Macroeconomic Adjustment and the Performance of the Agricultural Sector: A Comparative Study of Cameroon and Kenya

Transcription

1 Maroeonomi Adjustment and the Performane of the Agriultural Setor: A Comparative Study of Cameroon and enya William A. Amponsah and Leroy J. Hushak 1 Abstrat: The interation between maroeonomi and trade issues and agriulture is not well understood. In subsaharan Afria, this relation beomes ritial in reent strutural adjustment programmes, espeially in ountries where agriulture is the mainstay of the eonomy. This paper examines empirially examples of a nonliberalized eonomy and a gradually liberalizing eonomy in the region. It demonstrates that a suffiiently monolithi and ineffiient agriultural marketing struture results in the slow transmission of foreign exhange gains to farm gate pries that onstrain potential supply response. Monetary poliy impats seem to be a funtion of greater maroeonomi liberalization than nonliberalization, espeially when, in the latter ase, domesti urrenies are pegged diretly to foreign urrenies. Introdution There is a general need adequately to treat the interation between maroeonomi and trade issues and agriulture. This link is partiularly ritial for many subsaharan Afrian eonomies, but is often either negleted or not suffiiently understood. The designs of reent strutural adjustment failities in subsaharan Afria may not adequately inorporate the impliations arising from the nature of the prevailing agriultural prodution and marketing regimes, whih may seriously hamper the longrun suess of those adjustment programmes, espeially when a ountry is very dependent on agriultural exports. The outome of maroeonomi adjustment programmes may depend ritially on the poliy framework in the agriultural setor; implying that some agriultural setor regimes may be onsistent with suessful maroeonomi adjustment, while others may not. An evolving agriultural poliy framework subsequently beomes a neessary integral part of suh adjustment. For simpliity of exposition, the World Bank's taxonomy of agriultural regimes (nonliberalized, gradually liberalizing, and fully liberalized) is used. The primary harateristis of a nonliberalized regime are found in the major government and parastatal roles in a singlehannel marketing struture, a small or nonexisting private setor role in marketing, and rigid strutures of ontrolled pries for onsumers and produers. In a fully liberalized regime, there is a redued government role, a multipliity of marketing hannels with strong private setor partiipation, and marketbased priing mehanisms. A gradually liberalizing regime is an intermediate level, a gradually evolving agriultural framework from a nonliberalized to a fully liberalized regime. The fous of maroeonomi adjustment is usually exhange rate reforms, prodution inentives, monetary stability, and trade reforms. In subsaharan Afria, exhange rate reforms tend to be synonymous with urreny devaluations. When omplemented by redued industrial protetion, it is believed to result in a shift in internal terms of trade towards agriultural prodution. A potentially perverse effet on internal terms of trade often arises under nonliberalized or gradually liberalizing regimes when the agriultural marketing struture is suffiiently monolithi and ineffiient. It results in the slow transmission of exhange rate hanges to farm gate pries even as imported input pries adjust rapidly to the devalued urreny. The inidene of taxation on farmers poses potential barriers to prodution response. In sub Saharan Afria, this raises immense hallenges in slowgrowing eonomies, espeially when exaerbated by monetary instability. Trade liberalization must be intimately related to the liberalization of agriultural marketing and pries. Yet sometimes an important industrial subsetor may be massively proteted under an overvalued and quantitatively restrited external trade regime. The level of protetion may be redued under trade liberalization, yet the agriultural marketing senario remains nonliberalized, whereby proteted parastatal monopolies funtion ineffiiently. 290

