(metallic vibrating music)
- Gordon proposed us organize a panel
on the subject of
agriculture and governance.
He has had a particular interest in issues
of political economy and
governance over the years.
The way governance is usually looked at,
in terms of theories of the state,
is that you take them one at a time.
And I remember you organized
at Berkeley, some years back,
a series of seminars, and
each, in a sense, seminar
was particular theory of the state.
And you typically look
at them, contrast them,
evaluate them, and then
sort of make up your mind
as to how far does it take you.
Gordon had an interesting idea
coming out of this exercise,
which is that the theories of the state,
each take us to a different
angle of what the state does.
But they're best looked together
as a policy package where you
are going to try to achieve
an equilibrium between
different types of policies.
And the different types of
policies, eventually, correspond
to those different strands
of the theory of the state.
And so, in particular, he looked at the,
kind of neoclassical, kind of,
Stiglitz type approach to the state.
Where you look at the
state as an institution,
which is going to try to
overcome and counteract
market failures in search
of efficiency gains.
So those policies, he called
the Productive Policies,
or Growth Enhancing Policies,
or so called, PERT policies, P-E-R-T.
So those are the good guys in the language
of the policy contrast which
is going to be made, right.
On the other side what you had was the,
kind of, rent-seeking, the Mancur Olson,
the Anne Krueger, the Bhagwati.
This is policies which
are extractive as opposed
to being productive policies,
which create net social loss
as opposed to net social gains.
Those policies he calls the PEST,
so they're easy to remember.
They are kind of the bad guys in the story
and the name goes along with the function.
So what he proposed was that, in fact,
when you look at a policy
situation in a particular country,
what you witness is a an equilibrium
between those different types of policies.
And, in fact, the two
policies are, sort of,
part of an interior solution,
where there's an equilibrium,
which is going to be built within the PERT
productivity enhancing policies.
But then those productivity
enhancing policies,
especially, for example,
as applied to agriculture
where you have actually
an inelastic demand,
are going to have an equal
income distribution implications.
They're going to be gainers and losers.
The sum of the gains
and loses is positive,
so you can have compensation
and parity optimality.
There was always an issue as to,
how do you pay compensation?
And one of the ideas here is,
well, maybe the PEST policies
are part of a political equilibrium.
When you try to compensate
for the negative income
distribution effect
that prevent you from
achieving political equilibrium
for those compensatory PEST policies.
Of course, the sum of gains
from PERT and loses from PEST
still has to be positive,
so that compensation can actually be paid.
So he looked at the agricultural policy
in the United States, inelastic demand,
most of the gains from
research and development,
your PERT policies are going
to accrue to consumers.
Prices are going to fall.
Farmers eventually have to be compensated.
And hence the large policy distortions
that we witness, in
terms of protectionism,
and in terms of subsidies, PEST policies,
which are thus justified
as part of the political equilibrium.
Looking at the developing countries,
he was Chief Economist at USAID,
that took him around the world,
took countless missions
to different countries
looking at the policy
package for agriculture.
And what you see potentially
is a more elastic demand.
More gains going to producers,
hence consumers taxing part
of the consumer surplus gain
for producers in order to
make policy more feasible.
That is unlikely to be the
case in most situations,
where we see very little
research and development.
As a consequence, what we see
is taxation of agriculture
without compensatory investments
the PERT policies are missing.
And what we see is
stagnation and backwardness
in agriculture with
extensive rural poverty.
This was backed up by the important work
that was done by Anne Krueger,
by Alberto Valdés, by Maurice
Schiff, and then subsequently
by Kim Anderson, Gordon,
together with Jo Swinnen,
contributed to this empirical analysis.
Strong support for those
policy distortions.
So the PERT/PEST framework,
which is an important
theoretical contribution,
and important contribution, in terms of,
an analytical framework that
you can take to the data,
that you can take to policy
was quite effective to look at,
what was the main determinant
of stagnation at the time.
Which was price distortions
towards agriculture.
Now if we look at what happened since,
those price distortions
are largely gone, right.
The recent work that, Kim Anderson did.
The recent paper that you published
in the Journal of Economic
Literature makes the point
that good policy, in a sense,
got rid of the price distortions.
Yet, what we see is continuing stagnation:
continuing underinvestment in agriculture.
continuing underinvestment
in research and development
as we saw yesterday.
And as a consequence what we need
is a new political economy interpretation,
why that may be the case?
So this panel, in responding
to your invitation,
decided to take on that challenge,
and to take your theory to the test
of whether it can apply
to one of the dominant
problems that development
economies face today,
namely, what is happening
in sub-Saharan Africa,
and why is sub-Saharan African
agriculture not performing
better in spite of the
reliance of those economies
in agriculture, in spite of
the promise that agriculture
is offering to those countries.
So I'm going to tell to
the panel and, basically,
ask them the question.
Given what we see in terms
of under performance,
underinvestment in agriculture
in sub-Saharan African countries.
Is the PERT/PEST framework useful to you
in your way of seeing it,
and in your way of understanding it
to come up to an interpretation that will,
not only help us understand
why the reproduction
of this puzzle of
underinvestment and mismanagement
of agriculture, in a context
where agriculture should be,
as Joe Stiglitz said yesterday
in the context of premature
deindustrialization, you
need a broader spectrum
of sources of growth,
which includes, first and foremost,
agriculture and agro-industry
along with tourism,
along with commodity exports, et cetera?
So is that framework
useful to understand
what is happening today?
What is happening today in a sense beyond
the price distortions ways to
look at technology adoption.
Look at constraints and adoption.
And lament the fact
that there was so little
technology adoption that the
gaps are continuing to increase
between sub-Saharan agriculture
and the rest of the world,
in terms of fertilizer use,
in term so use of modern seeds.
