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In reality, after changes in prices, producers would switch production to the more valuable crops, consumers would in general switch to cheaper goods and away from the now relatively more expensive ones, and the household would adjust its labor supply to changes in wages. Because Eq. 3 keeps quantities fixed, this formulation provides a lower bound for any estimated gain and an upper bound for any estimated loss.

Results from the simulations

The following simulations, by adopting strong assumptions on quantities demanded and consumed, and on the way prices are determined, capture only partial and extremely simplified aspects of the plausible impact of reforms on households. Nonetheless, the dimension of the impacts simulated as well as the distribution across consumption deciles allow to have a first approximation for the potential positive or negative effect of different economic policy scenarios on poor people in Cambodia. The specification of Eq.1 and Eq.2 above are flexible enough to capture key avenues identified elsewhere for the improvement in the livelihood of poor households (for example, see chapter on Agriculture where transaction costs and post harvested losses are described for the rice market, and also the chapter on Trade Policy, where it is shown the potential pro-poor effect of some modifications to the current tariffs structure). For instance, the specification can properly capture the impact of a variation in the price of rice that is different for net sellers and net buyers or rice. Moreover, by introducing tax equivalent parameters for different types of transaction costs, and parameters for milling yield of paddy rice, post harvested losses, and milling costs, the specification allows to simulate several different impacts that seem appropriate for today’s Cambodia.

Following common practices in the literature on poverty, we anchor the analysis on households’ expenditures, and express all results as per cent of households’ expenditures, ordered by decile of per capita adult equivalent total household consumption. That is, the absolute change in net income of household i that is expected to come from a policy change is divided by total household i expenditures. The interpretation in terms of poverty is straightforward: a simulation identifies a pro-poor strategy if the latter provides extra money for the first five deciles. The size of the impact is measure as per cent of household expenditures.

The rice sector

As stated in the Sector Case Study on Rice, in Cambodia, most efficiency gains are to be realized from reforming the domestic production, processing and trade systems rather than from reforms at the border. This section presents results coming from two simulations in the rice sector. The first simulation makes an assessment of the poverty impact of reforms in domestic production coming from the introduction of better varieties of seeds that improves the paddy-to-rice yield, from reduction in post-harvesting losses, and from reduction in transaction costs. The second simulation assesses the impact on poverty of reforms that take place mainly in rural areas. It assumes the presence of market segmentation, where low quality rice is produced and consumed in rural areas and high quality milled rice is imported. Finally, the third simulation calculates the poverty impact of a rise in the price of rice.

Simulation 1: improving key elements in the rice market

This simulation implies a reduction in post-harvested losses, improvement in paddy-to-rice milling yields, and a reduction in broadly defined transaction costs. The two first elements are key technical components of the rice production system and are often indicated as the avenues for improving households’ revenues (IRRI 1997 and JICA 2001). Broadly defined transaction costs were also identified as impediments for a development of the rice sector (see sector study on rice). To make an assessment of the impact of a change in these three components, a useful decomposition of the value of the m quality of paddy rice output is:

where,    denotes the per cent of post-harvested losses due to improper handling, lack of storage facilities, rodents, etc., assumed to be currently about 10 per cent;  denotes milling transformation costs, assumed fixed; and is the milling yield of paddy-to-rice, assumed to be 0.62 on average with some regional variation, by the MAFF. The term  adopts here the form of a tax equivalent transaction cost, assumed to be 10 per cent. This simulation assess the impact of a plausible change in: a) from its current level of 10 per cent to 5 per cent, due, for instance, to an improvement in handling and packaging; b) in  from its current level of 0.62 to 0.64, due, for instance, to a plausible and attainable improvement in rice variety; and c) in from its current 10 per cent to 5 per cent, due to, for instance, to an improvement in infrastructure or to a diminishing in other transaction costs. The impact on total household income would be:

were the subscripts 1 and 2 denote the current value and the simulated new values, respectively.

In words, the combined simulated effect of a 5 percentage points improvement in post-harvested management, a 2 percentage points improvement in milling yield of paddy, and a 5 percentage points reduction in (broadly defined) transaction costs produced an increment in total value of production of 15 per cent (=0.5776/0.5022). The gains are directly linked to the amount of rice produced. As there is no effect on the equilibrium price of rice, all households gain, and net seller households gain more.

To calculate the impact at the household level by decile, the change in the value of rice output was divided by total household expenditures. The average gain in this simulation is 4.5 per cent (see table 4.6), with net sellers gaining 8.1 per cent and net buyers 1.4 per cent on average. The average gain for the first five deciles ranges from 4.7 to 5.8 per cent.

4.6 Effect of a 5 per cent reduction in transaction costs, +3 per cent increase in milling yield, and +5 per cent reduction in post harvested losses, by decile, as per cent of total household expenditures

(*) Deciles by per capita total equivalent consumption.
Source  : Model results

Simulation 2: decreasing transaction costs in rural areas

As seen in the Sector Study on Rice, there are some localized areas that currently has no opportunities to access other domestic and international markets. Under this assumption of rice market segmentation (due for instance to different rice qualities that are trade only locally), this simulation assesses the impact on poverty of a decrease of 2.5 percentage points in transaction costs (or equivalently, in producer and consumer taxes) faced by producers and consumers in rural areas. This simulation provides a measure by decile of the payoff of any measure that increases the effective price received by the producer and that reduces the effective price paid by consumers in rural areas (see table 4.7). The average impact is 1.6 per cent, higher for net-sellers (2.4 per cent).