Trade Policy and Access to Intermediate Inputs: Quantifying the Welfare Costs of a Fertilizer Shortage

Devaki Ghose, Eduardo Pinheiro Fraga and Ana Fernandes

No 10642, Policy Research Working Paper Series from The World Bank

Abstract: This paper leverages Sri Lanka’s 2021 chemical fertilizer import ban to quantify the costs of restricted fertilizer access for agriculture, trade, and welfare. By leveraging trade and production data, satellite-based yield estimates, and event studies, the authors document sharp declines in fertilizer imports, agricultural output, and exports. A quantitative spatial model of trade and agriculture estimates the ban’s average welfare cost at 7.3%, with farmers, estate workers, and fertilizer-intensive regions bearing disproportionate losses. Model-implied partial-equilibrium elasticities line up with the experimental evidence, but once general-equilibrium price and wage adjustments are accounted for, the elasticities are much smaller—implying that using partial-equilibrium estimates to assess large, economy-wide fertilizer shocks (like those seen during recent conflicts) would substantially overstate their effects. Domestic and trade policy interact: by curtailing fertilizer use, the import ban effectively contracted the country’s fertilizer subsidy program and its implicit transfers from mobile workers to farmers, thereby mitigating the former’s welfare losses.

Date: 2023-12-12
New Economics Papers: this item is included in nep-agr, nep-env and nep-int
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