1.In view of the foregoing, Argentina considers that the subsidies granted by the United States to the US cotton sector over the MY 1999-2002 period have caused and still cause serious prejudice to the interests of other Members, including Argentina, in that:
- They have a significant suppressing or depressing effect on international cotton prices, within the meaning of Articles 5(c) and 6.3(c) of the SCM Agreement; and
- they have the effect of increasing the U.S. world market share for cotton, within the meaning of Articles 5(c) and 6.3(d) of the SCM Agreement.
2.Furthermore, Argentina considers that the subsidies provided under US legislation for the MY 2003-2007 period threaten to cause serious prejudice to the interests of other Members, including Argentina, insofar as:
- they will have a significant suppressing or depressing effect on international cotton prices, within the meaning of Article 5(c), its footnote 13, and Article 6.3(c) of the SCM Agreement; and
- they will have the effect of increasing the US world market share for cotton, within the meaning of Article 5(c), its footnote 13 and Article 6.3(d) of the SCM Agreement.
3.Argentina accordingly requests the Panel to find that the aforementioned subsidies granted by the United States to the US cotton sector are inconsistent with Articles 5(c) and 6.3(c) and (d) of the SCM Agreement.
Further Third Party Submission of Benin
Third party submission of chad
3 October 2003
TABLE OF CONTENTS PageI. INTRODUCTION 29
II. SERIOUS PREJUDICE UNDER THE SCM AGREEMENT 29 III. THE COTTON SECTOR IN BENIN 29 IV. THE COTTON SECTOR IN CHAD 30 V. US COTTON SUBSIDIES – SERIOUS PREJUDICE TO BENIN AND CHAD 31 VI. CONCLUSION 34
I. INTRODUCTION 1. This dispute marks the first time that either Benin or Chad – two least-developed, sub-Saharan African countries – have participated in a WTO dispute. Benin and Chad have taken this unprecedented step in response to the serious threat posed to their economic and social stability by massive, WTO-inconsistent US subsidies on upland cotton.
2. As indicated below, subsidies provided by the United States to its relatively small and prosperous group of cotton farmers exceed the gross national income of Benin, Chad, and every other country in the West African region.
3. Cotton plays a critical role in the economic development of West Africa. The cotton farmers of the region are highly vulnerable to changes in the world price of cotton. These small, subsistence farmers have no ability to influence the international cotton market – they are “price takers”, not “price makers”.
4. When US subsidies cause or contribute to a dramatic fall in world prices, the consequences for Africa are severe: hundreds of thousands of people are pushed from basic subsistence living to stark poverty.
II. SERIOUS PREJUDICE UNDER THE SCM AGREEMENT
5. US subsidies have caused, and are causing, adverse effects to the interests of Benin and Chad within the meaning of Article 5(c) and 6.3 of the SCM Agreement. The United States has caused, and is causing, serious prejudice to the interests of Benin and Chad through the use of WTO-inconsistent subsidies on upland cotton. The serious prejudice to the interests of Benin and Chad arises because the effect of the US subsidies has been the significant price suppression and/or price depression for cotton in the same market, within the meaning of Article 6.3(c).1
6. Benin and Chad agree with Brazil that for the purposes of Article 6.3(c), the term “market” could encompass an individual country, a region, or the world market for cotton.2 In addition, in the view of Benin and Chad, the Further Submission of Brazil has clearly established the causal link between US subsidies and suppressed prices in the world market.
7. Therefore, for the purposes of this Third Party submission, Benin and Chad accept that the causal link has been established by Brazil, and will focus instead on the impact of such suppressed prices on the economies and cotton sectors of Benin and Chad.
III. THE COTTON SECTOR IN BENIN 8. Benin’s Third Party Submission of 15 July 2003, provided the basic facts about its cotton sector. While Benin does not wish to repeat all of this information, it would recall that:
- cotton is the most important cash crop in the national economy, accounting for about 90 per cent of agricultural exports;
- cotton has provided 75 per cent of the country’s export earnings over the past four years;
- cotton generates a quarter of the country’s revenues;
- a third of all households depend on the cultivation of cotton, and a fifth of wage-earning workers are employed in the cotton sector; and
- overall, about a million people in Benin – out of a population of six million – are dependent on cotton, or cotton-related activities.
