WELFARE AND PRODUCTION EFFECTS OF TECHNICAL CHANGE, MARKET INCENTIVES AND RURAL INCOMES: A CGE ANALYSIS OF UGANDA'S AGRICULTURE

In Uganda, as in much of sub-Saharan Africa, poverty is concentrated in rural areas. Because agriculture accounts for a large share of incomes for these households, policies and external shocks that affect agriculture, including shifts in world prices, changes in agricultural productivity, and reductions in marketing costs, may have significant effects on rural poverty. In this paper, we use a Computable General Equilibrium (CGE) model of the Ugandan economy, explicitly designed to capture regional variations in agricultural production and household incomes, to examine the implications of these policy changes and shocks. Simulation results suggest that a doubling of area planted to coffee (the governments target) would increase rural consumption by less than 2.0 percent, because of an estimated 10 percent decline in the world price of robusta coffee and an 11.3 percent real exchange rate appreciation of the Ugandan shilling. Smaller productivity increases in food crops may have greater potential to raise rural incomes, provided that markets perform well and producer incentives are maintained. A five percent increase in agricultural productivity raises consumption by 1.3 to 2.1 percent among rural households and lowers food prices by 3.4 to 3.8 percent relative to the CPI, thus benefiting households with high food consumption shares. Reducing agricultural marketing margins by 30 percent leads to increases of 2.3 to 4.1 percent in consumption of farm households, with the largest gains in regions where consumption out of own production is lower. INTRODUCTION In Uganda, as in much of sub-Saharan Africa, poverty is concentrated in rural areas. 86 percent of the population lives in rural areas, and farm households comprise two-thirds of the population. Average monthly per capita household expenditures of these farm households was only 20 thousand Ugandan shillings (about $14) according to the 1999 Uganda Household Survey, about one-third the per capita household incomes of the urban population. Given the large share of agriculture in rural incomes, policies and external shocks that affect agriculture, including shifts in agricultural terms of trade, increased agricultural productivity, and reductions in marketing costs, may have significant effects on rural poverty. Constraints to agricultural development vary sharply across regions because of marked differences in agroecologies, infrastructure, and cropping patterns (Pender et. al, 2001). Robusta coffee, grown mainly in the southeast of the country, remains the major export crop, but has suffered steep declines in export prices in recent years. Increases in production and quality are possible, but these may lead to lower export prices (You and Bolwig, 2002). Improved varieties of maize and cassava have enabled increases in food production that made significant contributions to poverty reduction, particularly in the northern regions (Mosley, 2002). Without a marketing outlet for these crops, however, further increases in production may result in sharp declines in prices that reduce rural incomes. 1 Using various partial equilibrium approaches including calculations of income changes of adopter households, labor market effects, changes in consumer prices and off-farm linkages, as well as multi-market analysis, Mosley calculates that approximately one-tenth of the total 6 percentage point reduction in the poverty headcount index is due to technical change in maize and cassava (Mosely, 2002; p. 712.) In this paper, we examine the impacts of alternative growth strategies in the agriculture sector, including expanding coffee production and improving quality, raising yields of food crops, and reducing marketing costs. Our analysis uses a Computable General Equilibrium (CGE) model of the Ugandan economy, explicitly focused on regional variations in agricultural production and household incomes. Section 2 of this paper presents a brief description of the Uganda economy, making use of the 1999 Uganda Social Accounting Matrix (SAM) that describes the economic flows involving production activities, household incomes, and consumption in a consistent framework. Section 3 describes the structure and equations of the computable general equilibrium model for Uganda that explicitly takes into account key features of the Ugandan economy, including a high degree of own consumption of agricultural production and differences in cropping patterns across regions. Results from policy simulations are presented in Section 4; concluding observations are given in Chapter 5. THE 1999 UGANDA SOCIAL ACCOUNTING MATRIX The 1999 Uganda SAM was constructed using data on macro-economic aggregates, external trade flows and value added by sector from 1999, the 1999/2000 Uganda National Household Survey, and the 1992 inputoutput table (Uganda Bureau of Statistics, 1999, 2000; Government of Uganda, 2000; IMF, 1999). The SAM specifies 25 