Margreet H. van den Berg
in collaboration with the Extension, Education and Communication Service
FAO Research Extension and Training Division
Part 1 of 3
1 2 3
"Public" and "private": theoretical aspects
Excludability, rivalry and appropriability
Types of research, technology and information
Market failure: supply problems and externalities
Ownership, control and sources of funds
Public or private: more than a technical matter
Knowledge: public or private?
The changing balance between public and private roles
Reasons for change
Ways of change
Intellectual property regimes
Institutional provision mechanisms
Considerations when changing the balance
Intellectual property mechanisms
Institutional provision mechanisms
Reasons for change
Developments in agriculture
Changes in the concept of knowledge
Agricultural knowledge policy
Ways of change
Mixed public and private funding
New public/private combinations
Observations and considerations
Public and private goods
Agricultural knowledge system
This study provides an overview of the theoretical discussions about the changing balance between public and private goods and roles in research and extension as related to the agricultural knowledge system. These discussions are used for an analysis of developments in The Netherlands.
One way of characterizing public and private goods is by using the criteria of economic theory. Market failure is the standard economic rationale for government intervention in agricultural research. The private sector tends to underinvest because most agricultural research is long term, large scale and risky. In the case of negative externalities in agriculture related to the environment and the quality of food the public sector should also invest.
There are various other ways of defining private and public goods and roles. Whether a good is public or private is only partly a technical matter. Questions can arise as to whether a good is or should be accessible to all. Whether an externality is either positive or negative is a political choice. Therefore, the distinction between public and private is not clear-cut.
The balance between public and private goods and roles has changed during the past decades. Reasons are many and different in scope, including the downsizing of budgets for public administration and the new role of governments with respect to an increasing belief in markets. The changing balance is also a result of private sector initiative related to enhanced intellectual property regimes. A country's level of development is another factor which affects the public/private balance.
In many countries, new arrangements for public/private research have emerged in the agricultural knowledge infrastructure. In many cases solutions must deal simultaneously with several sources of market failure. When changing the balance one should go beyond the simple dichotomy between "public" and "private" and seek for combinations of public and private funding and more institutional models. The public sector should not be a monopolist and a multi-organizational extension system should evolve.
In the Netherlands rapid changes occurred in the knowledge system in the 1990s, while links between the components of the agricultural system became increasingly problematic. The public sector announced almost ten years ago its intention to keep its special role for fundamental research, for long term knowledge development and for the knowledge infrastructure as a whole. The Ministry of Agriculture, Nature Management and Fisheries remained the primary client for basic research, environmental issues, food safety and nature conservation. Implementing a user pay principles meant that research aimed at short term and more production oriented research, with more appropriable benefits the responsibility of the private sector. The public sector remained responsible for financing extension programmes to carry out government policies.
At present, private agricultural research expenditures approximately matches public research expenditure, but it grew faster than the public component. Only during the past ten years has public/private cooperation gained specific attention as an instrument in research, resulting in a broad variety of subsidy schemes to stimulate innovation and technology and in new public/private institutions related to upstream research.
There does not appear to have been one main reason for the shift in balance between "public" and "private" in The Netherlands. Political reasons seem to have played a major role in this change in balance. The change can be seen as a complex process of many actors influencing each other. The role of the government in the new types of networks is still under discussion.
A case study of one country is not enough to draw general conclusions. No one country is the same as another, has experienced the same patchwork of changes in policies, in agriculture, in institutions or in concepts of knowledge. However it seems necessary to take into consideration both the positive and the negative effects of a shift in balance as well as the conditions necessary to change the balance and, finally, the amount of time it costs to implement change.
This study is the result of a six-month secondment of the author to FAO from the Ministry of Agriculture, Nature Management and Fisheries of The Netherlands, Directorate for Science and Knowledge Dissemination. During these six months, from January to July 2000, the author worked as part of the team of the Extension, Education and Communication Service (SDRE) within the Department of Sustainable Development.
The secondment to FAO had various goals. The first was to get to know FAO as an international multilateral organization. The Dutch Ministry considers FAO as an important actor in the international agricultural arena and the six months' stay was intended to enhance understanding between the two organizations. A second goal was to provide the opportunity for the author to gain international working experience. The third goal was to study a subject that would be interesting both to FAO and the Dutch Directorate for Science and Knowledge Dissemination.
The public and private roles in research and extension are complex and challenging to study. This is true for developing countries and the situation in The Netherlands. This study can provide the start for further discussions - at FAO, for staff at the Dutch Ministry and for development workers who daily face the task of bridging the public and private sectors.
