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3. Policy issues


Definition of the term 'policy'
Objectives of dairy import policy
Instruments of dairy import policy

Definition of the term 'policy'

National policies play a critical role in livestock development (World Bank, 1981, p. 55). They not only modify the overall economic environment for agricultural production, but also directly affect production, marketing, consumption and external trade in livestock products. Thomson and Rayner (1984, p. 162) defined national policies as "a collection of governmental instruments - taxes, subsidies, quotas, regulations, state-funded research and development, and even speeches - which are coordinated by politicians and bureaucrats towards the attempted amelioration of perceived problems".

Sandford (1985, p. 5) pointed out that 'having or making a policy' also includes having to choose between different policy options. The definition of policy must therefore include government objectives as well as policy instruments. Hence policy is "a set of decisions which are oriented towards a long-term purpose or to a particular problem" (Sandford, 1985, p.4). In the context of this study, policies are defined as those decisions which affect the dairy sector, particularly dairy imports.

The definition and subsequent analysis of the objectives and instruments of dairy import policy does not cover all the possible policy effects on dairy imports. Thus a distinction must be made between deliberate policies for which governments design instruments which they hope will be effective, and those expedients which are publicly espoused in the full knowledge that they can never succeed. Furthermore, some policies are clearly targeted towards dairy imports or the sector in general, whereas others, such as exchange rate setting, have an indirect effect on them. This may lead to incompatibility, since government decisions in one sphere may well conflict with those in another.

Objectives of dairy import policy

Dairy imports have implications for food availability, for overall imports and for the development of domestic milk production. Bates (1983b, p. 297) maintains that food policy in sub-Saharan Africa "appears to represent a form of political settlement - one designed to bring peaceful relations between governments and their urban constituents". Other authors (e.g. Christensen and Witucki, 1982, p. 890) have drawn similar conclusions, namely that African governments have in their food and agricultural policies given highest priority to urban consumer welfare. The main objectives of their general import policies are usually to generate revenue for the national budget and to control the balance of foreign exchange, while sector policies usually aim to develop domestic production and achieve self-sufficiency. Most African governments are motivated by one or more of the following considerations when choosing policy options:

i) To provide the urban consumer with dairy products at a price which the government feels they can afford to pay;

ii) To generate revenues from dairy imports for the national budget;

iii) To control and possibly reduce the amount of foreign exchange that is spent on dairy imports; and

iv) To stimulate dairy development, thereby generating income for producers and moving towards self-sufficiency in dairy products.

Governments often pursue several objectives simultaneously, some of which may be conflicting. For example, it is difficult to charge low consumer prices for imported dairy products and at the same time reap large benefits from taxing such imports. A balance must then be struck by weighing the relative priorities of the conflicting objectives. As Sandford (1985, p. 6) puts it, "...governments do not have to opt exclusively for just one objective, but it is important that they consider which of their objectives are the most important and how much progress towards one objective they are prepared to sacrifice in order to make progress towards another".

The four objectives of dairy import policy are now briefly discussed before considering which instruments most efficiently promote the chosen objectives, which is the second decision facing any administration.

A government may pursue consumer interests (objective i) for the simple political expedient of retaining power, but also because it is concerned about overall consumption or the general level of nutrition of the people within certain areas or among specific groups, such as children or nursing mothers. The objective must be quantified, since there is little point in pursuing it with an inappropriate instrument. For example, before subsidising the importation of baby milk, the desirable price and quantity must be determined, as well as the target group to whom the milk is to be made available.

The main goals of a general import policy - to generate revenue and conserve foreign exchange (objectives ii and iii) - require little elaboration with reference to the dairy subsector. No foreign exchange payments are involved in dairy imports received as food aid, but neither is it politically feasible to charge tariffs on such imports. The two goals, which are otherwise compatible, are then in conflict.

A further characteristic of dairy imports is that, unlike grain, they come in many different forms - butter, milk powder, condensed milk and even flavoured yoghurt. Different tariffs may be levied on these products to generate revenue, but only after taking into account the national objectives towards the consumers.

Both foreign exchange conservation and import taxation increase domestic prices. Such measures protect local dairy producers and increase their share of the domestic milk market, though these effects may not have been the declared policy objectives. Many governments do in fact declare the attainment of self-sufficiency in basic foodstuffs (objective iv) as their chief objective, and this entails three problems.

First, to increase substantially domestic agricultural production, especially of milk, calls for a long-term commitment and consistent policy, but both are frequently lacking. Second, the term self-sufficiency itself needs clarification. By definition, a country becomes self-sufficient if it closes its borders and covers domestic consumption by domestic production. But this begs the question, at what level of per capita consumption is self-sufficiency to be achieved? Public announcements of self-sufficiency must include figures on both target consumption per person and target production to justify a certain rate of production, or direct measures to boost domestic milk production.

