How does agri-business compare to others, in terms of profitability and competitiveness in international trade?
The following section describes the metrics on Value added and Trade that were embedded in Deliverable 6.3.
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Performance metric 1: Value-added and trade
An often used measure of viable well performing sector is the production or value-added. In economics, creating added value is an important indicator for economic growth and expresses industrial dynamism. Value added is seen as a better indicator than turnover as turnover includes also intermediate products, whereas value added is based on the production factors labour, capital and land. We use value-added information to look at three desirable (though not-quantified) goals in terms of sector growth. In addition we have three more goals related to trade.
Sector value-added
The first and simplest measure of viability is growth of sector value-added. The individual variable on value of sector output is used to calculate the derived variable – growth rate of sectoral value-added. Goal, and aggregate variables are then described according to the formula outlined above.
Sector value-added relative to world
While food sector can grow, it could still be worse than neighbouring country. Similarly a dismal performance within domestic economy does not rule out being the best performer when compared to food sector growth in other countries. For this reason, in addition to sector growth, we also use a measure of sector growth relative to that of world.
For this measure the individual variable is the share of food sector output of country r in the world food sector output. The derived variable according is the growth in this share.
Self-sufficiency ratio (SSR)
SSR indicates the extent to which a country can rely on its own production. ‘Self-sufficiency‘, is a measure of a country’s dependency on trade to meet its demand.
While not an end in itself, the 2007-2008 crop failure and ensuing price spikes followed by ban on grains trade by some countries, pushed some self-sufficiency in food back on political agenda.
The measure is derived using the individual variables on exports, imports, and production. A ratio above 100 indicates a higher production than the domestic demand and below 100 a lower production than the demand (FAO 2016).
The associated derived variable is growth in self-sufficiency ratio.
Sector’s Openness to trade
‘Openness to trade‘ provides information on extent to which a sector is open and linked with world markets (Mikic and Gilbert 2009). Trade theory suggests that opening up to global markets often results in reallocation of resources within sector and economy, often weeding out inefficient firms and leaving stronger firms to survive. By the same logic, a closed economy can shield and support an incompetent sector.
Measure of Openness is derived using the individual variables – exports, imports and production. The more open a sector the better able it is to capture gains from world market conditions but also more exposed it is to events unfolding in world markets. Hence it is a double edged sword. A ratio closer to zero indicates a relatively closed economy.
The derived variable is the growth in openness to trade.
Sector’s share in world export market
Export growth is one of the most used indicators for viability. Export market share depicts the importance of a country on the world market or on a specific market. Trade ensures that a sector is not limited by the size of its host country. Also the more competitive a sector the higher their shares of world export markets tends to be. To this end we use the individual variables on bilateral exports to calculate the growth in export market shares for the sector in a country – the derived variable.
The industrial economics theory uses also a concentration index: the dependency on the most important export destinations. The Herfindahl-Hirshman Market concentration index is also suggested by the World Bank (WITS 2013). Another concentration index is the Cn: the market share of the n-largest export destinations (Carlton and Perloff 1999). As our focus is based on the international economics thought, we will not include such a concentration indicator.