The Welfare Impacts of National and International Agricultural Efficiency Gains - A South African Case Study

Ongoing agricultural and food commodity price declines associated with efficiency gains in agricultural production, both domestically and internationally, can have important welfare effects for a country. The fact that consumers can buy cheaper imported and/or domestically produced foodstuffs has various spin-off effects in the economy. However, as with any economic shock there are winners and losers, and hence it is important to gain an understanding of the economywide effects, specifically in terms of the employment effects and the income- and substitution effects associated with relative price changes in the economy. In this paper the impact of domestic and international efficiency changes in the agricultural sector is modelled using a South African Computable General Equilibrium model with highly disaggregated food and agricultural sectors. The results indicate that while consumers gain from both domestic and international efficiency gains, domestic agricultural producers face a contraction in output when world trade prices decline as a result of international efficiency gains. Efficiency gains have different welfare impacts upon different types of household, with rural households not gaining as much as urban households due to job losses in the agricultural sector that offset welfare gains associated lower prices.