Magnus Alvesson and Mario Zejan*
For many small-holders in the Third World conditions determining the exchange of goods and services are important determinants of their welfare. These, in turn, depend on relative prices and the supply of consumer and investment goods in the rural markets. In Guinea-Bissau, a structural adjustment programme has been in place since 1986 and there has been considerable speculation on the impacts of the policy reforms. In this paper we analyse changes in the welfare of small-holder farmers in the period 1986-9 using unique farm-level data from the rice-producing region of Catió in southern Guinea-Bissau. The analysis focuses on changes in the terms of trade between goods produced and consumed by the farmers, and in the supply of consumer and input goods in rural markets.
In analysing the impact of changes in relative prices and in the supply of consumer and investment goods it is necessary to distinguish between incentive and welfare effects. Assuming no shortages of consumer or input goods in the rural markets, incentives for production and trading increase with prices for produced goods. When assessing the welfare impact, price changes for consumer and input goods also have to be taken into account. If these increase relatively more than producer prices, farmers will have to sell more produce in order to buy the same amount of consumer and input goods. Although this, in fact, implies increased incentives for production and trading, it also means a deteriorating welfare. The distinction between incentive effects and welfare effects is the starting point of this paper.
The presence of shortages in the rural markets alter the effects of changing relative prices. Up to the point where equilibrium prices are reached in the markets for consumer and input goods, increased producer prices actually lead to decreased incentives for production and trading. Welfare, on the other