Part two : Structural adjustment and smallholders

Contents - Previous - Next

Chapter 3 : Structural adjustment programmes and policies
Chapter 4 : Public intervention in agriculture under structural adjustment programmes
Chapter 5 : Macro-economic policies and agriculture
Chapter 6 : Conclusions and directions for research

Chapter 3 : Structural adjustment programmes and policies

Historical context
What are structural adjustment policies supposed to do?
The role of the public sector in agriculture

Historical context

Structural adjustment programmes were briefly defined in the Introduction. To assess the impact of structural adjustment on smallholders, it is now necessary to go further and make this definition more accurate. This is all the more necessary as the content of structural adjustment programmes has evolved over time. The term seems to have been forged by the International Monetary Fund to facilitate the dialogue between it and the indebted countries. The latter were aware of the necessity of new economic policies to overcome their immediate debt reimbursement problems. The Fund was reluctant to suggest any precise internal policy measures, which could have been interpreted as taking over sovereignty attributes.

Its recommendations were, therefore, very broad, pertaining mainly to what could be called "foreign economic policy". The essential recommendation was adjusting rates of exchange to increase the internal price of imports, so making them less attractive as well as making exports more profitable. For the same reason, a recommendation was made to remove taxes on exports (such as taxes on cocoa, groundnuts and coffee, which are common in many African countries). Rather than impose import duties, it recommended at least the removal of all import subsidies, such as those that were applied to a number of "strategic commodities", which often included fertilizers and, in some cases, staple foods. Such fiscal policies were especially recommended whenever a rare-of-exchange policy was not possible, as in the case of most of West Africa where currency is tied with the French franc (Comité Monétaire de la Zone Franc).

Such policies can succeed only if internal does not increase all internal prices, thus nullifying the effect of devaluations and tax exemptions. This is why anti-inflationary measures were also suggested, essentially to limit public-deficit spending (one of the sources of fresh money likely to fuel inflation), and to tighten the overall supply of credit by banks. At this stage, no specific suggestions were made on the nature of public spending to be cut, taxes to be raised and credit to be reduced. But country economic authorities were soon faced with this choice. In addition, since their short-term problems were urgent, they required structural adjustment loans to pay the extra costs that setting up a new policy was unavoidably creating. The World Bank was solicited. This organization is more concerned with long-term rather than short-term adjustments. Its recommendations are usually more subtle, and more far-reaching. For these reasons, World Bank authorities were less reluctant to suggest packages of relatively specific suggestions for economic policy and to subordinate borrowing allowances to their adoption.

Thus, structural adjustment loans were granted in exchange for promises of reforms, from temporary wage freeze to divestment of parastatal organizations. The general purpose was not so much to contract global demand as to expand production. The idea was to generate the savings necessary to repay debt, and to prepare for future production increases. In this respect, structural adjustment programmes resembled growth programmes, except that emphasis was put on liberalism, market and free enterprise, whereas during the preceding period direct state intervention in production was deemed, if not a prerequisite to growth policy, at least a necessary evil.

The World Bank took advantage of these structural adjustment loans to correct economic inefficiencies that many people had long been aware of, but had not dared to question openly.

At the same time, many local political authorities were rather satisfied to receive apparently sound suggestions for improving their efficiency as administrators, and to have a good opportunity to let international organizations bear the brunt of their unpopularity. Some were even tempted to add a few measures of their own to the package.

Finally, after nearly ten years of application, some of these measures prove to be less efficient, indeed more harmful, than was expected. Hence, they were sometimes removed, but most of the time adapted and often deprived of their original logic. Other proposals were made, with varying degrees of success. Nowadays, there is a tendency to call structural adjustment "any proposed change of economic policy aimed at restoring financial orthodoxy and increasing the role of markets in economic decisions" (Griffon, 1988).

