Briefing paper-agricultural-pricing-and-public-procurement1


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Briefing paper-agricultural-pricing-and-public-procurement1

  1. 1. Briefing Paper Number 10 | 2012 GDN Agriculture Policy Series Agricultural pricing Parakrama Samaratunga Meeta Punjabi Mehta and public procurement Binod Karmacharya policies in South Asia Uttara Balakrishnan Many countries in South Asia have achieved remarkable rates Female agricultural workers of growth, the result of decades of effective economic policies. cultivate a potato field in Chitwan, Nepal. Poor smallholders in Nepal In the agricultural sector, however, growth rates in many South Asian need better access to markets and countries are either declining or stagnating. This briefing explores increased market efficiency. the impact of pricing and public procurement policies on the g m b akash | panos pictures huge number of people who are dependent on agriculture for their livelihoods. This briefing paper is one of the Key messages 10-part Global Development Network (GDN) Agriculture Policy hree decades of subsidizing the farmers pT ittle evidence exists to prove the link pL Series for its project, ‘Supporting of South Asia through the policies of public between South Asia’s impressive output Policy Research to Inform growth in the past three decades and Agricultural Policy in Sub-Saharan procurement and public food distribution Africa and South Asia’. It is has helped to improve their welfare, any agricultural price and procurement based on a longer synthesis but only marginally. Trade liberalization, policies. Technological improvements paper, Agricultural pricing during these decades have certainly and procurement policies which many would expect to put in South Asia, which draws everything right, has not eliminated influenced this positive trend, but the on extensive published and the need for intervention. role of price risk reduction remains unpublished research. The full unclear and the costs of government paper can be downloaded at: he aim of stabilizing the price of goods pT intervention in agriculture are high has been met with success, substantially It will be of value to policymakers, and have increased over time. In spite experts and civil society working to insulating both farmers and consumers of this, current public procurement and improve agriculture in South Asia. from the worst of the price fluctuations in food distribution policies are likely to This project is supported by the the world market, but the price slumps Bill & Melinda Gates Foundation. continue in some countries due to the induced domestically during harvest times high political priority they receive. have not been dealt with equally well. hile there is a case for continued pW government intervention, there is also a strong need for reform of the private sector. Thus, there is a case for forging a middle path that combines the strengths of both the public and the private sector. Briefing Paper Number 10 Agricultural pricing and public procurement policies in South Asia 1
  2. 2. Overview Laborers work at a rice mill in Asuganj in Bangladesh’s Brahmanbaria district. The Bangladeshi government has successfully reformed its food policies by liberalizing trade and supporting farmers through irrigation and fertilizer provision. g m b akash | panos pictures Following the global food crisis of 2008, The review examines four main aspects agriculture received renewed attention in relation to price and procurement the world over, reigniting debate over policies in five countries: Bangladesh, the need for continuing government India, Pakistan, Nepal and Sri Lanka: intervention in South Asian agricultural 1 markets. At one end there are arguments Historical experiences relating to agricultural that, since the economic conditions which price and procurement policies. led to government intervention no longer 2 exist, governments should withdraw Whether there has been a reversal of from the food grain market. At the the economic conditions that justified other extreme, it is being argued that the government intervention. unfinished reform process in South Asia and the current price volatility in the 3 international markets support a case Critical evaluation of the extent to which for continued government intervention. government intervention in the agricultural This briefing paper, based on a review sector has achieved its stated objectives. of the existing literature and stakeholder 4 interviews, attempts to bring out the Documenting case studies that highlight various contours of the debate and also the debate as to whether government proposes possible ways forward. intervention should be continued. It analyzes three strands of debate: Is there a continuing need for government p intervention? Are government policies putting a strain on p public resources without a real role to play? Should existing agricultural systems be p reformed? 2 Briefing Paper Number 10 Agricultural pricing and public procurement policies in South Asia
