Agricultural Economics I: Agricultural and Food Policy Analysis

Adam Smith (1776): “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.”

Ricardo’s (1817) theory of comparative advantage used wine and cloth as the example.

http://www.econlib.org/library/Ricardo/ricP.html Anderson, Kym (2007). Distortions to Agricultural Incentives: A Global Perspective, 1955-2007. The World Bank and Palgrave Macmillan.

The Agricultural Roots of The Economist:
Created in opposition to the protectionist Corn Laws in the UK

Theodore Shultz on Agricultural Economics
• “Most of the people in the world are poor, so if we knew the economics of being poor we would know much of the economics that really matters. Most of the world’s poor people earn their living from agriculture, so if we knew the economics of agriculture we would know much of the economics of being poor.” T.W. Schultz (1979) – Nobel Prize Lecture

This Course
• An introduction to the field of agricultural and food policy analysis
– Primarily developed for use in the MA Program in Economics at the International School of Economics at Tbilisi State University (ISET) – 14 class sessions, 1 ½ hour each

• We will assess a variety of topics related to the economics (and political economy) of agricultural and rural development

Courses at ISET
Agricultural Economics: • Agricultural Economics I: Additional courses: • Cost-Benefit Analysis – Agricultural and Food Policy • Development Economics Analysis • Program Evaluation • Agricultural Economics II: • Trade Policy – Agricultural Product and Factor • Transition Economics Market Analysis • Agricultural Economics III (planned):
– International Agricultural Trade

Agricultural and Food Policy Analysis
• Agricultural and food policy analysis
– Subfield of agricultural economics – Focus on market specifics, agriculture in transition, agricultural and rural development

• Incorporation of insights from the literatures on development economics, political economy, new institutional economics, field experimental research methods
– Emphasis on the importance of the institutional environment for an economy, for the agricultural and food sector, and for understanding policy formulation

• A rich methodology
– Neoclassical economic analysis is enriched by insights and tools from the above fields

Acemoglu on Development Economics
• “Development economics investigates the causes of poverty and low incomes around the world and seeks to make progress in designing policies that could help individuals, regions, and countries to achieve greater economic prosperity.”

Acemoglu, Daron (2010). Theory, General Equilibrium, and Political Economy in Development Economics. The Journal of Economic Perspectives, 24(3), 17–32.

The Institutional Environment
• In Institutions, Institutional Change, and Economic Performance, Douglass North wrote that (p. 3):
– “Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction. In consequence they structure incentives in human exchange, whether political, social, or economic. Institutional change shapes the way societies evolve through time and hence is the key to understanding historical change.”

• The “rules of the game” and their enforcement • Organizations as the “players of the game”
North, Douglass (1990). Institutions, Institutional Change, and Economic Performance. Cambridge University Press, Cambridge UK.

Williamson’s Four Levels of Social Analysis

Solid arrows “…signify that the higher level imposes constraints on the level immediately below.”

Reverse arrows “…signal feedback”

Source: Williamson, Oliver (2000). “The New Institutional Economics: Taking Stock, Looking Ahead.” Journal of Economic Literature, XXXVIII: 595-613.

A Public Choice Analysis of Agricultural and Food Policies
• Involves examining why agricultural and food policies are the way they are • Calls for a positive economic analysis of policy formulation, decision making, and resource allocation
– James Buchanan: public choice is “politics without romance.”

• Contrasts with a normative approach to these issues
– What policies should be developed
• Though some normative criteria will be discussed (and debated!)

“Washington is awash in rumors this week that the White House is planning major changes in the way the U.S. donates food to fight hunger in some of the world’s poorest countries.

It has set off an emotional debate. Both sides say they are trying to save lives.
America’s policies on food aid are singularly generous—and also unusually selfish. On the generous side, the U.S. spends roughly $1.5 billion every year to send food abroad, far more than any other country. On the other hand, the rules for this program, known as Food for Peace, ensure that much of the money stays in American hands. Most of the food, which commonly includes wheat, corn, and soy meal, and vegetable oil, has to be bought from U.S. farmers, processed here and delivered to its destination by U.S. shippers.”
Listen: http://www.npr.org/blogs/thesalt/2013/04/04/176154775/a-political-war-brews-over-food-for-peace-aid-program

Why U.S. Taxpayers Pay Brazilian Cotton Farmers
• Contrary to WTO rules, the U.S. subsidizes domestic cotton farmers (by $1.5 to $4 billion per year)
• Brazil complained. The WTO ruled against the U.S., but it went nowhere because of a series of appeals. • So Brazil retaliated and threatened to tax imports of specific goods from the U.S. (in line with WTO rules). They grouped up with powerful U.S. industries (who would face the Brazilian import tax) to lobby the government. • What eventually happened? The U.S. now pays Brazilian cotton farmers $147 million a year. And the U.S. still subsidizes cotton farmers.

Source: http://www.npr.org/blogs/money/2011/01/26/131192182/cotton

A Public Choice Approach to Agricultural Economics
• What role do economists have in influencing the policy process if stakeholders have vested interests and influence in legislation?
– Explains why policies may not be changed even if economists and the vast majority of citizens would like them to be changed

• Fundamentally deals with issues related to “good governance” and the development of “good” political institutions

Course Goals
• Broad goals:
– Improve skills in applied economics – Improve critical thinking, writing and co-authoring, and presentation skills

• Specific goals:
– Become acquainted with the effects of agricultural and food policies and programs – Assess the role of government in a market economy – Understand the importance of institutions and organizations in a market economy – Identify potential policy problems related to rural and agricultural development

Course Goals
• Specific goals, continued:
– Study the transition of the agricultural sector and models of rural and agricultural development – Become familiar with the basic concepts and frameworks used in agricultural and food policy analysis – Assess how policies are designed, implemented, and evaluated in practice, with a clear understanding of the political economy of agricultural and food policy analysis – Become equipped with skills for analyzing agricultural and food policies and monitoring and evaluation of their impacts ex ante and ex post

This Course
• For examples and empirical evidence, much focus on the countries of the South Caucasus (Armenia, Azerbaijan, and Georgia) and other former Soviet republics • We’ll also examine the reform experiences of other countries in Central and Eastern Europe

Course Structure and Evaluation
• • • • Lectures and class discussions Assigned readings A short co-authored paper Presentations and discussions in a short “conference” • Final exam

Lectures, Discussions, and Readings
• The content of the lecture notes is not identical to the content of the reading materials
– It is important to read the assigned texts carefully in order to fully understand and appreciate the context and contributions of each article

• The reading material is meant to widen the scope of analysis beyond the content of the lecture • We will discuss the readings in class, in addition to having regular lecture sessions

Lectures, Discussions, and Readings
• At the beginning of each lecture, please feel free to raise questions to clarify the content of the preceding lecture or to clarify the content of the assigned readings • Don’t hesitate to ask questions and critique the materials!

Tentative Lecture Schedule
Lecture Lecture 1 Lecture 2 Lecture 3 Lecture 4 Lecture 5 Lecture 6 Lecture 7 Lecture 8 Lecture 9 Lecture 10 Lecture 11 Lecture 12 Lecture 13 Lecture 14 Topic Introduction to Agricultural and Food Policy Analysis The Puzzle of Agricultural Productivity in Georgia Agriculture in Transition Agriculture in Transition (Continued) Agricultural Market Specifics Insights from New Institutional Economics Case Study: Embedded Institutions and the Persistence of Large Farms in Russia Case Study: Property Rights in Mestia Agricultural and Food Policy Objectives Agricultural and Food Policy Objectives, Continued Agricultural and Food Policy Evaluation Impact Evaluation and Field Experimental Methods Impact Evaluation and Field Experimental Methods: Specific Studies The Political Economy of Agricultural Policy The Political Economy of Agricultural Policy, Continued Conference: Presentations and Discussant Comments

The Puzzle of Agricultural Productivity Agriculture in Transition

Section Readings
• Ellman, Michael. (1988). “Soviet Agricultural Policy.” Economic & Political Weekly, 23(24): 1208-1210.
• “The Arena and the Common Heritage,” Chapter 2. Lerman, Zvi, Csaba Csaki, and Gershon Feder. (2004). Agriculture in Transition: Land Policies and Evolving Farm Structures in Post-Soviet Countries. Lexington Books, Maryland. • Rozelle, Scott and Johan F. M. Swinnen. (2004). “Success and Failure of Reform: Insights from the Transition of Agriculture.” Journal of Economic Literature, XLII: 404-456. • The ISET Economist, October 11, 2012. “The Puzzle of Agricultural Productivity in Georgia (and Armenia).” http://www.iset.ge/blog/?p=836

The Puzzle of Agricultural Productivity
• According to official statistics, Georgia is the only former Soviet republic in which labor productivity in agriculture hasn’t returned to or exceeded its level in 1992
– Agricultural labor productivity: “value added in agriculture per agricultural worker, constant 2000 US dollars” from the World Bank’s World Development Indicators dataset

2000 4000 6000 2000 Ag

4000

6000

Agricultural Productivity

Agricultural Productivity

0
1990

1995

2000 Year

2005

2010

0
1990
Data source: World Bank

1995

2000 Year

2005 Azerbaijan Estonia Kazakhstan Latvia Moldova Tajikistan Ukraine

2010

Armenia Belarus Georgia Kyrgyz Republic Lithuania Russian Federation Turkmenistan Uzbekistan

The ISET Economist, October 11, 2012. “The Puzzle of Agricultural Productivity in Georgia (and Armenia).” http://www.iset.ge/blog/?p=836

200

300

400

Agricultural Productivity Relative to its 1992 Level

Ag 300 100 200 100 400

Ag

0
1990

1995
1995

2000 Year
2000 Year

2005
2005 Azerbaijan Georgia Kyrgyz Republic Moldova Tajikistan Ukraine

2010
2010

0
1990
Data source: World Bank

Armenia Belarus Kazakhstan Latvia Russian Federation Turkmenistan Uzbekistan

The ISET Economist, October 11, 2012. “The Puzzle of Agricultural Productivity in Georgia (and Armenia).” http://www.iset.ge/blog/?p=836

Inputs

Rozelle, Scott and Johan F. M. Swinnen. (2004). “Success and Failure of Reform: Insights from the Transition of Agriculture.” Journal of Economic Literature, XLII: 404-456.

Irrigation

Lerman, Zvi, and David Sedik. (2010). Rural Transition in Azerbaijan. Lexington Books, UK.

Land Reform

Rozelle, Scott and Johan F. M. Swinnen. (2004). “Success and Failure of Reform: Insights from the Transition of Agriculture.” Journal of Economic Literature, XLII: 404-456.

