The Performance of Rice Markets in Bangladesh During the 1974 Famine (2)

8/3/2019 The Performance of Rice Markets in Bangladesh During the 1974 Famine (2)

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The Performance of Rice Markets in Bangladesh During the 1974 Famine

Author(s): Martin RavallionReviewed work(s):Source: The Economic Journal, Vol. 95, No. 377 (Mar., 1985), pp. 15-29Published by: Blackwell Publishing for the Royal Economic SocietyStable URL: http://www.jstor.org/stable/2233466 .

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The Economic ournal,95 (March 1985), 15-29Printed n GreatBritain

THE PERFORMANCE OF RICEMARKETS IN BANGLADESH DURINGTHE 1974 FAMINE*

MartinRavallionDuring I 974 many people blamed 'hoarders' for the famine in Bangladesh.' Forexample, the influential Bangladeshi newspaper Daily Ittefaqclaimed on I 2 MayI974 that 'hoarders, profiteers and black-marketeers were creating the crisisconditions'. When the Prime Minister of Bangladesh officially declared faminehe was quoted as saying that:

. .. a group of sharks, hoarders, smugglers, profiteers and black-marketeerswere trading on human miseries. [Mujibur Rahman, The BangladeshObserver,ept. 23, I974.]

Recent discussions have further emphasised the role of speculation in foodgrainsas a cause of famine (Hartmann and Boyce, I979; Sobhan, I980; Rashid, I980;Sen, I98I; Greenough, I982). By this reasoning, famine is attributed to theexpectation on the part of foodgrain stockholders of a substantial future priceincrease or future rationing.

There is a weakness in this explanation. As Arrow remarks in his review ofSen (I98I):If the famine is prolonged, then hoarding at the beginning means greaterstores will be available later on. In fact, if the hoarder was correct in hisexpectations, that is, if the farmer does not need to consume his own grainat a later date or if the speculator makes money by selling at a higherprice, then hoarding will have improved the availability of food later on,at, to be sure, the cost of making things worse initially.' [Arrow, I982,p. 25.]Indeed, if there is a complete set of markets and each one clears at each pointin time under Arrow-Debreu assumptions then one could do no better (at leastfrom a Paretian point of view) than give profit maximising hoarders a free reinin determining the allocation of consumption over time. Although these arestrong assumptions one can reasonably argue that future scarcity makes at leastsome storage desirable, even in a famine.

* For their useful comments on this paper my thanks got to James Boyce, Wahid Mahmud, Quibria,Abhijit Sen, Amartya Sen, Rehman Sobhan, Dominique van de Walle and seminar participants atQueen Elizabeth House and the Bangladesh Institute of Development Studies, Dhaka. My thanks alsogo to this JOURNAL'S editor and referees whose efforts have added much of value to the original version.Financial assistance from the Overseas Development Administration and the Social Science ResearchCouncil is also gratefully acknowledged, subject to the usual disclaimer.

1 The seminal contribution to the recent literature on the economics of famine is Sen (1981) whichincludes discussion of the 1974 famine in Bangladesh. An influential early work on Indian famines isBhatia (1967). A major contribution to our knowledge about the 1974 Bangladesh famine has beenmade by Alamgir (1977; Alamgir et al. 198o). Elsewhere I have examined the performance of agri-cultural labour markets during the 1974 famine (Ravallion, 1982).[ 15 ]


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i6 THE ECONOMIC JOURNAL [MARCHThe validity of the 'hoarding' explanation remains in considerable doubt.Nor is it immediately clear how one would go about resolvingthe issue. This isfurther complicated by the fact that, as is common, the available informationon the level of private stocks during the famine consists of little more thanrumours or, at best, causalobservations.This paper offers a test for 'excessive hoarding' during the I974 famine. Forthis purpose,revealeddiscrepanciesbetween actual price movements and thoseimplied by rationalprice expectationsformedin competitive marketsare takenas an indication of the poor performanceof the actual markets. In other words,for competitive hoarding to be justified it must be based on a rational expecta-tion of future scarcity. I take this to be a simple and appealing axiom forjudging one aspect of the performanceof markets.' Under certain conditions