2 MACROECONOMIC ADJUS'J'MENT AND THE PERFORMANCE OF THE AGRICULTURAL SECTOR Of the 22 subsaharan Afrian ountries that have been undertaking strutural adjustment sine 1980 through World Bank and/or International Monetary Fund auspies, enya fits the above profile as a gradually liberalizing eonomy, while Cameroon is an example of a nonliberalized eonomy. Analytial Approah A large proportion of agriultural prodution in subsaharan Afria is traded to earn sorely needed foreign exhange. Thus, the link between the external setors and agriulture takes plae through the real exhange rate (measured in units of domesti urreny per US$ foreign prie index/domesti prie index). The effet of ommerial poliy on the struture of inentives in the agriultural setor is analysed using the tradedtonontraded goods model and abstrating from the elastiity approah to balaneofpayments disequilibria. The analytial approah of the study of the performane of the goods, money, and finanial markets follows from Garia Garia and Montes Llamas (1988). Whenever inreases in government expenditure are finaned through taxes, an exess demand for nontraded goods develops ifthe marginal propensity of the government to spend on nontraded goods is larger than the orresponding marginal propensity of the private setor. Thus, the pries of nontraded goods rise. These ourrenes redue inentives to produe in other tradeable ativities suh as agriulture and industry, whih may explain the eonomi performane of the seleted ountries. So the supply responses to the agriultural (AG"),.industrial (NA 8 ), and servie (NT') setors are determined to apture the various influenes in terms of the relative pries of agriulture and industry to servies. It is possible that inreases in the world interest rate, / (measured by the London Interbank Offer Rate), may have transmitted to the lean apital markets of these ountries to ontribute to reessions and, espeially, high flutuations in their monetary reserves. Flutuations in the monetary reserves (dr IM) are usually attributed to the effets of hanges in the urrent and apital aounts. The analysis isolates the real per apita GDP (PGDP), the per apita value of exports (PVEX), or the per apita value of agriultural exports (PAGVEX)inluding offee exports (COVEX) in enyaand the per apita balane of payments (PBOP) as the determinants of the urrent aount. The domestitoforeign interest rate differential, r //(1 +e), and the differene between per apita debt and debt servie (PDBT) are the major determinants of the apital aount. This is onsistent with Fleming (1962) and Mundell (1962 and 1968). The monetary Af'1 IP) speifiation follows Dornbush's demandformoney equation to determine the response to interest rate hanges in a semiopen eonomy (Dornbush, 1980, p. 176). The impat of ertain monetary instruments on the real exhange rate is also measured, abstrating from the portfolio balane approah of the asset market and defining the real exhange rate as a logarithmi funtion of the real market exhange rate (LEXCH), lagged real domesti interest rate (r_1), PGDP, and PBOP. Consisteny with the terms of trade (TOT) definition is ahieved by defining the real exhange rate as the ratio of the prie of tradeables to the prie of nontradeables <LPCNA). The size of government expenditure relative to GDP (EGDP) and PGDP are also inluded. A general equilibrium framework similar to Garia Garia (1981), Oyejide (1986), and Tsibaka (1986) is also used in arriving at an equation that allows measurement of the inidene of governments' trade and exhange rate poliy taxation on agriulture. The underlying stati equilibrium approah follows Dornbush (1974) and Sjaastad (1980) in that it demonstrates that exhange rate poliies sometimes have global eonomi reperussions quite different from those intended by poliy makers. It is also onsistent with Balassa (1981), Little et al. (1970), and rueger et al. (1981), whose studies dealt with how inentive systems and resoure flows in developing ountries have onentrated on the degree of protetion for ompeting manufaturing ativities by trade and exhange rate poliies. 291

