Policy Impact Analysis of Policies Using Partial Equilibrium Analysis (PEA) Multi-Market Models (MMM)

Transcription

1 1 of 41 Policy Impact Analysis of Policies Using Partial Equilibrium Analysis (PEA) Multi-Market Models (MMM) The Case of Paraguay and Other Examples About the FAO Policy Learning Programme This programme aims at equipping high level officials from developing countries with cutting-edge knowledge and strengthening their capacity to base their decisions on sound consideration and analysis of policies and strategies both at home and in the context of strategic international developments. Related resources See all material prepared for the FAO Policy Learning Programme See the FAO Policy Learning Website:

2 2 of 41 Policy Impact Analysis of Policies Using Partial Equilibrium Analysis (PEA) Multi-Market Models (MMM) The Case of Paraguay and Other Examples By Lorenzo Giovanni Bellù, Agricultural Policy Support Officer Agricultural Policy Support Service, Policy Assistance and Resource Mobilization Division, FAO, Rome, Italy and Rosaria Vega Pansini, Consultant Bocconi University, Milan, Italy of the FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS About EASYPol The EASYPol home page is available at: This presentation belongs to a set of modules which are part of the EASYPol Resource package: FAO Policy Learning Programme : The Policy Framework: Policy Impact Analysis Using PEA and MMM EASYPol is a multilingual repository of freely downloadable resources for policy making in agriculture, rural development and food security. The resources are the results of research and field work by policy experts at FAO. The site is maintained by FAO s Policy Assistance Support Service, Policy and Programme Development Support Division, FAO.

3 3 of 41 Purpose and objectives Purpose To illustrate PEA/MMM as one of the approaches used in assessing policy impacts and compare it with selected other approaches. Learning Objectives Describe the balancing mechanism on which a partial multi market model is based. Identify channels through which a policy measure impacts on costs, revenues, welfare of producers and consumers. List advantages and disadvantages of PEA/MMM compared to other approaches for impact policy analysis.

4 4 of 41 Contents Topics covered: 1. General aspects of the PEA approach 2. Simple exercise on Partial equilibrium Analysis 3. Description of a country case: Agricultural policy in Paraguay Identifying selected policy issues and policy measures for Paraguay; 4. Review the main features of the Multi-Market Model for policy impact analysis 5. Construction of a base scenario for policy analysis 6. Simulation results 7. Use of policy impact results to formulate policy advice 8. Study of other analytical tools for policy impact analysis

5 5 of 41 Exercise on Partial Equilibrium Analysis (PEA)

6 6 of 41 Partial Equilibrium Analysis exercise At the end of this exercise the participants will be able to: Explain the process through which supply and demand of a specific good match under some assumptions Exercise based on the case of the formal firewood chain in Burkina Faso, Ouagadougou area Define the concept of elasticity of demand and supply Explain how the simple PEA framework can be extended to a multi-market model (MMM)

7 7 of 41 Concept of demand function The demand of a good/service is the quantity of the good/service required by a consumer to satisfy its needs. It is determined by (is a function of) a set of elements such as prices and income. Example: Q firewood Demanded = Q D ( Pfirewood, Pgas, Pcookers, Income) ( - ) ( + ) ( - ) ( + )

8 8 of 41 Functional form of the demand The functional form of the demand is the specific relationship between the quantity demanded and the elements determining it. It is assumed by the analyst. Simple example: Linear functional form: Q firewood = α + β f Pfirewood + β g Pgas Demanded Q firewood, P firewood and P gas are the variables of which Q firewood (b) P firewood (b) and P gas (b) are observed values of the variables at the benchmark ; Alpha and the betas are the parameters of the demand function. Betas are usually estimated or worked out from elasticities. Alpha is usually calibrated.

9 9 of 41 Some definitions OWN PRICE ELASTICITY: The Elasticity of the quantity demanded of a given good with respect to its own price is the percentage change of the quantity demanded when its own price changes of 1%, other things equal CROSS PRICE ELASTICITY: The Elasticity of the quantity demanded of a given good with respect to the price of any other good is the percentage change of the quantity demanded when the price of the other good changes of 1%, other things equal. CALIBRATION: Calculation of one or more parameters of the demand function on the basis of the observed values of the variables in the baseline situation.

