5.1. Policies Reforms
5.2. Transitional Issues
5.3. New Market Compatible Policies
Most countries in Latin America have reduced public expenditures on research and extension due to fiscal constraints. At the same time, there has been a move towards descaling, decentralizing, and privatizing research facilities and extension services.
In Colombia, research is divided between ICA (a government agency) which focuses on staples and producers' organizations (gremios) which focus each on a particular crop. About 60% of all funding comes from ICA and the rest is private. Public expenditures on research fell by 51% in real terms between 1988 and 1994. In 1992, ICA was divided into two entities, an administrative body funded by the government and a research body that is jointly public and private. Extension has been decentralized from ICA to municipal governments. In Ecuador, the national research institute, INIAP, has had declining budgets over the last 15 years. The funding of agricultural research is being channeled through a foundation that receives both public and private funds. In Peru, public research and extension staff were cut back dramatically. Five research stations were converted to private foundations composed of associations of agricultural producers, exporters, extension agents, and NGO's. The salaries of public research and extension staff hired by these foundations are to be funded by government.
In Mexico, fiscal expenditures on agricultural research have declined from 0.46% to 0.27% of agricultural GDP. Parastatal assets were transferred to producers' organizations, including the Mexican Coffee Institute, the Institute for Sugar Cane Improvement, the National Cocoa Development Council, and the National Fruit Company, as well as to ejidos (Fertimex warehouses). Subsidies to the National Seed Production Company (PRONASE) have been reduced and it has been placed on a competitive basis with private firms. Seed prices are no longer controlled. The 1991 Seed Law gives seed companies access to government research products. Reform of extension services in 1985 included: (i) reorganized and decentralized administrative districts; (ii) increased cost-sharing; and (iii) a shift in focus away from basic grains. Reduced funding and increased non-extension duties for extension agents has led to a de facto privatization. Access to technical assistance for the ejido sector basically vanished under these reforms, seriously compromising the ability of ejidatarios to adapt to the new scheme of price incentives by modernizing and diversifying their crops (de Janvry, Gordillo, and Sadoulet, 1996).
Public private balance. Recent policies have promoted privatization and reduced government involvement in the provision of research and extension. These policies have been promoted because of fiscal austerity under adjustment and the observation that government services tend to be inefficient and bureaucratic, and lacking in innovation. An important current issue is to define the appropriate roles of the public and private sectors in the provision of agricultural research and extension. Emerging questions are: to what extent can public agencies be made more efficient by subcontracting services out to private companies? To what extent are agricultural technology and extension services public or private goods? To what extent can the government use economic signals (taxes and subsidies) rather than ownership to overcome market failures? An important determinant of the role of the private sector in biological research is introduction of new legislation regarding patent rights for biological innovations. Increasingly, under appropriate legal protection, biotechnology research is being done by multinational corporations as opposed to the traditional genetic research that produced the Green Revolution where public research systems had an important role to play.
Market failures. Market failures create important roles for the government in the provision of research and extension. Market failures arise in the case of research and extension because of strong positive externalities, moral hazards, and economies of scale. For example, investments into self-pollinating crops such as rice and wheat cannot be privately recuperated due to the non-excludable nature of this research. Vaccines and seed quality are two examples where markets could fail due to the moral hazards that would prevail without regulation and quality control. Private firms may find it unprofitable to provide extension services in remote areas, yet this may be deemed desirable for social reasons. In addition, there are important external effects in extension through the demonstration effects that early adopters create on others. Another rationale for state funded research is the infant industry argument: high start-up costs and high risks discourage or prevent private investment. Finally, it may be preferable for the government to operate in situations where economies of scale would lead to a natural monopoly. These market failures in general cannot be eliminated by perfecting markets, and calling on public and private institutional innovations to mitigate the impact of these market failures on research and extension.
Focus of public research resources. Reforms have changed the role of governments in research from having direct involvement at every level of research via a centralized bureaucracy, to having a more managerial role. In this emerging arrangement, the direction and focus of research is guided by a competitive allocation of research funds. A pressing question is: how should governments allocate these research funds? A general principle is that funds should be allocated toward crops where private research is not forthcoming, i.e., toward crops for which producer groups are not able to garner adequate resources. Producers' organizations tend to be weak in traditional staple crops such as cassava, potatoes, etc. A second criterion would be to focus on crops which the country is importing or exporting, as supply increases in these crops will have a lower producer price effect, allowing more of the gains from technological change to be directly captured by producers.
