Draft for discussion 14 September 2008 AGRICULTURAL POLICY AND DEVELOPMENT INDICATORS (APDI) FOR AFRICA A Scoping Project
2 TABLE OF CONTENTS SUMMARY OF A SCOPING PROJECT 3 METHODOLOGY NOTE 5 PROPOSALS FOR INSTITUTIONAL STRUCTURE AND RESPONSIBILITIES 12
3 SUMMARY OF A SCOPING PROJECT AGRICULTURAL POLICY AND DEVELOPMENT INDICATORS (APDI) FOR AFRICA A Project to Improve Policy Development and Impact in Africa Good policy decisions depend, first and foremost, on good information and analysis. A fundamental starting point is a detailed understanding about the performance of the agricultural sector and subsectors over time. African leaders have agreed to increase the share of national resources devoted to agriculture, while donors have also pledged to reverse the relative decline in funding for agricultural development. As fresh commitments are undertaken, it will be important to have an appropriate monitoring tool, which can be used to evaluate the effects of policy changes and of non-policy shocks such as the recent surge in world food prices. However, currently, there is no system in place to ensure that the required information, performance and policy data are available to African countries. The proposed APDIs would provide the core information needed for undertaking such types of analysis. To facilitate dialogue and assessments relative to other countries, especially neighboring countries, with similar constraints and opportunities, participating governments will be part of a network assisted by a project team. What are the Benefits for Participants? The APDI objective is to provide participating governments with consistent and comparable indicators on the performance of the agricultural sector and on the incentives/distortions associated with agricultural policies that impact this performance. The APDI will include economic measurement of development gaps in market chains that will help prioritize development investments. Aid donors, international organizations and the general public may also find the information useful. Participating countries will have active input to ongoing project development. Together with collaborating international agencies they will take part in developing methodologies for policy and indicator measurement and collating consistent and relevant datasets. The outputs of the main project should above all benefit the participating countries as they will be able to better monitor and analyse their national policies and as donors will more easily identify priority areas for assistance. The capacity building component of the project will greatly improve methods of data collection and analysis as well as the basis of knowledge at national level on which agricultural policies are designed, evaluated and improved. The output will also include a regular report at the African regional level presenting the indicators as well as analytical assessments of participating countries performance, prepared by the project team in close cooperation with the countries. Each government may choose to disseminate additional results pertaining to its country Main Project Design and Implementation Plan The project architecture will have to reflect the interest of African national governments and other parties in such an undertaking and views on how the content and structure of the initiative can focus on the real needs of policymakers. Institutions to be involved include the African Union, the UN Economic Commission for Africa and regional organizations. The system should also provide information of interest to aid donors, international organisations and private researchers. The project will seek the collaboration of relevant international development and research institutions. It is foreseen to establish a steering committee which will guide the work of the project team. The work of the project team as well as peer reviews of the indicator outcomes will be guided by a steering committee.
4 Three types of indicators are envisaged: (i) Measures of market incentives. These measures will be based on price gaps in major commodity, factor and input markets; and will distinguish direct policy interventions from excessive costs or rents that could be reduced through appropriate investments or institutional reforms. (ii) Development indicators. This group of internationally comparable indicators should help provide context for policy analysis and decision-making and record progress in addressing the goals of agricultural policies. The indicators will relate to production, consumption, trade; market structures, incomes; poverty and food insecurity; (iii) Measures of budgetary transfers. These measures will track budgetary transfers, with suitable distinctions across areas that affect agricultural and rural development. In the longer term, it is envisaged that all African countries may wish to participate in the APDI network. However, according to current thinking, the five year project will initially be limited to the 17 countries currently included in the FAO Project CountryStat, which is also funded by the Gates Foundation and aims to strengthen and harmonize existing agricultural statistics. Within this group of 17 countries, a two-speed process will be proposed, whereby a basic set of readily available indicators will be generated for all 17 countries, whereas an in-depth analysis and quantification of the full set of indicators, including a peer review and quality check, will only be conducted in a smaller number of countries. This core group will initially comprise four countries to be gradually enlarged in the course of the project. How the Scoping Project will be organized The scoping phase of the project is now in process. Sponsored by the Bill and Melinda Gates Foundation, and led by the OECD with the close collaboration of the Food and Agriculture Organization, this scoping phase aims to secure substantive interest and commitment by African countries and participating agencies. In addition to outlining appropriate indicators, the scoping exercise will also include consideration of a suitable architecture for the main project, identifying the roles of various national and international institutions. A proposal of the main project will be submitted by the end of October 2008, in which a five year project will be proposed. For this purpose, consultation missions are being conducted in September and October 2008 to four countries, namely Ethiopia, Tanzania, Ghana and Burkina Faso to solicit views, support and comments on the draft proposals. Input is also being sought from African organizations, international donors and agencies.