10 10 of 41 Example: Firewood in Burkina Faso baseline values Baseline values and elasticities and parameters Baseline Item unit values Firewood quantity Qd b,000 tons 1,100 Own price elasticity (guesstimate) Cross price (Gas) elast.(guesstimate) 0.40 P firewood b US$/ton Pgas b US$/ton Parameters of the demand function Beta firewood Beta gas 0.76 alpha

11 11 of 41 Demand side of the market Q = 1, P P firewood Demanded firewood gas

12 12 of 41 Supply side of the market Supply can be a function of prices as well, because producers may willing to produce more for higher prices and vice-versa. However, for a given price, supply can also be infinite if that price is high enough to cover (constant) production costs. In that case, the supply function is: Pfirewood = C prod P firewood = 68

13 13 of 41 Numerical example Spreadsheet exercise Show how a policy scenario changing the price of a substitute (the gas) changes the quantity of firewood demanded by consumers

14 14 of 41 An application of PEA MMM to Paraguay A recent FAO application of PEA MMM was run in Paraguay, in the context of the ROA project, a six year programme aimed at: Identifying and measuring the contributions generated by the agricultural sector in developing countries to poverty alleviation, social stability, environmental sustainability cultural identity.

15 15 of 41 The Paraguay case Socio-economic situation of the country: Stagnating economy; Worsening of socio-economic conditions of the population; Increasing incidence of poverty: from 30.3% in 1994 to 39.2% in 2005; Increasing trend of both rural and urban poverty although the latter increased much more than the former.

16 16 of 41 The Paraguay case [cont d] Agricultural sector: Diagnosis Substantial concentration of land ownership Increasingly capital intensive agricultural production labour intensive crops (relevant to small farmers) shares to total crop production have been falling while the share of crops produced on farms intensive in the use of commercial inputs has increased. These structural changes have reduced pro-poor bias of agricultural growth contributing to an increase in poverty; Decreasing public expenditure in agriculture.

17 17 of 41 The Paraguay case [cont d] Policy objectives: Decrease the incidence of extreme poverty Improve food security through: Pro-poor agricultural growth Improved distribution of land Increased small farm productivity Expansion of food supply Increase the level and improved quality of public expenditure

18 18 of 41 The Paraguay case [cont d] 2. Possible policy options: Alternative policies to improve farm competitiveness (change in tariffs; introduce export subsidies; full implementation of free trade agreements; exchange rate managements policies) Improve technical assistance to small farmers in order to raise their productivity (improved seeds, provide funds to purchase higher quality seeds, information services); Modernizing processing industry linked to agriculture Increase net income of smallholders: lowering transaction costs and trade margins (through improved transport infrastructures, increase credit availability to deal with capital constraints; improve the quality of drinking water, of sanitation and health facilities, etc.)

19 19 of 41 The Paraguay case [cont d] 3. Selected Policy Related Questions Is the identified policy measure contributing to poverty alleviation? How much should the government invest to obtain tangible results? Is the identified policy measure environmentally sustainable? What would be the most efficient policy mix to complement/enhance socio-economic impacts of the identified policy measure?

20 20 of 41 The Paraguay case [cont d] To answer the previous questions, a socio-economic impact assessment of policy measures is needed. Base scenario (Without policy): Socio-economic Situation in 2004 Socio-economic indicators chosen: Net income of different social groups and related with-without policy percentage change Poverty incidence Food security indicators

21 21 of 41 The Paraguay case [cont d] It is important in this context to capture income generating processes and expenditure paths, linked to technological changes. That is why a Multi-Market Model (MMM) associated to household level data was chosen. Income and expenditure effects: By means of technological and trade margin changes, variations in income and expenditure by social group are simulated. Poverty reduction aspects: combining the results of the MMM model in terms of income generation with household survey data to model income and expenditure effects. Food security aspects: combining the simulation results of the MMM in terms of expenditure by social group with household survey data to generate information on calories and nutrient intake at the household level.

22 22 of 41 Multi Market Model features General characteristics Focuses on quantity-price equilibrium in interdependent markets. Consumer demand and Producer supply behavior explicitly modeled. Relevance for poverty/fs Coverage of policy measures Technical structure Resource needs It allows to analyze the generation of net revenue and its allocation, by group of agents. Most policies related to markets and chains. inputoutput price policies and policies on technology and factor use No macro-economic closure. System of simultaneous equations and constraints, usually modeled in GAMS (rarely on MS Excel) Knowledge of economic modeling and availability of elasticities for the different agents and different markets.

