Download Exchange rate policies

Linkages between the Public Expenditure
Analysis, Incentive/disincentive Analysis and
Performance and Development Indicators
Incentive/disincentive Analysis
• This analysis will not consider specific commodity
policies in estimating the indicators but examine
the impact of overall policy environment on
commodity markets.
• To explain and analyze the indicators, we use:
– The policy review
– The PE analysis results
– Performance and development indicators
• To demonstrate these linkages, we present few
examples
Impacts of Agricultural Price Policies
• Agricultural price policies will affect producers, consumers, and
the government budget.
• Depending on the type of policy, there will be transfers between
two or all three groups.
• This means in all cases one group loses and at least one other
group benefits.
• Commodity and sector-specific transfers will come from the PE
analysis
(Producer’s) Taxes and subsidies
For agricultural commodities such policies result in transfers
between the public budget and producers and consumers.
Taxes transfer resources to the government, whereas subsidies
transfer resources away from the government.
Example of fixed producer price policy (higher than the
international prices): gain for producers; loss for consumers;
increase in budget outlay that should be compensated by higher
taxes.
Again, these transfers will appear as an output of the PE analysis
International trade restrictions
• Taxes (tariffs) or quotas that limit either imports or exports
changes domestic price levels and has impacts on both
producers and consumers depending on the policy.
• Import restrictions, for example, raise domestic prices above
relative to world prices, while export restrictions lower domestic
prices compare to world price.
• These needs to emerge from the policy review
Factor price policies: traded and non-traded
These policies directly affect agricultural costs of production. The case of
traded inputs such as fertilizer use is straight forward i.e. domestic prices
are compared with international prices to estimate taxes/subsidies.
The non-traded inputs include land, labor, and capital. Land and labor
costs, in general, account for a large share of the production costs of most
agricultural commodities.
Policies that can influence such costs include:
• land rental rates, minimum wage,
• interest rates, control of land use, and
• water use/cost policies.
These are especially relevant for the analysis of non-tradeables and needs
to be described in the policy review.
Question and discussion
1. Question: what are the key policy goals in Kenya?
2. Question: what are the key constraints in agricultural production
in Kenya?
3. Question: what are the key recent agricultural policy initiatives in
Kenya?
4. Question: what are the main policy tradeoffs?
Macro-economic Policies
• Three categories of macro-economic policies affect agriculture:
 Monetary policies
 Fiscal policies
 Exchange rate policies
Monetary and fiscal policies
• These policies influence all sectors of the economy. The key is their
impacts on the rate of price inflation (consumer or producer prices).
• Monetary policies leading to increase supply of money leads to faster
demand growth for goods thus puts pressure on inflation.
• Similarly, inflation increases when government deficits are covered by
expanding supply of money.
• These policies, when directed to agriculture, appear clearly from the
PE analysis as increased spending in the sector for certain expenditure
and also in the performance and development indicators.
Exchange rate policies
• Exchange rates affect agricultural prices and costs of tradable goods
(imports and exports) and in the estimations of price incentives,
exchange rate misalignment needs to be estimated.
• The exchange rate influences the price of an agricultural commodity
because the domestic price (in local currency) of a tradable
commodity is equal to the world price (in foreign currency) times
the exchange rate (the ratio of domestic to foreign currency).
• If relevant to the incentive/disincentive analysis, this needs to be
included in the policy review and development and performance
indicators.
• May result in higher cost of imported inputs subsidies and thus
reflected in PE analysis if these inputs are subsidized
Public Expenditure Policies Influencing Agriculture
• Government budgetary resources can be spent on agriculture
directly or indirectly to improve incomes, increase productivity
and to reduce transaction costs.
• The most common direct expenditures include production and
input subsidies, direct payments, investments in infrastructure
(on and off farm), investment in human capital (agricultural
education and training, etc.), and in agriculture research and
technology (and extension) while indirect expenditures include
rural development measures (rural infrastructure, education,
health).
Public expenditures on input subsidies
Input subsidies are implemented to enable farmers to use inputs
and technologies that are known to be effective and intend to
address in relatively simple manner otherwise difficult problems
of developing input markets and associated financial services to
small farmers.
But inputs subsidies treat the symptoms rather than origins of
market failures, distort resource allocation and are often costly
and difficult to sustain without cutting expenditures on
important public goods.
Public investments in research and technology (R&D)
• Such investments benefit both producers and consumers
(reflected in the PE analysis).
• These investments are very important for production growth
shifting the supply curve rightward
• They tend to have strong long-term impacts although difficult to
measure in terms of return to specific commodity in a given year.
• Lower marginal factor costs resulting from technological change
leads to low domestic prices.
• Therefore, some commodities may become cheaper than the
price parity
Public investments in infrastructure
• Infrastructure investment improves returns to producers or
lowers costs of production.
• Infrastructure investment includes investment in roads, ports,
and irrigation networks (and can be on and off farm). Such
investments tend to be targeted and benefit mostly the
producers and consumers who live in those regions.
• While clearly reflected in the PE analysis and supported by
development indicators, these are taken into account in
incentive/disincentive analysis through access costs at various
points in the value chain.
Public investments in human capital
These include wide variations of policies and include investment to
improve the skill levels and health of producers and consumers.
Investments in formal schools, training and extension centers,
public health facilities, and clinics and hospitals are examples of
such investment.
These investments are very important for long-term development,
but their short-terms impacts on prices difficult to measure.
These expenditures are taken into account in the PE analysis and
many development indicators including the UNDP human capital
index.
Discussion on Policy Tradeoffs
• Often gains for one policy goal result in losses for another
(example of price subsidy and budget deficit or consumer and
producer price subsidy).
• Assigning weights to objectives of government policies are value
judgments but the goal of analysis is to identify the appropriate
tradeoffs between policies.
• Quantitative analyses are critical for policymakers to examine the
impacts of their policies (producers, consumers, budget,
efficiency, equity, etc.).
Outlines of the country report
• Part 1: Background
– Description of the economy, and the agricultural economy
– F&A policy environment & political economy
• Part 2: Findings based on in-depth analysis of agricultural and food policies and
public investment in agriculture
– Analysis of price incentives and disincentives in agriculture and degree of market
development.
– Analysis of public expenditures and aid directed to agriculture
– Analysis of development and performance indicators and linkages
• Part 4: Specific policy issues of interest to the country
• Conclusions
– Policy implications and elements for an evidence-based policy dialogue
– Lessons learned and way forward
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Finalizing commodity selection
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Update and examine the data in the list with data from
national data sources (particularly diet composition ) for the
2006-2010.
Are the lists the same? How can we explain differences?
Repeat the methodology for the commodity selection
Does the country want to include a specific commodity? why?
Add the commodities of national interests to the list and
classify the commodities according to tradability
OUTPUT:
Final product list
Estimated time: 2 weeks.
Data Management
• For the import substitutes and exports, review value
chains (marketing channels) from available studies or ad
hoc surveys including estimates of access costs and
determine the relevant point of competition
• For each commodity, determine the relevant markets or
production region when multiple markets/production
regions exist for the commodity.
• Using the data template, collect and document the data
required for the estimation of the price
incentive/disincentive.
• Determine whether there are quality/quantity
differences between domestic and foreign commodities
and determine conversion factors (literature).
Incentive/disincentive analysis
• Using the data template provided estimate the
first layer indicators.
• Consulting the literature, determine and
document if adjustments needs to be performed
on:
– Exchange rate during the period of analysis
– Access costs
• If so, determine the alternative relevant
adjustments and perform the second layer
analysis.