the impact of removing the sugar quota on the u.s. economy: a general equilibrium analysis

NORTH- HOLLAND

The Impact of Removing the Sugar Quota on the U.S. Economy: A General Equilibrium Analysis

Roy Boyd, Khos row Dorood ian , and A m y Power , Ohio University

This paper assesses the effects of the sugar program on the sectors of the U.S. economy. A computable general equilibrium (CGE) model of the United States is used to survey the impacts of this program. The model includes 15 producing sectors, 14 consuming sectors, 6 consumer groups, a government sector, and a foreign sector. The study reveals that the U.S. Sugar Program causes an aggregate reduction in the output-producing sectors. In addition, the welfare of the 6 consumer groups combined is also negatively effected by the program. Also included are sensitivity experiments that compare the impacts of different input substitution elasticities; the results remain unchanged.

1. INTRODUCTION

The United States government has intervened in the sugar market since the nation's birth: at first by levying tariffs on imported sugar to raise government revenues, and now by imposing import quotas to protect the sugar industry. As the Uruguay Round, under the General Agreement on Tariffs and Trade (GATT), reached its com- pletion in Geneva in December 1993, quotas on sugar are agreed to be phased out. If the GATT agreements are approved by the U.S. Congress, ~ there will be a freer trade in almost all markets, including sugar. Other international trade agreements under negoti- ation, which also recommend more open trading conditions, include recent passage of the North American Free Trade Agreement (NAFTA) and the Caribbean Basin Initiative (CBI). The CBI, initi- ated in 1983, is to promote the development of the region by creating a free-trade zone to stimulate Caribbean exports to the United States.: There is a great deal of concern, especially among policy-

IA vote is expected by August 1994 (The Wall Street Journal, December 15, 1993). 2CBI nations exported 1,019,479 metric tons of sugar to the United States in 1983-1984,

while only 371,419 tons were exported in 1987-1988. Address correspondence to Prof. Khosrow Doroodian, Department o f Economics, 215

Haning Hall, Ohio University, Athens, OH 45701. Received December 1994; final draft accepted May 1995.

Journal of Policy Modeling 18(2): 185-201 ( 1 9 9 6 ) 0161-8938/96/$15.00 © Society for Policy Modeling, 1996 SSDI 0161-8938(95)00067-4

186 R. Boyd, K. Dorood ian , and A. Power

makers, on the repercussions of the removal of import quota policy. This paper examines the validity of these concerns by providing a quantitative analysis of the effect the sugar program has on various sectors of the U.S. economy by utilizing a CGE model. It will measure the benefits and costs resulting from the import quota system. In addition, this study includes a sensitivity analysis that compares the results with differing substitution elasticities. Our results show that a free-trade policy on sugar will cause an increase in net wealth for the society as a whole. Product ion of all sectors combined, however, will increase by less than one percent of total combined output.

The paper is organized as follows. Section 2 presents a brief history of the U.S. sugar program. The review of literature is exam- ined in Section 3. The theoretical model is discussed in Section 4. In Section 5, we present the simulation results. A sensitivity analysis is conducted in Section 6, and conclusions are drawn in Section 7.

2. A BRIEF HISTORY OF THE U.S. SUGAR PROGRAM

Sugar is an important agricultural crop, with the 1987-1988 crop valued at $1.9 billion, or approximately 3 percent of the total value of principal U.S. c rops) Sugar can be produced from almost any plant but is harvested commercially from two plants: sugarcane and sugar beets. Sugarcane, which satisfies 40 percent of the U.S. demand for sugar, is grown in Puerto Rico and four states: Florida, Hawaii, Louisiana, and Texas. Sugar beets, which satisfies 45 percent of the U.S. demand for sugar, is grown in 14 cold climate states. The major sugar-beet-producing states are Minnesota, California, North Dakota, and Idaho. 4 Sugar is a relatively stable commodity with regard to the quantity demanded and has historically been highly restricted. Due to the history and the importance of sugar, the sugar program provides for a solid analysis of the implications that removing quantitative restrictions can have on the particular variables of interest to policymakers.

The present sugar program guarantees producers a minimum price for domestic sugar that is usually double the price on the

3 MacDonald, S.B., and Fauriol, G.A. (1991) The Politics o f the Caribbean Basin Sugar Trade. New York: Praeger, p. 24.

4 U.S. General Accounting Office (1993) Sugar Program: Changing Domestic and Interna- tional Conditions Require Program Changes. Washington, D.C. April, p. 4.