production activities, each producing a single unique commodity. Given the objective of examining the impact of various agricultural investments and policies on production, incomes, prices and consumption, the SAM has a more detailed treatment of agriculture. It includes twelve agricultural activities (coffee, other cash crops, maize, sorghum/millet, cassava, sweet potatoes, matooke (cooking bananas), horticulture, other agriculture, livestock, forestry, and fishing). Each of these agricultural is split into separate accounts for production in each of the six rural zones of the country. Seven industrial activities are included: meat and dairy processing, coffee processing, grain milling, other beverages, textiles and leather, manufacturing, and petroleum and chemicals). The service sector activities are utilities, construction, transport, private services, and public services. A 26 commodity, Agricultural Chemicals, is also included in the SAM, for which there is no domestic production activity; (commodity supply derives solely from imports). The SAM includes nine factors of production: capital, skilled and unskilled labor, and six types of land, corresponding to the agro-climatic zones listed at the bottom of Table 1 as defined in Pender et. al. (2001), (p. 16). Households are disaggregated into nine household groups. Urban households are split into poor and non-poor according to their 1999/2000 per capita household expenditures (based on the 1999/2000 National Household Survey), with poor households defined as the poorest 30 percent, approximately equal to the estimated percentage of poor households out of total urban households (28 percent) using data from the 1992 Integrated Household Survey (Appleton et. al., 1999). Rural farm households, (classified according to occupation of the head of household) are split according to the six agro-climatic zones listed above. Nonfarm rural households form the last household group, accounting for 19.8 percent of total population. Per capita incomes of farmer household groups range from 219.2 shillings/year for farm households in zone 5 (high potential unimodal rainfall, mainly in the Eastern highlands) to 352.2 thousand shillings/year for farmers in zone 3 (low potential bimodal rainfall in the southwest). Per capita incomes of the urban nonpoor (968.1 thousand shillings/year) are 4.4 times higher than those of the poorest farmer household group (Zone 5). MODEL STRUCTURE This analysis is based on the neo-classical structuralist CGE model of Lofgren et. al. (2001), with closure rules and model parameters set to reflect behavior of the Uganda economy. Production technology is represented by a constant elasticity of substitution (CES) production function in primary factors. 2 The model is developed from the IFPRI standard CGE model (Lofgren et al., 2001). 3 Zone 6 comprises two zones from Pender et. al. (2001): the mediumand low-potential, unimodal, rainfall regions at moderate elevation in northern Uganda. 4 A detailed description of the general model can be found in Lofgren et al. (2001). This class of models has developed from the neoclassical modeling tradition presented in Dervis, de Melo and Robinson (1982). These factors are combined with fixed-share intermediates using a Leontief specification. Producers are assumed to maximize profits, with primary factors of production paid according to the value of their marginal products. Imported goods are modeled as imperfect substitutes for domestically produced commodities, using a Constant Elasticity of Substitution (CES) Armington specification (both in final and intermediates usage). Similarly, we assume imperfect transformability between exported commodities and home goods (goods both domestically produced and consumed) using a constant elasticity of transformation (CET) function. World prices of export and import goods are assumed to be exogenous. In addition to the nine representative households discussed above, two other domestic institutions (enterprises and the government) are modeled. Households and enterprises receive income in payment for producers use of their factors of production, pay direct taxes to government (based on fixed tax rates) and save. Enterprises pay their remaining income (dividends) to households and the rest of the world are exogenous. Government revenues derive from tax receipts (sales taxes, direct taxes and import tariffs) and transfers. Government consumption is fixed in real terms. In the simulations in this paper, total investment and foreign savings (in foreign currency) are constant. Savings rates of households adjust to balance total savings and investment. The consumer price index is fixed, acting as the numéraire of the model. Thus, the nominal exchange rate (which is here also a measure of the real exchange rate since the domestic price level is fixed) adjusts to bring about equilibrium in the foreign exchange market. The simulations assume fixed total supplies of land and labor, with flexible wages (and land rents). This closure is designe