How Prices and Macroeconomic Policies Affect Agricultural Supply and the Environment

Abstract

There is clearly a link between agricultural incentives and the environment, but quantitative data on such topics as soil quality and land use are inadequate for sound analysis. Mamingi studies the literature on how agricultural prices and macroeconomic policies affect agricultural supply and how that supply affects the environment. He addresses the question of how effective agricultural incentives are in boosting the agricultural supply, particularly in Sub-Saharan Africa. Certain generalizations are common in the literature: Farmers are rational. They increase their output in response to an increase in real output prices. The agricultural supply response is inelastic in the short run (as low as 0.02), but elasticities for individual crops are generally higher than those for aggregate output. Elasticities are higher in the long run than in the short.

In theory, if farmers are rational, if output responds to price increases, measures should be taken to eliminate price distortion. But, Mamingi points out, our understanding of the quantitative dimensions of the agricultural supply response is surprisingly weak. He points to four potential sources of bias in the estimates:

The simultaneity of variables is disregarded in many studies, although most variables are jointly determined in agriculture.

Bias results from the omission of such key variables as roads (density and quality), population, education, and land characteristics.

Bias results from improper pooling of data from different countries. In many cases, results are very sensitive to the degree of pooling. Moreover, some variables - the consumer price index among them - are not directly comparable across countries.

In most time series studies, the aggregate supply response is treated as reversible, but according to fixed asset (or sticky asset) theory, the supply response is irreversible. Output is more responsive to price increases than to price decreases, as land, trees, buildings, and equipment acquired when prices were high are not discarded when prices are low. There is clearly a link between agricultural incentives and the environment: An increase in agricultural supply - mainly through expansion of the area cultivated - can lead to erosion, sedimentation, soil degradation, and a reduction in natural habitat. But quantitative data on relevant aspects of the subject - for example, on soil quality and land use - are very inadequate.

This paper - a product of the Environment, Infrastructure, and Agriculture Division, Policy Research Department - is part of a larger effort in the department to understand the impact of macroeconomic policies on growth, poverty, and the environment.