The role and potential of animal health economics in the developing world

1. The role and potential of animal health economics in the developing world Prof. Karl M. Rich, Ph.D. Invited guest lecture at Obihiro University of Agriculture and Veterinary Medicine Obihiro, Japan, 14 February 2012

2. Outline • Motivation • What is economics? • Where are we in our knowledge base? • What’s missing – developed vs. developing countries • Overview of impacts of animal diseases • Economic impacts • Poverty and livelihood impacts • Frameworks for economic and poverty impact assessment : using the value chain for public policy (and examples). • The future: where do we need to go to better inform policy?

3. Motivation What is economics?

4. Motivation • It might be best to explain first what economics is NOT: • It is NOT just about money… • It is NOT about accounting … • It is NOT just about costs … • It is NOT about getting the number for your grant application … • And … it doesn’t have to be boring …

5. Motivation • Economics highlights how and why people make choices under conditions of scarcity and the results of such choices on society. • It is about assessing tradeoffs: how do we reconcile unlimited wants with limited resources? • It is about behavior and incentives: faced with tradeoffs, why do people do what they do?

6. Where does economics fit into the animal health world? • For starters, animal diseases are taking increased prominence and awareness both in domestic markets and on the global stage • Rise in perceptions and fear: emergence of new diseases or virulent strains of old diseases with potentially dangerous impacts on human health (think avian flu) • Rise in globalization: more trade, more potential for the introduction of pathogens (particularly from LDCs) • Greater demands from policymakers, particularly in light of new diseases, budgetary pressures and priorities, etc.

7. Where does economics fit into the animal health world? • Economics should provide a framework for helping with improved decision-making • Increased cost-effectiveness: optimization of spending decisions and resource allocation • Understanding of drivers, incentives, and constraints of decision-makers • Insights into potential impacts of different policies

8. What are we doing well? • The sophistication of economic impact analysis has greatly improved • Reviews: Rushton et al (1999); Rich et al. (2005); Rushton et al. (2009) Evaluation of impacts: McLeod and Leslie (2001); Otte et al. (2004) • Poverty impacts in LDCs: Perry et al. (1999; 2002; 2003); Randolph et al. (2002); Perry and Rich (2007); ongoing IFPRI-ILRI-FAO work on HPAI • Greater appreciation and integration of economics in epidemiological research as well • Lots of talk about greater “integration” of the vet world and the economics world (role of ISVEE, etc)

9. What have we achieved? • Institutionalization of cost-benefit analysis • Some applications of theoretical insights in terms of decision-making, some of which can be rather complex • Use of modeling frameworks to assess impacts and scenarios • Application of new institutional economics, particularly in understanding provision of public vs. private goods

10. Where are the gaps? • But this doesn’t mean all is well… • While our toolkits have expanded, the fundamental appreciation of what economics is as a discipline is missing. • As noted earlier, economics is not just about “the number” or getting a “better number” – it’s about choices under scarcity and the behavior induced when there are tradeoffs. • Too much normative economics, not enough positive economics

11. Where are the gaps? • But, you might ask: “well, our models capture what policymakers should do, right?” • Yes, but they also approach the world from a command-and-control perspective: if X then Y must happen • The problem is that there are always people behind those decisions, whether in policy, on the farm, or somewhere in between that influence how well those choices are implemented. • And, those people have their own incentives, their own tradeoffs they face. • Move from normative to positive approaches.

12. A veterinarian’s perspective on disease

13. An economist’s view: focus on the people behind the animals, their incentives, and constraints

14. Where are the gaps? • Context matters – we need better information on why actors behave how they do, what their incentives are, and how they interact.

