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C A B I P u b l i s h i n gi s a d i v i s i o no f C A B I n t e r n a t i o n a l CABI Publishing CAB International Wallingfbr6 O x o nO X l 0 8 D E UK
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Contents Foreword .....................................................................................................................xi Preface ......................................................................................................................xiii Introduction and Overview ..........................................................................................1 David Bigman Part I: Globalization from the Perspective of the South 1. The Pros and Cons of Globalization for Developing Countries ..........................27 David Bigman Part II: Globalization, Policy Reforms, and the Agricultural Sector: The Developing Countries’ Perspective st 2. Trade Liberalization and China’s Food Economy in the 21 Century .................83 Jikun Huang 3. Globalization and Public Agricultural Research in India ..................................103 P.V. Srinivasan and Shikha Jha 4. Globalization and Economic Reforms in Ghana ...............................................123 Cletus K. Dordunoo and Godwin Y. Dogbey 5. The Impact of Recent Policy Changes on the Agricultural Sector and Public Agricultural Research in Kenya..............................................................135 Hezron O. Nyangito and Joseph T. Karugia 6. The Impact of Trade Liberalization and Domestic Policy Reforms on the Agricultural Sector in Cameroon.......................................................................155 Aloysius Ajab Amin, Emmanuel Douya, and Alexander Mbeaoh Part III: The Changing Rules of Global Trading and the Impact on the Agricultural Sector and Agricultural Research 7. The Implications of Global Standards for National Agricultural Research.......171 Lawrence Busch 8. Intellectual Property Rights and the Commercialization of Public Agricultural Research in Developing Countries ................................................185 David Bigman 9. The Development of the Seed Industry Under Globalization............................201 Michael L. Morris 10. Managing Intellectual Property and Proprietary Technology in Agricultural Research ........................................................................................219 Joel I. Cohen, Cesar Falconi, Victoria Henson-Apollonio, John Komen, and Silvia Salazar v
Part IV: The Role of Public Agricultural Research 11. Diversifying Agricultural Production and Exports in Africa.............................237 David Bigman 12. The Opportunities and Challenges of Globalization for Agricultural Research in the Caucasus...................................................................................259 Larry Zuidema 13. Globalization, Internal Policy Reforms, and Public Agricultural Research in Nigeria............................................................................................275 Foluso Okunmadewa and Joseph K. Olayemi 14. The Reorganization of Public Agricultural Research in the Caribbean under the Pressures of Globalization and Privatization .....................................295 Compton L. Paul 15. The Impact of Globalization on the Agricultural Sector and Public Agricultural Research in Latin America and the Caribbean..............................307 Jorge Ardila Vásquez Acronyms .................................................................................................................325 Contributors .............................................................................................................327 Index.........................................................................................................................329
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List of Tables, Figures, and Boxes Tables Table 1.1. Demographic Characteristics of Selected Developing Countries: 1973–95 .................................................................................................................37 Table 1.2. Growth of GDP Per Capita in Selected Countries: 1960–97 ....................38 Table 1.3. Trends in GDP Per Capita in Selected Regions 1960–96 (in PPP Exchange Rates in 1985 Prices) ...............................................................40 Table 1.4. Measures of Inter-Country Income Inequality 1960–98 ...........................43 Table 1.5. Trends in World Poverty during the 1990s................................................45 Table 1.6. Growth of Food and Agricultural Production in Developing Countries (%).........................................................................................................62 Table 1.7. The Share of Agriculture in the Economy of Selected SSA Countries (%).........................................................................................................64 Table 2.1. Annual Growth Rates (%) of China’s Economy, 1970–97 .......................84 Table 2.2. Foreign Trade to GDP Ratios (%) in China, 1980-97...............................84 Table 2.3. China’s Nominal Rates of Protection (%), 1978–98: Selected Rates Evaluated at the Real Exchange Rate ....................................................................88 Table 2.4. China’s Agricultural Exports by Factor Intensity, 1980–97......................90 Table 2.5. China’s Agricultural Imports by Factor Intensity, 1980–97......................90 Table 2.6. Trade Balance of Agricultural Commodities in China ($ Million), 1980–97 .................................................................................................................90 Table 2.7. Simulation Results: Impact of Trade Liberalization on Agricultural Commodity Prices in China (in %) (Free Trade vs Baseline Scenarios) ...............91 Table 2.8. Simulation Results: Impacts of Trade Liberalization (Free Trade) on Production, Consumption, and Trade of Grains (2000–05)..............................94 Table 2.9. Simulation Results: Impact of Trade Liberalization (Free Trade) on Livestock Products and Fish Production, Consumption, and Trade, 2000–05. ................................................................................................................96 Table 2.10. Grain Self-Sufficiency Levels (in %) under Various Scenarios, 1995–2020. ............................................................................................................97 Table 3.1. Strategies Planned by the Government for Different Commodities........111 Table 3.2. Main Initiatives during the VIII and IX Plan Periods .............................112 Table 3.3. Relative importance of different goals in the projects considered ..........114 Table 4.1. Sectoral Share of GDP (%) at Current Market Prices.............................129 Table 5.1. Agricultural and Other Related Policy Reforms, 1993–98 .....................138 Table 5.2a: Specific Policy Changes for Various Agricultural Commodities ..........139 Table 5.2b: Policy Changes for Various Agricultural Inputs ...................................141 vii
Table 5.3. KARI Research Programs by Commodity/Activity Classification, 1997–98 ...............................................................................................................145 Table 5.4. Sources of Funding for KARI in 1997–98.............................................147 Table 5.5. Share in Initiating Research Projects ......................................................147 Table 5.6. Share of Different Sources in Funding Research Projects .....................148 Table 6.1. The Distribution of Farmer Revenues in Yemessoa, Cameroon .............159 Table 8.1. Type of Research and Collaboration with Other Research Institutes...............................................................................................................193 Table 8.2. Principal Research Categories.................................................................195 Table 8.3. Likelihood of IPR...................................................................................195 Table 8.4. The Use of Proprietary Technologies in Research .................................195 Table 8.5. Policy Measures Relevant to the Inputs Generated in these Research Projects.................................................................................................196 Table 9.1. Area Planted to Improve Maize and Wheat varieties, LDCs (%) ...........203 Table 9.2. Characteristics Associated with the Stages of Maize Seed Industry Development..........................................................................................210 Table 10.1. Applications of Proprietary Technologies and Materials in CGIAR Centers....................................................................................................222 Table 10.2. Products Expected from the Application of Proprietary Tools in CGIAR Centers................................................................................................225 Table 10.3. Proprietary Technologies and Materials Applied in Latin American NAROs ................................................................................................228 Table 10.4. Expectations to Protect Products...........................................................229 Table 11.1. Merchandise Trade of Africa, 1999 .....................................................242 Table 11.2. The Share of Commodities in the Total Export Earnings of the African Countries (%)....................................................................................245 Table 11.3. Principal Research Categories...............................................................253 Table 11.4. Distribution of Research Projects across Research Areas.....................253 Table 11.5. Who Initiated the Research Project? .....................................................253 Table 11.6. Who Covered the Costs of the Research Project?................................254 Table 11.7. Was the Project Conducted in Collaboration with Other Research Institutes? .............................................................................................255 Table 11.8. Were Farmers’ Organizations Involved in the Research Work?............255 Table 11.9. Were Extension Workers Involved in the Research Work? ...................255 Table 13.1. Selected Economic Indicators, 1992–98 ...............................................282 Table 13.2. Budget Allocation for Agricultural Research by the Federal Government, 1990–99 .........................................................................................287 Table 15.1. Area under Cultivation by Main Crops in LAC (’000 hectares). ..........310 viii
Table 15.2. Relative Yields, Growth Rates, and Indicators of Comparative Advantage in LAC ................................................................................................................312 Table 15.3. Differences between LAC Countries in Human-resource Capacities for Agricultural Research...................................................................315
Figures Figure 1.1. Average annual growth rates of GDP per capita in main regional groups, 1960–98 ....................................................................................................41 Figure 1.2. Index of GDP per capita (PPP adjusted) by regions, 1960–96................42 Figure 1.3a. The Share of Regions in the Three Income Groups: 1960 ....................43 Figure 1.3b. The Share of Regions in the Three Income Groups: 1996 ...................43 Figure 4.1. Growth rate of real GDP in Ghana, 1994–2001 ....................................124 Figure 4.2. Inflation rate in Ghana, 1994–2001.......................................................127 Figure 4.3. Incidence of poverty in Ghana, 1991–92 and 1998–99* ........................130 Figure 6.1. GDP Trend in Cameroon in the 1990s .................................................162 Figure 9.1. Public and private maize seed sales, 1990–97.......................................206 Figure 9.2. Evolution of maize seed prices, selected countries ...............................207 Figure 9.3. Maize seed industry concentration, selected countries, 1996 ...............208 Figure 10.1. Applications of proprietary technologies in CGIAR Centers and their means of protection (by reported number of applications) .........................223 Figure 10.3. Permission to use proprietary technologies in Latin American NAROs (by reported number of applications) .....................................................230 Figure 10.2. Applications of proprietary technologies in Latin American NAROs and their means of protection (by reported number of applications) .....230 Figure 11.1. Share of Africa in world merchandise trade, 1989–99 (percentage based on value data) .........................................................................242 Figure 11.2. Supply chain for agricultural commodities in a developing country .................................................................................................................251 Figure 12.1. GNP, PPP (current international US$)................................................261 Figure 12.2. Agricultural product (% of GDP) ........................................................261 Figure 12.3. Cereal yields, 1992–97 ........................................................................263 Figure 14.1. The commodity systems approach employed by PROCICARIBE networks....................................................................................301 Figure 15.1. Evolution of per capita food production indices in LAC ....................311
ix
Boxes Box 1.1. Foreign Direct Investment (FDI).................................................................52 Box 1.2. The Least Developed Countries ..................................................................54 Box 11.1. Trade reforms and privatization: The case of fertilizers in Ethiopia .......241 Box 11.2. Winners and losers in the global coffee marketing chain........................249 Box 13.1. The Cocoa Research Institute of Nigeria ................................................285
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Foreword Globalization and trade reform are credited with improved income growth and poverty reduction in much of the developing world. Empirical evidence points to the growth-inducing effects of open economies, where long-term growth is like the rising tide, lifting all the boats, including those of the poor. Reality, however, is often more complicated. Many countries have not reaped the perceived benefits of globalization, and in those countries that have, large segments of the population, in particular in the rural areas, lost out or were at best unaffected. As new evidence became available, a fierce debate emerged about how globalization actually affects the poor, and whether it can be made to work in their favor. Others argued that globalization merely magnified the effect of existing domestic policy failures to recognize the extent of poverty. To lift people out of poverty and malnutrition remains the prime challenge of the 21st century. More than one fifth of the world’s population lives in conditions of extreme poverty. Up to 1.2 billion people make a living on less than one dollar a day, and a large part of them is food insecure and malnourished. Three out of four poor people—some 900 million—live and work in rural areas, mostly in South Asia, but increasingly in sub-Saharan Africa. Half of all rural poor live in less-favored lands, low-potential areas with poor infrastructure and easily susceptible to environmental degradation. Among the poor, women and children are often the most vulnerable victims of poverty. Concern for the poor in the process of globalization and trade reform seems well justified, if only on theoretical grounds. Major sectors such as agriculture and textiles face limited market access in the developed world and distorted world market prices as a result of protection and subsidies. Liberalization, as many developing countries have been urged to do, in such a second-best world does not necessarily improve welfare, as the evidence in this publication shows. Even in an “ideal” world with the prospect of attractive net benefits, short-term adjustment cost can be substantial and carry a heavy political cost. It is equally likely that in the long run, important segments of the poor will be left behind, as infrastuctural, institutional, risk, and skill constraints make it difficult for them to respond to new market opportunities effectively. With decreasing state involvement and domestic reforms, it needs forceful arguing that at the same time appropriate institutions and enabling policies need to be designed to empower the poor. More decentralized and participative approaches, including privatization, show that such reforms can indeed be achieved, but need political will and time. This volume provides a timely analysis of these issues in the context of agricultural and rural development, facilitated by ISNAR in cooperation with other Centers of the Consultative Group for International Agricultural Research (CGIAR). It reviews the controversies surrounding the globalization process, presents case studies of winners and losers, introduces new issues regarding intellectual property rights and food safety standards in the global trading system, and draws implications for the future role of public agricultural research organizations. With funding for agriculture and rural xi
development so long neglected, despite poverty being prevalent in those areas, this book is a welcome addition to our understanding of the impact of globalization on the rural poor. Arie Kuyvenhoven Professor of Development Economics, Wageningen University, the Netherlands
xii
Preface An assessment of the process of globalization from the wider and more profound perspective of a historian, while the process is still going on at a breathtaking pace, presents a major challenge. A decade or two ago, there were high hopes that this process would lead to greater inclusiveness and generate more rapid growth in the developing countries; in recent years, however, it has galvanized vociferous opposition and bitter criticism of those who feel threatened or left out by it. This fierce criticism shifted the focus of the debate over the pros and cons of globalization from the narrow economic dimension to the moral dilemma presented by the widening gap between rich and poor and the responsibility of the “haves” of the world to narrow the income and knowledge divide and enable the “have-nots” to be integrated into the global economy. This wider assessment and an evaluation of the promise that the globalization process holds for poor countries and people must also come to grips with the questions, and sometimes doubts, that are raised about the insight that can be gained from the experience of these countries during the past decades. What, in particular, are the lessons that can be learned from the success or failure of many past policy reforms with respect to their effectiveness in the coming years—given the profound changes in the social and political conditions and in the institutional settings everywhere? How should the future reforms be structured in order to adjust them better to the new conditions that the globalization process has introduced? These are also the questions that attracted me to the work on a program on globalization that I was asked to manage when I joined the International Service for National Agricultural Research (ISNAR) in early 1999. More than three years later, I find these questions still both attracting and far from being settled as the controversies between “‘supporters” and “opponents” of globalization are spilling from conference halls and meeting rooms into the streets. The main goal of this research program was to bring in, share, and draw common lessons from the perspectives, experiences and views of researchers from different developing countries, as well as from development organizations and the academia, and this is also the goal of this volume. ISNAR’s work program on globalization started already in the mid-1990s with an extensive exchange of views and visions among leading experts in agricultural research. Their contributions were brought together in the book The Globalization of Science: The Place of Agricultural Research, edited by Christian Bonte-Friedheim and Kathleen Sheridan and published in 1996. The objective of ISNAR’s work program on globalization was to develop guidelines for the research strategies and priorities of the national agricultural research organizations (NAROs) in developing countries in order to enable them to deal more effectively with the issues presented by the policy and institutional changes brought about by globalization. The second stage of this work program started in early 1999 and evolved in three directions:
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First, research teams in some 20 developing countries were asked to review the impact of globalization on the overall economy and on the agricultural sector in their countries, and evaluate the measures taken by the national public research organizations to assist farmers in making the adjustments in their farming system that the integration into the global economy and the policy reforms in their countries require. Second, 15 experts in agricultural research from public research organizations in developing countries and from academic research institutions, along with ISNAR researchers, participated in a workshop that was aimed at reviewing and suggesting guidelines for ISNAR’s program on globalization. This workshop was conducted in September 1999, and many of the participants later took an active part in the research program itself and contributed chapters to this volume. Third, an extensive survey was conducted among 105 national agricultural research institutes in 33 developing countries to evaluate the changes that these institutes had made in their mode of operation and their research priorities in adjusting to the changing structure of the global trade in agricultural commodities, the rapid progress in research, and the evolving rules and institutional reforms that guide international trade and the transfer of new technologies.
As part of this work program, the Indira Gandhi Institute of Development Research (IGIDR) and ISNAR organized a two-day conference in India in March 2000 on “The Changing Role of Agricultural Research in the Era of Globalization.” The discussions in this conference focused on strategies to improve the targeting of agricultural policies in general, and agricultural research programs in particular, on the poor. I am greatly indebted to Dr Kirit Parikh, who, as Director of IGIDR, not only extended his hospitality to the conference participants, but also stimulated the joint research work of IGIDR and ISNAR. In August 2000, another workshop was held at ISNAR to evaluate alternative strategies aimed at expanding production and exports of non-traditional crops to assist farmers in adjusting to cope with and take advantage of the structural changes in the agricultural sector as their countries liberalize their trade. Another goal of this workshop was to provide guidelines for two research projects in ISNAR’s future work: “Improving and Expanding Processing and Exports of Non-Traditional Crops in the Caribbean” and “Improving Fruit and Vegetables Export Chains in Sub-Saharan Africa.” The present volume brings together many of the country reports and expert discussion papers that were prepared for ISNAR’s research program on globalization. I would like to thank all the participants in this program and, in particular, the researchers and country-teams in the developing countries who provided a wider perspective of how their countries and their rural populations were affected by the globalization process and the attendant policy reforms. My gratitude extends also to the experts who contributed chapters on specific aspects of the globalization process, including food safety standards, intellectual property rights, and the impact of multinational corporations in research and in trade.
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Many colleagues at ISNAR helped me in various stages of the research and of the editorial work on the book. Those who read the research reports prepared by the country teams gave very useful comments that were helpful in the revision of the reports for the book; in particular, I would like to thank Francis Idachaba, Howard Elliot, Han Roseboom, Joel Cohen and John Komen. Other colleagues at ISNAR lent me their ears and their brains in helpful exchanges of views and information; in particular, I would like to thank Victoria Henson-Apollonio, Hunt Hobbs, Doug Horton, Willem Janssen, Michael Loevinsohn, Ajit Maru, Heike Michelsen, and Paul Perrault. I also benefited from many stimulating discussions with my colleagues at Wageningen University that inspired also our plans for joint research programs in the future; my collaborative work with, and the contribution of Arie Kuyvenhoven are particularly appreciated. I would like to express my gratitude for the generous financial support that ISNAR received for this research from the Department for International Development of the UK (DFID) and the Japan International Research Center for Agricultural Sciences (JIRCAS). I am deeply indebted to Mina Senior-Faress, who went far beyond the call of duty and provided invaluable assistance in the editorial work on the book. Mina not only organized very efficiently the follow-up work on the contributions of all the research teams, but she also did the first and very challenging editorial work on the various chapters. Jan van Dongen, ISNAR’s dedicated Head of Publications, could always be counted on to give a helping hand to advance this work and bring it to an end. Finally, I would like to express my deep gratitude to my wife Petra, who not only provided me with much needed moral support, but also took upon herself the most difficult part of the editorial work, and never tired, no matter how demanding and at times tedious the revision and editing was. The Hague, David Bigman
xv
Introduction and Overview David Bigman After the 1999 WTO negotiations broke down amidst rioting and tear gas in Seattle, it has become increasingly difficult for the international economic organizations to meet without attracting large crowds of protesters who are fiercely opposed to globalization. Most of these protesters come from the rich industrial countries, and they represent a wide variety of causes and organizations. They include representatives of labor organizations worried about the loss of jobs if companies move “South of the border,” farmers anxious to defend the generous support to agriculture in the EU and the US, environmentalists worried about the degradation of our planet, and various groups of radicals who object to any form of global order and vehemently oppose corporate capitalism. Relatively few protesters claim to represent the poor of the world, and they are mostly representatives of various nongovernmental organizations in Europe and the US that watch with great trepidation the plight of the poor. However, they have so far failed to present a convincing case whether and why globalization is detrimental to the poor, and the accumulating empirical evidence suggests in fact the opposite. This empirical evidence of developments in poverty and income inequality during the 1990s has been evaluated most thoroughly in several World Bank studies that were summarized in two comprehensive reports. The first is the World Bank’s 2000–2001 World Development Report, which focused on poverty, and its central finding is that the percentage of the world population living in extreme poverty (less than US$1 a day in 1993 ppp) declined during that decade from 29% to 24%, although there were wide variations within and between countries as well as between country groups. A subsequent report entitled Globalization, Growth and Poverty: Building an Inclusive World Economy1 emphasized that, although globalization has helped reduce poverty in a large number of developing countries by accelerating their economic growth, not all countries and not all population groups have benefited: only 24 developing countries with a population of some 3 billion people—including China and India2—managed to integrate into the global markets and achieved higher growth rates, longer life expectancy, and a sharp reduction in poverty. But the other developing countries—particularly in sub-Saharan Africa, the Middle East, and the former Soviet Union—were left out, and the economies of many of them actually shrank during the 1990s. These countries, which are home to some 2 billion people, were not able to benefit from the more integrated global economy, and many were even negatively affected by the decline in commodity prices. Most of these countries are still predominantly agricultural and the majority of their population lives in rural areas. Moreover, even in countries that gained from globalization, certain 1. A World Bank Policy Research Report (2002). 2. It should be noted, though, that in both China and India, the main initial reforms focused on
internal deregulations, whereas the main international trade reforms took place almost a decade after the onset of higher growth, and, in both countries, there are still high trade restrictions. 1
2
segments of the population, particularly those that live in the more remote rural areas, benefited very little, and in some areas, poverty has actually increased. These are the countries, the geographical areas, and the population groups on which this book is focused. Obviously, this particular focus on the countries and regions for which globalization did not work is not meant to provide a balanced appraisal of the overall impact of globalization on developing countries. This focus is also not suited to explore the question whether the successful experience of those developing countries that gained from globalization can provide relevant lessons for the countries that have been left behind. Instead, by focusing on the experience of those countries, regions, and population groups that have so far not been integrated into and benefited from the global economy, and by analyzing their difficulties in restructuring their economies and institutions of governance, this book attempts to provide useful insights and instructive lessons on potentially problematic effects of globalization and on the policy reforms that may be required in order to enable these countries to join the global economy. * The starting point of the analysis in the book is an overview of the globalization process since the 1960s, the policy reforms that precipitated it, and the controversies that arose. Throughout these years, and particularly during the 1990s, this process was characterized by a rapid growth of international trade and investment, spurred by a sharp reduction in transport costs for commodities and people, a growing influence of regional and global institutions and agreements, and a dramatic increase in all forms of communication that was made possible by rapid advances in information and communication technologies. In the 1960s and the 1970s, the driving force of the greater integration of the world markets was the deepening of economic and financial relations among the developed countries, due, in part, to their growing cooperation on defense and global policy matters. In the 1980s, the deepening trade relations spread beyond the developed world and had an increasingly profound impact on the entire global economy. The expanding trade between countries and the rising flows of investments from the developed to the developing countries were facilitated by the far-reaching reforms that the developing countries introduced under the guidance, and with the support and sometimes pressure, of the international development organizations, primarily the International Monetary Fund (IMF), the World Bank, and the World Trade Organization (WTO). These reforms included the liberalization of trade and foreign investment regimes, deregulation and privatization aimed at enhancing the role of the free market, and measures to reduce the involvement of the central government in the economy. Many countries, economic sectors, and population groups were able to reap large benefits from these developments. In particular, most East Asian countries enjoyed rapid growth as they increased their trade with and their integration into the global markets; the structural changes that spurred this growth improved their standard of living and elevated a large number of their people out of poverty. However, many other
Introduction and Overview
3
developing countries, particularly in sub-Saharan Africa, have so far benefited very little and are becoming increasingly marginalized. Many of these countries were even negatively affected by the changes in the global trading system and the rules that govern international trade, particularly those relating to agricultural products; others were excluded from the mainstream of the globalization process due to critical geographic, agroclimatic, socioeconomic, or political constraints that posed obstacles to trade and deterred private investors. These negative effects of globalization may represent the high social costs of the transition period, when a country restructures its economy, reforms its institutions of governance, and adopts more liberal and market-oriented policies. During this transition, large numbers of people have to change their employment and even their place of residence; many retrenched workers in public, parastatal, and privatized enterprises, urban workers in import-competing enterprises, and rural producers may suffer heavy losses with the sharp fall in commodity prices in the global and/or the local markets, and all are negatively affected by the large changes in all prices, and by the shifting boundaries between government, business, and multilateral institutions. Even in countries that have managed to implement these changes effectively and achieved higher growth rates, there are sectors, geographical areas, and population groups that are still struggling with the adjustments. This leads many to argue that the burden of the transition has been distributed very unevenly across countries and between people; this unequal distribution of the burden may also have contributed to heightened political, social, economic and even ethnic frictions that in some countries deteriorated into chaos, prolonging the transition and raising its social costs. In countries that gained from globalization, one of the main factors that spurred economic growth was the rapid industrialization that allowed them to take advantage of their low labor costs; another important factor was the large flows of foreign direct investments (FDI) that were attracted to these countries and financed productive investments that further increased their productivity and competitiveness. Indeed, during the past decade, the global financial markets have become the principal source of capital for the developing countries and the main driving force for new investments in their economies. Most FDI concentrated, however, in a handful of developing countries, particularly in East Asia and Latin America, whereas in most of the countries in sub-Saharan Africa and South Asia (with the exception of India) the flow of private direct investment was reduced to a trickle, making these countries increasingly dependent on the international development organizations and donor countries. This uneven distribution of foreign investments was one of the main factors that augmented income inequalities between countries and contributed to the perception that the gains from globalization are distributed very unevenly. The widely diverse experiences of the developing countries during the past two decades are also one of the reasons for the diametrically opposed views on the pros and cons of globalization for a developing country and for the heated debate over the merits of alternative development strategies. On the one side of this debate are the opponents of globalization who blame, somewhat indiscriminately, this process and the international organizations that guide it for pushing forward reforms that marginalize many developing countries and population groups, widen the gap between the rich
4
industrial countries and the poorest developing countries, and degrade the global environment. On the other side of the debate are the enthusiastic supporters of globalization who see the economic reforms and the integration into the global economy as the key and the most effective strategy to spur economic growth and reduce poverty. * In most developing countries that gained from globalization, particularly in East Asia, economic growth was led by the industrial sector and benefited mostly the urban population, whereas the rural population was often left behind, and the rapid industrial growth thus augmented the disparities between the urban and rural populations. Similarly, most countries for which globalization did not work remained predominantly agricultural. Since this book focuses on countries, regions, and people that have so far failed to gain from globalization, the analysis presented here will center on the agricultural sector and the rural population. The adjustments in the agricultural sector were driven initially by the policy reforms that many developing countries implemented since the mid-1980s under the structural adjustment programs. These reforms included trade liberalization, privatization, removal of price and administrative controls, and the reduction or elimination of most subsidies and price supports, particularly for agricultural products. The resulting changes in the prices of all agricultural inputs and outputs forced many farmers to abandon their old farming and marketing practices and to switch either to the production of staple foods primarily for their own consumption, or to different crops and methods of production; some farmers even would find that they had to give up agricultural production altogether. Although the reforms were an essential part of the adjustment program and were needed to spur growth, it has become increasingly apparent that these adjustments are bound to take time and, in the short run, can impose a heavy burden on large segments of the population, particularly in rural areas. Several factors contributed during the 1990s to increase this burden: < Producers of traditional export crops such as coffee, cocoa, and cotton suffered considerable income losses with the removal of export or input subsidies, the elimination of country-specific commodity agreements, and the sharp fall in commodity prices in the world markets. < The removal of all nontariff trade barriers and the reduction in tariffs were two of the main pillars of the economic reforms. In the short run, however, these measures exposed local farmers to intensive external competition of cheap imports of maize, wheat, and other staples from developed countries where yields are much higher. The transition of these farmers to other crops and new methods of production that was envisioned in the reforms proved to be a lengthy and rather complex process, particularly in areas where substitution opportunities are limited. < At the same time, high tariffs and other support measures for agricultural products and producers in the developed countries have so far remained largely unchanged, and the conclusion of the “agricultural chapter” in the multinational trade negotiations proved to be lengthy and highly contentious. As a result, many
Introduction and Overview
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<
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developing countries face great difficulties to export their agricultural products to the lucrative markets of the EU and the US, despite their comparative advantage in production. The competitive pressures in the world market, the sharp drop in commodity prices and the flood of cheap imports of field crops exert intensive pressures on agricultural producers to diversify their farms and expand the production of nontraditional crops, mostly for exports. This transition may, however, be beyond the capacity of individual growers since it requires coordination among farmers, local producers’ cooperatives, private traders, and various semipublic and public enterprises. The increasingly centralized and often oligopolistic supply chains for agricultural products that are frequently dominated by multinational corporations further increase the pressure on farmers and force them to make additional adjustments in their farming system and production methods in order to meet the demands and standards of the local and international markets. The globalization of agricultural research, spurred by the TRIPS and other regional agreements on intellectual property rights and by the massive investments of private corporations in research, has significant effects on the role and mode of operation of the national agricultural research organizations in developing countries as well as the Consultative Group for International Agricultural Research (CGIAR), which must adjust their priorities, their budgets, and their forms of collaboration with the private sector in order to secure their access to advanced technologies. Most significant and, perhaps, most controversial, is the assertion of many in the developing countries that the global trading system that emerged from the multinational and regional trade agreements is neither free nor fair, and it is therefore significantly different from the system that had been envisioned by the neoclassical economists. On the one hand, trade is subject to many rules and regulations and is therefore not free; on the other hand, most of these rules and regulations have been determined in the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) of 1994, and that agreement was highly biased by the interests of the developed countries that dominated these negotiations. On these grounds it is argued that an agreement by the North for the North, reflecting the North’s ideologies and values, has driven the agenda of the 3 globalization process. The round of trade negotiations that was planned in Seattle was designed, in part, to reduce this bias; the failure of that round highlights the difficulties in achieving a more balanced agreement. *
3. See Stiglitz, Atlantic Monthly, October 2001.
6
The discussion and analysis of different aspects and different perspectives of the globalization process in this book is divided into four parts: < Part I provides a general overview of the controversies over the pros and cons of the globalization process and of alternative development strategies for a developing country. This part also reviews the empirical evidence that has been accumulated since the 1960s, but particularly during the 1990s, for different groups of developing countries. < Part II reviews the experience of five developing countries—China, India, Ghana, Kenya, and Cameroon—during the 1990s and the process in which they implemented the reforms. The two Asian countries, China in particular, are among the big gainers from the globalization process, but the reviews highlight the fact that even in these countries, certain regions and rural population groups trailed behind. < Part III provides an appraisal of the effects of key changes in the global trading system that were driven by the multinational trade agreements and assesses their impact on the short- and long-term prospects of agricultural production and exports in developing countries. Included in this review are the changes in the global trading rules regarding food safety standards and intellectual property rights, the increasing domination of multinational corporations in international trade and the growing share of the private sector in agricultural research. < Part IV focuses on the impact of all these changes on the role and mode of operation of the public agricultural research organizations in developing countries and on the international public agricultural research centers of the CGIAR. The regions covered in this part are sub-Saharan Africa, the Caucasus, and the Caribbean. Several chapters use data collected in a survey of national agricultural research organizations (NAROs) conducted by ISNAR to evaluate the effects of the globalization process on developing countries. Researchers participating in the survey were asked to review and evaluate the impact of the internal structural reforms and the changes in the global trading system in their countries as they affected the agricultural sector and the rural population. To focus the discussion of the impact of globalization, contributing authors were asked to pay particular attention to some key questions such as: < What are the characteristics of the economic sectors, geographical regions and population groups that were particularly disadvantaged by the reforms and by the changes in the global trading system? < What were the changes in the structure of agricultural production and in the marketing system of agricultural products to the domestic market and for exports? < What were the changes in the role and mode of operation of the public agricultural research system, and how responsive was this system to the changes in agricultural production? In examining these questions, the chapters highlight common features and critical factors that hampered the adjustments in countries, sectors, and regions for which
Introduction and Overview
7
globalization did not work, and the analysis of the experience in individual countries draws attention to certain distinctive aspects that can be relevant in the design of future reforms, particularly with respect to the role of the public sector. * Part I is a general background to the reviews of the experience of individual countries. It provides a survey of the debates over the benefits of globalization for developing countries and the merits of the development and trade strategies promoted by the World Bank and the IMF since the late 1960s. The survey’s subtitle “Globalization and its Discontents” seems all the more appropriate in view of the heated controversies over the choice of strategies to promote growth and reduce poverty. A central issue in these debates concerned the pros and cons of the market-oriented adjustments that a labor-abundant developing country must make in order to benefit from trade and an outward-looking development strategy. On the one hand, the very successful experience of the East Asian countries highlights the benefits from these adjustments; on the other hand, even in these countries the governments intervened in the market during the initial stages of the reforms in order to protect their infant industries, and provided subsidies to promote their exports. The countries in Latin America, sub-Saharan Africa, and South-Asia concentrated during the 1980s on the development of capital-intensive industries that produced primarily import substitutes behind walls of high tariffs and administrative controls. In the 1990s, however, the sharp reductions in transport costs and the pressures to liberalize trade eroded their capacity to further protect these industries. Despite their low labor costs, these countries encountered considerable difficulties in the development of an industrial base due to their poor road and port infrastructure, rudimentary communication facilities and highly ineffective institutions of governance that raised production costs and deterred foreign investors. An obvious alternative for these countries was to develop their agricultural sector. During the 1960s and the 1970s, many developing countries, particularly in South Asia and sub-Saharan Africa, implemented highly proactive policies that included government monopolies over the supply of agricultural inputs and marketing of agricultural outputs and strict controls over domestic prices of agricultural produce that were mostly biased in favor of urban consumers and against rural producers. In addition, these countries implemented strict exchange rate controls, and maintained exchange rates that were strongly biased in favor of import substitutes and against exports. The structural adjustment programs that these countries implemented during the 1980s and early 1990s, and the additional measures of trade liberalization that they implemented in the second half of the 1990s when they sought membership in the WTO, reduced that bias and gave greater power to market forces by gradually liberalizing trade, privatizing the public distribution systems, realigning the exchange rate, and removing regulations and monopolies that restricted free trade. These adjustments imposed, however, high social costs during the transition that were particularly difficult for agricultural producers and the rural population.
8
The design of a development strategy for the agricultural sector presented also difficult dilemmas regarding the role of the public sector and potential impacts on poor farmers and the environment. Development strategies encountered additional difficulties because the “agricultural chapter” in the Uruguay Round Agreement of the General Agreement on Tariffs and Trade and the WTO has not yet been concluded, and the developed countries remain exceedingly protective of their agricultural producers, thus placing high obstacles to agricultural exports from developing countries. Part I therefore reviews the debates over alternative development strategies that center on the agricultural sector and over their performance in different groups of developing countries. * Part II examines the effects of the changes in the global trading system and the impact of internal policy reforms in selected developing countries (China, India, Ghana, Kenya and Cameroon) on their economy and their agricultural sector. The reviews focus on the reforms implemented by these countries under their various structural adjustment programs and their subsequent agreements as they joined the WTO. Two points are noted most emphatically in these reviews: First, factors that are specific to each country ultimately determined the impact of the somewhat generic trade liberalization and adjustment policies that these countries implemented. The agricultural sector in particular had to face a multitude of hurdles and challenges that were dealt with by centrally prescribed policies, even though it became obvious very rapidly that the success of the reforms was determined primarily by how sensitive they were to local conditions and constraints. Second, the implementation of these policies and their adjustment to the local conditions proved to be quite complex, and the transition period, until the policies became effective and efficient, was often much longer and fraught with more problems than initially envisioned. Even trade liberalization, perhaps the most cherished reform of all, proved to be far more complex than a simple set of administrative decrees. In many developing countries, industries and crops that had existed for decades behind walls of high protective tariffs or administrative controls had to be scrapped almost overnight. In the agricultural sector, this transition proved to be particularly lengthy and tumultuous for several reasons: < Many farmers encountered obstacles and stiff competition in the production of traditional crops that they had grown for generations. In the past, farmers who produced these crops, particularly field crops, were protected by high transport costs; later on, the government protected them with high tariffs and controls. In recent years, however, the sharp reduction in transport costs and the drop in tariffs under the policy reforms and the trade agreements opened the gate to competing imports from abroad. < The majority of the farmers, particularly the small farmers, did not have immediate and obvious substitutes to replace their traditional crops, either because the soil and climatic conditions in their region were not favorable to other crops, or
Introduction and Overview
<
<
9
because they did not have adequate information and guidance about possible substitutes. The adoption of new and particularly nontraditional crops often required more sophisticated technologies, adequate seeds and other special inputs, and detailed instructions how to grow these crops. The selection of substitute crops had to take into consideration not only the agroclimatic and soil conditions, but also, and often primarily, the profitability and marketability of the alternative crops. The adoption of substitute crops and their marketing for local consumption or for exports require additional components in the trading chain, including procurement, transport, and storage, and, if necessary, processing. All these components are essential to secure the profitability of the new crops, but presently the marketing system for most crops—with the exception of traditional export crops—is very rudimentary and inadequate in most developing countries.
With the implementation of trade liberalization, local farmers in many developing countries were outcompeted by cheap imports of field crops from the US, Canada, Australia, and even the EU, but it may have taken them a season or two before they realized that, at the new market prices, they could not recover even their seed inputs. In the absence of clear information or instructions, the first step of many farmers was to withdraw to production for their own consumption, while many others abandoned farming altogether. In many countries and regions, farmers could have found profitable substitutes, but these were primarily nontraditional crops, and their introduction into the local farming systems is not a simple undertaking, since it requires coordination among all the parties along the supply chain—from the individual farmers and the local farmers’ organizations, through local private traders or the semipublic marketing board, food processors, local wholesalers and/or retailers, the local and central administrations of the government ministries in charge of foreign trade, and exporters or agents of the multinational corporations. The pertinent public institutions, particularly at the regional level, would have to support the transition process and strengthen the supply chain if the private sector in the country is too weak or inefficient, since a well-coordinated and effective operation of all the components along the supply chain is essential for the introduction and adoption of the new crops. Indeed, a basic premise underlying the reforms is that trade liberalization, deregulation, and privatization will eliminate price distortions and bring in an efficient market system that, by giving the correct price signals, will ensure that resources are put to efficient uses. In the long run, a competitive market system is indeed the most effective means of correcting the highly flawed and misleading signals that are currently given by the maze of government intervention measures and the conflicts between local interest groups. But it will take time for the markets to become competitive and efficient and for the market prices to converge to their correct levels, and it will take time for local producers and traders to adjust their operations accordingly. For the agricultural sector, the transition period is prolonged by factors like the geographical distance between producers and the market, inadequate private as well as public information and communication systems in rural areas, and by the fact that
10
market signals are transmitted in discreet intervals according to the crop seasons. It therefore takes farmers time to obtain and assimilate the information on the new prices, it takes them time to decide whether the crops they are currently growing are still profitable, and it takes them time to select alternative crops that would be more profitable under the new price system and to introduce them into their farming system. In many developing countries, the lack of effective public institutions that can help farmers to make the proper choices and necessary changes further complicates the transition, and farmers who already live at or below the poverty line do not have the means and the financial reserves that are needed for making the adjustments. It may therefore be necessary for the public sector to remain actively involved in the entire transition process, help farmers to make the proper decisions and the necessary adjustments, provide them with the information and the resources they need, and put in place the system for marketing these crops so that their production can indeed be profitable. These short-term difficulties, however, do not reduce the need for the policy reforms and adjustments that the entire economy, including the agricultural sector, must make. Indeed, without such adjustments, the government will have to continue to defend unprofitable sectors and inefficient economic activities and thus isolate the country still further, necessitating a much more tumultuous transition later on. The difficulties that the agricultural sector and the rural population encounter during the transition emphasize, however, the need for careful planning at the initial stage of the reforms. Trade liberalization reforms, for example, should include an assessment of the sectors, regions, and population groups that are likely to be negatively affected and a preparation of specific actions that can ameliorate these negative effects and shorten the time that is necessary for the adjustments. The design of these reforms must also take into account the strength and effectiveness of the current local market system, since the key to a successful transition of the agricultural sector is the proper response of all market agents—producers, traders and consumers. In countries where the market system is not efficient and competitive, the reforms may fall prey to monopolistic forces that can take control over local trading when the central supply system is privatized, thus introducing other distortions that will prevent effective adjustments. In many ex-centrally planned economies, for example, the haste to privatize public enterprises did not take adequately into account the absence of a functioning private trading system and, as a result, large segments of the market were taken over by local oligarchs. The reviews in Part II highlight the vastly different effects of the policy reforms on different geographical areas and different farmer groups. In chapter 2, Jikun Huang emphasizes the growing concerns in China over the impact of the country’s WTO accession and of the process of trade liberalization on agricultural production, prices, employment, and farmers’ income. China now faces critical choices: How to sustain agricultural growth and increase farmers’ income through this process? What will be the implications for food security? What additional policy measures might be necessary to adjust to the economy-wide transformation? Despite substantial efforts to liberalize agricultural prices and markets, most major agricultural commodities are still heavily penalized by commodity-specific policies that depress agricultural
Introduction and Overview
11
production and redistribute income from farmers to urban consumers and to the agroprocessing industries. The analysis in this chapter indicates that with the transition to free trade, the prices of most field crops (with the exception of rice) are likely to decline and their output is likely to fall due to cheap imports, whereas the prices and exports of most animal and horticultural products will rise. From the macroeconomic perspective, the resulting patterns of China’s agricultural trade will be highly desirable since they are consistent with the country’s domestic resource endowments, as China becomes a net exporter of labor-intensive agricultural products, like horticulture, animal products, and processed food, and increases its imports of land-intensive products, like grains, cotton, and vegetable oils. However, farmers in different provinces will be affected very differently by these changes. In many western and central provinces, farmers produce primarily field crops, and they have very limited substitution possibilities; these farmers may encounter considerable difficulties to compete with the cheap imports or to avoid a decline in their income. These farmers will depend on public support during the transition, and they will particularly need the support of the public agricultural research system to guide them in the selection of substitute crops and help them with the introduction of these crops into their farming systems. The experience in India also shows that the policy reforms had vastly different effects on different geographical areas and population groups, and, in some areas, farmers are still struggling with the transition. In chapter 3, P.V. Srinivasan and Shikha Jha highlight the immediate impact of the sharp reductions in direct and indirect government subsidies in the late 1980s and early 1990s, which were part of the effort to transform the economy from the production of import substitutes for the local market to export-oriented production in both the industrial and the agricultural sectors. In certain regions, primarily those close to the urban centers, farmers were able to adjust their farming system to the demands of the domestic and foreign markets, thus offsetting the negative effects of the removal of the subsidies and raising their income. In many of the more remote areas, where substitution possibilities were more limited, farmers were not able to make rapid adjustments and suffered considerable losses when subsidies for agricultural inputs were reduced or removed; resource and credit-constrained small farmers suffered the most since they lacked the resources necessary to change their farming system. In the three African countries reviewed in part II, the transition of the agricultural sector required transforming a system characterized by the complete control of the government over production, marketing, investment, and research, to a system in which these controls were gradually reduced by privatizing segments of the public marketing system, deregulating prices, and liberalizing the trade in agricultural inputs and outputs. In chapter 5, Hezron Nyangito and Joseph Karugia review this transition in Kenya and emphasize the slow pace and frequent reversals of the reform process despite strong pressure from the World Bank and the IMF and the declared commitment of the Kenyan government. However, internal political considerations often led the government to reinstitute controls that had been canceled earlier in order to ensure its grip over the economy or reduce the negative impact on certain privileged groups or regions.
12
In the 1990s, the pace of the reforms seemed to accelerate with declarations of the complete deregulation of the marketing and exports of all crops, the removal of most price controls, and the liberalization of trade. However, the reforms remained partial, and the on-and-off institution and canceling of controls was highly damaging to agricultural producers. The rather abrupt trade liberalization brought in a flood of cheap imports of foodstuffs, primarily rice, wheat, and sugar, and led to a total collapse of the cotton industry due to the importation of cheap textiles; the hesitating response of agricultural producers, processors and traders, and the inconsistency of government policies deterred investments and slowed down the adjustments. As a result, the reforms did not contribute to accelerate agricultural growth in the short run, and rural areas experienced a considerable increase in poverty. The reviews of the reforms in Ghana, presented in chapter 4 by Cletus Dordunoo and Godwin Dogbey, and the experience in Cameroon, presented by Aloysius Ajab Amin, Emmanuel Douya and Alexander Mbeaoh in chapter 6, provide a disturbingly similar picture despite obvious differences in the underlying conditions: The policy reforms in both countries concentrated on trade liberalization, privatization, and the dissolution of state-owned agroindustrial corporations that had dominated agricultural production and commerce. The removal of price controls (and, in Cameroon, the devaluation of the CFA franc in 1994) gave a strong boost to agricultural exports in some areas, but the removal of all subsidies for agricultural inputs and of all direct government assistance to the rural population reduced the net earnings of many farmers in other areas and forced them to shift from cash crops to food crops for self consumption. The far-reaching economic reforms that were implemented subsequently were aimed at making the final push in the transition from state-controlled to market-oriented production and trade by giving a much greater role to the private sector and by reducing government interventions and price controls. However, these reforms encountered many obstacles and strong opposition due to the weakness of the private sector and the lack of proper regulatory frameworks and viable public institutions to monitor local traders, secure the effectiveness of the local markets and protect against local monopolies. * Part III reviews the impact of a number of key changes in the rules, standards, and institutions that govern the global trading system under the WTO Agreements and their effect on the agricultural sector and on public agricultural research. The reviews cover the changes that followed the agreements on global standards for agricultural trade and intellectual property rights, the restructuring of the global trading system for many agricultural products in supply chains that are often dominated by multinational corporations, and the growing share of the private sector in agricultural research. The contributors to this part emphasize that rules that are, in principle, highly desirable and sensible from a global perspective, may create considerable difficulties and complications when they are implemented in developing countries by institutions that may bias these rules under the pressures of local needs.
Introduction and Overview
13
In chapter 7, Lawrence Busch evaluates the impact of the two agreements aimed at standardizing international trade in agricultural commodities: the Sanitary and Phyto-sanitary (SPS) agreement that determines food safety standards, and the agreement on all other Technical Barriers to Trade (TBT) in food and agricultural products. In principle, the goal of and the prospective benefits from the global agreements on these issues are obvious since, in the past, such standards had been set by individual countries and used as nontariff trade barriers. Under the new global agreements, however, standards now play a far greater role in international trade in agrifood products, including trade between developing countries, even when these countries do not maintain the standards in their own internal trade. Moreover, the growing share of multinational corporations in international trade and the formation of large supply chains from producers to retailers that set their own, more rigorous standards on the products they buy, may impose new barriers to trade. The author emphasizes the critical role of the public sector in general, and of the NAROs in particular, in resolving the technical and operational problems that these standards may create for local producers, and in helping the participants in agrifood exports, including farmers, transport and storage companies, food processors, and wholesalers, to adjust their operations so that they can meet the standards. The author notes, however, that many NAROs, particularly in sub-Saharan Africa and the Caribbean, have so far failed to take the necessary measures, thus putting local producers at a disadvantage; he also emphasizes that the NAROs should abandon research programs that can best be managed by the private sector. The prominent role of the private sector in agricultural research is another result of the changes in the rules governing the global trading system under the WTO Agreements; crucial in this context is the implementation of a global intellectual property rights (IPR) legislation. On the one hand, private companies, motivated by profit considerations, tend to concentrate on the more lucrative segments of the market, cater to the demands of large-scale commercial farmers, and leave out the small-scale farmers or farmers in remote areas. At the same time, public agricultural research organizations may face increased budgetary constraints due to payments for the use or acquisition of proprietary technologies. On the other hand, IPR protection can increase private investments in agricultural research and accelerate the development of new technologies. While public agricultural research organizations also have the option to protect part of their innovations by means of patents, they may be facing multiple dilemmas: < Should the NARO continue to make technologies accessible to all—or at least to some—at no cost? < If not, what criteria should the NARO use to determine restrictions and/or charges for the use of its technologies, particularly if these technologies are produced in collaboration with private companies that demand IPR protection? < Should the NARO concentrate on the development of new technologies that are needed mostly by the poorer farmers, and leave the development of more commercial technologies to the private sector?
14
<
Should the NAROs use the protection of IPRs and the option to commercialize their research results in order to recover part of their costs and thus possibly fund additional research?
In chapter 8, David Bigman reviews the impact of IPR legislation on the NAROs in 33 developing countries, based on a survey conducted in 105 NARIs. The survey highlights the concerns of researchers in the NAROs that pressures to commercialize part of their research may force them to change research priorities at the expense of projects targeted on small-scale farmers or on marginal areas that have smaller commercial prospects. The researchers were also concerned that a rise in the price of agricultural inputs due to patented technologies may exclude poor farmers who may not be able to afford the higher price. Nevertheless, the researchers and the NAROs’ managers who participated in this survey generally believed that the benefits from the new legislation—due to its stimulating effects on private research and the greater possibilities of collaboration between private and public agricultural research companies—far outweigh its costs. They also emphasized that the NAROs may have to insist on IPR protection in order to correct the current highly asymmetric system in which access to genetic resources is still essentially free, while the benefits from the research are not, and possibly also demand defensive patenting in order to prevent private companies from effectively appropriating their innovations. In chapter 10, Joel Cohen, John Komen, Cesar Falconi, and Silvia Salazar review the results and implications of another survey that was conducted among lead researchers in the international agricultural research centers of the CGIAR, as well as in the NAROs in several Latin American countries. Their first observation is the surprisingly small number of outputs that the researchers considered suitable for IPR protection; the authors note, however, that this could be attributed to a lack of familiarity with the new IPR legislation and the long-standing tradition that technologies developed in the CGIAR are made available to all at no cost as international public goods. One effect of the IPR legislation noted in the survey is that material transfer agreements (MTAs) have become the most common means for acquiring technologies by the public research organizations. This, in turn, highlights the potential benefits from collaboration between these organizations in the acquisition of these materials. The use of materials under these agreements also means that, as centers transform mandate crops, develop vaccines, do diagnostic probes, or provide for marker-assisted breeding, their dependence on licenses, MTAs, and other agreements with the private sector increases. Indeed, in recent years, the international and national public agricultural research organizations have markedly increased their use of proprietary technologies and materials developed by, or under the protection of, private research companies. On these grounds, the heads of the NAROs in Latin America who participated in the survey expressed high expectations that they will be able to obtain intellectual property protection for the majority of their new products, even though not all had clear knowledge of the type of protection that each proprietary tool provides.
Introduction and Overview
15
Another aspect of the reforms was a fundamental change in the role and the relative share of the public and the private sectors in many activities related to the production and marketing of agricultural inputs and outputs. In chapter 9, Michael Morris reviews the impact of the policy reforms of the 1990s that were designed to scale down the role of the state in seed production and marketing. In many countries, these reforms led to the withdrawal of public organizations from many seed production and distribution activities, while the relaxation of restrictions on entry into the seed industry and the lifting of controls on international germplasm flows opened the door to increased private-sector participation. The gradual privatization of many national maize seed industries has led to large changes in the types of cultivars available in the market: Whereas the public seed agencies used to offer a wide range of germplasm types, including both improved open pollinated varieties and hybrids, the private seed companies sell almost exclusively hybrids in which they effectively have a technical protection over their intellectual property rights. In addition, economies of scale in seed research and distribution, and a growing concentration of seed trading in large supply chains following a series of vertical integrations, further increased the share of the large seed companies, particularly the multinationals, and gave many of them a monopolistic power that they use to raise seed prices; as a result, the seed-to-grain price ratios for popular maize hybrids have more than tripled during the 1990s, and the small subsistence farmers find it increasingly difficult to buy these seeds. In addition, the changes in the seed markets allow the large seed companies to gain control over strategic technologies and “lock up” these technologies by using patents and other forms of intellectual property protection, thereby effectively denying access to seed wholesalers and retailers that sell to the small-scale farmers in developing countries, since they have only a small share of the market. However, the growing share of the private sector increased very significantly investments in seed research and brought about considerable improvements that included many genetic modifications. In India, the opening up of the local seed market had a very different impact than in the countries of sub-Saharan Africa, largely due to the strength of the Indian private sector, both in trade and in research. With the liberalization of trade and the opening up of the local seed market, the state seed corporations commercialized many of their operations, private investments in seed production and in research rose sharply, and the competitiveness of the private seed producers increased and improved. In the absence of a strict enforcement of intellectual property rights, however, the research of the local private seed companies concentrates on hybrid seeds and only few crops. P.V. Srinivasan and Shikha Jha, who describe these developments, argue that stronger enforcement of intellectual property rights and Plant Breeders’ Rights (PBR) legislation could promote considerably larger investments in research by local private companies as well as by foreign multinational companies. *
16
Part IV focuses more specifically on the necessary changes in the role and mode of operation of public agricultural research. All the country-review chapters in the book include an assessment of the implications for public agricultural research, and they highlight several common characteristics as well as significant differences between countries. The main difference is due to large variations in the capacity of the private sector, particularly the private seed companies, to assume some of the functions of the semipublic marketing boards and the public agricultural research organizations. In a country where the market system is relatively efficient and competitive, and where the local private companies or the multinational corporations can perform at least part of the research activities currently conducted by the public research organizations, the NARO need not be directly involved in all research activities, although it can still influence the research priorities through proper indirect measures. Even research that does not have a significant commercial value and results in an output that is essentially a public good can, in principle, be funded by the public sector, but carried out by private research companies. In developing countries where the private sector still lacks this capacity, the NARO must remain actively involved also in research and development (R&D), although it must adjust its operations and research priorities according to the changes spurred by the reforms and the resulting adjustments in agricultural production. Moreover, in many countries, the weakness of the market system, the narrow base of the private sector, and the difficulties of the adjustments may require the public sector to assume additional roles and responsibilities that, in other countries, are taken on by the private sector. Particularly the difficulties that farmers face as they struggle to adjust their farming systems and adopt new crops and technologies may require the NAROs to perform additional activities that are not strictly in the domain of R&D. The main reason for adding other tasks to the NARO’s responsibilities is that the adoption of new crops does not merely involve the choice of a new technology, but a far more complex decision on the marketing and profit prospects of the alternative crops that farmers can select. The NARO and the local extension services may be in the best position to assist farmers in making that decision, but this will require them to provide information to farmers not only on the technological aspects, but also on price and marketing prospects. On the one hand, the main activities that this task requires— namely, the development of suitable technologies that will facilitate the adoption of new crops and the dissemination of these technologies in the rural areas— complement the current activities of the NARO. On the other hand, the additional activities that are required, including the development of production practices in line with market demand and food safety standards, will contribute also to improve the NARO’s current operations. The NARO may also have a pivotal role in strengthening the other segments of the trading system that are necessary to enable farmers to market their produce either to the local market or abroad. Chapter 11 evaluates how the role and mode of operation of public agricultural research in a group of sub-Saharan African countries is changing in response to the adjustments in the agricultural sector. This evaluation is based, in part, on a survey conducted among 105 NAROs in 14 sub-Saharan African countries and 19 developing countries in other regions. (The results presented in this chapter are based on another
Introduction and Overview
17
section of the survey that is reported in chapter 6.) The survey inquired about the changes in the research priorities of the NARIs, their cooperation with other national and regional public research institutes as well as with private companies, and the impact of the changing rules concerning IPRs on their mode of operations. The NAROs have to make changes in order to better support the transition of the agricultural sector from a supply-oriented structure of production, based on traditional export crops and staple foods for domestic consumption produced behind high walls of tariffs, to a demand-oriented structure, open markets, and specialization in production in line with the country’s comparative advantage and the demand conditions in the domestic and global markets. The new research agenda of the NARIs should enable local producers to generate higher income from their production and to adjust their production to the market demands and the food safety and quality standards required for trade. Agricultural research and extension is the key to this transition, which requires the development of suitable crop varieties and production technologies and their dissemination in rural areas; in many countries, it may also require the development of agroindustries in order to increase the domestic value added of food exports, and the NARO can also play an important role in assisting these industries. The survey indicates, however, that the majority of the NAROs in sub-Saharan Africa have so far made very few changes in their research priorities, although they are fully aware of the demands of the emerging global market system; moreover, deep cuts in their research budgets restrict their capacity to develop new research areas, and the lion’s share of their current research is still focused on staple food crops and traditional export commodities. In the early 21st century, the continent thus remains highly dependent on the production and export of primary commodities that lost much of their value during the 1990s, and only few large farmers have managed to adjust their production and diversify their exports in line with the changes in the global markets. For Kenya, the review in chapter 5 evaluates the impact of the internal policy reforms on the mode of operation of the Kenyan Agricultural Research Institute (KARI). The steep price changes of all agricultural inputs and outputs that were part of the reforms forced farmers to change the share of different crops in their farming system and their use of inputs. Maize production declined precipitously with the fall in maize prices, while the production of cash crops increased, although rather slowly because farmers remained very cautious and tended to avoid large investments as long as government policies remained precarious. At the same time, the rapid increase in the share of private traders in the sale of seeds after the liberalization of the input markets was often detrimental to farmers, because the absence of proper controls and supervising institutions led to large sales of low-quality seeds; moreover, the sharp rise in the prices of all fertilizers forced farmers to restrict or even give up the use of fertilizers. KARI was slow to respond to these pressures, but gradually devoted more resources to research on integrated nutrient management strategies that farmers could use in order to adjust their production patterns. Only toward the end of the 1990s, the realization that the problems of the agricultural sector in Kenya are not due to any biophysical limitations, but rather to economic constraints that were imposed by the policy reforms, brought KARI to devote more resources to research on the impact of
18
policy and institutional changes on the agricultural sector and the necessary adjustments in agricultural research. In the absence of viable private research companies or significant investments of the multinational companies in local agricultural research in Kenya, KARI must still assume the leading role not only in conducting research, but also in initiating new research projects that can identify the impact of policy reforms on the needs of farmers in different regions and how best to address these needs. For India, chapter 3 describes a very different experience that shows that the growing significance of private companies in agricultural trade and research can give the private sector a much greater role. The authors emphasize, however, that the public sector must continue to assume a leading role in agricultural research in areas where research has positive externalities and high social benefits. One example is the development of genetic material for marginal lands and remote areas, where the profits potential are low and the main goal is poverty reduction. Another example is the role of public research in the development of technologies to sustain the environment, particularly in areas where it was damaged by the crop practices of the Green Revolution. Nevertheless, the authors stress the need to change the priorities of public research so that it can focus on the needs of disadvantaged regions, on crops grown primarily by small landholders, and on natural resource management; in all these areas, the commercial prospects of research are limited and the public sector must take measures to secure them a place on the priority list, although the research itself can be subcontracted to private research companies. Chapter 12 surveys the challenges facing three CIS countries in the Caucasus, Armenia, Azerbaijan, and Georgia. Larry Zuidema emphasizes in this survey that even today economic power in these countries is still highly centralized and their governments exert firm control over the economy. Nevertheless, the privatization of many state farms, the collapse of trade relations among the ex-Soviet Union countries, the large changes in all prices with the removal of state subsidies, and the disintegration of the traditional markets forced also far-reaching changes in the agricultural sector. A growing share of agricultural production is now carried out in family farms, but many of these farms lack the machinery needed for efficient production at this small scale, and their yields are extremely low. In addition, the production of many crops that were highly protected and highly subsidized under the Soviet system had to be discontinued, and the markets for many agricultural commodities that were previously imported from or exported to neighboring Soviet countries were effectively closed. The agricultural research systems had to undergo equally dramatic changes, particularly since the “division of labor” between the NARIs was previously determined according to the needs of the entire Soviet production system rather than the needs of each individual country; as a result, the NARIs in some countries conducted research on crops that were not even produced in that country. So far, however, the changes in the national agricultural research systems have been inadequate; the NAROs in the three Caucasus countries reviewed in this chapter failed to reorganize their activities and create viable agricultural research institutes. The NAROs continue to command considerable human and physical resources and highly
Introduction and Overview
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qualified scientists, but their financial resources are extremely limited and most of the research activities came to a halt. As a result, the NAROs are not able to conduct the research and provide the extension services that are desperately needed in order to enable the agricultural producers—at the family farms and at the remaining state farms—to start making the necessary adjustments in their production systems. The changes in the mode of operation of the public agricultural research systems in the Caribbean countries were also far too slow and insufficient. In chapters 14 and 15, Compton L. Paul and Jorge Ardila Vasquez offer different perspectives of these changes against the background of the policy reforms that these countries implemented and the changes in their external trade relations resulting from the evolving multilateral trade agreements. After the debt crisis of the 1980s, the Caribbean countries gradually abandoned the strategy of import substitution and embarked on an export-led and outward-looking growth strategy with stronger links to the global market. The government reduced its direct involvement in the economy, substantially diminishing the size of public enterprises and institutions, and assisted the private sector by promoting investments and production activities in line with each country’s comparative advantage and priorities. Trade liberalization and drastic reductions in the level of protection on agricultural products brought in a flood of cheap imports of rice, beans, some vegetables, wheat, and maize from the US and Canada that forced many local farmers out of production, since they were still using obsolete production methods and had very low yields. Trade liberalization thus initially resulted in a sharp increase in the imports of many food products, and a sharp reduction in farmers’ income. Gradual and very slow adjustments of local producers to nontraditional crops eventually increased the production and exports of exotic tropical fruits, vegetables, soybeans, meat, roots, and cut flowers, particularly for niche markets in North America and Europe, thus allowing farmers to raise their income by taking advantage of the trading opportunities in the local and regional markets. Both authors emphasize that agricultural research in the Caribbean has a key role in ensuring that farmers will be able to select the most suitable new crops and the most suitable technologies. Toward that end, the NAROs must adapt these technologies to the local agroclimatic and socioeconomic conditions and secure that the new crops meet the food safety standards in the main importing countries; the local extension services can be particularly instrumental in helping farmers, especially small-scale farmers, to make the right choices and adopt suitable crops. The small-scale farmers will therefore need public assistance in three directions to make the transition: < First, many small farmers will need resources to make the initial investments when they adopt new crops. < Second, farmers will need the guidance of the NAROs and instructions by the extension services which crops to select and how to grow them so that they meet the standards. < Third, farmers will not be able to market their products unless a functioning supply chain from the rural areas to the markets is in place. The pertinent government ministries and public institutions may have to provide support or even establish this chain by helping farmers to form cooperative
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organizations in order to collect and sell their products and by helping the local traders to set up an effective procurement and delivery system. This support is essential since the commercial prospects of new crops depend on whether they can reach the market, and that, in turn, depends not only on the quality of the access road and the distance to the urban center, but also on the organization of the entire supply chain, namely the organization of procurement, transport, storage, processing, and delivery of the products; yet, in many rural areas, these chains are still very rudimentary and inadequate. The capacity of public institutions to provide this support proved extremely limited, however, in part due to their resource constraints, but primarily due to the lack of coordination between the institutes and the absence of clear long-term policies to guide them. * For the countries in sub-Saharan Africa, the Caribbean and the Caucasus that did not achieve higher growth, even though high social costs were exacted, and for the regions and population groups that were left behind or even impoverished, globalization turned out to be an elusive promise. The poor in these countries concentrate in rural areas, and the crux of their poverty problem is the diminishing capacity of the agricultural sector in its present structure to secure enough food supply and adequate incomes. Structural adjustments are therefore necessary to increase that capacity and provide alternative and more rewarding sources of income to the rural population. Trade liberalization and other policy reforms aimed at opening up these countries to trade are vital ingredients of these adjustments, and the prospects for deepening global trade relations with a new trade agreement on agricultural commodities can further increase that capacity of the agricultural sector and offer the rural population new opportunities and more rewarding alternatives both in production and in consumption. These policy reforms require, however, far-reaching changes not only in the organization of production and trade, but also in the structure and mode of operation of the relevant public institutions that take part in the implementation of the reforms. The entire process, while the economy is undergoing this transition, is bound to take time, and during that transition certain economic sectors, geographical areas, and population groups may become considerably worse off. The existing markets in these countries are far too fragmented, and the organization of production and trade far too rudimentary and inefficient to be able to restructure production and streamline markets as smoothly as envisaged by the reforms. As a result, the set of policy reforms advanced by the “Washington Consensus,” which were described somewhat schematically as “Liberalize as much as you can, privatize as fast as you can, and be tough in monetary and fiscal matters,”4 failed to achieve its goals. The experience of those countries and regions that were unable to benefit from globalization makes clear that, while free market fundamentals and less government intervention in the economy are the basic tenets of the reforms, the sequence and pace at which they are introduced will have to be constrained by the 4. See G. Kolodko. 1998. Transition. World Bank Development Economic Research Group newsletter.
Introduction and Overview
21
existing capacity and effectiveness of local markets and institutions of governance. On these grounds, Joseph Stiglitz, formerly the World Bank’s Chief Economist, questioned the priority given by the ‘Washington Consensus’ to rapid privatization and the lack of attention to establishing competition or building social or organizational capital.5 In the more developed countries, “market forces” take up these tasks and provide these services rapidly and effectively; in the long run, a competitive market system is also the most effective means of correcting the highly flawed and misleading signals that are currently given by the maze of government interventions in many developing countries. However, in countries where markets are inefficient and often dominated by monopolistic forces, and where the public institutions in charge of supervising their operation and securing competitiveness are still in their infancy, reforms that strive to “let the market forces work” try to fly with little regard to take-off conditions. In these countries, the public sector still has an important role in supporting the transition and reducing its social costs, either by stepping in and providing directly the necessary services, particularly during the initial period, or by assisting the relevant private enterprises in developing that capacity. Clearly, the public sector is by no means a paragon of efficiency, and the existing distortions are obviously due to ineffective and politically biased government interventions in the economy. In the short run, a choice must therefore be made between two options: reliance on market forces or on public institutions. Both options are well below the optimum. Reliance on market forces must be limited and gradual as long as the markets are too fragmented and the organization of production and trade too rudimentary and inefficient to establish efficiency, restructure production, and streamline the markets, as envisaged by the planners of the reforms. The hopes that the removal of government controls will unleash market forces that will rapidly and smoothly eliminate price distortions and inefficiencies often proved far too optimistic. It takes time for the markets to become competitive and efficient, and for market prices to converge to their correct levels, and it takes time for local producers and traders to make the transition to new crops and new modes of operation. In countries that lack basic mechanisms and institutions, the reforms cannot commence with rapid deregulation and trade liberalization, as the “Washington Consensus” often preached,6 but must start with measures to strengthen the relevant public institutions that monitor the reforms as well as measures to develop social safety nets that can prevent the impoverishment of population groups or geographical areas during the transition. Equally important, the reforms should be tailored to the specific conditions in the country, rather than being based on a blueprint of general guidelines, so that they will not prescribe the same structure and pace for countries with a very 5. J. Stiglitz. 1999. The World Bank at the Millennium. Economic Journal. F577-97. See also J. Stiglitz. 1999. Whither Reforms? Ten Years of Transition. In The World Bank Annual Conference on Development Economics, edited by Boris Plesovic and Joseph E. Stiglitz. Washington, DC: World Bank. 6. In the context of financial deregulation, Stiglitz wrote: “…the IMF preached the gospel of rapid deregulation around the world, to countries far less able to withstand its negative consequences.” (Atlantic Monthly, October 2001)
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weak private sector and embryonic market institutions and countries with a much more developed market system and the necessary legal institutions to monitor its operations. For this reason, the privatization of public seed companies, for example, would be much more effective in India than in Zambia. Nevertheless, in both countries the first wave of reforms included the privatization of the public seed companies, with the result that in Zambia the company rapidly gained a monopolistic power that it used to raise prices and restrict most of its sales to the larger farmers. Measures to alleviate the social costs of the transition should include a thorough evaluation of the impact of the reforms on the various economic sectors, geographical regions, and population groups, and a design of specific measures to reduce the negative effects in the most sensitive areas. Even the planning of trade liberalization should include not only an evaluation of the longer-term effects, but also of the social costs during the transition period. The adverse effects of the reforms may undermine the entire adjustment process, both by prolonging the transition period and by raising social unrest that can destabilize the adjustment process, as indeed happened in many countries from Indonesia to Peru. The planning of social safety nets to alleviate the costs of the transition should begin with a careful assessment of the immediate impact of the reforms on the prices of key agricultural inputs and outputs, and use these assessments to estimate the impact of these price changes on the production costs of key crops and on the income of the farmers who grow these crops. By identifying the geographical areas in which these crops are grown and their shares in the farming systems of the main agricultural producers, it is possible to identify the population groups that are likely to be most adversely affected, and to estimate the likely reduction in their incomes. * The book pays special attention to the role and potential contribution of the NAROs to facilitate the transition in the agricultural sector and assist the population groups that are likely to be affected most adversely. In many countries and geographical areas, that transition requires farmers to diversify their production and adopt new technologies; these decisions depend not only on information on prices and market conditions, but also on thorough knowledge and experience how to evaluate the different alternatives and how to draw appropriate conclusions. In the more developed countries, market forces take up these tasks and provide this guidance rapidly and effectively through the price system. In developing countries, where markets are often inefficient and dominated by monopolistic forces, most farmers, particularly the small-scale farmers, do not have that knowledge and experience, and the NARO can step in and either provide these services directly through its economic research units and its extension service, or assist local private traders and marketing boards in developing that capacity. The selection of new crops and new technologies must be based first and foremost on their profitability and marketability; the success of that selection must be measured by the extent to which it raises farmers’ income. The key to that success is therefore an appropriate selection of crops, the availability and affordability of the necessary
Introduction and Overview
23
production inputs and technologies, and access to markets. To enable farmers to make these choices and to cope until they start to bear fruit, the NAROs will also have to put much greater emphasis on economic considerations in selecting their own research projects and in disseminating new technologies. In addition, if the local markets are not sufficiently efficient, the NAROs will also have to ensure that farmers have timely information on prices and market conditions, as well as knowledge and experience in evaluating the profit and marketing potential of different crops. To that end, the NAROs may have to take on additional tasks and activities beyond those traditionally included under the generic definition of R&D, and they may also have to adopt a different mode of operation to perform these tasks: < First, the emphasis on the profitability and marketability of the alternative crops require the NARO to give much greater weight to economic considerations in selecting its own research projects and in disseminating new technologies. < Second, the need to promote farm diversification and competitiveness, with an emphasis on small farms, will require different research priorities and more resources to conduct research on new and mostly nontraditional crops. < Third, the commercial prospects of the new crops depend on the farmers’ ability to deliver them to the market. That, in turn, depends not only on the quality of the access road to the village and the distance to the urban center, but also on the organization of the entire supply chain: the organization of procurement, transport, storage, processing, and delivery of the products. Presently, these supply chains in most developing countries are very rudimentary and inadequate. To secure the commercial prospects of new crops, the NARO may therefore have to take an active part in the development of these supply chains, particularly to remote areas. These new tasks will require the NARO to change its guiding principles, as suggested in the following table:
Present guidelines
Future guidelines
What cultivars to develop How to maximize the expected yields/output What are the production methods ...
What crops to select How to maximize the expected profits/income What are the production costs Where to deliver the produce
Although the basic policy decisions regarding the reforms will always remain with central authorities, their implementation “on the ground” should be carried out by those public institutions and organizations that are most directly related to the affected populations. These institutions are best qualified to provide feedback to the central authorities on any desirable modifications in the reforms that can facilitate their implementation, as well as “feed forward” information to the affected sectors and population groups that can reduce their difficulties as they implement the reforms. In the aftermath of the policy reforms that drive the country’s structural adjustment to the global economy and are related to the agricultural sector, farmers face considerable
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difficulties during the transition to a new mode of operation, new technologies, and a new market structure. They may therefore need assistance to be able to cope, and this assistance should come not only in the form of social safety nets, but also in the form of direct measures to guide the farmers as they make the adjustments in their farming system and in their marketing, and the NARO is the public institution that is best qualified to give farmers that guidance. The actual “division of labor” between the various public and semi-public institutions that operate in the rural areas will have to be determined by the specific conditions in each country and the relative strength of these institutions; the tasks of the NAROs are therefore likely to be different in different countries. Designing these tasks so that they are built less on a generic blueprint and tailored more to the specific needs and constraints of individual countries, sectors, and population groups, while taking into consideration the strength of the existing social and political institutions, should be the central task of the national and international public agricultural research organizations in the coming decade. Performing this task competently can be pivotal in helping the developing countries to achieve less serendipitous and more consistently positive outcomes as they adjust to the global economy.
Chapter 1 The Pros and Cons of Globalization for Developing Countries A Review of the Theoretical Issues and the Empirical Debate
David Bigman*
Introduction Despite the highly favorable views that most researchers in the academic community and in the international development organizations hold on the globalization process and its impact on developing countries, and notwithstanding the strong support of the empirical evidence of the benefits that many developing countries have derived from their integration with the global economy, the backlash against globalization continues unabated. An online debate on “Globalization and Poverty” organized by the World Bank Development Forum in mid-2000 echoed the loud and often very aggressive protests against globalization that erupted in Seattle, Washington, and Prague; nearly all the participants in the debate emphasized the very negative impact of the globalization process on the distribution of income and wealth between and within countries: “Globalization may improve growth rates, increase productivity, enhance technological capability, but it cannot redistribute created wealth and income in favor of the poor. In fact, it does the reverse—it redistributes wealth and income in favor of the not so poor.” The participants underscored the harmful impact on the poor: “Money can be made by growing things for export on foreign-owned commercial farms… No money can be made by the villager working her own land when she cannot afford the few bags of fertilizer, the seeds and the insecticides, courtesy of the structural adjustments, the liberalization, the removal of support systems and the massive devaluations.” Many participants also noted that the market is by no means the panacea for the central problems that the majority of the population in developing countries is facing: “With the opening of our market, our country has become a supermarket of foreign goods, which are cheaper, killing our local industries, rendering
* David Bigman: International Service for National Agricultural Research 27
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many more jobless. The disparity between the rich and the poor has widened, and although some may have benefited from the effect of liberalized economy, the majority continue to languish in poverty.” The opposition against globalization unifies labor organizations that protest against the flight of jobs “South of the border,” human-rights groups opposed to sweat shops thriving on child labor, environmentalists concerned about the damage to the global habitat, and radicals suspicious of the clout of multinational corporations that are perceived as the all-powerful agents of capitalism. The IMF, the World Bank, and the WTO, and, more generally, the high-income countries, are held responsible for influencing and largely determining the course of the globalization process. They are also seen as the driving forces behind the policy reforms that the developing countries had to implement as part of their structural adjustment programs under the stewardship of the IMF, the World Bank, and the WTO. However, while many passionate opponents of globalization view these reforms as unacceptable dictates, the reforms had actually quite positive effects on the economies of most developing countries. In East Asia, most countries experienced unparalleled rates of economic growth during the past two decades; as a consequence, a large portion of their poor population was lifted out of poverty. Despite the crisis of 1997–98, which exposed serious weaknesses in their financial, social, and political systems, as well as in their institutions of governance, most East Asian countries embarked on a course of comprehensive reforms to deal with the crisis, and they have entered the 21st century with renewed drive. In contrast, most countries of sub-Saharan Africa, and quite a few countries in South Asia, Latin America, and the Caribbean, did not benefit from the globalization process, and, despite a series of structural adjustments, these countries are burdened with much the same structural problems that plagued their economies in the previous century, but which now aggravated by heavy debts and the AIDS epidemic. It has been generally agreed that the benefits brought about by the global trading system under GATT and the WTO have so far been distributed very unevenly between and within nations. The rich industrial countries have reaped large gains from increased trade and faster growth, whereas most poor nations have actually become worse off and their economies shrank during the past decade. As a result, the gap between the nations with the poorest 20% of the world’s population (in terms of per capita income) and the nations with the 20% most affluent population has nearly doubled in the past two decades, and many developing countries have been marginalized and practically cut off from the mainstream of the global economy. These contrasting experiences and the growing global income inequality are reflected in the heated debate and the diametrically opposed views on globalization. On the one side of the debate are the various protest groups that underscore the failed experience of many sub-Saharan African and South Asian countries and the widespread perception that globalization is detrimental to the poor even in countries where it has had a positive impact on the economy at large. On the opposite side of the debate is the majority of the economists who, backed by the supporting empirical evidence on the gains from free trade, adhere to the neoclassical maxim that highlights
The Pros and Cons of Globalization for Developing Countries
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the potential gains from trade and trade liberalization. The theoretical tenets emphasize that, with trade liberalization, resources are allocated more efficiently to productive uses, and low-income countries with an abundance of unskilled labor and significantly lower labor costs can expand output and employment in labor-intensive industries, thus accelerating their growth.1 The poor also stand to benefit from this growth, and trade liberalization is therefore also good for the poor. These benefits are highlighted in several World Bank research papers that concluded that “growth is good for the poor” (Dollar and Kraay 2000a) and that “In general, the more rapid growth that developing countries experience as they integrate with the global economy translates into poverty reduction” (Dollar 2001). The positive effects of globalization on productivity are also thanks to the transfer of advanced technologies and to the opportunities that developing countries can obtain from the flow of FDI. Another World Bank paper that focused on the impact of the rising tide of FDI during the 1990s concluded that the flow of FDI was central to the more rapid growth that many developing countries achieved, and this growth also contributed to financing many government-led distribution programs that provided direct assistance to the poor and improved the social safety nets (Klein and Hadjimichael 2000). Even ardent proponents of globalization agree, however, that the benefits from free trade and trade liberalization can be realized only after a transition period during which the country’s institutions of governance and its legal system will have to be restructured, many public enterprises be privatized or dismantled and the market system be strengthened. Given the transformation that most segments of the economy and most institution of governance will have to undergo, this transition may take much longer than expected and the process may sometimes be reversed under political pressures. In Indonesia and the Philippines, for example, it is not clear whether the critical part of the transition was completed in the early 1990s with the expansion of export-oriented production, or whether it still continues through the first decade of 21st century, as the reforms reach the political institutions. Has China completed its transition period with the economic reforms it implemented as it joined the WTO, or has it just begun? These questions are also echoed in what has become known as the debate over the “post-Washington consensus,” which acknowledges the fragility of prescriptive policy packages of the form “liberalize trade and set the price right” and the likelihood that these “prescriptions” will fail in countries that lack proper institutions of governance and have only a rudimentary market system. In the on-line debate on “Globalization and Poverty” quoted earlier, many participants reflected these views when they argued that the benefits from market deregulation and trade liberalization are not likely to trickle down to the poor because, in the words of one of the participants, “the main cause of poverty is the market, not market failure,” since “markets fail to address strategic interests like food security.” Other participants noted that often their countries’ own institutions “prevent a flowering market-based 1. See, for example, the World Bank’s World Development Report 1999, p. 52, for a summary of these benefits.
