5.2 Growth or no growth
5.3 Intervention, incentives and control options
5.4 'Top down' versus 'bottom up' approaches
A strategy is the way the policy campaign is managed. According to the Outline for Guidelines for FAO Policy Assistance in the Agricultural Sector, the following steps should be kept in mind when outlining such a strategy (FAO, n.d.):
· Consistency with national objectives, including the identification and, where possible, the resolution of conflicting objectives.
· Identifying overall goals of strategies, consistent with national goals, but narrowed to be operationally meaningful.
· Identifying components of the strategy, meaning the bundle of measures that must be taken to attain the stated objectives.
· Identifying areas of intervention, e.g., working out what is the proper role for government in promoting SARD.
· Identifying investment strategies, which follows from the previous point; many forms of intervention will require capital injection into, say, infrastructure, and it will be necessary to plan the nature, scale and timing of the required investments.
· Identifying policy interventions or reforms consistent with the overall strategy. This means correcting policies that are incompatible with the goals of SARD, and deciding what positive things government (or its agencies) can and should do to attain the objectives set.
Throughout the process of outlining an overall strategy, major concern should be given to feasibility. The strategy chosen must be technically and politically feasible, and within the capacity of the administration. Similarly, the investment strategy must be within the financial resources available. All this means that strategy development must be an interactive process in which both policy makers and stake holders are consulted. As already discussed, it will also need to be adaptive, adjusted as circumstances change and as understanding grows about SARD and the systems on which it must be based.
In selecting broad strategies for SARD, a number of important options need to be considered, as discussed below. Some of these options are real, in the sense that it is important for policy makers to make a choice of the right balance or compromise to match their particular circumstances. In other cases, the choice is more clear cut.
SARD is sometimes erroneously equated with zero growth in output. It is argued by those holding this view that agricultural intensification, requiring large quantities of off-farm inputs, is not sustainable. It is said that this form of production will deplete reserves of non-renewable resources, such as phosphate for fertilizer, and will lead to levels of pollution from chemicals used in production that cannot be absorbed into the environment without serious consequences. And, of course, there is more than a grain of truth in these views. On the other hand, as discussed earlier, the problem is that SARD must meet the challenge of the increased future demand for food and other agricultural products, and must provide sustainable livelihoods for increased numbers of rural people. There is no alternative: the process of intensifying agricultural production must be continued, at least in the main. Expansion of production is unavoidable and, indeed, is necessary to meet the criteria for SARD.
At issue, therefore, is not whether there should be growth or no growth. Rather it is a matter of how the required growth can be achieved without degrading either the agricultural resources or the environment (de Haen and Saigal 1992). That is, the challenge for policy making for SARD is to find ways to promote changes that lead to sustainable agricultural growth.
Of course, there are agro-ecosystems that are so fragile that further sustainable intensification is not possible, at least with present knowledge and at reasonable cost. But equally, many more agricultural systems could be improved to yield more output while, at the same time, they are made more sustainable. So, placement of mineral fertilizer rather than broadcasting may lead to both higher yields and reduced pollution of ground water. Integrated pest management can be at least as effective as spraying with insecticides, as well as cheaper. Responsible fishery management yields a higher and sustainable catch, with less effort, than is possible with unrestricted access and over-fishing.
5.3.1 Types of market failure
5.3.2 Policy failure
5.3.3 Picking a strategy to deal with market failure
In an ideal world where markets work perfectly, scarce resources would be allocated among competing ends in ways that maximize the benefits for all (present and future) members of society. Even in the real world, as some resources become scarce, their prices rise, signalling to resource owners the need to use less of them, perhaps by substituting other inputs. Thus, as land for farming grows more scarce, its price rises and farmers find it profitable to apply more labour and capital to given areas. The changing costs of production associated with changes in resource availability are reflected in the quantities of goods and services producers are prepared to offer for sale at particular prices. As a result, consumption patterns adjust accordingly. But in addition, consumers' preferences for particular bundles of goods and services are communicated to producers of those items through the prices the consumers are prepared to pay. Hence, the resulting prices and quantities traded reflect the interaction of consumers' preferences with production costs, including the costs of using scarce resources. Finally, investors and resource owners try to balance profits today against the possibility of more profit in the future should increasing resource scarcity drive up prices. Such inter-temporal tradeoffs are governed by the operation of the capital market that signals to investors when to invest and when to refrain from investing.