5 METHODOLOGY NOTE AGRICULTURAL POLICY AND DEVELOPMENT INDICATORS FOR AFRICA This note discusses the types of indicators that might be constructed for the Agricultural Policy and Development Indicators (APDI) project. A more detailed note, addressing measurement issues, will accompany the submission to the Gates Foundation for project funding. 1. What types of indicators will be developed? The APDI project seeks to develop a suite of measures of value to policymakers in African countries. The proposed indicators are to be compiled for a range of African countries on a consistent and comparable basis, and to be computed on a regular basis for purposes of policy monitoring. Three types of indicator are envisaged: (i) Measures of incentives and disincentives. To the extent possible, price gaps will be calculated for all markets affecting agriculture, including commodity markets, factor markets (land, labour, credit, purchased inputs), and foreign exchange markets. These price gaps have two underlying causes: (i) policy interventions, which induce differences between observed prices and prices which would have prevailed in the absence of government policies such as taxes and subsidies; and (ii) costs or rents in the system, some of which can often be reduced through appropriate investments or institutional reforms. The excess of such costs and rents over efficient levels can be interpreted as a development gap that needs to be bridged by suitable policies and investments. (ii) Development indicators. The purpose of these indicators is to provide internationally comparable data that can help provide context for policy analysis and decision-making. Indicators may be provided in the areas of food balances (production, consumption, trade and stocks); market structures; incomes; poverty and inequality; food security; productivity; and state of natural resources. Where possible, these indicators would draw from existing sources (e.g. Countrystat). (iii) Measures of budgetary expenditures. These measures will track budgetary transfers, with suitable distinctions across areas that affect agricultural development (including payments to agriculture directly and to non-agricultural areas, such as infrastructure and education, which may have an important impact on agricultural development). They will also measure relevant aid flows to African countries, which will be mapped onto national expenditures. National budget expenditures will be broken down so as to reflect the differing economic impact of alternative types of expenditure (for example, making a distinction between spending on private versus public goods).
6 2. The use of APDIs The development of APDIs would provide African governments, aid donors, international organisations and researchers with hitherto missing information that is vital to effective policy decisions, aid allocations and research into policy effectiveness. APDIs serve two core functions: first they are useful for policy benchmarking by measuring policy interventions and development progress in multiple domains they can identify the most urgent areas for action; second, they form an essential input into more formal kinds of policy analysis. APDIs should make it possible to diagnose policy biases, identify the main development challenges confronting the agricultural sector and rural populations, and in conjunction with policy analysis suggest appropriate policy responses. How are the three types of indicators linked? The three types of APDI are complementary: 1. Measures of (dis)incentives represent potential areas for policy action. In the case of explicit policy interventions, there may be a need for assessing their effectiveness in reaching given objectives and a possible case for reforms, while in the case of implicit disincentives arising from market failures or high transactions costs, there may be a case for institutional or regulatory changes (e.g. a curbing of monopoly powers), or for new investments in public goods to reduce costs and bridge the development gap. 2. The development indicators would include measures linked to the size of implicit disincentives, such as the condition of rural infrastructure, the share of farm operations receiving credit, and measures of the functioning of land markets or water allocation. Changes in these measures would provide further information on progress in reducing disincentives. 3. The third type of indicator, government expenditures, would make it possible to contrast the actual allocation of money with areas of need. Thus there would be a link between the development gap and efforts to bridge that gap. How would this work in practice? Taking the output market as an example, producer prices may be high / low relative to landed border prices due to two kinds of (dis)incentive [level 1]: (a) price policies an explicit incentive when prices are supported and a disincentive when they are suppressed; or (b) high transport & other transactions costs an implicit disincentive. Factors that may explain the price wedge include policies (such as tariffs and non-tariff measures such as SPS regulations) and a lack of development, which may be revealed by indicators such as the percentage of rural roads that is paved, access to price discovery mechanisms such as mobile phones, and the availability of electricity [level 2]. Indicators of efforts to bridge that development gap would include absolute and relative spending levels on roads and other elements of farm & rural infrastructure [level 3]. By measuring (dis)incentives across multiple domains, it should be possible for policymakers to identify where the distortions in the system are greatest and where the most important priority areas are, be they in the area of commodity policies, macro policies, structural policies or regulatory reforms. It should also facilitate comparative analysis, so that countries can share experiences on the basis of a common analytical framework.
