Transcript Distributional and poverty effects of agricultural trade liberalization

UNCTAD Virtual Institute seminar on trade and poverty
Geneva, 8-10 September 2014
Distributional and Poverty Effects of
Agricultural Trade Liberalization:
The Case of the Democratic Republic of Congo
Christian Otchia
Nagoya University
Cooperating policymaker:
Charles Lusanda Matomina
Ministry of Economy & Trade; Enhanced
Integrated Framework, DRC
Mentor:
Marion Jansen
International Trade Centre
On the policymaker
 Name: Charles Lusanda Matomina
 Current Position: Senior Adviser, Ministry of Economy and National
Coordinator of the Enhanced Integrated Framework, DRC
 Contributions to this project:
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Documents of past agriculture reforms
Current agriculture reform agenda and priority for the government
 Cash crops or food crops and livestock production ?
 Transaction costs (trade and transportation margins)
 Industrial parks
 Challenges
 Lack of previous studies
 Reliability of historical data ---> FAOSTAT was a good help !
 Use of research findings
 Action plan for the “Note for Agriculture Policy and Rural Development”
 Background study for the Plan for rural poverty and food security
Page 2
Motivation
Democratic
Republic of
Congo
All indicators are
alarming
Agriculture
2nd largest country in Africa
Centre of Africa (9 neighbours)
80 million hectares of arable land (only 11% in use)
Diverse climatic conditions and abundant water
resources.
 Copper : 1/3 of the world reserves
 Diamonds : 1/4 of the world reserves
 Coltan : 4/5 of the world reserves
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Very high poverty rate (71.7%)
High inequality (0.46)
Unemployment reaches 3.7%
Underemployment is estimated at 72.7%
13.5% of the population has a formal job
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21% of GDP
60% of employment
78% of low-skilled labour
Low productivity
High transaction costs
Policy bias against agriculture
Page 3
Policy Context
DRC Poverty Reduction and Growth
Strategy Paper (PRGSP-2)
Growth, Employment, Poverty
First Pillar
Second Pillar
Third Pillar
Fourth Pillar
Governance
& Peace
Economic
Diversification
Human
Capital
Environment
Protection
Employment
Promotion
Re-launching
Agricultural
production
Infrastructure
Development
Restore
Production
Capacity
This research
Page 4
Research Objective
Identify policy options to promote growth
and reduce poverty in DRC
What is the impact of
agricultural trade
liberalization on poverty
and income distribution
What are the other policies relevant
to agriculture growth that are likely
to improve the relationship between
trade liberalization, poverty and
income distribution?
Page 5
Methodology
Page 6
Model Characteristics
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Single country, static CGE model consisting of 19 sectors
Follows the tradition of IFPRI CGE Modeling
The model includes home consumption of non-marketed commodities
Explicit treatment of transaction costs for marketed commodities
Transaction costs
Marketing margins
 Imports
 Exports
 Domestic
Transportation margins
 Imports
 Exports
 Domestic
Page 7
Data
 2005 National Accounts based on SNA (1993)
 Household and Informal Producer Survey (2005, 12098 Households)
• 19 activities and commodities
• Household autoconsumption
• Transactions cost
• Labor disaggregation (location and skill)
• Tax disaggregation (9 categories)
Page 8
Design of Policy Scenarios
Scenarios
Policy
Description
1
Agriculture trade liberalisation
100% cut in import tariffs in agriculture
2
Feeder roads development
20% reduction of agricultural
transportation costs
3
Productivity growth in
agriculture
4
Agriculture trade liberalisation
and feeder roads development
5
Agriculture trade liberalisation,
feeder roads development, and
Scenarios 1, 2, and 3
agricultural productivity
growth
5% increase in agricultural productivity
Scenarios 1 and 2
Page 9
Findings
 Agricultural trade liberalization has only a small effect on welfare
 Small gains due to low initial tariffs and high transaction costs
 Import price of agricultural goods falls more than domestic demand price
 Lower producer price leads a reduction of agricultural value added price
 Very small positive effects on factor remuneration
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Findings
 Feeder roads development boots agricultural exports and imports
 More agriculture trade as import price falls and producer price increases
 Substantial increase in export performance relative to imports
 Farmers cannot react to lowered transport costs due to low productivity