In theory, therefore, a perfect market should lead to the optimal use of resources both now and in the future, thus bringing about sustainable development. So, if markets really did work in this idealized way, there would be no need for policy intervention to attain SARD.
Unfortunately, however, there are several ways in which markets can fail. Important causes include:
· intended and unintended consequences of government interventions, such as taxes and subsidies;
· attenuated property rights associated with some common property and most open access resources;
· imperfect and asymmetric information;
· monopolistic competition;
· imperfect capital markets; and
· the inadequate capacity of market forces to accommodate value judgements about current and inter-generation equity.
Each is discussed in turn in the next subsection.
Attenuated property rights. Attenuated property rights - implying inability to enforce ownership rights - are common in agriculture (including forestry and fisheries). Land, trees or fish stocks may be held in communal ownership, with individual households having use rights only. Alternatively, there may be open access to some resources, with everyone having rights to use the resources. In either case, resource users have diminished incentives to preserve or develop the capacity of the resources. The attenuated property rights may mean that individual investors cannot capture for themselves all the benefits of investment in resource improvement. Or it may mean that they do not bear the full costs of allowing the resources to be degraded or depleted.
The well-known 'tragedy of the commons' occurs mainly with open access resources (and also with some common property resources). With no regulation in place, each individual using the resource earns the average revenue, and not the marginal revenue, attributable to his or her use. Open access to fishery resources, for instance, commonly leads to their over-exploitation. Similar problems can occur with common property resources; here, institutional control over these resources often breaks down under pressure from population growth and commercialization. Loss of control by institutions responsible for governing the use of common property resources can lead to an increased number of disputes, and failure to enforce sanctions on those who violate resource-use restrictions.
Externalities. Externalities occur when resource users create costs that others have to bear or, less commonly, where they create benefits for which others do not have to pay. For example, upland farmers may so manage their land as to cause damage to water courses affecting downstream water users. Usually, there is no market mechanism in place to force the upstream people to pay the costs of the damage they inflict on those downstream, nor any way the downstream people can offer incentives to those above them to mend their ways.
Imperfect information. Markets also fail when market participants have imperfect information and understanding - probably the norm in many agricultural systems. Environmental changes may be slow, at least at first, and may not be detected without close monitoring. Consequently, local people may not be aware of what is happening to their resources or, more plausibly, may lack the knowledge to do anything about it. Thus, markets for land or other resources, may imperfectly reflect future productive capacity.
The market failure is more likely to be severe and distorting when there is asymmetry of information between buyer and seller. Logging contracts between overseas companies and local individuals, communities and even governments are a common example. The locals may have little or no knowledge of the true value of their timber resources - a state of ignorance that the loggers work to preserve by such measures as 'transfer pricing'. (The latter is a method whereby the exporting firm covertly 'sells' the timber to itself for less than it is worth.) In consequence, the contracts are too often written on terms unfavourable to the timber owners, leaving too little surplus to pay for replanting and other necessary post-logging conservation measures.
Monopolistic competition. The power of monopolies to manipulate market situations for profit is well known. Accusing fingers are commonly pointed at the large, international corporations, which are certainly no paragons of virtue and may well use their market power in ways that cause rural resources to be depleted. But governments also may limit competition in agricultural markets, for example by granting exclusive trading rights to statutory marketing authorities. If such marketing institutions grow inefficient or corrupt, the markets they control no longer convey the right price signals to farmers, leading to inefficient resource use, and so detracting from sustainable development.
Imperfect and distorted rural capital markets. Imperfect and distorted rural capital markets are a hallmark of rural production in many less developed countries. Such markets emit the wrong signals to agricultural producers by pushing up the real cost of capital. The higher the interest rate, the less attractive it is for producers to invest in resource conservation, and the more attractive it is for them to run down resource stocks. As Lipton (1989, p. 1) noted:
When the rate of interest is very high - and poor people in the rural Third World commonly pay 25-50 percent in real terms - investment in long-term conservation of private property is not appealing: 'soil mining' is.
