The fundamental problem faced by a policy monitoring study such as discussed here is what data to collect and how to assemble it in a way that is useful for policy analysis and understanding. A secondary problem of how to present and interpret the results is also important but not addressed here, although the range of possible uses and the ease of interpretation must obviously be considered in the design of the data.
Our suggestion is to develop a set of measures collectively called Agricultural Policy Indicators (API). These would provide a framework for indicating the magnitude of the incentives given to producers by agricultural policies and the investment in productive capacity in the agricultural sector by the developing country governments. The full set of API would also allow detailed analysis of the effects of national policies on the agricultural sector. The aim is to allow for the tracing of policy developments over time and to be able to establish, through further analysis, the link between incentives and economic performance and policy effectiveness.
The API would itself be organized under five “modules.” Specific indicators would be included in each module, but the modules themselves would be separable. They could be collected by different members of the same team or assembled from different consultants. They could also be undertaken by different institutions. But they are deliberately additive, starting with basis information and extending to more subtle and information-intensive indicators. These API Modules are described below.
Commodity Market Module
The key module that would be included for all countries focuses on commodity markets, including both outputs from the farm sector and purchased inputs (fertilizer, seed, fuel, machinery, water, etc.). Separate calculations would be made for:
• Output market policies (price supports on internal market, direct payments tied to production, etc.). Indicators would include RNPRs calculated by commodity, but these would be able to be linked with the MPS in OECD PSEs for comparability with Tier II countries. The main question to be answered would be: What incentives do producers get from the set of market price policies and other direct support for the major commodities?
Input market policies (input subsidies and taxes). Indicators would measure incentive/disincentive impacts of input policies, and combined with output policies to give adjusted nominal protection and ERP using a matrix of inputs by commodity. The main question to be answered would be: What is the impact on producer incentives of policies toward input markets?
• Actual applied tariff rates for the major imported goods and the traded inputs, so as to bring out clearly the possible difference between the tariff equivalents resulting from the applied rates and those from the bound tariff rates. Such differences could be associated with the importation of goods from other members of a regional trade agreement. In some cases, actual tariffs or their equivalents may be higher than bound rates, if safeguard or other contingent actions have been taken. Border policies (tariffs and non-tariff barriers, applied rates qualified by preferential access provisions). Indicators calculated as tariff equivalents and reconciled with NPR and MPS measures to give the relationship between border protection and additional protection from domestic supports.21 The main question to be answered would be “How do border policies contribute to the level of incentives afforded by other price policies?”
The basic methodology for the commodity market module would be the estimation of the price relationship between the import (or export) price, the domestic producer price and the domestic consumer price. For each commodity, the price gap between import price and domestic price would be disaggregated into border and domestic policy components. Any direct payments and input taxes/subsidies would be included to give a coefficient of the net incentive and net income effects of domestic price policy.
The second module, important for developing countries, would include measures of structural policy, including both factor market policy and expenditure on infrastructure. Specifically, calculations would be made for the effect of:
• Labour market policies (wage rate policies, training policies). Indicators of net subsidy or tax arising from labour market policies calculated from studies of labour market or estimated by short-cut methods. The main question to be answered would be: Does the government influence the signals coming from the labour market in a way that taxes or subsidizes agriculture?
• Capital market (credit policies). Indicators include capital subsidies calculated from data on lending policies of credit institutions. The main question to be answered would be: Does the government stimulate investment in the agricultural sector by making capital available at a concessionary rate?
• Land market policies (property rights, rental markets). Indicators include qualitative evidence of impediments in the land market as well as indications of the effectiveness of rental markets. The main question to be answered would be: Does the land market inhibit agriculture and if so does government policy address such inhibitions?
• Infrastructure (government investment in rural infrastructure). Indicators include absolute investment levels, levels per hectare or livestock unit, and investment relative to share of rural to national economic activity. The main question to be answered would be: Does government policy provide adequate roads, electricity, water and other infrastructure in rural areas?
• Marketing (policy towards marketing boards and other agencies). Indicators based on analysis of marketing margins and price gradients and contours. The main question to be answered would be: What share of the consumer or export receipts reaches the farm sector, and how does policy affect that share?
