STRATEGIC POLICY ANALYSISWorkshop on Strengthening Capacity for Strategic Agricultural Policy and Investment Planning and Implementation in Africa Safari Park Hotel, Nairobi on 11th- 13th April 2012 Paul Guthiga, ReSAKSS-ECA, ILRI
Outline• Key policy issues in agriculture• Need for Policy Intervention• Approaches to Policy Processes• Tools for policy analysis 2
Key Issues in Agricultural Development and Policy Formulation in Africa (1)• Agriculture remains a key sector in most countries in Africa; – Part of strategy for achieving economic growth, poverty reduction & food security• After several decades of stagnation; – The continent posted positive overall GDP growth rates & agricultural growth during the last decade• However, some key challenges remain:-1. Agricultural investment & growth (quantity and quality); – Low; only a few African countries such as Burkina Faso, Ethiopia, Malawi, Ghana and Mali have surpassed the CAADP threshold of 10 % of budgetary spending – In some cases growth is not accompanied by proportionate reduction in poverty 3 – What levels of investments are needed to achieve set targets?
Key Issues… (2)2. Agricultural productivity - Generally low, but there are differences among countries3. Poverty & food insecurity – Still high but some positive signs being recorded in some countries – For example; annual average poverty levels fell from 65.9% (1990-95) in Ethiopia to 37.4% in 2003-2009 but increased from 18% to 22.5% in Cote d’Ivoire for the same period4. Environmental degradation & climate change – Huge threat but, little weight in policy5. Markets access and trade; – Poor access – Relatively low trade volume/value between countries – Trade barriers; tariffs & NTBs still persist – Poor infrastructure 4
The Current Context of Agricultural Policy Making• Agriculture has regained policy prominence; leading to continental policy initiatives like CAADP.• Evidence-based and inclusive policymaking processes are at the center of the CAADP initiative as well as national level.• Increasing economic integration hence more policy making processes at the RECs level; trade policies, macro-economic policies, agricultural policy etc• But, despite the renewed attention; there is little understanding of contemporary agricultural policy-making processes and of the political economy motivations that underlie them.• One reason for this lack of understanding is that a plethora of new actors now operate within the policy arena. 5
Need for public policies (1)• Key economic rationale for policy intervention is market failure.• Markets are said to have failed when they do not exist at all or when they are unable to allocate resources efficiently.• Causes of market failure:- – Existence of monopolies or oligopolies (One or a few buyers); – Imperfect/asymmetric information (lack of full information or some players have more information than others) – Existence of externalities; – Inability of the private sector to provide public or collective goods and – Barriers to entry or exit
Need for public policies (2)1. Existence of monopolies and oligopolies – Monopolists and oligopolists enhance their profits by restricting output so as to charge higher prices for their products. – They could also lower the quality of their products to increase their margins. – It is incumbent upon the government to check these unscrupulous behaviours through appropriate public policies (anti-trust laws)2. Imperfect information – Decisions of consumers, for instance, are conditioned by the amount and quality of information available to them. – Where information asymmetry exists, sellers take advantage and exploit consumers, either by selling inferior quality goods or over- pricing the goods. – Government intervenes to ensure that accurate and adequate information is availed by producers and sellers.
Need for public policies (3)3. Externalities – Unintended third party effects of activities of economic agents; either positive or negative. – Positive when the third party derives benefits for which he/she is not charged (e.g. ambiance from tree planting) and – Negative when the third party suffers harm or losses for which he/she is not compensated (e.g. polluting water). – Government intervenes to force producers of negative externalities to internalize them say by means of taxation. – Producers of positive externalities need to be compensated4. Provision of public goods – It is not feasible to exclude non-paying individuals from consumption of pure public goods such as a public road or national security. – The government itself must be directly involved because it is able to fund the provision through taxes.
Need for public policies (4)5. Barriers to entry or exit – In competitive markets, firms are free to enter and exit a given industry without inhibitions. – Barriers to entry or exit are said to exist when inhibitions to free entry and exit exist in a given market. – Examples of barriers to entry include:- i. Advertising; firms in the market make it difficult for new competitors by spending on advertising that new firms would find more difficult to afford.. ii. Lack of capital; new firms are unable to obtain the start-up capital such as equipment, building, and raw materials iii. Control of resources; iv. Predatory pricing; The practice of a dominant firm selling at a loss to make competition more difficult for new firms v. Others include economies of scale, customer royalty, distributor agreements, and government regulations among others.
