Social Valuation in Agricultural Policy Analysis

Its Significance for Sub-Saharan Africa

Matthew Okai

• Publisher: Routledge
• Year: 2019
• ISBN:
  9780429794117
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

First published in 1999, this volume is intended to encourage appreciation of the cardinal significance for integrating macroeconomic policy variables and environmental factors and any other relevant externalities into sectoral policy analysis as a tool for improving choice of strategic factors in agricultural development, investment of allocative efficiency in agriculture and environmental protection and overall agricultural development management. The main concern of Matthew Okai is for choosing realistic policy instruments to promote development, quantifying constraints and evaluating the impacts of policy on objectives.

1 Framework for Social Valuation in Agricultural Policy Analysis

Scope of the Book

The intention of this work is to provide coherent and mutually supporting paradigmatic technical and socioeconomic elements which are fundamental in evaluating the impacts and consequences of agricultural policy intervention. Since adaptive response to changing ecological conditions in Sub-Saharan African (SSA) is greatly influenced by social,¹ cultural,² technical and economic conditions, the integrative approach to agricultural policy analysis is ideal for the Africa region. In the agrarian context, this approach facilitates diagnostic analysis of the socioeconomic, technical and agro-ecological³ forces influencing farmers’ land-use decisions and adaptive strategies. Traditionally, agricultural policy analysis relies heavily on macroeconomic parameters and does not often incorporate externalities such as internal technical and environmental factors. The key feature of this book is the integration of macroeconomy and internal technical (agricultural and environmental) externalities into agricultural policy analysis. This integrative⁴ approach has become necessary because, in Sub-Saharan Africa, intervention to accelerate agricultural development has been typified by paradoxes: initiatives have often been followed by the intensification of environmental decline and rural poverty. This has arisen because policy decision-making processes were divorced from the consideration of externalities and did not anticipate unintended consequences and impacts of policy intervention on natural resources.

The indigenous technical and nontechnical knowledge⁵ (cultural endowments)⁶ had endogenously evolved around the use of land and land-based resources (the basic life-support resources). Each farming system (agriculture-based, animal-based, pastoralism, agro-pastoralism) had been evolved in such a way that it suited the different ecological niches. These systems were not only in harmony with the people but also in equilibrium with the environment. As the systems evolved, the old cultural practices were not abandoned but incorporated into the new ones. Following the integration of SSA into the global economy, the evolutionary development of indigenous technical knowledge (ITK) was disrupted by the superimposition of the exogenously and revolutionarily-developed science-based technologies which proved generally unsuccessful, and the resource-conserving quality of ITK had not been adequately incorporated into the externally introduced technological innovation.

The unique feature of this book is that it addresses not only the issues of the theoretical and methodological framework for agricultural policy analysis but also the pertinent imperative of the internalization of environmental externalities into the analysis. The book, therefore, goes a long way towards meeting the desire for upgrading and strengthening the analytical capacity of public sector management and filling the gap by internalizing the internal (natural resource perturbation), macroeconomy (external), and international externalities into policy analysis paradigms.

The book, with its primary geographical focus on SSA, can be used as a textbook by students of agricultural colleges, faculties of agriculture and postgraduate students of agricultural economics and policy analysis. It is also a useful companion for policy analysts, policy decision-makers and environmentalists. Most textbooks on economics or agricultural economics use examples derived from developed countries. Also, agricultural policy analysis had been divorced from macroeconomic policies. This book fills these gaps by using African examples, and demonstrates methodologies for the integration of macroeconomic policy variables into economic analyses of agricultural policies, including the internalization of environmental externalities into national policy design.

It highlights some paradigmatic elements, used here to encompass a coherent and mutually reinforcing pattern of investigation into concepts, perceptions, values, norms and interactive dynamics the synergy of which could be helpful in providing clinical evidence of farmers’ adaptive response and change to changing ecological, political and socioeconomic settings and circumstances. This understanding is useful in making strategic choices of factors critical in development. It is suggested, therefore, that these elements should constitute integral components of future farm management surveys and policy analysis.