The study reflects the author's personal opinion and is not an expression of the opinions of either FAO or the Dutch Ministry of Agriculture, Nature Management and Fisheries.
Knowledge has become perhaps the most important factor determining the standard of living - more than land, tools or labour. Today's most technologically advanced economies are knowledge based. The need for developing countries to increase their capacity to use knowledge cannot be overstated. Most countries must increase their knowledge base, invest in educating their people and take advantage of the new technologies for acquiring and disseminating knowledge. Countries that postpone these tasks will fall behind those that move faster (World Bank 1998/1999). Knowledge is also the key to being competitive in agricultural markets. Knowledge is central to accomplishing the growth of agricultural production in an environmentally sustainable way in order to achieve food security and to combat poverty. In 2025 the world's population may exceed 8 billion and food needs in developing countries may double. In order to provide food there is need for the intensification of land use. Expanding the area of land to be cultivated is no longer an option. Intensification calls for agricultural technology and innovation. Agricultural technologies and innovation stem from knowledge generation, transfer and exchange.
FAO and The World Bank have recently produced a publication titled "Agricultural knowledge and information systems for rural development (AKIS/RD): Strategic vision and guiding principles" (FAO/World Bank, 2000). This publication emphasizes the necessity for an integral approach to research and extension in order to accomplish growth of agricultural production in a sustainable way. The system should promote mutual learning, generate, transfer and utilize agricultural information, knowledge and technology and integrate all stakeholders in this process. The publication states that AKIS/RD needs to be more sustainable as a whole, more effective, more responsive and accountable, and better involve a variety of stakeholders.
Institutional and financial changes in the knowledge infrastructure have their effect on the functions in this infrastructure: the generation, transfer and exchange and use of knowledge, has an effect on the interaction between those functions. A large part of these institutional and financial changes are related to a shifting balance between public and private roles in both the fields of research and extension. Discussions are taking place in various countries about what should be public or private goods in research, extension and education and who should have what role. In addition, methods of future cooperation between the public and private sectors are explored. Most literature that deals with the roles of the public and private sectors in the agricultural knowledge infrastructure considers either the extension component or the research component. This raises questions about how results in one component, for example research, effect the performance in the other, extension, and vice versa.
Developments in the agricultural sector and the development of the global economy as a knowledge economy require the involvement of all stakeholders, including the private sector. A discussion is needed about the roles of the various stakeholders in AKIS. New partnerships and the new division of responsibilities in AKIS have to be considered. The aim of this study is to assess the policy implications of the public and private sector roles in research and extension and how changes in the public/private balance affect the performance of the agricultural knowledge system as a whole. It also provides a brief overview of the theoretical discussions about these roles. This theoretical part has been used as background information for an analysis of the situation in The Netherlands.
Regarding the public role, the study focuses on the public sector at the national level, highlighting lower levels when they affect performance at the national level. As for the private sector, it focuses on the for-profit sector, thus excluding an in-depth study of non-governmental organizations.
The first phase of the study provides an insight into the general discussions on public and private roles in research and extension and results in a theoretical framework for analysing a country, in this case The Netherlands. The last part of the study aims to identify policy implications related to the issue of the public/private balance in research and extension and how this affects the knowledge infrastructure as a whole.
It is practically impossible to classify research or extension strictly as public or private business. When talking about public and private goods and roles in research and extension one can be talking about many different matters. Echeverria and Thirtle (1994) classify research institutions as either public or private according to four points: ownership and control, sources of funds, economic behaviour and, finally, whether the technology produced enters into the public domain or is subject to private property rights. The distinction is not always clear cut. He finds 36 possibilities of which only three are purely public and three purely private. Other authors establish the roles of the public and private sectors in research in relation to the type of organization (public or private), the type of research (up- or downstream), the nature (appropriability of the benefits) of the technology, and finally the market for research output (large or small). This chapter elaborates upon the characteristics or criteria that are often used to define a good or an institute as public or private. Economic concepts of rivalry and excludability related to appropriability are investigated, as well as market failure and externalities. All these aspects influence the question of who will provide and/or finance the good.