Land Reform

Lerman, Zvi. (2007). “Land Reform, Farm Structure, and Agricultural Performance in CIS Countries.” Hebrew University, Discussion Paper No. 7.07

The Puzzle of Agricultural Productivity
• What is agricultural and rural development? • Is agricultural productivity necessarily the key variable of interest? If not, what metrics of agricultural development should we consider?
• These are just a few of the questions we’ll be thinking about…

Considerations
• How is value added calculated?
– How were agricultural product price data collected and calculated? – How valuable are existing inputs to the agricultural production process?

• How is employment calculated?

• How large is the informal agricultural sector?
– Schneider, Buehn, and Montenegro (2010) estimate that the total size of the overall shadow economy in Georgia was about 62 percent of officially recorded GDP in 2007, which suggests that there is indeed much economic activity occurring in the informal economy
Schneider, Friedrich, Andreas Buehn, and Claudio E. Montenegro. (2010). “New Estimates for the Shadow Economies all over the World.” International Economic Journal, 24(4): 443-461.

Measurement Error?
6000

Agricultural Productivity

2000

2000 4000 Ag

6000 4000

Agricultural Productivity

0
1990

1995

2000 Year

2005

2010

0
1990
Data source: World Bank

1995 Armenia Georgia

2000 Year

2005 Azerbaijan

2010

The ISET Economist, October 11, 2012. “The Puzzle of Agricultural Productivity in Georgia (and Armenia).” http://www.iset.ge/blog/?p=836

Definitely Measurement Error Here!

Source: http://databank.worldbank.org/data/home.aspx. April 2, 2013.

Reform and Agricultural Labor Productivity

Rozelle, Scott and Johan F. M. Swinnen. (2004). “Success and Failure of Reform: Insights from the Transition of Agriculture.” Journal of Economic Literature, XLII: 404-456.

How Productive Was Georgia During the Soviet Era?
What issues might there be with a data source like the Statistical Yearbook of the USSR?

Lerman, Zvi, Yoav Kislev, David Biton, and Alon Kriss. (2003). “Agricultural Output and Productivity in the Former Soviet Republics.” Economic Development and Cultural Change, 51(4): 999-1018.

Different Calculations

Lerman, Zvi, Yoav Kislev, David Biton, and Alon Kriss. (2003). “Agricultural Output and Productivity in the Former Soviet Republics.” Economic Development and Cultural Change, 51(4): 999-1018.

Additional Considerations
• How efficient are agricultural producers?
• Supporting environment
– Estonia, Latvia, and Lithuania are members of the EU and agricultural producers benefit from EU support measures

• A rights-based approach to agricultural development
– Forced labor in the cotton fields in Uzbekistan to increase cotton exports; should we discount these data because of rights violations?

It’s Not Agricultural Productivity Per Se That Matters…

A Rights-Based Approach to Agricultural Development
• Human Rights Watch:
– “For the 2012 harvest, the Uzbek government forced over a million of its own citizens, children and adults – including its teachers, doctors, and nurses – to harvest cotton in abusive conditions on threat of punishment, Human Rights Watch found. The authorities harassed local activists and journalists who tried to report on the issue. In 2011, Uzbekistan was the world’s fifth largest exporter of cotton.”

Additional Considerations
• The agricultural sector is much more complex than is suggested by macrolevel statistics on productivity or output
• A caveat about “growth”
Source: Paul Samuelson’s textbook; Marginal Revolution

An Enabling Environment
• Rozelle and Swinnen (2004): “…our analysis suggests that, above all, success requires two key elements: good rights and an institutional environment within which agents can exchange goods and services and access inputs.”

Rozelle, Scott and Johan F. M. Swinnen. (2004). “Success and Failure of Reform: Insights from the Transition of Agriculture.” Journal of Economic Literature, XLII: 404-456.

What is Development, After All?
• In Development as Freedom, Amartya Sen argued that development can be seen as:
“…as a process of expanding the real freedoms that people enjoy. Focusing on human freedoms contrasts with narrower views of development, such as identifying development with the growth of gross national product, or with the rise in personal incomes, or with industrialization, or with technological advance, or with social modernization. Growth of GNP or of individual incomes can, of course, be very important as means to expanding the freedoms enjoyed by members of the society. But freedoms also depend on other determinants, such as social and economic arrangements (for example, facilities for education and health care) as well as political and civil rights (for example, the liberty to participate in public discussion and scrutiny).”
Sen, Amartya. (1999). Development as Freedom. Anchor Books, New York.

Development as Freedom
• Sen (1999) argued that real development “…requires the removal of major sources of unfreedom: poverty as well as tyranny, poor economic opportunities as well as systematic social deprivation, neglect of public facilities as well as intolerance or overactivity of repressive states.”

Sen, Amartya. (1999). Development as Freedom. Anchor Books, New York.

The Capability Approach
• Amartya Sen
– View that income and wealth are not ends, but means
• Instruments for other purposes

• Sen argues that the ‘capability to function’ is what really matters
– Functionings: what a person does (or can do) with the commodities of given characteristics that they come to possess or control. – Freedom of choice (control over one’s own life)
Todaro, Michael and Stephen Smith (2012). Economic Development, Addison-Wesley.

Sources of Disparity Between Income and Development
• Personal heterogeneities
– E.g. disabilities, illnesses, age, gender

• Environmental diversities • Variations in social climate
– Crime, violence, and social capital

• Distribution within the family
– Family resources may be distributed unevenly (e.g. on the basis of gender)

• Relational perspectives
– Demand for some commodities to function in different societies
Todaro, Michael and Stephen Smith (2012). Economic Development, Addison-Wesley.

Agricultural Productivity
• Rising agricultural productivity is often viewed as a key policy goal…
– Rozelle and Swinnen (2004): “Rising productivity through policies that provide better incentives and reduce resource waste…will a.) lead to rising food and non-food agricultural production; b.) contribute to higher income; and c.) make the sector more modern.”

• …because it’s seen as important for poverty reduction.
• We’ll look at the sources of growth in agricultural output per worker (per person) later in the course
Rozelle, Scott and Johan F. M. Swinnen. (2004). “Success and Failure of Reform: Insights from the Transition of Agriculture.” Journal of Economic Literature, XLII: 404-456.

Employment in Agriculture (% of Total Employment)
60 50

XX

0
1990

35

1040

Ag 20 45

30 50

40 55

30

1995

2000 Year

2005

2010

1990

Data source: World Bank

1995

2000 Year Armenia Georgia

2005 Azerbaijan

2010

Agriculture value added (% of GDP)
80 % of GDP 40 60

XX
60 20 20 0
1990

Ag 40

80

1995
1995

2000 Year
2000 Year

2005
2005

2010
2010

0
1990
Data source: World Bank

Armenia Belarus Georgia Kyrgyz Republic Lithuania Tajikistan Ukraine

Azerbaijan Estonia Kazakhstan Latvia Russian Federation Turkmenistan Uzbekistan

Note: Moldova is not included because of measurement error.

2000 4000 6000 2000 Ag

4000

6000

Agricultural Productivity

Agricultural Productivity

0
1990

1995

2000 Year

2005

2010

0
1990
Data source: World Bank

1995

2000 Year

2005 Azerbaijan Estonia Kazakhstan Latvia Moldova Tajikistan Ukraine

2010

Armenia Belarus Georgia Kyrgyz Republic Lithuania Russian Federation Turkmenistan Uzbekistan

The ISET Economist, October 11, 2012. “The Puzzle of Agricultural Productivity in Georgia (and Armenia).” http://www.iset.ge/blog/?p=836

Source: http://www.feradi.in fo/en/visualizations/ 2012-2016-georgianbudget-foragriculture In Georgian: http://www.feradi.in fo/ka/visualizations/ soplis-meurneobisbiujeti-2012-2016

Georgia’s Agricultural Sector
Average monthly salary of employees by economic activity
Total Agriculture, hunting and forestry Fishing Mining and quarrying Manufacturing Production and distribution of electricity, gas and water Construction Wholesale and retail trade; repair of motor vehicles and personal and household goods Hotels and restaurants Transport and communication Financial intermediation Real estate, renting and business activities Public administration Education Health and social work Other community, social and personal service activities
GEL 2011 636.0 392.6 271.1 838.6 552.2 877.0 738.5 548.9 342.4 873.8 1386.3 674.3 998.8 319.6 522.9 511.5

Source: http://www.geostat.ge/

Georgia’s Agrobusiness Sector in 2011
OUTPUT OF AGRICULTURAL PRODUCTS IN GEORGIA (mil. GEL) Cereals and other crops n.e.c. Fruit, nuts, beverage and spice crops Vegetables, horticultural specialities and nursery Live animals and animal products Agricultural services Total OUTPUT OF FOOD PRODUCTS MADE BY PROCESSING AGRICULTURAL PRODUCTS (mil. GEL)
Grain mill products, starches and starch products; prepared animal feeds Bread, fresh pastry goods and cakes; rusks and biscuits; preserved pastry goods and cakes Meat and meat products; processed and preserved fish and fish products Dairy products and ice cream Alcoholic beverages Other food products Total Total output of agrobusiness, mil. GEL 471.3 476.5 290.1 1,336.8 99.3 2,674.0

476.9 1,255.6

Total output by economy, mil. GEL Share of agrobusiness in the output of total economy (%)
Source: http://www.geostat.ge/

124.7 463.2 443.2 792.0 3,555.6 6,229.6 36,430.7 17.1

Georgia’s Agrobusiness Sector
Share of Agrobusiness in Total Economic Output (%)
25.0

20.0

15.0

10.0

5.0

0.0 2006 2007 2008 2009 2010 2011

Source: http://www.geostat.ge/

Georgia’s Employment Situation

Source: http://www.geostat.ge/

Kan, Iddo, Ayal Kimhi, and Zvi Lerman. (2006). “Farm Output, Non-farm Income and Commercialization in Rural Georgia.” Journal of Agricultural and Development Economics, 3(2): 276-286.

Transition in Agriculture
• Institutional changes:
– Property and land use rights
• Their definition and enforcement, whether formal or informal

– Contract enforcement – Constraints on executive authority

• Macroeconomic changes (LCF 2004: p. 5):
– – – – – Abolition of central planning Reduction of government intervention Elimination of central controls Price and trade liberalization Economic stabilization

Lerman, Zvi, Csaba Csaki, and Gershon Feder. (2004). Agriculture in Transition: Land Policies and Evolving Farm Structures in Post-Soviet Countries. Lexington Books, Maryland.

Transition in Agriculture
• Sectoral policies (LCF 2004: p. 5)
– Demonopolized and competitive upstream and downstream industries – Rural credit institutions – Technological improvements – New capital investment patterns in agriculture – Rural non-farm job creation

Lerman, Zvi, Csaba Csaki, and Gershon Feder. (2004). Agriculture in Transition: Land Policies and Evolving Farm Structures in Post-Soviet Countries. Lexington Books, Maryland.

