Discussing the role of government policies in the success of agriculture. Investigating why developing nations prefer to pursue specific macroeconomic policies.

1. Macroeconomic Policies
and
Agricultural Development
_By Adelaide Naa Okpoti

2. OBJECTIVES
❏ To discuss the role of government policies in the success of
agriculture.
❏ To investigate why developing nations prefer to pursue
specific macroeconomic policies.

3. MACROECONOMIC POLICIES AND AGRICULTURE
● It is established that macroeconomic policies have a strong effect on
agriculture.
● Given its explicit influence on output prices, factor prices, incentives for
agricultural producers, consumers, and marketing agents.
● Foreign exchange rates affect export and import prices and volumes, as
well as output and input prices.
● Interest rates impact the cost of machinery and equipment investments, as
well as the capital intensity of production when combined with labor rates
as well as cost of storage.

4. ● A macroeconomic environment conditions the growth rate and
structure of the agricultural and urban industry. Employment,
income growth and distribution policies and target-specific
projects are all functions of the macroeconomic policy.
● The short-run and long-run effects of macroeconomic policies
and unemployment income distribution are very much distinct.
In urban communities, real incomes change sharply subject to
adjustments in macroeconomic policies aimed at managing
inflation and reducing government debt.

5. ● Policymakers are concerned with smoothing out short-run
effects of policy adjustments essential for long-term growth.
Hence, understanding the significance of macroeconomic
parameters on food and agriculture is essential for designing
economically and politically long and short-term policy
policies.
● Distortions from macro policies like galloping exchange rates,
low interest rates, expansionary fiscal and monetary policies
often create grounds for the agricultural sector to be
discriminated against and long-term prospects for
development of the sector are often compromised.

6. THE MACROECONOMY
● The macroeconomy is the summation of all the economic
activities taking place in the country:all the goods and
services and their prevailing macro prices to generate
revenue; foreign currency, capital and labour across all
sectors of the economy.
● Demand, supply and income can account for the value of
these economic activities in terms of current exchange rates,
interest rates and wage rates.

7. ● In developed countries, in managing macro policies, the
demand side of the economy is priority, while in developing
countries, it is the supply side of the economy.
● In developed countries, governments implement policies to
stimulate private consumption or investment, create demand
through public expenditures, and closely manage trade while
in developing ones, agricultural supply is managed via
government involvement in commodity production.

8. ● When inflation is netted out, demand is equal to supply.
Land, labour, capital along with management generate
incomes when employed in the production process. These
incomes are spent on components of aggregate demand and so
total income can be equated to GDP, which is the interest of
developing countries.
● They are concerned about the total income distribution among
wages, interest, rents and profits and design policies to
manage this distribution.

9. ● Market prices are generally in local (country’s) currency
units.
● The monetary value of commodities are subject to change
by inflation rates even when the real value of the
commodities remain unchanged. Unintended inflation rate
fluctuations are often as a result of fiscal and monetary
policies.

10. FISCAL AND MONETARY POLICIES
Fiscal Policy: when the government employs taxing and spending
to induce employment, income growth and distribution.
Monetary Policy: when the central banks of countries use money
supply and interest rate to induce this same employment, income
growth and distribution.

11. ● Governments are unique in their ability and willingness to run
budget deficits and financing them. In developing countries,
usually government debt is as a result of limited tax revenues.
● Tax collection is tedious and expensive and given their state
of information systems, taxes are easier to evade as compared
to developed countries. However, developing countries raise
large percentages of their revenues from exports taxes, import
tariffs and sales taxes because these tax types are organised
and often easier to collect than others.

12. ● Agriculture is usually the largest sector in development
economies. Overall, it generates more revenue to the
government than it receives in the form of government
programmes.
● Nonetheless, there are usually substantial budget allocations to
the sector:
For producers: irrigation systems, roads, agricultural research
and extension, access to markets and input subsidies and
For consumers: targeted and non-targeted food price subsidies
and investments in producer-related programmes .

