Evaluation the effect of food subsidy reduction on Iranian household calorie intake: VAR application

Transcription

1 Evaluaion he effec of food subsidy reducion on Iranian household calorie inake: VAR applicaion KHALIL HEIDARY Research faculy member of Iranian Saisical Research and Training Cener HOSSEIN KAVAND Ph.D. Suden and researcher of Iranian Saisical Research and Training Cener JEL classificaion: H31, 51; Q18 Key word: food subsidy, calorie inake, Iranian households, VAR mehod Address for Correspondence: KH. Heidary, Iranian Saisical Research and Training Cener, Tel: Iranian Saisical Research and Training Cener

2 Evaluaion he effec of food subsidy reducion on Iranian household calorie inake: VAR applicaion In each year, Iranian governmen provides for food subsidy in is budge. Recenly, he effec of food subsidy o he households has been conroversial. In his Aricle we use vecor auoregressive mehod for invesigaing he effec of food subsidy reducion on Iranian households' calorie inake. The resuls show ha one uni sandard error reducion in food subsidy wihou income compensaion has a considerable negaive effec on calorie inake in shor-run and ha i akes around five years for households o adjus hemselves o he new condiion. Bu, if he negaive shock of food subsidy reducion occurs wih he same amoun of posiive income, hen he effec of income increasing no only removes he negaive effecs of subsidy reducion, bu also will have posiive effec on calorie inake in shor-run and long-run. Therefore, i seems ha focusing on food subsidy reducion is no he bes soluion. Inroducion From 70s ill now, Iranian governmen has provided food subsidies in is budge. The amoun of food subsidies have been increased from 5.4 billion RIALS in 1973 o billion RIALS in The growh rae of food subsidy, meanwhile hese years has been 32 percen (HEIDARY e al., 2006). I is clear ha he goal of paying food subsidy is providing he needs of calories for each person and he communiy food securiy as a whole. As KHODADAD K.F e al. (2005),show abou percen of Iranian households inake less calorie han hey need. Then i can be a good reason for coninuing food subsidy. Some of he researchers have focused on invesigaing he relaionship beween calorie inake and income. For example, BOUIS and HADDAD (1992) for Philippines and RAVALLION (1990) for Indonesia provide esimaes ha are eiher close o, and/or insignificanly differen from zero, while Behrman and DEOLALILAR (1987) for India and Srauss (1994) for Sierra Leone produce 2 Iranian Saisical Research and Training Cener

3 esimae of around Srauss (1986) examines he relaionship beween farm produciviy and calorie inake in Sierra Leone and esimaes a significan oupu-calorie elasiciy of 0.34, while DEOLALILAR (1988) for India finds no evidence ha nuriion deermines wages. Dawson and Tiffin (1998, 2002) examine he long-run calorie-income relaionship applying co inegraion analysis and shows ha calorie inake is Granger-caused by income and he calorie-income elasiciy is.34, and food prices are insignifican. In his paper we include food subsidies in he model. Firs, we invesigae he uni roo es for per capia calorie inake, per capia income, food prices and food subsidy using Augmened Dicky Fuller es. Second, we esimae he long run relaionship beween above variables and es for weakly exogenous variables. Third, we examine impulse responses of calorie inake o one sandard error subsidy reducion wih and wihou he same amoun of income compensaion. Empirical mehod In vecor auoregressive model, i does no require he specificaion of a causal ordering prior o esimaion. The VAR model, in our case can be expressed as: C μ a a a a C ε 1 k,11 k,12 k,13 k,14 i 1 y k a 2 k,21 ak,22 ak,23 a k,24 y i ε μ 2 = + + P μ 3 i ak,31 a P k,32 ak,33 a k,34 ε = 1 i 3 S μ 4 a ε k,41 ak,42 ak,43 ak,44 S i 4 (1) Where c is logarihm of calorie supply variable, y is logarihm of income variable, sis logarihm of food subsidy variable, p is logarihm of food price variable, and k is he lag lengh and μ i and aijare parameers. By using impulse response funcion, i is possible o race he effecs over ime of a shock o a given variable of one sandard error on all variables in he model. If all he variables in VAR have a uni roo and heir linear combinaion is saionary, hen he series are co inegraed. 3 Iranian Saisical Research and Training Cener

