implemented a policy of a phased reduction of the Common
External Tariff (CET) in 1991. This policy has been blamed for causing a
contraction in the domestic beef sector in Jamaica. This thesis investigates the
trade dynamics of the Jamaican beef sector with respect to the world market.
The prime focus was to determine what impact, if any, the phased reduction of
the GET had on meat import demand and the output of the Jamaican beef sector.
It also sought to identify the most effective policy alternatives to increase the
competitiveness of the local beef industry.

Using time series data from 1979 to 2005, demand and supply equations
were estimated using Seemingly Unrelated Regression to test for structural
changes through the use of dummy variables. The analysis revealed that there
is substitutability between imported meats and domestic beef, and a statistical
significance of the policy change for imported meat. Furthermore, the short term
supply response of domestic beef with respect to its own price was inelastic and
became more inelastic after the policy change. A welfare analysis conducted on
an alternative tariff regime (assuming a 30% increase in tariff), showed a net loss

in social welfare.

 

 

Dedication

 

This thesis is dedicated to my late father Charles Clinton. The path he has
charted before provides a clear guide to finding life’s true value.

And to my dear mother Georgiana, who embodies the warrior spirit of Nanny of
the Maroons simultaneously with the prayerfulness of Hanna.

iii

Acknowledgment

“No duty is more urgent than giving thanks ”
James Allen

Completing this thesis represents the culmination of two years of intense
work. Throughout this time, I have been the recipient of much goodwill and
support, for which I now pause to acknowledge.

I express heartfelt thanks to my committee members for their advice and
guidance throughout this research process. Special thanks to my guidance
committee chairman, Dr. Dave Weatherspoon, for his wise counsel and support
over the years. I also thank the faculty members in the department, and my
peers for the collegial atmosphere which were shared. Throughout my graduate
program, I received a graduate assistantship from the Land Policy Institute (LPI).
Special thanks are extended to Dr. Adesoji Adelaja for his mentorship and
support during my masters program, and to the entire staff at LPI for the open
friendly and supportive environment I was privileged to have been a part of.

In accessing data for this thesis, it was necessary to interface with several
public and private institutions in the Caribbean. I am grateful to staff members
from the Bank of Jamaica CARICOM Secretariat, Ministry of Agriculture’s Data
Bank, Ministry of Foreign Affairs and Foreign Trade, Statistical Institute of
Jamaica (STATIN), Planning Institute of Jamaica (PIOJ), and the Jamaica
Livestock Association (JLA). It would have been impossible to have conducted

this analysis without their collective support.

iv

I must also extend gratitude to my family for their constant love and
prayerful support throughout the period. The sacrifices which you have made
have not gone unnoticed. Words alone are inadequate to express my
appreciation to you all.

Pursuing an academic degree ought not to be an end to itself, but a
means through which one fulfill a larger purpose in life. I want to put on record
my thanks to God Almighty, for allowing me to travel along this path, and for
permitting me success. I humbly lay this achievement upon God’s alter and ask

for his divine guidance in remaining true to his purpose.

Table of Contents

 

 

 

 

 

 

 

 

 

List of Tables -- viii
List of Figures ix
Abbreviations X
Chapter 1 1
1.0 Introduction ........................................................................................................................... 1
1.1 Knowledge Gap and Uniqueness of Study ........................................................................... 3
1.2 Research Objectives ............................................................................................................. 4
1.3 Outline of Thesis ................................................................................................................... 5
Chapter 2 ..... 5
2.0 Literature Review .................................................................................................................. 6
2.1 Policy Environment ............................................................................................................... 6
2.2 Review of Modeling Methods .............................................................................................. 19
2.3 Summary of Literature Review ............................................................................................ 31
Chapter 3 -- 33
3.0 Modeling and Data .............................................................................................................. 33
3.1 Analytical Framework for Demand models ......................................................................... 33
3.2 Analytical Framework for the Supply Model ........................................................................ 37
3.3 Approaches to Estimation ................................................................................................... 40
3.4 Data Considerations ............................................................................................................ 41
3.5 Chapter Summary ............................................................................................................... 43
Chapter 4 - 44
4.0 Presentation of findings ....................................................................................................... 44
4.1 Import Demand Model ......................................................................................................... 44
4.2 Seemingly Unrelated Regression Demand and Supply Model ........................................... 45
4.3 Why is Domestic Beef an Inferior Good? ............................................................................ 48
4.4 Scenario Analysis of Alternative Trade Regimes ................................................................ 51
4.5 Welfare Analysis ................................................................................................................. 54
4.6 Chapter Summary ............................................................................................................... 57
Chapter 5 - ....... 58
5.0 Policy Implications ............................................................................................................... 58
5.1 Possible Course of Action for Domestic Beef Sector .......................................................... 58
5.2 Prognosis for the Future ...................................................................................................... 62
5.3 Conclusion ........................................................................................................................... 62
5.4 Possible Future Research ................................................................................................... 64
Appendices 65
Appendix I Trends in Tariff Levels ........................................................................................ 66
Appendix II Optimization Problems ......................................................................................... 67

vi

Bibliography
Bibliography

 

 

vii

73

74

List of Tables

Table Number Title Page Number
Table 1 Exchange rate with US dollar .................................. 8
Table 2 Summary of the cattle sector in 2005 ........................ 15
Table 3 Data sources for the study ..................................... 40
Table 4 Results for the import demand model ........................ 43
Table 5 Results for Seemingly Unrelated

Regression ......................................................... 44
Table 6 Supply response with a 30% tariff

increase ............................................................. 51
Table 7 Supply response with a 60% tariff

increase ............................................................. 51
Table 8 Anticipated changes in beef supply

for scenarios one and two ...................................... 51
Table 9 Average tariff rate applied to selected

Jamaican imports ................................................. 63

viii

Figure

Figure 1

Figure 2

Figure 3

List of Figures

Title Page Number

Level of meat imports and domestic
beef production ................................................... 27

Price trends for imported meats, domestic
beef and domestic chicken .................................... 28

Welfare distribution with a 30%
tariff increase ...................................................... 54

ix

Abbreviations

Bank of Jamaica

Caribbean Community

Caribbean Free Trade Association
Caribbean Single Market and Economy
Caribbean Single Market

Common External Tariff

Consumer Price Index

European Union

General Consumption Tax

General Agreement on Tariffs and Trade
Gross Domestic Product

Imperfect Substitute Model
International Monetary Fund

Jamaica Agricultural Society

Jamaica Commodity Trading Company
Jamaica Livestock Association

Micro and Small Enterprises

National Training Agency

Net International Reserves

BOJ
CARICOM
Carifta
CSME
CSM
CET
CPI
EU
GCT
GATT
GDP
ISM
IMF
JAS
JCTC
JLA
MSEs
NTA

NIR

Ordinary Least Squares

Perfect Substitute Model

Planning Institute of Jamaica

Private Sector Development Program
Rural Agricultural Development Authority
Scientific Research Council

Seemingly Unrelated Regression
Statistical Institute of Jamaica

United Nations

World Trade Organization

xi

OLS

PSM

PIOJ

PSDP

RADA

SRC

SUR

STATIN

UN

WTO

Chapter 1

1.0 Introduction

The headline in Jamaica’s leading daily newspaper, on the 17th of
November 1998, read: “Clarke backs call to boycott imported beef." The article
reported on a speech by Jamaica’s Minister of Agriculture to the beef farmers, in
which he announced an increase in tariff rates on imported beef. This speech
was made in the context of dissatisfaction among beef farmers, with the trade
policy of increased market liberalization which has been pursued by the
government of Jamaica since 1991. More recently, the president of the Jamaica
Agricultural Society, while speaking at the Barbados Agricultural Show, called for
a ban on meat imports to the Caribbean region (Gleaner, 2007). The sentiments
presented above, is reflective of a general belief among leaders of the livestock
sector that the prevailing trade policy has impacted negatively on the Jamaica
livestock sector.

The beef industry was established in Jamaica during the early years of the
20th Century, and has a tradition of contributing to wealth and employment
creation in rural communities throughout the Island. Today, the most powerful
beef organization, Jamaica Livestock Association (JLA), has vocalized its
concern for the long-term viability of the sector, due to a perceived loss in price
competitiveness over the last 10 t015 years. This lack of competitiveness has

been attributed to the policy of a phased reduction of the common external tariff

(CET) on meat products entering the CARICOM1 region, which was implemented
over the period from 1991 to 1998.

The value of investment in the beef sector in 2004 was US$117 million
(JA$7.5 billion), and its direct contribution as a single sub—sector of the livestock
industry was US$53 million (JA$3.4 billion) (Duffus and Jennings, 2005). The
industry currently provides direct employment to 12,680 individuals, representing
approximately 6.6 percent of the employment opportunities in the agricultural
sector (Duffus and Jennings, 2005). Since the early 19908, contraction in the
domestic beef sector has resulted in a loss of over 13,870 jobs (Duffus and
Jennings, 2005). In the context of a pre-existing high unemployment rate, this
erosion of income compounds the economic and social problems of Jamaica,
while retarding the prospects for the economic prosperity of rural communities.

Parallel to this contraction occurring in the domestic beef sector, the JLA
recognizes potential growth opportunities. The creation of the Caribbean Single
Market and Economy (CSME) is expected to expand regional market access for
local producers. In addition, the projected growth of the local and regional
tourism sectors is expected to generate increased demand for beef (current hotel
demand is currently being met through imports). Global demand for beef is also

expected to increase from 209 million tons in 1997 to 327 million tons by 2020

 

' A regional intergovernmental body formed in 1973 to promote and facilitate greater regional
economic, cultural and political integration among member countries. The members include
Antigua and Barbuda, Barbados, Belize, Dominica, Guyana, Haiti, Jamaica, Montserrat, Saint
Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Suriname, and Trinidad and
Tobago

(Haan et al., 2001). Most of this demand is expected to be supplied from
developing countries.

A 2005 report commissioned by the JLA revealed that domestic demand
and price was high, while the ability of the sector to respond to demand was
weak. This was attributable to the reduction in the size of the industry over the
last 12 to 15 years. Since the local sector lacks the capacity to adequately meet
local demand, it is highly unlikely that the industry will be able to respond to
anticipated regional and global demands without significant policy initiatives that
focus on rebuilding the base of the beef sector.

For the last two years (since 2005), the domestic beef sectors have been
consulting with its members and stakeholders, with a view to repositioning the
sector to benefit from emerging and projected market opportunities. However, in
order to design and implement effective policy, it is essential that the factors
which led to the contraction of the sector over the last fifteen years be fully
understood. It is in that context that this study investigates the impact of the

phased lowering of the CET on the beef industry in Jamaica.

1.1 Knowledge Gap and Uniqueness of Study

No systematic study has been conducted that assesses the real impact of
the new tariff regime on the beef sector. The 2005 JLA report provides a
comprehensive overview of the demographic status of the sector, the levels of
output produced, and the efficiency of resource use. Its conclusion on the impact
of the new tariff regime on local demand was based more on observation and

feedback from stakeholders, rather than any rigorous statistical analysis. The

report did not consider other factors which could have implications for efficiency
and competitiveness of the beef sector was not fully addressed.

It is important to determine what impact, if any, the lowered CET might
have had, as well as the magnitude of that impact. It is equally important to
determine the impact of any other policy or existing economic condition which
could have impacted on the demand and supply relationship of beef in the
domestic market. This research will establish how trade liberalization since 1991,
as well as how other macro economic variables, may have affected the
competitiveness of Jamaican beef producers. This study will help inform national
and regional trade policies, and form the basis for further research. This study is
therefore uniquely placed to contribute to the ongoing dialogue on the strategic

direction of the beef industry in Jamaica.

