Increasing the welfare effect of the agricultural subsidy p - PowerPoint Presentation

Slide1

Increasing the welfare effect of the agricultural subsidy program for food crops in Macedonia

Dr. Marjan Petreski

UNCTAD Vi seminar on trade and poverty

8-10 September, 2014

G

eneva

, SwitzerlandSlide2

AgendaIntroduction of researcher and policymakers

Background and motivationObjectivesSurvey overviewReferent literature

Methodology

Findings

Policy recommendations Slide3

Introduction of researcher and policymakersMarjan Petreski

Asst. prof. in Macroeconomics and EconometricsResearch focused on macro phenomena, in the last period making a switch toward micro-phenomena (mainly due to micro-data becoming more available)

Nikica

Mojsoska-Blazevski

Prime advisor to the Minister of

Labour

and Social Policy

Biljana

Trajkovska

State advisor for strategic planning in the Ministry of

Labour

and Social Policy

Margarita

Deleva

State advisor for rural development in the Ministry of Agriculture, Forestry and Water ManagementSlide4

Background and motivationImportance of wheat, maize and rice for Macedonian households

24.5% of Macedonian households farm one or more of these cropsmore

than 50% of rural households spend more than 10% of the budget on

them

Poverty rate is estimated at 27.1% in 2011

Very

large part of poor household income is spent on crop food commodities and their products

.Slide5

Background and motivation (2)Prices and quantities

The aforementioned commodities experienced large price increases between 2006 and 2012:

maize

(165%); wheat (118%); and rice (76

%)

However

, the production of food commodities has been declining since

the shift away from the

planning system

in

1990s and is, on average, 60% of the production

levels in 1991.

Rising

prices were

not enough

to drag production upSlide6
Slide7

Background and motivation (3)

Government subsidiesambitious agenda for subsidizing agriculture enacted in late 2006 - budget

funds reaching 4.5% of total

gov’t

expenditures in 2011 from virtual zero back in 2006.

An

overarching objective

to

improve the living conditions and incomes, by targeting those who are predominantly living or temporary migrating to the rural areas.

Linear subsidization with sums per ha without prior analysis of the needs and optimal amounts

150

EUR per cultivated hectare up to 10 ha of cultivated land, which then drops to 90 EUR/ha for 10-50 ha; 45 EUR/ha for 50-100 ha; and 15 EUR/ha for above 100

ha

No special eligibility conditions apply for the type of households producing these staple foods

Effects, however, to a large extent,

unsatisfactorySlide8

Policy questions

What are the likely effects of the observed change in the level of food crop prices on households’ welfare in Macedonia?

What

are the likely effects of the government subsidy program on welfare and could another pattern of subsidies’ disbursement

improve the

impact on welfare of households? Slide9

MethodologyThe change in welfare following a change in prices for a household is:

Δwi=Δp[(

prod

i

-cons

i

)+

ηL

i

]

A

simple methodology outlined by Singh et al. (1986) and Deaton (1989a, 1997)

subsequently

widely

applied:

Barret

and

Dorosh

, 1996; Budd, 1993;

Ivanic

and Martin, 2008;

Wodon

et al. 2008;

Klytchnikova

and Diop,

2010Slide10

Methodology (2)We identify

which households, in which part of the income distribution and for which specific crop food commodity may benefit most of agricultural subsidies

Based

on

findings

, we propose a

different scheme

for disbursement

for the same

amount of agricultural subsidies

in 2012

i.e

. we

target specific

groups

(households)

instead of

a linear disbursement

to

everyone

We use the 2011 Household Budget SurveySlide11

ResultsWe present welfare effects:

for rising prices of wheat, maize and rice;for the government subsidies for these crops;

and for a new proposed scheme for subsidies’ disbursementSlide12

Welfare effects of rising prices- wheat and maize -

Negative welfare effect of the rising prices for urban households

the effect being more pronounced for the female-headed urban households

On the other hand, the overall welfare effect for rural households is positive

the effect being only negative for the female-headed rural households in roughly the first quarter of the income distribution.Slide13

Welfare effects of rising prices (2) - rice -

Urban households are negatively affected by the price increase along the entire income distributiondo not produce rice, or produce only negligibly

