The changing public role in services to agriculture: a framework for analysis

I~ U T T E R W O R T H E l N E M A N N

0306-9192(95)00044-5

Food Policy, Vol. 20, No. 6, pp. 521-528, 1995 Copyright © 1995 Elsevier Science Ltd

Printed in Great Britain. All rights reserved 0306-9192/95 $10.00 + 0.00

The changing public role in services to agriculture: a framework for analysis

D i a n a C a r n e y Agricultural Research and Extension Network, Overseas Development Institute, London

This paper presents a framework for the analysis of the public sector role in agricultural service provision. Having laid out the goals of change, it looks at both the economic and social factors which militate towards a continued, though significantly altered, role for government in this area. In particular it stresses the fact that governments need to be responsive to local conditions and to seek innovative and especially collaborative solutions to the problems which they are facing. Their ability to do so will be significantly enhanced if they undertake internal reforms, including decentralisation of decision-making power to more responsive lower level units.

Keywords: agriculture, services, public sector, decentralisation, privatisation, reform

The role of the public sector is changing. In agriculture as much as in other areas, the functions of government agencies are being reassessed and new equilibrium levels of involvement are being sought. This change is not simply a result of short-term shifts in resource availability. It goes well beyond one-off privatisations and entails a far more fundamental alteration of the relationship between the state and the individual, based upon a philosophy of liberalisation and the primacy of efficiency (Colclough, 1991).

The multiplicity of alternative service providers and institutional configurations which have appeared in the agricultural sectors of countries where public sector retrenchment is reasonably advanced is both exciting and daunting. Old style public provision tended to be the direct responsibility of, usually centralised, government ministries or, for the more commercially oriented activities such as marketing, wholly owned government parastatals. These have now been joined or superceded by organisations ranging from small-scale farmer groups, taking marketing into their own hands, to local subsidiaries of multi-national giants supplying hybrid seed to farmers. In between these two extremes lies a continuum of different organisations some pursuing profit, others humanitarian ideals, some almost too close to the government of organisations they replace, others radically opposed. University departments and unions, small-scale traders and NGOs are all feeling their way through the new environment, probing the boundaries and assessing the chances of fulfilling their often opposing objectives (Carney, 1995b).

Like all profound change, this is not a simple process and there are no clear rules as to how it should proceed. Answers are needed to questions about how far the public sector should withdraw, from which range of activities, in what sequence and

521

The changing public role in services to agriculture: D. Carney

about what should be left behind. There are differences of opinion as to the level of active nurturing that nascent markets require and whether the public sector is in a position to promote markets. What other non-market options are available and what are the particular advantages and disadvantages of the institutions which lie behind these? How will all the new players work together? Can some early planning help to reduce wasteful duplication and who will benefit or lose from the change? While there may be no blueprints for the different roles of the various actors, there is a growing pool of evidence and theoretical analysis upon which decision makers can draw (Anderson and de Haan, 1992; Killick, 1995; Smith and Thomson, 1991; Umali and Schwartz, 1994).

This paper begins with an outline of the goals behind the change, namely enhanced efficiency, effectiveness and accountability. It then goes on to consider how these might best be pursued and what particular conditions will be important in determining the most appropriate public sector role. If they are to be successful, governments must take on a dual responsibility; not only must they create the appropriate environment for primarily market-driven diversification of supply, but also they must monitor, assess and respond to the activities of alternative suppliers as they evolve. Finally, therefore, the paper proposes a stepwise approach which they may follow in doing this.

The objectives behind the change The first thing to clarify is why the change is taking place. The main objective in most countries is to increase social welfare by raising the effectiveness of service provision. However, this cannot be done at any cost; there is a corresponding emphasis on greater efficiency, achieving better value for money. This entails, first and foremost, greater reliance on markets, which enable governments to reap the benefits of competition. In competitive markets private sector ownership or more intensive involvement of the private sector and withdrawal of the public sector, is efficient because market forces channel private energies towards socially desirable ends. 1 Productivity in the sector generally increases and consumer prices are competed down while product quality is competed up. While greater competition is not logically incompatible with public ownership, experience has shown that the two rarely coincide (Vickers and Yarrow, 1988).

