The Impact of the International Coffee Agreement on Producing Countries

Abstract

Simulations of a global coffee model incorporating a vintage capital approach to production are run. Over the recent period of operation of the International Coffee Agreement's export quota system, the authors find that the quota system had a stabilizing effect on world coffee prices. The quotas reduced real export revenues for most small exporting countries, but large producers gained. Most small countries gained, however, in terms of risk reduction. If a brief suspension of the quota occurs from time to time, caused, for example, by adverse weather which results in a shortfall in world supply, the quota system works like a buffer stock scheme; on average, producing countries as a whole lose transfer benefits but gain risk benefits. The International Coffee Agreement (ICA), which utilizes an export quota sys-tem, has had an important influence on the world coffee market in recent years. The export quota scheme succeeded in stabilizing world coffee prices in its most recent period of operation (October 1980-June 1989) in spite of wide fluctuations in world coffee production. Because of disagreements among mem-bers over economic clauses that were introduced into the ICA in October 1989, however, the quota system was suspended in July 1989. World coffee prices fell by more than 40 percent following the suspension of the quotas, which led to large declines in producers ' incomes and in export and government revenues in most coffee-exporting countries. In spite of continuing negotiations, current prospects for the reintroduction of the quota system are bleak. The main objective of this article is to analyze the impact of the ICA export quota system on the world coffee market, focusing on increases in real export revenues (transfer benefits) and reductions in income variability (risk benefits) in each exporting country. In pursuit of this objective, we make extensive use of a new global model of the coffee economy. We begin with a brief description of recent developments in the world coffee market in section I, followed by a review of previous studies of the world coffee market in section II. In section III, a description of the model and its validation

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