 Trade and construction sectors capture the most of these benefits
 Return to all factors increases, except for urban high-skilled
 Urban low-skilled workers gain the most as they are intensively used in trade
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Findings
 Agricultural productivity growth raises GDP and welfare significantly
 Increase in the supply of agricultural goods leads to a reduction of demand
prices
 Agricultural imports contract and exports expand
 Other sectors (processed foods, textiles, hotels and catering) also expand
 All income groups benefit
 Wage gains for urban workers are higher than for workers in rural areas
 However, workers with lower skills gain more in rural and urban areas
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Findings
 Distributional effects: pro-poor in urban and pro-rich in rural areas
(b) Scenario 2
Feeder roads development
.25
.1
1.5
0
2
.05
.15
.1
2.5
.15
.2
3
.2
.25
(c) Scenario 3
Productivity growth in agriculture
3.5
(a) Scenario 1
Agriculture trade liberalisation
10
11
12
13
14
Log of consumption per adult equivalent
10
11
12
13
14
Log of consumption per adult equivalent
National
Rural
10
11
12
13
14
Log of consumption per adult equivalent
Urban
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Findings
 Gains are higher than when individual policies are implemented alone
(b) Scenario 5
Scenarios 1, 2, and 3
.1
2
.2
2.5
.3
3
.4
.5
3.5
(a) Scenario 4
Scenarios 1 and 2
10
11
12
13
Log of consumption per adult equivalent
National
14
10
Rural
11
12
13
Log of consumption per adult equivalent
14
Urban
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Findings
 Highest priority: Agricultural productivity and rural feeder road
 No substantial gain for agricultural trade liberalization
 Lowering transaction costs should be prioritized as net benefits are higher
 Agricultural productivity growth generates competitive gains for agricultural
exports
 Welfare effects of agricultural productivity improvement dominate the other two
policies
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Limitations
 Productivity growth and reduced transportation costs are assumed
to be exogenous
 The model does not consider the resources needed to implement
these policies
 Future research should estimate costs associated with each
policy and its financing sources
 CGE model results are driven by functional forms and assumptions
 Future research should conduct sensitivity analysis
 The microsimulation module considers only changes in labour
income (other sources remains constant)
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Policy recommendations
 Establish an agricultural promotion agency to increase the
government's capacity to implement effective agricultural policies
 30 government structures and autonomous institutions are
involved directly in agriculture
 7 parastatal bodies are involved directly in agriculture
 500 NGOs are involved directly in agriculture
 Take concrete actions to increase investment in agriculture in rural
areas
 Increase agricultural budget share from 2% to 10%
 Target productivity of smallholders as they are responsible for
80% of agricultural output
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Policy recommendations
 Modernize the agricultural production methods for smallholders
 Introduce improved hand tools and machines that can be
used manually or powered by animals
 Establish supply chains to provide spare parts and back-up
services to farmers as government imported 3000 tractors
 Facilitate access to modern harvesting, on-farm storage
equipment to enable farmers to reduce post-harvest losses
In the long run, public policymakers should:
 Promote local production of agricultural equipment
 Promote credit and subsidy programmes for poor
smallholders to encourage them to invest in farm machinery
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Policy recommendations
 Strengthen agricultural extension services, research, and education
 Transform the top-down extension service into one that
employs a more bottom-up participatory approach
 Build capacity of the 13.000 field staff of the ministry of
Agriculture to provide rural extension services
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Policy recommendations
 Build and maintain rural feeder roads and markets
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Continue current efforts of road construction but increase
attention to their quality and sustainability
Direct investment toward local and village-level roads
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