1. Distributional and Poverty Effects of Agricultural Trade Liberalization: The Case of the Democratic Republic of Congo Christian Otchia Nagoya University UNCTAD Virtual Institute seminar on trade and poverty Geneva, 8-10 September 2014 Cooperating policymaker: Charles Lusanda Matomina Ministry of Economy & Trade; Enhanced Integrated Framework, DRC Mentor: Marion Jansen International Trade Centre

2. Page 2 On the policymaker Name: Charles Lusanda Matomina Current Position: Senior Adviser, Ministry of Economy and National Coordinator of the Enhanced Integrated Framework, DRC Contributions to this project: Documents of past agriculture reforms Current agriculture reform agenda and priority for the government  Cash crops or food crops and livestock production ?  Transaction costs (trade and transportation margins)  Industrial parks Challenges Lack of previous studies Reliability of historical data ---> FAOSTAT was a good help ! Use of research findings Action plan for the “Note for Agriculture Policy and Rural Development” Background study for the Plan for rural poverty and food security

3. Page 3 Motivation Democratic Republic of Congo  2 nd largest country in Africa  Centre of Africa (9 neighbours)  80 million hectares of arable land (only 11% in use)  Diverse climatic conditions and abundant water resources.  Copper : 1/3 of the world reserves  Diamonds : 1/4 of the world reserves  Coltan : 4/5 of the world reserves Agriculture  21% of GDP  60% of employment  78% of low-skilled labour  Low productivity  High transaction costs  Policy bias against agriculture All indicators are alarming  Very high poverty rate (71.7%)  High inequality (0.46)  Unemployment reaches 3.7%  Underemployment is estimated at 72.7%  13.5% of the population has a formal job

4. Page 4 Policy Context DRC Poverty Reduction and Growth Strategy Paper (PRGSP-2) Growth, Employment, Poverty First Pillar Governance & Peace Second Pillar Economic Diversification Third Pillar Human Capital Fourth Pillar Environment Protection Re-launching Agricultural production Infrastructure Development Employment Promotion Restore Production Capacity This research

5. Page 5 Research Objective What is the impact of agricultural trade liberalization on poverty and income distribution What are the other policies relevant to agriculture growth that are likely to improve the relationship between trade liberalization, poverty and income distribution? Identify policy options to promote growth and reduce poverty in DRC

6. Page 6 Methodology

7. Page 7 Model Characteristics Single country, static CGE model consisting of 19 sectors Follows the tradition of IFPRI CGE Modeling The model includes home consumption of non-marketed commodities Explicit treatment of transaction costs for marketed commodities  Imports  Exports  Domestic Transaction costs Marketing margins Transportation margins  Imports  Exports  Domestic

8. Page 8 Data 2005 National Accounts based on SNA (1993) Household and Informal Producer Survey ( 2005, 12098 Households) 19 activities and commodities Household autoconsumption Transactions cost Labor disaggregation (location and skill) Tax disaggregation (9 categories)

9. Page 9 Design of Policy Scenarios Scenarios Policy Description 1 Agriculture trade liberalisation100% cut in import tariffs in agriculture 2 Feeder roads development 20% reduction of agricultural transportation costs 3 Productivity growth in agriculture 5% increase in agricultural productivity 4 Agriculture trade liberalisation and feeder roads development Scenarios 1 and 2 5 Agriculture trade liberalisation, feeder roads development, and agricultural productivity growth Scenarios 1, 2, and 3

10. Page 10 Findings Agricultural trade liberalization has only a small effect on welfare  Small gains due to low initial tariffs and high transaction costs  Import price of agricultural goods falls more than domestic demand price  Lower producer price leads a reduction of agricultural value added price  Very small positive effects on factor remuneration

11. Page 11 Findings Feeder roads development boots agricultural exports and imports  More agriculture trade as import price falls and producer price increases  Substantial increase in export performance relative to imports  Farmers cannot react to lowered transport costs due to low productivity  Trade and construction sectors capture the most of these benefits  Return to all factors increases, except for urban high-skilled  Urban low-skilled workers gain the most as they are intensively used in trade

12. Page 12 Findings Agricultural productivity growth raises GDP and welfare significantly  Increase in the supply of agricultural goods leads to a reduction of demand prices  Agricultural imports contract and exports expand  Other sectors (processed foods, textiles, hotels and catering) also expand  All income groups benefit  Wage gains for urban workers are higher than for workers in rural areas  However, workers with lower skills gain more in rural and urban areas

13. Page 13 Findings Distributional effects: pro-poor in urban and pro-rich in rural areas

14. Page 14 Findings Gains are higher than when individual policies are implemented alone

15. Page 15 Findings Highest priority: Agricultural productivity and rural feeder road  No substantial gain for agricultural trade liberalization  Lowering transaction costs should be prioritized as net benefits are higher  Agricultural productivity growth generates competitive gains for agricultural exports  Welfare effects of agricultural productivity improvement dominate the other two policies

16. Page 16 Limitations  Productivity growth and reduced transportation costs are assumed to be exogenous  The model does not consider the resources needed to implement these policies  Future research should estimate costs associated with each policy and its financing sources  CGE model results are driven by functional forms and assumptions  Future research should conduct sensitivity analysis  The microsimulation module considers only changes in labour income (other sources remains constant)

17. Page 17 Policy recommendations  Establish an agricultural promotion agency to increase the government's capacity to implement effective agricultural policies  30 government structures and autonomous institutions are involved directly in agriculture  7 parastatal bodies are involved directly in agriculture  500 NGOs are involved directly in agriculture  Take concrete actions to increase investment in agriculture in rural areas  Increase agricultural budget share from 2% to 10%  Target productivity of smallholders as they are responsible for 80% of agricultural output

18. Page 18 Policy recommendations  Modernize the agricultural production methods for smallholders  Introduce improved hand tools and machines that can be used manually or powered by animals  Establish supply chains to provide spare parts and back-up services to farmers as government imported 3000 tractors  Facilitate access to modern harvesting, on-farm storage equipment to enable farmers to reduce post-harvest losses In the long run, public policymakers should:  Promote local production of agricultural equipment  Promote credit and subsidy programmes for poor smallholders to encourage them to invest in farm machinery

19. Page 19 Policy recommendations  Strengthen agricultural extension services, research, and education  Transform the top-down extension service into one that employs a more bottom-up participatory approach  Build capacity of the 13.000 field staff of the ministry of Agriculture to provide rural extension services

20. Page 20 Policy recommendations  Build and maintain rural feeder roads and markets  Continue current efforts of road construction but increase attention to their quality and sustainability  Direct investment toward local and village-level roads