In addition, as far as agriculture is concerned, there has recently been a new development resulting from what could be termed "the project quarrel". Whereas at the end of the colonial period and at the begining of independence agricultural policy issues were mainly in terms of institutional choices (socialism or liberalism or, more concretely, the form of marketing boards and role of government in development), after the mid-1960s, and until recently there was a tendency for administrations to limit their roles to the management of a variety of "projects" proposed by various organizations, either local or, more frequently, international. As a consequence, plans had a tendency to become mere lists of projects, not necessarily coherent. Often, as has been noted by Griffon (1988), "rather than by plans, general lines of agricultural policies were in fact defined by formal or informal contacts between donor agencies, often on good terms with local authorities". Such an approach had the merit of being practical and possessing a certain empirical efficiency, with discussion mainly focused upon micro-economic issues. Its drawback was that macro-economic consequences of choices were often neglected. This is one of the numerous reasons for the debt crisis: there were too many projects, some of them being poorly designed, with no concern for general equilibria.

The emphasis put on structural adjustment, to some extent, corrects this tendency. It is now necessary to think about agricultural policy in terms of global equilibrium, balance of payments and rate of exchange. As a consequence, agricultural policy has caught the attention of a number of distinguished general economists.

In such a context, there is a temptation to leave out the "projects approach", and to be content with macro-economic policy. The danger is of going too far from field realities. In particular, too much emphasis put on macro-policy may divert attention from those whose political "voice" is weak, according to the International Fund for Agricultural Development (IFAD, 1988).

It would be easy to solve this question by simply observing that both approaches are complementary, and that a small dose of projects could very well be a useful addition to macro-economic policies. It seems, nevertheless, that the quarrel goes deeper than this and concerns the nature of state intervention in agriculture. With the project approach, governments (or other non-profit organizations, in relation with governments) directly supply farmers with services such as roads, irrigation facilities and market organization. In the macro-economic policy approach, the government is only responsible for creating the general conditions under which market forces will spontaneously provide these services, at least if their need is important enough to generate an actual willingness to pay for their cost.

The logic of these two types of action is so different that they would be perfectly antagonistic without an effort to state the conditions under which they could be complementary.

What are structural adjustment policies supposed to do?

The root of the problem lies in the difficulty of designing and implementing viable projects in highly distorted economics. When prices do not reflect true scarcities, rates of return more misleading than useful. Of course, the theory of shadow pricing was designed to solve this difficulty.. But it is notoriously difficult to operate correctly, and all the more so as distortions increase and last longer. After a long time of great distortion, the techniques that should have been chosen as the best on the basis of shadow prices no longer exist, or are not feasible at current prices. This is the result of a phenomenon known as "induced innovation". In any economic activity, the system of research and development produces techniques whose characteristics are determined by entrepreneurs' demand: if labour is expensive, the techniques produced will be labour-saving. They will be capital-saving if labour is cheap. In agriculture, where research and development is mainly financed by the state, the reasons for this situation are less evident than with other sectors, where research and development are under the direct control of capitalist firms. Yet, there is overwhelming evidence of its reality (Binswanger and Ruttan, 1978). Thus, whenever price systems do not favour the use of fertilizers, plant breeds that are not responsive to fertilizers are selected. Whenever export crops are the exclusive concern of government agencies, technical progress is restricted to the cultivation of such crops. As a consequence, even when economic evaluations are made on the basis of shadow prices instead of current prices, the bias in favour of current price-responding techniques is so large that they easily supersede those that would have emerged under a more rational price system.

It might be contended that the above reasoning is valid only for commercial farms, and that smallholders, obeying a different rationale, are less sensitive than other entrepreneurs to such incentives. However, in view of the remarks already made about smallholders' logic, the relevance of this statement is dubious.

In addition, in this paper we are not as interested in totality as in the marketed fraction of smallholders' production. For this fraction, smallholders are good customers of research and extension services that supply them with the necessary "transition" techniques, that is, techniques which are more capital-intensive than the true traditional techniques, and yet less capital-intensive than those in operation in highly capitalistic countries. We have noted above the necessity of adopting such techniques to foster modernity without wasting labour. It is clear that the current price system wilt play a central role in the generation and adoption of such techniques.