1.2 Research Objectives

The objectives of this research are to:

1. Determine how the 1991 CET regime implemented by CARICOM has
affected the demand for imported meats and the demand and supply of
domestic beef.

2. Conduct scenario analysis of two alternative tariff regimes on domestic
beef demand and supply, and

3. Conduct a welfare analysis of a potential tariff increase.

1.3 Outline of Thesis

This thesis is organized in the following manner. Section two provides the
literature review which includes an overview of the macro economic and trade
environment in Jamaica, an overview of the Jamaican beef sector, and a review
of econometric methods used in estimating import demand, domestic demand
and supply functions. Section three outlines the conceptual framework guiding
the analysis as well as modeling and data transformation procedures which have
been adapted to the research question. In section four the results of the
econometric analysis are presented and interpreted. In addition, scenario
analysis and welfare analysis are conducted. Section five presents a discussion
on the policy implications of the results and the future prognosis of the beef

sector under varying policy regimes.

Chapter 2

2.0 Literature Review

In this chapter, the policy environment prevailing in Jamaica (the macro
economic environment and the international trade policy environment), the
Jamaican beef sector, and previous studies conducted on the beef sector are
discussed. It also presents a review of econometric modeling procedures which
were used to estimate import demand as well as domestic demand and supply

equafions.

2.1 Policy Environment

2.11 Macro Economic Environment

The macro economic policies of Jamaica were set within “The Medium
Term Socio-Economic Framework” designed to govern the direction of the
country from 2004 to 2008 (PIOJ, 2007). The outlook of the policy was to create
an enabling environment, to foster private sector led economic growth. This was
intended to be achieved by maintaining macro-economic stability, developing
physical infrastructure, and implementing of sector specific initiatives to improve
global competitiveness.
Between 1999 and 2006 Jamaica’s economy experienced a relatively steady,
but slow growth of 1.32 percent per year (PIOJ, 2007). During the same period,

the Bank of Jamaica (BOJ), through use of monetary policies was able to reduce

inflation2 to an average of 10.25 percent per year. Containment of the inflation
rate and stabilizing of the exchange rate were seen by the government as
necessary conditions for inspiring confidence in the local economy. The
government’s short term macro economic objectives for 2005 were as follows
(PIOJ, 2007)

1. Achieve real GDP growth of 3 to 4 percent per year;

2. Maintain the inflation rate at single digit levels;

3. Reduce the fiscal deficit to 2.5 percent of GDP;

4. Accumulate Net lntemational Reserves (NIR) of US $2,118.6 million; and

5. Achieve a debt/GDP ratio of 118.5 percent, down from 131.5 percent in

2005.

Gross Domestic Product grew by 2.5 percent in 2005 (PIOJ, 2006). The
sectors responsible for this growth were agriculture, mining and quarrying, and
the service sector (mainly the restaurant and hotel sectors). During 2005, the
inflation rate was contained to 5.8% (the lowest in over ten years). The lowering
of the benchmark (30-day and 180 day instruments) interest rate also enabled a
lowering of commercial lending rate from 23.45 percent to 22 percent. There
was also a 0.9% reduction in the unemployment rate and the exchange rate
remained relatively stable with other major currencies. Table 1 shows the
exchange rate in relation to the US dollar for the period 1979 to 2005. There was

however a deterioration in the fiscal deficit from US$137 million (JA $8.5 billion)

 

2 In 1995-1997 the country experienced a instability in a number of commercial banks and
insurance companies. This resulted in a hyper inflationary condition during that time. The
government through the BOJ provided significant capital injection and strengthened banking
regulations in an effort to respite stability to the banking sector.

in financial year 2004 to US$601.5 million (JA $37.9 billion) in financial year
2005. The current account deficit widened during 2006, from US$3.207.9 million
in 2005 to US$3.666.9 million in 2006. This worsening trade balance was

attributable mainly to the current inflationary trend of fuel price on the global

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

market.

Table 1 . Exchange Rate with the US Dollar

Year Jamaican dollar Year Jamaican dollar
equivalent to the equivalent to the
US dollar US dollar

1979 2 1993 25

1980 2 1994 33

1981 2 1995 35

1982 2 1996 37

1983 2 1997 36

1984 4 1998 37

1985 6 1999 39

1986 6 2000 43

1987 6 2001 46

1988 6 2002 49

1989 6 2003 58

1990 7 2004 62

1991 13 2005 63

1992 23 2006 66

 

 

 

 

 

 

A new ruling by the World Trade Organization (WT O), in relation to
banana and sugar trade with the European Union (EU), adversely affected the
competitive position of these sectors vis a vis competing products from Central
and South America. In January 2006, the Caribbean Single Market (CSM) was
formally launched with 12 member countries of CARICOM. The total value of
exports grew by approximately US$452.0 million in 2005.

Currently the macro economic environment is stable. The government

has been successful in containing inflation, lowering interest rates, attaining

(I)

stability in the exchange rate and restoring some confidence in the local
economy. However, while the rate of economic growth has been consistent in
recent years, it has not been robust enough to raise the standard of living for the
average citizen. The challenge therefore exists to develop policies and programs

which will jump start the economy on a more progressive path.

2.12 International Trade Policies Affecting Beef

Jamaica’s international trade policy has been influenced by two main factors;

1. The economic policies during the decade immediately following political
independence in 1962.

2. A move towards market liberalization over the last 15 years, through the
General Agreement on Tariffs and TradeNVorld Trade Organization
(GA'I‘I'NVTO) and other multilateral institutions.

The foundation for Jamaica’s. trade policy was framed in the economic
thought of the import substitution industrialization which was promulgated by the
Prebish - Singer3 hypothesis of the 19505. Jamaica employed a mix of
protectionist and liberal policies in a bid to contain its trade deficit and protect
sensitive sectors, while meeting shifting political and economic commitments.
The major considerations then were the need to increase income and
employment and the preservation of rural economies (Lightbourne, 1969). The
policies implemented during that period were geared towards the following

objectives:

 

3 The Prebish-Singer hypothesis (1950) argued that there was a persistent declining term of
trade for commodities from developing countries, and predicted that this trend would continue into
the future. They suggested that developing countries should implement protective tariff barriers
in order to facilitate the development of new domestic manufacturing industries.

1. Protect traditional markets for primary products by stabilizing their prices

through commodity agreements at a bilateral or multilateral level;

2. Reduce dependence on imports by applying trade restrictions, and

simultaneously developing an indigenous manufacturing sector;

3. Increase the manufacturing base by promoting exports of manufactured

goods;

4. Diversify the agricultural sector for both local and export markets;

5. Rapidly expanding the tourism sector in order to generate employment;

and

6. Maximize returns from the mining industry by processing bauxite to

alumina, rather than only exporting bauxite ore.

This general policy direction is credited with reducing the rate of import
growth of consumer goods from 47.4 percent in 1965 to 41.5 percent in 1968.
Quantitative restrictions on imports (final goods) were predominantly used as a
means of fostering growth in import substitution while industrial inputs were
allowed to be imported without duty (Hudson, 2003).

Jamaica’s first steps towards more liberalized trade began in 1968, when
membership was gained in the Caribbean Free Trade Association4 (CARIFTA).
Within this framework, all quotas and licensing requirements5 were lifted. This
policy remained in place for a limited time period due mainly to member states

not conforming to the rules. The institutional arrangement in CARIFTA was

 

‘ CARIFTA can be considered the fore runner of CARICOM. The members include Antigua,
Barbados, Belize, Dominica, Grenada, Montserrat, St.Kitts-Nevis-Anguilla, St Lucia, St. Vincent,
and Trinidad and Tobago.

5 A reserve list of products were exempted from this policy, but allowed for a gradual removal of
protection.

10

strengthened and resulted in the formation of CARICOM and the implementation
of a common external tariff6 in 1973. The prevailing macro economic
environment in the mid 19705 resulted in a sharp devaluation of the Jamaican
currency. This prompted the government to introduce stringent import controls in
order to coordinate foreign exchange inflows with Import payments (Hudson,
2003). A special agency, the Jamaica Commodity Trading Company (JCTC),
was established to implement the import policies towards the end of the 19705
and early 19805.

Jamaica’s trade policy orientation gradually transitioned to a liberalized
mode in the 19805 in the context of the World Bank and International Monetary
fund (IMF) led structural adjustment programs. This shift, like many others in the
developing world was not done voluntarily, but attached to IMF and World Bank
conditionalities (United Nations 1999). This involved a commitment from the
government, to not introduce new tariff restrictions and to reduce existing
restrictions over a five year period (1982-1987), while simultaneously converting
some quotas to tariffs. Jamaica’s momentum towards greater trade liberalization
continued in 1990, through the commitments made by CARICOM countries to
reduce the CET as well as through the country’s increasing integration into the
world trading system as a member of the World Trade Organization (WT O).

The revised CET provided for a phased reduction from an average of 80
percent in 1992 to its highest binding rate of 20 percent in 1998 (Hudson 2003).

Imported goods were classified as competing and non-competing as well as

 

" Trade in goods within CARICOM countries attracted no tariff. Goods from third countries
attracted a uniform tariff structure and or quantitative restriction.

11

input, intermediate and final goods. This classification formed a continuum
where non competing inputs had the lowest tariffs and competing final goods had
the highest tariffs (United Nations 1999). A commodity is classified as
“competing" if its production in any CARICOM territory accounts for less than 75
percent of regional consumption. Within CET rules, a country may be allowed to
protect this competing industry by applying a higher tariff rate than the
established CET.

The 19905, therefore, represented the period of greatest trade liberalization,

as the country attained compliance with its tariff obligations under the CET (see
appendix l for tariff schedule). In spite of increased liberalization in recent years,
some levels of protection have been retained. These take the form of an
additional stamp duty, special consumption tax, an import cess, and an
environmental levy (which raises the level of import taxes on some goods to as
high as 90 percent). In addition, there were upward movements in tariff on
specific imports (e.g. chicken parts, beef and some fruits and vegetables), in an
effort to protect domestic industries from global competition as well as diseases
(e - 9. bovine spongiform encephalopathy).

Jamaica has fulfilled all major commitments for tariff reductions at the
multilateral and bilateral levels. However, the process of market liberalization is
or‘Igoing. There are real prospects for further market liberalization through the
establishment of the Caribbean Single Market and Economy (CSME), the-

implementation of the Free Trade Area of the Americas (FTAA), and the

12

establishment of the European Union Economic Partnership Agreement
(EUEPA)

Specifically related to the meat industry, tariff rates have been traditionally
high. Prior to 1990 the average effective tax rate applied to meats was 186
percent (STATIN, 2007). The policy toward greater market liberalization saw a
phased reduction of this level of tariff from 140 percent in 1991, to 100 percent in
1994 and to 38 percent in 1997 (STATIN, 2007). While the average tariff rate
has remained constant since then, there were tariff changes for some categories
of meat products. For example in October 1999, an additional stamp duty was

applied to mince, boneless beef trimmings and fresh briskets.

2.13 Review of the Beef Sector

Beef production in Jamaica has had a prestigious tradition. The modern
era of cattle production began in the 19405 with pioneering research and
development work by cattle breeders at the Boodles Agricultural Research
Station (and later at private farms). This led to the development of indigenous
breeds7 of cattle, with desirable traits, which were adapted to the tropical
conditions.