IV. THE COTTON SECTOR IN CHAD 9. Since Chad did not file an earlier submission, it takes this opportunity to provide the Panel with brief essential information about the national economy of Chad, and the cotton sector.
10. Chad, like Benin, is one of the poorest countries in the world. Of the 175 countries listed in the 2003 United Nations Human Development Index, Chad is ranked 165th.3 It is estimated that 80 per cent of the population of Chad lives on less than US $1 per day. Average life expectancy is 48 years. Nearly a third of all children in Chad under the age of five suffer from chronic malnutrition.4
11. The cotton-producing region of Chad is located in the southern part of the country, in an area covering about 127,000 square kilometres. Cotton is generally grown on small farms, usually no more than one or two hectares. Farmers have to rely on rain for irrigation and animals for traction when working the cotton fields during the sowing season.
12. Cotton production in Chad affects approximately 1.5 million people, out of a total population of about 8.1 million.5 Cotton exports account for 5.1 per cent of GDP in Chad, and represents 25 per cent of all exports.6 Cotton is therefore one of Chad’s main sources of income, and sustains the livelihood of a large portion of its population.
13. A recent World Bank report on the cotton sector in Chad stated that:
“Revenue from cotton constitutes the only source of community development for villages in the cotton-producing area to meet their needs and improve their quality of life [original emphasis]....[C]otton payments are received in two ways: as individual lump sums and as rebates/ balances (restourne), depending on the realized level of prices internationally [emphasis added]. Rebates constitute the only source farmers have to invest in village-level public goods such as schools, health centres, credit institutions, storage facilities, clean water pumps and wells, radiers to limit village isolation during rainy season, and so forth.”7
14. Rather more succinctly, the World Bank observed that: “Cotton was introduced in Chad during the colonial period and has dominated the economy since then.”8
V. US COTTON SUBSIDIES – SERIOUS PREJUDICE TO BENIN AND CHAD
15. Brazil’s Further Submission of 9 September 2003 provides compelling evidence of the serious prejudice Brazil has sustained as a result of massive, WTO-inconsistent cotton subsidies. Yet the serious prejudice to the countries of West Africa, including Benin and Chad, has been far worse.9 16. The subsidies paid by the United States to its relatively prosperous 25,000 cotton farmers dwarf the economies of West Africa. As indicated in Benin’s Third Party submission of 15 July US cotton subsidies exceed the gross national income of Benin (population 6 million), as well as Chad (population 8 million).
17. US cotton subsidies also exceed the gross national income of Burkina Faso (11 million), Mali (11 million), Togo (5 million) and the Central African Republic (4 million). As the respected international NGO Oxfam noted, “no region is more seriously affected by unfair competition in world cotton markets than sub-Saharan Africa”.10 18. The Oxfam report notes that:
“Central and West African countries have suffered far graver injury than any other developing region….The crop…occupies a pivotal position in the macro-economy of many countries….[Cotton] exports are a vital source of foreign exchange, financing essential imports such as food, fuel, and new technologies. They also underpin government revenues, providing the funds needed to invest in health and education….
High levels of poverty and limited government provision of basic services make Central and West Africa acutely vulnerable to adverse trends in world prices. Falling world prices mean that farmers have less to spend on health, education, and investment. Wages for agricultural labour also decline, as does the government’s capacity to provide basic social services.