3 WILLIAM A. AMPONSAH AND LEROY J. HUSHA Results The estimated equations for Cameroon and enya are presented in Tables 17. They over the period, and the data are derived from World Bank, FAO (Prodution and Trade Yearbooks), and IMF (International Finanial Statistis) soures. The tvalues are presented in parentheses below their respetive oeffiients. The stati supply response equations (Table 1) for the real setor did not provide the expeted signs and signifiane of prie oeffiients. However, modifiations ofnerlove's (1956) partial adjustment model provided more onsistent results. The own pries for Cameroon were all positive as hypothesized. However, for enya, the own pries for agriulture and industry were all negative, whih probably suggests the potential perverse effet of agriulture in an eonomy that is gradually shifting its dependeny towards the industrial and servie setors. However, a generally higher supply response to the previous year's relative pries in enya was observed. The elastiity of areage response (XC) expetation to the previous year's agriultural pries (PAG) was higher for enya than for Cameroon, and onformed to the nonzero results of Grillihes (1959). Farmers in both ountries, therefore, respond rationally to prie inentives. For both ountries, all setors exhibited positive trend variability, even though enya's was more signifiant. AG 8 f NT 8 f NA 8 f x Table ISupply Response: Partial Adjustment Constant I PAG_ 1 I PNA_l I AGs_l I x_1 I T I R2 I DW (2.96) (0.95) (l.21) (0.10) (2.29) , (18.11) (0.81) (0.24) (l.09) (5.14) (3.47) (0.17) (0.14) (8.84) 1, , , ,364.4 (10.87) (2.44) (2.41) (24.97) (0.15) (0.04) (0.47) (7.31) 3, , (6.41) (l.87) (0.33) (14.32) (12.12) (l.11) (2.59) (5.43) (1.18) 4, , , , (112.88) (0.20) (2.48) (2.03) (5.67) Note: C = Cameroon and =enya. Absolute values oftstatistis are in parentheses. The potential impat of agriultural prie inentives beomes very apparent in both nonliberalized and gradually liberalizing examples. An inrease in agriultural prie should redue the supply of nonagriultural tradeables in the shortrun as resoures (inluding human apital) are transferred to agriulture. This resoure movement effet, however, is expeted to reate an exess demand for all tradeables (sine industrial tradeables depend on agriultural inputs in both ountries) and, hene, should redue the prie of nontraded goods. On the demand side, inreases in agriultural pries also inrease inome and subsequently expenditures, whih drive up the demand for nonagriultural tradeables. Thus, the pries of industrial tradeables go up, thereby driving down the pries of nontraded goods in the long run. Suh senarios have strong impliations in narrowing the rural/urban terms of tradea neessary expetation in any adjustment sheme. 292

4 MACROECONOMIC ADJUSTMENT AND THE PERFORMANCE OF THE AGRICULTURAL SECTOR In Cameroon, inreases in both agriultural and industrial tradeable pries do indeed redue the supply ofnontradeable goods. In enya, however, agriultural pries redue the supply of nontradeables more signifiantly, but industrial pries signifiantly inrease nontradeable goods supply. The demand for money equation (Table 2) provided onsistent results as expeted for both ountries, exept for the negative sign on per apita inome in Cameroon. For enya, the marginal propensity to spend out of inreased inome is 0.002, whih is very small ompared to that obtained for the USA by Alexander (1952). Thus, loally indued investment is very small in enya. For Cameroon, the negative marginal propensity probably suggests the potential existene of monetary quirksan adjunt to the CameroonFranophone monetary alliane. AF IP Table 2Demand for Money Constant I Pl I r I (AF I P)_l I TOT I R2 I DW (0.60) (0.71) (2.53) (3.83) (0.75) t (0.69) (0.08) (2.49) (2.90) (l.67) The interest rate equation (Table 3) shows the expeted signs for all variables, exept for the rate of devaluation in Cameroon. While it is possible that enya's domesti interest rate follows the parity rate (and, thus, allows for flexibility in apital mobility), the negative value of the rate of devaluation (e) and the nonsignifiant parity rate in the seond real interest rate equation