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CHAPTER 2 A REVIEW OF AGRICULTURAL POLICIES IN BOTSWANA AND SOUTH AFRICA
Introduction
This chapter mainly reviews the agricultural policy in Botswana since independence in 1966 and considers how the policy has contributed (or failed) to the attainment of the objectives of this sector. Despite its reduced contribution to the macro-economy (see Chapter 1), the agricultural sector in Botswana, as in many developing countries, still plays an important role especially in rural areas since it provides employment and income opportunities as well as food to many people. Besides, the beef industry continues to provide the country with scarce export earnings so that it can import food, inputs and machinery.
Furthermore, because Botswana and South Africa are both members of the five-country Southern African Customs Union (SACU),1 this chapter also reviews the agricultural policy of South Africa in particular, as Botswana depends heavily on imported agricultural products from the latter. SACU administers a common external tariff in which all member countries apply a single duty on imported agricultural and industrial goods outside the customs
area. This chapter will therefore also briefly describe SACU’s agricultural trade and tariff policy in order to contextualize Botswana’s agricultural policy and show how the SACU policies affect household food security in the latter country. Finally, the chapter analyzes the recent institutional and trade tariff policy changes within SACU following the advent of global economic liberalization.These changes have a direct bearing on the way in which import tariff reduction for sensitive SACU food products could improve food security and contribute to agricultural competitiveness, greater choice for consumers in Botswana, in particular, and the SACU economy in general. SACU agricultural trade liberalization through of tariff reduction and improved market access is analyzed in Chapter 7 so as to assess its effects on food security, agricultural competitiveness and the overall economy of Botswana.While the aggregate economic contribution of the agricultural sector to the Gross Domestic Product (GDP) in the economies of Botswana and South Africa has been substantially reduced to less than 5 percent in both countries, the sector still possesses considerable potential to improve food security and employment creation, subject to the formulation and implementation of appropriate sectoral and macro-economic policies (Krueger et al., 1988; Sadoulet and de Janvry, 1995; Ingco and Nash, 2004). In fact studies carried out in many parts of the world indicate very strong forward and backward linkages between agriculture and the rest of an economy (Mellor, 1979; Vogel,1984; Fenyes and Van Rooyen, 1985; Mellor, 1986; Van Zyl and Vink, 1988;Nieuwoudt, 1989; Townsend and McDonald, 1998). In particular, these studies indicate that real increases in farm incomes create a demand for commodities as well as services in and outside the agricultural sector.One of the major reasons for the growth in demand for non-food items following real growth in per capita farm income, ceteris paribus, is that the proportion of food items in the household budget declines, and this provides additional disposable income for non-food commodities, including services (Engel’s Law; Nieuwoudt, 1989; HIES, Botswana, 1993/94). Therefore in lowincome countries, where the majority of people are still engaged in farming, public policies that discriminate against the real growth of agriculture and depress farm incomes will not benefit from the multiplier effects associated with sectoral linkages. Besides income and demand linkages, the agricultural sector in Botswana and South Africa provides raw materials for the manufacturing sector, investment capital and foreign exchange earnings in order to purchase food and other inputs, including capital goods and technology (Botswana SAMs for 1993/94 and 1996/97; South Africa SAMs for 1993, 1998 and 1999).The following sections review the agricultural policies of the two countries and examine the similarities in agricultural policies and the distortions in the respective economies. Similarities in such policies have led to macroeconomic effects as well as food security implications. Before a review of the agricultural policies of the two countries is undertaken, it is important, first, to understand fully the relationship between Botswana’s agricultural sector and SACU, in which South Africa has been a dominant player since the creation of the customs union in 1910.
Linkages between Botswana’s Agricultural Sector, SACU and Agricultural Policies of South Africa.
As pointed out earlier, it is important to understand these linkages. In order to introduce a brief analysis of the agricultural policies of Botswana and South Africa, it is essential to understand how Botswana’s membership of the Customs Union has influenced her policies and development strategies.
External Tariff Policy for SACU
When SACU was renegotiated in 1969 following the political independence of Botswana, Lesotho and Swaziland, the contracting parties made a major legal and/or political “mistake” in the Customs agreement. This legal provision, as enshrined in Article 4 of the SACU agreement of 1969, gave absolute powers to South Africa to determine external tariffs for agriculture as well as industry on behalf of the other members. Namibia, then a territory under illegal occupation by South Africa, joined SACU as a sovereign state in 1990.At the time when this provision was made and the agreement entered into, the smaller economies (Botswana, Lesotho and Swaziland) did not possess sufficient resources to run their countries. As a result, customs revenue from tariffs levied was indeed very necessary for socio-economic transformation as well as for consolidating the newly acquired political independence. Apart from underdeveloped primary agricultural production and limited agroprocessing in the smaller states, South Africa has developed more advanced agricultural and industrial sectors that would benefit significantly from tariff protection. In addition, the apartheid political system in South Africa made it difficult for this country to attract foreign investment. This in turn hardened the attitudes of both business and political leaders towards higher tariff protection and self-sufficiency in producing many goods including those in the agricultural sector (see table 2.3). It is no secret that the protection of high tariffs together with other discriminatory trade practices under Article 4 of the SACU agreement disproportionately favoured South Africa’s agricultural and industrial sectors (Leith, 1994; McDonald and Walmsley, 2001). Evidently, the granting of powers by the SACU states to South Africa to determine tariff levels on their behalf was de facto a surrendering of their fiscal mandate by the smaller BLNS economies. This later proved very costly for the smaller countries when they wished to industrialize, improve food security and develop competitive and sustainable farming. Although a compensation factor was built into the custom revenue formula, the smaller countries have consistently argued that it did not adequately cover their economic costs after they surrendered their sovereignty in fiscal policy. It is,however, gratifying that following the democratization of South Africa in 1994, SACU has renegotiated a new trade agreement, which came into force in 2002. The institutional and trade implications of the new agreement for food security and agriculture regarding Botswana, in particular, and SACU, in general, will be analyzed later in this chapter.