  3. 3. Market failure Further, newer forms of global market failure, such as climate change and Most of the literature claims that increased price volatility in international government intervention in the agricultural markets, may also call for newer market was due to different forms of interventions. For governments to respond market failure. to the rapidly changing global and local Four commonly agreed justifications for economic conditions, policies will have government intervention in food grain to change too. The policies of the 1970s markets are: demonstrated the power that government 1 intervention has in helping agricultural Weak infrastructure and limited flow markets grow at an impressive rate, of price information. although some differences of opinion in the literature still exist. Nevertheless, 2 there is now renewed clamor for a second Risk mitigation for the diffusion round of reforms, particularly in the wake of technology. of trade liberalization. Whether this implies 3 continued government intervention with Thinness and volatility of the changes, complete government withdrawal international market. or a public-private partnership, the most 4 important objectives of agricultural policy The inability to participate in the are farmers’ welfare, agricultural price international market. stability and general food security. Infrastructural, technological and Price and procurement policy has institutional developments in South Asian been a major instrument used by the countries have helped to relieve these governments of South Asia to develop their market failures over the past three decades. agricultural sectors, which were affected But a total withdrawal of government by weak market infrastructure, the volatility intervention in agriculture cannot be of domestic and international markets justified as the conditions have not changed and poor adoption of new technology – sufficiently and policies have not met all partly due to inadequate risk mitigation. their main objectives. The stated objectives vary, but these policies were primarily aimed at ensuring a ‘reasonably high’ and stable price Background to the research for farmers, thereby boosting production and farmer income. But despite being This briefing paper is based on a longer analysis of published and in practice for the last few decades, there is unpublished literature and websites on the subject, supplemented not much consensus over the effectiveness by interviews with a broad range of stakeholders. of this policy approach. The study reviewed existing literature and interviewed stakeholders There is also concern about the trade-offs relevant to the five focus countries. The bulk of the public funds that agricultural subsidies engender by allocated for public interventions in these countries have been spent ‘crowding-out’ resources from other on rice and wheat. Consequently, the focus of the present study productive uses, such as investment in has been confined to these two commodities. Furthermore, the education, infrastructure or health. impact of price and procurement policies is often evaluated alongside border protection and public food distribution policies. As such, In addition, public food distribution it is impossible to assess these components individually. In this briefing schemes in South Asia have failed paper, ‘price policy’ refers to all policies that create a price gap for to channel enough food to meet the a particular product in a particular country. This might include tariffs demands of the food subsidy recipients. at borders and price subsidies in domestic markets. Interventions such Yet such schemes continue to exist despite as direct payments (which do not affect price) are also included in heavy fiscal costs, because food security this study of agricultural market distortions. is such a politically sensitive issue. Poor targeting and leakages appear to be the major drawbacks of the schemes, while general inefficiency and limited resource availability also thwart their smooth execution. This is further compounded by the problem of poor and unplanned buffer stock operations, in which commodities are stored in a bid to stabilize prices. Briefing Paper Number 10 Agricultural pricing and public procurement policies in South Asia 3
  4. 4. The challenges in more detail Two main ideologies have prevailed in all Crop diversification could South Asian economies. Following political help South Asian countries independence, most South Asian countries adopted an inward-oriented strategy of in several ways, including import substitution. Governments export expansion under protected industries through import liberalization. Yet price restrictions, export taxes and overvalued procurement policies have exchange rates. Governments, however, discriminated against agriculture. had a negative impact on crop diversification. After a period of under-achieving polices, and with continuing pressure from Successful price stabilization international donor agencies and the World Trade Organization, South Asian countries The objective of price stabilization has been adopted international trade reforms to met with substantial success. As a result, varying degrees. In the 1990s, the neither farmers nor consumers have felt the agricultural