Transition in Agriculture
• Land reform (LCF 2004: p. 5)
– Restructuring of Soviet farms – Privatization of state-owned farms

• The political environment shapes how land reform and farm restructuring will occur

Lerman, Zvi, Csaba Csaki, and Gershon Feder. (2004). Agriculture in Transition: Land Policies and Evolving Farm Structures in Post-Soviet Countries. Lexington Books, Maryland.

Agriculture in the Soviet Period (LCF, 2004: 25-26)
• Large-scale collective and state farms
• Subsistence agriculture on small rural household plots
– A dual farm structure – Entire “value” chain (e.g., upstream input industries) controlled by state organizations
• In practice, gray/black market activity

– 95% of agricultural land publicly controlled – Yet the individual sector had a far higher level of land productivity than did the socialized farm sector

• Centrally dictated production targets • Soft budget constraints
Lerman, Zvi, Csaba Csaki, and Gershon Feder. (2004). Agriculture in Transition: Land Policies and Evolving Farm Structures in Post-Soviet Countries. Lexington Books, Maryland.

Agriculture in the Soviet Period (LCF, 2004: 25-26)
• Soviet state farms (совхо́з, sovkhoz) and collective/cooperative farms (колхо́з, kolkhoz)
– Sovkhoz: Productive assets owned by the state, farm workers were mainly salaried state employees; land state owned – Kolkhoz: Productive assets jointly owned by members, compensated by distribution of farm earnings; land state owned
• Also a guaranteed minimum wage since the Khrushchev era • No freedom of exit from cooperatives/collectives
Lerman, Zvi, Csaba Csaki, and Gershon Feder. (2004). Agriculture in Transition: Land Policies and Evolving Farm Structures in Post-Soviet Countries. Lexington Books, Maryland.

Agriculture in the Soviet Period (LCF, 2004: 28)
• Housing, power, water, heat provided in villages by local farm enterprises
• Salaries of teachers, doctors, postal workers paid by government, but disbursement carried out by local farm enterprises

• Subsidized inputs, financial transfers to loss-making farms, redistribution of funds from profitable to unprofitable farms
• Allocation of often interest-free long-term government credits
Lerman, Zvi, Csaba Csaki, and Gershon Feder. (2004). Agriculture in Transition: Land Policies and Evolving Farm Structures in Post-Soviet Countries. Lexington Books, Maryland.

Efficiency and Profitability (LCF, 2004: 29-30)
• Socialist collective and state farms: woefully inefficient
• Efficiency and profitability were not the focus; improving production was the focus

Lerman, Zvi, Csaba Csaki, and Gershon Feder. (2004). Agriculture in Transition: Land Policies and Evolving Farm Structures in Post-Soviet Countries. Lexington Books, Maryland.

Operating Decisions in Market-based and Socialist Farms
Business component Decisions in a market economy Decisions in a socialist economy

Sales
Costs Labor

Choose 𝑄 ∗ where 𝑃 = 𝑀𝐶
Cost minimization Adjust labor force to changing production volume/mix Seek best suppliers, control purchase quantities 𝑄

∗ centrally imposed
Cost overruns covered by state Labor force fixed; workers guaranteed lifetime employment Inputs at state-fixed prices; in quantities determined by production quotas

Inputs

Lerman, Zvi, Csaba Csaki, and Gershon Feder. (2004). Agriculture in Transition: Land Policies and Evolving Farm Structures in Post-Soviet Countries. Lexington Books, Maryland.

Operating Decisions in Market-based and Socialist Farms
Business component
Depreciation Credit/financial expenses

Decisions in a market economy
New capital investment if needed for profitability Hard budget constraints

Decisions in a socialist economy
New capital investment if decided by the plan Credit allocated centrally to cover deficits (soft budget constraints)

Profit

Maximize profit Profit uncontrollable (minimize cost) by producing where 𝑃 = 𝑀𝐶

Lerman, Zvi, Csaba Csaki, and Gershon Feder. (2004). Agriculture in Transition: Land Policies and Evolving Farm Structures in Post-Soviet Countries. Lexington Books, Maryland.

Inefficiencies of Soviet Agriculture
Attribute Inefficiencies due to..

Centrally commanded production targets
Soft budget constraints Collective organization of production Large farms (2,000 ha; 500 workers) Lifetime employment No effective individual ownership of land and productive assets

Lack of consumer orientation; insensitivity to market signals
Lack of profit orientation; reliance on writeoffs and subsidies Free riding, moral hazard, lack of individual incentives; payment not linked to effort High monitoring costs, anonymity, lack of transparency Inability to control costs by adjusting labor Nontransferability of land and assets; lack of incentives associated with property rights

Lerman, Zvi, Csaba Csaki, and Gershon Feder. (2004). Agriculture in Transition: Land Policies and Evolving Farm Structures in Post-Soviet Countries. Lexington Books, Maryland.

Optimal Farm Sizes
• Super large farms relatively inefficient due to high transaction costs (agency costs with hired management, costs of labor monitoring) (LCF, 2004: 45)
• Allow farm sizes to be decided in land markets (LCF, 2004: 35)
– But there may be other political determinants of the optimal size of a farm as well, something we will look at later…
Lerman, Zvi, Csaba Csaki, and Gershon Feder. (2004). Agriculture in Transition: Land Policies and Evolving Farm Structures in Post-Soviet Countries. Lexington Books, Maryland.

Agricultural Markets

Section Readings
• Binswanger, Hans P. and Klaus Deininger (1997). “Explaining Agricultural and Agrarian Policies in Developing Countries.” Journal of Economic Literature, XXXV: 1958-2005. • Bezemer, Dirk and Derek Headey (2008). “Agriculture, Development, and Urban Bias.” World Development, 7: 1-40.

Income from Agriculture
• To improve farmers’ incomes, policies must somehow increase farmers’ revenues or reduce their costs (Gardner, 1987)
– Sometimes this comes about through efforts to restrict supply or increase demand, so that there is an increase in farmers’ receipts – Let’s consider a few different policy approaches and their market effects…

Source: Gardner, Bruce (1987). The Economics of Agricultural Policies. Macmillan Publishing Company, New York.

Price

The Market
Supply 𝑃

Demand 𝑄 ∗

Quantity

Price

Quota
Supply 𝑃 𝐴

𝑃∗ 𝐷 𝐵 𝐶

Demand
Source: Gardner (1987) 𝑄 𝑄

Quantity

Price

Quota
Effective Supply Supply 𝑃 𝐴

𝑃∗ 𝐷 𝐵 𝐶

Demand
Source: Gardner (1987) 𝑄 𝑄

Quantity

A Quota
• Quotas limit how much each farmer can supply to the market • A quota reduces quantity supplied from 𝑄 ∗ to 𝑄 and increases the market price from 𝑃∗ to 𝑃. • Producers therefore receive a higher price for each of the units (up to 𝑄) supplied to the market.

– The total area under the supply curve from 𝑄 to 𝑄∗ indicates the industry’s cost savings from reducing output. – However, these units could have been sold at market price 𝑃∗ and these units therefore would have had marginal revenues exceeding marginal costs, resulting in producer benefits. – Therefore the total gain to producers is 𝐴 − 𝐶 . – The loss in consumer surplus is represented by areas 𝐴 + 𝐵 . – From society’s point of view, the quotas result in a net loss of 𝐵 + 𝐶 since these units were never produced and traded, whereas they would have been under baseline market conditions. This net loss therefore represents a misallocation of resources.

Source: Gardner, Bruce (1987). The Economics of Agricultural Policies. Macmillan Publishing Company, New York.

Price

Price Supports
Supply 𝑃 𝐵

𝑃∗ 𝐶 𝐴 𝑃𝐶

Demand
Source: Gardner (1987) 𝑄

∗ 𝑄

Quantity

Price Supports
• Producers receive price 𝑃 (up to a certain point, say 𝑄), which is higher than the market price.
• With price supports, producers gain area 𝐵 . • Consumers gain area 𝐴 because at the quantity being supplied due to the price support, they pay 𝑃𝐶 and demand the quantity 𝑄. • Yet there is a cost! The cost of the price support program to taxpayers. Taxpayers must fund the area 𝑃 − 𝑃𝐶 𝑄 which can be rather substantial.
– These payments equal 𝐴 + 𝐵 + 𝐶 so net of the producer (𝐵) and consumer (𝐴) gains, there is a social net loss of 𝐶 . This area also represents the misallocation of resources that occur since the units 𝑄 − 𝑄∗ are produced at the expense of something else. – They choose to produce more than they would under normal market conditions.

Source: Gardner, Bruce (1987). The Economics of Agricultural Policies. Macmillan Publishing Company, New York.

Prices and Incomes in Agriculture
• Is the agricultural sector affected more or less than other sectors in an economy during a recession? • Consider the case of a closed economy with a simple supply and demand model

Source: Koester, Ulrich and Ali El-Agraa (2003). “The Common Agricultural Policy.” In Ali El-Agraa (ed.), The European Union: Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390.

Prices and Incomes in Agriculture
• If 𝑄 𝐷 = 𝑄 𝐷 (𝑃, 𝑌) and 𝑄 𝑆 = 𝑄 𝑆 𝑃
• 𝑑𝑄𝐷
𝑄𝐷

= 𝜕𝑄𝐷

𝑃 𝑑𝑃 𝜕𝑃 𝑄𝐷 𝑃

+ 𝜕𝑄𝐷

𝑌 𝑑𝑌 𝜕𝑌 𝑄𝐷 𝑌 𝜕𝑄𝐷 𝑌 𝜕𝑌 𝑄𝐷

• Let 𝜕𝑄𝐷

𝑃 𝜕𝑃 𝑄𝐷

= 𝜀 𝐷 < 0 and 𝐷
𝑑𝑃 𝜀 𝑃 𝑑𝑌 + 𝜂 𝑌

= 𝜂 > 0

• Then 𝑑𝑄𝐷

𝑄𝐷

=

Source: Koester, Ulrich and Ali El-Agraa (2003). “The Common Agricultural Policy.” In Ali El-Agraa (ed.), The European Union: Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390.

Prices and Incomes in Agriculture
• We also know that since 𝑄 𝑆 = 𝑄 𝑆 (𝑃) then 𝑑𝑄𝑆
𝑄𝑆

= 𝜕𝑄𝑆

𝑃 𝑑𝑃 𝜕𝑃 𝑄𝑆 𝑃

and let 𝜕𝑄𝑆

𝑃 𝜕𝑃 𝑄𝑆

= 𝜀 𝑆 > 0

• Then 𝑑𝑄𝑆

𝑄𝑆

= 𝑆

𝑑𝑃 𝜀 𝑃

Source: Koester, Ulrich and Ali El-Agraa (2003). “The Common Agricultural Policy.” In Ali El-Agraa (ed.), The European Union: Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390.

