Increasing the welfare effect of the agricultural subsidy program for food crops in Macedonia Dr. Marjan Petreski UNCTAD Vi seminar on trade and poverty 8-10 September, 2014 Geneva, Switzerland

Agenda Introduction of researcher and policymakers Background and motivation Objectives Survey overview Referent literature Methodology Findings Policy recommendations

Introduction of researcher and policymakers Marjan Petreski – Asst. prof. in Macroeconomics and Econometrics – Research focused on macro phenomena, in the last period making a switch toward micro-phenomena (mainly due to micro-data becoming more available) Nikica Mojsoska-Blazevski – Prime advisor to the Minister of Labour and Social Policy Biljana Trajkovska – State advisor for strategic planning in the Ministry of Labour and Social Policy Margarita Deleva – State advisor for rural development in the Ministry of Agriculture, Forestry and Water Management

Background and motivation Importance of wheat, maize and rice for Macedonian households – 24.5% of Macedonian households farm one or more of these crops – more than 50% of rural households spend more than 10% of the budget on them Poverty rate is estimated at 27.1% in 2011 – Very large part of poor household income is spent on crop food commodities and their products.

Background and motivation (2) Prices and quantities – The aforementioned commodities experienced large price increases between 2006 and 2012: maize (165%); wheat (118%); and rice (76%) – However, the production of food commodities has been declining since the shift away from the planning system in 1990s and is, on average, 60% of the production levels in – Rising prices were not enough to drag production up

Background and motivation (3) Government subsidies – ambitious agenda for subsidizing agriculture enacted in late budget funds reaching 4.5% of total gov’t expenditures in 2011 from virtual zero back in – An overarching objective to improve the living conditions and incomes, by targeting those who are predominantly living or temporary migrating to the rural areas. – Linear subsidization with sums per ha without prior analysis of the needs and optimal amounts 150 EUR per cultivated hectare up to 10 ha of cultivated land, which then drops to 90 EUR/ha for ha; 45 EUR/ha for ha; and 15 EUR/ha for above 100 ha No special eligibility conditions apply for the type of households producing these staple foods – Effects, however, to a large extent, unsatisfactory

Policy questions 1.What are the likely effects of the observed change in the level of food crop prices on households’ welfare in Macedonia? 2.What are the likely effects of the government subsidy program on welfare and could another pattern of subsidies’ disbursement improve the impact on welfare of households?

Methodology The change in welfare following a change in prices for a household is: – Δw i =Δp[(prod i -cons i )+ ηL i ] A simple methodology outlined by Singh et al. (1986) and Deaton (1989a, 1997) – subsequently widely applied: Barret and Dorosh, 1996; Budd, 1993; Ivanic and Martin, 2008; Wodon et al. 2008; Klytchnikova and Diop, 2010

Methodology (2) We identify which households, in which part of the income distribution and for which specific crop food commodity may benefit most of agricultural subsidies Based on findings, we propose a different scheme for disbursement for the same amount of agricultural subsidies in 2012 – i.e. we target specific groups (households) instead of a linear disbursement to everyone We use the 2011 Household Budget Survey

Results We present welfare effects: for rising prices of wheat, maize and rice; for the government subsidies for these crops; and for a new proposed scheme for subsidies’ disbursement

Welfare effects of rising prices - wheat and maize - Negative welfare effect of the rising prices for urban households – the effect being more pronounced for the female- headed urban households On the other hand, the overall welfare effect for rural households is positive – the effect being only negative for the female-headed rural households in roughly the first quarter of the income distribution.

Welfare effects of rising prices (2) - rice - Urban households are negatively affected by the price increase along the entire income distribution – do not produce rice, or produce only negligibly The result for rural households is mixed: – only the poorest households are slightly negatively affected – nevertheless, the poorest female-headed households, approximately half of them, experience a negative welfare change

Welfare effects of the introduction of government subsidies - wheat and maize - Important effects of the agricultural subsidy program for wheat and maize – the subsidy effect may range up to 60% of the total income for the poorest rural male-headed households – this share then reduces to 20-30% for male-headed households around the second quintile of the income distribution and – reduces to zero afterwards As female-headed rural households were found not to be largely engaged in wheat-maize production – the effect of the subsidy is small (about 10%) for the lowest two quintiles – somehow rises to 15-18% for the third quintile and – then reduces to zero

Welfare effects of the introduction of government subsidies (2) - wheat and maize - Given limited production of rice, the effect of the government subsidy is also small or negligible – mainly because both poorest male- and female- headed rural households were found to be larger consumers than producers of rice

Estimated subsidies

Combined effect

New scheme for subsidies’ disbursement Three lines of thought given above findings: – The poorest female-headed rural households should be targeted in priority to get them into the production of wheat and maize; – All rice producers should be targeted with possibly larger subsidy per cultivated hectare for male-headed rural households in the first decile and female-headed counterparts in the first two quintiles of the income distribution; – Poorest urban households should be considered by the program for wheat and maize (the rice production being rather specific), with more intense targeting of the female-headed ones assuming the possibility for the agricultural program to be accompanied by a program for a usufruct of a state-owned land and one of subsidies for purchase of the minimum equipment for agricultural production

Welfare impact of the new scheme - wheat and maize - The new scheme produces a sizeable effect for the targeted urban households – the (small) ‘intervention’ by the government turns the welfare effect from significantly negative to significantly positive – effects are particularly large because these households are usually inhabited in smaller towns and can relatively easily be engaged in agricultural production Targeted female-headed rural households may also reap large benefits if larger production is adopted – households would need to increase their wheat-maize production from presently very low amounts to at least the average of about 1.15 cultivated hectares

Welfare impact of the new scheme - rice - Two important caveats with regard to the cultivation of rice and subsequently to the proposed scheme – Urban households are unlikely to be steered to produce rice even with offering free-of-charge state-owned land or additional subsidies for initial investment in machinery – specific process – The proposed scheme targets all rural households (producers or not) – ambitious: specific regions – Hence, overestimated results Though, results suggest that the effects of a well- targeted subsidy program for rice may be sizeable – For the female-headed poor rural households, the overall welfare effect turns into significantly positive and increases considerably the household income.

Estimated subsidies – new scheme

Conclusions Results suggest that rising prices for all wheat, maize and rice exerted positive welfare effects for the male-headed rural households only – While the effect for the female-headed rural and all urban households has been generally negative On the other hand, the welfare effect of the government subsidy program for wheat and maize has been positive for all rural households, but fairly larger for male-headed ones. – The one for rice has rather limited effects, largely due to the small offered subsidy amount versus the large effort needed for the cultivation of rice. Overall, both price and subsidy effects were found positive only for the rural male-headed households.

Conclusions (2) New subsidies scheme: – targeting female-headed rural households for both crops – male-headed rural households for rice aiming to steer non-producers into production where possible through larger subsidy per cultivated hectare – all poor urban households for wheat for the poor urban households, we also propose a possibility for a usufruct of state-owned land and initial subsidy for investment in machinery/seed Results: – significant welfare effect for poor urban households for wheat- maize ranging up to 30-40% of the initial income – targeting poor female-headed rural households may elevate the impact up to half that of males – the effect for poor rural rice producers may be also large – up to 20% of the household income - assuming the effort needed for starting off a rice production.

Policy recommendations Put particular emphasis on poor female-headed rural households for both wheat and rice production; Increase the subsidy for rice production due to its specific conditions for cultivation and large effort needed; and Offer the usufruct of state-owned land and start-off grants for poor urban households to get them into the production of wheat and maize

Thank you for your attention!