And as a consequence in terms
of of the yields, right.
So does the framework help you think
as to why there's underinvestment
and that of performance.
And then from a normative standpoint,
does the framework help
think as to solutions?
Namely, what could be
done give the outcome
that we see, that we do not like.
We know where it is coming
from in terms of facts,
namely, under investment.
We don't understand necessarily
where it is coming from,
in terms of the determinants
and political economic determinants.
Give us a political economic determinant
in the PEST-PEST framework and then tell
us what kind of solutions
we could come forward,
based on whether this framework
is helping us conceptualize it?
So on the panel we have,
let me start with Marcel,
Marcel Fafchamps is a PhD from ARE,
one of our distinguished alumni,
we are very proud of his career.
He was a professor at Stanford University.
He became a professor
at Oxford University.
He headed the Center for
African Studies for many years.
Came back to Sanford, he's now in the
Spogli Freeman Institute
at Stanford University.
He's one of the best
published persons in Africa.
He has been all over the place.
He's the par excellence Africanist.
There are very few thing that Marcel
would not know about Africa.
So we are in good hands and
the question is up to you.
- Okay (chuckles).
I should start with health warning.
I don't think I've thought
of the solutions yet.
- Okay.
- But I thought of--
- You have
10 minutes to do it.
- Oh, right.
(audience laughing)
Well maybe the audience will help me.
But at least I, thinking about
the PERT and PEST framework,
I actually realized that it
was very helpful to understand
one feature that I thought
had always puzzled me.
And it kind of reconciled
the observations with the,
you know, with the model.
And it's the fact that
in sub-Saharan Africa
there's a lot of development
aid, funded a lot.
A lot of it is by European countries,
the USAID and all that.
And so that's, you could
think of it as PERT,
I mean, it's a welfare transfer,
but perhaps it even helps growth.
But it's certainly beneficial
to African countries,
and certainly their population.
So that's if you want,
that's the benefit that
you get from foreign aid.
But, very often it comes
with strings attached.
And of course when people
talk about, strings attached,
they usually refer to
the initial, kind of,
very crude strings, like buy
our tractors, buy our stuff.
But that's not what I
wanna talk about today.
It's more, it's something a
little bit more insidious.
I remember when I was working for the UN
for the ILO in Africa.
I would go to these different countries
and I'd say, "Oh, yeah,
you're growing maize.
"Why don't we see more investment,
"research investment in maize?
And they say, "Oh, no, but maize,
"you know, we don't really
get support for maize."
"What about cotton?"
"Ah, no, no, no, cotton we
can not get support for cotton
"because we'll be competing with the U.S."
"So what about livestock?
"You should be export livestock"
"Lots of livestock in Sahel,
"in Southern Africa and all that."
"Ah, well, livestock's
difficult because, you know,
"we'll be competing with the
European livestock producers."
So what I discovered very quickly is that,
there was actually very
little funding by donors
for agricultural research focusing on
these exports, basically.
They were food crops, but
they could be exported.
The same thing goes for soya,
where there was, actually,
no investment whatsoever in soya.
And so what happened, and there was also,
after the end of colonization,
what you get is also very
little investment in export
cash crops, like coffee.
And so over that period after independence
what you learn is that,
who's taking over the production
of all these food crops,
and soya and all that.
It's not Africa, they're
basically losing market shares to,
you know, to Brazil for soya.
I don't mean soya, I
mean for vegetable oils.
So basically, you know,
they start in 1960 producing
a lot of peanuts, a lot of palm oil,
and then here's these vegetable oils
which are used in processed foods,
get replaced by
colza in Europe and by soya elsewhere.
And there's virtually,
there's no investment
in soya, in Africa.
So basically, you know,
Brasil picks it up,
some Asian countries pick it up.
Uganda lose, was producing
most of the robusta coffee, at one point.
There was absolutely
zero investment in that
by any donor I could see.
And who takes over that
entire market, is Vietnam.
Just basically take over the whole thing.
Of robusta, not Arabica.
Robusta coffee, which low land coffee.
Anyway, so I could continue
with examples like that.
So I thought that was
weird, and then, of course,
when I asked, why you're doing that?
Well, actually donors don't want to upset
their domestic constituency,
which are, you know,
in the case of Europe,
these CAP, these Common
Agricultural Policy programs
that Europe has, and therefore,
there's no effort by donors to develop
these crops for exports.
Cassava is another one.
So cassava is mostly used for food,
but you can also turn it
into a livestock feed.
There's no investment in that.
Sorghum, this is a good example, sorghum.
So you have ICRISAT,
which develops, you know, it's setup
to foster new varieties,
new cultivars of sorghum and millet.
You'd think, that, "Oh, sorghum
that's a great animal feed."
Well, they should be exporting the sorghum
to feed livestock elsewhere.
No, no, no, no, there's no investment
by ICRISAT in sorghum for animal feed.
'Cause I spent sometime in ICRISAT.
They said, "No, no, no, we're not allowed
"to invest in animal feeds,
"research in animal feeds."
So that's the first, kind
of a, realization I came to
that's basically, yeah,
aid comes with some strings attached.
These are now hidden strings, in a sense,
aid does not fund research
in the kind of crops
that Africa could develop and export.
So what kind of nice polish
did the donors put on that?
They say, "Oh we're talking
about food self-subsistence."
That became the name
that they put on that.
"This is all we're gonna develop.
"These people are hungry.
"We're gonna help them
produce food for themselves,
"and we're gonna help them produce
"the foods they already eat."
Then, only later that they start,
in fact, maize spread in
Africa by itself, basically.
It's replaced sorghum in
lots and lots of places.
Certainly in East Africa,
where people even forgot
that they (chuckles) used to
eat sorghum, not long ago.
That's for these crops.
