Distortions to Agricultural Incentives in Africa: Results from 17 Country Studies

1. Distortions to Agricultural Incentives in Africa: Results from 17 Country Studies Will Masters Purdue University www.agecon.purdue.edu/staff/masters CSAE Conference on Economic Development in Africa March 20, 2007 Views expressed are the authors’ alone and not necessarily those of the World Bank, its Executive Directors, or its Trust Funders (esp. UK and Dutch)

2. Distortions to Agricultural Incentives in Africa • A project led by Kym Anderson at the World Bank • to estimate incidence on farmers, processors & consumers • for >70 countries, all major farm products, 1955-2005 • with country specialists using a common methodology • of all policies potentially subject to “stroke of the pen” reform: • taxes/subsidies and other trade restrictions • parastatal firms and protected monopolies • not infrastructure, technology or institutions • Project staff: • Kym Anderson (WB Project Director) • Ernesto Valenzuela, Marianne Kurzweil (WB staff) • Jo Swinnen (coordinator/editor for Eur. Transition Econs) • Alberto Valdes (coordinator/editor for Latin America) • Will Masters (coordinator/editor for Africa)

3. Authors of the African country studies Mozambique: C. Arndt, X. Cicera & A. Alfieri Nigeria: P. Walkenhorst Senegal: W.A. Masters South Africa: L. Edwards, J. Kirsten & N. Vink Sudan: H. Faki & A. Taha Ahmed Tanzania: O. Morrissey & V. Leyaro Uganda: A. Matthews & J. Opolot Zambia: D. Ndlela & P. Robinson Zimbabwe: P. Robinson & D. Ndlela Cameroon: E. Bamou & W.A. Masters Cote d’Ivoire: P. Abbott Egypt: J.H. Cassing, S. Nassar & G. Siam Ethiopia: S. Rashid M. Assefa & G. Ayele Ghana: J. Brooks and A. Croppenstedt Kenya: A. Winter-Nelson & G. Argwings-Kodhek Madagascar: F.M. Rakotondrazaka Morocco: T. Roe & M.R. Doukkali

4. 1988-90 1995-97 2002-04 Motivation:Trade policies have changed but still costly Import-weighted average applied tariffs by level of processing and national income Ag./Other 0.38 0.68 0.75 1.89 2.86 8.59 Reproduced from K. Anderson et al., “Methodology for Measuring Distortions to Agricultural Incentives,” revised 13 September 2006, available online at www.worldbank.edu/agdistortions.

5. Reproduced from K. Anderson et al., “Methodology for Measuring Distortions to Agricultural Incentives,” revised 13 September 2006, available online at www.worldbank.edu/agdistortions. Motivation:Exchange reforms have had a large effect Black market exchange rate premia, weighted average across 59 developing and transition countries, by region, 1960 to 1993 (percent)

6. Motivation: Opportunity costs have changed Index of real international food prices, 1900 to 2005 (1977-79 =100) Source: K. Anderson (2006), “Reducing Distortions to Agricultural Incentives: Progress, Pitfalls and Prospects.” <www.worldbank.org/agdistortions>. Data shown are an index of export prices in US dollars for all major traded agricultural products, deflated by the MUV index which is the unit value of manufactures exported from France, Germany, Japan, UK and US, with weights based on those countries’ exports to developing countries.

7. Methodology:Calculating tariff-equivalent distortions • trade distortions • infer the value of NTBs from price comparisons, between • domestic prices (farmgate, retail or wholesale), and • border prices (unit values or price observations), minus • competitive margins (after “stroke of the pen” reforms) • or, use observed value of tariffs, taxes and subsidies • other subsidies/taxes (default is zero) • taxes/subsidies on production, marketing or consumption • taxes/subsidies on inputs, weighted by cost share at undistorted prices • exchange rate effects • official exchange rate • parallel exchange rate plus share of transactions in parallel market • or product-specific exchange rate if a multiple rate system is used

8. Methodology:Aggregation for policy analysis • Within countries, all aggregates are value-weighted • Across countries, will see: • simple averages (for political economy analyses) • value-weighted averages (for economic analyses) • Key measures are: • NRAA = Nominal Rate of Assistance for primary agric (farming) • NRAP = Nominal Rate of Assistance for agric processing • CTE = Consumer Tax Equivalent for purchasers • NRAM = Nominal Rate of Assistance on all importables • NRAX = Nominal Rate of Assistance on all exportables • For this summary, will focus on: • anti-farm bias as measured by aggregate NRAA • anti-trade bias as measured by NRAM relative to NRAX

9. Methodology:Price transmission along marketing chain • To what degree would policy reform change farm prices? • previous studies usually assume full transmission to farm prices (= marketing services are elastically supplied at a fixed margin) • at the other extreme, there could be no price transmission to farms (= farm production is elastically supplied at a fixed reservation price) • We allow country authors to specify their own estimates, for: • transmission from wholesale to farmgate (θ), and also • tax incidence between sellers (λ) and buyers (1 – λ) • Default value is equi-proportional transmission • some authors use their own judgment or econometric estimates

10. Methodology:Examples of price transmission Influence of price transmission on the incidence of a 33% import tariff for a processed good whose primary product is nontradable Price transmission: Full (all margins are fixed) None (farm price is fixed) Equi-proportional (distribution cost is fixed) (all sectors) Tax/subsidy measures: NRAA =farmer, NRAP =processor, CTE =consumer