The main advantage of successful structural adjustment is the disappearance of the "economic schizophrenia" involved in the distinction between current and shadow prices. By imposing "real" exchange rates, a major cause of differences between social utility values and current prices is removed. The removal of distortive taxes and subsidies, as welt as the imposition of "modem" tax systems, such as the value-added tax, obey the same logic.

Even the withdrawal of the state from many commercial ventures, such as the sale of fertilizer or credit distribution, may be linked to the same line of thought, despite the mixed character of almost any state intervention in these fields. For instance, when a parastatal organization distributes subsidized fertilizers as a part of a comprehensive scheme of "paddy production modernization", this action belongs to three different categories, which could be identified as:

Clearly, in this case, privatization of the activity will remove some price distortions, although it can also have side-effects, for instance, improving the commercial efficiency of the system, or depriving farmers of free access to technical information. If such side-effects are undesirable they may be corrected by relevant projects; for instance, the setting up of an extension service which would not recommend fertilizer use for the sole purpose of augmenting the volume of its turnover.

In addition, there are situations where public intervention is obviously necessary, independently of any structural adjustment programme. Without speaking of police or of army services, it is difficult to imagine a purely private road or postal system. In such cases, whenever economic calculations are necessary to decide on the size or location of state-provided facilities (this is certainly the situation for roads), using "real" prices for such computations is obviously easier and recommended.

In such a context, one can see how structural adjustment programmes and projects can be fully complementary. At the same time, the above discussion implies the necessity of a better understanding of the respective roles of the public and private sectors. This why we shall now devote a few pages to this subject, at least as far as it concerns agriculture.

The role of the public sector in agriculture

An important characteristic of the "project approach", as described above, is that a new administration was established as soon as a problem was detected and money supplied. For instance, after a drought, an irrigation project was set up; or if the product of a particular crop was needed, a state farm was founded to grow it.

Probably, the most conspicuous example of such a situation is the case of Mexico (Austin and Esteva, 1987), where a gigantic nationwide organization was put in operation during the mid-1970s, in order to attain food self-sufficiency. It involved a plan for crop insurance, a government supply of seeds and a large number of extension officers to aid Mexican agriculture in covering the nation's basic needs. It was terminated at the beginning of the 1980s because of lack of money. During the last few years of its operation it was clearly successful in reaching its target: for years, Mexico had never been so close to selfsufficiency. The only problem was the cost: for each dollar of food produced by the system, the cost was about $1.40 (Meissner, 1987).

The efficiency of this kind of action is highly questionable. This is not a consequence of the alleged inability of bureaucracies to be efficient. Of course, it is easy to find examples of inefficient bureaucracies, but this is not a general rule. Actually, most of the bureaucracies in question were perfectly efficient in that they reached the intended targets. The fact that the cost was, in general, far greater than the benefit was another problem, since bureaucracies are not equipped to deal with costs and benefits. They are made to achieve the goals that have been assigned to them, given the means with which they are endowed.

The difficulty arises from a confusion between "aims and means", or between "cause and effect". For instance, if drought is a problem irrigation can solve it. But, since this problem is not new, there were probably reasons for not having recourse to irrigation before. If one reason is the inability of people to associate in a body large enough to pay for the indivisible costs of a dam, then, clearly, a public intervention aimed a/establishing a new board in charge of this project is justified. But if reluctance to irrigate comes from other causes (for instance, from farmers' poverty, which prevents them paying for any investment, either collective or private), then the project board will not be able to reach its target unless it can provide farmers with the necessary equipment. Then it will be deemed inefficient in any case. If it chooses to distribute equipment, it will reach the target, but at a high cost; and, if it chooses not to, it will join the pitiful list of "non-irrigating" irrigation projects. In this case, the root of the problem lies in the inability of farmers to adopt intensive irrigation techniques, which is a consequence of a lack of capital and not a lack of administration. Perhaps food security, in this context, could be achieved other than by irrigation (for instance, emergency food distribution) so long as capital accumulation does not make irrigation techniques profitable.