Livestock is another one.
Which is actually even more aggravating,
because Africa has lots of animals,
produces lots of livestock,
and has enormous difficulties
exporting this livestock.
I remember when I was in Botswana,
we were driving around on a Safari,
and there was this fence
across the country.
And I said, "What's this fence?"
This is big place, it's
like the size of France.
So they put the fence across the country.
"So what's this fence?"
"Oh, this fence is to stop to
the wild animals coming into
"the south of the country where we grow,
"where we have livestock."
And I said, "Why would
you build this fence?"
"Oh, it's because of
foot-and-mouth disease.
"We don't want,
"we want to be able to export
our livestock to Europe.
"And so we made an investment,
"so that the livestock
will not be in contact
"with the wild animals, and
therefore foot-and-mouth
"disease would not spread
among the livestock."
And then I said, "Did it work?"
I said."
"No, they're still refusing
to import our livestock."
So these are kind of examples
I found along the way.
There was also very little,
so now if you look at
tropical export crops.
Well, these are crops
that, as I define them,
they don't compete with the,
either directly or
indirectly with crops grown
in temperate zones, in
basically that rich countries.
So coffee, can not be, you know,
arabica coffee can not be grown.
I already talked about,
so coffee, tea, bananas,
pineapple, sugarcane,
things like that.
For sugarcane has some substitutes,
beetroot sugar.
So depending on whether
you were in the U.K.,
which didn't produce beetroots
and would rely on Mauritius
to import sugar from,
so they would Mauritius
as their sugarcane producer.
But then Europe didn't want, (chuckles)
remember when U.K. joined, Europe said,
"Wait a minute, we don't
want all that sugar
"from Mauritius because it's gonna compete
"with our beetroot sugar producers."
So these examples, again,
of development aid coming
with certain costs.
The funny thing is that,
pineapple's actually good example,
we all know, I mean, many of us will know,
Chris Udry's paper with Tim Conley
on the pineapple development in Ghana.
That was an exciting point in time,
certainly in north of Accra.
People started growing,
small farmers started growing pineapple.
And then if you look at
the graph, you see the massive increase
in pineapple production.
And then, (exhales) you know,
big producers elsewhere realized,
"Hey, wait a minute, they're
gonna start competing with us."
And this production they just collapses.
It's not sustained, it just
basically doesn't stay,
and it suddenly stopped growing.
So what this suggested to me was that,
wait a minute, if you want
to establish yourself,
if you want to gain market shares
in these very competitive markets,
with very competitive global
value chains and all that,
you need some support.
And of course, if you don't
get support from the donors,
it makes it more difficult.
Now more recently what
has happened is that,
'cause I think donors are gradually
realizing all those things.
So what is happening
now is that the battle,
instead of going from that,
because now there's less
emphasis on public research
in agriculture, there's more
emphasis on private research.
Monsanto moving in Africa and so on.
So what you find (chuckles) is that
the battle moves elsewhere.
It's basically, rules of providence.
Well, you have to demonstrate
that this coffee comes
from a place where it's shade-grown,
or fair-trade or organic.
And so if you cannot
demonstrate providence,
then you're not gonna sell at the premium,
you're gonna get, you
know, a discount on that.
I remember, (chuckles) again, you know,
working on robusta coffee in Uganda.
All robusta coffee was produced
shade-grown, fair-trade,
you know, there's no fair-trade,
but certainly organic.
In fact, they had a wilt
disease in the country
for which they didn't get
any pesticide to get rid of.
So it was actually reducing
output by quite a lot.
And these were old people
growing this robusta coffee.
And on the London market,
for robusta coffee,
it was getting, it was
zero percent, or I think,
two percent of the Uganda robusta coffee
that was getting some kind of label.
Some kind of providence label.
And this was organized by NGOs.
Okay not bay donors, by NGOs.
So that's another one.
I mean, I remember the case
when there was a drought
in Zimbabwe, this is
already some years ago.
But is another good example.
And so I think Argentina, the U.S.
and so on, offered
grain, food grain
as food help.
And Zimbabwe turned it down.
And they said, "Why are
your turning it down?"
"Well we're worried it's GM crops.
"So we don't want to take
GM crops as food aid,
"even though our population is hungry,
"because we will endanger
"our export capacity
to European countries."
So I remember that case.
So these are kind of examples.
I don't want to take too long.
So, basically, you want me to stop here.
- [Alain] Can you conclude
back to the PERT/PEST.
I have a way of saying it, but
I would like you to say it.
(laughing)
- Right so, you know, clearly, up to me,
these are all distortions, right.
You're distorting research
away from what should be done,
trying to, you know, not favor
crop that should be grown.
That would be the competitive advantage
of African countries.
So these are PEST policies.
In exchange for that, of course,
Africa receive a really large
amount of development aid.
So you know, I don't know,
whether the balance is positive?
It probably is, otherwise
many of these countries
would not take the--
- [Alain] So the compesatory PEST
do not stop at the border, in other words.
There are externalities
which are pretty heavy,
which are being paid by the
rest of the world, right.
So it's PERT/PEST and
then PEST multiplication
onto other settings, right.
- Yeah.
- The next speaker is Jeremy Magruder.
Jeremy is one of our
colleagues at UC Berkeley,
he has a PhD from Yale.
He worked extensively
on sub-Saharan Africa.
He worked on labor markets,
He worked, very importantly,
on social networks
and technology adoption,
and how information can circulates
and leads people to decide on adoption.
But then more recently
he's worked quite closely
with the World Bank on
issues of irrigation,
and especially irrigation in Rwanda.
And when we looked a the theme, here,
in a sense, in terms of serving
investment in agriculture,
one of the big missing
investment has to be irrigation.
Only four percent of the land is irrigated
in sub-Saharan Africa.
