## sipea2023009

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---

### Background and key challenges
- Niger has experienced nine episodes of acute drought and five major floods over the past two decades, mainly affecting rural populations and the agricultural sector.
- Agriculture accounted for 36.4 percent of GDP in 2021 and mostly relies on rainfed crops.
- Niger endures on average a food crisis every four years due to the vulnerability of its agriculture to climate hazards and its low productivity.
- Malnutrition indicators (percentage of total children under 5, 2021):
  - Chronic malnutrition (stunted children under five): declined from 53.5 percent in 2000 to 44.4 percent in 2021; remains one of the highest in sub-Saharan Africa and the highest of the Sahel countries.
  - Acute malnutrition (wasted children under 5): declined from 15.8 percent in 2010 to 11.5 percent in 2021; still almost double the average for sub-Saharan African countries and the highest of the Sahel region.
  - Prevalence of children underweight follows similar unfavorable trends.
- Dependency rate to food imports was around 15 percent of the country’s net food supply value in 2020.
- Vulnerability drivers: widespread poverty, narrow export base, remoteness and landlocked status, large weight of food in household consumption baskets, low storage capacity, and spillovers from Russia’s war in Ukraine raising costs of agricultural inputs (energy, fertilizers, etc.).
- Macroeconomic effects of climate shocks and food insecurity:
  - Volatility in agricultural production and GDP.
  - Increased inflationary pressures and rising food prices.
  - Larger fiscal and current account deficits from relief plans and increased demand for imported foodstuff.
  - Reduced productivity of rural populations, erosion of physical and human capital, and undermined long-term growth.

### Methodology
- Model used: dynamic quantitative open economy spatial multi-sector macroeconomic model with rural and urban locations; derived from Baptista, D., Spray, J. and Unsal, D.F. (2022). A Macroeconomic Spatial Model of Food Insecurity in Low-Income Countries.
- Key model features:
  - Food produced in rural areas on household farms using labor, imported fertilizer, and capital.
  - Urban specialization in non-farm activities (services and industry).
  - Trade and migration across regions with frictions; imports from abroad.
  - Inclusion of subsistence consumption of food, limited access to finance, and high transportation costs and import tariffs.
- Calibration sources: national survey ECHVM 2018/19 database, FAO stats, and literature findings.
- Climate shock specification: a one-period temporary 25 percent decline in agricultural productivity—equivalent to two standard deviations of agricultural output.
- Model links agricultural output to households’ food consumption and total calories; quantifies effects on rural households’ capital, migration, urban/rural inequality, and food prices.
- Behavioral responses:
  - Households may sell productive capital to meet minimum food consumption.
  - Small, isolated shocks: temporary migration and quicker adjustments when trade and migration frictions are small.
  - Large shocks: substantial capital liquidation, persistent effects, permanent decline in agricultural production, higher food prices, lower food consumption, urban migration, increased regional inequality, and lower economic growth and productivity.

### Simulation results and comparative policy analysis
- Direct impacts of a 25 percent decrease in agricultural production (normalized relative to baseline period 0):
  - Rural food consumption declines by 18 percent; urban food consumption declines by 14 percent.
  - Food prices increase by 27 percent in rural areas and by 24 percent in urban areas.
  - Rural calorie consumption would fall and rural households would approach the 2100 kcal/day threshold.
  - Rural households’ disposable capital erodes by 15 percent and is only partially rebuilt 5 years later.
  - Urban and rural households increase consumption of imported food in response to the shock.
- Policy interventions simulated:
  - Cash transfers:
    - Financed by taxing all households up to 15 percent of their income and redistributing revenue to rural households (beneficiary targeting assumed).
    - Results: raise consumption and utility for rural households; enable purchase of goods and accumulation of capital; raise farm productivity; lower food prices and migration; reduce urban-rural wage gap.
  - Fertilizer subsidies:
    - Financed same as cash transfers; subsidize rural households’ fertilizer purchases.
    - Results: decrease price of domestically produced food and share of imported food; on net costly—reduce welfare for both rural and urban households relative to baseline; lower level of agricultural capital relative to baseline as farmers substitute capital for cheaper fertilizers.
  - Trade liberalization (eliminating import tariffs on staple food):
    - Expected to increase food imports and supplement domestic supply.
    - Benefits are uneven: urban households benefit slightly more due to larger share of imported food in their consumption basket, increasing urban-rural inequality.
  - Reduction in internal mobility costs:
    - Removal of mobility barriers between rural and urban areas; easier movement of households, goods, and services.
    - Results: more effective than lowering import tariffs at mitigating calorie shortfalls; lowers inequality as farmers access urban opportunities, increasing income, consumption, capital, and welfare.
- Comparative findings:
  - Cash transfers are more effective than fertilizer subsidies at safeguarding households’ welfare.
  - Reduction in mobility costs is more effective than trade liberalization at mitigating food insecurity and reducing inequality.
  - Fertilizer subsidies can decrease inequality and domestic food prices, and reduce food imports, but may yield lower welfare gains than cash transfers and can distort capital accumulation.

