Why Agricultural Policy

Sometimes, macroeconomists and government officials question the raison d'etre of agricultural policy. It is argued that the basic requirements for a successful economic transition or development experience are correct macroeconomic policy, privatization of government assets to the maximum extent, and the elimination of regulatory barriers and other counterproductive government interventions. According to this viewpoint, there is no need for sectoral policy per se, once markets are freed up and macroeconomic stabilization is assured. What makes agriculture different, it is asked, from the textile industry, the cement industry or the restaurant industry, in economic policy terms?

In response, sometimes it is asserted that agriculture's priority for policy makers derives from the fact that it produces food, second in importance only to fresh water for human survival. This argument is valid to a certain degree. It holds mainly for the poorest rural areas of the lower-income countries, which tend to produce mainly for their own consumption, but it becomes less applicable as the world economy becomes increasingly integrated and food imports and exports expand in almost all countries. Increasingly, it is recognized that the nutrition levels of most poor families depend more on their income levels and health conditions than on whether they produce basic foodstuffs. An example is found in the hillside farmers of Central America, who can raise their family incomes significantly by switching from producing corn and beans to cash crops.

Agriculture, of course, is the main source of income and employment in rural areas; indeed, in poorer countries it is often the principal employer in the entire economy. As pointed out in Chapter 1, agricultural growth is also the main way to reduce poverty, in both rural and urban areas. Poverty alleviation is universally recognized as a proper concern, indeed a responsibility, of policy.

There are other basic reasons for treating agriculture as a central topic of economic policy. No other sector is so deeply interconnected with the rest of the economy. Agriculture uses - sometimes abuses - vital resources which are limited and depletable, e.g. water, soils, forests and fish stocks. These are precisely the natural resources whose use has proven to be the most difficult to subject to the rule of markets. A completely hands-off approach, or laissez faire policy, for such resources has not proven to be tenable in any country, for it invariably leads to their overexploitation.

In addition to being a major employer of the labor force, the sector plays a similarly large role in the balance of payments in many countries, and it is the largest user of a country's fertile land. Questions about the societal role and legal status of land impinge heavily on agriculture. Likewise, environmental pollution of land and water arising from farming and ranching activities can severely

1. In some contexts, the usage of the terms 'strategy' and 'policy' is reversed, so that the broader concept is called an 'agricultural policy', and it consists of 'operational strategies' in each area. The important point is that an overall strategy or policy document should contain both a vision for the sector and the concrete instruments of governmental action that are needed to implement it.

affect urban communities if appropriate policies for ameliorating the damage are not in place.

These observations indicate that agriculture's performance has a significant effect on the rest of the economy, and vice versa. However, there is yet another, more fundamental, reason why agriculture is different from other sectors in the economy. Labor and capital can be moved from one industry to another, or one service activity to another, with varying degrees of ease or difficulty, and back again if circumstances should so dictate. However, once labor is moved out of agriculture, it is costly and extremely difficult to shift it back again. Many countries have discovered this lesson through their own experiences, as did Nigeria in the 1970s and 1980s, Mexico in the 1970s, and China during the Cultural Revolution. The intersectoral movement of labor, between agriculture and the rest of the economy, is practically an irreversible flow of resources. The reasons for this irreversibility may be as much social and cultural as economic, but nonetheless they are powerful.

A related concern is that such an intersectoral movement of labor gives rise to large societal costs per migrant for investing in additional infrastructure in urban areas: new housing, water and sewage facilities, and transportation networks, among other items. In addition, rural-urban migration in excess of cities' capacities to create gainful employment generates severe social problems. A study for El Salvador concluded that rural-urban migration costs the country between $159 million and $189 million annually, in terms of new infrastructure (roads, housing, potable water, sewage systems and electricity generation), and that the cost would be much higher if other types of infrastructure and social problems were taken into account. The authors pointed out that it would cost less than a tenth of this conservative estimate to improve the infrastructure, including housing and roads, to acceptable levels in rural areas if the migrants chose not to relocate.2

Therefore, a policy of discouraging agriculture prematurely and promoting primarily the growth of urban sectors can entail irreversible effects on the economy and society, and it can be costly as well. In light of these considerations, it is important for national economic policy to consider carefully the role of agriculture in the nation's development prospects and to design appropriate policies. This is not to argue that agriculture should be subsidized at the expense of other sectors' growth prospects, but an appropriate balance should be sought, consistent with an accurate assessment of agriculture's growth prospects.

Another reason for developing a set of agricultural policies - or a strategy for the sector - is that in most countries the economic institutions are generally less developed, and the economic rules of the game less clearly articulated, in rural areas than in urban-industrial areas. In effect, the economic environment in rural areas may be less well adapted to the requirements of economic growth. The geographical dispersion of farmers and poorly developed road networks and lack of other infrastructure may mean that farmers' access to markets is uncertain and expensive, and banks may not possess much expertise in evaluating agricultural projects or knowledge of their clients, to mention only two ways in which the entrepreneurial environment is weaker in the countryside than in cities.

In some cases, the economic environment in rural areas may be conditioned in part by the historical legacy of a different economic era, as in cases of pervasive State ownership of agricultural land or antiquated rural land registry systems. In contrast, land ownership or long-term leases are almost universally available in urban areas. Whatever the reasons for the differences between rural and urban economic environments, they exist. Reforming rural economic institutions so that they are more conducive to business activity, and at the same time facilitate a reduction in poverty, is normally a long-term undertaking but no less essential for that reason.

Thus, there are many persuasive reasons for assigning a high priority to the development of

2. Roger D. Norton and Amy L. Angel, La agricultura salvadoreña: políticas económicas para un macro sector, FUSADES, San Salvador, El Salvador, 1999.

appropriate agricultural policies. Such policies are strongly interdependent among themselves. For example, policies oriented toward improving marketing channels are usually linked to international trade policies, to competition policy (as applied to agro-industry) and to rural financial policy. Strengthening institutions dedicated to rural finance in turn frequently depends in part on providing greater security of land tenure, and so forth. Hence, a policy reform program in agriculture often has to be fairly comprehensive, dealing with policies in several important areas. This underscores the importance of developing an agricultural strategy.

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