60% is irrigated in Asia.
And it's unlikely that
you can increase yields,
and stabilize yields and also
diversify cropping patterns
unless you have irrigation.
So, Jeremy, can you use
the PERT/PEST framework
to give us an interpretation of,
why so much underinvestment in irrigation
in sub-Saharan Africa?
- I will do my best.
- Okay.
(audience laughing)
So Alain, thanks for that introduction.
And you stole my first paragraph.
So I'm gonna go to the second one.
I've been thinking a lot
about irrigation lately.
In part because I've been
working on evaluation of some
large irrigation schemes in Rwanda.
Irrigation is something that,
I think, both the academic
and donor community has
sort of forgotten about.
The large gains and yields that we've seen
in most of the developing world
have been accompanied hand-in-hand
with increases in irrigation access.
And it seems remarkably implausible
that that isn't an important
contributor to them.
Even setting aside all the
empirical work we have.
It's suggested that it it is.
It also, the donor community
right now is pretty excited
about agricultural transformations.
Which involves switching
to commercialization,
the growth of high value crops.
That's completely impossible
without water control.
And so, I think,
both the academic and donor
community has really failed
trying to understand the
yield deficit in Africa
by ignoring the fact that farm systems
are just entirely different in Africa.
As Alain mentioned,
only four percent of
arable land is irrigated.
Now, why is Africa not irrigated?
A lot of it, has nothing
to do with interesting
economic questions, and
it just that hydrogeology
is not as suitable for irrigation
as it is in South Asia.
Some of it, I think, PERT/PEST framework
is useful to think through.
And Gordon's work on that in particular.
What happens if irrigation
schemes were constructed?
Well, especially without the
ability to dig bore wells
and pump on a micro level.
Constructing irrigation means building
large-scale irrigation infrastructure.
That's going to transfer
benefits to a minority of farmers
at a cost of other farmers.
Presumably if that
irrigation is successful,
prices will go down.
Those farmers' product will be worth less.
And they won't be producing anymore.
And it may also benefit consumers.
Although, if consumers are
primarily the tax-base,
it's sort of unclear
who's gonna be the primary
beneficiary on that.
And so what does that mean
in the PERT/PEST framework?
Well, clearly irrigation
is a PERT technology.
This is something that's
going to massively expand
the production possibility
frontier for these farmers.
But, at the same time, in order for there
to be a politically viable
one, it, almost certainly,
will need a common setting
system of transfers.
So I do best thinking about
this the smallest picture
I possibly can, and I tend to struggle
thinking about bigger picture things.
Where I've been working, the small picture
is irrigation in Rwanda.
The Rwanda context,
they pursued irrigation
in a few different ways.
The primary way is, that actually
is not where my study is,
is on large-scale irrigation
for staple production
in the dry east part,
eastern part of the country.
That's were it's possible
to have economies of scale.
Where they're able to produce
much more maize at much lower
prices as a result of modern
irrigation infrastructure.
I think, thinking through these
agricultural bundling frameworks.
It's not surprising that the government,
in addition to ruling out these, sort of,
large-scale maize production
irrigation infrastructures,
has been engaging in
compensating policies.
These PEST policies, such
maize price supports,
fertilizer subsidy, is
actually the exact ones
that Gordon wrote about in his paper.
Now, there may be other
reasons for those as well.
But I think, thinking through
in this framework makes a lot of sense.
So over the past five years,
I've been actually looking at a different
irrigation context, which is some systems
that the government builds
in some of the wetter
parts of the country.
The west, the south and the central parts.
What's interesting from
an econometric perspective
about these irrigation infrastructures
is that they share several properties.
One, is that those parts of
the country are quite hilly.
So the way that the
irrigation systems are built,
is there's a canal
that cuts across a
contour of the hillside.
They're all gravity fed,
which is nice from a
sustainability perspective
because you don't have to worry
about pumps breaking down.
But, it has this tweak, which
because they're gravity fed,
everyone whose plot is below the canal
is going to get water,
nobody whose above the
canal is going to get water.
And so we have built variation
which is great for evaluation,
and some very clear
differences and access and potentially
needed transfer policies that
are going to exist, right,
even within the villages
that gain access to this irrigation.
So what we've done is we've
collected panel data on plots
just, both above and below the canal.
And just compare plots that are literally
right next to each other.
It's just that one of
them was below the canal,
and so it gets access to water,
against one that was above and does not.
And we can see,
immediately, that irrigation
has similar potential in Rwanda
as it does in South Asia.
The estimate we get on yields
is about 50% to 70% increase
in yields associated
with irrigation access.
Now, this is not a part
where economies of scale
are really possible.
The plots are tiny.
And mechanization potential
is pretty limited on steep hills.
And so the way that these
yields or gains are realized
is entirely through
cultivating high-value,
dry season horticulture.
And so farmers previously were
leaving their land fallow,
or else cultivating
bananas in the dry season,
and now they're cultivating horticulture.
So thinking through this
in a PERT/PEST framework.
Presumably the people of farmland
below the farmland are benefiting.
Consumers who value dry season
horticulture are benefiting.
And the producers of people
that were producing substitutes
for dry season horticulture,
are presumably losing out.
What I wanna just, sort of, conclude with.
So schemes like these are rare in Africa.
And I think one of the things
we can say with our data
as an additional wrinkle,
in addition to the expense
and governance issues,
that others have really
focused on with irritation.
As to why they might be rare?
And in particular, what
we see in our data,
is despite the fact that
potential yields are growing up
a lot in the time when
farms were otherwise
not very well engaged.
Only about 30% of the
farmers that gain access
to this water actually use it.
And using it is free.
So this, 30% turn on the valve.
That could in principle be efficient,
if returns are very heterogenous,
they could be inefficient if
there are market failures.