4 In order o es hypohesis of inegraion and co inegraion in he VAR model, i is ransformed ino is error correcion model (VECM) form: ΔX k 1 i= 1 = μ + Γ ΔX ε (2) i i + ΠX 0k + Where X [ c,y,s,p ] = x x x 1 i= a Γ i(γ i = -[ I - A A i] ) For i =1,...,(k -1) is a (4 4) marix and Δ = μ is a ( 4 1) vecor, ε is a ( 4 1) vecor. Π Is of reduced rank (r) and when 0<r<4, Π can be decomposed ino Π=αβ where α and β are (4 r) marix. The Granger represenaion heorem (Engle and Granger, 1987) shows ha β x is saionary implying ha x is co inegraed wih r disinc co inegraing vecors given by he columns ofβ. Johansen s (1988) procedure esimaes (2) and race saisics are used o deermine he rank of Π which can hen be decomposed o give he co inegraing vecor. For example if r=1 han, (2) can be rewrien as: Δc Δc i α1 c-1 ε1 y k-1 c y c i α Δ Δ y-1 ε2 =μ+ Γ + Δs Δs α s ε 2 i [ βββ 1 2 3β 4] + (3) i=1 i Δp Δp i α 4 p-1 ε 4 If β 4 is found o be insignifican, hen by excluding p from he model we can esimae a resriced VAR. If for example α 3 =0, hen s is a weakly exogenous variable (Enders, 2004, pp ).in his case s does no respond o he discrepancy from long-run equilibrium and oher variables do all of he adjusmen. Impulse response analysis (LUTKEPOHL, 1993, pp, 43-56) is used o invesigae he inerrelaionship among he variables. In his aricle we show he response of per capia calorie inake o subsidy shock wih and wihou income compensaion. Daa The annual daa relae o Iran for Calorie inake is average per capia energy (calorie) inake per day, calculaed on he basis of per capia dieary energy derived from naional 4 Iranian Saisical Research and Training Cener

5 food balance shees (source FAO:2006). Real per capia GDP is adjused wih CPI in 1990 and he real food price index is he corresponding nominal index deflaed by he CPI in 1990 (Source: Cenral Bank of he Islamic Republic of Iran year book). The real food price index (1990 prices) is he corresponding nominal indexed by he CPI (source: Cenral Bank of he Islamic Republic of Iran year book). Food subsidy (1990 prices) is deflaed by CPI (source: Consumers and Producers Proecion Organizaion) Resuls We used ADF es wih including rend for uni roo invesigaion. Table (1) shows ha all variable have uni roos in he level, bu heir firs difference rejec exisence of uni roo in 5% significan level. Inser [Table 1] Table (2) shows ha he bes lag lengh in respec o LR 1, AIC 2 and FPE 3 crieria is 3 lag. For deermining he number of long-run relaionships beween he variables, we used race saisics. Table (3) shows ha wih including inercep and rend in he long-run relaionship he null of r= 0 rejecs in favor of r 1. Then here is only one long-run relaionship beween c, y, s, p. Righ side of able (3) shows his normalized co inegraing vecor. The numbers in brackes are - saisics. Inser [Table 2,3] All he signs of he coefficiens are correc and in accordance wih economics heories. Bu, he Coefficien of price and subsidy isn' significan a 5% level. By eliminaing food subsidy from he model, he lag lengh becomes 2, bu he number of long-run relaionship is sill one. The coefficien of he price is sill a 5% level insignifican and wih wrong sign. We hen eliminae price, he lag lengh is sill 2 and here is only one long-run relaionship 1 likelihood Raio 2 Akake informaion crierion 3 Final predicion error 5 Iranian Saisical Research and Training Cener

6 beween c, y,s. All coefficiens have righ sign and are a 5% level significan. Table (4) shows he normalized co inegraing vecor. Inser [Table 4] Table (5) shows ha, absolue value of long-run adjusmen coefficiens are less ha one excep for food subsidy. We es ha s is a weakly exogenous variable by resricing α s =0. The respecive es saisics χ =0.78 (p value is 0.35), ha shows food subsidy is weakly exogenous. This means ha s does no respond o he discrepancy from long-run equilibrium and c, y do all of he adjusmen. Table (6) shows he resul of final model. Inser [Table 5, 6] The coefficiens of 0.16 and can be inerpreed as he long-run income elasiciy and food subsidy elasiciy, respecively. However, since feedback exiss beween c, y,s, his ceeris paribus inerpreaion is poenially misleading because i ignores relaions beween he hree variables in he VAR model. Then, impulse responses may give a beer picure of he relaions beween he variables (LUTKEPOHL, 1993, p, 380) Since all he variables are I (1), he effecs of he shocks are permanen. Furher, since all variables are expressed in logarihms, he impulse response of variables o a posiive shock of one sandard error can be inerpreed in erms of annual percenage changes following PESARAN and Shin (1998). Figure (1) shows he impulse response of calorie inake. The response of calorie inake o one sandard error reducion in food subsidy is negaive and is maximum effec occurs afer five years (-0.19%) and afer his period people will adjus heir calorie inake. afer 8 years i reurns back o is long-run equilibrium. Figure (2) shows he response of calories inake o one sandard error reducion in food subsidy shock ha is compensaed wih he same amoun of income increase. The response of calorie inake is posiive and i reaches o is maximum (6.80%) afer abou 7 years and hen reurns o is long-run equilibrium. According o hese resuls if shock of food subsidy reducion occurs wih he same amoun of posiive income shock, hen he effec of income increasing no only removes he negaive effecs of subsidy reducion, bu also will have posiive effec on calorie inake in shor-run and long-run. 6 Iranian Saisical Research and Training Cener