Prices and Incomes in Agriculture
• Since 𝑄 𝐷 = 𝑄 𝑆 we know that
• 𝐷
𝑑𝑃 𝜀 𝑃 𝑑𝑌 + 𝜂 𝑌 𝑑𝑃 𝑃

= 𝑆

𝑑𝑃 𝜀 𝑃

• Thus

=

• So prices for agricultural products will decline more, 𝑑𝑌 given an income shock ( < 0), when, ceteris paribus,
– The income elasticity of demand is larger – The price elasticity of demand is smaller – The price elasticity of demand is smaller
Source: Koester, Ulrich and Ali El-Agraa (2003). “The Common Agricultural Policy.” In Ali El-Agraa (ed.), The European Union: Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390. 𝑑𝑌

𝑌 𝜀 𝑆 −𝜀 𝐷 𝜂 𝑌

Prices and Incomes in Agriculture 𝑆
𝑚𝑎𝑛 𝑆 𝑎𝑔 𝑚𝑎𝑛
𝑃0 𝑚𝑎𝑛 𝑃1

Large supply overhang for the manufacturing sector Small supply overhang for the agricultural sector 𝑃

0 𝑎𝑔

𝑎𝑔 𝑃 1 𝑚𝑎𝑛 𝑄0 𝑚𝑎𝑛 𝑄1 𝐷

1 𝑄1 𝑎𝑔 𝐷

0 𝑄

0 𝑎𝑔

Yet the percentage change of prices in the agricultural sector is much higher

Source: Koester, Ulrich and Ali El-Agraa (2003). “The Common Agricultural Policy.” In Ali El-Agraa (ed.), The European Union: Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390.

Prices and Incomes in Agriculture
• With relatively small price elasticities of supply and demand, small changes in supply or demand will have significant implications for the prices for agricultural products seen by farmers and thereby their incomes
• Agriculture may thereby suffer more during business cycles than other sectors (though this is a closed economy model) • What might happen in an open economy setting?
Source: Koester, Ulrich and Ali El-Agraa (2003). “The Common Agricultural Policy.” In Ali El-Agraa (ed.), The European Union: Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390.

Income Elasticity of Demand for Calories
• Income elasticity of demand for calories:
– Percentage change in calories consumed given a percentage change in household income

• Among the poor in developing countries, this may range anywhere from 0 to 0.5
– Depends on region, statistical methods

Banerjee, Abhijit V. and Esther Duflo. (2011). Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty. New York: Perseus Books.

Income Elasticity of Demand for Calories
• Income is spent on other goods rather than food
– Medicine, media, festivals, weddings, funerals, etc.

• Increases in food variety (especially better tasting foods) without a necessary increase in caloric consumption
• Income  consumption of better-tasting, more expensive calories (rather than calories altogether or more micronutrients)
Banerjee, Abhijit V. and Esther Duflo. (2011). Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty. New York: Perseus Books.

Studies on Caloric Intake Among the Poor (B&D, 24)
• Robert Jensen and Nolan Miller
– Two regions of China – Offered randomly selected poor households a large subsidy on the price of the basic staple (wheat noodles in one region, rice in the other) – Effectively decreasing the price

• What happens?
Banerjee, Abhijit V. and Esther Duflo. (2011). Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty. New York: Perseus Books.

Studies on Caloric Intake Among the Poor (B&D, 24)
• Jensen and Miller:
– Households receiving subsidies for rice or wheat consumed less of those two items and ate more shrimp and meat – Caloric intake of those who received the subsidy did not increase (and may have very well decreased) – No real improvement in nutritional content of total food consumption

Banerjee, Abhijit V. and Esther Duflo. (2011). Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty. New York: Perseus Books.

Giffen Good
• Classic case of the ‘Giffen good’
• The price of a commodity decreases and you consume less of it – because of the magnitude of the income effect • Because the prices of rice and wheat declined, they were able to spend more money on all other commodities and they actually consumed less rice and wheat as a result

– Because all Giffen goods are inferior goods, it must be the case that those receiving subsidies for purchases of rice or wheat saw them as inferior to consumption of other types of foods
Banerjee, Abhijit V. and Esther Duflo. (2011). Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty. New York: Perseus Books.

Agricultural Markets
Government

R Upstream sectors R

U

L

E

S Downstream sectors
Consumers

Agriculture U L E S

Non governmental organisations

The red arrows affect activities of organisations. The green arrows affect exchange between the organisations. Source: Koester (2012) Lecture

Imperfect and Missing Markets
• Rural credit markets and insurance markets
– Especially important given volatility of income from the agricultural sector (Bezemer and Headey, 2008)

• Land markets • Heterogeneous labor market arrangements • Markets for research and development
– Developing new technologies, crop varieties, etc.

• Lack of information
– What options exist for value chain integration

• Asymmetric information
– Different information sets for smallholder farmers, wholesalers, input suppliers, etc.

• High transaction costs
Bezemer, Dirk and Derek Headey (2008). “Agriculture, Development, and Urban Bias.” World Development, 7: 1-40. Binswanger, Hans P. and Klaus Deininger (1997). “Explaining Agricultural and Agrarian Policies in Developing Countries.” Journal of Economic Literature, XXXV: 1958-2005.

Income Risk and Insurance
• “IN INDIA, when monsoons are delayed and crops fail as a result, farmers often don’t know how to pay back the debts they have taken on to purchase seeds. More than 15,000 commit suicide every year. These fates are a shocking reminder of a global problem caused by global warming. Farming has always been a gamble, but the growing number of “unusual weather events”, as experts call them, make seeding and harvesting an even riskier business.” The Economist

A Land Market Without Exchange
Price
Suppliers: High reservation prices for land (e.g., because of risk hedging, tradition, etc.) Buyers: Uncertainty about future returns from land

Supply

Illustrates the importance of insights from new institutional economics (e.g., informal norms, the importance of transaction costs, property rights, etc.)

Demand
Source: Koester, Ulrich and Ali El-Agraa (2003). “The Common Agricultural Policy.” In Ali El-Agraa (ed.), The European Union: Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390.

Quantity

A Land Market Without Exchange
• Back to the institutional environment
• Poorly defined and enforced property and land use rights • Uncertainty due to political instability, conflict, economic environment
– Attachment to land as a function of the risk environment
• Land owners may be hesitant to sell land since it’s a critical asset for risk hedging (Koester and Petrick, 2010)

• Low access to credit
Koester, Ulrich and Martin Petrick (2010). “Embedded Institutions and the Persistence of Large Farms in Russia.” In Imre Ferto, Csaba Forgacs, Attila Jambor (eds.), Essays in Honour of Professor Csaba Csaki, Budapest, pp. 57-76.

Rural Insurance Markets
• How is risk managed in rural areas in developing countries? Individuals often have to manage considerable risks, including but not limited to weather shocks (e.g., too much precipitation or too little), price shocks, and even risks which are more political in nature, like land tenure insecurity.

Source: http://www.civil.ge/eng/article.php?id=25021

Rural Financial Markets
• Besley (1994): “A market failure [in rural credit markets] occurs when a competitive market fails to bring about an efficient allocation of credit.”
• Potential for poor financial intermediation
– How are savers and borrowers matched up when there is no intermediary?

Besley, Timothy (1994). “How Do Market Failures Justify Interventions in Rural Credit Markets?” The World Bank Research Observer, 9(1): 27-47.

Rural Insurance Markets
• Cole, Giné, Tobacman, Topalova, Townsend, and Vickery (2013) use randomized field experiments to evaluate demand for a rainfall insurance product in rural areas in Andhra Pradesh and Gujarat, India
– Premiums are higher than expected payouts in many developing countries, including India – Along with being price sensitive, demand seems to be limited by a lack of trust, liquidity constraints, and relatively low product salience
Cole, Shawn, Xavier Giné, Jeremy Tobacman, Petia Topalova, Robert Townsend, and James Vickery (2013). “Barriers to Household Risk Management: Evidence from India.” American Economic Journal: Applied Economics, 5(1): 104-135.

Rural Private Banking Sector
• Problem areas (Koester, 2001):
– Small amount of credit needed, though high transaction costs for a bank – Knowledge and capacity limitations with respect to assessing creditworthiness
• Also uncertainty with respect to return on investment

– Risk level associated with agricultural credit – Geographic dispersion – Low average incomes
Koester, Ulrich (2001). “Agricultural Finance and Institutional Reforms in Transition Economies: The 1990s and Challenges Ahead.” Quarterly Journal of International Agriculture, 40(4): 301-323.

Rural and Agricultural Credit Cooperatives
• Koester (2001):
– May lower transaction costs if smaller, village based, and have better knowledge of credit history/creditworthiness – Preference for small loans

Koester, Ulrich (2001). “Agricultural Finance and Institutional Reforms in Transition Economies: The 1990s and Challenges Ahe ad.” Quarterly Journal of International Agriculture, 40(4): 301-323.

Rural Financial Markets
• Importance of the overall institutional environment for the functioning of rural credit markets (see, e.g., Koester, 2001)
– Particularly with regard to the quality of legal institutions, their transparency and efficiency
• Protection of property rights • Unbiased enforcement of contracts

Koester, Ulrich (2001). “Agricultural Finance and Institutional Reforms in Transition Economies: The 1990s and Challenges Ahe ad.” Quarterly Journal of International Agriculture, 40(4): 301-323.

The Institutional Environment

Section Readings
• North, Douglass (1991). “Institutions.” Journal of Economic Perspectives, 5(1): 97-112.
• Olson, Mancur. (1996). “Distinguished Lecture on Economics in Government: Big Bills Left on the Sidewalk: Why Some Nations are Rich, and Others Poor.” Journal of Economic Perspectives, 10(2): 3-24. • Lindsay, Stace (2000). “Culture, Mental Models, and National Prosperity.” In Lawrence E. Harrison and Samuel P. Huntington (eds.), Culture Matters: How Values Shape Human Progress, Basic Books, pp. 282295. • Williamson, Oliver (2000). “The New Institutional Economics: Taking Stock, Looking Ahead.” Journal of Economic Literature, XXXVIII: 595613.