23 23 of 41 The Paraguay case: Specific features of the model 7 commodities Cotton, maize, cassava, soybeans, wheat, sugar and livestock 4 Household groups: Small farmers, other farmers, non-farm urban, non-farm rural 6 blocks of equations: Supply Input demand Final demand (consumption) Income generation Prices Equilibrium conditions Base year: 2004 Calibration: based on three sets of data: Observed levels of quantities (levels and shares) Observed Prices Behavioral Parameters (own, cross price and other elasticities)

24 24 of 41 The Paraguay case: Summary analytical framework 1) Policy issues Rural development and poverty alleviation 3)? Impact of measure? 2) Policy measure Increasing technical assistance to small farmers 4) Base scenario Base indicators 5) Impact Model Policy Analysis Tool: Multi-Market Model 6) Scenario with policy Simulations results Indicators with policy Comparative analysis of the impact

25 25 of 41 The Paraguay case: Simulation results Simulation exercises based on multi-market model: impact SCENARIOS Small farm Change in HH income percent Other farm Non farm rural Non farm urban 0) Baseline=no simulation total 1) Plus 20% yields all crops Small Farm (SF) 2) Plus 20% yield all crops SF and minus 20% trade margins 3) Plus 30% maize yields to SF 4) Plus 30% manioc yield to SF 5) Plus 10% yields all crops and all farmers

26 26 of 41 Policy Impact Analysis: simulation results Simulation exercise based on multi-market models: impact on SCENARIOS Small farm Other farm Poverty Incidence Non farm rural Non farm urban total 0) Baseline=no simulation 1) Plus 20% yields all crops SF 2) Plus 20% yield all crops SF and minus 20% margin 3) Plus 30% maize yields to SF 4) Plus 30% manioc yields to SF 5) Plus 10% yields all crops and all farmers

27 27 of 41 The Paraguay case: Comments and remarks Comments Small Farmers sensitive to manioc/maize (measures 3 and 4); The maize sector does not seem integrated downstream (almost no changes in other incomes). High self-consumption? Measure 2 gives the maximum outcome to the small farmers Measure 2 compared to measure 1, shifts part of the income from nonfarm urban to small farm, as captured by poverty incidence ind. Measure 5 provides the maximum total income increase (+2.1%) Remarks Assumption: policy measures are exogenously funded. No macro-economic consistency imposed (deficit constraints, tax recovery etc). The relative costs of the different policies is not considered (e.g. if policy 1 is much cheaper than policy 2, could possibly be justified on costeffectiveness grounds)

28 28 of 41 MMM strengths and weaknesses Strengths Indicates the channels through which a given policy changes produce its effects. Allows to model specific agricultural products. Allows production decisions to be influenced by changes by output and input relative prices. Weaknesses Only direct and indirect effects in a small number of related markets. Average income of different household groups are modelled assuming within groups distributional neutrality. Does not allow analysis of investments. Is a static model. There is no macro-economic consistency

29 29 of 41 Other applications of PEA-MMM: Soybean markets and CO.SI.MO. model The MMM approach has been recently applied at FAO by EST-TCA in the context of a soybean market study in Latin America The study used the CO.SI.MO. Model (COmmodity SImulation MOdel), a joint FAO- OECD partial-equilibrium world agricultural model for forward looking analysis of the agricultural sector and related markets, policies and emerging issues. Goal of the study: Investigate trends of soybean demand under different international scenarios, such as: 1) reduction of demand from China; 2) worsening of yields; and 3) increased production costs. Findings: the possible reduction of imports of Chile would affect Brazil and Argentina

30 30 of 41 Other applications of PEA-MMM: Soybean markets Results: 1. Reduction of China imports would have a slight and almost even impact on the quantities produced the countries of the region; 2. Possible reduction in yields would however enable Brazil to increase its volumes, due to less limiting factors than other countries; 3. Increased production costs would leave Brazil unaffected but would significantly reduce production of Argentina. Quantity Reduction of China imp. Reduction of yields Increased prod.costs Baseline tons var % tons var % tons var % Argentina 50,079 48, % 46, % 38, % Brasil 79,362 75, % 84, % 78, % Paraguay 6,043 5, % 5, % 5, % Total 135, , % 135, % 123, % This scenario analysis would enable countries to react with suitable policy measures whenever the mentioned events should occur.

31 31 of 41 Other approaches for impact analysis: Micro accounting approach General characteristics Relevance for poverty/fs Coverage of policy measures Technical structure Resource needs Use of detailed household data to generate policy scenarios, by directly introducing changes in the data base, after selection of households affected. Linked the quantity/quality of available data. Good for poverty (expenditures, consumption.) Take only the direct effects. Not adapt for structural policies with strong indirect effects. Accounting frame without explicit modelling of behaviour feedback. Limited in most cases when household surveys have been carried out.

