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Chapter 9: Input and equipment supply and crop marketing services


The purpose of this chapter is to examine the particular features of input, equipment and crop marketing services that need to be considered in deciding what forms of, and approaches to, decentralization may be appropriate.


9.1 The nature of input and equipment supply and crop marketing services

Input supply can be usefully subdivided into three types of services:

Crop marketing is the fourth type of service examined in this Chapter.

Inputs, equipment, and crops are mainly private goods because most are excludable and rivalrous. Indeed, production and distribution of agricultural inputs and equipment, as well as crop marketing, are typical private sector businesses in most OECD countries. In principle, and with some exceptions discussed later, it should be possible to decentralize these services in developing countries through market liberalization, encouragement of private and voluntary sector organizations to enter service provision and improved efficiency and/or divestment of public sector organizations.

Market failures

However, for effective government disengagement, markets have to be well developed, there has to be an absence of general or specific market failures, and no other grounds for government intervention such as merit good status or income redistribution. For the services under consideration, the specific types of market failure and some of the other product characteristics that have to be accommodated in successful decentralization are considered in the next section.

9.2 Factors affecting demand and supply

9.2.1 Fertilizers and chemicals

Unstable demand?

Superficially, fertilizer distribution is an ideal service for private sector provision, as fertilizer can be considered as a pure private good being both rivalrous and excludable. The demand for fertilizer and chemicals is a derived demand and will be influenced by the price and profitability of the crop as well as the price of the input. However, fertilizer use often increases the risk faced by farmers if rainfall is low and/or crop prices are below expectations. This will tend to make the demand for fertilizer unstable as well as seasonal. With imperfect and incomplete finance markets, credit-constrained farmers will find it difficult to purchase fertilizer unless new channels of credit provision are made available to them. This is one conceivable disadvantage of scrapping single channel marketing systems. Although a temporary problem, exchange rate devaluations in the early days of liberalization combined with the removal of subsidies often led to substantial increases in domestic fertilizer prices and marked falls in effective demand.

Positive externalities?

For low-income countries it is sometimes argued that food security stimulated by fertilizer use on food crops generates positive externalities and thus, in principle, a case may be made for government intervention in the form of fertilizer subsidies. This is particularly true if the demand for fertilizer is price elastic and reducing the price of fertilizer leads to a marked increase in food production and food security[63].

Imperfect information

There are two types of imperfect information relating to fertilizer and chemical use. The first relates to the quality of the products. The effects of fertilizer applications, in particular, are often not seen for several months. It is therefore quite feasible for an unscrupulous trader to sell inferior quality products to farmers. The second relates to appropriate advice relating to applications. If this is not available, input use is likely to be sub-optimal or even ineffective. However, for fertilizer applications this advice tends to be crop- and location-specific as it is closely linked to soil and climatic conditions. Like all information, it has public good characteristics that suggest that the government should be involved in its provision. With pesticides and herbicides, incorrect use can generate serious negative externalities in the form of threats to human health and environmental damage that justify some form of government intervention in provision.


To summarize, the specific market failures relating to fertilizers and chemicals include:

9.2.2 Seeds and planting materials

Seed supply is a complex operation consisting of three major components:

In pre-reform situations public sector organizations are frequently responsible for all three functions, but there is no economic reason why this should be the case. Nevertheless, the nature of seed technology and the characteristics of the product suggest that the public sector is likely to continue playing a role in the provision of the research and regulation components.

Hybrid and OPV R and D

The general problems relating to agricultural research and saleable and non-saleable products were discussed in Chapter 6. Seed technology is rivalrous but only in the case of hybrid varieties is excludable. Open-pollinated varieties (OPVs) can be reproduced by farmers themselves and passed on through informal seed distribution mechanisms. This makes them common pool goods. While private sector firms are willing to conduct research into developing new types of hybrid seed, they will often not find it attractive to develop new OPV seeds. Exceptionally, they may have a clear advantage in terms of quality and reliability of supply that enables them to capture a significant share of the market. In some developed countries plant breeders’ rights give sufficient protection to make private sector provision of OPVs a viable proposition but it is debatable whether they would be appropriate or enforceable in developing countries. In small and poor countries with small potential seeds markets it is likely that the public sector, or non-profit organizations, will always play an important role to overcome this particular problem of market failure.