It is, therefore, important to identify carefully the means and purposes of state intervention in agriculture as well as to check the suitability of means to purposes. In this respect, we may list the following types of public intervention:

Clearly, structural adjustment measures, in the narrow sense, belong to the last category. But they have some influence over the others. If structural adjustment results in a "true" price system, that is, a price system that correctly reflects scarcities in the economy, the necessity of providing marketable facilities and price distortions or regulations is far less evident than otherwise. This does not mean that they would be suppressed from the government agenda.

The first item (providing non-marketable facilities) remains unchanged, although a tighter budget policy may make its achievement more difficult. Providing institutional innovations, however, could be reinforced, since it costs virtually nothing.

Finally, redistributing income is also important, although the means to be employed are no longer found in price manipulations (at either input or output levels), but in direct taxes on, or subsidies to, households.

As pointed out by Lemarchand (1986), if in many countries such as the United Republic of Tanzania and Angola socialist experiments ended as "egregious failures" due to "certain fundamental shortcomings in the strategies associated with agrarian socialism", "capitalist models show a very mixed track record, ranging from poor (Nigeria) to disastrous (Zaire), and seldom anywhere has rural capitalism generated a pattern of self sustaining growth". Although this opinion is presented in a deliberately provocative way, it is, at least, partly true. In all agriculturally affluent, developed countries, and contrary to what happens in the case of "agrarian socialism", the private free enterprise sector plays a vital role in the production and marketing of agricultural products. But in these same countries, and contrary to the case of "wild capitalism", the role of the state is also essential in determining floor and ceiling prices for agricultural commodities, financing the stockpiling or the dumping of excess quantities and providing a legal framework for all transactions, especially relating to land ownership. Thus, in these countries, a sort of division of labour between state and private enterprise has been put into operation. It is far from perfect. A lot of problems are pending, the most conspicuous of them being the presence of a permanent excess production. But it is certainly less dramatic to be plagued by excess production than by shortages. In any case, if increasing production is the immediate target of most developing countries' agricultural policies, the lessons should be drawn from this particular division of labour. It will help to understand the consequences of political changes in developing countries. This was the purpose of the above remarks. They will be developed in the next chapter.

Chapter 4 : Public intervention in agriculture under structural adjustment programmes

Two cases for intervention in marketable facilities
The necessity of intervention in non-marketable facilities
New perspectives of institutional innovations

In this clear that the main challenge of structural adjustment to agricultural policies is to determine the proper role of the public sector in agriculture. There are two facets to this problem. One pertains to the long term. Assuming a "good" general adjustment policy, what are the roles and instruments of agricultural policy? The other is more short-term related: in the process of establishing a more competitive and more efficient economic system, steps must be taken to prevent the transition being too harmful, especially for the weakest segment of the population, smallholders belonging to this group. Let us begin with long-term considerations.

Two cases for intervention in marketable facilities

In a purely competitive riskless economy, state involvement in marketable facilities should be ruled out, since it is well established that, in this case, competition ensures the only feasible pareto optimum, given current income distribution. But risk is ever present in economic life. Moreover, competition may not achieve efficiency if technical circumstances allow for economies of scale. For instance, it would tee foolish to build up two railways on the same itinerary just for the sake of competition. It is certainly better to have the line operated by only one company, even if it is necessary, at the same time, to watch out for its monopoly power.

Thus, risk and economies of scale are, in principle, the sole justifications of public intervention.

Economies of scale and monopoly power

We have seen above that economies of scale are virtually absent from agricultural production. However, they are present, to a high degree, in foodprocessing industries and in agricultural input-supplying industries. This is because these activities require transport; transportation systems, because of the "yes or no" character of the decision of building a pipeline, a railway or any similar facility, almost always exhibit increasing returns to scale.