Another important factor leading to the development of the local beef
sector was the establishment of the Jamaica Livestock Association in 1942. Its
main purpose then was to provide formal representation of the livestock industry
to the colonial government and to provide technical support to independent

farmers in order to develop the industry. Within this framework, breeder societies

 

7 From R&D work the Jamaica Hope (dairy breed), Jamaica Red, Jamaica Black and Jamaica
Brahamin breeds of cattle were established.

13

for all major beef breeds were established. Those societies worked closely with
the JLA and the Ministry of Agriculture to maintain a registry of all cattle and to
conduct annual appraisals of all registered beef herds in the country. This led
overtime to the continuous improvement of the breeds to conform consistently to
specific phenotype and performance traits. Overtime Jamaica has developed a
reputation for providing genetic material to other countries.

Another significant event influencing the modern growth of the sector was
the advent of the bauxite and alumina sector in the early 19505. As part of the
mining regulations, bauxite mines are required to be restored either for
agricultural or residential purposes. As a consequence, significant tracts of
restored lands have been devoted to cattle production. In fact, the alumina
firms,8 in order to demonstrate their commitment to restoring the land to
productive use, established several large dairy and beef farms on previously
mined lands. These large farms often serve as “mother herds”9 to the network of
small farmers who may own few heads of cattle. These combined factors have
resulted in Jamaica having a rich history in the cattle industry with the
accompanying experience, technical expertise and land infrastructure to support
an industry capable of meeting local demands, as well as the emerging
CARICOM markets.

Table 2 shows the summary of findings of a 2005 cattle industry report

which was commissioned by the JLA. This report indicated that the beef sector in

 

a Most livestock farms owned by alumina companies have been divested to private operators.

9 A large cattle farm from which small farms source breeding stock, sire services, and other forms
of support. In some instances mother farms may have milk or beef purchase agreement contract
with small farms.

14

Table 2. Summary of the Cattle Sector in 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beef Dairy
Number of farmers 3,964 245
Distribution by size Small (0.85) Small (0.73)
Medium (0.13) Medium (0.15)
Lflle (0.02) Lag: (0.12)
Total pasture land (ha) 26, 800 7,225
Percentage in improved 49 89
_Lrasses
Number of employees 3,002 539
Estimated job losses (1990- 12,680 1,190
2005)
Cattle population 66,500 17,300
Percent pure bred cattle 14.4 85.5
Total breeding herd 34,615 10,690
Stocking rate (au/ha) 1.29 1.48
Installed mocessigg capacity 76,900 heads 80 M liters
Throughput 2004 52,379 heads 15.4 M liters
Value of output at current $728M $498M .
pnces
Gross returns on asset 9.7 21.7
employed (%)
Contribution to GDP $3.4 billion $1.6 billion

 

Main technical limitation

Pasture Management

Pasture Management

 

Main strategy for increasing

Upstream integration

Upstream integration

 

 

 

cattle sector

 

market share through central abattoir throgh JDF F
Perceived role of government (a) Reduced (a) Reduced
interest rate on interest rate
farm loans on farm loans
(b) Increased tariff (b) Research and
on imports Development
(c) Concession on
import duties,
and GCT, on
imports for

 

(Source) Adopted from The Current State of the Jamaican Cattle Sector Report.

15

 

Jamaica is comprised of 3,964 farmers, 2 percent of which are large commercial
size farms (greater than 99 heads), 13 percent are medium size farms (between
29-99 heads), and 85 percent are small farms.

Of the 26,800 hectares devoted to beef production, 49 percent have
improved pastures"). The population of beef herds is 66,500 (34,615 breeding
cows), of which 14.4 percent are pure bred cattle of the indigenous breeds
mentioned earlier. The status of pastures and prevailing climatic conditions allow
for an average stocking density of 1.29 animal units per hectare.

In spite of this illustrious history, Jamaica has never been fully self
sufficient in beef production. Figures 1 and 2 provides graphs of production and
price tends for domestic beef and imported meats 1979-2005.

Figure 1. Level of Meat Imports and Domestic Beef Production

70,000,000

 

   

60,000,000 E -
50,000,000 P _,,
40,000,000

30,000,000 - -, -

Quantity (Kgs)

20,000,000 —— -~ —— La--- ~- .. ~r ——— - z- -e M
I

‘1. 7 r.
-_ .- ’l I ‘l _ 1‘
. - . L s. . . , _.
51,. z. 7;: - . ‘- 71.2 “1., ._. u...’
10 000 000 e ., m--. - -2" 722-2 , e . a. we W L,“ \ . ..-__._... —~
I I g. _,i_a '—J I' I.._
3; ~ .. ~ _-. .
.. "?

 

 

 

‘° Improved pastures include lands which have been developed primarily for cattle grazing.
These lands are generally fenced, planted with high quality pasture grass, frequently fertilized
and irrigated.

16

Figure 2. Price Trends for Imported Meats, Domestic Beef and

Domestic Chicken

, +Supplyprice of

2.50 M, , W, ,, _ , z z z. z z. z i i i. , i WE ‘ domesticbeef
' US$/lb

200 M 7. i .7 77777 A W. 7 .7. .7 7 i 7 —M 4, Domesticpriceof 1

imported meat us

$llbs
Demand Price of
Domestic beef US
$/lbs ‘

- Demand Price of
domestic chicken in‘ ‘

US dollar per lb

 

q, x ’\ C) N to ’\ N 93 . .
9" .9" .33? .9“? .59 .59 .99 $9 .99 .99 3°? .15? .19 Q9“ +Pnoermported
meat US$/lbs
Year

Output from the sector reached its highest level of 29.6 million lbs in 1990.
At that time, domestic production accounted for 82.9 percent of consumption.
This fell to 56.6 percent by 2000. Over the last decade, per capita consumption
of beef increased by approximately 25 percent. This increase in consumption
was primarily driven by import demand rather than domestic consumption. On
the contrary, the number of animals slaughtered fell from 85,248 in 1993 to
52,379 in 2004.

Currently the beef sector has little vertical integration11 and is comprised
mainly of small farmers (Duffus and Jennings, 2005). During the last decade,
there has been a steady attrition rate of farmers and a systematic reduction of
herd size. The result is a situation where the demand for local beef is high, but
the capacity to meet that demand is low. This provides a window of opportunity

to formulate appropriate policies which could guide the revival of the industry in

 

1‘ There is one large feed lot operator, with contract growers and a heavily mechanized
processing operation.

order to benefit from this favorable condition, as well as position Jamaica’s beef

industry to compete in the global market.

2.14 Jamaican Beef Sector Research

The local beef sector in Jamaica has not been the subject of many

economic studies over the years. Research activities have been traditionally
devoted to the development of domestic breeds, developing improved pasture
management systems and other technical issues related to animal husbandry.
In the context of deteriorating market conditions affecting the domestic beef and
dairy industry, the Jamaica Livestock Association (JLA) commissioned a study of
the local cattle sector in May of 2005. The main purpose of this study was to
obtain qualitative and quantitative information on the demographics of the
industry and identify the key constraints facing the industry. This study was
completed in September of 2005 and the findings were presented to a broad
stakeholder group. The recommendations emanating from this study are being
incorporated into a strategic development plan which will guide policy formulation
and the long term direction of the sector.

The following were the important recommendations from this report.

1. Create a fiscal environment to provide a cushion against imports.

2. Ensure the sustained generation of cost-effective and appropriate
technology, for primary production as well as value added, by enabling
the R&D arm of the Ministry of Agriculture and the Scientific Research
Council (SRC).

18

3. Raise the competencies of farmers through the Rural Agricultural
Development Authority (RADA), Heart NTA”, and other educational
institutions.

4. Facilitate the availability of low cost capital with extended payment
periods.

5. Facilitate greater levels of cooperation among members of the beef
sector through the promotion of network collaboration.

6. Establish a centrally located abattoir and meat processing facility while
allowing beef farmers the option of investing in its capitalization.

The JLA commissioned study provided a good indication of the state of the

industry, and pointed towards important imperatives which need to be addressed

in the short and medium term in order to rebuild the beef sector.

2.2 Review of Modeling Methods

2.21 Single Equation Import Demand

Seminal work by Goldstein and Khan (1985) provides a comprehensive
summary of methods used in estimating trade equations, and forms the
reference point for much of the quantitative work which was subsequently carried
out in international trade. This article identified the two models used in
estimating trade functions as being (1) The Imperfect Substitute Model (ISM) and

(2) the Perfect Substitute Model (PSM).

 

‘2 The Heart NTA is the national training agency through which vocational training is provided.

19

The ISM assumes that imported goods are imperfect substitutes for
domestic goods. This can be readily seen by the disparity in prices for the
“same” product in different countries, as well as differences between domestic
and export prices of a given product within a country. The import demand model
in this framework for a given country (i) in relation to the rest of the world is
specified as follows;

lDi = fWi. Pli. Pi)

where,

ID, = quantity of imports by country i

Y, = the income of the importing country

P, = is the price of the imported commodity, and

PI, = is the price of the domestically produced substitutes.

The PSM is primarily used when the good in question is homogenous or
highly standardized across countries and is traded in an institutional framework
where price differentials between domestic and foreign goods do not exist. The

demand and supply relationship in this framework is specified as follows;

Di = (Pi. Yr)
Si = "(PL Fi)
I = Di-S;

Xi = Si-Di

Pi; = P; = PX: = e. Pw
where,

D, = is the total quantity of traded goods demanded in country i,

20

P, = is the price of the traded good,

Y, = is the money income in county I,

S; = is the supply of locally produced goods in country i,
I, = is the quantity of imports of traded goods, and

X, = is the quantity of export of the traded good.

In contrast to the ISM, there is no separate function for import demand
and export supply. There is only a function for total traded product. Demand for
import, or excess demand is represented by the difference between total demand
and supply. There is also one traded price with local price being equal to world
price.

The ISM is the more widely used method of the two, although the PSM
can provide important insights when appropriately used. Of prime interest in this
research is the impact of a trade policy change on the quantity of meat imports.
In this framework, the impact of the price of domestic beef and chicken on
imported meat demand will necessarily be taken into consideration. It could be
argued that imported meats serve a similar nutritional function as domestic beef
and chicken, and as such could be substitutes. However, given the different
characteristics of these products, and price differentials across markets, they
satisfy the conditions of imperfect substitutes. The remaining portion of this
literature review will therefore focus on the ISM, as the subject of this research

appears to be more compatible to this approach.

21

The effect of income, price and exchange rate on the quantity of imports
was investigated by (Deyak, Sawyer, and Sprinkle, 1993) by using the model
specified below;

QM = f (+YD, - PF, + PD, + ER, + 02, +Q3, +Q4)

where QM is the volume of imports, YD is real domestic activity measured by
GDP, PF is foreign currency price of imports, PD is the domestic price of
measured by Canadian wholesale price index, ER is the exchange rate, and QZ,
Q3, and Q4 are dummy variables for different quarters (1 if period is 2nd, 3rd, or
4th quarter or 0 otherwise). In order to account for delays in responding to
changes in the independent variables, this model was modified to a polynomial
distributed lag function and expressed as follows;

lth = 8,, + ZBiInYDH + ZlenPFH- + ZBkLnERH + BmlnPDm + B102 + 3203 +

B3Q4 + at

All explanatory variables used were found to be statistically significant at
the 5 percent and or 10 percent levels.