T H E I M P A C T O F R E M O V I N G T H E S U G A R Q U O T A 187

world marke t ) The program insulates U.S. producers f rom lower and potentially volatile world prices. Unfortunately, these high U.S. prices obtained as a result of the program have been at the expense of sugar consumers and the manufacturers of sugar- containing products. The benefits of the program are mainly shared by the growers and processors (60 percent and 40 percent, respectively). However, the share of the benefits that go to the growers are extremely concentrated among a small percentage of farms. It is estimated that in 1991, 42 percent of these benefits only effected 1 percent of all the sugar farms. 6 In addition, concentration occurs further because many growers are also processors.

The current sugar program has two key components: (1) a domestic commodity loan program that sets a loan rate for sugar and (2) an import quota system. The import quota system controls the flow of sugar in order to prevent unapproved amounts from being imported. This means that the U.S. demand functions against an artificially managed supply and demand, and thus the supply forces outside the U.S. market do not directly influence, and are not directly influenced by, the demand and supply relationships in the outside world. The quota system raises U.S. prices enough to support producers and prevent them from defaulting on their loans. This issue is a priority because there is a stipulation that the sugar program must function at no cost to the government.

3. REVIEW OF LITERATURE

The gains and losses of the sugar program have been the focus of many partial equilibrium (PE) analyses, including U.S. General Accounting Office (GAO) (1993), Lopez (1989), Morkre and Tarr (1984), and Gemmil (1977). Both MacDonald and Demetrius (1986) and Kane (1983) focused their PE analysis on the Caribbean's effect of the U.S. sugar program. However, a study by Leu, Schmitz, and Knutsen (1987) is the only one that employs the general equilibrium analysis to evaluate the sugar program. Gemmil (1977) used a spatial equilibrium model to assess several trade policy options, including import quotas. 7 The latest report by the GAO estimated the loss to consumers at an average of $1.4 billion annually where

5 Between the years 1982 and 1988, the world price for sugar averaged 7 cents a pound, whereas the U.S. price was over 21 cents a pound.

6U.S. General Accounting Office, p. 4. 7 The main difference between spatial equilibrium models and PE or CGE models is that

spatial equilibrium models are concerned with the allocation of resources over space and the location of economic activity, where PE models only look at a single market and ignore

188 R. Boyd, K. Doroodian , and A. Power

producers only receive approximately 40 percent ($561 million) of that amount , s Other interest groups who have incentives to support sugar policies include producers and users of sugar substitutes, corn producers, corn sweetener manufacturers, and non-caloric sweetener manufacturers. These interest groups are all attempting to obtain a portion of the economic rents generated by the sugar program. With this program, foreign exporters or governments are able to secure higher prices and profits on their allotted sales in the United States because of the fabricated scarcity created in the domestic market.

Lopez (1989) looks at the impact that the program has on corn- sweetener producers and found that the high fructose corn syrup has captured over 35 percent of the U.S. caloric-sweetener market. Leu et al. (1987) estimated that 42 percent o f the total caloric-sweetener market has been captured by sugar substitutes. This shift has significantly reduced sugar demand. However, the United States does not produce enough sugar to meet its domestic demand; thus it must continue to import sugar. The United States imported less than 2 million tons of raw sugar in 1991, while in 1972 it imported 6 million tons. 9 It has been predicted that imported sugar will no longer be required if this trend continues, l°

4. THE THEORETICAL CGE MODEL

The advantages of using a CGE model, as opposed to a PE model, are numerous. While PE models typically focus narrowly on a particular industry or market, CGE models make it possible to track the full effects of quotas throughout the entire economy by considering the interdependence among various industries. One of the greatest advantages of this model is the disaggregation of economic sectors. The model includes 15 production sectors, 14 consumption sectors, 6 household income groups, and the government. The degree of the desegregation facilitates a more accurate judgment o f the ancillary effects as well as the explicit effects of the sugar quota system. By appraising these effects, it will be possible to know the degree to which the agricultural sectors, the other producing and consuming sectors, and household income classes could possibly gain or lose.

the repercussions in other markets and CGE models create an equilibrium where all markets clear.

8U.S. General Accounting Office, p. 3. 9U.S. General Accounting Office, p. 4. ~°MacDonald, S.B., and Fauriol, G.A., p. 24.