On a smaller level, this is also the reason for the greater efficiency of the multi-trade country shopkeeper compared with the specialized parastatal agency. With many very small individual transactions, as has already been shown, the multi-trade shopkeeper spreads his or her fixed costs over a relatively large number of customers in the same location. For the same number of customers, the specialized parastatal agency would incur much higher transportation costs. Most of the time these costs are not actually incurred with, consequently, a significant lowering of the service quality in comparison to the traditional shopkeeper. This explains what could be called the tragedy of local traders in sub-Saharan Africa. When, in the 1960s, administrations were playing a greater role in the region, a large number of foreign traditional traders were eliminated and replaced by parastatal organizations. There is now overwhelming evidence that this movement was extremely detrimental to peasants. The network of local traders provided transport and collective facilities with a flexibility and a resilience' that has never been achieved by a centrally administered agency.

However, the existence of economies of scale does not imply that the government should take these activities in charge entirely. Such a policy would be justified only if the corresponding investments were so large that they could not be easily financed by a private entrepreneur. In view of the modest size of most of the investments in question, as well as considering the small size of most public budgets compared with those of many multinational companies, the argument is hardly valid, except perhaps in the case of some irrigation projects. It is true, however, that these indivisibilities, small as they are, provide a real monopoly power to some agents.

The responsibility of governments may be to impose a "quasi competitive price system" by requiring marginal cost pricing policies from monopolists. For it is a well-known theory of welfare economics that the virtue of competition, and the source of its optimality, lies in the fact that it imposes a marginal cost pricing system which, itself, maximizes the sum of the producer's and consumer's surplus.

Yet, marginal cost pricing must not be confused with product differentiation. It is one thing to define a product as "water supplied in location X, at Y hour of the day, with maximum flow of Z", and a different one to compute (and charge) the corresponding marginal price. In general, optimal welfare requires marginal cost pricing along with a high degree of product differentiation. The failure of many state monopoly experiments is mainly ascribable to the omission of this precept. The example of traditional country trades is again fully relevant here. Apart from being able to spread their fixed costs over a larger number of customers, their success has been due to their ability to charge peasants for the additional services they provide, contrary to parastatal organizations, for which one kilogram of paddy was one kilogram of paddy, whatever its location, period of the year, or quality.

Another case of state intervention in marketable facilities is with large and risky investments, for which the average cost is less than the marginal profit, but the risk of failure is so great that no private enterprise could bear it. Irrigation is among the most obvious examples of such a situation, with often high ex post benefit cost ratios when computed over very long periods, but very dubious results in the short or medium term, as well as large lump investments at the beginning. Arrow (1971) has shown that risk-taking by governments may increase general welfare, provided that the sources of risk are numerous and independently distributed (an assumption more difficult to make than many people imagine; this point is discussed below).

Risk and stabilization

It has been shown that farmers are very vulnerable to risk. We have also seen that their supply responses are often considerably retarded. Let us draw the policy conclusion of such an analysis. If markets are left to themselves, the time-lag necessary to get a definite supply response will be long, thus creating the possibility of very large disequilibria before recovery. Moreover, equilibrium will not necessarily be met. It is more likely to be bypassed, in such a way that a symmetrical will arise with an oscillatory movement. At least, many models (derived from the basic "Cobweb model") suggest the possibility of such behaviour from long-lagged supply response markets (for instance, Day, 1969; or Boussard, 1988), and empirical evidence seems to confirm this view.

From the smallholders' point of view, such oscillations are simply random movements, which should be taken into consideration by means of a prudent policy of diversification and credit avoidance, as we have seen. The resulting average equilibrium is shown in Figure 4.

These are standard supply and demand curves, with supply being identified with marginal cost, as usual. In the absence of risk, competition means that equilibrium will occur for the quantity q*, and the price p*, which maximizes the joint sum of producers' and consumers' surplus.

In the presence of risk, farmers will not base their economic calculus on the demand price, as reflected by the demand curve. They will rather make use of the certainty equivalent of this price. This is a shadow price, which is always below the demand price. Thus, it looks as though the demand curve has been replaced by a lower surrogate demand curve. The new average equilibrium quantity is lower and the new average equilibrium price higher than without risk. On the average, the consumer surplus is decreased and producers get a profit. It must be stressed that the distance between the "real" and "surrogate" demand curve may be great. For instance, in an early study in southern France (Boussard and Petit, 1966), the risk premium was about 50 percent of the actual average price. Even if removing all risk is impossible (making the feasible risk premium reduction much smaller), this is enormous.