Seasonality of demand

One problem facing potential entrants to the seed supply sector is the strong seasonality of demand that means large stocks of perishable seed need to be carried. This ties up working capital but investment in adequate storage facilities is also required. The private sector also requires a level playing field and this is unlikely to be achieved if either the public sector or NGOs are subsidizing seed production or sales.

Imperfect information

Several aspects of seed regulation require at least some form of input from the public sector to overcome potential market failure problems. Seed certification must be sponsored by the public sector although it can be performed by a private organization. The government must also regulate seed testing, although companies that are trying to establish a reputation for themselves are inclined to apply their own adequate seed testing procedures, and associations of seed producers may provide this service for their members.

9.2.3 Machinery and equipment supply

There is a potential problem of market failure relating to imperfect and asymmetric information. As with fertilizer, it may be difficult for a farmer to assess the inherent quality of machinery and this creates particular difficulty when items involve substantial investment and purchases are only made infrequently.

9.2.4 Crop marketing

There are three potential market failure problems with agricultural produce marketing that need to be taken into account when considering decentralization. First, it is inherently risky because of unpredictable variations in output that cause marked price and income fluctuations. These in turn may cause food insecurity. Second, there may be positive externalities related to food security that justify some form of government intervention. Finally, spatial dispersion means that small and remote farmers may suffer from a lack of information and exploitation by traders.

9.2.5 Summary

There are a variety of market failure problems that affect the demand and/or supply of these agricultural support services. The most common concern situations in which one or another of the following features, or combinations of such features, prevail:

9.3 Appropriate forms of decentralization

9.3.1 Introduction

As mentioned earlier, in principle it should be possible to decentralize most input and equipment supply and crop marketing services in developing countries through market liberalization, encouragement of private and voluntary sector organizations to enter service provision and improved efficiency and/or divestment of public sector organizations. This, indeed, has already occurred in many countries. Many of the factors that need to be considered in this reform process have been discussed in Chapters 4 and 5. State ‘shrinkage’ has played a role in the measures undertaken so far and has included actions such as:

Even though the private sector has assumed a much larger role in input supply and crop marketing, governments at the central and local levels have an important role to play in creating an enabling environment for private sector activities. Drawing on the experiences gained so far from countries pursuing this approach, some specific aspects that need to be considered in the reform process are discussed in Section 9.3.2. The possible need for a financing role is discussed in Section 9.3.3. There is also still an important regulatory role for central and/or local government and issues relating to this are discussed in Section 9.3.4.

9.3.2 Market development and encouragement of the private and voluntary sectors

The development of a competitive market for agricultural inputs requires inter alia that:

Naturally, for an effectively competitive inputs market to achieve an efficient allocation of resources in the agricultural economy of a country, an equally effectively competitive market for crops must be in place. Four main conditions must be met for this to happen:

The long term nature of market development

The development of functioning private markets is not a short-term objective. In many developing countries, particularly small countries at the lower end of the scale in terms of income, there is hardly what can be called ‘a private sector’ capable of important new initiatives. It takes time for this to come about. In larger countries with more developed economies, the private sector is often dominated by large traders who concentrate on import/export operations and in supplying urban areas, where the volume of business is large and profit margins significantly higher than in rural areas. As a result, in many rural areas of larger and more developed countries the situation is not dissimilar to that of smaller and less developed countries.

Under these circumstances the policies aimed at developing functioning rural markets must be prompted by a long-term vision. New rules and other measures must be introduced and implemented in a coherent manner and on a permanent basis. This is a major challenge that is not always faced adequately. In fact, the persistence of the negative effects of market failures and the many factors related to the power configuration of the public agencies involved have often provided justification for continued government intervention in the agricultural markets as ‘interim measures’. Some interim measures have actually represented partial reversal of reform policies, discouraged private initiatives and seriously jeopardized the effectiveness of the reform.

