THE ANDEAN PRICE BAND SYSTEM: EFFECTS ON PRICES, PROTECTION AND PRODUCER WELFARE

provided by Research Papers in Economics

Submitted Paper for AAEA Annual Conference, Long Beach, CA, July 28-31,
2002

The Andean Price Band System: Effects on Prices,
Protection and Producer Welfare©

Nelson Villoria, Corporacion Andina de Fomento and Harvard University
and

David R. Lee, Cornell University

Abstract: The Andean Community’s Price Band System (APBS), introduced in 1995,
had the announced goal of reducing domestic price instability by buffering fluctuations in
international prices through use of a variable import tariff. This paper evaluates the
effects of the Andean Price Band System on domestic producer price variability, levels of
nominal protection and changes in producer welfare. Application is made to four
important food products - maize, rice, sugar and milk - in Colombia, Ecuador and
Venezuela, from the period 1990 to 1998. The effects of the APBS on producer price
variability are analyzed through 1) comparing coefficients of variation of detrended,
monthly deseasonalized real prices before and after the harmonization of the APBS in
1995, and 2) variance decomposition of real domestic prices. For Colombia and Ecuador,
the APBS is shown to have successfully reduced real price instability below levels of
instability which existed prior to its introduction. Real exchange rate instability also
decreased sharply in these two countries following introduction of the APBS. In
Venezuela, real price instability is shown to have increased following introduction of the
APBS, while real exchange rate instability was unchanged. The APBS’ effects on
producer price protection are examined through estimation of average nominal protection
coefficients for the twelve country-commodity combinations identified above before and
after the introduction of the APBS. Results show that in all three countries and four
virtually all products, the APBS contributed to increased producer protection. Finally,
this paper uses a variant of the Newbery-Stiglitz approach to calculate efficiency benefits
due to risk reduction among producers and the transfer benefits created by redistributing
income among producers, consumers and government. The results show that the risk
reduction benefits created by the APBS are small. Similarly, the income transfer effects,
though larger, are also low, and both contribute to generally low levels of estimated
producer welfare effects. Overall, the paper concludes that the APBS has been of limited
usefulness as a policy instrument designed to reduce producer price variability in an
economically efficient manner.

Key Words: Andean Community, price band system, agricultural prices, price
stabilization

©Copyright 2002 by Nelson Villoria and David R. Lee. All rights reserved.
Corresponding author: Prof. David R. Lee, [email protected]

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