FIGURE 4 : Average market equilibrium in the presence of risk

Thus, farmer income stabilization through government intervention on agricultural prices is not what is commonly assumed. It is designed less for the benefit of farmers, and more for consumers' welfare. This aspect should not be exaggerated. Because the quantity is smaller in ease of risk, if the demand is elastic (as in the ease for developing countries) the overall quantity of money flowing into farmers pockets may be smaller. And if the marginal cost is virtually constant, which is also the case for smallholders (we have seen that their production function is nearly homogeneous and of degree 1), the producers' profit is almost nil. Thus, equilibrium with risk, rather than benefiting anybody, is detrimental to the collectivity. It is really an unproductive deadlock and the consequence of a market failure.

This is a case for government intervention. Experience has shown that production increases when governments offer stable price policies to farmers. It is true not only in developed but also in developing countries. It is true for any kind of commodity, be it export crops, as in most African countries, or staple food and paddy, as in many Asian countries, or even industrial crops, such as sugar cane in Brazil.

Such intervention is not without dangers. The greatest is a flood of excess production, as is happening in most developed countries, where price guarantees were fixed years ago at levels which are no longer necessary, but that are politically difficult to decrease. In developing countries, this risk is not too great, except perhaps for export productions, such as groundnuts, copra, cocoa and coffee. The latter have long been supported in this way. As a consequence, production increases almost without limit in each producer state. In the face of limited demand, this triggers a fall in prices. It explains the terms of trade deterioration which is so often stigmatized by international organizations.

We can hypothesize that increasing the coverage of price support and extending it to staple foods would probably reduce the supply of export productions (thus increasing their average prices and improving developing countries' terms of trade), as well as increasing the supply of these foods without any change in present average price levels.

A consequence of the above remark is that, in this context, artificially low producer prices for export commodities, in connection with the market role of parastatals, are probably more justified than is usually recognized by international organizations. The low level of these prices is a type of compensation for their stability. Otherwise, the political risk is an exaggerated specialization in export crops, to the detriment of food crops, and also a permanent deterioration of the terms of trade because of global oversupply.

This situation, however, is not the best one. Without any land constraint, the supply of any "safe" commodity can increase to infinity, whatever the price level (Boussard, 1988). Therefore, under the present regime of marketing boards, one may be afraid of an oversupply of export crops, whatever the internal price level chosen by a particular government.

However, a destabilization of export crop prices would increase average prices, allow farmers to make profits and re-establish a production equilibrium in favour of urban required food crops. Symmetrically, a stabilization of currently unstable food crop prices would increase production, without needing to increase average prices and, therefore, without affecting urban consumers.

It must also be stressed that the kind of stabilization policy envisaged here does not imply heavy commitment of government officials in trade. "Light" stabilization boards can co-exist with the bulk of physical trade operations being performed by private merchants. This is shown not only by the experience of developed countries, but also by that of many developing countries, such as Thailand, Taiwan, province of China, and even India. In India parastatals and bureaucracies play a notoriously important role and "the Indian Food Corporation, probably the largest and most renowned intervention agency, does not normally handle more than 15 percent of India's grain crop, that is 20-25 percent of marketed production." (Reusse, 1987).

Finally, the most important problem facing governments embarking on this kind of policy is choosing the stabilization level. It has apparently never been solved satisfactorily, as is exemplified by the present difficulties of developed countries and also of some developing countries, such as Panama.

The necessity of intervention in non-marketable facilities

Defining a non-marketable facility

Apart from specific situations listed above, government interventions should be very limited in the case of marketable facilities, such as roads, research and extension. In this case, the impossibility of the operator's making a profit precludes any attempt at privatization.