Prospects for economic growth – a key requirement for poverty reduction – have also been damaged.”11
19. The Oxfam report – using data from the International Cotton Advisory Committee - estimates that in 2001 alone, sub-Saharan exporters lost $302 million as a direct consequence of US cotton subsidies. It notes that Benin’s actual cotton export earnings in 2001/02 were $124 million. However, had US subsidies been withdrawn, Benin’s export earnings are estimated to have been $157 million. Therefore, the value lost to Benin as a result of US subsidies was $33 million.12
20. Chad’s cotton export earnings in 2001/02 were $63 million, although in the absence of US subsidies, Chad would have earned $79 million, thus reflecting a loss of $16 million.13 21. For the period from 1999/2000 to 2001/2002, Oxfam estimates a total cumulative loss of export earnings of $61 million for Benin and $28 million for Chad.14As Oxfam rightly emphasizes, “the small size of several West African economies and their high levels of dependence on cotton inevitably magnify the adverse effects of US subsidies. For several countries, US policy has generated what can only be described as a major economic shock”.15 22. Indeed, for the subsistence cotton farmers of Benin and Chad, already highly vulnerable to fluctuations in the world price of cotton, the price suppression caused by US subsidies can and does have a highly destabilizing effect. According to the empirical data analyzed by two US economists, Nicholas Minot of the International Food Policy Research Institute and Lisa Daniels of Washington College:
“A 40 per cent reduction in farm-level prices of cotton is likely to result in a reduction in rural per capita income of 7 per cent in the short-run and 5-6 per cent in the long-run. Furthermore, poverty rises 8 percentage points in the short-run, equivalent to an increase of 334 thousand in the number of individuals in families below the poverty line. In the long run, as households adjust to the new prices, the poverty rate settles down somewhat, remaining 6-7 percentage points higher than originally….
Overall, the results in this paper challenge the stereotype of the rural poor in developing countries as consisting of subsistence farmers that are relatively unconnected to, and thus unaffected, by swings in world commodity markets. At least in the case of Benin, to the extent that fluctuations in world cotton prices are transmitted to farmers, they will have a significant effect on rural incomes and poverty.”16 [emphasis added]
23. Thus, as the Minot/Daniels paper indicates, a drop in world cotton prices of 40 per cent pushes an additional 334,000 people below the poverty line in Benin. Moreover, the Minot/Daniels study adopted a relative poverty line, equivalent to US$123 per person per year, far below the US$1 per day used by the World Bank.17
24. The Minot/Daniels paper describes what this means in human terms. The detailed household surveys carried out in Benin describe the living conditions for cotton farmers:
85 per cent of the cotton farmers in Benin have houses with mud or mud-brick walls.
62 per cent live in houses with a dirt floor.
72 per cent have corrugated metal roofs and 28 per cent have straw roofs.
53 per cent of the cotton farmer households get drinking water from a public well, while another 18 per cent use water from a river or lake.
Less than 2 per cent have electric lights, and 98 per cent use oil or kerosene lamps.
On average, the nearest source of potable water is 430 m away, and the nearest paved road is 36 km away.
About 34 per cent of the cotton farmers do not own a chair, 38 per cent do not own a table, and 34 per cent do not own a bed.18
25. Needless to say, farmers living in such conditions are “price takers”, not “price makers” in the global cotton market.
26. While comparable household surveys have not been conducted in Chad, conditions in Chad are, if anything, worse than in Benin. Moreover, as in Benin, the cotton farmers of Chad are highly vulnerable to changes in the international price of cotton.
27. Yet despite this situation of poverty, cotton farmers in both Benin and Chad are, and remain, efficient producers. As noted in Benin’s submission of 15 July the cost of producing cotton in West Africa is 50 per cent lower than comparable costs in the United States. Indeed, a recent World Bank Policy Research Working Paper found that West African countries were among the world’s lowest cost producers of cotton.19
28. Moreover, as Benin noted in its Submission of 15 July the IMF reported that Benin’s reform process in the cotton sector is among the most advanced in the region. However, to re-iterate a key point of Benin’s earlier submission, these economic efficiencies have been vitiated by the plunge in world cotton prices caused in no small part by US subsidies.