T H E I M P A C T O F R E M O V I N G T H E S U G A R Q U O T A 189

Table 1: Classification o f Produc ing Sectors and Consumer Goods and Services

Industries Consumer goods

1. Manufacturing I. Food 2. Mining (Coal) 2. Alcohol and tobacco 3. Mining (Other) 3. Utilities 4. Services 4. Housing 5. Chemicals and plastics 5. Savings 6. Food and tobacco products 6. Furnishings and appliances 7. Petroleum refining 7. Clothing and jewelry 8. Financial 8. Transportation 9. Crude oil 9. Motor vehicles

10. Natural gas 10. Financial & other services 11. Wood products 11. Reading and recreation 12. Agriculture 1: program crops 12. Non-durablehousehooditems 13. Agriculture 2: livestock 13. Gasoline and other fuels 14. Agriculture 3: other 14. Services 15. Forestry

The technique for constructing inputs into the model are based on the Ballard et al. (1985) CGE model of the U.S. economy. The model employed is slightly smaller and more suitably designed for evaluating the sugar quota system. Table 1 describes the exact producing sectors and types of consumer goods and services incorporated in the CGE model. In the model, agriculture production is segregated into three distinctive agricultural sectors and a separate forestry sector. A forestry sector is introduced as a separate sector because it produces distinctly different types of products than the other agricultural sectors. Agriculture 1: program crops, consist of corn, wheat, sugar, etc.; Agriculture 2: livestock, includes cattle, hogs, chicken, etc.; Agriculture 3: others, includes vegetables and fruit crops. This separation of agricultural production is determined by differences in product characteristics and government policies such as taxes and subsidies, which differ according to the agricultural industry.

There have been other CGE models that segregate the agricultural sectors as well; a model by Hertel and Tsigas (1987) classifies agriculture into seven sectors. For the purpose of this study, three agricultural sectors are preferable because with just three sectors the results are better able to hold globally, not just for infinitesimal changes. Furthermore, by disaggregating a sector too much, losses may appear in the subsectors in any given benchmark year.

190 R. Boyd, K. Doroodian, and A. Power

Table 2: Household Categories Classified by Income

Category Income range

I 0-9,999 II 10,000-19,999 III 20,000-29,999 IV 30,000-39,999 V 40,000-49,999 VI 50,000 and over

The CGE model classifies consumers by income class. It acknowl- edges the variations in desires of consumers as a function of their incomes and designates a particular demand system for each income group. This stratification permits a more precise account of the direct equity effects of significant variation in the marginal rate structure, as well as the indirect equity repercussions of the fluctua- tions in relative consumer and factor prices. Table 2 displays the various household categories, which are categorized by income. These particular household groups were determined by the avail- ability of data.

The general equilibrium model attempts to determine a vector of prices for consumer goods and services and for producer goods and services that will enable all markets to clear. The equilibrium prices ascertain the optimal share of resources once the endowment of labor, capital, and land is established. The philosophy behind CGE models appears to be easily understandable; however, the model is actually considerably intricate. To provide a proper com- prehendible presentation of the model, it will be discussed in sec- tions, beginning with the production (or supply side) of the model, followed by an explanation of the demand side including household demand, government demand, and foreign demand. Equations for the model are listed in Table 3 and the variable acronyms are listed in the Appendix.

4A. Supply

The supply side of the model includes the production sector of the CGE model. The sector is made up of an input-output model, with the substitution of factor inputs, land, labor, and capital hav- ing flexibility. In the model used, every sector is assumed to have the constant elasticity of substitution (CES) production function

THE IMPACT OF REMOVING THE SUGAR QUOTA 191

Table 3: Equations for Supply, Demand, and Consistency Aspects of the Empirical Model

Overall Equilibrium for Each Production Sector (1) Yj + GE~ + UMj = ~'LRASjL + GDj + UXj + INVy

Input equations (2) Z~SLc = Y-,~DLj + G D L (3) Y-.cSKc = ~'.~DKj + G D K

(4) Y-,cSDc = ~'flgDj + G D D where (5) GDL = Y-,jTL~ (6) G D K = Y_,jTKj (7) G D D = EjTDj

