Macroeconomic links to agriculture and the rural sector

What are the links of macroeconomic issues and the agricultural sector? The analysis of the connections between macroeconomic policies and agriculture in developing countries has emphasized mostly price effects caused by trade protection related to import substitutions industrialization (ISI) and by policies that affect the exchange rate (Krueger, et al., 1988; Valdes and Bautista, 1993). These analyses have focused basically on two indicators: the real exchange rate (an index of relative prices of tradable to nontradable products) and the internal terms of trade between agricultural and nonagricultural sectors. Usually these analyses have assumed that agricultural products are mostly tradable and that they do not have a significant content of imports in their production.

However, the impacts on agriculture from different macroeconomic conditions involve a larger number of variables and channels. This has long been recognized in studies of industrialized countries: In addition to the importance ofthe exchange rate for agriculture (Schuh, 1976), other, broader considerations have been factored in, such as income and demand effects, interest rates, and the impact of other monetary and macroeconomic variables operating directly or indirectly on the agricultural sector (see, for instance, Schultz, 1945; Gardner, 1981; the articles in Paarlberg and Chambers, 1988, especially Robert Thompson's; and Orden, 1986). In this chapter we take this second and broader view of macroeconomic issues and policy options and their impacts on agriculture.

Disaggregating the net income of an agricultural production unit helps better identify the channels through which macroeconomic conditions and policies affect the sector.

Defining agricultural net income (Ya) of a production unit (which in many developing countries is mostly family owned) as;

Ya = Value of agricultural production (VPa) — Costs of agricultural production (CPa) + Net Transfers from Government (NTG)

Vpa = Pa*Qa where Pa is a vector of agricultural prices multiplied (*) by Qa, which is a vector of agricultural quantities, produced and demanded,8 with each product properly indexed (indices not shown in what follows).

The determination of Pa (per product) depends on the different degrees of tradabil-ity. The price of perfectly tradable and homogeneous products (Pat) at the producer level is determined by (assuming the country is small in world markets):

where EXR is the exchange rate (domestic currency per international currency that we will call dollar); Paw is the price in world markets of the product; ta can be an import tax or an export subsidy; and margins are different costs from the point in the commercialization chain where the world price was defined and up to the point of sale of the producer.

The price of a pure nontradable is defined by domestic supply (Sant) and demand (Dant), which in turn depend on a series of macroeconomic and other factors:

Production of Qa is a function of factors of production owned by the productive unit (labor Lfa, capital Kfa, and land Tfa, using f to indicate that they are family owned), others hired (Lnfa, Knfa, and Tnfa; nf for nonfamily owned), and a variety of inputs.

Total external costs are:

CPa = w*Lnfa + Pk*Knfa + Pland*LANDnfa + i*CD + Pins*Inputs + Depreciation where w * Lnfa is the cost of nonfamily labor (salary times the quantity of nonfamily labor hired); Pk * Knfa is the cost of obtaining the nonfamily-owned capital (rental price times rented capital); i * CD is the cost of credit (interest times volume of credit); Pland * LANDnfa is the cost of rented land (rental price time the nonfamily land rented to produce); and Pins * Inputs is the cost of productive inputs (price times quantity).

Here costs include those related to factors of production and inputs that are not owned by the family. In that sense (VPa - CPa) is the return to all factors of production owned by producing unit or the value added controlled by that unit. Note that total value added generated by the agricultural unit exceeds the amount received by the owners of that productive unit.

Finally, agricultural net income (Ya) can include net transfers from the government:

All the previous channels affect the return to agricultural activities and the agricultural component of the incomes of rural families (Ya). However, those activities are part of a broader array of activities in the rural sector. For individuals and families in rural areas, incomes may also come from nonagricultural sources (Yna). In turn, all activities (agricultural or not) may feature exportable (Yax, Ynax), importable (Yam, Ynam), and non-tradable (Yant, Ynant) goods and services, as in the following simplified matrix:

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