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Sunday, 17 August 2008

Zambian agriculture, income diversification & rural poverty...

There's no doubt that faster growth is the key to faster reduction in Zambian poverty (the other alternative is redistribution but that is fraught with difficulties). The question therefore is how best to achieve that growth in many of our rural areas. This new FSRP paper argues that the key is to reduce the constraints facing Zambian farming households in rural areas in order to accelerate agriculture growth, while at the same time improving the possibilities of income diversification away from agriculture. The policy challenge is to identify the key social and economic constraints that prevents both things from happening, and that is what the paper attempts to identify. A very important contribution to an important issue. Excerpt:

Bigsten and Shimeles (2007) analysed the growth-redistribution trade-off for various African countries, and found that to reduce poverty by half by 2015, Zambia would need to achieve an annual increase in per capita income of 4.0%, assuming an unchanged income distribution (Gini-coefficient). However, the impact of growth on poverty depends on the pattern of growth. A pro-poor growth-pattern would be one where smallholders, who make up the majority of the poor in Zambia, did well. As we have noted in this paper, fast income growth for this category is associated with diversification of their incomes.

This paper has sought to understand what the constraints are to smallholder diversification and income growth.
We first showed that poverty as measured by the head-count index declined by about 5.4 percentage points between 1998 and 2004. We decomposed this change into a 6.6 percentage point reduction due to growth, and a 1.2 percentage point increase due to a slight change in inequality. We also looked at growth-incidence across consumption-deciles. According to our estimates, all deciles experienced an increase in consumption during the period. Overall, the increase seems to have been somewhat larger in rural areas, with the exception of the top urban decile,
which experienced an even more rapid consumption increase. Still, poverty remains much more severe in rural than in urban areas.

Our descriptive analysis of the pattern of income diversification then showed, among other things, that the lower quintiles had strikingly low incomes per adult-equivalent, but one should keep in mind that this does not mean that consumption levels are that low.
The overall picture is that the higher the quintile, the lower the farm-income share of income. Households engaged in non-agricultural work or had their own business had generally higher incomes than others.

To be able to identify some livelihood strategies, we classified households according to which sources they derived income from. The most common activity-combinations were F, FB, FN, FA, FNB and FAB, in falling order. About 30% of the households that were fulltime farmers (F) in 2001 had diversified further into wage-work and/or business in 2004. Most of those getting income from a combination of their own farm and work on the farms of others (FA) in 2001 did not do any agricultural wage-work in 2004. Thus, working on others’ farms is not generally a permanent feature of smallholder income generation in Zambia.

Panel-data analysis showed that greater diversification is associated with higher income per labourer. In line with this we also found that shifting into more diversified activity combinations was associated with higher growth of income per labourer. Further we studied what determines selection into an activity combination. The most striking result is that location, that is, province, matters a lot. If you are in a more diversified and urbanised environment, you are able to diversify more easily. Luapula and Western stand out, however, as remote regions but nevertheless having a high probability of diversification into business. Primary and secondary education opens up opportunities for non-agricultural wage-work. It also opens up the route to business, though this is less dependent on education.
Diversification into agricultural wage-work depends especially on land shortage, which suggests that this is more of a distress-diversification. Households with more market-oriented agricultural production were more likely to have diversified into business (FB), which also reduces the probability of entering also agricultural wage work (FA). A possible interpretation of this is that the cash income generated by market-oriented agriculture helps lift the cash-constraint on entering business. Female-headed households were less likely to have the combination FN, which may reflect the fact the females are often less geographically mobile (because of traditional household or family duties) than males.

Land per labourer, education and gender of the household head, and province did not just influence income indirectly via choice of activity-combination, but also directly. In other words, the endowments and constraints that a household faces not only affect the possibility for diversification, they also affect how successful the household is within the activity combination chosen. The negative direct effect of being in Luapula or Western more than offset the positive indirect effect via high probability of diversification.

Policy-makers should thus keep in mind that rural household incomes are not derived from agriculture alone. A major focus should be on measures that strive to facilitate smallholder income-diversification. Typically, these are policies that develop the overall economic environment and help smallholders get better market access. Agriculture is a major part of the private sector in Zambia, and should receive higher priority. Of course, poverty may also be reduced by households leaving agriculture altogether and migrating to town. This will also be the long-term pattern, but at this stage in the development of Zambia this type of migration will only be relevant for a minority (Bigsten 1988).

It is thus clear that the focus of poverty-oriented policies must largely be on the rural sector. Since Zambia is a very unequal society, with a high Gini coefficient, poverty-levels could also be reduced by lowering inequality. But since average income and consumption are extremely low, growth is crucial for poverty reduction. To make agriculture more efficient, and thus reduce rural poverty, resources should be used to improve infrastructure such as roads and electricity, extension services, and education, rather than for subsidy schemes. The strongest result of our regressions is that province matters very much, which can be seen as an indicator of the quality of infrastructure or access to markets. More than half of the Ministry of Agriculture budget has gone to fertilizer subsidies (mostly for maize) and maize programmes. However, there has been diversification, and in recent years it is for example, cassava, sweet potatoes, and livestock production that have performed well. Secure property rights are of course also a crucial determinant of rural investment. Cash constraints hinder diversification both into business and into new crops. Therefore it is crucial to give more household’s access to credit. This can be via direct measures, but also by strengthening the overall economic environment. While the Fifth National Development Plan emphasises the measures just mentioned, implementation in these areas seems to be low and slow.

Strengthening the position of women could have a strong positive effect on smallholder income, both indirectly by making it easier for female-headed households to diversify, and directly via higher income irrespectively of activity combination chosen. We also find that education had a strong positive effect on income, both directly and indirectly.
Empowering women and improving education are obviously not things that can be handled easily and quickly, but rather things that should be integrated into policies in general. But there are measures that could also have short run effects. One is child support, conditional on school attendance, and higher for girls. It could be in the form of free school lunches, or school uniforms, or cash transfers to families whose children showed up frequently enough in school. Such measures can be focused on girls and on districts with low income levels, and that could be a signal that women and their education are important. At the same time, it would strengthen education, and stimulate rural income.

In the 1980s, up to 17% of the national budget was devoted to maize and fertilizer policies, but this programme was later scaled back. However, in recent years as much as 70% of the Ministry of Agriculture budget has gone to fertilizer subsidies and maize marketing, plus stockholding programmes, but still only 20% of small farmers in Zambia use fertilizers. Farmers’ effective demand for fertilizer must be built up by making it profitable to use it, by developing output markets and regional trade. Jayne et al. (2007) argue that “sustained investment in crop science, effective extension programs, physical infrastructure, and a stable and supportive policy environment” is where public sector resources could be best used. Our analysis certainly supports the notion the market access is a key determinant of smallholder income-diversification and growth, and, for peripheral regions, improvements in market access require investments in infrastructure. The regional gaps in Zambia are very substantial.

Development of agriculture itself is also important to bring about the structural change required for long-term growth. But the introduction of a complex set of subsidy programmes via local governments and cooperatives does not seem to be the most efficient route to develop agriculture. Private sellers of fertilizer are in trouble, and many do not even hold fertilizer stocks any more, since their market has been taken away. Local traders and network sellers need a predictable environment for incentives for long-term engagement in the sector. The recent huge government maize-purchases point in the wrong direction. The private traders who had entered the market are squeezed, holding back development of a sustainable marketing infrastructure in the rural areas is held back.

The Food Reserve Agency should be just that, not a buyer of last resort. The policy in this area was straightforward until the last election, when purchasing by the agency shot up from 50 to 400 thousand tonnes. The surplus was supposed to be exported but there is considerable uncertainty about that. In addition, there seems to be a high risk that physical and financial losses will be very high. The government seems to have had a roadmap for private sector growth in agriculture, but now there seems to be a move toward more state-intervention, more subsidy-schemes. Now subsidised fertilizers are sold through farmers’ unions and the like, and well-connected farmers end up getting it. There seem to be very extensive rentseeking activities going on, where the elite get some of the cheap fertilizer, and other portions of it are sold onto the open market for other farmers to purchase at higher prices.

Hence, the introduction of these subsidy-schemes is problematic, not only from an efficiency perspective but also from a distributional point of view. Since 75% of farmers do not sell maize at all and a small (2%) minority sell half of it, the distributional impact of these subsidies is highly skewed. The subsidy-scheme has also had other distortionary effects. Since the guaranteed prices are higher than in neighbouring countries, it seems obvious that in some years maize is being carried over the border and sold into the Zambian reserves. There are at least four places along the borders where in past years buying stations have bought much more than the local farmers produced and sold.

There is high variation within districts in terms of land-ownership, which is an important income-determining factor. In areas under traditional tenure (94% of the land), the chief decides on allocation of land. Everyone is supposed to have land according to capability, but this is of course a flexible concept; influence seems to matter a lot as well. Local allocation of land in fairer ways seems highly important. Insecurity of tenure may have substantial effects on the willingness of farmers to invest, and on their ability to use land as collateral for loans to finance investment. Since land-ownership is clearly related to income, it is also a problem that some cultivable Zambian land is not cultivated.

The analysis in the previous section showed that smallholders in Zambia are dependent on a range of off-farm income sources, and that it is therefore important not to look at rural policies as only those concerning agriculture. Paving the way for diversification is key in a package of poverty-reducing policies. Infrastructure that facilitates income-generating activities other than agriculture of course includes many things that are also beneficial for agriculture, e.g., good transportation. The diversification route to higher income for rural households requires a well-functioning economic environment and general policies that make it possible for new income-generating activities to emerge.