Equity and the market. Central to the sustain-ability debate are concerns about the capacity of market forces to accommodate value judgements about current and, particularly, inter-generation equity. The power of the poor to command goods, services and resources in competitive markets is clearly limited. The untrammelled operation of competitive markets will not lead to the attainment of policy goals relating to poverty reduction and improved equity. This form of market failure is all the more important in the attainment of the goal of reducing poverty and deprivation of future generations - the unborn are powerless in the competitive markets of the present.
To sum up, these various forms of market failure are perhaps the more important part of the reason why policy intervention for SARD is an issue deserving careful consideration. Yet the existence of market failure does not automatically justify policy intervention, as discussed next.
Governments and their policy advisers often have inflated expectations about their capacity to change the way people behave and use (or abuse) resources. Policy interventions are often ill-conceived or inadequately implemented. As a result, their impacts are too often ineffective, sometimes even contrary to intentions.
Some common failures in policy include:
· Failure to recognize the impacts of macro-level policies on the micro level.
· Over-reliance on regulation to the neglect of solutions based on ameliorating market failure.
· Focus on larger-scale, commercial producers to the relative neglect of the resource poor.
· 'Compartmentalization' of policies, including agricultural and environmental policies.
· Over-emphasis on excessively optimistic resource use planning relative to knowledge development.
There is a widespread tendency for policy makers to turn to command and control regulations when it appears that market failure is leading to less preferred outcomes for SARD. Yet there are good reasons why such regulations seldom work, especially (but not solely) in less developed countries (Panayotou 1994b):
· Draconian penalties for breaches of environmental regulations are seldom enforced and are often unenforceable.
· It is usually impossible to monitor the myriad small-scale agricultural producers who control most rural resources. And, even if technically possible, the costs of monitoring and enforcement would make the exercise uneconomic.
· There is usually a mismatch between the implied requirements for monitoring and enforcement of regulations and the budgetary, personnel and administrative capacities of less developed countries.
· Actual penalties imposed on violators of regulations who are prosecuted are often so low that, given the low probability of apprehension, they do not serve as a significant deterrent.
· Governments often lack the capacity and willingness to use education and persuasion to change social attitudes in favour of compliance. Yet such attitudinal change may be needed so that those who break the rules are stigmatized in their own communities.
· Command and control regulations elicit rent-seeking behaviours, such as bribing of officials, that not only undermine the intent of the regulations themselves, but may lead to corruption of the whole process of administration.
The foregoing discussion of market and policy failures signals a need for SARD policy makers to make some broad strategic judgements. They need to consider the merits of more versus less intervention (zero intervention across the board will never be a realistic option), and the relative emphasis placed on market-based incentives versus command and control measures. While such broad strategic choices will be made in part on the basis of political views, some comments bearing on the choices can be offered.
Perhaps the first rule might be 'If it ain't broke, don't fix it'. In other words, if present arrangements, whether market-based or interventionist, appear to be operating reasonably consistently with SARD objectives, there is no need to change unless something truly better can be put in place.
When the existing arrangements are thought to be unsatisfactory, the next question to ask is whether it is feasible to design a policy intervention that will improve the situation. The information required to identify what is going wrong and why, and to devise a policy to correct the situation may not be obtainable at reasonable cost. Often, considerable uncertainty surrounds predictions about how the various agents will respond to a given policy initiative, so that its feasibility and efficacy will be doubtful. It is for this reason that simple, reliable interventions may be better than more ambitious but untested ones.
If and when it is thought that a feasible policy intervention has been identified, the next question is whether the benefits from the policy will justify the costs of implementation. These costs include the direct administrative costs faced by the government or the implementing agency, and also include 'hidden' costs of compliance by those affected by the legislation. Thus, a decision to ban a particular insecticide may prevent suspected adverse effects on the environment and/or on human health. On the other hand, it may also add to the costs of agricultural production through reduced yields or through the need for more expensive pest control measures.