The incentives from the structural module would be additive to those from the commodity market module to give the total direct impact of agriculture-specific policy.
Macro Environment Module
The macroeconomic module is important in most developing countries as the effect of distortions in the economy as a whole can have a significant impact on the agricultural sector. These non-agricultural policies include:
• Macroeconomic environment (exchange rate policy). The indicators would measure the indirect effect of exchange rate disequilibrium, as was done in Krueger, Schiff and Valdés. Alternatively, if the data were inadequate to make such calculations, estimates of PPP exchange rates would be used. The main question to be answered would be: Is there a bias against tradable goods such as agriculture in the misalignment of exchange rates?
• Trade policy environment (non-agricultural tariffs and non-tariffs measures). Indicators would measure the indirect tax/subsidy on the farm sector as a result of the general price level impact of non-agricultural tariffs. The main question to be answered would be How much does the level of protection in the non-agricultural sector influence the profitability of agricultural enterprises?
• Price level and price stability (inflation and general price policies). Indicators of these policies would include levels of inflation, relative prices between farm and non-farm sectors and measures of price instability. The main question to be answered would be: Does the policy toward inflation and price stability encourage or discourage the farm sector?”
The incentives and disincentives given to the farm sector through macro-economic policies would be added to the direct incentive impacts measured by commodity to give a total direct and indirect policy incentive.
Regulatory Environment Module
Important to the farm sector but more difficult to reduce to quantitative indicators is the regulatory environment in which the sector operates. Increasingly, issues of food quality and safety have come to determine the price that farmers get in world and domestic markets. The main regulatory policies include:
• Food quality (implementation of both product and processing standards). Indicators would mainly be qualitative, classifying such policies along lines of instruments and policy scope. The main question to be answered would be: Does the government have in place regulations to promote appropriate quality control and ways of helping farmers to meet the standards demanded by the market?
• Plant and animal health (sanitary and phytosanitary standards). Indicators would be mainly qualitative, but include outbreaks of plant and animal disease as these influence markets and farm income. The main question to be answered would be: Does the government have in place adequate SPS measures for farmers to participate in international trade as well as protect domestic producers?
• Food safety. Indicators would be mainly qualitative, but include incidence of food-borne disease from local production. The main question to be answered would be: Does the government have in place adequate food safety measures for farmers to participate in international trade as well as protect domestic consumers?
• Environmental regulations. Indicators would be mainly qualitative, but include evidence of environmental problems that influence farm practices. The main question to be answered would be: Does the government have in place adequate environmental measures for farmers to run their enterprises in a way that does not despoil the environment?
The regulatory module would be used as a qualitative supplement to the direct and indirect policy indicators. But it is useful as an indication of longer-run sustainability and participation in markets. Evidence could be collected on a cross-section basis from specialist agencies or divisions in FAO.
Research and the deployment of technology
Rounding out the set of policy modules would be indicators that dealt with issues of research and technology. This module may not be estimated for all Tier I countries, though it would be useful to have some basic information to complement the other policy indicators.
• Research (government research and government sponsored private research). Major indicators would include spending on research for agricultural and food production. Such spending could be related to output levels and hectarage to indicate imbalances. The main question to be answered would be: Has the government a set of research policies that are geared towards the needs of domestic agriculture?
Advisory Services (government advisory services). Major indicators would include spending on advisory services for agricultural and food production. Such spending could be related to output levels and hectarage to indicate imbalances. The main question to be answered would be: Has the government a set of advisory service policies that are geared towards the needs of domestic agriculture?
Technology (government policy toward the uptake of new technology). Indicators would include regulations governing the spread of technology, patent and other protection of property rights, plant breeders' rights and farmer incentives to adopt technology. The main question to be answered would be: Has the government a set of technology policies that are geared towards the needs of domestic agriculture?
As with the regulatory module, many of the indicators will be qualitative or at best classificatory. They cannot be incorporated directly with the incentive indicators in the first three modules. Nevertheless they are useful as complementary information for evaluation of policy needs and directions.
21 Agricultural protection could also differ from tariffs for products in which a country is autarchic and thus the domestic price fluctuates between the c.i.f. and the f.o.b. price. Measurement problems are more complicated when the imported good is a differentiated product, as the price comparison may require detailed local knowledge.