Additional note:
On a related issue, the Government has recently increased the size and amount of the fertiliser subsidy (see here, and here). The trouble has noted above is such increases are always subject to rentseeking because of how the input subsidies are allocated, often with the elite getting cheaper fertilisers than the rest, and sometimes reselling it to smallholder farmers at as much as 75% of the market price, for those willing to buy to avoid shortages!

42 comments:

  1. That's an interesting paper.

    In conversations about the Malawi fertilizer subisidy and the hype it generated in some US lefty circles, I was interested by how the mode of allocation chosen (distribution) was impacting the devellopment of an input market..

    But yeah, these are all great points..

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  2. Yeah, I thought it was very good...

    Quite Rodrikan :)

    The attention to constraints and particularly, second order ones...was incinsive..

    ReplyDelete
  3. On the effect of not supporting farmers with fertilizer subsidies.

    From: Economist's View at typepad.com:

    Are Some Development Experts "Full of Fertilizer"?
    This is very Rodrikian. It's also Sachsian:

    And from Commondreams.org:

    Destroying African Agriculture
    by Walden Bello

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  4. Thanks MrK!!!

    I have never come across that review of Rodrik’s book – which I got via Thoma’s blog.

    Random will want to check it out too, though I suspect he has already.
    But to the topic at hand…
    The NY Times article says this, which I found interesting:

    Though the donors are sometimes ambivalent, Malawi’s farmers have embraced the subsidies. And the government moved this year to give its people a more direct hand in their distribution.

    Villagers in Chembe gathered one recent morning under the spreading arms of a kachere tree to decide who most needed fertilizer coupons as the planting season loomed. They had only enough for 19 of the village’s 53 families.
    “Ladies and gentlemen, should we start with the elderly or the orphans?” asked Samuel Dama, a representative of the Chembe clan.
    Men led the assembly, but women sitting on the ground at their feet called out almost all the names of the neediest, gesturing to families rearing children orphaned by AIDS or caring for toothless elders.

    There were more poor families than there were coupons, so grumbling began among those who knew they would have to watch over the coming year as their neighbors’ fertilized corn fields turned deep green.

    Sensing the rising resentment, the village chief, Zaudeni Mapila, rose. Barefoot and dressed in dusty jeans and a royal blue jacket, he acted out a silly pantomime of husbands stuffing their pants with corn to sell on the sly for money to get drunk at the beer hall. The women howled with laughter. The tension fled.
    He closed with a reminder he hoped would dampen any jealousy.
    “I don’t want anyone to complain,” he said. “It’s not me who chose. It’s you.”

    The women sang back to him in a chorus of acknowledgment, then dispersed to their homes and fields.


    What I glean from this is that the distribution model may be different from what Zambia has. This one appears to rely less on unions.

    But I’ll ask the powers that be at FSRP to explain it to us the differences between Malawi’s distribution and Zambia’s in simple English.

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  5. The Malawi subisidy story is complicated and facinating. Neither the New York Times article or the Bello one does it justice.


    This paper provides the best explanation of the context, with the role played by various players, the range of choices and solutions and of course, domestic politics.

    This one compares the programs that have been experimented with.

    Or you can read this.

    Or better yet, this fascinating paper that suggests that fertilizer use has less to do with subsidies and more with crop-mix (by comparing Benin and Malawi)
    Text to be displayed
    http://72.14.253.104/search?q=cache:MDu7ULWU2-cJ:www.csae.ox.ac.uk/conferences/2000-OiA/pdfpapers/minot.PDF

    Or the corruption issues in the most recent program.


    The distribution method is I think: ministry of agriculture --> regional departments ---> chiefs --> people. There has been several accusations of mismanagement and corruption at all the levels. And the suspicion that the president of Malawi (who left his party and rules without majority representation) has used it to build up support for his newly created party has been there since the beginning.

    As I said before, the fact that the government took over the actual distribution of inputs is quite problematic. It crowds out the market for private distribution and ends up limiting fertilizer use to the government provided one. (a farmer who wants more than his government ration cannot get more because nobody sells it).

    But on the other hand, the universal import subsidies used before the SAP were costly since it included everyone, including the quite prosperous tea (and other export crops) commercial estates of the South.

    It's really a complicated situation.


    As a side note, every article that starts with "Africa used to be a net food exporter" is guaranteed to be crap. For some reason, that fact is used as proof that somebody killed agricultural production (lefties says IMF, people like Ayittey say the African Governments) while in reality the agricultural production kept growing, just not fast enough to catch up with the consumption (= birth rates)..

    Of course, there are exceptions, like Gabon or Congo-Brazzaville and to an extend Nigeria, were production actually decreased.. But that's because Oil makes things a lot easier, lol.

    ReplyDelete
  6. Oh no....that is a lot of references....you didn't even recommend which one was reading more than the other....lol!!!!

    Okay, let me pick at take a guess...

    ReplyDelete
  7. The first one is definetly the best.

    You can also check this one

    http://www.scrippsnews.com/node/27592

    The fertilizer subsidy cost the government $62 million -- 6.5 percent of the total government budget, a "whack of cash" in the words of one top economist -- but that pales in comparison to the $120 million the government spent importing food aid in the 2005 famine. And the sale of maize to Zimbabwe and other countries will inject an additional $120 million into the national economy, a sizable figure here.

    This passage explains how complicated it is.

    The subsidy program is clearly less costly than emmergency food aid but we know there's a lot more donor money available for emmergency/save the world type stuff. And while people throw in the sums of exports, nobody says how that helps the government recoup the expendure.

    It's really tough because you get a deficit either way and have to depend on donors who have their own priorities.

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  8. Thanks for the links...I'll check them...

    But this does not look good.....

    ReplyDelete
  9. not.at.all.

    (although he kinda sounds like Mobutu cancelling Zaireanisation: "it has been hijacked, this is horrible, *i* stand as the last defender of the poor".. while he created the bloody program)

    ReplyDelete
  10. Cho,

    But this does not look good.....


    Just because a good idea is badly executed, does not mean that it is not a good idea, or that it could not be executed well.

    Supporting agriculture is the only way to develop agriculture. The market is not going to provide.

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  11. Supporting agriculture is the only way to develop agriculture. The market is not going to provide.

    But the paper up there was discussing how to help devellop agriculture best, not how markets will provide.

    And they were arguing that spending the money on transport infrastructure and income diversification is better than spending it on distribution schemes designed in a way that maximizes rent-seeking.

    ReplyDelete
  12. Ha! Random beat me to the point….anyways MrK as the man says, its about finding the balance between two extremely…poor subsidies that crowds out emerging fertiliser markets….and a pure market that does nothing for moving the nation forward….

    Interestingly though…I don’t think the paper actually says what that balance is….for Easterlian reasons probably….there’s no magic bullet, it requires local experimentation probably….

    ReplyDelete
  13. Interestingly though…I don’t think the paper actually says what that balance is….for Easterlian reasons probably….there’s no magic bullet, it requires local experimentation probably….

    I think they actually do make proposals, based on what they see as the crucial constrains. They do clearly say:

    To make agriculture more efficient, and thus reduce rural poverty, resources should be used to improve infrastructure such as roads and electricity, extension services, and education, rather than for subsidy schemes.

    or

    More than half of the Ministry of Agriculture budget has gone to fertilizer subsidies (mostly for maize) and maize programmes. However, there has been diversification, and in recent years it is for example, cassava, sweet potatoes, and livestock production that have performed well. Secure property rights are of course also a crucial determinant of rural investment. Cash constraints hinder diversification both into business and into new crops. Therefore it is crucial to give more household’s access to credit.

    Among other things..
    On the topic of fertilizer, there is an argument to be made about their price being high at least partlially because of bad infrastructure, another to be made about credit and types of crops (see the article comparing Benin and Malawi), and one to be made about how to subsidize it (by giving money to people so they can buy it from the traders instead of crowding out the traders and limiting the options of the more succesful or bolder farmers).

    ReplyDelete
  14. Random,

    If we just concentrate on one of the constraints that they have identified to agriculture - fertiliser inputs.

    And focusing on the fact that the problem at the moment is farmers are not getting the input...

    A Rodrikian "growth diagnostic" would obvious start with the basic question of why? Its either a financing problem or low social returns. They have clearly pointed out that its mostly "low returns to economic activity" caused by the way government distorts the market "government failures". Here is the quote:

    "Development of agriculture itself is also important to bring about the structural change required for long-term growth. But the introduction of a complex set of subsidy programmes via local governments and cooperatives does not seem to be the most efficient route to develop agriculture. Private sellers of fertilizer are in trouble, and many do not even hold fertilizer stocks any more, since their market has been taken away. Local traders and network sellers need a predictable environment for incentives for long-term engagement in the sector. The recent huge government maize-purchases point in the wrong direction. The private traders who had entered the market are squeezed, holding back development of a sustainable marketing infrastructure in the rural areas is held back."

    Here is another:

    "Now subsidised fertilizers are sold through farmers’ unions and the like, and well-connected farmers end up getting it. There seem to be very extensive rentseeking activities going on, where the elite get some of the cheap fertilizer, and other portions of it are sold onto the open market for other farmers to purchase at higher prices.

    But after that narrative, they never actually propose solutions to THAT constraint, apart from pointing out it is bad.

