Previous - Next
Chapter ten: Other issues of agricultural taxation
A major issue with adjustment programs in developing countries is the impact on different types of groups. Given that agricultural producers are usually among the poorest, the impact of adjustment programs on agricultural producers is an important one from a policy perspective.
Since structural adjustment policies in agriculture usually try to dismantle or radically reorganize many of the agricultural institutions prevalent in developing countries, and especially the marketing monopolies, in order to diminish the extent of agricultural taxation, it is important to ask whether the original agricultural taxation policies have strong negative impact on agricultural producers. In developing countries taxation of agriculture is carried out mostly through price policies implemented through various monopolistic agencies. Cash crops and especially export crops are the ones that are more often under control. Staple food crops on the other hand, because of their widespread production and consumption are much harder to effectively control.
The impact on agricultural producers of price controls on certain cash crops will depend on the structure of production and consumption of various groups. If export crop production is concentrated on large farmers then of course taxation will influence them the most, while if it is concentrated among small scale producers, they will be the ones to suffer. Apart from the structure of agricultural income, the impact of taxation or reforms will depend on non-agricultural wage and non-wage income. It was seen earlier that worker welfare is likely to fall with an increase in taxation, while the surplus will increase. It was also shown that the level of non-agricultural profits P in most cases will increase as taxation increases and implicit tariff revenue (rents) will also increase. Hence agricultural taxation will hurt agricultural producers if they do not partake of some of nonagricultural profits or rents.
Another major issue concerns the efficiency of investments when carried by the private versus the public sector. Depressing the internal terms of trade of agriculture might diminish private sector profits and hence savings, while it will in all likelihood increase public sector revenues (since it increases the overall surplus). Hence to the extent that private sector investments are financed by retained private earnings, one expects that internal agricultural taxation will depress private investment. It might increase public investment to the extent that the state does not use the increased surplus for current consumption, but it might also decrease it to the detriment of total investment.
Structural adjustment programs to the extent that they reduce effective agricultural taxation tend to stimulate domestic private savings, and hence one would expect that they will stimulate private investment. Public investment on the other hand almost invariably suffers as the decline in state tax revenues is faster than the decline in real public spending. If the efficiency of private investment depends on the available infrastructure, then if additional foreign exchange inflows do not makeup for the decline in public investment funds, private investments might not be profitable and might eventually dry out. In most cases the adoption of structural adjustment programs entails an increase in foreign exchange inflows. To the extent that these inflows are not used just to pay-off old debts or to cover current deficits, public investment could indeed rise.
Another issue concerns institutional reform. In agriculture, reforms under structural adjustment programs usually take the form of privatization of marketing, and abolition of parastatals. It was argued earlier that export marketing boards are usually necessary in terms of the economies of scale inherent in export marketing. They also form an efficient taxation mechanism, as long as the level of taxation is not large, and they are efficiently operated. This implies that such marketing boards do not need to be abolished but rather that they need to be returned to the producers whom they serve, in order to be operated more efficiently. In such cases privatization seems warranted.
Concerning food marketing, state intervention will usually not be adequate to control trade, simply because of the size and pervasiveness of food trade. It is no coincidence that public food agencies almost invariably entail substantial operating losses, as they cannot usually be as efficient as small scale private traders. Given that control of staple food markets is almost impossible, the taxation objective cannot be served very well. Reforms of such agencies, towards either privatization, or restriction of operations to specialized institutions therefore are in the right direction.