### Policy recommendations
- Operationalize a larger-scale, better coordinated national social safety net system:
  - Strengthen technical and financial resources of the National Mechanism for the Management and Prevention of Food Crises (DNPGCA) to improve forecasting, crisis management, and donor coordination.
  - Improve safety net program coordination via a unified social registry and common monitoring schemes; improve coverage and security of the existing civil registry scheme.
  - Increase safety net spending while improving the mix between long-term, predictable transfers and shock responses; direct three-quarters of safety net spending to long-term, predictable transfers to the chronically food insecure and/or chronically poor.
- Reform food sales at subsidized prices and agricultural fertilizer subsidy systems to improve targeting, efficiency, and sustainability:
  - Establish a unified social registry to enable targeted subsidized food sales; reform the fertilizer subsidy system (CAIMA) including financing mechanisms to ensure sustainability, e.g., a revolving fund replenished with sales profits.
  - Recognize that well-designed, targeted subsidies can help build resilience where a solid cash transfer system is not yet established.
- Improve financial inclusion for vulnerable populations, including women and youth:
  - Financial inclusion helps smooth consumption, increase investments, and reinforce physical and human capital.
  - Unlike cash transfers (which are costly for urban households via taxation), financial inclusion can enable long-run self-financing of resilience through access to credit.
  - Key reform areas (SIP on Financial Inclusion in Niger):
    - Improving financial literacy.
    - Promoting digital financial services.
    - Advancing the operationalizing of the Financial Inclusion Fund.
    - Re-establishing a healthy and solid microfinance sector.
    - Strengthening supervision to preserve financial system stability and build customers’ trust.

### Policy proposal: investments and tariff policy (from chapter 15)
- Increasing investment in road and information technology infrastructure to lower internal mobility costs and open up agricultural production areas will reduce the impact of climate shocks on rural populations.
- Complementary policy: tariff reductions on imported food staples.
- Expected benefits:
  - Further integration between rural and urban areas in goods and labor markets.
  - Facilitation of rural populations' access to basic social services—health, education, and social protection—strengthening human capital and resilience to shocks.
  - Reinforcement of agricultural market functioning and improved competitiveness in exports to neighboring countries.
  - Easier access for rural populations to imported food substitutes at lower price in the event of domestic shortages.
- Trade-off in timing of gains:
  - Gains from road infrastructure investment expected to materialize in the medium term.
  - Removal of import tariffs can be used as a short-term instrument to respond quickly to shocks.
- Contextual note from the source: "In response to this year's food crisis, the government reduced tariffs on some imported food products (e.g., vegetable oil, sugar, rice, etc.) to ease pressure on food prices."

### Model overview: two-location economy
- Economy composed of two locations: rural (R) and urban (U).
- Population: L_U urban households and a continuum Ω of rural households of mass L_r.
- Consumption: both household types consume an agricultural good (F) and a non-agricultural good (M).
- Production:
  - All domestic agricultural production is carried out by rural households.
  - Urban households produce only non-agricultural goods.
- Labor allocation:
  - Rural households allocate a fixed share of labor to agricultural production and use the remaining share to supply wage labor to a perfectly competitive non-farm firm.
  - Rural households can supply wage labor in rural or urban area; urban households supply labor only in urban area and cannot move.