sector was liberalized. A full impact of price fluctuations in the world reduction in net tax reduced the fiscal food grain market. Nevertheless, the burden on the producer and consumer and domestic price slumps during harvest times agricultural trade increased. Governments cannot always be adequately remedied due do support the agriculture sector, but to inadequacies and inefficiencies in the overall the contribution of domestic policies procurement systems. Consequently, the to supporting agriculture is minimal. role played by price and procurement policy Domestic policies have also been scaled in promoting technological improvements down over the years in all the countries through the reduction of price risk is not studied. clear. Policymakers, and researchers’ interests The most pronounced objective of these have moved towards trade liberalization policies is to subsidize the farmers. policies. In the past, both domestic Governments provide substantial subsidies, and border measures together had albeit with negligible per capita subsidy discriminated against the agriculture sector levels (with the exception of India and but this has now changed, particularly after Sri Lanka). This objective has been met, but 2000. Pricing and procurement policies not to an appreciable degree as of 2012. are closely intertwined with public food The next most important objective of policy distribution policies in all countries and this intervention is to stabilize prices and this package appears to be providing positive, has been met with moderate success. For or at least non-negative, support to example, prices have been set at farm and farmers. In some cases, the procurement consumer levels to protect people from levels of the price and procurement policies violent fluctuations. However, evidence depend more on changes in public food indicates that while administered prices at distribution policies than the procurement the consumers’ end can effectively impact price itself. prices, placing restrictions on quantity is more effective at the producers’ end. There is little evidence to prove the link between impressive output growth in the past three decades and government pricing and procurement policies. Technological improvements during these decades have certainly influenced this positive trend, but the role of price risk reduction remains unclear. However, domestic prices held artificially high by price procurement policies can safely be assumed to have made the adoption of expensive modern inputs possible.4 Briefing Paper Number 10 Agricultural pricing and public procurement policies in South Asia
  5. 5. Reducing costs through information technology: e-Choupal Farmers in many parts of India face weak infrastructural links, poor transport and numerous intermediaries charging commission for their goods. e-Choupal is the brainchild of the Indian Tobacco Company (ITC), an Indian agribusiness conglomerate. It covers 1,300 choupals (village gathering places) and links almost 700 villages. A series of internet/information points give farmers access to online market prices and information about the weather or soil quality. This also enables farmers to negotiate directly with the end buyer (ITC in this case). A literate farmer is elected from the village to act as the interface between illiterate farmers and the internet/computer. ITC redefined the roles of the former intermediaries, who now help to set up new e-choupals and conduct village surveys. Farmers are now able to align their agricultural output with market demand, and they can also choose to sell their produce to the highest bidder. This model eliminates the huge leakages that are associated with government pricing and procurement in India. It provides farmers with a viable alternative to either travelling huge distances to government procurement centers or to making Farmers harvest rice in distress sales. Weweldigiliya, Sri Lanka. They receive seasonal loans for the The e-Choupal initiative is now recognized as one of the widest internet-based purchase of seeds, fertilizers and pesticides. Three decades initiatives in India. Almost 1 million farmers participate. The value of agricultural of subsidizing farmers in South commodities procured from these e-choupals is US$140 million. Asia has helped to improve their welfare, but only marginally. g m b akash | panos pictures Briefing Paper Number 10 Agricultural pricing and public procurement policies in South Asia 5
