Strategic Reserves and Grain Market Liberalization

Strategic reserves, almost always of grains, represent a response to the kind of concern felt by the Roman emperors mentioned at the beginning of this chapter: that the population might be left without adequate supplies of a basic food, if severe droughts or other unexpected events were to occur. Clearly, no government is willing to incur that risk, hence the tendency to store up strategic reserves. The pressure to accumulate strategic reserves can be strong for products with thin international markets, such as white corn, cassava and some varieties of beans.

Jan Tinbergen, On the Theory of Economic Policy, North-Holland, Amsterdam, 1952.

Reprinted from Food Policy, 22(1), F. Ellis, P. Senanayake and M. Smith, 'Food price policy in Sri Lanka', p. 95, Copyright (1997), with permission from Elsevier.

Attempts to strengthen the private sector's participation in food marketing can founder on strong biases against the private sector in bureaucratic circles. As Joseph Ntangsi has pointed out for the case of Cameroon:

. . . there has been a long-standing prejudice against the private sector, especially by government officials, who consider private traders as unorganized and inefficient (since they operate in numerous small units) or as downright unscrupulous and exploitative of ordinary citizens. (Joseph Ntangsi, Agricultural Policy and Structural Adjustment in Cameroon', in G. H. Peters and B. F. Stanton (Eds), Sustainable Agricultural Development: The Role of International Cooperation, Proceedings of the XXI International Conference of Agricultural Economists, International Association of Agricultural Economists, Dartmouth Publishing Company, Aldershot, UK, 1992, p. 267.)

At the same time:

The inefficiency of State marketing is also evident in the marketing of foodstuffs and inputs; in both cases marketing costs have been higher than for private traders, and in the case of inputs farmers have had to face the additional problem of late delivery (op. cit., p. 272).

Strategic reserves are costly, however. In addition to the storage costs over time, government outlays must cover the difference between (a) the purchase price plus handling costs, and (b) the sales price, since the grains often are sold at less than full cost. Administration of the program and storage losses of the grains represent other costs. For beans in particular, storage for extended periods of time makes them harden so they become difficult to use. Finally, there is an eco nomic efficiency cost associated with government interventions in the marketplace, when purchases are made for the reserve and also when releases from the stockpile are deemed necessary. This cost includes discouraging the development of modern marketing systems in the private sector. Therefore, the question arises of whether the stated aim could not be achieved in other, less expensive ways.

Constitution of a strategic reserve represents a lack of faith that the market will prevent extreme shortages from occurring. However, experience has shown that markets usually are better at ensuring that the populace's needs are met than governments are. A study by John Mellor and Sarah Gavian showed that worldwide, apart from wars, famines have been caused more by misdirected policies than by natural disasters.78 In principle, under a free trade regime, the private sector should respond to signals of impending shortages, and the quantities available on the world market have always been sufficient in the post-World War II period. That food has not always been available in the needed quantities and in a timely manner is attributable in part to weak distribution systems, and continuing government actions in markets for food products tends to inhibit the development of such systems.79

While the validity of these points is widely recognized, in low-income countries the private sector is not always prepared, as noted earlier, to take over all marketing and storage functions immediately. Capital and the requisite expertise may be in short supply. Above all, entrepreneurs may be skeptical that the government will stay out of the field in the future. For the case of Nicaragua, for example, it has been observed that private traders did not fill the gap left by the State when it ceased agricultural marketing activities.80 A similar phenomenon was found in the course of an economic reform program in Malawi: 'Traders have not replaced [the parastatal marketing corporation] in the markets which were abandoned as a result of the rationalization of

78. J. Mellor and S. Gavian, 'Famine: causes, prevention and relief', Science, 235(4788), 1987, pp. 539-545.

79. Chronic malnutrition, as opposed to temporary food shortages, is more a function of low income levels than of physical scarcities of food.

