7.4 Policy reforms and agriculture: the role of price and non-price factors

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Price and non-price factors: complementarities and conflicts

On the issue of the role of the state in economic activity in general and in agriculture in particular, the debate on policy reforms which emphasize efficiency and private initiative had-at its inception-more to say about what governments should not do than what exactly they should do. The approach to policy reforms has since undergone changes as a result of accumulation and analysis of experiences. Thus, in the late 1980s and early 1990s, loan conditionality emphasizing demand contraction and overall efficiency through restoration of "proper" relative prices has been supplemented with policies (and funding) emphasizing sectoral aspects and the supply side to stimulate economic growth. More emphasis is currently given to helping countries improve agricultural infrastructure, implement interventions for poverty alleviation, improvements in education and health, and deal with environmental and natural resource degradation. With the passage of time, policy approaches are modified and fine-tuned as more lessons are learnt as to which policies work and which do not, and why. For agriculture, a major issue concerns the additional policies or interventions required to supplement policies that "get prices right", which, most often, result in conditions favourable to agriculture.

Although the responsiveness of production of individual agricultural commodities with respect to price incentives may be high, for agriculture as a whole it is likely to be low due to aggregate resource constraints, at least in the short to medium term. More importantly, in countries or regions with poor resource endowments, price incentives under traditional technologies and poor infrastructure may not be sufficient to increase production significantly, stimulate investment and overall agricultural growth. Thus, although price reforms are necessary for agricultural growth, the pessimism about the extent to which output of the sector as a whole could respond to price incentives alone over the short to medium term, calls for emphasis on "non-price measures", in particular improved research, input delivery and infrastructure services.

If structural impediments predominate in agriculture, it will be difficult to achieve sustained growth in production by price incentives alone unless extension services, marketing, transport and storage facilities, etc., are improved (issues of marketing and rural credit are discussed in Chapter 9, those of extension services in Chapter 10). This view recognizes a significant role for governments in providing public goods and assisting structural change. Examples of positive reaction of agricultural output to public goods provision abound (Delgado and Mellor, 19X7; Binswanger, 1989), especially in countries with a low "stock" of infrastructural facilities and a low level of infrastructure services (see Box 7.1).

Box 7.1 Policy reform and agricultural development in sub-Saharan Africa: the crucial role of infrastructural deficiencies*

In evaluating the efficacy of reform programmes to spur overall agricultural growth, the issue of supply response of agriculture to price incentives is critical to the extent that almost all reform programmes concentrate on "getting the prices right" which, for the case of agriculture, often means an increase of relative agricultural prices.

There is a great deal of controversy as to the actual magnitude of and the proper method to evaluate supply response. Agreement exists that: (a) the short term price elasticity of the agricultural sector as a whole (as opposed to the one for individual commodities) is very small, hardly significantly different than zero (in the statistical sense); and (b) that the long-run elasticity can be quite substantial as intersectoral resource movements (capital, labour) take place and as new technologies are introduced.

For sub-Saharan Africa, very little empirical evidence exists on the supply response of agriculture to prices. From what is known (Bond, 1983) short-run elasticities are not lower than the ones in other countries (about 0.]8 for the period 1968-81), whie the long-run elasticities seem to be significantly lower than those that have been reported for other areas.

While the magnitude of the price elasticities is a disputed issue, little disagreement exists on the substantial response of agricultural output to non price variables especially infrastructure facilities and services. Empirical evidence demonstrates clearly large effects of changes in the levels and/or quality of infrastructure on agricultural production. Furthermore, such effects tend to be higher the lower the level of existing infrastructure in the country. Evidence also exists that the estimates of the price elasticity of supply tend to fall as infrastructural variables are included in the estimation, i.e. there is an interaction between supply response to price and availability of infrastructure.

There is abundant, though scattered and largely anecdotal, evidence to both the serious deficiencies on one hand, and the importance, on the other, of agricultural and rural infrastructure in sub-Saharan Africa. Particularly acute is the situation concerning transport and communications infrastructure, the lack or bad state of which inhibits the transmission of price signals to farmers and causes large disparities between prices at the producer level and prices at the consumer centres or ports. Collapsing transport infrastructure inhibits market integration of remote rural communities and discourages the production of market surpluses even when relative prices turn out to be favourable.

Table 7.2 demonstrates some significant differences in the infrastructural situation of African countries compared to the situation in some Asian ones. Those differences may be obscuring quality differences, and also the specific problems that may exist in the quantity and quality of rural transportation services. World Bank estimates show that the restoration and maintenance of the present rural road network in Africa will require an expenditure of about 0.5 percent of the region's GDP for the next 10 years. Expansion of the network to handle the increases in marketing of agricultural commodities will require an additional 0.6 percent of GDP.