Approaches in Policy Process Analysis• There are many approaches to policy analysis.• Overall, there is consensus among experts that policy processes are not linear but a complex web of interrelated systems, actors, and processes.• For every policy decision there are likely to be winners and losers.• Balancing attention to the favored and less favored subsectors, regions, and households is one of the toughest policy dilemmas 10
Approaches…2• Four of the most commonly cited policy process approaches are:-1. Institutional analysis and development; It is centered on the incentives and motivations for the selection of particular sources of action and On how institutional rules alter these motivations and the behavior of rational individuals;2. Multiple-streams framework; Based upon the “garbage can” model of organizational behavior It distinguishes three streams of actors and processes: problem identification stream, policy solution stream, and politics stream (consisting of elections and elected officials) 11
Approaches…33. Advocacy coalition framework; It focuses on the interaction of advocacy coalitions, each consisting of actors from a variety of organizations who share a set of policy beliefs within a policy subsystem; and4. Policy or social networks, It is characterized by the predominance of informal, decentralized, and horizontal patterns of social relations between interdependent actors that take shape around policy problems and the policy programs. 12
Tools for Policy Analysis Policy Analysis Matrix (PAM)…(1)• The PAM help address three central issues of agricultural policy analysis;I. Are agricultural systems competitive under existing technologies and prices? i.e. whether farmers, traders, and processors earn profits facing actual market prices. Helps compare private profitability before and after the policy change and measures the impact of the policy change on competitiveness in market prices.II. What is the impact of new public investment on the efficiency of agricultural systems? Efficiency is measured by social profitability; successful public investment (e.g. in irrigation or roads) would raise the value of output or lower the costs of inputs. A comparison of social profits before and after the new public investment measures the increase in social profits. 13
PAM…2III. What is the impact of new public investment in agricultural research or technology on the efficiency of agricultural systems (transfer effects of policies). How can economic analysis be used to help determine the most fruitful directions for primary and applied research to raise crop yields and reduce social costs, thereby increasing social profits? Successful public investment in new seeds, farming techniques, or processing technologies would enhance farming or processing yields and thus would increase revenues or decrease costs. The impact of research can be assessed by comparing social profits before and after the investment in research hence measure the gain in social profitability?. 14
PAM…3• The policy analysis matrix is a product of two accounting identities; – One defining profitability as the difference between revenues and costs and the other – Measuring the effects of divergences (distorting policies and market failures) as the difference between observed parameters and parameters that would exist if the divergences were removed.• By filling in the elements of the PAM for an agricultural system, an analyst can measure both the extent of transfers occasioned by the set of policies acting on the system and the inherent economic efficiency of the system. 15
PAM…4 Private Profits in the Policy Analysis Matrix Revenues Costs Profits Input Factor Private (observed market) Prices Private A B C D Social Divergences• In empirical PAM analysis, the revenue and cost categories in private prices (entries A, B, and C) are based on data from farm and processing budgets.• The symbol D, profits in private prices, is found by applying the profitability identity. According to that accounting principle, D is identically equal to A - (B + C).• Private profits in PAM thus are a residual arrived at by subtracting private costs from private revenues 16
PAM…5 Social Profits in the Policy Analysis Matrix Revenues Costs Profits Input Factor Social (efficiency) PricesPrivateSocial E F G HDivergences• E measures revenues in social prices, F stands for tradable input costs in social prices, G represents domestic factor costs in social prices, and H is social profit (identically equal to E - (F + G)).• In an empirical PAM analysis, E, F, and G are based on estimates of the social opportunity costs of commodities produced and inputs used in production.• Countries achieve rapid economic growth by promoting activities that generate high social profits (large positive H). 17
