Public Policy and Agricultural Development

Ha-Joon Chang

• Publisher: Routledge
• Year: 2012
• ISBN:
  9781136635281
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book critically re-examines the currently dominant paradigm of agricultural development policy from historical and comparative perspectives. Examining the experiences of 11 developed countries in their earlier stages of development and the experiences of 10 developing and transition economies in the last half a century, the book offers an in-depth discussion on a range of public policies for agriculture, some currently in use and others forgotten in the mist of history.

After presenting the overarching theoretical framework and a synthesis of findings over the 21 countries examined, the book presents six detailed case studies of agricultural policy in the last half a century in two Latin American countries (Chile and Mexico), two African countries (Ethiopia and Ghana), and two Asian countries (India and Vietnam). Each chapter examines a wide range of policies, including land policy (land tenure reform and land quality improvement), knowledge policy (research, extension, education, and information), credit policy (specialized banks and agricultural credit co-operatives), physical inputs policy (irrigation, transport, electricity, and divisible inputs such as fertilizers, seeds, and farm machinery), policies intended to increase farm income stability (price stabilization measures, insurances, and trade protection), and policies intended to improve agricultural marketing and processing.

Through its historical and comparative approaches, the book frees our "policy imagination" by showing that the range of policies and institutions that have produced positive outcomes for agricultural development has been much wider than any particular ideological position – be it the pre-1980s statist one or the pro-market NCW – would admit. It also shows that the willingness to experiment with new policies and institutions, and the willingness to learn from other countries' successes and improve upon their solutions, were important in all agricultural success stories.

Part I

Introduction and synthesis

1 Rethinking public policy in
agriculture – lessons from history,
distant and recent

Ha-Joon Chang¹

1 Introduction

Agricultural development is acknowledged to fuel economic growth and is crucial to poverty alleviation and food security. However, in the past 25 years or so, the agricultural sector has experienced a relatively sluggish development in a number of developing and transition economies, often failing to reduce rural poverty, even in cases of overall economic growth in some countries. In the last couple of years, rapidly rising food prices have pushed many people, both rural and urban, back into poverty and have again raised concerns over food security-an issue that many believed had been since died.

Several factors are associated with this poor performance of agriculture in developing and transition economies in the past quarter of a century, including structural and technological constraints, unfavourable external economic environment, war and civil conflicts, vulnerability to natural disasters, and inappropriate policy and institutional frameworks. Among these factors, agricultural policy and institutional frameworks are of particular relevance, as they are most directly relevant and also are at least to an extent controllable by the policy-makers, unlike the other factors.

During the past quarter of a century, a large number of the policy and institutional frameworks adopted by developing and transition countries have followed the so-called “Washington Consensus”, which emphasizes the role of market forces in the economy as the main mechanism for resource allocation. The prescriptions emanating from these frameworks have emphasized the need to redefine the role of the public sector into promotion and regulation of free and competitive markets, rather than direct provision and subsidization of goods and services needed for agricultural development.

However, application of the Washington Consensus policies to countries where markets are often yet to emerge, are underdeveloped even when they exist, and frequently fail, has produced mixed social and economic results. Compared to the policies that were applied in the immediate post-colonial period in developing countries from approximately the 1950s through the mid-1970s), Washington Consensus policies have performed poorly and may have resulted in the slowing down of economic growth, rising inequality and persistently pervasive poverty (McKinley, 2004). At the same time, some developing countries in Asia, which have followed a more calibrated and sequential approach in economic liberalization, have had far superior (if not perfect) results.

The failure of the Washington Consensus recipe has been particularly severe in the agricultural sector, where many of the world's poor make their living. Food security, poverty reduction and economic growth depend on improvement in rural productive sectors. However, the withdrawal of the state from a developmental role has negatively affected investment in “public goods” such as agricultural research, education, extension and infrastructure. In addition, reforms of financial institutions have left agriculture with less access to credit than before.²

Given this background, designing and implementing agricultural policies which overcome the limitations of the Washington Consensus approach and address the challenges faced by developing and transition economies is currently among the prime priorities of governments in these countries.

This project hopes to contribute towards addressing such concerns by drawing lessons from history. The history we look at is not simply the history of agricultural policy in developing and transition countries themselves, but also the history of such policy in today's developed countries in the past when they were at similar levels of development as those of developing countries today. In the developing country group, the project looks at seven countries across three continents. They include a star performer (Chile), two mixed performers (India and Mexico), and four sub-optimal performers (Egypt, Ethiopia, Ghana and Zambia). We also look at three transition economies-one very successful, although starting from a very low level (Vietnam) and two with mixed results (Hungary and Ukraine). In terms of the rich countries, we look at, in alphabetical order, Canada, Denmark, France, Germany, Japan, Korea, The Netherlands, Norway, Sweden, Taiwan (China) and the USA. These countries were all successful in developing their agriculture during the period we cover, that is, the late nineteenth and the mid-twentieth centuries (the late twentieth century in the case of Japan, Korea and Taiwan), with France as a partial exception (although it started from a high level of agricultural development, its progress during the period in question was not good).

As will become clearer later, despite distinctive country-specific issues, agricultural policy challenges that confront countries at earlier stages of economic development, today and in the past, are remarkably similar across countries. This means that there is a lot that countries can learn from other experiences, both historical and contemporary. This report is a contribution to that learning process.

2 The evolution of agriculture in the neo-liberal period

After having experienced a major crisis of free market capitalism during the Great Depression, there was a general shift towards more state-led models of economic management by the end of World War II. In line with this, agricultural policies also became more state-oriented all over the world.