Section Readings
• Koester, Ulrich (2005). “A Revival of Large Farms in Eastern Europe—How Important Are Institutions?” Agricultural Economics, 32(s1): 103-113.
• Koester, Ulrich and Martin Petrick (2010). “Embedded Institutions and the Persistence of Large Farms in Russia.” In Imre Ferto, Csaba Forgacs, Attila Jambor (eds.), Essays in Honour of Professor Csaba Csaki, Budapest, pp. 57-76. • Swinnen, Johan F. M., Anneleen Vandeplas, and Miet Maertens. (2010). “Liberalization, Endogenous Institutions, and Growth: A Comparative Analysis of Agricultural Reforms in Africa, Asia, and Europe.” World Bank Economic Review, 24(3): 412-445. • “Problems Related to the Protection of Property Rights – The Case of Mestia.” Available at: http://transparency.ge/en/post/report/problemsrelated-protection-property-rights-case-mestia-july-2011.

The Institutional Environment
• In Institutions, Institutional Change, and Economic Performance, Douglass North wrote that (p. 3):
– “Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction. In consequence they structure incentives in human exchange, whether political, social, or economic. Institutional change shapes the way societies evolve through time and hence is the key to understanding historical change.”

• The “rules of the game” and their enforcement • Organizations as the “players of the game”
North, Douglass (1990). Institutions, Institutional Change, and Economic Performance. Cambridge University Press, Cambridge UK.

The Institutional Environment
• North (1991):
– Institutions may consist of either:
• Informal constraints
– Sanctions, customs, traditions, etc.

• Formal rules
– Constitutions, codified laws, recorded and enforced property rights

North, Douglass (1990). Institutions, Institutional Change, and Economic Performance. Cambridge University Press, Cambridge UK.

The Institutional Environment
• Another widely accepted view is that “institutions are rules of human interaction that constrain possible opportunistic and erratic behavior, thereby making human behavior more predictable and thus facilitating the division of labour and wealth creation” (Kasper and Streit, 1999: 30).

Kasper, Wolfgang and Manfred E. Streit (1999). Institutional Economics: Social Order and Public Policy. Edward Elgar Publishing.

Focusing on Institutions
• Two broad views of economics:
– Economics as the study of the allocation of resources – Economics as the study of coordination and exchange

• Buchanan (1964): economists should focus on the latter
Buchanan, James (1964). “What Should Economists Do?” Southern Economic Journal, 30(3): 213-222.

Coordination and Exchange
• “A market is not competitive by assumption or by construction. A market becomes competitive, and competitive rules come to be established as institutions emerge to place limits on individual behavior patterns. It is this becoming process, brought about by the continuous pressure of human behavior in exchange, that is the central part of our discipline…A general solution, if there is one, emerges as a result of a whole network of evolving exchanges, bargains, trades, side payments, agreements, contracts which, finally at some point, ceases to renew itself. At each stage of this evolution towards solution, there are gains to be made, there are exchanges possible, and this being true, the direction of movement is modified.”

Buchanan, James (1964). “What Should Economists Do?” Southern Economic Journal, 30(3): 213-222.

Coordination and Exchange
• “Individuals are observed to cooperate with one another, to reach agreements, to trade. The network of relationships that emerges or evolves out of this trading process, the institutional framework, is called ‘the market.’” • Economists should “…concentrate attention on the institutions, the relationships, among individuals as they participate in voluntarily organized activity, in trade or exchange, broadly considered.”
Buchanan, James (1964). “What Should Economists Do?” Southern Economic Journal, 30(3): 213-222.

Williamson’s Four Levels of Social Analysis

Solid arrows “…signify that the higher level imposes constraints on the level immediately below.”

Reverse arrows “…signal feedback”

Source: Williamson, Oliver (2000). “The New Institutional Economics: Taking Stock, Looking Ahead.” Journal of Economic Literature, XXXVIII: 595-613.

The Coordinating Role of Institutions
• The institutional environment influences how different agents interact and coordinate in a market economy

“Big Bills Left on the Sidewalk: Why Some Nations are Rich, and Others Poor.”
Mancur Olsen 1996
Journal of Economic Perspectives

Inclusive Economic Institutions
• Acemoglu and Robinson (2012: 74) define inclusive economic institutions as “…those that allow and encourage participation by the great mass of people in economic activities that make best use of their talents and skills and that enable individuals to make the choices they wish. To be inclusive, economic institutions must feature secure private property, an unbiased system of law, and a provision of public services that provides a level playing field in which people can exchange and contract; it also must permit the entry of new businesses and allow people to choose their careers.”
Acemoglu, Daron and James A. Robinson (2012). Why Nations Fail: The Origins of Power, Prosperity, and Poverty. Crown Publishers, New York.

Inclusive Economic Institutions
• Acemoglu and Robinson (2012: 75) argue that
– “Inclusive economic institutions foster economic activity, productivity growth, and economic prosperity. Secure private property rights are central, since only those with such rights will be willing to invest and increase productivity. A businessman who expects his output to be stolen, expropriated, or entirely taxed away will have little incentive to work, let alone any incentive to undertake investments and innovations. But such rights must exist for the majority of people in society.”
Acemoglu, Daron and James A. Robinson (2012). Why Nations Fail: The Origins of Power, Prosperity, and Poverty. Crown Publishers, New York.

North Korea

South Korea

Henderson and Storeygard (2012). “Measuring Economic Growth From Outer Space.” American Economic Review, forthcoming.

Easterly on Institutional Design
• “The top down view of institutions sees them as determined by laws written by political leaders…the bottom up view sees institutions instead as emerging spontaneously from the social norms, customs, traditions, beliefs, and values of individuals within a society, with the written law only formalizing what is already maintained by the attitudes of individuals…” • “Institutional change in the bottom up view is always gradual, evolutionary rather than revolutionary.”

Easterly, William (2008). “Institutions: Top Down or Bottom Up?” American Economic Review, 98(2): 95-99.

Easterly on Institutional Design
• “Even if the bottom up economists can think of NO reason why a particular institution exists, they are still cautious about changing existing institutions abruptly (assuming such institutions are not too obviously destructive) with the knowledge that there is SOME reason, not yet understood and perhaps never to be understood, for their existence.” • “As Richard Dawkins said about the analogous exercise in evolutionary biology of trying to understand the rationale for the anatomy of each species, ‘evolution is smarter than you are.’”
Easterly, William (2008). “Institutions: Top Down or Bottom Up?” American Economic Review, 98(2): 95-99.

A Rights-Based Approach
• Property rights -- 2012
– “According to information obtained by Transparency International Georgia, government representatives pressured land owners in Anaklia into giving up their lands during the period 2009-2010. While this information was previously known to the public, now for the first time the victims have been openly discussing the alleged cases. A video shows government officials threatening landowners with arrest or the dismissal of family members from their work if they failed to relinquish their property.”
Source: http://transparency.ge/en/blog/property-seizure-officials-case-anaklia

Important Topics in New Institutional Economics Relevant for Agricultural Development
• Trust and informal norms
– Without trust in exchange partners, transactions will be limited or will have high costs (Koester and Petrick, 2010) – Particularly important for agriculture considering that most farm products are experience goods (quality is revealed upon consumption) or credence goods (neither the quality nor the production process are known ex ante) rather than search goods (quality is known at the time of purchase) (Koester and Petrick, 2010)

• Transaction costs • Enforcement costs • Institutional change and development
Koester, Ulrich and Martin Petrick (2010). “Embedded Institutions and the Persistence of Large Farms in Russia.” In Imre Ferto, Csaba Forgacs, Attila Jambor (eds.), Essays in Honour of Professor Csaba Csaki, Budapest, pp. 57-76.

Transaction Costs
• Transaction costs
– “The time, effort, and other resources needed to search out, negotiate, and complete an exchange” (Gwartney, Stroup, Sobel, and Macpherson, 2011: 31)

• Suggests the importance of brokers who bring buyers and sellers of agricultural products together and arrange trades
– Help to reduce transaction costs
Gwartney, James D., Richard L. Stroup, Russell Sobel, and David A. MacPherson (2011). Microeconomics: Private and Public Choice, South-Western, Cengage Learning.

Transaction Costs
• Transportation infrastructure
• Internal transaction costs
– For example, managing and monitoring workers and enforcing labor contracts
• Evaluating agricultural productivity levels among different farmers

• External transaction costs
– For example, negotiating with input suppliers, finding buyers and export markets – Uncertainty with respect to others’ behavior
• Can input suppliers be trusted? Are they reliable? How can this be evaluated ex ante? • As producers of agricultural products, the quality of these products may need to be inspected by end users (consumers or processors, for instance), which lead to the incurrence of transaction costs as well • Biased contract enforcement or weak definition and enforcement of property rights also lead to uncertainty

Transaction Costs
• These transaction costs are then added to the transformation costs
– Transformation costs: the pure costs of production (transforming inputs into final output)

Implications of Transaction Costs for the “Optimal” Farm Size
Average Costs Average Total costs Internal transaction costs (e.g., monitoring labor)

Transformation costs (Costs of production)

External transaction costs

Optimal Farm Size

Farm Size

Implications of Transaction Costs for the “Optimal” Farm Size
• Is there just one “optimal” farm size?
• No; it varies considerably based on different cost structures and the relative profitability of different farming activities
– Depends on management, production methods, etc. – The previous graph is just one potential setup of a cost structure for a farm – Illustrates that small farms may indeed be profitable, perhaps more so than relatively large farms

Implications for Transaction Costs for Farm Gate Prices
• With a given market price, the presence of high transaction costs will reduce farm gate prices
– If transaction costs were lower, this would thereby improve the prices seen by farmers for their agricultural products – This could be seen as one policy objective in order to support incomes in rural regions Transaction costs Farm gate price Market price

Embedded Institutions and the Persistence of Large Farms in Russia
• Let’s look at a specific case study to better understand the importance of institutions for the agricultural sector
– The paper by Koester and Petrick (2010) illustrates:
• The importance of embedded or informal institutions • The role played by mental models in policy reform and current sector structure • Why neoclassical economic approaches alone cannot explain the structure of the farm sector in Russia
Koester, Ulrich and Martin Petrick (2010). “Embedded Institutions and the Persistence of Large Farms in Russia.” In Imre Ferto, Csaba Forgacs, Attila Jambor (eds.), Essays in Honour of Professor Csaba Csaki, Budapest, pp. 57-76.

Embedded Institutions and the Persistence of Large Farms in Russia
• The original expectation was that state and collective farms would be transformed into family farms
– The starting point was state and collective farms, as well as household farms

• Yet the actual development was relatively few family farms, super large corporate and cooperative farms, and extended family farms
– Some agroholdings have more than 50,000 hectares
Koester, Ulrich and Martin Petrick (2010). “Embedded Institutions and the Persistence of Large Farms in Russia.” In Imre Ferto, Csaba Forgacs, Attila Jambor (eds.), Essays in Honour of Professor Csaba Csaki, Budapest, pp. 57-76.

