V. MACROECONOMIC POLICY

Macroeconomic policies comprise fiscal and monetary policy, budgetary policy, and policies that govern the economy-wide or macro prices-the exchange rate, the interest rate, and the wage rate. In most developing countries, macroeconomic policies have a major impact on the profitability of agricultural systems and the welfare of farmers. Governments typically extract a greater amount of tax revenue from agriculture than they spend on agricultural subsidies or investments. This bias against agriculture in budgetary allocations is then complemented with a pervasive tax on farmers, levied, sometimes unintentionally, through the exchange rate by skewed macroeconomic management. As a result, attempts to provide positive incentives to agriculture with commodity policies can be overwhelmed by negating macroeconomic policy that transfers resources away from agriculture and the rural economy.

This chapter focuses on these two primary biases of macro policy against the agricultural economy. The first part of the chapter introduces the central elements of budgetary, fiscal, and exchange-rate policies and examines how these dimensions of macroeconomic management can lead to biases in resource allocation to agriculture. The second part of the chapter is concerned with how the management of macro policy can impose a widespread tax on agricultural producers. This organization allows a clear focus on the two most critical macro-micro linkages.