Clearly, only those interventions that are needed, that are technically and administratively feasible, and for which benefits are expected to outweigh costs, should be implemented. If application of this rule leads to less rather than more policy intervention, that may be no bad thing. With less to do, governments and their agencies may be able to manage the more limited range of tasks more successfully.
A good starting point for policy might be to scrap, or redesign, existing policy interventions that are not consistent with SARD. Thus, it is not uncommon to find government-created distortions or impediments that are inhibiting the functioning of competitive markets, the removal of which would help assure more sensible resource use. Some specific policy instruments to these ends are discussed in section 6 below.
Given the prevalence of various forms of market failure as causes of unsustainable agricultural practices, and the perceived difficulties in making regulations work, many economists have argued that policy making for SARD is often best approached by fixing the market failure. That may mean finding ways to make failing markets work better, or it may mean finding a way to 'get prices right'. There are a number of ways in which these notions can be implemented.
For example, where a lack of enforceable property rights is leading to over-exploitation of a resource, as happens with open access and some common property resources, there may be a case for privatizing such resources. The privatized resources might then be allocated to the existing users. However, while privatization may lead to better management of the physical resources whose ownership is transferred, privatization of common and open access property may have a negative impact on equity (Baumol and Oates 1988, ch. 15). Not surprisingly, therefore, privatization decisions are often highly politicized.
Alternatively, some market failures may be handled by setting a tax or subsidy to 'correct' distorted prices. One example of this approach is the so-called 'polluter pays' principle, whereby those causing negative externalities through pollution are taxed in proportion to the damage they cause. Similarly, positive externalities from agriculture or forestry, such as contributions to such public goods as landscape, biodiversity and wildlife habitat, might be rewarded by subsidies. These might be funded partly by charges on beneficiaries such as recreational users of the land. Some examples of such policies, and their advantages and limitations are also discussed in section 6 below.
There are, however, limits to the applicability of the notion of adjusting prices for market failure; in practice, it is not possible to 'create' a market for every good (or 'bad') to mirror the 'right' price for SARD. However, if the 'right' price can be estimated by some other means, it may still be possible for policy makers to evaluate the impacts of alternative interventions using the appropriate social values. Most obviously, in project appraisal, prices used for economic or social analysis should reflect, so far as possible, the true costs and benefits to present and future generations of the alternatives considered. Similarly, there has been much concern that national income calculations do not properly measure the changes in levels of resource stocks and environmental quality. Approaches to full resource accounting have been developed to try to correct these deficiencies.
The valuation of resources and the environment presents some interesting challenges for economists. There is a large and growing literature on this topic that is too voluminous to review here (see, for example, Markandya 1995; FAO 1994a; Pétry 1995a, b). Policy advisers concerned with SARD will want to be familiar with the latest thinking on the topic.
Finally, despite the weakness of command and control approaches to deal with market failure, there are situations when regulations are the best, even the only, way to deal with market failure that threatens SARD. For example, absolute bans may need to be imposed on the importation of agricultural items such as plants and animals that may be the source of serious pests or diseases that could seriously affect the sustainability of local agriculture.
It is wrong to suppose that SARD is wholly or even mainly a matter for policy makers. In most countries, the important decisions about agricultural resource use are made by the rural people, particularly, but not exclusively, the resource managers. It is the farmers, forest people and fisherfolk who are responsible for most of the resource utilization decisions that affect SARD. These rural people are, of course, responding to the demands for agricultural products expressed through the prices that consumers are willing to pay for those products. The attainment of SARD requires the creation of conditions for both producers and consumers to change their ways.
What governments can try to do is to create the conditions and establish or improve local organizations to encourage people to change to more sustainable patterns of production and consumption. At the same time, by encouraging the participation of people in the process of SARD, government policy makers can learn from the people about their needs and circumstances, and about their likely responses to policy initiatives. This is another way of saying that a strategy for SARD needs to be both a 'top-down' and a 'bottom-up' process. Policy makers need to find culturally acceptable and effective ways of involving people in their decisions and of motivating people to search for and adopt their own solutions to problems of unsustainability. Some specific policy options are considered below.