it can also be given a clear Paretian justification (Newbery and Stiglitz, I98I).The main problem encountered in applying this criterion to the presentsettingis that price expectationsare not observed.The idea behind the proposedtest of market performance based on observed prices can be explained asfollows. Clearly, it is desirable that storage should respond to future scarcityand, thus, so should the spot price of a storablegood. But it is not so clear thatsuch a relationship should exist independently of future prices. I shall arguethat if there is convincing evidence that readily available information on likelyfuture scarcity affected current prices independently of realised future pricesthen it is reasonable to conclude that either market prices do not adjust toeliminate excess demands or that the information on future scarcity is leadingto biased price forecasts. In either case, marketsare not performingwell.2The following Section outlines the theoretical model to be used in inter-preting the movements in rice prices during the period. The model's structureis novel in that, under certain conditions, it permits one to infer deviations ofprivate storagedecisions fromthose implied by rational priceexpectations,evenwhen neither stocksnor price expectationsare observed. The model interpretsthe monthly rice price series as primarily the outcome of storage decisions inthe private and public sectors and the inherent seasonalityof production andtransactioncosts. Section II discussesappropriateestimation methods for themodel. Section III gives the resultsand Section IV examines theirimplicationsfor market performance.

I AntecedentsncludeWorking's 949b) methodof testing heperformance f a commodity uturesmarketsbased on comparisonwith an 'ideal market' in which changes n futureprices are seriallyindependent.The idea has also been applied to surveydataon price and interestrate expectations foran exampleand references ee Friedman,I980).

2 I do not knowof any previousworkusing this approach.The usualmethod s to compare easonalprice differentialswith storage costs, assuming hat profits indicate market inefficiency; see Farruk(1972) and Alamgir(I98o) for attemptsto apply this methodto Bangladesh ice price data. Spatialprice differentials ave also been used to test marketperformance, lthoughthe receivedmethodusingbivariate correlations s fraught with inferentialdangers; see Ravallion (1984) for an alternativeapproachand its applicationto post-IndependenceBangladesh.For a recent criticalsurveyof theliteratureon agriculturalmarketperformance ee Harriss 1979).


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I985] BANGLADESH RICE MARKETS 17I. MODELLING THE PRICE OF RICE IN BANGLADESH

In this section I shall offer some possible apriori justifications for the followingmodelof the monthly time seriesof rice pricesin post-IndependenceBangladesh(all logarithms are natural):log Pt = /%o/851og Pt_L+2 log Pt+]L+f33Xt4ALt

+h5AZt+fl6Gt+utt (t = I, ...,n) (I)where the fl's are parametric and P = retail price of rice, X = variable(s)determining the flows into storage from the non-storagesectors at given price(production and imports less current consumption), L = dummy variable forlean months (i if no rice produced, o otherwise), Z currently availableinformation on future foodgrain availability, G = net out-flows from themarket into Government rice stocks,It = an appropriate error process, to bediscussedin Section II.It is often assumed that competitive storage agents are risk neutral profitmaximisersfacing a constant marginal cost (for recent examples see Newberyand Stiglitz, I98I, I982, and Wright and Williams, I982). Evidence for wheatstoragein the United States does not entirely support this assumption.Certainly,marginal storage costs do not seem to vary much with stock level. However,positive stocks are observed even when expected future price falls short of thespot price plus marginal storage cost. Agents perceive a positive marginalbenefit fromholding stocks,in addition to expected profit. (The seminalcontri-bution here is Working, 1949a; for recent evidence see Gray and Peck, I98I.)Although there does not appear to be any comparable evidence for ricestorage in Bangladesh, there must be a reasonable presumption that stock-holders (farmers,millersand merchants) were not solely motivated by expectedprofits during the period. Stockholders are also likely to have viewed theirstocks as a desirable precaution in a period of very considerable social in-stability. Thus I shall assumethat storage agentsin post-IndependenceBangla-desh would also have held foodgrain stockseven if it were not profitableto doso. In particular, stockholders'preferencesare defined on the level and price ofstocks as well as the level of profits from holding stocks.To incorporate this assumption into a manageable econometric model,I shall also assume that:(i) all stockholdersare risk neutral with respect to profits and have identicalpreferences;(ii) their preferences can be well represented by a utility function which isstrictly concave in stocksat given profitability;(iii) their utility function is additively separable both intertemporarilyandbetween stocks and profits.It seemsplausiblethatthemarginalutilityfromholdingstocks(at givenprofit-ability) dependson the currentprice as well as the level of stocks.For example,one might reasonably supposethat utility is gained from a high monetaryvalueof stockholding.I shall also introduce an additional cost into the storage problem to do with


