Linkages between Macroeconomic and Agricultural Price Policies

The objectives-constraints-policies framework applies to macroeconomic policy as well as to price policy. Common macroeconomic objectives include rapid economic growth, a desirable distribution of national income, reasonably low unemployment, and moderate or low inflation. In addition to facing the sectoral constraints of supply, demand, and world prices, macroeconomic planners are also confronted by a need to maintain an approximate balance in the national fiscal accounts (government revenues and expenditures) and in the foreign-exchange accounts (export earnings and foreign capital inflows versus import expenditures and foreign capital outflows). The macroeconomic policies available to further these objectives in light of such constraints include fiscal and monetary policies, budgetary policies, and macro price policies influencing the foreign-exchange rate, interest rate, wage rate, and land rental rate.

The direct effects of macroeconomic policy on agricultural systems are felt through the macro price policies, especially exchange-rate policy. Fiscal and monetary policies influence agricultural systems indirectly by the interest and exchange rates. Budgetary policy-decisions on allocating both the recurrent and the capital budgets of the national government-also have indirect effects on systems, because budgetary choices influence agricultural price policy (through the availability of recurrent funds for subsidies) and public investment policy for agriculture. The three kinds of macro price policies affecting factor prices can be important in individual factor markets, although little can be said about them in general.

Some useful general lessons can be drawn from the relationships among fiscal and monetary policy, inflation, and the exchange rate and those between the exchange rate and price policies. Inflation is caused principally by macroeconomic policy-decisions to run fiscal deficits financed by expansionary monetary policy-abetted by inflation abroad that causes the prices of imports and exports to rise. If the government chooses to have a fixed-exchange-rate regime, the exchange rate will be changed only through discrete policy decisions, not because of market forces. When governments create inflation and then choose not to depreciate the nominal value of their currencies (by changing the exchange rate so that more units of domestic currency are required for each unit of foreign currency), profits are squeezed in agricultural systems that produce tradable commodities. The real exchange rate becomes overvalued when the rate of depreciation is less than the rate of inflation. Overvaluation of the real exchange rate imposes an implicit tax on producers of tradables (by keeping the domestic currency prices of their outputs artificially low), forces farmers growing tradable food crops to pay implicit food subsidies that benefit consumers, and permits artificially cheap imported inputs. A policy creating inflation with fixed nominal exchange rates squeezes agricultural profits, transfers the burden of subsidizing food from the government treasury to farmers, and makes projects based on tradable inputs appear to be more profitable than they would be if the exchange rate were set appropriately.

This state of affairs can be corrected if a government chooses to change the exchange rate. Devaluations are often difficult actions to take politically, because their short-run effects usually benefit rural inhabitants who have limited political power and harm powerful urban interest groups. Some form of foreign-exchange rationing is inevitable when the real exchange rate is overvalued, and this rationing is most often achieved by quantitive restrictions on imports that compete with domestically produced manufactures. Politically powerful urban manufacturers and their employees then shift from being supporters of devaluation to being vocal opponents of it. The prices of their products are protected from the taxing effects of overvaluation by the import quota, and the overvalued exchange rate permits them to obtain tradable inputs at artificially low prices.