In the economic theory, two criteria determine the character of a public or private good: excludability and subtractibility, or rivalry. When a good is excludable, access can be denied to those who have not paid for the product. A good is non-excludable when property rights have not been, or cannot be, defined or enforced. Rivalry means that one person's use or consumption reduces the availability of a good or service to others (Umali and Schwartz 1994). In the case of a non-rivalrous good, there is zero marginal cost from an additional individual enjoying the benefits of the good. Therefore, the market will tend to overprice non-rival goods from a society's perspective. Impure public goods have mixed benefits: goods that only partly meet either or both of the defining criteria. There are two categories according to Kaul et al (1999). "Club" goods are non rivalrous in consumption but excludable. These are also known as "toll" goods: excludable but with a low subtractibility. The second category is "common pool" goods or common pool resources: these have a low excludability and a high subtractibility, or rivalry, in consumption.
The extent of (non-) rivalry and (non-) excludability influences the appropriability of a good. Appropriability is the ability to capture all the benefits accruing to the innovation. It is one of the main factors that determine whether a private actor takes up a certain activity. The more "appropriable" a knowledge good is, the more likely it is that a private actor will carry out activities such as research or extension. Property rights make goods more appropriable. Appropriability is enhanced by establishing or enhancing a regime for intellectual property rights: trade secrets, or patents. Through patents, the inventor can capture the benefits by using the results from the research or selling the right to use them. (Alston et al, 1999).
Different types of research have different degrees of appropriability. These types can be seen as part of a continuum starting with basic research, followed by strategic research, applied research and finally adaptive research. The more downstream the research, the nearer it is to the market and the more private the research in general. The reason for this is the increase in appropriability of the research results.1
Appropriability is also a function of the area of technology. Different technology areas have different levels of appropriability, due to differences in patent enforceability, economic life and the ability of rivals to imitate or replicate innovations. Umali and Schwartz (1994) distinguish general or pure agricultural information from agricultural technologies or inventions. Information embodied in an invention, in technologies such as agricultural machinery, chemicals, hybrid or self pollinated seeds (in the short term), or in biotechnology products, can be classified as a private good because of its high excludability and subtractibility. Echeverria and Thirtle (1994) distinguish mechanical technology, chemical technology, biological technology, processing technology and managerial or agronomic technology.
Mechanical technology can be embodied in machinery, for example planting, cultivating and harvesting equipment. Patenting arrangements are comparatively straightforward. The invention, therefore, is easier to appropriate. The private sector also dominates applied and adaptive research to produce agricultural chemicals: fertilizers, fungicides, insecticides, herbicides, etc. It can appropriate returns from research investment with the sale of the product. Biological technology is a different area from mechanical and chemical mainly because of the fact that patenting of biological material is difficult. Falconi (1993) claims that biological technologies are mainly developed by the public sector since copying of the results is possible (with the exceptions of hybrids and vaccines). He makes a distinction between biological technology, being the improvement of plant varieties, hormones, vaccines and animal breeds, and biotechnology. Processing technology is mainly a private sector activity in developed countries because the appropriability is high. In some developing countries post-harvest and processing technology is a public sector or parastatal responsibility.
General agricultural information can be used without the acquisition of specific physical technology for most of the managerial or agronomic technology ownership is difficult to establish. The product - planting dates, densities, spray regimes and weeding strategies - is difficult to sell and is therefore less interesting to the private sector. Umali and Schwartz (1994) consider general information as a toll good in the short term and a public good in the long term. In this case being a toll good implies that in principal the information is available for everybody, but in practice not everybody will be able to receive this information simultaneously. Therefore, there is still a high excludability in the beginning. However, the diffuse nature of the information will make it a public good in the long term. General information can become a private good. Processing and marketing firms can carry out an extension programme aimed at farmers on condition that the costs of undertaking the extension programme are lower than the production costs. Output processors may want to secure the quality and quantity of the products they require as input. Their aim will be to diminish input supply and quality risks. Input companies can be exceptions to the rule of general information being a public good when they want their product to be used properly.
Private incentives provided by market mechanisms lead to a different resource allocation and a different mix than the socially optimal outcome. Therefore, there is a divergence of private and social costs and benefits. Market signals, such as prices, may fail to fully convey social values or consumer preferences (Fuglie et al, 1996). The market as a mechanism fails or is imperfect. Market failure can occur when the private sector is non-existent, or does not provide goods that benefit society. When the private sector does provide goods, but the provision affects society in a negative way, the so-called negative externalities, this is also seen as a case of market failure.