Agricultural Tariff Levels in SACU
For Botswana and other contracting parties, the high tariffs imposed on imported agricultural goods may have generated (in the short to medium term)benefits such as increased government revenue from the customs union,protection of fledgling industries including the export-driven beef industry,limited employment creation and economic surpluses for rent-seeking groups in the livestock and other sectors. For livestock farmers, in particular, the domestic producer price was significantly higher than the world price owing to the SACU import tariff, which created a wedge between these prices. Of course, Botswana’s membership of the Lome/Cotonou Agreement is also partly responsible for higher domestic beef producer prices. Through the Common Agricultural Policy (CAP) of the EU, members of the African,Caribbean and Pacific (ACP) group benefit from subsidized producer prices.
The EU provides direct producer subsidies to farmers as well as export subsidies for agricultural products, most of which are also exported by ACP countries.Table 2.1 describes the current bound and applied tariffs for selected agricultural products imported within SACU. Under SACU, beef, dairy, wheat and processed wheat products, maize and processed maize products and cane sugar are classified as sensitive products, which demonstrate very strong sectoral, household, income and employment linkages in SACU’s regional economy. As a result, these products are considered extremely important for food security and for agricultural as well as rural development. To distinguish sensitive SACU agricultural products from other farm products, the former attract higher import duties and in some member countries, permits are required from importers.SACU has stipulated bound tariffs for traded agricultural products as part of her commitment to trade liberalization under the World Trade Organization (WTO). Member countries to the WTO are obliged to submit proposals for bound or maximum import duties based on the value of the product, i.e. an ad valorem tax, in order to achieve a global trade system that is rules-based,transparent and consistent. Final bound tariffs, as approved by the WTO,constitute the base from which global trade liberalization through tariff reduction to improve market access is undertaken (WTO, 1995).Except for maize grain, final bound tariffs for other primary and processed agricultural products, as may be observed in table 2.1, are generally far higher than 50 percent. Bound tariffs for boneless beef and cane sugar are indeed very high compared to other products. Higher bound tariffs for meat and sugar products are also common globally (Ingco and Nash, 2004, p. 69). Final bound ad valorem duties are the maximum allowable tariffs that a country may impose on agricultural imports from any source. This means that SACU can no longer impose additional duties on products indicated in table 2.1 over and above the final bound tariffs.
Acknowledgements
Abstract
List of Tables
List of Figures and Charts
Acronyms/Abbreviations
CHAPTER 1: INTRODUCTION
1.1 The contribution of the agricultural sector to the macroeconomy of Botswana
1.2 Objectives of the Study
1.3 Problem Statement
1.4 Hypotheses of the Study
1.5 Research Methodology
1.6 Limitations of the Study
1.7 Commodities Chosen for the Analysis
CHAPTER 2: A REVIEW OF AGRICULTURAL POLICIES IN BOTSWANA AND SOUTH AFRICA
2.1 Introduction
2.2 Linkages between Botswana’s Agricultural Sector, SACU
and Agricultural Policies of South Africa
2.2.1 External Tariff Policy for SACU
2.2.2 Agricultural Tariff Levels in SACU
2.2.3 The Role of Agricultural Trade in Botswana’s Food
Security
2.3 A Review of the Agricultural Policy of Botswana
2.4 A Review of the Agricultural Policies in South Africa
2.5 SACU’s New Agreement and its Implications for Botswana’s
Food Security
2.6 Summary
CHAPTER 3: THE THEORY OF INTERNATIONAL TRADE AND CUSTOMS UNIONS
3.1 Introduction
3.2 Gains from International Trade
3.3 Theory of Comparative Advantage: The Hecksher-OhlinSamuelson Model
3.3.1 Hecksher-Ohlin-Samuelson (HOS) Assumptions
3.3.2 Income Distribution and the HOS Model:
The Stopler-Samuelson Theorem
3.4 Empirical Validity of HOS Model
3.5 Limitations of the HOS Theorem
3.5.1 Intra- Industry Trade
