High Hill Yak Cheese Production in Nepal:
An Analysis of Privatization Policy Incorporating the Impacts of Market
Failures for Agro-Industries in Developing Countries
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In recent years the development community has pressured LDCs to privatize agro- industries. This pressure stems from poor public enterprise performance and an ideological shift. However, public enterprises mitigate market failures. The major objective of this study is to measure the impact of privatizing the Nepalese yak cheese industry. To achieve the objective, public and private behavior are determined. The impacts of privatization stem from changes in monopsony behavior and institutional constraints that differ between the public and private sectors.
The Dairy Development Corporation (DDC) of Nepal produces yak cheese. The DDC's mandate is to provide a "fair" price to consumers and producers. Private producers of cheese have emerged in recent years. Milk shed structures include: single DDC factories, single private factories, multiple private factories, and mixed production.
Market performance is evaluated using partial equilibrium models that include the yak cheese and milk markets. Economic surplus measures are used for evaluation. Herder producer surplus is the most important criterion because herders are the poorest beneficiaries. The impact of privatization is determined through comparison of observed DDC and predicted private equilibria. Private equilibrium is predicted using a simultaneous equation system developed for this research. The equations ensure that supply and demand balance at the aggregate and individual milk shed levels. The Lerner index is incorporated to model monopsony behavior. Private monopsony parameters used in the system are estimated econometrically. A private equilibrium is also predicted with a modified firm cost structure reflecting reduced impacts of institutional constraints.
Findings show that private and public firms are exercising monopsony power. DDC privatization can be advocated because it increases herder producer surplus by 15.4%. Total surplus falls slightly because private cheese is lower quality. DDC privatization decreases herder welfare in milk sheds that support only a single firm. The simultaneous equation system developed to predict the private market equilibrium for post agro-industry privatization has the potential to be extended to solve a broader range of economic problems. The equation system can be adapted to applications where there are multiple production regions and monopsony behavior varies by regional characteristics.
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