We have a test for inefficiency
that I'm pretty excited about.
That I'm happy to talk
to people about later.
But it looks like this
is inefficiently low
use of the system.
This isn't rationalizable
with proper maximization.
Well, it is at the farmer level,
but not at the system level.
And so we show that it's low.
And in particular, we show that
frictions in land and labor
markets are a prime reason
why there's inefficient
use of this infrastructure.
It goes without saying
that 30% use is far below
what the government projected
when it built these sites.
It's far below, or even to be necessary
for a reasonable tax-base to
pay for ongoing operations
and maintenance costs.
I think it's not a surprise
that land and labor
market frictions are important in Africa.
Everyone who spent time in Africa
knows that land markets
don't function well.
And that labor markets barely
exist in rural settings.
Our setting's actually pretty favorable.
That is titled here,
and there is sort of a labor
market, but it's small.
What does that mean?
Well, it means that
when we try to implement
PERT interventions, particularly
high return infrastructure
interventions, that might
actually achieve something related
to agricultural transformation.
We not only have to worry about
this pecuniary externality,
which might undermine it,
but we might also need
to intervene in complementary markets.
And in this place we may need support
in land and labor markets
in order for farmers
to achieve anything close
to the PPF associated
with this expensive intervention.
It's worth noting that these
are politically challenging
things to work with.
What our data suggests is,
that what needs to happen,
is land needs to be
reallocated from farmers
that have little available labor
to farmers that have
a lot available labor.
Those types of programs have traditional
not been politically popular.
And while the market could,
in principle, achieve it.
It seems likely that land market frictions
are not going to disappear in Africa.
And so, with those two things in mind,
it sort of means that the
potential of PERT interventions
might require much more
massive PEST transfers
to try and achieve
political sustainability.
And whether those are even
possible is a good question?
So, just like Marcel, I
don't have a good solution.
(audience laughing)
- But you have a good interpretation,
which is the market failures,
both limit the PERTS,
but also amplify the PEST,
that you would need to
come up with, right.
So the PERT/PEST framework is relevant,
and is amplified and in a
sense, the market failures,
and especially the labor market failure,
which is one that one does
not think about too often,
is kind of binding here.
And what Jeremy proposes,
which is interesting,
is to use the land market, namely,
land rentals across households
with different labor endowments
to solve the labor market constraints.
So were going to turn to Michael Carter,
Michael is a professor at UC Davis.
He is a very distinguished Africanist
and development economist.
He is the head of the BASIS Project,
which was at University of
Wisconsin with him before.
Which he took, fortunately,
to the UC system when he came to Davis.
It's a large endowment
from the Feed the Future
Project under USAID.
It was just renewed for a
significant amount of money
under the aegis of markets,
risk and resilience.
And so we always welcome
Michael because, for us,
he's a big source of money
(chuckles) and we like to
court him for the money
that is available to him, and
that he generously assigns.
But, Michael has worked
very extensively in Africa.
He developed an expertise
in the last year,
which is quite unique.
He's worked on issues of risk.
He worked on the issues of insurance.
And he worked on the issue
of index-based insurance,
and how to make it work.
And it's one of the most
interesting in the sense
of theoretical propositions.
If classical insurance does not work.
Index insurance, should
have a lot of appeal,
but it has been hard to make it work.
So Michael, for what you do,
can you use the PERT/PEST
framework and tell us why,
under investment in sub-Saharan Africa?
But also why, for
example, such attractive,
potential technological innovations,
and institutional invocations,
like index insurance,
may be limited?
- Sure, yeah, thank you.
And thank you very much
for inviting me to speak
at this event.
It's a great pleasure and honor.
So I didn't quite tell, Alain
what I would speak about,
as I didn't what him to
have it summarized (laughs).
(audience laughing)
Giving him a little bit
of a tough time here.
But I want to sort of put
out a thought or an argument,
and I think it actually
complements very well,
what we've just heard.
And I wanna suggest that the
level of what I'm gonna call,
effective inequality, may be
too large in sub-Saharan Africa
to create a critical mass
of incipient, sort of,
commercial farmers to make PERT policies,
to use Alain's words,
to make PERT policies
politically bankable.
Okay, so that's where I'm going.
And in a sense, sort of,
thinking about the domestic
political economy for PERT policies.
And I think that lines up really
well with what Marcel said,
in terms of the spillover from
PEST policies in other parts
of the world, and ultimately
I'm gonna touch on,
briefly at least, on
some of the things Jeremy
just alluded to as well.
So that's where I'm trying to go,
and let me, sort of back up.
So when Alain mentioned
this opportunity to me.
I first started thinking
about the PERKiest,
if I could put it that way,
sort of agricultural
policies I ever heard of.
And I was taken back to the World Banks's,
"East Asian Miracle" studies
back in the early '90s.
There was a book, put
out, I believe, in 1993,
and was puzzling over what
had the East Asian countries
done that was so unique.
And if you look into the
agricultural sector in particular,
what you see a lot of,
you see a lot of strongly,
you see a portfolio of government policies
that are very PERT intensive.
And the Bank actually in
the, "East Asian Miracle"
referred to them as,
market enhancing, policies.
And so you saw a lot of
investment in public goods,
in information, in institutions
and things like that,
that made it possible.
So that's sort of out there.
And the puzzle,
you know, when I used to have my students,
or undergraduate students
read the "East Asian Miracle,'
and think about those things.
And I always felt the World
Bank's interpretation was,
Well, this stuff worked in East Asia,
but kids don't try this at
home, you know (chuckles).
It's too dangerous, you might mess it up.
And the real question
was a little bit less,
what the East Asian countries
did that really invigorated
the agricultural sector,
created a real
entrepreneurial rural sector?
