Welfare effects of food-processing development in agriculture-based economies: a CGE analysis for Benin

Abstract

Most agriculture-based economies in Africa are working on increasing their agricultural productivity and production following the African Union (AU) recommendations. However, it has been shown that increasing agricultural production without ensuring value-chain development may end up in welfare losses for farmers due to falling farm-gate prices. Little research has been conducted so far on the economy-wide effects of food value-chain development. This article contributes to filling this gap by analysing the effects of food-processing sector development on welfare in an agriculture-based economy, taking the example of Benin. We calibrate a Computable General Equilibrium (CGE) model to a comprehensive 2019 Social Accounting Matrix (SAM) for Benin. We introduce a novel welfare measure, accounting for changes in savings. Results show that enhancing the food-processing sector increases demand for agricultural raw materials and hence agricultural production and prices. Accordingly, the price of low-skilled labour increases. This primarily benefits low-income households, who derive most of their income from this factor. The overall income and welfare effects are pro-poor. Accordingly, income disparity as well as poverty incidence and gap decrease. We conclude, that the development of food-processing has the potential to make agricultural development in agriculture-based economies more pro-poor.