Rationales for Intervention

A second One reason that governments impose policies on their agricultural sector is the belief that intervention can accelerate the rate of income growth. Investment policies-the provision of public goods, such as the research and development of new technologies and infrastructural development (roads, schools, health facilities)-are examples of public sector interventions essential for increased economic activity. Sometimes, these investments will not be made by the private sector. Private investors may be unable to capture the full benefit from investment in public goods because it is impossible or too costly to exclude those who do not pay for services created. In other instances, consumption by one consumer does not reduce the availability of the good or service for others. Consumers therefore avoid declaring their willingness to pay for the good or service, and a market does not form. Finally, capital requirements of the investment might exceed the private sector's capacity to mobilize necessary financial resources. For most of these investments, the public sector has the potential to recover the costs of intervention through user fees or through taxation of the commodities or the regional populations that benefit from the investment.

The correction of market failures represents a second rationale for government intervention in the agricultural sector. If market imperfections are present, the prices of goods or services will not reflect their true scarcity values because the private sector is unable to develop the institutions necessary for efficient market functioning. Rural credit markets, for example, might be hampered by a lack of information on alternative lending and borrowing opportunities in other regions, or by the absence of formal lending institutions that can mobilize savings. Market power is another example of a market failure; private sector suppliers (or consumers) are able to influence prices because their numbers are small and because buyers (or sellers) have no other market outlets. These conditions are asserted to prevail often in factor markets (those for labor, credit, and land) and sometimes in remote rural commodity markets.

Another type of market failure arises because of externalities-costs or benefits from production activities that are not fully reflected in market incentives. Soil erosion, environmental pollution, and overutilization of common property resources are common externalities. Some form of government intervention-a tax, subsidy, or regulatory control-is justified so that user costs (or returns) will reflect fully the effects of the externality. The value of an externality is often difficult to quantify, and in many cases subjective judgments must be made as to whether externality effects are significant. These measurement problems, combined with the administrative costs of tax and subsidy policies, cause quantitative or legislative regulations to be widespread policy responses to externalities.

Although policies to correct market failures or to provide public goods can be important, the most common rationale for intervention in developing country agriculture is the promotion of nonefficiency objectives. The establishment of an efficient economy and the maximization of aggregate income are not the only, or necessarily the most important, goals of economic policy. When policy-makers are dissatisfied with the implications of income maximization, policies will be used to alter the economy. In some cases, these interventions will reflect neutral policymakers acting on a mandate from society. But more often, policies respond to the desires of special interest groups within or outside agriculture.

Income distribution concerns are often at the top of the list of nonefficiency objectives. Food is the most basic of necessities, and low prices of food are considered an important determinant of the welfare level of poor consumers. Staple food prices influence producer income levels as well, and the manipulation of producer prices may generate a more equitable distribution of income in the economy. Income distribution policies will also reflect the influences of rent-seekers-agricultural commodity producers and input suppliers, consumers of food, and industrialists who view changes in agricultural prices as ways to increase profitability in production or to increase purchasing power in consumption. Government policies can benefit target groups through direct regulation of prices-such as tariffs or subsidies on imports-or through policies that provide market power to the target group, such as the designation of monopoly suppliers of particular agricultural products or the allocation of import and export licenses.

Price stabilization is a second common justification for intervention in agriculture. Dependence on the weather causes agricultural production to exhibit a relatively large degree of random variation. When combined with inelastic demand, supply variations can cause market prices to fluctuate substantially from one production cycle to the next. The consequent potential income fluctuations for poor producers and variations in expenditure for poor consumers are often unacceptable to policy-makers. To avoid substantial fluctuations in domestic market prices, many governments establish a set of policies, choosing among international trade controls, storage schemes, price fixing, and rationing. Elements of market failure are also partially responsible for interventions of this type. In production, for example, crop insurance and futures and options markets are institutions that reduce the uncertainty of future prices and income. However, these institutions are usually absent from developing country markets.

National concern over the appropriate role for agriculture in the economy provides a third set of nonefficiency rationales for government intervention. Food security and self-reliance of staple food supplies are commonly held objectives for agricultural policy. For food-importing countries, the attainment of these objectives requires intervention to increase domestic production. This intervention might involve changes in producer prices of outputs and inputs, investment in infrastructure for production or marketing activities, or quantitative restrictions on the production of alternative crops. Agriculture also contributes to government revenue and the maintenance of fiscal balance in the public sector. Income taxes are a relatively unimportant revenue source in most developing countries because informal methods of income payment are prominent. As a consequence, the administrative costs of income monitoring and tax collection are often prohibitive, and indirect taxes on commodities are an important source of revenue. Because of its large size, the agricultural sector is usually expected to play a prominent role in the generation of tax revenues.

The relative importance of each justification for intervention in the agricultural sector follows no particular pattern across countries. In part, this variation results from wide disparities in the distribution of political power. The importance and effectiveness of various lobbying groups-domestic producers, consumers, government agencies, and foreign governments and corporations-vary enormously across countries. Consequently, cross-country variations in agricultural sector objectives are large. Differential resource constraints also create crosscountry differences in agricultural objectives. Governments have objectives for sectors other than agriculture, which implies that budget constraints are a potential limitation on agricultural sector interventions. Technological limitations also might mean that some objectives cannot be realized at reasonable cost. To some extent, policy-makers can overcome constraints by judiciously selecting policies. Selection of the policy that minimizes budgetary cost allows the furtherance of more objectives than would otherwise be the case. But, ultimately, constraints in most developing countries become binding well before all the objectives of agricultural policy can be realized.