### Household preferences, consumption, and savings
- Utility function: U_t = log(C_it - C̅) + β log B_it+1.
- Per-period constraint: P_it C_it + B_it+1 = Y_it + (1 − δ) B_it, with 0 < δ < 1.
- Net income: Y_it = Y_gross(1 − tax_t) + cash_it.
- Consumption requirement: C̅ captures minimum goods consumption; generates consumption smoothing motive.
- Under permanent income increase household moves away from constraint and saves closer to "ideal" savings rate β / (1+ β).
- Optimal nominal spending on goods: households spend X_it on goods consumption where remaining wealth is saved.
- Savings rate: sav_it = [β/(1 + β)](1 − P_it C / W_it) and is increasing in wealth.
- Final goods bundle uses Stone-Geary utility with 0 < α < 1.
- Food (agricultural) subsistence requirement: C̅_F introduced to capture non-homothetic preferences between agricultural and non-agricultural goods.
- Calorie consumption: kcal_it = a(C_it^F)^ζ, with 0 < ζ < 1 and a constant a.
- Assumption: households always satisfy food subsistence, P_i C_i ≥ P_i^F C̅_F.

### Trade, sourcing, and price indexes
- Armington aggregator for local varieties with elasticity of substitution σ, with σ > 1.
- Shipping goods between locations incurs iceberg trade cost τ_in for any pair n,i with τ_in ≥ 1 and τ_ii = 1 for all i, n.
- Price of imported goods equals factory gate price plus transportation cost; price of import from ROW, p_j^ROW, is exogenous.
- Import share π_in^j: share of expenditures X_i^jF spent on purchasing goods from origin n; falls with farm-gate price p_j^n and shipping cost τ, and rises with CES price index P_i^j.
- Exports to rest of world X_ROW,n^jF follow a constant elasticity function of prices with elasticity 1 − σ.

### Agricultural production and input finance
- Rural household production function (per household with land size h): production, with 0 < γ < 1 and 0 < θ < 1, depends on farm productivity z_t, installed farm capital k_t, and fertilizer input f_t.
- Fixed labor to farm production set equal to 0 < ρ < 1.
- Households allocate savings across capital and fertilizer to equalize marginal products: p_f and p_k are prices of fertilizer and capital.
- No borrowing: installed capital k_t and fertilizer f_t are financed exclusively through household savings.
- Households employ all savings B_it in farm capital and fertilizer; fertilizer fully depreciates each period; capital carried net of depreciation.
- All capital goods and fertilizer are imported from the foreign economy.

### Non-agricultural sector, wages, and migration choice
- Perfectly competitive firms produce non-agricultural goods in both urban and rural areas by hiring labor.
- Rural production uses share ψ_t of rural households who stay; remaining (1 − ψ_t) migrate to urban area for wage work.
- Local non-agricultural TFP in urban area: z_M.
- In equilibrium, marginal revenue product of labor equals wage: firms set MRP = wage for i = {R,U}.
- Migration decision for rural households includes amenity values D_i with D_R > D_n for any n = {U,ROW}, capturing moving costs.
- Idiosyncratic migration cost κ_it(ω) follows a Frechet distribution with scale parameter 1 and dispersion parameter λ, iid across households and time.
- λ measures heterogeneity in location preferences: λ → ∞ implies homogeneous preferences and infinite migration elasticity; lower λ implies more heterogeneity and smaller migration response to wage changes.
- Migration-adjusted real wage uses price index P_it|R combining origin and destination price indices with 0 < Φ < 1; Φ set equal to share of migrating household members.
- Migrants send remittances to equalize real consumption across household members.

### Market clearing and fiscal balance
- Goods market clearing: sales Y_i^j for j = {A,S} equal sum of sales across destinations.
- Exports X_ROW,i^F and trade shares π_ni determine equilibrium farm-gate prices vector (p_S^U, p_F^R, p_S^R).
- Government budget balanced: tax revenues R_i equal spending S_i on cash transfers and fertilizer subsidies for all t = {1, 2, ...}.
- Rural households are assumed sole recipients of government benefits.

