CGE Modelling for Sub-saharan Africa: STAGE_DEV model applications Pierre Boulanger, Hasan Dudu, Emanuele Ferrari, Alfredo Mainar Causapé European Commission – Joint Research Center The views expressed are purely those of the authors and may not in any circumstances be regarded as stating an official position of the European Commission.

JRC: Function and mission The Joint Research Centre provides EU Institutions and Member States with scientific analysis and advice. JRC mission is to play a central role in creating, managing and making sense of the collective scientific knowledge for better EU policy.

JRC: Quick Facts Established 1957 7 institutes in 5 countries 3000 technical and administrative personnel 1 200 contributions to EU Policy 684 peer-reviewed scientific publications in 2013 Budget: €400 million annually

TS4FNS Macro analysis (national and regional economic systems) Support agricultural data retrieval (DATAM) Micro analysis (farm models) Meta-analysis of best-practice for a sustainable agriculture Drivers of demand for agricultural products Scientific partnerships and networks Analysis of CAP impacts on developing countries

Macro Analysis Ex ante policy analysis (EU and national): Agricultural inputs & investments programs Infrastructure investments Education & Health Social protection Trade (tariffs, non-tariffs, etc.) & Food aid Rural development programs/policies Others (national specific) + Impact of EU policies on African regions (e.g., CAP)

What we do? 2014-2019+ Support stakeholders to do CGE analysis for current policy issues Create a CGE model tailored for developing country context Create SAM and other data bases required Make ad-hoc analysis on demand Two-way knowledge transfer Funded by: EC-DG Development and Cooperation

JRC Current Activities Kenya Support for the strategic investment plan (in coop. with FAO/MAFAP) Senegal Support for the fiscal policy reform Support for the new investment programme 2018-2023 for «Plan emergent Senegal 2035» (in coop. with FAO/MAFAP) Knowledge transfer activities Ethiopia Cooperataion with EDRI to develop a new SAM with a new IO & CGE model to support Development Plan Workshop in November on CGE modelling and policy issues in Ethiopia (in cooperation with EEA)

STAGE_DEV: What is new? Home Production for Home Consumption (non-separability) and nested CES/LES (two level utility nesting) Labour market un/under-employment with labor supply decision Migration Segmentation Endogenous distribution of factor income Several types of investments linked to different capital types Recursive dynamic version with benchmarking to GDP, investment etc… Human capital Exclusive population accounting (birth & death rates) Food Security indicators Flexible CES Nestining

Senegal: Fiscal Policy Reform Plan Senegal Emergent 2035 The Emerging Senegal Plan (ESP) aims to accelerate growth to 7% to 8% over 2014-2018. Fiscal policy is the main policy tool in order to achieve policy objectives Mobilization of fiscal resources = Tax reform The margin for tax revenue growth is 2.8% of GDP (Ba and Diagne, 2016). Agriculture is a difficult sector to impose VAT (IMF, 2010)

Senegal: Governmet Spending Increasing share of development projects Significant input subsidies Transfers to Households

Policy options The Program for Accelerating the Pace of Senegalese Agriculture (PRACAS) – agricultural component of the ESP2035: Restructure the subsidy policy (accompanying measures) IMF (2017): agricultural sector is not taxed enough! income tax (with little exemption, and reasonable thresholds in particular for income from land and high agricultural incomes); consumption taxes (e.g. VAT). European Commission (2015): VAT exemptions and input subsidies should be reduced for a sustainable budget

Scenarios VAT: Increase to 18% Intermediate input tax: Increase to 18% All commodities Agricultural commodities Intermediate input tax: Increase to 18% All intermediates Except chemicals Income Tax: Increase Flat rate: Increase by 50% Progressive: Increase 0 to 100% (according to income & poverty rate in regions)

2014 Social Accounting Matrix 14 regions 54 activities (including 14 accounts of houshold producers), 53 marketed and 9 subsistence commodities 3 types of labor (skilled, semi-skilled and unskilled) in each region + 1 region for rest of the world (foreing workers). 4 capital types (agricultural, non-agricultural, livestock). 1 type of land (will be 2 soon!) 5 tax accounts (direct, indirect, sales, factor and tariffs) 33 types of representative households (rural & urban in regions, income groups in Dakar) Rest of the accounts follow conventions

Production Structure

Macroeconomic Indicators VAT yields better results, income tax also performs good, int inp taxing does not have much effect Trade weakens when shock is introduced, back to baseline levels over time Gov’t can increase spending significantly

Government Reveneus

Welfare: Over time Better macro performance comes at a cost: Welfare loss is higher under VAT all But… Becomes + over time Welfare gain in 2035 Int inp tax causes slight welfare losses Flat income tax is less welfare reducing in the long run! What changes over time? Capital stock Migration Human capital After a critical treshold, Gov’t spending on health and education makes difference For other scenarios this treshold cannot be reached

Conclusion (?) & Future Research We can capture main dynamics with the model & SAM we have More realistic scenario design What are the actual plans Better handling of investments Sensitivity analysis Better analysis of the results Regional differences? What determines that treshold and how can it be reduced?

