3 rd National Agricultural Policy Workshop Damascus, July 1 st 2004

1. Comparative Advantages of selected Syrian agricultural commodity chains: implications for policy formulation 3rd National Agricultural Policy Workshop Damascus, July 1st 2004

2. Plan of the presentation • Policy issues. • Capacity building and study implementation • Policy Analysis Matrix: a tool for assessing comparative advantage • Results • Policy implications. • Conclusion

3. 1. Policy issues

4. 1.Policy issues 2/Syrian agricultural challenges: • Development strategy shifting from a central planned economy to a market oriented economy, while the state has played a major role in the transformation of the agriculture • Increasing competition from the rest of the world while the natural resource base is intensively exploited • Importance of the agriculture for balancing the increasing social differentiation induced by economic growth and urbanization.

5. 1.Policy issues 3/ • Main questions for the formulation of the agricultural policy in this new environment: • What is the impact of the gradual trade liberalization on the economic viability of the agriculture and related agro-food industries? • Is the Syrian agriculture able to draw benefit from the economic globalization through the expansion of its exportations? • What is the comparative advantage of the Syrian Agriculture?

6. 2.Capacity building and study implementation

7. CAS Team Started in Sep. 2003 to June 2004 • NAPC Researchers • Al Ashkar • B. Atiya • N. Ammouri • M. Al Shareef • R. Shwaiekh • R. Snoubar International Consultants F. Lancon M. Foke National consultants Y. Kassem M. Khazma Y. Ismail

8. 2. Capacity building and study implementation 2/ Selection of main agricultural outputs to be covered in the analysis Promising commodities Olive oil Fresh cow Milk Tomato paste Fresh beef meat Fresh Tomato Orange concentrate Fresh orange Local market Export Wheat pasta Wheat flour Cotton Strategic commodities

9. 3.Data collection and analysis 5/ 28 representative systems Cotton 1a Lint cotton all 1 Lint cotton network irrigated 2 Lint cotton well irrigated Wheat Flour 3a Flour all 3 Flour soft wheat network irr. large pub. mill 4 Flour soft wheat well irr. public mill 5 Flour soft rainfed irr. public mill 6 Flour hard wheat network irr. large pub. mill 7 Flour hard wheat well irr. large pub. mill 8 Flour hard wheat rainfed large pub. mill 9 Flour soft wheat network irr. small pub. mill 10 Flour soft wheat network irr. large pub. mill Wheat Pasta 11a Pasta low quality all 11 Pasta low quality network irr. 12 Pasta low quality well irr. 13 Pasta low quality rainfed 14 Pasta high quality rainfed Filtered olive oil 15 Olive oil filtered centrifuge rainfed 16 Olive oil filtered hydraulic rainfed Tomato 17 Tomato fresh open field regional mrkt. 18 Tomato fresh green house regional mrkt. 19 Tomato fresh green house European mrkt. 20 Tomato paste open field regional mrkt. Orange 21 Orange fresh network irr. regional mrkt 22 Orange fresh well irr. regional mrkt 23 Orange fresh rainfed regional mrkt 24 Orange fresh network irr. European mrkt 25 FOCJ network irr. Livestock 26 Fresh meat 27 Live animal 28 Packed milk

10. 3. Policy Analysis Matrix:A tool for assessing comparative advantage

11. A B C D Revenues Trad. Inp. Domestic Fac Profit E F G H Private prices I J L K Social prices Divergence Private Cost Ratio = Domestic Resource Cost = 3. Policy Analysis Matrix 6/ Profitability ratio: competitiveness and Comp. Advantages C ( PRC < 1 the system is competitive) A — B G ( DRC > 1 no comparative advantage) E — F

12. Revenue Trad. Inp. Domes Fac Profit A B C D Private price F E G H Social price I J L K Divergences Nominal Protection Coef. = Effective Protection Coef = 3.Policy Analysis Matrix 7/ Divergences: protection coefficients A NPC > 1 (subsidized) E A — B NPC > 1 (subsidized) E — F

13. Revenue Trad. Inp. Dom. Fac Profit Private price A B C D Social price F E G H I J L Divergences K Equ. Prod. Sub. = 3.Policy Analysis Matrix 8/ Divergences: Net transfer EPS=0 no transfer EPS>0 transfer from the economy to the system L A