Generation of effective demand

Private enterprise will respond over time to meet an effective demand for agricultural inputs. This will be generated from the development and promotion of crop technologies that bring about significant, not marginal, returns to farmers. This will often require actions by both the private and public sectors. Large trading companies engaged in export crop processing and input producers both have a general interest in promoting the growth of demand for inputs, because it brings about more crops to buy, not just more inputs to sell. These private enterprises may go beyond the assessment of existing markets and often have the resources to do so. A dynamic fertilizer market, for example, needs to be fostered by continued research on soil fertility, on crop responses under different ecological conditions, on adequate crop protection practices and products, on variety development, cropping practices, etc. In the case of ‘cash crops’ input suppliers and crop buyers do get involved in research and extension. This is not only the case of large-scale multinational companies. In Kenya, for example, several medium-size private companies engaged in seed production and in export of horticultural products are now involved in research and extension activities[64].

To promote increased effective demand by commercially oriented farmers, a crop approach to research and extension is often sufficient to identify which technical packages interest producers, stimulate more demand for inputs and production of more crops of interest to buyers. For the other category of farmers, matters are much more complex. Here, a farming system approach, continuous participatory diagnosis of problems and on farm adaptive research are required. As we saw in Chapter 6 there is only a low probability of adequate private returns in these activities and some form of financing by government or other bodies is likely to be required.

Public support to alternative technology

Government intervention is justified when private enterprise shows a strong tendency to be limited to production and distribution of products that embody a high degree of monopoly, such as chemicals or hybrid seeds. In these cases governments may legitimately support the introduction of alternative technologies, such as integrated pest management (IPM), and encourage producers of truthfully-labelled seeds of composite varieties, and of disease-free planting material of root and tuber crops, which can be easily reproduced by small scale farmers. As we saw earlier, spreading the know-how on IPM may be a publicly-supported research and extension activity, justified on grounds of mitigating negative externalities and of enhancing competition in the plant protection technology market. Supporting producers of composite seeds and of disease-free planting material fills a gap in supplies and stimulates competition with hybrid seed suppliers. It also responds to the needs of a different category of users. The most effective way of providing government support depends on country- and location-specific conditions. However, in the majority of cases, some form of devolution to the private and voluntary sectors would be useful, with the public sector retaining such functions as providing technical advice, supply of basic seeds, supervision of truthful labelling by producers, and implementing phytosanitary controls at government research laboratories.

Local governments do not appear to be an adequate locus for decision making in matters related to input supply and crop marketing services, particularly with respect to subsidy management, because of spillover effects. For example, products subsidized in an area can be sold at market price in another area.

... to capacity building

A strong case can be made for central governments to support capacity building and training of CSOs (farmers’ associations, genuine cooperatives, NGOs) in handling input supply and crop marketing services. Apex organizations in the voluntary sector can play an important role in moderating the impact of asymmetric information, which affects farmers and particularly poor farmers in a negative way with respect to both input purchasing and crop sales.

... to improving transport infrastructure

A most important contribution of government to mitigate rural market failures is to improve transport infrastructure. Many development specialists would share the view that if all the financial and human resources spent on fostering government direct intervention in crop marketing, input supply, and related credit operations were spent on improving rural transport infrastructure and on designing effective mechanisms for the maintenance of secondary and feeder roads, then the history of agricultural and rural development might have recorded a different performance in developing countries.

Decentralized provisions of transport infrasructure

Decentralization may provide important potential solutions to the provision of transport infrastructure. In most countries road construction and maintenance is the responsibility of public works departments (PWD). Normally, however, the PWD is not responsible for rural roads, which creates a serious institutional gap through the absence of a clear allocation of authority and resources in this domain. Planning trunk roads by PWD is generally influenced by the importance of urban centres, with little account being taken of the agricultural potential of rural areas. Traffic counts are used to establish priorities and these record existing situations. This invariably means that high potential agricultural areas with inadequate transport infrastructure produce much less, and therefore generate much less traffic, than they would with better infrastructure. This is well known to agricultural economists and planners and there is ample empirical evidence of the impact of rural road programmes on crop and livestock production. However, strong arguments against giving priority to feeder road construction are the difficult logistics and the high maintenance costs, particularly in tropical and equatorial environments.