Kenya: Boosting Fertilizer Production Export subsidy programme: €27 million per year NewFertilizer factory: €1.1 Billion – private Government of Kenya (2015): Fertilizer factory will reduce the prices by 40%, solve the accessibility issue for small holder farms, increase food staple production etc… Stage_DEV Model (2015): No! This will not happen!

2014 Social Accounting Matrix 9 regions 54 activities (including 12 accounts of houshold producers), 52 marketed and 18 subsistence commodities 3 types of labor (skilled, semi-skilled and unskilled) in each region + 1 region for rest of the world (foreing workers). 3 capital types (agricultural, non-agricultural, livestock). 2 type of land 5 tax accounts (direct, indirect, sales, factor and tariffs) 24 types of representative households (rural & urban in regions, income groups in Dakar) Rest of the accounts follow conventions

Main Scenario: Fertilizer 100% increase in fertilizer production Technical change in fertilizer production: 35% for N, 43% for P and 50% for K 5.15 billion Ksh investment (amortization) per year 80% of the increase => the non-agricultural capital supply remaining 20% is assumed to be used for transaction costs etc...

Sub-Scenarios Subsidies: Remove subsidies on fertilizers (around 5%) Protection: Impose tariff on fertilizers (impose tariffs to reduce imports by 50%; are 49% for N, 37% for P and 22% for K) Market : Extra 4 billion KSh. Investment for infrastructure (funded by government savings) Reduce trade&transport margins by 30% Extension : Extra 4 billion KSh. Investment for 7.5 million farm housholds (funded by government savings) Increase labor, fertilizer and seed productivity by 3%

Results: Fertilizer markets   Base Fertilizer Subsidy Protect Market Extension level % change from base % change from fertilizer scenario Production 7.82 100.0 -4.7 -14.5 2.7 2.9 Consumption 26.45 37.4 -7.5 -44.7 3.9 4.9 Supply Price 1.00 -22.0 -1.3 -4.1 0.7 0.8 Purchaser Price 1.04 -8.0 -0.5 15.2 -0.7 0.3 Export 0.27 224.2 -0.9 -2.8 1.2 0.4 Import 18.90 17.2 -8.7 -57.3 4.5 5.9 Exports/Production 10.07 64.0 9.4 -1.8 Import/Consumption 209.61 -15.8 -1.0 -21.8

% change from fertilizer scenario   Base Fertilizer Subsidy Protection Market Extension billion Ksh % change from base % change from fertilizer scenario Total Agri-Food 2363.21 0.8 -0.2 -1.2 0.4 1.5 Agriculture 1721.08 0.9 -1.6 1.7 Crop 1332.98 1.0 -1.9 0.3 1.8 Export Crops 328.40 2.7 -0.6 -6.3 -1.8 3.5 Food Staples 1004.58 0.5 -0.1 -0.5 1.1 1.2 Livestock 388.10 -0.4 Food 642.13 -0.3 HPHC 300.41 289.30 219.35 0.7 69.95 1.3 2.2 11.12 Marketed 2062.79 -1.4 1431.78 1113.63 -2.2 785.23 318.15 0.2 631.01

Food Security

Conclusion Increasing domestic production of fertilizers do not fully achieve the objectives of reducing rural poverty and increasing agricultural production. Need to implement complementary policies that help small-holder farmers to overcome the backward technology trap and give them better access to input and output markets. Increased fertilizer production benefit mostly to the export crops to help small-holder farmers, Kenyan government should pursue some complementary policies by improving the rural infrastructure or improving the extension services Government of Kenya (2017): Nobody should expect an immediate fall in fertilizer prices!

Contact Info Dr. Hasan Dudu Scientific Project Officer European Commission - DG Joint Research Center Sustainable Resources Directorate Seville, Spain Tel: +34 95 44 88 417 Email: hasan.dudu@europa.eu.ec

Closure Rules Closure rules: Neoclassical with some modifications Foreign savings is kept fixed to base year foreign savings plus the new investments for factories); exchange rate adjusts Government savings are fixed; government spending adjusts Numeráire: Consumer Price Index; Producer Price Index (PPI) adjusts All factors are fully employed with fixed supplies and flexible wage rates. The fixed supply of labour is updated to reflect changes due to migration and movement across labour types.