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development.” Others emphasized unequivocally that “Decades of external influences in different forms have undermined and destroyed the traditional institutional mechanisms while creating islands of modern institutions that are inefficient and alien to their society at large”. Through this process, “the North has imposed a money-based economic system and such rules for participation upon the poorer nations of the world [that] have destroyed the traditional and local ways of wealth distribution in favor of a cash economy ruled by international forces.” Indeed, suspicion and even hostility toward the market, and strong opinions that “unfettered market processes favor the rich and powerful and their outcomes are inherently unjust” are common. Against the background of these opposing views and the resulting heated debate over the merits of globalization for developing countries, the objective of this chapter is to provide an overview of the main arguments raised by the two sides in the debate and evaluate the pros and cons of globalization for different groups of developing countries. Section I reviews the theoretical issues raised in this debate and the empirical evidence on the impact of globalization on economic growth. The section includes a survey of the development strategies that the international development organizations, primarily the World Bank and the IMF, have promoted. In addition, the section presents the main results of an empirical study on global income inequality based on the data of the GDP per capita of 152 developed and developing countries over the period 1960–98. The first objective of this study is to identify and compare patterns in the economic reforms that countries that have gained from the globalization process have implemented in order to be integrated into the global economy, and patterns in the economic policies of countries that were left behind; the second objective is to evaluate how inclusive the process of globalization has so far been. Section II focuses on the different approaches to the trade policy of a developing country in the current global trading system. The theoretical writings and empirical evidence of the past two decades clearly support the basic tenets of the neo-classical paradigm which hold that a labor-abundant developing country stands to reap significant gains from trade liberalization and an outward looking economic policy. But a number of issues require closer examination: One issue is the question whether the global trading system that evolved under the Uruguay Round Agreement of the General Agreement on Tariffs and Trade, the WTO and the regional trade agreements, including the rules on food safety, the nontechnical barriers to trade, and IPR, is indeed the system of free trade that the neoclassical economists envisaged. Other issues are related to the lessons from the “Asian economic model:” First, even the East Asian countries adopted at the early stages of their development active policies that protected and subsidized their infant industries in order to promote their exports. Second, the high and often unqualified praise that was heaped on the “Asian model of capitalism” until the 1997–98 financial crisis ignored major weaknesses in their systems of government and their legal and political institutions that were exposed during the crisis and that, to a large extent, were responsible for this crisis. Another issue is related to the failure of most countries in sub-Saharan Africa and many countries in South Asia and Latin America to develop an industrial base, particularly against the background of the “Asia miracle.” One factor that hampered their growth performance is their focus on the production of import substitutes and the
The Pros and Cons of Globalization for Developing Countries
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bias of their policies in favor of consumers and against producers; another factor is the bias in their trade policies against agriculture and in favor of industrialization. These issues are discussed in section III, which focuses on the agricultural sector and on the trade and development policies that affected the rural population. The section underscores the difficulties that the rural population had to face during and as an effect of the structural adjustment programs (SAPs) and the reforms to liberalize trade. The chapter concludes with remarks that discuss some central considerations for the formulation of development policies.
Globalization and Economic Growth: Theory and Empirical Evidence The debates over development strategies—in retrospect The debate over the structure of development strategies that would be most effective and socially most desirable for promoting growth and alleviating poverty, and over the balance between these potentially conflicting objectives, went through distinct phases since the early 1960s. In part, these phases reflected the wide differences in the experience of different countries during different time periods; in part, they reflected marked disagreements over the ability to bring about a significant reduction in poverty by promoting economic growth alone, and over the need and the potential advantages and disadvantages of accompanying these growth strategies with active income distribution measures. The early economic growth literature that provided the intellectual foundation for this debate emphasized the segmentation of the economy in developing countries into a modern, mostly industrial sector in urban areas, and a traditional, mostly agricultural sector in rural areas. Constraints on land availability and declining land quality, together with the continued rise in the rural population, reduce the marginal product of labor in the traditional sector to near-subsistence levels and drive the surplus of unskilled labor to urban areas. In this model, the embryonic modern sector cannot absorb all the surplus labor and, at the early stages of development, this migration would lead to a rise in income inequality and poverty. However, abundance of cheap and mostly unskilled labor and open unemployment in urban areas, and disguised under-employment in rural areas, give incentives to increase production in the modern sector in labor-intensive industries. The rising demand for labor in the labor-intensive industries would gradually absorb the unemployed in urban areas and the underemployed in rural areas, thus bringing about, over time, a reduction in poverty and income inequality at later stages of development. The actual realization of this stylized model varied widely between countries and continents and between time periods. In the 1960s—with the emergence of new nation states throughout Asia and Africa and the rapid economic progress in all countries across all continents—the focus was on economic growth as the most effective strategy for meeting the needs of the rapidly growing populations in the newly independent countries. In the 1970s, poverty and income inequalities were on the rise. In many countries in Latin America and the Caribbean, South Asia, and sub-Saharan
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Africa, the pace of industrialization was too slow to absorb the flow of rural migrants, often because production in the modern sector, especially manufacturing of import substitutes, was highly capital intensive and did not provide enough employment. Despite the diminishing prospects of rural migrants to find employment in urban areas, migration from rural areas continued due to rapid population growth and dwindling land resources, thus leading to higher poverty also in the urban areas. Disillusion with the trickle-down effects of growth shifted the emphasis to a strategy that deals simultaneously with economic growth and poverty. The then World Bank’s President, Robert McNamara, expressed this shift by stating that “[g]rowth, as such, can be considered a necessary but not sufficient target of development strategy.” In 1974, the Bank issued a document titled Redistribution with Growth that extended the goals of its development strategy by seeking to influence both the rate and the patterns of growth in order to reach the poor. The document advocated “policy packages” consisting of a wide range of measures that included promoting employment of unskilled labor, developing new technologies to make low-income workers more productive, targeting investments on “pockets of poverty,” allocating more resources to the education of the poor, and providing for the basic needs of the poor, particularly food and health care, from public sources. Redistribution with Growth insisted that “poverty-focused planning does not imply abandonment of growth as an objective. It implies, instead, a redistribution of the benefits of growth.” (p. xviii). The 1980 World Development Report echoed this theme and made the case for a more concerted effort to secure the basic needs of the poor and argued for targeted investments in human development and technologies suitable for the poor primarily in rural areas. During the almost three decades since the publication of Redistribution with Growth, these strategies continued to evolve with the accumulation of more experience and data from a growing number of countries, and with the deepening understanding of the economic and political processes in developing countries. The 1980s brought two diametrically opposed experiences. At the one extreme was the failed experience of many countries in Latin America and the Caribbean and sub-Saharan Africa with highly interventionist policies and large public spending that led to high public debts, massive macroeconomic imbalances, stagnation, and growing poverty. The debt crisis propelled the IMF and the World Bank to enter stage and give rise to policy-based lending: loans disbursed in exchange for policy reforms aimed at correcting macroeconomic imbalances and boosting productivity through structural reforms. At the other extreme was the very successful experience of the East Asian countries with rapid industrialization, high growth rates and a steep reduction in poverty. The accelerated growth of their modern sector, led by labor-intensive production for exports, brought about a gradual reduction in their unemployment and a rise in incomes in their urban and rural areas that led, in turn, to a steep reduction in poverty. Moreover, improving skills of the labor force enabled these newly industrialized countries to gradually move to higher, more advanced levels of industrial production and to products and production technologies that are more capital- and more skilled-labor intensive. Although growth was accompanied in some countries by rising income inequalities, it “lifted all boats” and steeply reduced
The Pros and Cons of Globalization for Developing Countries
33
poverty. The sharp differences between these experiences underscored the limitations and potentially undesirable effects of proactive redistribution policies. Against this background, the debate over the pros and cons of alternative growth strategies acquired another dimension with the renewal of old debates over the proper balance between measures to promote growth and measures to reduce income inequality and poverty, and over the desirability of government intervention in the economy even if this meant curtailing the free market and reducing efficiency. During the 1980s, the reforms focused on “structural adjustment programs” under which governments had to make firm commitments to economic restructuring that focused on trade liberalization, tax reform, realistic exchange rates, liberalization of capital markets and privatization in exchange for support by the World Bank and the IMF. In the early 1990s, the East Asia “miracle” highlighted the significance of market-oriented structural adjustments. The World Bank’s 1990 World Development Report advocated a new strategy to combat poverty based on more effective market incentives and better social and political institutions, infrastructure, and technology on the one hand, and on direct measures of governments to provide social services such as primary health care and education on the other hand. This two-pronged approach was based on more open markets and large-scale privatization accompanied by greater government activism in the provision of public goods in health, education and infrastructure. The 1990 World Development Report on Poverty concluded that “[t]he evidence in this report suggests that rapid and politically sustainable progress on poverty has been achieved by pursuing a strategy that has two equally important elements. The first element is to promote the productive use of the poor’s most abundant asset—labor. It calls for policies that harness market incentives, social and political institutions, infrastructure, and technology to that end. The second is to provide basic social services to the poor” (p. 3). Specifically, the poverty reduction strategy recommended in the report had three main components: 1. Promoting broad-based growth that makes intensive use of labor in order to increase the productivity of the poor and the economic opportunities available to them. 2. Ensuring the access of the poor to good quality basic social services in order to enable them to take advantage of economic opportunities. 3. Providing social safety nets for the most vulnerable members of society. The 1990 World Development Report recommended a growth strategy that includes investments in industries and production technologies that can absorb surplus labor as well as investments in human capital to allow the poor to take advantage and reap the benefits of new technologies. The World Bank’s Poverty Reduction Handbook of 1993 and Adjustment in Africa of 1994 echoed the message of the 1990 World Development Report by emphasizing the importance of an outward-oriented strategy and export-led growth. The Handbook emphasized the need to promote trade and exploit the comparative advantage of developing countries in products and production processes that are labor-intensive; in contrast, tariffs and other restrictions on trade are likely to inhibit growth and increase unemployment and poverty by giving incentives to capital-intensive production of import substitutes. A study conducted by the World
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Bank’s Office of Executive Directors in 1995 titled The Social Impact of Adjustment Operations emphasized that growth is the most significant process affecting poverty and that a consistent implementation of sound macroeconomic policies is essential for promoting sustainable growth. A subsequent study titled Social Dimension of Adjustment, conducted by the Bank’s independent Operations Evaluation Department in 1996, concluded that “good macro-economic policies and measures, combined with relevant sectoral policies and appropriate public expenditure allocation, provide a favorable environment for … sustained growth and poverty reduction.” The study found, however, that in most countries, the actual reduction in poverty was quite small and high levels of income inequality and poverty persisted. Addressing the controversy over the seeming “trade-off” between growth and equality, Bruno (1995) noted that, although direct action on health, education, and nutrition can improve the quality of life for the poor, growth is the only strategy that can secure a sustained reduction in poverty and provide the resources that are necessary for any direct action to reach the poor. The 1995 World Development Report reiterated the conclusion that “open trading relations [and] domestic policies that promote labor-demanding growth” are central to equitable growth. The World Bank and the IMF therefore relentlessly pushed developing countries in the direction of the WTO “system.” However, the Bank’s 1995 report also noted that growth may augment income inequalities and that “[s]ome groups of relatively poor workers have experienced large gains in the past thirty years—especially in Asia. But there is no worldwide convergence between rich and poor workers. Indeed, there are risks that workers in poorer countries will fall further behind, as low investment and educational attainment widen disparities. Some workers, especially in sub-Saharan Africa, could be increasingly marginalized. And those left out of the general prosperity in countries that are enjoying growth could suffer permanent losses, setting in motion intergenerational cycles of neglect” (p. 21). These considerations led to the argument that in these countries the government must take active measures to secure the livelihood of the poor, even if these measures may restrict the free market and diminish the country’s growth prospects. The counterargument asserted that, by reducing the country’s rate of growth, the government might in fact defeat the long-term goal of reducing poverty. During the past decade, it has been increasingly recognized, however, that a successful implementation of policy reforms depends on the country’s institutions of governance, and that the weakness of the institutions in the majority of the developing countries was the principal obstacle for the success of their structural adjustment programs. In the East Asian countries, weak institutions contributed to the 1997–98 financial crisis; in many countries in Latin America and the Caribbean, the weakness of institutions contributed to aggravate the impact of the global crisis on their economies, and in nearly all the countries in sub-Saharan Africa, weak institutions were not only the main obstacle to the implementation of the reforms, but also the main reason for the continuous political and social unrest. It has been realized that, in all
The Pros and Cons of Globalization for Developing Countries
35
developing countries, the reforms were too narrowly focused on macroeconomic policy and that the new agenda must stress also anticorruption efforts, effective corporate governance, banking transparency and independence, strong capital markets, and adequate social safety nets. The World Bank and the IMF made concerted efforts to work with governments to implement codes of “best practices” in a variety of technical areas such as banking regulation and supervision, corporate governance, and accounting. The World Development Report of the year 2000 adopted a much wider definition of poverty, which includes not only income shortfalls and low levels of health and education, but also powerlessness, voicelessness, vulnerability, and fear. This very wide definition of poverty also calls for a much larger “menu” of policies to combat poverty, ranging from fostering economic growth, strengthening the rule of law, promoting community development and gender equity, to closing the digital and knowledge divide. To be able to attack the wider dimensions of poverty, the World Bank has continuously diversified its own operations by adopting new goals and new work areas in order to assist countries in education, science, health, child nutrition, population, industrial development, trade policy, and the environment. This expansion reflected not only the Bank’s propensity to grow, but often also pressing needs that had not been adequately addressed by the existing development institutions, primarily the other agencies of the UN system; in addition, it also reflected the growing influence of nongovernmental organizations (NGOs) that pushed for the incorporation of issues such as the environment, the role of women in development, human rights and democracy into the Bank’s agenda, although some critics claim that this expansion reflects mostly the Bank’s inability to sort out its priorities. In principle, each of the above actions is essential to tackle the wider dimensions of poverty. However, given the limited resources that developing countries can command, not all of these actions are feasible, and it is therefore necessary to establish clear priorities and trade-offs. The Bretton Woods institutions have a clear comparative advantage in advising on, and supporting the implementation of, actions that affect a country’s economy, and even among these actions, it is necessary to establish priorities. However, by widening the definition of poverty, spreading thin the World Bank’s resources, and, without determining priorities, extending the menu of actions beyond the scope of the Bank’s comparative advantage—thus also diverting governments (and the World Bank) from the task of promoting growth and economic efficiency—the 2000 World Development Report may have reduced the Bank’s effectiveness and its influence over the choice of a development strategy. While the debates over development strategies have always reflected topical concerns of the time, they often remained too abstract and generic in that they failed to recognize the substantial differences between countries. These differences cast doubt on the notion that a development strategy can be formulated in the abstract or that it can yield a menu of actions and policy recommendations that apply to all countries. Lumping all the “developing countries” together and advocating a “one-size-fits-all” development strategy with a blueprint of actions can be oversimplifying and possibly even misleading. For each country, it is necessary to recognize its unique geographic, socio-economic and political conditions, to establish priorities that reflect these
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conditions, and to identify the critical areas on which its economic policy should focus. Recommendations to “promote labor-intensive growth and open trade” (World Development Report 1990), or to “promote opportunity, facilitate empowerment, and enhance security” (World Development Report 2000), may fail to recognize country-specific needs and differences in the underlying conditions. Thus, while in most East Asian countries growth proved to be the most effective strategy for reducing poverty, many Latin American and Caribbean countries experienced a much smaller reduction in poverty with growth. Their greater sensitivity to the needs of the poor made it necessary to accompany the pro-growth policies with additional measures to ensure a more equal distribution of the growing national income. The experience in a considerable number of sub-Saharan African countries showed that for them, administrative restrictions on exchange and interest rates, or even on the government budget, proved to be quite useless, since these countries lack the necessary institutions and the rule of law to ensure the proper implementation of these policies. In these countries, the main focus of policy reforms at the early stages of development should therefore be on measures to strengthen the institutions of government and the rule of law. Indeed, one lesson of the East Asian crisis is that even in the relatively more advanced developing countries, economic policy must place much greater emphasis on institution building, strengthening the rule of law, fighting corruption, etc. The second lesson is that a country’s growth is function not only of its endowments of labor, capital, and natural resources, but also of the strength of its public and private institutions and its legal and political systems. The neo-classical prescription for promoting growth in a labor-abundant country The present discussions on growth and employment in a labor-abundant developing country take their origin in the neoclassical writings, particularly the labor-surplus model of Lewis (1954), Fei and Ranis (1964), which dominated much of the economic development literature in the 1960s and 1970s. In Lewis’ model of a dual (or segmented) economy of a labor-abundant developing country with two distinct sectors, the modern, mostly industrial sector in the urban areas operates along the traditional, mostly agricultural sector in rural areas. The low living standards in rural areas drive many to the urban centers and increase the supply of unskilled and low wage workers (Table 1.1). In the early stages of development, the rural-urban migrants join the ranks of the under- and unemployed in the urban areas due to the limited employment available in the modern sector. Empirical studies estimated that in many countries the rate of unemployment in urban areas exceeded 20% of the labor force (Berry and Sabot 1978; Berry 1989). Nevertheless, rural-urban migration continued unabated. Harris and Thodaro (1970) explained the continued flow of migrants despite the rising urban unemployment by the migrants’ (subjective) expectations for higher wages that took into account not only the wage differential between urban and rural areas, but also the probability of finding employment. Rural migrants were also attracted by the better facilities for health and education and the better quality of water
The Pros and Cons of Globalization for Developing Countries
37
Table 1.1. Demographic Characteristics of Selected Developing Countries: 1973–95 Annual growth rate of the population overall LAC Brazil Chile Peru Africa Ghana Kenya Tanzania Asia India Indonesia Pakistan
urban
rural
Share of urban population mid-1970s
mid-1980s
mid-1990s
2.2 1.8 2.3
4.1 2.4 3.6
-2.45 -0.9 -0.3
59 77 59
71 82 67
87 87 76
3.9 4.3 3.4
5.3 8.0 8.6
3.0 3.5 2.5
33 12 9
38 17 14
43 24 23
2.1 2.1 2.7
4.2 4.8 4.3
1.2 1.2 2.0
19 18 25
24 24 29
30 31 34
Source: World Bank, various tables
supplies in urban areas that reflected the large bias in government expenditures (Lipton 1977; Larson and Mundlak 1997). In many developing countries, industrial growth remained, however, quite slow and capital intensive despite the large supply of labor, and the bulk of new jobs in urban areas were not created in the modern sector, but in the informal, traditional urban sector that includes basic manufacturing and small-scale commerce and services, where production is highly labor-intensive and earnings are low (Berry 1989). In many East Asian and some Latin American countries, in contrast, rapid growth of labor-intensive and export-oriented industries led to a gradual reduction in unemployment, a rise in real wages, and a reduction in poverty in both urban and rural areas. In Korea, Adelman and Robinson (1978) concluded “the strategy of labor-intensive, export-led growth … produced significantly higher incomes for the poorer half of the population and a far more equal relative distribution” (p. 127). In Indonesia, Thailand, and Malaysia, the industrial growth led to an annual rise of over 2% in the real incomes of the rural population. Accumulation of both physical and human capita enabled the East Asian countries to move to higher, more advanced levels of industrial production, and to products and production technologies that are more capital-intensive and require more skilled labor. Table 1.2 demonstrates the large differences between the rates of growth of different countries during the past four decades. The economies of the sub-Saharan African countries generally stagnated; in Latin America and the Caribbean, growth rates were higher, but they varied widely between countries. In these two groups of countries, many of the poor remained in rural areas and did not benefit much from the growth in the urban sector. In the East Asian countries, in contrast, the rates of growth in labor-intensive export industries were high enough to absorb the surplus labor
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Table 1.2. Growth of GDP Per Capita in Selected Countries: 1960–97 Country
1960
1997
Average annual change (%)
South Korea Taiwan
885 1355
10,500 13,250
6.9 6.4
Ghana Senegal Mozambique
875 1015 1125
850 1095 805
-0.1 0.2 -0.9
Brazil Mexico Argentina
1745 2800 3295
5500 6300 4750
3.2 2.2 1.0
GDP per capita in US$ in 1985 prices. Source: World Bank, various tables.
despite the continued migration to urban areas; as a result, the rate of unemployment declined, both urban wages and rural earnings increased and poverty declined. Table 1.2 also highlights the reasons for the criticism of the labor surplus model, because it fails to explain why in so many labor-abundant economies growth was very slow and industrialization faltered, while in other countries growth was very rapid and industrialization was highly successful. There is also criticism of the model’s failure to explain the changes in income distribution that took place during the growth process: many countries that experienced rather similar growth rates of the average per capita GDP had wide differences in the changes in the level of poverty. In Mexico, the Philippines, Nigeria, and few other countries, growth was accompanied by a rise in income inequality to the extent that poverty actually increased. A large number of empirical studies tested Kuznets’ hypothesis either in cross-section studies of many developing countries or in time-series analysis of individual countries. Many of these studies, particularly the ones that conducted a cross-section analysis (Adelman and Morris 1973; Ahluwalia 1976; Chenery and Syrquin 1975), tended to confirm Kuznets’ hypothesis, and thus strengthened the inclination to adopt a development strategy that puts greater emphasis on redistribution measures. Since the initial impact of growth is to increase income inequalities, so the argument went, and since this effect can last for quite some time, growth must be accompanied by active redistribution measures. Chenery (1971) asserted that “growth that does not change the resource allocation in favor of the poor constitutes growth with little development,” and recommended proactive redistributive measures if economic growth does not bring about a significant reduction in poverty. During the 1990s, with the accumulation of more data on income distribution in a large number of developing countries over a longer time period, several studies examined again Kuznets’ hypothesis, but this time in a time series analysis (Bruno,
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39
Ravallion, and Squire 1995; Ravallion 1995; Ravallion and Chen 1996). These studies concluded that, while the trends in income inequality with growth differ significantly across countries, there is no evidence that growth has any discernible systematic impact on inequality. In a sample of household surveys from a large number of countries, Ravallion and Chen found that in only half of the cases growth was associated with an increase in inequality. Bruno et al. emphasized that although there are exceptions, as a rule, sustainable economic growth benefits all layers of society roughly in proportion to their initial standard of living. Based on the evidence of the last decades, there seems to be no credible support for Kuznets’ hypothesis. These studies also confirmed that positive economic growth was significantly associated with a falling incidence of poverty, and that economic contraction was associated with a rising incidence of poverty. Bruno et al. calculated with data of 20 countries over the period 1984–93 that a 10% increase in mean per capita consumption led to an average 20% decline in the proportion of the population living on less than $1 per day. Lipton and Ravallion (1995) calculated with the data of eight developing countries that a distribution neutral growth at an annual rate of 2% in mean per capita consumption would lead to a decline in the poverty gap of 3 to 8%. These findings motivated a change in the approach to development strategy in the mid-1990s in favor of a strategy that gives much greater weight to growth and advocates re-distributive measures only in countries where there is clear evidence that the growth process is narrowly based and leaves out large segments of the population. In most countries, though, this approach emphasized the potentially undesirable effects of re-distributive measures on economic incentives and efficiency. The debate on these issues is far from over, and the more recent chapters in this debate are discussed later on. Globalization and global income distribution 1960–98: Has there been a convergence? A large number of studies sought to estimate the changes in the global income distribution between and within countries during the second half of the 20th century. Blotho and Toniolo (1999), drawing on data for 49 countries, found that the measure of global income inequality shows a modest trend toward convergence starting in 1980. Melchio, Telle, and Wiig (2000) evaluated the changes in income inequality between countries on the basis of a sample of 115 countries and they also found that, after a relatively stable period during the 1950s through the 1970s, global incomes tended to converge from the mid-1980s through the mid-1990s. Other studies used different samples and slightly different time periods, but came essentially to the same conclusion (Schultz 1988; Firebaugh 1999; Radetzki and Jonsson 2000). In a sample of 100 countries, Clark, Kraay, and Dollar (see Dollar 2001) found that worldwide inequality increased during 1960–75, but declined during 1975–95, largely due to the accelerated growth in China and India. Using household survey data drawn from 91 countries for 1988 and 1993, Milanovic (1999) reached a different conclusion. According to his estimates, income inequality, measured by the Gini index, rose marginally from 63 to 66, primarily due to an increase in income inequality between
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countries, rather than rising inequalities within countries. These seemingly conflicting conclusions reflect primarily differences in the sample of countries and time periods on which they draw and the small changes—up or down—that these analyses indicate. The question examined in this section is whether the trends in global income inequality indicated by these global measures indeed represent a tendency of global incomes to converge, and whether they indicate that the globalization process has therefore been inclusive, as several recent World Bank reports maintain (see e.g., Dollar 2001). The analysis in this section is based on household survey data from a larger sample of countries that includes also the ex-centrally planned countries, but it focuses only on income inequalities between countries that represent only part, though a central part, of the global income inequality. Nevertheless, the estimates of the trends in income inequality between countries since 1960 are in agreement with the results of most of the studies mentioned above. According to these estimates, the three main measures of inequality indicated that there has been a decline in global income inequality during the past two decades after a period of relative stability during the 1960s and 1970s. This analysis also shows, however, that the global measures of inequality do not provide an adequate representation of the widening gap between the richest and the poorest countries. During 1960–96, the world’s average GDP per capita increased by nearly 80% in real terms, but growth rates varied widely between countries and regions: In SSA, the annual average growth rate of GDP per capita was less than 1% during the past four decades, and it actually declined in the past two decades, whereas in East Asia, the average GDP per capita increased since 1980 at an annual rate of over 4.5% (Table 1.3 and Figure 1.1). This rapid economic growth of one group of developing countries and the relative stagnation in the other group had two conflicting effects on the global income distribution: On the one hand, the “Asian miracle” and the accelerated growth of India and some Latin American countries during the 1990s closed the income gap between these countries and the developed countries. On the other hand, the gap between the average GDP per capita in the least developed countries, particularly in Table 1.3. Trends in GDP Per Capita in Selected Regions 1960–96 (in PPP Exchange Rates in 1985 Prices) Region
South Asia East Asia SSA LAC Dev’ped cts World
Number of Population 1990 countries* (millions)
6 18 45 32 28 164
* Including the CIS countries
1,105 1,671 478 421 858 5,064
GDP per capita (in USD$)
1960
1980
1996
781 630 761 2,447 6,205 2,250
935 1,242 1,130 4,537 11,347 3,806
1,333 2,251 1,036 4,480 14,259 4,000
Annual growth rate 1960–96 1980–96
1.5 3.5 0.9 1.6 2.4 1.6
2.2 3.8 -0.5 -0.1 1.4 0.3
The Pros and Cons of Globalization for Developing Countries
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8 6 4
1960-1980
2
1980-1996
D
ev
W or ld
el op ed
Pl an .
C
en t.
LA
A EN
SS A
tA
M
-C Ex
-4
si a
si a A
So ut h
-2
1997-1998
Ea s
0
Figure 1.1. Average annual growth rates of GDP per capita in main regional groups, 1960–98 Source: IMF
sub-Saharan Africa, and that in the developed countries has widened significantly. As a consequence of these conflicting trends, global income inequality changed relatively little during most of these years (depending on the measure) and the main impact was on the relative position of countries on the global income ladder. What conclusions can be drawn from these changes about the convergence of the global income distribution? In 1960, the East Asian countries were at the bottom of the global income ladder with an average GDP per capita that was some 20% lower than that of the sub-Saharan African and South Asian countries; in 1998, the average GDP per capita in East Asia was more than double the average GDP in sub-Saharan Africa. As a result, most East Asian countries climbed to much higher levels on that ladder, while the sub-Saharan countries fell to the bottom (Figure 1.2). In 1960, over 80% of the population in the lower one-third of the global income distribution were in the East Asian countries; in 1998, 65% of the population in the lower one-third of the global income distribution were in South Asia and 31% in sub-Saharan Africa. In 1960, less than 15% of the population at the higher one-third of the global income distribution were from developing countries; by 1998, their share had risen to 40% (Figure 1.3a and 1.3b). Table 1.4 shows the changes in global income inequality during 1960–98, as indicated by the three most common measures of income inequality: the Gini coefficient, Theil’s measure, and the coefficient of variations (CV). All three measures indicate that there were only minute changes in income inequality during the 1960s and 1970s, but since 1980 and until 1998, the decline has been more noticeable. During the 1990s, the decline in the measures of global income inequality was primarily due to the rapid growth in China and India and the large share of these countries in the global population. As a result, these two countries, along with most other East Asian countries and some countries in Latin America and the Caribbean, moved to a higher position on the global income ladder, whereas the countries in sub-Saharan Africa dropped to the bottom. The relatively small changes in the three global measures do not show, however, the changes in the relative position of countries on the global income ladder, nor do they show the growing absolute gap between the richest and the
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350
1985 US Dollars
300 250 200 150 100 50 1960
1970 South Asia SSA LAC Developed
1980
1990
1996
East Asia MENA Ex-centrally planned
Figure 1.2. Index of GDP per capita (PPP adjusted) by regions, 1960–96
poorest countries. The two other measures in Table 1.4 indicate that the gap between the group of high-income developed countries and the group of sub-Saharan African countries has increased by nearly 80% during these years, and the gap between the most affluent country (the US) and the poorest country (indicated in the table by the Max/Min Ratio) has increased by over 60%. Several other observations are noteworthy: 1. During the 1980s and the 1990s, the share of the sub-Saharan African countries in the lowest quintile of the global income distribution has nearly tripled from 11.8% to 31.5%, while the share of the East Asian countries in the lowest quintile fell sharply from 35.1 to 7.3% despite their growing population. 2. The share of the South Asian countries in the lowest one-third of the global income distribution increased during the 1980s and 1990s despite the relatively more rapid growth of India, and these countries now constitute more than two-thirds of the lowest income group. 3. In the 1960s and 1970s, the share of the East Asian countries in the lowest income group was more than three-quarters, but by 1996 this share had dropped to nearly zero. 4. The share of the East Asian countries in the middle-income group rose from around 10% in the 1960s and 1970s to around three-quarters by the end of the 1990s. 5. The share of the developed countries in the highest one-third of the global income distribution declined from 64% in 1960 to 43% in 1996, but this was due to the decline in their share in the global population.
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0,9 0,8 0,7 0,6 Low
0,5 0,4
Medium
0,3 High
0,2 0,1 0 South Asia
East Asia
SSA
MENA
LAC
Ex-Centrally
Developed
Planned
Figure 1.3a. The Share of Regions in the Three Income Groups: 1960
0,9 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0
Low Medium High South Asia
East Asia
SSA
MENA
LAC
Ex-Centrally
Developed
Planned
Figure 1.3b. The Share of Regions in the Three Income Groups: 1996
Table 1.4. Measures of Inter-Country Income Inequality 1960–98 Indicator
Max/min ratio1 Developed/SSA ratio 2 Gini Coefficient Theil’s Measure Coeff. of Variations
1960
1970
1980
1990
1998
Change: 1960–98 (%)
38.55 8.15
43.67 9.18
47.26 10.04
61.93 12.26
62.97 14.53
+63.3 +78.3
0.63 0.60 1.58
0.63 0.61 1.55
0.62 0.60 1.52
0.60 0.56 1.52
0.58 0.49 1.48
- 8.1 -17.6 - 6.3
1. The ratio between the average GDP per capita in the US and in the poorest country. 2. The ratio between the average GDP in the developed countries and the average in the SSA countries.
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As a result of these changes, the gap between the average GDP per capita in the developed countries and that in the sub-Saharan African countries has increased sharply, while the gap between the developed countries and the East Asian countries has narrowed by over 40%. During these years, the share of South Asia and sub-Saharan Africa in the world’s population rose from 27% to 33.4%, while the share of the developed countries dropped from 21% to 16%. As a result of all these changes, the gap between the average GDP in the group of developing countries and the average in the group of developed countries has changed by only 13%, and the measures of income inequality within the group of developing countries have actually declined. These changes do not reflect, however, a convergence of the global income distribution, since the gap between the richest and the poorest countries, i.e., the height of the income ladder, has increased significantly. Clearly, for the populations in the countries in sub-Saharan Africa, in most of South Asia, and in Latin America and the Caribbean, globalization was not inclusive, and the gap between their standard of living and that of the developed countries is now wider than ever. For the population in East Asia, India, and some Latin American countries, in contrast, globalization was indeed inclusive, and they enjoyed a rapid increase in their standard of living both in absolute and in relative terms. An attempt to draw a general conclusion from these opposing trends and apply it for the “average” or the “representative” people in developed and developing countries is a rather meaningless exercise in statistics. Instead, the sharp difference between these opposing trends makes it necessary to draw different conclusions for the group of countries that benefited from globalization and for the group of countries that were left behind. The critical question in this connection is whether the differences between these two groups of countries reflect also the differences in their development strategies. In other words, were the countries that reformed their economies able to gain from globalization and managed to achieve unparalleled rates of economic growth and a sharp reduction in poverty, and were the countries that failed to restructure their economies unable to integrate themselves into the mainstream of the global economy and, as a consequence, did they see their economies shrink and their number of poor increase? A complete answer to this question would require a more thorough analysis, but the reviews of the country experiences in this volume suggest that there is no such clear correspondence. Quite a few countries, including several countries in sub-Saharan Africa, made considerable efforts to reform their economies but were unable to integrate into the global economy due to a host of other reasons. Table 1.5 summarizes the trends in poverty in the main groups of developing countries and in the world during the 1990s. These trends in the incidence of poverty were reflected also in the changes in the rates of child mortality during the 1990s. Whereas in most East Asian and South Asian countries there was a reduction in the rate of child mortality during these years, in most sub-Saharan African countries this rate increased. In nearly all Asian countries (Cambodia is one exception), child mortality declined during the 1990. The steepest decline was in the East Asian countries: in Indonesia the rate declined from 97 to 52, and in the Philippines it dropped from 68 to 47. In sub-Saharan Africa, in contrast, child mortality increased in most countries.
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Table 1.5. Trends in World Poverty during the 1990s Region
1990 No. (million)
EA LAC SA SSA World*
450 74 495 242 1276
1998
Poverty rate
No. (million)
Poverty rate
27.6 16.8 44.0 47.7 29.0
280 78 522 291 1200
15.6 15.6 40.0 46.3 24.0
Source: World Development Report 2000. * Includes also MENA and the ex-centrally planned economies
The large differences between the patterns and rates of growth of different groups of developing countries underscore the fact that lumping all the developing countries together and conducting the analysis in terms of North vs South, or developed vs developing countries is becoming increasingly misleading.
International Trade and Trade Policies in Developing Countries The changing concept of comparative advantage International trade economists have long maintained that a liberal and outwardoriented trade regime is the best strategy for a small economy to increase its welfare and income by optimizing the allocation of its resources in production according to the country’s comparative advantage, and by minimizing the incentives for unproductive activities associated with protection, such as smuggling, lobbying, and tariff evasion. Additional channels through which trade can precipitate growth include higher returns to investments by increasing the market size with trade, higher productivity through imports and diffusion of advanced technologies, and pressures to rationalize the government trade and macroeconomic policies. Sachs and Warner (1995) estimated that open economies grew about 2.5% faster than closed economies, with even greater differences among developing countries. Tarr and Rutherford (1998) use a CGE model to estimate that a 10% reduction in average tariff (from 20 to 10%) brings about a welfare gain of 10 to 37% of the present value of consumption (depending on the type of taxes that are being used to replace lost tariff revenues). The neoclassical theory emphasizes the driving force of low wages, abundance of unskilled labor and labor-intensive production technologies in promoting trade and specialization in a labor-abundant country. This analysis is based on an aggregate model in which production is a function of labor and capital, and technologies are characterized by the proportions (or intensities) of labor and capital in production. Different proportions of labor and capital in the production of different goods, and different endowments of labor and capital in different countries provide the incentives for specialization in production and for trade. This model is the basis of the widely
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employed Heckscher-Ohlin model that separates consumption and production, and shows how the location of production is determined by differences in the technology and by differences in factor endowments between regions and countries that determine, in turn, their comparative advantage. The model predicts that, as trade barriers are reduced, production will relocate according to comparative advantage (with relatively unskilled labor-intensive activities moving to relatively unskilled labor-abundant locations). As this occurs, the changes in demand for factors of production will tend to equalize factor prices across countries. In this model, the patterns of trade are determined by ranking goods according to their factor intensities; the labor-abundant country has a comparative advantage in the production of labor-intensive goods. Rybczynski’s theorem strengthens this conclusion by showing that, under fairly general conditions, an increase in labor supply—or an increase in labor productivity (Corden)—brings about an increase in the production of labor-intensive goods. Specialization in production and movements of goods between countries, in line with their comparative advantage, are substitutes for the movement of factors of production, and trade therefore narrows the differences between factor prices. However, the comparative advantage of a country need not be fixed. It may change over time with the changes in its factor endowments and productivity and with changes in its production technologies. The higher the rate of growth of a country’s labor force, the larger the proportion of labor-intensive goods in production and the larger the comparative advantage of the country in the production of labor-intensive goods. The larger the flow of capital from the capital-abundant to the labor-abundant country, the smaller the comparative advantage of the former in capital-intensive goods. Labor-intensive production. In the neo-classical Heckscher-Ohlin two-factor model, labor intensity of a given production technology or a given product is determined by the capital-labor ratio in production. One production technology is said to be more labor-intensive than another if the capital-labor ratio in the first technology is lower than in the second. Several production technologies can be ranked from the most labor-intensive to the least, according to the corresponding capital-labor ratios, thus emphasizing that labor intensity is a relative concept. Moreover, the same product can be more labor intensive than another in one factor price ratio, but more capital intensive than another in another factor price ratio. (This is known as “factor reversal”). In empirical studies within a given country, the “physical” definition of labor intensity is replaced by a cost definition that evaluates the shares of labor and capital costs in the total costs. For this comparison, it is necessary to remove first any price and cost distortions due to subsidies or taxes targeted on some of the industries. A considerable number of articles have examined various modifications and extensions of the neoclassical model of comparative advantage in order to adjust the model to today’s conditions in the global economy. Most of these contributions still focus on production technologies, factor requirements, and factor endowments as the driving forces for specialization and international trade. Wood and Berge (1997) argued that the concept of comparative advantage in the Heckscher-Ohlin model is no longer suitable for today’s
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conditions for two reasons. First, the high mobility of capital has led to major changes in factor endowments across countries, thereby continuously changing their comparative advantage. Second, since there is little difference between primary products and simple manufactured products in the intensity of “‘unskilled labor” in their production, the only factors that distinguish the modern sector from the traditional one are land and skilled labor. On these grounds, they concluded that “[c]ountries that have a lot of land and low levels of education should concentrate on opportunities for progress within the narrow primary category” (p. 1468). This, however, is a static strategy that ignores the dynamic aspects of comparative advantage and the potential to raise the levels of education and thereby acquire new technologies and change the country’s specialization. The more recent writings on the dynamic nature of a country’s comparative advantage highlighted the following additional factors: < The effects of investment in R&D that can change a developing country’s comparative advantage by allowing it to produce and export high quality products. (Okamoto and Woodland 1998); < The impact of change in a country’s technological capabilities, and thus also in its comparative advantage, due to higher skills of its labor force with better education and training. (Pietrobelli 1997); < The impact of demand shifts in the more affluent North to higher-quality products as an effect of the rise in income that shifts the production in the North to higher-quality products, while production of an increasing number of relatively lower quality products is shifted to the South, where labor costs are lower (Flam and Helpman 1987). In addition to these “traditional” gains from trade through the more efficient allocation of resources that is achieved with trade, there will be the following additional gains when the domestic market can be made more competitive and production better organized: 1. Pro-competitive gains. These are the effects of increased imports on the competitive behavior of firms in the domestic market by disciplining the monopolistic or oligopolistic behavior of firms, forcing them to behave in more competitive ways. 2. Gains from economies of scale. As the quantity produced by one firm increases, its average cost decreases. This may be the result of economies of specialization (firms operating on a larger scale can match inputs more closely to tasks), of indivisibilities in production, or of the greater efficiency of large machines compared to small ones. The decline in average costs leads, in turn, to lower prices. 3. Gains from the rationalization of production. Competitive imports force local producers to increase efficiency or to exit the market. As a result, the number of domestic firms declines and the level of production of each remaining firm increases. Tthe remaining domestic firms are necessarily more efficient and can reap the benefits of economies of scale.
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4. Gains from the increase in variety. The larger variety of products that become available as the country opens up to trade give consumers higher levels of satisfaction. The globalization of trade and research, the growing weight of multinational corporations in world trade, production, and investments, and the rapid technological advancements all promoted greater specialization in production and introduced considerable changes in the comparative advantage of both developed and developing countries. These changes were precipitated by the large flows of investment capital to developing countries, by the growing share of skilled labor in these countries that enabled them to produce advanced manufacturing products, and by the rapid advancements of information and communication technologies that changed the concept of distance in all transactions. These changes help explain the significant transformation of the structures of industrial production in the East Asian countries. The initial industrialization process in these countries was led by the production of textiles and simple industrial products. Gradually, the production base expanded to include more sophisticated manufactured products such as machinery, steel, automobiles, and later to still more advanced products such as computers and electronics, which are more capital intensive and more skilled-labor intensive. However, not even the production of textiles and clothing could take place at the initial stages of the industrialization process without a considerable inflow of capital, since at the time these countries were primarily agrarian and lacked the capital necessary for the production of these simple and labor-intensive goods. Although the industrialization process also brought a rise in wages, the rise in labor productivity was more rapid and the comparative advantage of the East Asian countries against the developed countries was therefore maintained. Nevertheless, the structure of their production and trade gradually changed with the establishment of more advanced industries that were attracted by the increasingly better trained and more skilled labor. The multinational corporations were perhaps the most important vehicles that brought about this change. In their search for the least costly forms of production, these corporations established or expanded affiliates in the East Asian countries and transferred to them, or to independent contractors, the production of labor-intensive products. Labor costs were, however, not the only consideration of the multinational corporations; their choices were also influenced by the relatively stable political conditions in most countries and by the direct government support that these corporations received. Although labor costs were equally low or even lower in South Asia and sub-Saharan Africa, these countries were much less attractive to multinational corporations and other investors. Despite striking similarities between these groups of developing countries in their initial conditions in the 1960s, the huge differences between them in the depth of the industrialization process and the pace of the transition to the production of higher-quality and more sophisticated products are, first and foremost, testimony to the fact that the concept of comparative advantage can no longer be narrowly defined, as in the Heckscher-Ohlin model, only in terms of production technology, the direct costs of labor and capital, and the relative intensities
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of labor and capital. Other factors are also pivotal in determining the costs of production and the country’s comparative advantage. They include: < Access to markets. In this context, access refers not only to the geographical distance, but to all the components that determine transport costs, including inland and sea transport costs and the costs of insurance and financial services for trade. Although the African countries are closer to the European markets than are the East Asian countries, high inland costs due to the distance to the port and poor road infrastructure considerably reduce their access to these markets. Access to markets is also determined by tariff and/or quota protection and by other barriers to trade, including those established by bilateral or regional trade agreements. In the global economy, accessibility is also determined by access to supply chains that control the trade and marketing of many commodities at the wholesale and retail levels. < Access to advanced technologies. Low labor productivity, due to high levels of illiteracy, prevents many developing countries from taking full advantage of their labor abundance and low labor costs. In the agricultural sector, the use of traditional technologies, traditional crop varieties, and low yielding crop management practices in the indigenous agricultural systems constrain farmers to producing only self-consumption or for the local market and prevent the development of agricultural exports. The transfer of advanced production technologies and methods from developed countries can accelerate growth and raise labor productivity in the developing countries. The key question is, however, what barriers prevent or slow down the transfer of these technologies and what policy measures can accelerate their diffusion. On the one hand, access to advanced technologies is limited by the lack of necessary skills, by low investment in R&D, and, increasingly, by the costs and restrictions on the transfer of technologies due to IPR and patent issues. On the other hand, modern information and communication technologies, including the Internet, reduce communication costs and break down geographical borders, thus speeding up the diffusion of knowledge and advanced technologies. < Economic and political stability. These are essential non-tangible conditions that determine investment risks and costs. Until the 1998 crisis, investors in Asian countries enjoyed very stable political conditions. This stability was often assured by authoritarian rule, but opposition was significantly mitigated by the success in raising the standard of living. When these standards fell sharply during the crisis, political stability was severely shaken in many, if not most, of these countries. In most sub-Saharan Africa, political stability is all but lacking. Continued wars, frequent changes in policies and in the regimes themselves, weak institutions of law enforcement, and widespread corruption significantly raise business risks, discourage investment, increase insurance costs, and are highly detrimental to both internal and external trade. < (Relatively) stable labor market. The Asian countries—each according to its level of development—adopted elements of the Japanese system of lifelong employment, seniority-based wages, and enterprise labor unions that secured workers’ loyalty to their employers. Government welfare programs are rudimentary even in South Korea and Taiwan, and labor unions focus their
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demands mainly on job protection. In Latin America, labor unions are national and they are very active in their country’s politics. The pressures exerted by the unions and their political power triggered government intervention through minimumwage legislation and relatively high wages in the public sector. These interventions distorted the price of labor and inhibited the absorption of surplus labor. Functioning markets. The economies of many developing countries were, and still are, plagued by massive price distortions and a host of restrictions that prevent the development of functioning markets. The removal of these distortions and restrictions is necessary not only to attract foreign investors, but also to create profit incentives for domestic private enterprises, and thereby boost production and streamline labor allocation. In sub-Saharan Africa, the haphazard and incomplete market reforms were noted as one of the central reasons for slow growth (World Bank 1994). However, even among the most successful East Asian and Latin American countries, market reforms were limited in two ways. First, the governments in these countries maintained and even expanded some price distortions that were designed to support local enterprises and encourage industrial production. Second, the removal of distortions and the development of functioning markets were often confined to producer services and to what Radelet and Sachs (1997) termed the export platform. Government interventions. In all Asian countries, government investments in infrastructure, health, and education, as well as direct investments in enterprises were pivotal at the early stages of the industrialization process. These, together with large-scale interventions in many other forms, gave strong incentives to foreign and domestic entrepreneurs to invest in local industries. Indeed, even the World Bank (1993) survey of the “Asian miracle”’ provided details on more proactive tactics of direct intervention that the Asian government often adopted at the early stages of their development. The report acknowledged that the neo-classical, “getting the basics right” policies do not tell the entire story. In each of these economies the government also intervened to foster development, often systematically and through multiple channels. Policy interventions took many forms: targeted and subsidized credit to selected industries, low deposit rates, and ceilings on borrowing rates to increase profits and retain earnings, protection of domestic import substitutes, subsidies to declining industries, the establishment and financial support of government banks, public investment in applied research, firm- and industry-specific export targets, development of export marketing institutions, and wide sharing of information between public and private sectors.
Two additional factors that, from the public welfare point of view, must be considered negative have an impact on the comparative advantage of a country: < Absence of labor laws. In addition to minimum wages, companies in the developed countries must provide high social benefits that include pension contributions, vacation, paid sick leave, social security, and health benefits, etc. They are also bound by occupational safety and health rules. In many developing countries, there are no such laws, not even with respect to child labor.
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Low environmental standards. Against the high and rising standards of environmental protection and pollution control in the US and Western Europe, the very low standards and lax enforcement in most developing countries give them an “advantage” in highly polluting production processes (Bhagwati 1997).
On these grounds, producers in importing countries that maintain high environmental and labor standards claim that the lax standards maintained in some exporting countries give those countries an unfair competitive edge. Indeed, the pressures of many groups and labor unions in the developed countries to enforce minimum environmental standards and child labor laws under WTO agreements reflect not only a genuine concern for these issues, but also efforts to lower the comparative advantage that these exporting countries have on account of their low environmental standards and the absence of labor laws. Low labor costs, combined with all the other factors that determine the cost of capital and the risk for foreign investors, created the conditions that changed the comparative advantage of East Asian countries and enabled them to specialize in manufacturing production and to attract foreign investors. Other developing countries, particularly in Latin America, offered some of these components, but few could compete with the conditions investors found in East Asia. Obviously, not all of these components are positive or beneficial to the country in the long term, nor are they equally tenable in all countries. However, the rapid growth of the East Asian economies, their dramatic downfall in 1997 and 1998, and the equally dramatic recovery of most of them since 1999 emphasize the need to take into account the entire spectrum and all the components that determine the comparative advantage of a country, not just the abundance and low cost of unskilled labor, in order to have a more complete understanding of the “East Asian miracle” and in order to apply the lessons from this “miracle” in the design of development policies for other countries. Outward- vs inward-oriented growth strategy While the debate about the most suitable growth strategy for a labor-abundant economy has always been loaded with controversies, the dominating view was that, for the majority of developing countries, the prospects of growth are closely linked to industrialization. Even in the primarily agricultural countries of sub-Saharan Africa, long-term growth was linked to increasing the domestic value added through processing, and in practically all countries, per capita GDP grew with the rise in the ratio of manufactured to primary products. During the past decade, discussions on the most suitable industrial strategy were dominated by the rapid growth of the East Asian economies that was achieved through an outward-oriented development process and a rapid increase in exports. The discussions centered on the following key questions: < How significant was the outward-oriented strategy? < How significant was the focus on industrialization? < What was the role of the other components of the growth strategy of the East Asian countries, including government investment in infrastructure and education and the large subsidies to foreign direct investment (FDI, see Box 1.1)?
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Box 1.1. Foreign Direct Investment (FDI) Since the early 1980s, world FDI flows have grown faster than either the world trade or the world output. The flows of FDI to East Asia and, to a lesser extent, to the other developing countries, grew at an average annual rate of over 30% in the first half of the 1990s, from less than $35bn per year to around $100bn by 1994, and at an average annual rate of 15% in the second part of the 1990s to over $250 billion in 2000, but their share of total investment flows declined from 43% in 1997 to 21% by the end of the decade as an effect of the financial crisis in East Asia. More than half of these investments were made in East Asian countries, whereas the flow to Latin America and the Caribbean (primarily Chile, Argentina, and Brazil) grew at much lower rates, and only a trickle reached sub-Saharan Africa. The Asian crisis had a significant and immediate impact on this flow. Indonesia, for example, had an FDI inflow in excess of $4bn during 1994–97, but in 1998, with the emergence of the crisis, this flow dried out, and in 1999 there was a net outflow of over $2bn. China was the main beneficiary of this change of direction of FDI, and in 1999, it had an inflow of nearly $50bn. Some Latin American countries also had larger inflows in recent years due, in part, to the outflow of capital away from the crisis countries in East Asia. In 1999, the FDI flow to Brazil exceeded $30bn, and the FDI flow to Argentina reached nearly $25bn. Notwithstanding the financial turmoil in East Asia in 1998, global FDI inflows increased for the seventh consecutive year to reach $430-440 billion, becoming an important source of private external finance for the developing countries. According to the latest FDI data released by UNCTAD, world FDI flows increased by 18% in 2000 to a record US$1.3 trillion, compared with only $203 billion in 1990. Much of this investment was driven by corporations buying or merging with companies in other countries, contributing to increasingly global multinational firms. Most FDI flows went to the industrialized world. FDI flows to the developing countries overall grew by 8% to US$240 billion, and to the economies in transition of Central and Eastern Europe by 9% to US$25 billion. However, FDI flows to Latin America and the Caribbean declined in 2000 by 22% to US$86 billion, primarily as an effect of the evolving crisis in Argentina, and the flows to Africa continued to decline. The factors that determine the inflow of FDI into a country and make the country a desirable destination for FDI include political and economic stability, the market size, the availability of natural resources and human capital, the country’s growth prospects, and the existence of favorable investment and tax regimes. A recent UNCTAD report concludes, however, that such traditional features, although still important, no longer constitute the most significant driving forces. In a world increasingly characterized by a global and highly interconnected trading system, companies look for places to invest that offer specific advantages, such as a good communications infrastructure and intangibles such as political stability and business culture. The direct effects of FDI on the host country are the product of the FDI’s effects on factor endowments and rewards. These investments improve
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productivity, raise the marginal product of labor, and reduce the marginal product of capital, thereby promoting economic growth and exports and raising incomes and wages. There are also indirect effects (or externalities) of FDI that are due to the impact of foreign multinational corporations on their host economies. These effects may vary, however, between industries and countries, depending on the characteristics of the host country and the policy environment. The large flows of FDI to the EA countries and the growing integration and globalization of the capital markets increased their capacity (that came to be perceived as good risks) to access these markets directly in order to secure funding for projects that in the past could only be financed through the World Bank.
<
What was the rise in total factor productivity in these countries, and what was its contribution to their economic growth relative to the contribution of the large resource mobilization? How effective was export promotion industrialization vs. import substitution?
To answer these questions, this section surveys the discussions in the economic literature and reviews the experience of selected countries. In their highly influential research on trade and industrialization, Little, Scitovsky, and Scott (1970) provided a thorough account of the connection between an export-oriented growth strategy and the rate of economic growth. They emphasized the effects of competitive conditions in the world markets on exporting enterprises that force countries to eliminate distortions, thus leading to better macroeconomic performance and more rapid growth. In contrast, efficiency considerations are secondary behind the walls of protection, and (infant) industries (even construction) have little incentive to select the more cost-effective and labor-intensive technologies. The World Bank’s World Development Report of 1987 and 1990 noted that the high walls of protection often reduced the use of labor in the formal sector, whereas more open and outward-oriented trade regimes tend to support more labor-intensive patterns of industrial expansion in both import-competing and export industries. Bhagwati (1982) highlighted another distortion of an inward-oriented trade regime that is a result of its heavy reliance on market restrictions and state intervention and is therefore more likely to create an environment that is more congenial to directly unproductive profit seeking. With open, outward-oriented strategies, in contrast, the state is less involved, and profit seeking is more likely to be productive. Bhagwati noted the wide consensus among economists that an outward-oriented trade strategy helps the process of industrialization and economic growth. In his words: “The question of the wisdom of an outward-oriented (export-promotion) strategy may be considered to have been settled” (1987, p. 257). There is, however, no conclusive empirical evidence that in all countries an inward-oriented development strategy based on import substitution would indeed reduce longer-term growth rates. In a comprehensive cross-country study, Chenery, Robinson, and Syrquin (1986) showed that the average yearly GDP growth rate in
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semi-industrial economies that adopted import-substitution policies was only a few tenths of a percent lower than the growth rate in countries that adopted exportpromotion strategies. McCarthy, Taylor, and Talati (1987) used a different grouping of countries, based on per capita GNP, and showed that the fast-growing countries did not have, on average, a higher (or increasing) share of exports in GDP. Easterly and Levine (1994), however, established a clearer causal relationship between enhanced exports performance and more rapid growth in extended cross-section studies. Two factors may affect the straightforward calculus of the gains and relative merits of an outward-oriented trade policy. The first is the importance of trade taxes in the budgetary revenues of developing countries. An IMF survey of the 36 least developed countries (LDCs, see Box 1.2) found that trade taxes account on average for 5% of GDP, or about one-third of total tax revenues. The implementation of a broadly defined trade reform that includes the overhaul of customs administration or compliance with WTO obligations requires heavy budgetary outlays. The second factor is the strategic trade policy, emphasized by the “new trade theory,” which justifies protection in the presence of “strategic” interactions among firms in domestic and international markets (i.e., when a change in the behavior of firm 1 leads to a change in the optimal behavior and a strategic response of firm 2). By choosing an optimal import tariff or subsidy, the government can affect the strategic game played by firms in international markets to the advantage of domestic firms. Often, however, the strategic trade policy literature gives rise to contradictory results depending on the type of market structure and the form of competitive rivalry. As a result, this literature has generally been considered of little use in the guidance of governments’ trade policy. There are also doubts about its relevance for trade policy in developing
Box 1.2. The Least Developed Countries Since 1971, countries with weak economies and deep poverty have been categorized as Least Developed Countries (LDCs). By the end of the 1990s, 49 countries with a combined population of 610 million, equivalent to 10.5% of the world population, were identified as LDCs. Most of these countries are in sub-Saharan Africa. In 1981, the United Nations General Assembly held the first UN Conference on the Least Developed Countries in Paris, in which it adopted the “Substantial New Programme of Action for the 1980s for the Least Developed Countries.” However, despite major policy reforms initiated by many LDCs to carry out a structural transformation of their domestic economies, and supportive measures taken by donors, the economic situation of these countries as a whole worsened during the 1980s. The Second UN Conference on the Least Developed Countries held in Paris in September 1990 formulated national and international policies and measures for accelerating the development process in the LDCs, drawing on the experience and lessons from the 1980s. A mid-term review of the implementation of the program of action for the LDCs for the 1990s concluded, however, that these countries continue to be marginalized.
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countries, which tend to be primary product exporters, since the production of primary products is rarely characterized by large economies of scale. The success of East Asian countries in achieving high rates of economic growth made export promotion, spurred by open trade and market liberalization, the strategy of choice. The World Bank study titled The East Asian Miracle (1993) emphasized the prominent role of export-oriented policies in the economic “miracle” of the East Asian countries. The report paid close attention to the process of industrialization in these countries that initially took advantage of the abundance of cheap labor by building up industries with highly labor-intensive production that required mostly unskilled labor. Perhaps the most obvious example is the clothing industry, which is highly laborintensive and in which developing countries have a clear comparative advantage. Although higher productivity in the developed countries could offset part of their higher labor costs, the very low labor costs in Indonesia, China, and Pakistan, which were only 5 to 10% of those in the US, allowed these countries to produce much cheaper clothing despite their less productive technologies. In East Asia, the clothing industry was the quintessential foundation on which the industrial base was gradually built as these countries accumulated more know-how, developed a better-skilled labor force, and opened their economies to foreign investment. In other developing countries, the agricultural sector can play this role, as we see in Part III. The World Bank account of the East Asian “miracle” emphasized the importance of market-oriented incentives that led to large gains in efficiency and factor productivity. These incentives were created by setting the correct price signals through the unification of the exchange rate, the measured devaluation, and the removal of various distortions on the one hand, and the disciplining force of open trade and export-promotion strategies on the other. The pressures of international competition and the greater role of the market seem to have mitigated the worst kind of rent-seeking behavior observed in those countries that rely on industrialization through import-substitution. Other studies on the experience of East Asia gave, however, equal weight to the influence of government intervention through subsidies, trade restrictions, administrative guidance, and credit allocations (Rodrik 1992 and 1995; Amsden 1990; Wade 1990). In their view, this government intervention was necessary at the early stages in order to facilitate the transition from the production of primary products for the domestic market to the production of manufacturing goods for the home market and exports, and in order to make investments in the non-traditional sector sufficiently attractive. The weakness of the market system in these countries at the early stages of development, and the absence of the necessary financial and economic institutions, made the state the only entity that could offer these incentives and provide a measure of security. Rodrik argued that the main push for the economic take-off in South Korea and Taiwan did not come from the increase in exports, but from the sharp rise in investments that was largely engineered by the government through direct credit at low or even negative interest rates, and through investment subsidies, direct administrative subsidies, and the use of public enterprises. In both countries, investments rose from 10% of GDP in the late 1950s to 20% in the mid-1960s and 30% in the early 1970s. This large increase in investments was matched by a roughly equivalent increase in savings that prevented inflationary
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pressures. Government coordination in the form of administrative guidelines as well as direct investments in key industries were pivotal, since increasing returns to scale in the production of the modern sector made it initially impossible for the private sector to take full advantage of these investment opportunities despite the high subsidies (through credit at negative real interest rates, tax incentives, etc.). Another part of the debate on the forces behind the East Asian “miracle” focused on the effect of export-led growth on total factor productivity (TFP) and the contribution of the rise in TFP to growth. Several empirical studies found a high correlation between a country’s overall growth performance and its export growth, and between a country’s growth in TFP and its export growth, although this correlation does not establish causality. Sarel (1995) estimated that in the four Asian ‘”tigers,” output per person rose during 1975–90 by an average of 6.5% annually, whereas the annual TFP growth rate ranged between 2% in Singapore and over 3.5% in Taiwan and Hong Kong. According to his estimates, TFP growth accounted for nearly half of the total growth of output per person. In China, Hu and Khan (1996) estimated that TFP rose at an annual rate of nearly 4% during 1979–94. The World Bank 1993 study emphasized the contribution of the significant rise in productivity to economic growth, and noted two factors that led to this rise. One was the removal of discriminative and highly distorting prices in the domestic market and the elimination of trade barriers; these measures exposed local enterprises to the disciplines of competition, which led to better allocation of resources. The other factor was the adoption of new technologies and the latest vintage capital formation by export industries that led to technology and productivity spillovers from which the entire economy could benefit. To maintain their international competitiveness, enterprises in East Asia also had to rely on a steady rise in the productivity of their workers that was made possible by their improved skills and better training. In Korea, this led to a virtuous cycle of growing exports that led to more investment in the export industries that led, in turn, to further productivity gains. In contrast, Young (1992, 1994, 1995), Rodrik (1995), and Krugman (1994) argued that the remarkable growth of East Asian countries was not due to an unusual rapid growth of TFP, but to the rapid accumulation of capital and the increase of the labor force in manufacturing. According to Young’s (1994) estimates, the annual TFP growth in South Korea and Taiwan during 1966–90 was 1.2% and 1.8% respectively. These rates, however respectable, were of the same order of magnitude as the rates in Argentina, Brazil, Chile, and Mexico. Kim and Lau (1994) found that in the four Asian “tigers,” capital accumulation accounted for over half of their economic growth. Krugman attributes this growth primarily to an “astonishing mobilization of resources” rather than to gains in efficiency. The debate over the merits of export promotion vs import substitution was at the center of the discussion in the economic development literature as early as the 1950s. The consensus among professionals at the time in favor of an outward-oriented, export-led growth strategy did not rule out, however, an import substitution strategy in the first stage of the industrialization process, and it has been recognized that virtually all the successful exporters of manufacturing, with the exception of Hong Kong, began their industrialization with an inward-oriented strategy that promoted import substitution under significant protection. Moreover, in some countries, the gains from
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export-led growth that are due to scale economies in production can also be reaped in the production of import substitution if their domestic market is large enough. In small countries, the industrial strategy must be based on specialization and “niche-oriented” industries (Chenery et al. 1986). Brazil and Korea are good examples of these two extremes: in Brazil, the share of commodity exports in the mid-1980s was less than 10%, whereas in Korea, the share was close to 40%. Brazil relied on the growth of its domestic demand to generate scale economies and technical change, whereas Korea pursued more aggressively outward-oriented policies aimed at transforming the domestic industries from producing predominantly for the highly protected local market to producing industrial goods for exports (Taylor 1989). Korea is poor in natural resources and the shares of its industry in both exports and GDP are therefore much higher than in resource-rich Brazil. A series of country studies organized by the World Institute for Development Economics Research in 1987 and 1988 demonstrated that Korea, Taiwan, Turkey, and other countries where economic progress was led by the rapid growth of export industries had an initial stage of industrialization based on import substitution. In Turkey, for example, the export-led growth during the first part of the 1980s was built on an industrial base that had been created at an earlier stage of import-substitution industrialization as well as on heavy export subsidies and various administrative measures to promote exports. The success of the export-oriented strategy in these countries was attributed, in part, to the “crowd in” effect of public investments that gave incentives to private investments via complementarities and allowed a greater diversification of the industrial sector. On these grounds, Shapiro and Taylor (1990) argued the following: “There is no reason why production for appropriate niches should not initially be supported by import barriers and export subsidies; indeed, the ‘opportunity costs’ of not trading have to be ignored until learning and scale effects take hold. The point is that full industrialization only occurs after infant firms grow up, and can compete more or less effectively on international terms.” (p. 873). In Korea, infant industries were protected by high tariffs during the early stages of industrialization alongside the export drive, and while exports were liberalized, the domestic market remained protected. The monopolistic or oligopolistic conglomerates that dominated many Korean industries were able to practice price discrimination that was considerably augmented by export subsidies. Infant industries matured by acquiring more advanced technologies, and gradually the effective protection rates were reduced. These industries turned to international trade not due to market forces, but largely because they were driven by government regulations to export their products (Lee 1997). However, the concentration of manufacturing production in Korea and in most other East Asian countries (except Taiwan) in large conglomerates, together with the power exercised by transnational corporations over exports created their own distortions, substantially reducing the efficiency gains of the export-led growth and its advantage over industrialization via import substitution (Helleiner 1990).
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What are the prerequisites for and the impediments against the adoption of a similar growth strategy in sub-Saharan Africa? What should the components of this strategy be? The East Asian Miracle drew two main lessons from the strategy of East Asian countries. First, the prerequisites for a successful growth policy are suitable social and political environments. Appropriate infrastructure—from electricity and highways to schools and health clinics—must be in place, and the government must have a central role in building this infrastructure. Second, the price system must provide proper incentives, and the institutions and mechanisms for competition must be sufficiently robust to secure the efficient working of the market. The World Bank report titled A Continent in Transition: Sub-Saharan Africa in the Mid-1990s (1995), which focused on the lessons for sub-Saharan Africa, emphasized the need for more market-oriented policies, more openness to trade, and sound macroeconomic policies. Alesina (1997) emphasized the importance of institutions for growth and noted the need for the protection of property rights and relative political stability. All these components determined the comparative advantage of East Asia as much as, or even more than, their factor endowments and relative costs in production. The role of institutions and the idiosyncratic structure of institutions in the “‘Asian model” are discussed in more detail in the next section. The “Asia way” and the role of institutions The high performance of the East Asian countries until the 1998 crisis was the main reason for the near general praise of the policies that these countries implemented. The East Asian Miracle noted the importance of market-oriented incentives that led to large gains in efficiency and factor productivity. These incentives were created by setting the correct price signals through the unification of the exchange rate, the measured devaluation, and the removal of discriminatory and distorting prices on the one hand, and the disciplining force of open trade and export-promotion strategies on the other. Other studies on the East Asian “miracle” gave equal weight to the role and effects of direct government intervention through continued subsidies, trade restrictions, administrative guidance, and targeted credit allocations to selected industries, on the grounds that, at the early stages of development, direct government support was necessary to make the transition from the production of primary products for the domestic market to the production of manufacturing goods for exports, and in order to stimulate foreign direct investments in the nontraditional sector. The weakness of the market system in these early stages, and the near absence of the necessary financial and economic institutions, made the state the only entity that was able to offer these incentives and provide a measure of security. The focus on the economic aspects of the “Asian miracle” narrowed the “Asian model” unduly and omitted key components that did not show up in the countries’ statistics, but are essential for a more comprehensive understanding of the “miracle.” It was recognized well before the 1997–98 crisis that the “Asian way” of doing business is different from that of the West. The Asian model of capitalism, in which free market competition was transformed to accommodate collusion between the government and the business establishment, was, however, touted (until that crisis) as better suited to
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Asian traditions than the Western model of free market capitalism. The crisis exposed fundamental weaknesses of this model, which were also the main reasons for the crisis itself. The organization of production for exports at the early stages of development allowed Asian countries to make the transition despite the lack of an industrial base. Radelet and Sachs (1997) noted that a unique and essential feature of the Asian model was the creation of an export platform—an enclave economy, hospitable to foreign investors and integrated into the global economy, unfettered by problems of infrastructure, security, rule of law, and trade policies that plagued the rest of the economy. On this platform, Asian countries were able to concentrate their investment and move up in technological development. Moreover, in the authors’ view, the platform not only allowed these countries to move up on the production ladder—from primary products to textiles to electronics and machinery—but also created a much broader modernization of the political and economic institutions. The principal reason for the greater complexity and the inherent weakness of the Asian economic model is that the export platform was not really an autonomous economic enclave. Rather, it remained connected in some essential functions to the rest of the economy. Plagued by problems of infrastructure, security, and the rule of law, these countries had to find a strategy that would allow an efficient and unimpaired management of production and the conduct of other business affairs on the export platform, despite these connections. Asian countries found a strategy that proved workable and effective for nearly three decades and was instrumental in promoting their rapid growth. The most important channel through which the export platform was connected to the rest of the economy was the financial sector. Since foreigners were not allowed to own banks, corporations that produced for exports had to rely on and adjust to the country’s financial institutions. The financial system was plagued, however, by sloppy banking practices and ineffective and often corrupt supervision, which allowed the provision of loans on the instruction of, or as a favor to, influential politicians or cronies. Another channel was the work force and the increasingly militant labor unions. With the rise in living conditions and the expansion of the industrial sector, workers began to organize and demand wage increases and improved working conditions. The third channel was the system of government, which was highly centralized, highly authoritarian, and actively involved in all aspects of the economy. These channels exposed the export platform to the weaknesses of the local economic, legal, and political systems and threatened to stall its take-off. To deal with these stumbling blocks, it was necessary to have a strategy that would allow the export platform to function despite these weaknesses. The strategies adopted by Asian countries show remarkable similarities. In fact, these countries followed, with surprisingly little variation, the patterns of the countries just ahead of them in the development process, not only in their technological advancement, but also in the evolution of their economic institutions. Indeed, the common denominator of these patterns constitutes the “Asia model.” The principal components of this model were the following:
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strong and authoritarian governments, assisted by an obedient and highly efficient bureaucracy, secured peace and stability, and enabled corporations to work without red tape in their investments and production decisions; the financial system, which had very limited independence in making business decisions and mainly functioned as a service agent to corporations; large corporations that organized a significant portion of production and exercised influence over the political system and controlled the financial institutions; a social welfare system that was built on a social contract between the workers and the corporations employing them. The role of the government was mainly to support that contract by subsidizing companies in order to keep people employed.
Authoritarian governments had a clear and significant role in creating the necessary conditions for establishing the export platform, in forging partnerships with foreign capital (and meeting the whims of foreign investors), and in conducting conservative fiscal and monetary policies, thus igniting the engines of growth and keeping them on track. The management of the economy was often delegated to a team of efficient technocrats that conducted a very responsible fiscal policy and maintained a stable currency, helping to keep inflation low. Thus, for example, the relative peace and social stability until the crisis, abundance of cheap labor, plentiful natural resources, and a stable currency made Indonesia highly attractive to foreign investors. As the economy developed, production became more sophisticated and capital intensive, financial decisions grew more complex, and the scope for errors and corruption under an authoritarian government rose sharply. Moreover, the Indonesian government, like most other East Asion governments, did not permit any significant development of institutions of governance and any significant move toward greater democracy. Hopes and expectations that the export platform would provide an incentive to modernize the political and economic institutions did not materialize. In the absence of these institutions, cronyism and corruption became common. In Indonesia, the absence of proper institutions of government was the reason why a financial crisis that initially appeared rather benign—primarily a case of mismanagement—and seemed not too difficult to correct, rapidly deteriorated into a complete meltdown of the currency and a crisis of leadership. In the 1960s and 1970s, most East Asian countries were essentially political tyrannies, either of political parties or of individuals. In that sense, they were not much different from the political tyrannies that ruled in most of sub-Saharan Africa. Yet in the 1980s, East Asia grew very rapidly and succeeded in developing rather advanced economic institutions that managed the economy very efficiently, whereas sub-Saharan Africa failed to reform its economies and entered into a spiral of slow or even negative growth that was accompanied in many countries with a collapse of the institutions of governance and outright chaos. An intriguing explanation of the marked differences between the experiences of these two groups of countries can be found in the (last) book that Mancur Olson published in 1998, entitled Power and Prosperity: Communist and Capitalist Dictatorships. Olson distinguished between what he terms political tyrants and political warriors, arguing that political tyrants have a stake in the country they are ruling over and exploiting, because the more the country prospers, the
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more they can extract for themselves in the form of legal or illegal taxes. The political tyrant therefore keeps taxes relatively low and develops rather effective institutions to manage the economy in order to assure the country’s long-term prosperity, thus maximizing also his long-term profits. The political warrior, in contrast, does not have the long-term perspective and seeks to maximize the profits he can extract from his subjects as fast as possible, thus leading to the collapse of institutions and to anarchy. The Asian financial “model” served the needs of the production systems in these countries very well in the early years by raising funds, initially in the domestic market and later also abroad, and making them available, on the instructions of government officials and at highly subsidized rates, to “strategic” industries. The investment and lending decisions were rather simple at that stage, since the choice of strategic industries and the investment decisions in these industries were rather clear. Already early on, however, banking practices were sloppy, in part due to the absence of a proper regulatory system and lax government oversight, and in part because the financial institutions were captive to high-level politicians, bureaucrats, and corporate managers. Nonetheless, the banks remained profitable because they were able to raise inexpensive funds from the public thanks to the very high saving rates and the rapid growth in income. At a later stage, the banks were also flooded with funds as a result of the larger inflow of foreign capital that grew six-fold between 1991 and 1996. Unconstrained by the lax government oversight, the banks went out of their way to give loans, in the process exposing themselves to higher risks and becoming leveraged with short-term debts. Corporations expanded well beyond their needs, and profitability of new investments was not the guiding principle for corporations or banks. Deference, trust and tightly knit relationships—those Asian values that in the early stages were instrumental in providing a substitute for the lack of practice and experience with risk management—gradually gave rise to cronyism, nepotism, corruption, and reckless risk-taking whenever rising profit opportunities presented themselves. Large investments in real estate and office construction continued unabated despite the slow-down in exports. The Asian crisis brought the deficiencies of the Asian “model to the forefront and revealed the weaknesses of the economic and political institutions in these countries. When the crisis unfolded, some hastened to conclude that the model was fundamentally flawed. The crisis should not obliterate, however, the fact that the “Asian way” had many advantages in the early years of the region’s development. It failed, however, to keep up with its own success by hindering the evolution of the institutions that are essential for longer-term development. The focus on economic growth gave precedence to the short-term. The longer-term price that Asian countries paid for this narrow focus was not, however, confined to the lack of institutional development and improper governance; it also included environmental degradation, crowded cities, and the decay of the rural sector. The Asian crisis thus highlights the need to make the development of institutions an integral part of development strategy. The relatively rapid recovery of some of the countries in the region—particularly South Korea, Singapore, and Malaysia—in 1999 and, even more so, in 2000, and the slow recovery of Indonesia, Thailand, and the Philippines, also emphasize the political dimension of the crisis and the fundamental weaknesses of the political and social
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systems that were aggravated in the crisis and slowed down the recovery. Indonesia is clearly the most notable example of the impact of political instability on the economy. The country experienced a 14% fall in GDP in 1998 and zero growth in 1999. The economic decline exacerbated the political problems, and in mid-2000 the economy entered a new slump. The Philippines were initially less affected by the regional crisis, but the political turmoil in 2000 very markedly slowed down economic growth. The entire region benefited from the continued rapid growth in the US and the EU during 1999 and 2000, which generated high demand for East Asian export products, most notably electronics. However, the high share of electronics in their exports and the high share of exports in their GNP make these countries very vulnerable to any slowdown in the economy of developed countries, particularly the US.