And it's even less about why it worked?
But it's why did it happen there?
And why didn't we see that
same, sort of, policy,
PERT policy intensity in
other kinds of countries.
A number of you may be familiar,
"The Handbook of
Development Economics" paper
by Hans Binswanger et al,
a couple of years ago.
So you look at Latin
America, what did they do?
It's all PEST policies,
right, giving subsidies
to large-scale producers, you know.
But they didn't really make
the kinds of investments
that they might have.
And you can make a
similar kind of argument
that African countries have
had their own kind of policy
PESTalance, if you don't mind me, sort of,
making that play on words.
So the question was, why?
What was different about East Asia?
And there was some writing, that said,
"Well, East Asians are, sort of,"
I'm just gonna be a little flippant here,
"East Asians we're sort of better people,
"maybe their politicians
weren't as corrupt,
"or weren't as interested
in seeking rents.
"Maybe there's a Confucian ethic."
And the there were serious
discussions about that.
In the mid-90s, when I was
at University Wisconsin,
I heard, Masahiko Aoki give a talk.
And, he'd, I think, been part of the,
"East Asian Miracle" team at the Bank.
And he was sort of
pondering this question.
So why was it different in East Asia?
And he immediately
asserted that East Asians
aren't any better than anybody else,
and he pulled out some statistics
on political corruption
in Japan and said,
"See these people, these politicians
"are just like your politicians."
So there's nothing there.
And what he argued was actually sort of a,
he sort of floated out a material,
political economy explanation.
And in simplest terms, what
he more or less said was,
that East Asian's economies at the time
they really took off
economically did not have strong,
they did not have big elites.
They had land reforms that
were pushed on them, you know,
the Japanese did it.
In China the Americans did it,
in Japan, et cetera, et cetera.
And from his perspective,
if you were a politician
and you were interested
in gaining votes, it'd be
very difficult to provide
enough private goods because
there wasn't an elite
that you could, sort of,
give a bunch of stuff to
and gain political power that way.
And his argument was, that
the winning political strategy
was actually to provide public goods
and get the benefit of
the multiplier effect.
So if you could really get the
agricultural sector moving,
that can benefit a lot of people
at a relatively low kind of expenditure.
I'd been pondering that for
a long time and thought,
maybe we should go back and
kind of think about that
a little more carefully.
And so, I'll get to this, I made a merman
I could add to this beautiful diagram,
but I thought it would give
us a little color on the wall.
(audience laughing)
If nothing else.
But I've been working on this,
I started to write a theoretical
political economy model
of this, a couple of years
ago, to sort of revisit
these ideas that Aoki
had kind of thrown out.
And the guts of the model are that as we,
nothing surprising here,
public goods, investments,
complement private capital.
Producers have a choice
between subsistence strategies,
sort of petty commercial strategies
and large-scale commercial strategies.
Where a large-scale
producer could be someone
like Del Monte, who actually
provided all their own,
sort of, public good,
or quasi public goods.
Their own airports and light houses
and all that kind of stuff.
And then the government comes along,
and the government has a choice to,
or the political sector has a
choice to provide public goods
or private goods to the rural sector.
And the question is,
what's gonna happen?
So this is work with John Morrow,
who's now at Kings College in London,
and we put this all into
a model to, sort of,
think about stuff, and it
allows us to do a thought
experiment in this sort of context.
And the what the thought experiment
and the theoretical modeling reveals,
is that Aoki's actually,
basically correct.
So taking the parameters of the model,
taking the parameters of the
agricultural economy as fixed.
If you increase inequality,
you will move the political economy
into a dual equilibrium system.
Where one equilibrium,
is one in which there are
no public goods provided,
and the government spends
its resources just on,
you know, basically not taxing,
and therefore letting rich
people have private goods.
The other possible equilibrium
is a high public good kind of equilibrium.
But interestingly, as
you shrink an inequality,
holding everything else equal,
that first equilibrium goes
away, and the only equilibrium,
consistent actually with
what Aoki, was suggesting,
the only political economy equilibrium,
using kind of standard vote models,
is in fact, one where
the government optimally,
or politicians optimally
choose to offer PERT intensive
kinds of public expenditures.
Now one of the things that's
interesting about this
is to, sort of, think a title bit more,
and a little bit more deeply about,
what's actually the political
economy that's going on here?
Now this beautiful diagram behind us
is meant to illustrate the
following thought experiment.
The vertical axis is
the wealth distribution.
So we can think of an
economy as characterized
by a more egalitarian
distribution of wealth,
or a more spread out
distribution of wealth.
And that's, sort of, how
we conduct our experiments.
The horizontal axis there,
is the amount of public
goods that might be provided.
And then the color scale is telling us,
what fraction of their
assets would an individual,
at any point in that
space, be willing to offer,
in order to pay for
that public good, okay.
And the interesting thought is.
If you're a producer a
relatively low wealth producer,
and you're trying to make
the transition from substance
to sort of petty commercial,
you know, your political
contributions compete in
your budget constraint.
They compete with your investment
that you wanna make in
your own farm, okay.
So you may have a lot of people
that would be willing to,
they could benefit from public goods.
But actually their
capital constraint ability
to make political contributions
is actually quite limited.
'Cause the shadow price of
money is really, really high
for those same individuals.
And what you're seeing in this diagram
is the people at the top are
actually willing to contribute
a rather large fraction of their income
to oppose public good policies.
And the people in the middle
are willing to provide
a little bit of positive money.
But they can't provide very much.
Because if they provide very much,
given a budget constraint that includes
their business investment, plus
their political investment.
Then they can't actually benefit
from the business investment.
And then the people at the very bottom
are the ones that are
gonna stay in subsistence.
And why do they care if
there's a better road built,
or if they're gonna be kind of autarkic.