An Introduction to Paradigmatic Elements for Policy Analysis

Framework of Analysis

Essentially, agricultural policy consists of decisions that influence the levels and stability of economic determinants which govern changes in relative prices of inputs and outputs, the choice of public investment and the allocation of public funds on intellectual investment (research to improve production and processing technologies). Policies pursued create an economic environment within which enterprises and individual households operate in an economy. The variables whose levels are to be influenced are referred to as endogenous (target) variables while policy instruments used to influence endogenous factors are referred to as exogenous variables. The framework for agricultural policy analysis is premised on: i) making choice of policy instruments to promote national and sectoral objectives through government intervention in the agricultural sector; ii) quantifying constraints; and iii) estimating impacts of policies on objectives (see Figure 1). The three most common objectives are efficiency, concerned with the allocation of resources to effect maximum national output and income, equity, concerned with how the national wealth is owned, produced and distributed (the income distribution consideration), and food and environmental security. Typically the promotion of one objective conflicts with one or both of the others. The essence of policy analysis is to facilitate taking decisions between competing objectives. Policy decision-makers explicitly or implicitly make judgments on the value of promoting different objectives. Decision-makers then have to trade-off the value of the perceived non-efficiency benefit against the measured efficiency. Traditionally the costs and benefits are valued in social prices (efficiency or shadow prices or accounting prices) which lead to the most efficient allocation of scarce resources (chapter 2).

For Sub-Saharan Africa, the fourth major objective is concerned with social articulation of risks and uncertainties. The preoccupation with risk aversion can blunt technical progress. The region is in all stages of development but most people still depend on the moral economy within which individuals, within a specific cultural context (cultural homogeneity) voluntarily participate in a reciprocal sharing of the means of livelihood (income diversification and consumption stabilization) and reciprocal access to productive assets and valued resources (income stabilization). The colonial destruction of social reciprocal relations (social capital of reciprocity) subjected the moral economy to a gradual transition to modern economy. During the transition, the moral economy had been facing social dualism because of the dichotomous situation between the two economies, ultimately leading to social exclusion due to the differential wealth accumulation, the individualization of risks and the peripheralization of the disadvantaged in society. Survival is achieved through an array of diversifications. Households draw on diversified strategies and employ a variety of non-market devices and income diversifications. The main ones are activity, temporal, technical and environment diversifications. Since risk varies with environment, technology, physical endowments and social institutions to which households have recourse, strategies chosen depend on the nature of the production shocks. Households’ adaptive response and change are influenced by their perceptions in terms of the capacity of an innovation in strengthening their risk-coping and risk management capacity. Social anthropology was not included in development paradigms until recently. Policy analysis in this type of social environment should include social anthropological investigation into the circumstances holding back progress.

Figure 1Framework of agricultural policy analysis

Often the difficulty in making choices arises because of the existence of constraints in the economic system. There are principally three categories of constraints that limit the agricultural sector from realizing its full potential: supply constraints, due to availability and quality of domestic resources (land, water, labour and capital); technological advances; and the relative costs of all inputs (chapters 3 and 4). In the case of Sub-Saharan Africa, Farrington and Boyd (1997, pp. 371–2) observed that while in other developing regions positive change in environmental recovery is strongly driven by policy, in SSA the change depends heavily on endogenous social, cultural, internal technical and economic conditions which are not easily influenced by external interventions. Thus any development intervention should be based on a better understanding of factors (ecological, social-economic, institutional) that influence farmers’ land-use decisions and the links between land use and the farmers’ welfare. The value of the commodities produced is greatly determined by domestic demand constraints arising from population growth, changes in taste preferences and the relative price of agricultural commodities (chapters 2, 5 and 6).

Both the domestic supply and demand constraints are moderated by the world prices of agricultural inputs and outputs that enter the international trade. As these prices, the third constraint, determine the domestic prices of tradeable commodities, price policies either decrease, increase or stabilize prices (chapters 5 and 6). Responsiveness of producers and consumers (chapters 7 and 8) to price policy depends on the underlying supply and demand constraints which in turn condition producer and consumer behaviour. It is this behaviour that determines the supply and demand schedules.

Policy comprises the instruments of action that governments employ to effect changes. The principal development concern of any country is to promote economic growth and development, through the execution of policies, that enables the national economy to produce and deliver an economic well-being that is within its potential and capability. Thus the key features of policy intervention are to: i) encourage economic growth and stability through national monetary, fiscal, trade and foreign exchange policies; ii) encourage resource use in satisfying sector and national output growth targets through policies such as market price, price support, ceilings, subsidies, taxes and government measures affecting demand and producer supply response; and iii) achieve a socially and politically acceptable sharing of the benefits and costs of development between competing groups (i.e. basic terms of trade, consumer and producer benefits, producer income, consumption, nutrition, poverty, etc.).