  6. 6. Debating government intervention A major determinant of procurement volumes under price and procurement It is clear that the initial conditions programs is the procurement price. Prices for government intervention have not are intended to benefit the farmers as they been completely altered. Nor have are generally higher than the farm price the interventions achieved their major in a market isolated from the rest of the objectives of improving farmer welfare, and world. But they are lower than world prices, achieving agricultural price stability and and consequently the price policy appears general food security to the desired extent. to be a tax on farmers for the benefit Therefore, the debate about the necessity of consumers in trading economies. Thus, of government intervention is still an the studies conducted using free trade open one, contrary to the arguments as a benchmark reveal that overall food of the neo-liberal school of economics. policy has subsidized the farmers only marginally and this had been overshadowed by the impact of the protective border Bangladesh: deregulation and productivity growth policies in the past, making the net effect Bangladesh is perhaps the only South Asian economy to have completely on farmers an implicit tax. However, dismantled its food procurement and distribution system and still achieve following relatively free border policies remarkable success in reducing poverty and increasing agricultural adopted after trade liberalization in the productivity. Since 1994, the government proactively reformed its 2000s, the situation has become less food policy. It privatized food grain distribution, lifted restrictions on restrictive. Presently, farmer subsidy is international trade, and reduced its presence in food grain markets. non-negative, though not very effective. This took place through substantial investment in agricultural research, Increased domestic price stability should and institutional developments in irrigation and fertilizer markets. have contributed to the income stability As a result, the cost of government subsidies reduced from taka 3,916 of farmers. The domestic prices of million (US$120 million) in 1989 to taka 1,680 million (US$42 million) food grains kept artificially high by such in 1994. More resources are now available for investment in new social policies could have made it possible for welfare programs targeted towards poor people. Reduced intervention farmers to adopt expensive modern inputs. by the Bangladeshi government has led to efficiency gains and market However the contribution of price risk development. Competition in domestic markets has increased and reduction through price procurement this has benefited customers. Prices and production are more stable policies to technological improvements and there is more focus on enhancing social welfare. As a result of is not clear. There has also been a negative increased private sector participation in international trade, government impact of crop diversification, diversification costs have been reduced by US$190 million per year. which could help South Asian agriculture. Youths working as day laborers in Sindhuwa, Dhankuta district in Nepal, carry vegetables to a local market on behalf of a rich landlord. New markets have emerged in Asia for high-value commodities such as fruits and vegetables but poor infrastructure makes it hard for smallholder farmers to access markets. michael ostergaard | panos pictures 6 Briefing Paper Number 10 Agricultural pricing and public procurement policies in South Asia
  7. 7. Recommendations In view of the fact that price procurement Regionalize procurement prices p policy and national food distribution Instead of uniform prices, regional programs are generally inefficient but differences in production costs and quality receive high political priority in South Asian should be taken into account in setting countries, the only logical way forward is procurement prices. to modify them to suit the rapidly changing global and local economic conditions, Minimize risk to farmers p particularly following trade liberalization. Procurement mechanisms should entail minimum risk to the farmers. This should The case studies presented bear evidence be ensured by providing a network of to the fact that reforms of this nature procurement points adequately covering all are possible, but that specific strategies production areas and by improving general need to be context-specific. efficiency of the procurement system. Avoid excessive buffer stocks p Chhattisgarh, India: people empowerment and Buffer stock maintenance should be improved governance modified to eliminate conflicts between From the 1960s, the Indian government ran the Public the twin objectives of stabilizing farm prices Distribution Scheme (PDS), which was criticized for and ensuring consumers’ easy access to widespread corruption. In Chhattisgarh state nearly food. The policy goal should be to acquire 50 per cent of the subsidized rice did not reach poor food grains when there is a surplus and people. One reason for this was that private businessmen release it when there is a shortage. owned the PDS shops and had little incentive to keep them Maintaining a minimum buffer stock at all open for long hours. The businessmen were not accountable times is unnecessary and imports and/or to the villagers and there was no way to control them. exports of food grain should be harmonized with domestic procurement to avoid excess In 2003, the newly elected state government decided stock build up. Further, the disbursement to tackle the problem. Local community groups such of procured grains should be in small as co-operatives, gram panchayats and women’s self-help quantities, to avoid price slumps in the retail groups took over the running of the PDS shops. market. The management of