An Evaluation of the Disincentive Effect Caused by P. L. 480 Shipments

TLDR: In this paper, a conceptual framework was developed to isolate and obtain probable bounds on the price-output effects of U.S. Public Law 480 shipments on prices and domestic output in recipient countries.

Abstract: Changes in foodgrain prices and domestic output caused by changing the quantity of U. S. Public Law 480 shipments to a hypothetical country show that both prices and output are highly sensitive to elasticities of supply and demand. But for many cases examined, changes in these shipments had relatively insignificant price-output effects and these could have been offset by a modest growth in population. Estimates of parameters for India indicate that a 20-percent increase in the quantity of foodgrain shipments between 1956-57 and 1961-62, other things being equal, would have decreased foodgrain prices 1.6 percent and domestic foodgrain output 0.4 percent. These disincentives may be outweighed by the effects on consumption, income distribution, and resource allocation, suggesting that, overall, the effects of P. L. 480 shipments are beneficial. HERE has been a good deal of argument over adverse and positive effects of U. S. Public Law 480 shipments. Of particular concern to policy makers is the effect of shipments on prices and domestic output in recipient countries. Witt has concluded that "all indications are that this [disincentive effect] is one of the most critical problems for P. L. 480. It should, therefore, be given the highest priority" [14, p. 88]. Economists hold diverse views about these effects, including the following: 1. Because the domestic supply curve for foodgrains is highly price-inelastic or even negatively sloped, P. L. 480 shipments affect output only slightly even though they do cause prices to decrease [5, 10]. The result is a redistribution of income away from the agricultural sector. 2. By lowering prices for foodgrains, P. L. 480 decreases output as producers shift resources to the production of nonfood products. Although the composition of output changes, total farm production does not change because aggregate supply is very inelastic [1]. 3. Although lower prices for foodgrains do not significantly affect short-run supply, they discourage private investment; lower private investment, in turn, diminishes long-run output. P. L. 480 shipments also allow governments to neglect public investment in the agricultural sector, and this neglect also hinders long-run output [4, 12]. Without subscribing to any of these arguments, I develop a conceptual framework in order to isolate and obtain probable bounds on the price-output effects. This is accomplished by comparing various combi* I appreciate the guidance of Dale E. Hathaway in conducting the research on which this article is based and the suggestions of Dupe Olatunbosun in preparing the final manuscript.