7 Inser [Figure 1, 2] Summary and conclusion This aricle uses Vecor Auoregressive mehod o invesigae relaionship beween per capia calorie inake, food subsidy and income in Iran using annual daa for By using co inegraion analysis we find a long-run relaionship only beween calorie inake, income and food subsidy variables. The weakly exogenous es shows ha food subsidy does no respond o he discrepancy from long- run equilibrium and income and calorie inake do all of he adjusmen. The final model shows ha long run income elasiciy of calorie demand is Also resuls show ha long run food subsidy elasiciy of calorie demand is inelasic a The impulse responses analysis shows ha a one sandard error food subsidy reducion shock has negaive effec on calorie inake and is maximum negaive effec occurs afer 5 years. Bu, one sandard error food subsidy reducion shock wih income compensaion has posiive effec on calorie inake and is maximum occurs afer 7 years. These resuls show ha income growh can alleviae and evenually eliminae inadequae calorie inake. Therefore i seems ha focus on food subsidy reducion is no he bes soluion wihou considering income growh. 7 Iranian Saisical Research and Training Cener

8 References Behrman, J.R. and Deolalikar, A.B, (1987). Will Developing Counry Nuriion Improve Wih Income? A Case Sudy for Rural India. Journal of Poliical Economy. 95, Bouis, H.E. and Haddad, L.J, (1992). Are Esimaes of Calorie-Income Elasicies Too High? Journal of Developmen Economics, 39, Dicky, D.A. and Fuller, W.A, (1981). Likelihood Raio Saisics for Auoregressive Time Series wih Uni Roo. Economerica, 49, Enders, Waler. (1948). Applied Economeric Time Series. 2nded. Heidary, Khalil and e al. (2006). Improvemen of Subsidy Paymen Sysem in Iran (Wih Emphasis on Targeing Subsidies). Insiue for Trade and Research. Iran. Khodadad Kashi, F. and Heidary, KH. (2005).Comprehensive Sudy on Nuriion Performance and Food Subsidy of Iranian Households. Insiue for Trade and Research. Iran. Johansen, S. (1988). Saisical Analysis of Co inegraion Vecors. Journal of Economic Dynamics and Conrol Johansen, S. (1991). Esimaion and Hypohesis Tesing of Co inegraion Vecors in Gaussian Vecor Auoregressive Models. Economerica, 59, Lukepol,H.(1993). Inroducion o Muliple Time Series Analysis. Berlin: Springer- verlag Pesaran, M.H. and Shin, Y. (1998). Generalized Impulse Response Analysis in Linear Mulivariae Model. Economics Leers, 58, Ravallion, M. (1990). Income Effecs on Undernuriion. Economic Developmen and culural Change, 38, Srauss, J. (1984). Join Deerminaion of Food Consumpion and Producion in Rural Sierra Leone: Esimaes of a Household-Firm Model. Journal of Developmen Sudies, 14, Tiffin. R. (1998).Esimaing he Demand for Calories in India. American Journal of Agriculural Economics, 80, PP Tiffin. R and Dawson. P. J. (2002).The Demand for Calories: some Furher Esimaes from Zimbabwe. Journal of Agriculural Economics. 53 (2), PP Iranian Saisical Research and Training Cener

9 Table1: ADF Tes for Uni Roos (H0: has 1 uni roo) Series Prob. Series Prob. LCAL D(LCAL) 0 LFCPI D(LFCPI) LRGDP D(LRGDP) LRS D(LRS) 0 Noe: 95 per cen confidence level. 9 Iranian Saisical Research and Training Cener

10 Table 2: deerminaion Bes Lag Lengh Lag LR FPE AIC 0 NA * 5.95e-06* * Iranian Saisical Research and Training Cener

11 Table 3: Trace Saisics and Normalized Co inegraing Vecor (Full Model) H0 Variables r = 0 r 1 2 r c y p s Trend Consan (63.87) (42.91) (25.9) [-8.82] [0.49] [-0.56] [-3.028] Noes: 1. Criical values (95 per cen level) in parenheses. 2. The numbers in square brackes are -saisics. 11 Iranian Saisical Research and Training Cener

12 Table 4: Trace Saisics and Normalized Co inegraing Vecor (Reduced Model) H0 Variables r = 0 r 1 r 2 c y s Trend Consan (42.9) (25.9) (12.5) [-6.07] [-2.8] [-9.9] Noes: as for Table Iranian Saisical Research and Training Cener

13 Table5: long-run adjusmen coefficiens Variables D( c ) D( y ) D( s ) [-4.8] [1.98] [-0.97] Noes: The numbers in square brackes are -saisics. 13 Iranian Saisical Research and Training Cener

14 Table6: Resul of final model long-run adjusmen coefficiens D( c ) D( y ) D( s ) c Variables s Trend Consan [4.9] [-2.2] NA Noes: The numbers in square brackes are -saisics. y 14 Iranian Saisical Research and Training Cener

15 Figure 1: Response of c o Food Subsidy Reducion.000 Response of LCAL o User Specified Shock Iranian Saisical Research and Training Cener

16 Figure 2: Response of c o Food Subsidy Reducion wih Income Compensaion 7 Response of LCAL o User Specified Shock Iranian Saisical Research and Training Cener