7 3. Measuring price incentives and disincentives The following sections set out possible indicators to be computed. Two key references are the OECD s manual for calculating its Producer Support Estimate (PSE) and related indicators (OECD, 2008) and the methodological exposition of the World Bank s Distortions to Agricultural Incentives (DAI) project (Anderson et al., 2008). These and other relevant documents are available at www.oecd.org/tad/apdi. Output market distortions The calculations of output market interventions would be made in a manner that is consistent with the OECD s calculations of market price support (MPS), a component of the PSE. These estimates are available for OECD countries and a number of non-oecd countries. 1 This consistency would provide an important basis for comparing policies and their impacts in developed and developing countries. The degree of market price support is typically revealed through price comparisons. Prices received by domestic producers are compared with international (traded) prices received by foreign producers. These prices are adjusted for quality differences and for transport and other costs, in order to bring them to the point of competition i.e. to capture the opportunity cost of domestic provision. In developing countries, transport and other transaction costs are often high, and could be reduced significantly through suitable investments, e.g. in physical infrastructure, and through institutional reforms. An important aim of the proposed measures is to calculate the impact that a lowering of these costs would have on producers incentives. These costs are policy related to the extent that they can be reduced through public investments and other reforms. Figure 1 illustrates, for the case of an exported product, the potential importance of computing a development gap in addition to the price gap associated with formal policies. If the only costs incurred were the inevitable ones of getting the product to market and those costs were as low as possible, at T, then the price received by domestic producers would be P w T and the volume of exports would be equal to Q s Q d. The imposition of an export tax, ET, reduces the producer price further, and with it the volume of exports. Excessive costs have the same effect, and the two together reduce exports to Q s Q d. In the case of an imported product, excessive costs could provide additional protection, and act in the same way as a tariff. However, there is another possibility: a product may be imported at the world price and the domestic price at the border could be raised further by a tariff. Yet inland, those costs of getting the product from the interior to the coast could be so high that the inland market is cut off and prices are determined locally. Thus inland prices could be lower than world prices, even for an import, precisely because of this development gap. 1 PSEs and related indicators are available for the following non-oecd countries: Brazil, Chile, China, Russia, South Africa and Ukraine. In addition, estimates for the European Union include data from five non- OECD countries: Bulgaria, Estonia, Latvia, Lithuania, Romania.