The result for rural households is mixed:

only the poorest households are slightly negatively affected

nevertheless, the poorest female-headed households, approximately half of them, experience a negative welfare changeSlide14

Welfare effects of the introduction of government subsidies- wheat and maize -

Important effects of the agricultural subsidy program for wheat and maize

the subsidy effect may range up to 60% of the total income for the poorest rural male-headed households

this share then reduces to 20-30% for male-headed households around the second quintile of the income distribution and

reduces to zero afterwards

As female-headed rural households were found not to be largely engaged in wheat-maize production

the effect of the subsidy is small (about 10%) for the lowest two quintiles

somehow rises to 15-18% for the third quintile and

then reduces to zeroSlide15

Welfare effects of the introduction of government subsidies (2)- wheat and maize -

Given limited production of rice, the effect of the government subsidy is also small or negligible

mainly because both poorest male- and female-headed rural households were found to be larger consumers than producers of riceSlide16

Estimated subsidiesSlide17

Combined effectSlide18

New scheme for subsidies’ disbursement

Three lines of thought given above findings:The poorest female-headed rural households should be targeted in priority to get them into the production of wheat and maize;

All rice producers should be targeted with possibly larger subsidy per cultivated hectare for male-headed rural households in the first decile and female-headed counterparts in the first two quintiles of the income distribution;

Poorest urban households should be considered by the program for wheat and maize (the rice production being rather specific), with more intense targeting of the female-headed ones

assuming the possibility for the agricultural program to be accompanied by a program for a usufruct of a state-owned land and one of subsidies for purchase of the minimum equipment for agricultural productionSlide19
Slide20

Welfare impact of the new scheme- wheat and maize -

The new scheme produces a sizeable effect for the targeted urban households the (small) ‘intervention’ by the government turns the welfare effect from significantly negative to significantly positive

e

ffects are particularly large because these households are usually inhabited in smaller towns and can relatively easily be engaged in agricultural production

Targeted female-headed rural households may also reap large benefits if larger production is adopted

households would need to increase their wheat-maize production from presently very low amounts to at least the average of about 1.15 cultivated hectaresSlide21

Welfare impact of the new scheme- rice -

Two important caveats with regard to the cultivation of rice and subsequently to the proposed schemeUrban households are unlikely to be steered to produce rice even with offering free-of-charge state-owned land or additional subsidies for initial investment in machinery – specific process

The proposed scheme targets all rural households (producers or not) – ambitious: specific regions

Hence, overestimated results

Though, results suggest that the effects of a well-targeted subsidy program for rice may be sizeable

For the female-headed poor rural households, the overall welfare effect turns into significantly positive and increases considerably the household income.Slide22

Estimated subsidies – new schemeSlide23

Conclusions

Results suggest that rising prices for all wheat, maize and rice exerted positive welfare effects for the male-headed rural households onlyWhile the effect for the female-headed rural and all urban households has been generally negative

On the other hand, the welfare effect of the government subsidy program for wheat and maize has been positive for all rural households, but fairly larger for male-headed ones.

The one for rice has rather limited effects, largely due to the small offered subsidy amount versus the large effort needed for the cultivation of rice.

Overall, both price and subsidy effects were found positive only for the rural male-headed households.Slide24

Conclusions (2)

New subsidies scheme:targeting female-headed rural households for both cropsmale-headed rural households for rice

aiming to steer non-producers into production where possible through larger subsidy per cultivated hectare

all poor urban households for wheat

for the poor urban households, we also propose a possibility for a usufruct of state-owned land and initial subsidy for investment in machinery/seed

Results

:

significant welfare effect for poor urban households for wheat-maize ranging up to 30-40% of the initial income

targeting poor female-headed rural households may elevate the impact up to half that of males

the effect for poor rural rice producers may be also large – up to 20% of the household income - assuming the effort needed for starting off a rice production.Slide25

Policy recommendationsPut particular emphasis on poor female-headed rural households for both wheat and rice production;

Increase the subsidy for rice production due to its specific conditions for cultivation and large effort needed; andOffer the usufruct of state-owned land and start-off grants for poor urban households to get them into the production of wheat and maizeSlide26

Thank you for your attention!marjan.petreski@uacs.edu.mk