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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

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
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 MODELS
Flows in the Regional Economy
Factor
Factor
Costs
Activities
Domestic Private Savings
Markets
Wages
& Rents
Taxes
Intermediate
Input Cost
Households
Capital:S-I
Government
Transfers
Home Consumption
Sales
Gov. Savings
Commodity
Markets
Exports
Imports
Rest of the
World
Source: Adapted from Lofgren et al. (2002)
Private
Consumption
Household
Remittances
Government
Consumption
Investment
Demand
Foreign
Transfers
Foreign Savings
Economy-wide Models
The 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:

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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
 Macro system 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
Unemployment of Factors
Perfectly Elastic Supply
WF1
QFS0
WF2
QF1
QF0
QF2
QFS2
QFS – Quantity of factor supply
QF – Quantity of factor demand
WF – Wage/rent (price of factor)
QFS0
QFS1
• 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: Savingsdriven Investment
Wage/rent
rate
WF0
– Government budget: fixed tax
rates and flexible savings
Quantity of Factor
• Appropriate for a credit
constrained economy
Policy Simulations with the CGE Model
 Expansion: Increase in activity specific capital
 Expansion with:
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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 Simulations
Cotton Areas – Grower Households (CG)
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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 Simulations
Cotton 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:
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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