Deregulation as (welfare reducing) trade reform: the case of the Australian Wheat Board.

State trading enterprises (STEs) in the agriculture sector have two characteristics that distinguish them from commercial, profit-maximizing firms. First, they are given by government certain exclusive rights to procure and to sell; and second, they invariably have an objective other than the maximization of profit. In developed countries, the objective is often the maximization of the revenues of their input suppliers while, in developing countries, it is the maximization of consumer surplus. As a consequence, they have the potential to affect the way in which both the domestic and international markets operate. Such possibilities have caught the attention of national authorities (e.g., in Australia (see NCP-WMA Review Committee 2000)) and trade negotiators in the Doha Round of multilateral trade negotiations taking place in the World Trade Organization (WTO) (see the submissions to the agriculture negotiations by the European Communities (WTO 2000b), Japan (WTO 2000c), and the United States (WTO 2000a), and recent proposals by the Chair of the WTO Agriculture Committee (WTO 2006a,b)). Because STEs alter market structure, their effects on trade and welfare are potentially difficult to measure.

In this article, we focus on the evolution of the partial deregulation of the Australian Wheat Board (AWB), highlighting the role of the changes over time to its exclusive rights and the issues associated with its objective function. An analysis of the AWB is an interesting case through which to study the alternative forms that the deregulation of STEs can take because the AWB has undergone a continual process of deregulation over the past two decades. This process has occurred in terms of the change in the application its exclusive rights and the change in its objectives. These have altered from it being primarily concerned with the welfare of producers to, more recently, with the maximization of profits. Therefore, the evolution of the AWB is of interest, not only from the experience of deregulation in Australia and the welfare effects that may have arisen, but also in terms of the lessons that it may hold for the process of deregulation of STEs in other countries and, in particular, the light that it may shed for trade negotiators on the effects of exporting STEs on international markets. (1)

The article is organized as follows. In the next section, we outline the historical development of the AWB and provide a summary of on-going pressures for reform both domestically and externally through the WTO. Next, we outline our theoretical framework in which explicit measures are derived of the effects of the AWB on domestic consumers and on exports. The theoretical model is then calibrated and the results highlight the trade distorting effects and welfare redistributive effects associated with the partial deregulation of the single-desk authority of the AWB. We also show that this partial deregulation has not necessarily been welfare enhancing in Australia. Finally, we summarize and conclude with reference to the general lessons that arise for both domestic regulators and WTO negotiators.

Historical and Current Perspectives

National Perspectives

For more than half a century the exporting of Australian wheat has been the exclusive right of a state trading enterprise, the Australian Wheat Board, variously named. The institutional arrangements for the marketing of Australian wheat have evolved since the Australian Wheat Board was first established in 1939 and since it became a statutory marketing authority in 1948. (2) At that time, it was given sole rights to purchase wheat and to sell it on both the domestic and export markets, thus allowing it to pool revenues and costs across markets and through time, and to practice price discrimination between the domestic and export markets. In the early years, the main objective of the AWB was to raise and stabilize the incomes of wheat growers. In 1989 and the new marketing Act of that year, the objective had become the maximization of returns to growers. By the time of this legislation, the various layers of special privileges that had been enjoyed by the AWB had been removed, especially those relating to government underwriting of pool prices. In this Act the exclusive right to sell wheat on the domestic market was also removed.

In 1999, the process of privatizing the AWB began when it was corporatized, being converted from a statutory authority into a grower-owned and grower-controlled company (AWB Ltd); while in 2001 it was fully privatized when one of its two classes of shares was floated on the Australian Stock Exchange. (3) AWBI, the export arm of AWB Ltd, still retains a single-desk authority over exports. With privatization, the objective of AWBI is to maximize returns to growers who sell through the national export pool and to maximize profits for the benefit of shareholders in AWB Ltd. There is now a separation between shares that are held by growers, which cannot be traded on the Stock Exchange (A-class shares), and shares that can be traded (B-class shares), which can be held by growers and nongrowers, with the substantial majority of shares being held in the B category (AWB 2006). This structure of shareholding has implications for the overall objectives of the AWB because shareholders who are not wheat growers (owning only B-class shares) may desire profit maximization rather than the revenue maximization desired by growers. As anticipated in the National Competition Policy Review in 2000: "[the] public listing and trading of certain classes of AWB Limited Shares ... will introduce additional competitive pressures and inevitably create tensions between shareholder and grower interests" (NCP-WMA Review Committee 2000, p. 9).

WTO Perspectives

In the WTO the extent of the exclusive rights and special privileges enjoyed by exporting STEs is being negotiated under the export competition pillar of the Agreement on Agriculture. Central to the concern about STEs are the exclusive rights and special privileges that STEs may have and through which they may obtain an advantage in export markets beyond that which would be expected if the private sector were solely responsible for exports. While there has been some agreement on a few aspects of the rights enjoyed by exporting STEs (see WTO 2005; WTO 2006a,b), yet to be specifically discussed in the negotiations is the issue of their monopsony/monopoly power in the domestic market as well as any recognition of the need to distinguish between monopoly power in the domestic market and market power in the international market. Other issues have also been raised with respect to STEs. These include their potential to gain an unfair commercial advantage through preferential access to credit, through financial export subsidy assistance in excess of that permitted under the Agreement on Agriculture, and through financial underwriting. The focus in this article is on their exclusive rights and objectives and the interaction of these on the operation of the domestic and international markets. (4)

Despite these relatively recent concerns about STEs in agriculture, they have always been GATT-legal so long as they operate within the rules. The economic activities of STEs are regulated through a number of Articles of the GATT (General Agreement on Tariffs and Trade) but especially by Article XVII. Fundamentally, STEs are expected to act on the basis of commercial considerations according to Article XVII:1(b) (WTO 1995, pp. 509-510). (5) Prior to GATT 1994, what an STE was remained undefined in this Article. The omission was partially made good through the following working definition, which is contained in the "Understanding on the Interpretation of Article XVII of the General Agreement on Tariffs and Trade 1994":

Governmental and non-governmental enterprises,

including marketing boards, which

have been granted exclusive or special rights

or privileges, including statutory or constitutional

powers, in the exercise of which they

influence through their purchases or sales the

level or direction of imports or exports (WTO

1995, p. 25).

It is clear from this definition that ownership of the enterprise is irrelevant to the definition of an STE. AWBI, despite being privately owned, still satisfies the definition. The fundamental distinguishing characteristics of an STE are its exclusive rights and its objective.

Related Literature

While there exists a considerable descriptive literature on STEs (see, e.g., USDA 1998 and OECD 2001), there is only a small body of literature in which theoretical economic analysis of STEs has been undertaken in an imperfectly competitive setting. Early work by Lloyd (1982), who assumed perfectly competitive markets, showed that an STE could have an effect equivalent to an export tax as it would be able to restrict exports to the world market and hence derive terms of trade effects.