29. Similarly, since 1999, Chad has undertaken major reforms in its cotton production system. The aim of these reforms has been to improve production and productivity with a view to generating supplementary income, which could then be used to reduce widespread poverty in cotton-growing areas, and indeed in the country as a whole. The method for achieving this goal is a progressive liberalization of the cotton industry, similar to methods employed in other African cotton-producing countries.
30. However, as in Benin, the reforms in Chad are being seriously undermined by huge US subsidies. As stated by the World Bank:
This analysis20 appears to be all the more urgent today, given the current situation on the international market and the low price of cotton deriving from the recently-introduced US subsidies. These can have the effect of thwarting the reform and of having a considerable social and poverty impact. Unless the international situation changes and the US subsidies are removed, any liberalization and privatization of the cotton sector is unlikely to be successful. [original emphasis].21
31. The World Bank Policy Paper adds that:
“…subsidies to cotton farmers in major cotton producing countries increase artificially the supply in international markets and depress export prices for WCA [West and Central Africa] countries. Downward pressures on export prices have been exacerbated by generous (and in the case of the United States, rapidly increasing) subsidies for cotton production in the United States, China and the European Union.”22
32. The Policy Paper ultimately concluded that:
“Removal of these subsidies would benefit WCA countries, and allow them to better exploit their comparative advantage in cotton production for growth and poverty reduction.”23
VI. CONCLUSION 33. On 10 June 2003, the President of Burkina Faso, H.E. Blaise Compaoré, presented the joint proposal on cotton to the Trade Negotiations Committee on behalf of Benin, Burkina Faso, Chad and Mali.24 In presenting the proposal, President Compaoré remarked that:
“More than ten millions of people in West and Central Africa directly depend on cotton production, and several other millions of people are indirectly affected by the distortion of world market prices due to production and export subsidies to this agricultural product….
While cotton accounts for only a small portion of economic activity in industrialized countries, in all our States, it represents a determining and critical factor for poverty reduction policies as well as for political and social stability. Through induced effects on infrastructure development, education and basic health services, cotton production acts as an essential link within our countries’ development strategies….
Arguments in favour of sector-based modalities for cotton are straightforward: our countries are not asking for charity, neither are we requesting preferential treatment or additional aid. We solely demand that, in conformity with WTO basic principles, the free market rule be applied. Our producers are ready to face competition on the world cotton market – under the condition that it is not distorted by subsidies.”25 [emphasis added]
34. Similar remarks were made following the Cancun Ministerial by Dr. Kipkorir Aly Azad Rana, a Deputy Director-General of the WTO. Speaking to the Second East African Business Summit in Kenya (18-21 September 2003), he stated that:
"A strong call for action in addressing subsidy issues in cotton was made earlier this year by Benin, Burkina Faso, Mali and Chad….West African negotiators put the spotlight, before and at Cancún, on cotton subsidies leading to overproduction by less efficient farmers in rich countries and depressing global market prices….The countries who brought this issue to the table do not have a broad range of export possibilities to choose from, but in cotton, they produce high quality merchandise at competitive prices. In recognition of the benefits of export-led growth for development, they have turned, at the highest level, to the WTO. They do not ask for aid, which is the World Bank's remit, nor do they make political appeals that belong to the United Nations. They have just asked that WTO rules and disciplines apply also in sectors of interest to the poor - that a fair and market-oriented system be established in agriculture and that rich countries' wasteful export and production subsidies be abolished and cease to undermine their comparative advantage.”26 [emphasis added]
35. Both President Compaoré and Deputy Director General Rana were speaking about WTO negotiations, not dispute settlement. Yet their messages are equally valid for the purposes of this Panel proceeding. In this dispute, Benin and Chad are not seeking charity or preferential treatment. Similarly, Benin and Chad do not wish to make political appeals.
36. In the context of this proceeding, Benin and Chad ask the Panel simply to find that the United States must adhere to the WTO rules and disciplines on subsidies that it accepted at the conclusion of the Uruguay Round. This includes the clear prohibition in Part III of the SCM Agreement against causing serious prejudice to the interests of other Members. US subsidies on upland cotton have demonstrably caused serious prejudice to the interests of Benin and Chad by suppressing world prices for upland cotton. The results have been devastating for West Africa.