    Now supposed I gave them a benefit of benefit of doubt...I assume the first step in their "model" is to eliminate the constraint, but that leaves us to MrK's point which rightly questions whether removing the government is the way forward to the fertiliser problem.

    Now all the other things they mention PRIOR to discussing the constraint, are noble..but I am not convinced they solve THIS particular constraint of government failures.

    In other words I am not sure what they are proposing to rectify that specific GOVERNMENT FAILURE....

    IS the model simply one of grafting on existing failures?????

    ReplyDelete
  15. If we just concentrate on one of the constraints that they have identified to agriculture - fertiliser inputs. 

And focusing on the fact that the problem at the moment is farmers are not getting the input...

    But that's not the problem per se.
    The problem is what prevents Zambian agriculture from growing ? What prevents rural Zambia from improving its living standards ? etc..etc..

    Getting the input is one solution, THE solution if one thinks lack of input is the immediate constrain.

    "Development of agriculture itself is also important to bring about the structural change required for long-term growth. But the introduction of a complex set of subsidy programmes via local governments and cooperatives does not seem to be the most efficient route to develop agriculture. Private sellers of fertilizer are in trouble, and many do not even hold fertilizer stocks any more, since their market has been taken away. Local traders and network sellers need a predictable environment for incentives for long-term engagement in the sector. The recent huge government maize-purchases point in the wrong direction. The private traders who had entered the market are squeezed, holding back development of a sustainable marketing infrastructure in the rural areas is held back."

    Once again, they're not focused on figuring out how to improve fertilizer output, they're concerned on how to improve Rural folks' livelyhood.
    And they clearly think that because the costs of the subsidy program exceed the benefits, those are not the best solution.

    But after that narrative, they never actually propose solutions to THAT constraint, apart from pointing out it is bad.

    They're not trying to resolve THAT problem.

    Now supposed I gave them a benefit of benefit of doubt...I assume the first step in their "model" is to eliminate the constraint, but that leaves us to MrK's point which rightly questions whether removing the government is the way forward to the fertiliser problem. 

Now all the other things they mention PRIOR to discussing the constraint, are noble..but I am not convinced they solve THIS particular constraint of government failures. 

In other words I am not sure what they are proposing to rectify that specific GOVERNMENT FAILURE....

IS the model simply one of grafting on existing failures?????

    I won't repeat myself so let me switch to why their analysis is actually Rodrikan..

    Rodrik in this post about his work said:

    "In the interest of precision, the Growth Diagnostics framework entails looking not for biggest direct distortion (i.e., the largest "tax"), but for the distortion with the costliest effects. "

    The authors of the paper, by looking at current income trends found out that:

    Households engaged in non-agricultural work or had their own business had generally higher incomes than others.

    Panel-data analysis showed that greater diversification is associated with higher income per labourer. In line with this we also found that shifting into more diversified activity combinations was associated with higher growth of income per labourer.

    The most striking result is that location, that is, province, matters a lot. If you are in a more diversified and urbanised environment, you are able to diversify more easily.

    And they deduct that the right policies should:

    Policy-makers should thus keep in mind that rural household incomes are not derived from agriculture alone. A major focus should be on measures that strive to facilitate smallholder income-diversification. Typically, these are policies that develop the overall economic environment and help smallholders get better market access.

    To make agriculture more efficient, and thus reduce rural poverty, resources should be used to improve infrastructure such as roads and electricity, extension services, and education, rather than for subsidy schemes.

    And when discussing subsidy scheme, they say:

    The strongest result of our regressions is that province matters very much, which can be seen as an indicator of the quality of infrastructure or access to markets. More than half of the Ministry of Agriculture budget has gone to fertilizer subsidies (mostly for maize) and maize programmes. However, there has been diversification, and in recent years it is for example, cassava, sweet potatoes, and livestock production that have performed well.

    Cash constraints hinder diversification both into business and into new crops. Therefore it is crucial to give more household’s access to credit. This can be via direct measures, but also by strengthening the overall economic environment.

    Empowering women and improving education are obviously not things that can be handled easily and quickly, but rather things that should be integrated into policies in general. But there are measures that could also have short run effects. One is child support, conditional on school attendance, and higher for girls. It could be in the form of free school lunches, or school uniforms, or cash transfers to families whose children showed up frequently enough in school. Such measures can be focused on girls and on districts with low income levels, and that could be a signal that women and their education are important. At the same time, it would strengthen education, and stimulate rural income.

    In the 1980s, up to 17% of the national budget was devoted to maize and fertilizer policies, but this programme was later scaled back. However, in recent years as much as 70% of the Ministry of Agriculture budget has gone to fertilizer subsidies and maize marketing, plus stockholding programmes, but still only 20% of small farmers in Zambia use fertilizers. Farmers’ effective demand for fertilizer must be built up by making it profitable to use it, by developing output markets and regional trade.

    Since 75% of farmers do not sell maize at all and a small (2%) minority sell half of it, the distributional impact of these subsidies is highly skewed.

    In short, they argue that in terms of "bang for the buck", fertilizer subsidy schemes rank pretty low. Worse it uses ressources that could be used to work on issues that would actually lower the real constrains: possibility of diversification into non-farm income, market access etc...

    They're not saying "cut the subsidy program and let the market do its magic", they're saying "cut the fertilizer subsidy programs, use the money to: 1. build infrastructure (and hire rural people to do so they can have extra income) 2. improve access to credit 3. design educational programs that will put some strong incentives for school attendance and girl school attendance in particular.

    They definetly don't think access to fertilizer is the biggest constrain in Zambia. That's why they don't try to "resolve" that problem.

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  16. This is the post from which I got the Rodrik quote:

    http://notsneaky.blogspot.com/2007/11/dani-rodrik-is-liar.html

    ReplyDelete
  17. Okay, I am happy to take your clarification that they are looking at constraints in the small holder agriculture sector..

    And that I am being unfair on them by criticising them for not offering an answer to the question that I am interested in..

    [I guess this is one of the problem with the Rodrikan approach anyway...it "has no unique solutions" to quote one of its critics...but that is a topic for another time..]

    But it still does not satisfy me..and I probably won't..because I am not convinced that they have demonstrated to me that resolving the government failure with respect to inputs is NOT the binding constraint...

    Also I see difficulties with each of the three "solutions" proposed:

    "1. build infrastructure (and hire rural people to do so they can have extra income)"

    Sensible as a constraint to agriculture but this takes time. And not all infrastructure is the same anyway. Is this roads? Is this markets to sell food? what is it?

    "2. improve access to credit"

    This is always my punching bag..lol! It is not simple....this infact has its own constraints..which requires someone to do a separate diagnostic on it...and should say they are talking about HOUSEHOLD CREDIT...that brings more complex issues to the table.....

    "3. design educational programs that will put some strong incentives for school attendance and girl school attendance in particular."

    I like this...but again...horizon is the issue...takes time..


    I guess my question is...should this diagnostic have a time dimension to it? [Rodrik bizarrely ignores time factor.....by the way, after reading Rodrik and then visiting the Easterlian temple..I have now become convinced all Rodrik does is turn "White Man's Burden" into a practical tool kit...]

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  18. But it still does not satisfy me..and I probably won't..because I am not convinced that they have demonstrated to me that resolving the government failure with respect to inputs is NOT the binding constraint...

    But once again, they don't even seem to think that lack of fertilizer in general is such a major constrain. And in this case, the government failure (or rather the bad design of the program) is a constrain to improving acces to fertilizers, but not necessarily to small holder agriculture in general.

    And they explain why, by looking at the factor that determine income variations in the sector. Now if you believe that access to fertilizer is the majot constrain, work on data that would suggest it.

    Sensible as a constraint to agriculture but this takes time. And not all infrastructure is the same anyway. Is this roads? Is this markets to sell food? what is it?

    I think they mean transport infrastructure..
    And they base it on the fact that there's a lot of regional variation in income and that the variation is correllated to market access.

    But remember the second part. They think building roads will help agriculture but they also think that it would provide non-farm income while it's being build. Non farm income that can be used to improve farms, buy fertilizer, send kids to school etc..

    So it's a double-benefit and with part of it delivered while the investment is done.

    This is always my punching bag..lol! It is not simple....this infact has its own constraints..which requires someone to do a separate diagnostic on it...and should say they are talking about HOUSEHOLD CREDIT...that brings more complex issues to the table.....

    Yeah, access to credit is in itself a deep issue.. That involves lots of things and can be improved by using different ways.
    May be a system of crops futures with not only FRA but the private traders could help without being too costly.. I don't know.

    I'm not sure they're thiking household credit specifically, nor are they only thiking about the small business side. The credit constrain prevents more farmers from making investments allowing them to diversify their income and prevents them from making personal investment in the same way.


    "3. design educational programs that will put some strong incentives for school attendance and girl school attendance in particular."

I like this...but again...horizon is the issue...takes time..


    Not really.
    You make a phone call to the Brazilian embassy and ask them if they can send people who have worked on the very succesful Bolsa Familia ( http://en.wikipedia.org/wiki/Bolsa_Família ).. Do a seminar and a few meetings and a year later, you have your program.

    You don't really need to involve schools or teachers, just to monitor them to fight possible corruption. What you need to do is give a monetary benefit to parents who send their kids to school (and therefore take a loss on the child's labour).