Not all goods are suitable for market provision - some will have to remain largely in government hands. The second manner in which governments can contribute to increased efficiency is, therefore, to cut the cost of their own operations. They should, for example, adopt a more creative approach to collaboration with the private sector, including membership organisations and NGOs which may be able to share some of the costs of service provision, and experiment with the use of low cost mass media methods for dissemination of extension information (Farrington, 1994). This is likely to be a critical intermediate step in the pursuit of overall efficiency. It is, nonetheless, dangerous to focus too heavily on this aspiration. Indiscriminate cost cutting, without regard to the effectiveness of services, tends to be counter-productive in the long term. Since the quest for increased effectiveness can and should lead governments into different types of activities, more efficient government will not necessarily be cheaper government (Carney, 1995b).

If governments are to be both effective and efficient, effort needs to be put into

JThis is not to say that further progress towards a socially desirable allocation cannot be made. Even in competitive situations market allocations may need to be supplemented (see below).

522 Food Policy 199.5 Volume 20 Number 6

The changing public role in services to agriculture." D. Carney

- GREATER EFFECTIVENESS | better performance in terms of meeting needs I ÷

- GREATER EFFICIENCY better value for money

1 GREATER RELIANCE

ON MARKETS - more intensive

involvment of the private sector

" ' ' ' - . , .

i L

BETI'ER USE OF PUBLIC MONEY

- create structures which promote participation

and enhance accountability

/ More creative I approach to

collaboration with the private sector

\ More critical and |

I targeted

approach to spending

Figure 1 The goals of change

identification of needs and targeting of public sector services. It is important, therefore, to create government structures which enhance accountability. 2 The value of accountability lies not only in its contribution to effectiveness and efficiency, but also in the role it plays in the strengthening of civil society. This in turn is fundamental to the new, more contractual, partnership between the state and the individual. In the past the relationship has been paternalistic, and not necessarily benevolent. The problem has been not simply the potential for abuse inherent in the monopoly situation, but also a fundamental lack of concern on behalf of governments, individuals within governments and donors for rural producers. At best they have been treated as ignorant and in need of modernisation and at worst they have been actively exploited by urban elites (Schiff and Vald6s, 1992). Consequently public sector institutions in many countries have made insufficient effort to identify and service their needs, let alone monitor how closely their activities are meeting those needs or incorporate diagnosis and response to such needs into their own criteria for staff evaluation. With market provision accountability is, in a sense, built into the system; this is one of the reasons why market supply is so attractive. When consumers pay for goods they can use their purchasing power both to express and to enforce the satisfaction of their needs. In the public sector accountability must be deliberately pursued through increased openness of government and transparency of electoral systems. Cost recovery schemes can replicate some of the benefits of market provision in linking clients with providers through the medium of money, but unless clients have viable alternative sources of supply they can only withdraw their contributions as a last resort (Wilson, 1991).

It should, however, be acknowledged that governments are by no means exclusively dedicated to the pursuit of efficiency or even accountability and effectiveness, whatever the rhetoric may be. They are also interested in generating and maintaining political support (Migdal, 1988). Privatisation and liberalisation

2Defined as institutionalised responsiveness to clients' needs.

Food Policy 1995 Volume 20 Number 6 523


programmes offer numerous opportunities to do just this. Government owned companies can be sold off to friendly elites and obscure regulations can hinder the entry of particular competitors into newly emerging market places (Killick, 1995). While such goals are far from unimportant, I shall not be considering them in detail here. It should also be noted that though the process of change itself may be very manipulable by self-interested governments, the resulting configuration should be less so. Once supply is placed in the hands of those with primarily commercial objectives, the scope for ongoing direct political intervention is substantially reduced.

Which factors help to determine the role that the public sector should play?

Even when the objectives of change are set out clearly and there is some commitment to achieving them, it remains difficult to draw from them either prescriptions for action or criteria for measuring the performance of evolving public sector institutions. The widely accepted starting point is that governments should withdraw from direct service provision in areas where competitive markets do or could exist. 3 The characteristics of the goods and services in question provide the first indication of where this might be the case. Goods are classified according to the degree to which they exhibit the two key properties of excludability (those who have not paid for the goods are excluded from consuming them) and subtractability (one person's consumption of the goods reduces its availability to others). In general only those goods which are both highly excludable and highly subtractable (private goods, such as fertiliser) are candidates for private, fully market-driven supply. If the supply of other types of goods is left entirely to market mechanisms, the result will be undersupply and a loss in economic efficiency. If, conversely, private goods are subsidised then they tend to be used at levels higher than the economic optimum. Costs will exceed benefits and other criteria for limiting supply will have to be introduced; experience has shown that these are often arbitrarily defined (Smith and Thomson, 1991).