Financing rural road construction and maintenance

Devolution of responsibility for planning, construction and maintenance of rural roads is one option tried in several countries with World Bank support. In some cases, local governments (regional or district level) have been devolved financial resources on a matching grant basis for rural road construction and maintenance. These have been financed from a share of the central government fiscal revenue from road users (for example, a given percentage of the tax on petrol and diesel) coupled with the authority to raise local levies from road users. The local governments then contract out design, construction and maintenance to various private enterprises. The deconcentrated units of technical ministries provide the necessary support to the local governments in contracting and supervision of consultants, and/or contractors’ performance. The advantages of this option are to:

... through matching grants to local governments

There are however drawbacks to this approach that need to be considered and, if possible, overcome. These include:

In practice, it will take time to make the new system functional and performance is unlikely to be the same in all local governments.

... through partnership arrangements with CSOs

A complementary option is to provide funds to finance, through CSOs, local community projects on a matching grant basis under partnership arrangements. This would be more appropriate when road projects benefit single villages rather than a number of villages, which is the domain of the district on account of jurisdictional spillover. Such small projects could be supported on a cost-sharing basis with the local community’s share, in cash or labour, paid in advance to provide proof of stakeholders’ commitment. The argument in favour of this option is that if local people are free to select the project they desire they will select a road project whose benefits are not shared with other communities. Having willingly invested their own resources in its construction there is a higher probability that they will take care of the road maintenance.

Public support to communications

Another important contribution of government to improve the performance of private markets is the provision of better communication systems. Mass communication media (radio and television) are increasingly used by public extension organizations. Technology breakthroughs in telephone communications mean, for example, that small portable cellular phones fuelled by batteries can be purchased and operated by farmers (or groups of farmers) at reasonable costs. This would allow them to acquire very valuable information on crop prices, market demands, etc., on a private basis thus reducing the disadvantages of asymmetric information. However, for this to be possible, the networks of such services need to cover rural areas.

Price stabilization and buffer stocks schemes

An important aspect of crop marketing that also affects input markets concerns price fluctuations, which are a major problem for agricultural producers. At the global level, commodity markets have developed very sophisticated institutions with a view to attracting private investors and moderating the negative impact of sharp and erratic fluctuations in the price of agricultural commodities. Examples are global commodity information services, global commodity exchanges, financial products such as trading in futures and ample commercial storage facilities. The overall impact has been positive, but price fluctuations continue to be a feature of the international agricultural commodity markets. The experience of most developing countries with price stabilization schemes and buffer stocks have been fairly negative, with the result that policy reform advocates have argued convincingly in favour of ending such schemes. The current opinion is that government intervention in export crops markets is not advisable because little can be done by a national government to influence global markets beyond what global markets institutions already do and the risk of wasteful use of limited financial resource is considerable.

Can price fluctuations be moderated with minimal government intervention?

In domestic markets, crop price fluctuations are more pronounced with sharp seasonal fluctuations in food crop prices compounding the impact of inter-annual fluctuations. Price instability is one of the main risks faced by agricultural producers, and the absence of adequate market infrastructure and institutions, particularly for food crops, is a major market failure in developing countries. Furthermore, failure to maintain national food security is often a threat to political stability. The issue confronting decentralization reform designers is how to introduce effective mechanisms aimed at moderating agricultural price fluctuations, with a minimum of direct government involvement. There are some examples of successful management of floor price policy by government agents. BULOG, an Indonesian government organization, controls minimum paddy prices through open market operations involving less than 3 percent of the national crop. It does this through good management of a deconcentrated monitoring of local markets, and of an effective network of purchasing agents, coupled with adequate resources. Admittedly, paddy is an irrigated crop, with smaller production fluctuations than rainfed crops, which makes price stabilization easier. Nevertheless the BULOG experience is worth keeping in mind. However, grain stock management and price stabilization, at any level, require high management skills, transparent and accountable management, no corruption, and good experience of markets reactions and behaviour. Moreover, no such scheme can effectively deal with the impact of long lasting droughts or exceptional calamities.

Link of community storage schemes with central government policy

Decentralization policies include other successful experiences. These concern, for example, the promotion of community storage schemes at village level in several African countries, some of which have managed to effectively improve producers’ prices. Overall, however, the experience of these projects is mixed. Some have been wrongly designed, with an emphasis on physical storage facility construction rather than working capital requirements, and without a workable link to the sources of commercial finance. Many have been located in deficit areas for food security purposes, rather than marketing improvement. The approach has a better chance of working in grain surplus areas where farmers’ stocks of grains can fetch higher prices during the lean season. Group storage has considerable advantages, including the possibility of obtaining credit from commercial banks on the basis of ‘bonded stock’ procedures (FAO, 1995), improved market information, and lower transport cost through bulk conveyance to markets. Coordination with the central government stock management policy is required, to avoid decisions about selling public stocks at the wrong time undermining the viability of village storage operations.