13. ● Given the limitations of generating revenues for financing
government spending, governments often meet budget deficits by
borrowing from abroad or increasing money supply (by printing
more money).
● Many developing nations have huge debts accrued from previous
borrowing which constrains them from taking on additional debt.
The supply of money must match the needs for production of the
economy. When money is printed to finance a large budget deficit,
inflation occurs.

14. ● Inflation does not usually imply a rise in prices of all
commodities by the same amount. Hence, it creates some
winners and losers. Often, it hurts agriculture because the
prices of inputs usually rise by more than the prices of
farm outputs.
● In the event of inflation, foreign exchange rate should
adjust to reflect the devaluation of the local currency, yet
in many developing countries, this adjustment is not
allowed to occur completely.

15. ● This results in an overvalued exchange rate which
increases the price of agricultural exports_ reduces export
demand and makes food imports cheaper. Foreign food
products would attract more demand and local production
of food products was suffer.
● Thus, the foreign exchange rate policy is one
macroeconomic variable that has significant impact on
agriculture and should be given much attention.

16. MACRO PRICES AND AGRICULTURE
Governments employ macroeconomic policies to manage
inflation, provide incentives and distribute income.
1. Foreign exchange rate
2. Interest rate
3. Wage rate
4. Food Prices
5. Land Prices

17. ● Foreign exchange rates, interest rates, and wage rates are
determined by supply and demand forces and so if
governments influence them by fiat, excess demand or
supply may arise.
● Interest and wage rates signal scarcity of capital and labour.
● Governments are often tempted to set wage rates artificially
high in order to raise income levels and interest rates low to
motivate borrowing and investments.

18. ● Wages set above the equilibrium value (determined by
demand and supply forces) lead to excess supply of labor
and hence unemployment occurs.
● Interest rates set below the equilibrium value lead to excess
demand for credit and so the need for credit to be rationed.
● Government policies to stimulate demand and supply can
be manipulated to intervene in these shortfalls. Imposing
tariffs directly affect food and land prices.

19. Exchange Rates
● In developing countries, government sets the exchange rates
weather then it been determined in the currency markets.The norm
is to ‘peg’ the value of the local currency to the USD.
● When exchange rate is overvalued, it implies inflation. Increases in
money supply, government spending and a “pegged” exchange rate
leads to overvaluation. To maintain an overvalued exchange rate,
governments control the movements of foreign exchange and
foreign investment in order to keep domestic prices low.
M > E = Many goods in the market
Domestic SS > Relative DD = Fall in prices of commodities

20. ● A fall in the prices of commodities produced and traded in the country
such as agricultural goods become depressed relative to those non traded
commodities and so rural incomes fall as compared to urban income levels.
● Devaluation can address this issue temporarily at least.Unless fiscal and
monetary policies are adjusted to cut back on government spending or
access to credit, inflation will gallop and result in an overvalued exchange
rate.
● Devaluation could cause a losing situation for producers of non-tradable
goods who consume tradable goods like civil servants and certain groups
of factory workers. Here, food prices rise in response to the fall in currency
value aiding food producers and hurting urban consumers.

21. ● When the currency has to be heavily overvalued and a large
adjustment is prudent for devaluation to occur, policies are
essential to protect the welfare of the poor.
● Countries with a history of monetary instability often chose a
fixed exchange rate system.
● Overtime, countries open to capital flight in and out of their
economies have found that an exchange rate allowed to float
against other currencies is more sustainable than a “pegged”
one managed by the government so it adjusts gradually.

22. Interest Rates
● Is the price of capital investments and reflects the productivity or
opportunity cost of using capital for one activity relative to another.
● Again it reflects the risk associated to and the value of current
consumption relative to future consumption and is determined by
the demand and supply for investment funds.
● To manipulate interest rates governments set them for public credit
facilities and impose regulations like reserve requirements for
private credit facilities.