    I guess my question is...should this diagnostic have a time dimension to it? [Rodrik bizarrely ignores time factor.....by the way, after reading Rodrik and then visiting the Easterlian temple..I have now become convinced all Rodrik does is turn "White Man's Burden" into a practical tool kit...]

    I've never read WMB because I find Easterly cranky and bitter. Seriously he sounds like a mean and angry old man, especially recently. And I have a hard time imagining him being interested in finding solutions.

    But yeah, they're probably super close. Just like Rodrik's works is a continuation of Aceomuglu, I can imagine it's a continuation of Easterly.

    As far as the time element, it's a dynamic framework. The goal is to constantly remove constrains, including new ones as they come along (but that you hopefully didn't create).
    To take this case, there will be a time when tractors, productivity, heavy mechanisation will be the issue and not having a road to get your crop to where people could consume it.

    ReplyDelete
  19. And if you really want to think about improving the subsidy programs and reduce the corruption in them, the stories on Malawi mention it.

    Part of the disagreement between the two aid camps and the government and the opposition was on the nature of the system.

    I think the WB/IMF/UsAid side pushed for vouchers then starter packs (vouchers but not only for fertilizer) and a lot of targetting, while the Malawi opposition wanted an universal program basically an import subsidy (i bet the southern commercial farmers would want that), while the government was somewhere in between with their targeted distribution scheme.

    It's weird that direct cash transfers haven't been tried although "starter packs" came close.

    It's not weird at all, in my opinion that the government choose the solution they choose. A system that put that type of hierarchy in charge of distributing not only the vouchers but the product, with a lot of "autonomy" at all levels maximizes rent-seeking opportunities and patron-client relationships.

    The goal was to be able to steal some and to use the rest to build support, quite simply.

    And in general, in my opinion, things have to be thought about that way..You reduce that type of failure by reducing possible autonomous decision makers. And you do that by simplifying the program.

    You can't do more simple than direct cash transfers

    ReplyDelete
  20. Cho,

    A Rodrikian "growth diagnostic" would obvious start with the basic question of why? Its either a financing problem or low social returns. They have clearly pointed out that its mostly "low returns to economic activity" caused by the way government distorts the market "government failures". Here is the quote:

    "Development of agriculture itself is also important to bring about the structural change required for long-term growth. But the introduction of a complex set of subsidy programmes via local governments and cooperatives does not seem to be the most efficient route to develop agriculture. Private sellers of fertilizer are in trouble, and many do not even hold fertilizer stocks any more, since their market has been taken away. Local traders and network sellers need a predictable environment for incentives for long-term engagement in the sector. The recent huge government maize-purchases point in the wrong direction. The private traders who had entered the market are squeezed, holding back development of a sustainable marketing infrastructure in the rural areas is held back."

    I think I'm getting it now. Rodrik is an economist, but this is not really a subject that is economic in nature, but one of administration and government.

    So rather than look for an economist's view, perhaps we should look toward people who have specialized in administration instead.

    The Politics of Patronage in Africa: Parastatals, Privatization and Private Enterprise in Africa (Hardcover)
    by Roger K. Tangri (Author)

    Privatization of Parastatals: : Implications for Socio-Economic Development in Sub-Saharan Africa (Paperback)
    by George B. Samah Ph.D.

    Product Description
    In the pursuit of policies and approaches that would sustain and accelerate economic development after the declared departure of colonial powers, African governments set up parastatals to serve as conduit for economic development through which governments could deliver services to the general populace. However, there is evidence that most parastatals do not utilize resources efficiently; instead, they impose heavy burdens on public resources and distort their use in the economy. Given the shortcomings of parastatals, in the 1980s, the World Bank, the International Monetary Fund (IMF), USAID, and other international donor agencies came to Africa with a philosophy of privatization. These multi-national corporations and donor agencies discretely advocated the overhauling of parastatals but the suggested processes and methods to this end were vague. Nonetheless, the arm-twisting strategies of multi-national corporations and international donors forced African governments to succumb to the philosophy of privatization. Unfortunately, in general, the philosophy, policies and practices of privatization operated to the economic detriment of African countries. Thus, as pursued in this text, it is actively compelling that the process of privatization be examined critically, considering advantages and disadvantages as well as the economic profitability for countries in sub-Saharan Africa.

    ReplyDelete
  21. Cho,

    its about finding the balance between two extremely…poor subsidies that crowds out emerging fertiliser markets….and a pure market that does nothing for moving the nation forward….

    The thing is that we have over a century of experience to look back at.

    I think the balance is pretty clear - government ownership of 'The Commons' (infrastructure, the necessities of doing business or farming like fertiliser), and semi-free markets for entrepreneurs (government support for them, restrictions in the form of consumer protection and against private monopoly formation).

    Also, reading Ha-Joon Chang, the government businesses are usually used not so they can act as a rival to existing private business, but as a way to kickstart private business.

    Where is this 'private sector' in Zambia that the neoliberal theorists rely on to take over from the state? There isn't any, which is why they keep trying to attract foreign companies ('foreign investors' - although they are businesses, not investors).

    State Owned Enterprises are a stepping stone to having a private sector.

    Also, taking the politics out of the civil service and parastatals is going to make a huge difference, but that simply takes a combination of political will and the correct legal framwork to make them more independent of politicians.

    ReplyDelete
  22. Random,

    ”But once again, they don't even seem to think that lack of fertilizer in general is such a major constrain….”

    Of course they don’t….that is precisely my point. I think they have not demonstrated the basis for ignoring what is an accepted constraint among many people….I am not saying they are wrong to think its not, I just think they need to look at all the constraints and say why that one is not a particular constraint.

    ”And in this case, the government failure (or rather the bad design of the program) is a constraint to improving access to fertilizers, but not necessarily to small holder agriculture in general…”

    Well it is the basis for statement that I also question…I mean if the failure to government is a constraint to improving access to fertilizers, those that think fertilizer is critical to smallholder agriculture, could rightly argue that it is a constraint to small holder agriculture in general…..
    I think understanding whether x causes y, and y causes z is important.

    ”And they explain why, by looking at the factor that determines income variations in the sector. Now if you believe that access to fertilizer is the majot constrain, work on data that would suggest it.”

    But those income variations simply tell us that other factors are also critical in INCOME determination, it does not rule out whether a non-distortionary application of fertilizer would not deliver development in agriculture, which by the way is clearly demonstrated in their paper as the engine for diversification…

    ”They think building roads will help agriculture but they also think that it would provide non-farm income while it's being build. Non farm income that can be used to improve farms, buy fertilizer, send kids to school etc.. So it's a double-benefit and with part of it delivered while the investment is done. ”

    Yeah, I agree with that.

    ”May be a system of crops futures with not only FRA but the private traders could help without being too costly.. I don't know.”

    Oh, you do know….we discussed this here….

    ”I'm not sure they're thiking household credit specifically, nor are they only thiking about the small business side. The credit constrain prevents more farmers from making investments allowing them to diversify their income and prevents them from making personal investment in the same way…”

    They say specifically:

    Secure property rights are of course also a crucial determinant of rural investment. Cash constraints hinder diversification both into business and into new crops. Therefore it is crucial to give more household’s access to credit. This can be via direct measures, but also by strengthening the overall economic environment. While the Fifth National Development Plan emphasises the measures just mentioned, implementation in these areas seems to be low and slow.

    ”I've never read WMB because I find Easterly cranky and bitter. Seriously he sounds like a mean and angry old man, especially recently. And I have a hard time imagining him being interested in finding solutions. “

    That’s interesting…I always like reading people’s work that challenges my diametrically opposite view….not because I expect to change my view, but just to make sure they are not saying anything new…lol!!
    Anyways, Easterly is brilliant, and you should read his book….when you have time..I am sure you will like it…

    ”Just like Rodrik's works is a continuation of Aceomuglu…”

    I think there are some important differences, the main being that Rodrik reckons the Washington consensus reforms failed. Acemoglu believes that its not that they failed, but that for them to succeed it would have been necessary for there to be a change in the political equilibrium. Although it is possible that the Washington Consensus could have brought about such change in the political equilibrium, it did not happen. So they start from very different points.

    ”As far as the time element, it's a dynamic framework. The goal is to constantly remove constrains, including new ones as they come along (but that you hopefully didn't create). To take this case, there will be a time when tractors, productivity, heavy mechanisation will be the issue and not having a road to get your crop to where people could consume it.”

    Yeah, that makes sense. In other words, the economist is guaranteed a job for life! Now nothing can be better…lol!

    ReplyDelete
  23. Random,

    ”And in general, in my opinion, things have to be thought about that way..You reduce that type of failure by reducing possible autonomous decision makers. And you do that by simplifying the program. You can't do more simple than direct cash transfers”

    Its a weird one...because what you want is to eliminate corruption, but you also want the credit to be spent directly on the inputs.

    I would adopt the direct cash transfer, plus some clear reward within it...farmers collect cash, but their ability to get cash next time depends on how their productivity in the previous period or over some three year average...

    ReplyDelete
  24. MrK,

    ”I think I'm getting it now. Rodrik is an economist, but this is not really a subject that is economic in nature, but one of administration and government. So rather than look for an economist's view, perhaps we should look toward people who have specialized in administration instead. “

    Oh there’s no no go area for economists!

    ”The thing is that we have over a century of experience to look back at. I think the balance is pretty clear - government ownership of 'The Commons' (infrastructure, the necessities of doing business or farming like fertiliser), and semi-free markets for entrepreneurs (government support for them, restrictions in the form of consumer protection and against private monopoly formation). “

    You need to expand on this…..explain it to me as farmer in rural village…how does your model look like?