for Cameroon seem to suggest that the domesti interest rate may depend on external fators but not on internal fators. Domesti monetary poliy may, therefore, have no impat on Cameroon's eonomy; however, it does have an impat on enya's eonomy. Table 3Interest Rate Constant I. r I e I PGDP I PBOP I r*cl+e) I R 2 I DW (1.63) (0.33) (l.38) (5.15) (0.74) r (0.10) (2.70) (8.17) (0.40) (0.18) (1.45) (5.07) (0.06) (0.64) r > (0.36) (0.18) (1.12) (4.03) The hanges in international reserves equation (Table 4) provides the ustomary mixed results for small ountries. For example, the signs on PVEX and PCOVEX were negative for enya. For Cameroon, PAGVEX was negative, demonstrating agriulture's weak role as an export setor in the eonomy's reserve aumulation. Also, PDBT was positive for Cameroon but negative for enya. Generally, enya's relatively greater debttodebt servie ratio negatively affets its reserves. For both ountries, the parameters on the interest rate differential were positive but insignifiant, whih suggests some international mobility of apital into the ountries. However, real inome and the value of exports play weak roles in the urrent aount portion of the balane of government reserves. 293

5 WILLIAM A. AMPONSAH AND LEROY J. HUSHA dr/m ~ Table 4Changes in International Reserves Constant f PGDP f PBDP I r//(l+e) I PVEX I AGVEX I PCOVEXf PDBT f PBOPf R 2 I DW (0.16) (0.45) (0.66) (0.08) (0.38) (0.08) (0.27) (0.79) (0.80) (0.08) (0.18) (4.98) (3.07) (3.08) (1.12) (1.97) (1.00) dr/m f (0.34) (0.44) (0.87) (0.3) (0.25) (0.4) (4.58) The real exhange rate equation (Table 5) provides onsistent results for enya, exept for PGDP. However, the results of the seond equation provide a better fit for enya. As a result of its pegged exhange rate with the Frenh fran, it is possible that the level of real output and pries of tradeables do not positively affet real exhange rate movements in Cameroon. In other words, an improvement in terms of trade towards tradeables and an inrease in government expenditure would tend towards an inrease in the relative prie of nontraded goods. The negative effets of government expenditure on the relative prie of tradeables also suggest that Cameroon's propensity to spend on nontraded ommodities is higher than that for traded ommodities. LEX CH LPCNA Table 5Exhange Rate Constant f r _1 f ln PGDP I In PNAG I ln PNA I GBOP I In EGDPI R2 I DW (23.2) (2.5) (1.8) (0.63) (1.2) (0.23) (22.7) (4.1) (2.3) (0.3) (1.6) (0.5) (16.2) (1.5) (2.7) (5.6) (2.8) (0.28) (26.7) (1.2) (3.2) (5.6) (1.4) (0.8) Note: All variables are lagged A key observation for both ountries is that the interest rate has a positive effet on the prie of traded goods. So poliies that inrease real interest rates lead to an inrease in the real exhange rate, eteris paribus. This relationship is in agreement with the presumption that inreases in the interest rate also generally inrease relative pries of tradeables. Nevertheless, the relative pries of agriultural and nontraded outputs equation (Table 6) seems to suggest that inreases in the interest rate derease the relative prie of agriulture (logarithmially) in enya but not in Cameroon. An improvement in the terms of trade of agriulture and industry, real inome, and government expenditure (biased towards agriulture) should, therefore, inrease the relative prie of agriulture in enya. Indeed, this is a ardinal imperative in any gradually liberalizing marketing regime. The ommerial poliy equations (Table 7) yield exellent results for the inidene of taxation on the agriultural setor. Highly signifiant levels of taxation of 64 perent and 83 perent, respetively, were obtained for agriulture in Cameroon and enya. These results are similar to earlier results obtained for Nigeria (Oyejide, 1986) and for Colombia (Garia Garia, 1981). The results onfirm the slow transmission mehanism of prie inentives to agriultural produers, espeially in a gradually liberalizing eonomy suh as enya. Unfortunately, data unavailability poses a binding onstraint on the examination of setorspeifi poliies, in terms 294