Embedded Institutions
• These are the “first level” institutions identified in Williamson (2000)
– They are deeply ingrained, based on tradition, religion, and culture
• The “informal” institutions are informal rules of the game and their enforcement

– They influence the mental models of individuals
• Individuals’ beliefs, inferences, and goals

Koester, Ulrich and Martin Petrick (2010). “Embedded Institutions and the Persistence of Large Farms in Russia.” In Imre Ferto, Csaba Forgacs, Attila Jambor (eds.), Essays in Honour of Professor Csaba Csaki, Budapest, pp. 57-76.

Koester, Ulrich (2005). “A Revival of Large Farms in Eastern Europe—How Important Are Institutions?” Agricultural Economics, 32(s1): 103-113.

Koester, Ulrich (2005). “A Revival of Large Farms in Eastern Europe—How Important Are Institutions?” Agricultural Economics, 32(s1): 103-113.

Koester, Ulrich and Martin Petrick (2010). “Embedded Institutions and the Persistence of Large Farms in Russia.” In Imre Ferto, Csaba Forgacs, Attila Jambor (eds.), Essays in Honour of Professor Csaba Csaki, Budapest, pp. 57-76.

Koester, Ulrich and Martin Petrick (2010). “Embedded Institutions and the Persistence of Large Farms in Russia.” In Imre Ferto, Csaba Forgacs, Attila Jambor (eds.), Essays in Honour of Professor Csaba Csaki, Budapest, pp. 57-76.

Koester, Ulrich and Martin Petrick (2010). “Embedded Institutions and the Persistence of Large Farms in Russia.” In Imre Ferto, Csaba Forgacs, Attila Jambor (eds.), Essays in Honour of Professor Csaba Csaki, Budapest, pp. 57-76.

Embedded Institutions in Russia
• Potential farmers relatively less willing to take risks, make changes, and be entrepreneurial
– Employees preferring to work on large farms

• Mental models of large farm managers, policy makers, and bureaucrats orienting them toward viewing large farms as having a comparative advantage
– Also with regard to ensuring food security
• Distrust of markets in ensuring food security

– Facing soft budget constraints, still – Managers feeling partly obliged to provide social services

• Low willingness to rely on credit among farmers; issues with ascertaining credit-worthiness of potential clients among banks
Koester, Ulrich and Martin Petrick (2010). “Embedded Institutions and the Persistence of Large Farms in Russia.” In Imre Ferto, Csaba Forgacs, Attila Jambor (eds.), Essays in Honour of Professor Csaba Csaki, Budapest, pp. 57-76.

Koester, Ulrich and Martin Petrick (2010). “Embedded Institutions and the Persistence of Large Farms in Russia.” In Imre Ferto, Csaba Forgacs, Attila Jambor (eds.), Essays in Honour of Professor Csaba Csaki, Budapest, pp. 57-76.

Economic Implications
• Sectoral production is fairly high, but…
– Distorted markets
• High unemployment in rural areas

– Overly capital-intensive production – High level of political influence of super-large farms

Koester, Ulrich and Martin Petrick (2010). “Embedded Institutions and the Persistence of Large Farms in Russia.” In Imre Ferto, Csaba Forgacs, Attila Jambor (eds.), Essays in Honour of Professor Csaba Csaki, Budapest, pp. 57-76.

Prospects
• With market-driven structural change, the situation may change
– Yet this requires better functioning land, credit, insurance markets – Better information and training

• Along with economies of scale arising from technological change, the return of the family farm is unlikely
– Will drive down internal transaction costs due to new monitoring technologies – Will drive down transformation costs – External transaction costs are biased in favor of large farms
• Think about political economy considerations here…

Koester, Ulrich and Martin Petrick (2010). “Embedded Institutions and the Persistence of Large Farms in Russia.” In Imre Ferto, Csaba Forgacs, Attila Jambor (eds.), Essays in Honour of Professor Csaba Csaki, Budapest, pp. 57-76.

Prospects
• With policy driven structural change, the situation may change
– Yet mental models are “sticky” over time – Path dependence in agricultural organizational arrangements, institutional arrangements, and economic behavior – Political influence of large agroholdings

• May have unintended consequences, high transition costs in the short run with policy driven structural change
Koester, Ulrich and Martin Petrick (2010). “Embedded Institutions and the Persistence of Large Farms in Russia.” In Imre Ferto, Csaba Forgacs, Attila Jambor (eds.), Essays in Honour of Professor Csaba Csaki, Budapest, pp. 57-76.

Agricultural and Food Policy

Section Readings
• Koester, Ulrich and Ali El-Agraa (2003). “The Common Agricultural Policy.” In Ali El-Agraa (ed.), The European Union: Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390.

Agricultural and Food Policies
• Some often stated objectives among agricultural and food policy analysts (which may be [or are!] in discord with one another):
1. 2. 3. 4. 5. 6. Food security Agricultural income Efficiency in the agricultural sector Price stability Food safety Environmental concerns

Source: Koester, Ulrich and Ali El-Agraa (2003). “The Common Agricultural Policy.” In Ali El-Agraa (ed.), The European Union: Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390.

Food Security
• Food security, as defined at the World Food Summit in 1996:
– Food security as existing “when all people at all times have access to sufficient, safe, nutritious food to maintain a healthy and active life.”

Source: Koester, Ulrich and Ali El-Agraa (2003). “The Common Agricultural Policy.” In Ali El-Agraa (ed.), The European Union: Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390.

Food Insecurity
• Food insecurity exists, as defined in Cafiero (2013):
– (a) “When people cannot access food, simply because food is not physically available where and when it is needed;” – (b) “When people do not have economic access to food, meaning they lack the means to acquire the food even if the food would be at their physical reach;” – (c) “When people can only afford to procure and eat combinations of foods that do not meet their preferences, are not safe, or are nutritionally unbalanced;” – (d) “When any one of the above conditions holds even occasionally.”

Source: Cafiero, Carlo (2013). “What Do We Really Know About Food Security?” NBER Working Paper No. 18861.

Source: http://www.geostat.ge/

50.0

100.0

150.0

250.0

300.0

350.0

200.0

0.0

(FAO, 2002-2004=100)

Source: http://www.fao.org/worldfoodsituation/wfs-home/foodpricesindex/en/

1/1990 7/1990 1/1991 7/1991 1/1992 7/1992 1/1993 7/1993 1/1994 7/1994 1/1995 7/1995 1/1996 7/1996 1/1997 7/1997 1/1998 7/1998 1/1999 7/1999 1/2000 7/2000 1/2001 7/2001 1/2002 7/2002 1/2003 7/2003 1/2004 7/2004 1/2005 7/2005 1/2006 7/2006 1/2007 7/2007 1/2008 7/2008 1/2009 7/2009 1/2010 7/2010 1/2011 7/2011 1/2012 7/2012 1/2013

Monthly Real Food Price Indices

Oils Price Index

Meat Price Index

Food Price Index

Dairy Price Index

Sugar Price Index

Cereals Price Index

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

0.0

(FAO, 2002-2004=100)
Food Price Index

Source: http://www.fao.org/worldfoodsituation/wfs-home/foodpricesindex/en/

1/1990 7/1990 1/1991 7/1991 1/1992 7/1992 1/1993 7/1993 1/1994 7/1994 1/1995 7/1995 1/1996 7/1996 1/1997 7/1997 1/1998 7/1998 1/1999 7/1999 1/2000 7/2000 1/2001 7/2001 1/2002 7/2002 1/2003 7/2003 1/2004 7/2004 1/2005 7/2005 1/2006 7/2006 1/2007 7/2007 1/2008 7/2008 1/2009 7/2009 1/2010 7/2010 1/2011 7/2011 1/2012 7/2012 1/2013

Monthly Real Food Price Indices

Food Price Index

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

0.0

(FAO, 2002-2004=100)
Food Price Index

Source: http://www.fao.org/worldfoodsituation/wfs-home/foodpricesindex/en/

9/2006 11/2006 1/2007 3/2007 5/2007 7/2007 9/2007 11/2007 1/2008 3/2008 5/2008 7/2008 9/2008 11/2008 1/2009 3/2009 5/2009 7/2009 9/2009 11/2009 1/2010 3/2010 5/2010 7/2010 9/2010 11/2010 1/2011 3/2011 5/2011 7/2011 9/2011 11/2011 1/2012 3/2012 5/2012 7/2012 9/2012 11/2012 1/2013

Monthly Real Food Price Indices

Food Price Index

Can the FAO Food Price Index Be Seen as a Measure of Food Security?
• Perhaps not.
– “…as more evidence is gathered on actual food availability and food consumption worldwide, there appears to be very limited—if any—relationship between the time evolution of the FAO Food Price Index and the dynamics of supply and demand, what should be considered the fundamentals of price formation and food security” (Cafiero, 2013)

Source: Cafiero, Carlo (2013). “What Do We Really Know About Food Security?” NBER Working Paper No. 18861.

Food Security
• Roles played by transaction costs, market integration, and information flows
• Focus on understanding the policy and institutional environment
– Specific factors (e.g., extractive political and economic institutions) may be hindering trade flows across regions or investments in stockpiling
Source: Koester, Ulrich and Ali El-Agraa (2003). “The Common Agricultural Policy.” In Ali El-Agraa (ed.), The European Union: Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390.

Back to Thinking About Policy Objectives
• With which other policy objective(s) might the objective of food security conflict?
– With the agricultural income objective
• If price support is used a policy instrument – this would likely reduce food security

– With the efficiency objective
• Keeping farm prices artificially low wouldn’t be costeffective and may have other (political) economic distortions

– With other objectives it may be difficult to say
Source: Koester, Ulrich and Ali El-Agraa (2003). “The Common Agricultural Policy.” In Ali El-Agraa (ed.), The European Union: Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390.

Given the Objective of Efficiency…
• May seek to improve household incomes of those working in the rural economy or agricultural sector by improving incentives (e.g., not violating property rights) and promoting an enabling environment
– All of which require some form of redistributive transfers or taxation (even if just to invest in legal capacity for improving the definition and enforcement of property rights and the unbiased enforcement of contracts)

• Overarching roles of income and food prices
Source: Koester, Ulrich and Ali El-Agraa (2003). “The Common Agricultural Policy.” In Ali El-Agraa (ed.), The European Union: Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390.

Income Growth in Agriculture
• There is a perception that income from the agricultural sector doesn’t increase as much as income from other sectors in a growing economy • Consider the following closed economy model with limited mobility of labor.
– Somewhat similar to the model above, but with some additional variables to consider.
Source: Koester, Ulrich and Ali El-Agraa (2003). “The Common Agricultural Policy.” In Ali El-Agraa (ed.), The European Union: Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390.