Transfer to consumer goods (8) CDj = Xi~ji[GCE i - TCj] (9) Y-,cRCS~c = GCEi

(10) Z~RCS~c = SL + SK~ + SD~ + TRN~ - P I T c Demand, household

(11) GC~ = XiRCS~c - SAVc + ( 1 - x , ) ( Z T A , ) S L ~ (12) GC~ = SLc + SK~ + SDc + TRN~ - P I T t + (1-xc) (ZTA~)SLc

Government tax adjustment (13) TE = ~[SL~ZTAcx~ + SKcx~ + SD~TAU~ - (¢P~ + TRN)]

where ~c = SL~x~ + SK~x~ + SD~x¢ - P I T t Balance, foreign

(14) Xj IUMjyEMA1 + EMj) + UMA1 + EMj)] = XjUXj + FEj) Consistency

Household income equals expenditures (15) 7.~ (SL~ + SKc + SD~ + TRN~ - P I T c ) = ,Y..~(CD~ + TC~)

Government plus income equals expenditures (16) Xj (GSKj + GE~ + TLj + TKj + TDj + TXOj) - ~'~ TRN~ + GDj)

+ G D D + G D L Total imports equals total exports

(17) Xj(UMj - UXj) = 0 Value of market excess demand equals value added plus taxes

(18) Xj(CDj + GDj + UXj - CEj + UMj) = 7. j(DLj + DKj + TDj + DDj + TLj + TKj + TXOj)

Note : See Appendix for description of variables

where the value added by the specific sector is a function of labor and capital. 11 The elasticity o f substitution between these factors may be set to any value between zero and infinity.

The production function for the agricultural and forestry sectors

~' For a discussion on the CES function, see Arrow et al. (1961).


also includes land, thus three factors of production are involved. In order to incorporate land, the third factor, into the production function, a nested production function must be estimated. In the nested production function, an input is defined that is only a function of land and capital in one CES function, and then it is entered into the original CES function as capital. This procedure allows the substitution elasticities to be different, depending on the different inputs.

The principal factor inputs are taken from each of the six household income groups. The owners of the land, labor, and capital accumulate the output of the combined 15 producing sectors. The owners of the factors will then sell the output and use the receipts to either consume domestic or foreign goods and services, save, or pay taxes to the government. As mentioned earlier, a separate demand system is stipulated for each of the six groups.

4B. Demand

The consumption of the household income groups is modeled as a triple-nested consumption function. The consumer first en- counters a CES trade-off between present consumption (utility) and future consumption (savings). This is the first tier of the nested CES function where savings has been assumed to equal investment in the economy. The next trade-off is between leisure time and the goods and services bought from labor services. This second tier is modeled with a CES nest. Lastly, the 14 consumer goods and services, including savings, consumed by the various households are derived from the production sector's outputs and taxes by the government in the form of excise taxes. Between any two of these goods, the elasticity of substitution is assumed equal and predomi- nantly fixed at one. This enables the nested consumption function to take the form of a basic Cobb-Douglas utility function for each of the households. The utility function is then maximized subject to a budget constraint in order to determine the consumer's consumption levels of the 14 consumer goods and services, as well as the quantity of labor supply and the amount of consumer's savings. ~2 In the budget constraint of a household, expenditures on goods and

~2 Ballard et al. (1985) gives the exact derived demand elasticity from this function form. We obtain a derive demand elasticity for all agricultural goods of roughly -0 .7 by using BaUard et al.'s deviation, the share parameters used in this study, and aggregating over all the income groups.


services must be less than or equal to its income, which is equal to the factor payments the household receives.

The model includes the government as a separate sector in a manner analogous to Ballard et al. (1985). The government gains tax revenues from various taxes, including the personal income tax, labor taxes, capital taxes, property taxes, and sales and excise taxes. These revenues are returned to the public in the form of transfer payments or subsidies when purchasing goods and services up to the point where the government budget is balanced. A single level Cobb-Douglas consumption function is used to estimate government demand for sectoral outputs, capital, and labor. By using this particular function, it allows the government demand to exhibit responsiveness to prices. Consumers in each income group are taxed at their marginal tax rate and then receive the difference between collections using this rate and their average tax rate as a lump-sum transfer.

The demand for goods and services by the foreign consumer is the last element of the model. The exports, or foreign demand, in the model are expressed in terms of producing sectors, not in terms of consumer goods and services. Imports, or foreign supply, are expressed in the same fashion. The exports and imports are altered proportionately so that the total foreign account is balanced. Both supply and demand elasticities are estimated and from them import and export demand relationships are constructed for each of the producing sectors. For this study, the elasticity used for demand elasticity is taken from GAO's estimate of - 0 . 2 . This estimate is approximately the average estimate, with the low estimate of - 0.05 calculated by Lin and Novak (1988) and - 0 . 6 2 by Sudaryanto (1987) as the high.