8 Figure 1. Price policies and the development gap : the case of an exportable product S P w P w -T P w -T-ET P w -T-ET-DG Cost Export tax Development gap D Q d Q' d Q' s Q s Exchange rate distortions Historically a number of African countries have operated multi-tier exchange rates, or attempted to fix the exchange rate above its equilibrium value. For a discussion of the distortions associated with these interventions, see Anderson et al. (2008). The simplest method for calculating the equilibrium rate is to assume that the elasticity of supply of foreign currency is equal to the elasticity of demand. In this case the equilibrium exchange rate is halfway between the official and the parallel market rates (data on both is available from the World Bank). Other more sophisticated approaches are possible, but this may be the most practical, especially since explicit exchange rate distortions have now been removed in most African countries. Nominal and effective rates of protection can be calculated at both the official exchange rate and the estimated equilibrium rate. The difference gives the amount of protection that is attributable to exchange rate policy. Policy interventions downstream from the farmgate and in related sectors One aim of the proposed indicators is to capture the effects of policy interventions on farmers incentives. If this intervention takes place directly at the farm level, then the incidence of the policy can be captured directly via a price wedge. If it occurs at a downstream market (e.g. subsidised bread prices), or in a related agricultural market, then some estimation needs to be made of the pass-through to the farm level. This is typically a modelling issue, not just a measurement one, and would need to be addressed on an ad hoc basis. In the case of downstream price policies, nominal and effective rates of protection could be adjusted. Intersectoral incentives The focus here is on how government policies discriminate in favour of or against agriculture compared with other sectors. Naturally it will not be possible to apply the same degree of rigour to measuring non-agricultural incentives, but data on non-agricultural tariffs can be employed to produce a relative rate of protection, both for each agricultural sub-sector and for the sector as a whole. For calculating these relative incentives, the methodology employed in the DAI project would be employed (Anderson et al., 2007), and calculations from that project would be harnessed to the extent possible. These annual measures could be benchmarked against cross-section measures that account for all sectors and (in
9 principle) tax/subsidy policies across economic sectors. For this, an IO Table, SAM and CGE model would all be helpful. Input and factor market incentives The basic aim here would be the same as for the commodity market module, i.e. to identify the agents at whom those policies are directed (e.g. producers, or input suppliers), measure an input price gap that can be attributed to (i) formal policies and (ii) excessive costs due to market failure or a development gap. [Similarly, there would be an effort to find indicators of the extent of excessive cost in the input market and of policy effort to reduce those costs.] As with output markets, there would be a need for some within-country disaggregation in the data collected. For example, some farmers may have access to credit at commercial rates (possibly from overseas) while others may be charged much higher interest rates or, more likely, have no access at all. It is the spread of prices within each country that can provide a good gauge of the extent to which costs can potentially come down with improved policies. Although it may be too difficult to fully account for the sources of price gaps in input markets, some measures of the underperformance of these markets should be sought. In principle, measures of explicit distortions across output and input markets should lead to nominal and effective rates of protection at the commodity level and for the sector as a whole. Measures of excessive costs could be similarly aggregated to produce commodityspecific development gaps, an agricultural market development gap (summing across subsectors), and a sectoral development gap (adding in the cost of underdevelopment to input markets). ERPs In calculating effective rates of protection, it is necessary to distinguish between traded intermediate factors (such as fertiliser, chemicals and fuel), non-traded intermediate inputs (such as insurance and water), and primary factors (land, labour and fixed capital). The effective rate of protection is ideally calculated as ratio of value added on primary factors at domestic prices compared with border prices. This requires calculating the use of primary factors in the final product, in producing traded intermediate factors, and non-traded intermediate factors. It is difficult to account for all these elements properly, and a number of simplifying methods has been proposed (see Sadoulet and de Janvry, 1995). In any event, the ERP does not account for policy interventions or the malfunctioning of the markets for primary factors. These would need to be examined separately.