procurement, Previously, PDS shop owners cheated and sold the grain stocking and distribution of food grains and rice to millers who sold it back to the government at should be done by a central body with market rates. This was stopped. adequate information about private traders’ behavior, even though procurement and Bogus identity cards that allowed people to claim the disbursement operations are decentralized. grain were in circulation, so fresh cards were issued and the security net was widened so that more families were Widen availability of subsidized food p allowed to claim. Subsidized food grain should be available through a system of ration coupons granted The Civil Supplies Corporation took charge of transporting to the targeted households. Recipients the subsidized grains and was held accountable. A web-based should be able to use coupons to buy application allowed real-time tracking of the amount procured, food from any store, thereby eliminating disbursed and transported. People received rations in the any ‘intermediary’ ration shop owners. presence of government and vigilance officials and locally elected representatives. Research individual policies p Chhattisgarh is considered a model for successful intervention. Finally, to fill the information requirement of a scheme of this nature, more research should be undertaken at individual policy level to complement the available studies conducted at a highly aggregate level.Briefing Paper Number 10 Agricultural pricing and public procurement policies in South Asia 7
  8. 8. Key references The full paper Agricultural pricing and K Anderson and W Martin (2007) procurement policies in South Asia is available for Distortions to Agricultural Incentives download at in Asia, Agricultural Distortions, It was written by: Working Paper 59, The World Bank Dr. Parakrama Samaratunga K Basu (2010) Institute of Policy Studies of Sri Lanka The Economics of Foodgrain Management Dr. Meeta Punjabi Mehta in India, Working Paper, India Ministry Creative Agri Solutions, India of Finance Dr. Binod Karmacharya N Chowdhury (2010) Nepal Council for Development Research Price Stabilization, Market Integration Uttara Balakrishnan and Consumer Welfare in Bangladesh, Yale University, USA Final Report PR 6/07, Bangladesh Rice and reviewed by Foundation Prof. Alexandros Sarris P Dorosh and A Salam (2006) University of Athens, Greece Wheat Markets and Price Stabilization in Pakistan: An Analysis of Policy Options, P roject Steering Committee Working Paper no 5, Pakistan Institute Senior Advisors of Development Economics Prof. Per Pinstrup-Andersen World Food Program and United Nations Cornell University, USA Food and Agriculture Organization (2007) Prof. Thomas S. Jayne Food and Agricultural Markets in Nepal, Michigan State University, USA Rome: World Food Program and United Prof. William A. Masters Nations Food and Agriculture Organization Tufts University, USA United Nations Food and Agriculture Prof. Alexandros Sarris Organization (2010) University of Athens, Greece Pricing Policies for Agricultural Inputs and Prof. David Zilberman Outputs in Nepal, Rome: United Nations University of California, Berkeley, USA Food and Agriculture Organization A Gulati, A G Kumar and R Cummings Project Management Team (2007) Principal Advisor Foodgrains Policy and Management Prof. Douglas Gollin in India, Indira Gandhi Institute of Williams College, USA Development Research Project Director A O Krueger, M Schiff and A Valdes (1988) Dr. George Mavrotas ‘ gricultural Incentives in Developing A Chief Economist, GDN Countries: Measuring The Effect Of Deputy Project Director Sectoral And Economy-Wide Policies’, Tuhin Sen World Bank Economic Review, vol 2, no 3, Lead Strategist, GDN pp255–72 S Rashid, R Cummings, and A Gulati (2005) Project Consultant Grain Marketing Parastatals Asia: Nupur Suri Why Do They Have to Change Now? Policy Outreach Analyst International Food Policy Research Vinaina Suri Institute Research Report, International Food Policy Research Institute you wish to reproduce or build upon this work, If please contact Global Development Network (GDN). P A Samaratunga, K Karunagoda and M Thibbotuwawa (eds) (2007) © Global Development Network ‘ apping and Analysis of the South Asian M Designed and produced for GDN by Panos London, Agricultural Trade Liberalization Efforts’, in Economic And Social Commission For All photographs © Panos Pictures, Asia And The Pacific (ESCAP), Agricultural Trade: Planting the Seeds of Regional All rights reserved. Liberalization in Asia, Asia-Pacific Further information Research and Training Network Studies in Trade and Investment 60, Bangkok, more information on the ‘Supporting Policy For Thailand: ESCAP, pp33–74 Research to Inform Agricultural Policy in Sub-Saharan Africa and South Asia’ project and for free World Bank (2010) download of the Agricultural Policy Research App Food Price Increases in South Asia: (for iPad, iPhone, Kindle and Android) visit: National Responses and Regional Dimensions, Washington DC: World Bank ew Delhi | Cairo | Washington DC N 8 Briefing Paper Number 10 Agricultural pricing and public procurement policies in South Asia