5. BASE-YEAR D A T A

The general equilibrium model is created for the year 1988. Data for the 15 producing sectors, taxes, and capital receipts are computed from data obtained directly from the Bureau of Economic Analysis of the U.S. Department of Commerce (1990), the U.S. Department of Agriculture (1990), the U.S. Department of Energy, and from Hertel and Tsigas (1987). The various elasticities of substitution utilized in the study are acquired from a variety of sources in the literature. In order to get the sensitivity of the analysis to their values, the simulations are subsequently run with the modified elasticity values.


Capital income and labor income are accumulated from the Bu- reau of Economic Analysis of the U.S. Department of Commerce. Land income is estimated using factor shares obtained from the Economic Research Service (ERS) of the U.S. Department of Agri- culture and applied to the capital income component mentioned above. The percentage of capital income increases with the income group. The problem with capital income is that it experiences double taxation, first as corporate profits and then as distributed dividends. However, farms that are not incorporated usually escape this double taxation. Thus, the total effective tax rates applied to farm income is somewhat lower than those for the average capital income. Labor income is computed directly from the salaries and benefits for each production sector. In industries where an individ- ual is self-employed, labor income is imputed by taking the hourly wages of part-time employees in the same field and calculating them for the full-time self-proprietor.

Labor tax rates are obtained by subtracting from gross labor income all employer contributions to social insurance and employee contributions to social security, unemployment insurance, public workman's compensation, and railroad retirement, and then divid- ing this value by net labor income. These rates fluctuate from 0.158 in food processing to 0.094 in Agricultural Sectors 1 and 2 (Boyd, 1988). Because the non-incorporated farms do not make social security and other labor payments, the agricultural rates are slightly lower. Land tax for the agricultural and forest sectors are computed by using the factor shares on capital use, determined by the ERS, and removing the land component from them. Capital tax rates for the agricultural sectors differ from the land tax in that each sector is taxed according to the relative size of the subsidies and consumption allowances collected by the two factors. The capital tax rates in the three agricultural sectors and the forestry sector are 0.309, 0.372, 0.395, and 0.418, respectively (Boyd, 1988).

The Bureau of Labor Statistics supplied the data on average expenditures for commodity consumption, factor earnings, and taxes paid by the income groups. The Survey of Current Business of the Department of Commerce (1990) provided the investment (savings), import, export, and government purchase data by sector. The Department of Commerce's input-output table of the U.S. economy is used for the 15-by-14 transfer matrix that describes the transformation of sector outputs into commodity goods. Lastly,

T H E I M P A C T OF R E M O V I N G T H E S U G A R Q U O T A 195

the data for the sugar quotas and the actual amount of sugar imported in 1988 is provided by the ERS of the U.S. Department of Agriculture.

6. THE SIMULATION RESULTS

The purpose of the simulation exercise is to model the general equilibrium effect of the sugar program's import quota system. The model replicates the base-year (1988) values as an equilibrium. This is known as the benchmark case. By comparing the results from the benchmark case with those without the import quotas, we are able to quantify the effects of the sugar program on the various segments of the economy. The estimated quantity of sugar imported, when no quotas are imposed, is obtained using the estimated elasticity demand for sugar by the United States and modifying the base-year imports accordingly. 13 In this study, all welfare effects are derived for a range of elasticities (low, central, and high). The values used for these demand elasticities are -0 .05 , - 0 . 2 , and - 0.62 for low, medium, and high, respectively. However, for this presentation, only the medium estimate of - 0.2 is used. The supply of imports is assumed to be vertical. Using the modified import level, we are able to increase general exports by the same amount because imports are assumed to equal exports in the model.

The analysis compares the benchmark case with the simulation of the economy produced with the sugar import quotas. The com- parison revealed an increase in net wealth for the society as a whole. However, all six income groups are not affected proportionately (see Table 5). Income Group II realizes a decrease in net wealth as a result o f the removal of the import quotas, while Income Group VI experiences the greatest net wealth increase.

