Macroeconomic Policy and Agriculture

Macroeconomic policies (monetary and fiscal policies, exchange rate policies, and trade policies) can significantly impact agricultural development and food security, and vice versa. This complex relationship is the subject of a new book, Macroeconomics, Agriculture, and Food Security: A Guide to Policy Analysis in Developing Countries, written by IFPRI Visiting Senior Research Fellow Eugenio Diaz-Bonilla.

According to the author, macroeconomic agricultural policies are critical to both developing countries’ economies and the global economy for several reasons: (1) agriculture makes up a significant portion of developing countries’ overall domestic production, exports, and employment; (2) agricultural growth reduces poverty more than growth in other sectors; and (3) developing countries play a significant role in both global agricultural production and international agricultural trade. Thus, any policies that either encourage or impede agricultural growth and development can have serious impacts – both positive and negative – on economic growth and poverty reduction throughout the world.

The book begins with an introduction of macroeconomic policy analysis using a simplified macroeconomic consistency framework; it then goes on to present several theories related to the various aspects of macroeconomic policymaking in developing countries. According to the author, policymakers should keep in mind two essential principles when designing public policies: the Tinbergen rule, which states that the number of policy instruments used should be equal to the number of targeted policy objectives; and the Bhagwati principle, which states that policies should be tailored as closely as possible to their desired objective.

In addition, the book points out that while macroeconomic policies play a critical role in economic development and poverty reduction, such policies alone are not enough. Rather, policymakers should take a broader approach that looks at investments in human capital, social safety nets, market function, and infrastructure in addition to macroeconomics. The impact of such policies on rural populations should be particularly emphasized in developing regions such as Africa south of the Sahara.

Economic structures can vary significantly from country to country; hence, policymakers and policy analysts need to take their country’s specific structural characteristics into account when designing public policies. Many countries in Africa south of the Sahara are low-income countries with agriculture-based economies characterized by smallholder farmers, weak infrastructure, and high levels of rural poverty and food insecurity. Diaz-Bonilla estimates that public expenditures in SSA average 20 percent or lower of overall GDP and argues that macroeconomic policies in these countries should focus on increasing overall public expenditures to improve infrastructure, health services, education, agricultural research and development, and social safety nets. For example, his estimates place SSA’s expenditures on agricultural R&D at around 539 million USD; in contrast, that number is 1,693 million USD in East Asia and the Pacific region.

One area in which public expenditures is growing rapidly in SSA is input subsidies, specifically for fertilizer. In 2011, 10 SSA countries representing 60 percent of the region’s population spent almost 1 billion USD on input subsidies, a total of 29 percent of their overall public expenditures. Breaking this spending down, it becomes clear that these input subsidy programs can have a large fiscal impact on the countries in which they are implemented; Diaz-Bonilla finds that Malawi’s input subsidy program accounted for 2.8 percent of the country’s total GDP in 2010.

Determining the appropriate macroeconomic policies to ensure agricultural development and food security also requires a broader understanding of how country-level and global economic policies and development interact. For example, Diaz-Bonilla points out that the effect of economic growth in developed countries on developing country growth varies by region; for SSA, growth in the European Union is particularly significant, with 1 percent economic growth in the EU leading to 0.25 percent growth in SSA. In contrast, growth in the United States has a larger impact on growth in Latin America and the Caribbean.

Similarly, trade flows and the type of goods traded differ from country to country as well. For SSA, agricultural exports still tend to rely largely on coffee, tea, and cocoa, as well as textile fibers; other primary commodity exports include oil, lumber, metals, and diamonds. Exports from the region go mostly to Europe and other African countries. Therefore, any changes to trade policy in the European Union could have a significant impact on Africa due to these region’s greater trade and financial links.

The framework presented in this new book can provide a first step for policymakers to gain this expanded understanding of how regional and global policies interact, as well as how macroeconomic policies affect and are affected by other development strategies, such as social safety nets and value chain interventions.

On October 28, a policy seminar was held at IFPRI to launch Macroeconomics, Agriculture, and Food Security: A Guide to Policy Analysis in Developing Countries and to provide expert-led discussions on the important issues of macroeconomic policy and agriculture. View the full seminar below.

By: Sara Gustafson, IFPRI

Photo credit:Flickr: IFPRI-Images/Milo Mitchell