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I8 THE ECONOMIC JOURNAL [MARCHthe seasonality in rice availability. Although it is possible to increase privatestocks in the lean months (by importing, buying up government stocks orsmuggling) it is likely to be considerablylesscostly to do so at times of harvest.Thus the seasonalityof production introducesseasonalityin search and trans-action costs for buyers. It is assumed that the total transaction cost in leanmonths is proportional to the value of transactions.Combining these considerations,the storage problem is represented by

Max U(St, Pt) + (Pt+I-Pt-Ct)St- TtPt(St-St-,) (2)(St)with U8,> o, Up > o, U. < o, U,P > oand where St = stock level at time t, Pt+1 = price expected for time t + I on thebasisof the informationavailable at time t, Ct = unit storagecost at time t andTt = unit transaction cost at t.It is assumed that T can take two possible values, namely Tt = Lt, whereL = I when AS > o but rice is not produced while L = o otherwise.In the empirical work it will be assumed that L = I in all months when,according to a typical crop calendar, little or no rice is produced. Thus, anadditional cost of 0 per unit value of transactionsis incurred when a traderattempts to increase stocks in the lean months rather than at the harvests. Italso seems a reasonablesimplification to suppose that unit storagecost is pro-portional to current price, C = ct. ()This will be a good approximation when wastage and interest charges are ahigh proportion of storage cost, as seems plausible in this setting (for furtherdiscussionsee Moore et al. 1973) .The solution to (2) will depend on the functional form of U. A convenientassumptionwith all of the desiredpropertiesis that U is linear in P and quad-ratic in S, in a suitable neighbourhood of the optimum. So U is strictly concavein S but not additively separable between P and S. Then a solution can beobtained of the following form

St = a'o+c+(P(t+L-Ptt-Ct-TtPt)Ptl+e1t (a, > o), (4)where the a's are parametric and el is any appropriate error process. Forreasonably small differences between price expectations and spot prices, theabove equation can be well approximated by:'

St = a0+ a(log Pt+1-log Pt- c-Tt) + elt (5)Since price expectations are not observed, a theory of their formation isrequired.Let etdenote the error made in predicting log price, i.e.

et logPt-log Pt. (6)1 Although errors in approximating AP/P by A log P are large for large IAPI, very good piece-wiselog linear corrections are possible over the range of price differences found in the present data. How-ever, the main results are unaffected by using the simpler approximation and so I have omitted dis-cussion; details are available.


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I985] BANGLADESH RICE MARKETS I9If expectationsare rational in the senseof Muth (196I) then they are unbiasedpredictorsconditional on available information,i.e.

E(etIIt-1) = o, (7)where It is the informationset available to traderswhen formingtheir expecta-tion at time t. By the propertiesof conditionalexpectations, etwill be orthogonalto all elements of It-,. In short, under the Muthian hypothesis, storage agentscould not have made better use of the availableinformationwhen formingtheirprice expectations.One can generalise this model and suppose that expectations need only bepartially rational in that only a subset of the available information is usedin forming (rational) expectations. Then et will be correlated with remainingelementsof It-,. Thus the strongform of the REH (that e is a zero-mean whitenoise errorprocess)is nested within a more general model and formsa testablehypothesis.Following this approach, suppose that

et = y1Zt-1+Y2logPt-L+62t (o < 72 < 2) (8)for some Zt in It (which may, of course,be a vector). In this settingit is reason-able to assume that It includesPtand thisvariable is singledout. The restrictionthat o < 72 < 2 seems plausible.' The 'strong form' of the rational expecta-tions hypothesis,namely that Y = =is interpreted as a normativecriterionfor the informationalefficiencyof storagedecisions.Combining these assumptions (equations (5), (6) and (8)), the change inprivate stocksduring time interval t is given by'ASt 1(A log Pt+1 (72-I) AlogPt + y1AZt - 0bL4) + 'Alt + 1lAe2t+1l

(9)Given that the restof the model is log-linearin price it is highly desirablefromthe point of view of solving the model to assume that this is also the case forflows into storage from non-storage activities (production and imports lesscurrent consumption). Denoting the latter by Q it is assumed that:

Qt = ao+alogPt+a2Xt +3t (a > o). (IO)This specification can also be given a dynamic structure in prices withoutaltering the main results, for example, by assuming that farmersneed not haverational price expectations. To simplify the exposition I have ignored thesepossibilities.