Defining a non-marketable facility can be a problem, however. For instance, roads are normally logged in this category. Yet, in most developed countries, only secondary and rural roads are toll-free. Highways have tolls. Similarly, customers of public or private health services pay or do not pay, depending upon which "sector" they choose, for a service that is usually technically better in the well-equipped public sector than in the private sector (although the quality of the hospital service is obviously better in private hospitals).

Even the status of agricultural research may be ambiguous from this point of view. As is shown by Berland (1987), the research effort on hybrids (considerable since the 1930s, particularly in the development of hybrid maize varieties) was made possible mainly because the use of hybrid seeds necessitates purchases each year from a dealer, whereas autogamous plant seeds can simply be deducted in advance from the previous harvest. Thus, the hybrid seed producer is in a much better situation than the producer of autogamous plant seeds for making a profit over a comparable initial investment. This is the explanation for the outstanding quality of most hybrid seeds, rather than in so-called "hybrid strength", the existence of which has never been proved.

In the latter example, a technical circumstance limits the domain of activities that can or cannot be privatized. But, in general, policy-makers have some control over the delineation of this frontier. Yet, there is no firmly established rule for exercising this power. Judgement criteria are a combination of equity considerations (this is often the case in health services), technical constraints (as exemplified by the hybrid seeds case), risk considerations (Arrow's reasoning on the government bearing risks instead of private bodies is relevant here), and national traditions. This list is not comprehensive.

Consequences for smallholders

It is clear that the elimination of non-marketable facilities is generally harmful to smallholders when they are in the habit of using them. This is true especially of road transportation facilities. A bitumen road is even more useful for a bicycle than for an automobile. A large farm can load its harvest on a truck for sale in the regional capital. The alternative, the small farmer, is to rely on the country bus service, if it exists. The existence of a network of rural roads is a prerequisite for incorporating smallholders into the economy. The building of such roads has been the aim of a number of successful projects, such as the pistes cacaoyères in Cameroon and the routes de pêche in Senegal.

At the same time, this prerequisite is not sufficient. For instance, Algeria was famous for the density of its network of secondary roads, built during the colonial period for the convenience of European farmers. It was not sufficient to trigger a significant development of traditional farming, because all other political conditions for this (high output prices, marketing facilities and input availability) did not exist during the last 20 years (and earlier).

Special case for research and extension

A special mention should be made of research and extension services. These are clearly non-marketable facilities. Their rates of return are extremely difficult to assess, because the bulk of their output has no direct value although, occasionally, and completely unpredictably, they generate enormous benefits: this is a case of applying Arrow's principle of the state bearing large risks. An additional argument for state involvement in research and extension is that benefits may not accrue to their instigators. In agriculture, in particular, a large proportion of technical progress is embodied in pure information (e.g. the genome of a plant or an animal) which can be reproduced at virtually no cost and, therefore, cannot be charged to anybody. It is unthinkable to put a policeman behind each farmer to check if he is violating a copyright law or not. This is all the more true because we are concerned with smallholders, that is, people who are spread over large areas and who, individually, would not be able to pay much. Collecting a tax on agricultural innovation, therefore, would not be worth the travel cost of the collector from one smallholder to another.

Yet agricultural research and extension are highly beneficial, especially for smallholders. Over the centuries extension has developed a set of techniques that are well adapted to self-sufficient systems. These techniques are no longer adapted to the conditions of an exchange economy. At the same time, however, the techniques in use in developed countries are not adapted to the transition between purely traditional and "modem" cultivation systems, as shown by the above considerations of the necessity for the progressive disappearance of smallholders. Thus, there exists a "niche" for the development of transition techniques (one often speaks of `'adapted technology"). Such developments are specific to local conditions so that research carried out in developed countries cannot be of much use for that. But they require a high professional level, and may be embodied in more fundamental research. Thus, they must not be considered as secondary research activities. As theorists of induced innovation observe, researchers and developers are often market-oriented. Since smallholders are poor, they do not represent a worthwhile "market" likely to bring about any significant rewards in terms of wealth or honours. It is thus the responsibility of the government to create such rewards. Such actions can be exceptionally useful, as was the ease for the creation of the International Centre for Maize and Wheat Improvement (CIMMYT) by the Mexican government in 1961. It attracted a number of distinguished scientists, including Norman Borlaugh, who was awarded the Nobel Prize. As a result, a new family of wheat varieties was developed. These varieties were spread worldwide, covering more than 30 million ha, mostly cultivated by small and medium farmers. They permitted the Mexican government to gain an excellent reputation in international scientific circles and, more generally, in public opinion.

