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Lecture

Government Failures in Development

10 Pages
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Department
Political Science
Course Code
POL201Y1
Professor
Sophia Moreau

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November 1, 2010
Government Failures in Development
o What do governments in Africa do? They tax the output of farmers
and they tax the agricultural inputs
o Theyre trying to increase agricultural production without increasing
the prices they offer for the outputs (beans, coffee, rice, cocoa)
o What does this mean?
o They introduce economic inefficiencies like price distortions, non-
competitive rents
o Governments in Africa tend to undermine the market
o Subsidized: Fertilizers, seeds, machinery
o Taxed: Coffee, tea, cocoa
o Cost of inputs things farmers need in order to farm (fertilizer,
seeds, irrigation)
Elements of Agricultural Policy
o Cost of inputs (fertilizer, irrigation, etc.)
o Cost of outputs
o Cost of secondary/manufactured goods
o What does the farmer have to buy in terms of inputs and secondary
goods and how does it all add up?
o The inputs and the manufactured goods are expenses that the
farmer has and the cost of outputs is his income
o Banks analyze agricultural policy from the perspective of the farmer
Government Intervention
o Cost of outputs beans, coffee, cocoa, etc. (governments decrease
the cost of outputs); the cost of this is artificially depressed
o Cost of manufactured goods (governments increase this)
o Cost of inputs (governments decrease the cost of inputs)
o Decreasing income while increasing expenses governments also
subsidize the cost of inputs
1. The government depresses the price of crops; how exactly is it that
governments are controlling the market for crops? Monopsonies
o Governments depress the price of crops through monopsonies:
sets the price for a crop, buys all of a crop for farmers and resells it
either domestically or on the international market
o Farmers sell their crops to a marketing board and all of the sales
are sold to the marketing board (state run) and this sets the price
for the product everyone gets the same price in the same year
o Theres no competition; the price is set, stable and theres no way
you can get a better price for your product
www.notesolution.com
o If farmers are not able to sell their products on the open product,
this is called a monopsony (variation on the word monopoly)
o Domestic producers tend to receive less than the price on the
international market
o Sometimes, farmers receive less than half the world market price
for what theyre producing
o Effectively, the government is taxing groundnut farmers 62% in
Nigeria (1970) refer to graph: Robert H. Bates, Markets and
States in Tropical Africa, 1981
o One of the characteristics of agricultural production is that it’s
incredibly volatile; it goes up and down year by year, season by
season
o The volatility is one of the things that makes you very vulnerable as
a producer and as a country if you primarily produce agricultural
products
o One of the things that states say is that the reason theyre taxing
farmers to such an extent is that theyre going to accumulate this
surplus and in a year when the price is very low, they will be able to
subsidize: they depress the price of a good when the world price is
high, but then theyll subsidize the price of a good when the world
price is low
o Volatility of cotton prices, 197-2009:
static.seekingalpha.com/uploads/2008/6/5/js_resize.png
o Who does benefit? Where does this money go?
o That money usually goes to the state bureacracies that run that
particular monopsony
o And it usually goes to them in the form of higher salaries
o Another place the money goes is into the urban industrial sector
governments are favoring a strategy of economic development
through industrialization; theyre funneling state resources into
the manufacturing sector
o Under ISI, governments also benefit the industrial sector at the
expense of the agricultural sector by overvaluing the exchange rate
o Recall, when you overvalue the exchange rate, it makes it cheaper
for industries to import capital equipment
o Currency overvaluation makes imports less expensive, but harms
agriculture by exposing it to competition with cheaply-priced
imported food
o The majority of exports in the early stages of ISI are agricultural
exports: this hurts primary commodity exports
o Dutch Disease
o Youre not in a position yet to export manufactured goods
www.notesolution.com
o By overvaluing the exchange rate, youre primarily hurting the
agricultural sector because the price of all of your exports are going
to be high, but what youre exporting are agricultural goods
o Countries still overvalue and undervalue their exchange rates, even
though it’s more common now to understand exchange rates as
something that floats to the market price
o The most undervalued currencies right now are those of the Asian
countries: Chinese yuan, for example
o Big Mac Index: Chinese, Thailand undervalued; Norway and Euro
area overvalued
o If you were going to undervalue your exchange rate, it’s because
you want to depress the price of your exports
o If youve overvalued your exchange rate, it’s because mainly youre
an importer of products you want to make those products cheaper
than they would normally be
o One of the reasons for governments playing with their exchange
rates theyre trying to keep the domestic price of food low
o One of the reasons they want to keep the domestic price of food
low is…
o Theyre not only depressing the price of cash crops sold
internationally, but in pegging the monopsony price low, theyre
actually controlling the price of food for domestic consumers
o Controlling the price of food for domestic consumers urban
workers; they want to keep food cheap for urban workers
o This helps to keep the cost of labor down and it prevents food riots,
which can be fairly common in urban areas if theres a sudden rise
in a price of food like maize
o Foreign food is going to be cheaper if you can import cheap
foreign food, that’s going to depress the prices of domestic food if
the government is not protecting local growers with tariffs
o When world food prices go up, governments can ban exports to
prevent food shortages at home and to keep prices low
o One of the problems that governments have is they have less
control over food crops than they do over cash crops
o Food crops can be sold in private markets; cash crops are sold
abroad exporting
o You cant export individually
o Governments can control the price of cash crops, but they cant do
as good a job controlling the price of food crops
o It’s not so easy to control food crops through monopsonies
o Prices of food crops have much greater tendency to respond to the
laws of supply and demand
o One of the things that governments are able to do, because food
crops respond more to the laws of supply and demand and are less
www.notesolution.com

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Description
November 1, 2010 Government Failures in Development o What do governments in Africa do? They tax the output of farmers and they tax the agricultural inputs o Theyre trying to increase agricultural production without increasing the prices they offer for the outputs (beans, coffee, rice, cocoa) o What does this mean? o They introduce economic inefficiencies like price distortions, non- competitive rents o Governments in Africa tend to undermine the market o Subsidized: Fertilizers, seeds, machinery o Taxed: Coffee, tea, cocoa o Cost of inputs things farmers need in order to farm (fertilizer, seeds, irrigation) Elements of Agricultural Policy o Cost of inputs (fertilizer, irrigation, etc.) o Cost of outputs o Cost of secondarymanufactured goods o What does the farmer have to buy in terms of inputs and secondary goods and how does it all add up? o The inputs and the manufactured goods are expenses that the farmer has and the cost of outputs is his income o Banks analyze agricultural policy from the perspective of the farmer Government Intervention o Cost of outputs beans, coffee, cocoa, etc. (governments decrease the cost of outputs); the cost of this is artificially depressed o Cost of manufactured goods (governments increase this) o Cost of inputs (governments decrease the cost of inputs) o Decreasing income while increasing expenses governments also subsidize the cost of inputs 1. The government depresses the price of crops; how exactly is it that governments are controlling the market for crops? Monopsonies o Governments depress the price of crops through monopsonies: sets the price for a crop, buys all of a crop for farmers and resells it either domestically or on the international market o Farmers sell their crops to a marketing board and all of the sales are sold to the marketing board (state run) and this sets the price for the product everyone gets the same price in the same year o Theres no competition; the price is set, stable and theres no way you can get a better price for your product www.notesolution.com
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