Given that prices are unlikely to adjust costlessly, it is plausible to permitprice autoregressionindependently of market conditions. Following commonpractice, I shall assume thatlogPt = 8 log Pt-, +(I -8) log Pt* (o < 8 < I), (II1)

For example, it is implied by the condition that static expectations, while not generally rational,should at least be consistent with stationarity in the autoregressive process of actual prices. (Noting thatlog Pe = log P-1 implies that log P = (1 - Y2) log P-1 - YiZ-l - 62.)


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20 THE ECONOMIC JOURNAL [MARCHwhere log P is the market clearing price which solves

AS+G =Q (2)at each point in time.Currentprice in the market can now be expressed n the form of equation (i)(substituting(9) and (io) into (i 2), solving forlog P* and substituting nto (I I)),where

130 - ao36 (I3.I)1 - 8+ (I -Y2) al36 (13.2)ft2 - fal36 > ,(I33)f33 - a2136, I3.4)ft4 - a,0136 < o, (135)f35 -alYl 36 (I3.6)f36 (I -8)/[al-a1(Y2-2)] > O. (13.7)

The main taskof the empiricalworkis to test hypothesesconcerning yi and72. Provided that A2and /35 are identified y, is estimatable as a (non-linear)function of the model's parameterestimatessince

YI = /35//32. ('4)However, 8 is not identified and, hence, estimation of

72 = I+(8 -31)//32 (I5)requiresa prior assumptionabout the degreeof price flexibility.For thispurposeit is useful to establisha confidenceinterval for

8 = 31 -- A (i6)since72 ; o as 8 t d* noting that f2 > ?.If one concludes that y7 is positive then price forecastsare biased in thattraderssystematicallyover-estimatethe effect of cropdamage at agiven date onfutureprices.By implication, storage and, hence, currentprice at that date aretoo high. Similarly, if one believes that 8 > a* and thus that 72 > o, then priceexpectations are sluggish in the sense that forecasting errors are correlatedpositively with past prices.However, it should be emphasised that all such inferences are conditionedon the validity of the set of prior assumptions outlined above. The mostimportantsourcesof doubt are probablythe treatmentof storagedecisions andthe assumptionthat marketsclear on the basis of those decisionssubject to anyshort-termcosts of adjustment.I shall return to these issues and discusspossiblealternative interpretationsof the empirical results.

II. ESTIMATION METHODS AND MEASUREMENT PROBLEMSThe theoretical model outlined above has a number of propertieswhich pre-clude consistentestimation of equation (i) by ordinary least squares.First, autoregressivefuture prices will be correlated with the error term inequation (i). This particular simultaneity problem arises from the model's


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I985] BANGLADESH RICE MARKETS 21treatment of price expectations.A number of estimation methods appropriateto models assuming (unobserved)rational expectationshave been discussedinthe recent literature (for a survey see Wickens, I982). McCallum (1976) hasproposed a convenient and consistent estimator according to which futureprices are treated as expectations measured with a white noise error (also seeMuth, I98I). The 'errorsin variablesmethod' has been adapted to the presentproblem; the difference being that the present version does not assume thestrong form of rational expectations but contains this as a nested hypothesis.'Variables selected from the assumed informationset are used as instrumentalvariables for future price. The main IV's used were lagged prices, seasonaldummy variables and variablesrelated to crop damage and other damage dueto natural causes.