For the agricultural sector, the public sector policies have considerable influence on resource allocation. These influences can be classified into three broad categories: i) public expenditure to provide infrastructure (such as roads, communication, land improvement, irrigation schemes) or services to support or regulate private consumption or production activities (research and extension services, market information, supporting services such as mechanization, research, credit facilities, agricultural education, etc.); ii) direct public sector participation in agricultural production, marketing outputs or supplying inputs with the state acting as entrepreneur; and iii) government regulation of trade, exchange rate, credit facilities, and prices of inputs and outputs. The major objective for undertaking policy impact analysis, given sectoral concern, is to focus on food and the agricultural sector in general, identifying some key issues relating to agricultural supply response, effects on food and demand, availability and nutritional effects on food demand, availability and nutritional effects of policy variables, the incidence of rural poverty and income distribution, and, given current environmental concern, the dynamic consequences of macroeconomy-environment interactions on resource quantity and quality. The essence is to recognize the importance of macro-coherency by internalizing environmental externalities into the development framework.

Of the three principal categories of policies, the first is price policy. There are two main types of price policy instruments used to alter prices of agricultural inputs and outputs. For instance, quotas, tariffs and subsidies on imports and quotas, taxes and subsidies on exports (distorting policies) directly decrease or increase the volume of tradeable commodities and thus alter domestic prices, some of which cause divergences between domestic and world prices (chapters 5 and 6). An overvalued exchange rate, for instance, creates an implicit tax on producers of exportable commodities because only a small amount of domestic currency is earned or paid for by imports. While those who have access to imports benefit from cheap imported commodities, exporters are effectively taxed because domestic price is lower than its efficiency level.

Domestic taxes and subsidies create transfers between domestic fiscal resources and domestic producers and consumers. Thus the second category of policy is the macroeconomic management policy. In addition, as a third category, government influences the agricultural sector through public sector investment in developing new technologies, economic and social infrastructure, services and specific agricultural projects to increase outputs. Inefficient macroeconomic policy management results in government failure.

Market failures occur whenever monopolies or monopsonies, externalities (third party impacts or external economies) or factor market imperfections arising from inadequate development of institutions fail both to provide efficient and competitive services and to prevent the market from creating an inefficient allocation of factors or products. Unless price policy is capable of offsetting some failures of a market (efficient policies) to operate efficiently, the policy decision drives the domestic prices away from their most efficient levels based on world prices. An efficient policy is then applied to offset the market failure. Social (efficiency) valuation (chapter 2) of outputs and tradeable outputs are based on world prices adjusted for locational circumstances (chapter 5). Since internal factors of production are not traded, social valuation uses social opportunity cost (SOC) of each factor, the amount of national income forgone for not using the factor in its next best alternative use. In the valuation it is also necessary to distinguish between private and social valuations defined as the effects of divergences. Private valuations measure the actual market cost incurred and benefits gained by individuals. They reflect the actual prices received or paid by the individuals or individual enterprises, and incorporate the underlying costs and the effects of policies and market failures that create transfers in the system.

The key feature of analysis should be the integration of macroeconomic policy variables into the framework for economic analysis of agricultural policies, including the internalization of environmental externalities into national policy design and evaluation of impacts. This is necessary because in any economy there are three distinct but interlinked levels of the economy. At the macro-level, national policies (monetary, fiscal, trade and exchange rate, price, interest rate and income) are conceived and executed. The effects of the execution of these policies are first felt at the intermediate (meso-) level, which constitutes the channel of effects of policy execution through socioeconomic and institutional infrastructure. These effects cause changes in economic determinants (relative prices), factor and product markets. At this level the principal analytical work is to study the effects of policy changes on commercial coefficients. Mathematical methodologies had been developed by econometricians to analyse both the positive and negative effects of protective regimes on the economies on which they are imposed (chapter 6).

It is at the micro-level that the impacts of macroeconomic policy execution are felt by smallholders and the individual enterprises which constitute the productive sectors of the economy. Their response (the endogenous variables) to ch...

Table of contents

• Cover
• Half Title
• Dedication
• Title Page
• Copyright Page
• Table of Contents
• List of Figures
• List of Maps and Tables
• List of Algebraic Symbols
• Preface
• Acknowledgments
• List of Abbreviations
• 1 Framework for Social Valuation in Agricultural Policy Analysis
• 2 Theoretical Basis for Social Valuation of Production Factors
• 3 Economics of Resource Conservation
• 4 Analysis of Domestic Constraints and Resource Sustainability
• 5 Equity Aspects of Agricultural Pricing Policy
• 6 Effects of Trade and Exchange Rate Policies on Incentive Structure
• 7 Demand Analysis
• 8 Analysis of Agricultural Supply Response
• References