Income Growth in Agriculture
• Let demand for an agricultural product (𝑄 𝐷 ) depend on income (𝑌), the price of the product (𝑃) and the size of the population (N): 𝑄 𝐷 = 𝑄 𝐷 (𝑌, 𝑃, 𝑁)
• Let the supply of an agricultural product (𝑄 𝑆 ) depend on the price of the product (𝑃) and technology (𝐴): 𝑄 𝑆 = 𝑄 𝑆 𝑃, 𝐴 • Assume that supply and demand are equated by the prevailing price, or that: 𝑄 𝐷 = 𝑄 𝑆
Source: Koester, Ulrich and Ali El-Agraa (2003). “The Common Agricultural Policy.” In Ali El-Agraa (ed.), The European Union: Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390.

Source: http://www.fastcoexist.com/1680400/100-years-ago-french-artists-predicted-the-future-with-eerie-accuracy#4

Income Growth in Agriculture
• Fully differentiating 𝑄 𝐷 , we find the following: 𝑑𝑄𝐷
𝑄𝐷

= 𝜕𝑄𝐷

𝑌 𝑑𝑌 𝜕𝑌 𝑄𝐷 𝑌

+ 𝜕𝑄𝐷

𝑃 𝑑𝑃 𝜕𝑃 𝑄𝐷 𝑃

+ 𝜕𝑄𝐷

𝑁 𝑑𝑁 𝜕𝑁 𝑄𝐷 𝑁

• Let 𝜕𝑄𝐷

𝑌 𝜂 = 𝜕𝑌 𝑄𝐷 𝜕𝑄𝐷 𝑁 = 1; 𝐷 𝜕𝑁 𝑄 𝑑𝑄𝐷 𝑑𝑌 = 𝜂 𝐷 𝑄 𝑌 𝜀

𝐷 = 𝜕𝑄𝐷

𝑃 𝜕𝑃 𝑄𝐷

and

then we have
+ 𝐷
𝑑𝑃 𝜀 𝑃

+ 𝑑𝑁

𝑁

Source: Koester, Ulrich and Ali El-Agraa (2003). “The Common Agricultural Policy.” In Ali El-Agraa (ed.), The European Union: Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390.

Income Growth in Agriculture
• = + • (Let 𝜀 𝐷 be negative)
• 𝜕𝑄𝑆
𝐴 Letting 𝑆 = 1, 𝜕𝐴 𝑄 𝑑𝑄𝑆 𝑠 𝑑𝑃 + 𝑑𝐴 = 𝜀 𝑄𝑆 𝑃 𝐴 𝑑𝑄𝐷 𝑄𝐷 𝑑𝑌 𝜂 𝑌 𝐷 𝑑𝑃 𝜀 𝑃 𝑑𝑁 + 𝑁

we also have

• Because we assume that 𝑄 𝐷 = 𝑄 𝑆 , we have the following: 𝑑𝑌 𝑑𝑁 𝑑𝐴 𝐷 𝑑𝑃 𝑠 𝑑𝑃 𝜂 + 𝜀 + = 𝜀 + 𝑌 𝑃 𝑁 𝑃 𝐴 • We can solve for 𝒅𝑷
𝑷

= 𝒅𝑨

𝒅𝑵 𝒅𝒀 − −𝜼 𝑨 𝑵 𝒀 𝜺𝑫 −𝜺𝑺

Source: Koester, Ulrich and Ali El-Agraa (2003). “The Common Agricultural Policy.” In Ali El-Agraa (ed.), The European Union: Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390.

Income Growth in Agriculture 𝒅𝑷
𝑷

= 𝒅𝑨

𝒅𝑵 𝒅𝒀 − −𝜼 𝑨 𝑵 𝒀 𝜺𝑫 −𝜺𝑺

• If the rate of technological change is larger than the sum of the growth rate of income per person (times the income elasticity of demand) plus the growth rate of the population, then the price of the agricultural product will decrease
– (This is because 𝜀 𝐷 − 𝜀 𝑆 < 0)
Source: Koester, Ulrich and Ali El-Agraa (2003). “The Common Agricultural Policy.” In Ali El-Agraa (ed.), The European Union: Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390. 𝑑𝐴

( ) 𝐴

Income Growth in Agriculture
• Thus, technological change in agriculture will depress prices, but only under certain conditions • With growth in income and population only, this would increase agricultural prices • Yet technological change in agriculture has been sufficiently large to offset these effects for most of the past 50 years
– Along with a declining income elasticity of demand with higher incomes, flattening of population growth, technological progress has led to a lowering of food prices – Yet think about the recent price spikes in food prices and other changes in supply and demand of agricultural products
Source: Koester, Ulrich and Ali El-Agraa (2003). “The Common Agricultural Policy.” In Ali El-Agraa (ed.), The European Union: Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390.

Income Growth in Agriculture
• What happens to labor income with falling prices?
– Labor income in agriculture may not decline that much with growth in agricultural technology – Depends critically on the price elasticities of supply and demand, which are functions of how well integrated sectoral labor markets may be

Source: Koester, Ulrich and Ali El-Agraa (2003). “The Common Agricultural Policy.” In Ali El-Agraa (ed.), The European Union: Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390.

Growth in Different Sectors
• Idea that growth in the agricultural sector sparks growth in other sectors (Bezemer and Headey, 2008)
– Agricultural growth as “pro-poor” growth, especially if occurring on small family farms

• May aid growth “…by providing cheap food, raw materials, labour, savings, and demand for non-agricultural goods” (Bezemer and Headey, 2008).
Bezemer, Dirk and Derek Headey (2008). “Agriculture, Development, and Urban Bias.” World Development, 7: 1-40.

What Are Some (But Not All) Potential Sources of Agricultural Growth?
• Improvements in the institutional environment
– – – – – Importance of the absence of political violence The rule of law Constraints on the executive Protection of property rights Unbiased contract enforcement

• Market access
– Import bans or regulated and protected markets distort the prices seen by farmers in developing countries for their agricultural products

• Reduction of transaction costs • Information flows, research and development, extension • Development of rural markets for credit (e.g., micro-finance, rural banks, training of those working in these institutions to assess creditworthiness, etc.), insurance, inputs, and outputs

Why Isn’t Neoclassical Growth Theory Very Helpful?
• Not all factors may be employed • (Restrictive) assumptions regarding the role of capital in the production process • Other important inputs not considered • Doesn’t consider the sources of long run economic growth, how reorganization of the factors of production plays a role

Rodrik (2005)
• Policies that promote growth tend to be context specific and context appropriate

Rodrik, Dani (2005). “Growth Strategies.” In Philippe Aghion and Steven Durlauf, eds. Handbook of Economic Growth, Amsterdam: North-Holland.

Rodrik, Dani (2005). “Growth Strategies.” In Philippe Aghion and Steven Durlauf, eds. Handbook of Economic Growth, Amsterdam: North-Holland.

Income Support Measures
• A large literature on the role of (conditional) cash transfers aimed at poverty reduction, improvements in child health and education • In general: policy measures aimed at poverty reduction should focus as near as possible to the source of the problem and not its symptom(s)
– By-product distortions should be avoided as much as possible

• Let’s think about the behavior of subsistence farmers and what policies may help reduce poverty among such farm households

Efficiency in Agriculture
• Importance of information about new technologies, production methods
– Research and extension

• Role of property rights and title transferring
– May incur high transaction costs if improper registration – Uncertainty about the future returns of the land, interest rates for both buyers and sellers of land

• May be market challenges with respect to markets for land, rural credit, and insurance as a result of the general institutional environment, which may reduce the efficiency of the agricultural sector
Source: Koester, Ulrich and Ali El-Agraa (2003). “The Common Agricultural Policy.” In Ali El-Agraa (ed.), The European Union: Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390.

Price Stability
• Consider a simple closed economy case in which supply is perfectly price inelastic. Suppose there is no storage and that all which is produced in the current period must be consumed at the same time:
• 𝑄 𝑆 = 𝑄 𝑆 • 𝑑𝑄𝐷
𝜕𝑄𝐷 𝑃 𝑑𝑃 Let 𝑄 = 𝑄 𝑃 such that 𝐷 = 𝑄 𝜕𝑃 𝑄𝐷 𝑃 𝑑𝑃 𝑑𝑄𝑆 1 𝐷 𝑆 With 𝑄 = 𝑄 then = 𝑆 𝐷 𝑃 𝑄 𝜀 𝐷 𝐷

= 𝜀 𝐷 𝑑𝑃

𝑃

• • Here, the percentage change in the price with a 1 percent change in quantity supplied will be larger when the price elasticity of demand is lower (in absolute terms) • Of course, in the real world there will also be storage, so that market demand will be a function of current demand and of demand for storage
– The latter is a function of expected agricultural prices in future periods, storage costs

Source: Koester, Ulrich and Ali El-Agraa (2003). “The Common Agricultural Policy.” In Ali El-Agraa (ed.), The European Union: Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390.

Policy Against Price Increases
(khachapuri)

Price

S1
2 GEL

 Quantity Doesn’t Increase  Price Doesn’t Change  Results in Shortages of Khachapuris! D2

 𝑸𝑺 < 𝑸𝑫
Price ceiling

1 GEL

D1
Q1

Q2

Q3

Quantity
(khachapuris)

Food Safety
• Most farm products are experience goods (quality is revealed upon consumption) or credence goods (neither the quality nor the production process are known ex ante) rather than search goods (quality is known at the time of purchase)
• Incentives to create and preserve trust among producers, traders, especially with brand name products • Yet there may be issues related to water quality, failures in supply chains, principal-agent problems, etc.

Source: Koester, Ulrich and Ali El-Agraa (2003). “The Common Agricultural Policy.” In Ali El-Agraa (ed.), The European Union: Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390.

Environmental Concerns
• May be positive and negative externalities with agriculture • Rapid transformation of the agricultural sector may induce environmental damage unless handled properly

Source: Koester, Ulrich and Ali El-Agraa (2003). “The Common Agricultural Policy.” In Ali El-Agraa (ed.), The European Union: Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390.

Source: Yandle, Vijayaraghavan, and Bhattarai (2002)

Source: Yandle, Vijayaraghavan, and Bhattarai (2002)

Additional Objectives
• Agricultural development and rural development • Solely supporting the former may not have the intended poverty alleviation effects • Importance of investments in rural infrastructure, health, and education as well (Bezemer and Headey, 2008)

Agricultural and Food Policy Analysis
Introduction to the Economic Evaluation of Agricultural and Food Policies

Steps in Policy Analysis
• • • • Step 1: Justification of policy changes Step 2: Measure selection Step 3: Implementation Step 4: Quantification of effects on production, consumption, income, etc. • Step 5: Welfare and distributional effects assessment • Step 6: International trade effects • Step 7: Governance problems

Value Judgments in Policy Evaluation
• Any policy evaluation is necessarily normative
• Value judgments also color empirical assessments
– What models to use, the assumptions concerning exogenous variables, etc.