A 2004 study by the Central Bank of Turkey (Aydin, Ciplak, and Yucel
2004) employed both single equation and Vector Auto Regression (VAR) to
estimate import demand and export supply. The single equation model specified
below used quarterly data from 1987 to 2003.

LMQ=C+LY+LRER+01 +02+D3+e
where LM is the natural logarithm of imports, LY is the natural logarithm of real
GDP, and LRER is the natural logarithm of the CPI based index. The variables

D1, DZ and D3 are dummy variables to capture quarterly variations in trade.

22

From this study it was shown that imports were largely determined by exchange
rates and national income, with an increase in real income and an appreciation of
the currency leading to more imports. The VAR provided similar results, but with
the additional insight that real exchange rate was more important to import but
not significant in determining exports.

An estimate of the import demand for Croatia by Merver (1993) used the
traditional (ISM) demand function specified as follows;
IM = 9(Yd. Pd . Pm)
where lm represents the quantity of imports, Yd represents real income of the
importing country, Pd represents the price of domestic substitutes in the importing
country, and Pm represents the price of imported commodities. In order to
overcome data limitations in a country which was at an initial stage of transition,
the author used domestic industrial production as a proxy for real income, and an
index of real effective exchange rate as a proxy for relative prices. Additional
variables used were the exchange rate between Croatia and Germany and
dummy13 variables for February and May of 1992, and January and February
1993. Using OLS regression on monthly data for the period January 1990 to
December 1993, the model showed that there was a significant negative
relationship between imports and the index of real exchange rate.

A slightly modified approach was used to conduct an analysis of Fiji’s
import demand (Narayan and Narayan, 2005). While drawing on the framework

of ISM, an attempt was made at disaggregating income into various components

 

‘3 The dummy variables were integrated to evaluate the significance of structural shifts in the
economic transformation process.

23

of private and government consumption and expenditure on investment. The
function was specified as follows;

mm = o + B1lnCG. + 32 lnlt + Bglnxt + dlant + at

where lnM. is the natural log of imports, lnCGt is the natural log of the sum of
government and private consumption, Inl. is the natural log expenditure on
investment, lnX, is the natural log of expenditure on exports and lnXt is the
natural logarithm of the ratio of the imports price index to domestic price index.
The analysis revealed that all the regressors used were statistically significant
but with an inelastic effect on the quantity of imports. The model also allowed the
impact of various kinds of expenditure on import demand to be observed. A one
percent increase in expenditure on exports and consumption increased imports
by .69 percent, while a one percent increase in investment expenditure increased
imports by .17 percent. Additionally, a one percent increase in relative price
results in a .4 percent reduction in imports.

Where as the previous models were used to estimate aggregate import
demand, a similar approach was used to estimate import demand functions for
dairy products for the Mexican economy for the period 1975 to 1995 (T anyeri-
Abur and Rosson, 1998). The model was designed to account for structural
shifts associated with the new trade policies through the North American Free
Trade Agreement (NAFTA) and currency devaluations.

The function which was based on the ISM was specified as follows;
lth = 30 + B1ID(PITI/Pd) + EziflYt + B3II'IMM'I' B4B: 4' at

where,

24

lth = the natural log of volume of imports in period t
InMM = the natural log of volume of imports of period t-1
ln(Pm/Pd) = the natural log of relative price.

lnYt = the natural log of real GDP at time t

Dt = 0 before January 1994 and 1 after.

The analysis revealed that there was a significant positive relationship
between income and the imports of both fluid milk and cheese.

Dutta and Nasiruddin (2006) utilized the ISM within a small country
framework to estimate an aggregate import demand for India. Their objective
was to estimate the impact of income and relative prices on import demand in the
context of trade liberalization. The long run demand function was specified as
follows;
lnRIMPORT = 80 + B1lnlMPrice1 + lenRGDP + BalnDt + at
Where,

RIMPORT = real quantity of merchandise import

RIPRICE = relative price of imports

RGDP = real GDP (1990)

D = Dummy variable (D= 0 between 1971-1991 and 1 between 1992-1995)

In the model estimated, real import prices and real income was lagged for two
years. The dummy variable was introduced to capture the effect of the policy
shift from protectionism to trade liberalization. The aggregate import demand
was found to be price inelastic. However, the income elasticity was greater than

unitary. This suggests that demand for import grows faster than a given increase

25

in income. The dummy variables were found to be statistically insignificant at the
10 percent level. This suggests that liberalization policies have had little effect on

import demand.

2.22 Demand and Supply Models

Approaches to single equation supply models are first presented, followed
by approaches which seek to estimate demand and supply in a system.

An OLS estimation of Hungarian pork supply (Nyars and Vizvari, 2005) in
the context of a transitioning economy is presented as a starting point to
showcase econometric procedures used to estimate the supply function in the

meat industry. The model was specified as follows;
03 "-' [30 - 32M t-2 'I' BZPt-Z - Bali-2 4' I34Ct 4' 3t

where, Qs represents the quantity of pork supplied in time t, M: represents the
price of maize in time t, Pt represents the price of pork in time t, It represents the
price of piglet in time t and Ct represents the price of chicken. The coefficients on
the regression followed the economic convention, i.e. increasing in its own price,
decreasing in the price of input (maize), decreasing in the competing use price
(piglets), and increasing in price of substitute (chicken).

In investigating the supply behavior for beef producers, Reutlinger (1966)
found that there was a negative price elasticity of supply. This finding was
confirmed in subsequent research (Nelson and Spreen, 1978; Ospina and
Shumway, 1981; Bessler, 1982). The reason advanced for this seemingly

contradiction of generally accepted economic theory is the dual use of cattle as g

26

both a final product to be consumed as meat, as well as animal stock which can
be held for future production and sale.

Recognizing the interdependence between demand and supply in any
market, a more rigorous approach to trade modeling was developed by Brooks,
Baudin, and Schwarzbauer (1995) and used by the Food and Agriculture
Organization (FAQ), to conduct a multi country assessment of trade in forestry
products. Their model was represented by the following;

Consumption = f(Domestic price, Import Price, and Demand Shifters)

Production = f(Domestic price, Export Price, and Supply Shifters)

They further postulated that consumption is comprised of goods from local
consumption as well as imports. Similarly total production comprised of
production for the local markets as well as for exports. In order to account for
that dynamic, the equations above were expanded in the following manner;

Dd = f(Pd, Pm, Demand Shifters Domestic Market)

Dm = f(Pd, Pm, Demand Shifter Import market)

8,. = f(Pd, PX, Supply Shifters for Domestic markets)

Sx = f(Pd, PX, Supply Shifters for Export Markets)

where Dd is domestic demand, Dm is import demand, 8,, is domestic supply,

Sx is export supply, Pd is domestic price, Pm is import price and Px is export price.
While there were wide variations in the estimated elasticities across countries the
signs of the cross price elasticities were consistent with economic theory. This is
indicative of substitution between imported and domestic wood products as well

as substitution between the domestic market and export market.

27

The system represented by th e expanded equations utilized variables
which were previously used in single equation models, but allowed for the
analysis of the dynamic relationships between the domestic market and the
international market. It allowed for isolating those factors important for the local
market from those important to the export market, as well as examining the
relationship between them.

A simultaneous equation model (SEM) was utilized to evaluate the impact
of declining US retail beef demand on farm level prices and production (Marsh,
2000). Marsh utilized a four equation demand and supply system to capture the
dynamics of both the beef market as well as the feeder cattle market. The
system was specified as follows;

Pds = f (st . Dr. Pb. M, ,u1) Beef Inverse Demand
st= f (P’s, PC, Pf, I, Tf, p1) Slaughter Supply

0% = Q“; = Q, ; Pd... =Pss = P, Market Clearing

Pdr = f (er. Ps. PC, I, Tr #3) Feeder Inverse Demand
03:: f (Psi. Pw. Pn. Tc. #4) Feeder Supply
Q“: = Q“: = Q, ; Pdf =P’f = P, Market Clearing

where st and Q’, are quantity demanded and quantity supplied of cattle in
million of heads and P"s and P3, are the respective demand and supply prices of
slaughtered cattle. Similarly, Qdf and st are the quantity demanded and
quantity supplied of feeder cattle in million of heads and Pdf and Psf are the
respective demand and supply prices of feeder cattle. PW is the price of

slaughter cows, Dr is the estimated retail demand index, Pc and Ph are the prices

28

for yellow corn and hay respectively, Pb is the price of beef bi-products, M is an
index of food marketing costs, I is the US prime interest rate, T; is the technology
in cattle finishing and To is the technology in feeder cattle production.

In order to account for delays in response to changes in price of output
(slaughter animals/ feeder animals) and cost of input, as well as delays in
building up the herd due to biological constraints, the system was modeled as an
auto regressive distributed lag in the supply function and estimated by the
iterative three stage least square (I3SLS) method.

The results of the estimation are shown in the following four equations,

with most variables being statistically significant at the 5% level.

Slaughter Demand and Suggly
InPds = 7.566- 0.668 ands + 0.604 lnDr + 0.382 lnPb — 0.805 lnM

Ians= 2.244 + .0264 In P5s - .437ln Pf - .013 In P04 -.09 lnlt-1 - .12 In Tf,
+ 0.551nos,.1
Feeder Demand and Supply
In P“, = 3.749 + 1.199 In P, — 0.158 In P, — 1.347 0", + .024 In I— 0.220T,
ln st= 0.939 + 0.220 In PS” -0.020 In Ph-2- 0.120 In Pw_1- 0.154 lnTc,
+- 0922 In 031.1
The above results conform generally to economic expectation. For
example it can be seen that price and quantity demanded are inversely related,
Wh ile marketing costs are negatively related to price. The statistically significant

price elasticity of supply for slaughter animals shows that there is a oo-

29

dependency between the price of slaughtered cattle and the quantity supplied.
Feeder cattle, being an input cost is negatively related with quantity supplied.

A Simultaneous Equation Model (SEM) was employed by Noel Roy (1994)
to analyze market conditions in the Canadian Atlantic Cod market. The

equations were specified as follows;

Yd = ad + y] In Y(d _1) + 72 lnPt'+}/3 1n P,"+74 ln P,"'+75 In [(1 _ 1) + Dmt + v,
lnYS = as +,61 an, +82 In P',+,B3 an, + Dmt +u,
Where,

Yd = demand for products across time

Pt” = Price of cod across time

Pt” = Price of substitutes across time

Pt’” = Consumer Price Index across time

IN = Disposable income lagged by one time period.
Y3 = supply of products across time

Qt= cod landings across time

W, = factor prices

Dmt = Monthly dummy variables

Dummy variables were introduced in order to access seasonal variation in
Atlantic cod demand and supply. This model was estimated using monthly time
series data for the period 1972 to 1987 using three stage least square. The

results of this estimation showed that demand for Atlantic cod was income elastic

30

 

and showed significant seasonal variations in demand comparative with the

seasonal variation in supply.

2.3 Summary of Literature Review

Since the mid 19905, the government of Jamaica has succeeded in
maintaining stability in inflation and exchange rates, as well as achieving a small
positive GDP growth rate. The country’s trade policies have continued on the
trend of increased liberalization, primarily through the phased reduction of the
Common External Tariff. In this context of lower protection from international
trade, the beef sector has experienced a contraction (number of farmers, as well
as animal population) from 1990 to 2005.

