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# ANNEX C - CLASSIFICATION OF COUNTRIES BY POLICY ENVIRONMENT

For comparative purposes countries in Sub-Saharan Africa have been classified into two groups based on the policy environment that existed in the mid- to late-1980s. The principal considerations for classification of countries are the direct policies that affect agricultural incentives (the real producer prices, levels of direct taxation i.e. NPC), and indirect policy measures which affect the competitiveness of the agricultural sector vis-a-vis other sectors in the economy and in international markets (real exchange rate).

On the basis of criteria for these key policy variables the countries were classified as shown in the table below as having a Favorable Policy Environment (FPE) or as having an Unfavorable Policy Environment (UPE). This classification differs in several respects from that used recently in (Africa's Adjustment and Growth in the 1980s (World Bank 1989) to compare "strong reforming" and "weak reforming" countries. Policy reform programs differ among countries and, given the kinds of policy changes undertaken they may or may not be expected to have any relatively shortrun impact on economic performance overall, or agricultural performance in particular. For example, reforms in public enterprises, govemment revenue collection, or reduction of government payrolls are all measures that at least partly share the goal of alleviating fiscal imbalances, to reduce deficit financing through money creation that is inflationary, and thereby lead to lower inflation, positive real interest rates, and better allocation of investments to promote efficient growth. These measures have longer-term objectives and therefore cannot be expected to affect productivity in the economy or in the agricultural sector over a five year period.

In addition, the categories of "strong" and "weak" reforming countries rely on formal agreements with Bretton Woods institutions as the criteria for being considered "strong reforming", rather than by having these reform programs manifested in objective policy performance indicators such as the real exchange rate or level of agricultural taxation. As a result of this different approach to classification, several differences arise in the grouping of countries.

First, the PPE category includes countries which have adopted _or mantaned_ a favorable policy environment, thereby including countries which have not undergone a stmctured reform program, but where on the basis of these policy performance measures, the need for such a program - or the detrimental effect of their policies on productivity - is less apparent (Benin, Burkina, and Cameroon fit this group).

Second, several countries considered to be "strong reformers", on the basis of the policy performance variables examined here, cannot be considered to provide a favorable policy environment, because exchange rate misalignment persists. As a result, Mauritania and Tanzania are considered to provide unfavorable policy environmtnts due to their exchange rate policy which continue to impose heavy indirect taxation on the agricultural sectors, and to make them less competitive with respect to other sectors and in international markets.

Several countries classified as "strong reforming" countries are here also considered to have favorable policy environments, but because the improvements in their policy performance variables are so recent (in 1986 or 1987), they are excluded from the comparisons of performance, since it is too soon to expect any significant response, especially in countries where agricultural exportables are tree crops where production response can take four or five years. These countries are Burundi, Ghana, Guinea, Madagascar, and Nigeria. Malawi is also a recent reformer, but because its agricultural exports are annual crops, a more immediate response can be expected.