Framework for Agricultural Policy Analysis

Governments are assumed to have broad objectives that they are trying to further through interventions in the agricultural sector. The three most common objectives are efficiency (the allocation of resources to effect maximal national output), income distribution (the allocation of the benefits of agricultural production to preferred groups or regions), and food security (the short-run stability of food prices at levels affordable to consumers, reflecting the adequacy of food supplies, and the long-run guarantee of adequate human nutrition). Government actions that can further all three objectives are likely to be taken. Typically, however, the promotion of one objective conflicts with one or both of the others. In that situation, policy-makers must trade off gains in one area with losses in the others. For example, small losses in efficiency might be tolerated if the action were believed to result in significant improvements in income distribution or food security. Policy-makers make these tradeoffs explicitly or implicitly by forming value judgments about the worth of different objectives.

The need to make tradeoffs arises because of constraints in the economic system. Three categories of constraints limit the ability of policy-makers to realize all that they would like from their agricultural sectors. Production is limited by supply constraints-the input requirements of production technologies (for farming and processing) and the costs and availability of inputs. The value of the commodities produced is constrained in part by the characteristics of domestic demand-levels and growth rates of populations and incomes, changes in tastes and preferences, and willingness to substitute various agricultural commodities. Domestic supply and demand constraints are moderated by world prices for agricultural outputs and inputs. Because world prices, the third constraint, determine the domestic prices of internationally tradable commodities when no policies intervene, price policies either increase, decrease, or stabilize domestic prices relative to the underlying world prices. For each agricultural system, therefore, the three categories of constraints can be depicted by a drawing of a supply curve, a demand curve, and the relevant world price line for the outputs (the cif import price for goods that are partly imported or the fob export price for exported commodities).

Policies are the instruments of action that governments employ to effect change. Three principal categories of policies are used to bring about change in agriculture. The first is agricultural price policy. Two main types of price policy instruments can be used to alter prices of agricultural outputs or inputs. Quotas, tariffs, or subsidies on imports and quotas, taxes, or subsidies on exports directly decrease or increase amounts traded internationally and thus raise or lower domestic prices; these policies apply only to volumes traded internationally, not to domestic production. Domestic taxes or subsidies, in contrast, create transfers between the government treasury and domestic producers or consumers. Some cause a divergence between domestic and world prices; others do not.

The second category of policies is nationwide in coverage. Macro-economic policy includes the central government's decisions to tax and spend (fiscal policy), to control the supply of money (monetary policy), and to impose macro price policies affecting the foreign-exchange rate (exchange-rate policy) and the domestic factors (wage, interest, and land rental rates). With the exception of land market policy, these decisions typically are not taken because of their impact on the agricultural sector. But macro policy effects, however unintended they might be, can more than offset the desired incentives of agricultural price policy.

In addition to price and macro policies, governments influence their agricultural sectors through public investment policy. Government budgetary resources can be invested in agriculture to increase productivity and reduce costs. The most common investments are in agricultural research to develop new technologies, in infrastructure (roads, irrigation, ports, marketing facilities), in specific agricultural projects to increase productive capacity and demonstrate new technologies, and in education and training of agriculturists to upgrade the human capital in the sector.