    ”Also, reading Ha-Joon Chang, the government businesses are usually used not so they can act as a rival to existing private business, but as a way to kickstart private business. “

    But I am not sure how that translates in practice..are you suggesting that for agriculture, government creates a fertilizer business which someone else can run few years later? But fertilizer is not a missing market…I mean its not a market that cannot exist without government intervention…it can, the problem is that when it does, it won’t lead to low fertilizer prices!!!

    ”State Owned Enterprises are a stepping stone to having a private sector.”

    But in the past this did not work well….infact State Owned Enterprises are difficult to disband….just look at ZAMTEL…its more of a blocking stone than a stepping stone….

    ReplyDelete
  25. Of course they don’t….that is precisely my point. I think they have not demonstrated the basis for ignoring what is an accepted constraint among many people….I am not saying they are wrong to think its not, I just think they need to look at all the constraints and say why that one is not a particular constraint.

    Yeah, they don't look at fertilizer use data and check if there's correlation. Well, that's a topic for a paper !

    That said, I'm pretty suspicious about it being an accepted constrain among many people. It's not like there's plenty of evidence on that side either.

    Well it is the basis for statement that I also question…I mean if the failure to government is a constraint to improving access to fertilizers, those that think fertilizer is critical to smallholder agriculture, could rightly argue that it is a constraint to small holder agriculture in general…..
I think understanding whether x causes y, and y causes z is important.

    That's pretty indirect though.
    In itself that government failure is not a direct constrain on rural growth. It may be a constrain in improving something that may be a constrain. That's two may be's !

    But those income variations simply tell us that other factors are also critical in INCOME determination, it does not rule out whether a non-distortionary application of fertilizer would not deliver development in agriculture, which by the way is clearly demonstrated in their paper as the engine for diversification…

    1. I don't know what you mean by agriculture devellopment. The paper is about reducing rural poverty. And poverty has to do with income.
    2. They demonstrate or attempt to demonstrate that diversification is an engine for reducing proverty, not that agricultural devellopment is the engine for diversification.

    ”May be a system of crops futures with not only FRA but the private traders could help without being too costly.. I don't know.”

Oh, you do know….we discussed this here….

    We did ?

    On whether it's household or business credit, they say:

    Cash constraints hinder diversification both into business and into new crops. Therefore it is crucial to give more household’s access to credit.

    Remember here the household are businesses too.

    That’s interesting…I always like reading people’s work that challenges my diametrically opposite view….not because I expect to change my view, but just to make sure they are not saying anything new…lol!!

    It's not what he says, it's how he says it.
    His "style" annoys me, not his views.

    But I'll give it a shot, at some point.

    I think there are some important differences, the main being that Rodrik reckons the Washington consensus reforms failed.

    Doesn't Rodrik believe the Washington consensus failed because of its lack of political sensitivity and its textbook-ish, first-best, let's-do-it-all-at-once approach ?

    In other words, the economist is guaranteed a job for life! Now nothing can be better…lol!

    Ahahahaha

    Aren't guaranteed work for ever in any framework ?

    Its a weird one...because what you want is to eliminate corruption, but you also want the credit to be spent directly on the inputs.

    You don't trust the people ?
    I mean if they need fertilizer, they will buy it. If they rather spend money on sending their kids to school or on buying cattle or eating, it's because they decide they need it better.

    You should read that wiki page on the Brazilian program. Of course it's a pure anti-poverty program and its goals are different, but the cash transfer thing succesfully replaced the web of pre-existing subsidies (on food, on gasoline, etc..) that tend to go to people who don't need them. And in general, people did spend the money on what used to be subsidized.

    I would adopt the direct cash transfer, plus some clear reward within it...farmers collect cash, but their ability to get cash next time depends on how their productivity in the previous period or over some three year average...

    Is that necessary ?
    I mean will farmers who reach higher productivty need cash ?
    And think about the money and time spent checking the data.. Or the rent seeking opportunities created in that.

    ReplyDelete
  26. Cho,

    ”The thing is that we have over a century of experience to look back at. I think the balance is pretty clear - government ownership of 'The Commons' (infrastructure, the necessities of doing business or farming like fertiliser), and semi-free markets for entrepreneurs (government support for them, restrictions in the form of consumer protection and against private monopoly formation). “

    You need to expand on this…..explain it to me as farmer in rural village…how does your model look like?

    First, we could use existing institutions to provide farm inputs at a reduced cost or free. For instance, the FRA or the marketing boards could be used to create local storage facilities for both maize and fertilizer. These depots could also be used to house farm machinery, and used for locations to train farmers in their use and repair.

    The FRA would transport grain from the farm to the depots and from the depots to whereever it is required locally, regionally and nationally.

    That would create separate departments that are involved in:

    - fertilizer procurement and/or manufacturing
    - storage depot building and maintenance
    - transportation (trucking)
    - information and education of farmers
    - sales and marketing (breaking into new markets, discovering new commercial products and applications, etc.)


    After they show they can generate more money than they use in their operations, they can be spun off as independent companies and floated at the LUSE.

    Getting there, management can be rewarded by giving them a percentage of shares in the company if they achieve their goal. In other words, they would be amply rewarded for being efficient and professional. On the other hand,the government does not inject money into loss making parastatals without a mandatory change in management.

    So there would be rewards for good performance, but also punishment for poor performance. Meanwhile, the management gets real world experience that will allow them to go into private business management without too much of a (business) culture shock.

    ”Also, reading Ha-Joon Chang, the government businesses are usually used not so they can act as a rival to existing private business, but as a way to kickstart private business. “

    But I am not sure how that translates in practice..are you suggesting that for agriculture, government creates a fertilizer business which someone else can run few years later? But fertilizer is not a missing market…I mean its not a market that cannot exist without government intervention…it can, the problem is that when it does, it won’t lead to low fertilizer prices!!!

    It doesn't matter whether it is a market that could exist in theory, what is important is that such a government business would step into the vacuum created by market failure in the provision of fertilizer. How it does that is a matter of judgment. However, why wouldn't the government train and attract local business where such market failures exist?

    There is a lot of market failure that results from the application of neoliberal theories - something the likes of Milton Friedman don't address.

    ”State Owned Enterprises are a stepping stone to having a private sector.”

    But in the past this did not work well….infact State Owned Enterprises are difficult to disband….just look at ZAMTEL…its more of a blocking stone than a stepping stone….

    In the past, the state has been heavily politicized. At the same time, much of UNIP's policies were applied during a time of war, which itself distorted the economy and society.

    I am not letting UNIP off the hook completely, because things could have been done better if there had been a better understanding of the opportunities of entrepreneurship to for instance supply people with a living wage.

    However, neoliberalism as it has been applied from 1991 onward is also not desireable at all. We have all seen the extensive market failures that result from simply withdrawing government and then try to compensate for it's absence by chasing down 'foreign investors' - which not only attracts a little capital, but also exports much more in profits and jobs (through loss of re-investment and exports of raw materials).

    So the question in the end boils down to a choice between government failure and market failure in the delivery of specific economic goods and services.

    ReplyDelete
  27. On IMF/World Bank hypocrisy:

    Just reading, I came across this remarkable statement from a World Bank employee in China back in 2004:

    " The task of increasing agricultural production and improving farmers' incomes still remains arduous, said Tang. There is still much for the government to do in lightening farmer's burden, he said.

    "If the government continues to do like before, just giving more money to build irrigation works or give subsidies for farmers to buy farm chemicals or seeds, the outcome can not be necessarily good and it might be money-wasting," he said.

    Thanks to the increase of grain price and decrease of tax and fees, farmers' income has been improved, Tang said. But the situation can not be changed soon since the agricultural tax will be canceled in the coming two years and grain prices cannot be increased greatly with the reference to the international grain price, he said.

    He suggested cutting down farmers' expenses, especially educational and medical payout. The central government should invest more in rural compulsory education and medical system.

    Bert Hofman, lead economist and chief of the Economics Unit of the World Bank's Beijing Office, agreed with him, saying individuals pay too much for education and many poor families cannot afford to.

    Tang said reducing educational expenses would change the life of rural people, which account for 60 percent of Chinese population. "

    So in the case of China, the World Bank is for increased government spending on education, but in the case of Zambia, they are violently opposed to it? Maybe it is a difference between individuals working for the WB, but I hate to have to believe that they see Zambia as a permanent exporter of raw materials, whose population should not be educated.

    ReplyDelete
  28. Random,

    ”That said, I'm pretty suspicious about it being an accepted constrain among many people. It's not like there's plenty of evidence on that side either.”

    Well may be not so accepted! Lol!

    ”That's pretty indirect though. In itself that government failure is not a direct constrain on rural growth. It may be a constrain in improving something that may be a constrain. That's two may be's !”

    The first step is to identify what constrained rural agriculture growth…that might reveal that the fertiliser market is a constraint….and then ask what constrains that and so forth...is it government failure, inadequate credit, etc?

    ” 1. I don't know what you mean by agriculture devellopment. The paper is about reducing rural poverty. And poverty has to do with income.”

    I meant agriculture growth….slip in drafting!

    ”2. They demonstrate or attempt to demonstrate that diversification is an engine for reducing proverty, not that agricultural devellopment is the engine for diversification.”

