The Real Rate of Protection: The Stabilizing Effect of Price Policies and Direct Payments

Traditional indicators of protection refer to the level effect of price policies on income and ignore the stabilizing effect. We derive a measure of the real rate of protection which incorporates these dual dimensions. The income stabilizing effects of price policy protection lead to a greater level of real protection than would be measured conventionally. Without compensatory payments real protection rates for the European Union wheat market over the preand post-MacSharry reform periods would have been some 10 percent greater than traditional indicators. However, the direct payments to farmers following the 1992 reforms had a major risk reducing impact.