1. Poverty Effects of Expansion and Policies in Cotton Economies in Rural Mozambique: An Economy-wide Approach Rui M.S. Benfica Maputo, Mozambique September, 2006

2. OUTLINE oResearch Objectives oEconomy-wide Models  Flows in the Regional Economy  Regional CGE Model  Policy Simulations with the CGE Model  Model Results oPolicy Implications

3. RESEARCH OBJECTIVES To assess the economy-wide and poverty effects on household groups of expansion in the cotton sector and of shocks/policies affecting the sector

4. ECONOMY-WIDE MODELS Flows in the Regional Economy Activities Commodity Markets Factor Markets Rest of the World HouseholdsGovernment Capital:S-I Factor Costs Wages & Rents Intermediate Input Cost Sales Private Consumption Taxes Domestic Private Savings Government Consumption Gov. Savings Investment Demand ImportsExports Foreign Savings Transfers Foreign Transfers Home Consumption Household Remittances Source: Adapted from Lofgren et al. (2002)

5. Economy-wide Models The Regional CGE Model  Based on the IFPRI Standard Model ( Lofgren et al., 2002 )  Calibrated with the disaggregated Zambezi Valley SAMs  Agent behavior:  Producers maximize profits  Consumers Maximize utility  Functional forms:  Production technology: LEO and CES  Consumer demand: LES  Output supply: CET to domestic market and exports  Commodity demand: CES from domestic market and imports (*) Model used to account for feedback and indirect effects of expansion and shocks and assess the income poverty implications on household groups.

6. The Regional CGE Model Closures  Factor market closures –Fully employed activity specific CF capital –Full mobility and unemployment for all other factors –Unemployed factors can be brought into production at the going market wages/rents during expansion  Macro system closures –Government budget: fixed tax rates and flexible savings Limited role of Local GOV –Rest of the World balance: flexible exchange rate regime Justified by significant foreign trade Fixed exchange rate attempted without major differences in results –Capital account: Savings- driven Investment Appropriate for a credit constrained economy

7. Policy Simulations with the CGE Model  Expansion: Increase in activity specific capital  Expansion with:  Productivity gains in the cotton sector  Increases in export prices of cotton and maize  Increase in import prices of intermediate inputs  Tax on cotton exports (*) Mix of shocks relevant for the policy debate. All shocks at 15% change level.  Stochastic Dominance approach to poverty analysis  CDFs and Flexible Poverty Lines

8. Results of Policy Simulations Cotton Areas – Grower Households (CG)  Poverty reduction good for CG: 15% (CFC+productivity) => 40% pc inc  Higher productivity yield greater effects than export prices of cotton  Maize has substantial impact  Effect of increase in import price of inputs almost negligible on poverty reduction efforts. Why?

9. Results of Policy Simulations Cotton Areas – non-growers (CNG)  Income effects on CNG smaller in magnitude and comparatively to tobacco areas: 31% with productivity and expansion  Somewhat important indirect effects:  Increased demand for farm (26-33%) and non-farm labor (32-38%) increases remunerations for all groups  Indirect effects greater with productivity gains  With productivity gains each 10% gain in CG income corresponds to 7.7% gain among CNG…but both groups start from a low base  Substantial Benefits/losses from variations in maize export prices  A 15% increase in maize export price during cotton expansion increases CNG pc income in 39%

10. POLICY IMPLICATIONS (1)  Encourage expansion with increased productivity:  Use of improved/high yielding seeds  Strengthening of extension systems  Improve techniques and field practices  Better grading systems  Gains from expansion and improved productivity can:  Maximize indirect effects leading to broad based poverty reduction  Counter the negative effects of low export prices and increased import prices of inputs  Encourage maize production and trade  Include maize package in CF schemes  Avoid domestic and cross-border flow restrictions  Poverty reduction effects are sizable when prices are high  Associated food security important

11. POLICY IMPLICATIONS (2)  Government needs to avoid trade restrictions, e.g., export taxes  Lack of returns to education suggests  high scope for improvement in productivity enhancing field practices capable of rewarding more educated farmers;  Further research in understanding the differential poverty impacts of alternative contracting styles during expansion  Intensive versus extensive approaches