6 MACROECONOMIC ADJUSTMENT AND THE PERFORMANCE OF THE AGRICULTURAL SECTOR of the diret and indiret effets on the main agriultural export setors (offee and tea) in enya. Table 6Relative Pries of Agriultural and NonTraded Output Constant I In (PGDP)_ 1 I r_l I Jn TOT_ 1 I BGDP_ 1 I R2 I DW ln (1.81) (0.68) (0.65) (1.04) (0.84) PAG! PNT (2.16) (2.73) (1.21) (2.54) (2.26) In PNT!PAG Table 7Commerial Poliy Impats Constant I Zn (PNA/PAG) I ln PGDP I PBOT I R (0.52) (6.23) (0.40) (1.61) (2.38) (8.39) (2.36) (0.65) I DW Conlusion The possibility that a suessful maroeonomi adjustment proess in a subsaharan Afrian ountry may not neessarily translate into a good performane by the agriultural setor is provided by the enyan example. In the medium to long term, there may be negative reperussions on the eonomywide adjustment proess, espeially when the slow transmission mehanism of relative pries does not allow better prie inentives to farmers. Farmers in both ountries respond rationally to prie inentives. The high inidene of taxation on agriulture seem to suggest that, in the gradually liberalizing regime, the agriultural setor is not liberalized enough. In any ase, the gradually liberalizing regime demonstrated a higher propensity for prodution growth than the nonliberalized regime. Monetary poliy has no impat on the Cameroon eonomy, but does on the enyan eonomy. But the monetary setor's performane in Cameroon may reflet not the nonliberalized nature of its regime but rather its monetary relationship with Frane. Capital flows into both ountries are not very signifiant, even though flows into Cameroon may be onstrained by its relationship with Frane. Inreases in interest rate in the medium run translate into inreases in the pries of tradeables, inluding agriultural goods for enya. However, government poliy seems to delay prie inentives to farm produers. Faed with a volatile international ommodities market, it is imperative that a gradually liberalizing eonomy that is dependent on agriulture redue the inidene of taxation on agriulture to allow for rapid domesti prodution response. The study also demonstrates the possibility that, for an nonliberalized eonomy whose export setor does not depend heavily on agriulture, formal maroeonomi strutural adjustment may not be a neessary requirement in effeting effiient performane in the agriultural setor. Furthermore, it proves that a more diversified export setor may offer other alternatives that redue the high inidene of taxation on agriulture. 295

7 10hio State University. WILLIAM A. AMPONSAH AND LEROY J. HUSHA Note Referenes Alexander, S.S., The Effets of Devaluation on a Trade Balane, Staff Paper No. 2, International Monetary Fund, Washington, D.C., USA, 1952, pp Balassa, B., The Struture of Protetion in Developing Countries, Johns Hopkins University Press, Baltimore, Md., USA, Dornbush, R., "Tariffs and NonTraded Goods," Journal of International Eonomis, 1974, pp Dornbush, R., Open Eonomy Maroeonomis, Basi Books, In., New York, N.Y., USA, Fleming, M., Domesti Finanial Poliies Under Fixed and Under Floating Exhange Rates, Staff Paper No. 9, International Monetary Fund, Washington, D.C., USA, Garia Garia, J., The Effets of Exhange Rates and Commerial Poliy on Agriultural Inentives in Colombia: , Researh Report No. 24, International Food Poliy Researh Institute, Washington, D.C., USA, Garia Garia, J., and Montes Llamas, G., Coffee Boom, Government Expenditure, and Agriultural Pries: The Colombian Experiene, Researh Report No. 68, International Food Poliy Researh Institute, Washington, D.C., USA, Grillihes, Z., "The Demand for Inputs in Agriulture and a Derived Supply Elastiity," Journal of Farm Eonomis, Vol. 38, 1959, pp rueger, A.O., et al. (Eds.), Trade and Employment in Developing Countries, University of Chiago Press for the National Bureau of Eonomi Researh, Chiago, Ill., USA, Little, I.M.D., Sitovsky, T., and Sott, M., Industry and Trade in Developing Countries, Oxford University Press, Oxford, U, Mundell, R.A., The Appropriate Use of Monetary and Fisal Poliy for Internal and External Stability, Staff Paper No. 9, International Monetary Fund, 1962, pp Mundell, R.A., "Capital Mobility and