Globalization and Strategies of Sectoral Development The role and structure of agricultural development strategy The slow pace of industrialization and the rapid population growth in many developing countries, particularly in sub-Saharan Africa and South Asia, severely compromise the potential of the modern/industrial sector to absorb surplus labor. As a result, the continued flow of rural migrants has led to growing unemployment and poverty in the urban areas. An effective growth strategy in these countries must have a balance between industrialization and rural development and explore the potential employment opportunities in rural areas. So far, however, the pace of development is not very encouraging. During the past two decades, the per capita agricultural production in all the developing countries grew at an annual rate of less than 1%, and in many of the LDCs, agricultural growth was outpaced by population growth. The pace of agricultural growth is considerably slower than during the 1970s, at the time of the Green Revolution, when per capita agricultural production in the developing countries grew at an annual rate of 1.1%, after declining at an annual rate of 0.3% during the preceding decade (Table 1.6). The evidence of the last two decades, primarily in sub-Saharan Africa and South Asia, makes clear that in these countries the agricultural sector will not be able to Table 1.6. Growth of Food and Agricultural Production in Developing Countries (%) Country group
Food Total
All agriculture Per capita
Total
Per capita
1961–70 1971–84 1961–70 1971–84 1961–70 1971–84 1961–70 1971–84
Developing Low-income Asia Africa
2.2 1.3 1.2 2.6
Source: World Bank (1986)
3.2 3.2 3.4 2.0
-0.3 -1.3 -1.3 -0.2
1.1 1.2 1.5 -0.9
2.4 1.9 1.8 3.0
3.0 3.3 3.6 1.2
-0.1 -0.7 -0.7 0.2
0.9 1.3 1.7 -1.7
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sustain per capita growth rates in excess of 2% per annum without a significant increase in yields. Despite the early hopes during the Green Revolution, growth rates in agriculture seldom exceeded 4% per annum, and sub-Saharan Africa benefited very little from the new crop varieties that were developed at that time. Several factors may inhibit the growth prospects of the agricultural sector in many developing countries: < large direct and indirect subsidies to agricultural producers in the EU and the US and a rise in their production efficiency and yields. This led to a continuous and often sharp decline in many commodity prices in the international markets and reduced the capacity of farmers in the developing countries to produce these commodities at competitive prices. In many developing countries that opened up their economies to international trade, cheap imports of wheat, rice, corn, soybeans, and other raw crops from the developed countries made it difficult for local farmers to sell their products at competitive prices even in the local markets. < constraints on the transfer of advanced technologies and crop varieties from the developed countries due to IPR regulations and constraints on the development and adaptation of local technologies and varieties due to shrinking budgets for public agricultural research; < slow diffusion of new technologies due to the ineffective and resource-stretched extension services and slow adoption of high-yielding varieties due to the skills required for successful adoption. < poor infrastructure limits access to markets, both domestic and abroad, thus preventing greater specialization and adoption of high-value crops that can generate higher income, and forcing many farmers to grow primarily for self-consumption; < limited access of small landholders to credit and lack of financial institutions, arrangements and instruments for savings and investments in rural areas; < continuous erosion in the quality and quantity of agricultural lands; < decline in the world prices of traditional export crops such as coffee, cocoa, and bananas—the main cash crops in sub-Saharan Africa and in Latin America and the Caribbean. As a result, the growth of agricultural production was much slower in quite a few countries, particularly in sub-Saharan Africa, and employment opportunities for the rural population declined in practically all developing countries. In the developing countries as a whole, the share of the agricultural sector in total employment fell from an average of over 30% in the mid-1960s to an average of less than 20% in the mid-1980s, primarily due to the decline in the share of agriculture in the total GDP and the rapid urbanization. There were, however, wide variations between countries: during 1950–90, the share of agricultural employment in total employment declined by 30% in Thailand and Indonesia, by nearly 80% in South Korea, by 50–60% in Latin America, and by 10–25% in sub-Saharan Africa. In sub-Saharan Africa, the growth rate of agriculture was highly correlated with the growth rate of the other sectors, primarily because of the dominant role of the agricultural sector in the economy, and the share of agriculture in the GDP therefore changed relatively little (Rao and Caballero 1990). Since the growth rate of their
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industrial sector was also very slow, these countries could not rely on the industrial sector as a source of employment, and the pace of urbanization was much slower than in other continents. The relatively slow decline in the share of agriculture in total employment also accentuates the low and declining productivity in agriculture that was due, in part, to the migration to the urban areas, which left behind the very young, the old, the handicapped, and single mothers (Table 1.7). For countries that are predominantly rural and where industrialization is still at an early stage, rural-based development strategies have been advocated (Mellor 1976). The time that these countries would need to build an industrial base able to absorb the surplus labor from rural areas is bound to be long, and a strategy based on rural development therefore promises a faster increase in employment and reduction in poverty. Restructuring and expansion of agricultural production can also contribute to the development of the other sectors through forward linkages with processing industries. A study in India, Pakistan, Malaysia, and the Philippines found that, as an effect of this linkage, a 1% addition to the growth rate of agriculture would add 0.5% to the growth rate of industrial output, and 0.7% to that of the national income (Haggblade, Hazell, and Brown 1989). A rural-based strategy will also be more effective in reaching the poor because the majority of the poor still live in rural areas, and most of them depend on earnings from agriculture or from non-farm work that is partly linked to agriculture (WDR 1990). Over two-thirds of the rural poor are small farmers and landless laborers; many of them live in countries and regions where growth in agricultural production is lagging behind the population growth, turning many regions into “pockets of poverty.” Even in these countries and regions, however, the potential for agricultural growth is far from being exhausted, since their crop yields are very low and increased only very slowly in the past decade. In many countries in sub-Saharan Afriaca and South Asia, the single most important factor that inhibits agricultural growth and limits farmers’ income from agriculture is the lack of passable roads to the urban center. Mellor and Johnston (1984) estimated that this was the major reason why in India the potential growth of the agricultural sector during 1969–84 (calculated on the basis of the available inputs) was 50% higher than the actual growth. By realizing the potential of their agricultural sector, these countries could increase their food supply and the Table 1.7. The Share of Agriculture in the Economy of Selected SSA Countries (%) Country
Ghana Madagascar Malawi Niger Tanzania Zaire
Share of agriculture in GDP 1975–77 1980–82 1989–91 50.7 32.3 39.5 35.1 56.1 27.3
Source: World Tables, World Bank, various years
56.8 32.3 36.9 30.8 53.4 29.0
47.7 36.5 34.4 37.0 55.7 34.8
Share of agriculture in employment 1980–87 65 81 83 91 80 72
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earnings of the rural population. That, however, would require massive investments in irrigation, roads, and extension services. In addition, the adoption of high yield crop varieties and the use of fertilizers would have to be increased, and access to rural credit would have to be improved. Despite their potential, most developing countries refrained from building on their traditional strength in agriculture, citing a long list of reasons for their strategy to promote industrialization, the most common one being the following: < The demand for primary products is both price- and income-inelastic, and therefore cannot be a reliable base for export-led growth or a stable source of foreign exchange. < Export earnings from primary products are subject to wide fluctuations. < The traditional sector is often “backward” and unresponsive to economic incentives. < Agricultural exports from developing countries are depressed by the high protection rates on agricultural products in most developed countries, particularly in the EU (Bautista and Valdez 1993). On these grounds, many developing countries implemented policies that were highly biased against the agricultural sector, including: < overvalued exchange rates and/or direct export levies that reduced real returns on agricultural exports; < high protection rates on import-competing manufacturing goods that lowered the relative price of agricultural goods in the domestic market; < ill-functioning state marketing boards that used their monopoly power to raise the margins between the border price of exports and the farm-gate price and lowered the returns to farmers; < suppressed prices of food produce paid to farmers in order to secure low prices to urban consumers. These policies, implemented as part of the industrialization process, inhibited the development of the agricultural sector and trapped the entire economy in low productivity and low growth (Krugman 1991; Lucas 1988). They also reflect the political bias in favor of the politically and economically more influential urban population. To capitalize on their potential for agricultural growth, countries in sub-Saharan Africa, where a large portion of agricultural production is based on “slash and burn” or “shifting cultivation,” will have to encourage the transition to settled cultivation and to invest in rural infrastructure in order to increase agricultural production and employment. In South Asian countries, where the rural areas are already densely populated, agricultural development will have to be based on high-value products and highly intensive cultivation. To exploit the countries’ comparative advantage, the industrialization process will have to be built on two-way linkages with the traditional sector that allow both agriculture and industry to realize their growth potential. The key to future agricultural growth, however, lies in significant increases in yields. After an increase of 3% in yields during the Green Revolution in the 1970s, the
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rate of increases in yields dropped to 1% in the 1990s. In all the developing countries, there are still heavy losses of crops to pests, disease, salinity, and drought, but efforts to compensate for these losses by increasing the area under cultivation may aggravate the pressure on the environment and natural resources. Small-scale farmers may, however, not be able to increase production by using modern technologies or more fertilizers and pesticides due to their high costs. Further increases in yields at affordable costs and without depleting the country’s nonrenewable resources or damaging the environment, therefore present a daunting challenge to agricultural research. The recent developments in biotechnology and research in transgenic crops may offer a way to meet this challenge. Transgenic plants with traits such as pest and herbicide resistance, and tolerance to salinity and drought, can increase yields and reduce crop losses without the heavy use of fertilizers and chemicals. To take advantage of this potential, the challenge of public agricultural research is to develop or adapt suitable plant varieties and technologies, and to expand and improve their extension services so that they can bring these new technologies to farmers and encourage their adoption. The impact of multinational trade agreements on agricultural trade Another obstacle to the development of the agricultural sector in developing countries is posed by the constraints on the access to the markets of the developed countries, primarily the EU and the US. These constraints are due, in part, to the various tariffs these countries impose on imports of agricultural products and the subsidies they give to their own agricultural producers, and, in part, to the myriad regulations and administrative restrictions. The agricultural “chapter” is high on the agenda of the WTO since Seattle, but despite the general agreement on the need to open up the markets of the developed countries to agricultural products from the developing countries, actual progress has been very slow. The GATT agreement that was signed initially by 23 mostly developed countries was a provisional agreement without any institutional setup. At the time, it was envisaged that the next step would be the establishment of an international trade organization, but the World Trade Organization was founded only in 1995, 47 years later. Until that time, GATT was expanded in both scope and global coverage, and a series of interim agreements brought about a reduction of tariffs and other barriers to trade, contributed to a vast expansion of international trade, and precipitated the globalization process. The GATT rules applied, however, primarily to merchandise trade, and in the Uruguay Round in 1992, the need to expand the agreement to agricultural products became apparent. The WTO provided a framework of rules for the conduct of world trade in goods and services, but nearly a decade after the Uruguay Round, it does not yet include an agreement on agricultural trade. The agreements on a wide variety of trade issues and the establishment of the WTO represent the widening recognition that open trade—largely free of government intervention and based on legally binding rules—is to the benefit of all nations and helps to secure global growth. The liberalization of trade met with opposition from various interest groups within countries that stood to lose, at least in the short run, from more liberalized trade. The legal obligations that bind member countries when they
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join the WTO were designed, in part, to help reduce these pressures by presenting the wider benefits. An important principle governing the WTO is the nondiscriminatory treatment of all member countries; the legal term for that principle is the “most favored nation” (MFN) treatment. The GATT agreement states that any advantage, favor, privilege, or immunity granted by one WTO member to another has to be granted immediately and unconditionally to all other members. Another important principle is the need to establish a consensus as the basis for any resolution. Decision-making by consensus is bound to be slow and tedious in an organization of more than 140 members, but it was hoped that this would reduce conflict and secure wide acceptance of the rules. A third important principle of the WTO is the stability, transparency, and predictability of trading conditions, and this has been achieved by establishing upper bounds on tariff levels and a schedule of tariff concessions, and by determining the conditions of market access for services. Agriculture was the most contentious area in the negotiations and, as of 2002, very little progress has been made. The main reason was the impasse between the EU and the US that also delayed the conclusion of the entire Uruguay Round by four years and contributed to the failure of the 1999 Seattle meeting. Although agriculture was finally incorporated into the GATT in 1994, the more difficult negotiations were delayed to early 2000, but then these negotiations broke down and were delayed again. Nevertheless, a major achievement of the 1994 agreement was the conversion of all the nontariff barriers to trade—quantitative restrictions, import bans, etc.—into tariffs. The Uruguay Round Agreement on Agriculture took the first step to subject agricultural trade to the same rules that apply to merchandise trade, and to progressively reduce interventionist policies. The agreement stipulated the elimination of all quantitative and other nontariff restrictions, converting them into explicit tariffs, and it determined bounds on and a gradual reduction of domestic support and export subsidies for agriculture. Complete import bans on specific agricultural products were also replaced by tariffs, though these tariffs were initially set at a sufficiently high level so that they effectively prevented any imports of these products. Import quotas were replaced by “equivalent tariffs” (tariff rate quota or TRQ) that established the same restrictions. These tariffs brought agriculture into conformity with other trade areas, provided a more transparent regime and facilitated any liberalization agreements in the future through a gradual reduction of these tariffs over time. The Uruguay Round Agreement stipulated that the developed countries had to lower the aggregate tariffs by 36% over a six-year period, and the developing countries had to lower the tariffs by 24% over a 10-year period. In addition, the agreement imposed limits on production and export subsidies for agricultural products by requiring that the budgetary outlays on export subsidies, the overall volume of the subsidized exports, and the domestic subsidies be gradually reduced by predetermined rates—in the developed countries over six years and in the developing countries over 10 years. The LDCs (with a GNP per capita below $1000) were not subject to these restrictions. The agreement to restrict export subsidies was a major achievement of the Uruguay Round Agreement, since it came against the background of the trade war in agricultural products between the US and the EU in the 1980s, when their prices faltered and the price support programs in both the US and the
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EU generated large commodity surpluses. Both the EU and the US provided massive export subsidies to sell these surpluses in third markets. With these sales, they inflicted considerable damage to agricultural export earnings and farmers’ incomes in many developing countries. With all the exemptions and concessions, however, the main accomplishment of the Uruguay Round Agreement with respect to agriculture was primarily symbolic and only little immediate progress was made. Nevertheless, the changes in the ground rules in the Agreement paved the way to more substantive achievements. In particular, the agreements on TBT and SPS measures permit governments to use technical regulations, standards, and sanitary measures for health and safety reasons—provided they are transparent—while the SPS measures have to be scientifically justified and not create unnecessary obstacles to trade. These new rules and agreements reduced the likelihood of a renewed trade war of the type that was waged between the US and the EU in the 1980s (as the peaceful resolution of the 2001 banana war illustrates), but it left in place many of the policies and practices that are damaging to agricultural producers and exporters in the developing countries. The failure in Seattle to negotiate a new trade agreement on agricultural and textile goods delayed the removal of the walls of high tariffs that agricultural exporters from the LDCs are facing for some of their key products. A recent World Bank study (Hoekman, Ng, Olarreaga 2000) estimates that reducing the tariffs on imports of these products from the LDCs will raise exports of the affected products by 30–60%; an agreement in the next round of trade negotiations can therefore make a significant contribution to enable LDCs to increase their exports. The promise and challenge of new technologies In the second half of the 1990s, many developing countries benefited from large gains in productivity due to major technological improvements. Information and communication technology (ICT) and the Internet were key to these productivity gains, but many other technologies also offered innovations that contributed to increasing the productivity. In the developed countries, the huge investments in R&D that were required for these technological advancements were provided by the private sector. In the developing countries, most of these investments—particularly in education, training, and R&D—must be made by the public sector. While the need to invest heavily in the physical and human infrastructure presents obstacles to the adoption of many new technologies by poor countries, there are some major technologies that offer significant improvements without requiring large investments. An obvious example is ICT, particularly the Internet and the mobile phone. By giving even the less affluent individuals and entrepreneurs access to a huge amount of information and expert advice, these technologies have a “leveling” capacity, and they help reduce the barriers to competition along the supply chain. The Internet and the World Wide Web are not just symbols of globalization, as Thomas Friedman suggested in his book The Lexus and the Olive Tree. They are also among the main factors that made the process of globalization possible and profitable.
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Yet, whether the benefits from the new technologies will trickle down to all segments of society, or whether the primary beneficiaries will be the more educated and more affluent, remains open to question. In India, the main beneficiaries of the rapid growth brought about in recent years by ICT have been the professional workers. The majority of the Indian population, which lacks basic education and training, has benefited very little from the “new economy,” and spillovers to other sectors have been minimal. Moreover, the penetration of ICT into poor countries and poor regions has been very slow. The Organization for Economic Co-operation and Development (OECD) estimates that 95.6% of the world’s Internet hosts in 2000 were located in its member countries. On these grounds, UNDP’s 1999 Human Development Report warns that “[t]hose with income and— literally—connections have cheap and instantaneous access to information. The rest are left with uncertain, slow and costly access. When people in these new worlds live and compete side by side, the advantage of being connected will overpower the marginal and impoverished, cutting off their voices and concerns from the global conversation” (UNDP 1999). The gap between the rich and the poor thus threatens to widen the knowledge gap, and the widening gap between the “knows” and “know-nots” will further deepen the income and wealth gap. While the breathtaking pace of technological innovation in recent years, particularly in ICT, may indeed threaten to increase the gap between the rich and the poor, there is also a promising potential that technological innovation will make it easier to fill the gap. An instructive example is the fate of the public telephone services. In most developing countries, particularly in sub-Saharan Africa, telephone service is dismal, due to the poor state of the local infrastructure, the inefficiency of the mostly public telephone companies, and the very high prices, which are primarily due to the monopolistic power of these companies. Privatization of public telephone companies is therefore high on the agenda of most economic reforms. However, the process of privatizing these companies is quite complex and has proceeded rather slowly even in many of the more developed countries. In developing countries, the monopolistic public telephone company is often replaced by a monopolistic private company that increases profits by extorting its captive customers rather than reducing costs and increasing efficiency. In recent years, however, with the spread of the new mobile phone technology, customers found an effective way of bypassing the existing services and overcoming the constraints imposed by the poor infrastructure. By doing away with the requirement of setting up a cumbersome physical infrastructure, the new technology facilitates the entry of new providers that compete by improving efficiency and reducing prices. Similarly, with this technology, access to the Internet no longer depends on an expensive desktop computer connected to a telephone line, thus making it cheaper and easier to get “connected.” While technological innovation created the gap between those with “connections” and those without, it is also creating possibilities for developing countries to leapfrog outdated technologies.
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Concluding Remarks Development strategy has two central components. The first determines the policy guidelines for the country’s economic development: the balance between industry and agriculture, between rural and urban development, between exports and import substitution, etc. The second defines the role of the public sector in the implementation of this strategy. The large differences between the experience of the East Asian countries and most countries in sub-Saharan Africa and South Asia during the past two decades should therefore be explained not only by the differences in the policies that these countries implemented, but also, and perhaps much more so, by the differences in the role and effectiveness of their public sector, i.e., their public institutions and their systems of governance, law, and order, in the implementation of these policies. A brief comparison of the development strategies of these two groups of countries can offer a number of instructive lessons. In the 1960s, the standards of living in Africa were, on average, considerably higher than in the Far East, and the growth prospects of most African countries seemed to be much brighter. The picture changed dramatically in the 1980s, as an increasing number of East Asian countries embarked on an export-oriented, industry-led course of development that ushered in a period of rapid growth and a remarkable reduction in poverty. Sub-Saharan Africa and many countries in Latin America and the Caribbean and South Asia entered into a deep debt crisis and saw their growth rates and growth prospects plummeting. These sharply diverging experiences raise several questions: < What lessons can be drawn from these experiences with respect to the structure of and the balance between industrial, agricultural and trade policies in a developing country? < What economic, social, institutional, and political conditions made the “Asian miracle,”and the subsequent Asian crisis, possible, and what lessons can their experience offer for the design of growth strategies in the countries of sub-Saharan Africa? < What lessons can, for example, Bangladesh or Ghana draw from the experience of Thailand, Malaysia, and Uganda, as they design their development and trade strategies and structure their institutions of governance? < What lessons can be drawn from the large differences in the pace of development between these groups of countries with respect to the rather generic policy prescriptions of the form “liberalize thy trade, deregulate, privatize and set thy prices right” that were advocated by the World Bank and the IMF (and became known as the “Washington Consensus”)? The successful experience of the East Asian countries during most of the 1980s and 1990s underscores the merits of an outward looking development strategy and greater integration with the world economy. Indeed, this lesson remains valid despite the Asian crisis of 1997–98 and despite some periodic setbacks to the process of globalization. The key to the rapid industrialization and the swift rises in income and employment in East Asia were the effective use of the large supply of a cheap but disciplined labor force for the development of an internationally competitive and
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export-oriented industrial base. The outward-oriented development of these countries avoided the constraints that an inward-looking, import-substitution industrialization encountered in many other countries due to the limited size of their local markets. The export-led growth of the East Asian countries contributed to accelerating their growth also by attracting foreign investments and advanced technologies. The adoption of labor-intensive industries and technologies at their early stage of development enabled these countries to absorb rather rapidly the waves of migrants from rural areas and thereby raised employment and income in both rural and urban areas. In contrast, many of the countries that relied more heavily on inward-looking industrialization led by capital-intensive manufacturing were much more constrained by the limited size of their market that restricted, in turn, their capacity to absorb surplus labor and reduce unemployment. Despite the wide validity of these lessons, the diverging experiences of these countries also suggest caution in translating them into “commandments” and applying them too schematically in other countries. An equally important lesson is that a development strategy cannot be formulated as a menu of rules and policy recommendations that can be applied with relatively minor modifications to most countries. Indeed, the menu of policies that became known as the Washington Consensus achieved highly inconsistent results mainly because these policies did not take adequately into account the importance of each country’s unique social, cultural, and political conditions, the constraints imposed by the country’s past on its present course of development, and the impact of these conditions and constraints on the country’s capacity to build up the institutions and the system of governance and law necessary for an effective implementation of these policies. Instead, the underlying logic of these policies appears to have been their apparent “technical” and thus also, it seems, a-political nature (”remove this tariff,” “cut that subsidy”), and the apparent assumption that these policies, by being so highly beneficial for the vast majority of the population, would enable the government to easily mobilize the wide public support and the political coalition necessary to guarantee their successful implementation. However, this logic seems to ignore the social and economic quake that each policy reform unavoidably triggers by shattering the existing balance between sectors, regions, and social groups. Policy reforms that involve a change in import tariffs or export subsidies inadvertently affect a large number of consumers and producers. Eeven if, in the long run, most of them will benefit from the more rapid economic growth thanks to the greater efficiency in production and in the allocation of resources, in the short run, some people and sectors will gain, while others will lose. Those who lose are likely to coalesce in order to demand different policy reforms or at least compensations that will minimize their losses; those who gain may coalesce to oppose any policy reversal (see also Alesina et al. 1999). These conflicts prolong the transition period and make the implementation of the reforms far more difficult and controversial. Although the initial step in the reform may look “technical,” the subsequent steps are likely to be highly political. Strong institutions of governance are therefore necessary throughout this process to ensure that the reform will remain on course and that the promised “Pareto improvement,” when progress takes place and economic growth is accelerated, will indeed materialize.
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These conflicts and their impact on the economy may not be captured, however, in the standard analysis that focuses on technical indicators. A symptomatic illustration is provided by Esterly (2001) in his discussion of an apparent puzzle: During 1980–98, the growth of median per capita income in developing countries was 0.0%, compared with 2.5% in 1960–79, even though variables that are standard in growth regressions (policies like financial depth and real overvaluation, and initial conditions like health, education, fertility, and infrastructure) generally improved during these years, and theory suggests that, therefore, these countries’ growth should have increased. In most of sub-Saharan Africa and South Asia, the puzzle is even more perplexing because their median per capita income actually declined rather sharply during these years, even though, in the majority of these countries, the variables that represent the determinants of growth in the standard growth regression generally improved. Esterly commented that this stagnation represented a disappointing outcome of the standard menu of policy reforms of the “Washington Consensus”. In fact, the puzzle was created by the analysts themselves as they focused exclusively on technical variables in the standard growth equation. These variables fail to take into account other dimensions of the growth process, particularly the rather dramatic changes in the social and political setting that occurred in the majority of the African countries during the past two decades. These changes had a very strong impact on the explanatory power of the technical variables, and if they are not taken account, a puzzle is likely to emerge. Even more important, these changes in the social and political conditions affect not only the retroactive explanatory power of these variables, but also the power of economic reforms that focus on the more technical rules of the economic policies that these variables determine to generate growth. A failure to take into account the changes in the social and political conditions and in the institutional setting in the country may doom the reforms themselves to fail. Consider, as an illustration, the reasons for the mixed performance of privatization, one of the principal policy reforms that were aimed at improving the notoriously malfunctioning public services. Among these public services, the public marketing boards are at the top of the list in most developing countries. Their dismal performance, particularly in the African countries, and the widespread corruption that cripples their operation make their total elimination via privatization the only logical solution. Privatization is expected to usher in healthy competition between the newly privatized enterprises, and this competition, in turn, is expected to become the driving force for the elimination of the distortions that were introduced by the heavily regulated public agencies. In practice, however, the transition from a marketing system based on public marketing boards to a system based on private trading companies was by no means beneficial to all producers and consumers. In many countries, the privatized marketing boards were essentially taken over by trading companies that established their monopolistic power either in the country at large or in the local market, often with a little help from the retired managers of the existing public board, from other government officials, or from family members of the president. These monopolistic private enterprises often created much larger distortions to the disadvantage of larger segments of the population, particularly the politically and economically weak. With few constraints on their monopolistic power, these trading
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companies were under no pressure to improve their service or reduce prices to their customers. In developed countries, these distortions are reduced to a minimum, thanks to the watchful eye of various public legal institutions charged with preventing such abuses. In most developing countries, these institutions are too weak or nonexistent, and the supervision over private companies is either highly inefficient or entirely lacking. Consider, for example, the potential obstacles that may hinder the process of trade liberalization, another example of a policy reform that developing countries are often pressured to implement. The existing tariffs and/or subsidies are clearly damaging to the country as they distort its resource allocation and reduce economic efficiency. Prior to the reforms, producers, consumers, and traders have to organize their entire operations on the basis of the distorted prices. The trade liberalization reforms then force them to make considerable changes, particularly in their production system, and these changes may also require large investments that are bound to prolong the transition period. During the transition period, some producers and traders will suffer losses due to the decline in the relative price of their products, while others will gain as the relative price of their products is rising. Even though most people will be better off in the long run, those who suffer losses during the transition period are likely to oppose liberalization, while those who gain already in the short run are likely to have higher-than-normal profits until all producers and traders make the necessary adjustments. The losses of one group of producers and traders as an effect of the reforms, and the higher-than-normal profits of the other group are bound to sharpen the discord and possibly lead to an open conflict that can embroil all the country’s social and political institutions. The possibility of such a conflict inadvertently introduces social and political dimensions to the process of implementing the reforms, no matter how “technical” or “a-political” the reforms may appear at the outset. The possibility that the reforms will produce rival coalitions or deepen already simmering conflicts between social or ethnic groups must be taken into account in advance, i.e., the reforms have to be designed with full consideration of the specific social, economic, and political conditions in the country and with the participation of the potentially affected groups. Trade liberalization reforms may then have to be accompanied by targeted measures aimed at assisting those producers who may be outcompeted by a wave of cheap imports of the products they produce. This can be achieved by offering assistance for their transition to new products or to other sectors. Obvious examples for the failure to avoid unintended consequences can be found in the situation resulting from the measures that many countries implemented in order to reduce trade barriers on agricultural products when they joined the WTO. The flood of cheap imports of maize, wheat, and other field crops from developed countries forced many small farmers in developing countries either to retreat into production for their own consumption or to abandon agriculture altogether, because their own resources—financial and otherwise—did not enable them to make the transition to other crops and a different farming system quickly enough. Indeed, many of these farmers joined the ranks of those who oppose globalization.
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To smooth the transition and reduce the intensity of potential conflicts, it may also be necessary to put in place a proper legal system and establish or strengthen the institutions that can prevent one group or sector from taking undue advantage of the distorted prices that are likely to emerge during the transition period. In some cases, it may also be necessary to provide some form of compensation to those who may become worse off as an initial result of the reforms. However, the provision of measures and mechanisms to ease the transition period takes time, and when the institutions that are supposed to provide them do not even exist, the preparatory process is likely to be even longer. Without careful preparation, however, the conflicts and inequities that may emerge during the transition period can pose a risk not only to the success of the reforms, but also to the country’s entire social infrastructure. This is why a country’s institutional and legal systems and its specific social, economic and political conditions are critical to the success of trade liberalization. Even when the need for reform and the gains that it promises in the long run are obvious, the seemingly technical reforms will still have to be implemented in a specific context, and this is why the “Letters of Agreement” of different countries cannot be mere duplicates.
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Chapter 2 Trade Liberalization and China’s Food Economy in the 21st Century Implications for China’s National Food Security
Jikun Huang*
Introduction Since the economic reforms of late 1978, China’s economy has grown substantially, with annual GDP growth rates of 9% or more during most years (Table 2.1). Despite the decline to 7.8% in 1998 and to 7.3% in 1999, China’s growth rate was still among the highest in the world. Foreign trade expanded even more rapidly (Table 2.1) and has played an increasingly significant role in the national economy. As a result, China’s trade to GDP ratio increased from 13% in 1980 to 36% in 1997 (Table 2.2). During the same period, the total value of China’s agricultural trade increased at an annual rate of 6.0% (Huang and Chen 1999b). After 14 years of negotiations, China joined the WTO in 2001. The sheer size of China’s economy and its rapid growth will make the country a crucial player in the future development of world markets for inputs and outputs of food, agricultural products, agribusiness, and industry. There are, however, growing concerns about the impact that China’s membership of the WTO mya have on China’s domestic agricultural outputs, prices, employment, and farmers’ income. The question of how to sustain agricultural growth, achieve food security, and increase farmers’ income through—and in some cases despite of—the process of trade liberalization has become the primary concern of policymakers as well as farmers. What is the impact of trade liberalization on China’s agricultural production? What are the implications of trade liberalization on China’s food security? What are the policy implications for changes in the economy resulting from trade liberalization in the future? The answers to these questions are by no means clear. While all studies show that both China’s economy and the world economy will benefit from China joining the WTO, the impact on the country’s agriculture and rural population is highly debatable. Some researchers claim that the impact on domestic agricultural production and on world trade will be marginal (Anderson 1997). Others believe that the impact should not be understated (Wang 1997; State Council 1998; Huang 1998; Huang and Chen 1999a, 1999b). To gain a better understanding of the questions raised above, this chapter first examines the reform process of China’s foreign trade sector and its impact on China’s agricultural trade in the past two decades. It will then explore the effects of trade liberalization on China’s agriculture, using an agricultural sector-wide general
* Jikun Huang: Center for Chinese Agricultural Policy, Chinese Academy of Agricultural Sciences 83
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Table 2.1. Annual Growth Rates (%) of China’s Economy, 1970–97 Pre-reform
Reform period
1970–78
1979–84
1985–95
1996–97
4.9
8.5
9.7
9.2
2.7 6.8 na
7.1 8.2 11.6
4.0 12.8 9.7
4.3 11.4 8.0
Import Export
21.7 19.4
12.7 15.9
13.4 17.2
10.8 3.8
Population
1.8
1.4
1.37
1.03
GDP per capita
3.1
7.1
8.3
8.2
Gross domestic products Agriculture Industry Service
Note: In 1970–78 the figures are the growth rates of national income in real terms. Growth rates are computed using the regression method. GDP and per capita consumption growth rates refer to the value in real terms. Source: State Statistical Bureau, China Statistical Yearbook, various issues.
Table 2.2. Foreign Trade to GDP Ratios (%) in China, 1980-97. Year
Total trade* to national GDP
Agricultural trade* to agricultural GDP
Agricultural export to agricultural GDP
Agricultural import to agricultural GDP
1980 1990 1997
12.7 29.8 36.0
10.3 14.5 14.9
4.6 9.1 9.1
5.6 5.4 5.8
* Trade = imports+exports Sources: State Statistic Bureau, China Foreign Economic Statistical Yearbook, various issues; China’ Customs Statistics, various issues; China Statistical Yearbook, various issues.
equilibrium model, and the final section summarizes the conclusions and policy implications from the study.
The Reform of China’s External Sector and Agricultural Trade The foreign trade regime in the pre-reform period (before 1979) When the People’s Republic of China was founded in 1949, the government soon established a socialist planned economy. As it wanted to accelerate its economic growth and industrialization, China, like many other developing countries, adopted the
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“import substitution” strategy for industrialization and established a highly centralized and planned foreign trade regime. Under this regime, exports were aimed at serving imports, and foreign trade was aimed at serving national industrialization (Lardy 1992 and 1995). This planned foreign trade regime was implemented strictly under the rules and regulations of trade organization and operation, trade management and control, trade planning, and trade financing. The foreign trade rights were granted by the Ministry of Foreign Trade to a few state-owned enterprises or corporations. Only 12 national and specialized foreign trade corporations and their port subsidiaries held the trading rights nationwide and thus monopolized all foreign trade in China before 1978. Foreign trade of agricultural products was monopolized by China National Grain, Oil and Food Import and Export Corporation (COFCO), the China National Native and Animal Products Import and Export Corporation, and the China National Textiles Import and Export Corporation. Foreign trade management and control were mainly based on administrative intervention by the government (Huang and Chen 1999a). The state foreign trade plan was mandatory and covered all aspects of foreign trade, such as foreign trade procurement, transfer and allocation, export, import, foreign exchange earnings, and payments. Foreign trade corporations were not responsible for making profits and losses from trade. The Ministry of Finance was responsible for all profits and losses and also provided all working capital to foreign trade corporations. The early reform period (1979–87) China implemented a series of important policies and measures in the early period of foreign-trade reform. The highly centralized and monopolized foreign-trade operation system was gradually reformed and partially decentralized by establishing more trading ports and granting more corporations and production firms direct foreign trading rights. During 1979–87, more than 2,200 foreign-trade corporations were established. The single mandatory planning system for foreign trade was also replaced by a new system that introduced a guidance plan and some market adjustments to the old plan in order to improve the trade response to domestic and international market changes in 1985. Except for a few bulk products that were considered important for the national economy and people’s livelihood, the new foreign trade system covered the majority of products, including most agricultural products (mainly grains). The reform of the foreign-trade management system was gradually achieved through reducing direct administrative intervention by the government and introducing trade instruments to manage foreign trade. In 1980, China established the quota system and restored the licensing system to manage the import and export of commodities, including agricultural products. In 1982, experiments on linking foreign-trade corporations with production firms were carried out to improve the quality of export products and increase competitiveness on the international market. To promote exports, China introduced the export tax rebate in the early 1980s and initiated a trade contract responsibility system in 1987.
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Toward more market-oriented trade reform (post 1987) Despite the progress made in reforming China’s foreign trade sector, the fundamental problem in the foreign-trade sector remained unchanged: the efficiency of the trade and budget financing system. Since the late 1980s, foreign-trade reform was aimed at fully implementing the trade contract responsibility system and introducing a more market-oriented trade regime in the economy. Other major trade policies included regional open-door policies, direct foreign investment policies, fiscal policies, monetary policies, foreign exchange policies, and foreign trade control (tariff and nontariff measures) policies. The foreign trade contract responsibility system. This system was initiated in 1988–90 and implemented nation-wide later. It provided an incentive mechanism for trade corporations to increase foreign-exchange earnings. Foreign-exchange controls were relaxed, and local governments and enterprises were allowed to have their own rights in the disposal or use of the retained foreign exchange through the foreignexchange swap centers that were established in 1988 in the main cities of each province. This policy was in effect until the unification of the official and swap foreign exchange markets in 1994. Export subsidies. Under the planned foreign-trade regime, foreign-trade corporations were not responsible for the profits and losses they incurred in their foreign-trade business. The Ministry of Finance not only took all profits and covered all losses, but also provided all the working capital for foreign-trade corporations. Because of the distorted domestic pricing system, export subsidies were common under the planned foreign-trade regime. China fixed its export subsidies for 1988–90 at about 4% of the total export value of 1987 to curb the rising subsidy trend that not only caused financial problems, but also inefficiency in the trade sector. Although export subsidies were phased out in 1991, the implementation of this policy proved to be difficult, particularly after the Asian economic crisis. Export tax rebate. To promote exports and to increase the competitiveness of China’s export commodities in the international market, China began to use an export tax rebate on an experimental basis for 17 export commodities in 1983. This policy was extended to cover more export commodities in the mid-1980s and applied to almost all export commodities after 1988. At present, the export tax rebate includes the product tax, value-added tax, business tax, and special consumption tax. Foreign exchange policies. With the unification of the two-tier foreign exchange rate systems, the foreign exchange retention system was finally abolished in 1994, and the RMB became convertible on the current account in 1996. Historically, the overvaluation of the domestic currency for trade protection purposes had reduced export incentives. Real exchange rates remained constant and even appreciated during the 30 years prior to reforms, but depreciated rapidly after the reforms, with the exception of several years following the high domestic price inflation of 1985. During
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1978–92, the real exchange rate depreciated more than 400%. Economic productivity growth and technological innovation in agriculture, foreign trade, and industry contributed to low inflation and the success of exchange rate adjustments. China is the second country in Asia (after Indonesia) to have aggressively adjusted exchange rates over the two decades prior to 1997 (real exchange rates appreciated by about 30% from 1992 to 1997). Falling exchange rates increased export competitiveness and thus contributed to China’s phenomenal export growth record and the spectacular economic performance of the 1980s. Tariffs and nontariff measures. China’s average tariff was 47.2% in 1991, one of the highest in the world (World Bank 1997). Since then, China has gradually reduced its import tariff rates. In April 1996, rates were reduced for more than 4,900 items, lowering the simple average tariff rate from 35.9% to 23%. In October 1997, there was a further reduction for more than 4,800 items, bringing down the simple average tariff rate from 23% to 17% (23.6% for agricultural products). During the 1980s, China extensively used quotas and licensing to control its foreign trade. However, since the early 1990s, China has progressively and drastically reduced the number of items subject to export and import quotas and licensing administration, and by 1998, the products subject to quota, licensing and other import control measures accounted for only 5% of the total import tariff lines (Huang and Chen 1999a). In sum, during nearly 20 years of reform, China’s foreign trade regime has gradually changed from a highly centralized, planned, and import-substitution one to a more decentralized, market-oriented, and export-promotion regime. However, while significant progress has been made since the beginning of economic reform, China’s foreign trade regime continues to have major inefficiencies, and international trade in agricultural products still remains largely monopolized. Domestic support to agriculture Fiscal and financial policies. Government fiscal expenditure on agriculture has been consistently higher than fiscal revenues from agricultural taxes and other fees collected from agriculture (Huang 1999). However, this fiscal revenue, which is based on explicit taxes and fees, is only a small portion of the total agricultural capital contribution to industry and the urban sector. A significant capital outflow from agriculture to industry occurred during the last two decades through the financial system, particularly through Rural Credit Cooperatives (Huang and Ma 1998). Thanks to explicit agricultural taxes through the government procurement system, China accumulated a total of 313 billion Yuan (at 1985 prices) from the agricultural sector for national industrialization, and 563 billion Yuan from the rural sector for the urban economy during 1978–96. Moreover, the shifting of capital from agriculture to industry and from the rural to the urban sector has increased since the beginning of reforms in the late 1970s. Agricultural protection. Price and market reforms are key components of China’s development policy shift from a socialist to a market-oriented economy. The price and
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market reforms initiated in the late 1970s were aimed at raising farm-level prices and gradually liberalizing the market. These reforms included increases in quota and above-quota prices, reductions in quota levels, the introduction of above-quota bonuses for cotton, tobacco, and other cash crops, negotiated procurement of surplus production of grains, oils, and most other commodities, and flexibility in the private marketing of surplus production of all categories of agricultural products. Table 2.3 shows the estimates of nominal and real protection rates based on various producer prices from 1978 to 1998 for selected agricultural commodities. Several observations can be made. The quota prices consistently represented a negative protection for farmers. The introduction of negotiated procurement significantly reduced the negative protection that was due to the government procurement operations. Not surprisingly, the most heavily taxed commodities are exportable ones, such as rice. Wheat, an importable commodity, is more favored. Apart from the lower quota price or the nominal protection rate (NPR) for rice, the proportion of grain procurement at the higher negotiated price is typically higher for corn and soybean. It is also worth noting that the nominal protection rates for wheat and maize at free market prices have been about 20–25% since the mid-1990s. In sum, despite substantial efforts to liberalize the price and the market structure of the agricultural sector, most major agricultural commodities continue to be heavily penalized by commodity-specific policies. When the impact of the overvaluation of the domestic currency is considered, the negative agricultural incentives would even be greater. These distortions in price incentives depress agricultural production and redistribute income from farmers to urban consumers and to the agro-processing sector.
Table 2.3. China’s Nominal Rates of Protection (%), 1978–98: Selected Rates Evaluated at the Real Exchange Rate
Market retail price Rice Wheat Maize Soybean Procurement prices Rapeseed Cotton Sugarcane Sugarbeet
1978–79
1980–84
1985–89
1990–94
1995–981
-36 -12 -10 -34
-44 -26 -32 -32
-50 -34 -40 -38
-53 -39 -46 -40
-26 -14 -10 -20
-48 -53 na na
-43 -51 na na
-56 -63 na na
-48 -65 -64 -56
-31 -35 -42 -29
1. For rapeseed, cotton, sugarcane, and sugarbeet, the period is 1995–96. Note: China’s import or export unit values are used as border prices, except in the case of maize, for which we used US Gulf Port prices x 1.10 as the border price. No quality adjustments are made for all products.
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Patterns of Agricultural Trade Trends of total and agricultural trade One of the most significant features of China’s open-door policy and the shifting trade regime is the remarkable expansion of its international trade. Average annual exports rose from US$ 22.16 billion in 1980–84 to $160.84 billion in 1995–97, at an annual growth rate of 14.6% (Huang an Chen 1999b). Although imports also increased significantly, by more 600% during the same period, the annual growth rate of imports (12.2%) was lower than that of exports. This resulted in a move from a trade deficit in the 1980s to a significant trade surplus in the 1990s. China has enjoyed an annual trade surplus of about $23 billion since the mid-1990s, and by 1998 China had about $140 billion of foreign exchange reserves (SSB 1999). Because of the fast growth of international trade, China has greatly improved its position and increased its share in world trade. China’s exports ranked only 26th in 1980; by 1997, the country ranked 10th among the world’s trading nations. At the same time, China’s share in world total trade also increased, and its export share grew from 0.9% in 1980 to 2.9% in 1996. Agricultural trade had been an important contributor to China’s foreign trade, but its importance in China’s total trade has declined since 1980, and particularly since the early 1990s, from 21% in 1980–84 to 8.7% in 1995–97 (Table 2.4). Despite this decline, the volume and value of agricultural trade increased during the past two decades from a total annual value of $9 billion in 1980–84 to $25 billion in 1995–97, at an annual growth rate of 6.0% (Table 2.5). During the same period, the annual growth rate of agricultural exports was 8.0%. China’s agricultural trade balance has been in surplus since 1983, reaching $6 billion in the 1990s. In terms of the relatively “openness” of China’s agricultural sector, as shown in Table 2.2, China’s agricultural sector has been relatively less open to the world economy than the other sectors. Nevertheless, the ratio of agricultural trade to agricultural GDP increased from 10.3% in 1980 to 14.9% in 1997. The changing structure of China’s agricultural trade In analyzing the patterns of China’s agricultural trade, we grouped the agricultural trade data into three categories, based on the factor intensity of production: land-intensive products,1 labor-intensive products,2 and labor/capital-intensive products.3 The results are presented in Tables 2.5, 2.6, and 2.7. These tables show that China’s agricultural exports were overwhelmingly and increasingly dominated by the export of labor-intensive agricultural products and labor/capital-intensive products, while imports were dominated by land-intensive products. The patterns of China’s agricultural trade reveal two main points. First, at the aggregate level, the pattern of China’s agricultural trade is consistent with its domestic resource endowments. China 1. Land-intensive agricultural products include cereals, vegetable oil seeds, and raw cotton. 2. Labor-intensive agricultural products include live animals, dairy products, roots and tubers, coffee, tea, etc. 3. Labor/capital-intensive agricultural products include meat, sugar, cocoa.
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Table 2.4. China’s Agricultural Exports by Factor Intensity, 1980–97 Year
1980 1990 1997
Land-intensive products
Labor-intensive products
Labor/capital-intensive products
Value ($ billion)
Share (%)
Value ($ million)
Share (%)
Value ($ million)
Share (%)
0.6 1.7 2.2
15 18 14
2346 4971 6538
56.22 52.10 42.63
1185 2881 6642
28.40 30.20 43.30
Source: Huang and Chen, 1999a.
Table 2.5. China’s Agricultural Imports by Factor Intensity, 1980–97 Year
1980 1990 1997
Land-intensive products
Labor-intensive products
Labor/capital-intensive products
Value ($ million)
Share (%)
Value ($ million)
Share (%)
Value ($ million)
Share (%)
4256 4032 4644
83.26 71.88 47.34
314 642 2179
6.14 11.45 22.21
542 935 2987
10.60 16.67 30.45
Source: Huang and Chen, 1999a.
Table 2.6. Trade Balance of Agricultural Commodities in China ($ Million), 1980–97
Total agricultural imports Grains & consumable vegetable oils cereals animal feed Horticultural products vegetables and fruits coffee and tea Animal products live animals meat products seafood products Other agricultural products sugar raw cotton Source: Huang and Chen 1999a.
1995–97
1980–97
4044 -3789 -1863 -468 4712 2850 486 4313 448 2206 1323 -1193 -281 -1280
3242 -1279 -1293 136 2914 1598 405 1995 388 878 789 -388 -166 -387
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Table 2.7. Simulation Results: Impact of Trade Liberalization on Agricultural Commodity Prices in China (in %) (Free Trade vs Baseline Scenarios) Commodity
Price change 2000–05
Baseline Rice Wheat Maize Soybean Sweet potato Potato Other grains Pork Beef Mutton Poultry Egg Milk Fish
-0.4 -1.1 7.5 0.4 0.7 -0.4 -1.8 0.8 1.8 3.4 0.9 -3.5 1.5 -4.8
Percentage price difference in 2005
Free trade
Free trade vs Baseline
4.1 -20.2 -20.1 -20.2 -9.6 -9.5 -9.7 14.8 0.0 0.0 10.4 0.0 -20.2 0.0
3.5 -19.9 -26.0 -20.4 -11.8 -10.4 -8.4 14.4 -1.0 -2.6 9.9 4.2 -20.9 5.5
was a net exporter of labor-intensive and labor/capital-intensive agricultural products, such as horticultural products, animal products, and processed agricultural products, and a net importer of land-intensive agricultural products, like grains, cotton, and consumable vegetable oils. Second, in terms of the changing trend, there is evidence that over the past two decades the patterns of China’s agricultural trade are increasingly in line with its comparative advantage, especially in exporting more labor-intensive and labor/capital- intensive agricultural products.
Impacts of trade liberalization on China’s agriculture To evaluate the future impacts of trade liberalization on China’s agriculture, we apply an existing CCAP Agricultural Policy Simulation and Projection Model (CAPSiM). CAPSiM was developed out of the need to have a framework for analyzing policies affecting agriculture in general, polices related to macroeconomy and trade, and policies directed towards agricultural commodities in particular. CAPSiM is a partial equilibrium model, or sector-wide general equilibrium model (considering all crossprice impacts for both demand and supply equations). It is the first and most comprehensive model for China’s food supply, demand, and trade analysis. Most of the elasticities and parameters used in CAPSiM are estimated econometrically with the imposition of theoretical constraints. In projection or policy simulation, prices can be determined endogenously or exogenously. CAPSiM explicitly accounts for
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urbanization and market development (demand side), technology, agricultural investment, environmental trends and competition for labor and land use (supply side), as well as the price responses of both demand and supply. A detailed description of the model can be found in Huang and Rozelle (1998), and Huang and Chen (1999b). Defining projection scenarios All simulations begin with 1994–96 as the base period. The base-period data on production and utilization is the three-year average of 1995. Baseline scenario Income growth and population growth will remain an important determinant of food balance in the future. Population growth peaked in China in the late 1960s and early 1970s. Since then, fertility rates and the natural rate of population growth have begun to fall. The United Nation’s demographic estimates show that the growth rate during 1996–2000 was 1.11% per year. This rate will fall during the next five years to 0.88%, a level that is considerably below the world’s projected growth rate of 1.70–1.80%, but above recent projections made by China’s demographers. The share of the urban population is expected to rise from 28% in 1994–96 to 31% in 2000, 35% in 2005, and 46% in 2020. The baseline per capita income growth rate is estimated to average about 4% in the rural sector and 4.5% in the urban sector. The growth rates in the late 1980s and early 1990s were substantially above this level in the urban economy (around 6–7%), and significantly below this level in rural areas (less than 1% per year between 1985 and 1992). But in recent years the overheated urban growth has slowed, and in 1991, the rural economy began to pull out of its recession, growing at the rate of 4% per year. The agricultural commodity prices at the baseline are endogenously determined and are generated from simulations, assuming that the current trade policy (tariff levels and nontariff restrictions) remains unchanged. Supply will mostly respond to prices, new technology, and irrigation investment. The fertilizer price is assumed to be constant in the projection period, but the opportunity costs of land and labor for the agricultural sector are assumed to grow at the rate of 1% and 2% respectively during 1996–2005. Technological change has significantly contributed to China’s agricultural growth in the past (Huang and Rozelle 1996; Fan and Pardey 1997). However, annual expenditures on research declined from 1985 to 1990, and irrigation expenditures dropped from 1975 to 1985. Because of lags, these early investment dips will keep baseline projections of investment growth below historic rates in the early projection period. The recent recovery in research and irrigation investments, together with the experience of other Asian countries and China’s commitment to a strong domestic agricultural economy, lead to the expectation that China will sustain its recent upturn in investment funding over the long run. The annual growth rates of research and irrigation expenditure are assumed to be 4% and 3.5% respectively in the future. Erosion and salinization are expected to continue to increase at a steady but slow pace.
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Alternative scenarios: Free trade and productivity enhancement growth scenarios In order to have a better understanding of the impacts of China’s accession on its agricultural market and trade, we assume that China will continue to liberalize its agricultural sector and reach a free trade environment for most of its agricultural commodities by the year 2005. Specifically, the free trade scenario in this study assumes that tariff levels, export subsidies, and trade barriers for 14 major agricultural products4 will be gradually reduced after 2000, and then reach a zero tariff and complete the phasing out of nontariff trade barriers by the year 2005. This is an extreme case in the economy and represents the highest impact of trade liberalization on China’s agriculture. The actual impact of trade liberalization and China’s joining the WTO is likely to be between the simulation results of the baseline scenario and the free trade scenario. Under the free trade scenario, both import tariffs and trade barriers for agricultural inputs such as fertilizers and pesticides will also be reduced and eventually be phased out in 2005. Therefore, the fertilizer and pesticide prices are assumed to decline by 20% from 2000 to 2005. All other assumptions are the same as those defined in the baseline scenario. It should be noted that the CAPSiM model is a country model and the impact of China’s trade liberalization on world market prices is not examined. It is expected, however, that the increase in the import of feed grain under the free trade scenario will raise international market prices for feed and in particular, for maize. Similarly, the simulation results in the next section indicate that trade liberalization will increase China’s pork and poultry exports, and this may push the world pork and poultry prices downward, depending on the extent of China’s trade liberalization. To estimate the impacts of world agricultural price changes (as a result of China’s trade liberalization) on China’s agricultural trade, we simulate the free-trade scenario in two stages. In the first stage, world prices of all agricultural products are assumed to remain unchanged in the real term in 2000–05. The results from the analysis under this assumption with respect to the impact on the quantities of China’s imports and exports of various agricultural commodities are then used to calculate the changes in the world market prices. In the second stage, the simulation analysis is conducted with the new world market prices, and this procedure is repeated until the marginal changes from additional rounds of simulation on the quantities of imports and exports of agricultural commodities become minimal. To provide a long-term perspective of China’s food security under a free-trade regime, we project China’s food supply, demand, and trade toward 2020 under a free-trade scenario without and with the progressive improvement in agricultural productivity enhancement investment. The latter assumes that the annual growth rate of agricultural research expenditure will rise from 4% (baseline assumption) to 6%.
4. Seven grain products, including rice, wheat, maize, soybean, sweet potato, potato, and other
grains, and seven animal products, including pork, beef, mutton, poultry, egg, milk, and fish.
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Impacts of trade liberalization on China’s agricultural prices Table 2.8 presents the price differences of the selected agricultural products in China’s domestic markets under the baseline scenario and the free-trade scenario during 2000–05 as projected by the model. Under the baseline scenario, the increases in the domestic production of rice, wheat, other grains, and most animal products will nearly meet the increase in the domestic demand for these commodities; the changes in their trade over 2000–05 will be marginal (see next subsection). Changes in the domestic prices (in real term 1995 prices) of most of these commodities will therefore range from only –1% to +2% in 2000–05. This implies that China’s domestic grain prices, except for the price of rice, will continue to be higher than the world market prices in 2000–05, and the differences between the domestic market prices and the world market prices will increase during these years. In particular, the price of maize, wheat and soybean in China’s domestic market will far exceed their price in the world market. Under the free-trade scenario, in contrast, China’s grain prices in the domestic market (except for rice) will decline gradually during 2000–05, as the prices of wheat, maize and soybean decline by 10 to 20%. Table 2.8 also shows the price differences between the baseline and the free-trade scenarios. The results indicate that crop producers (except for rice) will have income
Table 2.8. Simulation Results: Impacts of Trade Liberalization (Free Trade) on Production, Consumption, and Trade of Grains (2000–05). Commodity
Rice production consumption net import Wheat production consumption net import Maize production consumption net import Total grains production consumption net import
Baseline
Free-trade scenario
Annual growth rate 2000–05 (%)
Annual growth rate 2000–05 (%)
Difference in 2005 (’000 tons)
Annual average difference 2000–05 (’000 tons)
0.89 0.88
1.77 0.55
5744 -1377 -7121
2419 -248 -2668
1.29 0.93
0.43 2.06
-5061 7281 12,342
-2672 4059 6731
2.33 3.35
0.69 5.91
-10,416 20,207 30,623
-5375 11,389 16,764
1.44 1.60
1.02 2.69
-10,632 29,176 39,809
-6272 17,130 23,402
Note: Consumption (or demand) includes stock changes.
Free trade vs baseline scenarios
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losses from farming activities under free trade (compared to the baseline scenario) as most crop prices decline. By contrast, most producers of animal products (except for beef, mutton, and milk), particularly farmers raising hog and poultry, will benefit from trade liberalization. The prices of pork, poultry, egg and fish will be 5–15% higher than the prices under the baseline scenario in 2005. The impact of trade liberalization on agricultural production, demand, and trade Tables 2.9 and 2.10 present the impact of trade liberalization on production, consumption, and trade of grains and animal products in 2000–05. Baseline scenario According to the analysis, per capita food grain consumption in China reached ts highest level in the late 1990s and will fall during the remaining forecast period. The average rural resident will increase food grain consumption slightly through 2005, and food grain consumption for the urban resident will level off during the projection period. The per capita food grain demand at the national level will ebb at a time when neither rural nor urban food grain demands decline, due to the impact of urbanization. In contrast, the per capita demand for red meat is forecast to rise sharply throughout the projection period. Rural demand will grow more slowly than overall demand, but urbanization trends will shift more people into higher-consuming urban areas5. While starting from a lower level, the per capita demand for poultry will rise proportionately. The projected rise in meat and poultry product demand will stimulate the aggregate feed grain demand. Baseline projections for the supply of grain show that although China’s total domestic grain production will increase from 2000 to 2005 at an annual rate of 1.44%, the production growth rate will fall below the domestic grain consumption growth rate (1.60%), indicating a widening gap between the domestic supply of, and demand for grains. The grain production growth rate in 2000–05 will be much lower than the growth rates achieved in the 1980s and 1990s, which is evidence of the impact of declining public investment intensity in agricultural R&D since the mid-1980s (Huang et al. 1999). The net imports of grain will rise to nearly 20 mmt in 2005 (Table 2.9). Despite the increase in grain imports during 2000–05, the grain self-sufficiency level will remain as high as 95–96% in the early 21st century. In the livestock and aquatic sectors, the increases in domestic production nearly match the increases in demand.6 The annual production growth rates for various animal products will range from 3% to 7% in the period 2000–05. The growth rates are equivalent to the growth rates of the demands for these products during the same period (Table 2.10). The sector will continue to be an exportable one, but the amount of
5. In the mid-1990s, an urban resident consumed about 60% more red meat than his/her rural counterpart. 6. The livestock data used in this paper are significantly different from the data published by the State Statistical Bureau. The CAPSiM model uses a completely new set of data that corrects for over-reporting of livestock production and under-reporting of consumption.
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Table 2.9. Simulation Results: Impact of Trade Liberalization (Free Trade) on Livestock Products and Fish Production, Consumption, and Trade, 2000–05. Commodity
Baseline
Free-trade scenario
Annual growth rate Annual growth rate in 2000–05 (%) in 2000–05 (%)
Pork production consumption net import Beef production consumption net import Mutton production consumption net import Poultry production consumption net import Egg production consumption net import Milk production consumption Net import Fish production consumption net import
Free trade vs baseline scenarios Difference in 2005 (’000 tons)
Annual average difference in 2000–05 (’000 tons)
3.39 3.43
6.33 2.16
4281 -1735 -6016
2071 -839 -2910
4.49 4.54
4.94 5.49
75 121 46
39 53 14
4.35 4.36
4.68 5.58
33 96 63
18 42 24
4.66 4.61
7.42 3.66
1088 -383 -1471
525 -187 -712
4.21 4.21
6.32 3.89
1630 -270 -1900
799 -129 -927
6.86 6.67
5.68 10.90
-476 2019 2495
-209 910 1118
5.89 5.73
6.72 5.37
640 -328 -968
307 -169 -476
Note: The production and consumption data used in CAPSiM model are significantly different from the data published by the State Statistical Bureau. The database in CAPSiM on livestock and aquatic production and consumption correct for the problems on over-reporting production and under-estimating consumption of these products.
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Table 2.10. Grain Self-Sufficiency Levels (in %) under Various Scenarios, 1995–2020. 1994–96 Baseline: Total grain rice wheat maize Free trade: Total grain rice wheat maize Free trade with higher agric. research expenditure*: Total grain rice wheat maize
2005
2010
2020
98 100 92 101
96 99 92 94
96 100 95 91
97 101 100 90
98 100 92 101
88 105 83 76
90 107 88 74
92 115 97 72
98 100 92 101
88 105 83 76
90 108 89 75
97 120 102 78
* The third scenario assumes that the growth rate of agricultural research expenditure in real terms rises from 4% (the assumption used in the other scenarios) to 6% during the entire period of the projection.
exported livestock products and fish is very small compared to the size of the total domestic production or consumption. Free-trade scenario Under the free-trade scenario, domestic grain prices (except for rice) will fall. The fall in domestic grain prices will raise grain consumption and slow down production. Our projection shows that China’s domestic grain production will fall far behind domestic grain consumption under the free trade scenario. Compared to the baseline scenario, the grain deficit between domestic supply and demand will grow further. China’s net grain imports will increase to nearly 60 mmt in 2005, about 12% of the total grain consumption in China. Comparing with the baseline scenario, domestic grain production will decline by 11 mmt (or 2.3%) while domestic grain consumption will increase by 29 mmt (or 6.0%) in 2005. The grains most seriously affected by trade liberalization will be maize, followed by wheat and soybean. Under the free-trade scenario, China’s domestic maize production will fall far behind maize consumption as production grows by 0.7% annually and consumption grows by nearly 6% as an effect of the decline in local maize prices and a surging demand to feed the expanding livestock production. Consequently, the imports of maize will increase dramatically from less than 2 mmt in
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2000 to 39 mmt (nearly one-quarter of maize consumption in China) in 2005. China will likely become the world’s largest importer of maize if the sector is completely liberalized. When trade liberalization will be completed by 2005, its net impacts (relative to baseline) on maize production, consumption, and trade, will reach the highest levels with a reduction of 10 mmt or 7.8% in maize production, an increase of 20 mmt or 14% in maize consumption and an increase of 31 mmt or over 350% in maize imports. The impact of trade liberalization on wheat consumption and trade is also substantial. The annual growth rate of wheat production during 2000–05 will fall from 1.3% in the baseline to 0.4% in the free-trade scenario (Table 2.9), whereas the growth rate of wheat consumption will rise from 0.9% in the baseline to 2.1% in the free-trade scenario. Wheat production is projected to be only 110 mmt in 2005, i.e., 5 mmt (or 4.4%) lower than in the baseline projection. By 2005, wheat imports will rise sharply from about 12 mmt in 2000 to 22 mmt in 2005. Compared to the baseline scenario, wheat consumption under free trade will increase by about 7 mmt (or 5.8%) in 2005. The net impacts of the free-trade versus the baseline scenario on wheat imports will be a rise from 9.9 mmt to 22.3 mmt, a rise of over 12 mmt by 2005. The impact of trade liberalization on China’s animal sector is also significant. But in contrast to the grain sector, trade liberalization will raise domestic prices of pork and poultry substantially, and a moderate rise in the prices of egg and fish will be observed. The increase in the prices of these major animal products and a decrease in the feed price resulting from trade liberalization will stimulate the domestic production of these products on the one hand, and dampen their consumption on the other hand. Livestock and fish product exports will expand considerably (Table 2.10). The impact of trade liberalization on China’s grain self-sufficiency Food security has been and will continue to be one of the central goals of China’s policy. While food security has many dimensions, one of the targets that was set by the Chinese government recently is to achieve a grain self-sufficiency level of 95% or more in the future. Although this level of self-sufficiency has been widely debated, any changes, including trade liberalization, that can result in long-term self-sufficiency levels far below 95%, will hardly be adopted by the current government in the absence of alternative solutions. Table 2.10 presents China’s grain self-sufficiency levels under three scenarios for the period 1995–2020. The third scenario assumes that the growth rate of agricultural research expenditure in real terms rises from 4% (the assumption used in the other scenarios) to 6% during the entire projection period. Several interesting points can be derived from these results: < First, under the baseline scenario, while the grain self-sufficiency rate will decline over time (from 98.1% in 1994–96 to about 96% in most years during the next two decades), China will be able to achieve one of the major components of its food security target (grain self-sufficiency) in the future. In the long term, self-sufficiency levels will fall below 95% only for maize. The maize
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self-sufficiency rate will decline significantly from 101% in 1994–96 to 94% in 2005, and further down to less than 90% in 2020. Second, although the baseline scenario or the policies embodied in the baseline assumptions would ensure high levels of grain self-sufficiency, the costs related to this scenario should not be underestimated. All domestic grain prices except rice will considerably exceed prices in the international markets. Maize prices will reach the high level of wheat prices by 2020. Whether the government budget and consumers can sustain such a high level of grain price protection and how this will affect livestock production and exports are issues that need to be considered. Third, the complete trade liberalization (free-trade scenario) will obviously challenge the current food security goal defined by the government. China’s grain self-sufficiency rate will decline rapidly from 98% in the mid-1990s to 88% in 2005 (Table 2.10), a level that is hardly acceptable to the present government. Although the grain self-sufficiency rate will rise gradually after 2005, there will still be about 8% of domestic grain demand that needs to be met by imports in 2020. However, it is worth noting that this is an extreme case (free trade regime) representing the maximum impact of trade liberalization on China’s grain economy. The actual impact of China’s joining the WTO will be lower than the results from this free-trade scenario indicate. Fourth, the most effective policy to improve China’s food security and raise the grain self-sufficiency level in the long term is to increase agricultural productivity enhancement investments, such as agricultural R&D, rural infrastructure, and water control (i.e., irrigation). For example, Table 2.10 shows that China could achieve its grain self-sufficiency target in the long term under the free-trade regime if the annual growth rate in agricultural research investment rises from 4% to 6%. Finally, the shock of trade liberalization on China’s grain sector will differ greatly between food and feed grains. Maize will be the major imported grain, and it will be used in producing exportable livestock products. If the food-grain selfsufficiency concept can replace total grain self-sufficiency, China will achieve its 95% food-grain self-sufficiency level even under a completely liberalized market (Table 2.10).
Conclusions and Policy Implications Reform and trade liberalization in China’s external sector have proceeded gradually because of their strategic role in the economy. Gradual trade liberalization, in line with reforms in the other sectors of China’s economy, has its logic. At the initial stage, reformers only implemented measures that provided incentives to sets of corporations and institutions. As the experience gained from the reform grew and the trade objectives were achieved through alternative settings of institutions and policies, trade liberalization could proceed more smoothly from the late 1980s onwards. Understanding the process will enhance the discussion about China’s international trade and help put into perspective what the government has done so far, what else it may be intending to do, and why or why not they have gone faster or further.
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As has been outlined in this chapter, the highly centralized and monopolized foreign-trade system has been gradually reformed, decentralized, and commercialized in the past 20 years through granting trade rights to more trade corporations and reducing direct administrative intervention by the government. The trade regime has also gradually moved from an import-substitution system to a more export-oriented system. The move toward a more market-oriented trade system is evidenced from various aspects of China’s trade policies and patterns. While significant progress has been made with the reforms, China’s foreign-trade regime still has major inefficiencies, and international trade in agricultural products remains largely monopolized. With further trade liberalization and adjustments of the trade regime in compliance with WTO membership, it is expected that China will face great challenges in the coming years. The simulation results on trade liberalization indicate that the producers of most crops (except rice and horticulture) will suffer income losses from farming activities not only due to the decline in the prices that farmers will receive, but also due to the reduction in production. Most producers of animal products (except beef, mutton, and milk), particularly farmers who raise hog and poultry, will benefit from trade liberalization as export demands increase. In connection with food security and grain self-sufficiency issues, a completely liberalized economy in the short term will challenge the current food security goal defined by the government. China’s grain self-sufficiency rate will decline rapidly from 98% in the mid-1990s to less than 90% in 2005 if the free trade regime is fully implemented by 2005. Regarding the world food situation, our results suggest that China will neither empty the world grain markets, nor become a major grain exporter. It does seem likely, however, that China will become a more important player in world grain markets as an importer in the coming decades. Both potential exporters outside China and those charged with managing China’s food needs through domestic production and imports need to be ready. Exporting nations—especially those dealing with wheat (in the short run) and maize (in the long run)—will undoubtedly be the beneficiaries of these trends. If China’s policymakers deem the projected level of imports too high (either politically or because they see some other physical or economic constraint), investment strategies need to be revised in the near future. In the long term, the most effective policy to improve China’s food security and raise grain self-sufficiency levels is to increase agricultural productivity enhancement investments, particularly in agricultural R&D. If these policies are formulated properly, China can reach its grain self-sufficiency target in the second decade of this century, even if the grain market will be completely liberalized by 2000–05. China should allow a greater role for the market to determine trade patterns in order to reap comparative advantage gains. This would probably mean increased overall agricultural trade and a shift towards importing more land-intensive agricultural products and exporting more labor- intensive agricultural products. Policy steps to achieve comparative advantage gains might include removing implicit taxes on farmers and reforming the domestic grain pricing and marketing system.
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References Anderson, K. 1997. On the Complexities of China’s WTO Accession. The World Economy, 20(6): 749-72. Development Research Center. 1998. The Global and Domestic Impact of China Joining the World Trade Organization: A Project Report. China: Development Research Center, the State Council. Editorial Board of the Almanac of China’s Foreign Economic Relations and Trade, various issues of Zhongguo Duiwai Jingji Maoyi Nianjian [Almanac of China’s Foreign Economic Relations and Trade]. Beijing: Zhongguo Shehui Chubanshe. Fan, S, and P. Pardey. 1997. Research Productivity and Output Growth in Chinese Agriculture. Journal of Development Economics, Vol.53:115-137. Foreign Investment Administration of the Ministry of Foreign Trade and Economic Cooperation. 1998. Tax Exemption Policies on Importation of Equipment by Enterprises with Foreign Investment. Beijing: Foreign Investment Administration of MOFTEC. Huang, J. 1998. The Impact of Joining the WTO on China’s Grain Market,” International Trade, No. 20:10-13. Huang, J. and C. Chen. 1999a. Effects of Trade Liberalization on Agriculture in China: Institutional and Structural Aspects. Bogor, Indonesia: United Nations ESCAP CGPRT Centre. Huang, J. and C. Chen. 1999b. Effects of Trade Liberalization on Agriculture in China: Commodity and Local Agricultural Studies. Bogor, Indonesia: United Nations ESCAP CGPRT Centre. Huang, Jikun and Hengyun Ma. 1998. The 20-Year Reform and the Role of Agriculture in China: Capital Flow from Rural to Urban and from Agriculture to Industry. Reform, 5:56-63. Huang, J., S. Rozelle, and M. Rosegrant. 1999. China’s Food Economy to the 21st Century: Supply, Demand and Trade. Economic Development and Cultural Change, 47:737-766. Huang, J., S. Rozelle and M. Rosegrant. 1997. Public Investment, Technological Change and Reform: A Comprehensive Accounting of Chinese Agricultural Growth. Working Paper. Food Research Institute, Stanford University. Huang, J. and S. Rozelle. 1996. Technological Change: The Re-Discovery of the Engine of Productivity Growth in China’s Rice Economy. Journal of Development Economics, Vol. 49:337-369. Huang, J. 1999. Agricultural Policy and Food Security in China. In Poverty Alleviation and Food Security in Asia, Lessons and Challenges, edited by FAO Regional Office for Asia and the Pacific. RAP Publication 1999/1. Lardy, N.R. 1992. Foreign Trade and Economic Reform in China 1978-90. Cambridge: Cambridge University Press. Lardy, N.R. 1995. The Role of Foreign Trade and Investment in China’s Economic Transition. The China Quarterly, 144, December, pp.1065-1082. Ministry of Foreign Trade and Economic Cooperation. 1998. Individual Action Plan on Trade and Investment Liberalization and Facilitation 1998 of the People’s Republic of China. MOFTEC, unpublished. Naughton, B. 1996. China’s Dual Trading Regimes: Implications for Growth and Reform. Paper presented at an International Economics Association roundtable conference on International Trade Policy and the Pacific Rim. Sydney, 15-17 July 1996. State Statistical Bureau, various issues of Zhongguo Tongji Nianjian [China Statistical Yearbook]. Beijing: Zhongguo Tongji Chubanshe.
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State Statistical Bureau, Zhongguo Duiwai Jingji Tongji Nianjian [China Foreign Economic Statistical Yearbook], various issues. Beijing: Zhongguo Tongji Chubanshe. United Nations. 1994. World Investment Report 1994: Transnational Corporations, Employment and the Workplace. New York and Geneva: United Nations. Wang, Z. 1997. The Impact of China and Taiwan Joining the World Trade Organization on U.S. and World Agricultural Trade: A Computable General Equilibrium Analysis. An Economic Research Service Report. Technical Bulletin 1858. Washington, DC: US Department of Agriculture. World Bank. 1997. China Engaged: Integration with the Global Economy. In China 2020, edited by the World Bank. Washington, DC: World Bank. World Bank. 1999. Rural China: Transition and Development. World Bank Report. Washington, DC: World Bank: Rural Development and Natural Resources Unit, East Asia and Pacific Region.
Chapter 3 Globalization and Public Agricultural Research in India P.V. Srinivasan and Shikha Jha*
Introduction The globalization process that entered a new and more accelerated phase after the Uruguay Round and the far-reaching policy reforms that the Indian government implemented in the course of joining the WTO, have opened up new opportunities for Indian producers, both industrial and agricultural, by giving them wider and faster access to more advanced technologies and to larger markets both at home and abroad. These developments were not, however, a one-way street leading to better economic conditions from which all have benefited; indeed, in many parts of the country agricultural producers, particularly subsistence farmers, were negatively affected by the domestic price gyration and the greater competition that followed the reforms. The Indian policymakers must now face the challenge of minimizing the negative fallouts and lift the affected rural households out of their dire conditions. The objective of this chapter is to analyze the impact of the globalization process and the attendant policy reforms on the agricultural sector and the rural population in India and to evaluate the options that the public sector and the Indian national agricultural research system (NARS) now have in order to meet these challenges and assist the segments of the rural population that were negatively affected. Pressures to lower public spending that were an important part of the reforms forced the Indian government to sharply cut its domestic spending, including items such as agricultural research and extension, irrigation, and rural development. The shrinking financial resources of the public agricultural research institutes exposed these institutes to pressure to increase their income from other sources through selective commercialization of their activities, such as claiming IPR, provision of research, and other services to the private sector, charging commission for the use of materials they owned when these materials were used for commercial purposes, and seeking ways to collaborate with the private sector. Recent experience also suggests that the negative impact of the diminishing public budget was partly offset by considerable efficiency gains thanks to collaboration with domestic and multinational private enterprises and access to more advanced technologies. A particularly important aspect of the reform program was the removal of many restrictions on agricultural trade and improvement in the terms of trade between the agricultural and nonagricultural sectors that was brought about by lowering the protection on the domestic production of many industrial products. This gave strong
* P.V. Srinivasan, Shikha Jha: Indira Gandhi Institute of Development Research, India 103
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incentives to increase private investment in agriculture by local and international companies. Private agricultural companies, motivated by profit prospects, are attracted, however, to crops with significant commercial prospects, and they benefit mostly the resource-rich large farmers that can increase their investments and have access to credit, whereas credit-constrained small and marginal farmers, who grow mostly for their own consumption, are not likely to benefit much from these developments. Another consequence of the increased use of improved technology as an effect of the price reforms and the trade liberalization is likely to be a more extensive use of fertilizers and pesticides, which can, in turn, adversely impact the environment and the sustainability of agricultural growth. The intensive commercialization of agricultural production and the over-exploitation of the soil may also exacerbate the unsustainable use of natural resources and accelerate soil degradation. To prevent these negative externalities, maintain the balance between higher productivity and environmental sustainability, and give incentives to a more efficient management of the country’s natural resources, the Indian Federal, State, and local governments will have to introduce comprehensive regulations, take active measures, and make considerable investments in the environment and in the development of new, more efficient, and environmental friendly technologies. Domestic deregulation measures, such as the removal of many restrictions on domestic and foreign trade and on foreign investments, are expected to lead, in the long run, to greater efficiency in agricultural production and more rapid growth. In the short run, however, these gains are not likely to be equally shared by all regions and socioeconomic groups. The lessons from the Green Revolution indicate that the benefits are likely to concentrate rather narrowly in certain geographic areas and producers groups. The limited experience from the current reforms suggests that the market deregulation, the incentives and pressures to boost privatization, the improved technologies, and the extended market opportunities are likely to benefit initially the more resourceful farmers and the more developed regions that have better infrastructure and better access to the central markets. In the absence of targeted and well-designed policies, subsistence farmers in remote areas with less access to the markets and to new technologies may become increasingly marginalized. Policies will have to include public investments in rural infrastructure, targeted agricultural research and extension services to address the specific needs of poor farmers, and social safety nets to assist them in dire times when their output and farming systems are devastated by droughts, floods, or political unrest. This chapter presents an examination of the impact of the various internal changes as an effect of globalization and the domestic policy reforms that affected agricultural producers. The focus is on the impact of deregulation measures and other policy measures aimed at liberalizing trade in the seed industry in India and in the production and imports of other inputs used in agricultural production. The section also examines the impact of these developments on agricultural R&D and on the public agricultural research system and discusses the possible effects of the introduction of IPR legislation. It evaluates the response of the agricultural research system in India to various policy changes and to the challenges posed by globalization, and it discusses
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alternative strategies and policy options for the future. It concludes with a summary of the main findings and offers some conclusions and recommendations.
Recent Developments in Indian Agriculture During 1999–2000, the agricultural sector in India, excluding forestry and fishing, contributed a little over 25% of GDP, down from about 28% in 1993–94. In some recent years, this was coupled with a negative growth of agricultural production. This decline occurred even though 1999–2000 was the 12th consecutive year with a normal monsoon (which heavily determines the performance of the agricultural sector) and despite increasingly favorable terms of trade for agriculture, growing private investment in agriculture, and an increase in fertilizer consumption from 12.5 million tons in 1990–91 to about 19 million tons in 1999–2000. The pre-reform period (before 1991) was characterized by heavy protection for industry and taxation of agriculture vis-à-vis international prices. Since agricultural policy focused more on price policies, neglecting nonprice factors such as technology and infrastructure, agricultural growth was affected (Dev and Ranade 1999). The poor performance of agriculture in recent years can also be attributed to some extent to an uneven spread of production and technology across geographical regions. On the whole, India’s agricultural productivity lags behind that of many developing Asian countries such as China, Indonesia, Pakistan, and Sri Lanka. Productivity levels of rice and wheat—the major beneficiaries of the Green Revolution—have reached a plateau. The growth rate of the production of food grains halved from 3.5% per annum in the 1980s to 1.7% in the 1990s, which is lower than the population rate of growth at 1.8%. This would mean substantially rising import requirements despite domestic food grain outputs at record levels in 1999–2000. The 1980s and 1990s, however, witnessed a regional diversification of agricultural growth. New technology, initially confined to the northwestern parts of the country, spread to the southern and eastern states. There were also cropping pattern changes, and in large areas cultivation shifted from low yield, low value, coarse cereals to highvalue crops such as oilseeds (Bhalla and Singh 1997). The spread of new technology was facilitated by increased irrigation and price support provided by the government. Restrictions on trade, for example, helped maintain the domestic price of edible oils at a level that was much higher than the world price. The trade liberalization measures undertaken in recent years and the GATT agreement might change the situation substantially, leading perhaps to further changes in cropping patterns and differently affecting farmers in different regions and different income groups. The Indian economy adjusted to globalization through trade liberalization and deregulation measures such as liberalizing domestic trade, removing trading zones, and lifting price and quantity controls. As a signatory to GATT, India will soon be replacing all quota restrictions with suitable tariffs and then phase them out over time. The GATT agreement on agriculture has three sections: export liberalization, import liberalization or market access, and reduction of domestic subsidies. The developing countries have to reduce the new bound tariffs by at least 10% over a period of 10 years from 1995–2004. The GATT commitments in the area of agriculture also require that,
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if domestic support to agriculture (product and nonproduct specific) in monetary terms exceeds 10% of the value of the agricultural product, this support will have to be reduced by 13.3%. In the case of India, the support to farmers is mainly in the form of minimum support prices for their produce and subsidies on inputs like fertilizers, seeds, irrigation, electricity, and credit. Analysis by Gulati and Sharma (1994) revealed that domestic support levels are negative for most agricultural commodities. Therefore, the price reform in India is driven more by a need to reduce distortions in input markets and less by the GATT agreements. The SPS measures and TRIPS agreement also have an important bearing on Indian agriculture. These policy changes have a direct impact on the agricultural sector and on the rural population. The various globalization-related developments and their impact on Indian agriculture are briefly outlined in the following sections. Trade liberalization policies The economic reform program reduced barriers to external trade and hurdles to domestic and foreign private investments. Some of these measures were part of the structural adjustment process that started soon after the crisis in 1991; others resulted from the agreements at the Uruguay Round that are administered by the WTO. Agricultural exports benefited from the removal of export restrictions as part of the trade reforms initiated in 1991 and the move to a market determined exchange rate policy in 1993. The export policy led to the introduction of new products such as floricultural and horticultural crops and marine products in India’s export basket. Other policy changes that favored exports included lower import duties on capital goods used in food processing industries and subsidies on airfreight for exports of perishables. Agricultural exports constituted 18% of total exports from India from 1994–95 to 1999–2000. Accelerated growth in exports is envisaged through enhanced investments in infrastructure and the appropriate policy environment. Indian exporters, however, must meet the more stringent quality standards in the international market in terms of health and safety of human, plant, and animal life that are stipulated in the WTO agreements. Processing, packaging, transport, and port facilities must be geared to support export activities. The need to reduce quantitative restrictions on exports came mainly from the commitments made to the WTO. In the case of food grains, however, the rapidly increasing amount of stocks with the government and the associated cost burden was an added reason for the government to remove the restrictions on exports. Until recently, imports of food grains were channeled through state trading agencies such as the Food Corporation of India (FCI) and the State Trading Corporation. Exports were subject to quotas and were required to fetch a specified minimum export price. But the increasing financial burden of holding large food stocks to stabilize domestic prices prompted the government to look for alternative ways of disposing excess supply during glut and fulfilling excess demand during shortage. As part of its overall reform program, the Indian government opened some avenues for integrating the domestic market with the world market in order to boost agricultural exports. Except for some restrictions on the export of wheat and wheat products, coarse grains, sugar, and pulses
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in bulk, almost all other agricultural products are now freely exported. In recent years, the country has emerged as a leading exporter of both fresh and processed agricultural products, including meat and meat preparations, spices, and cashew. These commodities have made a considerable breakthrough in international markets (Paroda 1996). Among food grains, Indian rice exports were traditionally mostly of the highquality aromatic Basmati variety, and only after trade liberalization substantial exports of other rice varieties became possible. Indian exports of rice peaked at 5.6 million tons in 1995–96 and reached 4.9 million tons in 1998–99, amounting to a large share of the total world trade in rice, which is about 20 million tons. Integration into the global economy through the removal of trade barriers will lead to greater commercialization of agriculture and to a shift towards high value crops. As a result of trade liberalization, it is expected that the area under crops such as rice, wheat, maize, sorghum, chickpea, and cotton will increase, whereas the area under oilseed crops such as groundnut, rapeseed-mustard, and sunflower will decline (see Gulati and Sharma 1997). Since world prices are normally more unstable than domestic prices, and since with the integration of the Indian market into the world market, domestic prices are directly linked to world prices, there can be greater domestic price volatility (Nayyar and Sen 1994). This, however, need not necessarily be the case, since the wedge created between domestic and international prices by the existing export/import margins plus the domestic trade and transport margins are high enough to insulate domestic prices from world price instability (Jha and Srinivasan 2000). Policies related to seeds, machinery, and other inputs The deregulation of technology transfer and foreign investment had a direct impact on the seed industry. While the Green Revolution helped improve seed quality for cereals, other crops such as oilseeds and vegetables remained heavily dependent on seed imports in the absence of a major breakthrough in seed technology. With the liberalization of 1991, 100% foreign equity is allowed in the seed industry and there are fewer restrictions on seed imports. The Foreign Exchange Regulation Act of 1979 had earlier restricted firms with foreign equity exceeding 40% from entering the seed industry. The Industrial Policy Act of 1986 put seeds and biotechnology under core industries allowing the entry of large Indian firms and firms with majority foreign ownership. The New Seed Industry Development Policy of 1988 made it easier to import germplasm for research and allowed vegetable seed imports under Open General License with a 15% tariff. It also allowed imports of oilseeds and seeds of coarse grains for tests and commercial trials. As a result of the policy changes in the 1980s and 1990s, investment in private plant breeding multiplied threefold (Ramaswami et al. 1999). The market for seeds in India is very limited, however. Notwithstanding the liberalization efforts, only 12% of all the seeds planted are provided by commercial seed companies. The main source of seed for most Indian farmers is still farmer-saved seed. In rice and wheat, only 10% of the seeds are supplied by the commercial system. The majority of the seeds distributed by the public sector State Seed Corporations (SSCs) are open pollinated, whereas the
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private-sector sales are predominantly of the hybrid variety. The increasing demand for hybrid varieties is raising the share of the private sector in the seed market. In fact, an increasing proportion of seeds supplied by the SSCs comes from private companies (Shiva and Crompton 1998). Although this will not diminish the importance of the public sector in the future, there is an increasing recognition of the need for an interaction between the private and public sectors through innovative institutional arrangements in order to exploit their potential complementary linkages. For instance, the public sector can let the private sector use its large research infrastructure through collaborative projects or the contractual sale of research services. It can also use private-sector marketing networks in the dissemination of new technology. IPRs and agricultural R&D The TRIPS agreement included under the GATT requires a universal IPR regime in countries that have not provided such protection previously.1 India, like all other member countries of the WTO, is required to have a legal system to protect inventions related to plant varieties, agrochemicals, agricultural machinery and equipment, etc. To meet this requirement, several changes are being made in the present Indian Patent Act. Agricultural research, which was earlier exempt from the Patent Act, has now been cleared by the government for patenting, and a separate Assistant Director General for IPR has been appointed in the Indian Council of Agricultural Research (ICAR). The government has been rapidly working towards a new law for the protection of plant varieties (Mishra 1999a) and has formulated legislation on the Plant Variety Protection Act and the Indian Biodiversity Act. ICAR helps the Ministry of Agriculture implement the Plant Variety Protection Act by establishing ownership rights over plant material, maintaining DNA finger printing, genebanks, etc. The general recommendations include a term of 15 years for the protection of plant varieties with annual cropping and 18 years for trees and vineyards. ICAR is also taking action on the legal side to be prepared to settle or address disputes and, in doing so, it has moved from plants and animals to microorganisms. Some experts argue that under the IPR regime, the diffusion of new technologies will slow down as farmers will find it increasingly difficult to propagate, sell, or exchange seeds. Access to new technologies may become more difficult, and even in cases where they are accessible, the costs of acquisition of new seeds and technology will be too high for many farmers. But it has to be noted that the gains from improved seeds will not be fully captured by the seed companies if farmers have no incentive to adopt the new technology because they do not get a share in the productivity gains achieved. For example, in the US, companies capture 35–48% of the gains from sorghum and maize seeds (Pray and Ramaswami 1999). In India, even with proprietary rights and higher prices for seeds, private companies still made significant contributions in raising average district yields in the states of Andhra Pradesh, Karnataka and Maharashtra. Since coarse grains are both staple grains of the poor and
1. IPR protection can be of two types: protection through patents and through a sui generis system such as Plant Breeders’ Rights (PBR) embodied in the Union for Protection of Plant Varieties (UPOV).