PAM…6 Divergences in the Policy Analysis Matrix Revenues Costs Profits Input Factor Private A B C D Social E F G H Effects of Divergences I J K L• It adds a third row termed the Effects of Divergences row; arising from either distorting policies or market failures.• Divergence causes observed market prices to differ from their counterpart efficiency prices.• Divergences are identically equal to the difference between entries in the first row (measured in private prices) and entries in the second row (measured in social prices).• Therefore, I is identically equal to (A – E), J is identically equal to (B – F), K is identically equal to (C – G), and L is identically equal to (D – H). 18
PAM…7• The symbol I measures divergences in revenues (caused by distortions in output prices),• J stands for divergences in tradable input costs (caused by distortions in tradable input prices),• K represents divergences in domestic factor costs (caused by distortions in domestic factor prices), and• L is the net transfer effect (arising from the total impact of all divergences). 19
PAM Applications• Efficacy of agricultural price policies• Efficacy of public investments in agriculture• Essential baseline information for benefit-cost analysis of agricultural investment projects. 20
Social Accounting Matrix (SAM)…1• A social accounting matrix (SAM) is a comprehensive, economy-wide data framework, typically representing the economy of a nation.• Being strictly a square matrix, the underlying principle of SAM accounting is double entry bookkeeping by which revenues of any account is depicted along its row whereas expenditures of the same account is shown along its column.• Therefore for a consistent SAM table, revenues and expenditures of each account must balance.• SAMs are square (columns equal rows) in the sense that all institutional agents (Firms, Households, Government and Rest of Economy sector) are both buyers and sellers.• Columns represent buyers (expenditures) and rows represent sellers (receipts). 21
SAM…2 Illustrative Open Economy SAM Rest of Net Total Firm Household Government Economy Investment (Received) C+GF+(X- Firm C GF (X-M)K I M)K+I Household W GH (X-M)C W+GH+(X-M)C Government TF TH TF+TH Rest of (X-M)K+(X- (X-M)K (X-M)C Economy M)C Net SH SG SH+SG Investment Total C+TH+(X- (X-M)C+(X- W+TF+(X-M)K GF+GH+SG I (Expended) M)C+SH M)KAbbreviations: Capital letters: Taxes, Wages, iMports, eXports, Savings, Investment, Consumption, Government TransferSubscripts: Firms, Households, Government, Consumption Goods, K: Capital Goods 22
SAM…3• SAMs were created to identify all monetary flows from sources to recipients, within a disaggregated national account.• The SAM is read from column to row, so each entry in the matrix comes from its column heading, going to the row heading.• Finally columns and rows are added up, to ensure accounting consistency, and each column is added up to equal each corresponding row.• In the illustration in the next page for a basic open economy, the item C (consumption) comes from Households and is paid to Firms. 23
SAM…4• SAMs can be easily extended to include other flows in the economy, simply by adding more columns and rows, once the standard national account (SNA) flows have been set up. Often rows for ‘capital’ and ‘labor’ are included, and the economy can be disaggregated into any number of sectors• SAMs form the backbone of Computable General Equilibrium (CGE) Models, various types of empirical multiplier models, and the Input-output model. 24
SAM-Possible Applications• Economy-wide impacts of agricultural investments;• Modelling economy-wide impacts of agricultural policy reforms• Some examples from ReSAKSS; – Agricultural Growth Options for Poverty Reduction in Mozambique- applied CGE model – Agricultural Growth and Investment Options for Poverty Reduction in Zambia-Applied CGE and Micro-simulation models – Agricultural Growth and Investment Options for Poverty Reduction in Uganda-Applied CGE and Micro-simulation models 25
Other toolsTool What it does Possible applicationsSpatial equilibrium model Provides quantitative measures Impacts of trade policy change(SEM) of the welfare impacts of change on quantities and prices of in trade policy agricultural commodities traded between regionsSocial Cost-benefit Analysis Compares costs and benefits of Analysing the economic a policy change worthiness of agricultural investmentsDynamic Evaluates the economic impacts Evaluating economic impactsResearch Evaluation for of agricultural research and of technology adoption underManagement (DREAM) development (R&D) based on a a wide range of market,model flexible, multi-market, partial research spillovers, and trade equilibrium models. policy scenariosEconometric Analysis Applies mathematics and Wide range for example statistical methods to economic analysing impacts of policies data to give empirical content to on agricultural productivity, economic relations poverty, consumption etc 26