9.3.3 A financing role

Are subsidies justified?

Generally speaking, there is little justification for government to subsidize inputs and equipment. It is sometimes alleged that there is ‘inadequate’ use but this is often because technical ‘requirements’ are confused with effective demand. There are several instances where special crop production programmes associated with input subsidy schemes have performed well, but whether this was primarily determined by input subsidies or by favourable market conditions, adequate infrastructure, and appropriate technologies is far from clear. On the other hand, there are many examples of overestimation of the potential demand, because many important factors determining demand are invariably underestimated by agricultural development planners. Among these are:

9.3.4 Regulatory issues

Even if the government divests itself of its responsibilities for producing, delivering and financing input and crop-marketing services, it still has an important role in providing a regulatory framework with rules[65] that govern the trade in agricultural inputs, equipment, and crops. This framework should foster the effective functioning of markets and moderate the effect of market failures. The revision of this regulatory framework is an important part of the decentralization process.

Trade regulations

In a decentralized system of governance, and in pursuit of liberal economic policies, regulations governing trade play a vital role in creating a satisfactory enabling framework. With regard to input and equipment supply and crop marketing services the main issues that need to be covered include:

Trade regulations may be handled at different levels of governance. Typically the central government establishes the regulations or at least the framework within which detailed regulations must be formulated by other agents, and may delegate the power of taking action for enforcement to lower levels of governance. In some cases the authority to formulate regulations may be devolved to lower levels. For purely illustrative purposes, Box 9.1 offers some examples of decentralization of the functions and tasks required to achieve the main objectives of trade regulations.

Box 9.1 Decentralization of regulatory functions

Possible decentralization of the regulatory function (formulation and enforcement) to achieve policy objectives in the market for crops and agricultural inputs

Objectives of rules

Levels of governance

Central government

Local governments


Central offices

Deconcentrated units

Delegated public agents

Users informed of quality

Perform inspections

Report on violations

May set regulations if delegated to do so

Perform inspections

Report on violations

Consumers’ associations report problems and violations

Quality certification

Rules are formulated centrally

Perform certification

Professional organizations may be devolved responsibility

Prevention of negative externalities

Central authorities take action against violators

Perform inspections

Report on violations

May add local regulations.

Perform inspections.

Take action against violators.


Central government decides which data must be kept

Collect data through established procedures

Statistical institutes organize data banks.

Collect data from other agents and/or on their own

Collect data through established procedures

Fraud and negative externalities

Trade regulations are particularly important in agricultural input supply to protect farmers from frauds by unscrupulous suppliers, and to prevent or regulate negative externalities. Enacting adequate rules is not a simple matter when complex technical issues are involved. Enforcement is not always easy. Good simple regulations vigorously enforced can be highly beneficial. Decentralized enforcement, and some degree of devolution to professional and consumers’ associations, may help making rules more effective. However, too many rules, or vague, confused often contradictory rules may have devastating effects. Over-regulation may obtain opposite results to the declared objectives of the regulating authority. Typically the scope for decentralization decreases the more numerous are the regulations, and the more complex the procedures which must be applied. At the same time the scope for abuse by public administration officers increases.

Three particular issues related to trade regulation deserve some more attention:


Trade licences are enforced in every country across the world. Good governance requires that the procedures to obtain a licence are simple, transparent and equitable. However, often the criteria for obtaining a licence are opaque and there are unreasonable delays in granting a licence. In agriculture, the fees charged and the documentation required by the administration to issue a licence can be serious handicaps for small traders. The principle of subsidiarity suggests that responsibility for issuing licences can usually be undertaken by deconcentrated local units of the central administration, or devolved to local governments, with a view to cutting ‘red tape’ and delays in processing the applications.