The major cause of the communications/transportation problems in sub-Saharan Africa is the low population densities in the continent compared with other regions. Thus while on one hand Africa has the greatest need for a good transport and communications network given the spatial distribution of its population, on the other hand not only is it under-equipped relative to its needs, but the little infrastructure that exists cannot be properly maintained let alone expanded due to the low per caput incomes prevailing in the region.

The causes of the deficient transportation system in Africa are rooted both in the colonial past of the region as well as in some ill-focused interventionist policies of post-independence governments. Namely, during colonial periods the transport infrastructure was heavily skewed in favour of the colonial enclaves or to connect ports to mines, as massive railway building in the sparsely populated Africa was considered uneconomic. The little rural road capacity that was built either during or after the colonial period is heavily under-utilized (traffic consists mainly of pedestrians and head-loaders) due to shortage of foreign exchange necessary to buy spare parts for trucks and vehicles. In addition, a nexus of transport regulations, trading limitations, interegional transport restrictions, reliance of parastatal truck fleets, and the stagnation of the agricultural sector that limited transport volumes, discouraged private investment in transport capacity and vehicle servicing. Such policies stifled local attempts to develop transport means suited to the region's technological capabilities (means of transport in between head-loading and motorized vehicles such as bicycle trailers, handcarts, motorized rickshaws, etc.). The system of pricing and marketing of fuel created serious chronic shortages further exacerbating the situation. Such deficiencies in the transport systems, coupled with poor information flows, inhibit the production of marketed surplus (especially food items) and increase the tendency of farmers towards subsistence production. They also increase the interegional variability of prices and impair food security in food-deficit areas. Such deficiencies prevent the integration of small rural communities in the market system, the creation of markets and create a set of "semi-tradable" commodities with relative prices being determined by local conditions rather than by international price movements (Delgado, 1992).

*Based on Platteau (1993).

Structural considerations notwithstanding, improved price incentives are a necessary component of policies to alleviate input shortages in agricultural production and to stimulate investment of private capital. The responsiveness of total agricultural output to such incentives may be low in the short run, but is considerably higher in the longer term. Often the responsiveness of agricultural supply to price and non-price factors is compared. Such comparisons have no meaning to the extent that price and non-price incentives are complementary. In one case, though, they may be substitutes. Namely, modalities of financing the provision of public goods for agriculture may be (at least partly) related to the price incentives to agricultural producers. Given the limited capacities of developing countries in levying income taxes, a part of their fiscal receipts necessary for increasing the provision of public goods to agriculture will have to come from border taxation of agricultural exports and imports as well as imports of agricultural inputs, thus affecting agricultural incentives.

Table 7.2 Selected indicators of surface transport for Africa and Asia, 1990

Region/country Rail and road mileage per 1000 persons Rail and road mileage per 1000 ha of cultivated land Number of motorized vehicles per mile of paved road
Benin 0.17 0.36 9.0
Kenya 0.30 1.09 19.2
Malawi 0.28 1.55 17.0
Senegal 0.44 0.60 12.2
Tanzania 0.15 0.09 14.2
Togo 0.37 1.26 13.5
Zimbabwe 1.09 4.11 35.7
Bangladesh 0.07 0.75 47.5
India 0.68 3.58 49.0
Pakistan 0.73 3.71 42.5
Philippines 1.65 7.38 51.8
Korea, Rep. 0.58 11.41 67.2

Source: Platteau (1993), with data from Ahmed and Donovan (1992).

With respect to price and non-price incentives, some issues need to be considered:

1. From an efficiency standpoint, the prices used to calculate project priorities are critical. The implication for policy sequencing is that restoration of "proper" relative prices should precede planning for public goods, though it must be recognized that the "proper" level of relative prices is itself a function of the level of public goods.

2. The long-run effects of improved price incentives will differ between countries and regions depending on the availability and quality of land and water resources and the "stock" of public goods already in place. In situations characterized by the existence of land rents, price increases may induce private investment, even with less government provision of public goods or where public goods are already in place, than in cases where land rents are absent (Delgado and Mellor, 1987). This implies that a careful analysis of long-run private sector response to price incentives (in terms of capital accumulation, reversal of migration to urban areas, etc.) should be made before the appropriate levels of public goods are decided.

3. Often, low aggregate agricultural production response to price incentives may be due to a number of institutional reasons other than the lack of public spending on infrastructure. Some of them are examined in later sections. It is now well recognized that the fact that similar policies seem to work in some countries and not in others is, to a large extent, due to differences in the quantity and quality of existing physical but also institutional infrastructure, and of political consensus to carry out often unpopular policy measures.

Provision of public goods: what role for the state?