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grown in semi-arid tropics (which are the poor regions), private research in these areas can contribute significantly to help the poor. In both developed and developing countries, multinational corporations engaged in R&D for seeds, farm machinery, fertilizers and other farm chemicals, and post-harvest technology, take a larger share in research and attract larger budgets. There is a growing concern among public research institutes in developing countries that the Uruguay Round agreements on trade and IPR may lead to the monopolization of research by large corporations. Public research institutes may find it difficult to keep pace with developments in new areas of technology such as biotechnology and genetic engineering, where the strength of multinational private companies is greater. Debroy (1998) allays some of the fears by pointing out that these pessimistic assessments “underestimate Indian strengths in seed research.” He argues that with better protection, India may be able to get better prices for its seeds sold abroad. In his view, the other fears are also unfounded since it is not common practice in India to use foreign hybrids and plant variety material. Globalization implies easier access (through imports or direct foreign investments) to the latest technologies including biotechnology. Research in biotechnology can be extremely important in reversing the declining trend in the growth rate of yields. But various concerns have been expressed from different quarters within India on the possible adverse effects of biotechnology. Since most seeds in India are farmer saved or homegrown, grains produced from seeds based on Terminator Technology, which are devoid of regenerative/productive capacity, will make farmers completely dependent on seed markets, for which they are financially not equipped (Mishra 1999b)2. Although transgenic varieties improve yields, they may also deprive the society of biomass and plant genetic resources by causing harm to biodiversity. Loss of biodiversity can result in various problems, such as the outbreak of disease and pest attacks in agriculture. Mishra (1999a) argues that plant variety protection can promote the conservation of biodiversity. This is because, with the establishment of “farmers’ rights,” farmers will be compensated for their contribution to the selection and conservation of the genetic diversity of crops and livestock, which means that a plant breeder who acquires rights over a variety developed on the basis of genetic resources supplied or conserved by farmers is liable to compensate them.
Recent Changes in the Agricultural Research System Research priorities The process of trade liberalization, deregulation, and, in particular, the growing activities of private companies, including multinationals, in research and in the distribution of seeds, fertilizers, etc. brought considerable changes in the underlying economic conditions and led to changes in the research priorities of the NARS. ICAR shows a change in priorities over the last three decades with a two-thirds reduction in 2. Percentage of homegrown seed used in cultivation in 1996–97: wheat (92), paddy (88), gram (97), tur (92), groundnut (93), rapeseed/mustard (76), and soybean (91).
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educational expenditure to give way for higher spending in research and, even more so, in extension. With trade liberalization and other policy reforms, the need to strengthen the links between agricultural research and economic policy-making was felt. To fulfill this objective, the National Centre for Agricultural Economics and Policy Research (NCAP) was established in 1991. A policy shift is now beginning to take place. Until recently, priority setting for agricultural research often depended on subjective judgments and collective decision-making. Formal methods based on concepts such as economic surplus are beginning to be used and institutionalized in the NARS, and multiple criteria, such as efficiency, equity, sustainability, and export promotion, are employed. In the beginning of the Green Revolution, achieving national self-sufficiency in food grains was one of the main objectives, since the country depended substantially on imported food grains for its food security. In order to increase grain production, priority was given to areas that had high potential for technology adoption. By the late 1980s, there was an increasing justification for public funding of research specifically focused on the needs of the poor. Despite the overall food self-sufficiency, the high incidence of poverty and household food insecurity that is persisting has become one of the main concerns of public agricultural research. The impact on household-level food security, as opposed to national food self-sufficiency, is currently an important criterion in determining the allocation of public funds for agricultural research. Other important considerations in the allocation of research resources include regional imbalances in productivity growth and income, and sustainability and conservation of natural resources. This motivation for a change in research priorities is further reinforced by the realization that the benefits from globalization bypass subsistence farmers and farmers with poor access to markets. The focus of public research is primarily on regions with a difficult topography, hills, and coastal areas, and the main effort is to address the issues of equity, human resource development, and the environment. Reorientation of research is also taking place to take advantage of the liberalized export policy by strengthening research on Basmati rice, durum wheat, spices and condiments, fruits and vegetables, meat and meat products, and fish and other marine products. Public research efforts are therefore being directed at the development of breeding and processing technologies for crop diversification and value-addition. A major objective of the Draft Ninth Five-Year-Plan (1997–2002) is to enhance productivity through the development of high-yielding hybrids and varieties, research on quality improvement, post-harvest technology and export-oriented commodities. Domestic socioeconomic needs and consumption patterns have been changing with rising income levels (see, e.g., Radhakrishna 1996). Consumers’ tastes are also influenced by the increased flow of information and the entry of multinational corporations, which is leading to rising demands for processed foods. Table 3.1 lists strategies that are being planned for different commodities to promote agricultural growth, and Table 3.2 outlines the main initiatives taken by the government in recent years.
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Table 3.1. Strategies Planned by the Government for Different Commodities Commodities
Strategies
Wheat, non-basmati rice, coarse cereals, maize, sugar, dairy products, milk, semen and vaccine Basmati rice, fine rice, cotton, tobacco, tea, spices, lac, natural gum Pulses
Plan for self-sufficiency, discourage imports through tariffs
Coffee, rubber, spices, condiments and medicinal plants Onion, potato, mangoes, pomegranate, grapes, apple, litchi, banana, other fruits, vegetables, vegetable seeds and products, areca nut, floriculture, live plants, mushrooms Chocolates, malts, biscuits, spirituous beverages, animal feeds, etc.
Promote exports aggressively Deficit likely to continue, long-term production and processing strategy Need long-term production strategy and institutional support, capable to remain export competitive Need long-term production strategy and institutional support, capable to remain export competitive. Promote exports aggressively
Comparative advantage exists, promote exports
Source: Mruthyunjaya (1999)
Private-sector participation The reforms provided strong incentives to increase the share of private research in India. The liberalization of the import of technologies and other inputs, the relaxation of restrictions on foreign investments, and other reform measures have led to a growing presence of the private sector in agricultural R&D activities. In particular, the opening up of the seed industry led to an increase in the volume of research by foreignowned and local firms. Pray and Ramaswami (1999) indicate that between 1984–85 and 1994–95, real research expenditure in the private sector tripled from Rs. 42 to Rs. 155 million, compared to an increase of only 69% in public research expenditures. Thus, the private sector shows a high sensitivity to the changing policy environment. Currently, public funds account for 85% of the total expenditures on agricultural research in India, and the remaining funds come from the private sector. Private investments are focused on input-related technologies such as chemical fertilizers and pesticides, and mechanical and biological/hybrid technologies. Thus far, there has been no overlap in funding and execution of research by the public and private sectors. A very small share of private funds is allocated to research areas that are in the domain of public research and vice versa. Well-developed science and other infrastructure facilities and rapidly expanding markets for inputs and new technologies provide a good backdrop for active private sector participation in agricultural research (Pal and Joshi 1999). ICAR and other public-sector institutions have initiated reforms aimed at the private sector in an effort to respond to the “new
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Table 3.2. Main Initiatives during the VIII and IX Plan Periods Goal
Initiatives VIII Plan (1992–97)
IX Plan (1997–2002)
Efficiency
<
Hybrid projects on nine crops
<
Sustainability
<
Research Centre on DNA fingerprinting, NBPGR, NBAGR Project Directorate (PD) on biological control
<
<
<
<
Equity
< <
Import substitution
< < <
Export promotion
< < <
<
<
<
Human engineering
< < < <
<
National Research Centre (NRC) on women. Central Agricultural University in North Eastern Hills region Indian Institute of Pulses Research NRC on rapeseed and mustard All India Coordinated Research Projects (AICRPs) on chickpea, pigeon pea, ground nut, rapeseed and mustard oil palm PD on maize Indian Institute of Vegetable Research Central Institute of Post Harvest Engineering and Technology (CIPHET) NRC on arid horticulture, banana, grapes, onion and garlic, orchids, medicinal and aromatic plants Quality control labs for Foot and Mouth disease, High Security Animal Disease (HSAD) laboratory, quality seed laboratory Indian Institute of Spices Research Centre of advanced studies in frontier sciences NRC on biotechnology Network on Embryo Transfer Technology (ETT) Information and Communication Technology (ICT) –setting up of Agricultural Research Information System (ARIS) Phytotron
< < <
< < < <
<
<
Strengthening of hybrid research under National Agricultural Technology Project (NATP) National Bureau of Fish Genetic Resources (NBFGR) and National Bureau of Agriculturally Important Micro-Organisms (NBAIMO). National facility on plant viral research, network on watershed management, network on hill agricultural. Production system. More research on integrated pest management (IPM) and integrated plant nutrient supply (IPNS) under NATP. ICAR research complex in northeastern region Emphasis on dryland farming under NATP Further strengthening under NATP
NRC on seed spices AICRP on vegetables, freshwater prawn culture, shellfish mariculture NRC on meat technology, fish quality testing lab More research on post harvest technology (PHT) and waste minimization and value addition under NATP
Accreditation, avoiding inbreeding, visiting scientists scheme, sabbaticals, 1700 scientists trained in frontier sciences in India through summer, winter and special short courses, 112 scientists abroad Network on transgenics, colleges of agri-business management, departments of biotechnology and PHT, e-mail connectivity to all the key players
Globalization and Public Agricultural Research in India
Researchextension-farmer (REF) linkage
< < <
Partnership
<
Growth-oriented governance
< < < < < <
< < < <
113
261 Krishi Vigyan Kendras (KVKs), 8 Trainers’ Training Centres (TTCs) 42 Institute Village Linkage Program (IVLPs) Front Line Demonstrations (FLDs) Private sector, NGOs
<
Perspective plan Participation of private sector, NGOs Setting IPR cell, NCAP Resource mobilization Decentralization Implementation of GVK Rao Committee Report on administrative, financial and research reforms Strengthening of monitoring and evaluation mechanisms Fixing cadre strength of scientists in institutions by disciplines Strengthening award system Better publication system
<
< < <
< < < < < < <
<
Expansion of KVKs, IVLPs Agricultural Technology Information Centres (ATICs) Agricultural Technology Management Agencies (ATMAs) Private sector, NGOs, MOUs with 15 countries and 16 international organizations Project-based budgeting Matrix mode of research management Review of AICRPs, Regional Research Stations (RRS) Widening and deepening of award system O&M reforms, more than 100 Agro-ecosystem, production system research Documentation of indigenous technology knowledge (ITK) Production system research (PSR), team of excellence (TOE), competitive grant scheme (CGS) and mission mode (MM) research Prioritization, monitoring and evaluation (PME)
Source: Mruthyunjaya (1999)
R&D challenges.” These efforts include the design of a new strategy for priority setting, technology development, testing and training, and commercialization. Under the World-Bank funded National Agricultural Technology Project (NATP), public research and extension institutions will be geared more towards the development of technologies with public goods’ characteristics. With the Indian Patent Act in place, private participation is likely to rise over time. Observations from a survey of research Institutes In order to examine the changes in the research agenda in recent years in response to the challenges posed by the globalization process and the attendant policy changes, we conducted a pilot survey of selected representative national agricultural research institutes (NARIs) in India. The questionnaires for the survey had been prepared by ISNAR and were completed by government officials and researchers of the institutes in coordination with ICAR. The institutes that participated in this survey were asked to provide various details for four of their most important research projects undertaken in recent years.3 From the questionnaires submitted by these institutes, a number of inferences emerge. 3. The details of these institutes, such as their area of operation and the thrust areas of their research programs, are presented in Srinivasan and Jha (2000).
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There is no discernible evidence of a change in the goals of research in response to globalization trends (Table 3.3). The sample of projects currently being undertaken does not show any evidence that the traditional goals of obtaining self-sufficiency in production and increasing income for producers have diminished in importance. Food self-sufficiency, increasing farmers’ income, and environmental protection appear to be the most popular goals. Neither exports nor region-specific developments receive much emphasis: 10 out of 32 projects have a geographical focus. It is therefore left to the private sector to take up the research needed to exploit the trade gains. Measures taken to further liberalize trade and remove barriers to direct foreign investment can aid this process. An important insight gained from the survey is that the Indian government continues to play a significant role in agricultural R&D in terms of initiating and funding research projects in the NARS. Government ministries and researchers in the NARS had the maximum influence in terms of setting priorities. Extension services and regional/subregional programs come next, whereas donor countries and the private sector/farmers’ organization had the least influence. Very few cases of donor funding (two of the 32 projects) are observed, indicating that not much research is driven by foreign funds. Seven of the 32 projects, however, were in collaboration with foreign institutes. Most of the research appears to be supply driven, as a limited number of projects were found to be initiated/funded by potential users (seven projects). The survey inquired also about the relative importance of different factors that determine the research priorities. It shows that the local NGOs, the Ministry of Agriculture, regional/subregional and bilateral/multilateral programs played only a minor role in funding or affecting research the research priorities and objectives; only half the projects were carried out in collaboration with other local, regional, or foreign institutes. The impact of potential users in initiating or financing these projects varied, however, between institutes. In some of them the institute has initiated, funded, and led the entire research, whereas in others the research was conducted with full participation and funding of farmers’ cooperatives, NGOs, and the relevant government ministries. Table 3.3. Relative importance of different goals in the projects considered Goals
No. of projects giving positive weight in a total of 32
Food self sufficiency Farmers’ income Development of specific regions Production of import substitutes Promotion of exports Environmental protection Source: Survey based on questionnaires. Note: Each project could have multiple goals.
Relative weight attached (%)
11 17 7
21.0 34.1 11.1
2
3.3
9 13
10.7 19.8
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Strategies and Options for the Future The changing global environment will introduce substantial adjustments in the agricultural research system due to the presence of rules and regulations such as the implementation of IPRs. The system will have to adjust in order to convert such restrictions into gains by properly reorienting research strategies. The globalization process, combined with the squeeze on public spending, necessitates a careful evaluation of various options and priorities of the agricultural research system. Agricultural research spending in India has been particularly low at 0.3% of the agricultural GDP, as compared to 0.7% in the developing countries and 2–3% in developed countries (Rao and Gulati 1994). The reallocation of expenditure in the agricultural sector towards agricultural R&D will require an improvement in the finances of the government. Towards this end, the government can take steps to increase revenues through commodity levies and reduce expenditure through the reduction of input subsidies. As a result of trade liberalization, deregulation, and privatization, there have also been several changes in the research funding patterns. Public research organizations are beginning to diversify their sources of funds to make up for the deficits in their budget outlays. ICAR has already initiated measures to allow sales of research products and services by its institutes. The government has also introduced a matching grant scheme for revenues commercially earned by ICAR. The private sector has been playing an increasingly important role in certain areas, and it can be encouraged to participate in other fields of agricultural R&D as well in order to ease the pressure on public spending. Mruthyunjaya and Ranjitha (1998) discuss various issues pertaining to the reforms in the Indian agricultural research system. For example, the current ratio of scientific to support staff in the research system (1:4.5), and the opportunities for upgrading human capital need to be increased. While spending on agricultural R&D is stepped up, there is also a need to take care of the people who may be adversely affected by various impacts of globalization. Reorienting public research and the role of the private sector Globalization is changing the balance between public and private research across the world. The private sector is playing an increasingly large role in seed production and the supply of other inputs that embody advanced technologies. This trend may have the effect of diminishing the public-good nature of the outputs from most agricultural R&D activities. The factors that contribute to this change include the development and wider use of hybrid seeds and the legal protection of technological inventions under the TRIPS agreement. In India too, there is a growing presence of private traders, including multinationals and private research companies, in areas such as plant breeding, agricultural chemicals, and food processing as a result of the policy reforms and the opening up of the economy. The implementation and enforcement of IPRs will further help these companies to appropriate more of the R&D benefits and thus expand their operations. Private companies have also been active in developing drought-resistant seeds for resource-poor rainfed/dryland areas that comprise a large share of the total cropped area in India. Their research and investments, however, are concentrated on hybrids
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and limited to only a few crops, such as cotton, maize, sunflower, oilseeds, sorghum, and pearl millet, in which the potential profitability is high. Pal and Joshi (1999) report that private investments in hybrid seed research were induced by free access to public research materials and the 1998 New Policy for Seed Development. Since the seeds of hybrids cannot be used in the subsequent season without a significant loss in yields, they are particularly attractive for private research companies that depend much less on legal protection. Pray and Ramaswami (1999) demonstrate that in the semi-arid regions, private research had a positive impact on both the area under hybrids and the yields. Technology for new commercial inputs and machines and research for diversification into export or other high-value crops could also be supported by the private sector. The opening up of the Indian seed industry has improved its competitiveness and set in motion a trend of increased commercialization of the State Seed Corporations. Import of commercial seeds needs to be further liberalized in order to encourage private research. An effective quarantine system in line with the International Plant Protection Convention (IPPC), together with a transparent germplasm collection policy, is required to encourage imports of plants and germplasm and thus benefit from potential complementarities between domestic and foreign research. Monopolization of research by large companies can be tackled either through appropriate regulatory mechanisms or through the strengthening of public research programs, so that public research can compete with the private sector in the production of private goods. Regulatory measures need to be responsive to the changing global scenario and should be enforced through strong legal mechanisms. Regulation and quality control through appropriate certification procedures are necessary to protect farmers from fraud and poor-quality seeds. These measures are also needed to reduce the negative externalities (such as resource degradation) that may result from the use of the newly developed or imported seeds and plants, which the private sector disregards in its decisions. The growing presence of the private sector does not diminish the importance of public research in the future. There is in fact a need to exploit the potential complementary linkages between the two sectors. For example, there can be a contractual agreement on the public funding of private research for innovations that will be made available as public goods. According to Mruthyunjaya (1999), the interaction between the two sectors can take several forms: < consultation to determine research priorities; < collaboration in the funding and execution of applied research; < contractual agreement on the private funding of public research programs or the provision of public research services to the private sector on cost recovery basis; < supervision over the private sector in order to ensure competitive and quality services and to enforce regulations. These developments mean that the role and modus operandi of public-sector research will have to be redefined by reorienting its research towards specific tasks and research areas and leaving other areas to the private sector. Public research could, for example concentrate on cropping- systems research rather than on the development of new seed varieties, since the private sector is less likely to enter the areas where the benefits from
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research are not easy to appropriate. Public-sector research also has to focus on areas where the externalities are high and the output is a public good in nature. Examples of such areas include natural resource management and basic research where knowledge spillovers can be high. The technology for natural resource management will generally not be marketable and requires public funds. The public sector may have to withdraw from some areas where the private sector has greater strengths, and it may have to shift its operations to address the needs of marginal areas such as the northeastern hills and the eastern regions. The large benefits that accrue to farmers by adopting hybrid seeds developed by private companies imply that private research should be encouraged. Pray and Ramaswami (1999) argue that reforms should continue to allow entry of private domestic and foreign companies into the seed industry and the imports of germplasm for private research, as well as to promote further collaboration between ICAR institutes and private research institutes. Food processing, in which private research expenditures have grown eightfold over the decade from 1984–85 to 1994–95, is another important area for future development. There are various ways of encouraging private efforts in agricultural R&D, the most important of which are the protection of intellectual property and plant variety rights. Other incentives that are particularly common in developed countries include tax breaks, direct subsidies, and grants. When providing such incentives, it must be ensured that the benefits in terms of distributional implications outweigh the social costs of distortions in the quantity and mix of research (Alston et al. 1998). The public sector should compete with the private sector on a level ground. This means that the regulatory role of the public sector should be clearly separated from its role as a producer. The presence of the public sector in production can also help in keeping seed prices in check in the absence of any price regulation. Adopting a strategy of selective commercialization, using resources optimally and following prioritization, monitoring, evaluation, and impact assessment will increase their resource base. To achieve all this, the public research institutes will need greater autonomy and freedom from bureaucratic control. There is a need to make the research system less bureaucratic and provide adequate resources to scientists in public research institutes so that they can compete effectively with the private sector. The active presence of the public sector is also important in keeping indigenous research capabilities alive.4 Safety nets for rural households negatively affected by the policy reforms To provide safety nets to the poor who might be adversely affected by the process of globalization, there is a need to set pro-poor research priorities and to identify the needy groups, such as landless workers, small farmers, large poor farming households, and urban workers. Production, employment, and incomes in the agricultural sector 4. For example, Chile imported technology from California and earned foreign exchange for 15 years from exports of fruits based on crops grown using this technology. In the meantime, their domestic research capability deteriorated, and the country faced difficulties when post-harvest problems started after 15 years.
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can be substantially increased through firm support for agricultural R&D, the spread of new technologies, and the dissemination of modern inputs to less developed and rainfed regions. In this context, it is interesting to note that, even though prices of private hybrid seeds are 2–6 times higher than the price the output fetches in the market, net benefits to farmers are positive as a result of much higher gains in yields. In particular, poor farmers have benefited from the improved quality and higher yields of hybrid seeds of coarse cereals such as sorghum, pearl millet and maize (Pray and Ramaswami 1999, and Ramaswami et al. 1999). Research aimed at converting these coarse grains into high-value grains, e.g., baby foods, cattle feed, can further raise the income of these farmers. However, private seed companies, which play a leading role in the production, distribution, and development of improved germplasm, focus on commercial hybrids for major production zones and leave out the development of less profitable materials suitable for small-scale, semisubsistence farmers. Public research must focus on the development of seed varieties that are suitable for areas with low production potential. While the role of the public sector in seed production and distribution has been reduced, it will have to support the private sector in basic germplasm research and in research aimed at marginal areas and farmers. A well-organized, high-quality seed production and distribution system with an effective delivery mechanism, correct timing, and an affordable price can improve seed replacement rates and thereby enhance productivity. In addition, the development of modern seed technology including hybrid seeds, resistance to pests and soil stresses, etc., can contribute to reducing rural unemployment and providing better safety nets for resource-poor farmers. There is also a need to identify the factors that constrain the adoption of new agricultural technologies in different regions. The available empirical evidence from India shows that apart from the crop share in each farming system and the costs of necessary inputs, various other factors influence the adoption rate of a new technology between regions and between farming systems. These factors include access to extension services, irrigation facilities, credit, whether the crop is grown primarily for self-consumption or for sale, the distance from the market for inputs and outputs, the level of education of the farmers, institutional membership, and social participation. Effective extension services and the suitability of seeds to a particular agroclimatic region also determine the adoption rate of a new technology. The spread of new technologies and the dissemination of modern inputs to less developed and rainfed regions can be improved through education, extension and better marketing systems. According to some writers, the time seems to have come for a second Green Revolution, but unlike the first one, the new technology will have to be tailored to specific locations. Land heterogeneity and the wide range of agroecological conditions imply that the technologies required and the methods used for their dissemination need to be designed for specific social and geographic environments. Since poor farmers mostly live in unfavorable areas, new research should focus on developing varieties that can overcome the specific production constraints in these areas, such as, for example, the development of varieties that are salt and drought resistant.
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Summary and Concluding Remarks This chapter examined the impact of globalization on the agricultural sector of India in general and on the Indian agricultural research system in particular. It also identified various options and strategies that may be used to meet the challenges posed by globalization. Economic reforms aimed at fiscal stabilization led to decreased public spending on agricultural research and extension, irrigation, and rural development. The resulting negative effect on the agricultural growth rates was partly offset by efficiency gains as an effect of trade liberalization measures. Institutional, trade, and price policy reforms, together with improvements in the public sector’s management of infrastructure facilities such as irrigation, power, and roads, can further increase the efficiency of agricultural production. The decline in public investments in the agricultural sector is likely, however, to affect poor farmers disproportionately. Unlike resource-rich farmers who can compensate for the fall in public investments by raising their private investments thanks to incentives provided by the more favorable conditions created by deregulation measures, the credit-constrained, small, and marginal farmers cannot make such investments. While the fiscal adjustments reduced the total value of public funds allocated to agricultural research, they also necessitated reforms in the distribution of available funds across competing needs, taking into account the policy concerns and issues brought up by the globalization process. The public agricultural research system is responding to these needs by establishing new priorities for its resource allocation and by encouraging private-sector participation with adequate supervision and regulation. Moreover, the growing commercialization of agricultural research, as an effect of trade liberalization, deregulation, and the introduction of IPR, provides an opportunity for public research organizations to make up for the deficits in their budget outlays by selling research products and services. The introduction of a matching grant scheme by the government for revenues commercially earned by ICAR can precipitate this process. To enhance the impact and effectiveness of public research, there is, however, a need to take advantage of potential complementaries between public and private research through collaboration or the joint funding of research projects. Public research projects can be contracted out to private research companies, and public research services can be provided to, and funded by the private sector. But as the pilot survey among selected NARIs in India indicates, the institutes have not changed many of their research goals as a result of policy reforms. The sample of research projects currently undertaken in the NARIs does not show a decreased importance of the primary traditional goals of agricultural R&D: self-sufficiency in production and raising farmers’ income. There is no significant increase in the emphasis of goals such as the promotion of exports. It may therefore be left to the private sector to take up the research needs of agricultural exports. The government of India plays a significant role in agricultural R&D through funding provided to the NARS (this includes ICAR as well as, for example, universities). Moreover, government ministries and researchers in the NARS appear to have the decisive influence in setting the research priorities of the public agricultural research institutes, and most research projects appear to be supply-driven.
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Deregulation, privatization, and trade liberalization stimulated private investments in the seed industry and in seed research. However, research by private seed companies concentrates on hybrid seeds and thus only on a few crops. The implementation of stronger IPR and Plant Breeders’ Rights (PBR) legislation would encourage further growth in these investments. But the public sector will continue to play a significant role in agricultural R&D in India, particularly in areas such as cropping systems in which there may be difficulties to appropriate the benefits, which the private sector is less likely to enter. Public research is also required in areas with positive externalities, where social benefits are high, and in developing genetic material suitable for marginal lands and remote areas like the northeastern hills and eastern regions where the profit potential is low. Moreover, public research also has a role in sustaining the environment, particularly when it was damaged by the increased use of fertilizers and pesticides with more intensive production, and by the increasing pressures of the growing population on the land and other natural resources. In addition, the public sector has a significant regulatory role by developing appropriate certification procedures and institutions to keep a check on quality and to prevent private-sector monopolies in production and distribution. As the public research system leaves certain research areas to the private sector, it should focus specifically on disadvantaged areas to more effectively help the poor and contribute to increasing production, employment, and incomes of small landholders and landless rural households through facilitating the adoption of new technologies, the use of modern inputs, and improvements in the crops grown by the poor. Production methods should be improved to increase the yields of coarse grains, which are produced primarily in poorer regions and consumed primarily by the poor, and new varieties that are less sensitive to the soil and climatic conditions in these areas (e.g., varieties resistant to soil salinity and drought) should be developed. Post-harvest losses can be reduced by improving post-harvest technologies such as cold storage, packaging, handling, and transport. With greater efforts in these directions, agricultural R&D could be reoriented to not only put the agricultural sector on a higher growth path, but also to raise the income and improve the standard of living of the poor.
References Alston, J.M., P.G. Pardey and J. Roseboom. 1998. Financing agricultural research: International investment patterns and policy perspectives. World Development 26(6), 1057-1071. Bhalla, G.S. and G. Singh. 1997. Recent developments in Indian agriculture: A state level analysis. Economic and Political Weekly, March 29, A-2–A18. Cromwell, E., S. Wiggins and S. Wentzel. 1993. Sowing beyond the state: NGOs and seed supply in developing countries. London: Overseas Development Institute. Debroy, B. 1998. Intellectual Property Rights. In Agenda for Reform: Action Plan for the Economy, edited by B. Debroy and P. Shah. 50-60. New Delhi: Rajiv Gandhi Institute for Contemporary Studies.
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Dev, S. Mahendra and A. Ranade. 1999. Persisting poverty and social insecurity: A selective assessment. In India Development Report, 1999-2000, edited by K.S. Parikh. New Delhi: Oxford University Press. Gulati, A. and A. Sharma. 1994. Agriculture under GATT: What it holds for India. Economic and Political Weekly, July 16, 1857-1863. Gulati, A. and A. Sharma. 1997. Freeing trade in agriculture: Implications for resource use efficiency and cropping pattern changes. Economic and Political Weekly, December 27, A155-164. ICAR. 1998. National Agricultural Technology Project (NATP): Project summary. January. New Delhi: Krishi Bhawan. Jha, Shikha and P.V. Srinivasan. 2000. Food inventory policies under liberalized trade. International Journal of Production Economics, Elsevier, forthcoming. Mishra, J.P. 1999a. Plant Variety Protection including UPOV Convention on Biodiversity: An Indian experience. Paper presented at the International Seminar on Implications of NEW IPR. Mishra, J.P. 1999b. Regime under TRIPS for Developing Countries, Habitat Centre, New Delhi, 19-21 May. Biotechnology and Intellectual Property Rights. Yojana. Mruthyunjaya. 1999. The impact of the globalization process and the economic reforms on the agricultural sector. Paper presented at an expert consultation meeting at ISNAR, The Hague, The Netherlands. Mruthyunjaya and P. Ranjitha. 1998. The Indian agricultural research system: Structure, current policy issues and future orientation. World Development 26(6), 1089-1101. Nayyar, D. and A. Sen. 1994. International trade and the agricultural sector in India. Economic and Political Weekly, May 14, 1187-1203. Pal, S. and P.K. Joshi (eds). 1999. New paradigms of agricultural research management: Institutionalization of research prioritization, monitoring and evaluation, and partnership with the private sector. Workshop Proceedings 6. New Delhi: National Centre for Agricultural Economics and Policy Research. Paroda, R.S. 1996. Farm research: New paradigms, The Survey of Indian Agriculture. Chennai, India: The Hindu. Pray, C.E. and B. Ramaswami. 1999. Technology, IPRs and reform options: Case study of the seed industry with implications for other input industries. Paper presented at the NCAER-IEG. World Bank Conference on Reforms in Indian Agriculture for Growth, Efficiency, Equity and Sustainability, New Delhi, April 15-16. Radhakrishna, R. 1996. Food trends, public distribution system and food security concerns. Indian Journal of Agricultural Economics 51 (1&2), Jan-June. Ramaswami, B., C.E. Pray and T. Kelly. 1999. Private plant breeding and farmers’ yields in the semi-arid tropics of India. Discussion Paper No. 99-07. New Delhi: Indian Statistical Institute. Rao, C.H. and A. Gulati. 1994. Indian Agriculture: Emerging perspectives and policy issues. Economic and Political Weekly, Vol. 29, No. 16 & 17. Shiva, V. and T. Crompton. 1998. Monopoly and Monoculture: Trends in Indian seed industry. Economic and Political Weekly, Vol. 26, pp. A137- A151. Srinivasan, P.V. and Shikha Jha. 2000. Impact of recent policy changes and globalization on the agricultural sector and agricultural research in India. Proceedings/ Project Reports No. 40. Mumbai, India: IGIDR.
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Swaminathan, M.S. 1993. Genetic diversity and the Indian seed industry. Paper No. 4. New Delhi: Rajiv Gandhi Institute for Contemporary Studies.
Chapter 4 Globalization and Economic Reforms in Ghana Cletus K. Dordunoo and Godwin Y. Dogbey*
Introduction In the 1990s, Ghana was one of Africa’s success stories. After initiating a comprehensive program of structural adjustments in close cooperation with the World Bank and the IMF in 1983, the Ghanaian economy reached relatively stable economic growth with a GDP growth rate of 4–4.5% per annum in the mid-1990s (Figure 4.1). This growth brought about a marked reduction in poverty, and from 1991–92 to 1998–99, the percentage of the poor declined from 52% to just under 40%.1 In Ghana, the average growth rate was considerably higher than the average 2.9% growth rate of other sub-Saharan African countries during the same period, and the reduction in poverty contrasted sharply with the rise in poverty elsewhere in the region. The most important success, and indeed the key to economic development, was the deepening of the democratic process. With two relatively orderly elections in 1992 and 1996, democracy in Ghana became increasingly stable and more widely accepted, as exemplified by the peaceful transition of the presidency to the candidate of the opposition party after the election of December 2000. Ghana emerged during the 1990s as a model for free-market innovation in Africa, and now, at the onset of the 21st century, it embarks on a strategy of accelerated growth and a further reduction of poverty. This strategy, known as Vision 2020, specifies the growth path of the main economic sectors and the benchmarks for attaining the goal of becoming a middle-income country by the year 2020. Prior to the structural adjustments of the late 1980s, the government was heavily involved in economic activity, and much criticism was leveled at the tight state controls over the economy. The subsequent policy reforms moved to liberalize the economy, deregulate and cut the size of the public sector, and privatize many public enterprises through divestiture and other institutional renewal mechanisms. The agricultural sector was a very important component of all economic reforms in Ghana and continues to feature prominently in “Vision 2020”, largely because of the concentration of the poor in the rural areas. Agricultural research had an important role in the sectoral reforms, resulting in a relatively higher allocation of resources for this
1. During these years, the infant mortality rate fell from 85 to 57 per 1000 live births, and life expectancy rose from 55 to 58 years.
* Cletus K. Dordunoo, Godwin Y. Dogbey: Ghana Institute of Management and Public Administration 123
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5 4 3 2 1 0 1994
1995
1996
1997
1998
1999
2000 (est.)
2001 (proj)
Figure 4.1. Growth rate of real GDP in Ghana, 1994–2001 Source: World Bank and IMF, based on data provided by Ghanaian authorities.
purpose than for other public scientific research institutions. In recent years, however, the resources allocated to public research have dwindled, and the NARS had its physical and human resources seriously cut. The current trend to commercialize many hitherto public activities and institutions, and the pressures of trade liberalization, has forced the NARS to reorient its research strategies and resource allocations to new areas of research and to collaborate and share information with other public and private research organizations.
Economic Developments and Policy Reforms in the 1990s The current economic policies originated in the series of economic reform programs and the structural adjustment programs that were implemented since 1983. Prior to these reforms, the economy was plagued with myriad problems, such as overvalued foreign exchange, import restrictions, fiscal and external imbalances, high inflation, excess capacity in industry, scarcity of imported consumer goods, and unavailability of domestic substitutes. Heavy government intervention in the economy—through controls of prices, distribution, and imports, as well as a massive expansion of the public sector through the establishment of large state enterprises, combined with the inefficiency of the public institutions in charge of importing and distributing agricultural inputs and outputs—exacerbated the distortions in the economy and severely eroded incentives to produce, save and invest (Kapur et al. 1991). The policy reforms introduced in the early stages of the structural adjustment programs in 1983 focused on the massive external imbalance that had practically wiped out the profitability of producing for export, and on the massive fiscal imbalance that had made the budget deficit soar to 11% of GDP. A gradual exchange rate reform that freed up the foreign exchange market was a key component of the reform. The exchange rate reform contributed also to reducing the fiscal deficit by increasing import-duty collections. In addition, various administrative reforms and a simplification of the indirect tax schedule increased the effectiveness of the tax administration. Other reforms included a reduction of the bias against employees in the informal sector, the introduction of programs to alleviate the social costs of adjustment
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and a restructuring of state-owned enterprises that in the mid-1980s accounted for 60% of the value added and 55% of employment in the industrial sector. Another part of the reforms, implemented under pressure from international organizations, was a reduction of government involvement in the economy. This was achieved by large-scale privatization and an accelerated divestiture program that included a number of important state assets, such as the Social Security Bank. In addition, the government shares in large state-owned banks were sold. and, in 1998, the government launched the privatization of the remaining state-owned banks. In the second half of the 1990s, the economic reforms in Ghana included accelerated deregulation, trade liberalization, considerable reduction of the government’s direct involvement in the economy, large-scale privatization, and stable macroeconomic management through prudent fiscal and monetary policies. To further reduce the size of the public sector and its involvement in the economy, the government privatized many additional state enterprises through divestiture. Under the National Institutional Renewal Program (NIRP), the government gradually reduced subsidies to most public institutions. Trade liberalization proceeded to gradually eliminate the incentive system in order to comply with the WTO rules and regulations, improve the competitiveness of local producers, and remove the extensive quantitative restrictions and domestic price controls. The tariff regime was progressively lowered to the rate of 20% by 2001 and was greatly simplified, and the majority of import and price controls were relaxed. Nevertheless, these reforms were subject to extensive criticism, primarily because they were introduced rather abruptly and, as a result, were damaging to many local infant industries, which were unable to withstand external competition (Hussain and Faruquee 1994). Export promotion was, however, an essential component of the liberalization plan, and domestic producers, primarily agricultural producers of export crops, benefited from the removal of many export duties. Fiscal policy was growth oriented and the national budget served as an instrument for mobilizing resources in support of investment and other public expenditures to provide priority services. The initial goals of the fiscal policy were to correct the massive fiscal imbalances that existed in earlier years, to reform the tax system, to widen and deepen revenue collection, to enhance economic incentives, and to improve the economic and social infrastructure (Amuzu 1998). Monetary policy was also aimed at curbing inflation through tight controls over money supply by means of improved monetary instruments, as well as more indirect and market-based instruments. As a result, inflation continued its downward trend, dropping below 10% in the second half of 1999 (Wampah 1998; Dordunoo and Donkor 1998). The government reform program was also criticized as regionally biased and having a strong focus on Accra. Indeed, the poverty rate in Accra fell from 23.1% in 1991–92 to 3.8% in 1998–99, whereas the poverty rate in the Savannah remained essentially unchanged and declined only marginally in the coastal areas.2
2. In the urban coastal areas, the poverty rate declined from 28.3% to 24.2% and in the rural coastal areas from 52.5% to 45.2%.
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Despite these far reaching reforms, the fiscal and monetary targets were not reached until recently. Inflation and interest rates remained quite high and there was a general macroeconomic imbalance. After several successive years of a moderate government budget surplus of around 1.5% of GDP from 1986 through 1991, there was a budget deficit of over 5% of GDP in 1992, due to a sharp increase in government expenditure—largely associated with the election of that year—and represented a clear break in the government’s economic discipline. Inflation accelerated from 34% in 1994 to over 70% in 1995, compared with the target of 18%. This was due to several factors: (1) rapid growth in the money supply by over 37%, compared with a programmed target of 8%, (2) fiscal expansion that ran into deficit when divestiture proceeds were excluded, (3) depreciation of the Cedi, (4) cost-push effect of petroleum price increases, and (5) the poorly implemented and problem-laden value-added tax (VAT). The introduction of VAT in early 1995 to replace the manufacturers’ sales tax was aimed at improving the tax administration and broadening the tax base in order to meet the growing expenditures and to finance the chronic deficit. This deficit was further augmented in 1996 with the surge in government expenditure in anticipation of the election in that year. The cascading effect of VAT on prices, the political pressures of parliament, and the weaknesses in administering VAT doomed this tax and led to its withdrawal two months later. VAT was reintroduced in early 1999 at the lower rate of 10%—compared with 17.5% in the initial attempt—and in that year VAT seemed to operate well. Since 1999, Ghana has suffered a trade shock, resulting from the sharp drop in the international price of its two main export products (gold and cocoa) and the price rise of petroleum imports. This shock has led to a deterioration of the country’s macroeconomic performance—primarily a depreciation of the exchange rate and a rise in inflation—and the accumulation of large external arrears. Sharp rises in petroleum prices had often been used as a means of revenue generation with very negative consequences. In 1996, for example, petroleum prices (ex-pump) rose by over 25%, resulting in an increase in direct transport costs of about 30%. The high petroleum prices and the introduction of new taxes affected production costs, primarily of agricultural produce, and led to high transport costs that constituted close to 70% of marketing margins, thus driving a wide wedge between farm-gate prices and the final prices paid by consumers in the urban areas. This large difference reduced the profitability of cash crops, including cocoa, and drove many farmers to the production of food for self-consumption. In the aftermath of the sharp rise in petroleum import prices in 1999, the government also raised the prices in the domestic market very significantly to reduce the operating losses of the state-owned refinery, and it raised the tariffs on water and electricity. Mineral production and exports, including gold, bauxite, diamonds and manganese, had also been adversely affected by the unfavorable changes in the exchange rate prior to the reforms and by the ineffective state ownership. The combination of exchange rate reforms, privatization, and realistic royalty rates made a significant contribution to the recovery of the mineral sector until the recent decline in the world prices.
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Since the mid-1990s, the government has increased the reserve ratio steadily to an all-time high of 57% in an attempt to control the money supply. A sharp rise in the discount rate drove up the lending rates on personal (and investment) loans from 45% to over 50% (Dordunoo 1996). After 1997, the economy started to show signs of relief and inflation gradually declined (Figure 4.2). The rapid inflation had a direct impact on the competitiveness of the Ghanaian exporters until recent years. After a rapid depreciation of the Cedi from 1991 through 1994, the effective exchange rate, calculated on the basis of consumer prices, began to appreciate in 1995. The jump in inflation to over 70% in 1995 prompted the authorities to intervene in the foreign exchange market to slow down the Cedi depreciation. As a result, the unit labor costs in Ghana increased compared to those of its trading partners, even though wage costs were generally contained. Consequently, Ghana lost much of its competitiveness in the international markets. Moreover, after Ghana had accepted the demand of international organizations to remove all restrictions on foreign exchange payments and transfers, the only way to affect the foreign exchange rate was through direct intervention in the foreign exchange market. Indeed, in recent years, the central bank of Ghana frequently intervened in the foreign exchange market to prevent a rapid depreciation of the Cedi and to moderate the inflationary impact of the resulting rise in import prices. A critical area of the reform was the transformation of the state-owned enterprises. By 1987, more than half of the value added and employment in the industrial sector (including mining) was in state-owned enterprises. Their share in the agricultural and service sectors, including banking, was equally high. It was widely acknowledged that the only solution was divestiture, but the reform program proceeded initially very slowly. A Divestiture Secretariat was set up in 1987, but actual sales started only in 1990. The process quickened somewhat after the election of 1992. The divestitures, however, yielded only modest revenues to the government due to the large outstanding liabilities that many enterprises had. The divestiture of the state-owned banks was stalled in many cases due to their poor quality. Since the IMF frequently criticized the slow pace of the divestitures, the government indicated its commitment to the process in its Letter of Intent to the IMF in 1999, in which it stated its intent to divest all the
70 60 50 40 30 20 10 0 1994
1995
1996
1997
1998
1999
2000 (est.)
Figure 4.2. Inflation rate in Ghana, 1994–2001 Source: World Bank and IMF, based on data provided by Ghanaian authorities.
2001 (proj)
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remaining shares in financial institutions other than the Agricultural Development Bank. Several state-owned enterprises were excluded from divestiture, purportedly due to their “strategic” importance, but the decision was also influenced by political pressure.
Agricultural Sector Reforms During the 1990s, sector-specific policies and programs were guided by the Medium Term Agricultural Development Program (MTP). The MTP was initiated in 1988 and became operational in 1991. A joint Ghana government/World Bank initiative provided a 5–10 year rolling strategy for agricultural development for the period 1991–2000. The aim of this strategy was to establish and support market-led growth in agriculture. The government accordingly reduced interventions in the input and output markets while increasing its support for agriculture through the provision and development of agricultural infrastructure, including feeder roads, marketing infrastructure, irrigation, and research and extension. Under the MTP, the agricultural sector was projected to grow at an annual rate of 4%. In addition to economic incentives, private-sector development was to be hinged on improvements in infrastructure, credit, and the efficient provision of public services (research, extension, animal health, etc.) Carefully increasing and targeting public expenditure for the development of roads and communications in high growth areas was one of the main components of the program. Another component was the decentralization of decision making in public-sector agencies and an increase in beneficiary participation by promoting grassroots organizations. The realization of the objectives of the Medium-Term Agricultural Development Strategy required actions in the following areas: 1. improving the incentive framework; 2. improving agricultural support services; 3. increased private-sector participation in agricultural development; 4. strengthening agricultural sector management; 5. establishing a framework for a more rational allocation of public-sector resources; 6. strengthening agricultural research and extension. Privatization featured prominently under the MTP so as to reduce the drain on the government budget arising from unprofitable public-sector production activities and to concentrate resources on policy planning and the provision of public goods. Privatization was to be pursued through the participation of local corporate entities, formal beneficiary groups and cooperatives, and local-foreign joint ventures. Indeed, another important objective of privatization was to give enhanced opportunity to these private sector organizations to participate fully in the marketing of agricultural inputs and products. To support and encourage these organizations the strategy included the following measures: < technical assistance to cooperatives in order to enable them to assume a greater role in the privatized agricultural market;
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a greater role for communities in the cocoa growing areas in order to enable them to become cocoa-buying agents and distributors of input supplies; training for women’s groups involved in grain marketing and agroprocessing.
Vision 2020 gives agriculture in Ghana a more prominent role in the future. Along with practically all other low-income developing countries, Ghana is grossly underinvesting in agricultural research compared with the industrialized countries, even though agriculture accounts for a much larger share of employment and income in developing countries. Typically, public-sector expenditures on agricultural research have been less than 0.5% of the gross agricultural GDP, compared with at least 1% in the higher-income developing countries, and 2–5% in the industrialized countries (IFPRI 1995). The NARIs obtained some funding in their collaboration with other national and international research institutes, and of other institutions in the NARS in Ghana, primarily the universities. Sector policies of the government of Ghana have been reoriented in recent years under the Vision 2020 strategy. Under this strategy, the growth rate of real GDP will gradually rise from 4% in 1999 to 6% in 2003. The growth rate of the agricultural sector will rise from the current rate of 2–3% to over 4% in later years. These changes will be accompanied by significant structural changes, and the share of the agricultural sector in the GDP will gradually decline from around half in the mid-1990s to less than one-third in 2020. The share of the industrial and services sectors will grow from 16% and 35% respectively in the mid-1990s, to 18% and 49% respectively by 2020. Agricultural policies must derive their general and specific thrusts from this planning framework. Agriculture is still the main economic sector in Ghana. During the first half of the 1990s, agriculture contributed on average 45% to GDP, while industry and services contributed 17% and 38% respectively (Table 4.1). In 1996, agriculture employed about 70% of the labor force and accounted for over 53% of foreign exchange earnings. In rural areas, agriculture is the main source of employment and income; rural households that depend on agriculture for living constitute about 72% of the population of Ghana (Dordunoo 1994 and 1997). It is also the major source of food for the nonagricultural urban population and of the bulk of raw materials for agrobased industries (Seini 1998).
Table 4.1. Sectoral Share of GDP (%) at Current Market Prices Item
1991
1996
GDP Agriculture Industry Services
100.0 45.5 17.0 37.5
100.0 44.4 16.6 38.9
Source: MOFA, 1997.
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The principal aim of the agricultural sector policies is to ensure food security and adequate nutrition for the entire population in Ghana, to supply raw materials and other inputs to the other sectors of the economy, to contribute to improving the balance of payment, and to raise the income of the rural population and thus contribute to reducing poverty. In 1998–99, 83% of the poor in Ghana were in the rural areas, and most of them were food crop farmers (Figure 4.3). Significant reductions in poverty can therefore be achieved only by significant improvements in the agricultural sector. These improvements require the diversification of agricultural production, the introduction of export crops, stronger linkages with the other sectors of the economy, and an increase in private investment, improved infrastructure and targeted research. At present, however, the agricultural sector is highly concentrated and is made up of five main subsectors: cocoa (14% of agricultural GDP), crops other than cocoa (61%), livestock (7%), fisheries (5%), and forestry (11%). The noncocoa crops include food crops (primarily cassava, yam, plantain, and maize), industrial crops, and some horticultural crops. Food crops command domestic importance since they constitute the basic staples for subsistence and have a strong impact on domestic inflation. Livestock is constrained by the presence of the tsetse fly in the forest zone, the low nutritional value of the local grass, and the lack of adequate water supplies in the savanna zone. As a result, Ghana has to import about two-thirds of its beef and almost all milk and dairy products. Cocoa has long been Ghana’s principal export product, providing a significant source of foreign exchange and government revenue, and the main source of income for farmers in many parts of the country. An effective reform in this sector is therefore pivotal. The strategy in the early years of the reforms focused on raising producer prices in order to reverse the decline in production and sales for exports. The exchange rate reform was also an important component that contributed to raising the foreign exchange earnings of the Cocoa Marketing Board (CMB) and permitted the Board to triple the real producer prices within five years. However, the rapid decline of cocoa prices in the world markets in the mid-1980s, and even more in the early 1990s (to 40% of its level in 1987–88), made it difficult, for the CMB to maintain the real producer prices, and the recovery in export volume that had started in 1983 stalled by 1990. In
70 60 50 40 30 20 10 0
Incidence of Poverty 1991/2 Incidence of Poverty 1998/99
Rural
Urban
Total
Figure 4.3. Incidence of poverty in Ghana, 1991–92 and 1998–99 * Poverty line = 900,000 Cedis; Source: GLSS3, 1991–92; GLSS$, 1998–99
*
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the first half of the 1990s, the share of cocoa in the total export receipts fell to just over 20%, down from around 50% in the mid-1980s. A major expected outcome of the reform program was that the private sector would vigorously respond to the substantially improved enabling environment, taking over those functions that had previously been carried out by the government and parastatal enterprises. In cases of domestic cocoa marketing and farm input marketing, the outcome to date has fallen short of expectations. By the late 1990s, about 40% of the internal cocoa marketing was expected to be handled by the private sector, whereas actually only about 25% of the cocoa crop is purchased by the private sector and 75% is still marketed by the publicly owned Produce Buying Company. This unexpectedly slow growth of the private sector in cocoa marketing can be explained partly by the fairly significant up-front investments required to enter into this business. In addition, the capacity and facilities of most Local Buying Companies are still limited by the lack of trained staff, trucks, storage facilities, scales, bags and the high cost of capital as well as cumbersome credit procedures. Yet another hampering factor was the very tight marketing margins allowed for Local Buying Companies in the initial years of liberalization. These margins have proved to be inadequate in the face of high inflation and undue delays in having cocoa deliveries unloaded and paid for by the CMB. It was also expected that once the input trade was liberalized and the undue advantages of the CMB and the Farmers’ Services Companies (FSCs) were eliminated, the private trade would eagerly take up the opportunity to engage in input wholesaling and retailing. This, however, did not take place. In fact, the government faced considerable difficulties in its attempt to dispose of the FSCs, even after writing off all their debts to the government. It appears that potentially interested traders lacked the capital to take over FSC stocks and facilities and were not prepared to take the high business risks associated with the prevailing bank lending rates of about 30–40% per annum and the pronounced seasonality of the trade. Furthermore, existing trading houses were and still are reluctant to invest in the establishment of distribution networks out of concern that international aid projects might again provide free or subsidized inputs, thus undermining the price structure and making advance planning of imports and up-country distribution close to impossible. Although the monopsony of the public enterprise over the purchase of cocoa beans from producers was gradually reduced, private-sector agents handle only about 25% of the annual crop. The anticipated growth in the private marketing of inputs has not yet fully materialized, due to factors such as the lack of capital and facilities, regulatory constraints on fertilizer marketing, the slow growth of effective demand, and poor rural transport infrastructure in most parts of the country. Hence, the objective of increasing competition and therefore efficiency in marketing has not been fully achieved. In addition, the implicit tax on cocoa producers that is still ranging between 40% and 51% of the export price has a strong contractionary impact on the cocoa output. In 1999, the government approved a new cocoa strategy designed to improve the incentive for producers, promote competition in the domestic market, and end the public monopoly in cocoa exports. The governmental Produce Buying Company was finally offered for sale and its shares were to be floated in the Ghanaian stock exchange. The Cocoa Sector Development Strategy also envisions a doubling of cocoa
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production in a decade, major improvements in infrastructure, and better credit and payment facilities for farmers. As part of the reform, the Agricultural Program Coordinating Council (APCC) has been empowered to coordinate the policy for the sector as a whole and to review and approve the budgets for all key ministries and agencies in the agricultural sector. This was to help minimize imbalances in resource allocation, program, and expenditure rationalization, with emphasis on poverty reduction and environmental concerns. Since 1994, there have been significant reductions in budgetary appropriations to parastatals resulting in reduced subsidies. However, subsidies have been increased for the Environmental Protection Agency as a result of the government’s increasing interest in addressing environmental concerns. Other reform measures include the following: < The government withdrew from price determination and price support operations in the agricultural sector, with the exception of cocoa. < The Livestock Marketing Board and nearly 40 livestock farms were closed down; cost recovery was introduced on veterinary drugs, and restrictions on exports were removed. < The Ghana Food Distribution Corporation (GFDC) ceased to expand its storage capacity for price support purchases and food distribution. Agricultural research in Ghana was historically mainly in the public domain. Priority setting for research continues to be strongly influenced by the government, the extension services, and the NARIs. The Council for Scientific and Industrial Research (CSIR) is the main public institute in Ghana. It is responsible for all scientific research, including agricultural research, and the NARIs are the main public institutes that undertake agricultural research. The NARIs were strongly affected by the government’s fiscal discipline that led to an effective freeze on employment in most public-sector institutions, and during 1990–96, the average number of researchers increased by only 25%, largely due to external funding. Most prominently, the mid-term review by a joint World Bank/Government of Ghana panel in 1995 recommended specific research projects for 17 commodity/factor research programs, including the collection and characterization of germplasm, hybrid development, varietal trials of locally screened material for its resistance to pest, disease and weed, increased yield, and suitability for end use. The experience thus far with the agricultural sector reforms suggest a number of lessons: 1. The intensive collaboration between the government and international organizations in formulating a medium-term sectoral development strategy resulted in a wide consensus on the necessary sectoral policy and institutional reforms, thus ensuring that the reforms were implemented effectively and with a high degree of commitment. 2. Programs that involve divestiture of parastatals and market liberalization need to be accompanied from the beginning by measures that actively support private-sector entry. Otherwise, a void may be created and the government may
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come under pressure to step back in and satisfy unmet demands for marketing services. 3. When the sale of government assets to the private sector is a condition, clear guidelines for these sales have to be established.
Conclusion Ghana’s great economic potential has all too often been marred by turbulent and inconsistent economic policies. Even the economic reform program that was designed and monitored jointly with the World Bank and the IMF progressed very slowly and had to overcome many pitfalls. The past reform programs stopped the slide of the economy and were the main reason for the continuous recovery since the mid-1980s. That recovery was, however, very modest, and the level of per capita GDP in Ghana by the end of the 1990s was more or less the same as in the early 1950s and was still significantly lower than in the early 1970s. The slow pace of recovery was due in large measure to the low rates of net investment in the economy, particularly in the late 1970s and the 1980s, but also in the 1990s. Private domestic investments were particularly low, hampered largely by the lack of proper credit facilities. Another reason for the slow pace of the recovery was the bias of the government trade policies against the traditional sectors in which Ghana has a comparative advantage. These sectors suffered over the years not only from an overvaluation of the currency, but also from other policy measures that systematically discriminated against them. One example is the cocoa export tax that had a very negative impact on production and exports. The heavy involvement of the state in the various stages of cocoa marketing further reduced the profit margins of producers and their incentive to increase production. The positive effects that were expected from the comprehensive Development Strategy of the cocoa sector launched in 1999 were compromised, however, by the steep drop in cocoa prices in the world markets, falling in the late 1990s to half their value in real terms compared with their level in the mid-1980s. Nevertheless, the success, albeit partial, of past reforms made it possible to design a bold strategy in Vision 2020 to guide the Ghanaian economic policy in the coming years. This strategy outlines the specific sectoral performances required and the benchmarks for the total attainment of the goal of becoming a middle-income country by the year 2020. The fundamental principles of this strategy are liberalization of the economy, deregulation and downsizing of the public sector, privatization through divestiture, and other institutional renewal mechanisms. It envisions more precipitated growth and less turbulent and much lower inflation. However, with the growing importance of the global market for the Ghanaian economy, the ups and downs in the world market are bound to have a strong effect on its domestic market, and the success of Vision 2020 will depend of the steady hand of the government in guiding the economy.
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References Amuzu G.K. 1998. Fiscal Policy and Inflation in Ghana: 1984-1997. Ghana Economic Outlook, Vol.3 No.1. Policy Analysis and Strategic Studies Division (PASSD), GIMP. Azam, J.-P. 1996. .The Diversity of Adjustment in Agriculture. In Africa Now: People, Policies and Institutions, edited by Stephen Ellis. Netherlands Ministry of Foreign Affairs. Portsmouth: Heinemann. Dordunoo, C.K. 1994. A Macroeconomic Analysis of Output and Employment in Ghana. Paper presented for the formulation of the National Employment Policy Programmes for Ghana, (GHA/89/007). Dordunoo, C.K. 1995. Macroeconomic Policies and Agricultural Performance: The Case of Ghana. Paper presented at the EDI seminar on Agricultural Policy Analysis. Dordunoo, C.K. 1997. Enabling Conditions for Accelerated Agricultural Growth and Development in Ghana: The Macroeconomic Conditions. Strategy paper presented at the discussion of Ministry of Food and Agriculture. Dordunoo, C.K. and A. Donkor. 1998. Ghana: Monetary Targeting and Economic Development. Research Paper No. 77. Nairobi: AERC. Dordunoo C.K. 1996. The 1996 Budget Review. Ghana Economic Outlook, Vol.1 No1. Policy Analysis and Strategic Studies Division (PASSD), GIMP. Huq, M.M. 1989. The Economy of Ghana—The First 25 Years since Independence. London: MacMillan Press. Kapur I., M.T. Hajimichael, P. Hilbers, J. Schiff and P. Szymczak. 1991. Ghana Adjustment and Growth, 1983-91. Washington, DC: International Monetary Fund. ISSER. 1997. State of the Ghanaian Economy in 1996. Ghana: Institute of Statistical, Social and Economic Research (ISSER) of the University of Ghana. IFPRI. 1995. A 2020 Vision for Food, Agriculture and the Environment: The Vision, Challenge and Recommended Action. Washington, DC: IFPRI. Ministry of Food and Agriculture (MOFA). 1997. Accelerated Agricultural Growth and Development Strategy in Support of Ghana Vision 2020. Unpublished Policy and Strategy Paper. Seini, A.W. 1998. Agriculture and Food Security under the Structural Adjustment Programme. Paper presented at the first national forum on the Structural Adjustment Participatory Review Initiative (SAPRI) at the International Conference Center, Accra, August, 19-21. Wampah H.A.K. 1998. Monetary Policy and Inflation in Ghana. Ghana Economic Outlook, Vol.3 No.1. World Bank. 1995, 1996. Global Economic Prospects and the Developing Countries, Washington, DC: World Bank. World Bank. 1981. Agricultural Research: Sector Policy Paper. Washington, DC: World Bank.
Chapter 5 The Impact of Recent Policy Changes on the Agricultural Sector and Public Agricultural Research in Kenya Hezron O. Nyangito and Joseph T. Karugia*
Introduction The objective of this chapter is to analyze how recent changes in Kenya’s agricultural policies, which were spurred by the globalization process, have impacted on the agricultural sector and, in particular, on the agricultural research system. On the basis of secondary data and information available in various documents and research reports prepared in recent years on the impact of the reforms on the agricultural sector, and on the basis of primary data collected through questionnaires that were completed by the managers of the Kenya Agricultural Research Institute (KARI), three specific issues will be examined: 1. the policy changes in the past 4–5 years that have had an impact on the agricultural sector; 2. the changes in Kenya’s agricultural research system during these years; 3. the future changes in the Kenyan NARS in view of the globalization of trade and research and of the domestic policy reforms.
Recent Changes in Kenya’s Agricultural Policy To ensure that the agricultural sector retains its central role in Kenya’s economic development, a wide variety of policies have been designed and implemented over the years. These policies included government decisions on the level of input and output prices, public investment affecting agricultural production, and the allocation of funds for research and development in order to improve farming and processing technologies. Some of these policies focused on the agricultural sector, while others, such as fiscal, monetary, and public enterprise policies, had macro or economy-wide effects. Until the early 1980s, the government had a decisive influence on agricultural production, marketing, and investment. Subsequent reforms gradually reduced government participation in the agricultural sector, especially in the marketing of agricultural products through various marketing boards. The first attempts to introduce policy reforms in the agricultural sector were made in the Fourth Development Plan of 1979–1983. Those reforms focused on a gradual reduction of price controls, the
* Hezron O. Nyangito: Kenya Institute of Public Policy Research and Analysis * Joseph T. Karugia: Department of Agricultural Economics, University of Nairobi 135
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promotion of private trade and marketing of agricultural commodities, in large measure by reducing the grip of the marketing boards. The reforms gained momentum in 1982 under the World Bank structural reforms that imposed the removal of various distortions in the economy as a condition for disbursing loans to the Government of Kenya. Although policy reforms were advocated as early as 1980, the key policy intervention initiative came in 1986 with the report titled Economic Management for Renewed Growth. The report set out an economy-wide growth strategy, assigning the agricultural sector a central role in providing food security, absorbing the growing labor force, increasing export earnings, and facilitating rural industrialization. It specified policies to raise incentives to producers, promote research and extension, increase credit and input supply, and expand the role of the private sector. The report also specified conditions to rationalize the structure of public-sector expenditures and to implement comprehensive structural reforms of the parastatals and the civil service. Subsequent important government policy documents, including the Development Plans (Kenya 1988; 1993; 1997), the 1994 report Economic Recovery and Sustainable Development to the Year 2000, the second 1994 National Food Policy, and the 1996 Policy Framework Report, all emphasized various components of these reforms. The initial agricultural policy reforms emphasized the liberalization of the agricultural market and the removal of price controls for all agricultural commodities. The government readily agreed to re-align export crop prices to world market prices, but reforms in the grain marketing system proved far more difficult to implement (Ikiara et al. 1993). Additional reform proposals aimed at easing restrictions of the fertilizer import licensing and price control system, and the removal of other administrative obstacles in the marketing and distribution system. The implementation of these policy reforms during 1980–92 was inadequate and characterized by considerable official ambiguity and strong covert and overt resistance (Ikiara et al. 1993). While the government gave the impression that it was not opposed to agricultural and other economic reforms, only half-hearted efforts were made to implement them. For example, the reforms in grain marketing emphasized the restructuring of the National Cereals and Produce Board (NCPB) to confine its functions to buying and selling of last resort, but the government insisted on adding several major regulations, seemingly for food security reasons. As a result, there was an on-and-off removal of controls until 1993, when the subsector was fully liberalized even though the NCPB is still involved in marketing alongside the private sector. This was part of a wider wave of implementation of other substantial agricultural reforms in 1993 aimed at liberalizing the markets. In principle, Kenya has embraced the concept of structural adjustment programs since the early 1980s. The buzzword of these programs has been liberalization, and considerable deregulation of domestic trade in all commodities, the removal of price controls, trade liberalization, and institutional reforms of key agricultural sectors (coffee, tea, maize, dairy, cotton, and sugar), as well as restructuring the Ministry of Agriculture were among the reforms that have been implemented. The deregulation of markets, the removal of price controls, and trade liberalization were aimed at encouraging the private sector to play a greater role in the production, marketing and processing of agricultural commodities. The cotton, sugar, beef, dairy, and maize
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markets have already been deregulated, and although the government has not yet deregulated the marketing of export crops completely, it has substantially reduced price controls and liberalized the trade in coffee and tea. Institutional reforms were aimed at reducing the government’s involvement in the marketing of agricultural commodities and allowing its marketing institutions to operate like commercial entities and compete with the private sector. These reforms have been implemented by restructuring the grains, sugar, cotton, dairy, and coffee marketing boards to encourage private competition. The restructuring of the Ministry of Agriculture was aimed at reorienting its roles to strategic functions that emphasize research and the provision of extension and other essential services to farmers. Reforms in macroeconomic policies have also been introduced, including the removal of restrictions on the exchange rate, foreign exchange retention and remittances, and the liberalization of interest rates. Government spending has been reduced through retrenchments in the civil service, and this, coupled with reduced government borrowing, was expected to reduce the inflationary pressures in the economy. Between 1993 and 1998, several specific policy measures with implications for agricultural development were proposed, and many of them have already been implemented. Table 5.1 presents the major policy reforms during these years, and Table 5.2 provides a summary of these reforms for the main agricultural outputs and inputs in Kenya. Table 5.2a lists the reforms for the seven commodities that are central to Kenya’s agriculture: coffee, tea, maize, wheat, milk, beef, cotton, and horticulture (Nyangito 1998), and Table 5.2b lists the policy actions that affected the major agricultural inputs, i.e., fertilizers, seed, agrochemicals, veterinary services, machinery, and credit. As Tables 5.1 and 5.2 illustrate, the reforms freed the domestic market and prices were fully deregulated. Trade in cereals and milk, which was previously under the control of the NCPB and the Kenya National Trading Company, was liberalized. Imports are now controlled by means of variable import duties rather than by various restrictions and administrative barriers. Substantial deregulation of the trade in coffee and tea and complete deregulation of the trade in cotton were effected and exporters were allowed to retain most of the foreign exchange proceeds. Other reforms included the rationalization of staffing and budgets in the Ministry of Agriculture to reorient the ministry’s roles to strategic functions with an emphasis on research, extension, market information, infrastructure, and other essential services to farmers. The government has not been keen to implement some of the more controversial reforms, such as the restructuring of the NCPB to make it an autonomous commercial entity. The NCPB continues to be engaged in the buying and selling of grain, often in complete disregard of market forces. It has been recognized that improvements in the efficiency of the product markets must be accompanied by the development of an efficient seed production and distribution system. Accordingly, the seed subsector was liberalized in May 1996, and the monopoly of the Kenya Seed Company (KSC) in the multiplication, distribution, and pricing of seeds was removed, so that KSC is no longer the sole grantee of breeders’ seed from KARI. Under the new policy regime, KARI and other publicly funded research institutions such as the Tea Research Foundation, the Coffee Research
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Table 5.1. Agricultural and Other Related Policy Reforms, 1993–98 Policy
Policy action
Agricultural policies
< <
< < < < < < < < < < <
< <
< < < < < < <
Domestic market liberalization
<
Timing
Implemen tation
Implement plan to streamline KARI Initiate and complete any legal, policy, and institutional changes arising from the review of the role of co-operatives Accelerate reforms of agricultural parastatals NCPB to offer storage facilities for maize to private sector at cost Submit necessary legislation reviewing NCPB Act to Parliament Publish policy statement in liberalization of oil seed industry Implement operating rules for NCPB Expand role of KARI’s Agricultural Research Fund in the financing of research contracts Recover unpaid loans extended to KCC Complete restructuring of the MOALD&M Commence special financial and physical audit of NCPB Review role of co-operatives in a liberalized agricultural sector Establish financially self-sustaining breeder and foundation seed units at KARI’s research centers and improve public plant quarantine facilities to enable import and export of seed Implement agreed operating rules for NCPB during transition period Submit to Parliament revisions of the Co-operative Act defining new and more independent role of co-operatives in a liberalized agricultural sector Implement actions to improve operations of KCC Issue policy statement related to the liberalization of the seed market Issue letter of invitation for proposals for provision of services to undertake commercialization of NCPB Experts in place to prepare and implement commercialization program of NCPB Establish modalities for maintenance of strategic maize reserve stock and market interventions Establish NCPB as a commercial entity, free to make independent commercial decisions Complete rationalization of KARI
1995–97 1995
Done Done
1995 April 1995
Not done Done
June 1995
Done
June 1995
Done
July 1995 July 1995
Not done Done
July 1995 Dec. 1995 Dec. 1995
Not done Ongoing Done
Dec. 1995
Done
1996
Done
1996
Done
March 1996
Done
March 1996 March 1996
Done Done
March 1996
Done
June 1996
Done
Dec. 1996
Done
Dec. 1996
Delayed
June 1997
Done
Reduction of the number of national and local fees and licences required for new start-ups of retail and wholesale trade
Dec. 1994
No progress
The Impact of Recent Policy Changes in Kenya
Trade policy
< <
< <
<
<
Abolish specific duties on cereal imports Present to Parliament an anti-dumping legislation consistent with WTO rules and impose anti-dumping duties on cereal imports in accordance with the law Aim to reduce tariffs towards the lowest prevailing in COMESA Initiate discussions to reduce nontariff barriers to trade and harmonize investment regulations under the auspices of EAC Work with EAC partners towards a goal of a subregional common external tariff with maximum rate of no more than 25% and one other non-zero rate Maximum tariff to be lowered to 30% and no more than 3 non-zero rates and lower trade-weighted average tariff
139
Dec. 1996 Dec. 1996
Done Done in June 1997
1997
Ongoing
1997
Ongoing
1997
Ongoing
July 1997
Done
COMESA: Common Market of East and Southern Africa EAC: East African Community KCC: Kenya Co-operative Creameries MOALD&M: Ministry of Agriculture, Livestock, Development and Marketing Source: Ng’eno, N.K. 1997. Comparative Analysis of Economic Reforms in Eastern Africa.
Table 5.2a: Specific Policy Changes for Various Agricultural Commodities Commodity
Policy before change
Coffee
< <
Tea
< <
Beef
<
Cotton
<
Sugar
< <
Policy after change
Auctioning done with local currency only No retention of foreign currency proceeds
<
Auctioning done with local currency only No retention of foreign currency proceeds
<
Marketing and prices controlled Domestic marketing, trade, and prices controlled
<
Producer prices controlled Controlled imports
<
<
<
<
<
Date of change Implemenin policy tation Nov. 1992
Done
1992
Done
Nov. 1992
Done
1992
Done
1987
Done
1992
Done
1994 Minimum Prices established Variable duty introduced 1994 to protect local producers
Done
Auctioning using foreign currency allowed Retention of 50% of foreign exchange proceeds by exporters Auctioning using foreign currency allowed Retention of 50% of foreign exchange proceeds by exporters Marketing and prices decontrolled Complete deregulation of domestic marketing, trade, and prices
Done
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Maize
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<
NCPB only importer
<
<
Producer prices controlled
<
<
Consumer prices controlled Movement permits required NCPB maintained strategic reserves
<
<
Only 8% of public research funds allocated to maize
<
<
Producer prices controlled
<
<
NCPB only importer
<
<
Public research funding
<
<
Prices controlled KCC monopoly in processing and marketing
<
Kenya Dairy Board a monopoly
<
< <
Wheat
Milk
<
<
< <
<
<
1992 Private sector can import but variable duty will be imposed Minimum (floor) prices 1994 based on long-term import parity prices 1994 Controls abolished
Done
1994
Done
1994
Not done
Ongoing
Ongoing
1994
Done
1994
Ongoing
1994
Ongoing
1992 1992
Done Done
1992
Done
1992
Done
Movement permits not required Foreign exchange reserve of $60 million established Funding to be increased to reflect importance of the crop. Private funding to be sourced through user charges Minimum (floor) prices based on long-term import parity prices Private sector can import but variable duty will be imposed Public and private research funding Prices decontrolled Private sector allowed to participate in processing and marketing Monopoly of Kenya Dairy Board removed Imports of powder milk allowed but variable duty will be imposed
Not done
Done
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Table 5.2b: Policy Changes for Various Agricultural Inputs Input
Policy before change
Fertilizer
<
< < < <
Prices controlled and restrictions on importation imposed Duty imposed on imports Value Added Tax charged on imports Controlled imports No subsidy
Policy after change
<
< < < <
Machinery
< <
Subsidy on Tractor Hire Services Duty imposed on imports
<
< <
Agrochemicals
Veterinary drugs & services
Seed
Value Added Tax charged on imports
<
Duty imposed on imports Value Added Tax charged on imports
<
<
No subsidy on drugs
<
<
Duty imposed on imports
<
<
Value Added Tax charged on imports
<
<
Controlled by Kenya Seed Company
<
< <
<
< <
Semen, embryos
<
Duty imposed on imports
<
Prices decontrolled and restrictions on importation removed Duty on imports removed Value Added Tax on imports abolished Decontrolled 5% subsidy introduced Subsidy removed and commercial rates charged Duty on selected imports removed Value Added Tax on selected imports abolished Duty on imports removed Value Added Tax on imports abolished 5% subsidy on drugs introduced Duty on selected imports removed Value Added Tax on selected imports abolished Plant Breeders Rights gazetted Sector liberalized and prices decontrolled Establishment of a self-financing breeders and foundation seed units at KARI research centers Duty on imports removed
Date of change Implemenin policy tation 1991
Done
1992 1992
Done Done
1994 1993–96
Done Done
1994
Done
1994
Done
1994
Done
1994 1994
Done Done
1993–96
Done
1994
Done
1994
Done
1994
Done
1996
Done
1996
Ongoing
1992
Done
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Foundation, and the Pyrethrum Board provide breeders’ seeds and other planting materials to registered seed companies without discrimination. Prior to the reforms, there were 16 private seed development companies, which confined their operations only to horticultural crops, whereas the KSC had the sole rights to multiply and distribute seed material for the major staples. With the onset of the reforms, four multinational seed companies, including Cargill and Pioneer, entered the Kenyan seed market and developed seed materials for basic cereals, especially maize (Nyoro 1996). Before the reforms, seed testing, inspection, and certification was undertaken by KARI’s National Seed Quality and Control Board, and this role involved a potential conflict of interest. These services are now under the ambit of the independent Kenya Plant Health Inspection Service (KEPHIS), and this could improve the reliability of seed inspection and certification. The official recognition and enforcement of the international Plant Breeders’ Rights Convention is expected to further increase private trading in new seed technology. The wave of policy reforms since 1993 followed a period of on-and-off removal of controls that was highly detrimental to the performance of the agricultural sector in the early 1990s. Between 1983 and 1990, agricultural production grew at an average annual rate of 3.5%, followed by a decline by an annual rate of 0.4% in 1990–91, and a very steep decline at an annual rate of 4.1% in 1992–93. With the implementation of the reforms beginning in 1993, combined with good weather conditions, there was an increase in agricultural production at the rate of 2.8% in 1993–94, and an annual rate of around 4.5% in 1994–95 and 1995–96. The growth rate, however, declined to less than 1.5% per annum from 1996 to 1997–98. The agricultural policy changes also affected producer prices, marketed output, private-sector participation, trade, and consumer prices. Following the liberalization of the food subsector in 1993, there was a dramatic increase in producer prices for all food commodities, except the price of rice that was still under the control of the National Irrigation Board (NIB). The poor response in food production to the price increases is explained by the wide fluctuations in the real producer prices and the worsening terms of trade between the outputs and inputs (Nyangito 1998). The policy reforms also led to fluctuations in the marketed output through the formal market channels for the main food commodities (maize, wheat, sugar, rice, and milk), as less and less food commodities are being channeled through the formal markets. The liberalization of trade in these commodities has resulted in a steep increase in the import of foodstuffs, and the imports of rice, wheat, and sugar have been on the increase in recent years. The policy reforms have also increased the participation of private firms and individuals in the trade in food products. For example, the number of private firms involved in the processing and marketing of milk rapidly increased, and the private sector accounted for about 30% of the market by 1995. The number of private firms involved in the domestic distribution of rice, sugar, wheat, and maize has also increased. However, the liberalization led to the total collapse of the cotton industry, due to the importation of cheap textiles that outcompeted local products. After increasing dramatically in 1991 and 1992, consumer prices of food commodities began to decline in 1993, probably as a result of the government’s demonstrated commitment to policy changes as well as the reduction in inflation.