23. ● Interest rates are affected by governments financing fiscal
deficits. If financed by domestic borrowing, interest rates rises
in response to demand for credit.
● Alternatively, if money is printed to finance deficits,
inflationary rates increase. Therefore, a high interest rate
coupled with a falling budget deficit will keep inflation low.
● Macroeconomic policy of interest rate attempt to balance the
value of capital in increasing production with valuation of the
future relative to current consumption.

24. Wage Rates
● The price of or returns to labour and the primary source of
income for a large population of the world. Hence, investing in
job creation is essential to reducing poverty and hunger.
● Governments set minimum wages in an attempt to raise people
out of poverty. However, in low-income countries, minimum
wage legislation does not function and may even hurt labour.
● The market for labour is complex and characterised by
segments of skill levels, occupations and geographical
locations.

25. ● In rural areas, labour is rewarded in kind (food and other
goods) and may involve conditional access to land or depend
on relationships between employers and employees
determined by local customs and institutions.
● For unskilled labour in these areas, wages are much closer to
the average product than the marginal product and so
minimum wage legislation is virtually unenforceable in the
rural areas of developing countries.

26. ● However, in urban areas minimum wage legislation has seen
success in large industries and governmental organisations.
● Nonetheless, by raising wages, demand for labour by these large
institutions and governmental organisations falls and supply for
labour rises- there will be unemployment in the short-run.
● In long-run, these industries would employ technologies that further
displace labour or relocate to areas with lower flexible wage rates.

27. ● There will be an influx of migrants informed by higher wages
in the formal sector of urban areas and will overtime depress
wages of the informal sector.
● Especially to the poor, wages are an essential macro price, yet
governments have little ability to manipulate it to raise people
out of poverty.

28. Prices of Agricultural Products and Land
These prices are influenced by government interventions in the input
and output markets.
❏ Price supports
❏ Input subsidies
❏ Export taxes
explicitly affect terms of trade between the agricultural and non-
agricultural sectors and other macro prices.
Fiscal and monetary policies have an even larger influence on terms of
trade.

29. ● An overvalued exchange rate induces higher imports and discourages exports
which is significant to trade deficits.
● When macro prices and policies discriminate against the agricultural sector,
agricultural prices become depressed and so pressure mounts on land prices as
well.
● Again, incentives for technologies to optimise land-use reduce.
Unless, agricultural production is substantially increased, simply manipulating macro
prices via government policies will hinder agricultural development, create
distributional defects and hurt the rural poor.

30. WHY GOVERNMENTS PURSUE PARTICULAR
MACROECONOMIC POLICIES
● Political leadership and individual personalities play significant roles in
influencing choices of macro policies. Governments follow policies that
respond to the balance of political power within their economies.
● Income distribution is conducted in particular ways to aid sectors of their
choosing the correct past external debts, reduce inflation and react to
changing world conditions.

31. ● Because food is a wage good (i.e. a high proportion of consumer
expenditure) in developing countries, the interests of the urban
consumers interact with owners of industries:
● and so consumers view lower-priced food as higher real wages
● while industries see it as a decrease in the upward pressure on
nominal wages.

32. ● Thus, an overvalued exchange rate is a quick fix to stimulating
industrial growth, distributing income to politically influential urban
consumers and industries and reducing inflation. This stimulus is
often short-lived.
● Discrimination against agriculture reduces agricultural investment
and growth as well as foreign exchange earnings from agricultural
exports.
● A severely overvalued exchange rate can influence a food exporter
to become a food importer.

33. ● Rural pressures on macro policies to adjust mount, inflation
increases_ food prices grow higher and unemployment also
increases.
● Urban pressures also mount, government may subsidize prices
of agricultural inputs and increase output prices via subsidized
market margins for food staples.
For political expediency, governments pursue complex macro
policies.

34. LINKS BETWEEN MACROECONOMIC & FOOD POLICIES
Source: C. Peter Timmer, Walter P. Falcon, and Scott R. Pearson, Food Policy Analysis (Baltimore: Johns Hopkins University Press, 1983), p. 223.