Social Sustainability of Reformed Syrian Agriculture: the Risk Dimension C. Cafiero, University of...

Social Sustainability of Reformed Syrian Agriculture: the Risk Dimension

C. Cafiero, University of Naples - Federico II, Italy

The contribution of Agriculture to Economic Reforms of SyriaInternational WorkshopDamascus 1-2 July 2008

Outline

PART ONE1. Backgrounder: the economic and social cost of

risk exposure2. Implications of economic policy on risk exposure3. Implications of risk exposure on economic

behaviour4. Risk related institutionsSYNTHESIS: the role of public policies for risk

management

The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

Outline

PART TWO

5.Principles of risk management– Risk analysis– Security funds

SYNTHESIS: there are effective instruments to promote, assist and induce solidarity.


Outline

PART THREE6.Lessons and warnings from other countries’

experiences7.The Syrian experience8.Relevant risks for Syrian AgricultureSYNTHESIS: elements for informing the

continued process of agricultural Policy reform in Syria


1. The cost of risk exposure

• Economic– Resource misallocation (i.e. the case of water)– Foregone opportunities

(i.e., delayed innovation adoption)• Social– Distress due to insecurity– Risk exacerbates the inequalities (the rich are

better equipped to face risk) – Political tensions due to inequality


2. Impact of economic policy on risk exposure

• Efficiency vs. equity (or: growth vs. quality of life): • Recent example of a clear trade-off– Opening to trade to exploit comparative advantage has

increased food imports, and increased the exposure to price shocks

• Is the trade-off inevitable?– Not necessarily: there are efficiency aimed policies that

reduce the impact of risk exposure.– Example of good policy:

• Promotion of investments in infrastructures and services– Example of bad policy:

• Labor flexibility


3. Implications of risk exposure on economic behaviour

• Risk avoidance (altering the probability of event)– Delocalization, forego innovation adoption, Dercon’s risk

“skewing” activities• Risk management (altering the impact of the event)– Diversification (both in-farm and off-farm)– Self-insurance (precautionary savings)– Commercial insurance– Hedging (contracts)

• Risk coping (adapt behaviour ex-post)– Credit (usury)– Disinvestment (child labour)


4. Risk related institutions

• Cooperatives (mutual) social, private

• Commercial insurance• Derivative contracts market based• Banking and Credit

• Solidarity funds social, public


Summary: the role of public policy

• Economic prosperity can be associated with social protection (social security is not a cost, but a resource)

• The State must:– Promote solidarity– Provide public goods, specially information– Prevent rent seeking activities by promoting true

competition– Create a legal environment for risk sharing activities– Invest in public research and education– Seek an equitable distribution of wealth

• And then, let the economy free to adjust provided the government The contribution of Agriculture to Economic Reforms of Syria-International Workshop, Damascus 1-2 July 2008

5. Principles of risk management

• The fundamental principle is solidarity, in the form of risk pooling.

• Because of decreasing marginal utility of wealth, by dividing one big loss into many small losses, the total impact is reduced by transferring the burden of the risk from the shoulders of one or few to that of many – from one year to many years, (savings)– from one persons to many persons, (insurance)– from one group to many groups, (redistribution)



• Spontaneous solidarity usually manifests itself ex-post, that is, after the event occurs.

• With risk management, we aim at creating ex-ante the condition for solidarity to be expressed.

• Even if solidarity must be promoted through incentives, the benefits always exceed the costs.



• Economists are wrong when they say that “utility cannot be interpersonally compared”.– The “utility” that can be gained from, say, one

hundred additional Syrian pounds is ALWAYS worth more for a poor person than for a rich one.

• What is needed is to determine incentives to motivate (rich) people to accept the risk of a loss in exchange for an expected return



• Once the political objective of providing solidarity is agreed upon, material resources ought not to be wasted, when it can be avoided.