11. Preliminary Results:Anti-farm* and anti-trade** bias in Africa Ad-valorem tariff equivalent *Anti-farm bias is measured by the “All Products” line ** Anti-trade bias is the gap between “Importables” and “Exportables” Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

12. Africa’s anti-farm bias varies, but clearly worsens then improves over time Ad-valorem tariff equivalent Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

13. Africa’s export taxes account for mostof the level and trend in its anti-farm bias Ad-valorem tariff equivalent Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

14. Africa’s import policies vary widely Ad-valorem tariff equivalent Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

15. Summary of the evidence • Agricultural trade policy has taxed farmers • increasingly from 1961 to 1977 period, from 15 up to 40%; • then at a reduced rate after 1987, back down to 15-20% • Taxation increased sharply over 1960s and 1970s • a doubling of export taxation, from 25 to 50% • elimination of import protection, from 20% to <0 • Taxation has since been reduced just as much • much lower export taxes, to well below 25% • a period of high import protection in the 1980s

16. Summary of the evidence (continued) • Import policy varies more than export taxes • across countries • suggesting political-economy differences • over time within countries • possibly stabilizing domestic prices • across crops within countries • so welfare cost of distortion may have fallen by less than the decrease in average protection

17. Behind these data, stories from the country case studies • Real policies and the reform process • Reforms had large effect, but slowly and with reversals • Export taxes • often set a fixed local price; taxes vary with world price • taxation may be needed for revenue and redistribution • have been reduced but not eliminated over time • Import restrictions • sometimes stabilize some prices, but… • rarely stabilize prices for remote rural producers • have sometimes been significant revenue sources

18. Implications for policy • Successful reforms typically switch instruments • away from state trading, QRs and specific tariffs • towards more transparent taxes (ad-valorem and VAT) • Border reforms leave weak domestic markets • High transport costs and lack of spatial integration • High credit costs and lack of temporal integration • Thin input markets and limited flow of new technology • Demographic and health constraints on human capital • After policy reform, a big agenda for project aid • to raise agricultural productivity, education and health

19. Further information: • www.worldbank.org/agdistortions • wmasters@purdue.edu

20. Annex of country datafor 16 African Countries • Chapter drafts will be available soon www.worldbank.org/agdistortions • Results shown here are: • for primary products (not processed) • by country, in alphabetical order: Cameroon, Cote d’Ivoire, Egypt, Ethiopia, Ghana, Kenya, Madagascar, Mozambique, Nigeria, Senegal, South Africa, Sudan, Tanzania, Uganda, Zambia, Zimbabwe

21. Cameroon: an early reformer? Importables: none Exportables: cocoa, coffee, wood, bananas Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

22. Cote d’Ivoire: consistent export taxes Importables: rice Exportables: cocoa, coffee, cotton Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

23. Egypt: episodes of import protection Importables: maize, wheat, sugar Exportables: cotton, rice Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

24. Ethiopia: steady reformer? Importables: none Exportables: coffee, hides and skins, chat, oilseeds and pulses Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

25. Ghana: an extreme case Importables: rice, maize Exportables: cocoa, groundnuts Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

26. Kenya: episodic reformer? Importables: rice, maize Exportables: cocoa, groundnuts Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

27. Madagascar: now pro-ag. but still anti-trade Importables: rice, sugar Exportables: vanilla, coffee, cocoa, cloves, pepper, sugar Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

28. Mozambique: from anti-agriculture to anti-trade? Importables: maize (in South), beans, groundnuts, rice, sugar (to 1982) Exportables: maize (in North), tobacco, cotton, cashew, sugar (after 1982) Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

29. Nigeria: now neutral? Importables: maize, rice, sorghum, cassava millet, yams Exportables: cocoa, groundnuts, palm oil Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

30. South Africa: from anti-trade to neutral? Importables: poultry, mutton, beef Exportables: maize, wheat, grapes, apples, oranges, sugar Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

31. Senegal: successful reforms? Importable: rice Exportable: groundnuts Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

32. Sudan: a recent reformer Importables: wheat, sugar Exportables: cotton, sorghum, millet, groundnut, gum arabic, livestock Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

33. Tanzania: consistently anti-agriculture? Importables: maize, rice, wheat, sugar Exportables: coffee, tea, cotton, tobacco, beans, cashews, sisal, pyrethrum Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

34. Uganda: still protecting importables? Importables: rice plus maize (some years) Exportables: coffee, cotton +maize (some years) Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

35. Zambia: episodic reformer? Importables: wheat, rice plus maize, sorghum and soybeans (in some years) Exportables: tobacco, cotton, groundnuts plus maize, sorghum and soybeans (some years) Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

36. Zimbabwe: increasingly anti-agriculture? Importables: wheat plus maize, soyabeans, and sorghum (some years) Exportables: tobacco, cotton, groundnuts plus maize, soyabeans and sorghum (some years) Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

37. Cameroon, crop by crop Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

38. Cote d’Ivoire, crop by crop Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

39. Egypt, crop by crop Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

40. Ethiopia, crop by crop Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

41. Ghana, crop by crop Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

42. Kenya, crop by crop Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

43. Madagascar, crop by crop Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

44. Mozambique, crop by crop Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

45. Nigeria, crop by crop Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

46. South Africa, crop by crop Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

47. Sudan, crop by crop Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

48. Tanzania, crop by crop Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

49. Uganda, crop by crop Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)

50. Zambia, crop by crop Source: Preliminary results from K. Anderson and W.A. Masters (2007), Distortions to Agricultural Incentives in Africa. Washington, DC: The World Bank. (Online at www.worldbank.org/agdistortions.)