Research should also be focused on non-labor displacing technologies and crops, that is towards cropping patterns and technologies that take into account the effective relative prices of labor and capital in the local economy. Effective prices measure the prices paid and received by farmers who face idiosyncratic transactions costs in relating to markets (Sadoulet and de Janvry, Chapter 9, 1995). In general, public funds should be used to promote technologies that raise the levels of land and labor use intensity so as to capitalize on the comparative advantage of smallholders (effective market prices) and of the nation as a whole (effective shadow prices). Research that raises the profitability of crops per unit of land can help stem off-farm migration. The equity criterion would focus research funds on crops cultivated by poorer producers in farming systems that characterize their access to cheap labor, high levels of risk aversion, and often high transactions costs in accessing to markets.
Transactions costs and access to extension services. Analogously to banks, private providers of extension assistance will be discouraged from selling services to smallholders unless they can be compensated for the additional transactions costs they will incur. There consequently is a role for government in facilitating and encouraging the formation of producers' organizations that can meet with extension agents as groups, thereby lowering transactions costs for the extension providers. An alternative solution would be to provide subsidies based on the number of households the extension agencies work with. These subsidies can be on a declining basis as producers learn to value the services of the extension agent and learn to cooperate in using these services. To induce competition among providers of extension services and control moral hazards in delivery, funds can be allocated to smallholders as vouchers that can be freely used to demand the desired services, as effectively done by INDAP in Chile. The approach is, however, not free from difficulties. Private extensionists have little accountability in the quality of the services delivered and they can easily collude with clients to share the subsidized fees instead of delivering socially beneficial services. Needed is to design incentive contracts whereby private extensionists share in the benefits of the results derived from the advice they provide. Also needed is to promote users' organizations that can assume the role of monitoring the quality of the services delivered by private extensionists (Cox, Niño de Zepeda, and Rojas, 1990).
Contract farming. Contract farming represents a potentially efficient way of transferring information and technology to growers. Agro-industrial firms can provide, via contracts, the credit, inputs, technical assistance, and information smallholders need to cultivate and market lucrative cash crops. An institutional innovation (contract fanning) can thus serve to overcome market failures (in credit, inputs, technical assistance, and information). Success stories exist in Central America where subcontracting has been effective to help smallholders produce non-traditional exports (NTX), but only after a strong effort to organize them had been achieved by bilateral assistance programs (the Swiss development agency in the case of Cuatro Pinos in Guatemala). Serious questions arise, however, about the sustainability of these initiatives for smallholders. Increasing pest resistance, toxic buildups, and soil erosion have led to rapidly rising costs that exclude small farmers exposed to credit and insurance market failures. Experience shows that initially progressive patterns of adoption are followed by regressive screening of survivors (Conroy, Murray, and Rossett, 1996). From a policy standpoint, this implies that complementary interventions for pest and soil management need to be introduced from the outset if early successes with NTXs are not to be followed by disasters for smallholders.
There may be a role for public policy that encourages contract fanning, and contracting with smallholders, in promoting the formation of producers organizations (Key and Runsten, 1996). Producer organizations can lower contracting transaction costs for the firms and growers, and facilitate input and product deliveries. By working with producer groups, firm extension agents can meet with growers in groups rather than individually, and growers can bring soil or plant disease samples to extension meetings rather than have the extension agent visit the plots. Smaller growers are better able to assume the higher yield risk associated with cash crops if they are able to effectively insure themselves, via mutual insurance networks which take advantage of local information and self-monitoring. NGO or state assistance may be required to organize producers as firms may be reluctant to do so for fear that the organizations will be used for collective bargaining (Marsh and Runsten, 1994).
New market compatible policies for research and extension thus open a vast array of joint initiatives between government and producers organizations for the co-production of club goods and services (Evans, 1996). From a policy standpoint, the state needs to take a pro-active role in identifying areas and modalities for such co-production, for instance by promoting dialogue between producers organizations and specialized government agencies. In research and extension, the relative roles of state and civil society will no longer respond to preset formulas but will require innovativeness to adapt solutions to a highly heterogenous rural environment.