STRATEGIC POLICY ANALYSIS

Paul Guthiga,

ReSAKSS-ECA, ILRI

Workshop on Strengthening Capacity for Strategic Agricultural Policy

and Investment Planning and Implementation in Africa

Safari Park Hotel, Nairobi on 11th- 13th April 2012

Outline

• Key policy issues in agriculture

• Need for Policy Intervention

• Approaches to Policy Processes

• Tools for policy analysis

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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

– What levels of investments are needed to achieve set targets? 3

Key Issues… (2) 2. Agricultural productivity

- Generally low, but there are differences among countries

3. 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 period

4. Environmental degradation & climate change – Huge threat but, little weight in policy

5. Markets access and trade; – Poor access

– Relatively low trade volume/value between countries

– Trade barriers; tariffs & NTBs still persist

– Poor infrastructure

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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.

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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 compensated

4. 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

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• 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

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)

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Approaches…3

3. 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; and

4. 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.

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Tools for Policy Analysis

• 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.

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Policy Analysis Matrix (PAM)…(1)

PAM…2

III. 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?.

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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.

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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

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• 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

PAM…5 Social Profits in the Policy Analysis Matrix

Revenues Costs Profits

Input Factor

Social (efficiency) Prices

Private

Social E F G H

Divergences

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• 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).

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

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• 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).

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).

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PAM Applications

• Efficacy of agricultural price policies

• Efficacy of public investments in agriculture

• Essential baseline information for benefit-cost analysis of

agricultural investment projects.

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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).

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SAM…2

Firm Household Government Rest of

Economy

Net

Investment

Total

(Received)

Firm C GF (X-M)K I C+GF+(X-

M)K+I

Household W GH (X-M)C W+GH+(X-M)C

Government TF TH TF+TH

Rest of

Economy (X-M)K (X-M)C

(X-M)K+(X-

M)C

Net

Investment SH SG SH+SG

Total

(Expended) W+TF+(X-M)K

C+TH+(X-

M)C+SH GF+GH+SG

(X-M)C+(X-

M)K I

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Illustrative Open Economy SAM

Abbreviations: Capital letters: Taxes, Wages, iMports, eXports, Savings, Investment, Consumption, Government Transfer Subscripts: Firms, Households, Government, Consumption Goods, K: Capital Goods

SAM…3

• SAM's 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.

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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.

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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

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Other tools Tool What it does Possible applications

Spatial equilibrium model (SEM)

Provides quantitative measures of the welfare impacts of change in trade policy

Impacts of trade policy change on quantities and prices of agricultural commodities traded between regions

Social Cost-benefit Analysis Compares costs and benefits of a policy change

Analysing the economic worthiness of agricultural investments

Dynamic Research Evaluation for Management (DREAM) model

Evaluates the economic impacts of agricultural research and development (R&D) based on a flexible, multi-market, partial equilibrium models.

Evaluating economic impacts of technology adoption under a wide range of market, research spillovers, and trade policy scenarios

Econometric Analysis Applies mathematics and statistical methods to economic data to give empirical content to economic relations

Wide range for example analysing impacts of policies on agricultural productivity, poverty, consumption etc

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