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Foreign exchange liberalization generally increased producer prices for cash crops, and domestic producer prices are now more aligned with world market prices. The upward trend in producer prices started already in 1992 and continued thereafter for coffee, sisal, and cotton, whereas tea producer prices began to decline in 1994 due to the decline in world market prices. Despite the reforms, domestic taxation combined with delays in the payments to farmers contributed to depress producer prices to well below world market prices, with the result that the nominal protection coefficients were less than unity for coffee, tea, and sisal between 1993 and 1996 (Nyangito, 1998). Input prices dramatically rose following the reforms and this trend has continued. The sharp increase was attributed partly to inflation and partly to the weakening exchange rate, since input prices are very sensitive to exchange rate policies because most inputs are imported or have a large import component. The level of input use has remained more or less unchanged since the mid-1980s, with fertilizer use fluctuating within a narrow range of 174,000 and 285,00 metric tons—well below the potential level of use estimated at 600,000 metric tones. Although the record of implementing policy reforms has improved since 1993, a wide gap continues to exist between the policy pronouncements in government policy papers and development plans and their actual implementation. Several characteristics of these reforms should be noted: < Policies that required simple policy pronouncements such as price decontrol were implemented at a much higher rate than policies that required structural changes and budgetary commitments. < Although the policy reforms had the objective of placing markets at the center of the economy, little has been achieved in empowering the private sector to play the important role envisaged in these reforms. < Government policies have often been inconsistent and unpredictable, and throughout the reform period there has been uncertain political commitment to carry out the necessary changes. < Stakeholders have not always been involved in the design and implementation of the policy changes, which means that policies with potentially significant long-run economic benefits have met with resistance due to their negative short-run impacts. < The negative effects of the reforms have been exacerbated by the extreme poverty in Kenya, since the poor are less capable to withstand the necessary adjustments during the transition period and endure any disruption in their economic and social status quo. The temporary hardships brought about by the reforms raised considerable unrest and had negative effects on the political system. < The implementation of the reforms has also suffered due to the lack of capacity in key areas including the capacity to analyze their effects. The policy reforms had a measure of success in achieving the necessary macroeconomic changes, but they were much less successful in promoting growth in the agricultural sector. This failure appears to be due to significant weaknesses in the policies themselves as well as major flaws in institutional and administrative structures that oversaw the implementation of the reform program. Many reform packages lack
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complementary policy components and proper sequencing. The government has the important role of providing the infrastructure (e.g., roads, information), the institutional framework for the efficient operation of markets, and a system of law and order as well as rights and obligations that hold the economic system and the society at large together. It seems that the government equated liberalization and privatization with an abdication of any responsibility for economic development. After a long period in which government production and marketing monopolies dominated the Kenyan economy, private traders lacked the managerial skills, the financial capacities, and/or the physical infrastructure to take over production and marketing functions. This was clearly demonstrated when some parts of the country faced food shortages while maize surpluses in the Rift Valley pushed prices to very low levels (Daily Nation, January 7, 1999). The core of the reforms is to leave to the private sector those economic activities that it can do better than the state, and to leave to the government the provision of goods and services with public good characteristics such as agricultural research, infrastructure, and the establishment of the institutional and legal framework. Available evidence suggests, however, that the government is only partly committed to assume this role. Policy inconsistencies and the resulting uncertainties discourage the private sector from investing in agriculture.
Changes in Kenya’s Agricultural Research System KARI dominates public agricultural research in Kenya. It is institutionally affiliated with the Ministry of Research and Technology, but it has a Board of Directors that gives guidance to the operations of the institute, while the Director is responsible for all day-to-day activities of the institute. The core objective of KARI is to improve the welfare of Kenyan agricultural producers and consumers through the development of new technologies; it also carries out research in agriculture and veterinary science to achieve the following goals: < protect, conserve, and upgrade the basic resources upon which Kenya depends for agricultural development; < improve the quality of food and other farm products, thereby increasing domestic and foreign demand for Kenyan agricultural products; < enable farmers to produce adequate food supplies and other farm products at decreasing real production costs; < protect crops and livestock from pests and other production hazards and protect consumers from health hazards that may arise through the use of agrochemicals; < help raise the income base and quality of life in rural areas through improved farming technologies; < develop the Kenyan scientific capacity in order to generate and disseminate new knowledge and technologies for the solution of current and future problems; < cooperate with other research organizations within and outside Kenya that are carrying out similar research.
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The mandate is undertaken by 16 national research centers, six regional research centers and seven subregional centers that are spread out over the country. The national and regional centers are headed by directors who are accountable to the director of KARI at the headquarters in Nairobi. The mandate of the national research centers is to conduct applied strategic research on issues of national scope. The regional centers have the mandate to conduct adaptive research on the production systems of their particular region defined by official administrative boundaries. The subregional centers are attached to national or regional centers. Although basically a research institute, KARI is also involved in other activities, such as extension and education. In 1996, about 80% of professional staff time was dedicated to agricultural research, while 20% was devoted to these other activities. During 1997–98, there were 491 researchers out of a total personnel of 4621. During that year, 192 researchers visited other countries in connection with their work. The institute is linked to the Internet, and in 1998 about 10% of the researchers were connected to e-mail services. The major research programs undertaken by the institute are shown in Table 5.3. About 60% of the programs deal with crop research; cereals crop research dominates with 25% of all the programs. There have been significant changes in the orientation of the research programs in recent years compared with the early 1990s: about 25% of the research activities are in new areas, including socioeconomic and regional research programs, which were initiated by KARI to be more responsive to the needs of farmers in a changing policy environment. KARI is also involved in regional and international research programs; it plays a leading role in research programs in the Association for Strengthening Agricultural Research in East and Central Africa (ASARECA) and collaborates with international development organizations, such as the United States of Agency for International Development (USAID), the Rockefeller Foundation, the International Center for Maize and Wheat Improvement (CIMMYT), and others. Policy changes such as trade liberalization, deregulation, and privatization have had an impact on the research orientation of the NARS in general and KARI in
Table 5.3. KARI Research Programs by Commodity/Activity Classification, 1997–98 Program Cereals Other food crops Industrial cash crops Vegetables and fruits Livestock Factor research Environment/NRM Other thematic
Share (%) 25 15 5 15 20 10 5 5
Main commodities Maize, rice, and wheat Sorghum, millet, and beans Cotton, Pyrethrum, and sugar cane Cabbages, mangoes, and bananas Cattle, small ruminants, and poultry Soil and water Land Socioeconomics, post harvest, and priority setting
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particular. The liberalization of trade in agricultural commodities caused product price shifts that affected all agricultural producers. Maize production, for example, declined precipitously both in acreage and in the use of inputs with the decline in maize prices, whereas the production of cash crops increased. The liberalization of the inputs market (seed and fertilizers) has increased the participation of the private sector. However, due to the lack of proper supervisory institutions and mechanisms, this has sometimes resulted in the provision of seeds of sub-standard quality to farmers and the use of uncertified seed material. The prices of fertilizers have also increased, forcing small-holding farmers to use low quantities or refrain from using any fertilizers for their crops. This has put pressure on KARI to explore integrated nutrient management strategies that farmers can use to mitigate the decline in the use of fertilizers. In recent years, KARI has intensified its work in new research areas, particularly in biotechnology, policy, and institutional studies, and impact assessment. Biotechnology offers a new potential for research to improve crop varieties to increase yields and improve resistance to diseases and pests. Specific crops on which this research concentrated were maize and sweet potatoes. KARI has seconded researchers to the Monsanto Research Company in order to learn new methodologies in biotechnology work with a view to applying the techniques in the development of high yielding sweet potato varieties. KARI also collaborates with CIMMYT in biotechnology development of maize varieties that are resistant to striga infestation, a weed that is a major constraint in maize production in Kenya. The focus on policy and institutional studies by the socioeconomic program is a result of the realization that problems of agricultural development are not necessarily due to biophysical limitations alone, but also a result of political and economic constraints. KARI therefore took new initiatives to focus on policy and institutional studies to identify political and economic constraints that retard agricultural development. Impact assessment studies are necessary to determine the level of adoption of new technologies and their impact on agricultural development. The studies help refine the developed technologies and justify funding. This is an area that has been ignored in the past, even though it provides important information for refining technologies and helping KARI set the research agenda and prioritize research programs. In 1997–98, the overall level of financial support to KARI (in US$) declined by 50% compared to 1996–97. Government funding declined by 20%, and that of multiand bilateral donors declined by 30%. There was, however, an increase of 10% in support from local nongovernmental organizations (NGOs). The reduction in funding did not have any immediate impact on the number of staff, but it was estimated that if the trend continues, the number of researchers will have to be decreased by at least 20%. The main sources of funding for KARI in the last two years are shown in Table 5.4. Multilateral and bi-lateral organizations, primarily the World Bank and donor countries, were the main sources of funding, followed by the government; local organizations fund only 5% of the total. There has been a significant increase in funding for agricultural R&D from private and semipublic institutions in recent years; their funding was provided primarily to cereal research that was previously dominated by the public sector.
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Table 5.4. Sources of Funding for KARI in 1997–98 Organization
Percentage share
Local NGOs Government Regional/subregional Multilateral and bilateral (World Bank, EU, USAID, etc.)
5 35 5 55
Source: KARI
Selected case studies: Four research projects were selected to illustrate the impact of the recent policy changes on agricultural research in Kenya: 1. Adaptive groundnut research: variety and agronomic testing and adapting to farmer conditions. 2. Land and water: soil management for improved tillage and drainage methods. 3. Maize research: breeding and agronomy. 4. Dairy adaptive research: feed resources and utilization, animal health, breeding and genetic improvement, and socioeconomics. The initiators of these research programs are shown in Table 5.5. The major initiators are the research teams within KARI, whose share is 40–50%. Initiation by farmers (20–30%) and the extension and Ministry of Agriculture follow, except for the adaptive groundnut program, where multinational donors played a bigger role (20%). It is important to note that local NGOs played a limited role in initiating research programs; they were involved only in the land and water research program. This analysis indicates that the institute’s researchers dominate the process of setting the research agenda and priorities. The funding sources for the research projects varied, but the multinational donors, primarily the World Bank, the CGIAR (primarily ILRI, CIMMYT, and ICRISAT) and USAID were the main ones, followed by the government (Table 5.6). Regional funding was provided by ASARECA. Table 5.5. Share in Initiating Research Projects Initiator of research
KARI team Local NGO Extension / Ministry of Agriculture Regional / subregional programs Multinational / bilateral donor Others (farmers) Source: KARI
Research project Groundnuts
Land and water
Maize
Dairy
50 0 0 0 20 30
50 5 10 5 5 25
40 0 10 15 15 20
40 0 20 0 10 30
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Table 5.6. Share of Different Sources in Funding Research Projects Donor
Multinational Government/KARI Bilateral donor International / Regional research agency Local NGO
Research project Groundnuts
Land and water
Maize
Dairy
60 30 0 10
40 32 0 14
20 60 20 0
30 30 20 20
0
14
0
0
Source: KARI
Each of the research projects had specific objectives, and some of them had a geographical focus as well. The maize project was focused on the development of improved hybrid seed varieties that have early maturing, high yield, and disease and pest resistance. The groundnut project was also aimed at increasing the use of improved seed. The land water project had the objective of developing improved tillage tools and conservation methods in the country’s dry areas. The dairy project had the objective of improving production technologies and dairy breeds. The project leaders stated that the two main goals of these projects were to raise farmers’ income and increase farmers’ food self-sufficiency and security. In the past, the products of KARI’s research were given free of charge to other public institutions for multiplication and distribution. For example, improved maize and wheat varieties were given to KSC, a semipublic organization for multiplication and distribution. With the liberalization of the seed industry, new private companies have entered the industry and are involved in the multiplication and distribution of seeds. The sources of most of these seeds are private companies outside the country, primarily the multinationals. This has created competition to KARI’s products that are still monopolized by KSC. However, KARI’s emerging strategy is to reorient its policy and make its products available to whoever is willing to buy them for multiplication and distribution on a commercial basis. KARI hopes to undertake collaborative work with the private sector in the development of new technologies either through contracts or charging royalties for its innovations. This strategy is in part aimed at obtaining new funds for research and compensate for the decline in public funding.
Emerging Strategies for Agricultural Research Prior to liberalization, KARI undertook all the research in seed development, including the national performance trials (NPT), and recommended management practices, types and levels of fertilizer use, etc. In some instances, KARI collaborated with private firms specializing in specific crops such as barley, for Kenya Breweries. For maize, wheat, and rice, KARI had the sole responsibility over the development of
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proper basic seeds and the inspection of the multiplication process. With liberalization, new private firms such as the multinationals Cargill and Pioneer and the local Oil Seed Development company are now involved in the development, multiplication, and distribution of improved seed, particularly for cereals. Some of the new varieties are developed outside the country, and KARI does not have control over the NPTs to offer recommendations regarding the suitability of these seeds and the needed management practices in different ecological regions. Instead, this mandate has been given to the Kenya Plant Health Inspectorate Services. KARI material is accessible to KSC and the other firms for multiplication, but KSC continues to dominate the multiplication of KARI material, while the new private companies focus more on the multiplication and distribution of their own material. The trade liberalization and deregulation process has not much changed the research priorities of KARI with respect to the development of new varieties. But KARI has reduced its activities in overseeing the performance of the new varieties in the NPTs and is now providing recommendations on the suitability of new varieties and on management practices for all crops grown in the country. This has made it easier for private firms to use their materials and thereby compete with KARI’s materials. The new practices have reduced the national performance trials that recommend suitable varieties for various regions and suitable management practices to the extent that they may impact negatively on food security in the short run. Some of the new crop varieties developed by private firms may not be well suited to certain regions and may have much lower yields in these regions. KARI scientists complain that the new entrants to the seed market do not undertake adaptive research through NPTs to ensure that the new varieties are suitable to the areas where they are grown. This, they argue, is the reason for the low quality of the seeds that are currently available in the market. Over the years, KARI has collaborated with private firms in the development of new varieties, particularly for horticulture. With liberalization, KARI is expanding its linkages with private firms in undertaking collaborative research, and is in some cases undertaking contract work for private firms. KARI also proceeds to commercialize some of its activities in order to compete with private firms by charging royalty payments for use of some of its products (innovations), by undertaking contract research work for the private sector and for other public organizations, and by conducting the multiplication of basic seeds for sale to private firms and individuals. In addition, KARI will have to focus in the future on a number of specific research areas, either because private enterprises do not operate in these areas, or because the new rules that govern global research will force KARI to make the following adjustments: Arid and semi-arid areas The major factor that constraints agricultural development in marginal areas (primarily arid and semi-arid lands) in Kenya is water scarcity. Possible scientific solutions focus on the development of crop varieties and animal breeds that can withstand water stress and on management practices that protect the environment. Crop breeding projects and programs to improve management practices have been,
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and continue to be undertaken at the National Dryland Research Station at Katumani. Under these programs, suitable crop varieties for maize, sorghum, millets, legumes, and fodder crops in the semi-arid areas have been developed; other programs include water and soil conservation measures. For livestock, range management research programs are undertaken at Kiboko and Marsabit centers. These centers focus on livestock management practices for the semi-arid and arid areas. Naivasha National Research Centre is involved in research breeding programs for cattle suitable for the arid and semi-arid lands of the country. As a result, the Sahiwal cattle breed that was initially bred in Asia has been improved to produce a breed that is most suitable to these areas. The policy-related issues are concerned with improving the infrastructure for water provision (irrigation and water harvesting) for crops and livestock. These issues are managed directly by the relevant government ministries, primarily within the framework of Agriculture and Planning and the National Development. In addition to scientific research, the KARI system is also involved in infrastructure support programs for pastoralists, including the identification and development of marketing systems for livestock, to enable pastoralists to access markets. Ecological sustainability KARI’s research programs incorporate the following environmental sustainability issues: 1. crop protection and evaluation of pesticides for persistence, residual effects and toxicity before recommendations are made; 2. fertilizer use trials for analyzing residual effects of fertilizer use, both in the research centers and on farms; 3. soil and water conservation programs that focus on adaptive research; 4. fresh water resource-conservation programs, mostly in collaboration with multilateral and bilateral donors. KARI strikes a balance between conservation issues and efforts to raise productivity by means of cost-benefit analyses to determine the trade-offs of the various production practices recommended for increasing agricultural productivity and the associated environmental effects. The issue of ecological sustainability is of concern to policymakers, and there is a dialogue between KARI and the institutes and ministries in charge of formulating policies in this area. The government has taken a keen interest in environmental issues and has published a policy paper on guidelines for environmental protection legislation. IPR Kenya formally accepted the international Plant Breeders’ Rights Convention Act on IPR in May 1999. Plant breeders are now given exclusive property rights for breeding new varieties. This allows KARI to register and have exclusive property rights on all its registered products and in return reward plant breeders (innovators) with a fraction of the royalties received for the new varieties (innovations). These rules also allow producers to access, on a commercial basis, the best materials developed and patented
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among convention member countries. Access to IPR will encourage KARI and its scientists to invest more efforts in the development of new varieties (innovations), but scientists may also scramble to take control over the potential innovative areas that have commercial potential, to the detriment of research in areas that have the aspects of public goods. Most of the materials used in KARI have been obtained from the international agricultural research centers of the CGIAR, where payment of royalties was not required. In cases where materials were sought from the private sector (e.g., flowers), payment of royalties for the use of the material was made to facilitate the adoption of the new crops. KARI will continue to have a leading role in the development of new technologies as public goods and in basic research that has a long gestation period before any commercial benefits can be realized. Toward that end, KARI has conducted systematic strategic planning and priority setting exercises in the past few years and has developed mechanisms to screen research activities for both relevance and scientific merit. The liberalization of input prices Kenya has liberalized its input markets. The removal of government subsidies raised the production costs of these inputs, particularly fertilizer, to producers. The markets for these inputs were also negatively affected by the low product prices during liberalization and the dumping of cheap commodities, particularly maize, wheat, sugar, and dairy products in the country, which further depressed domestic producer prices. One result was the low levels of use of the purchasable inputs that negatively impacted the farmers’ capacity to use these inputs and to adopt new crop varieties and new technologies. In the longer term, the development of appropriate marketing systems for private trading in these inputs and greater efficiency of the markets will reduce the costs of distribution and delivery of the inputs to producers. Similarly, the development and efficient performance of product markets will enhance product competition and ensure better returns to producers. Both reduced costs for inputs and better returns for products will in turn enhance the use of inputs by producers. This will also increase the demand for research associated with the use of such inputs.
Conclusion Kenya, along with many other sub-Saharan African countries, embarked on ambitious economic policy reforms in the early 1980s within the framework of a structural adjustment program, at the urge of multilateral aid agencies. The review of the recent policies that were implemented in the second half of the 1990s indicates that as a result of globalization, the country’s economy has largely been transformed from one where the government dominated agricultural production, marketing, and investment activities, to one where the private sector is becoming increasingly more important in performing these activities. The reform process during this decade proceeded slowly until 1993, when the pace gradually increased. Since then, a wide range of reforms have been implemented, affecting the production and marketing of many agricultural commodities that were
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included in the liberalization program: commodity prices have been deregulated, the distribution of many inputs has been privatized, and the government no longer sets prices for inputs and outputs, nor does it provide lavish subsidies to local producers. However, a number of policy reforms that require budgetary provisions or counter well-entrenched interests have met with less success. The goal of the liberalization and deregulation policies was to let the private sector conduct those economic activities that it can do better than the public sector, and give to the government the responsibility to provide goods and services with public good characteristics. Available evidence suggests, however, that the government of Kenya has so far been less than fully committed to this goal. Inconsistencies in the direction of many policies and the uncertainties thus created discourage the private sector from investing in agriculture. There is therefore a real challenge of nurturing the very fragile private sector to undertake activities previously undertaken by the state. The consequences of the policy reforms have so far been mixed, with a general decline in agricultural production. Nevertheless, the full impact of the policy changes on the agricultural sector in Kenya is yet to be evaluated. In the last four years, KARI has undergone considerable changes as a result of trade liberalization, deregulation, and privatization policies. There have been significant changes in the orientation of its research programs and a shift from an emphasis on upstream strategic research thrusts in both commodity and factor programs to adaptive programs, social sciences, and biotechnology. The underlying force behind these changes has been the goal of reaching small-scale farmers, having an impact at the grassroots level, and responding to their needs. The large price shifts resulting from liberalization forced KARI to shift its research to socioeconomic studies to better evaluate the policy issues and their impact on research and the small farmers who are the main clients of this research. The liberalization of the inputs market has led to increased prices particularly for fertilizers, and this has resulted in low levels of use of the inputs. This has also put pressure on KARI to develop integrated soil and water management technologies to mitigate the decline in the use of fertilizers by farmers. The policy changes had a negative effect on the capacity of KARI to provide research and extension services. Adjustments in the government’s fiscal policy have meant that less funding was available to KARI to finance its research programs. The higher costs of agricultural inputs resulting from the elimination of subsidies have resulted in calls for the development of more efficient production technologies. Trade liberalization and deregulation have resulted in the wider participation of the private sector in research and distribution of inputs, particularly food crops, and this more prominent role has required adjustments in the role and mode of operation of the relevant public institutions, particularly KARI. In the new environment and under the new policies, KARI has to assume a new role and secure alternative sources of funding in the face of dwindling public and donor funding in order to meet the new demands for public research. KARI is gradually changing its research program to a more client-oriented one, but whenever possible, charges its clients for the services rendered. The crucial challenge is the balance between the development of technologies for the small or resource-poor farmers and
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technologies for the more resource-endowed farmers who are able to pay for the new technologies.
References Daily Nation. 1993. Government Admits to Looming Famine. January 7. Ikiara, G.N., M.A. Juma and J.O. Amadi. 1993. Agricultural Decline, Politics and Structural Adjustment. In Social Change and Economic Reform in Africa, edited by P. Gibbons. Uppsala: Nordiska Africainstituete. Kenya, Republic of. 1979. Fourth Development Plan, 1979-1983. Nairobi: Government Printer. Kenya, Republic of. 1986. Sessional Paper No. 1 on Economic Management for Renewed Growth. Nairobi: Government Printer. Kenya, Republic of. 1988. Sixth Development Plan. 1989-1993. Nairobi: Government Printer. Kenya, Republic of. 1993. Seventh Development Plan, 1994-1996. Nairobi: Government Printer. Kenya, Republic of. 1994. Sessional Paper No. 1 on Recovery and Sustainable Development to the Year 2010. Nairobi: Government Printer. Kenya, Republic of. 1994. Sessional Paper No. 2 on National Food Policy. Nairobi: Government Printer. Kenya, Republic of. 1996. Policy Framework Paper. Nairobi: Government Printer. Kenya, Republic of. 1997. Eighth Development Plan, 1997-2002. Nairobi: Government Printer. Ng’eno, N.K. 1997. Comparative Analysis of Economic Reforms in Eastern Africa. Nyangito, H. 1999. Agricultural Sector Performance in a Changing Policy Environment”. In Kenya’s Strategic Policies for the 21st Century: Macroeconomic and Sectoral Choices, edited by Kimuyu, Wagacha, and Abagi. Nairobi: Institute of Policy Analysis and Research.
Chapter 6 The Impact of Trade Liberalization and Domestic Policy Reforms on the Agricultural Sector in Cameroon Aloysius Ajab Amin, Emmanuel Douya, and Alexander Mbeaoh*
Introduction Until the mid-1980s, Cameroon—like many other African countries—experienced relatively rapid economic growth behind the walls of high tariff barriers and quota restrictions. From the second half of the 1970s, petroleum production was an added enhancement to the rapid expansion in agricultural production and exports. As a result, Cameroon recorded growth rates of over 7% from the mid-1970s through the mid-1980s. The rapid economic growth was supported by a strict exchange rate policy in Cameroon and in several neighboring countries that pegged the CFA Franc to the French Franc, and by high tariff barriers and quantitative restrictions that were part of a trade policy that also included import and export controls and export price adjustments. This protectionist policy was combined with state intervention in all spheres of the economy and strict price controls that effectively prohibited the development of a viable market system. These policies encouraged the development of a relatively large industrial sector that was mainly focused on the local market. The agricultural sector remained, however, the main economic sector, providing more than one-third of the country’s GDP, and the main source of foreign exchange earnings. The high import tariffs also figured prominently in the country’s fiscal budget, and there were some 20 different taxes that were applicable selectively to import and export products at rates that sometimes exceeded 150% of the CIF value. The oil boom in 1982 accelerated the country’s growth but led to a relative stagnation of the agricultural and industrial sectors (the so-called Dutch Disease), with the oil sector providing more than two-thirds of the country’s GDP. The budget year 1985–86 marked the end of the era of rapid growth and the onset of a deep economic crisis that still plagues Cameroon. Export revenues from both petroleum and other commodities declined dramatically, and the government revenues diminished as a result. The marked appreciation of the CFA Franc against the US Dollar, the general deterioration of the terms of trade, and the growing negative impact of numerous internal distortions that were enacted by political decrees in total oblivion to their economic costs were the main causes of the crisis (Blandford et al. 1999; Tybout et al. 1996; Amin 1996). What triggered the decline was the fall in the world prices of Cameroon’s main exports, namely oil, coffee, and cocoa, and the
* Aloysius Ajab Amin, Emmanuel Douya, Alexander Mbeaoh: University of Yaounde 155
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depreciation of the US Dollar, the country’s main export payment currency, by nearly 40%. As a result, the balance of payments went from a surplus of 4.4% of GDP in 1984–85 to a deficit of 8.8% in 1986–87. Growth rates turned negative between 1985 and 1988, and in the second half of the 1980s, the GDP fell by 4.5%; even in the first part of the 1990s, the average annual growth rate was only 0.5% compared with 3.4% in the first part of the 1980s. The industrial sector was most negatively affected by the misalignment of the CFA-Franc exchange rate. After a precipitated growth in the 1980s at an annual rate of 5.9%, industrial outputs declined during the 1990s at an average annual rate of 3.3%—a total decline during this decade of around 30%. Investments, particularly in the industrial sector, also suffered from the crisis and they declined at an annual rate of 1.6% during the 1990s. The agricultural sector was less affected by the exchange-rate misalignment and by the other domestic distortions that were the result of the highly protectionist policies: after growing at an average annual rate of 2.1% during the 1980s, it continued to grow at an even more rapid rate of 5% per annum during the 1990s. Starting in 1988, the government of Cameroon was assisted by the Bretton Woods institutions and several donor countries to put in place a sequence of macroeconomic and sectoral reforms aimed at addressing the ongoing economic crisis, gradually removing trade barriers and reestablishing the necessary conditions for the resumption of economic growth. However, trade barrier reductions were very modest initially. Only in 1994, most of the quantitative restrictions were removed and new economic policies with more substantial reforms of the country’s trade policies and a fundamental adjustment of the exchange rate were implemented. Given the high dependence of the fiscal budget on revenues from export and import tariffs, the more open trade policy and the reduction in these tariffs imposed strict restrictions on the fiscal budget also. However, due to the significance of the budget in the stimulation of productive activities in the country, the overall impact of the combination of a more liberal trade policy and a more conservative fiscal policy contributed to prolonging the economic crisis.
Policy Reforms During the 1990s The policy reforms during the 1990s can be grouped into three main categories: financial sector reforms, trade reforms, and other non-financial reforms. The nonfinancial reforms mostly concentrated on trade liberalization and on policies specific to the agricultural sector and they included: < liberalization of trade in agricultural products; < privatization of agricultural production and dissolution of state-owned agroindustrial corporations that undertook production and commercial activities. Added to these internal reforms was the growing impact of the globalization process as the economy opened up after the devaluation of the CFA-F and underwent considerable internal adjustments. This process was precipitated by the Lomé Convention (and its preferred accords), which link African, Pacific, and Caribbean (APC) countries to the EU, and by the conditions of the WTO.
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Privatization of state-owned enterprises A series of measures have been taken since the early 1990s to privatize the state-owned enterprises that dominated agricultural production and commerce in Cameroon. These measures were accompanied by a general reduction in the government budget for the agricultural sector, particularly in the early 1990s. In addition, state controls over the price and distribution of agricultural inputs such as insecticides, pesticides, and fertilizers were gradually removed. The removal of price controls led to a fall in producers’ prices and a considerable decline in profits in many products. Nevertheless, the positive impact of trade liberalization, the alignment of the CFA-F, and the large-scale privatization far outweighed the negative impact on producers of the rise in their input prices. As a result, the agricultural growth rate more than doubled during the 1990s. The reforms that contributed to promoting trade liberalization in agricultural produce concentrated on a complete withdrawal of the National Produce Marketing Board (NPMB) from trade in agricultural products, on the removal of subsidies from agricultural inputs, and on the reduction of export taxes. The reduction of state controls started by closing down the NPMB, whose sole duty was the commercialization of traditional agricultural export products: coffee, cocoa, and cotton. Today, the purchases and sales of these products are conducted entirely by the private sector, but the state’s disengagement has been accompanied by a series of measures that made it initially difficult for the private sector to be efficient in the commercialization of these products. These measures included deregulation of the buying agents and the replacement of NPMB by the National Office of Cocoa and Coffee (ONCC) with the duty of quality control, delivery of compilation certificates, and data collection. The compilation certificate is an export declaration of the exporter in a special certificate of the selling price of the export product. Before the product is exported, this price is compared to the domestic price, and depending on whether the international price is higher or lower than the domestic price, the authorities impose a tax or provide a subsidy to the exporter. Exporters therefore have strong incentives to provide the information that entitles them for compensation and prevents any deductions. The fact that ONCC accepted the exporters’ declarations in the compilation certificate without asking for the actual contract or for any other verification led to the widespread use of false declarations that distorted prices significantly. Thus, for example, the quantity of exports recorded according to the compilation certificates in 1995 was twice the quantity recorded in the balance of payments statistics, and of the 175 approved export agents during that year only some 80 were actually export agents (Afrique Agriculture, April 1995). Generally, the declared price was below the actual selling price, mainly to avoid the export duties and to qualify for the deductions. For example, in June 1995, the actual selling price for coffee was 1540 FRS/kg, but the exporters declared the price as only 1000 FRS/kg. The export duties were calculated on the basis of the declared price and with the difference of 540 FRS/kg that was thus created, exporters could afford to buy coffee from the producers at a very low price. These speculations induced the sales and purchases of all kinds of coffee, irrespective of quality, and the export of products that failed to conform to international standards. As a result, 40% of
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the cocoa and 70% of the coffee exported from Cameroon were of poor quality and therefore lost the “good” label (Douya 1995). As an effect of these pricing practices, the National Office of Cocoa and Coffee failed to perform its duties as a quality control agent. After the dissolution of NPMB, an information system (SIMARC) was created for Arabica and Robusta coffee. Its main task was to inform producers about the trends of these products in world market prices. In practice, however, this valuable information only provided guidelines for the intermediaries to carry out their domestic trade before the commodities reached the world market, without taking farmers into consideration and also ignoring other factors such as transport costs. In 1995, these practices pushed producers to demand higher prices. In Moungo Basin, for example, factory owners bought Robusta coffee at the price of 1500 Francs/kg, i.e., 150% of the world market price. The difference was not enough to cover transportation and other costs and leave any profit for the intermediaries. Some intermediaries were therefore forced to resell their products at a loss while others attempted fraudulent sales and the purchase of poor-quality products. This system thus created more problems, and the liberalization of the traditional export-crops sector failed to initially put in place the necessary structures and regulations. Trade liberalization in the agricultural sector also included the removal of subsidies on agricultural inputs and the privatization or dissolution of state corporations. Indeed, one of the major goals of the agricultural sector reforms was the privatization or liquidation of most public enterprises that were operating in the agricultural sector. Besides closing down the National Produce Marketing Board, the government also closed down the Mission de Développement des Cultures Vivrières et Marâichères, whose main task was to provide foodstuffs to the urban population. Its closure brought about a rapid revival of private trade and raised profit margins for producers. Other public enterprises were privatized or are currently undergoing privatization and this process has resulted in an increase in production. Cameroon’s banana production, to take one example, increased from less than 100,000 tons before the privatization drive to more than 280,000 tons in 1997 (DSCN 1998). However, some public enterprises still face numerous problems that were not completely resolved when they were privatized. Removal of subsidies Before the reforms, government subsidies to agricultural inputs amounted to 80% of their price. The subsidies on inputs such as insecticides, pesticides, and fertilizers were removed altogether. This was accompanied by a fall in producers’ prices and led to a considerable decline in farmers’ earnings, to the extent that many producers nearly ceased their production and many others significantly changed their production methods. In the cocoa-producing zones, phytosanitary products that are indispensable to cocoa production are no longer being used because of their high price. These reforms led many farmers to shift from the production of cash crops to the production of food crops that became more profitable. Table 6.1 describes the typical changes in the composition of farmers’ revenues as an effect of the removal of these subsidies.
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Table 6.1. The Distribution of Farmer Revenues in Yemessoa, Cameroon Item
1991
1994
Cocoa Coffee Food crops Nonagricultural activities Total
45 – 20 35 100
26 18 39 17 100
*Source: Ndembou, 1994.
In the coffee producing regions, especially the Moungo Basin, the quantity of fertilizer used per unit of cultivated land, as well as the number of producing farms has been declining continuously. Similar developments took place in the cocoa-producing areas due to the general decline in the incentive to produce coffee. The advantages of devaluation affected these crops only marginally with the exception of the cotton subsector, which is still under the control of the state enterprise and enjoys relatively higher growth. New agricultural policies Since 1994, Cameroon has implemented significant reforms within the framework of the Sectoral Adjustment Program for Agriculture with four main objectives: (1) creating a favorable environment for recovering agricultural production, (2) ensuring food security, (3) promoting agricultural production by reducing production costs, and (4) rendering agricultural products more competitive in all markets (MINAGRI 1994). The government has now made it possible for farmers to organize themselves into groups such as cooperatives and to establish savings and credit cooperatives to increase productivity and output. The government has also encouraged the creation of microfinancial institutions in the agricultural sector and provided technical and financial resources to these institutions. The principal objectives of this policy are the following: < to ensure that by 2010, Cameroon cocoa will gain at least 5% of the world market. To achieve this goal, it is necessary to raise the total production of cocoa to 2,000,000 tons – an increase of 66%. < to double the total production of Robusta coffee by 2010 to reach the production level of 120,000 tons; < to reach an average annual production level of 100,000 tons for Arabica coffee and to improve its quality; < to raise cotton production in the coming five years to 240,000 tons, thus enabling full capacity utilization, and to subsequently raise the production to 300,000 tons by 2010; < to increase rubber exports to around 75,000 tons annually.
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Prior to the Sectoral Adjustment Program for Agriculture, and contrary to trade liberalization objectives of the export tax reduction, the Cameroon government instituted, after the devaluation of the CFA-F in January 1994, an export tax on the main agricultural products (coffee, coca, cotton, banana, rubber, etc.). This tax rendered exports more expensive internationally and reduced the quantity supplied. Other consequences of this tax were illegal exports to Nigeria bypass the export tax and to sell in that market at a higher producer price. As a result of the Adjustment Program, however, resources are generally more efficiently utilized in the agricultural sector for greater agricultural performance.
Financial Reforms Before the 1992 financial sector reforms, a number of special institutions were created, mainly to serve the rural areas with a focus on financing agricultural activities. All these institutions were liquidated, however, by 1996. Partly as a result of the reforms in the formal banking sector, there are now many semi-formal and informal financial institutions that provide financial services to the economy at large and to the agricultural sector in particular. These reforms included the creation of a decentralized financial system and a currency devaluation. Creation of a decentralized financial system In an attempt to promote a viable rural credit system in Cameroon, the government decided to put in place a decentralized financial system that addresses some specific issues. In the framework of these reforms, Savings and Credit Cooperatives were established and operated under the judicial control of the Ministry of Agriculture. These cooperatives, along with other NGOs, had previously been severely restricted but were now able to operate more freely in the field of rural financial intermediation The government’s main objective in the promotion of a decentralized financial system was to make financial services more readily available in rural areas. Since formal financial institutions in Cameroon are not present in the rural financial market, their services are not available to the rural population. The attempt to integrate informal financial groups into the official financial programs was encouraged through the 1992 cooperative law, which officially recognized indigenous savings and credit cooperatives as locally registered financial market intermediators. While the decentralized credit system was meant to improve the rural population’s access to credit and savings services, the coverage of this system is limited to a small number of provinces; in contrast, the cooperative credit unions are present both in rural and urban areas. In addition, the government facilitated group formation and associations among the rural population (e.g., Common Initiative Groups) to help the rural population undertake joint economic activities, exchange experiences, elaborate common or specific strategies, obtain technical training, mobilize savings, and extend credit. The rural population was encouraged to form associations since only associations were allowed to operate and benefit from these services—especially the mobilization of
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savings and the extension of credit. As a result, there has been a large increase in the formation of associations, unions, and common initiative groups, and in the mobilization of financial resources in the agricultural sector. The devaluation Although the CFA-F had a fixed parity with the French Franc (FF) for many decades, in the 1970s and 1980s the CFA-F was over-valued by more than 40% (Amin 1996). In an attempt to restore the exchange rate and improve the country’s competitiveness, the CFA-F was devalued on January 12, 1994. In the following year, there was a significant impact on both agriculture and some key subsectors, as discussed below. Since the devaluation was followed by US-Dollar fluctuations, there could have been a need for another devaluation, but nothing was done until the introduction of the Euro in 1999 and its sharp depreciation in 2000. In 1994, the CFA-F was devalued by 50% against the French Franc and thus also against the US dollar. Before the devaluation, the exchange rate between the US dollar and the CFA-F was $1 = 250 CFA-F; after the 1994 devaluation, it was around $1 = 500 CFA-F. With the coming of the Euro and the linking of the CFA-F to the Euro, the CFA-F was again indirectly devalued against the US dollar, and its current exchange rate against the US dollar is about $1 = 700 CFA-F. This should facilitate exports from the CFA-F countries, but at the same time, the world price of commodities such as cocoa, coffee, and cotton is declining, thus offsetting the devaluation of the CFA-F. The price per kg of Robusta coffee, for example, declined from 600 CFA-F in 1994 to 240 CFA-F in 2000. To stop this downward trend in price, it was decided in a ministerial meeting in July 2000 by the group of the four main cocoa producers (Cote d’Ivoire, Ghana, Nigeria and Cameroon) to destroy part of this year’s cocoa production; however, the modalities of this agreement must still be worked out. The devaluation of the CFA-F coincided with a sharp decline in the world price of many primary products. Nevertheless, the 50% devaluation of the CFA-F against the French Franc in 1994, mainly aimed at improving the country’s competitiveness, seems to have had a favorable impact on relative prices and on the allocation of resources in favor of the sectors producing tradable goods and on their profitability. As a result of these reforms and the devaluation, Cameroon enjoyed an uninterrupted period of positive growth rates in GDP and per capita income (Figure 6.1). During the period 1997–2000, the annual growth rate was 4.7%, but given the high population growth at an annual rate of 2.9%, the improvement in the standard of living was very slow and poverty rates remained high. The 1996 Income and Expenditure survey indicates that more than 50% of the population in Cameroon lived below the poverty line.
Impact on the Agricultural Sector The impact of the devaluation on agricultural production was generally positive despite the rise in the price of factors of production, especially imported agricultural inputs. The main reasons for the rise in profitability were the transition of producers to
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Value
Cameroon's GDP -- in US Dollars (million) 2000 1800 1600 1400 1200 1000 800 600 400 200 0 1993
1994
1995
1996
1997
1998
1999
Year
Figure 6.1. GDP Trend in Cameroon in the 1990s
higher-price produce and lower-price inputs, and the impact of the import substitution on the local producers of products such as cassava, which has been in greatly increased demand after the devaluation. As a result, the consumer price index of cassava in Yaounde rose by 56.4% during 1994 (DSCN 1995). Not only has this commodity been transformed into different forms such as “bibolo,” but it has also replaced bread in many households. Cassava is one of the products being tested, in combination with wheat flour, in bread manufacturing so as to reduce bread production costs. Likewise, sorghum is being tested by the brewery industry to explore its potential to substitute malt. Sorghum, however, constitutes a basic foodstuff for the northern part of the country and, at present, only about 10% of the total production is sold. Therefore, there are concerns about the overall effect of this substitution. If successful, then more sorghum is likely to be produced to meet the increasing demand of beer producers, but the rise in price will have a negative impact on the food security of low-income consumers in the area. The evolution of the consumer price index indicates that the rise in the price of domestically produced products, especially foodstuffs, was slightly less than the rise in the price of imported products. As a result, during 1994, the rise in the price index of foodstuff in Yaounde rose by 47.9%, while the general price index rose by 48.4% (DSCN 1995). This rise in price also had an effect on the intercountry trade in the CFA-F zone, particularly between Gabon and Cameroon. The devaluation of the CFA-F greatly increased the prices of imported goods coming from Gabon, and the demand for products from Cameroon by consumers in Gabon sharply increased. This additional demand resulted in price increases for some domestic food products in Cameroon such as plantains, cassava, cocoa, and yam. The impact of the devaluation on the production and profitability of traditional export products like coffee, cocoa, and cotton was substantial. The devaluation has
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increased the incentive to produce these crops: during the first year after devaluation, cotton production rose from 126,000 to 165,000 tons, and in 1997, cotton production rose to 218,000 tons (DSCN 1998). Several studies also highlighted the potential comparative advantage of Cameroon in the production of cocoa and coffee (Douya 1998; Bamou 1999). More recently, however, these crops have suffered from the sharp decline in commodity prices. Agricultural inputs are no longer subsidized after liberalization. As a result, their market price has risen sharply. In the Arabica zone, for example, a 50-kg bag of fertilizer is now sold at 10,000 Francs instead of 4,500 Francs, an increase of 110%. Production costs have therefore risen sharply, largely offsetting the rise in commodity prices in CFA-F resulting from devaluation. In the Moungo region, to take another example, the price of a 50-kg bag of fertilizer rose by nearly 90% as an effect of devaluation. For the coffee producers in Moungo, the devaluation probably increased the overall cost of production by 35%. Nevertheless, during the three to four years that followed the devaluation and until the more recent decline in commodity prices, the profitability of intensive Robusta coffee cultivation significantly improved. Also the cocoa producers must now buy their inputs in the open market at nonsubsidized prices, and that measure itself contributed to rising input prices. Even before the devaluation, input prices practically doubled with the elimination of state subsidies. The cocoa producers’ price rose from 200 CFA-F/kg before the devaluation to an average of 350 CAF-F/kg after the devaluation, and the profitability of cocoa production was on the rise until the decline in world commodity prices. Therefore, it seems warranted to conclude that, in general, the devaluation had a positive effect on both the production level and profitability, and was beneficial to the producers of cocoa and coffee. Nevertheless, the increase in the production of cocoa and coffee has not been very substantial, initially due to the difficulties in making adjustments to free market prices, and later on due to the decline in commodity prices. The impact of the devaluation on cotton producers was significantly more pronounced: initially, cotton producers’ prices rose from 90 CFA-F/kg to 135 CFA-F/kg, and cotton production increased sharply. However, the decision of the monetary authority to prohibit the convertibility of the CFA-F outside the Franc zone affected the border trade between Nigeria and Cameroon very negatively, because Nigerian traders were unable to convert their earnings in CFA-F to their domestic currency and were forced to buy Cameroon products, particularly cotton, at a price ranging from 200 CFA-F/kg to 250 CFA-F/kg, compared with a price of 135 CFA-F/kg that was offered by SODECOTON. Despite the exclusive dealing contract between cotton producers in Cameroon and SODECOTON, these producers were still able to export large quantities of cotton to Nigeria illegally, boosting their profitability. To buy fertilizers, peasants have a choice of either paying the cheaper market price in cash, or buying on credit from SODECONTON. Despite the increase in input costs, the increase in producers’ selling price and in the volume of production more than compensated for the cost increase, leading to a significant improvement in profitability in the cotton subsector. The devaluation also had important effects on the production and consumption of other goods, particularly those with high domestic consumption. In the maize
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subsector, for example, the high level of demand raises concerns about the impact on food security, since farmers may be slow to adjust their production to the higher producer prices, and they may be tempted to sell their maize reserves, thus exposing themselves to the risks of supply shortfalls. Producers of palm oil, to take another example, benefited from a rise in world market price, and the pressure to increase the quantities exported was so high that palm oil exports were sometimes restricted so that domestic demand could be met. After the devaluation of the CFA-F in 1994, both the domestic price and the output of major agricultural export products rose sharply. The increase in production of the main export crops, primarily cocoa, coffee, and cotton, contributed to increasing farmers’ income and the overall food security. The drop in commodity prices in the latter part of the 1990s considerably reduced this profitability and farmers suffered heavy losses despite the depreciation of the CFA-F, together with the Euro, against the US dollar by an additional 25%.
WTO and Future Trade Reforms In the past 25 years, the Lomé Convention governed trade relations between the African, Caribbean, and Pacific countries (ACP) on the one hand and the European Union (EU) on the other. In four successive Conventions, the EU granted nonreciprocal trade preferences to these countries, according to which all exports, except for a selected list of products, entered the EU market free of customs duties and quantitative restrictions. The ACP countries were also entitled to technical and financial assistance that softened the impact of price variations or fluctuations on their export earnings. The rules of the WTO prohibit, however, nonreciprocal trade preferences and thus create serious obstacles for the continued implementation of the trading rules under the Lomé IV Convention. The conflict in the European banana market between the EU and the USA is just one example of the incompatibility of the WTO rules with the preferential treatment under the Lomé Convention—and Cameroon is a major banana producer and exporter. For several years, the EU was told that the rules that govern its banana imports from ACP countries discriminate against US exporters and are therefore not compatible with world trade rules, and no adequate waiver was obtained to cover this situation. The principles of nondiscrimination and reciprocity inherent in the WTO rules contradict the mode of operation of the Lomé Convention. In February 2000, the Lomé IV Convention was up for renewal and the EU planned to introduce drastic changes in this trade regime. It was clear, however, that it is bound to take some time before the ACP-EU relationships based on nonreciprocal preferences under the Lomé Convention can be replaced by a system based on an open and liberal trade. During the lengthy negotiations between the EU and the ACP countries, several proposals were made to make the Lomé Convention compatible with WTO rules. One proposal was to take the trade chapter out of the Convention and harmonize the regime with the existing Generalized System of Preferences, or transform nonreciprocal preferences into free trade agreements (Van Hove and Solignac Leconte 1999). The EU has proposed several free trade agreements with different groups of ACP countries and in
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different geographical regions (Regional Economic Partnership Agreements – REPAs). The potential impact of such REPAs on the ACP economies was subject to a heated debate, since the costs could be quite large in terms of lost customs revenues and trade diversion. In the discussions with the ACP countries on the post-Lomé Convention, the EU proposed to establish economic partnership agreements with the same regional blocks, leading eventually to free trade agreements with the EU. The shift from a relationship based on preferences to one based on liberal trade was to be implemented over a period of several years, taking into account the differences between the ACP countries in their level of development. After more than a year of difficult negotiations, an agreement was finally reached in mid-2000 on a post-Lomé IV Convention trade regime. The Cotonou Partnership Agreement between the ACP countries and the EU stipulates that the Lomé type preferences will continue for an interim period from 2000 to 2008. After that, new WTO compatible trading arrangements would be instituted for the majority of the countries. In preparation for this transition from the current nonreciprocal trade preferences to reciprocal trade relations, the Agreement requires that the ACP countries and the EU begin to examine and negotiate already by 2002. The ACP trade negotiators will have to elaborate alternative trading arrangements and identify arrangements that best promote their trade and development interests, taking into account their level of development and safeguarding and strengthening their subregional and regional integration processes. At the same time, the new trading arrangements that would govern ACP-EU trade relations from 2008 onwards will have to be consistent with the rights and obligations of the ACP countries and with the EU common agricultural policy. The new agreement replaces the nonreciprocal, preferential regime that was granted thus far by the EU to all ACP countries (except South Africa) with several new reciprocal and WTO-compatible trade regimes between the EU and all ACP countries. According to this agreement, from 2008 onwards, different ACP countries will start to receive a different treatment from the EU. The 39 least-developed countries, including Cameroon, will continue to have free access to the EU market for (essentially) all their products. In other words, these countries will be able to keep the Lomé Convention without having to reciprocate by opening their own markets to the EU products after 2008. The other 31 ACP countries will have, as of 2008, a reciprocal agreement that will allow them to protect their most sensitive sectors until 2020. The European Trade Commission considers another proposal that will allow the world’s 48 poorest countries better access to EU markets. The proposal that the Commission originally tabled in October 2000 was intended to achieve full duty-free, quota-free access to the EU for all products except arms. Only three sensitive products (sugar, rice, and bananas) would be liberalized progressively over three years, i.e., by 2004. Together, the 48 least developed countries account for 0.4% of the total world trade, and only 1% of the EU imports. Nevertheless, along with all the other developing countries, Cameroon exports still face severe constraints in the development of their export markets. Even after full implementation of the Uruguay Round, the average tariffs on imports of developed countries from developing countries still exceed 120%, and for some products the
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tariffs reach 350%. Other obstacles are created by the agreement on food safety standards of agricultural produce and on other trade barriers on these commodities under the WTO agreements. Agricultural producers and processors in Cameroon still find it difficult to meet many of these conditions, and this has resulted in a considerable decline in the exports of several agricultural products. Moreover, many shipments of these products were retained in the Douala seaport because they failed to meet the applicable standards.
Conclusions More than half of the population in Cameroon lives below the poverty line, and the majority of the poor, some 57% of the poor households, live in the rural areas. The severe economic crisis of the 1980s and early 1990s was particularly detrimental for the poor, and the adjustment measures implemented by the government—even those not targeted on them directly—had serious repercussions on the rural population in general and on the poor in particular. The far-reaching economic reforms that were implemented to avert the crisis were aimed at making a transition from state-controlled production and commercial activities to more market-oriented policies that give a much greater role to the private sector. The goal of these reforms was to promote more rapid growth, primarily in agricultural production and productivity, to remove state controls, and to give a greater role to the market. But there is still a need for state intervention in certain key areas in order to secure the viability of institutions and the rule of law that are necessary for the effectiveness of the market system and for a private sector that is not to be strangled by monopolies. One of these areas is the provision of financial services, particularly to the agricultural sector and rural households. At present, private-sector financial institutions are still too weak and they need to be strengthened in order to make the rural credit system function more efficiently. Above all, the forces of globalization and the membership in the WTO present many new challenges that the Cameroon economy will have to cope with in the coming years.
References Amin, A.A. 1995. The Effects of Structural Adjustment Programme on Cameroon’s Major Exports: Cocoa, Coffee and Cotton”. Les Cahiers D’OCISCA. Yaounde. Amin, A.A. 1996. The Effects of Exchange Rate policy on Cameroon’s Agricultural Competitiveness. Research Paper 42. Kenya. Amin, A.A. 1999. An Examination of the sources of Economic Growth in Cameroon’s Economy. Revised Final Report. Kenya: AERC. Blandford, S., D. Friedman, S. Lynch, N. Mukherjee and D.E. Sahn. 1995. Oil Boom and Bust: The Harsh Realities of Ajustment in Cameroon”. In Adjusting to Policy Failure in African Economies, edited by D.E. Sahn. Cornell University Press. Defo, T. 1997. L’impact des circuits financiers informels et semi-formels dans la mobilisation de l’eparge et le financement du développement: Cas de l’Afrique Francophone. Africa Development Review, June 1997, pp.234-270.
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Douya, E. 1995. Analyse de l’Impact de la Dévaluation du FCFA sur la Production Agricole et la Sécurité Alimentaire au Cameroun. FAO. Douya, E. 1998. Analyse de la Compétitivité de la Filière Coton au Cameroun, Revue de Management. Université de Douala (forthcoming). DSCN. 1995. Note sur l’Evolution des Prix de Détail à la Consommation Finale des Ménages en 1994. Yaoundé. FAO. 1995. Analyse de l’Impact de la Dévaluation du FCFA sur la Production Agricole et la Sécurité Alimentaire et Proposition d’Action. Rapport Technique TCP/CMR/3452. Lizondo, J.S. and P.J. Montiel. 1989. Contractinary Devaluation in Developing Countries: An Analytical Overview. IMF Staff Paper. Njinkeu, D. 1999. Pre and Post Uruguay Round African Market Access Conditions. AERC. Suwa-Eisenmann, A. 1994. La Dévaluation Contractionniste: Les Enseignements d’un Modèle Macro-Micro. Revue d’Economie du Développement, No. 3, pp. 57-78. Tybout, J., B. Gauthier, G.B. Navaretti, and J. de Melo. 1997. Firm-Level Responses of the CFA Devaluation in Cameroon. Journal of African Economies, Vol.6, No.1, pp. 3-34. Van Hove, K and H.-B. Solignac Leconte. 1999. The WTO Compatibility of ACP-EU Trade Relations. AERC Collaborative Research Project: Africa and the World Trading System, Yaoundé, April 17-18. World Bank. 1996. Cameroon Rural Financial Markets. Agriculture and Environment Division.
Chapter 7 The Implications of Global Standards for National Agricultural Research Lawrence Busch* A little more than 500 years ago, Christopher Columbus sailed west from Spain to find a new way to the orient. His goal was not to discover a new continent. It was not to prove the world was round. Although his voyage was financed by the state, its goal was thoroughly economic: It was to find a new way to break the Arab monopoly on the spice trade. Columbus’s voyage marks the beginnings of a truly global trade in foodstuffs. Even though he did not find his way to the spice islands, he did discover a world unknown to Europeans, and he returned to Europe with a shipload of exotic fruits, vegetables, and grains. One hundred years later a thriving trade existed—supported in part by slavery—between Europe, Africa, and the Americas, shipping sugar and rice, among other commodities. Today, globalization is once again all the rage. But the globalization that we are experiencing today is not merely a linear projection of Columbus’s experience. First, Columbus’s voyage was financed by the state, whereas the globalization of today is a mix of state and private-sector activities. Second, globalization today involves the incorporation of virtually everyone on the planet into a global economy. Third, globalization today means the not-so-gradual elimination of centuries of tariff barriers, closed markets, incompatible standards, and protectionist regimes. Finally, globalization has modified the longstanding relationships among nation-states and private corporate actors. The proponents of globalization today tell us that this will lead to a world in which all will benefit from free trade and free markets. Each nation will be able to maximize its comparative advantage in the new global marketplace. Investors will be able to invest wherever the greatest return on investment is to be found. Producers will be able to sell their goods in all the new markets opened as a result of free trade. Consumers everywhere will benefit from lower prices and a wider range of goods from which to choose. All will benefit from a future of newfound and permanent prosperity. Irrespective of the truth of these claims, the new global economy is changing the relationships among nation-states, firms, farmers, and agricultural research institutions. This means that each of these actors is faced with both new challenges and new opportunities. Two interrelated changes are essential to understanding the impact of this new wave of globalization on agricultural research: the creation of the WTO and the rise of private, corporate standards.
* Lawrence Busch: Institute for Food and Agricultural Standards, Michigan State University, USA 171
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On the one hand, the context for agricultural research is changing markedly as a result of the formation of the WTO. Two agreements signed as part of the Uruguay round of GATT are essential here. First, the Sanitary and Phytosanitary (SPS) agreement required that signatories provide clear, scientific evidence for food safety standards as well as standards for animal and plant health. Such standards had frequently been used as nontariff trade barriers in the past; the designers of the agreement hoped that requiring scientific justification would reduce or eliminate those trade barriers. Countries could continue to have their own standards, but only if they could demonstrate that they were equivalent to international standards. Second, the agreement on Technical Barriers to Trade (TBT) included many other barriers to trade in food and agricultural products not covered by the SPS agreement. Neither agreement directly involves the WTO in standards setting or enforcement. Nevertheless, by virtue of the agreements, the WTO is empowered to use conformity or equivalence to recognized international standards in settling disputes among nations. Therefore, while it has no a de jure authority, the WTO has become a de facto international standards enforcement agency able to impose its views on nations.1 On the other hand, the liberalization of trade has been accompanied by a rapid growth in the size of multinational agrifood corporations (Reardon et al. 2001). These corporations are now in a position to set their own standards on the products they buy—standards that are often more rigorous than those set by public agencies. Moreover, since these standards are private, they do not come under the purview of international standards setting bodies. Furthermore, these corporations have an incentive to create more rigorous standards: Their very size makes maintaining a reputation for providing safe, high-quality products essential as a means of drawing and keeping retail customers. It also makes them more vulnerable to the actions of citizens’ groups promoting both environmental quality and fair labor standards. One obvious implication of these changes is that standards are likely to play a far greater role in international trade in agrifood products than they have played in the past. NAROs will need to become active players in standards development, resolving technical problems associated with both public (those enforced by WTO) and private (those set by the multinationals) standards, and helping all actors involved in agrifood exports to respond to the new challenges and opportunities. In this chapter, I will focus on just one of the many issues raised by the liberalization of international trade: the consequences of global standards for trade in agrifood products for public agricultural research. First, I examine the many roles that standards play in the rapidly changing agri-food system. Then, I describe the different kinds of organizations that develop, modify, and enforce standards. Next, I focus on the impact of international standards on agrifood systems and on developing nations. Finally, I make specific recommendations for research managers in light of the changing role of agrifood standards. But why have standards anyway?
1. An irony is that the only enforcement mechanism available to the WTO is to impose sanctions—a policy that reduces international trade.
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Why Have Standards? Standards have been around for a very long time. Standard weights and measures were first established in the ancient world to facilitate tax collection and commerce. Much later the metric system came into widespread use (Adler 1995). Today, standards are ubiquitous. Virtually every commodity traded in international commerce and most traded domestically are subject to various standards (Busch 2000). But what do standards actually do? While I make no attempt at completeness in this chapter, consider some of the things that standards do. Standards reduce transaction costs In local markets, where only small quantities of goods are exchanged, formalized standards are of little value. Rapid visual inspection is usually sufficient for a transaction to be carried out. However, when vast quantities of a commodity must be exchanged, standards become imperative. Standards eliminate the need for visual inspection of each unit of a given product by providing a guarantee to the buyer that all units meet the same standard. For example, without standards, if I wished to buy 1000 tons of rice, I would have found it necessary to inspect each unit (e.g., sack, railway car, truckload) in order to determine if the entire shipment met my quality specifications. This process is costly and burdensome, especially for those dealing in large quantities or contracting across great distances (Hill 1990). In contrast, if standards exist and are adequately enforced, I can purchase the rice by examining an inspection certificate ensuring that it is of a particular grade. The additional significance of standards is that they give clear signals to growers or processors to guide their production. The grade will be defined based on a set of scientifically measurable characteristics commonly understood by both buyers and sellers. Such standards are often costly to establish and enforce, since an organization must exist and function to ensure the execution of the standard. However, they reduce the costs of transacting business greatly, thus facilitating trade. Standards can promote transparency and contribute to fairness in the marketplace If standards are well designed such that they are widely known, understood, transparent, and provide the necessary information to both buyer and seller, they promote fairness. While they never provide complete information, standards can provide the information that both parties consider essential in determining whether or not they wish to enter into a market transaction at a given price. Moreover, if standards are widely used, they permit price comparisons by both sellers and buyers. However, as noted below, standards may be designed to thwart transparency and fairness as well. Standards can increase or exclude competition In markets that have no standards buyers are faced with a plethora of products which look similar but are clearly not the same. One commonly finds this in food markets in
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developing countries. For example, a buyer of rice may be faced with a bewildering array of lots, each of which is somewhat different from other lots. One might be cleaner, another less damaged, while a third lot might be of a longer or shorter grain. In this situation, price comparisons are difficult if not impossible. In contrast, since adherence to standards requires that sellers standardize their products, buyers are able to make direct comparisons among sellers. Thus all rice of grade 1 would be identical for marketing purposes, making it relatively easy for buyers to determine which seller has the best price. At the same time, competition among sellers would increase. But even as standards may be used to increase competition, so they can be used to exclude some actors from the marketplace. For example, better capitalized processors might encourage the adoption of stricter food safety standards. Stricter standards might require greater capital investment, thereby excluding the less capitalized competitors from the market. Indeed, there is clear evidence that this is precisely what happened in the USA a century ago when the first food safety legislation was enacted (Levenstein 1988). Competition may also be excluded by requiring that expensive equipment be used to measure conformity to the standards. For example, pH may be measured by a very simple and inexpensive test or by a highly automated machine that processes thousands of tests per hour. Larger companies with vast throughput will probably welcome the highly automated equipment. But, if the use of the machine is required, smaller firms will find conformity to the standard impossible. The International Organization for Standardization (ISO) has recognized this problem and formed a special committee, DEVCO, to address it. It is unclear whether other international standards bodies are equally aware of and responsive to this issue. Standards may serve particular functions For example, restrictions on the addition of sugar to fruit juice serve to maintain the purity of the juice. Regulations governing the spraying of pesticides serve to protect farm workers’ health and safety. Pasteurization of milk serves to ensure food safety. The building of lagoons to capture manure from animals serves to protect the environment. Each of these functions—protecting quality, improving food safety, protecting workers, and protecting the environment—is often presented in standards for food and agricultural products. Yet, it is rare that standards only serve one function. Nor is the serving of that function an entirely neutral process, since it often has side effects. As Salter (1988: 168) puts it: “The decisions made by Codex Alimentarius Commission and its committees are anything but symbolic in their importance. They have a direct effect upon the profit levels of major corporations. The trade relations created by Codex standards are likely to benefit some countries, and some interest groups more than others.” On occasion, standards may conflict, posing dilemmas for all concerned. For example, in order to meet a phytosanitary standard in an importing nation, exporters may feel forced to use large quantities of pesticides that endanger farm workers and/or the
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environment (Thrupp 1995). In these situations, research may be needed to establish alternative methods to meet the phytosanitation standard. Standards may be used as company strategies In their endeavor to enhance their competitive position, companies may use standards as part of their strategy in at least four ways. First, companies may use standards to increase their market share. For example, by requiring suppliers to adhere to company standards, it may be possible to differentiate the company’s products as being of higher quality (however defined) than that of other companies (Foray 1995). Second, companies may use standards to create new markets. For example, a company might establish standards that permit exportation of a tropical fruit hitherto not consumed in the temperate zone, thereby creating a new market.2 Third, companies may use standards to block entry or force exit of other firms (Manchester 1994). They may do this by lobbying for mandatory governmental standards to which their competitors, possibly in other countries, cannot conform. Alternatively, they may raise the costs of admission to the market by requiring, for example, that certain tests be performed using very expensive equipment (or lobbying that the government require these tests). Finally, they may use standards to regulate supply, e.g., by relaxing standards in years of poor harvests, and raising them in years of abundant harvests. Standards as state strategies Nation-states may also use standards in a variety of ways as strategies (Office of Technology Assessment 1992). First, they can enhance the quality of products in the country by using standards. Japan successfully used standards as a means to increase the quality of its industrial and agricultural products, for both domestic use and for export, during the second half of the last century. There is some evidence that China is attempting to adopt this model as well (Krislov 1997). Second, standards may be used as trade barriers. For example, a nation might have particularly onerous requirements for labeling of food products, or inspection of imports might be slow and cumbersome. Finally, standards may be used to promote exports. A product might be advertised as being far superior to other products because it meets certain standards (e.g., Busch et al. 1994). For example, manufacturers in the EU effectively used ISO 9000 standards (a set of quality management standards) to promote their goods over those manufactured in the USA. Products manufactured according ISO standards were so labeled. Only later did the US manufacturers realize the importance of such standards in international trade (Howie 1995). Standards may be used to authenticate products Special labels are commonly used to differentiate wines and cheeses based on their national or regional origin as well as their method of production. The well-known 2. Grindley (1995) has shown how IBM has effectively used this strategy in the personal computer market.
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appelations d’origine controllée are widely used on French products for this purpose. In addition, today, 10% of French food products contain the label produits de qualité specifique (Sylvander 1995). Similar labeling is now frequently used to differentiate coffee by national origin. This practice allows product differentiation based on real or perceived characteristics of a product. Such labels have been used in some places as effective protection against invasion by larger firms. Also relevant here are labels that guarantee that certain religious rituals have been correctly performed in the preparation of the product in question (e.g., Kosher foods). However, it should be noted that such products need not be traditional or artisanal in any sense for labeling to be effective (Boisard 1991). Standards may identify the benefits derived from the use of a product on the label Such standards, usually voluntary, are used to guide consumers with respect to benefits not necessarily apparent from visual inspection of the product. For example, fair-trade organizations may label food products to emphasize to consumers that those who grew the product received a fair wage. Alternatively, some labels proclaim that a particular product was produced in an environmentally sound manner (eco-labeling). Other products are labeled to identify particular health benefits deriving from the product’s consumption (e.g., products likely to protect against heart disease are sometimes so labeled). Like labels designed to authenticate products, these labels are designed to differentiate products in the marketplace, thereby carving out a market niche for producers and/or processors. In sum, standards play multiple roles. Standards are often based on science, but they are rarely based solely on scientific concerns (Jukes 2000). They may “level the playing field” in some cases, but they may also block some nations and firms from ever getting on the playing field. They may carve out special market niches for some, while denying others such advantages. They may increase competition in some markets, even as they reduce it in others. They may stabilize trade in some markets, even as they disrupt it in others. They may open new avenues for agricultural research, even as they block older ones. But standards do not merely appear de novo. They are set in a variety of ways, each of which may have implications for participation in a given market as well as for agricultural research activities. Let us consider the typical ways in which standards are set.
How are Standards Set? To simplify somewhat, in the agrifood sector standards are set by four types of organizations. Let us examine each of them in turn.
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International standards International standards are set by intergovernmental bodies. The members of these bodies are usually nations, although industry and consumer representatives often participate in the standards setting committees. Primary among the international standards bodies in agriculture is the Codex Alimentarius Commission. Administered jointly by FAO and WHO, the Codex seeks to promote food safety and international trade in food and agricultural products by establishing voluntary standards to which nations may choose to adhere. The OECD sets quality standards for (mainly temperate) fresh fruits and vegetables for its member nations and for any other nation wishing to conform to the standards (OECD 1983). The International Plant Protection Convention (IPPC) sets phytosanitary standards for the handling and quarantine of plants transported across national boundaries. Similarly, the Office International des Epizooties (OIE) sets standards for animal health. The ISO3 sets standards for tests used in the measurement of various characteristics described in food and agricultural standards. Still other standards are established by the United Nations Economic Commission for Europe (UNECE) and the EU.4 In general, with respect to international standards, NAROs are standards takers rather than standards makers. That is to say, they rarely if ever sit on the myriad committees that design standards, nor do they have much to say about whether their nation agrees to employ the international standards domestically. Most developing nations do not send persons to participate in international standards formation as it is a costly process (Avery, Drake, and Land 1993). Thus, although NAROs need to know these standards in order to assist producers to meet these standards, they are not likely to influence their formation. National standards In addition to (or instead of) international standards, most industrialized nations and many developing nations have their own standards. These standards may be virtually identical to the standards set by international bodies or they may be substantially different. The national standards may be either voluntary or mandatory. However, with the advent of the WTO, considerable pressure has been exerted to adjust national standards such that they are either identical to international standards or, if they differ from international standards, are equivalent based on scientific evidence. As might be 3. Unlike other international standards bodies, ISO is an NGO. However, its members are the standards agencies of some 130 nations. 4. Each of the key organizations implicated in standards setting and enforcement have websites as follows: FAO: www.fao.org/WAICENT/FAOINFO/ECONOMIC/ESN/codex/default.htm IPPC: www.fao.org/WAICENT/FaoInfo/Agricult/AGP/AGPP/PQ ISO: www.iso.ch OECD: www.oecd.org OIE: www.oie.int WHO: www.who.int WTO: www.wto.org
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imagined, the definition of the concepts “equivalence” and “science-based” in these guidelines still remains ambiguous and controversial (Jukes 2000). NAROs often do play some role in the creation of national standards, as it is often scientific experts who serve on standards setting committees. In many developing nations, however, standards are lacking or are poorly enforced. In addition, government officials may not fully understand the advantages of agrifood standards. This is an educational role that NAROs can fulfill. Industry standards Often industry associations also set voluntary quality standards, both nationally and internationally. Such standards are generally designed to serve the industry’s needs. For example, processors of domestic oils may set certain characteristics for the clarity of the processed product. In addition, in some cases, associations have been established that serve more than one industry or an industry and a public interest group. Such associations are often concerned about environmental standards. As with international standards, industry standards are rarely set with the participation of NAROs. Nor are companies in developing nations often parties to industry standard setting. Thus, here, too, NAROs are standards takers. Corporate standards Finally, large agribusiness corporations may set standards for their suppliers. These standards are essentially mandatory in that failure to meet the standard usually is tantamount to having the contract with the corporation cancelled. Such standards may encompass not only quality and food safety, but also labor protection and environmental quality. Corporate standards are already commonplace for some commodities that are subject to further processing (e.g., coffee, cocoa), but they are now found more frequently for fresh fruits and vegetables as well. These standards pose considerable challenges for public agricultural research. In some circumstances, NAROs may be able to influence company standards, especially with respect to developing cheaper, equivalent tests. However, doing so may involve considerable diplomacy in negotiating with large corporations that may see only their suppliers as legitimate contacts. Conversely, such corporations may well look to NAROs to engage in research that is more appropriately undertaken by the corporation itself. In sum, standards setting occurs in multiple venues, each of which has its own rules. As the process of globalization continues, NAROs will need to be cognizant of how standards of particular concern to them are set. They will need to determine whether and in what ways they might participate in standards setting for commodities of interest. Doubtless, in some cases, NAROs will decide that the costs are such that participation is impossible. In other cases, NAROs will find that strategic participation provides significant advantages to their nations. At the same time, NAROs will need to become more cognizant of existing standards and incorporate knowledge of them into their research strategies. For example, there is little value in helping farmers to
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increase fruit production, if so doing violates food safety, environmental, or quality standards demanded by purchasers. But whatever positions NAROs take with respect to standards, global standards will have consequences for all developing countries. Let us consider some of them.
Consequences of Global Standards for Developing Countries The elimination of quotas and the reduction of tariffs are likely to facilitate global trade in agrifood commodities. However, that increase in trade comes at a price. First, longstanding trade relationships that favor trade between certain developing and industrialized nations in export crops such as bananas, coffee, cotton, and cocoa are being disrupted (this was the background for the “banana war” between the EU and the US in late 1989). Similarly, longstanding restrictions on textile imports into industrialized nations are being eliminated. As a result, producers and processors may find that protected markets that have existed for a century or more no longer exist. Second, the new biotechnologies (including genetic engineering), information technologies, and precision farming—all invented in the public sector but developed in the private sector—are rapidly reducing the costs of production of many agricultural commodities. At the same time, the new biotechnologies have the potential to increase product differentiation in agriculture through the development of (1) identitypreserved crops (e.g., soybeans with low saturated fats), (2) animals that produce pharmaceuticals in their milk, and (3) food processing technologies that are more efficient and/or create new or enhanced flavors. However, at the same time, these technologies have raised consumer concerns in some nations, especially within the EU. As a result, the expected market for some genetically modified products has failed to materialize. The lesson to be learned is that future public investments in research employing the new biotechnologies will need to take into account not only technical feasibility but also market consequences. Third, new, stronger intellectual property laws and the extension of European- and American-style intellectual property regimes to developing nations have markedly increased private-sector investment in agricultural research. In many nations, the public sector no longer sets the agenda for agricultural research. Many public research institutes, including NAROs, have responded by protecting their own inventions using these same laws. As a result, the cost of access to some new technologies has increased (e.g., genetically modified seed), although these higher costs may be offset by increased profits for farmers and food processors. Fourth, the shift away from quota barriers and the reduction in tariffs have been offset partially by the creation of a wide range of nontariff trade barriers. Unlike tariffs and quotas which are clearly stated, nontariff trade barriers are often difficult to identify and may even be disavowed by importing nations. Many of these are directly linked to subtle changes in national standards, including but not limited to labeling, sanitary, and phytosanitary requirements. Each of these four shifts in the nature of the global market and trade policies has increased both the economic risks and the potential benefits of participating in those markets. Moreover, the current debate over the use of genetically modified organisms
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(GMOs) in food products epitomizes those economic risks by forcing exporting nations to strategize over whether to encourage or discourage the use of GMOs.
What NAROs Can Do De facto mandatory standards, whether stemming from international standards, national standards, and/or the WTO dispute settlement process or from corporate demands, pose new problems for NAROs. NAROs need to identify these changes, determine how they affect commodities of interest, consider what investments are necessary in order to meet new standards, and develop strategies for addressing these issues. While specific recommendations for particular commodities are beyond the scope of this chapter, some general recommendations are possible. Some of these involve pursuing what are generally acknowledged to be good practices for NAROs, while others involve new practices with which NARO managers may not be familiar. 1. NAROs need to reexamine their research portfolios in light of global standards In the past, most NARO portfolios excluded high value crops for export as it was assumed that the rents from such crops were captured by a small segment of society. Put differently, such crops were considered private goods. However, recent events have blurred the distinction between public and private goods. For example, it might well be argued that, if a commodity provides a large portion of national foreign exchange, and if no private-sector organization has the wherewithal to undertake research to meet international standards or standards of corporate buyers, then it should be the subject of public research. Doing so might well involve revising the NARO mandate to include such commodities. However, no clear rule can be drawn. NAROs will need to examine each case on its merits. 2. NAROs need to assess the standards for each of the commodities included in their research mandate that are commonly exported They need to know whether national standards conform to international and/or corporate norms. If not, they need to encourage adoption of appropriate standards. Moreover, it is not sufficient merely to adopt the international standards; they must be adequately enforced. Questions that require consideration in this context include: Do export standards exist? If so, are they enforced? If not, can they be developed, enacted and implemented rapidly? What agency is responsible for implementing agrifood standards? Does the commodity in question meet export standards? If not, is the problem technical or organizational? If it is organizational, what incentives or organizational restructuring are needed to resolve the problem? If the problem is technical, what changes in the production process (including harvesting, storage, and distribution) will make it possible for the commodity to meet export standards? This may require improvements in growing practices, e.g., reduction in the use of pesticides. Are these changes technically and economically feasible?
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3. NAROs need to plan strategically to manage standards issues It is likely that the number of standards issues that need to be addressed will require human and financial resources beyond those available to most NAROs in developing countries. World Bank economists J. Michael Finger and Philip Schuler (1999) suggest that meeting all the requirements of the Uruguay round (including establishing stronger IPR and streamlining customs procedures as well as adopting international standards) could cost an entire year’s development budget in the poorest nations. Only by planning strategically together with other stakeholders, including governmental units charged with standards creation and enforcement, will NAROs be able to ensure that the most pressing issues are tackled first or at all. Such planning should include realistic estimates of the costs of compliance as well as of the potential benefits. Moreover, strategic planning should also reveal which standards are unreachable suggesting that production of those commodities should be confined to the domestic market. 4. NAROs need to mobilize other agencies in designing and implementing standards strategies NAROs can serve an important educational objective by helping both key officials and key persons in the private sector to understand the increasing importance of global standards to national agricultural research and development. They must clarify the potential benefits of complying with the standards and the costs of non-compliance. They can help to identify the problems, propose solutions, and design action programs to ensure that established markets meet international and/or corporate standards and that new markets that meet such standards are developed. 5. NAROs need to revise their research portfolios to incorporate research that addresses actual or potential shortfalls in meeting international and/or corporate standards For example, reducing cosmetic blemishes on fruits to be exported might be the subject of agronomic or post-harvest research. It should be noted that this type of research might differ considerably from the production-oriented research that has characterized much public-sector research in the past. Questions needing consideration here include: What research needs to be done in order to help producers and/or processors meet export standards? Is the research likely to be done by the private sector if the NARO does not do it? Is that research likely to bring about the needed changes within a reasonable period of time? What are the likely consequences of failure to complete the research? 6. NAROs need to broaden their research portfolio to encompass minor export commodities Such commodities may not have been previously in the mandate of the NAROs, but they are most vulnerable to the new international standards regime as they are least
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likely to have private-sector research capacity. For example, many developing nations produce and export tropical fruits as specialty products. However, with few exceptions, such fruits are not the subject of significant research by either public- or private-sector research organizations. New phytosanitary standards may block exports unless NAROs engage in research to determine how those standards might be met. 7. NAROs need to abandon those research programs best managed by the private sector It is commonplace for the NAROs to allocate resources for research among a portfolio of commodities. Yet, the current situation calls for far greater flexibility than was the case in the past. A traditional export crop in which a large agribusiness corporation has an investment might be better left entirely to the private sector. Private-sector researchers are likely to be far more in tune with the needs of the companies processing and marketing the commodity in question than public sector researchers. In contrast, new crops and (what are currently) minor crops might become the central focus of public research. 8. NAROs need to borrow information about standards and obtain the technical knowledge useful for meeting those standards as much as possible Since standards already exist, it is far more efficient to adopt existing standards than to devise new ones, even though such standards may not have been created with developing nations in mind. Moreover, in some cases, multiple standards exist. NAROs will need to determine which standards best fit their needs. Furthermore, some modifications may well be necessary in light of the specific demands of buyers of export commodities. 9. In general, NAROs should not become involved in enforcing standards While NAROs might do well to participate in standards formation, in establishing agencies to enforce standards, and in doing research on tests, the regulatory and supervisory functions are best left to other actors, including government agencies and private firms. Regulation that is seen as inadequate or capricious is likely to reflect poorly on the NARO and to generate resentment among actual and potential NARO clientele. 10. NAROs should become involved in assessing the impacts of standards Of necessity, NAROs should focus on the standards that have the greatest impacts on their countries. These assessments should include research on participation in the establishment and implementation of standards. They should also include research on the impact of standards. For example: Who has access to the markets at each stage in the production and processing of the commodity governed by the standard? What other
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implications does the standard have for the society at large in terms of food safety, relations of production in the workplace, and the environment?
Conclusions In sum, the current changes in the world economy pose both new challenges and new opportunities. If managed successfully, the rapid increase in world trade offers new avenues for both economic development and poverty alleviation. Developing market niches for specialty crops and improving quality in existing markets offer new, higher income opportunities for farmers. Similarly, developing locally based processing of these products offers the potential for increased nonfarm employment. In addition, the enhancement of food quality and food safety standards holds the potential to reduce food-borne diseases in developing nations, while offering new means to escape from poverty. Developing new markets and improving quality in established ones will require greater attention to standards by NAROs as well as other stakeholders. While there is nothing inevitable about the current trend toward global standards, it is likely that such standards will be more commonplace in the near future. NAROs need to understand that standards are both the rules of the game and the strategies by which markets can be built or destroyed. By acting strategically with respect to standards, NAROs may be able to open new markets and expand old ones, thereby increasing incomes in their respective nations. On the other hand, failing to respond strategically to the advent of international and corporate standards may lead to the collapse of established markets and to economic decline of certain significant subsectors. The results of all these changes and the emerging new challenges will require significant changes in the mode of operation and the priorities in research and extension of the NAROs. These changes will require access to wide information and the accumulation of high expertise as well as large investments. They will also require significant changes in the legal system and the establishment of effective enforcing agencies to ensure that producers comply with the standards. At the present, however, a relatively small number of NAROs took adequate measures to adjust their operations in order to meet this challenge. Agricultural producers in these countries may fail to diversify their production and make the adjustments required by the emerging trading system and thus find themselves at a growing disadvantage as their countries liberalize their trade.