14. 4. Results

15. Tradable input Labour Capital 4.Results 1/ Cost structure 1a Lint cotton export large ginery all 1 Lint cotton export large ginery network 2 Lint cotton export large ginery well 3a Flour soft import public large all 3 Flour soft import public large network 4 Flour soft import public large well 5 Flour soft import public large rainfed 6 Flour hard import public large network 7 Flour hard import public large well 8 Flour hard import public large rainfed 9 Flour soft import public small network 10 Flour soft import private network 11a Pasta low export pasta factory all 11 Pasta low export pasta factory network 12 Pasta low export pasta factory well 13 Pasta low export pasta factory rainfed 14 Pasta high export pasta factory rainfed 15 Olive oil filitered export centrifuge rainfed 16 Olive oil filitered export hydraulic rainfed 17 Tomato fresh export reg packing open field 18 Tomato fresh export reg packing green house 19 Tomato fresh export eu packing green house 20 Tomato paste export reg pasta factory open field 21 Orange fresh export reg packing network 22 Orange fresh export reg packing well 23 Orange fresh export reg packing drip 24 Orange fresh export eu packing network 25 Orange concentrate import FOCJ network 26 Fresh meat import butcher Fattener 27 Live animal import no proc Fattener 28 Packed milk import dairy factory small prod 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00% 100.00%

16. 4.Results 2/ Financial Cost Benefit

17. 4.Results 3/ Domestic Resource Cost

18. 4.Results 5/ Effective protection coefficient

19. 4.Results 6/ Equivalent Producer Subsidy

20. Effect of land and water valuation on systems’ comparative advantage (DRC) Ref w/o Land and water cost. Land Water (low value) Water (High value) 01 Lint cotton export large ginery network 02 Lint cotton export large ginery well 03 Flour soft import public large network 04 Flour soft import public large well 05 Flour soft import public large rainfed 06 Flour hard import public large network 07 Flour hard import public large well 08 Flour hard import public large rainfed 09 Flour soft import public small network 10 Flour soft import private network 11 Pasta low export pasta factory network 12 Pasta low export pasta factory well 13 Pasta low export pasta factory rainfed 14 Pasta high export pasta factory rainfed 15 Olive oil filitered export centrifuge rainfed 16 Olive oil filitered export hydraulic rainfed 17 Tomtao fresh export reg packing open field 18 Tomtao fresh export reg packing green house 19 Tomtao fresh export eu packing green house 20 Tomtao paste law export reg pasta factory open field 21 Orange fresh export reg packing network 22 Orange fresh export reg packing well 23 Orange fresh export reg packing drip 24 Orange fresh export eu packing network 25 Orange concentrate import FOCJ network 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50

21. Simulation of yield and parity price changes on DRC for selected systems Probability Lowest Highest N. Systems Scenarios for a DRC<1 DRC DRC Prevailing conditions from 1990 - Lint cotton produced from network irrigated 2002 1 39% 0.5 3 system exported to Europe Parity price = 1577 USD/t Average yield=3.9 t/ha Prevailing conditions from 1990 - 2002 0% 1 2.8 Parity price = 133 USD/t Standard flour produced from network Average yield=3.7 t/ha 3 irrigate soft wheat Increase in Parity price and yield 11% 0.8 2.42 Parity price = 147 USD/t Average yield=3.9 t/ha Filtered olive oil centrifuge exported to 15 100% 0.25 0.7 Europe Fresh tomato from open field exported to 17 100% 0.51 0.6 AFTA countries 20 Tomato paste export to AFTA countries 98% 0.13 2.1 Fresh orange from network irrigation 21 100% 0.3 0.7 exported to AFTA countries Fresh Orange Concentrated Juice from 25 30% 0.85 4 network irrigation

22. Simulation of yield and parity price changes on DRC for selected systems Probability Lowest Highest N. Systems Scenarios for a DRC<1 DRC DRC Prevailing conditions from 1990 - Lint cotton produced from network irrigated 2002 1 39% 0.5 3 system exported to Europe Parity price = 1577 USD/t Average yield=3.9 t/ha Prevailing conditions from 1990 - 2002 0% 1 2.8 Parity price = 133 USD/t Standard flour produced from network Average yield=3.7 t/ha 3 irrigate soft wheat Increase in Parity price and yield 11% 0.8 2.42 Parity price = 147 USD/t Average yield=3.9 t/ha Filtered olive oil centrifuge exported to 15 100% 0.25 0.7 Europe Fresh tomato from open field exported to 17 100% 0.51 0.6 AFTA countries 20 Tomato paste export to AFTA countries 98% 0.13 2.1 Fresh orange from network irrigation 21 100% 0.3 0.7 exported to AFTA countries Fresh Orange Concentrated Juice from 25 30% 0.85 4 network irrigation

23. 5. Policy implications

24. Macro-level issues (1/4) • The selected systems benefit of a net transfer from the whole economy. • The major share of the transfers of resources to the systems are due to: • Trade protection (tariff and non-tariff barrier that increase the price of the systems’ outputs on the domestic market compared to the price prevision the world market. • Subsidy, fixed price for cotton and wheat. • Non-accountability of the opportunity cost for natural resources (water).