Import demand has been predominantly estimated using the Imperfect
Substitute Model, where quantity of imports is modeled as a function of price of
imported good, price of domestic substitutes and real income. Other relevant
explanatory variables and qualitative structural dummies have also been
integrated. The traditional supply equation has been modeled as a function of
product price, input prices and other relevant shifter. Simultaneous equation
models have also been successfully used to evaluate market conditions. In this
context qualitative variables have been used to account for seasonal variation.

This inquiry is primarily concerned with market demand and supply (import
meat demand, domestic beef demand and domestic beef supply) response to
exogenous variables. The prevailing conditions in this study include a structural
shift (trade policy change), and possible interactions between import meat

demand, and domestic beef supply and demand. Studies by Tanyeri-Abur and

31

 

Roson (1998), and Dutta and Nasiruddin (2006), have demonstrated the
usefulness of dummy variables to test trade policy changes in import demand
models. Brooks, Baudin and Schwarzbauer (1995) successfully used a system
of four equations to estimate import demand, domestic demand, export supply
and domestic supply, in order to account for substitutability between categories
of markets. A two equation system, with dummy variables (to test for seasonal
changes) was also employed by Roy (1994) to estimate the demand and supply
of Canadian Atlantic cod. These studies show the econometric procedures
which have been successfully used to study situations with features similar to the

subject of this inquiry.

32

 

Chapter 3

3.0 Modeling and Data

In this section, the theoretical framework underlying the specification of
the econometric model is provided. This forms the basis for specifying an import
demand model, and a three equation system of import meat demand, domestic
beef demand and domestic beef supply model. A description of the sources of

data, and data transformation procedures followed is also presented.

3.1 Analytical Framework for Demand models

The underlying principles for the demand function specified was the
Imperfect Substitute Model (Goldstein and Khan, 1985) but also informed by
consumer utility maximization (Robert and Daniel, 2005). Although domestically
produced beef is a different product from imported meats, (a composite group of
products) it may display some level of substitutability in use. Meat consumers in
the Jamaican meat market will seek to maximize utility, subject to their income

constraint as shown below:

Maximize U(Im,Db,X,-)subject to Pimlm + deDb +Xi S Y (1)
Where,

Inn = Imported meats

Db = Domestic beef

X, = all other goods

33

 

Y = Income

Px = 1

The LaGrange function therefore is;
L:U([msDb,Xi)+/i(Y—Pimlm‘deDb‘Xr') (2)
The first order condition are represented as;

6U
LIM= a—Im——/1P1m =0

6U
L = ————/tP =0
DB an db

6U
L = ——,t=0
X 6X

L1 = Y—Pimlm —deDb —X =0

1m*=f(Pimanb,Y) (3)

Db*=f(PimanbaY) (4)
Quantity of imported meats (IM*) is determined by the price of imported

meats, the price of locally produced beef (substitutes), and real income (among
other shifters), which is represented in equation 5.

Import meat demand = f(lmport Price, Local Price, Income) (5)
Demand for locally produced beef (Db!) is also dependent on the price of

imported meats, the price of local beef, and income, as shown in equation 6.
Local beef demand = f (Import Price, Local Price, Income) (6)
The solutions represented by equations 5 and 6 are consistent with the

estimation approaches employed by Goldstein and Khan (1985), and the

34

 

extensions to various research contexts (Deyak, Sawyer, and Sprinkler, 1993),
(Merver, 1993), Narayan and Narayan, 2005) and (T anyeri-Abur and Rosson,
1998).

The maximization problem expressed as an implicit function facilitates
conducting a comparative static analysis of the impact of domestic price, import
price and a tariff on both import and domestic demand.

Maximize U(1,,, , Db , Y — 1>,-,,,(,)1,,, — de 0],) (7)

The comparative static is facilitated by taking the total derivative of the
unconstrained utility function, and individually investigating the impact of the
exogenous variables (prices, and tariff rates) on the endogenous variables. In
Appendix III, the complete mathematical derivation for this comparative static is
presented. The results of this comparative static show that;

arm

<0, fl1> aIm<0, and an >0, a—Db—<O, 922>0
6P5," ('3de at 6PM, 6de 6t

 

 

These results imply that as the price of imported meat increases the
quantity demanded will decrease; as the price of domestic beef increases the
quantity of imported meats will increase; and as the tariff rate increases the
quantity of imported meats will decrease. Additionally, as the price of imported
meats increases the quantity demanded from domestic beef sector will increase;
as the price of domestic beef increases the demand for domestic beef will

decrease; and as tariff increases, demand for domestic beef will increase.

35

3.11 Estimated Demand Models

The utility maximization shown in the previous section (equations 1 to 6)
provided the foundation for developing the estimated economic model.
Import Meat Demand = f (Meat import Price, local beef price, Income). (8)

Exchange rate was shown by Aydin, Ciplak, and Yucel, (2004) to be
significant in determining the quantity of imports to Turkey. Macro economic
theory suggests that when a currency devalues it becomes relatively more
expensive to purchase imported goods (Shafaeddin, 1995). In Jamaica’s case
the Jamaica Dollar has lost value against most major currencies consistently
over the last three decades (see Table 1). Exchange rate was therefore included
in order to evaluate its impact on meat imports. Per capita consumption of
chicken in 2006 was approximately 80 kg per capita‘per year (Levey, 2007). This
level of consumption is close to the per capita consumption in the United States,
and above the average consumption in industrialized countries (Jamaica Broilers,
2007). This data suggest that chicken is an important meat source in Jamaica
and could be a substitute for imported meats as well as domestic beef. It was
therefore initially included as an explanatory variable in the import demand
equation. However, preliminary examination of the data revealed that domestic
price of chicken was highly correlated with the price of domestic beef. As a result
it was dropped from the model. In order to evaluate the impact of the trade policy
shift on the quantity of meat import demand, an intercept dummy variable was

introduced; where D equals 0 between 1979 to 1993, and 1 between 1994 to

36

2005. The model with anticipated signs of the coefficients is specified as
follows;
Import Meat Demand = f (-lmport Price, +Local Beef Price, +lncome, + Exchange
rate, + D) (9)
The domestic beef demand was specified using a similar mix of variables
to the import meat demand in equation 9. The model with the anticipated signs
of the coefficients is specified as follows;

Local beef demand = f (+ Import Price, - Local Beef Price,+ Income) (10)

3.2 Analytical Framework for the Supply Model

Conventional economic theory suggests that firms will seek to maximize
their profits by increasing or decreasing their output in relation to output prices
and input costs. The supply of beef from the local sectors will be driven by the
desire of farmers to maximize profits, given a particular production function,
where profit (TT) is the difference between revenue and costs.
H=P.f(l,k)—wl—rk (11)
Where
P = price of domestic beef
l=labor
k = capital
w= wages (labor cost)

r = interest rate (capital cost)
The LaGrange representing this is;

L=P.Y—rk—wI+/t[f(l,k)-Y] (12)

37

The first order condition with respect to labor, capital cost, and the
LaGrange multiplier (A) is;

6L
—=- +2 1,]: =0
61 w fl( )

6L
-—=—-+A Lk=0
6k r flc( )

61.
——= l,k —Y=O
6’, f( )

6_Y = P — A = O
The solution from this first order condition yields the optimal demand for
labor and capital represented by;
|*=9(P.W.r.) (13)
k* = g(p,w,r,) (14)
The profit function above is converted into a value function by inserting
these optimal inputs to yield;

11*: P. f(l*,k*)—wl*-rk* (15)

11* = P-f[(g(p. w,r,),g(p, Wm) - Wig(p, w.r.)l - rlg(p, w,r.)] (16)
By Hotelling’s Lemma, the partial derivative of the optimal profit function
with respect to output price yields the supply function;

E. _.
6P — f [g(p, W.r.),g(p, WM (17)

The traditional supply function shown above, derived from the optimal
profit function with respect to output price, shows that quantity supplied is a

function of price of product and cost of input. In this framework, quantity supplied

38

is expected to be increasing with price and non increasing in input costs. Output
from the sector will therefore be largely determined by the price of local beef, and

the cost of factor inputs.

3.21 Estimated Supply Model

Building from the supply equation derived in the previous section and the
precedents observed in the literature, the domestic supply for beef was specified
as follows;

Local Beef Supply = f (+Local Supply Price“, -Wage rate (-1, -Bank Lending Rate
,1, —o, -0* Local Supply Price) (18)

The practice of applying a one year lag to supply variables has been a
convention of past estimations of beef supply functions (Reutlinger, 1966). It is
conceivable that the price received in a previous time period will serve as an
indicator of future prices for the product. The production processes involved in
beef production are inherently long-term. It is therefore conceivable that costs
associated with beef production in earlier periods could impact on production
decisions, thereby impacting supply in future periods. As a result one year time
lags were also applied to the cost variables (wage rate and bank lending rate).
As in the import demand model previously shown, dummy variables were applied
to asses the impact of the trade policy change in quantity of domestic beef
supplied. In addition in order to evaluate the responsiveness of the domestic
beef sector to price signals before and after the policy changes a slope dummy

variable (associated with domestic beef supply price) was applied.

39

3.3 Approaches to Estimation

Micro economic theory suggests that substitute products (in this case
imported meats and domestic beef) cause a shift in demand. This is indicative
that there will be an interactive relationship between quantity of imported meats
and the quantity of beef produced from domestic sources. Likewise local supply
and demand will seek to find equilibrium quantity and price. From these
relationships it is implicit that import demand for meats, and domestic supply and
demand for beef (locally produced) are interrelated and could be estimated by a
simultaneous model.

A review of existing literature revealed that a single equation import
demand model adequately captures the effect of structural changes. It was also
shown in the literature review that systems estimation such as Brooks, Baudin
and Schwarzbauer (1995), were effective in estimating products substitutability in
a given market.

Two approaches were adopted in this study. Firstly, a single equation
import demand model (as specified in equation 9) was estimated using Ordinary
Least Squares (OLS). Robust standard errors were calculated, and corrections
for autocorrelation were done using Cochrane—Orcutt transformations. Secondly,
as a basis for comparison, the import demand was integrated into a three
equation system (equations 9, 10 and 18) and estimated using Seemingly
Unrelated Regression (SUR). The SUR approach was used as the research
question required that the impact of exogenous variables on demand and supply

response be explicitly modeled. An additional advantage of this method of

40

estimation, over estimating each model individually, was an improvement in the

efficiency of the estimates which were derived. The results of both models are

presented in Section 4.

3.4 Data Considerations

Table 3 provides a summary of the data used in this study and the

sources from which they were drawn.

Table 3. Data Sources for the Study

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variables Import Domestic Domestic Data Source
Meat Beef Supply Beef
Demand Demand

Quantity of meat ‘1 UN Comtrade

imports

Domestic beef )1 M Ministry of

output Agriculture

Price of imported \M )7 UN Comtrade

meats

Demand price of «1 Statistical

domestic beef Institute of
Jamaica

Price of domestic \M \M Statistical

chicken Institute of
Jamaica

Per capita income 11 \i World Bank

Exchange rate )1 Bank of
Jamaica

Supply price of 1] Jamaica

domestic beef Livestock
Association

Domestic interest \M Bank of

rate Jamaica

Minimum wage )1 Planning

rate (used as a Institute of

proxy for farm Jamaica

wage)

Dummy \/ \/

Dummy*supply ‘1

price domestic
beef

 

 

 

 

 

41

 

Yearly time series data for the period 1979 to 2005 were used in this analysis,
Le. 27 observations for the single equation model, and 26 observations for the
SUR model. The low number of observations represents a weakness of this
research as the normality assumptions of the error term may not be met. This
weakness is partly offset by estimating the model in a SUR, thereby improving
the efficiency of the estimates.

