The evolution of agricultural policy in South Africa – what worked and what did not work

1. The evolution of agricultural policy in South Africa – what worked and what did not work Nick Vink Department of Agricultural Economics University of Stellenbosch

2. Outline • Policy changes • Productivity indexes • SA/NZ (Vink and Sandrey) • Technology change (Sandrey and Vink, OECD) • Where does RSA fit in? (Anderson et al) • Conclusion

3. Early 1980s to early 1990s Reduction in commodity-specific subsidies • Interest rate subsidies cut (but ‘drought aid’) • Abolition of dairy price control • Bread price subsidy • Abolition of control over price of maize meal, bread flour, bread • Maize price formula changed • Etc.

4. Early to mid 1990s Reduction in farmer support programmes • Tax treatment changed (ring fencing tightened, capital depreciation aligned) • Budgetary allocations supporting white farmers declined by some 50 per cent between 1987 and 1993 • The basis for farmer support programmes was taken away

5. Early 1990s to 2000 Trade liberalization under the AoA • Tariffication and agreed reductions • Unilateral reductions • GEIS

6. 1994 and ongoing Intervention in input markets Land • Abolition Act 1991 • White Paper, Acts, Implementation Labour • Dedicated legislation, 1993 • Incorporated in mainstream after 1994 • Minimum wage, etc. 2001 Water • Loss of riparian rights

7. 1997 to early 1998 Deregulation of agricultural marketing • The ‘big bang’ of 1997

8. What were the results? Productivity of: • Labour • Capital • Land • TFP

9. Unit cost of labour (labour cost of producing R1.00 of output)

10. Capital formation

11. Capital use in agriculture

12. Efficiency of capital use

13. Efficiency of capital use

14. Land use efficiency

15. Summary: TFP

16. Has this worked? • SA/NZ comparison • Technology adoption • Southern hemisphere comparison

17. NZ and SA agriculture have similarities and differences • Share southern hemisphere climate • NZ has more reliable rainfall and better soils • NZ, with its smaller domestic population, is more export-oriented • Both are Cairns Group members: world leaders in unsubsidised agriculture

18. NZ and SA agriculture have similarities and differences • Both underwent dramatic reforms; NZ in the mid 1980s and SA a decade later • The evidence shows that NZ has adjusted to ‘free’ markets better than SA to date • The ‘to date’ qualification is important, as the NZ experience shows that time lags can be longer than expected

19. NZ and SA agriculture have similarities and differences: • Marketing reform was triggered by external macroeconomic factors in both • NZ: economic stagnation, change in government in 1984, subsequent drive to liberalise • Agriculture a central part of these reforms • SA: also macroeconomic precedents, as attempts to stabilise the economy in the late 1970s resulted in a rapid increase in interest rates

20. NZ and SA agriculture have similarities and differences: • Thus, both countries embarked on the reforms at about the same time • However, the process from that time onwards was markedly different • To understand these differences, and their consequences, it is necessary to compare the reforms in terms of their timing, sequencing, breadth, and depth

21. Timing • NZ: most reforms implemented within 3 years of the 1984 elections • PSE declined to below 5% after 1988, and has since declined to below 1% • SA: reforms for 15 years followed by the ‘big bang’ that lasted for 12 months • NZ market reforms preceded SA by a decade • SA’s PSE remained at above 10% until 1995 after which it declined to below 5%

22. Sequencing Deregulation in NZ had two distinguishing features : • NZ: marketing reforms preceded international trade liberalisation under the AoA • SA: sequencing more complex as explained above. Trade liberalisation preceded the ‘big bang’ • However, no evidence that policy makers in NZ or SA followed any deliberate sequence of reforms

23. Breadth • SA and NZ: Virtually all of agriculture was subject to intervention before deregulation • In both there is evidence that previously uncontrolled industries have been the most successful • NZ: deer and wine • SA: Poultry and vegetables • NZ also implemented labour market reforms, which resulted in more flexible labour markets

24. Depth The biggest difference between SA and NZ was in the depth of the reforms SA: all statutory powers were removed, with two exceptions: • Sugar industry • The powers of the NAMC that allow statutory levies NZ: the end result was more nuanced: • Quota allocations into EU and USA remain in dairy and meat, while kiwifruit operates a single desk with monopoly export powers

25. Depth • This did not result in a higher PSE, because import controls are not necessary to maintain an export monopoly, hence the price gap between domestic and world prices, the key to the measurement of PSE, is unaffected • This has both costs and benefits to different stakeholders

26. Have the marketing reforms resulted in technology innovation? • Agricultural exports’ share in production increased from 1/5 to 1/3 • Agricultural exports increased by 9.2% p.a. between 1997 and 2007: wine, citrus and table grapes grew by 17.8%, 16% and 12.9% • Some evidence of innovation, but the jury is still out on the results of the reforms • Different patterns of technological growth can be observed by and within regions over time

27. Have the marketing reforms resulted in technology innovation? • Innovation continues apace, but how much of it can be ascribed to the reforms? • Field crops • Prices declined to world market levels • Farmers shifted to low-till, etc. production • Reduced inputs such as fertilisers, insecticides, herbicides, tractors, other machinery, and fuel • Thus process rather than product innovation • Industry average yields more than doubled

28. Have the marketing reforms resulted in technology innovation? • Fruit sector • Increase in output and exports, driven by: • (1) the addition of new export-oriented production regions (Orange river: pre-reform) • (2) introduction of new production technology • (3) introduction of better control over the cold chain • Export growth OK, but limited

29. Have the marketing reforms resulted in technology innovation? • Wine • Marketing reforms resulted in: • (1) Many new entries in the industry (2 cellars/month for >10 years!) • (2) Inward FDI, accompanied by overseas marketing and the burgeoning tourism sector • (3) Large scale replanting of vineyards

30. World = 1.0

36. Conclusion • NRA calculations show that South African agriculture is relatively unprotected – similar to Australia, Chile and New Zealand (Argentina still taxes agriculture) • But output and export growth has been slowest in South Africa • Why: poor resources or investor confidence? • Or do we just have to wait longer to reap the benefits (or pay the price!)