Blog Post

Guiding Macroeconomic Policy to Foster Agricultural Development and Food Security

In a new book , Macroeconomics, Agriculture, and Food Security: A Guide to Policy Analysis in Developing Countries , IFPRI’s Eugenio Diaz-Bonilla unpacks the significant and complex interplay between policies within a state’s economic program-- fiscal policy, monetary policy, exchange rate policy, and trade policy—and the impact of those relationships on agricultural development and food security.

According to the author, macroeconomic agricultural policies are critical to both developing countries’ economies and the global economy for several reasons. First, agriculture makes up a significant portion of developing countries’ overall domestic production, exports, and employment. Second, agricultural growth reduces poverty more than growth in other sectors. Third, developing countries play a significant role in both global agricultural production and international agricultural trade. For these reasons, policies that either encourage or impede agricultural growth and development can have serious impacts – both positive and negative – on economic growth and poverty reduction throughout the world.

The book begins with an introduction of macroeconomic policy analysis using a simplified macroeconomic consistency framework; it then goes on to present several theories related to the various aspects of macroeconomic policymaking in developing countries. The author encourages policymakers to consider the systemic impacts of policies as well as each of the “accounts” involved in macroeconomic policy (fiscal, monetary, exchange, trade). Policies in one account can be felt across the others and result in secondary impacts. For instance, when Egypt printed new money in order to finance an expensive food subsidy program in the 1980s, the measure resulted in an increase in the inflation rate, trade deficit, and exchange rate rationing. Corrections to overvaluation of the real exchange rate can lead to economic and financial crises, which in turn increase poverty and food insecurity. In the case of Ethiopia and the 2008 price shocks, writes the author, inflation, exchange rate appreciations, and the rationing of exchange rate were more important determinants of the crisis than the global price jumps.

While macroeconomic policies play a critical role in economic development and poverty reduction, such policies alone are not enough, he says. Rather, policymakers should take a broader approach that looks at investments in human capital, social safety nets, market function, and infrastructure in addition to macroeconomics.

The author also emphasizes that economic structures can vary significantly from country to country, so policymakers and analysts need to take their country’s specific structural characteristics into account when designing public policies. For instance, if a government devalued the local currency to try to improve internal terms-of-trade for agricultural products, the production response would depend on the constraints producers face in infrastructure, capital, and technology.

It is also unrealistic to expect multiple objectives to be achieved via one policy instrument; this is the reasoning behind what the author dubs the Tinbergen rule, taken from Jan Tinbergen’s On the Theory of Economic Policy , which demands that the number of policy instruments equal the number of desired outcomes. He also notes the importance of the Bhagwati principle: that interventions need to be tailored as closely as possible to the intended objective. The author derives this from Jagdish N. Bhagawati’s The Generalized Theory of Distortions and Welfare . For Diaz-Bonilla, the application in this context is that economic policy should not hope to, by proxy, impact indicators of food security; rather, each intervention should be crafted to impact its true target, and thereby reduce the risk of negative secondary effects. Coupled with his theoretical framework, these concepts can aid policymakers and analysts in their development and assessment of a country’s macroeconomic policy and its relationship to agricultural development and food security.

On October 28, a policy seminar was held at IFPRI to launch Macroeconomics, Agriculture, and Food Security: A Guide to Policy Analysis in Developing Countries and to provide expert-led discussions on the important issues of macroeconomic policy and agriculture. View the full seminar below:

 

For more in-depth regional analysis of the book, visit our related blogs on the India Food Security Portal , the Central America and the Caribbean (CAC) Food Security Portal , and the Africa south of the Sahara (SSA) Food Security Portal .

BY: Rachel Kohn, IFPRI