The impact of taxes and subsidies on crop yields. Agricultural price distortions in Africa.

27-12-2016 | Publication

Agricultural taxes and subsidies are known to affect farmer’s production decisions in Africa, but their precise impact on crop yields and agricultural intensification across the continent is less clear. This is the focus of this PBL report. It is found that the impact of these price distortions is greater than generally expected. Moreover, neither taxes nor subsidies lead to more intensified agricultural production.

The analysis is based on data on subsidies, taxes and crop yields between 1961 and 2010 from 22 African countries. It includes the largest African economies and the most important commodities.

Both taxes and subsidies reduce crop yields

Many African countries tax export crops such as cocoa and cotton, while this report highlights a strong negative impact of such taxes on cocoa and cotton yields. Meanwhile, the production of food crops such as maize and sugar is often subsidized, with an objective to safeguard national food security. Subsidies, however, do not lead to increases in crop yields, but rather  tend to reduce crop yields.

Greater fiscal capacity of African countries needed

While a removal of taxes and subsidies could spur agricultural intensification, it would also have some short-run consequences. Levying taxes on export commodities often represents the only means for cash-strapped countries to raise public finances. Furthermore, subsidies on food production are an important mechanism to provide income-support to poor populations in rural areas.

Nevertheless, a strong increase in agricultural intensification across Africa is urged in order to meet Africa’s growing demand for food and to safeguard the remaining pristine ecosystems. Altogether, these findings thus call for enhanced commitment to improve the fiscal capacity of African nations. A key aim should be to identify alternative solutions to raise taxes and distribute subsidies, without direct negative impacts on agricultural intensification.