    Ha..I read it as saying…. agriculture growth is a necessary, but not sufficient condition for diversification.

    ”Cash constraints hinder diversification both into business and into new crops. Therefore it is crucial to give more household’s access to credit.” “Remember here the household are businesses too.”

    True. But ignoring for one second the other study we discussed which showed that household credit was largely not as effective as “business credit”, I would say it is challenging providing credit to households in our rural areas. It is much more complicated since it is linked to tenure security.


    ”It's not what he says, it's how he says it.
    His "style" annoys me, not his views.”


    By the way, I have now received “CITIZEN AND SUBJECT”. Looks good. I will turn to it shortly when I finish a curious titled new book I am reading called “One Zambia, Many Histories”….

    ”Doesn't Rodrik believe the Washington consensus failed because of its lack of political sensitivity and its textbook-ish, first-best, let's-do-it-all-at-once approach ?”

    He does. But I guess Rodrik is asking, what policies can work within the existing political framework. But I read Acemoglu as asking, what political framework would allow the Washington consensus policies to work, and how does that change in the political framework emerge?

    ”You don't trust the people ? I mean if they need fertilizer, they will buy it. If they rather spend money on sending their kids to school or on buying cattle or eating, it's because they decide they need it better.”

    I do, but I am arguing from wider social goals kind of perspective. I mean of course microeconomics 101 shows that cash transfers are superior to rationing. But the discussion here is about what overcomes what constraints to maximise social returns.

    ”You should read that wiki page on the Brazilian program. Of course it's a pure anti-poverty program and its goals are different, but the cash transfer thing succesfully replaced the web of pre-existing subsidies (on food, on gasoline, etc..) that tend to go to people who don't need them. And in general, people did spend the money on what used to be subsidized.”

    I’ll check it out.

    ”Is that necessary ? I mean will farmers who reach higher productivty need cash ? And think about the money and time spent checking the data.. Or the rent seeking opportunities created in that.”

    Obviously some people graduate out of the program, but those that remain require some reward mechanism….You don’t want people just to receive unlimited handouts from the state….

    ReplyDelete

  29. ”That said, I'm pretty suspicious about it being an accepted constrain among many people. It's not like there's plenty of evidence on that side either.”

Well may be not so accepted! Lol! 



    I mean, it IS accepted, no doubt about it. The issue is on what grounds.

    The first step is to identify what constrained rural agriculture growth…that might reveal that the fertiliser market is a constraint….and then ask what constrains that and so forth...is it government failure, inadequate credit, etc?

    You should use "fertilizer use/access". And you could add "supply constrains" or even better "demand constrains" (Health people based on the examples of Cuba and the Indian state of Kerala say that investments in health infrastructure pays off a lot more if there's investments in education that build up the demand for healthcare. I sort of wonder if something similar could happen).

    Ha..I read it as saying…. agriculture growth is a necessary, but not sufficient condition for diversification.

    Once again, I don't think so. I think it's the opposite: diversification -> growth.

    True. But ignoring for one second the other study we discussed which showed that household credit was largely not as effective as “business credit”, I would say it is challenging providing credit to households in our rural areas. It is much more complicated since it is linked to tenure security.

    Read that paper comparing fertilizer access in Benin and Malawi (i don't remember where i posted those Malawi links).
    But basically, Benin, a marxist-leninist state (with super weak tenure security) had better access. Because cotton exporters sold fertilizer on credit and repaid themselves on the harvest. Land wasn't part of the deal, ever.
    And of course, on top of that, farmers there tended to grow more than one crop at a time and fertilizer was used on more than cotton. (and also, smuggled subsidized fertilizer from Nigeria helped a bit).

    But basically, it doesn't HAVE to be linked to tenure security. Even if going through land makes it a lot easier.

    I will turn to it shortly when I finish a curious titled new book I am reading called “One Zambia, Many Histories”….

    Is it a recommendation ?

    He does. But I guess Rodrik is asking, what policies can work within the existing political framework. But I read Acemoglu as asking, what political framework would allow the Washington consensus policies to work, and how does that change in the political framework emerge?

    YES !
    Which tends to be depressing.. I mean how does one change political frameworks ? Especially when by reading Acemoglu, you tend to think they're influenced by long-long-term large socio-economic factors.

    But the discussion here is about what overcomes what constraints to maximise social returns.

    Yeah but in this case, it may be a good idea of letting the people themselves which constrain they want to overcome first.. No ?

    Obviously some people graduate out of the program, but those that remain require some reward mechanism….

    Better productivity is a reward in itself, isn't it ?

    You don’t want people just to receive unlimited handouts from the state….

    Actually, I do. lol.

    Well, not unlimited but I wouldn't mind a tax-funded guaranteed minimum income for everyone. Especially if it's a bargainning chip for all sorts of other thing (subsidies, tax breaks, etc..).
    I'm a Friedmanite like that. lol.
    And I believe that there will would STILL be less waste than with say, a nation-wide fertilizer subsidy program.

    ReplyDelete
  30. MrK,

    If I understand your vision correctly, its one of state led capitalism. The role of the state is basically to develop these industries and seeing them mature and run independently. Is that correctly?

    I also understood your case for such an approach to broadly in terms of being better than the neo-liberal approach. However, I am unclear whether there's any positive reason for it, per se, other than the fact that the alternative is bleak.

    In other words, what are your goals with state led capitalism? is it fairness? Is it about mass development? Is it avoiding abnormal profits that private sector companies do?

    Also I am unclear as to what form of ownership you see AFTER the government "completes" its job. Is it people ownership?

    I do have some additional questions if I may:

    1. Would these companies operate for profit or would they simply ensure average revenue matches average costs? If so, how do they expand?

    2. Are there specific industries you have in mind or will this apply to all industries?

    3. Do you see these companies operating in markets alongside private ones or just where private ones have failed to function? For example, do you see this model applied to banks in rural areas?

    ReplyDelete
  31. Cho,

    If I understand your vision correctly, its one of state led capitalism. The role of the state is basically to develop these industries and seeing them mature and run independently. Is that correctly?

    As a broad concept, right.

    I also understood your case for such an approach to broadly in terms of being better than the neo-liberal approach. However, I am unclear whether there's any positive reason for it, per se, other than the fact that the alternative is bleak.

    The reason for it would be the ample evidence of market failure that follows privatisation.

    In other words, what are your goals with state led capitalism? is it fairness? Is it about mass development? Is it avoiding abnormal profits that private sector companies do?

    All of the above. However, if I would boil it down to three main reasons, it would be

    1) Market failures obvious in the case of neoliberalsism;
    2) Precedent;
    3) It builds national industries

    Whereas the neoliberal model has never been shown to develop an economy, there are plenty of examples of state companies that stepped in in case of an economic need, and that were later floated on the local exchange.

    In the case of foreign investment, without the requirement of indigenisation or extensive sharing of profits, FDI will always remain a foreign entity, grafted upon the Zambian economy. Even to the point of flying in low-wage workers from China, in the case of both Zambia and Jamaica (see Live And Debt).

    The only way to economic growth is continuous re-investment of profits and costs in the Zambian economy. Costs should be spent on Zambian suppliers, and all these companies should pay taxes to the Zambian state.

    It is the absence of a large number (hundreds of thousands) of SMEs from the formal economy that is creating the high level of official unemployment.

    If the informal sector businesses were engaged by the state to become formal, and if the state created a nurturing environment of low taxation, training (including universal education), low or no interest rate business loans, infrastructure, it would transform the economy.

    Also, the way I see it, is that by offering low interest rate business loans, while banks were charging 20% or more, they would not be competing with the commercial banks, because no one (and few business models) can take on loans at 20% or higher interest rates. The banks would barely miss the business. In fact, by creating a larger middle class, the government could be creating an environment where the banks would be able to lower their interest rates because they could spread risk over a much larger number of customers. One of the reasons for high interest rates even in the presence of low inflation, is that the Zambian middle class is very small (about 20% of the population), and that this creates a very small pool of customers for the banks to serve. Increasing that number would create markets for all kinds of goods and services, and at lower prices because of economies scale.

    Also I am unclear as to what form of ownership you see AFTER the government "completes" its job. Is it people ownership?

    I would say that would be less important than re-investment of profits in the local and national economies.

    I would be in favour of some ownership by management, as well as pension funds, trade unions, insurance funds, etc. Owner/managers tend to be very interested in how their business is doing, while ownership by trade unions and pension funds redistributes profits back into society and the workers.

    And I think this could be achieved through regulation and taxation. Companies with a lower percentage of ownership by pension and trade union funds could be forced to pay higher taxes to make up the difference.

    I do have some additional questions if I may:

    1. Would these companies operate for profit or would they simply ensure average revenue matches average costs? If so, how do they expand?


    They would be ordinary companies. However, the government could create special business entities that could be (for instance) exempt from paying any taxes. It could do so in economic sectors it wants to stimulate - mining, agriculture, etc.

    They could also fill a gap in business services, in which case they would not need to make a profit but could just break even.

    2. Are there specific industries you have in mind or will this apply to all industries?

    It could apply to all industries that in some way underserved their markets. There is no way that development should be held hostage to the failure of private enterprise.

    3. Do you see these companies operating in markets alongside private ones or just where private ones have failed to function? For example, do you see this model applied to banks in rural areas?