Reform of administrative procedures

Market liberalization and privatization in many countries have not always been accompanied by the reform of administrative procedures. Even when far reaching changes in policy and procedures have been introduced, widespread and transparent information has not always followed. The failure to simplify procedures and/or adequately inform people about changes does not reduce the delays, the high transaction costs (of a legal and illegal nature), and the other impediments which limit the effectiveness of liberal economic policies. As a result, many rent-seeking positions in bureaucracies are not seriously challenged and the role of private enterprise will fall short of expectations. In a democratic system of governance, the public authorities have a precise responsibility to make rules clearly understandable and widely known, well beyond the publication in official journals that are sometimes difficult to find even in capital cities in developing countries. Deconcentration and devolution, when local managers are effectively accountable to a local constituency, may help to reduce the risk to some extent.

Dealing with negative externalities

This objective requires that input users are adequately informed about the potential negative effects of the products that they intend to use on the sustainability of their own resource. This is essentially an extension message problem, which, because of conflict of interest, cannot be entrusted to the product suppliers. It also needs users to be fully and very clearly informed about the specific characteristics and the adverse effects of inappropriate use of a product, such as endangering the user’s health (in the case of poisonous products, for example), or the health of his plants and animals. In part, this can be achieved by rules that insist on adequate labelling of products and on full disclosure of information by suppliers in product marketing. Government has a general policing responsibility in this respect vis-à-vis traders and manufacturers, which needs to be forcefully implemented. The extension service has a specific function of warning uneducated farmers about dangerous products circulating in the market (legally or illegally).

Protection of users’ rights

This is particularly important in the case of seeds, since product quality is an essential element of the price set by suppliers and a consumer’s decision to buy. However, the external characteristics of the product often do not reveal product quality, making fraud easy. Government therefore has the responsibility for regulating the quality of the seeds traded in the market. The rules enacted depend on decisions about the strategies to be followed to enhance quality control, and the related organizational consequences such as delegation to autonomous agents in accordance with the specialisation principle. The four major options confronting policy makers are summarized in Box 9.2, although options may vary depending on the crop.

Box 9.2 Strategic options in seed quality control

  • Certification by a government specialized agency. A public sector regulatory agency is established to inspect the fields of seed producers, samples their products, and certifies a number of factors, such as the variety, the purity of the product, germination rates, etc., in accordance with standards established by law. This option is very costly, offers little flexibility in setting standards, results in a limited coverage and opens up room for corruption.

  • Certification by independent private agencies. Groups of producers and consumers may choose to have seeds certified by an independent private technical outfit. This allows for flexibility and transparency of standards. The cost to government is limited, since the cost of the certification is borne by the groups of producers and consumers according to private cost-sharing agreements. The effectiveness of this option depends on the degree of understanding by consumers of the advantages of certification, and on sufficient demand to justify private investment in certification services. Government should however certify the professional standards of the private seed certification outfits, through licensing and regular spot-checking of their keeping up to declared professional standards.

  • Quality declared seeds (QDS). Seed producers and merchants wishing to sell QDS establish their own controls and declare the standards (quality) of the products they sell. The government regulatory agent samples a small percentage of seed production plots and of seed selling points every year, on a rotating basis, to test the truthfulness of the declarations. This option is less costly to government and/or users than the previous options, permits flexible standards and wide coverage, and promotes the spreading of quality control capacity throughout the seed industry. It requires good management of spot-checking methods, clear enforcement rules, and good, constant enforcement practices.

  • Truthful labelling. The minimum standards to be met can be established by the regulatory agency or left to the discretion of seed producers. Producers are responsible for the quality they advertise on their products, so that standards may vary and product prices reflect this flexibility, which facilitates better adaptation to different clients’ demands. Consumers are called to monitor the performance of the products and to file complaints with the regulatory agency, which plays an overall supervisory role through spot-checks. In cases of non-compliance with the advertised products the courts of law may be used for disputes between consumers and suppliers, though this possibility is unlikely to be of great help to farmers in developing countries. Cost of quality control are borne by seed producers under this option, while the cost of the supervisory role of the Government regulatory agency is limited.

Source: Carney (1998). Other references include FAO (1993).