*Prepared by Diogo Baptista (RES), Yoro Diallo, and Arsene Kaho (AFR).*

### 1. As a result of global warming, Niger is subject to frequent climate-related shocks in

### 1. As a result of global warming, Niger is subject to frequent climate-related shocks in

### Background and key challenges
- Niger has experienced nine episodes of acute drought and five major floods over the past two decades, mainly affecting rural populations and the agricultural sector.
- Agriculture accounted for 36.4 percent of GDP in 2021 and mostly relies on rainfed crops.
- Niger endures on average a food crisis every four years due to the vulnerability of its agriculture to climate hazards and its low productivity.
- Malnutrition indicators (percentage of total children under 5, 2021):
  - Chronic malnutrition (stunted children under five): declined from 53.5 percent in 2000 to 44.4 percent in 2021; remains one of the highest in sub-Saharan Africa and the highest of the Sahel countries.
  - Acute malnutrition (wasted children under 5): declined from 15.8 percent in 2010 to 11.5 percent in 2021; still almost double the average for sub-Saharan African countries and the highest of the Sahel region.
  - Prevalence of children underweight follows similar unfavorable trends.
- Dependency rate to food imports was around 15 percent of the country’s net food supply value in 2020.
- Vulnerability drivers: widespread poverty, narrow export base, remoteness and landlocked status, large weight of food in household consumption baskets, low storage capacity, and spillovers from Russia’s war in Ukraine raising costs of agricultural inputs (energy, fertilizers, etc.).
- Macroeconomic effects of climate shocks and food insecurity:
  - Volatility in agricultural production and GDP.
  - Increased inflationary pressures and rising food prices.
  - Larger fiscal and current account deficits from relief plans and increased demand for imported foodstuff.
  - Reduced productivity of rural populations, erosion of physical and human capital, and undermined long-term growth.

### Methodology
- Model used: dynamic quantitative open economy spatial multi-sector macroeconomic model with rural and urban locations; derived from Baptista, D., Spray, J. and Unsal, D.F. (2022). A Macroeconomic Spatial Model of Food Insecurity in Low-Income Countries.
- Key model features:
  - Food produced in rural areas on household farms using labor, imported fertilizer, and capital.
  - Urban specialization in non-farm activities (services and industry).
  - Trade and migration across regions with frictions; imports from abroad.
  - Inclusion of subsistence consumption of food, limited access to finance, and high transportation costs and import tariffs.
- Calibration sources: national survey ECHVM 2018/19 database, FAO stats, and literature findings.
- Climate shock specification: a one-period temporary 25 percent decline in agricultural productivity—equivalent to two standard deviations of agricultural output.
- Model links agricultural output to households’ food consumption and total calories; quantifies effects on rural households’ capital, migration, urban/rural inequality, and food prices.
- Behavioral responses:
  - Households may sell productive capital to meet minimum food consumption.
  - Small, isolated shocks: temporary migration and quicker adjustments when trade and migration frictions are small.
  - Large shocks: substantial capital liquidation, persistent effects, permanent decline in agricultural production, higher food prices, lower food consumption, urban migration, increased regional inequality, and lower economic growth and productivity.

### Simulation results and comparative policy analysis
- Direct impacts of a 25 percent decrease in agricultural production (normalized relative to baseline period 0):
  - Rural food consumption declines by 18 percent; urban food consumption declines by 14 percent.
  - Food prices increase by 27 percent in rural areas and by 24 percent in urban areas.
  - Rural calorie consumption would fall and rural households would approach the 2100 kcal/day threshold.
  - Rural households’ disposable capital erodes by 15 percent and is only partially rebuilt 5 years later.
  - Urban and rural households increase consumption of imported food in response to the shock.
- Policy interventions simulated:
  - Cash transfers:
    - Financed by taxing all households up to 15 percent of their income and redistributing revenue to rural households (beneficiary targeting assumed).
    - Results: raise consumption and utility for rural households; enable purchase of goods and accumulation of capital; raise farm productivity; lower food prices and migration; reduce urban-rural wage gap.
  - Fertilizer subsidies:
    - Financed same as cash transfers; subsidize rural households’ fertilizer purchases.
    - Results: decrease price of domestically produced food and share of imported food; on net costly—reduce welfare for both rural and urban households relative to baseline; lower level of agricultural capital relative to baseline as farmers substitute capital for cheaper fertilizers.
  - Trade liberalization (eliminating import tariffs on staple food):
    - Expected to increase food imports and supplement domestic supply.
    - Benefits are uneven: urban households benefit slightly more due to larger share of imported food in their consumption basket, increasing urban-rural inequality.
  - Reduction in internal mobility costs:
    - Removal of mobility barriers between rural and urban areas; easier movement of households, goods, and services.
    - Results: more effective than lowering import tariffs at mitigating calorie shortfalls; lowers inequality as farmers access urban opportunities, increasing income, consumption, capital, and welfare.
- Comparative findings:
  - Cash transfers are more effective than fertilizer subsidies at safeguarding households’ welfare.
  - Reduction in mobility costs is more effective than trade liberalization at mitigating food insecurity and reducing inequality.
  - Fertilizer subsidies can decrease inequality and domestic food prices, and reduce food imports, but may yield lower welfare gains than cash transfers and can distort capital accumulation.