Second, the error term in equation (i) is unlikelyto be seriallyindependent.The error n equation I is related to the underlyingstochastic terms n equations(5), (8) and (Io) as (At Llt+ lx6A2t+,-63t)36 (I7)So, even if el, 62 and ?3 are serially and contemporaneously ndependent, # willhave a negative serial correlation;

COy(/tt 4u-l) = - /32 (var Clt-i + aaxar 62t) < 0. (I8)Of course, serial, or contemporaneouscorrelations amongst the e's could alterthis result.Nonetheless,there is an a prioricase for using autoregressiveestima-tion methods.An importantmeasurementproblem is posed by the choice of thosevariableswhich are hypothesised to be correlated with price forecasting errors. Theselection has been guided by two principles:(i) It should be highly plausible that the value of the chosen variable wasinformation available to stockholders at the time they formed their priceexpectations.(2) To avoid identificationproblems, the chosen variable should not also bea determinantof current production or consumption.In view of the first consideration, it was decided to only use informationcontained in past newspaperreports.The obviouschoices were the main Englishlanguage newspaperpublished in Dhaka, TheBangladeshObserver,nd the mainBengali newspaper, the Daily Ittefaq.Of course, one need not believe that moststockholdersread these newspapers (although their circulations are high) tojustify the assumption that their contents give a reasonablecharacterisationofthe available information on crop damage. The latter assumption seemsplausible. (The BangladeshObservers known to 'have been politically censored

1 There is an important but subtle difference between McCallum's (1976) 'partly rational expecta-tions' model and the present one. McCallum estimates a model in the form: P = fl8P-1 + /82P4I + error(or in log form as appropriate), and only variables from assumed current information set should be usedfor predicting P+1 as the instrument for P!,1. The present paper estimates a new equation which isderived from the one above under an additionalassumption about the determinants of e = p_- P ByMcCallum's method one should not use IV's correlated with e+6; by my method one should not useIV's correlated with the error term in the behavioural equation for forecasting errors (for example,equation (8)). If one does then, in terms of equation (i), /2 will be inconsistent. As a precaution againstthis, all IV's which were significant in an OLS regression for log P+1were tested as possible additions toequation (i).


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22 THE ECONOMIC JOURNAL [MARCHat times but this does not appear to have affected its crop damage reporting;see Ravallion and van de Walle, I984). A count was made of:

CDt = the number of reports of crop damage in month t, likely to affecteither current output or the time profile of future output. Causesincluded flood, drought, excessive rainfall, erosion, salinity, cropdiseasesand pests.Countswere also made of: other reportsof non-farmdamage to real propertyand persons,including loss of life, and variablesdescribing government activi-ties. Furtherdetails and examplesof the newspaperreportsand how they weretranslated,coded and checked aregiven in Ravallion and van de Walle (1984).From the point of view of the second principle above, it was decided to usethe information contained in the crop calendar and the reportsof crop damageto constructan index of recent damage to future output. 'Recent' is taken tomean within the last four months, and 'future' to mean within the next fourmonths. The index was only constructedfor the main ('aman') crop. With theexception of a small amount of earlier broadcast rice, this crop is plantedbetween mid-June and mid-August and is harvested between mid-Novemberand mid-January. The aman crop accounts for about 6o% of annual pro-duction. The index of amancropdamage t time t - i is given by:

ACDt_t = AtAt_jCDt-j (I 9)whereA = I for July, August, September, October and November, i.e. thosemonths for which aman rice is due within the next four months andthe crop has been planted

= o otherwise.Thus, if ACDt-iis positive then it is inferredthat damage to aman rice occlurredi months ago and that this is likely to delay or diminish the future aman crop.At least some of any crop damage in the months ofJuly and August is likelyto affect the relatively small 'aus' crop at the point of its harvestingas well asthe future aman crop, thus posing an identification problem in estimating A5.On apriorigrounds,it is implausiblethat thiscould account for the high autumnprices of I974 nationally since the aus harvest turned out quite well by recentpast standards(and, indeed, it was I4% higher than I973 in the districtsworsthit by the famine; see Alamgir, I980, ch. 6). Nonetheless, an alternativedefinition for ACD was also considered in which CD was weighted by the pro-portion of aman rice in total acreage for each month, estimated from theannual acreagedata under alternativeseemingly plausibleassumptionson cropcompositionfor each month. These alternativemeasuresof ACD had negligibleeffect on estimates of /5 or their standard errors and so the simpler measureoutline above has been preferred.In termsof equation (i), it is assumedthat the price effect of the one month


