Economic Policy Adjustments in Developing Countries: Discussion

Both of the papers in this session use the term "structural adjustment" to refer to a package of policy changes, but Humphries and Jaeger focus on macroeconomic policy reforms, while Weber et al. focus on sector-specific policies to improve agricultural incentives. In developing countries where agriculture accounts for a large share of GNP and trade, macroeconomic and agricultural sector policy reforms can be highly complementary. Although these two papers approach the subject of policy reform from differing perspectives, they provide companion evidence on the limitations of policy reform. Two common themes emerge. First, policy adjustments are often based on erroneous assumptions. Second, several linked policy changes must be made together in order to be effective. In the remainder of these comments, I would like to compare the conclusions of these papers on sub-Saharan Africa with evidence from Southeast Asia. Humphries and Jaeger focus on the links between macroeconomic policy changes and agricultural incentives. Good macroeconomic management should aid agricultural growth. Exchange rate adjustment is particularly important to agriculture because the agricultural sector typically produces a larger proportion of tradable goods than the industrial and service sectors. Two countries in Southeast AsiaIndonesia and the Philippines-provide examples of how macroeconomic management can influence agricultural incentives and growth. Both countries experienced declining external terms of trade for their exports during the 1980s. Yet, through implementation of two devaluations, Indonesia has successfully maintained a current account surplus and raised the price of tradable goods relative to nontradables (Dorosh). The Indonesian agricultural trade surplus increased as a share of GNP (World Bank) and the real agricultural wage rose from the mid-1970s to the mid-1980s (Roche). In the Philippines, the peso became increasingly overvalued during the 1970s and the early 1980s (Intal, David, and Nelson). David found that changes in the exchange rate were the most important variable explaining the largely declining domestic terms of trade for agriculture. Philippine agriculture's share of exports fell and real incomes in rural areas were stagnant between the mid-1970s and the early 1980s (David). An important question raised in the Humphries and Jaeger paper is whether exchange rate devaluation is automatically reflected in the prices of agricultural commodities. In Indonesia, the above example of successful macro management, Dorosh found that rice and fertilizer were essentially nontraded goods because of tight government management of these markets. Therefore, part of the Indonesian success story in agriculture must be attributed to policies specific to rice production. Good macro management did contribute to better incentives for other staple food crops (Dorosh). Although not all agricultural prices move with border prices in Southeast Asia, the degree of government intervention in agricultural markets seems to be far greater in African c untries. Humphries and Jaeger report very low verage NPCs of .3 to .7 for several African countries, and their overall results show the limited reflection of border price increases in producer prices. Simple realignment of the exchange rate will not have the intended effect of improving agricultural incentives without corresponding reforms in agricultural price and marketing policies. This finding is the most important contribution of this session. Humphries and Jaeger's findings also have strong implications for macroeconomic management. An exchange rate devaluation will Laurian J. Unnevehr is an assistant professor, Department of Agricultural Economics, University of Illinois. The author thanks Gerald C. Nelson for comments on a draft of this discussion.