32 32 of 41 Other approaches: Computable General Equilibrium Models General characteristics Relevance for poverty/fs The models allow us to work in a coherent macro context and flexible prices, taking into consideration the behaviour aspects of economic agents. The models allow us to analyse the establishment of revenue by group of agents and their expenditures. Coverage of policy measures Most of the policies concerned with markets, products and revenues. Weak in investments. Technical structure Resource needs Simultaneous constraints and equation system. We need strong knowledge of economic modelling, micro and macro data, time and resources.

33 33 of 41 Other approaches: Sectoral and macro-economic accounting frameworks General characteristics Relevance for poverty/fs Coverage of policy measures Technical structure Resource needs Chain analysis and the Social Accounting Matrices (SAM) allow us to analyse the structural interdependencies. The chain anlaysis allows us to analyse the production/ consumption systems. With SAM, we can analyse the macro-intersectoral links. Only policies with impacts that do not deviate too far from the base situation. Accounting frameworks with no explicit modelling of behaviour. For SAM, fixed prices. Possible with some knowledge of accounting rules at company and macro levels. Much macro and micro data needed.

34 34 of 41 Other Approaches: Integrated macro-micro approaches General characteristics Relevance for poverty/fs These allow us to work in a macro coherent and flexible price context, by integrating the level of detail of micro-accounting approaches. The approaches allow us to analyse the establishment of revenue and food expenditures by household. Coverage of policy measures Technical structure Resource needs Most policies concerned with markets, products and revenues. Weak for invetstments. Different approach combinations are possible. Strong knowledge of economic modelling. Needs: micro-macro data, time and resources.

35 35 of 41 Example of integrated macro-micro approaches Pro-Poor Livestock Policy in Vietnam Launched in 2001 to facilitate and support the formulation and implementation of livestock-related policies and institutional changes that have a positive impact on the world s poor. To evaluate policy options for Livestock sector, different techniques have been applied and brought together in the IPALP Integrated Poverty Assessment of Livestock Promotion (IPALP)

36 36 of 41 Integrated Poverty Assessment of Livestock Promotion (IPALP) The case of Vietnam Promoting a general understanding of the role of livestock in poverty alleviation Policy experiments to assess the impact of economy-wide policy of trade liberalization on poverty alleviation with and without concomitant livestock promotion. Four components: Analysis of initial macro economic conditions Micro-economic analysis of initial conditions Dynamic simulation of policies and external economic conditions Micro-economic assessment of PPLI and related polices

37 37 of 41 Integrated Poverty Assessment of Livestock Promotion (IPALP) The case of Vietnam Policy Impact Assessment Tool chosen: Dynamic integrated MICRO-MACRO simulation model Micro component: econometric estimation of : Household income generating model Occupational choice models Macro component: CGE model calibrated to production and consumption side using Social Accounting Matrix

38 38 of 41 Integrated Poverty Assessment of Livestock Promotion (IPALP) The case of Vietnam Period: Scenarios: 1. Baseline: no change in the status quo 2. Vietnam accession to the WTO= abolition of all tariffs and export subsidies over the period Vietnam accession to the WTO with a livestock policy implementation that increases productivity in the livestock sector by 25% over five years.

39 39 of 41 Integrated Poverty Assessment of Livestock Promotion (IPALP) [cont d] The case of Vietnam Simulation results: compared to the baseline scenario, the WTO shows most of its benefits for poverty reduction, especially for urban population. When the WTO scenario is associated with the promotion of the livestock sector, poverty reduction is less in urban areas but very significant for the rural population. Rising rural population participation in the WTO-induced economic expansion trough livestock promotion makes the third scenario more pro-poor.

40 40 of 41 Integrated Micro-Macro simulation models: Remarks Potential: The most completed models, encompassing an analysis of demand and supply at the same time; Analysis at both macro and micro level; Analysis of direct and indirect effects. Limit: Very complex models; Requirements of different sources of data; They do not take into account feedback effects generated at the micro level into the macro system.

41 41 of 41 Conclusions Quantitative socio-economic policy analysis provides a support to policy making. Analytical efforts need to be well calibrated, taking into consideration many elements, such as: policy measures analised answers to be provided donors time availability of resources In many practical situations, an effective quantitative socio-economic impact analysis depends on: the time frame of the exercise the existing human capacity the selection of the most appropriate approcach to analyse policy implications