    For the purpose of stimulating agriculture, mechanisation, acquiring land, yes, it could apply to rural banking. If people are forced to pay 20% or higher interest rates, there should be a government bank or finance scheme that would make farm equipment available at low or no interest - with the specific purpose of stimulating agriculture. Just urging banks to lower their interest rates might not work in the absence of a good legal framework - and has not worked, leading to the paradoxical state where inflation is well below interest rates.

    In general, where private enterprise is functioning and manages to provide goods and services against international prices, the state would not need to offer extra services. However, some things are better done by the state itself - ownership and construction of infrastructure like roads, utilities, etc. are often better off in the hands of people who do not need to turn a profit before anything else.

    Also, the state should intervene in an intelligent manner. For instance, the price of maize in Zambia is $200 per tonne, and in South Africa $140 per tonne. Instead of the state producing more maize to bring it down to South African levels, it could look at what the main constraint on maize production is (inputs, transportation, storage, land ownership) and address that issue alone. So it could create a transportation company, or a fertilizer factory, or a road construction company, depending on what was needed to get the process going.

    So the questions to for instance the neoliberal MMD and it's large number of presidential hopefuls would be:

    1) What are you going to do to create large consumer markets in Zambia (demand side instead of supply side) and

    2) What are you going to do to address the market failures caused by neoliberal economics?

    ReplyDelete
  32. ”I mean, it IS accepted, no doubt about it. The issue is on what grounds.”

    Agreed.

    The first step is to identify what constrained rural agriculture growth…that might reveal that the fertiliser market is a constraint….and then ask what constrains that and so forth...is it government failure, inadequate credit, etc?

    ”You should use "fertilizer use/access". And you could add "supply constrains" or even better "demand constrains" (Health people based on the examples of Cuba and the Indian state of Kerala say that investments in health infrastructure pays off a lot more if there's investments in education that build up the demand for healthcare. I sort of wonder if something similar could happen).”

    Agreed, though it is important to be clear between improving information and improving education, with the latter probably more crucial in the long term but more costly to implement.

    ”Read that paper comparing fertilizer access in Benin and Malawi (i don't remember where i posted those Malawi links). But basically, Benin, a marxist-leninist state (with super weak tenure security) had better access. Because cotton exporters sold fertilizer on credit and repaid themselves on the harvest. Land wasn't part of the deal, ever.”

    Yeah I have seen it. Of course their other ways on getting round the tenure insecurity problem, including better credit management database has recently implemented with the cotton farming in Zambia. I think what is encouraging is that by and large studies in Zambia reveal that credit is not a binding constraint for small farmers (which is why I question the FSRP paper for emphasising that), but inputs are. The issue is whether access to credit is constraint to wider development of fertiliser markets…and evidently not!!! Of course the FSRP does not examine that issue, because as you say its approach is rather different.


    I will turn to it shortly when I finish a curious titled new book I am reading called “One Zambia, Many Histories”….

    Is it a recommendation ?


    It’s good as a quick tour…yes. But nothing more. I may scan one or two chapters to share around to you and MrK on the “economic history” bits. I am keen to remind MrK that it is the Mulungushi and Matero reforms with their “state capitalism” that led to the decline in Zambia’s standing in the world.

    He does. But I guess Rodrik is asking, what policies can work within the existing political framework. But I read Acemoglu as asking, what political framework would allow the Washington consensus policies to work, and how does that change in the political framework emerge?

    “YES !
    Which tends to be depressing.. I mean how does one change political frameworks ? Especially when by reading Acemoglu, you tend to think they're influenced by long-long-term large socio-economic factors.”


    Lol!!
    I asked him how he thought we could change the political framework….I wanted to know whether the “leadership model” had any merit…in particular whether the political equilibrium can be shifted with minimal reforms aimed at incentivising “better leaders” to emerge - leaders who could eventually shift the political equilibrium from within…..after exonerating himself from my charge that in his model change can only come from outside….since the incentives of those within the system are caught in perpetual equilibrium….he just responded its difficult!!!


    Obviously some people graduate out of the program, but those that remain require some reward mechanism…. Better productivity is a reward in itself, isn't it ?”

    True! But the question is whether the cash transfer could distort other incentives.

    You don’t want people just to receive unlimited handouts from the state…. Actually, I do. lol. Well, not unlimited but I wouldn't mind a tax-funded guaranteed minimum income for everyone.

    Then why not just reduce taxes?

    ReplyDelete
  33. The first step is to identify what constrained rural agriculture growth…that might reveal that the fertiliser market is a constraint….and then ask what constrains that and so forth...is it government failure, inadequate credit, etc?

    What methodology one uses though ?
    I mean, it's much easier to comb data to answer yes/no questions than to answer an open one like "what constrained agricultural growth?".

    Agreed, though it is important to be clear between improving information and improving education, with the latter probably more crucial in the long term but more costly to implement.

    Well, without education information is semi-useless..
    And the cost of education doesn't need to be super high. Having litterate farmers will be a huge plus. Having farmers who finished high school and have an understanding of scientific methodology would be even better.

    Yeah I have seen it. Of course their other ways on getting round the tenure insecurity problem, including better credit management database has recently implemented with the cotton farming in Zambia. I think what is encouraging is that by and large studies in Zambia reveal that credit is not a binding constraint for small farmers (which is why I question the FSRP paper for emphasising that), but inputs are.

    Link ?

    The issue is whether access to credit is constraint to wider development of fertiliser markets…and evidently not!!!

    hmmm..

    I asked him how he thought we could change the political framework….I wanted to know whether the “leadership model” had any merit…in particular whether the political equilibrium can be shifted with minimal reforms aimed at incentivising “better leaders” to emerge - leaders who could eventually shift the political equilibrium from within…..after exonerating himself from my charge that in his model change can only come from outside….since the incentives of those within the system are caught in perpetual equilibrium….he just responded its difficult!!!

    ahahahah. yes.

    Better productivity is a reward in itself, isn't it ?”

True! But the question is whether the cash transfer could distort other incentives.

    If the incentives are income-based, I don't know that it's possible.
    But that's a matter of finding the right levels.

    Actually, I do. lol. Well, not unlimited but I wouldn't mind a tax-funded guaranteed minimum income for everyone. 

Then why not just reduce taxes?

    Well, I really like Friedman's Tax Credit thing.
    Which is a tax reduction for most and a credit for those who pay less than the credit in taxes.

    Why pay them ? Because some people are poor, unlucky or whatever and it's good to provide them with an income.

    ReplyDelete
  34. MrK,


    ”All of the above. However, if I would boil it down to three main reasons, it would be

    1) Market failures obvious in the case of neoliberalsism;
    2) Precedent;
    3) It builds national industries”


    I general, I think the first two are negative resources. They point to why we should not do something else, rather than why we should do what your propose. However, clearly the third is the centre of your case.

    ”Whereas the neoliberal model has never been shown to develop an economy, there are plenty of examples of state companies that stepped in in case of an economic need, and that were later floated on the local exchange. “

    But there also cases where state companies have failed to do the job.

    The Mulungushi and Matero reforms in Zambia are the prime examples. Kaunda also promised that ZCBC and Mwaiseni would later be floated. It never happened and reason is simple. State led companies suffer from serious incentive problems and are susceptible to state capture. Don’t get me wrong, I think it can work, but it requires a more sophisticated institutional arrangement that you are suggesting.

    ”In the case of foreign investment, without the requirement of indigenisation or extensive sharing of profits, FDI will always remain a foreign entity, grafted upon the Zambian economy. Even to the point of flying in low-wage workers from China, in the case of both Zambia and Jamaica (see Live And Debt).”

    Again, this is very Kaundanian. I would say the problem is “grafting” to the Zambian economy, the issue is about economic security in the long term. That I think is handled through effective diversification of the underlying economy, not through indigenisation. When the economy is diversified it is more resilient to changes in FDI flows or other non-economic pressures.

    ”If the informal sector businesses were engaged by the state to become formal, and if the state created a nurturing environment of low taxation, training (including universal education), low or no interest rate business loans, infrastructure, it would transform the economy. “

    Agreed.

    ”In fact, by creating a larger middle class, the government could be creating an environment where the banks would be able to lower their interest rates because they could spread risk over a much larger number of customers. One of the reasons for high interest rates even in the presence of low inflation, is that the Zambian middle class is very small (about 20% of the population), and that this creates a very small pool of customers for the banks to serve. Increasing that number would create markets for all kinds of goods and services, and at lower prices because of economies scale.”

    Of course I agree with you that larger pool of customers would lead to economies of scale emanating from higher savings and so forth – and thereby helping lower the cost of finance. But some of the problems with cost of high cost of finances are due to international finance issues. For example, we know that Zambia having a sovereign external rating may help with signalling good management, thereby allowing better private sector borrowing on international markets, at better rates. This clear would help with local credit constraints.

    ”I would say that would be less important than re-investment of profits in the local and national economies.”

    Except the ownership matters for how those “profits” are re-invested!

    ”I would be in favour of some ownership by management, as well as pension funds, trade unions, insurance funds, etc. Owner/managers tend to be very interested in how their business is doing, while ownership by trade unions and pension funds redistributes profits back into society and the workers.”

    But would you put restrictions on other people from abroad coming in taking over the companies down the line???

    Also what happens if those companies owned by management go under? Is there a safety net you would establish, and on what basis?

    ”And I think this could be achieved through regulation and taxation. Companies with a lower percentage of ownership by pension and trade union funds could be forced to pay higher taxes to make up the difference.”