When goods are non-rivalrous and non-excludable, the private sector is not willing to provide them. The goods face supply problems, a market failure occurs. There are two main problems that affect the provision of public goods according to Kaul et al (1999): the "free-rider problem" and the "prisoner's dilemma". The free-rider problem is based on the powerful incentive of an individual to avoid contributing personal resources to common endeavours. The individual rather frees himself of the trouble and the expense hereby placing the burden on others. Whereas, at the same time, the individual will benefit from the provided good later all the same. The prisoner's dilemma entails the situation in which a lack of information impedes collaboration between two or more actors because of lack of communication.
Externalities arise when an action of an individual or firm affects others who have not paid for a service. They are by-products or side effects of certain activities - spillovers in the public sphere. Externalities are not taken into consideration at the time when the decision has to be taken as to what level to produce or consume a certain good or service. They imply a divergence between private and social (public) costs and benefits resulting from the activity (Umali and Schwartz, 1994). Positive externalities arise when an individual or firm takes an action but does not capture all the benefits. Negative externalities arise when services provided to an individual cause harm or injury to others. Kaul et al (1999) argue that public goods, notably purely public goods, can be considered as special cases of externalities. In the case of private research or extension, there can be a role for the public sector related to the quality of a good or service. Market failure occurs when research activities have positive or negative spillover effects on other individuals or society as a whole that are not compensated through markets (Alston et al, 1999). Public intervention might be needed mainly to deal with environmental externalities. In the case of such negative externalities, private decisions are not socially optimal, for instance when negative environmental side-effects are not taken into account, unless, of course, the private sector itself takes up the responsibility to guarantee the quality of the good or service. However in some cases the nature of externalities means that private investors do not have adequate incentives to make an effort to reduce them (Persley, 1998). This may result in the need for rules and regulations in fields such as food security, nutrition and environmental issues.
The standard economic rationale for government intervention in agricultural research and development (R&D) is market failure (Alston, et al, 1999), such as under-investment. The main reason for the private sector to underinvest in agricultural research in general is the inappropriability of research benefits. Products of research cannot be appropriated by individuals as real intellectual property to the exclusion of others. Fully effective patenting or secrecy is not possible or the benefits accrue to people other than those who use the results: the free rider problem. The free rider shares in the benefits without sharing in the costs. Economies of size, scale and scope play a role possibly greater in agricultural than in other area of R&D (according to Persley) because of the biological basis, the long production cycles and the jointness between enterprises.
The nature of the agricultural research activity is long-term, large scale and risky. As a consequence production firms in agriculture in general are not able to carry out R&D. A United States Department of Agriculture (USDA) report (Fuglie et al, 1996) confirms that agriculture as a whole appears to be underfunded and that there is a unique role for public investment in agricultural research. Alston et al (1999) use the concept of comparing the private rate of return (comparing private costs and benefits to the investor of the research) and the social rate of return (comparing benefits and costs to society as a whole). The authors assert that the estimated "real" rates of return to agricultural research have been very high. The USDA report states that empirical studies validate the finding that the social rate of return to private research exceeds the private return. It means that the benefits of research extend beyond the initial users. Of course, measuring the rate of return of research entails many complexities and reservations exit because of possible overestimation of the rate, caused by the exclusion of price distorting policies or costs of taxation. However, underestimation can be the case too because spillovers from agricultural R&D into non-agricultural applications are excluded as well as the consequences of research into areas of environment, food security and social science. The USDA report indicates that the marginal rate of return to public agricultural research in the USA is estimated to be at least 35 percent annually. Also, rate-of-return studies in Africa indicate that agriculture is a worthwhile investment. Positive results can be achieved even in a difficult and inappropriate policy environment. The impact of agricultural research in Africa has not been as dramatic as the green revolution in Asia, but there have still been substantial achievements in many African countries at both the farm level and in diverse agro-ecological zones.
The issues of appropriability and externalities influence the fact of whether a public or private actor will finance and/or carry out a certain knowledge based activity. As Echeverria et al (1995) indicate, there are various possible combinations of ownership, provider of funds and provider of the service. The public sector can both fund and provide research and extension, it can fund but have it provided privately, and research and extension can both be financed and carried out privately.