Various forms of data transformations were conducted prior to estimating the
model. A brief description is provided below.

1. Quantity of meat imports: UN- Comtrade provided the data for quantity of

imported meats in kilograms. This was converted to pounds.

2. Price of meat imports: UN Comtrade provided the volume of meat imports
as well as the total value. The unit price was therefore calculated from the
given volume and value.

3. Domestic beef output: The Ministry of Agriculture’s Data Bank provided
the total weight of animals in pounds for before 1989, and kilograms (kgs)
from 1990 to 2005. The quantities in kgs were converted to pounds.

4. Domestic demand beef price: The Statistical Institute of Jamaica provided
monthly prices in Jamaican currency (cents). This was first aggregated to
an average annual price in Jamaican dollars converted to real prices
(2005 dollars) and then converted to US dollars.

5. Domestic supply price for beef was sourced from the minutes of beef

committee meetings of the Jamaica Livestock Association. This price

42

was also converted to real prices (2005 dollars) and expressed in US

dollars.

3.5 Chapter Summary

Consumer utility maximization and profit maximization provided the
conceptual foundations for developing the econometric models. Drawing on the
precedents set in previous estimations of similar research questions, three
models were specified. Import demand was estimated using OLS, and a three
equation system (which included import meat demand, domestic beef demand
and domestic beef supply) was estimated using SUR. Data used in the analysis
were sourced from several public bodies in Jamaica, the Jamaica Livestock

Association, the United Nations and the World Bank.

43

Chapter 4

4. 0 Presentation of findings

In this section, the results of the models are shown. A brief discussion of
these findings is also presented. Lastly, various scenario analyses are
conducted to evaluate possible market outcomes with two tariff policy

approaches.

4.1 Import Demand Model

Table 4 shows the coefficients and associated t statistics for the single
equation import demand model. The explanatory power of the model is
demonstrated through the R2 value which indicates that the model explains 47%
of import demand. The coefficients shown in Table 4 in general have the
expected signs and should be interpreted as elasticities.

Table 4. Results for Import Demand Model

 

 

 

 

 

 

 

 

 

 

 

Variables Cons Import Dom GDP Exchange D2
Meat Beef Per Rate
Price Price Capita
Coefficients 19.3 -0.21 0.16 -0.21 -0.007 0.57
t value 2.04 -0.71 0.87 -0.19 -0.08 2.22
N=26 R2 = .47

 

In this model the only significant variable was the dummy variable.
The result provides evidence that the trade policy change14 brought about by the

phased reduction of the CET, resulted in a 57% increase in the quantity of

 

“ The policy change in question involved a phased reduction in the tariffs on imported meet from
187% in 1991 to 38% in 1998.

44

 

imported meats. This is consistent with international trade theory which posits
that a tariff reduction will result in an increase in the volume of imports. The high
t statistic associated with this variable provides strong evidence of a trade

creating impact of the policy change.

4.2 Seemingly Unrelated Regression Demand and Supply Model

Results from the seemingly unrelated regression estimates are provided in
Table 5. Included in this model were equations for meat import demand,
domestic beef demand and domestic beef supply, and the results demonstrated
explanatory power with R2 values of .73, .61 and .39 respectively.

Table 5 Results for Seemingly Unrelated Regression Estimates

 

Import Demand

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variables Cons Import Dom GDP Exchange D
Meat Beef Per Rate
Price demand Capita
Pfice
Coefficients 19.4 0.08 0.37 -0.23 -0.09 0.92
2 value 2.65 0.24 2.86 -0.26 -1.39 4.95
N=27 R2 = .73
Domestic Demand

Variable Cons Domestic Import GDP

beef Meat Price Per

demand Capita

pfice
Coefficients 33.99 -0.25 0.48 -1.91
2 value 10.04 -3.52 2.30 -5.00

N = 26 R2 = .61
Domestic Suppl

Variables Cons Domestic Wage Rate Bank D 0* Beef

Beef supply Lending supply

Price Rate price
Coefficients 17.84 0.28 0.004 -0.24 -0.12 -0.57
2 value 50.9 1.94 0.06 -2.79 -0.97 -2.67

N = 26 R" = .39

 

 

45

 

The estimates of the seemingly unrelated regression model resulted in
more variables being statistically significant, while generally conforming with the
expected signs. In the import demand equation, significant variables at the 5%
level were domestic beef demand price and the dummy variable. The result
suggests that a one percent increase in the price of domestic beef will increase
the quantity of imported meats by .37%. This level of elasticity suggests that
there is some substitutability between domestic beef and imported meats. This
is lower than the elasticity of .6 for chicken with respect to beef price in Turkey
(Halil, 2002), as well as the elasticity of 1.54, for low quality imported beef with
respect to the price of poultry and pork, in the US (Van, Everett, and Wayne,
2000).

In relation to the dummy variable, the result implies that consequent to the
change in trade policy, the quantity of imported meat increased by 92%. This
result provides strong evidence of the trade creating impact of tariff removal on
imported meats.

On the domestic demand side, the significant variables at the 5% level
were the domestic beef demand price, price of imported meats and per capita
income. The results suggest that a one percent increase in domestic beef
demand price will reduce its demand by .25%. In addition a percentage point
increase in the price of imported meats will increase the demand for domestic
beef by .48%. This is further evidence of the substitutability between domestic
beef and imported meats. The results also show that a one percentage increase

in income will reduce the demand for domestic beef by 1.91%. The negative

46

income elasticity implies that domestic beef has the characteristics of an inferior
good in the domestic market. This result was counter to expectations, as
Jamaican beef is considered to be of fairly high quality and is perceived as a
better product than many of the cheaper imported substitutes. This is a very
significant finding, and warrants further discussion under a separate heading
(see section 4.3).

On the domestic supply side of the model, domestic beef supply price was
significant at 10%, and commercial bank lending rate and the slope dummy
variable (interaction term associated beef domestic supply price), was significant
at the 5% level. The results suggest that a percentage point increase in the
supply price of domestic beef will result in a 28% increase in the quantity of
domestic beef supplied. Given the long term nature of cattle production this
inelastic short term price response is understandable. In addition the coefficient
on the interaction term suggests that after the policy change the price elasticity of
supply was reduced by .57%. This means that after the policy change the short
term supply response became more inelastic. Studies earlier cited in the
literature review such as (Reutlinger, 1966) even showed a negative short term
price elasticity of supply. It has been accepted that beef farmers in response to
high price show a tendency to cutback on the sale of animals in the short term in
order to maximize future earnings at a higher price. On the flip side, in a flat
market with reducing prices, it could be anticipated that farmers may slaughter
more animals in order to reduce future losses. While the elasticity in this analysis

was positive, the small price response may be reflecting the dynamic profit

47

maximizing (loss minimizing) decision making of farmers. The JLA report
(previously cited in the literature review), indicated that beef farmers in Jamaica
reduced the size of their herds in the face of lower priced imported meat
products. It is therefore possible that in more favorable price environments
(which occurred towards the end of the study period in 2004 and 2005), farmers
did not have the capacity to respond. An alternative reason for this response
may be that farmers not only viewed their animals as commodities per say, but
as capital stock which guarantees future earnings. These factors may help to
explain the inelastic supply response suggested by the result.

The commercial bank rate results imply that a percentage point increase
in bank lending rate will reduce beef supply by .24%. This makes a strong link
between the cost associated with capitalizing a farm and the decision to

expanding output.

4.3 Why is Domestic Beef an Inferior Good?

In the domestic demand results presented in the previous section, the
negative coefficient on income suggested that Jamaican domestic beef is an
inferior good, or may be viewed as such by Jamaican consumers. This is a very
significant finding and runs counter to expectations. From a purely technical,
product content point of view, Jamaican beef may be comparable or even
superior to beef from other countries in the world. In defending the quality of
Jamaican beef, industry representatives often refer to local cattle as being
completely grass fed, uses more environmentally friendly production practices,

free from diseases such as BSE, and does not use antibiotics at the same level

48

as farmers in some other countries. This section, (while acknowledging the need
for further research) attempts to provide some contextual arguments why this
phenomenon may be true.

There are three main reasons which could explain the perception of
Jamaican beef to be a negative good. These arguments are health related,
product innovation, and restaurant market development. The last two factors are
somewhat related.

First, over the last decade and a half, medical research has reported
extensively that red meat (which includes beef) contributes to the incidence of
heart diseases. There has been reports which established a link between cardio
vascular disease and increased consumption of red meat (Pramparo Palmira et
al., 2006). Findings such as these influence pubic education efforts geared
towards preventing diet related diseases. It is therefore plausible that over time
consumers changed their preference away from beef to more healthy options.
There is some indication that Jamaican consumers view beef as a less healthy
meat option, compared to chicken, pork and a vegetarian diet. Since the real
income in Jamaica has been increasing with time, the analysis may therefore
show a reduction of beef demand with income as consumers shifted their
preference to more healthy options.

Second, over the last ten years, local meat companies have been
developing indigenous brands of local convenience foods. Most of these
innovations have been in the chicken, and the vegetable industries. For

example, one local company has developed an entire family of products

49

including, pre—cut chicken, pre-seasoned chicken and pre-cooked chicken among
others. The beef industry, has lagged behind in this respect, and persists in
selling basic cuts through the traditional channels in the local markets and
supermarkets. The development of convenience foods may be in response to
the demands of a new and emerging market. As the society evolves and more
women become involved in the work place, the opportunity cost of meal
preparation time increases. It has been found in previous studies that shoppers
with limited meal preparation time and higher incomes will pay a higher price for
convenience (Capps, Tedford, and Havlicck, 1985). To the extent that the beef
industry lags behind in this kind of product innovation, consumers may purchase
less beef as their income increase.

Third, over the last 15 to 20 years, there has been a significant increase in
the number of fast food restaurants across the island. These include
international chains (such as KFC), but also local chains (such as Island Grill,
and Juicy Patties), which provide menus which are biased towards chicken, fish
and pork dishes. As a consequence, with increasing incomes, and a greater
capacity to eat prepared meals away. from home, the structure of the market
provides few opportunities for beef consumption compared with other forms of
meat.

These three factors to varying degrees could help to explain the findings
of domestic beef being an inferior good which was presented earlier. These
ideas could provide the basis for further economic analysis. However, it may be

worthwhile to consider this result in designing a strategic redevelopment plan for

50

the industry. Recommendations based on these findings will be provided in the

conclusion.

4.4 Scenario Analysis of Alternative Trade Regimes

As indicated in the introduction of this thesis, major players in the
domestic beef industry have actively lobbied the government to provide tariff
protection for the local beef sectors. The government of Jamaica through the
protocols governing the CET in CARICOM has the autonomy to increase tariff
rates against products which are considered competing goods. A policy decision
in this direction would however be counter to the general trend of increased
market liberalization, and may attract countervailing tariffs from existing trade
partners. While acknowledging that this may be an improbably course of action,
it is useful to evaluate the market response which may result under two different
tariff regimes. The analysis is conducted by utilizing results for calculating
demand and supply shifters presented in Nicholson (2005). The resulting

formula from this derivation is applied as follows;

Elasticity beef price, tariff = ElaStiCi f anti demanded tan’ff

ElaStiCitY beef supply, supply price "" E'aStiCitY beef demand, demand price

An increase in the tariff rate would raise the price of imported meats at the
same rate as the tariff increase (Jamaica being a small country). Therefore the
elasticity of beef demand with respect to import price, is representing the

elasticity of beef demand with respect to tariff. Using the estimates15 from the

 

'5 The supply estimates in this study yielded inelastic short run own price supply elasticities. In
the long run it is anticipated that the response will become more elastic. For the purpose of this
analysis the price supply elasticity previously estimated by Brester (1996), was used.

