Agricultural Policy Indicators:Developing an approach to monitor policy

changes and their impacts on the agricultural sector of developing countries

Statistics, Knowledge and PolicyOECD World Forum on Key Indicators

Palermo 10-13 November 2004

Workshop on Indicators to evaluate agricultural policies in OECD and non-OECD countries

Basic Foodstuffs ServiceCommodities and Trade Division

FAO

Problem settingProblem setting

• No comprehensive information on policies affecting agricultural sectors of the developing countries is currently available

Why is such information needed?Why is such information needed?

• First, to understand nature of and changes in policies affecting the agricultural sector for cross country and temporal comparisons

• Then, to assess the impact of those changes on global and domestic commodity markets, and more importantly on food security of vulnerable population groups

But with a caveat…But with a caveat…

• Indicators should provide useful indications of policy dimensions but not take the place of analysis of policy impact

With the ultimate objective of…With the ultimate objective of…

• providing developing countries with information that will be useful in improving their agricultural policies,

• through measuring the effects of policies on the incentives of the actors and their ability to respond to those incentives

Structure of the Agricultural Policy Indicators (API) project

Which policies?Which policies?Structural ModuleStructural Module

• Labour market:– wage rate & training policies

• Capital market:– credit policies

• Land market:– property rights & rental markets

• Infrastructure:– government investment in rural and institutional infrastructure

• Marketing:– policy towards marketing boards & other agencies

Which policies?Which policies? Macro Environment ModuleMacro Environment Module

• Macroeconomic policies:– Exchange rate policies, i.e. indirect effects of exchange rate

disequilibrium

• Trade policy environment:– non-agricultural tariffs & non-tariff measures

• General price level & price stability:– Inflation, relative prices between farm and non-farm sectors,

measures of price stability

Which policies?Which policies? Research & Deployment Module Research & Deployment Module

• Research:– Government research & government sponsored private

research

• Advisory services:– i.e. extension and other services related to output levels and

hectarage

• Technology:– Government policies toward uptake of new technology,

including patents, other IPRs, plant breeders and farmers rights

Which policies?Which policies? Regulatory Environment ModuleRegulatory Environment Module

• Food quality:– implementation of both product and processing standards

• Plant and animal health:– sanitary and phytosanitary standards

• Food safety:– food born diseases

• Environmental:– problems that influence and are caused by farm practices

Which policies?Which policies? Commodity Market Module (CMM) Commodity Market Module (CMM)

• Output market policies:– price support on internal market, direct payments tied to

production etc.

• Input market policies:– input subsidies and taxes

• Border policies:– tariffs and non-tariff barriers, applied rates qualified by

preferential access provisions (also for traded inputs)

The Commodity Market ModuleThe Commodity Market Module

• CMM: is the main module that will be developed first, eventually for most developing countries

• the module will allow:– develop quantitative policy indicators to monitor and

evaluate agricultural policy developments for individual commodities

– assess whether producers in developing countries are being subsidized or taxed

– integrate the monitored indicators into quantitative/ comparative analyses of agricultural policies

The policy questions to be The policy questions to be answered by the CMManswered by the CMM

• Output market policies:– Question: What incentives do producers get from the set

of market price policies and the direct support they receive?

• Input market policies:– Question: What is the impact of input market policies on

producer incentives?

• Border policies:– Question: How do border policies contribute to the level

of incentives afforded by other price policies?

Information to be collected within Information to be collected within the CMMthe CMM

• on production and marketing chains of the selected commodities

• on production processes

• on all policies currently employed through output & inputs markets that affect production incentives

• stock-taking of all government activities and expenditures in output and input markets

Information to be collected Information to be collected continued…continued…

• Output markets:– major commodities (mainly tradables): producer/

wholesale/retail prices in major producing and consuming regions and border prices at major ports

– costs of handling, storage and transportation for the bulk of farm commodities between major production, consumption and exit/entry centers

• Input markets:– retail prices at major production regions and

exit/entry centers

– costs of handling, storage and transportation

Information to be collected Information to be collected continued…continued…

• Border measures:– all tariffs, taxes, subsidies

– TRQs, preferential access

– non-tariff barriers

– port charges and any other costs associated with the importation or exportation of the commodity

• Direct payments:– all direct payments applied to the commodity and

related major inputs

Transforming the information into Transforming the information into policy indicators for impact analysis policy indicators for impact analysis

Nominal rate of protection (NRP)

Increase in gross revenue per unit (producer price) from sales of product

Adjusted nominal rate (ANRP)

Increase in net revenue per unit after input subsidies (taxes) are taken into account

Effective rate of protection (ERP)

Increase in value added per unit (gross revenue less input costs)

Nominal rate of assistance (NRA)

Increase in revenue including payments not tied to production (decoupled)

Effective rate of assistance (ERA)

Increase in value added after adding decoupled payments

Producer subsidy equivalent (PSE)

Income transfers through price and non-price policies as a proportion of with-policy income

Methodological Issues

• Accounting for economy wide interventions

• Structural Impediments and marketing Margins

• Measuring government outlays

• Public goods in the absence of pricing

• Incidence of income transfers to agriculture

• Commodity coverage

Methodological IssuesEconomy wide interventions

• Various indicators, i.e. NRPs, ERPs, etc., do not capture effects of non-agricultural sector specific policies caused by

– exchange rate misalignments (departure from equilibrium exchange rates)

– trade policies affecting the non-agricultural sector

• As a minimum, and where available, real exchange rate movements (price of tradables to non-tradables) be monitored

• Where this is not possible, purchasing power parity exchange rate be monitored

Methodological Issues Structural impediments and marketing

margins

• Distinguishing explicit trade and price policies from presence of structural impediments due to

– poor physical and institutional structure

– uncompetitive processing industry

– high intermediate transaction costs due to erratic policy changes

Methodological IssuesMeasuring government outlays

• List of budgetary outlays can be long

• Data only available on sector level, not commodity level

• Not all outlays are done by central governments

• Estimates can vary depending on reporting government agency

Methodological IssuesIncidence of income transfers to

agriculture

• Difficult to differentiate who really benefits from government outlays

– Farmers, or

– input suppliers, or

– agro-processing industry, or

– simply reflect the cost of excessive bureaucracy

Computational Issuesespecially related to ERPs

• definition of non-tradables (Corden – primary factor inputs, or Balassa – traded inputs with zero level of nominal tariff)

• possible substitution between traded inputs (only few empirical estimates of elasticities – could bias results if input prices are more distorted than output prices)

• degree of substitution between traded inputs and primary factors (non-traded inputs): how value added is estimated could change if there is substitution

• interpretation of ERPs in terms ranking or relative scale of protection