So I think what sort of
comes out of this is,
sort of, a really interesting reflection
on what does it take to create
an effective political constituency?
Again, using fairly standard, sort of,
voting political competition
models to make it work.
The final point I wanna make at this,
and bring it back into African
and bring it back to risk and
irrigation just a little bit.
Because this is drawn from
a certain level of economy,
but as I think, we can intuit,
if we ramp up the level
of risk within the system,
actually that middle
space starts to shrink.
Even for a given level
of land an equality.
So I think I purport what
Jeremy was trying to tell us.
If we think about the political economy
of a lot of African countries,
one of the things that's different is,
there isn't irrigation, there
all kinds of constraints.
And my favorite topic of index insurance,
there just a lot of risk,
which is really restraining people.
So in a sense, even
though, land and inequality
in sub-Saharan Africa does
not look like land inequality
in Brazil, the effective inequality,
or the critical mass
of people who actually
have some ability and willingness
to pay for PERT policies,
may actually be quite small.
And I think, this is actually something
we need to kind of take seriously.
And the final comment I'll make is,
I do do some work on fertilizer subsidies.
And one of the interesting
things that I've been seeing
is watching the transformation
of what's originally
presented as a PERT policy,
so a short term fertilizer subsidy
that will allow people to learn.
And before you know it, it's
turned into a PEST policy,
and it's actually benefiting the people
that are importing fertilizers.
The fertilizer that gets to
the farmer is very low quality
and it becomes kind of
rent-seeking circus.
So I don't know exactly
what the answers are either,
but I do think--
- [Man] Welcome to Indonesia.
- (laughs) Okay.
But, anyway that's what I
wanted to share with you.
- Thank you.
What's important, I think,
is to bring in the issue
of inequality and to bring
in the issue of capacity
to exercise voice, and how
this is going to affect
the choice of policy.
I also like the concluding observation.
You can actually design
smart PESTs in a sense.
The smart PEST would be
transfers that induce learning,
which are then one time PEST
and become self-sustaining
in terms of being PERT.
But what you also saying,
is that you can have the opposite.
Namely, what is initially a smart PEST
can be captured politically,
and can be reproduced
frequently as a PEST, right.
So let me open the for discussion briefly,
and then we'll try to go back
to the panel and to conclude.
We have to give an answer
to Gordon in a sense as to,
how far is his theory
going to go in the future
in explaining what is happening
in sub-Saharan Africa.
So hold on Gordon will give you an answer.
But in the meantime,
let's have a discussion.
Are there any questions we could collect?
Can we please go ahead.
- [Woman] Yeah, hi, my question, I think,
might be best directed
to Marcel Fafchamps,
but perhaps to any of the panel.
We've been hearing over
the past decade, or so,
about the problem of land grabbing,
or this phenomenon of land grabbing,
especially in Africa, I believe.
I was wondering if you could
link up that phenomenon,
or what you perceive to be
the extent of that phenomenon,
to what you were saying,
in the framework of what
you were talking about
what you were seeing happening in Africa.
- David, would you like to go?
- [David] I think one of the
things that maybe I consider
a PEST is the lot of time
with the donation common ideology.
We always as European
especially like to say,
"We don't want you to do the
same mistake that we did."
So you fertilize, we use GMO and it's bad,
we use fertilizer and it's bad.
We use organic, we don't
grow organic and it's bad.
So you really have to
use all these practices,
also the private sector in other countries
is really collapse.
So, please don't use marketing.
So don't you see, and
there's very little daring,
at least in my view, to think about
some of the big type of investments
that change the U.S. and
foreclosed out this area.
At least my feeling is that, again,
a lot of time is compared,
considered and controlled by NGOs
and the people that have nice
background in humanities,
and they don't not control very much,
but people that think about making money.
- Any other question?
Let's pick up one more and
then we'll have a discussion.
Okay, so let me turn to the panel.
Let's go sequentially in the
same way as we presented.
Marcel you want to start?
- I wanted to say something
about land grabbing.
So here's an example of,
I mean, that would certainly,
could be portrayed in the
press exactly as land grabbing.
I think South Korea,
tried to strike a deal with Madagascar.
I think there was like a,
from the press article I read,
it was like a million hectares,
so it's a very large area.
But they were gonna,
I know that area, it's kind
of west of the capital,
and it's an area with no roads.
Basically, virtually inaccessible.
Even though it's between
the capital and the ocean
and it doesn't have any road.
If you want to go to the ocean
you have to go all the way around.
And it's got a lot of cattle there,
and sort of crime with
cattle feuds, and so on.
So it would've been
beneficial to kind of develop
that area, put some roads and all that.
And that's what the South Korean proposed.
And they were gonna export to Korea,
they were trying to export
food to their country.
So it was, kind of, ticking
several of the boxes
that we would care about.
But, of course, they were doing this
as a very-large scale program,
and of course, you know, you
heard what Jeremy was saying
about the difficulties
about land and land control
and all that.
So they figured, well
we need the government
to guarantee that we will
be able to "grab" the land,
basically, be able to
not to have hold up problem,
whereby you put all
infrastructure and people say,
"No, no, were not gonna
let you actually capitalize
"on infrastructure you put in."
So it's like the U.S. railways.
When the U.S. they built the railways,
they have these zones around the rail
that is given to the rail.
So it was kind of same kind of logic here.
It completely backfired.
You probably heard of that,
the Prime minister at the
time or President at the time,
basically faced the riots in
the streets of Antananarivo.
There was a radio DJ that
basically accused him
of selling out.
The country's is chaos,
so it's a land grab.
And kind of, let's say, reformist,
Prime minister or politician was replaced
by a populist politician
who used that argument to take over.
As soon, you know, the
politician took over,
and basically the deal
was immediately canceled.