The third problem relative to self-sufficiency concerns a country's overall welfare. Van Dijk et al (1983) challenged the validity of the general argument that the welfare of developing countries will be maximised through free trade in dairy products. They cited such qualifying factors as the allocation of scarce foreign exchange, income or food distribution and the possible indirect effects of dairy production on agricultural development, but these factors qualify the free-trade argument without altogether overturning it (von Massow, 1985b, p.1). A government wanting to follow a welfare-maximising policy must be able to justify any production target deviating from the level that would be achieved under free trade.

Instruments of dairy import policy

Having discussed the reasons why governments may interfere with dairy imports, i.e. the objectives of dairy import policy, we shall now consider briefly the methods by which they interfere, i.e. the instruments of dairy policy. For convenience, policy instruments have been grouped under the four objectives discussed above. They are described in general, and their appropriateness to achieve one or more of the objectives in question is assessed.

A general consumption target and/or consumer price level for milk and dairy products (objective i) can be achieved by reducing existing import tariffs, by paying import subsidies and by using food aid. An overvalued exchange rate also stimulates imports. But to reach particular target groups within the population, more specific instruments must be designed, e.g. food stamps or special shops.

An instrument which benefits all milk consumers enriches those who can do without food subsidies. All general consumer-oriented instruments (e.g. import subsidies or untargeted food aid) tend to depress domestic prices, which in turn serves as a disincentive for domestic producers. In contrast, subsidies to defined groups can create a demand for milk that would not otherwise exist.

Targeted import measures help avoid or at least reduce disincentive effects, but they are difficult to implement. For example, it is possible to tax dairy imports at different rates or to subsidise imports of those products which are usually consumed by the lower-income groups. Such methods, however, are not the best way of reaching selected groups of consumers as they primarily raise the general average level of milk consumption.

Charging tariffs on dairy imports generates revenues (objective ii), but it also reduces the volume of imports. The level of tariff may be specified as a fixed amount, an ad valorem rate, or a progressive rate, and this has differential implications for the government's revenues. The different levels also determine the effect of the tariff on the quantities imported and consequently on domestic prices, production and consumption.

Consumers of imported dairy products are usually assumed to be the more affluent members of society, hence better able to bear the burden of taxation. Clearly, imposing import tariffs is not compatible with the promotion of consumer benefit. Thus if the government wants to give the poorer or more vulnerable groups access to cheap dairy products, it must exempt them from duty payments - which presents a considerable administrative problem. Alternatively, dairy imports can be taxed progressively and the revenue used to subsidise milk to specific target groups. But although there are ways of reducing the negative effects of import tariffs for some consumers, the overall welfare effect as a whole will always be negative, because imposing import tariffs conflicts with the consumers' benefit in principle.

Import tariffs also affect domestic producers and have implications for the foreign exchange account. Raising tariffs is compatible with two common objectives of dairy import policy, namely to save foreign exchange and achieve self-sufficiency. Reducing dairy imports reduces the hard currency bill and protects the domestic dairy sector, by increasing the price of dairy products. The rate of self-sufficiency automatically goes up when imports are reduced, but more often than not the increase is merely mathematical rather than a real success for dairy import policy.

Exchange rates are directly influenced by government policy in almost all African countries. If the rate is overvalued, as is often the case, all import prices are comparatively low when translated into domestic currency. Moreover, prices for dairy imports in the mid-1980s were below production costs even in many exporting countries, and are likely to remain so in the foreseeable future (FAO, 1985). Low import prices considerably reduce the drain of foreign exchange.

Governments can impose substantial tariffs on dairy imports and raise revenues from them, yet the price of dairy imports (in local currency, including the tariff) will still not exceed the domestic cost of milk production. Such a policy lessens the trade-off between revenue generation and consumer interests, while the government gets away cheaply in terms of foreign exchange, but the bill for it must be paid elsewhere in the economy.

Foreign exchange can be conserved (objective iii) by imposing tariffs to reduce dairy imports, and directly by controlling the allocation of foreign exchange through import licenses. Allocating foreign exchange for dairy imports has the same effect as a variable import quota, whose limit in volume terms increases with declining international prices.

As with all the other instruments which tend to reduce dairy imports, foreign exchange allocation is not compatible with the promotion of consumer interests. It does save foreign exchange though and serves those objectives that aim to stimulate domestic milk production, thereby helping to achieve self-sufficiency (objective iv).

Dairy development can also be pursued through a channelled increase in dairy imports, rather than a decrease. A number of different instruments are usually involved, including the use of dairy food aid as a major component. The complexity of such a policy, and its potential for general livestock development in Africa, are discussed in detail in Chapter 4.


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