51

econometric analysis and the formula outlined the price elasticity with respect to
tariff is calculated.

The elasticity of quantity demanded with respect to tariff = 0.48

The elasticity of supply with respect to price = 0.28

The elasticity of supply with respect to price (Brester 1996 estimate) = 0.86

The elasticity of demand with respect to price = 025

Therefore Elasticity price, a = .48/(.86-(-.0.25)) = 0.78

This elasticity means that a one percent increase in tariff would increase the

domestic price of beef by 0.78%.

4.41 Scenario One: Increasing Import Tariff from 38% to 68%

Under this scenario, if the government of Jamaica increases its tariffs on
meat from 38% to 68%, then the price of beef would increase by 23.4%. By
multiplying this percentage change in price by the elasticity of supply we obtain
an estimate of the percentage change in quantity of output which could be
expected from the producers. Therefore, as shown in table 6, a 20.1% increase
in output would result from the increasing tariff by 30%.

Table 6. Supply Response with a 30% Tariff Increase

 

 

 

Beef supply Tariff Change in Change in Quantity of

2005 (kgs) increase supply price supply supply after
tariff (kgs)

18,550,457.00 30 % 23.4% 20.1% 22,279,098.86

 

 

 

 

 

4.42 Scenario Two: Increasing Import Tariff from 38% to 98%

Under this scenario, if the government of Jamaica increases its tariffs on

meat from 38% to 98%, then the price of domestic beef would increase by

52

 

46.8%. As shown in table 7 this will result in the supply of beef increasing by

 

 

 

40.2%.
Table 7. Supply Response with a 60% Tariff Increase
Beef supply Tariff Change in Change in Quantity of
2005 (kgs) increase supply price supply supply after
tariff (kgs)
18,550,457.00 60 % 46.8% 40.2% 27,232,070.88

 

 

 

 

 

4.43 Summary of Scenarios One and Two

It can therefore be concluded that the application of a tariff on imported
meats will result in an increase in the domestic supply over the medium to long
term. Table 8 shows a summary of the changes calculated in scenarios one and
two.

Table 8. Anticipated Changes in Beef Supply for Scenarios One and Two

 

Beef supply Anticipated beef Change in
2005 (kgs) supply after tariff beef supply

 

 

 

 

 

 

increase (kgs) (kgs)
Scenario 1 18,550,457.00 22,279,098.86 3,728,641
Scenario 2 18,550,457.00 27,232,070.88 8,681,613

 

 

The supply response which was observed in this analysis is a non-trivial
outcome, especially for members of the farming community. For example, the
anticipated change in supply under scenario 2, represents potential earning of
US$82 million or J$5.1 billion (using 2005 nominal price). Beef farmers therefore
have strong incentives to lobby government to provide protection from

international trade, through the imposition of higher taxes.

53

 

The analysis would not be complete without looking more generally at the
welfare impacts of any new trade policy. In Section 4.5, a welfare analysis using

scenario one is presented.

4.5 Welfare Analysis

It is generally accepted that in any policy change there may be winners
and losers associated with the transfer and distribution of consumer surplus and
or producer surplus. This analysis will examine the impact of a 30% tariff
increase on consumption and production decisions in order to identify who the
losers and winners may be, and estimate the welfare impact to society in
general.

Social welfare is the sum of producer and consumer surplus. The graphs
in Figure 1 illustrate the distribution of consumer and producer surplus given this
hypothetical tariff increase.

Figure 3. Welfare distribution of 30% Tariff Increase

         

 

 

 

 

 

 

 

PanelA PanelB
ll l‘
A Domestic

Imported meat 0,
’5 demand g 1.7 f _ . . , g . beefsupply
§ 0) 1.4 > D,
a, 2
a '60 g \ D
8 o. 0
'C
‘L .46

87 93 7 18-5 22-7
Millions of Kgs Millions of Kgs

54

Panel A represents the reduction in the quantity of imported meats
demanded with a 30% increase in tariff. Since imported meats and domestic
beef are substitutes, a reduction in quantity demand of imported meats due to
price increase results in an increase in demand for domestic beef. This increase
in demand is represented in panel B, by an outward shift in the demand curve
from Do to D1_ This increase in demand and the price signal it brings is the main
cause for the increase in supply of domestic beef. The change in consumer and
producer surplus presented in sections 4.51 and 4.52, were calculated using
shaded areas under the curves in figure 1. The area shaded black in panel A,
represents the reduction in consumer surplus that would occur given a 30%
increase in tariff on imported meats. The area shaded grey in panel B represents
the increase in producer surplus farmers would be expected to gain given a 30%

tariff increase.

4.51 Change in Consumer Surplus

As noted earlier, an increase in tariff will increase the price of imported
meats by the amount of the tax. Therefore a tariff increase by 30% would raise
the price to the consumer from US $0.46 per pound in 2005 to US $0.6. This
means consumers would have to cut back in consumption and or switch to more
affordable meat substitutes. The results from the import demand model suggest,
that a 30% increase in the price of imported meats would decrease imported
meat demand by 6.3%. This means that demand of imported meats would fall
from 93.3 million kilograms to 87.4 kilograms. Using these prices and quantities,

and calculating the shaded area in panel A of figure 1, a 30% increase in tariff on

55

imported meats results in a loss of US$ 12.6 million (JA$763 million) to
consumers, or JA $282.59 per capita. Imported meats are generally cheaper
sources of protein upon which the lower income groups depend. This policy
could therefore impose economic harm on the poor and vulnerable groups in the
society. In addition, the domestic price of beef would be expected to increase by
23.4%. This means that the quantity of domestic beef consumption could fall by
5.85%. This is another source of loss in consumer surplus. However, this

component of change in consumer surplus was not quantified.

4.52 Change in Producer Surplus

The analysis presented in the previous section showed that a 30% increase in
tariff would increase production by 20%. This represents a n increase from
18,550,457 kgs in 2005 to 22,260,54840 (or a change of 3,710,091.4 kgs) in the
short to medium run. Using output and the prices change of 23.4% suggested by
scenario analysis 1, (see section 4.41), this projected increase in output would
represents an improvement in the welfare position of producers to the tune of

US$ 6.15 million (JA$385.4 million)

4.53 Total Welfare Change

The total welfare change of a 30% tariff increase is the sum of the
changes in producer and consumer surpluses generated by the tariff. From
quantifiable results, the total welfare change would be minus US $6.65 million
(minus JA $418.9 million). Figure 1 illustrates that the area representing gains to

producers (shaded area in panel B), is smaller than the area representing loss to

56

consumers (shaded area in panel A). This suggests that by applying a tariff of
30%, while the producers may benefit greatly the society in general will face a
net loss. This finding is consistent with traditional trade theory which posits that
tariffs do not satisfy the conditions of Pareto efficiency due to the generation of

dead weight loss.

4.6 Chapter Summary

In chapter four the conceptual and analytical frameworks were presented.
A single equation import demand model was estimated using ordinary least
squares. Demand and supply equations were also estimated using seemingly
unrelated regression. The results and discussions of the results showed that the
tariff regime did have an impact on meat import demand. It was also shown that
there was substitutability between imported meats and domestic beef. The
supply response of domestic beef with respect to its own price was inelastic in
the short term, and became even more inelastic after the policy change. Further
analysis of the results showed that a policy of increasing tariff would reduce

consumer surplus resulting in a net loss to the society.

57

Chapter 5

5. 0 Policy Implications

This study found that the potential welfare effects of increasing tariffs,
make protectionism an unattractive and improbably policy option at this time. A
brief discussion on possible courses for the strategic direction of the Jamaican
beef sector is presented. Given the sector’s response, and the policy initiatives
of the government, Jamaica’s beef sector could rebound in response to emerging
market opportunities. Recommendations on possible future research are also

made.

5.1 Possible Course of Action for Domestic Beef Sector

The analyses which were presented in the previous chapter showed clear
relationships between the trade policies of the last two decades and the
economic wellbeing of the consumers of imported meats and domestic beef, as
well as farmers who are involved in beef production. Farmers are not without
good cause in lobbying for change in order to protect their interests. What ever
actions are taken can now be partly informed by this research.

It is important to note that the options of retuning to a high tariff regime
may not be the most appropriate response for the beef sector. First, as the
welfare analysis showed, an increase in tariff would erode consumer surplus,
especially among the poor in the society. This would not be a politically

appealing decision for the government. Second, Jamaica is a signatory not only

58

to the CET of CARICOM, but to several other bilateral and multilateral trade
treaties (including the WTO). A protectionist policy would run counter to
Jamaica’s interest in gaining access to global markets. Third, the provision of
tariff protection may not provide the right kinds of incentives which will stimulate
the industry to adopt and respond appropriately to the changing market
environments.

The following three recommendations are proposed as alternatives

strategies to the provision of tariff protection.

5.11 Strategy One

The first recommendation involves organizing farmers as a coordinated
production system with greater levels of vertical integration. Currently, there is
little vertical integration in the system. Farmers are involved in all stages of
production, and compete against each other within the same small market. It
may be possible to gain scale efficiencies in some operations, by specializing in
a specific subset of the production process (eg. growing weaners, or fatteners).
By organizing the sector in this way, the industry can work strategically to regain
price competitiveness, as well as to attain consistency in standards.

The Jamaica Livestock Association, with its long standing traditions may
be ideally suited to provide leadership in this kind of organization. This concept
of vertical integration could be extended to include slaughtering, meat distribution

and marketing functions in which member farmers have a share in ownership.

59

5.12 Strategy Two

The second recommendation is for the beef sector to aggressively launch
a public relations campaign which focuses on the quality of Jamaican beef.
Results from beef demand estimates presented in chapter four, which suggested
that Jamaican beef is an inferior good, make this recommendation especially
important. In addition, the sector should invest resources in developing new and
attractive ways of serving beef in local restaurants. They should also invest
resources in developing and promoting processed beef products to tap into the
increasingly expanding convenience foods market. Adopting this approach could
attract attention to domestic beef and its potential positive attributes as an

alternative source of animal protein.

5.13 Strategy Three

The third strategy is for the domestic sector to target critical niche markets
which exist in Jamaica and throughout the Caribbean. For example, the local
hospitality sector sources most of their beef products from the United States. By
working through the vertically integrated approach, mentioned in strategy one,
premium specialized cuts of beef required by the hospitality sector can be

supplied. This market is valued at US $8 million (JA $560 million) (USDA, 2002)

5.14 Role of Government

Although tariff protection is not being recommended at this time, the
government of Jamaica can play an important role in helping to revitalize the

sector. They could provide fiscal incentives through the provision of tax credits,

6O

and or low interest loans for infrastructure and herd improvement. This is
particularly important given the negative relationship shown between commercial
lending rates and domestic beef supply. Bearing in mind the negative
relationship between domestic lending rates and domestic beef supply, the
government in partnership with lending institutions, could create a line of credit at
lower interest rates. This could provide the financial support required to
recapitalize the sector and to attain the levels of production efficiencies required.
The government through its research and extension institutions must
continue to provide the technical support required by farmers. This will help
farmers to improve their cattle husbandry practices and attain greater
productivity. A key role for the government is to access technical support and
new farming techniques through institutions such as Caribbean Agriculture
Research and Development Institute (CARDI), and the Inter American Institute
for Cooperation on Agriculture (IICA) among others. The government through
the Ministry of Science and Technology’s Food Technology Institute can also
provide technical support in helping the industry develop marketable products as
a part of a product diversification and rebranding drive. Support could also
involve the importation of mature heifers to provide breeding stock (as well as
sire services and or artificial insemination services) in order to quickly restore the
size of herds. This way the government could help restore the capacity of the
sector to respond to the positive price signals which are now present in the

market.