### Policy recommendations
- Operationalize a larger-scale, better coordinated national social safety net system:
  - Strengthen technical and financial resources of the National Mechanism for the Management and Prevention of Food Crises (DNPGCA) to improve forecasting, crisis management, and donor coordination.
  - Improve safety net program coordination via a unified social registry and common monitoring schemes; improve coverage and security of the existing civil registry scheme.
  - Increase safety net spending while improving the mix between long-term, predictable transfers and shock responses; direct three-quarters of safety net spending to long-term, predictable transfers to the chronically food insecure and/or chronically poor.
- Reform food sales at subsidized prices and agricultural fertilizer subsidy systems to improve targeting, efficiency, and sustainability:
  - Establish a unified social registry to enable targeted subsidized food sales; reform the fertilizer subsidy system (CAIMA) including financing mechanisms to ensure sustainability, e.g., a revolving fund replenished with sales profits.
  - Recognize that well-designed, targeted subsidies can help build resilience where a solid cash transfer system is not yet established.
- Improve financial inclusion for vulnerable populations, including women and youth:
  - Financial inclusion helps smooth consumption, increase investments, and reinforce physical and human capital.
  - Unlike cash transfers (which are costly for urban households via taxation), financial inclusion can enable long-run self-financing of resilience through access to credit.
  - Key reform areas (SIP on Financial Inclusion in Niger):
    - Improving financial literacy.
    - Promoting digital financial services.
    - Advancing the operationalizing of the Financial Inclusion Fund.
    - Re-establishing a healthy and solid microfinance sector.
    - Strengthening supervision to preserve financial system stability and build customers’ trust.

*Prepared by Diogo Baptista (RES), Yoro Diallo, and Arsene Kaho (AFR).*

### 15. Increasing investment in road and information technology infrastructure to lower

### sipea2023009 - 15. Increasing investment in road and information technology infrastructure to lower

### Policy proposal: investments and tariff policy
- Increasing investment in road and information technology infrastructure to lower internal mobility costs and open up agricultural production areas will reduce the impact of climate shocks on rural populations.
- Complementary policy: tariff reductions on imported food staples.
- Expected benefits:
  - Further integration between rural and urban areas in goods and labor markets.
  - Facilitation of rural populations' access to basic social services—health, education, and social protection—strengthening human capital and resilience to shocks.
  - Reinforcement of agricultural market functioning and improved competitiveness in exports to neighboring countries.
  - Easier access for rural populations to imported food substitutes at lower price in the event of domestic shortages.
- Trade-off in timing of gains:
  - Gains from road infrastructure investment expected to materialize in the medium term.
  - Removal of import tariffs can be used as a short-term instrument to respond quickly to shocks.
- Contextual note from the source: "In response to this year's food crisis, the government reduced tariffs on some imported food products (e.g., vegetable oil, sugar, rice, etc.) to ease pressure on food prices."

### Model overview: two-location economy
- Economy composed of two locations: rural (R) and urban (U).
- Population: L_U urban households and a continuum Ω of rural households of mass L_r.
- Consumption: both household types consume an agricultural good (F) and a non-agricultural good (M).
- Production:
  - All domestic agricultural production is carried out by rural households.
  - Urban households produce only non-agricultural goods.
- Labor allocation:
  - Rural households allocate a fixed share of labor to agricultural production and use the remaining share to supply wage labor to a perfectly competitive non-farm firm.
  - Rural households can supply wage labor in rural or urban area; urban households supply labor only in urban area and cannot move.

