Government’s role in agriculture

Government will have to change its role in agriculture or face a lot of angry, hungry people.
Issue date : 15 August 2008

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THE CURRENT GLOBAL FOOD CRISIS HAS forced countries to implement extreme trade-restricting measures to ensure their populations’ food supply. China has prohibited the export of various foodstuffs, while Russia and the Ukraine and some others have restricted exports with export taxes and other measures. At least 29 countries implemented policies to limit food exports during June this year. In SA, the higher food prices have caused concern at government and NGO level. Cosatu took to the streets and demanded the nationalisation of so-called offending agricultural industries.

A short history
The SA agricultural markets were deregulated in the 80s and early 90s, mainly under the influence of prominent agricultural economists like Eckard Kassier and Lieb Nieuwoudt. This culminated in a marketing act that closed down all the remaining control or marketing boards. What our agricultural economists failed to see is that internationally, market liberalisation carefully excluded their agricultural sectors. The mistake policy makers in developing countries made was to think that the free market system could address complex allocation problems in an imperfect world. They deregulated their markets in the erroneous belief that the developed world will follow suit.

Farmers in developing countries suddenly had to compete not with other farmers in developed countries, but with the governments in these countries. The effect was that while exports from developed countries to developing countries increased, the same did not happen with exports from developing countries. In spite of more than a decade of market liberalisation, the world’s food security is now worse than in 1995. Governments and politicians have quickly lost the illusion that food security can be based on food production in other countries.

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For many years, Adam Smith’s doctrine of the free market and the benefits of specialisation was accepted as the only truth. But, as food supplies shrink, more countries are changing their viewpoint. The World Trade Organisation’s director general Pascal Lamy and US trade representative Susan Schwab have pointed out that it’s impossible for every country to become completely self-sufficient in food production.

Are there any alternatives?
Market failure may result in a move back towards more controls on financial and agricultural markets, going even so far as the nationalisation of some industries in the name of food security. Unfortunately, overprotected agricultural sectors seldom remain competitive. European farmers are a good example. They’re unable to produce without huge (60% and more) government support.

The subsidised environment allowed them to become inefficient producers. In marked contrast, producers in countries such as New Zealand and SA had to become efficient or go under. In his book The Competitive Advantage of Nations, well-known expert on competitiveness Michael Porter describes the role of government in the development of competitive industries. He says government’s role is not to sit back and let the market forces work. It must promote competition within existing industries and create an environment in which industries are able to upgrade to newer technology and enter into new markets. According to Porter, firms compete in industries, not governments.

A country’s firms must create and sustain competitive advantages in markets. Governments are notably inefficient in managing industries and they can’t be as in tune with markets as the actual market participants. Dynamism leads to competitive advantage, not short-term cost advantages. There’s a natural tendency in industries to eliminate so-called wasteful competition. In the days of the old Co-operatives Act, the registrar of co-ops determined the boundaries within which specific co-ops were allowed to operate. Government should curb the tendency of industries to limit competition.

The agriculture department should spend less time, energy and money on transformation and more on promoting and improving commercial agriculture. Laws that limit the ability of production factors to move to areas of higher return, must be limited as far as possible. This means government will have to re-look things like the Extension of Security of Tenure Act and other legislation that limits the ability of farmers to adapt to change. Trade and tariff policy need a re-think. While less protection promotes efficiency, local industries, unable to compete against international governments, will fail without some protection.

The answer to the current food price crisis doesn’t lie in the destruction of the free-market system, but in using it to build and enhance the competitiveness of the local commercial agriculture. A prosperous commercial sector will also result in the development of viable farming enterprises owned by previously disadvantaged people. Too much emphasis on small-scale and emerging agriculture may force politicians to explain why there is no bread. When Marie-Antoinette failed to do so, she lost her head. Politicians beware! Dr Koos Coetzee is an agricultural economist at the MPO. All opinions expressed are his own and do not reflect MPO policy. |fw