37. Benin and Chad therefore respectfully request the Panel to grant the relief requested by Brazil in Part 9 of its Further Submission.
Exhibit Ben-Cha 1
Markets, Trade, and Institutions Division
International Food Policy Research Institute
2033 K St. NW
Washington, D.C. 20006 USA
Department of Economics
Chestertown, MD 21620 USA
26 September 2003
Contact information: The authors may be contacted by mail using the first address listed above, by phone at +1 202 862-8199, or by email at email@example.com.
Acknowledgements: This original version of this paper was prepared for The World Bank. The field research was funded by the German Bundesministerium für Wirtshaftliche Zusammenarbeit (BMZ). The authors also wish to acknowledge useful comments and assistance from Ousmane Badiane at the World Bank, Karen Macours and others at the Northeast Universities Development Consortium conference at Williams College in October 2002, and an anonymous reviewer at IFPRI.
This paper combines farm survey data from Benin with assumptions about the decline in farm-level prices to estimate the direct and indirect effects of cotton price reductions on rural income and poverty in Benin. The results indicate that there is a strong link between cotton prices and rural welfare in Benin. A 40 per cent reduction in farm-level prices of cotton results in an increase in rural poverty of 8 percentage points in the short-run and 6-7 percentage points in the long run. The short-run impact is equivalent to an increase of 334 thousand in the number of individuals in families below the poverty line.
The results in this paper challenge the stereotype of the rural poor in developing countries as consisting of subsistence farmers that are relatively unconnected to, and thus unaffected, by swings in world commodity markets. At least in the case of Benin, to the extent that fluctuations in world cotton prices are transmitted to farmers, they will have a significant effect on rural incomes and poverty.
Introduction 1. From January 2001 to May 2002, world cotton prices fell almost 40 per cent, from 64 cents per pound to 39 cents/pound27. Since then, prices have rebounded to about 60 cents/pound, but cotton prices still show a long-term downward trend from the mid-1990s when cotton prices were over 80 cents/pound (see Figure 1). One reason for the long-term decline is that world demand for cotton has been stagnant at 20 million tons since the mid-1990s, in part due to competition with synthetic fibers. Short-term fluctuations in cotton prices are often driven by shifts in the net trade of China, the largest cotton producer and consumer in the world.
2. In addition to these two effects, cotton prices are pushed below what they otherwise would be by government support to cotton growers. The International Cotton Advisory Committee (ICAC) estimates that world-wide direct assistance to cotton growers was US$ 4.9 billion in 2001/02. Of this amount, the United States accounted for US$ 2.3 billion, equivalent to 24 cents per pound of cotton produced. Other sources, using a broader definition of assistance, estimate that the government provides US$ 3.9 billion to the cotton sector (Oxfam, 2002). Until 2002, US cotton policy consisted of various programs28, including two (the marketing loan program and loan deficiency payments) that ensure that farmers receive at least 52 cents/pound. This has the effect of insulating US farmers from the falling world prices. In 2001, in spite of low world prices, the US posted record cotton production and near-record export volumes. Furthermore, US subsidies to cotton have increased since these studies were carried out. The 2002 Farm Bill introduced target prices for the major commodities and programs that effectively pay farmers most of the difference between market prices and the target price. For upland cotton, the target price is 72 cents/pound. In addition, by allowing farmers to update their “base acreage”, the new policy provides incentives for farmers to expand production29.