    But surely taxation should be linked to income???? Doesn’t your proposal run the danger of making companies go under??

    ” They would be ordinary companies. However, the government could create special business entities that could be (for instance) exempt from paying any taxes. It could do so in economic sectors it wants to stimulate - mining, agriculture, etc.”

    ”They could also fill a gap in business services, in which case they would not need to make a profit but could just break even. “

    So you are talking about a private sector led company that is heavily regulated to ensure all it does is break even, after allowing for reinvestment.

    Any Regulator does that with private sector led monopolies. The only distinction you are making I think is that, these companies do not have to be sole monopolies. But you probably return to this later on.

    ”It could apply to all industries that in some way underserved their markets. There is no way that development should be held hostage to the failure of private enterprise. “

    Uh…you have answered it here.
    What do you mean by “underserved their markets”?

    ” If people are forced to pay 20% or higher interest rates, there should be a government bank or finance scheme that would make farm equipment available at low or no interest - with the specific purpose of stimulating agriculture. Just urging banks to lower their interest rates might not work in the absence of a good legal framework - and has not worked, leading to the paradoxical state where inflation is well below interest rates. “

    I am confused here :)
    We have this already. People are forced to pay higher interests rates!!!
    You may have to expand more on this.

    ”In general, where private enterprise is functioning and manages to provide goods and services against international prices, the state would not need to offer extra services. However, some things are better done by the state itself - ownership and construction of infrastructure like roads, utilities, etc. are often better off in the hands of people who do not need to turn a profit before anything else.”

    Its unclear what services mean here. A local grocery in a remote area might be a service. Does that fall under your framework. Do you envisage governments providing grocery stores where none exist????

    ”Also, the state should intervene in an intelligent manner. For instance, the price of maize in Zambia is $200 per tonne, and in South Africa $140 per tonne. Instead of the state producing more maize to bring it down to South African levels, it could look at what the main constraint on maize production is (inputs, transportation, storage, land ownership) and address that issue alone. So it could create a transportation company, or a fertilizer factory, or a road construction company, depending on what was needed to get the process going.”

    I agree with you to an extent, though I am less confident that government direct supply is the solution to every constraint. In fact some of the problems we have faced in this sector are all led by government agencies like the FRA and others. So “government failures” cannot be ignored.

    ReplyDelete
  35. Random,

    ”What methodology one uses though ? I mean, it's much easier to comb data to answer yes/no questions than to answer an open one like "what constrained agricultural growth?".”

    I think you start off with a theoretical framework about what may…follow that up with some survey of opinions…and then do statistical assessments to establish relationships….and proceed with trial and error policy solutions…FSRP are doing that…..very much a Dufflo style approach!! One needs to be on the ground…literally..

    ”Well, without education information is semi-useless..”

    It depends on the type of information. I recall you making the same point actually!

    ”And the cost of education doesn't need to be super high. Having litterate farmers will be a huge plus. Having farmers who finished high school and have an understanding of scientific methodology would be even better.”

    Agreed, but I have always said what is important is the type of education. I mean agriculture aside, the problem of human capital investment in Africa is that we worst investment on people when we very well know they’ll end up abroad or they’ll just become unemployment.

    Yeah I have seen it. Of course their other ways on getting round the tenure insecurity problem, including better credit management database has recently implemented with the cotton farming in Zambia. I think what is encouraging is that by and large studies in Zambia reveal that credit is not a binding constraint for small farmers (which is why I question the FSRP paper for emphasising that), but inputs are”. Link ?”

    I’ll email them across.

    ”Why pay them ? Because some people are poor, unlucky or whatever and it's good to provide them with an income.”

    Jobs would be better…lol!

    ReplyDelete
  36. I think you start off with a theoretical framework about what may…follow that up with some survey of opinions…and then do statistical assessments to establish relationships….and proceed with trial and error policy solutions…FSRP are doing that…..very much a Dufflo style approach!! One needs to be on the ground…literally..

    What do you mean by "survey of opinions" ?

    I mean, if the goal is to have empirical research on the constrains, you sort of have to consider more or less everyone of the possible ones. And it gets even harder when we adopt the Rodrikian approach about weighting the constrains.
    Other than that, I agree with trial and errors policy solutions even if it scares me to think of how some people are willing to overlook previous "errors".

    It depends on the type of information. I recall you making the same point actually!

    You're right, I did make that point.
    I guess it depends on prioritization. My point back then was that right now, levels of available information are inferior to levels of available education. So while improving education is a goal in the medium to long term, improving access to information will yield results in the short term.

    Agreed, but I have always said what is important is the type of education. I mean agriculture aside, the problem of human capital investment in Africa is that we worst investment on people when we very well know they’ll end up abroad or they’ll just become unemployment.

    I don't know if the kind of education is exactly the problem.. One successful industrialist in China was a litterature teacher of something like that. Rather it's what we get out of it. And that's why I keep talking about not distorting the labour market in a way.. We need countries where everyone has at least an high school education, where a plumber or a construction worker has been at least exposed to scientific method and other cool things. Instead we get countries where education is sold as a way to get out of the normal labour market.

    I’ll email them across.

    Got them. i'll read them in the next days.

    ”Why pay them ? Because some people are poor, unlucky or whatever and it's good to provide them with an income.”

Jobs would be better…lol!

    Not necessarily.
    What's the coast of giving them jobs instead of just an income ? What does one do to give everyone a job ? Create make-work programs ? State-owned companies ? As far as economic efficiency, the case is not that good.
    And beyond that, a lot of the poor, the unlucky have jobs. They're just not making enough. Which is a problem.

    I guess my opinion is based on things like the debates over protectionism in some develloped countries. Your unefficient automotive industry or steel industry or low-range manufacturing is crumbling due to foreign competition. Is it really better to save that industry by the way or tarrifs, subsidies for those companies or other plans than to make sure the workers aren't starving and can get a chance to learn a new trade or something ?

    ReplyDelete
  37. ”What do you mean by "survey of opinions" ? “

    I simply meant focused group discussions with the people involved to get feedback.

    ”You're right, I did make that point. I guess it depends on prioritization. My point back then was that right now, levels of available information are inferior to levels of available education. So while improving education is a goal in the medium to long term, improving access to information will yield results in the short term.”

    Agreed. That said, it is isn’t always the case that short term measures would be reinforce long term goals…sometimes they can work in the opposite directions…indeed that that is the whole basis of the moral hazard argument…but in the example we are discussing of course that is not the case and minimal information really can provide greater incentive for knowledge searching, etc…

    ”I don't know if the kind of education is exactly the problem.. One successful industrialist in China was a litterature teacher of something like that. Rather it's what we get out of it. And that's why I keep talking about not distorting the labour market in a way.. We need countries where everyone has at least an high school education, where a plumber or a construction worker has been at least exposed to scientific method and other cool things. Instead we get countries where education is sold as a way to get out of the normal labour market. “

    I kind of agreed, and we probably are saying the saying thing…I certainly agree that some form of minimum education is necessary, and indeed some regard that as up to second school…(the UK this week made it legally binding for children to stay in school up to 17 years)..my emphasis on the type actually picks up on the point that education has to achieve a certain goal….we need to look at the needs of the nation and ask how we can fill those gaps that lead to wealth creation……so at the moment, in Zambia (and much of Africa) informality is a problem…the government has tried to deal with this through vocation and other technical courses, it hasn’t worked….it is simply not leading to lower unemployment…in short the current courses or education seems to have very low returns….I think the answer is to go for a more apprenticeship type of system….where people come out of it with something that is immediately useful, and does not easily lend itself to exiting the market for something abroad or straight into the informal sector..

    ReplyDelete
  38. Interesting article regarding American agriculture:

    http://www.washingtonpost.com/wp-dyn/content/article/2008/10/18/AR2008101800234.html

    ReplyDelete
  39. Interesting article. However, it barely distinguishes between the family farmer, and corporate agribusiness, which many formerly independent family farmers now work for.


    Farm subsidies were supposed to be a temporary relief for small farmers during the Depression, but today they go mostly to big agribusinesses that hardly need them.

    Stop the Corporate Welfare for Agribusiness
    Robert B. Reich
    October 15, 2007

    I've got a way to reduce global poverty, decrease the number of workers crossing our borders illegally, save American taxpayers money, and cut your supermarket bills all in one swoop.

    How? Get rid of U.S. farm subsidies and tariffs.

    They were supposed to be a temporary remedy for small farmers during the Depression. But renewed every five years regardless of which party controls Congress, farm subsidies keep going and going. The latest version is now before the Senate. If enacted and signed into law, these farm subsidies will cost American taxpayers some $11 billion a year over the next five years.

    I can see why the nation might want insure small, family farmers against risk. But these subsidies go mostly to big agribusinesses that hardly need them.

    Read more...

    ReplyDelete
  40. Mr K,
    "I've got a way to reduce global poverty, decrease the number of workers crossing our borders illegally, save American taxpayers money, and cut your supermarket bills all in one swoop.
    How? Get rid of U.S. farm subsidies and tariffs"

    I agree. Fertilizer packs for subsistence farmers who otherwise would starve is one thing, but subsidies for agribusiness is quite another. Now if only they could overcome the resistance in the U.S. Congress where farming states have a lot of political power, it would quite an achievement. Same applies to Europe.

    ReplyDelete
  41. Hi Nice Blog .If your time is less valuable, then it is probably less worthwhile to employee time attendance.

    ReplyDelete

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