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I985] BANGLADESH RICE MARKETS 23change in the current information set pertaining to future aman crop damagecan be representedby the following polynomial distributedlag:

4E (f9 +fi51 i +f62 i2) ACDt-i, where f5 (fio, fin, f52) (20)i=OThis specification was tested against an unrestricteddistributed lag and a thirddegree polynomial and was preferred.Another measurement problem is posed by the variable L (entering themodel in first difference form). Once again, this is a dummy variable taking thevalue I in months for which no rice is produced but traderswant to increasetheir stocks. Rather than let L vary from year to year (thus posing furthermeasurement and estimation problems) it was decided to fix L on the basis ofthe crop calendar. Negligible rice is produced from mid-Januaryto mid-Apriland from mid-August to mid-November. Processingand transportationdelaysmean that new rice is usually still available late-January and late-August.Furthermore, it is unlikely that traders would want to increase stocks in theweek or two prior to harvest. So:

L = I for February, March, September, October= o otherwise.

III. DATA AND RESULTSThe time span of the empirical work is the post-Independence period underMujibur Rahman, the charismatic leader of the Bengali nationalist movementprior to 1971. The period was one of considerable internal unrest, as well asbad weather. It would seem that Mujib's early popularity had waned by thefamine year and many people had lost faithin their government (Ravallion andvan de Walle, I984). Mujib was assassinated n August 1975 and therefolloweda period of political instability.The model was estimated using monthly data for the period July 1972 toApril 1975, giving 30 observations after lags. The starting date was chosen inthe attempt to avoid the undoubtedly disruptive effects on markets of theBangladesh War of Independence in 1971. The terminatingdate was chosentoavoid the effectsof an unprecedented currencydemonetisationand increase infood aid, mid-1975. However, estimatesof the main parametersof interestandtheir standard errors were found to be quite robust under small changes in thestarting and terminatingdates and also for a 42 month version (to mid-I976)estimated on a restricted data set (Ravallion and van de Walle, 1984).With only a few yearsof monthly data it is difficult to capture convincinglythe effects of annual variables such as harvested rice output or graduallychanging ones such as population. Furthermore,one would expect month-to-month price changes to be primarily determined by short-term storage de-cisions (both in the public and private sectors) and the inherent seasonalityintraditional rice production. Also, foodgrain import and distributionpolicies inBangladesh during this period are likely to have provided considerableinsula-tion of local rice markets from international prices and trading conditions.


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24 THE ECONOMIC JOURNAL [MARCH(The Governmentcontrolledall foodgrain imports,mainly wheat sold in urbanration shops at controlled prices.')With these points in mind, the following choices were made concerning thespecification of the price model reported in Table i.(i) A number of variableslikely to influence supplies to the marketfrom thefarmsector were tested,including imputed rice output, domesticjute pricesandagricultural wage rates. A number of seemingly plausible monthly allocationsof the annual outputsforeach cropwere considered.All of theseperformedverywell but generally no better than a simple dummy variable (H) for Novemberand December. The choice made negligible difference to other coefficientsinthe model. Jute prices and wage rates were generally insignificant. On re-flection this does not seem too surprising; the poor (and presumablyunantici-pated) weather conditions during the period suggest that actual outputs wereprobably less than those chosen by farmers. Furthermore,the effects of juteprices arise via land-use changes which one would have difficultyin capturingwith a short monthly series.(ii) The resultswere consistent with the view that the domestic rice marketswere reasonably well insulated from foreign foodgrain prices and tradingconditions (except in so far as these are reflected in the Government'sownstock position which does affect domestic prices; see (iv) below). Foodgrainimportsgenerally had the expected signs when added to the price model but,at their best, were only mildly significant. (The best result was current wheatimports with a t-ratio of - 17). Nor were international rice and wheat pricesan important determinant of domestic prices. Indeed, world foodgrain priceswere, if anything, generally declining during I974-5.(iii) Excessivemoney supply growth has been discussedelsewhereas a possibleexplanation for the famine (for example, see Lifschultz, I974). However, thepresentinvestigations have not been supportive. Currentand lagged values forthe log differencesof Mi and M2 stocks were tested as additional variables inthe price model but were insignificant.A number of ad hocspecifications werealso tested with the change in log rice price regressedagainst a distributed lagof current and past money supply changes. These models performedpoorly.While a reasonable case might be made for the belief that high rates of moneysupplygrowthin the firstyearafterIndependencedid have aninflationaryeffect,this does not appear to have been a reason for the high rice pricesin late I974.(iv) More preciseestimates of the effects of changesin the Government'sricestockholding (G) were obtained using a one month lag rather than currentvalue. This is presumedto reflect the time requiredfor the transportationanddistributionof rice after leaving the Government'sgodowns. Changes in wheatstocks were also tested but did not prove significant. This could reflect theeffects of the Government's urban wheat rationing system and/or the well-known strengthof the Bangladeshipreference for rice.