3. Several recent studies have attempted to assess the impact of subsidies on world prices. The Centre for International Economics in Canberra uses a five-region world model of fibre, textile, and garment markets in 2000-01 to simulate the impact of US and European subsidies on cotton production and export. They find that removing US and European subsidies to cotton growers would raise the world cotton price by 6 cents/pound or 11 per cent. Another study, carried out by ICAC, estimates that removing US production subsidies would have increased the world price by 11 cents/pound in 2001/02 (ICAC, 2002). And most recently, Sumner (2003) estimates that, in the absence of US subsidies, the world cotton price would have been 12.6 percent higher over 1999-2002. This estimate is probably the most authoritative because it takes into account the 2002 Farm Bill, it incorporates a detailed treatment of various US subsidy programs, and it uses a standard modelling framework and parameter estimates.
4. The World Bank estimates that removing US cotton subsidies would generate US$250 million per year in additional revenues for West African cotton farmers (Badiane et al, 2002). An Oxfam report calculates the losses to three West African nations at 1-2 per cent of gross domestic product. It points out that, in Mali and Benin, losses in export revenue associated with US cotton subsidies are greater than US development assistance to those countries (Oxfam, 2002).
5. The adverse impact of lower cotton prices on export revenue and GDP in cotton exporting nations is clear, but does this translate into higher incidence of rural poverty? If cotton is grown mainly by larger farmers with relatively high incomes, then the effect of changes in cotton prices on rural poverty may be modest. Even if cotton is grown primarily by small farmers, the magnitude of the effect on rural poverty will be small if few farmers grow cotton or if it accounts for a small share of rural income. Assessing the direct impact of changes in cotton prices on rural poverty requires detailed household-survey data on incomes and expenditures.
6. This paper examines the impact of changes in cotton prices on rural poverty in Benin. In particular, it has two objectives:
to describe the living conditions and level of poverty for cotton growers and other farmers in Benin; and
to estimate the short- and long-run impact of lower cotton prices on the income of cotton growers and on the incidence of poverty in rural Benin.
Background 7. The Republic of Benin is a small West African nation of about 6.0 million inhabitants, 59 per cent of whom live in rural areas. Its rural economy is based on maize, sorghum, millet, yams, cotton, and livestock production. The per capita gross national product is US$ 380, placing Benin among the poorest 20 per cent of countries. The per capita income of Benin is lower than the average for sub-Saharan Africa (World Bank, 2000).
8. In 1989, Benin entered a period of economic and political reform. Elections were held in which the military government was voted out of office, and Benin entered into the first of several structural adjustment programs with the International Monetary Fund and the World Bank. In the agricultural sector, state farms and cooperatives were disbanded, food crop prices and marketing were liberalized, and many state-owned enterprises, including agro-processing enterprises, were privatized or closed (République du Benin, 1997). In January 1994, the CFA franc (FCFA) was devalued by 50 per cent, effectively doubling the price of imports and the returns to exports. Although this imposed hardship on manufacturing firms and consumers that had become accustomed to cheap imports, it stimulated the local production of cotton, rice, and other tradable goods.
9. Although the cotton sector benefited from the 1994 devaluation, structural reform in cotton marketing was limited. The cotton sector in Benin remained under the control of the state-owned Societé Nationale pour la Promotion Agricole (SONAPRA). In the past two years, Benin has begun to implement reforms to reduce the role of SONAPRA and introduce competition in the distribution of inputs and the marketing of cotton. The fall in world cotton prices has led to political pressure for the government to support the domestic price or even to re-assume control of the sector to protect farmer interests. According to ICAC (2002), the government provides modest support for the cotton price, equivalent to 5 cents/pound. Currently, cotton represents 90 percent of agricultural exports and 60-70 per cent of its total exports (excluding re-exports30).