61

5.2 Prognosis for the Future

In spite of the challenges which the domestic sector faced over the last 10
to 15 years, the Jamaican beef sector can create a better future. The level of
success will be contingent on how well the industry, in partnership with
government, responds to changing market environments.

Two forces operating at the global level have slowly been increasing the
price of imported meats. First, the aggressive bio-fuels policy which has been
pursued in the United States (from which most if Jamaica’s meat imports
originate) has caused an increase in the price of corn and subsequently the price
of meats. Second, the increasing price trend of fuels will increase transportation
costs and may also impact on the price competitiveness of imported products.
These two changes could provide the price incentive for Jamaican farmers to
reorganize the industry.

Jamaican beef farmers therefore have reasons to be optimistic about the
future. This can be realized if the sector is re-organized in such a way as to
capture production efficiencies, implement programs which re-brand beef as a
healthy, nutritious, convenient and delicious meat alternative and aggressively
position itself to cater to niche markets (such as the hospitality industry), in

Jamaica and the Caribbean region.

5.3 Conclusion

Through the use of traditional trade equations (Ordinary Least Squares

and Seemingly Unrelated Regression), the results showed that the phased

62

reduction of the Common External Tariff did harm the domestic beef sector.
These points to the need for governments to implement programs which will
empower domestic industries to adapt to international competition when trade
policies change. The results also showed that domestic beef is viewed as an
inferior good. A Welfare analysis computed using the estimated elasticities
showed that an increase in tariff, while creating benefits to farmers, will not be
welfare improving to society in general. Given the prevailing international trading
environment, the use of tariff protection goes against the trend of increased
liberalization and could spawn a "tariff war” with trading partners.

A more viable option to restoring the domestic beef industry is to find new
efficiencies through industrial reorganization and vertical integration,
repositioning the sectors for emerging market opportunities through the CSME,
develop and market value added products, and aggressively promote the
consumption of domestic beef as a healthy meat alternative. The government
will need to play an important role in providing: fiscal incentives; access to
capital; extension service, marketing and product development and other forms
of support. Recent inflationary market forces could provide the price incentives
for farmers to re-organize and expand the domestic beef industry. Efforts at re-
organization should be focused on making beef farmers more efficient, promote
the use of appropriate modern techniques, promote product development geared
towards value added products and being responsive to niche markets which exist

in Jamaica and the Caribbean (such as the hospitality industry). This approach

63

would position the domestic industry to compete more effectively in both the

domestic and global market.

5.4 Possible Future Research

This research showed that domestic beef is an inferior good. While the
results were conclusive using the existing data, this phenomenon needs to be
investigated in more detail. My recommendation is to use a mixed method
approach utilizing both qualitative and quantitative techniques. The qualitative
approaches could investigate domestic demand for beef, while including other
meat sources as substitutes in the model. An additional quantitative approach
may also be to investigate the relationship of fast food restaurants to beef
consumption and other meats. Alternatively, a qualitative inquiry could be
conducted utilizing in-depth interviews or focus groups with shoppers/home
makers to elicit their perceptions of beef vis a vis other meats, and the manner in
which they arrive at their shopping and consumption decisions. These
procedures would bring more clarity to the issue and provide useful information

to guide the strategic direction of the beef industry.

64

Appendices

65

Appendix! Trends in Tariff Levels

Table 9. Average Tariff Rates Applied to Selected Imports

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1993 1995 1999
Aerated water 30.0 25.0 20.0
Infant formula 20.1 17.5 10.0
Fish (snapper, mackerel, etc) 26.1 25.5 28.4
Chicken and parts thereof 20.0 24.0 28.7
Medicaments 9.8 9.71 15.0
Printed books and periodicals 0.0 0.0 0.0
Napkins/sanitary towels/diapers/toilet tissues 26.7 23.3 20.0
Paper/paperboard 5.0 0.0 0.0
Jewellery 30.0 30.0 30.0
Watches and calculators 30.0 30.0 30.0
Tennis shoes/sLlippers/footwear 21.3 22.8 15.8
Articles of plastic 13.9 11.2 7.4
Motor cars 19.8 19.8 25.0
Corn seed 0.0 0.0 0.0
Refined war 40.0 0.0 0.0
Wheat 0.0 0.0 0.0
White rice 30.0 25.0 25.0
Sodium hydroxide (caustic soda) 5.0 0.0 0.0
Paper products (paper boxes) 19.0 13.9 10.6
Bottles and Jars 15.0 10.0 4.6
Bunker (0 grade oil) 15.0 15.0 10.0
Motor spirit (gasoline) 3.8 3.8 3.8
Parts for aircraft engines 5.0 5.0 10.0
Tyres 10.3 7.0 6.7
Parts for motor vehicles 8.2 8.6 13.9
Coaches and buses 7.9 5.4 5.7
Construction materials 16.5 10.9 8.4
Telephonic and telegraphic applications 5.0 5.0 5.0
Data processing equipment 5.0 5.0 5.0

 

 

 

 

(Source: Statistical Institute of Jamaica)

66

 

Appendix II Optimization Problems

Import and domestic demand

Maximize U(Im,Db,Xi)subject to PimIm + deDb +Xi S Y

Where

Inn = Imported meats
Db = Domestic beef

Xi = all other goods

Y = Income

Px = l

The LaGrange function therefore is;

L = U(Im,Db,Xi)+}.(Y—Pim1m -de1)b —Xl.)

First order condition

L, :21. ..
a] 1m
m
6U
Ling—35"” db-O
b
6U
L =———/1=0
X M
L=Y—PimIm—deDb-X=O
*—
Im _f(Pim’de’Y)

Dz)" =f(Pim’de’Y)
Comparative Static

67

A comparative static was conducted in order to establish a sound theoretical
basis for the expected signs of the coefficients which were to be estimated. The
approach taken was to convert the utility function previously outlined into the
implicit function.

Maximize U(IM’Db’Y_Pim(t)1m —deDb)

Where X = Y— Prm (t)1m ’deDb

The total derivative of this implicit function is then taken.

 

DU——.dI +—.dD +dY— . .dtJ +—.dI
61m m Db b (Wimp) at m 51 m'Pim

_ 5U 6U [ aU 66mm 53H
m

8U 6U
- —.dP .Db + —.D .P — = 0

 

aP- t
DU = 131w", +9—qdbb +§ZdY- 6U . 'm()dt.1m —§E—d1m.1>im(t)
61m Db M 511m (t) at m
- fldpdb .Db -'-‘3(—J—.dDdb.de - = o
anb 61),,

This forms the basis for conducting a comparative static. The research is
concerned primarily with how a change in tariff impacts the quantity (demand) of
imported meat, as well as the quantity (demand) of domestic beef. However, this
comparative statistic also looked at how the demand changed with respect to the
price of substitutes, and income.

To determine the impact of Pim on the demand for lm divide by dPim and

assume no change in domestic price, income and tariff. Set deb = dy = D = 0

68

d1 dD d - dD
6U m + 6U b _ 6U 1m Pimm— 6U de :0
61m dPim 6D b dPim a1m dPim an dPim

 

 

 

6U dDb P 6U dDb
—“—. . db — _.
d] m = an dPim an dPim
dP- 6U 6U

1m __ _ __
51m 61m

 

 

<0

 

 

11mm

To determine the impact of Pub on the demand for lm. divide by deb and

assume no change in domestic price, income and tariff. Set dP.m = dy = Dt = 0

d1 d1 d1 dD
0U m + 6U m _ 6U m Pim(t)-‘9(L'Db-a_U—_bpdb=0
61m deb 61m deb 61m deb apdb 60b deb

 

 

aU dDb P w dDb
“‘"—."—'"'—“‘. db "" M.“
dlm = 61),, deb an deb > o
“"0 db _a_U__a_U p. (t)
arm 61m 1’"

 

 

To determine the impact of tariff (t) on the demand for lm, divide by dt and
assume no change in import price, domestic price, and income.

Set dPim = dy = de = 0

69

aU all," + at! dDb _ 6U dIm . t w dB},
6] dt an dt 6] dt ’

m m

 

6U dDb P 6U dDb

d1 an' dt 'db an' dt

m < O
.Pimm

dt — 6U _ 6_U_
arm 61

m

Jamaica being a small country, an increase in tariff will also increase the
price, therefore demand for imported meats will decrease.
To determine the impact of Pim on the demand for Db, divide by dPim and

assume no change in domestic price, income and tariff. Set deb = dv = D = 0

 

 

 

 

 

 

 

6U 611," + 6U dDb 6U 611," P (t) 6U 6113}, 0
‘ ' ‘— db =
61m dPim an dPI-m 61m dPIm "'1 6D dPl-m
d1 d1
3%. m 'Pim(’)"flj_' m
dim = 61b dam 51m dPl-m > 0
dP- 6U 6U
1m ——————. db
61),, 51),,

To determine the impact of P93 on the demand for De, divide by deb and

assume no change in import price, income and tariff. Set dPim = dy = Dt = 0

w d1," + 6U dDb aU dIm P t 6U 6U dDb
_ . , b
61m deb 61),, deb 61m deb ' anb 61),, deb

 

 

 

at! all," P_ (1)—6U d1,"
dDb 61m 'deb' ‘m 61m 'deb
= <0
deb 6U _ 6U P
an an' db

7O

To determine the impact of tariff (t) on the demand for 03, divide by dt and
assume no change in import price, domestic price, and income.
Set (1le = dy = de = 0

6U all," + 6U dDb _ 6U dIm 6U dDb

P- :————. =0
arm dt an dt 6P,-,,,(t) dt ""0 an dt db

 

6U dIm 6U dlm
dDb apimo)’ dt ' 'm 51 ' dt
d; ‘ 5U 6U

 

Supply Function
Supply derived from maximized profit function, where profit (Tr) is
represented by;

H=P.f(l,k)—wl—vk

Firms will seek to maximize profits subject to a technology constraint. The

LaGrange function is;

L=P.Y—rk—wl+,t[f(lk)—Y]

FOC

6L
—=— +1 l,k =0
61 w fl( )

6L
—=— +2 l,k =0
61 r fk( )

71

6L
a — _f(lak) _ O

The solutions provide optimal input demand for labor and capital
L*=9(W.r.y)
K* = 9(W.r.y)

Inserting these optimal inputs into the profit functions yield a value function

I] = P.f(l*,k*)- wI*—rk*

n = P.f[(g(w,r,y),g(w,r,y)—w[g(w,r,y)]—r[g(w,r,y)]

The partial derivative of the profit function with respect to output price
yields the supply function.

ELL __
6P —f[g(W.r,y),glw,r,y]

Supply will therefore be a function of product price, price of labor, and
price of capital.

72

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73

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