Increases in the aggregate output production sectors total $254,000, which is less than 1 percent of total output . Table 4 presents the effects on the main product ion sectors. The largest positive impacts are found in the service and manufacturing sectors. The increases in these sectors amount to approximately $500,000, which is less than 1 percent as well. The increase in manufacturing is attributed to the release in capital from the refining and financial sectors, which can be more suitably utilized for the manufacturing of other goods and services. As the sugar quotas are eliminated, the price of food drops, reflecting the increase in demand. Thus,

13These elasticities are obtained from Morker and Tarr (1984).


Table 4: Impact on Product ion Sectors

Gross revenue change Sector ($thousand)

1. Manufacturing 200 2. Mining (coal) 8 3. Mining (other) 3 4. Services 300 5. Chem. and plastics 10 6. Food and tobacco products 110 7. Petroleum refining - 20 8. Financial - 40 9. Crude oil 0

10. Nat. gas 0 11. Wood products 50 12. Agriculture 1 -451 13. Agriculture 2 60 14. Agriculture 3 11 15. Forestry 13

Total 254

the demand pull on services can be explained, because the food sector consists of 53 percent services and 40 percent processing. The service sector also increases due to a demand increase for services used in the utility sector.

The largest negative impact, as expected, is on Agriculture 1, which includes sugar. The output declines by $451,000. The output in the refining sector declines by $20,000. This outcome reflects the

Table 5: Est imated Change in Total Net Income

Equivalent variation Equivalent variation Income group ($thousands) (Percentage)

I 0 0 II - 2 0 -0.0004 IlI 0 0 IV 0 0 V 10 0.0001 VI 100 0.0006

Total (I-IV) 90 0.0002

Government - 10 - 0.0001 Total (combined) 80 0.00014


decline in the demand for oil that results now that foreign exchange is used for purchasing food rather than oil. The financial sector is composed of non-traded goods; as the relative price of traded goods to non-traded goods declines, financial production decreases by approximately $40,000. Food and tobacco processing show an increase of $110,000. This demand-pull can be explained by the greater demand for food goods that utilize several forms of high- technological equipment. The chemicals sector exhibits a modest increase of $10,000. The increased demand for food and, thus, food processing creates an increased demand for chemicals that are used in food processing.

The agricultural and forestry sectors combined experience reduc- tions amounting to $367, again less than 1 percent of the sector's production; however, this aggregate reduction is mainly due to the sole reduction of $539 in Agriculture 1 (program crops). The other agricultural sectors and forestry sector experience slight expansions as land becomes available for alternative uses. This land can be utilized more appropriately by producing commodities in which there is a comparative advantage.

The sugar program has a significant impact on the price of land and a moderate impact on the price of capital. The price of land drops by 0.04 percent, and the price of capital increases by only 0.0001 percent both relative to the price of labor. The decline in the price of land may be attributed to the demand shift away from agricultural production to the manufacturing sector.

The welfare impact of the removal of the sugar program is pre- sented in Table 5. It indicates that the welfare of all groups combined increases by $90,000, while the government's utility declines by $10,000. We can see that the policy change would be regressive because the highest income class would benefit by the greatest amount. Income Class II is the only class that realizes a decline in net welfare. This group, with incomes in the range from $10,000 to $19,999, embodies a large percentage of agricultural producers. In the United States the agricultural producers, with low money incomes, own a significant share of the land holdings. Therefore, the land price depreciation will negatively affect the agricultural producers. The wealthiest income class realized the largest portion of the benefits, as this group represents the individuals who are endowed with the most capital and thus control a major portion of the service industry. As demonstrated in Tables 4 and 5, the percentage gains are small; however, the total amount of sugar


imported without the quotas would only be approximately 0.02 percent of the entire imports of Agriculture 1.

7. SENSITIVITY TESTS

A fundamental concern when using CGE models is the extent of robustness that the results are to alternative parameter values. For this study, the values for the elasticities of substitution in the agricultural sectors and the demand elasticities in the consumer sectors are the most important set of parameter values used in determining our results. Because we relied on empirical estimates found in the literature, the results obtained are only as robust as the elasticity estimates used. In this study, the values used for the elasticity between capital and labor and between capital and land for the agricultural sectors are 0.7 and 0.3, respectively. In forestry, a value of 0.3 is used for the capital-labor (K/L) elasticity, and 0.5 is used for the capital-land (K/D) elasticity. To check the sensitivity of the results to elasticity choice, the elasticities in the agricultural and forestry sectors are modified, and the model is employed again. The new elasticities used vary from 0.2 for the low level to 1.0 for the high level.