25. Macro-level issues (2/4) • The current policy create limited distortions on the tradable input side as a low level of duty is applied on agricultural input importations. • However it should be noted that: • The fee paid for network irrigation utilization represent only 1/3 of the total irrigation cost. • The low price of energy compared to the prevailing parity price for diesel on the world market price is an implicit subsidy to systems that are energy intensive • For agro-food industries, a high tariff on the importation of packaging device (can, bottle…) have an impact on the profitability of agro-food industries

26. Macro-level issues (3/4) • Domestic factors costs • Current labor regulation do not have a significant impact on the systems’ efficiency because limited share of labor is employed on a permanent basis. • Under the current level of knowledge the study assumed that there is no imperfection on the labor market, but the evolution of the wage level should be carefully monitored if new job opportunities arise on the domestic or regional labor market. • The non-accountability of water is equivalent to a net transfer of resources to the water intensive systems

27. Macro-level issues (4/4) • The impact of the exchange rate and interest rate variation depends upon the cost structure of the systems. • Exchange rate variation has a limited impact on the systems efficiency given the high share of tradable (45%) on total cost which compensate the effect of exchange rate on the tradable output. • Interest rate variations have also a limited impact on the systems’ efficiency due to the low share of capital (17%) in total cost. • The current macro-economic policy is supporting the development of the selected systems.

28. The wheat and cotton • Under the current level of technology and within the current trends of world markets’ prices, irrigated wheat and cotton systems have a low probability to have a comparative advantage • Limited benefit can be expected from a reverse trend toward higher prices on the world commodities’ markets. • Irrigated well systems operate at a high cost for the rest of the economy. • Rainfed systems have a comparative advantage, but there is no rainfed cotton and they roughly represent only 40% of the total wheat supply.

29. Possible options for wheat and cotton (1/2) • Enhance the comparative advantage through productivity increase or/and costs reduction: • Improving water use efficiency: • efficiency of drip irrigation (to be done) • new varieties (Biotech technology) • Consider sources of productivity increase at the post-harvest level, like for the ginning industries. • Shifting to the most efficient systems: • Promoting the utilization of the less costly systems in social terms: rainfed and network irrigation, but the available areas for each systems is limited and this rainfed environment also have their environmental cost (fertility…) • At least the allocation of irrigated well land to cotton should be limited to the maximum extent

30. Possible options for wheat and cotton (2/2) • Promoting crop diversification on well irrigated systems to substitute new sources of income for the farmer and the whole economy. • Should be promoted as much as possible, but given the huge areas concerned it is doubtful that the national and/or the world market will have the possibility to absorb the additional production of alternative crops. • Looking at new institutional mechanisms to internalize the cost of water use in farmers decisions making in order to promote any of these water saving options.

31. The promising crops • Syria has certainly a comparative advantage for olive oil, fresh tomato and oranges but having a comparative advantage does not mean being able to export. Attention should be given to: • Reinforcing the current policy for trade agreements to reduce barriers to entry. • Quality issue: quality and sanitary issues are becoming more and more determining, even for standard quality product to access markets. • Appropriate marketing strategy. Syria traditional markets are highly competitive and might become saturated. It is important to explore new market opportunities where habits are changing with income increase

32. Commodities responding to changes in Syrian food habit. • The promotion of new systems should carefully assess the viability of technical options within the Syrian economic environment. • The low efficiency of the Fresh Orange Concentrated Juice system is mainly due to the low conversion ratio at the processing level due to the unavailability of appropriate oranges varieties. • The efficiency of the system depends also on the capacity of the Syrian agriculture to supply enough volume of juicy oranges to allow to use the processing capacity at their optimal level. • The study didn’t covered the entire diversity of the cattle systems and the current results are more of a prospect than a definitive value.

33. ConclusionPutting the PAM into perspectives

34. Balancing efficiency objectives with non-efficiency objectives. • The economic efficiency should not be the only criteria for deciding whether or not a specific system should be supported or abandoned in terms of policy priorities. • If there is no alternative for a system that has no comparative advantage, the cost of inefficiency should be put in perspective with the human costs of rural exodus and uncontrolled urbanization. • When alternatives do exist, the PAM allows to select the option that have the least social cost.

35. Putting the PAM at the service of the decision making. • The PAM should be considered as a tool for policy dialogue: • to support discussion among policy makers but also • with other stakeholders, especially with private entrepreneurs and farmers, to explore policy options. • The discussion with stakeholder is also a mean to improve the accuracy and the coverage of the information collected.

36. Toward a system to monitor policy impact • The investment done in building the human capacity in the NAPC and in developing this first set of PAMs will be fully recovered through the establishment of policy monitoring systems focusing on: • Increase the number of commodities covered to explore possible alternatives. • Develop a set of PAMs for major commodities by agro-ecological zone or governorate to take into account the spatial/ecological dimension of the comparative advantage • Developing a cost efficient mechanisms to update the technical coefficients through an institutionalization of the process with appropriate services of the MAAR and other technical minitries (industry, transport…) • To integrate the results on the comparative advantage with other analytical tools such as Farming Systems, Poverty mapping to better put into perspectives equity and efficiency.

37. Thank you all for your attention