Poverty Effects of Expansion and Policies in Cotton Economies in Rural Mozambique:

An Economy-wide Approach

Rui M.S. Benfica

Maputo, Mozambique

September, 2006

OUTLINE

o Research Objectives

o Economy-wide Models Flows in the Regional Economy Regional CGE Model Policy Simulations with the CGE Model Model Results

o Policy Implications

RESEARCH OBJECTIVES

To assess the economy-wide and poverty effects on household groups of expansion in the cotton sector and of shocks/policies affecting the sector

ECONOMY-WIDE MODELSFlows in the Regional Economy

Activities

Commodity Markets

Factor

Markets

Rest of the World

Households Government Capital:S-I

FactorCosts

Wages& Rents

IntermediateInput Cost

Sales

PrivateConsumption

Taxes

Domestic Private Savings

GovernmentConsumption

Gov. Savings

Investment

Demand

ImportsExports

Foreign Savings

Transfers

Foreign Transfers

Home Consumption

Household Remittances

Source: Adapted from Lofgren et al. (2002)

Economy-wide ModelsThe Regional CGE Model

Based on the IFPRI Standard Model (Lofgren et al., 2002) Calibrated with the disaggregated Zambezi Valley SAMs Agent behavior:

Producers maximize profits Consumers Maximize utility

Functional forms: Production technology: LEO and CES Consumer demand: LES Output supply: CET to domestic market and exports Commodity demand: CES from domestic market and imports

(*) Model used to account for feedback and indirect effects of expansion and shocks and assess the income poverty implications on household groups.

The Regional CGE Model Closures Factor market closures

– Fully employed activity specific CF capital

– Full mobility and unemployment for all other factors

– Unemployed factors can be brought into production at the going market wages/rents during expansion

Macro system closures

– Government budget: fixed tax rates and flexible savings

• Limited role of Local GOV

– Rest of the World balance: flexible exchange rate regime

• Justified by significant foreign trade

• Fixed exchange rate attempted without major differences in results

– Capital account: Savings-driven Investment

• Appropriate for a credit constrained economy

Unemployment of FactorsPerfectly Elastic Supply

Wage/rentrate

Quantity of Factor

QFS0

QF2

QF0

QF1

WF1

WF0

WF2

QFS2 QFS0 QFS1

QFS – Quantity of factor supplyQF – Quantity of factor demandWF – Wage/rent (price of factor)

Policy Simulations with the CGE Model

Expansion: Increase in activity specific capital

Expansion with: Productivity gains in the cotton sector Increases in export prices of cotton and maize Increase in import prices of intermediate inputs Tax on cotton exports

(*) Mix of shocks relevant for the policy debate. All shocks at 15% change level.

Stochastic Dominance approach to poverty analysis

CDFs and Flexible Poverty Lines

Results of Policy SimulationsCotton Areas – Grower Households (CG)

Poverty reduction good for CG: 15% (CFC+productivity) => 40% pc inc

Higher productivity yield greater effects than export prices of cotton

Maize has substantial impact

Effect of increase in import price of inputs almost negligible on poverty reduction efforts. Why?

Results of Policy SimulationsCotton Areas – non-growers (CNG)

Income effects on CNG smaller in magnitude and comparatively to tobacco areas: 31% with productivity and expansion

Somewhat important indirect effects: Increased demand for farm (26-33%) and non-farm labor (32-38%)

increases remunerations for all groups Indirect effects greater with productivity gains

With productivity gains each 10% gain in CG income corresponds to 7.7% gain among CNG…but both groups start from a low base

Substantial Benefits/losses from variations in maize export prices A 15% increase in maize export price during cotton expansion increases

CNG pc income in 39%

POLICY IMPLICATIONS (1) Encourage expansion with increased productivity:

Use of improved/high yielding seeds Strengthening of extension systems Improve techniques and field practices Better grading systems

Gains from expansion and improved productivity can: Maximize indirect effects leading to broad based poverty

reduction Counter the negative effects of low export prices and increased

import prices of inputs

Encourage maize production and trade Include maize package in CF schemes Avoid domestic and cross-border flow restrictions

Poverty reduction effects are sizable when prices are high Associated food security important

POLICY IMPLICATIONS (2)

Government needs to avoid trade restrictions, e.g., export taxes

Lack of returns to education suggests high scope for improvement in productivity enhancing field

practices capable of rewarding more educated farmers;

Further research in understanding the differential poverty impacts of alternative contracting styles during expansion Intensive versus extensive approaches