A second sensitivity test is conducted varying the demand elasticity for the consumer groups. The value used for the study is 1.0 for all the consumer groups. This value is altered to 0.5 for the low level and 2.0 for the high level.

A portion of the results from the tests are displayed in Table 6. As shown, the effects of altering the substitution elasticities for the agricultural and forestry sectors are minimal. The rest of the economy experienced smaller impact than the agricultural sectors; thus, they are not included in the table. The modification of the demand elasticities of the consumer groups proved to be insignifi- cant. In either test, output nor consumption is affected by more than $100,000, and in no case are there any changes in the qualita- tive results discussed above.

These sensitivity results suggest that the values used for the substitution elasticities and consumer demand elasticities are not so criti- cal to the model as to reveal false results when errors occur in the estimation of elasticity values. However, these elasticity values are significant in the resolution of a general equilibrium.

8. CONCLUSION

This paper has attempted to quantify the impact of the U.S. sugar program within a general equilibrium framework. As the

T H E I M P A C T O F R E M O V I N G T H E S U G A R Q U O T A 1 9 9

Table 6: Effect o f Changing Substitution Elasticity values

Base Case Low level High level Sector (elasticities) (elasticity) (elasticity)

Agriculture l (K/L) 0.7 0 .2 1.0

(K/D) 0.3 0 .2 1.0

Agriculture 2 (K/L) 0.7 0 .2 1.0

(K/D) 0.3 0 .2 1.0 Agriculture 3 (K/L) 0.7 0 .2 1.0

(K/D) 0.3 0 .2 1.0 Forestry (K/L) 0.3 0 .2 1.0

(K/D) 0.5 0.2 1.0

Output Output Output

Agriculture 1 - 0.0640°/o - 0.05760/0 - 0.0645°/0

Agriculture 2 0.0042070 0 .0063 07o 0.002807o

Agriculture 3 0.001607o 0.0047070 0 .0011 070

Forestry 0 . 0 0 8 6 % 0.0133070 0 . 0 0 4 6 %

present GATT agreements are calling for more open trading conditions, major changes in the U.S. sugar program may be forthcom- ing. The removal of sugar protection in the United States has generated heated debates for the past two centuries. This study has reviewed the impact that discontinuing the program would have on various sectors of the U.S. economy. The analysis reveals that the benefits realized by removing the sugar quota policy, which is the major component of the sugar program, outweigh the losses for the economy as a whole. The benefits are realized by all sectors of the economy, with the exception of just a few; they are agriculture production, petroleum refining, and the financial industry. These benefits amount to approximately $254,000 annually. How- ever, the main losses, occurring in the agricultural industry, are only realized by a small percentage of the agricultural producers.

APPENDIX

Variable Description for the Equations in the Model

"[c

CDj CD~

= 15 x 14 transformation matrix = marginal income tax on household c

= total production in sector j (] = 1,2 . . . . . 15)

= consumer demand for product j = total government consumption by the c th household


CEj =

DDj =

DKj =

D L j =

E M j =

FEj =

GC~ =

CGEi =

CDj =

G D D =

GSKj =

I N V j =

PIT~ =

UMj =

ELRASsL =

RCSic =

S A V~ =

SL~ =

UXj =

SKc =

SDc =

TCc =

TDj =

TE =

TLj =

TKc =

TRN~ =

T X O j =

Ulv6 =

UXj

Z T A

government endownment of product j demand for land in industry j deamnd for capital in industry j demand for labor in industry j demand elasticity of export demand endowment demand vector of adjusted elasticity of export demand

gross consumption of household c consumer demand for the ?h consumer good, i = 1,...,14 govenment demand for product j government demand for land government endowment of capital in the fh industry investment in sector j personal income tax payment from household c imports of product j RAS balanced input-output intermediate demands RAS balanced matrix of each household demand for consumer good (6 x 14)

savings in household c supply of labor by household c (c = 1,2 ..... 6) exports of product j supply of capital by household c

supply of land by household c consumption taxes on the c th household

tax on land in the flh industry total government endownments tax on labor in the fh industry tax on capital in the flh industry transfer payment to household c government output tax on the flh industry

imports of product j = exports of product j = total output of production sector j = consumption + lesiure coefficient

REFERENCES

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the impact of removing the sugar quota on the u.s. economy: a general equilibrium analysis

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