Ensuring that the fruits from an increased provision of public goods "trickle down" to all producers (especially small farmers) is an important task of the public sector. The cost-reducing effects of infrastructural improvements in the system of agricultural marketing and distribution will not be shared by farmers if the retreat of monopsonistic government parastatals is replaced by monopsonistic traders or transporters, a situation more likely to occur under conditions of incomplete credit markets. An active role of government is needed in such cases to prevent such situations from occurring and to rectify them when they do occur.

Although agreement may exist "in principle" on the need for governments to provide public goods, the modalities of provision, institutional organization, and especially the relative roles of the public and private sectors may be different for different types of public goods. Firms investing in the discovery of new technologies may only capture a small part of the net income gains resulting from it. This reduces their incentives to invest in research, with the consequence that "too little" research may be produced by relying on the private sector only (Timmer, 1991). In such situations, public-sector-supported research is a necesary component of the "non-price" policy interventions (for broader discussion of the case for publicly supported agricultural research see Schultz, 1990).

The case of other types of public goods is less clear-cut. One example of a "mixed case" is irrigation. The complexity of management and large financing requirements of irrigation projects make them inaccessible to private investors in developing countries. Inclusion of externality costs in those projects (waterborne diseases, depletion of underground aquifers) may make the intervention of the public sector necessary for social efficiency (Ellis, 1992). On the other hand, the private sector or local communities, cooperatives, etc., may have an advantage in the construction, design and operation of such projects. For rural roads, while a central authority is more competent to undertake construction, experience shows that such projects are more successful when users are involved in the planning stage, and when local resources are mobilized for the maintenance and rehabilitation of the rural roads network. The setting of clear rules allocating benefits and responsibilities among the central authority and user groups is critical for the success of decentralization of decision making. In general, while the responsibility for planning and overall execution and supervision of infrastructural facilities rests with governments, the provision of infrastructure services may very well be the responsibility of the private sector and local communities.

Pricing issues are also important in public goods (such as electrification, education, irrigation, etc.). Experience shows that few countries charge "fair" or cost recovery prices for water use. This increases the burden on public budgets, cuts into budgets for maintenance and rehabilitation, and results in the overuse of the resource with secondary environmental effects. Public investments should primarily strive at attracting private sector resources in agriculture, but should also consider wider non-strictly economic objectives, such as employment generation and poverty alleviation, through the execution of rural public works programmes. Public investment in rural infrastructure, research and extension are of great importance as a motive force for a broad based rural development.

Policy reforms: the role of institutional capacities and political constrains

As no clear-cut general conclusions can be drawn on how to choose among alternative options for providing public goods, careful analysis of needs, means available, and policy impacts in the individual countries and contexts is required. The analytical skills and institutional capacities of the public sector for performing such tasks are currently lacking in a number of countries. Large public projects, despite their usefulness a priori, can turn into white elephants without the proper administrative and implementation capacity. Such capacities should be carefully considered at the planning stage.

Often the lack of developed private sector institutions to take over the role of the retreating agricultural parastatals in marketing, storage, imports and exports of agricultural inputs and products, complicates and frustrates liberalization efforts. For countries with a history of limited private sector involvement in marketing and distribution activities (other than parallel market activity), the private sector may not "step forward" to cover the vacuum left from the withdrawal of the state. There are also cases where rapid privatization entails short-term problems associated with staff redeployment and increases in social tensions. In such cases, reform of parastatal enterprises and marketing boards needs to be gradual, with emphasis on increasing accountability, streamlining operations and reducing costs. Steps are also needed to rid such organizations of multiple developmental tasks that they are often called upon by governments to perform (price stabilization, provision of guaranteed marketing outlets, food security, employer of last resort). Mitigating the adverse effects of employment should be the object of alternative targeted interventions. Experiences with privatization in developed countries show that introducing competition from the private sector can be an important first step towards successful liberalization, although recent evidence from sub-Saharan Africa is mixed.

In many cases, liberalization efforts are not accompanied by a clear legal framework to sanction the activity of the private sector. The lack of such a framework creates risks that discourage private participation in productive and marketing activities. Examples include continued or erratically applied subsidies to parastatal agencies competing with the private sector and quantitative restrictions to cross-regional marketing.

In relation to the origins of the policy reforms, existing evidence suggests that "home-grown" adjustment programmes have a better chance of being consistently implemented and produce results. It is not always possible for countries to come up with the necessary political consensus needed for implementing a wide-ranging credible reform programme. To the extent that price distortions and the level and composition of public spending reflect a structure of political power, their removal or prospect of removal, will be met with differing degrees of resistance. If the beneficiaries of reforms (private merchants, traders, informal sector) are able to capture the opportunities created by economic liberalization and replace the state in the productive and distributive functions it (the state) relinquishes, then the reforms have a better chance of being effective. For a pre-reform consensus to be achieved, the potential beneficiaries have to have some political leverage before the reforms are initiated. The importance of institutional and political issues in conditioning success of reforms is presented in Box

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