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Social Sustainability of Reformed Syrian Agriculture: the Risk Dimension

This workshop explores the role of agriculture in the economic reforms of Syria, focusing on the social sustainability of reformed Syrian agriculture and the dimensions of risk. It covers topics such as the cost of risk exposure, implications of economic policies on risk exposure, and risk-related institutions.

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Social Sustainability of Reformed Syrian Agriculture: the Risk Dimension

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  1. The contribution of Agriculture to Economic Reforms of Syria International Workshop Damascus 1-2 July 2008 Social Sustainability of Reformed Syrian Agriculture: the Risk Dimension C. Cafiero, University of Naples - Federico II, Italy

  2. Outline PART ONE Backgrounder: the economic and social costofriskexposure Implicationsofeconomic policy on riskexposure Implicationsofriskexposure on economicbehaviour Riskrelatedinstitutions SYNTHESIS: the roleof public policiesforrisk management The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  3. Outline PART TWO Principlesofrisk management • Riskanalysis • Security funds SYNTHESIS: there are effectiveinstrumentstopromote, assist and induce solidarity. The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  4. Outline PART THREE Lessons and warningsfromothercountries’ experiences The Syrianexperience RelevantrisksforSyrianAgriculture SYNTHESIS: elementsforinforming the continuedprocessofagricultural Policy reform in Syria The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  5. 1. The cost of risk exposure Economic • Resourcemisallocation (i.e. the case of water) • Foregoneopportunities(i.e., delayedinnovationadoption) Social • Distress due toinsecurity • Riskexacerbates the inequalities (the rich are betterequippedto face risk) • Politicaltensions due toinequality The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  6. 2. Impact ofeconomic policy on riskexposure Efficiency vs. equity (or: growth vs. qualityof life): Recentexampleof a cleartrade-off • Opening totradeto exploit comparative advantagehasincreasedfoodimports, and increased the exposureto price shocks Is the trade-offinevitable? • Notnecessarily: there are efficiencyaimedpoliciesthat reduce the impact ofriskexposure. • Exampleofgood policy: • Promotion ofinvestments in infrastructures and services • Exampleof bad policy: • Laborflexibility The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  7. 3. Implicationsofriskexposure on economicbehaviour Riskavoidance (altering the probabilityofevent) • Delocalization, foregoinnovationadoption, Dercon’s risk “skewing” activities Risk management (altering the impact of the event) • Diversification (bothin-farm and off-farm) • Self-insurance (precautionarysavings) • Commercial insurance • Hedging (contracts) Riskcoping (adaptbehaviour ex-post) • Credit (usury) • Disinvestment (childlabour) The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  8. 4. Risk related institutions Cooperatives (mutual) social, private Commercial insurance Derivative contracts market based Banking and Credit Solidarity funds social, public The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  9. Summary: the role of public policy Economic prosperity can be associated with social protection (social security is not a cost, but a resource) The State must: • Promote solidarity • Provide public goods, specially information • Prevent rent seeking activities by promoting true competition • Create a legal environment for risk sharing activities • Invest in public research and education • Seek an equitable distribution of wealth And then, let the economy free to adjust provided the government The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  10. 5. Principles of risk management The fundamental principle is solidarity, in the form of risk pooling. Because of decreasing marginal utility of wealth, by dividing one big loss into many small losses, the total impact is reduced by transferring the burden of the risk from the shoulders of one or few to that of many • from one year to many years, (savings) • from one persons to many persons, (insurance) • from one group to many groups, (redistribution) The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  11. 5. Principles of risk management Spontaneous solidarity usually manifests itself ex-post, that is, after the event occurs. With risk management, we aim at creating ex-ante the condition for solidarity to be expressed. Even if solidarity must be promoted through incentives, the benefits always exceed the costs. The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  12. 5. Principles of risk management Economists are wrong when they say that “utility cannot be interpersonally compared”. • The “utility” that can be gained from, say, one hundred additional Syrian pounds is ALWAYS worth more for a poor person than for a rich one. What is needed is to determine incentives to motivate (rich) people to accept the risk of a loss in exchange for an expected return The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  13. 5. Principles of risk management Once the political objective of providing solidarity is agreed upon, material resources ought not to be wasted, when it can be avoided. Economic analysis can provide very useful insights also in terms of efficiency The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  14. 5. Principles of risk management Index insurance seems to open new perspectives for the role of government in information brokerage and certification Innovations in finance (bonds, options, swaps, etc.) cause the institutional settings to rapidly changing and this also opens up new roles and functions for public intervention The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  15. 