10. The economic reforms carried out in the 1990s and the growth in cotton production during this period resulted in concrete benefits for rural households. The 1994-95 Enquête sur les Conditions de Vie en Milieu Rural(Survey on Living Conditions in Rural Areas) estimated the poverty rate at 33 per cent (UNDP-MDR, 1996: 13). Adopting a similar definition of expenditure and the same poverty line (adjusted for inflation), the poverty rate in the 1998 survey had fallen to 21 per cent. Qualitative questions in the latter survey appear to support the view that rural conditions improved in the 1990s. According to the IFPRI-LARES survey, 52 percent of the households reported that they were better off at the time of the survey (1998) than in 1992 and only 28 per cent reported being worse off . Furthermore, those reporting improvement tended to attribute these gains to economic factors such as crop prices and off-farm income opportunities, while those reporting worsening conditions tended to cite health and weather factors. Cotton farmers, those in the north of the country, and poor households were more likely to report improved conditions than others. (IFPRI, 2001)
11. These results suggest that there is a strong link between market-oriented policies and cotton expansion on the one hand and the living conditions of farmers in Benin on the other hand. The analysis presented in this paper will further examine this link, focusing on the impact of changes in cotton prices on rural income and poverty.
12. The data used in this paper come from the Enquête des Petits Agriculteurs (EPP) or Small Farmer Survey, carried out in 1998 by the International Food Policy Research Institute (IFPRI) and the Laboratoire d’Analyse Régionale et d’Expertise Sociale (LARES). The survey used a 24-page questionnaire, divided into 16 sections31. The households were selected using a two-stage stratified random sample procedure based on the 1997 Pre-Census of Agriculture. In each of the six departments32, villages were randomly selected, with the number of villages proportional to the volume of agricultural production, subject to a minimum of 10 villages per department. In total, one hundred villages were selected. In each village, nine households were randomly selected using household lists prepared for the pre-Census of Agriculture. The survey was carried out from August to November 1998. In a few villages, the number of interviewed households was eight or ten, resulting in a final sample size of 899 agricultural households. Sampling weights are used in calculating the results presented here (see IFPRI, 2001 for more detail).
13. In this study, we adopt a relative poverty line, set at the 40th percentile of per capita consumption expenditure. Per capita expenditure is calculated as cash expenditure on consumption goods, the imputed value of home-produced food, and the rental equivalent of owner-occupied housing. The resulting poverty line is equivalent to US$ 123 per person per year. It is worth noting that this poverty line is far below the US$ 1 per day frequently used by the World Bank.
14. We simulate the impact of various percentage reductions in cotton prices on the incomes of rural households. In the short run (before the household responds to lower prices), the change in income of each household is simply the change in the value of cotton production, assuming the farmer grows the same amount of cotton. This can be calculated as follows:
where y1i is per capita income33of household i after the shock, y0i is per capita income before the shock, Qc is the quantity of cotton produced by household i, ∆Pc is the change in the price of cotton, and Hi is the number of members in household i.
15. In the long run, lower cotton prices will lead farmers to substitute away from cotton and reduce input use, so the long-run direct impact is smaller than the short-run direct impact of the change in cotton prices. In this analysis, we use the concept of producer surplus to measure the welfare impact of the change in cotton price. This is calculated using the following equation:
where εc is the general equilibrium supply elasticity of cotton and Pc is the price of cotton34.
16. In the absence of estimated elasticities of supply for cotton in Benin, we use a range of plausible elasticities to calculate the range of plausible welfare impacts35. The elasticities used are 0.5, 1.0, and 1.5. As in the analysis of the short-run effect, we simulate the impact of these changes on the income of each household in the sample (micro-simulation) in order to estimate the impact on different types of households in terms of income and poverty.
17. The simulations are run with farm-level reductions in cotton price (ΔPc) of 10%, 20%, 30%, and 40%. The other variables (yoi and Qci ) are all defined at the household level, allowing the changes in per capita income to be calculated for each household in the sample. This “micro-simulation” approach allows us to estimate the change in income for any sub-group in rural areas, defined by income, farm-size, or other variables.
18. The impact of price changes on poverty is measured using the Foster-Greer-Thorbecke measures of poverty36, the most widely used of which are known as P0, P1, and P2. P0 is just the proportion of the population below the poverty line. P1, sometimes called the poverty gap measure, takes into account how far below the poverty line the poor are, on average. And P2, sometimes called the poverty gap squared, takes into account the degree of inequality among poor households, giving greater weight to extreme poverty.