Alternative approaches to regulation

There is a different view emerging about the role of government in performance and quality control, based on neoclassical economics arguments and on some empirical evidence about the cost and benefits of the regulatory function[66]. Regulations have a direct cost for government and suppliers (government employees cost money, suppliers dealing with procedures spend money), that may or may not be commensurate with benefits. Some regulations may yield negative net benefits. For example, delaying the introduction of new products for a long time, until all tests of performance and quality are carried out, deprives users of considerable gains which they may have made by using the product, and discourages private suppliers to seek introducing new products.

Gisselquist et al. (1999) argue that country case study evidence (Bangladesh, India, Turkey and Zimbabwe) suggests that benefits from regulating input performance or quality are low, while costs (primarily foregone gains) are significant. Thus the argument goes ‘that the optimal level of this kind of regulation is nil’. However, other benefits of regulation may be significant, such as those of preventing or reducing serious negative externalities. It is therefore suggested that the regulatory function be limited to the latter cases, or to the need to check possible frauds. The market generally would take care of performance and quality by penalizing suppliers of inferior products. Box 9.3 indicates the regulatory strategy suggested by this view.

Box 9.3 A regulatory strategy for input suppliers?

  • Allow all types of new companies - from small local companies to multinationals - to enter inputs production and trade at any level, based on simple objective requirements (e.g. tax registration) just as in other sectors.

  • Allow companies to market inputs embodying new technology without having to seek official approval based on performance tests or other processes that involves time, money, and subjective judgement (except when negative externalities are an issue, such as for high-risk conventional pesticides).

  • Allow companies to manage input quality and farmers to decide on the value of quality and quality differentials, enforcing truth-in-labelling to ensure that markets transmit accurate information (except when negative externalities are an issue, such as for pesticides that could have dangerous impurities or livestock vaccines that could introduce or spread communicable livestock disease).

  • Strengthen and re-focus controls to target realistic threats of negative externalities.

Source: Gisselquist et al. (1999).

This policy would prevent the risk that regulators in many transition and developing countries, who distrust private companies and misunderstand the market process, suppress market entry and competition, leaving farmers heavily dependent on public research for new technology and on regulators to judge input quality.

The suitability of this strategy to specific situations, however, depends critically on the stage of market development that has been achieved. It is likely to work mostly with commercial farmers, only for saleable technology products, and in well performing markets. It is debatable whether it would work as well in small fragments markets, where buyers suffer from asymmetric information problems or for non-saleable technology products.

9.4 Conclusions

Although most agricultural inputs and crops can be classified as private goods, their supply encompasses certain features that may require some continuous form of government intervention. Thus, although decentralization leading to divestment to the private sector is appropriate in most cases, decentralization for other services, or aspects of them, is best effected by deconcentration or devolution to lower levels of government. In several cases partnerships with, and encouragement of, CSOs may be the most appropriate path to follow. Box 9.4 summarizes, in simplified manner, the impact of decentralization on the main functions of agricultural input supply and crop marketing services.

Box 9.4 The impact of decentralization on input supply and crop marketing functions

Inputs and services

Private Goods

Other Goods



Decentralization of the public administration

Partnership with CSOs

Farm inputs

  • fertilizer
  • chemicals
  • equipment

Supply and distribution to private sector

State policy and regulatory role enhanced

Ensure competition

Prevent negative externalities

Promotion of alternative non-saleable technologies

Promotion of private traders

Promotion of users associations



Seed certification

Ensure competition

Open-pollinated seeds: central government withdraws from production, enforces quality control

Smallholder contract seed multipliers

Crop marketing

Government withdraws

Ensure competition

Improve transport infrastructure

Improve communication systems

Promotion of producer organizations

One of the important roles of government is to ensure that a suitable regulatory framework is available. However, many aspects of this can be decentralized and the recent literature suggests that there may be a larger role for self-regulation through CSOs than previously realized.

[63] However, the subsidized fertilizer might be used on non-food crops and have no direct effect on food production.
[64] Box 7.1 (page 131).
[65] In this context 'rules' take the form of laws approved by parliament, and of regulations issued by government, which interpret the law. Specific regulations establish the procedures which must be followed to comply with the law, both by the citizens who wish to undertake an activity and by the officials responsible for enforcing the respect of the law by citizens undertaking such activities.
[66] Gisselquist et al.(1999).

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