However, assessing whether market supply of a good is theoretically feasible is just the first step. Figure 2 illustrates that even when this is the case, markets may either fail to develop or produce socially sub-optimal results. The complex task for policy makers is to isolate the precise reason for this and to design an appropriate response - the following provides some explanations:

No functioning market develops This is usually the case for public goods. These tend to be under-supplied by profit-oriented companies because returns are not attractive. Individuals have an incentive to 'free ride', to avoid paying for the relevant goods or services, waiting for their provision to be financed by others. Many services which are information based can, arguably, be defined as public goods. 4 Extension advice which is not bound up with particular products and research which enhances the general pool of information both fall into this category (Umali and Schwartz, 1994).

Markets for private goods may also fail to develop. The reasons for this tend to

3Some have reservations about such a prescription. While they broadly subscribe to it they believe that the economic imperfections in developing countries are, in practice, so pervasive that most markets are non-viable and so to go through all the steps detailed below is nugatory. 4The issue of how fast information flows and what controls can be put upon it enters into the classification.

524 Food Policy 1995 Volume 20 Number 6

The changing public role in services to agriculture." D. Carney

MARKET i DRIVEN | 2

ECONOMIC CHARACTERISTICS I

PUBLICGooD i

Markets do i not develop

Markets produce socially

sub-optimal results

Markets do not develop

Inadequate infrastructure e.g. no roads, poor

communications

Incomplete supporting/ factor markets

e.g. credit, trained people

Unconducive regulatory environments

e.g. traders not allowed to operate; taxes prohibitively

high

Monopolies and cartels e.g. in purchasing and

credit

Extemalities - positive (e.g. inoculations, pest

control) and negative (e.g. chemical use)

Adverse selection and risk e.g. extension, seeds,

natural phenomena

Figure 2 Factors helping to determine the public sector role

be somewhat circumstantial, situation or time specific. They include incomplete supporting and factor markets and macroeconomic and regulatory conditions unconducive to investment and the establishment of private trade. Rather than engaging in direct provision the best solution for the public sector is usually to work towards removing the constraints (including investing in physical and institutional infrastructure) and providing the appropriate incentives to market formation. The challenge for governments is to do this without creating the impression that they will be re-engaging as primary suppliers of services, which would clearly be counter-productive. Criteria need to be developed for allocation decisions to be made; this moves into the area of social cost benefit analysis which is beyond the scope of this paper.

Markets do not produce socially desirable outcomes The fact that markets do or would develop should not allow governments to be complacent about their own role. There are a range of circumstances which call for continued public sector intervention. The first type can be classified as economic (in the technical sense of the word) and include:

• Monopolies - these tend to occur where there are very large economies of scale or scope and significant barriers to entry. They result in high consumer prices.

5 Natural monopolies are uncommon in agriculture. De facto regional monopolies and cartels are, conversely, common because of poor information flows, transport infrastructure and credit availability in rural areas.

• Externalities - these occur when social costs and benefits diverge from individual

5Natural monopolies occur when the long-run total cost of production for a single firm is always lower than the sum of the costs of production for multiple firms.



costs and benefits, meaning that one individual's consumption of a good automatically affects others. Goods with positive externalities (such as certain veterinary treatments relating to contagious diseases) tend to be under-supplied by the market while goods with negative externalities (such as some chemical fertilisers and pesticides) tend to be over-supplied, unless the externalities themselves can be internalised through the actions of some collectivity - often government.

• Adverse selection - this is the name given to the problem which occurs when consumers are unable to judge the value of the good at the time of purchase. This is the case for goods such as seeds and services such as extension where the quality is not apparent until a significant period after purchase and even then is difficult to assess. The result is that sellers have an incentive to market sub-standard products (Akerlof, 1970). This heightens consumer risk and, in the absence of government intervention, may cause the market to seize up entirely. A different type of risk is that imparted by natural phenomena such as adverse weather conditions and pest and disease infestation. The high covariance of risk in any geographic area may affect the availability and cost of agricultural credit (because local lenders cannot easily balance their risk portfolio) and can have a devastating effect upon prices if these are market determined. Governments throughout the world use this as a basis to justify heavy price intervention.