Stabilization Poliy Under Fixed and Flexible Exhange Rates," Canadian Journal of Eonomis, Vol. 29, pp Reprinted in: Caves, R.E., and Johnson, H. (Eds.), Readings in International Eonomis, Irving, Homewood, Ill., USA, 1968, pp Nerlove, M., "Estimates of the Elastiities of Supply of Seleted Agriultural Commodities," Journal of Farm Eonomis, Vol. 38, 1956, pp Oyejide, A.T., The Effets of Trade and Exhange Rate Poliies on Agriulture in Nigeria, Researh Report No. 55, International Food Poliy Researh Institute, Washington, D.C., USA, Sjaastad, L.A., "Commerial Poliy, True Tariffs, and Relative Pries," in Blak, J., and Hindley, B. (Eds.), Current Issues in Commerial Poliy and Diplomay, St. Martin's Press, New York, N.Y., USA, Tsibaka, T.B., The Effets of Trade and Exhange Rate Poliies on Agriulture in Zaire, Researh Report No. 56, International Food Poliy Researh Institute, Washington, D.C., USA,

8 MACROECONOMIC ADJUSTMENT AND THE PERFORMANCE OF THE AGRICULTURAL SECTOR Disussion OpeningTimothy 0. Williams (International Livestok Centre for Afria) Eonomi theory and experiene both suggest that in subsaharan Afrian ountries, where agriulture aounts for a substantial share of GNP and trade, maroeonomi adjustment programmes will impinge on the agriultural setor. Indeed, the suess of suh adjustment programmes depends largely on improved performane of the agriultural setor. By assessing the impat of adjustment programmes on the performane of the agriultural setor in two subsaharan Afrian ountries, this paper addresses a topi that is of relevane not only to the ountries studied but also for other developing ountries urrently undertaking strutural adjustment programmes. However, in assessing agriultural setor performane, the paper uses an eleti framework that requires further elaboration in plaes. First, in estimating the response of agriultural prodution to adjustment poliies, the approah used ignores the importane of nonprie variables in determining supply response. There is ample evidene that weather, infrastruture, and extension servies together affet aggregate agriultural output more than pries alone. Inorporation of these strutural variables into the framework employed would produe different omparative results, given that enya has relatively better infrastruture and extension servies than Cameroon. Seond, the framework used onentrated entirely on the performane of agriultural exports. To the extent that maroeonomi adjustment programmes are exeuted to promote growth and effiieny in the agriultural setor as a whole, the performane of other aggregates (suh as domesti food prodution) needs to be evaluated as well. Available evidene suggests that net exports respond quikly to higher pries indued by adjustment poliies, but domesti food supply may not inrease as rapidly. Further empirial evidene on the response of these two aggregates is needed in order to improve the design of strutural adjustment programmes. Another point to note is that there is little disussion of the effets of agriultural setorspeifi reforms on prodution inentives in the two ountries. Yet the onlusions reahed in this paper and the results of other studies have shown that maroeonomi adjustment poliies (involving devaluation, fisal austerity, and redution in industrial protetion) alone are unlikely to have a signifiant impat on aggregate agriultural output unless aompanied by a number of setoral reforms, inluding elimination of export taxation, redution of subsidies to agriultural marketing boards, and improvement in servies.. On a more general note, a areful interpretation of some of the estimated parameters reported in the paper produes results that are diffiult to reonile with available data on the ountries studied. Nonetheless, I share the authors' onern for a better understanding of the links between maroeonomi poliy hanges and agriultural inentives. I onsider the approah used in this paper as a useful first step whih, with elaboration, an produe results that ould be used to improve the design of strutural adjustment programmes. [Other disussion of this paper and the authors' reply appear on page 306.} 297