The new world hegemon, the USA, itself had already overhauled its agricultural policy in that direction in the 1930s in order to deal with the agricultural crisis that followed the Great Depression (see below). In addition to its already strong government-financed programmes in research, extension, and irrigation, it set up a series of financial institutions providing subsidized loans to farmers and introduced government-managed price stabilization schemes. The USA also encouraged land reform in countries under its influence in the belief that it helped fight off (real and imagined) communist threats. It strongly pushed for comprehensive land reform in Japan, Korea and Taiwan in the late 1940s and early 1950s. It also funded (less comprehensive) land reform programmes in Latin America through President Kennedy's Alliance for Progress in the 1960s.

In the meantime, the spread of socialism into Eastern Europe and China in the 1940s resulted in widespread (although not complete) agricultural collectivization and in the formation of (state-controlled) cooperatives in many countries, although not all socialist countries completely collectivized their agriculture in the manner that the Soviet Union had done since the 1930s. Subsequently, socialist agriculture was practised, to one degree or another, by poor countries like Vietnam, Egypt and Ethiopia in the 1970s. It goes without saying that in the socialist countries the state directed every aspect of agriculture – choice of products, prices, input types, input prices, marketing channels, and so on.

The Latin American countries were already independent and started their state-led agricultural development in the 1930s, the Mexican land reform under Cardenas being the best example. Most of the developing countries in Asia and Africa that became independent in the two decades following World War II also adopted state-led models of agricultural development.

It was believed that, if left alone, the market mechanism would not be able to supply socially optimal quantities of many necessary agricultural inputs – land, water, transport, seeds, fertilizer, pesticide, animal feeds, and so on – nor would it be able to provide the means to attain stability in rural income – credit, insurance, stable prices, and so on. It was argued that the state needed to provide these inputs directly or, should the private sector provide them, subsidize them. It was thought that measures needed to be taken to stabilize rural income.

Land reform was attempted in many developing countries, although few countries, due to political resistance of the landed class, could implement comprehensive (and successful) land reforms like those that were carried out in countries like Korea or Taiwan. In most countries, the state invested in rural infrastructure (especially irrigation and roads) and in the improvement of land quality. It also provided research and extension, although in many countries the quality of the provisions was not very high due to financial limits and the shortage of qualified staff.

In many countries, arrangements were set up to provide subsidized loans to (especially small) farmers. State-owned or-subsidized rural banks were established to expand banking access in rural areas and to provide subsidized loans to farmers. Rural credit cooperatives (or co-ops) were encouraged, while in some countries (such as Japan, Korea and Taiwan), government-controlled general agricultural co-ops provided credits to farmers as well as subsidized inputs and marketing services (see below). Modern inputs, especially fertilizer and improved seeds, were also supplied by the state or, when supplied by the private sector, heavily subsidized by the state.

The state also regulated the marketing of key agricultural products – through state marketing boards in sub-Saharan Africa and through government-controlled co-ops in countries like Japan, Korea and Taiwan. Processing of agricultural products was advanced by the state, both directly (e.g. through state-run agricultural processing plants as in Ghana) and indirectly (e.g. tariff protection of and subsidies to processing industries). This was seen as a way not only to reduce waste (as fresh produces have short shelf-lives) but also to raise rural income by adding value to agricultural products and by creating off-farm employment opportunities.

Many countries tried to stabilize rural income through various means. Some maintained minimum prices for key products (especially grains) and managed buffer stocks. Key agricultural products, especially food grains, were protected from import competition by tariffs and other trade restrictions. Some countries, notably India, provided (for crops, livestock, and so on) agricultural insurances that were intended to stabilize rural income.

Compared to the policies prescribed by the Washington Consensus, or what we call the New Conventional Wisdom (henceforth NCW) in this report, these policies produced very respectable outcomes, especially when they were combined with Green Revolution technologies (another product of government intervention, albeit on an international scale-see Section 4.1.2.1 below). However, they did have some problems – waste and corruption – and thereby started to come under attack from the 1970s from the believers of what later came to be the NCW.

The 1980s proved to be the turning point for agricultural policy in most developing countries – the obvious exception was Chile, which had embarked upon the neo-liberal path before anyone else, following the military coup of General Pinochet in 1973. The traditional state-led agricultural policies experienced serious reversals, with the launch of the Structural Adjustment Programs (SAPs) implemented by the IMF (International Monetary Fund) and the World Bank.

It was argued that state provision and/or subsidization of inputs – credits, extension services, irrigation, fertilizer, seeds, and so on – was causing inefficiencies and corruption, while putting unbearable burdens on state finances. In the context of intense pressure for balancing the budget under the SAPs, it was emphasized that the state could not afford to provide these inputs at subsidized prices. It was advised that the agencies providing these inputs should be privatized and the subsidy elements eliminated, or at least radically reduced. State involvements in agricultural marketing (especially attempts to set minimum prices) and processing were to be eliminated, or at least drastically reduced, as they only produce inefficiencies.

As we pointed out, the above-mentioned policies recommended by the NCW have produced very poor outcomes in most countries in terms of growth, equality, stability and poverty. There are good reasons why that has been the case in each policy area, and we will discuss them in greater detail below. However, before we do that, it is important at this point to highlight the limitations of the very theoretical framework that underlies the recommendations of the NCW in agriculture. Two points are particularly important.

2.1 Eliminating “distortions”

The persistent theme in the NCW is the need to “eliminate distortions”. According to the NCW, state interven...

Table of contents

• Front Cover
• Public Policy and Agricultural Development
• Routledge ISS studies in rural livelihoods
• Title Page
• Copyright
• Contents
• Notes on contributors
• Preface
• PART I Introduction and synthesis
• PART II Case studies
• Index