This does not mean that managing agricultural research and extension services does not raise any problem. If managed poorly and in a bureaucratic fashion they may divert huge resources from direct production, as exemplified by the Lyssenko case in the USSR during the 1940s. Nevertheless, experience shows that no progress or technical change can take place in a country without a dynamic research and extension service.

Special case for irrigation

Because a dam is a long-term investment involving considerable risks (throughout the world there are numerous examples of unused dams), and often implying a collective organization of farmers to make the best use of water, it is understandable that irrigation is often considered as a typical case for public investment. This is true in developed as well as in developing countries. Besides, waterworks are spectacular installations that can be shown to the press and publicized in tourist offices. This explains the interest many officials take in such projects.

Nevertheless, we must not lose sight of the essential. If it is true that some publicly funded irrigation works were perfectly justified and highly successful, it is also true that, in many cases, the money spent would have been much better employed elsewhere. Here, again, the question of the capitalistic nature of production techniques arises. If irrigation makes use of the kind of adapted techniques referred to in the last paragraph, and which can be put into operation by smallholders, then it may be useful. If, in addition, the nature of the water resource implies the necessity of big collective works, then public intervention is probably justified. But if public irrigation consists of eliminating existing smallholders and replacing them by large (publicly funded) companies which will operate typically capitalistic agricultural systems over the freed fields, this is a waste of resources. (This type of action was common during the 1960s and 1970s, on the grounds of efficiency, since smallholders were considered backward and lazy.) Capital would have been more productive in the hands of smallholders (we have seen that they obtain a high rate of capital productivity) and human resources are poorly used, since the expelled smallholders are now idle, whereas relatively high wages must be paid to a smaller number of displaced wage-earning workers.

New perspectives of institutional innovations

We have kept for the end the question of government involvement in measures in which the cost is very small yet in which impact may be great.

At the beginning of the nineteenth century, many countries which are now developed were in a situation comparable to that of currently developing countries. Because industrialization was in its infancy, and because the spectrum of available techniques was much narrower than now, they were actually much poorer than most modem developing countries, particularly as they were often engaged in wars which absorbed most of their resources. In any case, massive involvement of the state in production activities was out of the question. Yet, they developed their agricultural production parallel to their industrial activities, mainly by establishing a number of laws and regulations (e.g. the Code civil in France), which did not strain the budget (a parliament is an affordable luxury!), but which brought security and transparency to rural areas. It is difficult to assess to what extent safety and transparency accounted for the outstanding agricultural progress that took place during the nineteenth century but, if the above analyses concerning the role of risk and uncertainty in small farmers' behaviour are correct, one must assume that this role was indeed important.

Because clear and detailed laws regulated and guaranteed landownership, inheritance and all the essential details of rural life, small peasants were induced to extend and accumulate much more than before. The main virtue of landownership is that it reduces the lenders' risk in credit operations, thus making possible cheap credit for agriculture.

Notice that private landownership of smallholders in Western Europe was mainly obtained by three mechanisms:

These legal mechanisms also constitute efficient systems for transferring agricultural savings to the industrial sector through the government budget: in order to accumulate, farmers live frugaly, and die wealthy, for the benefit of the state.

In view of the advantages of such systems for the state, it is surprising that so few governments in developing countries have tried to apply this formula during the last few years. This would be all the easier since such measures are virtually costless. The only real cost is the setting up of a cadastre, a task probably far less costly, and far more accessible to many intermediate members of the civil servant staff, than extension work which, to be successful, requires so many conditions it is almost Utopian to find them among such poorly paid people.

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