• Even more pronounced for ex-ante policy evaluation than for ex-post policy evaluation

Identification of Effects
• How can we evaluate the causal claims of policy statements?
• Policy statement: The EU’s Common Agricultural Policy (CAP) has contributed to the productivity objective as productivity in agriculture has increased more than in the overall economy over the last 20 years.
– Issues:
• 1. One must know how productivity would have changed without the CAP. What is the counterfactual? • 2. One has to take into account the costs of the policy if it is inefficient.

Without CAP Productivity With CAP

Cost of CAP

Time
If the diagnosis is true, the CAP is ineffective and inefficient with respect to the productivity objective. The policy could have been effective, but inefficient.

Rodrik on the Washington Consensus
• First-order economic principles (protection of private property, contract enforcement, market-based competition, sound money supply, etc.) do not map into unique policy packages.
• Effective policy reforms take the underlying cultural, political, and social context into consideration

Rodrik, Dani (2005). “Growth Strategies.” In Philippe Aghion and Steven Durlauf, eds. Handbook of Economic Growth, Amsterdam: North-Holland.

Rodrik on the Washington Consensus
• “Economics is full of big ideas on the importance of incentives, markets, budget constraints, and property rights. It offers powerful ways of analyzing the allocative and distributional consequences of proposed policy changes. The key is to realize that these principles do not translate directly into specific policy recommendations. That translation requires the analyst to supply many additional ingredients that are contingent on the economic and political context, and cannot be done a priori. Local conditions matter not because economic principles change from place to place, but because those principles come institutions free and filling them out requires local knowledge.”

Rodrik, Dani (2005). “Growth Strategies.” In Philippe Aghion and Steven Durlauf, eds. Handbook of Economic Growth, Amsterdam: North-Holland.

Project Evaluation
• GTZ’s sequence of evaluation criteria: • Relevance  Impact  Effectiveness  Efficiency  Sustainability
– (Discussion in class)

Source: GTZ

The Policy Process
• Vision  Targets  Strategic objectives  Indicators  Ex ante evaluation  Selection of policy measures  Monitoring and ex post evaluation

Strategy Papers
• Help to reduce uncertainty about future activities and policies (may prevent crowding out or may facilitate crowding in)
• Helps to identify main problems or policy areas • Informing the private sector on the previous process

Agricultural Industrial Policy?

Impact Evaluation

Section Readings and Discussions
• Gilbert, Natasha. (2013). “International Aid Projects Come Under the Microscope.” Nature, 493(7433): 462463. • Herberich, David H., Steven D. Levitt, and John A. List (2009). “Can Field Experiments Return Agricultural Economics to the Glory Days?” American Journal of Agricultural Economics, 91(5): 1259-1265.
• Millennium Challenge Corporation (2012). “MCC’s First Impact Evaluations: Farmer Training Activities in Five Countries.” Issue brief.

Source: http://xkcd.com/552/

Gerber and Green (2012):  “Randomized studies that are conducted in realworld settings are often called field experiments, a term that calls to mind early agricultural experiments that were literally conducted in fields.”

Pulling Off a Field Experiment
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Rely on economic theory to guide the research design and for interpreting results Be an expert about the market or context being studied Have a proper control group Have sufficient sample sizes Coordinate with the organization well – have the leadership on board Understand organizational dynamics Ensure that organizations are committed to the research design and experiment Importance of timing Identifying the costs and benefits of the experiment Be humble Experiment early Experiment objectively and publish results and data freely Understand issues related to equity and the treatment Have institutional oversight

List, John (2011). “Why Economists Should Conduct Field Experiments and 14 Tips for Pulling One Off.” Journal of Economic Perspectives, 25(3): 3-16.

Political Economics and Agricultural and Food Policy

Section Readings and Discussion
• De Gorter, H. and J. Swinnen (2002) “Political Economy of Agricultural Policy.” In: Gardner, B. and G. Rausser, (Eds), Handbook of Agricultural Economics, pp. 1993- 1932. • Swinnen, Johan (2010). “The Political Economy of Agricultural and Food Policies: Recent Contributions, New Insights, and Areas for Further Research.” Applied Economic Perspectives and Policy, 32(1): 33-58.
• Acemoglu, Daron and James A. Robinson (2013). “Economics versus Politics: Pitfalls of Policy Advice.” Journal of Economic Perspectives, forthcoming.

Scott, James A. (1998). Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed. Yale Agrarian Studies, Yale University.

Development Policy and Programming
• How do we know what works and what doesn’t?
– There has been no shortage of failures in cooperative development, “big pushes” for agricultural development, etc. etc.

• How can we know how to structure policies and programs?

Political Economics
• Insights for thinking about agricultural and food policy, agricultural and rural development:
– Rent seeking and protectionism
• Assessment of the objectives of policymakers and interest groups
– How well-organized are farmers? – Corruption

– The knowledge problem
• Moral hazard • Unintended consequences

– Incentive compatibility – How government agencies and international organizations operate
• Assessment of the objectives of bureaucrats

A Public Choice Approach to Agricultural Economics
• Involves assessing why agricultural and food policies are the way they are
– Calls for a positive economic analysis of policy formulation, decision making, and resource allocation – Contrasts with a normative approach to these issues
• What policies should be developed

• What are some examples of positive and normative economic statements related to agricultural and food policies?

The Knowledge Problem
• How can we know individuals’ preferences? • How can we know the incentives people face? • How can we predict likely behavioral responses to policies and programs? • How can we know which policies and programs will have income supporting effects?
– For example, with respect to agricultural and rural development, which activities should be supported? – Many in rural areas derive much income from non-farm activities (Bezemer and Headey, 2008)
Bezemer, Dirk and Derek Headey (2008). “Agriculture, Development, and Urban Bias.” World Development, 7: 1-40.

The Pretense of Knowledge
• “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. To the naïve mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account.” F.A. Hayek (1988)
Hayek, F.A. (1988). The Fatal Conceit: The Errors of Socialism. University of Chicago Press.

Theodore Shultz on Knowledge
• “People who are rich find it hard to understand the behaviour of poor people. Economists are no exception, for they too find it difficult to comprehend the preferences and scarcity constraints that determine the choices that poor people make. We all know that most of the world's people are poor, that they earn a pittance for their labor, that half and more of their meager income is spent on food, that they reside predominantly in low income countries and that most of them are earning their livelihood in agriculture. What many economists fail to understand is that poor people are no less concerned about improving their lot and that of their children than rich people are.”
– T.W. Schultz (1979) – Nobel Lecture

T.W. Schultz's Nobel Prize Lecture

Knowledge Limitations
• Specific rules adapted to local circumstances and context • Ostrom (2005: 223) challenges “…the assumption frequently made by policy analysts that it is routinely feasible to conduct complete analysis of a problem and develop ‘the optimal’ set of rules for solving that problem.”

Ostrom, Elinor (2005). Understanding Institutional Diversity. Princeton University Press, Princeton and Oxford.

Common-pool Resource Management
• Ostrom (2005: 219) on the sources of the complexity of common-pool resource problems:
– “The many variables of the bio-physical/material world, the communities involved, and the rules-in-use combine to affect the structure of appropriation situations, the patterns of interactions among appropriators from a common-pool resource, and the outcomes achieved. Those who try to solve these problems have to cope with complexity as well as coping with the commons.”
Ostrom, Elinor (2005). Understanding Institutional Diversity. Princeton University Press, Princeton and Oxford.

Unintended Consequences
• A lack of knowledge of how people behave or how they will respond to certain policies can result in the development of policies that have unintended consequences

Source: http://www.georgiatimes.info/en/articles/88339.html

Incentives
• Are policies that are being implemented compatible with the incentives faced by specific actors?

The Policy Reformers Themselves
• Not so clear that reformers will choose policies that benefit society as a whole
– Self-interest – Biases in decision-making – Lack of information

Interest Groups
• Individuals and groups seek privileges through the political process
– Favorable legislation, regulation, tax breaks, subsidies, monopoly rights, etc.

• Concentrates benefits in the hands of a few well-connected people, while dispersing the costs across everyone else

Interest Groups
• Such interest groups are politically wellorganized, much more so than general voters or citizens • Politicians often have strong incentives to favor the views and policy preferences of special interest groups, even if such policies are wasteful

Agricultural Development in Georgia: Going Forward

Back to the Institutional Environment
• Supporting the development of an enabling environment
– Reduction of transaction costs and uncertainty – Provision of a stable economic and political environment
• Allows for discovery and entrepreneurship in the agricultural sector • Discovering what works and what doesn’t in terms of improving agricultural profitability and reducing rural poverty

– Recognition and respect for property and land use rights

Promoting Rural Economic Development
• Will it necessarily come through improvements in agricultural productivity and development of the agroprocessing sector?
– It is difficult to say. – There may be other policy approaches not related to improving farm incomes that will promote rural development more effectively (e.g., health insurance, education, etc.)

The Lack of an Enabling Environment
• Many examples over time and across countries • Georgia: the Gorbachev anti-alcohol campaign (mid-late 1980s) led to the destruction of vineyards in Georgia
– Only about ¼ of Georgia’s vineyards survived the campaign (The Economist, 2010)

The Economist, Eastern Approaches blog. “Georgia’s Wine Industry: What Doesn’t Kill Us Makes Us Stronger.” September 21, 2010.

What Happened in Other Countries?
• It’s helpful, though not fully informative, to look at the experiences of other countries with regard to agricultural development • Let’s look at some figures from EU countries with respect to their agricultural sectors, past and present…

Source: Koester, Ulrich and Ali El-Agraa (2003). “The Common Agricultural Policy.” In Ali El-Agraa (ed.), The European Union: Economics and Policies. Seventh Edition. Pearson Education Limited. Harlow, Essex, UK, pp. 354-390.

Dethier, Jean-Jacques and Alexandra Effenberger (2011). “Agriculture and Development: A Brief Review of the Literature.” World Bank Policy Research Working Paper No. 5553.

Acknowledgements
• This is the first edition of this set of lecture notes. The course materials were primarily developed for use in the MA Program in Economics at the International School of Economics at Tbilisi State University (ISET). These lecture notes were prepared by Adam Pellillo, with extensive and helpful input from Professor Ulrich Koester, who delivered a model course on Agricultural and Food Policy Analysis at ISET in 2012, and Lasha Labadze. The views herein are those of the instructor and they do not necessarily represent those of Professor Koester, Mr. Labadze, ISET, or ISET-PI. These lecture notes are made possible by the generous support of the American people through the United States Agency for International Development (USAID). The contents are the responsibility of the instructor and do not necessarily reflect the views of USAID, EWMI, or the United States Government.

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