1 For further discussion see Ahmed (1979). Also, these policies could well account for some of thesignificant urban-rural rice price differentials during this period, particularly between Dhaka and itsrural hinterland (Ravallion, I984). The price model was also estimated using a national price seriesexcluding Dhaka but this made negligible difference to the results.


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1985] BANGLADESH RICE MARKETS 25(v) The crop damage counts from The BangladeshObserverwere stronglycorrelated with those from Daily Ittefaq r = 0.79) and so it proved difficult toseparate their effects in a single regression. There does not seem to be muchdifference between the two papers, at least in terms of their crop damagereporting (compare i and 2, Table i).

Table IRice PriceEquation

(I) (2)Bangladesh DailyVariable Parameter Observer Ittefaqlog Pt-, 0?45 o.46(9.3) (8.5)log Pt+, 53 0?54

(12) (lo)Ht 4 -O099 -111(xX I) (7 ?) (6 6)ALt P0-48 044o48(x IO) (4 2) (3 5)YACDi-1 fl50 -o-x I-3ACDt_i](xioo) (4 7) (4 6)XiACDi- 11 0-32 0-23iACDt-i ~( IOO) } 6 (o5 )2 (4 6)3

z i2ACDtt t5' I -0o072 -0?047(x io)J (4.3) 34Gt-l 4fi. o'89 o-63(x IOOO) (2.9) (2.0)Errort-1 - 047 - 035

(2.1) (i.6)S.E.E. 0o027 0-029Mean log P 10 95

(rho weighted)Note: Absolute t ratios in parentheses. The TSP programme for IV estimation with a first orderserially correlated error has been used; for further details see Hall and Hall (ig80).

(vi) The log price model (equation (i)) was also tested against a linear pricemodel. The log model consistently performedbetter than the linear model; thestandard errorof estimate was a higher proportionof mean price for the linearmodel in all specifications tested and all coefficientsexcept /1 were estimatedwith less precision than could be obtained with the log price model. This isconsistent with the presumed non-linearityof the storagedemand function.(vii) The following instrumentalvariables were used for log P+1: og P1, -2,H, H+1,G1, the distributed lags of ACD, foodgrain imports and newspaperreportsof other (non-crop) damage. A number of changes to the set of IV'swere considered including the deletion of logP.1, the deletion of G-1 and theaddition of agriculturalwages but these changes made negligible differencetoestimates of the main parametersof interest, namely 131,32and /6. However,


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26 THE ECONOMIC JOURNAL [MARCHestimates of /)3provedto be quite sensitiveand so I have my doubts about howwell this parameter has been estimated.Possibly the most important variable omitted from the model is the level ofillegal rice exportsinto India. The sign of any consequent bias in the estimateof f5 will equal that of the correlation between smugglingand expected futurecrop damage (assumingthat exportsraise the domesticprice level). Since cropdamage and high prices in Bangladesh are likely to diminish the rewardstosmuggling, it seems plausible that any bias due to the missing variable willresult n underestimationf fl5,although he effecton yi = f5/f2 iS less clearsince, by the same reasoning, the omission of smuggling probably results inunderestimationof f2. However, neither a prioriconsiderationsnor the limitedavailable evidence (in particular, Reddaway and Mizanur, I975) suggestthatsmuggling is likely to have been substantialduring the I974 famine.Fig. I gives the firstdifferencesof log price and the fitted values using ACDcounts from ' TheBangladeshObserver'r = 0.97).