3.5.2 Increasing Returns to Scale
3.5.3 Imperfect Competition
3.5.4 No Barrier to Trade: Zero Transport Costs
3.5.5 Factor Price Equalization Theorem
3.6 The Rybczynski Theorem
3.7 The Theory of Customs Unions or Regional Free Trade Zones
3.8 Economies of Scale and the Customs Unions
3.9 Intra-Industry Trade and the Customs Union
3.10 Terms of Trade and the Customs Union
3.11 Non-tariff Barriers to Trade and the Customs Union
3.12 Rent Seeking and the Customs Union
3.13 Real Exchange Rate
3.14 Summary
CHAPTER 4: PARTIAL EQUILIBRIUM ANALYSIS IN AGRICULTURAL TRADE LIBERALIZATION
4.1 Introduction
4.2 Experiences with Partial Equilibrium Analysis in Agricultural
Trade Liberalization
4.3 Border price and Producer and Consumer Surplus/Welfare
4.4 Application of a Partial Equilibrium Model to Global Trade
Liberalization in the Agricultural Sector
4.5 ATPSM formulas applied to Liberalize Global Agricultural
Trade
4.6 ATPSM Results on Agricultural Trade Liberalization in
Botswana
4.6.1 The effects of global agricultural trade liberalization
on Botswana’s agricultural export earnings
4.6.2 The effects of global trade liberalization on
Botswana’s agricultural import Cost by Formula
4.7 Summary: Advantages and Disadvantages of the Partial
Equilibrium Approach in Agricultural Trade Liberalization/
Policy
CHAPTER 5: SOCIAL ACCOUNTING MATRIX THEORY (SAM)
5.1 Introduction
5.2 A description of a SAM
5.3 Justification for using a SAM-Multiplier Analysis
5.4 SAM-Leontief Models
5.4.1 Accounting/Income Multipliers
5.4.2 Fixed-Price Multipliers
5.5 Price Multiplier Analysis
5.6 Empirical Evidence Regarding Trade Liberalization using
SAM-based Models
5.7 Advantages and Disadvantages of SAM-Income Multiplier
Analysis
5.8 Summary
CHAPTER 6: A DESCRIPTION AND AN ANALYSIS OF THE
1993/94 SOCIAL ACCOUNTING MATRIX (SAM) FOR BOTSWANA
6.1 Introduction
6.2 Justification for and the description of Botswana’s 1993/94
SAM
6.2.1 Botswana’s Macro-SAM
6.2.1.1 Factor Account
6.2.1.2 Household Account
6.2.1.3 Other Institutions
6.2.1.4 Activity Account
6.2.1.5 Government Account
6.2.1.6 Capital Account
6.2.1.7 Rest of the World Account
6.2.2 Botswana Micro-SAM
6.2.2.1 Factor Account
6.2.2.2 Household Account
6.2.2.3 Rest of the World (ROW) Account
CHAPTER 7: POLICY SIMULATIONS/EXPERIMENTS USING SAM ACCOUNTING MULTIPLIERS
7.1 Introduction
7.2 Exogenous and Endogenous Accounts under
SAM-Accounting Income Multiplier Analysis
7.3 Policy shock based upon an increase in beef export
Income/Earnings
7.3.1 The Effects of an Increase in Beef Export
Earnings/Income on Food Security based on the
Multiplicative Multiplier Matrix (Ma)
7.3.2 The Effects on Food Security of an Increase in Beef
Export Earnings, based on Stone’s Additive Multiplier
7.4 Policy Simulation based upon an increase in textiles export
earnings
7.4.1 The Effects of an Increase in Textiles Export Earnings/Income on Food Security based upon the Multiplicative Multiplier, M a
7.4.2 Effects of an Increase in Textiles Export Earnings
based upon the Stone’s Additive Multiplier
7.5 Summary
CHAPTER 8: POLICY SIMULATIONS/EXPERIMENTS BASED UPON SAM PRICE MULTIPLIER ANALYSIS
8.1 Introduction
8.2 Household Consumption Expenditure and SACU Tariffs
on Main Food Items
8.3 Policy Experiments using Price Multiplier Analysis
8.3.1 The Effects of a Change in Domestic Price of Boneless Beef on Food Security in Botswana (based upon the Multiplicative Multiplier, MP)
8.3.2 The Effects of a Change in Domestic Price of Beef, after Tariff Liberalization, on Food Security (based upon Stone’s Additive Multiplier)
8.3.3 The Effects of a Tariff Elimination/liberalization as regards Maize Grain on Food Security (based upon the Multiplicative Multiplier, Mp)
8.4.2 The Effects of Tariff Liberalization of Maize Grain on Food Security (based upon the Additive Price Multiplier)
8.3.4 The Effects of Tariff Liberalization with respect to Powdered/Concentrated Milk on Food Security (based upon the Multiplier)
8.3.5 The Effects of Tariff Liberalization of Powdered/ Concentrated Milk on Food Security (based upon Stone’s Additive Multiplier)
8.3.6 The Effects of Tariff Liberalization of Wheat Grain on Food Security (based upon the Multiplicative Multiplier)
8.4 Summary
CHAPTER 9: SUMMARY AND CONCLUSIONS
REFERENCES
ANNEXURE