That kind of gives you a whole bunch of,
so why is it, after what,
40, 50 years of independence,
why Madagascar is find
herself in a position where,
a foreign government can actually say,
"Oh were gonna do better than you?"
That's the puzzles, why
do we get to that point?
And I think we get to the point partly
because of what I explained earlier.
Basically, there's not
been enough investment
in some of these places.
And therefore you get, you know,
lots of very small land
owners who basically,
they're not supported enough
to become commercially oriented and so on.
So, basically, then they're
at the mercy of land grabs.
So that's my conclusion.
- [Alain] Jeremy.
- Yeah, I mean, I agree.
I think, the one thing I
would add on the table.
The problem is that,
it's not clear that's
it's possible to actually
properly create a transfer policy
to compensate someone
from taking their land,
and what that would look like?
I mean, I think it almost
certainly is the case
that small holder, that
very small holdings of farms
in sub-Saharan Africa are not consistent
with the idea of massive
agricultural productive growth.
And with that in mind,
some sort of consolidation
is going to have to happen,
and presumably the frontier
will push out faster
if that was done by an
international capital intensive
farming activity, rather
than domestic one.
I don't think the fundamental challenge
is so much the idea that foreign investors
want to farm this land.
I think the problem is
that it's not very clear
that it's possible to
adequately compensate
farmers for the land.
And you know, thinking,
actually this is really useful
use of the PERT/PEST framework.
Thinking through what the
right transfer policy would be,
and I think it probably involves something
that would engage labor
as well as a direct fair
payment for the land,
could be potentially really interesting.
I'm not sure that we've
seen may examples of that
because governments aren't so
accountable to their people,
they can't just take it.
- [Alain] Yeah, you said a good point.
Michael.
- Okay thank you.
Again, I can't speak so
much to David's questions,
but on the land grabbing as well.
I think the interactions
there are really important
and do get it back to the
nature of labor markets.
Let me give a couple of
Latin American examples,
which I think we should
think about these things very carefully.
In Paraguay, for example,
there was a very large soybean
export boom some years ago.
And there were these stories
of campesino households
who sold out their land
on the soybean frontier,
and they said, "Oh we're
gonna get jobs," or
"Were gonna go buy land in
another part of the country."
But, once prices started changing,
and also when mechanization came,
the jobs didn't really appear.
And you got what some
people started calling
an exclusionary growth path,
where you had both the
concentration of land,
but also kind of a dip in wages.
And that spilled over into
other parts of the country,
where there wasn't export booms,
but that that area got overpopulated,
and land prices started rising there.
I mean, again, it does come back
to the absence of PERT policies.
I actually wrote my own dissertation
on the Peruvian land reform.
And I was just back in Peru recently
for a conference celebrating
the 50th anniversary
of the Peruvian land reform.
And one of the interesting
things was the discussion around,
you know, how little has
changed, especially in terms
of support for the
small-scale farming sector.
So if you look at what's
going on in Peru now,
and what's happened in
the land reform sector.
It's not been land grabbing
in the same sense of Africa,
but were looking at small-scale
farmers that do not have,
they still don't have
adequate access to capital.
They don't have adequate access
to risk management instruments.
And so they're at a
competitive disadvantage.
Now whether it's cost
effective to try, you know,
improve those things
for small-scale farming,
to let, as I used to say,
"Let people be pulled
out, not pushed out."
I don't know, but I think
it roots fundamentally
to that in Africa right now.
Where there can be
extremely strong incentives
for other people to take over the land.
Precisely because the current
occupants and uses of the land
are not in a position to
be particularly productive.
- So we had an interesting contribution,
also sent to us by Kostas Stamoulis.
Kostas, was one of the early PhD students
for Gordon Rausser.
Develop his whole career at the FAO,
and adopted a very high
position at the FAO.
The proposition he made was that,
in many situations PEST can be smart,
and so a smart PEST becomes a PERT.
And instead of having a
PERT/PEST equilibrium,
you end up with a PERT-PERT equilibrium.
And this, all the more,
if the PEST transfers,
in a sense, are going
to be used productively
by those who receive it.
In other words, if your
PERTs side of the story
is made to be more
effective to absorb PESTs.
And in transforming those
PESTs into instruments
that are going to
overcome market failures,
both in credit and insurance,
and become PEST over time.
Via reduction in market failures
we are learning via economies of scale.
So what he's proposing in a
sense is an interpretation
where you go from a PERT/PEST situation.
The PEST is thought of as
a way of being absorbed
and transformed into a PERT as it goes,
and you end up with a
virtuous equilibrium.
Which is very much at the
core of where the FAO,
especially IFAD.
This is where, Hans Binswanger
had an important role to play.
Paul Winters, one of our former students,
he's now the chief economists at IFAD.
This is very much the
line that they pursue.
So let me conclude because we
only have a couple of minutes.
I think what's important
of this PERT/PEST framework
is the versatility.
It reminds us importantly
that when we look at the world
we have to think about it
in political equilibrium.
What is key in a sense,
especially in Africa,
is we are in a sea of PESTs.
And we want to cast space
for PERTs to emerge.
And that is, in essence,
negotiating the possibility
of getting space out of the
PEST in order to build PERT.
There are different implications,
I think, from the theory.
One, is you would like to
have less distribution,
or negative distribution or implication
from the PERTs that you use.
So maybe more inclusiveness,
more purposeness,
in the PETS themselves
so they call on less
PEST for compensation.
And the second, as Kostas
and also has been said here,
to use the PEST in a smart fashion.
So the PEST, instead of
being creating externalities
of the other countries,
or being amplified by market failures
can be transformed into
PERT outcomes of their own.
So Gordon thank you.
Congratulations for the opportunity.
And we look forward for more.
(audience clapping)