• Economic analysis can provide very useful insights also in terms of efficiency



• Index insurance seems to open new perspectives for the role of government in information brokerage and certification

• Innovations in finance (bonds, options, swaps, etc.) cause the institutional settings to rapidly changing and this also opens up new roles and functions for public intervention



• The objective of economic analysis of risk management mechanisms, therefore, should be that of providing prescriptions on how to obtain an adequate level of risk protection at the lowest possible cost to the whole society.

• Key is the matching of each risk with the right instrument


Ordering of risk management toolsProbability

Entity of loss


Selfinsurance

Credit

Mutualfunds

Commercial

insurance

Options

Contingent

bonds

Public solidarit

y



• A security fund is a set of instruments (financial reserves and contingent contracts) that would make the needed resources available, in the event of an accident, a crisis, a catastrophe.


6. Experiences and lessons

• Public involvement in subsidized insurance can be expensive and, when carefully considered, is ineffective

• Provision of excessive risk protection (i.e., national solidarity funds) can be counterproductive



• Financial markets can and should be used to greatly expand the scope for economic risk spreading onto the global economy

• We have learnt that the most valuable resources to be provided to the farm sector are:– a trustable social and political environment– a sustained pace of research and innovation



• Letting governments do what markets can never do– ‘Security’ and knowledge are undepletable immaterial

goods which should not be ‘traded’ as depletable goods. Markets can never be efficient mechanisms of security and information generation and spreading.

• Letting (competitive) markets do what they do best: arbitraging– Avoiding that governments directly run markets or

that they crowd-out private agents.


7. The Syrian experience

• There are challenges and opportunities for Syrian agriculture opening to the global market

• “Burning issues”– Water– Rural poverty

• Farm incomes• Rural living conditions, to revert the rural/urban migration

• Medium term issues– Competitiveness on foreign markets


7. The Syrian experience

• Risk appears to be a crucial element.• Lack of credit has been one of the major

hindrances to the process of innovation and diversification of Syrian agriculture

• Saddidin (forthcoming) demonstrates that releasing existing credit constraints would already generate sizeable positive effects on all the burning and medium term issues.


8. Relevant risks for Syrian Agriculture

• Natural risks– Rain distribution• Is it truly a “risk” ? Something that has been there for

millennia should be predictable. If it is still considered a “risk” it is because there have been problems adjusting• The long term response should be adaptation and

innovation (research on drought resistant species, investment in irrigation)• Removing the causes that have prevented adaptation

will induce a genuine shock, at least for the time needed to re-adjust



• Market risks– Input prices and procurement• Key role of the price mechanism as a scarcity signaling

device

– Output price and collocation• Trade policies, promotion, international cooperation

– Here again, the removal of policies that have prevented adaptation will induce a genuine shock



• Political/social risks– Mostly fuelled by external factors (the role of

sovranational insititutions)– Exacerbated by internal factors– Uncertainty on the future value of investments– Unreliable enforcement of basic rights (property,

entrepneurship, etc.)


Conclusions: what is ahead?

• By using the metaphor of the government being like a wise parent who wants to see his children to grow healthy and safe and to fluorish, we may identify three phases in the process of economic development and in each the Government has a distinct role:– Infancy– Adolescence– Adulthood



• During infancy, the predominant role of the State is to provide DIRECT PROTECTION

• During adolescence, the predominant role of the State is to provide EDUCATION

• During adulthood the Government shoud guarantee FREEDOM TO CHOOSE and TO REACT



• Syrian agriculture is at the virge of leaving infancy and move towards adulthood

• It is time to help Syrian farmers to more fully release their potential



• My personal list:– Promote creation of rural community groups and

farmers associations (rural mutual funds)• They would take care of the first “layer” of risk

– Create and maintain an agricultural security fund (not an agricultural subsidy fund)• to provide protection to farmers in case of the “tail

risks” (drought, market risk)



• to provide protection to consumers (strategic stocks)• the exposure of such a fund might be hedged on the

global financial market

– Provide subsidized credit in a selective way• To promote adoption of water saving crops• To promote production of new crops for expanding

international markets (organic, quality food, pharmaceutical plants, etc.)


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Social Sustainability of Reformed Syrian Agriculture: the Risk Dimension C. Cafiero, University of...

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