Objectives of icas, Managerial Economics

Objectives of ICAs

Most schemes have as their main objective to stabilize and/or increase the world price of commodity, producers' incomes, foreign exchange earnings of exporting countries and governing revenues from taxes on the commodity.  More stable prices are desired because wildly fluctuating prices may cause hardship and are likely to increase the costs of both producers and consumers through increasing uncertainty and producing exaggerated responses in production and consumption.  Where these responses are lagged one or more seasons behind the price change they can be particularly damaging in producing 'cobweb' cycles.  High current prices for coffee, for example, may stimulate planting of new coffee trees that will only bear fruit five or more years hence when  the prices may become, as a result very depressed. More stable earnings for producers becomes a particularly important objective when the producers are small farmers with low incomes and little or no reserves, though most countries have national measures such as marketing boards which try to stabilize producers' earnings.  Greater stability in export revenues should reduce uncertainty in economic planning and where taxes are geared to export revenues, as is the case for many primary exports, this objective is reinforced.

The aim of raising prices, incomes or export earnings above the levels that would prevail without intervention has to be seen as a form of disguised economic aid or as compensation for declining terms of trade.  The charters of several ICAS also include the aim of expanding the markets for their primary products by developing new uses, reducing trade barriers and increasing sales promotion.

As is often the case in economics, many of these objectives are mutually incompatible.  A world price stabilized within narrow limits could cause greater instability in export earnings for some commodities, whereas a raised price may involve lower incomes and will certainly militate against expanded markets.  Obviously these possibilities depend on assumptions about elasticities of demand and supply for specific commodities, but are in fact more than likely.  For example, where demand shifts are the main cause of fluctuations but demand is  price elastic, an export  quota agreement  will destabilize export earnings.   Similarly, where supply variations are the basic cause, holding price stable though a buffer stock can destablise income if the price elasticity of demand is greater than 0.5.  a stable price can also involve lower total export earnings.  But recently research shows these results are less likely than was previously considered to be the case, particularly if the bank within which a buffer stock seeks to confine price movements is fairly wide.  In practice the conflict between price stabilization and stabilization of export earnings for most countries' export earnings is unlikely.

Posted Date: 11/30/2012 5:08:18 AM | Location : United States







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