One extreme is formed by "real" public institutions: funded by general tax revenues, publicly controlled and providing publicly available research results or extension. For research, these are departments of agriculture, national research institutes or councils, and universities whereas, at the international level, these can be international research centers. At the other extreme one can find the real private institutions: privately owned, funded and controlled, seeking profit and providing private goods. Agribusiness firms can be input suppliers, purchase/processing firms or marketing firms. Agricultural industry, such as input and processing companies, can have their own R&D branch. Agribusiness firms are either domestic or international and in some cases domestic firms have a joint venture arrangement with multinational firms. Extension provided by the private sector is mostly related to commercially produced high value commodities, but the content and reasons for extension can differ. In general, input suppliers provide information as part of their technology sale. Extension is traditionally incorporated into the marketing strategies, which also implies that the information is exclusively for the use of their respective products. Processing and marketing firms will provide extension as an integral component of contract growing schemesThey seek to increase output, to diminish post-harvest losses and to increase quality, consistency and timeliness. Apart from agribusiness firms there are other types of private extension services, for example the consulting business (Umali and Schwartz, 1994) or the technical assistance sector (consultancy and management companies) according to Echeverria and Thirtle (1994).
Between those two extreme categories of the public and private sectors there are many subcategories. If there is a levy on a selection of agricultural producers for research or extension one can call this private, but, at the same time, the levy is not voluntarily (which is supposed to be a characteristic of the private sphere). The financing of extension commodity boards is mainly through levies and membership fees. Commodity boards are often government parastatals and have been established mainly for traditional plantations and export commodities. They mainly provide production and marketing extension. Traditionally, farmers' associations are organized around special agricultural functions or commodities. They can be both consumers and suppliers of extension. In general, farmers' associations cover a wide range of commodity specific topics. These associations can have economic and social reasons for providing extension. As marketing and processing associations, they want to ensure volume, quality and timing of supply. As credit associations, they aim at increasing productivity to guarantee that farmers are able to pay back their loans. As production associations, they strive for increased production by the farmer to raise the output and income of the farmer.
Besides the above mentioned private actors, the private branch consists of non-profit private organizations such as foundations, charities and voluntary groups. Economic behaviour then becomes a criterion for distinction, the behaviour of seeking for profit or not. Non-governmental organizations (NGOs) can be considered as private but, at the same time, as part of the public domain because they may be recipients of public funds and their output is likely to be in the public domain. Public research and extension institutes, when bidding for contracts, either publicly or privately funded, must behave commercially and will therefore have characteristics of "private" behaviour. In various countries governments even stimulate this behaviour.
Carney (1998) states that in general the private sector will be the most effective provider of goods and services because the links with clients tend to be stronger. It is widely held that public sector intervention should be avoided in areas where markets function. The public sector should intervene where market failures occur or where markets do not extend, in the presence of risks and imperfect markets, in the case of imperfect information and when there are increasing returns to scale (Carney, 1998). In other cases the government still has a role to play as "manager" of markets, which contributes to the overall system efficiency of the system.
Whether a good is public or private, however, is only partly a technical matter, according to Stiglitz (in Kaul et al, 1999). It is not just a matter of whether, and to what extent, the good exhibits properties of non-excludablity and non-rivalry in consumption. It is also the practical/political aspect of goods being public. Questions arise as to whether the good is accessible to all. Being a positive or negative externality is not absolute either. Economists define externalities as positive or negative utilities to third parties. Beside this though, there is the issue of prioritization. Prioritization on what is desirable or not. This can only be the result of a political process, according to Kaul et al (1999). This should be a transparent and participatory process, but is often ignored.
Lindner (in Alston et al, 1999) states that knowledge per se is a classic public good in the sense that it is non-rival in consumption and non-price excludable. It has large spillovers: benefits (from the research) that the inventor cannot capture. Persley (1998) adds that the use of knowledge does not diminish its value to another. Stiglitz (in Kaul et al, 1999) goes so far as to suggest that most knowledge is a global public good because scientific truth is universal in nature. It is, in fact, a global public good, although not a purely public good. The United States Department of Agriculture (USDA) also indicates that research has global spillovers or benefits (Fuglie et al, 1996): for instance, genetic improvement in agricultural commodities is largely dependent on global sources.2
However, the distinction between public and private goods is not clear cut (as mentioned earlier by Echeverria et al, 1995). In general, knowledge is often considered an impure public good because returns of some forms of knowledge can, to some extent, be appropriated, such as trade secrets and patents. Alston et al (1999) state that the properties of excludability and rivalry should not be thought of in absolute terms in connection with research. New knowledge is rarely a pure private good as it also exhibits some degree of public goodness.
The characterization of extension as a public or a private good depends on the nature of the extension and the stage of the development of a country, according to Carney (1998). Information on new technology is public until a certain level of technology becomes widely accepted. Farmers then need a more tailored problem-solving service which makes extension a private good. The service at that moment will become both excludable and subtractable.
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