A log P0-20 -

0-15

0.10 I

0*050 -~~~~~~~~~

-0-05 -I -

ActualeFitted-0-20 -

Harvest Aman Boro Aus Aman BoroAus Aman Boro

N D JF MAM J JA S O N D J FM A MJ J A SO0N DJ FM A1972 1973 1974 1975

Fig. i. Actual and fitted first differences of log price.


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1985] BANGLADESH RICE MARKETS 27IV. IMPLICATIONS FOR MARKET PERFORMANCE

The resultsof Table I suggest that available informationon current and pastdamage to the future crop affected current prices independently of realisedfuture prices.An F-test convincingly rejects the restrictionf5 = Oagainst eachof the unrestricted models in Table I (F(3, 20) = I6 and 14 respectively). Whenthis empirical result is interpretedin terms of the theoreticalmodel of Section I,it is concluded that price forecasting errors were correlated with availableinformation.From Table I the polynomial distributed lag can be seen to give quite a pre-cise representation of the dynamic effect of ACD on current price. In view ofequation (14), one can use the results of Table I to estimate the effect of ACDon price forecasting errors. For example, using equation (i) in Table i, thefollowing result s obtained for the contribution of ACD to the one month changein price forecastingerrors:

4X (-o030o+o6oi-o0I4i2)ACDt_i/Ioo.(4


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28 THE ECONOMIC JOURNAL [MARCHupwards. Then, independently of theirbeliefs about future prices, tradersmightstore in responseto reports of crop damage (as an indicator of future rationing)and so y, could reflect this effect rather than non-rationalprice expectations.Of course, this alternative interpretation of yi is inconsistent with a com-petitive equilibrium since it assumes that storage agents had systematicallyfailed to achieve their desired stock levels. Furthermore, if this alternativeinterpretation of yi is preferredthen one must also maintain that 6 and, hence,Y2 are positive. Either way, biases in expectation formation are indicated.

V. SUMMARY AND CONCLUSIONSAn econometric model of rice price determination in Bangladesh has beenformulatedand shown to performwell in reproducinga monthly time series ofrice prices for the period I972-5, including the dramatic changes in the latterhalf of I974. The results ndicate that newspaper reportsof future crop damageresulted in higher rice prices during the period and that this effect existedindependently of future prices.The main interpretation offered for this empiricalfindingassumesthat riceprices adjustcompetitively to clear markets.Although the adjustmentneed notbe instantaneous, t is assumed that tradersbelieve that futureprices adequatelyreflect the future scarcities on which their storage decisions depend. Thisinterpretation supports the conclusion that price forecasting errorswere posi-tively correlated with readily available information on damage to the futureharvest. Thus, rice hoarding prior to anticipated production losses was ex-cessivewhen comparedto the likelyoutcome under competitiveconditions withinformationallyefficient expectations.In my view it is not behaviourally implausible that stockholdershad over-optimistic price expectations during the famine. But there is an alternativeexplanation. This assumes that stockholdersalso anticipated future quantityrationing. Although this could well be a rational expectation, it does suggestthat marketsfailed in their primary function of equilibrating excess demandsthrough price adjustment. By eitherinterpretationof the results,rice markets nBangladeshseem to have workedpoorly.The results also raise doubts about the performanceof non-market foodinstitutions.Rice pricesin Bangladeshare influencedby changesin the Govern-ment's foodgrain stock,itself determined by previous imports (including foreignaid) and internal procurement efforts.Thus, expectations of the effect of pre-harvest crop damage on future prices requirean assumptionabout the Govern-ment's responseto shared information. The most plausibleconclusion is that thestockholders'over-optimistic price expectations and/or anticipations of futurerationing during the I974 famine were premised on a belief that the Govern-ment would be unable to implement a suitable stabilising response to thereported damage to the future crop.QueenElizabethHouseandNuffieldCollege,OxfordDateof receipt ffinal typescript:March1984


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1985] BANGLADESH RICE MARKETS 29REFERENCES

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The Performance of Rice Markets in Bangladesh During the 1974 Famine (2)