Whilst these economic problems have received much attention, the range over which they apply is almost insignificant when compared to that of the second problem - that markets, by their very nature, exclude those with inadequate purchasing power. Large numbers of those who depend either directly or indirectly upon agriculture are amongst this group. They are doubly disadvantaged being both poor, women in particular often have very little access to cash, and widely scattered. This makes the costs of meeting their needs particularly high. Their very poverty derives from the complexity and riskiness of the environments in which they live which, in turn, makes their needs very specific and fragmented. They require small amounts of tailored inputs and advice, meaning that economies of scale in transport costs tend not to be forthcoming. The same is true, though in reverse, of the issue of marketing outputs. Small farmers living in remote areas often produce relatively low quantities of output which may be of very varied quality because of the conditions under which they are produced and processed. Traders may not therefore find it economically worthwhile to purchase in such areas. This, of course, creates a vicious circle, in that it reduces the amount of money which such people might have available for input purchase the following year (Carney, 1995b).

The implication of this is that economically efficient market allocations may need to be altered to achieve broad increases in social welfare. Formulating the details of a response to this problem and determinillg the extent of intervention is extremely contentious. It moves the debate into questions of tradeoffs between economic growth and equity and the extent to which the poorest benefit from economic advancement of the more wealthy. Nonetheless, it is widely accepted that the importance of agriculture in many developing countries and the number of people who depend upon it justifies some intervention.

A practical approach Recognising their own limitations, and furnished with a more systematic and accurate understanding of the issues at hand, government agencies need to adopt



innovative approaches in designing new roles for themselves. First, they need to assess the theoretical prospects for market provision. Second, they must identify the range and nature of the problems they are facing when markets are either not forthcoming or do not result in socially desirable outcomes. Third, they must seek solutions appropriate to the problems avoiding, where possible, direct and exclusive private sector provision. These should include indirect sponsoring of markets and joint or collaborative solutions.

It is at this point that the benefits of any concurrent political liberalisation, allowing or encouraging the formation of a range of alternative service providers, may be apparent. Often non-profit organisations or groups of individuals with a direct stake in the good or service in question will be the most effective providers. Such organisations can also help overcome some of the problems associated with market provision outlined above. For example, farmers' organisations can aggre- gate the economic power of their members creating more economically viable purchasing and marketing units 6 (Merrill Sands et al., forthcoming).

Collaboration itself can take many forms and may involve both profit-seeking and non-profit organisations. Government regulation of markets may be thought of as joint supply, in a minimal sense, but more active options for collaboration are often appropriate in agriculture. These include: public sector agencies financing the activities of private sector providers where markets do not reach - for example offering incentives to private companies to purchase produce in remote areas; public sector investment in the establishment and on-going support of rural people's organisations which take over supply - for example, of locally produced seeds or credit; public sector agencies establishing collegiate relationships with non-profit organisations, especially in extension, and the public sector sub- contracting or franchising certain aspects of its own provision, such as some agricultural research activities, to the most economically attractive providers (Maalouf et al., 1991).

New approaches are constantly being developed and tested; the challenge is for government agencies to adapt as fast as the environment in which they are working. To do this they must exhibit sustained commitment to reform at the highest levels. In addition, they must often adjust their own internal structures by decentralising authority and financial resources to more responsive and accessible local units which are in a better position to seek out, evaluate and respond to partnership opportunities (Carney, 1995a). Changing the structure of government may not alone be adequate. Managerial measures such as reform of public sector incentive systems so that individuals are rewarded according to their success in meeting clients' needs may be equally or more important. Such individuals need to be able to exercise discretion; most benefits have countervailing costs, including the transaction costs associated with partnership formation, so blanket prescriptions are not appropriate. However, extending discretionary powers is itself not costless in that it increases the need for monitoring and audit. By no means all those who are instrumental in the execution reform are likely to support it, certainly at the outset, and some may choose actively to undermine it.