References Adler, K. 1995. A Revolution to Measure: The Political Economy of the Metric System in France. In The Values of Precision, edited by M. Norton Wise. Pp. 39-71. Princeton: Princeton University Press. Avery, N., M. Drake, and T. Land. 1993. Cracking the Codex: An Analysis of Who Sets World Standards. London: National Food Alliance. Boisard, P. 1991. The Future of a Tradition: Two Ways of Making Camembert, the Foremost Cheese of France. Food and Foodways 4:173-207.
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Busch, L. 2000. The Moral Economy of Grades and Standards. Journal of Rural Studies 16:273-283. Busch, L., V. Gunter, T. Mentele, M. Tachikawa, and K. Tanaka. 1994. Socializing Nature: Technoscience and the Transformation of Rapeseed into Canola. Crop Science 34:607-614. Finger, J.M., and P. Schuler. 1999. Implementation of Uruguay Round Commitments: The Development Challenge. Washington, DC: World Bank. Foray, D. 1995. Standard de Reférence, Coûts de Transaction et Economie de la Qualité: Un Cadre d’Analyse. In Agro-Alimentaire: Une Economie de la Qualité, edited by F. Nicolas and E. Valceschini. Pp. 139-154. Paris: INRA and Economica. Grindley, Peter. 1995. Standards Strategy and Policy: Cases and Stories. Oxford: Oxford University Press. Hill, L.D. 1990. Grain Grades and Standards: Historical Issues Shaping the Future. Urbana, IL: University of Illinois Press. Howie, R.L. Jr. 1995. Competing Through Standardization. Businessweek (3446):119 141. Jukes, D. 2000. The Role of Science in International Food Standards. Food Control 11:181-94. Krislov, S. 1997. How Nations Chose Product Standards and Standards Change Nations. Pittsburgh: University of Pittsburgh Press. Levenstein, H. 1988. Revolution at the Table: The Transformation of the American Diet. New York: Oxford University Press. Manchester, A.C. 1994. The Coming of Market Regulation and Public Marketing Services. In Food and Agricultural Markets: The Quiet Revolution, edited by L. Schertz and L.M. Daft. P p. 58-76. Washington, DC: National Planning Association. Office of Technology Assessment. 1992. Global Standards: Building Blocks for the Future. Washington, DC: US Government Printing Office, GPO stock #052-003-01277-4. Organisation for Economic Cooperation and Development. 1983. The OCDE [sic] Scheme for the Application of International Standards for Fruit and Vegetables. Paris: OECD. Thomas R., J.-M. Codron, L. Busch, J. Bingen, and C. Harris. 2001. Global Change in Agrifood Grades and Standards: Agribusiness Strategic Responses in Developing Countries. International Food and Agribusiness Management Review, vol. 2(3), forthcoming. Salter, L. 1988. Mandated Science: Science and Scientists in the Making of Standards. Dordrecht, Netherlands: Kluwer. Sylvander, B. 1995. Conventions de Qualité, Marchés et Institutions: Le Cas des Produits de Qualité Specifique. In Agro-Alimentaire: Une Economie de la Qualité, edited by F. Nicolas and E. Valceschini. Pp. 167-183. Paris: INRA and Economica. Thrupp, L.A. 1995. Bittersweet Harvests for Global Supermarkets: Challenges in Latin America’s Agricultural Export Boom. Washington. DC: World Resources Institute.
Chapter 8 Intellectual Property Rights and the Commercialization of Public Agricultural Research in Developing Countries David Bigman*
Introduction New areas of agricultural research, particularly biotechnology, with their promise of lucrative technological innovations, have opened the gates to an intensely competitive treasure hunt. Private multinational corporations lead the race, but public agricultural research organizations and universities have also joined in. The hectic activities are driven not only by the great potential of biotechnology and the enormous commercial prospects of the innovations that can result from this research, but also by the prospects to appropriate high returns for investments in the research as a result of the worldwide protection of IPR that is given by the rules and regulations of the WTO. Public and semipublic agricultural research organizations have joined this race for several reasons. First, private research companies increasingly dominate the research in these areas due to the astronomic investments that are required, and the public research organizations can hope to share or have access to their research only if they accept the rules on the protection of IPR. Second, the high costs of biotechnology research and the growing need to use costly proprietary technology raise the costs of research at a time when many public research organizations are facing growing financial difficulties due to severe cuts in public funding. Public research organizations are therefore obliged to search for alternative sources of income to cover their costs, and, by adapting their mode of operation to comply with IPR protection, they can collaborate with private companies and benefit from their substantial financial resources and advanced research capacities. During the past decade, the legislation on the protection of technological innovations with a global agreement on IPR was expanded very rapidly, both in scope and in geographical coverage. The 1994, the Uruguay Round agreement on TRIPS opened a new chapter in the protection and enforcement of IPR, and this agreement is now binding all 140 members of the WTO. Quite a few developing countries are still exempted until January, 2005, and even then it may take some time before IPR protection is strengthened in all the developing countries to the extent that spillovers of important technical information to unauthorized users can be effectively blocked.1 1. Mansfield (1994) noted that IPR is protected at different levels in different countries and that the differences in the strength of IPR protection are particularly large among developing countries.
* David Bigman: International Service for National Agricultural Research 185
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The NAROs in developing countries initially did not expect to be significantly affected either by the TRIPS agreement or by the absence of a strong IPR legislation in their countries. This expectation was based on two reasons: First, most of the NAROs’ research is focused on crops, technologies, and thematic areas in which the private sector does not have much interest, and second, innovations resulting from their research were, as a matter of principle, freely available to all as public goods. On these grounds, a study conducted in the early 1990s concluded that “[t]hese [public] institutions are generally less oriented towards financial incentives meant to stimulate private research. The absence of IPRs will therefore only have limited effect on research and development activities in developing countries” (Study Committee 1991). It may therefore seem surprising that in many developing countries that have enacted or strengthened IPR and Plant Breeders’ Rights (PBR) legislation, the pressure to enact this legislation came not only from domestic private seed companies and subsidiaries of foreign seed companies, but also from the NAROs. The objective of this chapter is to review the unfolding impact of IPR legislation on public agricultural research and on the NAROs in developing countries, and to evaluate the pros and cons of the commercialization of public agricultural research. In most developing countries, the process of implementing an effective IPR legislation is still ongoing; the evidence currently available on its impact is therefore largely anecdotal. A survey conducted by ISNAR in 2000–01 among 430 research projects in 105 NARIs in 33 developing countries provides more systematic evidence of the effects of IPR on public research institutes. As a background for the discussion of the survey’s results, the chapter provides first an overview of the global IPR legislation and outlines how the commercialization of public agricultural research in developing countries could impact the agricultural sector and the research priorities of the NAROs. The chapter then reviews and analyses the results of the survey and finally offers some concluding remarks.
IPR Legislation and the Commercialization of Public Agricultural Research The rights over new inventions and processes that are given by IPR are aimed at enabling the inventor to exclude imitators from the market and to obtain a monopoly power over commercial exploitations of the invention for a limited time. The main objective of offering these rights to inventors is to stimulate innovation by giving them profit incentives, recognition, and rewards. Their monopoly power allows inventors to extract higher returns on their investment than the market could have offered in the absence of this protection. The goal of the state in granting this (limited) monopoly power to a company that gains patent rights is to make its invention available to the public. Society as a whole may lose a little by granting the monopoly and thus necessarily raising the price somewhat and possibly prohibiting some segments of society (producers and/or consumers) from using the technology or the information. Society should nonetheless expect positive net gains as a result of the incentive to invest in research that can generate new technologies. Thus, for example, although the incentives inherent in the TRIPS agreement may shift the focus of agricultural research
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to commercial applications and away from research on staple foods, thereby potentially excluding many poor consumers, the innovations that are likely to result from the huge investments in this research will ultimately increase the total food supply and benefit all members of society. Intellectual property protection that can be applied to innovations in agriculture and biotechnology includes patents, granted usually to products and production processes, but possibly also covering (with differences between countries and cases) cells, DNA, specific genes, genetic sequence related to a specific protein, etc., while plant varieties are protected through breeders’ rights, which are granted according to the standards determined by the International Union for the Protection of New Varieties of Plants (UPOV).2 The patent regime thus caters to the interests of companies with genetic engineering capabilities, whereas the breeders’ rights regime is aimed at growers and researchers who perform plant breeding activities using conventional techniques. The need for protection of intellectual property in agricultural research is particularly strong in the case of plant breeders that produce a new variety of self-pollinating seeds that have low technical protection, since anyone with access to the seed can, in principle, produce an unlimited number of seeds that “embody” the technology. In contrast, plant breeders who sell hybrid seeds enjoy high technological protection due to the loss in yield of the re-planted seeds. The management of intellectual property issues by the NAROs varies widely between countries. In some countries, the NAROs established specialized units to handle IPR issues or assume responsibility for technology transfer and protection as well as for disseminating information. In other countries, there is very limited awareness of IPR issues. The central decision that must guide the NAROs is the basic principle that is underlying the protection of the IPR of their research results. One option is to permit unrestricted dissemination (without compensation) of all research results; other options are to protect the results through IPR or to disseminate certain types of results, while keeping other results subject to IPR protection. The mission of the NARO has traditionally been seen as creating public goods, accessible to all without payment. There were concerns, however, that, in the absence of IPR protection, some technological developments might not be pursued or not be put into practice, because private companies prefer to explore technologies that give them exclusive rights. At the same time, free access to the research results of the NAROs will allow private companies to use those results without contributing to finance the original research. The opportunity costs of the research for society, in terms of research funds foregone or in terms of the potential contribution of private companies to this research, can therefore be quite high. The protection of IPR and the commercialization of the NAROs’ research results can arguably help them recover part of their costs to conduct additional research for the benefit of the general public. The World Bank’s World Development Report of 1998–99 noted, however, that the global IPR legislation can disadvantage the developing countries “by increasing the knowledge gap and by shifting the bargaining power toward the producers of 2. Countries have also become aware of the value of their genetic resources, especially after the adoption of the Convention on Biological Diversity (CBD).
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knowledge, most of whom reside in industrial countries” (p. 35). Strong IPR regimes in the developed countries may also slow down the process of sharing and exchanging information, thus restricting the capacity of developing countries to adopt advanced technologies from the developed countries and reducing their prospects to “catch up” and close the gap. A study conducted in the mid-1990s in three Latin American countries concluded that “[t]he budget pressures, which oblige the [public] institutes to market new plant varieties in a more profitable way, enhance the strategic importance of their germplasm and reduce its availability” (Jaffe and Van Wijk 1995). Private companies in developing countries have little commercial incentive to apply for a patent since they have neither a good market for their invention in these countries nor effective means—primarily a functioning legal system—to enforce the patent. Instead, the main motivation to apply for a patent under these circumstances is to prevent other private companies that operate in their countries from using the technology or making products that infringe on their rights. However, only the large multinational corporations are likely to pursue this option, since it involves an elaborate, slow, and often very expensive process of licensing the patent and enforcing it through the country’s legal system. Nevertheless, patenting is clearly one of the main reasons for the breakdown of the traditional mode of free access and benefit sharing in agricultural research that existed during the 1970s and the 1980s, when the developing countries provided free access to their genetic resources and received the benefits of the research in developed countries for free. This mode has now been replaced by a highly asymmetric system in which access to genetic resources is still essentially free, while the benefits of the research are not. Developed countries gain access to valuable genetic resources in developing countries, but the scientific returns for the developing countries are minimal. The UNDP Human Development Report of 1999 underscored this asymmetry by noting that the developed countries now hold 97% of all patents worldwide, and over 80% of the patents granted in developing countries are owned by residents of the developed countries. In 1998, the total number of patents filed by residents in the USA, Germany, and Japan was nearly 540,000, compared with less than 18,000 patents filed by residents of India and China combined, and less than 500 patents filed by residents of Brazil (Persaud 2001). The temporary monopoly power given to companies by the patents therefore contributes to widening the income gap between the developed and the developing countries, while the much weaker protection of IPR in the lessdeveloped countries reduces the incentives of local enterprises to invest in R&D. Large investments in R&D give the top five biotechnology companies control over 95% of the gene transfer patents and a large portion of the patenting of genetic material from developing countries. On these grounds, critics argue that the current IPR regime effectively appropriates the resources of the developing countries, while failing to acknowledge the contribution that their farmers made to the world’s genetic resources. Today, agroindustries and traders prefer standardized products, and they exert commercial pressures to homogenize crop varieties, which may have negative implications for the stability and sustainability of the entire agroecosystem. By effectively forcing farmers to adopt the homogeneous and genetically narrow base of modern agriculture, private seed companies displace the wide diversity of traditional
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local varieties with a handful of hybrids of the homogeneous modern varieties that generate much greater uniformity. At the same time, the incentives given by the IPR regime to private seed companies that develop the new seed varieties is to maximize their profits by concentrating their research on varieties that have already been widely adopted. Patent owners can, however, enforce their rights only in countries where protection has already been granted. An inventor in country A who fails to obtain a patent in country B cannot enforce his/her rights in that country, even if country B is a member of the WTO. Since the IPR regime in developing countries is much weaker so far than in developed countries, it is difficult for research companies from a developed country to protect their inventions in many developing countries. In recent years, steps have been taken to increase the harmonization of national IPR legislation and its enforcement in all countries. A key element in these efforts is the TRIPS agreement that is binding all WTO members by setting certain minimum standards for the implementation of IPR at the national level. During the 1990s, the main engine of change in public agricultural research was the process of trade liberalization and the globalization of trade and research. The structural changes that took place as an effect of these processes, the more active role of the private sector and the flood of innovations, primarily in biotechnology, that came from developed countries, forced the public research organizations in developing countries to reform their mode of operation. Initially, adopting the TRIPS agreement was only a formality and a by-product of the act of joining the WTO. Opponents of the WTO argue, however, that the TRIPS agreement was promoted by the developed countries in order to globalize patent laws and that the agreement is highly biased in favor of the developed countries and the private sector. They also argue that, since most developing countries have now joined the WTO, the agreement is contributing to exacerbating inequities. Even if farmers in developing countries are initially only marginally affected by the financial costs of patents, they claim that, by consolidating the seed industry, the agreement may create much higher risks by inadvertently reducing plant diversity. The enactment of IPR legislation in developing countries gradually strengthens the role of the private sector in agricultural research, in plant breeding, and in many other activities in the agricultural sector. However, the NAROs’ tight budgets and the rapid decline in the financial support of their governments, donor countries, and international organizations puts increasing pressure on these organizations to search for alternative sources of funding to supplement their income and maintain their research program. One promising source of income is the royalties on their innovations, and this motivates many public research institutes to actively search for ways to patent and commercialize at least part of their innovations and/or license their technologies to private enterprises. These trends are reflected in the survey conducted by ISNAR, which shows that many public research organizations in developing countries have already established IPR units, and many others are seeking legal advice on means and measures to protect their innovations. As Jaffe and Van Wijk noted in their study on the Latin American countries: “Budgetary pressures are forcing the [public] institutes to take advantage of
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PBR protection as a means of developing new sources of revenue,” but Tripp and Byerlee warned in this context that “[s]elling public varieties to the private seed industry can divert attention from the needs of farmers with few resources.” Others underscored the negative impact of the IPR regime on the quality of agricultural research in developing countries, due to the drop in the flow of knowledge and material between potential research partners, the pressure to abandon research projects because of insufficient “freedom to operate” as a result of patents held by competitors, and the restrictions on sharing research results and experience between research institutes. Barton (2000) indicated that the current patent laws also complicate and deter useful follow-up research. Many NARO managers believe that stronger IPR legislation and commercialization of part of their research is the only way to recover some of their expenses. In practice, however, only a small number of the NAROs’ research projects can lead to patentable innovations, and only a small number of patents in agricultural research can be commercialized. The financial prospects of IPR protection are, therefore, highly uncertain. Nevertheless, public research institutes increasingly apply cost recovery criteria in selecting research projects and try to commercialize their plant breeding products to collect royalties on plant varieties that they developed in the past, on their current sales to private seed companies, and on their direct sales of seeds to farmers. The risk is that this commercialization may divert their limited resources away from research that focuses on the needs of poor farmers or farmers in marginal areas, since this research has very limited commercial potential. This has given rise to concern, as expressed by Byerlee and Alex (1998): “If the public sector is motivated by financial rewards, will its research be diverted to serve better-off regions and farmers at the expense of small-scale farmers and more marginal areas that might be the primary target of national policy for public research organizations?” In some cases, the commercialization of selected research projects can be justified if they generate income to cover the costs of other research projects that aim at developing more widely beneficial public goods. Private companies will always concentrate on a relatively small number of crops with a high commercial value, whereas public research should continue to take the lead in research areas such as germplasm conservation, crop and resource management, and other research programs that do not a have commercial value but are highly beneficial to society at large. The risk is that the enforcement of IPR laws in developing countries will change the research priorities of public research organizations by giving them incentives to commercialize their research, while research programs that have smaller commercial value, but are urgently needed, may be neglected. Privatization of selected public research programs is also an option, but private companies will be motivated to take over or participate in public research programs only if this research is likely to yield profits. Byerlee and Alex (1998) ask, however: “If the sale of research products is feasible and profitable, why should the public sector be involved in the first place?” This question presents a “Catch 22” dilemma for the
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public research organizations: On the one hand, the commercial prospects of the research products may well be the main incentive for the public research organizations to initiate or participate in this research program (see also their response to ISNAR’s survey discussed later on); on the other hand, these commercial prospects may be the very reason to exclude the public research organizations from this research program. Another option is to transfer some public research programs to private companies on a cost-plus basis. Collaboration with private research companies offers significant advantages to public research organizations by giving them access to advanced technologies developed by the private sector and to additional financial resources. Access to the advanced technologies of private companies becomes increasingly essential to the public research organizations because these technologies are protected by patents and their use becomes increasingly expensive. A survey among the CGIAR centers conducted by Cohen et al. (1998) shows that centers often use proprietary technologies without getting formal authorization. Binenbaum et al. (2000) argue that in developing countries, concerns about access to essential intellectual property are exaggerated, because most modern technologies are not protected by IPR in these countries. Still, advanced research in newer areas such as biotechnology encounters mounting difficulties due to the higher costs and greater complexity of the technologies, and the higher costs of many essential inputs. These costs can limit the capacity of the NAROs in the developing countries to conduct research in these areas, and therefore threaten to widen the technology and knowledge gap between the developed and the developing countries.3 The commercialization of the NAROs’ research and the possible effects of the IPR regime on their research priorities raise a number of additional concerns: < Can these developments disadvantage small-scale and marginal farmers, who may not be able to pay higher prices for inputs that have been produced with patented technologies? < Will the NAROs cease to be public research organizations in the traditional sense by no longer developing technologies that are freely available to all as public goods? (Lindner 1999). < How free will the NAROs be in selecting their future research programs if they are not in line with the research priorities of private companies? < Will the NAROs be driven to focus their research on high-value crops, primarily for exports, and be diverted from research on low-value crops for self-consumption that have limited commercial prospects? < Will the NAROs have incentives to conduct research in new areas and on nontraditional crops at the early stages of development, even though commercial value is still highly uncertain? < Will the IPR regime reduce the collaboration among public and semipublic research institutes? This can be particularly detrimental to the formation of
3. Tripp and Byerlee (2000) suggest that “appeals to a corporate sense of duty to support public efforts to address food security and poverty alleviation” may help to gain access to biotechnology. In the real world, the corporate CEOs are more likely to pay lip service than hard cash.
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strategic partnerships between the NAROs in different countries in an effort to mitigate the budgetary pressures on public research. 4
These concerns require a careful evaluation of the overall benefits of the commercialization of public agricultural research. ISNAR’s survey indicates that prospective royalties from a patentable technology are one of the main criteria used by public research institutes in their cost-benefit analysis of research projects. Clearly, this criterion does not provide a complete assessment of the economic benefits from the research project; it may fail, however, to correctly assess even the financial benefits since the commercial prospects of the research program are likely to be affected by the following: 1. Stronger IPR legislation in most developing countries will not suffice to secure the commercial value of a patentable technology and thus to give incentives to local research. 2. Public research organizations in developing countries may find it very difficult to elbow into the global market with patentable technologies, given the dominating market power and the large research budgets of multinational corporations. The wave of mergers of these corporations, primarily in the biotechnology and seed industries, and the economies of scale in R&D activities, give these corporations a dominating market power and considerable freedom to set pricing and standards that put new entrants at a considerable disadvantage. 3. The NAROs seem to minimize the difficulties and costs involved in establishing the legal structure and enforcement mechanisms of IPRs. 4. The IPR legislation in itself does not ensure positive returns to research, and only a small fraction of all patents are ever commercialized. 5. Obtaining a patent can involve considerable costs. Applications for a patent must be submitted in every country where it is deemed desirable, the preparation of patent applications in each of these countries is very costly, and in many countries there are also annual fees to maintain the patent as well as high litigation costs to determine who has what rights. The arguments for and against the commercialization of agricultural research do not apply with equal force to all the developing countries. In several Latin American countries, the private sector is strong and its investments in the agricultural sector in general, and in agricultural research in particular, are quite substantial. In these countries, the change in the mode of operation of the NAROs will be less problematic. In large countries like India or Brazil, the pool of qualified scientists and the size of the market are sufficiently large to encourage the expansion of private agricultural research once the private companies are assured that the technologies that come out of this research are protected. In contrast, in most countries in sub-Saharan Africa and in
4. Tripp and Byerlee (2000) noted that “[a]s the possibility for taking advantage of plant variety protection (PVP) increases, there is a growing temptation for the national programs to close their doors, to charge collaborators for what used to be freely exchanged, or to deny national or regional partners access to material for fear that they will gain a commercial advantage.”
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many countries in South Asia, the private sector is still too unorganized to take up a significant part of the research that the NAROs currently conduct, and the size of their markets are too small to support viable private research companies. In these countries, the NAROs will continue to have a very wide mandate, and the potential for the privatization of their research is very limited. Nevertheless, even in many of these countries ISNAR’s survey indicates that the NAROs are actively exploring the options of commercializing some of their research activities.
The NARI Survey The survey was conducted in 105 NARIs in 33 developing countries, and the questionnaire included two sections about the approach of the NARI’s management and one section inquiring about four ongoing research projects in each NARI, requesting the project managers themselves to give their views and the relevant information about their projects. The analysis in this section is based on the replies of the project managers, who provided information for a total of 430 projects. The analysis in this section focuses only on the part of the questionnaire that related to IPR. Table 8.1 shows the distribution of the projects between basic, applied, and adaptive research, and it provides information on whether the projects were conducted in collaboration with other research institutes. Of the 430 projects, only 43 were defined by the project managers as basic research, 265 projects (62% of the total) were defined as applied, and 105 projects (25%) were defined as adaptive. 243 projects (56%) were conducted in collaboration with one or several other research institutes—local (public or semipublic), regional, or international (primarily CGIAR)—while 43% of the projects were conducted by the institute’s researchers only. Nearly 70% of the adaptive research projects but only 47% of the basic research projects were conducted in collaboration with researchers in other institutes. In response to another question, the project managers indicated that in projects initiated by the institute’s own researchers, there was considerably less collaboration. Their general view was that IPRs have a negative effect on the collaboration between research institutions and between developing and developed countries. They generally expected that IPR would slow down research collaboration and the flow of knowledge between researchers and research institutes and thus have a negative impact on the quality of their research. Interestingly, the economic literature corroborates their
Table 8.1. Type of Research and Collaboration with Other Research Institutes Collaboration
In collaboration No collaboration N/A Total
Type of research Adaptive
Applied
Basic
N/A
Total
72 (69%) 32 (30%) 1 (1%) 105 (100%)
143 (54%) 120 (45%) 2 (1%) 265 (100%)
20 (47%) 23 (53%) 0 43 (100%)
8 8 1 17 (3%)
243 (56%) 183 (43%) 4 (1%) 430 (100%)
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pessimistic views: Hardin (1998) noted that, unlike the “tragedy of the commons”, where having too many owners can result in an overuse of resources, the proliferation of patents in research may lead to the tragedy of the “anti-commons,” where owners have the right to exclude others and the resource may thus become underused, because research is stifled rather than stimulated by the large number of patents. Patenting may also hinder the exchange of knowledge and genetic material between private enterprises and induce biotechnology companies to abandon promising lines of research if they lack sufficient “freedom to operate” because they must use patented technologies of their competitors. Moreover, since scientists working on something that may be patented tend to share less knowledge with their colleagues, IPR may even restrict the flow of germplasm between the private and the public sectors, which was one of the characteristics of the Green Revolution. Table 8.2 shows the distribution of the research projects in main research categories: 57% of the projects focused on specific commodities and 14% were research projects on pest or disease control that were part of specific commodity programs. In total, 305 projects (71%) were part of specific commodity programs. Nearly one-third of the commodity research projects (22% of the total) focused on genetic improvement. A relatively small number of the research projects were on the environment (11%) or on policy or economy related issues (6%). Table 8.3 shows the project managers’ assessment of the chances of obtaining a patent or seeking IP protection on the innovation that did, or was expected to, result from their research. In over 25% of the projects, the answer was negative or the question was not deemed relevant (e.g., in an economic research project). In nearly 30% of the projects, the project managers estimated that the products of their research were not likely to generate any patent. In 175 projects (41%), the project managers thought that IPRs were either quite likely (27%) or very likely (14%). However, the answers also indicate that the project managers have very limited and largely inaccurate information on IPR legislation and on the process of obtaining and securing a patent, possibly because IPR legislation in these countries is not yet fully incorporated into the legal system. Table 8.4 reports on the use of proprietary technologies and materials. The survey indicates that, for the time being, the use of proprietary technologies or inputs is very limited (5% of the total). This is most likely a reflection of the small number of proprietary technologies and materials that are used in developing countries—in part because they use technologies and materials that have been developed by the CGIAR centers and are freely available,5 and, in part, because the TRIPS agreement is not yet fully implemented in most developing countries. Several developments of the recent years may increase the use of proprietary technologies and inputs in the future. One is the growing worldwide significance of IPR and of the TRIPS agreement, the second is the increasing importance of biotechnology in NARI research, and the third is the more prominent position of the private sector in the global trading system and in research.
5. According to a declaration of 1997, “The CGIAR stands for free flows of germplasm and it has no profit motive. However, it may have to think of defensive patenting in order to stake out a claim and ensure access.”
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Table 8.2. Principal Research Categories Research category
Commodity/factor Environment Pest/ Policy/ research NRM disease control1 economics
Projects
248 (57%)
1
Of which: genetic improvement 95 (22%)
44 (11%)
101 (23%)
Other or N/A
Total
13 (3%)
430 100%
24 (6%)
Including research on specific pest/disease controls conducted within the framework of commodity programs.
Table 8.3. Likelihood of IPR Expecting IPR?
Not likely/ not relevant
Very likely
Quite likely
N/A
Total
In collaboration No collaboration N/A Total
124 (51%) 111 (61%) 2 237 (55%)
36 (15%) 21 (11%) 1 58 (14%)
75 (31%) 42 (23%) 0 117 (27%)
8 (3%) 9 (5%) 1 18 (4%)
243 (100%) 183 (100%) 4 430 (100%)
Table 8.4. The Use of Proprietary Technologies in Research Region
No
Yes
N/A
Total
Africa Asia Latin America Total
193 164 37 394
3 8 3 14
9 11 2 22
205 183 42 430
Another survey conducted by ISNAR in 1997 among seven CGIAR centers shows that most centers used proprietary technologies for biotechnology research (Cohen et al. 1998). Some proprietary materials were used only for their research, while others became part of germplasm or other products for dissemination to the NARIs, to NGOs in developing countries, and to other international agricultural research centers. That survey also showed that more than 35% of these applications were used without any written agreement, and the centers were unclear about their legal responsibilities. At the same time, the survey revealed that the centers sought only very limited IPR protection, in large measure due to the lack of familiarity with IPR issues. The research managers were also asked about policy changes in their countries that may have affected the trade with and distribution of inputs that were the subject of their research. Their replies indicate that only 181 projects (60%) were on commodities or technologies that were affected by policy changes. Out of these projects, 65 projects concerned commodities in which foreign companies are not allowed to trade, and 38 projects were on commodities in which even domestic private companies are not allowed to trade (Figure 8.5). Their replies also indicate that more than half of the
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Table 8.5. Policy Measures Relevant to the Inputs Generated in these Research Projects Measures
Are foreign companies allowed to trade in these inputs? Are local private companies allowed to trade in these inputs? Is there a public distribution system for any of these inputs? Are there any subsidies for these inputs?
All commodity research
Of which: genetic improvement
No
Yes
N/A
Total
No
Yes
N/A
Total
65 (21%)
116 (38%)
124 (40%)
305 (100%)
22 (23%)
40 (42%)
33 (34%)
95 (100%)
38 (13%)
156 (51%)
111 (36%)
305 (100%)
16 (17%)
53 (56%)
26 (27%)
95 (100%)
95 (31%)
90 (30%)
120 (39%)
305 (100%)
40 (42%)
26 (27%)
29 (31%)
95 (100%)
139 (46%)
37 (12%)
129 (42%)
305 (100%)
48 (50%)
13 (14%)
34 (36%)
95 (100%)
Note: This includes seeds, fertilizers, pesticides, etc.
commodities that were the subject of these projects were distributed by the public distribution systems, but, in many countries this system was either reduced or totally dismantled; 37 of these commodities still receive public subsidies.
The Challenge for the CGIAR The CGIAR Centers, whose genebanks hold a significant part of the world’s ex situ collections, agreed to place their holdings of designated materials under the auspices of FAO. The agreement between FAO and the Centers stipulates that the latter act as trustees of the germplasm for the benefit of the international community and, as such, do not enjoy ownership of the germplasm. The trust provides for neither the transfer nor the acknowledgement of ownership by the trustee. Furthermore, the Centers cannot claim ownership or seek IPR over the collected germplasm or any related information, and they must ensure that recipients of samples are bound by the same obligation. Materials supplied by the Centers, whether designated germplasm or the products of the Centers’ breeding activities, may be used by recipients for breeding purposes without restriction. Recipients, including the private sector, may protect the products of such breeding through plant variety protection that is consistent with the provisions of UPOV or any other sui generis system, and that does not preclude others from using the original materials in their own breeding programs. The CGIAR has put forth IPR management guidelines for material held in ex situ deposits as well as material acquired from third parties and developed by the Centers. As a general policy, the Centers will not seek protection as a source of financing, but rather as means to obtain other technologies or favor the dissemination of protected technologies. Instead, the Centers will regard the results of their work as international public goods, and full disclosure of research results and products in the public domain will be the preferred strategy for preventing misappropriation by others. Hence, the
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Centers will not assert intellectual property control over derivatives except in cases when this is needed to facilitate technology transfer or otherwise protect the interests of developing nations. As a principle, however, the Centers do not see the protection of intellectual property as a mechanism for securing financial returns for their germplasm research activities, and will not view potential returns as a source of operating funds. Despite these guidelines, policymakers and agricultural researchers in many developing countries expressed concerns about the declared intentions of the CGIAR Centers to collaborate with the private sector, particularly in biotechnology, and forge partnerships with commercial enterprises. Many were concerned that the profit objectives of the collaborating commercial enterprises and the incentives provided by the IPR regime to commercialize their own research would negatively impact the goal of the CGIAR to promote food security by providing new technologies for the production of basic foods and making these technologies freely available to all. On these grounds, participants in discussions on the future of public research recommend that the CGIAR Centers as well as all public agricultural research organizations should adopt only a defensive IPR policy and seek to maintain, to the extent possible, their research output in the public domain. Others, however, favor the opposite approach and recommend that the public agricultural research organizations manage their research with the objective of generating revenues or improving their position to bargain for access to proprietary technologies of others. The changes in the global agricultural R&D system and in the role and mode of operations of the NARS in the developing countries require the CGIAR to reevaluate its own research strategy as well as its current guidelines on IPR. These guidelines stress that the “[g]enetic resources of the CGIAR Centers are common property of all mankind, and the research results from public institutions would remain freely available in the public domain.” The changing global conditions for agricultural research make it essential to reevaluate these guidelines in light of the following questions: < Will the protection of IPR by the CGIAR Centers contribute to or hinder the development of genetic material and production technologies that can benefit the poor? < What are the wider implications of protecting IPR by the CGIAR with respect to the access of public agricultural research organizations in developing countries to the Centers’ genetic material, and what should the Centers’ policy be? < Under what conditions and in which countries can the collaboration with private companies or the protection of IPRs by the CGIAR ultimately assist the development of technologies and materials for the poor, despite the possible restrictions that this may impose on their distribution, by providing access to proprietary technologies? < What will be the effect of and benefits from defensive patenting? < What will be the effect of the protection of IPRs on collaborative research with other CGIAR centers or with the NAROs? For the time being, there is very limited system-wide planning, and the CGIAR Centers continue to develop their own individual strategies, establish their own
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individual IPR units, and explore the potential for and the means of protecting their intellectual properties.6
References Amstalden Sampaio, M.J. 199. Perspectives from National Systems and Universities—Brazil. In Intellectual Property Rights in Agriculture. The World Bank’s Role in Assisting Borrower and Member Countries, edited by U. Lele, W. Lesser, and G. Horstkotte-Wesseler. Washington, DC: World Bank. Binenbaum, E., C. Nottenburg, P. Pardey, and B. Wright. 2000. South-North Trade, Intellectual Property Jurisdictions, and Freedom to Operate in Agricultural Research on Staple Crops. Washington, DC: IFPRI. Byerlee, D. and G. Alex. 1998. Strengthening National Agricultural Research Systems: Policy Issues and Good Practice. Washington, DC: World Bank. Cohen, J., C. Falconi, J. Komen, and M. Blakeney. 1998. Proprietary Biotechnology Inputs and International Agricultural Research. Briefing Paper No. 39. The Hague: ISNAR. Conference #6 of FAO Electronic Forum on Biotechnology in Food and Agriculture, entitled The impact of Intellectual Property Rights on Food and Agriculture in Developing Countries. March 2001. Evenson, D. 2000. Patent and other private legal rights for biotechnology inventions. In Agriculture and intellectual property rights, edited by V. Santaniello, R. Evenson, D. Zilberman, and G. Carlson. New York: CABI Publishing. Geadelman, J. 1993. Plant Variety Protection – A Breeder’s Viewpoint. In Seminar on the Nature and Rational for the Protection of Plant Varieties under the UPOV Convention. Nairobi. Hardin, G. Extension on the ‘Tragedy of the Commons.’ Science, 280 (1998), 682-83. Jaffe, W. and J. van Wijk. 1995. The Impact of Plant Breeding Rights in Developing Countries. Inter-American Institute for Cooperation on Agriculture. Lesser, W. Assessing the Implications of Intellectual Property Rights on Plants and Animal Agriculture. American Journal of Agricultural Economics, 79: 1584-91, 1997. Lindner, B. 1999. Prospects for Public Plant Breading in a Small Country. Paper presented at the meeting of the International Consortium on Agricultural Biotechnology Research, Rome, June. Mansfiled, E. Intellectual Property Protection, Foreign Direct Investment and Technology Transfer. IFC Discussion Paper No. 19. Washington, DC: World Bank. Moschini G. and H. Lapan. 1997. IPR and the Welfare Effects on Agricultural R&D. American Journal of Agricultural Economics, 79 (November). Persaud, A. The Knowledge Gap. Foreign Affairs, 80 (2001), 107-117. Study Committee on Biotechnology and IPR. 1991. The Impact of Intellectual Property Protection in Biotechnology and Plant Breeding on Developing Countries. The Netherlands: Ministry of Foreign Affairs. Tansey, G. 1999. Trade, Intellectual Property, Food and Biodiversity. Discussion paper. London: Quaker Peace & Service.
6. Recently, ISNAR started a research project aimed at evaluating the choices available to the CGIAR given the changes in the global conditions for agricultural research, and the role of IP management in the CGIAR system, with the objective of developing criteria for a system-wide IP management.
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Tripp, R. and D. Byerlee. 2000. Public Plant Breeding in an Era of Privatization. Natural Resource Perspectives No. 57. ODI. World Bank. 1999. World Development Report 1998–99. Washington, DC: World Bank.
Chapter 9 The Development of the Seed Industry Under Globalization Michael L. Morris*
Introduction Globalization and internal policy reforms—including deregulation, domestic market reform, trade liberalization, privatization, and, at the international level, the implementation of WTO agreements and IPR—are having pronounced effects on the agricultural sectors of many developing countries. While attention to date has focused mainly on documenting the impacts of globalization on the production and trade of agricultural outputs, the potential impacts of globalization are also significant for many agricultural inputs, including seed of improved crop varieties. In most developing countries, responsibility for crop varietal research, seed production, and seed distribution was traditionally assigned to public organizations. Government participation in the seed industry was frequently justified on political grounds (national food security being deemed too important to be entrusted to the private sector), or defended for economic reasons (subsistence farmers being considered unsuitable customers for private firms). Although public breeding programs continue to operate in most countries, in recent years policy reforms designed to scale back the role of the state have resulted in the withdrawal of public organizations from many seed production and distribution activities. At the same time, the relaxation of restrictions on entry into the seed industry and the lifting of controls on international germplasm flows have opened the door to increased private-sector participation in the seed industry (Morris 1998a). These reforms associated with globalization are having a marked impact. One striking development has been a rapid increase in many countries in the number of private seed companies, both national and multinational. On a positive note, many of these companies have demonstrated an impressive capacity to identify farmers’ germplasm needs, develop improved cultivars in response to those needs, produce adequate quantities of high-quality seed, and deliver that seed to the farmers in a timely fashion. At the same time, it is becoming increasingly evident that not everybody has benefited from these changes. Private seed companies exist to earn profits for shareholders, so not surprisingly they have chosen to concentrate on markets in which they think they can make money—which usually means concentrating on large-scale commercial farmers located in favorable production environments. Meanwhile, they have often ignored small-scale, subsistence-oriented farmers located in remote areas
* Michael L. Morris: International Maize and Wheat Improvement Center (CIMMYT) 201
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poorly served by the transportation infrastructure, since these farmers are not likely to purchase commercial seed on a regular basis. The changes currently underway in the organization of national seed industries warrant attention from policymakers. In most developing countries, agriculture still serves as the backbone of the rural economy, and crop production activities provide human food, animal feed, cash income, and employment opportunities for hundreds of millions of poor households. For many of these households, improved seed represents the delivery vehicle for productivity-enhancing technological change, so any development that disrupts the flow of improved seed threatens to undermine food security and aggravate rural poverty. This chapter examines the likely impacts of globalization on national seed industries, with particular reference to maize. Maize is one of the three cereals that dominate the world grain economy, the others being wheat and rice. In industrialized countries, maize ranks second only to wheat in terms of planted area and production. In the developing countries, where most of the world’s rice production is concentrated, maize ranks third behind rice and wheat. Maize makes a particularly appropriate subject for this inquiry, because with maize the diffusion of improved germplasm is critically dependant on the availability of commercial seeds (for reasons that are explained below). Changes in the organization of national seed industries brought about by the globalization process will thus have a greater impact on maize than on any other crop.
Documenting the Impacts of International Crop Improvement Research The International Maize and Wheat Improvement Center (CIMMYT), one of 16 research centers that make up the CGIAR, is the world’s leading publicly funded maize and wheat breeding organization. Improved germplasm developed by CIMMYT breeders, working in collaboration with colleagues from numerous NARS, is distributed free of charge to public and private maize and wheat breeding programs throughout the developing world. During the early 1990s, CIMMYT researchers carried out two major studies designed to document the impacts of international maize and wheat breeding research (see López-Pereira and Morris 1994; Byerlee and Moya 1994). These studies generated a wealth of information about the germplasm products of maize and wheat breeding programs in developing countries (both CIMMYT’s own breeding programs, as well as those of the NARS) and sketched out a compelling picture of the widespread dissemination of improved maize and wheat varieties. The data generated by CIMMYT’s global impact studies subsequently came to be recognized as definitive and was widely used to inform research investment and research management decision-making. Following the completion of the initial global impact studies, CIMMYT made a commitment to update and extend its databases and to publish summary reports roughly every five years. Efforts to update and extend the databases were initiated in 1997. The final versions of the updated reports were available by 2001.
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One of the most interesting findings generated by CIMMYT’s global impact studies was that there has been a significant difference in the diffusion patterns of modern varieties of maize and wheat.1 Even though breeding gains in the two crops have been roughly equivalent, and despite the fact that improved germplasm developed through collaborative international breeding efforts is distributed in much the same way, improved wheat varieties were diffused more widely than improved maize varieties (Table 9.1). The marked difference in diffusion patterns uncovered by the global impacts studies engendered a lively debate within CIMMYT, which must be concerned not only with developing improved germplasm, but also with ensuring that locally adapted cultivars developed from that germplasm are adopted by farmers. The evidence that improved maize materials have apparently not been diffused as extensively as improved wheat materials raised an obvious question: In what respects does maize differ from wheat, and to what extent do the differences between the two crops account for the observed differences in germplasm diffusion patterns?
Plant Reproductive Biology: Implications for Technology Delivery Biologically, maize differs from wheat in several respects that turn out to have important implications for the development and spread of improved germplasm. Because it is a self-pollinating crop, when wheat reproduces, each generation of plants retains the essential genetic and physiological identity of the preceding generation. This means that farmers can safely replant wheat seed harvested from their own fields, giving them effective control over the technology embodied in improved germplasm. Farmers can set aside a portion of their harvest for use as seed in future cropping seasons, as long as they are careful to avoid mixing seed of different varieties. Furthermore, if they choose, they can easily distribute seed to other farmers. This is what happened during the so-called Green Revolution in wheat: After small quantities of seed were released by public breeding programs, improved varieties quickly spread
Table 9.1. Area Planted to Improve Maize and Wheat varieties, LDCs (%) Region
Latin America Asia (excluding China) Sub-Saharan Africa All LDCs (excluding China)
Early 1990s
Late 1990s
Wheat
Maize
Wheat
Maize
82 88 52 69
43 43 42 43
99 97 81 92
48 39 51 52
Source: CIMMYT surveys.
1. Throughout this paper, the term modern varieties is meant to denote varieties and hybrids developed since 1960 by scientific breeding programs.
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through farmer-to-farmer seed exchanges, with relatively little involvement on the part of any type of formal seed industry. Maize represents a different case, however. Because it is a naturally cross-pollinating crop, when maize reproduces, much depends on whether the pollen used to fertilize a given kernel comes from the same plant or from a different one. Unlike wheat, when maize plants self-fertilize, the resulting progeny are often characterized by undesirable traits, such as reduced plant size and low yields. But when maize plants cross-fertilize, some of the resulting progeny tend to demonstrate desirable traits, such as increased plant size or high yields. Commonly referred to as “hybrid vigor,” this phenomenon is attributable to the complementary action of favorable genes and is frequently exploited by plant breeders in their efforts to develop commercial materials. Unfortunately, the benefits of hybrid vigor do not persevere across generations. When seed harvested from cross-pollinated maize plants is replanted, performance in the resulting progeny decreases because of the inbreeding phenomenon referred to earlier. These two characteristics of maize—its tendency to deteriorate through inbreeding and its ability to demonstrate hybrid vigor—affect the degree of control exercised by farmers over the technology embodied in seed. Because of the marked decrease in performance between first-generation hybrid plants and subsequent-generation plants, farmers who choose to grow maize hybrids in effect forfeit the option of saving a portion of their harvest to use as seed in the following cropping cycle. Farmers who choose to grow open-pollinated varieties (OPVs) can save a portion of their harvest to use as seed in subsequent cropping cycles, but they must be careful to maintain the genetic purity of successive crops grown from re-planted seed (for example, by physically isolating plots and by staggering planting dates to prevent cross-pollination between varieties). With on-farm seed production either technically difficult (in the case of hybrids) or inconvenient and costly (in the case of varieties), maize farmers must acquire fresh seed for each planting if they want to be certain of maintaining a high level of genetic purity in their crops. Consequently, if farmers are to grow maize hybrids, they must have access to a reliable supply of affordable, high-quality seed. The realization that diffusion of improved maize germplasm depends critically on farmers’ access to adequate seeds motivated CIMMYT to launch a research initiative designed to clarify the role played by national seed industries in encouraging or discouraging the dissemination of improved maize cultivars. The following section summarizes the key findings of this research initiative, which was carried out during the mid-1990s.
Recent Changes in the Organization of National Maize Seed Industries Throughout the developing world, globalization is having a marked effect on the national maize seed industries. Following a wave of economic reforms designed to open domestic seed markets to increased competition, the public sector has for all intents and purposes withdrawn from seed production and distribution. In country after
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country, the government agencies that once monopolized maize seed production and distribution have drastically scaled back their activities in the face of stiff competition from private seed companies (the only significant exception is China, where the state remains active in seed production). By the late 1990s, the proportion of commercial maize seed produced by public seed agencies had fallen to less than 10% in Latin America, sub-Saharan Africa, and Asia (Figure 9.1). The increasing privatization of national maize seed industries has been accompanied by a change in the types of cultivars available in the market. Whereas many of the old government-subsidized public seed agencies offered a range of germplasm types, including both improved OPVs and hybrids, the private seed companies that now dominate the market concentrate almost exclusively on selling hybrids. The shift in the types of cultivars available in the market has been accompanied by changes in seed pricing strategies. Intercountry comparisons of maize seed prices are best made using seed-to-grain price ratios, which express the price of 1 kg of commercial maize seed as a multiple of the price of 1 kg of ordinary maize grain (this method eliminates potential distortions due to exchange rate effects). In many developing countries, seed-to-grain price ratios for popular maize hybrids have increased significantly in recent years (Figure 9.2). Possible explanations for the increase in seed prices include the following: (1) the decline of government seed agencies has been accompanied by a withdrawal of subsidies to seed, (2) the research costs involved in developing modern hybrids have increased, forcing seed companies to charge higher prices to recover their investment costs, and/or (3) increasing concentration of the seed industry is allowing seed companies to exert market power and charge oligopolistic/ monopolistic prices. One of the main reasons for privatizing national seed industries is to displace the old government seed monopolies, in the hope that this will foster increased competition throughout the seed industry. Although privatization has often been accompanied by a proliferation in the number of seed companies, the power of the industry leaders has not necessarily been diluted. In many countries, the three largest companies continue to control over two-thirds of the national maize seed market (Figure 9.3). In a few countries, the industry concentration level is much higher, with a single dominant seed company controlling over 75% of the entire market.
National Maize Seed Industry Case Studies In an attempt to shed additional light on the factors that determine seed industry performance, researchers from the CIMMYT Economics Program organized a series of case studies of national maize seed industries in a number of developing countries (Aquino 1998; Garcia 1998; Morris 1998b; Pal et al. 1998; Pray 1998; Pray et al. 1998; Rusike 1998; Rusike and Smale 1998). The goals of the country-case studies, most of which were carried out with NARS collaborators, were to describe the organization of the national seed industry, to assess the performance of the national seed industry, to identify major constraints to germplasm diffusion, and to evaluate policy options for overcoming these constraints.
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Prportion of total maize seed sales (%)
(a) Latin America Private seed companies
Public seed agencies 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
1990 1991 1992 1993 1994 1995 1996 1997
Proportion of total maize seed sales (%)
(b) Eastern and Southern Africa 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Public seed agencies
Private seed companies
1990 1991 1992 1993 1994 1995 1996 1997
Proportion of total maize seed sales (%)
(c) Asia (excluding China) Public seed agencies
Private seed companies
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1990 1991 1992 1993 1994 1995 1996 1997
Figure 9.1. Public and private maize seed sales, 1990–97
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Seed-to-grain price ratio
(a) Mexico 16 14 12 10 8 6 4 2 0 1970 1975 1980 1985 1990 1995
20 15 10 5 0 1962 1967 1972 1977 1982 1987 1992 1997
(c) India 14 12 10 8 6 4 2
94
90
86
82
78
98 19
19
19
19
19
19
74 19
70
0
19
Seed-to-grain price ratio
Seed-to-grain price ratio
(b) Zimbabwe
Figure 9.2. Evolution of maize seed prices, selected countries
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(a) Latin America
National market share (%)
100 90 80 70 60 50 40 30 20 10 0 Brazil
El Salvador
Mexico
(b) Eastern and Southern Africa
National market share (%)
100 90 80 70 60 50 40 30 20 10 0 Kenya
South Africa
Zimbabwe
(c) Asia (excluding China)
National market share (%)
100 90 80 70 60 50 40 30 20 10 0 India
Philippines
Thailand
Figure 9.3. Maize seed industry concentration, selected countries, 1996 Note: The share of the three largest companies in total sales.
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The conceptual framework used for the seed industry case studies was drawn from the industrial organization theory. According to this framework, national seed industries engage in three basic types of activity: (1) varietal improvement research, (2) seed production (including seed multiplication, seed conditioning, and seed storage), and (3) seed distribution (including marketing and promotion). While these three types of activity remain the same from one country to the next, the manner in which they are organized and carried out can vary tremendously. The institutional actors, coordination mechanisms, and degrees of horizontal and vertical integration can all differ. The results of the CIMMYT case studies make clear that regardless of any apparent similarities, no two national maize seed industries are exactly alike. In any given country, the precise configuration of organizations and institutions involved in plant breeding research, seed production, and seed distribution reflects unique circumstances of history, environment, and culture. Generalizing across the country case studies, however, recurring patterns are discernible in the way national seed industries grow and evolve. The fact that these patterns appear over and over suggests that despite having unique features, every maize seed industry develops in predictable ways. The patterns provide important clues about the forces that drive the process of change and indicate the likely consequences of policy interventions designed to influence future performance.
The Life Cycle Theory of Seed Industry Development National seed industries often follow an evolutionary growth path that can be described as a “life cycle” (Morris 1998a). Each stage of the seed industry life cycle tends to be characterized by a particular combination of factors relating to the orientation of agriculture, farmers’ seed acquisition practices, the predominant seed technology, the locus of seed R&D, predominant seed production methods, and prevailing intellectual property rights regimes, to name a few (Table 9.2). Four stages can be distinguished: Stage 1: Pre-industrial Subsistence farming systems typically find themselves in the pre-industrial stage of seed industry development. During the pre-industrial stage, none of the organizations and institutions associated with a formal seed industry are evident. Germplasm improvement occurs at the farm level as farmers carefully select superior ears from their own production to use as seed stock in the following planting season. Only OPVs are grown; hybrid technology is unknown. Most farmers use seed saved from their own harvest, although some may also exchange small quantities with relatives or neighbors. Farmers are the dominant actors because seed production technology is readily accessible to them and because few incentives exist for commercial seed production.
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Table 9.2. Characteristics Associated with the Stages of Maize Seed Industry Development Stage 1: pre-industrial Orientation of agriculture Predominant seed technology Seed procurement practices
Seed production
Seed market coverage Sources of seed information Locus of seed R&D
Supporting legal systems IPR
subsistence
Stage 2: emergence
Stage 3: expansion
Stage 4: consolidation
semisubsistence
mostly commercial completely commercial varieties varieties, some some varieties, hybrids hybrids hybrids annual purchasing on-farm production, on-farm production, frequent purchasing farmer-to-farmer farmer-to-farmer exchange, some exchange purchasing private companies on-farm on-farm, public on-farm, public (global) organizations organizations, private companies (national) local local, regional local, regional, local, regional, national national, global direct experience, public agencies private seed private seed other farmers companies companies on farm public organizations public and private public and private organizations organizations (specialized) customary law civil commercial commercial (global) (domestic) none none trade secrets plant varietal protection, patents
Source: Morris and Smale 1997.
Stage 2: Emergence The emergence stage of seed industry development often coincides with a shift from subsistence farming to semicommercial agriculture. During the emergence stage, the realization that specialized knowledge and skills are needed to carry out germplasm improvement work leads to the formation of specialized research organizations. But because most farmers still grow OPVs, private firms lack economic incentives to invest in plant breeding research or commercial seed production, and therefore these activities must be carried out by public organizations. During the emergence stage, the state tends to be the dominant actor in the seed industry. In the absence of profit opportunities, private firms are unwilling to invest in research and seed production; these activities consequently end up being performed by government research institutes and seed agencies, which can justify their involvement for reasons other than profit making. The profitability of these organizations is adversely affected by the fact that until farmers learn to appreciate the benefits of highquality seed, they are generally unwilling to pay cost-recovery prices, so seed prices often must be subsidized.
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Only after a significant number of farmers appreciate the value of using quality seed do private firms begin to spring up to compete with the state seed agencies. Initially, demand for commercial seed is quite limited, and it is not worthwhile for private companies to establish their own breeding programs; instead, they concentrate on multiplying and distributing seed of varieties and hybrids released by the government research stations. The speed with which this process occurs is quite variable. In some countries, private seed companies have been relatively slow to appear; in others, the rise of the private seed industry has been sudden and dramatic. Stage 3: Expansion The rise of commercial agriculture usually coincides with the expansion stage of seed industry development. During the expansion stage, maize production becomes increasingly commercialized, and the dominant seed type changes to hybrids. As farmers increase the adoption of improved seed, agricultural productivity rises, resources become available for buying seed, fertilizer, and other scientific inputs, farmers increase their demand for proprietary hybrids, and the industry is driven into a phase of rapid growth. During the expansion stage, private firms assume an increasingly important role in carrying out plant breeding work, conducting varietal evaluation trials, producing foundation seed, multiplying, conditioning, and testing commercial seed, and distributing it to farmers. Legal codes of conduct are enacted to guide research, enforce seed certification procedures, and regulate the seed trade. Trade secret laws evolve to provide protection for private sector investment in the seed industry. As private seed companies increase their level of investment, they voluntarily ensure that seed quality standards are maintained and use a combination of government certification and brand names to develop a reputation for product quality. Market competition helps assure seed quality, because farmers do not make repeat purchases from companies that market inferior products. Although government agencies continue to enforce seed quality control and phytosanitary standards for international trade in seed, responsibility for seed certification and laboratory testing is transferred to the private sector. Stage 4: Consolidation The appearance of large-scale agribusiness generally signals the onset of the consolidation stage of seed industry development. During the consolidation stage, private firms dominate the varietal development, multiplication, conditioning, and testing of the commercial seed and seed marketing and distribution activities. As the competition for market share intensifies, the private seed industry consolidates through mergers, acquisitions, and strategic alliances among seed companies and agrochemical firms. Ever greater investment in research coincides with the enactment of IPR laws such as Plant Breeders’ Rights and plant patents, stimulating additional investment in seed enhancement processes, biotechnology, and information technology. Private firms use a mix of brand names, logos, trademarks, advertising, field demonstration, and personal selling to inform farmers about the characteristics of
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their products. Seed companies develop global research, seed multiplication, and distribution networks coordinated from headquarters located in industrialized countries. Meanwhile, nonremunerative activities are left to the State, such as the collection, evaluation, and conservation of genetic resources, and the management of varietal evaluation trials. The evolutionary growth path described by the life cycle theory is not deterministic, but the model is useful because it clarifies the conditions needed for the seed industry development, suggests how the roles of participants are likely to change through time, and signals areas of potential concern for policymakers. In addition, the life cycle theory provides a useful framework for analyzing the seed industry organization and performance by focusing attention on the changing incentives faced by different actors as the industry evolves.
Forces Driving the Evolutionary Process The results of the CIMMYT case studies not only lend support to the view that national maize seed industries evolve along the same basic path, but they also provide important clues concerning what motivates the recurring pattern of organizational and institutional transformation that gives rise to the seed industry life cycle. Maize seed industries evolve because the organizations engaged in research, seed production, and seed distribution respond to changing external circumstances in ways that help them realize their own particular objectives. Efficiency considerations are important in this process, because regardless of their objectives, organizations that operate efficiently are more likely to survive. In their drive to achieve increased efficiency, seed organizations assume forms and adopt operating practices that allow transformation and transaction costs to be minimized; organizations that fail to achieve efficiencies have difficulty surviving. The process is not completely deterministic, however, because it does not always unfold in exactly the same way in every country. It is path-dependent in the sense that the particular organizational structures and institutional arrangements that survive in the long run are influenced to a greater or lesser extent by events, to a considerable extent random, that happened earlier. Thus, in countries in which historical forces have fostered the emergence of a thriving merchant class, privatization of the seed industry is likely to be spearheaded by large numbers of small local firms. This has been the experience in India, for example, where policy reforms enacted during the late 1980s and early 1990s led to the sudden appearance of dozens of local seed companies (Pal et al. 1998). In contrast, in countries where an established merchant class is lacking (perhaps because the emergence of such a class was discouraged by colonial rulers), privatization of the seed industry is likely to feature an invasion by foreign corporations. Zimbabwe and Malawi represent examples of the latter pattern: efforts to privatize the maize seed industries in these two countries have succeeded in attracting the large transnationals, but without giving rise to anything resembling a local industry (Rusike 1998; Rusike and Smale 1998).
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Effects of Globalization on the Seed Industry Structure From a policy perspective, it is interesting to note that the drive to achieve increased efficiency not only motivates the behavior of individual organizations, but also affects the seed industry as a whole. Efforts on the part of individual seed organizations to achieve increased efficiency drive the industry as a whole toward concentration and vertical integration. Concentration As the national seed industry becomes more concentrated, the individual organizations that make up the industry grow in size. By growing in size, the organizations are able to exploit potential economies of scale and scope. The opportunities to capture economies of scale and scope are particularly evident in research. The economic criteria of research are changing rapidly, and increasingly there are advantages to being big and diversified. In conventional breeding programs, economies of scale and scope relate not so much to the physical processes of screening germplasm, making selections, combining materials, and evaluating progeny since these are laborintensive activities that are best carried out on a fairly small scale. As competition in the industry intensifies, however, success in plant breeding depends increasingly on having access to a wide range of superior germplasm and on being able to test experimental materials in many different locations. These are things that small organizations generally have difficulty managing for themselves. The large transnational seed companies all have established international networks of research stations and testing facilities that allow experimental materials to be moved around the world and evaluated in many different locations. Companies that are able to build and operate these global networks enjoy a distinct advantage over national programs and local seed companies whose spheres of operation are limited. This explains why the number of organizations engaged in maize breeding research is declining and why the size of surviving breeding programs is increasing. The trend toward concentration in maize research has accelerated with the rise of biotechnology. Although the basic ingredients of research have not changed (trained staff, well-equipped facilities, superior germplasm), the cost of equipping laboratories and training scientists to carry out biotechnology research has increased greatly. This has put many cutting-edge technologies out of the reach of all but the biggest organizations that are able to mobilize large amounts of investment capital. The prospect of reaping enormous profits from sales of genetically engineered hybrid maize seed, as well as from the complementary chemical inputs which the new hybrids will require, has fueled numerous mergers, acquisitions, and joint licensing agreements throughout the global biotechnology industry as the leading players seek access to key technologies. Less widely recognized is the fact that opportunities to capture economies of scale and scope also exist in seed distribution. Large organizations, particularly diversified corporations that derive income from a range of products and services, are in a stronger position than small organizations to undertake advertising and promotional activities. Their large size increases the expected revenues from seed sales and permits a larger
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absolute investment in advertising; this is important, because once brand name recognition is established, attracting and retaining customers becomes easier. Their diversified nature allows them to draw on alternative sources of revenue, enabling them to cross-subsidize seed market development activities during an initial start-up phase and to continue operating during years of poor performance. Last but not least, large companies generally have an easier time raising capital than do small companies. Since access to low-priced capital reduces inventory costs and increases a company’s ability to survive occasional lean years, access to low-priced capital is an important consideration in the seed distribution business. Vertical integration Concentration in the maize seed industry is advantageous when it allows organizations to capture economies of scale and scope in production. But concentration can be a mixed blessing, because it involves an increase in the average size of seed organizations, and increased size generally means increased risks. Maize seed organizations, like other organizations, respond to increased risk by seeking out mechanisms designed to improve coordination between successive stages of economic activity. One such mechanism is vertical integration, which occurs when successive stages of economic activity carried out by separate firms are combined within the same firm. Vertical integration allows seed organizations to reduce transaction costs by eliminating the uncertainty that arises when research, seed production, and seed distribution activities must be coordinated through market exchange mechanisms. Opportunities to reduce transaction costs through vertical integration can be found throughout the research-seed production-seed distribution continuum. As the cost of research rises, research organizations face increasing losses if they are unable to recoup their research investment through sales of germplasm products; this creates strong incentives for them to integrate downward into seed production and distribution. Similarly, as establishing a market presence and developing brand name recognition become increasingly costly, distributors face increasing losses if they are unable to maintain access to a continuing stream of high-quality products; this creates strong incentives for them to integrate upward into seed production and research. In the private sector, vertical integration is by now a fact of life. In today’s competitive market, most private seed companies carry out research, produce seed, and distribute seed. The fact that all three activities are carried out by each company has a number of advantages. First and most importantly, vertical integration allows the risks associated with individual activities to be greatly reduced. Thus, the research division is ensured an outlet for its products, the seed production division is ensured a steady supply of high-quality hybrids, as well as a reliable outlet for the commercial seed it produces, and the marketing and sales division is ensured an adequate supply of quality products. Second, because research, seed production, and seed distribution activities are carried out within the same corporate entity, profits and losses can be distributed in a way that maximizes the objectives of the firm, even if this means cross-subsidizing certain inherently unprofitable activities. Third, vertical integration
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makes it easier to protect valuable products, processes, and information by keeping them within the company. The advantages of vertical integration become especially clear when the performance of transnational seed companies is compared to that of public seed organizations. Vertical integration is relatively uncommon in the public sector. Most national maize programs maintain separate organizations for research, seed production, and seed distribution. Because these organizations are usually managed by different ministries, they are often plagued by coordination problems. Researchers in public breeding programs frequently target environments other than those in which new varieties are most urgently needed, and public seed agencies often over- or underestimate the effective demand for seed. These two trends affecting the organization and performance of national seed industries—concentration and vertical integration—are directly influenced by the globalization process. Prior to the recent economic reforms, concentration and vertical integration were prevented in many developing countries by regulations that erected barriers to entry into the seed industry, assigned exclusive rights over crop varietal research and seed production to moribund State monopolies, prohibited private firms from engaging in plant breeding research and seed production, restricted international flows of germplasm, and failed to recognize IPR over plant genetic resources. The responsibility for research, seed production, and seed distribution was often assigned to independent agencies that rarely communicated with one another, resulting in a serious lack of coordination and giving rise to much inefficiency. In many countries, the net effect of these regulations was to prevent the national seed industry from developing further than one of the earlier growth stages in which responsibility for crop varietal research, seed production, and seed distribution remained in the hands of inefficient state agencies (Tripp 1997). With globalization, all this is changing. In an effort to increase efficiency at home by establishing closer links to international markets, governments in many developing countries have removed many of the impediments to structural change in the seed industry and have opened the door to increased private-sector participation. The results have been nothing less than dramatic. At the national level, loosening of controls often resulted in an initial proliferation of small private seed companies; in many cases, this has been followed by a consolidation within the industry as small companies have merged to capture economies of scale and scope. At the international level, the dismantling of trade and investment barriers, combined with a codification of commercial codes and the strengthening of intellectual property regimes, produced a similar effect; the leading multinational seed companies have moved aggressively into many developing-country markets, forging alliances with local partners as a way of strengthening their global research and marketing networks.
Conclusion These are turbulent times for the global maize seed industry. Following a long period of relative stagnation, many national maize seed industries are undergoing pronounced structural changes, particularly in developing countries. Almost overnight, private
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seed companies (national as well as multinational) have captured a significant share of the markets that were once dominated by public organizations. In most cases, the emergence of a thriving private seed sector has been made possible by policy reforms associated with globalization: economic deregulation, domestic market reform, trade liberalization, privatization of State industries, and the implementation and enforcement of standardized intellectual property rights. Without a doubt, these structural changes have brought many benefits. Private seed companies have proved adept at identifying the germplasm needs of important groups of producers and consumers of maize, and they have demonstrated the ability to develop superior hybrids and to deliver improved seed to farmers more effectively than public and parastatal seed agencies. Economic reforms ushered in by globalization have increased the ability of the private companies to move technology, financial resources, and information across national boundaries, thereby allowing them to exploit opportunities to capture efficiencies in research, seed production, and seed distribution. But despite their obvious competencies, private seed companies do not necessarily represent an unmitigated blessing for everyone. Concern has been expressed in some circles that private seed companies will continue to concentrate on commercial producers in favorable production environments, while neglecting subsistenceoriented farmers in marginal areas who do not represent an attractive market for hybrid seed. Furthermore, the increasing concentration of the global maize seed industry has raised fears that powerful multinationals will seize control of strategic technologies and lock them up using patents and other forms of intellectual property protection, thus denying (or at least delaying) access to noncommercial producers. For those concerned with the welfare of the millions of poor people who produce or consume maize, the globalization-induced changes currently sweeping the developing world’s maize seed industries raise many important questions. Is the rise in importance of the private sector and the corresponding decline of the public sector likely to continue? Who will benefit as a result of these changes, and who will lose? At the global level, is the maize seed industry becoming dangerously concentrated? Can governments act to influence the organization and performance of the industry in order to ensure socially desirable outcomes? Against this background of uncertainty, policymakers must face up to the challenge of improving seed industry performance. Large numbers of maize farmers are relatively well served by the systems presently in place, but in many countries large numbers of rural households still lack regular access to reliable sources of high-quality, affordable seed. Innovative strategies will have to be introduced if these households are to be reached. To compound the challenge facing policymakers, these strategies will have to be implemented during a period when funding shortages are creating strong pressure to scale back the role played by public organizations. In many countries, the twin forces of globalization and seed industry liberalization have led to a scaling back of direct public-sector participation in research and especially seed production. In the future, however, governments may feel the need to reverse course and to assume a more proactive role in order to avert undesirable consequences of excessive seed industry concentration. If current trends continue, the
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global maize seed industry could eventually become concentrated in the hands of a small number of extremely large firms, at least some of which would have the ability to exert oligopolistic or monopolistic power (e.g., by restricting the choices offered to farmers, by charging excessively high prices for seed). If and when this happens, governments may be forced to take steps to regulate the behavior of these large firms to ensure that the performance of the industry is consistent with society’s needs and expectations.
References Aquino, P. 1998. Mexico. In M.L. Morris (ed.) 1998a. Op. cit. Byerlee, D. and P. Moya. 1994. Impacts of international wheat breeding research in the developing world: 1966-90. Mexico, DF: CIMMYT. Garcia, J.C. 1998.“Brazil. In M.L. Morris (ed.) 1998a. Op. cit. Lopez-Pereira, M.A. and M.L. Morris. 1994. Impacts of international maize breeding research in the developing world, 1966-90. Mexico, D.F.: CIMMYT. Morris, M.L. and M.A. Lopez-Pereira. 1999. Impacts of maize breeding research in Latin America, 1966-97. Mexico, DF: CIMMYT. Morris, M.L. (ed.). 1998a. Maize seed industries in developing countries. Boulder, CO: Lynne Rienner and CIMMYT. Morris, M.L. 1998b. Thailand. In M.L. Morris (ed.) 1998a. Op. cit. Morris, M.L., R.P. Singh, and S. Pal. 1998. India’s maize seed industry in transition: Changing roles for the public and private sectors. Food Policy 23(1). Morris, M.L. and M. Smale. 1997. Organization and Performance of National Maize Seed Industries: A New Institutionalist Perspective.” CIMMYT Economics Program Working Paper 97/05. Mexico, DF: CIMMYT. Pal, S., R.P. Singh, and M.L. Morris. 1998. India. In M.L. Morris (ed.) 1998. Op. cit. Pray, C. 1998. Turkey. In M.L. Morris (ed.) 1998a. Op. cit. Pray, C., S. Rozelle, and J. Huang. 1998. China. In M.L. Morris (ed.) 1998. Op. cit. Rusike, J. 1998. Zimbabwe. In M.L. Morris (ed.) 1998a. Op. cit. Rusike, J. and M. Smale. 1998. Malawi. In M.L. Morris (ed.) 1998a. Op. cit. Tripp, R. 1997. New Seeds and Old Laws: Regulatory Reform and the Diversification of National Seed Systems. London: Overseas Development Institute.
Chapter 10 Managing Intellectual Property and Proprietary Technology in Agricultural Research Joel I. Cohen, Cesar Falconi, Victoria Henson-Apollonio, John Komen, and Silvia Salazar*
Introduction Several significant developments that have taken place in the past decade on the scientific front and in international law affect the use and exchange of genetic resources and the management of intellectual property.1 The Convention on Biological Diversity (CBD) of 1993 and TRIPS agreement of 1994 are the two main international agreements that are important in this context. While the concept of intellectual property protection itself is by no means new, in the past it used to be implemented by specialists and was of interest primarily to inventors and authors. However, with the internationalization of the economy and the advent of free market agreements, the subject of IPR has become a critical aspect of all international trade agreements. Most developing countries fundamentally opposed during the 1960s the notion of a patent system, and they therefore did not seek patent rights on innovations in strategic areas such as living organisms (plants and animals) or the biological processes that produce them, thereby excluding many biotechnological inventions from the agreements. Many new pharmaceutical and nutritional products as well as agrochemical products such as fertilizers, fungicides, herbicides, and insecticides were also excluded from protection under these agreements. The TRIPS agreement made it obligatory, however, to patent the inventions of products and processes in all fields of technology for a minimum period of 20 years. While there are some exceptions for plants and animals and the essentially biological processes that produce them, practically all other products, such as agrochemicals, are subject, according to this agreement, to patent protection. Biotechnological innovations arising from microorganisms and microbiological processes are also eligible to patent protection 1. “Intellectual property” is a broad term for the various rights that the law gives for the protection of economic investment in creative effort. The principal categories of intellectual property relevant to agricultural research are patents, plant variety rights, trade secrets, and trademarks.
* Joel I. Cohen: International Service for National Agricultural Research Cesar Falconi: Inter-American Development Bank Victoria Henson-Apollonio: CGIAR Central Advisory Service on Intellectual Property John Komen: International Service for National Agricultural Research Silvia Salazar: IPR Consultant 219
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under the TRIPS agreement; plant varieties are eligible for either patent protection or an effective sui generis system or any combination of the two. As a consequence, an increasing number of developing countries are revising or setting up their own systems to protect intellectual property rights, and the WTO also requires its members to introduce international standards for the protection of IPR. The NAROs of developing countries, the international agricultural research centers of the CGIAR, and many other public or semipublic agricultural research institutes are affected by these changes in proprietary rights. The impact on these institutes is particularly strong because of two related developments. The first is the increasing importance of biotechnology in agricultural and related fields of research; the second is the growing share and importance of private research institutes in research in these fields. An increasing number of new inputs that have been derived from basic research in biotechnology are finding wide use in applied agricultural research, and IPR protects most of these inputs, since most have been developed by private research institutes. However, not only the private sector is now seeking intellectual property protection; increasingly, national and international agricultural research organizations, along with other public and semipublic institutions (primarily universities), including those working for and with developing countries, are seeking this protection. All agricultural research institutes, including the centers of the CGIAR and the developing-country NAROs, are therefore greatly affected by the growing impact of IPR protection. A recent study by ISNAR documents the complex dilemma that public research institutes face regarding the use and dissemination of products resulting from the use of proprietary technologies or materials that are owned, managed, or protected through some sort of IPR agreement or a specific contract2. Such technologies and materials usually have restrictions placed on their use both during the research stage and later on (for a limited time), when products derived from the protected materials are ready for wide dissemination. The main goal of ISNAR’s study was to collect and analyze information to evaluate the options now available for public agricultural research and to examine the implications of international agreements and national policy regulations regarding IPR on their future work; the second goal was to assess the possible effects of IPR on the dissemination of products and technologies to farmers and other end-users. The study’s specific objectives were as follows: 1. assess the use of internally-generated and third-party proprietary applications of biotechnology (technologies and materials) in national and international research centers; 2. evaluate the potential legal implications of the use of proprietary technologies and materials; 3. synthesize the main findings and recommendations in order to set the agenda for future discussions.
2. Contracts that are associated with the transfers of materials and other types of IP usually take the form of licensing agreements or material transfer agreements (MTAs).
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This chapter focuses on the use of protected or proprietary materials and technologies in seven CGIAR centers and in 13 NAROs from five countries in Latin America.
IPR Management in International Research Centers: The CGIAR Experience Since the early 1980s, CGIAR Centers have invested in strengthening their infrastructure and human resources for biotechnology research. Most of them now have specialized units or divisions to do research on molecular biology and other techniques covered by the term biotechnology. In 1996, the CGIAR adopted “guiding principles” on genetic resources and intellectual property. Some selected provisions of the CGIAR’s guidelines on IPR and genetic resources stipulate the following: 1. The guidelines reaffirm that the germplasm designated3 by the Centers is held in trust for the world community in accordance with the agreements signed with FAO4. 2. The Centers will not claim legal ownership of, nor apply intellectual property to the germplasm they hold in trust, and require recipients to observe these same conditions. 3. Materials supplied by the Centers may be used without restriction for breeding purposes and the results of such breeding may be protected by plant variety protection that does not prevent others from using the original material in their own programs. 4. The preferred strategy for preventing misappropriation by others is full disclosure of information on research results and products in the public domain. 5. The centers may engage in “defensive patenting:” That is, the centers should not seek legal protection for their innovations unless it is absolutely necessary to ensure that developing countries have access to new technologies. 6. The centers should not seek intellectual property protection for income-generating purposes and will not view potential returns from intellectual property protection as a source of operating funds. 7. Any cells, genes, or molecular constructs isolated from materials provided by the Centers may be protected by recipients in agreement with the supplier Center following consultation with the country of origin, when known. 8. The Centers may enter into agreements with holders of protected materials that recognize restrictions on the use and distribution of such materials only when this is in the best interests of developing countries.
3. The majority of materials currently held in Center genebanks have been designated under agreement with FAO signed in October 1994, as part of the International Network of Ex Situ Collections. The agreement and guidelines are under periodic review. 4. Materials held in the in-trust collections are distributed with an MTA.
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The guiding principles reaffirm that the resources maintained in the gene banks at the centers should be freely available, and that the centers should not seek legal protection for their innovations unless it is absolutely necessary to ensure that developing countries have access to new technologies (defensive patenting). The centers should not seek intellectual property protection for income-generating purposes and will not view potential returns from intellectual property protection as a source of operating funds. The 1996 document also states that any IPR acquired by a center should be exercised without compromising in any manner the fundamental position of the CGIAR regarding free access by developing countries to knowledge, technology, materials, and genetic resources. The use of proprietary technology in CGIAR Centers In May 1997, an expert panel was established to focus on issues of proprietary science and technology. The panel explored legal issues and their ramifications regarding proprietary science and the complex partnerships arising in agricultural research (TAC 1998). The panel felt that gaining an understanding of the current technologies and practices employed by the various centers would be an important first step in this process. The study of the seven CGIAR centers described above was done by ISNAR on behalf of the panel. All the CGIAR centers that responded to the survey currently use proprietary inputs for biotechnology research. ISNAR recorded 166 applications of proprietary research inputs. In total, 46 different technologies and materials were reported over the eight technology categories listed in Table 10.1. Most centers apply these technologies and materials in research on several mandated commodities. Of the technology categories surveyed, three had the broadest utility across centers: selectable marker genes, promoters, and transformation systems (Table 10.1). This clearly demonstrates
Table 10.1. Applications of Proprietary Technologies and Materials in CGIAR Centers Technology category
Selectable markers Promoters Transformation systems Insect-resistance genes Disease-resistance genes Genetic markers Diagnostic probes Others Total Source: Cohen et al. (1998)
Number of applications per research category Cereals
Noncereals
Other
Total
17 18 12 8 6 4 0 7 72
25 14 14 11 5 4 0 6 79
2 3 3 0 0 2 3 2 15
44 35 29 19 11 10 3 15 166
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the important role that proprietary technologies and materials have assumed in research in the CGIAR, as is true for advanced research centers globally. Means of protection and permission for use Figure 10.1 describes the means by which some of the technologies and materials used by research centers are protected. Results from the survey help centers explore applications where potential difficulties could be foreseen. It is noteworthy that the data in Figure 10.1 indicate that for many applications of proprietary technology, responding centers were not able to provide clear knowledge or information regarding the type of IPR provided for a particular proprietary tool. This is not surprising, especially for technologies protected by patents, given the complexity of patent claim interpretation. In addition, other factors influenced by case law and mergers in the biotechnology industry, affect the availability of many technologies. For example, extensive litigation occurs among commercial and public entities and farmers regarding details of license and use agreements (Barton 1998). Patent litigation concerning the validity of patent claims in the biotechnology area has a confounding effect. Without the ability to keep up with current case law, such legal activities can make it difficult for agricultural research institutes to determine whether their use of a particular technique or product might infringe on IPR. An additional problem may arise as a result of industry consolidation through mergers. It is often difficult to trace the true owner of a particular patent, individual claims in a patent, or information with
50 45 N.K.
35
Other
30
Patent
25 20 15 10
Others
Diagnostic probes
Genetic markers
Disease resistance
Insect resistance
Selectable markers
0
Transformation systems
5
Promoters
Number of applications =>
40
Technology category =>
Figure 10.1. Applications of proprietary technologies in CGIAR Centers and their means of protection (by reported number of applications) Source: Cohen et al. 1998.