15. Where are the gaps? • If we look at a more complicated case (LDCs), context is even more critical: • Actors are diverse • Governments and institutions have limited capacity • Sufficient regulations and compliance are lacking • No data • In addition, there is not a strong history of using animal health economics tools in decision making

16. Impacts of animal diseases • What are the potential economic impacts of an animal disease? • While many of these are disease-specific, there are some commonalities • Example: FMD (based on Perry and Randolph, 2003)

18. Impacts of animal diseases • Given the diversity of market and non-market impacts from animal diseases, it is helpful to tease out the various dimensions and contexts associated with them: • Disease characteristics • Production characteristics • Market characteristics • Livelihoods characteristics • Control characteristics

19. Impacts of animal diseases • Disease characteristics: refers to biological or epidemiological aspects of the disease itself that modulate its general impacts • E.g., mode of spread, frequency, severity, zoonotic impacts • Production characteristics: are there aspects about livestock production that influence disease impacts? • Types of systems, cycles, seasonality, multi-functionality/uses of livestock

20. Impacts of animal diseases • Market characteristics: the contribution of market dynamics to animal health impacts • Commercialization, market interaction, scope/complexity of value chains, economic linkages • Livelihoods characteristics: where do livestock fit in different stakeholders’ livelihoods? • Market/non-market/cultural roles • Control characteristics: how do the logistics and characteristics of control shape impact? • Effectiveness, resources, maintenance, regulation costs, externalities

21. Impacts of animal diseases • Putting it all together, an important and repeated characteristic that influences the impact of animal diseases is the role of interactions • Between and within different systems • Between and within different actors • Between and within different institutions • In developing country settings, these interactions will be particularly important in understanding poverty impacts and in designing policies sensitive to those impacts.

22. Animal health economics models • Given these various impacts of animal diseases, how do we analyze and quantify impact? • Economic models can provide us with six categories of information

23. Animal health economics models • Costs: budgetary costs arising from different mitigation strategies or farm-level costs resulting from losses in livestock sector • Prices: particularly important in the context of livestock production, given expectations

24. Animal health economics models • Linkages: inter-industry linkages can be particularly important in assessing the impact of an animal disease outbreak • Examples: livestock/feed sector, agriculture/non-agriculture linkages (tourism e.g.) • Trade: Two types of issues are important: • Impact of international trade bans as a result of an animal disease outbreak • Impact of regional trade bans (e.g., movement controls between regions)

25. Animal health economics models • Welfare: animal disease outbreaks can affect certain segments of society more than others • Losses in income • Developed vs. developing countries • Employment: labor markets can be impacted by animal health emergencies (positive and negative effects) • Idling of livestock-related industries (slaughter plants) • Negative impact in unrelated industries (tourism) • Temporary employment in government • Short-term vs. long-term impacts

26. Animal health economics models • Scale of analysis plays an important role in the choice of economic platform • Animal diseases have differential impacts at different levels of analysis • Herd-level • Farm-level • Region • Nation • International • The appropriate level of analysis will depend on the information desired by stakeholders as well as on the disease itself

27. Animal health economics models • Two additional aspects of the level of analysis also need to be considered: • Time: important in evolution of certain types of diseases (FMD vs. BSE) • Scale should be set with respect to time and level of production • Role of dynamics (short vs. long run effects) • Seasonality • Space: role of spatial interactions in the evolution of the disease

28. Animal health economics models • Five types of modeling platforms have broad applicability to animal health issues: • Benefit-cost analysis (BCA): accounting forms • Linear and mathematical programming • Partial equilibrium models • Input-output & social accounting matrices • Computable general equilibrium models • Note also that BCA is a standard way of analysis: all of these different techniques build on simple, accounting forms of BCA to derive benefits.

29. Time Stakeholders Data Available Space Information Desired Costs Prices Trade Linkages or Welfare Jobs Input-Output & SAM Cost-Benefit Linear Program Partial Equilib. Multi-Market ECON. MODELS PAM CGE Herd or Farm National or Regional Sector Global Scale of Analysis Risk Time Type of Disease Space Models boxed in solid line are more capable of accommodating time considerations than those boxed in dashed line.

30. Challenges: developed vs. developing world • The institutionalization of models has happened with some success in the developed world. • But, in the developing world, limitations on data and capacity plus more complex issues concerning livestock, have limited their use there. • Need: frameworks that capture the complexity of developing country livestock with the constraints present there.

31. Role of value chains as a framework • The oft-heard concept of the value chain is one way to address this… but what exactly is a value chain? And how can it help us?

32. Is THIS a value chain? Producers Traders Retailers Consumers

33. Or is THIS a value chain?

34. Or THIS? Firm infrastructure Human resource management Margin Technology development Procurement Inbound logistics Operations Outbound logistics Marketing & sales Service Margin

35. Or THIS?

36. Or maybe even THIS?

37. What is a value chain? • A value chain is “the full range of activities which are required to bring a product or service from conception, through the intermediary phases of production, delivery to final consumers, and final disposal after use.” (Kaplinsky 2000:121) • The point was to go beyond traditional supply chain analyses rooted in logistics, although modern techniques are closely linked to value chains.