10 4. Development indicators The contextual information of value to policymakers would be harnessed primarily from secondary sources, and coordinated with the Countrystat initiative to the extent possible. Indicators would be developed in the following four areas (the examples are at this stage suggestive): (i) (ii) (iii) (iv) (v) (vi) (vii) Sectoral performance a. Production, consumption, trade and changes in stocks. These figures will in any event need to be collected in order to compute policy distortions. In general, data are much easier to obtain for crops than for livestock products, which is a serious deficiency in many African economies. b. Crop yields, and value added as a share of livestock production (Countrystat core); c. Productivity/efficiency of water use d. Agriculture as a share of rural and overall economic activity. Poverty, inequality and food security a. The rural poor as a % of total poor; b. Rural relative to urban per capita incomes; c. Gini coefficient and rural gini coefficient; d. Share of urban households which are food insecure; share of rural / farm households that are food insecure; Costs in output markets a. Share of rural roads that is paved; b. Extent of rural electrification; c. Share of farm households with mobile phones; d. Development of storage infrastructure Costs in input markets a. Irrigated land as a share of cropland (Countrystat core); b. Share of farms with access to credit; c. Share of land for which there is legally recognised land tenure (Countrystat core). Environment and natural resources Health and human development Market structures
11 4. Government expenditures The main task is to break down national budgetary expenditure by various categories and sub-sectors. Another task is to map incoming aid flows onto national receipts and expenditures. In order to facilitate economic analysis, the following distinction is proposed: 1. Between agriculture-specific, agriculture-supportive, and non-agricultural expenditures; 2. Within agriculture-specific, the OECD s distinction between payments to farmers and payments not to farmers but to the sector more generally should be preserved. The distinction between payments to farmers and payments to the sector as a whole provides a rough division between the provision of private and public goods. A useful distinction might also be made between income support and the provision of irrigation and extension services. Within the OECD s General Services Support Estimate (which includes payments to the sector, but not directly to farmers), the following categories of support are included: research and development, agricultural schools, inspection services (SPS), infrastructure, marketing and promotion, and public stockholding. These categories might be added to the direct payments to farmers. In addition, given the importance of large scale project, there may be a need to distinguish recurrent from one-off expenditures, and apportion investment expenditures over a suitable period of time. At the national level, it may not be possible to track all the relevant sub-categories that are identified at the donor level. It will be important to keep track of the correspondence between donor information on commitments and disbursements on the one hand, and national receipts and expenditures on the other.
12 PROPOSALS FOR INSTITUTIONAL STRUCTURE AND RESPONSIBILITIES Steering Committee Membership: OECD (1); FAO (1); IFAD (1); International research agency (1); African Union (1); African Regional Organizations (2); Donors Platform for Rural Development (1); other invited experts (2); Participating country on rotational basis. (1) Function: guide the work of the project team Frequency: 6 monthly meetings, organized by project manager Technical Network Membership: Experts from Steering committee (2), ADPI Secretariat, CountrySTAT, National researchers and their advisors Functions: forum for in-depth technical collaboration and exchanges Frequency: mostly virtual meetings as needed APDI Secretariat (based at FAO) Membership: Project Manager and 2-3 staff, plus support at FAO and 1-2 staff at OECD. Overall mandate: o Under the guidance of the Steering Committee and directed by the Project Manager to operate the project in close cooperation between FAO and OECD o Reporting regularly to the Steering Committee Specific Functions o Identification of African national counterparts o Capacity building (Training of local policy analysts, institution building) o Production of "secondary" indicators (i.e. those that do not require primary data collection in the country o Validation of APDI estimates o Production of a regular report "Monitoring agricultural policies and development in Africa") o Ensure liaison with donors; African partners; regional organizations; research institutions (IFPRI), IFAD and other interested parties. Role of FAO: o Hosting the APDI Secretariat o Coordination with Countrystat o Facilitate close cooperation between APDI Secretariat and other relevant units in FAO Role of OECD o Develop detailed methodology jointly with FAO and Project Secretariat o Preparation of inputs from within OECD (e.g. CRS aid flow data) o Co-validation of APDI estimates with FAO
13 Country Level Structure Unit within the Ministry, able to allocate resources to the project o Staffing: 2-3 experts o Functions: Undertaking policy analysis for the government Interact closely with APDI Secretariat Focal point for capacity building provided under the APDI project Ensure collection of relevant data Computation of provisional APDIs Preparation of background reports for bi-annual report Working with competent research institution(s), including international partners Agency in charge of agricultural statistics o Collection, processing and provision of relevant agricultural statistical data as inputs to indicator calculation o Collaboration with Policy analysis unit in indicator development University or research institute o Supporting the Ministry Unit and Statistics Agency in policy analysis and data processing Regional And Pan-African Level African Union and relevant regional economic organizations to support the APDI project o Take part in the APDI Steering Committee o Serving as forum for policy discussions o Facilitate cooperation with relevant organizations and individuals within Africa, such as producer associations, research associations, donors, NGOs o Peer discussion of policy changes and development challenges in each country o Review of policy report