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regard to its “field of use.” A case in point is illustrated by the complexity of issues associated with the use of tissue transformation systems. These techniques are quite popular in the CGIAR centers surveyed. However, the data presented in Figure 10.1 indicate that only 40% of the applications of transformation tools were reported to be protected. A cursory look at the patents in the field of the most widely used transformation tools—Agrobacterium-mediated, polyethylene glycol (PEG) protoplast transformation, and biolistic (microprojectile-mediated)5—indicates the complexity of the situation. The appropriate background patents associated with each of these techniques are in force in the USA, Canada, Japan, and the EU. They are not in force in the countries and geographical regions where CGIAR Center outputs are distributed. However, a large number of improvements have been made; directly (e.g., those that flow from the original patents) and indirectly (those that are independent of the original patents). Some of these improvements may be protected more widely, so that establishing “freedom to operate” can become a very time consuming and complex project. However, research into which particular background patents are protected and where this protection is in force is very important to know whether a license is necessary. This type of research can also help an individual scientist determine whether material that is covered by a license or MTA that carries strict provisions regarding dissemination could just be duplicated from starting materials rather than obtained under a license or MTA. Without exact knowledge of the nature and intended use of the biological material involved, and conditions for use, it is difficult to assess the extent to which existing IPR would curtail dissemination or the extent to which MTAs are even necessary. A risk associated with the widespread use of material transfer agreements (and also license agreements) is that such legal instruments place the IPR of a proprietary technology in the context of contract law, which is quite a different realm from strict intellectual property (IP) law. IP regulations are enforceable only in states where an official patent has been issued, whereas contract law can be more far-reaching. The enforcement of contract law is often in a more advanced state, even in developing nations, while the implementation and enforcement of IP regimes in many developing countries is still in the very early stages. Expected products from research and the ability for dissemination The survey also sought information on research products that were expected to encounter difficulties in their dissemination. As inputs are proprietary, restrictions may exist for their use, dissemination, or further production. Survey results showed that the centers expected a total of 58 outputs or products (Table 10.2). The majority of responses indicated that centers often lack critical information or knowledge needed to anticipate difficulties in post-research use and the dissemination of outputs that are generated from proprietary technologies. However, some outputs
5. US Patent numbers 4,459,355, 4684611, and 4,945,050 are examples of early, background patents in the transformation area.
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Table 10.2. Products Expected from the Application of Proprietary Tools in CGIAR Centers Product category
No. of products expected Examples
Improved crops
36
Diagnostics Vaccines Others
11 1 10
Improved cereal and noncereal varieties with enhanced insect, fungal, and virus resistance Diagnostic tests for tropical livestock diseases Vaccine for East Coast fever Transformation protocols, genetic markers
Source: Cohen et al. 1998
developed with proprietary technologies may encounter problems in their use and dissemination, depending on the specific conditions included in patent claims, licensing contract, or MTA. Most centers have started considering the implications of legal agreements for disseminating research outputs, with some respondents foreseeing potential limitations. For example, a contractual arrangement between a CGIAR Center and a private multinational as owner of the input technology specifies that outputs can be distributed only in certain countries. In this case, there is a priori understanding of the restrictions and limitations for dissemination that should be studied further by the CGIAR. Such studies have already begun on a center-by-center, case-by-case basis. CGIAR Centers’ patents The study assessed the degree to which centers are planning to patent or otherwise protect inventions. Only three outputs were identified that may be patented. Centers anticipated the use of other protective measures, e.g., copyright, trademarks, or plant variety rights, for another 11 outputs. This limited amount of IP protection being sought by centers can be attributed to many factors, including lack of familiarity with IPR issues, the fact that suitable IPR options are not yet developed and approved, and the tradition that goods and services are developed as international public goods. Furthermore, many bilateral donor and civil society organizations are opposed to applying IPR protection to products of CGIAR research. The findings of the CGIAR expert panel on proprietary technology, and general concerns regarding the use of IPR in agricultural research stimulated recent developments regarding the use and management of each center’s own IP and that obtained from external sources. Examples of these developments are covered below, including requirements for centers to conduct Intellectual Property Management Reviews, the establishment of a CGIAR Central Advisory Service on Intellectual Property (CAS), and means to strengthen IP management among the centers.
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IP capacity building in the CGIAR Intellectual property reviews: Following the CGIAR expert panel’s report, it was seen as essential to document the following: < the extent to which IP material is created from the centers or from external sources; < how IP-protected material is used and may be used by the centers in the future; < the importance of IP in achieving the centers’ mandate; < the centers’ ability to use, protect, and develop IP material. The CGIAR developed terms of reference for such IP reviews under the leadership of CIMMYT (CGIAR 1999). Accordingly, IP reviews consists of three main steps: (1) conducting a comprehensive “IP audit”, (2) identifying a strategy for regularizing a third-party IP6 currently in use, and (3) developing long-term IP management guidelines. The first activity (conducting an IP audit) is a critical first step in managing IP and includes three components: First, Centers compile an inventory of all third-party IP being used. Then they compile an inventory of all new IP developed at the centers. Finally, they identify all contracts, licenses, collaboration agreements and other legal agreements that may affect centers’ ability to access, use, or distribute their own IP and/or third-party IP. Based on the information of the first activity, the objective of the second activity is to identify steps needed to ensure that third-party IP currently used by the centers’ researchers is being utilized under appropriate agreements. For the third activity, centers are to prepare guidelines for IP management at each center to assure the optimum and appropriate use, access and protection of existing and future IP. All CGIAR centers have started their audits. Most are implemented in two phases: An inventory of resources, and a management audit. Central Advisory Service: In 1998, the CGIAR Expert Panel on Proprietary Science and Technology recommended establishing a central unit to deal with technology transfer, IP, and alternative rights regimes (TAC 1998), following the conclusions and suggestions from ISNAR’s study on proprietary technology. In 1999, the CGIAR Committee of Center Directors established a CGIAR Central Advisory Service on Intellectual Property (CAS). CAS supports the CGIAR Centers by providing and facilitating expert advice and enhancing knowledge exchange on IP issues. CAS’ objectives are to < consult with centers regarding R&D activities with implications for managing proprietary technology, followed by preparation of expert reports; < serve as a liaison for CGIAR Ccenters with expert organizations and legal expertise regarding proprietary technology and the management of IPR; < establish mechanisms for documentation, communication and exchange of experience among the CGIAR Centers and the global agricultural research community.
6. Intellectual property owned and protected by parties other than the Centers.
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In its first full year of operation (2000), CAS has established contacts at every CGIAR Center and is currently in the process of producing Center-specific IP reports, based on visits and discussions at several Centers. Following such visits, CAS has responded to a number of requests for assistance in the area of licensing and technology transfer. Furthermore, standardized IP management tools are being developed, such as nondisclosure agreements and invention disclosure forms. Strengthening IP management at individual centers: Some of the CGIAR Centers already have considerable experience in acquiring and using proprietary technologies. A few have pursued protection for their own technological developments, following the general CGIAR guidelines. The Rockefeller Foundation provides support to CIMMYT, ILRI, and IRRI to further strengthen their IP management capacities. This initiative seeks to rapidly establish a fully operational Intellectual Property Management Unit (IPMU) at each of the three centers. Over time, the cost of the IP professionals hired to assist the Centers in their IP management will become part of the center’s core budgets. Thus, there will exist both centralized expertise in the CAS, which can support and relate to the individual expertise established at some, if not all, of the Centers themselves.
National Research Organizations: NARO Experiences with IPR Management Between July and September 1998, ISNAR conducted a similar survey among NAROs in Brazil, Chile, Colombia, Costa Rica, and Mexico. At the time of the survey, none of the institutions that were surveyed had suitable institutional or legal frameworks for dealing with IPR matters. With the exception of two organizations, none had an office or person responsible for assisting the researchers in IP issues, access to adapted technologies, technology transfer, or ways to protect their own inventions. There was little coordination between institutions in the same country and even between researchers in the same institution. For example, within the same institution, there were cases where the same type of technology was requested from different sources and provided under different conditions. There were also cases where one scientist had an agreement for the transfer of biological material, while a neighboring scientist used related material without permission. The researchers were functioning without the institutional support needed to address these issues for their research. Such conditions certainly point to the need for centralized IP management that supports, not hinders researchers, and helps provide an institutional umbrella for obtaining access to emerging technologies. Table 10.3 summarizes the range of proprietary technologies and materials used by the research organizations and the number of applications reported in each category. In total, 34 different technologies and materials as well as 388 specific applications of proprietary research inputs were reported. Of the eight technology categories surveyed, selectable marker genes (GUS, kanamycin resistance), promoters (CaMV/35s), and transformation systems (Agrobacterium) show the most widespread use across the institutions involved in the survey.
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Table 10.3. Proprietary Technologies and Materials Applied in Latin American NAROs Technology category
Specific tool*
Selectable markers (7 tools reported; 137 applications)
GUS Kanamycin resistance Hygromycin resistance BAR HPT Ac/Ds transposons Other Agrobacterium Biolistic Electroporation Other CaMV/35S rice actin 1 Maize ubiquitin Other RAPD AFLP Micro-satellite Coat protein Pathogen derived Other Cry genes CpTI Other Virus probe Golden nematode RG157 Bacterial gene codon Antisense Cre-lox recombination system Snowdrop lectin
Transformation systems (4 tools reported; 66 applications)
Promoters (4 tools reported; 59 applications)
Genetic markers (3 tools reported; 55 applications) Disease-resistance genes (3 tools reported; 24 applications) Insect-resistance genes (3 tools reported; 15 applications) Diagnostic probes (3 tools reported; 5 applications) Others (4 tools reported; 27 applications)
Total Source: Salazar et al. 2000
No. of applications reported 45 38 20 15 4 3 12 41 22 2 1 40 6 5 8 23 16 16 10 4 10 7 7 1 3 1 1 14 10 2 1 388
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Means of protection and permission for use: Figures 10.2 and 10.3 show what means of protection have been given to the technologies and materials analyzed in the survey and how permission for use was obtained. Again, while not all proprietary inputs pose difficulties regarding IP or for the dissemination and use of resulting products, this study has helped research organizations explore areas where potential difficulties may occur. As indicated in Figure 10.2, in more than 30% of the applications of proprietary technology NARO respondents indicated that they lack clear knowledge or information on the type of means of protection provided for a particular proprietary tool. These cases need to be further examined to avoid potential infringement of legal conditions on the use of these proprietary technologies and materials. Figure 10.3 indicates that material transfer agreements are the most common means for acquiring technologies, as they are in CGIAR Centers. The study’s findings also highlight the importance of international collaboration as a mechanism for the acquisition of technologies, and that some of the NAROs purchase proprietary technologies for their own use. The use of licenses as a tool for technology transfer is very limited. NARO patents: The results show that the Latin American NAROs have high expectations to obtain intellectual property protection for their new products. They expect that 74% of the 50 products that are expected from the application of proprietary technologies will be protected either by patents or by plant variety protection (see Table 10.4). IP capacity building in NAROs In Latin America, a few agricultural research organizations have started to build up their own IP management capacity. In Brazil for instance, Embrapa (the Brazilian Agricultural Research Corporation), has given high priority to this challenge. The institute began to discuss necessary internal changes in 1995 by considering the economic and social consequences of forthcoming policy changes.7 It identified the following steps regarding intellectual property protection: Table 10.4. Expectations to Protect Products Expectation
Protection anticipated No protection anticipated Not yet decided Total
Brazil
Chile
11 0 0 11
9 3 0 12
Colombia
0 6 2 8
Source: Salazar et al. (2000)
7. This section is based on Sampaio and Brito da Cunha (1999).
Costa Rica 0 0 2 2
Mexico
17 0 0 17
Total
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160 140
Not known
46
Patent
100 80
13
40
42
15
5
12
Disease resistance
Genetic marmers
Promoters
Transformation systems
0
14
3
9
13
Others
46
20
19
Diagnostic probes
40
20 91
Insect resistance
60
Selectable markers
Number of applications =>
120
Technology category =>
Figure 10.2. Applications of proprietary technologies in Latin American NAROs and their means of protection (by reported number of applications) Source: Salazar et al. 2000
Number of applications => 0
10
20
30
40
Permission for use =>
70
80
90
83
lacking written approval
international collaboration
68
purchased
not known
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MTA
licensed
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21
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Figure 10.3. Permission to use proprietary technologies in Latin American NAROs (by reported number of applications) Source: Salazar et al. 2000
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1. Implementing an internal IP policy. Embrapa has implemented an internal policy, in conjunction with the Brazilian congress, approving the necessary legal framework. 2. Raising awareness of IP. The organization should launch an internal awarenessraising campaign through lectures, courses, and workshops to promote and diffuse the new IP policy. This campaign would also help researchers understand that they should have their research results prescreened for possible intellectual protection before publication. 3. Creating assets from IP. Embrapa should protect all assets coming from its research programs. Thus, revenues can be obtained through licensing, or the institute can allow a third (resource-poor) party to use an asset for free. 4. Establishing a regulatory infrastructure. Embrapa hired and trained personnel to manage the implementation of its policies and intellectual property laws. It took into account that this includes a learning curve for preparing and filing patents and negotiating and licensing a protected technology. 5. Modifying the licensing system. Embrapa is in the process of modifying its cultivar licensing system and its basic seed production program to suit the IPR legislation and the growing presence of a much stronger and competitive private seed industry in the country. To address these challenges, Embrapa published an institutional policy for managing intellectual property in 1996. The basic guiding principles of the policy can be summarized as follows: < Embrapa has to maximize its capacity to use IPR to facilitate the transfer or the licensing of technology, processes, and products without sacrificing its social mission. < Embrapa has to seek legal protection for the technologies, processes, and products derived from its research program, giving credit to employees as inventors. < Embrapa may authorize the use of its protected assets through a royalty-free license only when its social commitments are at risk and only after approval from its Intellectual Property Committee < Embrapa research centers cannot release a new cultivar or disclose any process or product without previous analyses by the designated committee of the possibility, convenience, and opportunity for protection. Embrapa created an Intellectual Property Committee in 1997 to help implement the IP policy. Composed of Embrapa researchers and reporting to the head of the Intellectual Property Secretariat, this committee meets twice per year to deliberate on internal policies and other IP issues associated with processes, products, and technologies arising from the research pipeline. The committee prepared guidelines for the functioning of laboratories and decided on the need for confidentiality in research projects and grants applications. It also prepared documents that stipulate the responsibilities of and confidentiality from visitors to Embrapa, such as visitors, grantees, consultants, and undergraduate and graduate students who develop joint research projects.
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In order to complement the work of the committee and to help disseminate the policy, smaller IP committees were created in 1997 in each of Embrapa’s 39 research centers. The diverse nature of Embrapa’s research program makes it very difficult to train staff with the expertise that is needed to respond to the complex issues involved in the implementation of the policy at each research center. Based on the experiences gained during 1997–98, Embrapa created a centralized unit, the Intellectual Property Secretariat, in December 1998. Located at Embrapa’s headquarters in Brasilia, the secretariat has a direct link with Embrapa’s president. The secretariat now coordinates the technology acquisition and technology transfer associated with processes and products that have Embrapa- or third-party-owned IP. In addition, the secretariat serves as the policy-making body that adapts, adjusts, and updates Embrapa’s IPR policy and its implementation in accordance with global developments.
Conclusions and Management Lessons The ISNAR studies indicate a pressing need for establishing competent professional IP expertise at national and international agricultural public research centers, and this IP expertise can be strengthened by a centralized service or conducted in a centralized manner. A number of specific lessons and recommendations on the management of IPR and proprietary technologies and materials can be made. Use of licenses and material transfer agreements The extensive use of agreements and licenses is a new fact of life for public agricultural research organizations. Proprietary technologies and materials (developed by or under the protection of private-sector research organizations) have become an important component of CGIAR-Center and NARO research. The use of such materials means that as Centers genetically transform mandate crops, develop new vaccines or diagnostic probes, or conduct marker-assisted breeding, they must be increasingly aware of or rely on licenses, MTAs, or other agreements with technology owners. The experience with and conditions of MTAs should therefore be analyzed and exchanged among CGIAR Centers, NAROs, and other public agricultural research institutes in order to explore the possibilities for standard formats for these agreements and to determine the legal implications of possible restrictions on the use of proprietary technologies and on the dissemination of technologies that they have developed. Enforcement of obligations As licenses and MTAs impose legal obligations, the receiving institute must be in a position to honor its obligations under the agreement. For example, if proprietary technologies involve a trade secret or impose confidentiality obligations, the institute must be able to police the handling of the material supplied. This may require the establishment of a secure system of operation and placing researchers and visitors under confidentiality obligations. If public research institutes anticipate any constraints being placed on dissemination due to relevant legal arrangements or trade
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restrictions, then these increasing legal complexities reinforce the need for centralized IP management units or a secretariat that contains expertise to ensure compliance with MTAs and with the terms of IP licenses. Protection sought by public research organizations All the national and international research institutes that were surveyed in this study indicated that they increasingly use protected biotechnology applications. While the CGIAR Centers apply a wide variety of proprietary technologies, the number of products that they themselves expect to be patented or otherwise protect is very small. In contrast, the Latin American NAROs that were surveyed expected that a far larger number of products will be patented, and that, in turn, would require an interface such as an IP management unit. These studies highlight the fact that international and national public research organizations that are using agricultural biotechnology are now undergoing a transition from a phase in which products and processes used in research were predominantly in the public domain, to a phase in which they are increasingly IP protected. The growing benefits from proprietary technologies, their use in public research, and the large number of developing countries that are affected by these changes raise the importance of determining appropriate IPR and institutional arrangements for protecting their own technologies and materials. For many scientists and research institutes these concerns are overwhelming, but they proceed with their research under an implicit assumption and trust that as they develop the final products, no rules and regulations will block the dissemination of improved technologies materials to their clients. The use of more proactive strategies for the management of IP requires considerable investments in time and professional expertise in order to become familiar with all the rules at the national and international levels and to test alternative institutional arrangements in order to evaluate their effectiveness, responsiveness, and ability to address the current legal rules and agreements and the far more complex rules and agreements that are expected in the future.
References Barton, J.H.1998. The impact of contemporary patent law on plant biotechnology research. In Global Genetic Resources: Access and Property Rights. CSSA Special Publication. Madison: Crop Science Society of America. Blakeney, M. 1999. Agricultural Research and the Management of Intellectual Property. In Managing Agricultural Biotechnology: Addressing Research Program Needs and Policy Implications, edited by J.I. Cohen. Biotechnology in Agriculture Series, No. 23. Wallingford: CABI Publishing. CGIAR. 1999. The Third System Review: From Proposals to Practice. Progress Report on IPR Matters and Proposal for Review of Plant Breeding. Washington, DC: CGIAR. Cohen, J.I., C. Falconi, J. Komen, and M. Blakeney. 1998. Proprietary biotechnology inputs and international agricultural research. Briefing Paper 39. The Hague: ISNAR. Salazar, S., C. Falconi, J. Komen, and J.I. Cohen. 2000. The use of proprietary biotechnology research inputs at selected Latin American NAROs. Briefing Paper 44. The Hague: ISNAR.
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Sampaio, M.J.A. and E.A.B. Brito da Cunha. 1999. Managing Intellectual Property in Embrapa: A Question of Policy and Change of Heart. In Managing Agricultural Biotechnology: Addressing Research Program Needs and Policy Implications, edited by J.I. Cohen. Biotechnology in Agriculture Series, No. 23. Wallingford: CABI Publishing. TAC. 1998. Report of the CGIAR Panel on Proprietary Science and Technology. SDR/TAC:IAR/98/7.1. Rome: Technical Advisory Committee of the CGIAR.
Chapter 11 Diversifying Agricultural Production and Exports in Africa The Role of Public Agricultural Research
David Bigman*
Introduction In the mid-1980s, a FAO study entitled African Agriculture: The Next 25 Years (1986) evaluated the prospects of the agricultural sector in sub-Saharan Africa. It concluded that the sub-Saharan African countries could increase their agricultural production and become self-reliant if their potential was properly utilized. New and better production and resource management technologies were deemed essential to improve the use of land and the continent’s other natural resources. Three principal sources of increasing crop production were identified: Epansion of arable land can contribute to increase production by 27%, higher yields can contribute to increase production by 51%, and greater cropping intensity can contribute to increasing production by 23%. The key to increasing agricultural production in sub-Saharan Africa, according to this report, is therefore an increase in yields, and this can be achieved first and foremost by intensifying agricultural research. With the advent of globalization and the sweeping measures of trade liberalization and other policy reforms implemented by many sub-Saharan African countries under their structural adjustment programs, the strategies of production, growth, and research adopted in the 1980s had to undergo very significant changes. Agricultural R&D still holds the key to an increase in agricultural production, but the supply-oriented strategies of the 1980s, based on the production of traditional export crops and staple foods, were no longer effective. Instead, a new approach had to be taken to enable the agricultural sector to realize its growth potential by increasing production for international trade and by promoting greater specialization. This new strategy would have to be demand-oriented, built on a broader and more diversified production base, geared to the demands in the domestic and global markets, and designed to meet the food safety and quality standards required in the markets of the developed countries. The agricultural sector must therefore undergo a significant transition and agricultural research must assume a key role in assisting the transition, helping farmers to diversify their farming system and disseminate new production methods and new crops. A significant element of this strategy should be the introduction and dissemination of nontraditional crops for export and the development of agroindustries in order to
* David Bigman: International Service for National Agricultural Research 237
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increase the domestic value added of the country’s food exports. The comprehensive changes in the global market conditions and the sharp reduction in the prices of practically all agricultural inputs and outputs, in large measure a result of the policy reforms themselves, underscore the need for a development strategy aimed at diversifying agricultural production in line with the country’s comparative advantage and with the changes required by the constraints and opportunities presented by the emerging global trading conditions. In most developing countries, agricultural research, and, in particular, the NAROs, have an essential role in guiding and facilitating the transition process by helping farmers adopt new and mostly nontraditional crops and adapt production technologies suitable to their needs and to the agroclimatic and socioeconomic conditions in their area. So far, however, most NAROs in sub-Saharan Africa have made relatively few adjustments to reorient their research strategies in order to meet these needs, and the lion’s share of the NAROs’ research is still focused on staple food crops and traditional export commodities. The objective of this chapter is to evaluate the measures that African countries must implement in order to diversify their production base and to increase the competitiveness of their agricultural exports. It begins with providing an overview of the trade reforms implemented in African countries during the 1990s against the backdrop of changes in the global trading system and the impact of these changes on their production, competitiveness and exports. It then surveys the main reforms that have taken place so far in sub-Saharan Africa and outlines the policy measures that must still be implemented in order to expand their production base, gain competitiveness, and diversify their exports. Next, it examines the role and potential contribution of agricultural research in assisting that transition. It then summarizes the main findings of a survey conducted among 105 NAROs in 33 developing countries to evaluate the adjustments these institutes made in their research priorities in order to accomplish this role. Finally, it offers some concluding remarks.
Globalization and the Transition of the Agricultural Sector The final agreement in the Uruguay Round of the multilateral trade negotiations was held up for three years, largely because of conflicts regarding the structure of the prospective agricultural trade agreement, particularly between the USA and the EU. Although the signatories of that Round agreed to begin another set of negotiations in the WTO by the end of 1999, their efforts in Seattle failed to achieve the “progressive reduction in support and protection” that had been envisaged. It is widely recognized that agricultural trade reforms are important and that new trade rules can help the governments of both developed and developing countries to reform their domestic farm and food policies. So far, however, the discussions on global trade agreements under the WTO have proved to be too confrontational to withstand the constant disputes over agricultural export subsidies, discriminatory market access agreements, the activities of state trading enterprises, differing food standards, etc. A new development in this area since the start of the Uruguay Round has been the incorporation of agriculture in the free trade provisions of regional trade arrangements, including the Asia Pacific Economic Cooperation forum and the Free Trade Area of
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the Americas. This has given the regional agreements a significant role in liberalizing agricultural trade and moving toward freer trade. Sub-Saharan Africa was no exception. Until the early 1990s, Africa’s imports and exports were subject to severe restrictions: most commodity trading, particularly in agriculture, was under state ownership or control. The high walls of tariffs and export taxes that restricted international trade were also a main source of government revenue. These walls included not only explicit export taxes, but also implicit taxes through over-valued exchange rates and wide margins for marketing parastatals. Internal trade was also subject to price and quantity controls that were aimed primarily at reducing food prices for urban consumers. All these restrictions were highly detrimental to agricultural growth and the standard of living of the rural population; the gradual reduction and removal of these restrictions has therefore been a major goal of successive structural adjustment programs since the mid-1980s. In practice, however, the implementation of these adjustment programs turned out to be very slow and unsteady. After relatively little progress during the 1980s and the early 1990s,1 the process gained momentum in the second half of the 1990s, and reforms were implemented much more rigorously, largely as a result of the commitments made under the GATT and WTO agreements. By the end 2000, 41 of the 55 independent countries in Africa were members of the WTO, and four additional countries were in the process of joining. The new “international order” under the WTO rules and regulations is therefore bound to have a significant impact on the region. In addition to the multilateral trade agreements under the WTO, regional trade agreements have also proliferated. In Africa, there are 13 different regional and subregional trade agreements that seek to achieve customs union or even create a complete economic community with free movement of goods. Notable examples are the West Africa Economic and Monetary Union (WAEMU), the East African Community, and the Regional Integration Forum. Presently, however, the importance of the African regional trade agreements is rather limited, since intraregional trade is less than 10% of the total trade in the region. Originally it was planned to implement the WTO agreements on agriculture for the developing countries in 2004. Although this process was delayed due to the Seattle debacle, it still continues. Key elements of the agreements on agriculture had already been negotiated in the Uruguay Round Agreement on Agriculture that became effective on January 1, 1995, the most important one being the replacement of nontariff trade restrictions by bound tariffs. Starting in 1995, these tariffs on all agricultural products were to be lowered by an average of 36% for developed countries, and 24% for developing countries over six and 10 years respectively. The Agreement also included a reduction in export subsidies, an increase in minimum import access and limits on trade-distorting domestic support. The “millennium round” of agricultural trade negotiations that the meeting in Seattle was meant to launch, was aimed at speeding up this process. At the close of the 1990s, however, trade reforms in sub-Saharan Africa are still considerably less advanced than those in 1. As a result, in three-quarters of the World Bank adjustment loans the installment tranche releases had to be delayed because the policy conditions had not been implemented.
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other regions. Estimates of the “trade openness rating” of the African countries (based on the IMF methodology with “0” representing most openness and “10” least openness) show that the average rating of sub-Saharan Africa was 6.0 in 1998, while the rating of the rest of the world was 4.4.2 The early reforms concentrated on lowering export taxes and import tariffs, dismantling marketing boards, removing administrative restrictions on exports, and relaxing and gradually removing quantitative restrictions on imports (Valdez 1998). The impact of these reforms varied widely between countries, but, in general, the desired results were not achieved. One obstacle was the failure of most African governments to complement the economic reforms with wider and deeper social and political reforms to strengthen weak institutions and their systems of government. Another obstacle was their continued heavy reliance on exports of a small number of primary commodities that comprise 90% of Africa’s exports. The prices of these commodities have been very unstable, with most prices declining sharply in real terms since the late 1980s. Producers of many traditional export commodities such as coffee, cocoa, sugar, and bananas suffered heavy income losses as a result of the sharp drop in prices, and many farmers were forced to go back to the production of staple foods for self-consumption. In addition, the narrow concentration in volume and the wide price gyrations of their main export commodities exposed African countries to even larger business risks that inhibited domestic and foreign investments and destabilized their foreign exchange earnings. Another dimension of the reforms was the privatization or dismantling of public enterprises that had effectively controlled the entire distribution of most agricultural inputs and outputs before the onset of the structural adjustments program. In many cases, however, the privatization reforms had only limited success, as illustrated in the following case of privatizing the fertilizers trade in Ethiopia (see Box 11.1). Since the 1960s, sub-Saharan Africa has been increasingly marginalized in the global trading system. Its share in the total world trade of commodities and services has continued to decline in the 1980s and, even more so, in the 1990s, and the continent remained highly dependent on the production and exports of primary commodities. Most African countries have managed to diversify their production and exports only to a very limited degree, and they still have very limited capacity to cope with the competitive pressures of the global trading system and the downward pressures on the prices of many primary products. By the mid-1990s, the total value of exports from the continent fell to less than $100 billion (roughly equal to the exports of South Korea), mostly of primary products, while the share of manufactured goods was only around 10%—two-thirds of which originated from North African countries; the 30 sub-Saharan African countries exported hardly any manufactured goods. This rather dismal performance occurred despite favorable conditions due to active discrimination measures that favored products from sub-Saharan Africa. The share of Africa in global merchandise exports declined from 3.1% in 1990 to 2% in 1999, due to the heavy reliance on exports of primary commodities that lost much of their value during that 2. The rating has improved, however, from an average of 8.3 in 1993–95. See N. Gorjestani (September 2000).
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Box 11.1: Trade reforms and privatization: The case of fertilizers in Ethiopia Fertilizers are essential to improve agricultural productivity, and the government made extensive efforts to increase their use. Until the early 1990s, the government provided heavy subsidies to fertilizers and tightly controlled their imports and distribution. The liberalization of the fertilizer market under the structural adjustment program began in 1991 by ending the government’s monopoly on their distribution and by phasing out subsidies. In many regions, the privatization replaced the parastatals that were previously in charge of the distribution of fertilizers by private enterprises, but their number was very small and the potential for an effective competition was thereby excluded. In most cases, these distributors have monopolistic status in the area where they operate, and since many of them operate as commission agents of the importers, the possibilities of competition are reduced still further and their monopolistic hold on the local market in which they operate is absolute. Moreover, over three-quarters of fertilizer sales are on credit and these sales are linked to a small number of distributors that have been selected by local government officials that are in charge of approving the loans to the farmers and nominating their suppliers. D. Mulat and T.S. Jayne. 1997. Promoting Fertilizer Use in Ethiopia. Grain Market Research Project, Addis Ababa.
decade and to their limited flexibility in adapting to the evolving international trading system (see Table 11.1 and Figure 11.1). As a result, the competitiveness of most African countries eroded during the decade and they lost a considerable share of their traditional markets to Asian countries. The failure of the African countries to restructure their economies and jump-start a new process of development that could expand their production base was largely a result of the narrow base of their internal market, their protectionist trade policies, and an acute shortage of skilled manpower.3 During these years, globalization has led to significant reductions in production costs, due to economies of scale in production, the sharp fall in transport, communication and other transaction costs, the introduction of new technologies, and the speedy delivery through trade networks. Globalization of production and trade also brought about a rapid expansion of intraindustry trade and international outsourcing, primarily between the industrial and the newly industrialized countries, as an effect of the efforts made by multinational companies to identify cheaper ways to produce and deliver their products. The lack of suitable physical infrastructures, effective institutions and organizational capabilities were, however, highly detrimental to the
3. The lack of qualified personnel with technical knowledge of the WTO rules and agreements also prevented African countries from participating in trade negotiations and using these rules to better effect.
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Table 11.1. Merchandise Trade of Africa, 1999 Exports
Imports
112 2.0
133 2.3%
-8 5 1 2 -16 9
-5 5 4 6 1 0
Value (billion US$) Share in world (%) Merchandise trade Annual percentage change: 1980-85 1985-90 1990-96 1997 1998 1999 Source: International Trade Statistics 2000, WTO
5
4
Exports
3 Imports
2
1
0
89
90
91
92
93
94
95
96
97
98
99
Figure 11.1. Share of Africa in world merchandise trade, 1989–99 (percentage based on value data) Source: International Trade Statistics 2000, WTO
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efforts of most African countries to be integrated into the global trading system. Even in textile and clothing, which involves a high degree of international outsourcing, sub-Saharan Africa remained a marginal source in the global network due to the lack of information and communication infrastructure, a skilled labor force, and managerial capacity. These constraints have also inhibited the flow of foreign direct investments to these countries, and that, in turn, further diminished their competitive advantage and their capacity to expand exports. Clearly, low labor costs are no longer a sufficient incentive for the development of labor-intensive industries, and the lack of other important components that are essential for production and trade, primarily road and communication infrastructure, considerably reduce the capacity of most African countries to compete in the global market. The slow progress in the multinational trade agreements, especially after the failure to reach an agreement in Seattle, gave a strong incentive to the proliferation of regional trade agreements that strengthened trade relations within Europe, the two American subcontinents and Asia, thus contributing to further marginalize the African continent. The growing weight of the multinational corporations in global trading further deepened the regional division due to the competitive advantage given to corporations within a region over those outside their block by the trade barriers established by the regional trade agreements. Thus, for example, the NAFTA agreement and the agreement to enlarge the EU give companies within these blocks an advantage over companies outside their block that contributed to diverting trade away from companies in sub-Saharan Africa. The regional trade agreements within the African continent contributed, however, only marginally to expanding trade among the African countries, both because many of these companies have very similar lines of production in agricultural and in industrial goods, and because the poor road infrastructure hinders intraregional trade. Another factor that contributes to the loss in competitiveness of many African countries is the pressure to gradually phase out most preferential agreements that apply to a large share of their trade—the most important of which are the Generalized System of Preferences, the agreement between the ACP and the EU under the Lomé Convention, and the agreement between the USA and several sub-Saharan African countries under the Africa Trade and Opportunity Act. Some of these agreements have already been modified in line with the general rules of the WTO and the new Lomé Convention.4 These agreements focused on the African countries’ traditional crops and gave them tax and tariff advantages over the imports of these crops from other countries.5 The loss of trade preferences that many African countries enjoyed under the Lomé Convention may dry up the traditional export markets for plantation crops such as sugar, banana, and coconut erode the competitiveness of many other exports crops.6
4. The new Africa Trade and Opportunity Act will apply to a smaller number of countries. 5. Under the current Lomé Convention, for example, African countries enjoy preferential margins of 100% for coffee, coffee extracts and cocoa, more than 20% for tobacco, etc. 6. These export commodities remain also an important source of revenues for the governments in many SSA countries and the loss in competitiveness and in export revenues will reduce also the revenues of the government.
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The postponement of the agreement on international trade in agricultural commodities in Seattle delayed the reduction or removal of the existing barriers on their trade. In the EU and the US, the barriers on trade in “traditional” primary agricultural products such as wheat, maize, rice, and meat are particularly high, and plans to remove these barriers met with stiff resistance of farmers and were the primary reason for the fiasco in Seattle. Trade in nontraditional crops and processed goods is much less restricted, however, and diversification of agricultural production with the expansion of production and exports of horticultural, medicinal, and other nontraditional crops (such flowers and spices) would enable the African countries to bypass most trade barriers. Deepening the local production component through processing can further widen market opportunities, broaden the resource base, increase domestic employment, and stabilize foreign exchange earnings.7 The reduction in import tariffs and export subsidies on many agricultural products that is expected in future rounds of trade negotiations will, however, change the global market conditions for agricultural trade very significantly.8 In order to gain competitiveness in anticipation of these changes and be prepared to expand agricultural production and exports after these changes take place, the African countries will have to continue adjusting their production system and widen their narrow base through vertical diversification by adding new and mostly nontraditional crops, and through horizontal diversification by adding new products and increasing their domestic value added. These changes will require active participation and financial support of the government, public institutions, and the public agricultural research system in order to develop suitable crop varieties, disseminate new technologies to the local farming systems, deepen the domestic component of processed commodities, adopt more advanced production technologies, and develop more efficient trading channels.
The Role of the Public Sector Policy reforms At present, the majority of the African countries derive more than 90% of their export earnings from two to three commodities (raw materials and traditional agricultural goods) (Table 11.2). Most of these export products are primary commodities, whereas the share of industrial products in exports is very small. The share of most of these primary commodities in world trade has declined since the mid-1980s, and the decline is expected to continue in the coming years. The drop in the volume of trade was 7. An OECD study (1997) found that the annual growth rate of imports of processed agricultural products to the OECD countries was more than double the annual growth rate of the imports of basic agricultural products. 8. Presently, the terms of trade of many crops are still affected by the heavy direct and indirect subsidies that agricultural producers in the EU and the US receive. In the US, for example, the Freedom to Farm Act of 1996 freed farmers who produce corn, wheat, soybeans, rice and cotton from all government production controls, but the subsidies nearly tripled to $22 billion by the year 2000 – instead of the gradual phasing out of the subsidies that the original bill stipulated.
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Table 11.2. The Share of Commodities in the Total Export Earnings of the African Countries (%) Country Benin Botswana Burkina Faso Burundi Cameroon Cape Verde Central African Republic Chad Comoros Congo Côte d’Ivoire Equatorial Guinea Ethiopia Gabon Ghana Guinea Guinea Bissau Kenya Liberia Madagascar Malawi Mali Mauritius Mauritania Mozambique Niger Nigeria Senegal Seychelles Sierra Leone Somalia Sudan Swaziland Tanzania Togo Uganda Zambia Zimbabwe
Single commodity 35 78 48 87 38 65 33 29 56 91 35 54 66 82 59 29 30 64 39 55 57 65 45 27 85 96 32 69 32 76 42 39 40 47 95 98 20
Two commodities 63 87 63 91 61 81 64 87 86 96 58 95 88 88 83 91 53 54 81 56 75 96 67 87 43 97 99 52 80 49 86 56 52 53 60 97 99 27
Three commodities 84 95 75 92 81 97 87 96 87 99 69 100 96 96 91 99 66 75 88 69 84 98 70 98 52 98 99 62 86 62 96 68 54 61 72 98 99 31
Sources: Africa’s Commodity Problems: Towards a Solution. 1990. United Nations; and Commodity Yearbook. 1995. UNCTAD.
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accompanied by a steady decline in the price of these commodities and by wide variations in their price in the international markets. In most African countries, a comprehensive strategy to stabilize export earnings, reduce exposure to the instability in commodity prices, and prevent the deterioration in the terms of trade must therefore focus on the diversification of production and markets and on increasing the domestic production component of their exports with additional stages of processing. Additional stages of processing will also enable domestic producers to expand the range of export products, deepen the linkage between the primary sector (primary commodities) and the secondary sector (manufacturing), and increase the production of intermediate and finished products for the local market and for exports. At the initial stages of implementing this strategy, government support will be necessary, both because of the high risks involved in the investments necessary until the new products and the new producers establish their market niche, and because of the weakness of the private sector in most of these countries. Another factor that pressures the African countries to change their agricultural production and trade is the process of trade liberalization that these countries pursue as part of their structural adjustment programs and the measures they implement as they join the WTO. In the initial period, after the African countries liberalized their trade by removing many quantitative restrictions and reducing tariff barriers, an inflow of cheap imports of agricultural products, primarily field crops, from the developed countries flooded their markets and brought down the prices of these products in the local markets and, with it, the incomes of many farmers. Indeed, the prospects that the removal of trade barriers will open their gates to a flood of cheap imports was a source of great concern for many developing countries during the early GATT negotiations on the WTO agreements, and for countries like China that joined the organization later on. Local farmers in these countries, who rely on the production of maize, wheat, and other staple foods, were severely hurt by cheap imports from the USA, Canada, and Australia. The process of introducing new crops to replace the traditional field crops of these developing countries can be long, however, since it will require comprehensive reforms in the entire structure of the local market system. In the short run, specific measures will be necessary to assist farmers in making the transition in their production system, to support the reforms in the other segments of the market, and to protect the livelihood of the rural population as their incomes erode during the transition. Government support may have to include active participation in certain stages along the production and supply chain, as well as the provision of fiscal incentives, credit, development of infrastructure, training, and information to the private sector. The degree and forms of government participation will vary widely between countries, depending on the stage of development of their private sector, their banking system, and their relevant public institutions. In East Asia, proactive government policy was the key to the development of new industries, and this policy included even temporary measures such as export bans and direct incentives to local producers and exporters that effectively restricted foreign competition in the early stages of development. In sub-Saharan Africa, the need of local producers and traders to make the transition to a new mode of operation, new products, and new markets will also require
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proactive government policies and direct government participation in certain stages of production and trade. Targeted policies will have to strengthen the linkage between the primary and the manufacturing sectors, assist with the development of the necessary human capital, improve the performance of the public institutions, and provide a stable source of credit at affordable prices to entrepreneurs. Presently, the narrow base and limited capacity of the local financial market and local banks in most African countries raise the costs of new investments to levels that erode the competitiveness of local producers and even bankrupt many. The adjustments that most local producers will have to make in their mode of operation in order to be able to meet the demand and conditions of the global market may therefore be beyond their capacity, and government support will be indispensable. In the more developed countries, the private sector can make the necessary investments or mobilize the necessary financial resources. In Africa, most private enterprises are still small, have limited resources, limited credit, and limited capacity to mobilize financial resources from local banks. To support local enterprises, some African countries have set up national “diversification” funds that are financed by taxes levied on the exports of their major commodities. Government support may also have to include the provision, through public or publicly subsidized enterprises, of certain services that local entrepreneurs will otherwise not be able to obtain. They include information on products, markets, and demand conditions; market research services to identify new products, new production technologies, new trade opportunities, and new markets; R&D to develop new production and processing techniques, and extension services to disseminate this know-how and provide the information to individual producers. Additional stages in processing agricultural commodities can also play an important role in the development of local industries and in the expansion of the range of export commodities. The linkage that will thus be established between the primary sector and the evolving industrial sector can promote the production of intermediate and finished products for local consumption and for exports. Presently, however, the efforts to deepen the domestic value added component of agricultural exports through processing are hampered by the existing practices of tariff escalation that occur when the various tariffs that are applied along the supply chain lead to higher effective protection rates for processed commodities and for the domestic value added in the importing countries. The plan for future negotiations is to remove this escalation by maintaining equal tariff rates on the value added. The introduction of nontraditional crops Measures to introduce nontraditional crops into the farming system of the African countries are likely to encounter considerable resistance of local farmers initially, due to the difficulties in replacing the familiar crops with new ones, the greater risks in production, and the need for an organized supply chain from producers to the local market or abroad in order to ensure their marketing potential. The lack of experience and expertise in production and trade with these crops will require extensive support of the country’s national agricultural research and extension services in order to develop
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crop varieties and methods of production that are suitable for the country’s agroclimatic conditions, the inputs available to local farmers, and their technical skills. The country’s extension services will have to disseminate the new crops and production methods, and translate the scientific information into specific instructions for growers, processors, and traders across the country. To increase the competitiveness of local producers, these services may also have to provide assistance in increasing the value added of the products by improving post-harvest treatment, packaging, and processing. The marketing of these crops, especially for exports, will require strengthening all the components of the supply chain, including procurement, trade, packaging, storage, and marketing at the wholesale and retail levels. The transition to a more diversified production and trade will also require the NAROs to pay special attention to the needs of small farmers who, at the early stages of the process, will not be able to make this transition, due to a lack of resources, and who thus may be exposed to more food insecurity rather than less. The competitive pressures of cheap imports of field crops from the developed countries may bankrupt many of these farmers or force them to produce for their own consumption. Farmers in remote areas are particularly vulnerable, since they may not be able to grow nontraditional crops at competitive prices due to poor infrastructure, the distance to urban centers, and the reluctance of traders to reach these areas. At present, however, most NARS in Africa do not play a very active role in supporting the diversification of agricultural production, due, in part, to a chronic shortage of funds, and in part due to the low priority presently given to research on nontraditional crops. The main focus of the NAROs in most developing countries is on research aimed at increasing output and yields, whereas research on the profitability and marketing potential of current or prospective crops at home and abroad, and thus also on the income of farmers, is highly inadequate. The public research system also provides a very limited contribution to activities of the other components along the supply chain; and not much research is conducted on the adjustments needed in production, transport, and storage to ensure that these products can meet the food safety and quality standards in the export markets. The links with multinational supply chains The gradual reduction in tariffs and trade restrictions on agricultural products that is expected in the new round of negotiations will not be enough to guarantee that the lower production costs in a country will give it a comparative advantage in the global market. A country’s competitiveness will be determined not only by its low wages and low production costs at the farm level, but also by all the other costs of delivering the products to the market and by its links to the global trading system. These links are increasingly dominated by multinational companies that control a large share of the trade in agricultural inputs and outputs (see Box 11.2). As a result, a considerable and increasing portion of the world trade in agrifood products is, in fact, intracompany, and even many national retail chains in industrial countries merge into large trading companies that are linked to the multinationals. These corporate actors exert
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Box 11.2. Winners and losers in the global coffee marketing chain There are four dimensions of a Global Commodity Chain (GCC): Its input-output structure, the territory covered, the governance structures, and the institutional framework. The input-output structure and the geographical coverage of the GCC are mainly used to outline the configuration of specific chains and the distribution of value added. The governance structure specifies the power relationships along the chain, and this is where the distinction between producer-driven and buyer-driven GCC governance structures is introduced. The institutional framework specifies the local, national and international conditions that shape each activity within the chain. The global coffee chains evolved in two periods: First, from 1962 to 1989, the chain was dominated by the International Coffee Agreement regime, during which entry barriers in farming and in domestic trade were generally mediated by the governments of the producing countries, and the international coffee trade was regulated by the commodity agreement. With the collapse of the coffee agreement in 1989, the form of governance of the global coffee chain was clearly transformed, and since then, coffee trading exhibits many of the characteristics of what is called “buyer-driven chains” (or, in this particular case, a “roaster-driven” chain.) The efforts to guarantee a constant supply of a variety of origins and coffee types have prompted international traders to get even more involved in the producing countries. Brandname firms contract manufacturers along the production networks and outsource the supply of intermediate products. Requirements set by roasters on the quantities needed in the specialty market from any particular origin to be included in a major blend effectively set entry barriers to producing countries on the basis of market requirements. Quality criteria for organic coffee, for example, are based on buyer-defined specifications, and often the roasters also monitor the process. With the transition to the buyer-dominated system, a substantial portion of the total income generated in the coffee chain has been transferred from farmers to consuming-country operators. Since local traders in the producing countries do not have easy access to financial sources or hedging instruments, they have to ally themselves with the international traders, and, in most cases, they have lost control over processing and export functions. Farmers and farmers’ organizations find it increasingly difficult to compete with local subsidiaries of large trading firms, in part as an effect of the retreat of their government from regulating the domestic coffee market, and in part because the specialty markets have so far have been more suitable for large estates than for smallholders.
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considerable leverage over the sources of supply, and often they establish their own food safety and quality standards.9 In sub-Saharan Africa, trade and exports of traditional agricultural products such as coffee, bananas, and cocoa are still conducted primarily by marketing boards, large wholesalers, and multinational companies. Production and exports of nontraditional crops are still minor, and the expansion of their share in the local farming systems depends primarily on the possibility to increase their niche in the global market. That, however, requires the simultaneous development of all segments of the supply chain for these crops in order to establish the connection between local producers and traders and wholesalers, primarily multinationals, in the foreign markets to secure their marketing. Figure 11.2 provides a flowchart diagram of the general structure of the supply chain for agricultural commodities in a developing country. The diagram highlights the fact that farmers can market their crops only if a trading system is in place to procure the crops and transport them either directly to the domestic and foreign markets or to storage/packaging/ processing centers. The introduction of new crops that are destined for marketing rather than for self-consumption requires therefore that the entire supply chain is in place to procure the crops from the farmers, transport them to storage centers, and deliver them to the market. In most African countries these supply chains are very rudimentary and inadequate, and, initially, public or semipublic organizations will have to perform these tasks. At a later stage, the private sector may be strong enough to take over. Another gap that public and semipublic organizations may have to fill is the provision of information to local producers and traders on market conditions, prices, trade services, etc. In many African countries, the NARO is one of the better organized public institutions to that can provide many of these services. This, however, will require the NARO to expand its activities beyond its traditional scope: < The introduction of nontraditional crops into the local farming system will require the NARO to develop crop varieties and production technologies that are suitable for the country’s agroclimatic and human-resource conditions. < The introduction of export crops also requires the development of production methods so that the export commodities will meet the food safety and quality standards in the importing countries. < The country’s extension system will have to translate this technical information into specific instructions for growers, processors, and traders, and disseminate this information in the rural areas. < The NARO, in collaboration with other relevant government agencies, may have to go beyond its current mandate of research, development. and extension, to include such activities as the collection of information on standards, and rules and regulations for trade and IPR.
9. The following examples of the growing concentration are indicative: most of the world’s major seed companies are now subsidiaries of a few large agrochemical companies; a handful of companies control the world grain trade; and meatpacking is now a global industry dominated by a small number of large producers.
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PRODUCERS
Market
PRIVATE
Producer’s Household
CONSUMPTION
TRADERS
STORAGE
MARKETING BOARDS
SEEDS
CONSUMPTION
PROCESSING PACKAGING STORAGE
Domestic Market
Exports
WHOLESALERS
MULTI-NATIONALS
RETAILERS
Export Markets
PROCESSING PACKAGING STORAGE
RETAILERS
Figure 11.2. Supply chain for agricultural commodities in a developing country
< <
The NARO may also have to expand its research to include the development of suitable technologies for processing and packaging. The NARO and other branches of government may also have to take charge of providing information on market conditions, trading options, and standards to wholesalers and exporters until private traders can set up effective services.
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Changing Priorities in Public Research—Evidence from a Field Survey To evaluate the changes in the research strategies and priorities of public agricultural research in the African countries, this section presents the results of a survey conducted in 2000–01 among 105 national agricultural research organizations and institutes in 33 developing countries—half of them in Africa. The questionnaire in this survey included general questions on the institute and specific questions on several new research projects that were conducted at the institute during the time of the survey. The section in the questionnaire about specific research projects was completed by the project managers themselves. The results reported here summarize the relevant parts of the questionnaire for these research projects. These results cover 430 research projects, of which 205 (47%) were conducted in research institutes in sub-Saharan Africa. The first question inquired about the general topic of the research project. Table 11.3 summarizes the distribution of these projects across the main categories. The replies indicate that 57% of the projects were in commodity or factor (primarily soil and water) research, while only a relatively small portion of the projects were in pest/disease control, environment/natural resource management (NRM) or policy/ economics. In Africa, the share of commodity/factor research was considerably higher, at 71%. Less than a quarter of the research projects in all regions were in relatively new areas: 12% on horticulture and 11% on environmental/NRM topics.10 The second question inquired about the specific research areas within these subgroups of research topics. These areas included crop management (including plant breeding), genetic improvement, pest and disease control, and post-harvest management. Table 11.4 summarizes the results; they indicate that both in Africa and the other regions, two-thirds of the new research projects were on crop management and genetic improvement. In response to another question, the project managers indicated that a relatively large share of the research projects was on traditional commodities: cereals, other food crops, cash crops and livestock. In Africa, the share of traditional crops was larger, and a relatively smaller number of projects were on genetic improvement. To gain further insight into the process by which the research projects were selected, the project managers were asked to indicate who initiated the project. Table 11.5 summarizes their replies and shows that 56% of the projects were initiated by the researchers themselves. Sources outside the country, primarily regional or multinational organizations, initiated only 15% of the projects, and the ministries of agriculture initiated around 10% of the research projects. However, both the ministries and the international organizations and donor countries were far more active in funding the research projects. It should also be noted that the ministries of agriculture had a much stronger influence on the selection of research projects, since they had to go through a selection process supervised by the ministries to be approved for funding.
10. The latter is based on information reported in the survey but not included in the table.
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Table 11.3. Principal Research Categories Research category
Commodity/factor Environment/ Pest/ Policy/ research NRM disease control1 economics
All regions
248 (57%)
Africa
Of which: genetic improvement 95 (22%)
146 (71%)
Other or N/A
Total
44 (11%)
101 (23%)
24 (6%)
13 (3%)
430 100%
27 (13%)
15 (8%)
13 (6%)
4 (2%)
205 100%
1. Including research on specific pest/disease controls conducted within the framework of commodity programs.
Table 11.4. Distribution of Research Projects across Research Areas Research area
Africa
Total1
Asia
No. of projects
%
No. of projects
%
No. of projects
%
66
33
63
34
139
32
43 43 10
21 21 5
41 44 3
23 24 2
95 101 14
22 23 3
20 14 5 201
10 7 3 100
19 9 4 183
10 5 2 100
44 24 13 430
10 6 3 100
Farm/crop/livestock management Genetic improvement Pest/disease control Soil/other factor research Environment/NRM Policy/economics Other Total 1. Including the LAC countries.
Table 11.5. Who Initiated the Research Project? Initiator
Africa
Other regions
Total
Institute’s research team Ministry of Agriculture Regional organizations Multinational organizations Others Total
54% 9% 6% 10% 21% 100%
57% 12% 6% 8% 17% 100%
56% 10% 6% 9% 19% 100%
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Project managers also indicated that the institute’s own resources covered nearly a third of the total research costs. In Africa, the institute’s share was nearly a quarter, and in the other regions it was around 40% (Table 11.6). There was a considerable difference between the institutes in Africa and those in the other regions concerning the share of multinational organizations and donor countries in their research budget. In Africa, their share was 21%, whereas in the other regions it was only 8%. In Africa, the three principal sources of funding were the ministry of agriculture, multinational organizations, and donor countries, and the institutes themselves. In the other regions, the share of the institutes was much larger than that of multinational organizations and donor countries. Question 5 inquired about another organizational aspect, namely whether the research was conducted in collaboration with other research institutes. Table 11.7 indicates that a relatively large number of the research projects in sub-Saharan Africa were conducted in collaboration with other research institutes, whereas the numbers in other regions were, relatively, much smaller: In Africa, 62% of the research projects were conducted in collaboration with other research institutes, compared with 47% in Asia. Question 6 inquired about the involvement of farmers’ organizations in any stage of the research work. Project managers in Africa indicated that in nearly three-quarters of their projects, there was some involvement of farmers’ organizations in at least one stage of the research; in Asian research institutes, farmers’ organizations were involved in about half of the projects (Table 11.8). Finally, question 7 asked about the involvement of extension workers in the research work. Project managers in Africa indicated that there was at least some involvement of the extension workers in over 60% of their projects, whereas those in Asia indicated that the extension workers were involved in only 44% of their projects (Table 11.9). The survey suggests that changes in the research priorities of public agricultural research institutes in Africa, as well as in the other regions, have been relatively minor. Table 11.6. Who Covered the Costs of the Research Project? Source of funding Institute Government1 National agricultural research organization Multinational organizations/ donor countries Regional/subregional organizations Others Total 1. Primarily the ministry of agriculture.
Africa
Other regions
Total
23% 29% 9%
39% 29% 11%
31% 29% 10%
21%
8%
15%
7%
2%
4%
11% 100%
11% 100%
11% 100%
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Most research projects still focused on the traditional crops, and the share of new research areas, such as NRM/environment and nontraditional crops such as horticulture, remained relatively small. This may have been, in part, due to the fact that the researchers who initiated over half of the research projects did not have enough incentive to open up new research areas. Demands of farmers’ organizations for new types of research were still very modest and the funding given by governments and the donor countries for agriculture concentrated primarily on traditional crops because of their perceived impact on poverty. Table 11.7. Was the Project Conducted in Collaboration with Other Research Institutes? Africa
No Yes N/A Total
Total1
Asia
No. of projects
%
No. of projects
%
No. of projects
%
76 127 2 205
37 62 1 100
95 86 2 183
52 47 1 100
183 243 4 430
43 56 1 100
1. Including LAC
Table 11.8. Were Farmers’ Organizations Involved in the Research Work? Africa
No Yes Total
Total1
Asia
No. of projects
%
No. of projects
%
No. of projects
%
55 150 205
27 73 100
88 95 183
48 52 100
156 273 430
37 63 100
1. Including LAC
Table 11.9. Were Extension Workers Involved in the Research Work? Africa
No Yes N/A Total 1. Including LAC
Total1
Asia
No. of projects
%
No. of projects
%
No. of projects
%
73 126 6 205
36 61 3 100
99 80 4 183
54 44 2 100
188 231 11 430
44 54 3 100
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Concluding Remarks The need for an agricultural strategy in developing countries that takes into account the varying global conditions and the changing rules of agricultural trade will require comprehensive reforms that will include not only policies, but also the mode of operation of public institutions. One public institution that can have a very important role in facilitating the transitions of the agricultural sector is the NARO. Traditionally, the NAROs (and the CGIAR) focused their research on staple foods and the traditional export crops of the developing countries, and their main goal was to increase the yields and the country’s total production of these crops to secure availability of sufficient food in the country and the capacity of farmers to be self-sufficient. The new strategy will have to be much more market oriented and its goal will be to increase farmers’ income and make them self-reliant. To achieve this goal, the public research organizations will have to devote more resources and efforts to research on nontraditional crops and on a wide range of other subjects in addition to crop research. They will have to assist farmers in selecting the right crops and the right technologies and in producing these crops in compliance with the food safety and quality standards under the WTO agreements to ensure their marketability. The required reforms present a daunting challenge to the NAROs as well as to other public institutions that will participate in this process. The NAROs’ strategy will have to pay particular attention to the transition of the agricultural sector from a mode of operation which is supply-driven—with an emphasis on yields and based on traditional crops and staple foods for own consumption—to one which is demand-driven—with an emphasis on value-added, nontraditional crops, and the development of market niches. To accomplish this task, the NAROs will have to establish alliances with other governmental organizations, NGOs, and private enterprises, as well as with the NAROs and other research institutes in neighboring countries and with regional research organizations. This strategy will also require the NAROs link their research to the demands of a more diverse clientele, which may include information and inspection agencies, food processors, exporters, and wholesalers. The starting point for the design of the new strategy is to change the process of setting research priorities and of assessing their impact. Today, most of the weight in the process of setting research priorities is given to an evaluation of the prospective impact of individual research projects, and the selection of the projects is made by each NARI. This is the reason why nearly 60% of the research projects are selected by the individual researchers, as the survey shows, whereas the NARO or even the ministry of agriculture had a minimal say in this process. In the future, an impact assessment of the NARO’s strategy will have to start from an assessment of the impact of the entire organization, and priorities will have to be set first between the NAROs. This will require the organization to start this process by defining its principal goals, and to allocate its resources between the NAROs so that these goals can be met. Only in the second stage can priorities be established between projects/programs within the NAROs. Thus, for example, the first stage will require the NARO to decide what portion of its resources—if any—to allocate to research on maize or wheat, and what
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portion to allocate to research on new crops or to post-harvest or even market research. Only then can the specific research projects be selected within the NARIs under their resource constraints. The NARO may also have to provide additional services that are well beyond its traditional role and mode of operation, which may include the provision of information on food safety standards, market conditions, feasibility studies to assess the profit and marketing potential of new crops or of additional stages of processing. Not all these activities will have to be conducted by the NARO itself, and at a later stage, the private sector can have a large share in these activities. At the initial stage, however, the private sector may lack the necessary resources, and the public sector may have to facilitate or even manage the provision of these services.
References E. Diaz-Bonilla, M. Thomas, and S. Robinson. 2000. Food Security and Trade Negotiations in the WTO: A Cluster Analysis of Country Groups. Discussion Paper No. 59. Washington, DC: IFPRI. Gorjestani, N. 2000. Cross-Border Initiative in Eastern and Southern Africa. FINDINGS. September. Washington, DC: World Bank. Koning P. and H. Meilink. 1998. Regional Economic Integration in Sub-Saharan Africa. In Regionalization and Globalization in the Modern World Economy, edited by A. Jilberto and A. Mommen. Routledge Studies in the Development of Economics. OECD. 1997. The Uruguay Round Agreement on Agriculture and Processed Agricultural Products. Paris: OECD. Oyejide T. A. et. al. 1996. Regional Integration and Trade Liberalization in Sub-Saharan Africa. An AERC Collaborative Research Project. Rudrik D. 1999. The New Global Economy and Developing Countries: Making Openness Work. ODC Policy Essay No. 24. Shafaeddin, S.M. Risks of Future Marginalization of SSA in International Trade. Journal of Development Societies, 1966, 254-74.
Chapter 12 The Opportunities and Challenges of Globalization for Agricultural Research in the Caucasus Larry Zuidema*
Introduction The three countries of the Caucasus—Armenia, Azerbaijan, and Georgia—are going through multiple transitions. The first is a political transition from being republics in the Soviet Union to becoming independent nations. The second is an economic transition from being part of a command economy with state enterprises to becoming market economies with emerging private sectors. The third is a social transition from being closed societies to becoming part of the world community. These three transitions are important background considerations for looking at opportunities and challenges of globalization for these countries in general, and specifically with respect to the agricultural sector and agricultural research. Globalization may be defined as a dynamic set of processes that increases the linkages and interdependencies of national economies. Some of the currently observable effects of globalization on the agricultural sectors of many countries include: < gradual shifts of economic power from the state to the individual; < greater opportunities for innovation in the agricultural sector; < changes in the mix of commodities produced; < changes in the mix and use of natural and purchased resources; < a greater role of the private sector in agriculture. While globalization is a reality and a force of change that is increasingly influencing the economies and agricultural sectors of all countries of the former Soviet Union, including those of the Caucasus, various dimensions are subject to national influence (for good or bad). Some of these key dimensions of globalization are the following: < International commerce. World market integration can be encouraged or discouraged through tariff and trade policies and regulations. < Foreign investment. Foreign investments in agribusiness are conditioned by the legal framework of a country and the prevailing economic and business climate. < Communications and information access. Communications policy, regulations, infrastructure, and equipment condition access to external information.
* Larry Zuidema, International Consultant, Agricultural Technology Institutions and Systems, *The Netherlands 259
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<
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Scientific cooperation and technology transfer. Science and technology policy and regulations influence the amount and quality of technology spillover and acquisition.
Being part of the Soviet Union until 1991, the three countries of the Caucasus had closed economies and were partly insulated from global impacts. When they were established as nation states, they were suddenly thrust into a new environment and gradually opened their doors to the possibilities of external influence. They did not and, in many instances, still do not have the legal, institutional, organizational, and political frameworks and capacities to deal with the complex impacts of globalization. Furthermore, many of the leaders of these countries remain heavily influenced by their former closed association with the former Soviet Union and have not yet developed a mindset that is conducive to effective interaction with the world community. The development of free markets and information flows will take time. Even today, economic power in these three countries remains concentrated within the state, which, in many cases, appears to be more concerned about losing control than opening the economy. Despite moves toward privatization of major sectors of their economies, government, quasi-government, and private monopolies in several industries severely diminish possibilities of increased economic growth and production efficiency. Several large agricultural firms fall in this category. In the small republics of the Caucasus, this has been particularly devastating as production of many crops ceased, due to the inefficiency of these processing firms in terms of world markets, despite exceedingly low commodity prices at home. Reduced access to previous markets in the former Soviet Union was also a factor. Consequently, the agricultural sectors of the republics of the Caucasus have mostly declined since independence. This chapter first reviews the current situation in the Caucasus with respect to their economies, agricultural sectors and agricultural research. It then examines the potential impacts of globalization, looking at both opportunities and challenges. Implications of globalization for agricultural research in these countries are the focus of the subsequent section. The conclusion discusses strategies that might enable these countries to capture the benefits of globalization.
The Countries of the Caucasus at the End of the 1990s Armenia, Azerbaijan, and Georgia are relatively small countries with populations of 3.2, 7.7, and 5.4 million people respectively, and their economies are rather limited. Like other republics of the former Soviet Union, the Caucasus countries have suffered from severe economic decline since independence, and signs of improvement have only recently begun to show. Rampant inflation, which peaked in 1993 and 1994, has now settled down to reasonable levels, and the rapid decline in GNP and GDP that had begun in 1989 is showing slight improvement since 1994–95 (Figure 12.1). This improvement is one of the most encouraging indications of economic recovery throughout the region.
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35000
millions
30000 25000
Armenia
20000
Azerbaijan
15000
Georgia
10000 5000
19 97
19 95
19 93
19 91
19 89
19 87
19 85
0
Figure 12.1. GNP, PPP (current international US$) Source: World Bank, World Development Indicators CD-ROM, 1999
Yet, there is great concern about the rising level of external debt, particularly in Armenia and Georgia, where debt is high relative to GNP (38% and 27% respectively). Both imports and exports rose sharply (total and as a percentage of GNP) in the early period of transition, but declined since then. Exports have now dropped to about 20% of GNP in Armenia and Azerbaijan, while imports remain high relative to GNP, particularly in Armenia; in Georgia, imports and exports are about half that of the other countries (as a percentage of GNP). One difficulty is that the main export markets of the Caucasus are themselves ex-centrally planned economies that are also in economic crisis. The agricultural sector rose in importance (relative to GDP) from 1989 to about 1994 in Armenia and Georgia, primarily due to the near collapse of the industrial sector and a small service sector (Figure 12.2). Agriculture in GDP in Georgia has now returned to the share prevailing before 1989, but remains high at 41% in Armenia. Only in Azerbaijan has the agricultural sector remained fairly stable relative to GDP at about 22%. 70
% of GDP
60 50
Armenia
40
Azerbaijan
30
Georgia
20 10 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 years
Figure 12.2. Agricultural product (% of GDP) Source: World Bank, World Development Indicators CD-ROM, 1999
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Since independence, significant changes have taken place in each of these countries with respect to land use and crop and livestock production and processing. These changes are largely due to the transition processes mentioned above, but are also influenced by the corresponding forces of globalization. Land use Natural resource endowments will delimit the future possibilities for the growth and development of the agricultural sector as well as the scope and nature of agricultural research programs in each of the countries. Total land in the Caucasus (averaging 1.09 ha per person) and arable land (at 0.17 ha per person) are relatively low compared to other agriculturally oriented countries in the world. Within the region, Georgia has the most land per person at 1.28 ha, while Azerbaijan has the most arable land at 0.22 ha per person. Given the high variability of topography, climate and soils in all three countries, they are each able to produce a variety of commodities for local and export consumption. For all three countries, however, much of this production requires expensive irrigation water. As a policy issue, each country will need to analyze economic returns, market opportunities, processing possibilities, comparative advantage, and other factors in order to determine the best use of the limited amount and variable natural resources that can be devoted to agriculture without negative long-term environmental consequences. Eventually, as the market economy develops, farmers themselves will seek the best possible use of their natural resources to maximize their returns on their land. One of the implications of the limited amount of arable land is that these countries will most likely continue to import substantial amounts of food and feed grains. As a result of the heavy dependency on irrigation systems, it is likely that production will shift to higher value products for export markets in order for farmers to cover the real cost of water delivery that must be assessed in the near future. The major implication of these land and water constraints is that there are likely to be major changes in the use of natural resources in these countries. More importantly, the agricultural research systems in these countries will need to be flexible and capable of responding to these changes. Crops Azerbaijan’s crop production declined during the 1990s and by the end of the decade it is was 42% lower than in 1992. This decline has been attributed to a variety of factors, including lack of funds for imported and domestic agricultural inputs, the loss of traditional export markets based on the command economy of the former Soviet Union, the decline of irrigation and other agriculturally related infrastructure, and the closing of uneconomical and outmoded processing facilities. About 40% of arable land in the Caucasus was harvested for cereals in 1999, representing no change since 1992. The total area harvested for cereals increased most significantly in Georgia, was stable in Armenia, but showed a slight decline in Azerbaijan. Yields were variable over the period (mostly weather related) with a
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downward trend in Azerbaijan and not much overall change in the other two countries. As a consequence, total production of cereals declined substantially in Azerbaijan, increased significantly in Georgia and remained level in Armenia. Figure 12.3 shows average cereal yields from 1992 to 1997 for the three Caucasus countries (each now at about 1,700 kg/ha) with comparisons to the Czech Republic (at 4,100 kg/ha) and Austria (at 5,900 kg/ha). As the economies and agriculture sectors in the Caucasus countries improve, it is apparent that cereal yields could rise substantially. New varieties, renovated irrigation systems, better soil and water management, and improved fertilization and crop protection will help increase yields. Focused agricultural research will be needed to realize this potential. Wheat has been the most important cereal in the region, with Azerbaijan having two-thirds of hectares harvested for wheat in the region. The area harvested for wheat has increased in all countries, but yields have not shown much improvement. As a result, overall production of wheat in the Caucasus increased only 3% from 1992 to 1999. The region imported in 1998 about half of the wheat and flour (wheat equivalents) consumed. In Georgia, maize passed wheat in importance in 1993 and remains the dominant grain crop. Most of Georgia’s two-and-a-half-fold increase in maize production is related to a dramatic increase in area planted, as yields have remained fairly flat. Maize is a relatively unimportant crop in Armenia and Azerbaijan. Barley area and production declined five fold in Azerbaijan, the major producer in the region, and is now half of 1992 levels in Armenia and Georgia. Fruits and vegetables are historically important crops in all three countries (from about 500,000 metric tons in Armenia and Georgia to about 700,000 in Azerbaijan). Vegetable production has generally increased in Georgia but has been fairly constant in the other two countries. Fruit production, however, has declined sharply in Azerbaijan, is trending downward in Georgia, and is fairly stable in Armenia. Apple production is now less than half that of 1992 for the region. Grape production for the region is now only 44% of what it was in 1992. Azerbaijan, which in 1992 produced 56% of the grapes of the region, produced only 29% in 1999, thus accounting for most of the decline in production. Wine production, however, declined only 9% from 1992 to 1999, with Georgia remaining the regional leader with 69% of the total production. Azerbaijan remains the clear leader in exportation of wine with a total of 38,760 metric tons in 1997, representing 91% of the regional total.
Kg/ha
8000 Armenia
6000
Azerbaijan
4000
Georgia
2000
Czech Rep.
0
Austria 1992 1993 1994 1995 1996 1997
Figure 12.3. Cereal yields, 1992–97 Source: World Bank, World Development Indicators CD-ROM, 1999
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The area harvested for potatoes increased sharply in Azerbaijan and Georgia, and remained the same in Armenia during the past seven years. Yields have increased somewhat in each country, resulting in an overall potato production increase in the region of 73% from 1992 to 1999. Potatoes have played an important role as a survival crop during these past difficult years of economic decline. Sunflower seed production has recently grown very rapidly in Armenia and Georgia, where it is a new crop. Cotton, grown only in Azerbaijan, has declined substantially and is now at one-third the level of production in 1992. Livestock Cattle numbers in the region declined very little compared to the 1992 level. Azerbaijan has the highest numbers of cattle followed by Georgia and Armenia. Sheep and goat numbers have dropped dramatically in Armenia and Georgia. Regional sheep and goat numbers are now at 85% of the 1992 level, primarily because Azerbaijan currently has 83% of the sheep and goats in the region and its numbers are above the 1992 level. While not important in the region, pig numbers have declined dramatically and now stand at only 41% of 1992 levels. Predictably, the highest percentage decline occurred in Azerbaijan, while Georgia, which now produces 82% of the numbers of pigs in the region, is now at 50% of its 1992 level. Since 1992, milk production has increased in all three countries; the region as a whole showed a 22% increase by 1999, while Georgia had a 44% increase. Meat production, on the other hand, declined by 16% with each country showing a downward trend. Egg production dropped overall with a decrease of 31% in Azerbaijan, while Armenian production remained about the same and Georgia increased by 31%. Wool production dropped dramatically in Armenia and Georgia and increased slightly in Azerbaijan, corresponding to sheep numbers in these countries. Substantial numbers of livestock are currently in the hands of small farmers under entirely different livestock management systems than those that prevailed before independence. For example, very large farm structures for livestock have declined substantially. This means that the research agenda must change to deal with animal husbandry issues that previously were not addressed. Agricultural research In the past, the mandate for research in the Caucasus was primarily vested in the Trans-Caucasus Branch of the Soviet Academy of Agricultural Sciences (VASKHNIL), located in Georgia. A primary objective was to meet production quotas assigned by Moscow in view of the overall needs of the Soviet Union. Some agricultural research institutes in these countries were affiliated with their ministry of agriculture. Agricultural universities were primarily teaching institutions with quotas for training the required technical staff. Advanced degrees in agriculture were organized by academic committees affiliated with the institutes of the Academy of Agricultural Sciences. Upon independence, much confusion arose concerning the organization and mandates of the agricultural institutions in each of the countries, which were then to be
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formed into national systems. Some of the mandate issues involved in each of the countries were and, in some cases, still are: (1) who is responsible for what mandate, (2) what is the role of the agricultural universities, and (3) what type of research should different institutions conduct? In Armenia, the Ministry of Agriculture (MOA) currently has the responsibility for agricultural research, and institutes are coordinated there under the MOA Department of Science and Education. In Azerbaijan, most of the agricultural research institutes were placed with the Ministry of Agriculture under a Central Board for Science, Education and Extension. In Georgia, most agricultural research institutes were consolidated under a newly established Georgian Academy of Agricultural Sciences, which was based on the former Trans-Caucasus Branch of VASKHNIL. From their past assignments within the Soviet system, each country continues to have considerable human and physical resources for agricultural research. Adjustments are needed to bring these resources in line with anticipated national needs. Financial resources for agricultural research have been extremely low over the past 10 years, with little prospect for improvement in the near future. Due to this poor financial situation, very little research is being undertaken, which is particularly true for field experiments in relation to the changing structure of agriculture and internal and external markets. There has also been virtually no funding for maintenance and repair of buildings and equipment, research supplies, and scientific literature. This has caused a serious deterioration of physical resources for research. Agricultural research programs were traditionally prepared as a part of five-year agricultural sector plans in support of the “agroindustrial complex.” Vestiges of this practice remain within the agricultural research organizations in the region today. In the past, research was conducted based on “orders” and support from the ministries of agriculture and from VASKHNIL institutes, the branch unit, or headquarters. These orders were focused on the achievement of production goals assigned to the republics. Today the “the agroindustrial complex” has collapsed, remaining state and collective farms are in serious financial difficulty, and an increasing amount of land is being privatized into large numbers of small “farms.” Neither the ministries nor state and cooperative farms are giving research orders as they have little money or incentive to do so. Small farmers are not well organized to place demands on the system and, as is often said, have no money to “pay” for agricultural research. With little effective demand for research, the choice of research programs and projects is essentially left to researchers and research institutes using traditional review methods. Since all staff must be paid, it has been observed that the research programs of these national systems have changed very little since independence.
The Impact of Globalization Globalization is a relatively new phenomenon for the region. During the past 10 years, while these three countries were engaged in political, economic, and social transitions, they have developed increasingly open societies and a desire to participate in the world community. Unfortunately, by default or design, there are still barriers to integration with the world community as these young nations seek to develop the capacity to
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manage the process of change. As these barriers are lifted or modified, opportunities for the growth and development of the agricultural sector may increase significantly, but challenges and difficulties will have to be overcome before the benefits can be captured. Opportunities from globalization As documented in the above review of the economic and agricultural sectors of these countries at the end of the 1990s, significant changes have been occurring. Most of these changes are the result of the sudden separation from the Soviet Union, and many developments are negative. The question is if increased integration will improve the situation, and for the most part, the answer would be yes. But to reap the benefits, more work is needed to provide the necessary policy and legal prerequisites to ensure that the benefits will outweigh the possible negative consequences. International commerce. One of the most significant consequences of the collapse of the Soviet Union was the accompanying collapse of traditional markets for both processed and unprocessed agricultural products under the past command economy. As a result, production and prices dropped dramatically in the early 1990s, but have since improved as the economies stabilized. With the relative geographic and economic isolation of the region, new markets have been difficult to develop. Some trade with Russia and other CIS countries has increased for all countries in recent years. Trade with Turkey has been established by Azerbaijan and Georgia, while Armenia has established trade with Iran. All three countries have very limited trade with the EU and US. Trade deficits have now reached serious levels in the Caucasus. In 1998, Armenia and Georgia were importing about four times more than they were exporting in terms of value. With respect to agricultural commodities, the situation is even more problematic, with Armenia’s imports being 17 times greater than exports, Georgia’s imports seven times greater, and Azerbaijan’s imports four times greater. Wheat and wheat products represented nearly 40% of agricultural imports in Azerbaijan and about 25% in Armenia and Georgia. Wine made up a significant portion of the total value of agricultural exports at 90% for Azerbaijan, two-thirds for Armenia and a third for Georgia. Some wine continues to go to traditional markets in republics of the former Soviet Union, while new markets in Europe and the US are slowly developing. Food self-sufficiency is currently a political objective of these three countries due to their relative economic isolation. With significant deficiencies in grain production and a push for more internal production, however, opportunities for exporting agricultural products have been somewhat constrained. In addition, traditional agricultural processing industries, such as silk, tobacco, and canned vegetables, have declined due to the collapse of traditional markets. Where are the market opportunities of the future? If, as expected, income generation is an economic objective, the export of high value processed products would be the best strategy. This means a continuation and expansion of the marketing of wine and cognac as well as the development of markets for specialized products
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such as processed temperate and subtropical fruits and nuts. To do this, it will be necessary to find niche markets in Europe, the US, and elsewhere along with the maintenance of traditional markets in the region. Cooperative ventures with foreign businesses may be necessary to gain access to these niche markets. The development of these markets may serve to reduce the political emphasis on food security as a policy, since increased income from these products may be used for the importation of basic grains. Foreign investment. Due to the unstable political and economic situation in the region, foreign investment has been limited. At the present time, the greatest amount of foreign investment in the region is attracted by the oil industry in Azerbaijan, which has risen dramatically since 1994 to a current level of over 1 billion US$. Given the weakness of the Caucasian economies and the lack of local capital, foreign direct investment will be essential for the growth and development of the agricultural sector, for both domestic and export production and processing. The entry of foreign firms (private sector) into these countries allows for the acquisition of technology without the high costs of research and development. Cooperative ventures with local firms may improve the chances of attracting such firms and of their being responsive to local needs. Some foreign investment in the agricultural sector is already being made in these countries. An Italian wine company has invested in Armenia, a Canadian tobacco company has revitalized a collapsed tobacco industry giving technology to small farmers to encourage production, and while a Dutch company did not succeed in purchasing the Georgian wine research institute with its extensive vineyards, it is quite likely that foreign investment and local privatization will be its destiny. While globalization offers opportunities for increased foreign private investment in the agricultural sector, such investment will be primarily based on good business opportunities in a secure business environment where contracts can be made and enforced. A positive and enticing environment for foreign investment is only now being put in place in these countries. Policies and procedures are still needed to ensure that investments are secure. As these countries make progress in their political, economic and social transitions, the overall environment for foreign firms will likely improve and investments increase. Communications and information access. One of the most significant opportunities arising from globalization is an increase in information flows through the liberalization of communications regulations and the use of new information technologies, not the least of which is the Internet. This offers great promise for the agricultural sector and particularly for those involved in agricultural research and education. It is now possible to gain relatively easy and inexpensive access to information about market opportunities as well as new technologies and agricultural practices that can be applied or adapted to local conditions. This means that agricultural production and processing opportunities may become more diversified and new approaches to environmental issues—where past local responses have been deficient—can be explored.