38. Why value chains for animal disease analysis? • Animal disease outbreaks take place in a systems context, with the risk and spread of disease contingent on measures taken throughout the chain. • “Weak links” in the chain may accentuate disease risk, but analysis is needed to understand who these stakeholders are, how they interact with others, and why they behave as they do. • Utilization in livestock systems and animal health applications increasing (see Kobayashi 2006 and unpublished FAO work in context of HPAI), though a lot of analysis is quite ad hoc

39. Components of value chain analysis Step 1: Mapping the value chain (can be done at different levels/systems) • Idea: • Assess the characteristics of actors and their linkages • Understand role of chain activities in terms of broader livelihoods context (profit/income) • Identify service providers and roles of public sector • Characterize business environment of the chain • Compute flows of goods throughout the chain, including prices and seasonal variation.

40. Components of value chain analysis Mapping the chain (cont’d) • Main outputs: • Graphical maps of actor linkages and product flows (between actors and across space) • Quantification of role of livestock in livelihoods • Identification of production practices and costs • Typologies of chain actors based on income • Identification of different chains based on relationships, etc. • Transactions costs and chain constraints • Note that mapping has an important purpose of showing possible pathways of transmission as well (linkage with risk analysis)

41. From Wanyoike and Rich (2007) Somalia Garissa livestock marketing value chain Local Somali producers Traders, brokers, trekkers (60% of cattle) Traders CARE LIME Project Traders, brokers, sellers of fodder etc. Garissa Market Transporters, trekers Traders Ranches NRB. & MSA (66% cattle;63% shoats KMC Butcheries GSA Brokers Supermarkets Meat W/sellers S/house, Transporters Hotels Butcheries Shipping agencies Meat Retailers Abroad Consumers Consumers GSA

42. From Kobayashi (2006)

43. Components of value chain analysis • Step 2: Governance in the value chain • Idea: identify the nature of relationships and coordination mechanisms that exist between actors in the value-chain. Also provide details on aspects of the business environment of the chain • Main outputs: • Who decides what is produced • How the rules of trade are determined • The nature of relationships between the participants • Roles of associations • Coordination mechanisms (contracts, market sales, etc) • The extent of chain “power,” based on the relative size of a particular actor, share of chain profits, or control over technology

44. Components of value chain analysis • Types of coordination • Arms length (spot markets) • Full vertical coordination (total integration of supply chain) • Intermediate forms (contracts, etc. – in between arms length and full coordination)

45. From Kobayashi (2006)

46. Components of value chain analysis • Step 3: Identify opportunities for upgrading in the value chain • The usual way we think about upgrading in value chain analysis are ways to add value for specific actors in the chain • However, a more general way of approaching upgrading is understanding how the chain reacts to changes • Main outputs: • How has the chain changed over time, in terms of linkages, products sold, relationships, etc. • How has the chain responded to different events, especially animal disease outbreaks (e.g., HPAI)? • What are the drivers for change? What are the incentives?

47. Components of value chain analysis • Step 4: Distributional issues • Value chain analysis can be used to identify who gains and who loses in value chains. A component of this is calculating how value-added is distributed among chain participants

48. Contributions of value chain analysis • In the context of an animal disease, value chains can improve our understanding of the impact of disease on diverse chain actors, including the poor. • A further contribution of value chain analysis is its ability to understand the various constraints faced by different actors and the context (socio-economic and institutional) behind those constraints. • Finally, value chain analysis can also help to inform critical control points in the chain that accentuate risk: • Interface with risk analysis to understand the socio-economic context behind risk pathways and disease transmission

49. From Taylor et al. (2008)

50. Contributions of value chain analysis • An example: Rift Valley Fever (RVF) in Kenya. A value chain analysis on RVF was conducted to assess the impacts of the 2007 outbreak (Rich and Wanyoike 2010). • Focus: all actors in the value chain (producers, traders, processors, retailers, restaurants, etc.) • Data collection from semi-structured interviews and field work.