In principle, by focusing public sector resources on a smaller number of core areas which are not serviced by other actors and where partnerships or shared responsibility are not appropriate, government agencies can increase the depth and

"Membership organisations can offer shared collective goods to their members, financing provision through members ' subscriptions and thereby circumventing 'free rider ' problems. Such goods, which are neither fully private nor fully public are often referred to as 'club goods'.



efficiency of their actions. It must be accepted early on, though, that these core areas will almost certainly include many of the activities in which the agencies have had least success in the past (Carney, 1995b). This is especially true in terms of meeting the needs of the poorest through research and extension. In such areas more participative approaches are often proposed but these tend to be extremely expensive in terms of both time and resources. The risk remains, then, that governments will appeal to their (nominal) ideological belief in privatisation and retrenchment of the state to justify exactly those withdrawals which most suit them. While the performance of newly privatised manufacturing industries is relatively easy to measure, using various indicators of productivity, the performance of service delivery systems in general is far harder and more costly to quantify. Provision is usually fragmented and the quality of the goods in question can often not be measured for several years. By this time much damage may have been done. The framework proposed above may then be used equally often by those assessing and reorienting programmes of reform as by those involved in the original planning and execution.

References Akerlof, G. (1970), The market for lemons, Quarterly Journal of Economics 84 (3), 488-500. Anderson, J.R.. and de Haan, C. (eds) (1992), Public and Private Roles in Agricultural Development:

Proceedings o f the Twelfth Agricultural Sector Symposium. World Bank Publications, Washington DC.

Carney, D. (1995a), Management and Supply in Agriculture and Natural Resources: Is Decentralisation the Answer? Natural Resource Perspectives, No. 4. ODI, London.

Carney, D. (1995b), Changing Public and Private Roles in Agricultural Service Provision: A Literature Review. Overseas Development Institute Working Paper No.81. ODI, London.

Colclough, C. (1991), Structuralism versus neo-liberalism: an introduction, in Colclough, C. and Manor, J. (eds), States or Markets? Neo-liberalism and the Development Policy Debate. Clarendon Press, Oxford.

Farrington, J. (1994), Public Sector Agricultural Extension: Is there Life after Structural Adjustment? Natural Resource Perspectives, No. 2. ODI, London.

Killick, T. (1995), Privatisation and Market Development in Africa (a paper commissioned by the African Development Bank). ODI, London.

Maalouf, W.D., Contado, T.E. and Adhikarya, R. (1991), Extension coverage and resource problems: the need for public-private cooperation, in R.ivera, W.M. and Gustafson, D.J. (eds), Agricultural Exwnsion: Worldwide Institutional Evolution and Forces for Change. Elsevier, Amsterdam.

Merrill-Sands, D., Arnaiz, M.E.O., Bingen, R..J., Carney, D., Farrington, J. and Bcbbington A.J. (forthcoming), The Role of Farmers' Organisations in Technology Change: Current Situation and Future Prospects. ISNAR, The Hague.

Migdal, J. (1988), Strong Societies and Weak States: State-Society Relations and State Capabilities in the Third World. Princeton University Press, Princeton, NJ.

R.ivera, W.M. and Gustafson, D.J. (eds), (1991) Agricultural Extension: Worldwide Institutional Evolution and Forces for Change. Elsevier, Amsterdam.

Schiff, M. and Vald~s, A. (1992), The Plundering o f Agriculture in Developing Countries. World Bank Publications, Washington, DC.

Schwartz, L.A. (1994), The role o f the private sector in agricultural extension: economic analysis and case studies. Agricultural Research and Extension Network Paper No. 48. ODI, London.

Smith, L.D. and Thomson, A.M. (1991), The role o f public and private agents in the food and agriculture sectors of developing countries. FAO, Economic and Social Development Paper 105. FAO, Rome.

Umali, D.L. and Schwartz, L. (1994), Public and Private Agricultural Extension: Beyond Traditional Frontiers. World Bank Publications, Washington, DC.

Vickers, J. and Yarrow, G. (1988), Privatization: An Economic Analysis. Massachusetts Institute of Technology Press, Cambridge, MA.

Wilson, M. (1991), Reducing the costs of public extension services: initiatives in Latin America, in Rivera, W.M. and Gustafson, D.J. (eds), Agricultural Extension: Worldwide Institutional Evolution and Forces for Change. Elsevier, Amsterdam.


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The changing public role in services to agriculture: a framework for analysis