### Household preferences, consumption, and savings
- Utility function: U_t = log(C_it - C̅) + β log B_it+1.
- Per-period constraint: P_it C_it + B_it+1 = Y_it + (1 − δ) B_it, with 0 < δ < 1.
- Net income: Y_it = Y_gross(1 − tax_t) + cash_it.
- Consumption requirement: C̅ captures minimum goods consumption; generates consumption smoothing motive.
- Under permanent income increase household moves away from constraint and saves closer to "ideal" savings rate β / (1+ β).
- Optimal nominal spending on goods: households spend X_it on goods consumption where remaining wealth is saved.
- Savings rate: sav_it = [β/(1 + β)](1 − P_it C / W_it) and is increasing in wealth.
- Final goods bundle uses Stone-Geary utility with 0 < α < 1.
- Food (agricultural) subsistence requirement: C̅_F introduced to capture non-homothetic preferences between agricultural and non-agricultural goods.
- Calorie consumption: kcal_it = a(C_it^F)^ζ, with 0 < ζ < 1 and a constant a.
- Assumption: households always satisfy food subsistence, P_i C_i ≥ P_i^F C̅_F.

### Trade, sourcing, and price indexes
- Armington aggregator for local varieties with elasticity of substitution σ, with σ > 1.
- Shipping goods between locations incurs iceberg trade cost τ_in for any pair n,i with τ_in ≥ 1 and τ_ii = 1 for all i, n.
- Price of imported goods equals factory gate price plus transportation cost; price of import from ROW, p_j^ROW, is exogenous.
- Import share π_in^j: share of expenditures X_i^jF spent on purchasing goods from origin n; falls with farm-gate price p_j^n and shipping cost τ, and rises with CES price index P_i^j.
- Exports to rest of world X_ROW,n^jF follow a constant elasticity function of prices with elasticity 1 − σ.

### Agricultural production and input finance
- Rural household production function (per household with land size h): production, with 0 < γ < 1 and 0 < θ < 1, depends on farm productivity z_t, installed farm capital k_t, and fertilizer input f_t.
- Fixed labor to farm production set equal to 0 < ρ < 1.
- Households allocate savings across capital and fertilizer to equalize marginal products: p_f and p_k are prices of fertilizer and capital.
- No borrowing: installed capital k_t and fertilizer f_t are financed exclusively through household savings.
- Households employ all savings B_it in farm capital and fertilizer; fertilizer fully depreciates each period; capital carried net of depreciation.
- All capital goods and fertilizer are imported from the foreign economy.

### Non-agricultural sector, wages, and migration choice
- Perfectly competitive firms produce non-agricultural goods in both urban and rural areas by hiring labor.
- Rural production uses share ψ_t of rural households who stay; remaining (1 − ψ_t) migrate to urban area for wage work.
- Local non-agricultural TFP in urban area: z_M.
- In equilibrium, marginal revenue product of labor equals wage: firms set MRP = wage for i = {R,U}.
- Migration decision for rural households includes amenity values D_i with D_R > D_n for any n = {U,ROW}, capturing moving costs.
- Idiosyncratic migration cost κ_it(ω) follows a Frechet distribution with scale parameter 1 and dispersion parameter λ, iid across households and time.
- λ measures heterogeneity in location preferences: λ → ∞ implies homogeneous preferences and infinite migration elasticity; lower λ implies more heterogeneity and smaller migration response to wage changes.
- Migration-adjusted real wage uses price index P_it|R combining origin and destination price indices with 0 < Φ < 1; Φ set equal to share of migrating household members.
- Migrants send remittances to equalize real consumption across household members.

### Market clearing and fiscal balance
- Goods market clearing: sales Y_i^j for j = {A,S} equal sum of sales across destinations.
- Exports X_ROW,i^F and trade shares π_ni determine equilibrium farm-gate prices vector (p_S^U, p_F^R, p_S^R).
- Government budget balanced: tax revenues R_i equal spending S_i on cash transfers and fertilizer subsidies for all t = {1, 2, ...}.
- Rural households are assumed sole recipients of government benefits.

*Source: sipea2023009 - 15. Increasing investment in road and information technology infrastructure to lower*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2023/english/sipea2023009.pdf_