80. M. Spoor, 'Liberalization of grain markets in Nicaragua', Food Policy, 20(2), April 1995, p. 99.

economic activities.. . . This has had adverse effects in most remote areas in terms of access to inputs and markets'.81

However, the private sector is not always slow to respond. In Somalia, 'Prior to reform in the mid-1980s, producers were obliged to deliver all surplus production to the Agricultural Development Corporation ... at prices well below parallel market prices. . . . there appears to have been a significant production response to the removal of these controls and the legalization of private trade and storage. This was accompanied by a strong private sector trading response'.82

Furthermore, the same authors point out that 'A large number of studies of private traders' responses to food market liberalization have been carried out in several countries in [Eastern and Southern Africa] over the last five years. The general finding of most of this research is that private traders have been able to respond to increased market opportunities resulting from the relaxation of legal restrictions on their activities and the reduced role of the parastatal marketing agencies with greater success than pessimists might have anticipated' (op. cit., p. 404). Nevertheless, the private sector's response was not always fully adequate in those countries: 'In most countries of the region, private sector trading activities have received little official support even after liberalization. This has inhibited the private sector's capacity to respond to the opportunities of a more liberalized environment. There is therefore an urgent need to find effective ways of assisting the development of the sector and the promotion of competition within it' (op. cit., p. 406).

In circumstances in which the private sector is not quick to fill the gap left by elimination of gov ernmental marketing programs, policy makers can be faced with a difficult choice: whether to allow shortages to develop far enough, with markedly rising food prices or input costs, so that the private sector will respond by importing food in the necessary quantities, or whether to continue to maintain a strategic reserve against such a contingency, and possibly to import foods on public sector account once prices begin to rise. The latter policy surely will delay the promotion of a private sector role in food marketing, but the former policy may entail real hardship in the short run for the population, at least for the urban poor.

This dilemma is basically a transition problem, a question of tactics rather than long-run strategy, but it is no less difficult for that reason. A solution has to be developed within the economic and historical context of each country, but perhaps adherence to two principles can assist in the development of an appropriate approach: (a) proper sequencing of policy reforms, and (b) absolute clarity and transparency regarding the rules governing public sector interventions during the transition period.83 An example of the proper sequencing of reforms is that a targeted food assistance program for the urban poor must be in place before all responsibility for managing the food marketing chain is turned over to the private sector. Another example was mentioned above for Kazakhstan, regarding the need to liberalize agricultural output markets before or simultaneous with a liberalization of input markets. Likewise, such a fundamental change should be preceded by extensive sensitization of private businessmen to the nature of the new policies and the role expected of them, through workshops, focus groups, publications in the news media and other techniques.

81. Reprinted from Food Policy, 18(4), K. M. Mtawali, 'Trade, price and market reform in Malawi: current status, proposals and constraints', p. 306, Copyright (1993), with permission from Elsevier.

82. Reprinted from Food Policy, 17(6), J. Beynon, S. Jones and S. Yao, 'Market reform and private trade in Eastern and Southern Africa', p. 401 (and pp. 404 and 406), Copyright (1992), with permission from Elsevier.

83. Based on the experience of Tanzania, it was found that successful implementation of grain market liberalization requires clarity and consistency in government policy and also the reform of financial services and the sale of unused storage capacity to the private sector (J. Coulter and P. Golob, 'Cereal marketing liberalization in Tanzania', Food Policy, 17(6), December 1992, p. 420).

For ensuring clarity and transparency of the rules for government interventions during a transition period to a market economy, it is important that releases of grains from a strategic reserve be made only when, for example, the real prices of the grains rise from one month to the next by more than a specified percentage. Such a rule should be disseminated widely. On the side of purchases for the reserve, in order to avoid favoritism and to ensure that the market price is not disrupted more than necessary, the required purchases should be made in small lots in open auctions among producers and other sellers, in different locations of the country. Finally, a companion measure should be to gradually reduce the size of the strategic reserve, in a programmed way, until it is completely eliminated.

Alternatively, decision makers' concerns about food prices can be allayed by constitution of a financial food security reserve instead of a physical grain reserve. The financial reserve would be used to import grains under specified conditions regarding rises in real prices, again respecting the principle of clarity and transparency. An advantage for a government is that a financial reserve is cheaper than a physical reserve: there is no wastage, there are no management costs, and it would earn interest. A financial reserve also should be viewed as a transitional measure, maintained only until it is clear that the private sector can manage the grain trade adequately, but it may be the least costly of the alternatives.

Finally, when the problem of building up an adequate private sector marketing system is viewed in its fullest expression, there is an argument for transitional subsidies for marketing activities, in order to assist with the shift from a State-dominated system to a private one. Such subsidies can be implemented through privatization of State storage facilities on concessional terms (provided that private monopolies are not created) and perhaps through use of temporary credit rediscount lines to support investments in private capital goods for storage and marketing. This kind of support should be accompanied by training activities for private marketing agents.

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