5. Principles of risk management The objective of economic analysis of risk management mechanisms, therefore, should be that of providing prescriptions on how to obtain an adequate level of risk protection at the lowest possible cost to the whole society. Key is the matching of each risk with the right instrument The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  16. 5. Principles of risk management Ordering of risk management tools Probability Entity of loss The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  17. 5. Principles of risk management A security fund is a set of instruments (financial reserves and contingent contracts) that would make the needed resources available, in the event of an accident, a crisis, a catastrophe. The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  18. 6. Experiences and lessons Public involvement in subsidized insurance can be expensive and, when carefully considered, is ineffective Provision of excessive risk protection (i.e., national solidarity funds) can be counterproductive The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  19. 6. Experiences and lessons Financial markets can and should be used to greatly expand the scope for economic risk spreading onto the global economy We have learnt that the most valuable resources to be provided to the farm sector are: • a trustable social and political environment • a sustained pace of research and innovation The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  20. 6. Experiences and lessons Letting governments do what markets can never do • ‘Security’ and knowledge are undepletable immaterial goods which should not be ‘traded’ as depletable goods. Markets can never be efficient mechanisms of security and information generation and spreading. Letting (competitive) markets do what they do best: arbitraging • Avoiding that governments directly run markets or that they crowd-out private agents. The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  21. 7. The Syrian experience There are challenges and opportunitiesforSyrianagriculture opening to the global market “Burningissues” • Water • Ruralpoverty • Farm incomes • Rural living conditions, torevert the rural/urbanmigration Medium termissues • Competitiveness on foreignmarkets The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  22. 7. The Syrian experience Risk appears to be a crucial element. Lack of credit has been one of the major hindrances to the process of innovation and diversification of Syrian agriculture Saddidin (forthcoming) demonstrates that releasing existing credit constraints would already generate sizeable positive effects on all the burning and medium term issues. The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  23. 8. RelevantrisksforSyrianAgriculture Naturalrisks • Raindistribution • Isittruly a “risk” ? Somethingthathasbeenthereformillenniashouldbepredictable. Ifitisstillconsidered a “risk” itisbecausetherehavebeenproblemsadjusting • The long termresponseshouldbeadaptation and innovation (research on droughtresistantspecies, investment in irrigation) • Removing the causesthathavepreventedadaptationwill induce a genuine shock, at leastfor the timeneededtore-adjust The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  24. 8. RelevantrisksforSyrianAgriculture Market risks • Input prices and procurement • Key role of the price mechanism as a scarcity signaling device • Output price and collocation • Trade policies, promotion, international cooperation • Here again, the removal of policies that have prevented adaptation will induce a genuine shock The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  25. 8. RelevantrisksforSyrianAgriculture Political/social risks • Mostly fuelled by external factors (the role of sovranational insititutions) • Exacerbated by internal factors • Uncertainty on the future value of investments • Unreliable enforcement of basic rights (property, entrepneurship, etc.) The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  26. Conclusions: what is ahead? Byusing the metaphorof the governmentbeinglike a wiseparentwhowantstoseehischildrentogrowhealthy and safe and tofluorish, wemayidentifythreephases in the processofeconomicdevelopment and in each the Governmenthas a distinctrole: • Infancy • Adolescence • Adulthood The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  27. Conclusions: what is ahead? During infancy, the predominant role of the State is to provide DIRECT PROTECTION During adolescence, the predominant role of the State is to provide EDUCATION During adulthood the Government shoud guarantee FREEDOM TO CHOOSE and TO REACT The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  28. Conclusions: what is ahead? Syrian agriculture is at the virge of leaving infancy and move towards adulthood It is time to help Syrian farmers to more fully release their potential The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  29. Conclusions: what is ahead? My personal list: • Promote creation of rural community groups and farmers associations (rural mutual funds) • They would take care of the first “layer” of risk • Create and maintain an agricultural security fund (not an agricultural subsidy fund) • to provide protection to farmers in case of the “tail risks” (drought, market risk) The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

  30. Conclusions: what is ahead? • to provide protection to consumers (strategic stocks) • the exposure of such a fund might be hedged on the global financial market • Provide subsidized credit in a selective way • To promote adoption of water saving crops • To promote production of new crops for expanding international markets (organic, quality food, pharmaceutical plants, etc.) The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

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