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Capturing the potential benefits of increased access to information in the agricultural sector will require both policy and regulatory changes so that key actors can have unlimited access. It will also require strategic investments and new institutional strategies within agricultural research, extension and education institutions. An important dimension of information is that it be considered by agricultural technology institutions as a public good to be shared with and made useful for farmers. Scientific cooperation and technology transfer. Once discouraged, and in some cases prohibited, cooperation with international and foreign scientific institutions has increased dramatically since independence. Some of this cooperation has been in association with development programs and projects, including those designed for investment in the agricultural sector. Many relationships are bilateral with corresponding institutions in other countries, some of them are exploratory in nature. For example, Israeli dairy production units have been set up in Georgia for demonstration and production purposes. In the area of agricultural research, several CGIAR Centers, notably CIMMYT and ICARDA, have established cooperative agreements and joint programs with the research systems of these three countries. European and US research institutions have also developed cooperative projects and programs, which, in some cases, are the only source of funding for agricultural research activities, as local funding has been severely curtailed. The agricultural research and education systems of these countries recognize the value of these cooperative activities and have been seeking to expand them for the purpose of revitalizing their institutions. An expansion of cooperative agreements with reliable institutions outside the region offers the promise of increased access to new technologies. With increased scientific cooperation and technology transfer, the agricultural research agenda can shift toward more adaptive research based on the testing of foreign technologies and comparing them with existing local practices. If directed to the realities of the restructuring of the agricultural sector, scientific cooperation and technology transfer can become a significant force in the overall development of the agricultural sector and the economy. Challenges of globalization Globalization does not only offer opportunities to these three Caucasian countries, but will also bring major and unsettling changes and require sometimes painful adjustments. The expansion of agricultural exports from the Caucasus countries will require greater market integration within a highly competitive world community. This represents a sharp contrast to their experiences with the command economy of the former Soviet Union. The required market integration means that they must produce agricultural commodities and processed goods at competitive prices, under competitive quality standards, and in quantities and a timeframe set by buyers. At the present time, these conditions can often not be met despite the relatively low cost of production of commodities thanks to low labor costs. But when these conditions are
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eventually met, exports will increase, and there will also be an impact on the domestic agricultural markets, including commodity shifts and price changes. With greater international market integration, traditional commodities may no longer be produced due to the effects of international competition. This is already the case with the collapse of silk production (and research support) in all three countries, due to cheaper silk from Asia. The tobacco industries of Georgia have also largely collapsed, and the production of vast quantities of canned tomatoes in Armenia has just become a memory from the days of the Soviet Union. While these changes may negatively affect only a few agricultural producers and regions, they serve to illustrate how international competitiveness can influence both domestic and export marketing possibilities. A more important aspect is the fact that the political objective of food security may be jeopardized by new market conditions. In such a case, subsidies may be needed to ensure the continued production of wheat or similarly essential crops. Once agricultural commodities enter international markets in significant amounts, they are subject to the law of supply and demand and, therefore, to fluctuations in international prices. For a small country with an important export commodity, the shock of these fluctuations can be severe, particularly for producers. Government strategies, policies and procedures will be needed to insulate local farmers from these shocks and to provide assistance in making appropriate adjustments. Maintaining the current diversity of commodities is one important strategy to limit the impact of international market shocks. It is clear that not all actors in the agricultural sector will benefit from globalization, and a few may benefit much more than others. This will be particularly true if government, quasi-government, and legalized private monopolies in these three countries are allowed to persist. This has already had a devastating effect on domestic markets as well as on the export of wine and cognac from some of these countries. Open competition for new products will help improve efficiency of processing firms and improve the chances that their products will be competitive on world markets. It will also give producers more opportunities to obtain inputs and market their goods at fair prices. The key issue is that all countries have already created a class of small farmers who, under current conditions, neither are nor can be viable economic units. Adjustments are and will continue to be made as land registration progresses and ownership is well established. This process requires free and open markets with competitive sales opportunities. The stranglehold of current monopolies, particularly those tied to export markets, can only delay the process and cause suffering among small farm families seeking to survive. Exports of raw commodities that require processing for domestic consumption can cause a collapse of local processing capacity, since a large volume is necessary to justify the investment in processing equipment and facilities. This has already been the case with some vegetables and fruits that are directly exported from the region. As a result, raw products are sold at relatively low prices, the opportunity for adding value is reduced, and the cost of processed products for domestic consumption is increased due to the necessity of importing them. Government strategies and policies need to be put in place to encourage private-sector processing for both domestic and export markets,
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thus retaining (or creating) a viable local processing capacity, as well as retaining (or creating) employment opportunities. The presence of an efficient local processing capacity can also stimulate increased commodity production if a competitive environment is encouraged. Governments in the region have all listed food security as a prime objective for the agricultural sectors of their countries due to the relative political instability in the region. For these governments, staying in power means near self-sufficiency in basic grains. However, increased market integration and the possibility of market-driven shifts in the commodity mix in favor of international markets may reduce the ability of the agricultural sector to address the range of national priorities. Where food security remains an important element of the political agenda, policies may need to be established to encourage and stimulate basic grain production. As the political environment changes within the region, the emphasis on food security may diminish in importance. In this case, income generation and import substitution may become more important objectives. The principle of economic comparative advantage can then overtake food security as agricultural sector policy. For example, a high-value commodity for export may produce more economic benefit and more government revenues through taxation, thus making the importation of needed basic grains more economical. Azerbaijan, with new income from oil, may now alter its agricultural policy since it can use oil revenues to purchase basic grains. While still a major producer, Azerbaijan is currently importing a third of its wheat and flour (based on wheat equivalents).
Implications of Globalization for Agricultural Research The transitions underway in the Caucasian countries and the forces of globalization are beginning to have an effect on the agricultural sectors in these three countries. Their agricultural technology systems and, consequently, their agricultural research will also be directly affected by the attendant changes. Importation of new technologies One effect of increased globalization is that new technologies (and/or information about them) will become available within the agricultural sector. This desirable change can occur only if governments do not construct barriers to the importation of new technologies, including those embodied in the production of inputs like seeds. For some in the agricultural research systems of these countries, technology importation is seen as a threat to their personal employment and, in some cases, the very existence of their institutes. For others, this is a chance to assess and compare local technologies with those made available in the international market place. One of the key implications for these agricultural research systems is that they will have an increasing role in technology assessment and recommendations for farmers who cannot possibly bear the risk of doing this on their own. This will likely mean a shift in the balance of research from technology development to technology adaptation.
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Changes in agricultural research agendas Research agendas need to change to respond to new realities within the agricultural sector that came about as a result of changes in both domestic and international markets. Not only will there be changes in the commodity focus, but also in the type of research that is conducted. Research needs to be substantially reduced or terminated for commodities no longer produced for the market, but this is still problematic. Research on newly produced commodities (e.g., sunflower) and commodities with potentially high demand (e.g., soybeans) needs to be initiated. Furthermore, food science, such as processing standards and procedures and market research, will have to be more prominent than in the past. With respect to the type of research, it is likely that more applied and adaptive research will be conducted in the future in order to deal directly with the problems of farmers adjusting to the effects of globalization. The most significant change in the public-sector research agenda, however, will be the result of the emergence of private-sector involvement in the agriculture of these countries. The private sector will be active in areas where the cost of research and development investments can be recouped by selling products to farmers or buying from them a quality product at a lower cost. It is quite likely, for example, that the domestic private sector alone or in cooperation with international firms will be conducting research on inputs (e.g., pesticides, fertilizers, animal feeds, and farm-level machinery) and on the production and processing of high-value commodities with few buyers (e.g., tobacco). The Caucasian countries may also benefit directly from research spillovers from prior research conducted by international organizations and firms through the direct importation of their products, such as seeds of varieties that embody a range of research activities. All of this means that the NARS in the region will be shifting the balance of their research agendas from marketable technology development (e.g., crop variety development), toward areas related to their publicsector responsibilities. These will include such topics as soil and water conservation and management, farm management, crop cultural practices, integrated pest management and, to some extent, commodity marketing. An additional aspect of globalization that may have some influence in these countries and that may alter the research agenda is the increased vertical integration of production and marketing of agricultural commodities such as wine and broilers. This means that farmers will become virtual employees of large marketing firms and will be required to use the technology they have developed. It is unlikely, however, that this will be a significant factor in these countries, since agricultural export potential is limited and these international companies require large quantities of products. Changes in the agricultural technology systems The agricultural technology system that existed in these countries under the Soviet Union was designed to be well integrated with production, although reality left something to be desired in many cases. This system, however, is no longer functional for these three independent nations, since the structure of their economies and their agricultural sectors has radically changed. This fact is still to be discovered by some
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within the agricultural research systems as they maintain a preservationist posture in the absence of strong market signals that will eventually define technology needs. To meet the emerging agricultural technology requirements of the newly market-oriented economies, much needs to be done to develop and/or reform technology related institutions that can work together in an effective manner. In addition to major reforms needed within the research system, there continues to be a need to develop an effective extension service with the capacity to assist the multitude of small farmers in choosing appropriate technologies and applying them effectively. Once viable farm units are formed, they will be in a better position to organize and integrate themselves into the technology system through farmer associations. As mentioned above, it is quite likely that the private sector, both local and foreign or in combination, will play a greater role in developing and delivering new technologies in these countries. This will eventually and inevitably result in major organizational changes in the agricultural technology systems within the region. Some of these changes are already underway and others can be anticipated. Changes in the financing of agricultural research The funding of agricultural research remains at a critically low level in each of these countries with little hope of improvement in the near future. Increasingly, governments expect research institutions to become more self-financed. While this may be inevitable and desirable in some cases, there is also reason to be cautious. Increased globalization has opened some doors to funding through cooperative agreements with research institutions in other countries. When these agreements focus on priority research issues, as they mostly do with respect to joint research with CGIAR institutions, this allows agricultural researchers to make significant contributions to their agricultural sectors. However, some cooperative research may be focused more on the interests of the partner (e.g., a private company) and may not address priority areas. For example, when a large international firm has a joint agreement with a research team in one of these countries with a goal of synthesizing pesticides for a large international market, this has the effect of diverting scarce scientific resources away from priority concerns of this country.
Conclusions The extent to which the three countries of the Caucasus are able to make political, economic and social transitions will be influenced by the globalization process and, more importantly, by the ability of these countries to capture the benefits of globalization. The globalization process, as it seeps into the fabric of the societies and economies of these three Caucasus countries, can be partially managed and nurtured as a force for growth and development within their agricultural sectors. Strategies for capturing the benefits, while recognizing and mitigating possible negative consequences, need to be developed and translated into policies, procedures and regulations. If agricultural research is to make a significant contribution to agricultural development in these countries, some specific actions will be necessary.
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Develop strategies for accessing information Internet access for agricultural scientists is essential. In the initial stages, this can be readily accommodated in key locations within national agricultural libraries, agricultural universities, and selected agricultural research institutes with the employment of trained multilingual operators. Investment (and reinvestment) in, and centralized access to, selected up-to-date scientific journals from Russia, the EU, and the USA are also essential to bring these research systems into the mainstream of world scientific literature. Develop strategies for cooperative research Much can be gained from cooperative research activities with international organizations and research organizations in advanced countries. However, the proactive development of cooperative agreements with selected and reputable international (e.g., CGIAR Centers) and foreign research organizations (universities and research institutes) in areas of priority agricultural research is a much better strategy than allowing the proliferation of agreements with any organization which promises to finance its own agenda. Cooperative agreements always involve transaction and opportunity costs which need to be calculated against any possible benefits that might be realized. Access, assess, adapt, and adopt external technologies Small countries cannot possibly conduct all the research needed to support their agricultural sectors and, therefore need to benefit strategically from research conducted in other countries. Barriers to externally generated technologies need to be lowered to the point of not only allowing access to them, but also encouraging their assessment and adaptation within the country. The current resistance to the importation of externally generated technologies by some agricultural scientists is shortsighted and potentially unproductive. In fact, a major and wise strategic change for agricultural research institutions would be to seek out external technologies for comparison with locally developed technologies and letting farmers judge the results. Develop an efficient and responsive technology innovation system Globalization places the agricultural sectors of these countries in a wider competitive environment with respect to both domestic and export production. Part of the cost of production is the cost of developing and disseminating useful technologies. The agricultural research systems will need to be not only effective and responsive to farmer needs, but also proactive in improving the efficiency of agricultural production in these countries. More importantly, farmers, extension workers, researchers, educators and agribusiness leaders need to see themselves as part of a wider agricultural technology innovation system and act accordingly.
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Develop appropriate legal and institutional frameworks and policies Ministries of agriculture and other government institutions can do much to both capture the benefits and mitigate the potentially negative effects of globalization. “Letting the winds blow as they may” or “closing the doors to the evils of globalization” are both inappropriate approaches. A much better approach is the strategic development of legal and institutional frameworks and policies to strengthen the ability of the national agricultural technology institutions to use the globalization forces in the interest of the country’s agricultural development. Make new investments in human resources The transitions underway and the effects of globalization on the agricultural sectors of these countries imply the need for both new understandings and new skills for those involved with the national agricultural technology systems. The most important new understanding relates to how the functioning of a market economy will influence the agricultural sector and its needs for technology support. This includes examining how globalization will likely change the nature and scope of the agricultural sector. New skills relate to (1) new research topics (e.g., market analysis), (2) new technology areas (e.g., integrated pest management), (3) new processes (e.g., participatory rural appraisal), and (4) redirected services (e.g., extension for small farmers). Some of these skills can be developed through changes in the curricula of the agricultural universities, while others can be addressed through short-term training of key agriculturalists. Defining the educational basis for developing both the understanding of the functioning of a market economy and the skills needed for the future is already taking place. As the three Caucasus countries progress with their transitions, market signals grow stronger and the impact of globalization more obvious, and more directed educational programs can be developed.
References Bonte-Friedheim, C., S. Tabor, and H. Tolini. 1997.; Agriculture and Globalization: The Evolving Role of Agricultural Research. In The Globalization of Science: The Place of Agricultural Research, edited by C. Bonte-Friedheim and K. Sheridan. 1997. New expanded edition. The Hague: ISNAR. Food and Agricultural Organization (FAO). 2000. FAOSTAT Statistics Database. World Bank. 1999. World Development Indicators CD-ROM. Zuidema, L. 2001. The Legacy of the Soviet Agricultural Research System for the Republics of Central Asia and the Caucasus. Research Report 20. The Hague: ISNAR.
Chapter 13 Globalization, Internal Policy Reforms, and Public Agricultural Research in Nigeria Foluso Okunmadewa and Joseph K. Olayemi*
Introduction The major policy changes in Nigeria and the measures taken to promote greater integration into the global economy have been taken within the framework of the structural adjustment program launched in the late 1980s. The emphasis of this program was on gradual deregulation, cautious economic liberalization, and a gradually increasing role for free market forces in the economy. This chapter reviews Nigeria’s major policy changes of the recent years and evaluates their impact on the agricultural sector and on the role and effectiveness of agricultural R&D. Greater integration into the global and regional economies is bound to influence the future development of the economy as a whole and of the agricultural sector in particular, and these developments will therefore also influence the research priorities of the public agricultural research institutes in Nigeria. Changes can be expected in the following directions: < more intensive agricultural extension service and stronger linkage between agricultural research and extension; < increased coordination of agricultural research at the national level; < greater involvement of stakeholders in identifying agricultural research problems and priorities; < encouragement of interdisciplinary research; < upgrading of the quality of agricultural research infrastructure, research personnel, and research equipment. In addition, issues relating to effective partnerships between the private and public sector operators for the utilization of research outputs need to be given more emphasis. This chapter provides a review of the recent policy changes in Nigeria that have had an impact on the agricultural sector. It then evaluates the changes in the research activities of three agricultural research institutes in recent years, based on information obtained through questionnaires completed by the three institutes. Finally, it assesses briefly future changes in Nigeria’s NARS in view of globalization and the emerging trends in world economy.
* Foluso Okunmadewa and Joseph K. Olayemi: University of Ibadan, Nigeria 275
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Policy Reforms During the 1990s Nigeria’s economic policies during the 1990s were, to varying degrees, operating within the framework of a structural adjustment program launched in 1986. Generally, structural adjustment programs in most countries focused on economic growth, greater efficiency in the use of public resources, liberalization of economic and social policies, promotion of transparency and good governance, environmental protection, and sustainable development. They were spurred by the growing interdependence between nations as a result of the globalization process. In Nigeria, however, the focus of structural adjustment was somewhat narrower (at least, until very recently), with an emphasis on gradual deregulation, cautious economic liberalization, and an increasing role for free market forces in the economy. The adjustment program emphasized macroeconomic policies, although some important sectoral policies and institutional reorganizations have also been put in place. The macroeconomic policies included the following comprehensive fiscal, monetary, credit, trade, export, and macroprice (i.e., exchange rate, interest rate, and wage rate) policies: Fiscal policies The objectives of fiscal policies, which focused on budgetary and tax policies, were to enhance efficiency and to reduce inflation through fiscal discipline and reducing the budgetary deficit. The key instruments of this policy during the 1990s were the following: 1. a tight fiscal policy characterized by the reduction in extra-budgetary expenditures and in budgetary deficit; 2. the introduction of a value-added tax (VAT) in 1993 at the rate of 5% for 10 categories of goods (excluding basic food items) and 23 services; the base and coverage of VAT were since then broadened and the revenues from this tax increased from about 7.2 billion Naira in 1994 to about 34.0 billion Naira in 1998; 3. reduction in personal income tax rates in 1993 from 10–45% to 10–35%, and a further reduction in 1995 to 5–10%. Initially, the budgetary deficit of the Federal Government increased from 7.2 to 7.7% of GDP, but in 1995, there was a modest surplus of 0.1% of GDP, and this surplus rose to 1.6% in 1996. In subsequent years, however, new deficits emerged and they are likely to increase in the near future, in part due to the evolving global economic recession that reduces the government revenues from the sale of petroleum. The budget share going to the agricultural sector declined from 2.4% in 1992 to less than 2% in 1995, but rose again to 2.45% in 1996, 3% in 1997, and 3.3% in 1998. Monetary and credit policies Monetary and credit policies were designed to reduce the rate of growth in the money supply and the rate of inflation. Their second objective was to strengthen the money market institutions and to increase the role of the market in determining interest rates.
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After annual growth rates of around 80% of the broad money supply (M2) in 1991–94, the relatively restrictive policy from 1995 to 1998 kept the growth rate below 30% per annum. Aggregate credit supply rose by 45% in 1991, 70% in 1992, and over 90% in 1993, but the annual rate of growth dropped to below 30% in the years 1994–98. Credit to the agricultural sector increased by an average of 14% per annum between 1991 and 1995, and by about 22% per annum in 1996 and 1997. Other “preferred” sectors received credit under the law that required mandatory bank credit allocation to preferred sectors. In 1996, this law was repealed, however. Measures designed to stabilize and sanitize the financial sector include a continued enforcement of the Failed Banks Decree of 1994 that dealt with defaults and distress in the financial system, transfer of all retail banking functions from the Central Bank to commercial and merchant banks, and a reduction of the subsidy to development finance institutions. Trade policies Trade policies in Nigeria remained highly interventionist despite the market reforms. Import policies were designed to discourage the importation of nonessential raw materials, as well as inputs and finished goods that have local substitutes in order to give incentives to domestic producers. Between 1986 and 1988, the main thrust of import policies was on tariff reduction, lifting of import bans and prohibitions on a number of essential commodities, and the abolition of import duties on some others. But between 1989 and 1991, tariffs were raised again on a number of imported products, including some food commodities, transport equipment and chemicals, and outright prohibition was imposed on many food staples. The prohibition of rice importation was lifted in 1992, while the other prohibitions remained until 1995. Since then, the government has started to de-emphasize the use of import prohibitions, in large measure to avoid retaliatory measures from Nigeria’s trading partners and to comply with the country’s commitments under the WTO agreements; hence the replacement of the prohibition by import duties in 1996. Initially, the import duties were high, but they were reduced after 1999. During these years, the value of food imports as a share of total imports increased from 8% in 1992 to over 10% in 1994–97. ECOWAS Trade Liberalization Scheme (TLS). The scheme of eliminating trade barriers, including taxes and levies was a major instrument for liberalizing intra-West African trade and promoting economic cooperation in the Economic Community of West African States (ECOWAS) subregion. However, only the manufactured products admitted under the scheme (a total of 353 products) can benefit from customs duty elimination and gradual duty reduction. In January 1990, the target dates for the total elimination of tariffs in the subregion were set at 10 years for the least industrialized countries, eight years for semi-industrialized countries, and six years for the relatively industrialized countries (which include Nigeria). Until 1999, however, Nigeria had not yet ratified the protocol for the ECOWAS TLS.
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Export policies Export policies were designed to promote the exports of non-oil commodities in order to diversify the country’s export trade and revenue base. The key instrument for export promotion was the Export Incentives Decree of 1986, which stipulated the introduction of several export incentive schemes that were based on payments of cash incentives to exporters. These funds were in operation until January 1999, when they were replaced by noncash incentives and merged into a new scheme under which payments of cash incentives to exporters were replaced with noncash Negotiable Duty Credit Certificates that are more compatible with the WTO agreement. Previously, export prohibition had been the major instrument for enhancing the supply of locally produced food, raw materials, and other products to domestic consumers and industries. In January 1999, many food staples were removed from the export prohibition list. Macroprice policies Macroprice policies are those that relate to the prices of capital (credit), foreign exchange and labor, i.e., exchange rates, interest rates, and wage rates. Foreign exchange policies. A major objective of the foreign exchange policies was to free foreign exchange transactions from administrative controls and allow free market forces to determine exchange rates. This policy was pursued with some consistency under the structural adjustment between 1986 and 1993. During these years, the Naira was devalued from 1 Naira per US Dollar in 1985 to over 90 Naira per Dollar in 1995. The massive devaluation of the Naira during these years pushed up the rate of inflation very markedly. There was a major reversal of policy in 1994, when administrative controls were again instituted, the allocation of foreign exchange was centralized, the official exchange rate was fixed, and the autonomous market for foreign exchange was abolished. The following year there was another policy reversal when the Autonomous Foreign Exchange Market was reestablished to allow exchange rates to be determined by market forces while a fixed official exchange rate of 22 Naira per US Dollar was retained for some official transactions. This dual exchange rate regime remained in operation until January 1999, when the official exchange rate was abolished. Interest rate policy. Despite the various monetary and credit policies, real interest rates remained negative for most of the period from 1990 to 1996, due to the high rates of inflation, but positive rates prevailed from 1997. Interest rates were determined primarily by market forces between 1990 and 1994. From 1995, however, a policy of “controlled deregulation” was formulated, whereby a cap was put on interest rates, with a maximum spread of 7.5% between deposit and lending rates, and a maximum lending rate of 21%. In the 1999 budget, all administrative controls on interest rates were removed; instead, market-determined interest rates would only be influenced through a Minimum Rediscount Rate and by making investment in treasury securities more attractive to the public. The 1999 budget stated that the government would take measures to reduce the financial instability arising from external sources through a
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phased liberalization and the sterilization of speculative and destabilizing short-term capital flows. Wage policies. Wage rates were partly determined by the income and wage policies of the government. Although from 1990 to mid-1998 there was no explicit income and wage policy in operation, the implicit government policy was to keep the nominal wages of the public-sector workers stagnant, thereby eroding their real wages, as an anti-inflation measure. In the second half of 1998 there was a decision to increase public-sector wages to partly restore their eroded real purchasing power, but the implementation of this measure has so far been inconsistent. Agricultural policies The sectoral policies for agricultural development include those on agricultural research, extension and technology transfer, input pricing and subsidies, water resources and irrigation, and land development. Agricultural research. Agricultural research programs have undergone many changes over the years, but their objective has always been the development of viable technologies that are well adapted to Nigerian conditions. Although there have been many changes in the number of agricultural research institutes in the NARS and in their mandate, the major reforms that have progressively occurred since the 1970s concern the institutional mechanisms for the national coordination of agricultural research and for stronger linkages between agricultural research, extension, and the farmers. In the process, there were relocations of some research institutes and changes in the supervisory ministries or agencies to which agricultural research institutes were assigned. In the early 1990s, the National Agricultural Research Project (NARP) was established to fund priority agricultural research, strengthen agricultural research institutions, and strengthen the research-extension-farmer linkage. More recently, Nigeria’s various agricultural research institutes established linkages with similar research institutes in other countries for research collaboration and exchange of technological information, and new research areas are being explored to meet an emerging demand for new types of technology. Agricultural extension. The objective of the various extension schemes is to promote the adoption of new technologies by farmers through a nationally coordinated extension service system. The basic strategy involves the use of a unified agricultural extension system under the aegis of state-wide agricultural development programs. An important recent development has been the creation of institutional arrangements to strengthen the linkage between agricultural research, extension, and farmers. In 1987, the National Agricultural Extension and Research Liaison Services evolved through a long process of mutation to become the organ for planning and coordinating agricultural extension liaison nationwide and for conducting research on technology transfer and adoption.
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Agricultural input supply and pricing. A major thrust of the agricultural input supply and pricing policy in recent years has been the withdrawal of the government from agricultural input procurement, distribution, and pricing activities, including fertilizer, petroleum products, seed and agrochemicals, after a process of deregulation and commercialization that gradually gave a greater role to market forces in determining market prices. Most input price subsidies have also been withdrawn, but government still retains its ownership of local petroleum refineries and fertilizer plants. These plants have been badly managed, however, as recent investigations by the government have revealed. Nigeria’s past price subsidy policies have been highly ineffective in reaching the intended beneficiaries, and highly unstable, with frequent changes or reversals under the various military regimes that often seemed arbitrary. This arbitrariness is best illustrated by the sudden decision in 1996 to reduce the factory price of the fertilizer produced in Nigeria to 10,000 Naira per ton while, in fact, the production cost was about 20,000 Naira per ton. As a result, the country’s fertilizer plants at Kaduna and Onne had to be closed down after making large losses, whereas cheaper imported fertilizers further rendered the local plants idle and redundant. Water resource development and irrigation policy. A network of 11 River Basin Development Authorities established in 1977 remains the major institution for water resource development and irrigation in Nigeria. In 1992, the Authorities were partially commercialized and some of the subsidies on irrigation water supplied to farmers were removed. The process is aimed at achieving full commercialization. Land development policy. The implementation of land development policy is largely the responsibility of the National Agricultural Land Development Authority, established in 1991 with a mandate that covers the provision of strategic support for land development and the promotion of the optimum utilization of the nation’s rural land resources. Commodity exchange market. The establishment of a private-sector commodity and futures exchange market (COMEX) was first proposed in the 1995 budget to fill the vacuum created by the abolition of commodity boards. However, only in 1999 the law enabling the establishment of the market was enacted. The market will deal in agricultural commodities, currencies, and solid and liquid minerals. Privatization. The plans to privatize important public-sector enterprises have existed for many years, but the implementation has been slow. A Bureau of Public Enterprises was established, but its initial impact has been meager. Only in the 1999 budget, a law has been proposed to give a stronger legal backing to privatization. The main focus of the privatization program in 2000 was on paper mills, sugar factories, fertilizer plants, steel rolling mills, and power and telecommunication companies and parastatals. Employment policy. As part of its employment policy, the government has recently established a new agricultural program for youth employment to complement the
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existing employment-promotion activities of the National Directorate of Employment, the Family Economic Advancement Program, and the People’s Bank. Assessing the impact of government policies An attempt to assess the impact of policies is fraught with difficulty not only because policy effects are not always additive but, more importantly, because there are many nonpolicy variables that tend to confound the effects of policies, such as the international economic climate, the weather, and domestic political factors. Hence, the observed changes in the economy cannot be wholly attributed to policies. Nevertheless, some important changes in the economy in the period under review should be noted. The impact of globalization on Nigeria’s economy is becoming significant although the process is still evolving. One of the areas in which this impact has become evident in recent years is the country’s trade policy, which was greatly influenced by the WTO agreement, signed in 1995. Major changes in tariff structures and other international trade practices (e.g., import and export prohibitions) that have occurred in recent years were largely determined by the terms of this agreement and by the imperatives of globalization. The agreement calls for trade liberalization and mobility of resources and increased competitiveness. Globalization calls for greater integration with the world economy, greater economic interactions, and freer exchange of information and technology. Although detailed studies are yet to be conducted on the impact of globalization on Nigeria, there are indications that the country has been losing out, due, in part, to its apparently weakened competitive position in international trade, and, in part, to the direction of international capital flow, which has been adverse to the country. Since 1995, external trade has become more liberalized, but the net benefit to the economy has not been very large. One consequence of the liberal trade policy has been an influx of cheap imports of products such as textiles, sugar, vegetable oils, fertilizers, wheat, and rice, to the detriment of Nigerian farmers and other producers of their local substitutes. The negative effect worsened during the Asian crisis, primarily for textiles. As soon as the ban on the importation of textiles was lifted in 1997, cheap imported textiles, mainly from Asia, flooded the Nigerian market and squeezed the less competitive local textile industry by encroaching on its market share and reducing its capacity utilization to less than 30%. In the process, Nigerian cotton producers and other suppliers of raw materials to the local textile industry suffered a major economic depression. At the same time, Nigeria’s exports have not benefited significantly from the country’s liberal trade policies as a result of the large share of petroleum in its exports, and because most of the non-oil exportables are not competitive in the international market. In addition, the prices of most agricultural export commodities have been falling in recent times as a result of the decline in international prices; for example, the price of cocoa declined by over 40% in the world market in the past years, and the local producer price followed a similar trend. Table 13.1 shows selected economic indicators during the 1990s. The performance of the economy was clearly unsatisfactory until 1994, improved somewhat from 1995
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Table 13.1. Selected Economic Indicators, 1992–98 Indicator
1992
1993
1994
1995
1996
1997
1998
Real GDP growth rate (%) Real GDP per capita* Rate of inflation (%) Growth rates of: agricultural production staple crops other crops livestock
3.0 1066 44.5
2.7 1069 54.2
1.3 1060 57.0
2.2 1063 72.3
3.3 1046 29.3
3.8 1056 8.5
2.4 1052 9.8
8.1 2.0 -0.9 0.0
4.8 -5.5 1.4 -25.4
3.9 -0.1 1.5 6.7
3.1 2.6 4.2 10.3
3.3 5.5 2.9 20.8
4.2 5.3 2.5 11.3
-
* Niara. Source: Central Bank of Nigeria. Annual Report and Statement of Accounts (various issues).
to 1997 and dropped again in 1998. It has also been estimated that capacity utilization in the manufacturing sector has declined from 31.8% in 1997 to 29.5% in 1998, and that employment in this sector has declined by over 29% in 1998. Real GDP per capita declined continuously during the entire period. Other indicators also show that, generally, the standard of living of the average Nigerian has deteriorated sharply in the period under review. The incidence of poverty in the country declined from 46.3% in 1985 to 42.8% in 1992, but rose sharply to 65.6% by 1996 (FOS 1999). The proportion of the core poor increased from 12.1% in 1985 to 13.9% in 1992 and to 29.3% by 1996. The incidence of poverty among the rural population was higher than that of the urban population: it declined from 53.5% in 1985 to 47.9% in 1992, but then rose sharply to 71% in 1996. Many constraints impeded the effectiveness of government policies in Nigeria: 1. With the current technologies in agriculture and the low rates of adoption of new technologies, many domestic agricultural products cannot compete effectively with their imported substitutes. Unless import policies are consistent with policies aimed at encouraging domestic agricultural production, Nigerian farmers may not be able to reap the full benefits of agricultural research and technology development. 2. Instability and inconsistency in agricultural commodity import policies have weakened the potential impact of agricultural research. For example, when the importation of wheat, grains, and malt was first banned in the 1980s under the structural adjustment program, elaborate research programs were designed to develop technologies for the domestic production of proper substitutes. But before these new technologies could become available, the ban on imports was lifted and an influx of relatively cheap imported commodities discouraged the adoption of the local technologies and decreased domestic production. 3. Research conducted in an effort to find solutions to the persisting scarcity and high unofficial prices of inorganic fertilizers was aimed at developing alternatives to the use of inorganic fertilizers by breeding cereal crop varieties that are tolerant of low nitrogen and can utilize soil nutrients more efficiently, as well as developing
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5. 6. 7.
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legumes which fix nitrogen naturally, introducing appropriate crop rotation and intercropping systems, and promoting the use of organic manures. However, progress in research and the adoption of new technologies in these areas were hampered by the instability of government’s fertilizer price subsidy policy that went through alternating regimes of subsidy imposition and removal, thereby creating uncertainty and weakening farmers’ incentive to adopt the technologies (Voh 1999). The physical infrastructure and utilities deteriorated. One consequence was the severe and persistent energy crisis, which virtually paralyzed the economy in recent years, sharply increased the cost of producing and distributing consumer goods and fuelled cost-push inflation. Governance was poor, partly manifested in high political uncertainty, corruption, and gross inefficiency in the management of national resources. There was a serious external debt burden or debt overhang. Nigeria became one of the highly indebted countries in the world, and servicing this debt is a major burden on the national economy. Nigeria’s strong dependence on crude oil exports has accentuated the effect of the vagaries of the global market on its economy.
To address these constraints and to improve the impact of government policies, several short- and long-term measures are required: 1. allocation of resources to improve the physical infrastructure; 2. accelerated privatization and market competition, including policies to take advantage of the opportunities in the global market; 3. promoting investments in agricultural and manufacturing with a special emphasis on the diversification of the country’s exports; 4. good governance, accountability, and efficiency in the management of the country’s resources; 5. consistent planning of the nation’s priorities and the policies to achieve these goals; 6. policy stability and consistency.
Evaluating the Changes in Nigeria’s Agricultural Research System Nigeria has 18 agricultural research institutes, scattered in different parts of the country, each with a mandate for specific commodities or fields of activity. In addition, some research activities are carried out by the agricultural and veterinary faculties of 23 universities, three agricultural universities, and five international research centers. To enhance their effectiveness and secure research coordination and researchextension linkages, the country has been divided into five major agroecological zones, namely the North-West, North-East, central, South-West and South-East zones. Five research institutes have been designated as coordinating research institutes to monitor research and extension linkages in these zones. The coordinating research institutes collaborate with the relevant Agricultural Development Program in the transfer of technologies.
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In recent years, Nigeria’s agricultural research system has been undergoing rapid changes. NARP, established in 1991, is part of a long-term strategy to revitalize the national agricultural research management system. In 1996, in line with the new National Agricultural Research Strategic Plan, new research structures based on the mandates of the NARIs were put in place. These new structures resulted in the establishment of 24 Nationally Coordinated Research Programs (Voh 1999). To evaluate the changes that took place in the NARS in recent years, three research institutes were selected for an in-depth case study. These institutes are the Cocoa Research Institute of Nigeria (CRIN) (see Box 13.1), the Forestry Research Institute (FRIN), and the Institute for Agricultural Research (IAR). The following findings are noteworthy: < The communication systems and facilities in the agricultural research institutes are entirely inadequate. One of the three research institutes was not even connected to the Internet, and none of its staff members were directly connected to e-mail. The institute did not even have a working telephone. The other two institutes surveyed were connected to the Internet, but only 4% of the research staff in one of them were directly linked to e-mail. < Exchange of visits between researchers in these institutes and researchers in other organizations outside Nigeria was very infrequent. In 1998, for example, only five researchers from each of the three institutes visited other research institutes outside the country. Journal subscriptions were also uncommon and most researchers seemed to be isolated from their colleagues in other countries. < All three institutes had inadequate and declining resources, especially research funds and research staff. Idachaba (1998) has underscored the problem of instability in the funding of NARIs by showing that the coefficients of variation in the actual disbursement of funds are very high (Table 13.2). For example, the coefficient of variation in the actual disbursement of capital budget to CRIN and IAR between 1984 and 1994 was 73% and 93% respectively. The delay in the release of budgets to the research institutes during 1991–96 was also shown to be very high. < There is also a general shortage of professional research staff in the NARIs. At the time of the survey, the researchers in the three institutes constituted less than 10% of the total number of permanent employees. There is also a high rate of turnover in research staff. Idachaba (1998) indicates a turnover in research staff of 43% for CRIN, 55% for FRIN, and 100% for IAR. Many reasons have been given for this high turnover, including poor remuneration and inadequate research infrastructure and facilities. < As a result of these constraints, the research institutes were limited in their capacity to change their research orientation, and by and large, they remained within their traditional thematic research areas. Conventional crop improvement research is still the most important thematic focus, and they have not ventured into new research areas such as genetically modified crop breeding. < Government measures to precipitate privatization and deregulation were not consistent or well focused. For example, the subsidy on fertilizer was restored in early 2000 after it had been removed a few years earlier.
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Box 13.1. The Cocoa Research Institute of Nigeria The Cocoa Research Institute of Nigeria (CRIN) is situated at Idi-Ayunre, Ibadan, in the Oyo State of Nigeria. Established in 1953 as a substation of the West African Cocoa Research Institute, it became a full-fledged research institute under the Research Institutes Act of 1964. Since then, many changes and reorganizations have taken place in the institute in its mandate, institutional affiliation, and research programming. At present, the institute is under the Federal Ministry of Agriculture and Natural Resources. The mandate of the institute covers both research and nonresearch activities, but 60–80% of the working time of the research staff is devoted to agricultural research. In 1997–98, CRIN had a total of 568 permanent employees of which only 22 were researchers. The number of researchers had declined in 1997–98, due mainly to a drop of about 60% in budget support from the government. The research programs of the institute cover (1) industrial crops research, (2) factor research, (3) food crops research, including cereals research, (4) livestock research, (5) environmental research, (6) fruits and vegetables research, and (7) other thematic research like socioeconomic research. The institute has therefore had a highly diversified range of research programs in recent years, although more than half of the institute’s total research effort is devoted to industrial crops research. < The institute’s industrial crops research has focused on cocoa, kola, cashew, coffee, and tea. Factor research has covered plant-nutrient research, land-use optimization and increased productivity, pesticide and insecticide research, and the use of crop by-products as livestock feed. < Food crops research covers maize, cassava, cocoyam, and melon, either as components of farming systems research or of livestock feed research. < Environmental research covers the identification of suitable agroclimatic conditions for such industrial crops as tea and coffee, and studies of soil conservation and environmental protection techniques. < Fruits and vegetables research focuses on the use of plantain, banana, and other fruit crops as shade materials and for food or livestock feed. < Other thematic research studies cover a wide range of issues like crop processing and utilization, socioeconomics, technology adoption and impact assessment, and suitable intercropping systems and optimum intercropping population. In recent years, there has been a shift in the orientation of research activities in the institute as a result of the need to seize new research opportunities created by the Structural Adjustment Program. For example, the scarcity of agrochemicals and their high cost have led to new research on new crop varieties that require less use of chemical pesticides. New research areas include (1) socioeconomic studies, including technology adoption and impact assessment studies, (2) biotechnology (continued on next page)
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(continued from previous page)
research for genetic improvement, (3) integrated pest management research for cocoa, kola, and coffee, and (4) the “adopted village” concept for coffee. Potential new research areas, as identified by the institute, include (1) new biotechnology research (e.g., plant tissue culture), (2) ethnobotanical research, and (3) breeding research on cocoa for resistance to harsh weather. The relevant organizations that influence priority setting for agricultural R&D in CRIN are, in order of importance, government ministries (Ministries of Agriculture and Science and Technology), donor countries or agencies (World Bank, CGIAR), farmers’ organizations (e.g., Cocoa Association of Nigeria, Coffee/Tea Association of Nigeria), and extension services. The Federal government was the main source of financial support for research in the institute in the last two years, providing 90% percent of research funds. In terms of US Dollars, the overall financial support to CRIN declined by 75% in 1997–98, compared with the level in 1996–97. One of the recent policy changes that affected the institute’s research orientation relates to the removal of price subsidies on agrochemicals used for the control of pest and diseases in cocoa and other crops. The removal of this subsidy caused the prices of agrochemicals to increase very sharply. In response, the institute refocused its research on integrated pest management techniques that would rely less on the use of agrochemicals for the production of industrial crops like cocoa. Trade liberalization, import substitution, and export promotion policies have also given impetus to research on the processing and utilization of industrial crops and their by-products. One of the institute’s main research programs is the cocoa research program. The program focuses on improving cocoa yield with both hybrid and selfpollinating seedlings, and the processing and utilization of cocoa products and by-products. The program has basic, applied, and adaptive research components. The main socioeconomic goals of the research program are, in order of relative significance, increased output, increased farm and export income, and protection of the environment. The program has a specific geographical focus in terms of specific soil and agroclimatic requirements. It requires fertile top soil with clay subsoil in the humid zones of the country. The major outcome expected from the research is the development and production of improved cocoa seedlings for distribution through both public and private distribution systems to farmers. This will involve the Agricultural Development Programs that have already commercialized their input supply units, with bulk input purchasing facilities and dropping points to serve farmers. Farmers will get no significant subsidy since subsidy on seedlings has been withdrawn.
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Table 13.2. Budget Allocation for Agricultural Research by the Federal Government, 1990–99 Year
1990 1992 1994 1996 1997 1998 1999
Capital allocation
Recurrent allocation
Budget proposal1
Actual release1
% of budget actually released
Budget proposal1
Actual release1
% of budget actually released
54.8 100.0 113.3 177.0 54.9 42.7 55.5
2.0 1.3 6.6 4.2 4.3 16.4 4.5
3.6 1.3 5.8 2.4 7.8 38.4 8.1
24.1 32.2 29.5 34.9 81.4 121.0 156.4
9.5 13.9 27.1 40.4 40.5 55.0 49.5
39.3 43.1 91.5 115.6 49.8 45.4 31.7
1. Million Niara at current prices. Source: Voh 1999.
<
<
The contribution of private national or multinational companies to agricultural research in Nigeria is very small at present. In some cases, private companies like breweries, seed companies, and agrochemical companies provided funds to research institutes to undertake specific research projects that were of relevance to their interest. A number of multinational companies became increasingly involved in Nigeria’s agriculture in recent years, primarily in the area of input production, import and distribution (e.g., Pioneer Seeds). Government ministries contribute the largest share, ranging from 55% to 90% of the total funds for research in the three research institutes covered in the survey. International organizations and donor countries contributed 10–45%, and the private sector made only a negligible contribution.
Recent changes and current plans for the NARS The rapidly evolving globalization of agricultural research and trade is bound to influence the research priorities and strategies of the Nigerian NARS and agricultural extension services. The main changes expected in these areas in the coming years are (1) more intensive agricultural extension services and a stronger linkage between agricultural research and extension, (2) increased national coordination of agricultural research, (3) greater involvement of the stakeholders in identifying agricultural research problems and priorities, (4) support for interdisciplinary research, and (5) upgrading the quality of agricultural research infrastructure, research personnel, and research equipment. The current agricultural extension service system in Nigeria is operated under the annual Agricultural Development Programs (ADPs) that started in the mid-1970s as semiautonomous, integrated agricultural development projects with the objective of
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promoting agricultural growth through the increased production of food and industrial materials. The main components of the ADP are intensive extension service, adaptive research, input delivery system, and rural infrastructure development (mainly rural feeder roads and water supply). The organizational structure of the ADP extension system is along zones, blocks, and cell (or circle) tiers for field-level operations. This is to ensure intensive and effective coverage and supervision. All ADPs in Nigeria operate the training and visit (T&V) extension services system. The system was introduced on a pilot scale in four ADPs in 1986 but was extended to all ADPs in 1988. The system was modified in 1990 to become the Unified Agricultural Extension Service system (UAES), whereby one Village Extension Agent passes all technical information and advice to all the farmers in his/her area, covering all the subsectors of agricultural crops, livestock, fishery, and agroforestry. The T&V system has the following core components: A technology that is judged to be feasible under on-station experimental conditions is tested in on-farm adaptive research (OFAR) on farmers’ fields. For this purpose, the country has been divided into five zones, corresponding to those developed for the National Farming Systems Research Network. OFAR and the farming activities in a given zone are coordinated by the national research institute in the zone; the institute provides a Zonal Coordinator for OFAR activities in all the ADPs in the zone. The OFAR team is multidisciplinary, with members from research institutes, universities, the Federal Agricultural Coordinating Unit, and the ADPs. The procedure adopted under OFAR is to conduct diagnostic surveys to identify farmers’ problems, to develop plans of action (=research) to address the identified problems, to carry out on-station trials to test the technical feasibility of the innovations developed to solve the identified problems in a particular zone, and to carry out on-farm trials in a number of farms in the ecological zone concerned with active farmer participation with respect to innovations that have successfully passed the on-station stage. If OFAR tests are successful, the results constitute the final recommendation for adoption by farmers in that zone. The Monthly Technology Review Meeting (MTRM) is a forum where an interdisciplinary team consisting of scientists from research institutes and universities, and subject-matter specialists, managerial staff of extension and commercial services units, as well as adaptive research officers from the ADP meet to review field problems and the performance of existing production recommendations and formulate new production recommendations to meet specific needs of the farmers for a particular period. After each review meeting, the subject specialists provide the field extension workers at fortnightly training sessions with extension messages to meet the needs of the farmers in their specific locations. The Small Plot Adoption Technique (SPAT) is a mini-demonstration technique used by extension agents to convince doubting farmers of the efficacy of the production recommendation. The demonstration is carried out in a small part of the farmer’s field, with full farmer participation. Usually, the farmer pays for or provides
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the inputs used in this experiment. Strong monitoring and evaluation outfits back the extension system. They collect and analyze data on extension activities, and provide the linkage to research to ensure the availability of sound technical information to the farmers and adequate feedback from the farmers. The Women-in-Agriculture (WIA) component of the agricultural extension service was established on a pilot basis in 1988, even before the introduction of the unified agricultural extension service in 1990. When the unified extension service was introduced, the WIA program was emphasized as an important component. It was designed to strengthen the extension service by undertaking gender-specific farming and post-harvest activities as an integral part of extension service activities. The WIA program makes provisions for trained female staff to operate at the headquarters, zones, blocks, and cells to provide extension service to women, contact farmers, and women groups. In 1982, the National Farming Systems Research Network was established by the Federal Ministry of Science and Technology to coordinate and strengthen all aspects of the farming research system in the country with a mandate to develop location-specific technologies for solving identified farmers’ problems. This led to the development of close collaboration between the NARIs and the ADPs through the OFAR program and a stronger research-extension linkage through which the ADPs influenced the research agenda of the NARIs. However, the procedure for implementing this linkage went through many stages, the latest being the Research Extension-Farmer-Input-Linkage System (REFILS). This was an organization of research, extension, input agencies, and farmers who participated in the initiatives to increase agricultural production and improve productivity. The concept of REFILS is meant to encompass all contributors to agricultural production. REFILS is the amalgam of the T&V system of managing the extension system and the farming systems research approach to agricultural development. REFILS was initiated in 1986 as a calculated attempt to minimize or eliminate identified constraints to effective research-extension-farmer linkage in the two systems (i.e., T&V and FSR), and to smooth the functioning of agricultural research and extension service delivery under the T&V system. The main components of REFILS are 1. diagnostic surveys; 2. on-station adaptive research (OSAR); 3. on-farm adaptive research (OFAR); 4. small-plot adoption technology (SPAT); 5. quarterly technology review meeting (QTRM); 6. fortnightly training (FNT). Nigeria’s agricultural research system has significantly improved national coordination, partly thanks to the coordination mechanism put in place under REFILS, which brought many agencies together for coordinated research and extension activities. The following are the key coordinating bodies:
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Zonal Technical Coordinating Committee: the policy-making body for each of the agroecological zones with membership comprising the directors of agricultural research institutes in the zone, deans of faculties of agriculture in the zone, the representative of NARP, ADP program managers in the zone, and the Regional Head of the Federal Agricultural Coordinating Unit. Coordinating research institutes: comprising specific national research institutes in each zone. Collaborating research institutes and universities: aimed at providing research and extension leadership and at supplying scientists with diagnostic surveys, technology review meetings, and on-farm adaptive research. All universities with faculties of agriculture as well as the National Agricultural Research and Extension Liaison Services and some other national research institutes are among the collaborating institutions. National Farming System Research Network: with several other program leaders (for adaptive research, extension, etc.), members of the National Steering Committee. NARP: gives financial and material support to REFILS. ADPs: responsible for adaptive research and extension. The Federal Agricultural Coordinating Unit: among other functions, responsible for coordinating the activities of the ADPs, the research institutes, universities and other institutions involved in OFAR. The farmers who are involved in OFAR. National Agricultural Extension and Research Liaison Services: has the mandate to disseminate agricultural research findings throughout the country. Agricultural input supply agencies, including the commercial services units or companies of the ADPs: ensure that farmers obtain high-quality inputs on time and at affordable prices.
Obviously, the national co-ordination mechanism for agricultural research and extension is comprehensive and all-embracing, involving researchers, extension services, input supply agencies, farmers and many facilitating agencies. The process of involving stakeholders to identify research problems has gained momentum in recent years, especially under REFILS. As a result, most research programs are now evolving through the participation of a broad range of stakeholders, including researchers, extension experts, governmental and nongovernmental organizations, intergovernmental organizations, donor countries, private-sector organizations, and farmers. However, private-sector involvement is still largely focused on the mass production and commercialization of the technologies developed by the public-sector research institutions in Nigeria or imported technologies. Improved seed varieties, agrochemicals, small machinery, and equipment constitute their major activities. There are also some multinationals operating in Nigeria’s seed market (e.g., Pioneer Seeds). The question is how and whether to ensure the survival and competitiveness of small- and medium-scale indigenous seed companies.
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There is a clear trend towards interdisciplinary research in recent years. This was first manifested in the plan of farming systems research but was later extended to incorporate crop processing and utilization research, socioeconomic research, and technology adoption research components into most agricultural research programs in the NARIs. The final component of the T&V system is research infrastructure and manpower development. The establishment of NARP in the 1990s gave some impetus to the effort to rehabilitate moribund and long-neglected facilities in the NARIs, procure new and modern research equipment, upgrade the quality of research personnel through in-service training, workshops, seminars, etc., and sponsor research projects.
The Future Structure of the NARS Among the changes that can be expected are shifts in agricultural research priorities in favor of improved biotechnology for higher agricultural production and resource productivity. There will also be greater emphasis on crop and livestock breeding research to develop livestock species with desirable characteristics and on crop varieties resistant to drought, insects, diseases, and other unfavorable environmental conditions. Farming systems research will focus more on farming practices that are friendly to the environment, conserve farm resources and require less use of such conventional inputs like inorganic fertilizers and agrochemicals, the prices of which are currently increasing at very high rates due to currency devaluation, market liberalization, privatization, and other policies. Furthermore, there is a need for research to develop technologies and farming systems that integrate crop and livestock production, technologies for integrated pest management, and technologies for post-harvest commodity management (i.e., storage and processing). Collaboration with the private sector in agricultural research and development projects can be expected to increase. Large industrial and commercial organizations (including multinationals) may be able to set aside a percentage of their annual profits to fund the research projects of the NARIs. The commercialization of technologies developed by these NARIs may also be the responsibility of private-sector organizations, but under an arrangement that would protect the intellectual property rights of the NARIs and their scientists. NARIs will have improved access to technical information and new scientific developments in research institutions outside Nigeria through a process of improved interaction and collaboration. This is gradually evolving, and it needs to be promoted. Research funding will have to be increased and is essential to improve the quality and increase the quantity of the research infrastructure, personnel and equipment. The orientation towards a systems approach in agricultural research is expected to be accelerated. In this approach research is not only interdisciplinary and broad-based, but also holistic in the sense that it covers the entire range of agricultural problems from inputs, to production, processing, storage and post-harvest loss prevention, packaging, marketing, distribution, and consumption. The need to enhance the competitiveness of Nigeria’s processed agricultural commodities in the international
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market will also call for research on methods and techniques of reducing commodity cost and improving commodity quality to meet international standards. Scientifically processed and packaged agricultural products, such as cocoa products, vegetable oils, cassava products, fruits and vegetables, livestock products, wood, and other forest products, will be able to compete effectively in the international market to earn foreign exchange for Nigeria or serve as effective import substitutes to conserve foreign exchange. Among the problems that will have to be addressed is the present lack of formal IPR for the products of agricultural research in Nigeria. All three research institutes covered in the survey denied any knowledge of existing IPR covering the materials and inputs used in their research or the products of their research. The examples of prototype small-farm machinery and improved breeder seeds developed through research, but supplied almost free to private and public institutions, were cited to support this. It was, however, suggested that appropriate charges be imposed on new technologies developed by the NARIs as IPR, in order to enhance the financial sustainability of the agricultural research system and provide incentive to researchers. The globalization process will present additional challenges to the NARS in many new research areas, but particularly in the following: < commodity processing and utilization, including research to diversify the utilization of many crop, livestock, fishery and forest products; < development of new harvest and post-harvest technologies, including commercial food preparation technologies; < identification and improvement of alternative agricultural inputs, fuels and energy; < identification and development of indigenous and wild species of crops and livestock for food and industrial uses.
References Central Bank of Nigeria. Annual Report and Statement of Accounts (various issues). Federal Government of Nigeria. 1999. Budget Speech and Briefing. An Analysis of the 1999 Budget by the Federal Minister of Finance. Idachaba, F.S. 1998. Instability of National Agricultural Research Systems. Research Report No. 13. The Hague: ISNAR. Manufacturers Association of Nigeria. 1999. The State of the Economy, 1998. The Guardian, May 18. National Agricultural Research Project. 1997. An Appraisal Study of Agricultural Extension System in Nigeria. Unpublished report. Olayemi, J.K. 1995. Agricultural Policies for Sustainable Development: Nigeria’s Experience. In Sustainable Agriculture and Economic Development in Nigeria. Proceedings of a Workshop by the African Rural Social Sciences Research Networks of Winrock International, edited by A.E. Ikpi and J.K. Olayemi. Olayemi, J.K. 1998. Food Security in Nigeria. Research Report No. 2. Ibadan, Nigeria: Development Policy Centre. Olomola, A, A.C. Nwosu, and F. Okunmadewa. 1996. Market Liberalization and its Effects on Nigerian Agriculture. Working Paper No. 16. NISER/SSCN National Research Network on Liberalization Policies in Nigeria.
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Shaib, B., N.O. Adedipe, O.A. Odegbaro, and A. Aliyu. 1994. Towards Strengthening the Nigerian Agricultural Research System. Proceedings of NARP Conference on National Agricultural Research Strategy Plan for Nigeria. Voh, J.P. 1999. Recent and Prospective Changes in National Research Systems in Nigeria as an Effect of Globalization. Paper prepared for a Globalization Workshop organized by ISNAR, The Hague, The Netherlands.
Chapter 14 The Reorganization of Public Agricultural Research in the Caribbean under the Pressures of Globalization and Privatization Compton L. Paul*
Introduction Globalization is having a significant impact on Caribbean agriculture. As traditional secured markets for plantation crops such as sugar, banana, rice, cocoa, coffee, and coconut dry up under global competition and the WTO rules, the large agricultural producers in the region are forced to downsize and become more efficient in order to remain competitive. Small landholders, the majority of whom farm mainly hilly land, will not be able to meet the pressures of competition, and they must diversify their production. A good alternative in the Caribbean is nontraditional crops such as exotic tropical fruits, vegetables, roots, and cut flowers, in which the islands have a comparative advantage for the domestic market and especially for niche markets in North America and Europe. Agricultural R&D has an essential role to ensure the selection of the most suitable crops and to adapt them to the local agroclimatic conditions, food safety standards, and the quality demanded by importers. Extension services will be necessary to introduce the new crops and to assist the small-scale farmers in adopting them. This chapter reviews changes in the conditions of the region’s agriculture as an effect of the pressures of globalization and attendant policy reforms, and it evaluates the necessary changes in the role of public agricultural research and national agricultural research institutes in order to support the transition of the agricultural sector and the diversification efforts of small-scale farmers.
Background The early economic development of the Caribbean countries was based on export-oriented agriculture with large plantations of tobacco, sugar, cocoa, and coconuts, using (until 1837) slave labor in the large farms, while small farmers cultivated marginal hilly areas. Peasant farming continued to expand on marginal hillsides due to population pressure, but in the mid-1960s, after independence, many
* Compton L. Paul: Executive Secretary of the Caribbean Agricultural Science and Technology Networking System (PROCICARIBE), Acting Executive Director of the Caribbean Agricultural Research and Development Institute (CARDI) 295
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large plantations were broken up and divided into small farms. In the 1970s, smallholdings of less than two hectares occupied over 80% of the farms but less than 20% of the arable land. In recent years, an influx of cheaper imported agricultural products—in part as an effect of the WTO rules—has increased the pressure on farmers, particularly small farmers, to diversify their agricultural production away from the traditional export crops. By 1993, the region’s agricultural exports had fallen to less than half of its 1987–89 level and the region had become a net agricultural importer with an agricultural trade deficit of US$ 2.6 billion, compared with a surplus in 1987–89 of $2.6 billion (Valenzuela 1999).1 In addition, most of the terrestrial and marine ecosystems that support agriculture and food production were under stress from population pressure, rapid urbanization, expanding tourism, and pollution. High rates of deforestation and poor soil and water management practices of many farmers contributed to rapid degradation of the environment. At the present, the Caribbean agricultural sector comprises the following groups of farming systems: < a large number of small traditional subsistence farmers practicing mixed cropping on marginal hilly lands in small family units; < a small number of commercially oriented small farmers that focus mainly on domestic markets but sometimes join the export market especially at the regional level; < a small number of larger commercial farmers that dominate the export market; and < a small number of large farms that are idle because of owner-absenteeism. Several constraints have affected this structure of the farming systems: < The policy environment in the Caribbean countries, especially with respect to production and marketing was and, in large measure still is, mainly conducive to the large commercial farmers. < Farming on marginal lands has very low productivity and high production costs. Frequent hurricanes, floods, and droughts considerably increase the production risks. < Most farms are in remote areas with poor access roads, which restricts their capacity to trade. Their production is primarily for self-consumption or for the local market, and the quality of their produce is very low. < Local markets are small and the potential for specialization and economies of scale in production for the local market is practically nonexistent. < There is high dependence on imported inputs. < Increased use of fertilizers and pesticides in an effort to increase productivity, particularly of the marginal lands, increases pesticide residues and augments environmental problems. < The dependence of agricultural exports on a small number of commercial crops in a limited number of markets increases their vulnerability to fluctuations in the international markets and the decline in commodity prices in recent years.
1. The main reason for the decline was the sharp fall in Cuba’s exports to the former Soviet Union.
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Market information is very limited and practically unavailable for small farmers. Regional trading is highly disorganized and lacks reliable transport, storage, packing, and distribution facilities. Marketing agencies handle primarily the trade in traditional crops. Limited human and financial resources are devoted to agricultural research; extension services are weak or absent. Public funding for agricultural R&D is very limited and has been declining sharply in recent years. Increasing volume of food imports as an effect of trade liberalization reforms and demand pressures for the population (including tourism) also increases the pressures on small farmers and erodes their incomes.
Despite these negative factors, the agricultural sector remains the backbone of the economy in a number of Caribbean states and the main source of livelihood for many small subsistence farmers in rural areas. In addition, a sizeable portion of the region’s work force is employed in the agricultural sector, and agricultural exports are an important source of foreign exchange earnings. In the larger countries, the share of agriculture in GDP ranges from over 50% in Haiti to only 3% in Trinidad and Tobago. Sugarcane represents 27% of the total crop output in the region (with Cuba producing 69% of the total). Bananas dominate the agricultural production in some islands and are a main source of foreign exchange earnings. In some countries (e.g., Guyana and Suriname) rice is the main export product.
Effects of Globalization on Caribbean Agriculture Globalization has ushered in an era characterized by the rising importance of international trade and commerce and the introduction of rules and regulations that govern this trade under GATT and the WTO. Trade liberalization, rapid technological advances in communications and transportation, unprecedented mobility of capital, labor, technology and information, and convergence towards market-friendly economic management systems are the main forces underlying the process of globalization (Pinstrup-Andersen 1998). By 1997, 60% of global trade was under liberalized agreements, and more than 100 such agreements were registered with the WTO (Bonte-Friedheim et al. 1997). Under the agreements on agricultural trade, member countries agreed to increase market access and export competition and to reduce government support to the agricultural sector. The impact of market liberalization in the Caribbean and the growing competition of imported food provided the stimulus to introduce productivity-enhancing technologies in rural areas, particularly in the large farms, and for a greater emphasis on quality, uniformity, and consistency of the produce and the timing of supply. It has also contributed to a rapid integration of previously isolated regional markets. However, farmers in the more remote rural areas and small local food industries find it increasingly difficult to compete with the cheaper imported food from the USA, Canada, and Australia, which have also higher quality and better packaging. In particular, the liberalization of agricultural trade in the Caribbean raises concerns that the incomes of the very poor households in rural areas will erode due to their low
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productivity and the low quality of their produce. The competitiveness of local producers has also eroded due to environmental degradation and soil erosion, causing them to lose valuable export earnings. These pressures are motivating an increasing number of farmers to diversify their production and introduce nontraditional crops in which Caribbean countries have a comparative advantage thanks to their climatic conditions. In addition, the changing patterns of agricultural production and trade are forcing small farmers to form farmers’ organizations in order to trade collectively, particularly in the nontraditional crops that they are adopting. To be able to trade, these farmers need access to information on food safety standards, market conditions and prices, etc. In the more developed countries, the private sector provides this information, but in the Caribbean, the private sector will not be able to provide this information because it lacks the necessary resources to make such investments, so the public sector will have to step in and provide support. The slow pace of the transition and adjustment to new global conditions is forcing many farmers to cease farming and seek other employment opportunities elsewhere, even though alternative employment is not easily found, especially in the rural areas. So far, the Caribbean countries have not used the provisions of the Uruguay Round Agreement of the General Agreement on Tariffs and Trade to develop safety nets, insurance, or risk management tools for their agricultural exports, thus increasing the negative impact of trade liberalization and the concomitant policy reforms and adjustments on the small landholders. In addition, domestic producers have difficulty dealing with the nontariff barriers, such as food safety standards and various technical barriers that have in recent years become the main reason for the exclusion of Caribbean agricultural produce from global markets. A study on the preparedness of Caribbean countries to comply with food safety standards indicates that many countries face significant difficulties. Whereas the international regulations governing food safety raised the production costs of food exports, the lax application of safety regulations for food imports has left many domestic consumers exposed to the risks of food-borne diseases. External pressures also force the Caribbean countries to collaborate in establishing trade partnership agreements and regional Free Trade Agreements, and in pressing for antidumping measures that will prevent or restrict exporters from the USA and the EU from dumping their surplus food.
The Impact on Public Agricultural Research and Development Regional cooperation in agricultural research in the Caribbean dates back to 1924 and the establishment of the Imperial College of Tropical Agriculture (ICTA) in Trinidad with the mandate of teaching and research. The priority research areas at that time were the major plantation crops: sugar, cocoa, bananas, and citrus. This research was coordinated centrally, and implementation proceeded through the execution of projects at the regional and country levels. Scientific disciplines such as plant breeding, soil science, and plant protection were integrated into the commodity programs (Blades 1998). Today, agricultural research capacity in the Caribbean is extremely fragmented due to geographical and political boundaries. Most R&D units are small and deal with
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applied and adaptive research. Emphasis is on technology acquisition and transfer rather than on technology generation per se, with a focus on small ruminants (goat, sheep), crop research, and natural resource management. Vegetable research is limited and fragmented. R&D in support of traditional plantation crops is still carried out mainly by the private sector, whereas public or public-supported research is focused primarily on specific thematic areas rather than on selected commodities. To improve the effectiveness of R&D investments, a 1993 World Bank sector review recommended to reduce the number of organizations involved in agricultural R&D and to increase the cooperation among research institutes in different countries. Specific strategies were elaborated, with an emphasis on strengthening existing research networks in the region and ties with extra-regional institutions and the private sector. Additional policy measures and resources are required to enable public agricultural research institutes to increase their effectiveness in assisting the transition of the sector from the production of goods for protected markets in Europe (under the Lomé convention—see below) and protected domestic markets under various trade barriers, to the production of goods that can compete in the global market. Toward that end, additional resources are needed in countries that lack facilities, equipment, trained staff, and operating funds to enable them to carry out effective research. The pressures that globalization exerts on the agricultural sector, and through it on public agricultural research to be more market oriented, also increase the incentives for the private sector to conduct more research. They also drive small farmers to organize themselves in units to take advantage of the opportunities in the markets and sell their produce. So far, however, priority setting for R&D has been informal and all too often absent altogether due to the very fragmented institutional structure of most NAROs and the lack of coordination between individual institutes. As a result, little attention has been given to the definition of national priorities; technologies with little value to farmers have often been generated and scarce resources have been wasted in the process despite the limited budget and the meager facilities. At the national level, especially in the smaller countries, R&D is not solution oriented, and there is also a lack of effective horizontal and vertical linkages between the research institutes and the main stakeholders: policymakers, NGOs, social groups, and farmers’ associations. In addition, budgetary pressures have brought substantial reductions in the allocation of public money to agricultural research in recent years and have curtailed the ability of public research institutes to meet the research needs in order to generate commercially valid technologies that can help transform the region’s agricultural sector. To meet these needs, it is necessary to pool together the region’s financial and human resources, implement collaborative research, and develop a regional agenda and priorities for agricultural research. The collaboration in research will eliminate unnecessary duplications, allow economies of scale in research, and reduce expenses. The countries will also have to put in place a regulatory framework to ensure compliance with food safety standards and IPR to be able to trade in the global market. Regional cooperation can contribute to strengthening the capacity of all the national research institutes, especially in strategic and basic research; partnerships between the public and the private sectors can strengthen the capacity in more applied research. This will require, however, the development of regional programs in order to
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determine the regional research priorities and the research agenda of the NAROs. The World Bank report also recommended a reduction in the number of R&D organizations and the establishment of strong research networks between the remaining organizations. With the advent of the globalization process, the reduction in trade barriers for goods and technologies is bound to reduce the demand for domestic R&D and increase the dependence on the global one. However, the research of the private sector, either at home or abroad, is driven primarily by market opportunities and prospects and by the potential to reap the benefits from IPR. Public-sector supervision over the private sector research is still needed, therefore, to adapt the new technologies to local conditions, and government supervision and controls are necessary to prevent market segmentation by the private sector that aims at enhancing its monopoly power and discriminating against certain producer groups or geographical areas. Public investments will also be required to develop infrastructure and provide up-to-date market information. In 1996, the Caribbean Agricultural Research and Development Institute (CARDI) was mandated by the Caribbean heads of government to develop an agricultural science and technology system for the region. Now termed PROCICARIBE, the Caribbean Agricultural Science and Technology Networking System is designed as a mechanism to generate new technologies and promote the transfer of technologies from developed countries under the Regional Transformation Program. PROCICARIBE provides the institutional framework within which Caribbean governments, R&D institutions, the private sector, NGOs, farmers’ groups, and other stakeholders design and implement strategies for the integration and co-ordination of agricultural research and development at the national and regional levels. The key to the design of these strategies is an agreement on research priorities and the strategy for conducting research based on these priorities. The networks employ the commodity systems approach in the implementation of their programs (Figure 14.1). PROCICARIBE’s core mission is to improve food security, alleviate poverty, improve the standard of living of the general population, and coordinate public and private research. To achieve these goals, it will be necessary to promote the following: < a competitive and sustainable agricultural sector, demand-driven agricultural R&D, competitive business systems and enterprises, and the use of modern information technologies; < laws and policies that protect the region’s natural resources and enhance inter- and extra-regional trade; < regional collaboration in agricultural R&D. To meet the challenge of globalization, the staff of local public research institutes must be better informed in areas such as marketing and business management, and be au fait with TRIPS, genetically modified organisms, international trade policies, food safety, quality environmental protection, and policy formulation. They must be able to evaluate the improvement of agricultural commodities for niche markets, the development of higher value-added products through PHT (agroprocessing), and to
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Strategic Alliances
Caribbean Agricultural Information Service Network
Policy and R&D priorities
Genetic Resources ! ! ! ! ! ! ! !
Accession Introduction Quarantine Evaluation Breeding Conservation Utilisation Marketing
Genetic Resources Network
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Socio-Economics
High farmer involvement ! Generation ! Validation ! Testing ! Transfer
IPM Network
Land & Water Resources Network
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Harvesting Handling Cleaning Packing Grading Storage Processing Transport
Post Harvest Network
Markets
Agribusiness
! Structure & function ! Intelligence ! Infrastructure
! Business Plan ! Interface with Business Community (enterpreneurs, joint venture, buyers, etc.)
Marketing Network
Technical Assistance
Figure 14.1. The commodity systems approach employed by PROCICARIBE networks
assess the desirability of specific production methods, such as organic farming techniques, that can be relevant for both small- and large-scale farming. A regional consortium of universities called CACHE has been formed in the Caribbean in recent years to place greater emphasis on curricula that are more relevant to the needs of the regional agricultural sector and to achieve economies of scale by linking regional agricultural institutions. Together they have developed a shared vision for training in agricultural research and development and an effective network with R&D centers of excellence in the region in order to develop a regional curriculum that will include agrotourism, ecotourism, and biodiversity maintenance and exploitation. During the past decade, however, enrollment in agricultural training institutions has been declining due to the very limited availability of jobs in the sector and the relatively high academic fees. It is clear, though, that investment in human resources is an effective policy instrument, and CARDI is therefore planning to join CACHE in research and training.
The Challenges Ahead Around 13 million people, or 38% of the region’s population, are poor; Jamaica, Dominica, Haiti, Guyana, and the Dominican Republic are the poorest countries (in Haiti as many as 94% of the population is poor). Many of the poor households
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concentrate in rural areas, and many of the rural poor depend on agriculture for the larger share of their income. Many of the poor rural households are farming marginal hillside lands, and farming in these areas often has negative environmental effects, due to severe soil erosion, deforestation and overgrazing. More than 20% of the labor force in the Caribbean countries is employed in agriculture; in some countries this share is considerably higher and therefore, agriculture provides effective means to reduce poverty and enhance food security. To realize this potential, Caribbean governments will have to put in place appropriate policies, provide the necessary infrastructure, and allocate enough resources to public research in order to promote the production of nontraditional crops and facilitate the trade in these crops in the rural areas where poor farmers concentrate. At the same time, appropriate assistance must be given to small farmers who may be forced out of farming as a result of trade liberalization. Facing a growing competition of food imports from the developed countries, primarily of staple foods like wheat, rice, and maize in which these countries have a comparative advantage thanks to the large scale and efficiency of production, the main alternative of the agricultural producers in the Caribbean is to diversify their production and include nontraditional crops for the domestic market and for exports. The main challenge of the Caribbean NARS is, therefore, to secure a successful selection and adaptation of nontraditional crops in which the countries in the area have a comparative advantage as a result of their climatic conditions and to assist local producers in diversifying their farming system and adopting these crops. This requires the NAROs to devote more human and financial resources to assist in the selection, transfer, and adaptation of nontraditional crops and suitable new technologies by the local farmers. In this selection, the focus must be on increasing the income of the small-scale farmers by giving them the option to grow more profitable cash crops for the local market and to export rather than rely on staple foods for self-consumption. The diversification of on-farm activities can also include post-harvest treatment and processing to increase the value added of their trade. Niche markets in North America and Europe can be an important target for the region’s exports of crops, such as spices, selected fruits and vegetables, in large measure because these crops are particularly suitable for small farmers. Other elements of reform in the coming years should include sound environmental management land tenure systems to ensure proper land use, education to end users, and incentive schemes so as to reduce improper land husbandry practices that erode the Caribbean natural resources. Appropriate land reform policies would be needed to deal with the accelerating deforestation as well as with waste disposal, water quality, and integrated pest management, with the objective of developing an agricultural system that is more friendly to the environment. New research in biotechnology has the potential to increase crop productivity, and irrigation will gain importance in intensive high-input farming systems that specialize in high value crops such as tropical fruits, vegetables, roots, and cut flowers. These reforms will have to be implemented against the background of gradual liberalization of global trading in agricultural produce and the abolition of the preferential tariffs and quotas that were given in the past to several of the Caribbean traditional agricultural exports in the EU under the Lomé Convention. The Cotonou
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agreement that was signed in June 2000 replaces the 1975 Lomé Convention and brings the agreement in line with WTO rules by extending the preferential access for goods from most Caribbean countries to the EU market only until 2005. The strict food safety rules under the WTO agreement and the more demanding standards imposed by many developed countries may, therefore, create barriers and restrict some of their agricultural exports. Overcoming these barriers would require technical and legal assistance to the Caribbean countries, and the NARS has an important role in assisting the local producers to comply with the standards and avoid having their products blocked by these barriers. Meeting all these challenges requires the support of an efficient, dynamic, and flexible agricultural R&D system operating in an enabling policy environment in an integrated, collaborative manner with linkages to regional and international R&D institutions. Supply-oriented research must give way to demand-oriented research that is driven by the marketplace and the needs of the farming community. The public sector must create a supporting environment and establish an appropriate regulatory framework for public and private research by ensuring IPR and encouraging privatesector investment in agricultural research. The following key areas for R&D have been identified from priority-setting exercises that were conducted in the region during the past five years (Paul 2000): < agroprocessing to increase the value added of the marketed commodities; < agroforestry integrated into crop/livestock systems to help rehabilitate the degraded watersheds; < integrated land and water resource management; < ensuring quality standards of the commodities traded in regional or exported to extra-regional markets; < integrated pest management to reduce pesticide levels and residues and provide control of the major pests and diseases; < diversification of the agricultural system away from traditional commodities into vegetables, small ruminants, fruits, root crops, cereals, grain legumes, cut flowers, including aquaculture and greenhouse/shade-house technologies. The drive for trade liberalization under the pressures of globalization and the WTO agreements, and the abolition of preferential tariffs in the EU will force domestic agricultural producers in the Caribbean to compete in cost and in product quality both within the region and in the international marketplace by adjusting their production practices and their allocations of land, labor and capital. This competition is likely to favor, however, the larger farmers that can increase the use of mechanization, irrigation, agroprocessing ,and agrochemicals, while many small farmers are forced to continue farming in marginal mountain areas and in fragmented holdings. To balance the disadvantage of the small landholders and combat the rise of poverty in the rural areas, the NARS will have to devote a greater portion of their research and their extension services to the specific needs of the small farmers to improve their productivity, assist them in diversifying their farming system and help them take part in the trading system in agricultural produce.
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References Antoine, P. 2000. Positioning David to Face Goliath: Issues and Considerations for Caribbean Agricultural Negotiations (unpublished). Paper presented at OIC Conference, Ottawa, Canada, April 2000. IICA Antoine, P.A. and E.A. Simms. 1994. Assessing the Impact of Agricultural Policies on Producers and Consumers in Selected OECS countries. IICA, T&T. Blades, H. 1998. Background to PROCICARIBE. Presentation to the 1 Meeting of the Board of Governors of PROCICARIBE. February 1998. Kingston, Jamaica. Antoine, P. and C. Pemberton. 1996. Economic incentives and the Agri-food sector: A quantitative assessment. Prepared for OECS-ADCU. IICA Office T&T. Bonte-Friedheim, C., S.R. Tabor and H. Tolini. 1997. Agriculture and globalization: The evolving role of agricultural research. In The Globalization of Science: The Place of Agricultural Research, edited by C. Bonte-Friedheim and K. Sheridan. 1997. New expanded edition. The Hague: ISNAR. Davis, L.H. and R.E. Pierre. 1993. Sustainable development in an era of economic liberalization: Prospect for LAC. Invited paper to American Agr. Economic Association and Caribbean Agricultural Economic Society (Ca-LS). Orlando, Florida. August 1-4, 1993. FAO. 1999. Special ministerial conference on agriculture in small island developing states (SIDS). 12 March 1999. Rome. Gamble, W.K. 1997. The Globalization of Science: Agricultural Research in Developing Countries. In The Globalization of Science: The Place of Agricultural Research, edited by C. Bonte-Friedheim and K. Sheridan. 1997. New expanded edition. The Hague: ISNAR. Grauwde, H. and J.R. Deep Ford. 1999. Assessment of the impact and policy implications of trade liberalization on the agricultural sector of CARICOM countries: Purposes and expected outputs from the ongoing FAO projects. In Trade and Economic Liberalization: Implications for Agriculture and the Environment in the Caribbean and Latin America, edited by L. Rankine. Holingsworth, W. 2000. Implications of the acquisition and deployments of GM Crops in the Caribbean. Presentation at the 1 CLAWRENET Meeting, 3-5 October 2000, Barbados. IICA. 1998. Performance and Prospects for Caribbean Agriculture. Trinidad, West Indies: IICA. IICA. 1999. Food, Safety, Trade and Public Health, edited by D. Francis and J.A. Francis. In a Nutshell #4. IICA-CARC. IICA. 2000. Caribbean Agriculture and the WTO Agreements. In a nutshell. Trinidad: IICA. IICA. 2000. Emerging Issues in Agriculture Health and Food Safety – Directorate of Agriculture Health and Food Safety. Technical Consortium. Costa Rica: IICA. Jolly, C.M. and C. Ligeon. 1999. The environmental and social impact of trade and economic liberalization for the environment in the OECS. In Trade and Economic Liberalization: Implications for Agriculture and the Environment in the Caribbean and Latin America, edited by L. Rankine. McDavid, C.R. and S. Maximay. 2000. Mechanisms/Processes for achieving vision and for making universities and agricultural colleges centres of excellence and their alumni more competitive. Presentation at the IICA Sponsored Week of Agriculture. 4-7 October 2000, Jamaica. Messina, W.A. Jr. 1999. Cuban Agriculture: Adopting new policies and new realities in a world of liberalizing trade. st
st
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Mellor, J.W. 1997. Implications of Trade Globalization to Agricultural Research. In The Globalization of Science: The Place of Agricultural Research, edited by C. Bonte-Friedheim and K. Sheridan. 1997. New expanded edition. The Hague: ISNAR. Momsen, J.H. 1999. Caribbean tourism and agriculture: New linkages in the global era? In Globalization and neoliberalism: The Caribbean context, edited by J. Thomas. Pp. 115-133. Rowman and Littlefield. Monyo, J. 1997. The plight of NARS in low income, food-deficit countries. In The Globalization of Science: The Place of Agricultural Research, edited by C. Bonte-Friedheim and K. Sheridan. 1997. New expanded edition. The Hague: ISNAR. Paul, C.L. 1997. The Impact of Agricultural Development on Water Resources in the Caribbean. Invited Paper presented at the Integrated Water Resources Management Seminar organized by CCST, WRA of the Government of Trinidad and Tobago, the World Bank, CDB, OAS, IADB and the WMI. 24-27 June, 1997. Trinidad, W.I. Paul, C.L. 1998. Designing an Agricultural Research and Development Policy and Agenda for The Caribbean. Presentation at the 1 Meeting of the Governing Body of the Caribbean Agricultural Science and Technology System – PROCICARIBE, 2-3 February 1998, Kingston, Jamaica, Univ. Antilles and Guiana, 1989. Caribbean Agricultures and Development. Guadeloupe Pinstrup-Andersen, P. 1998. Food policy research for developing countries – Emerging issues and unfinished business. Washington, DC: IFPRI. Ramautarsing, W.R.D. 1999. Experiences of Suriname agriculture in the context of trade and economic liberalization. Robbins, P. 1999. Review of the impact of globalization on the agricultural sectors and rural communities of ACP countries – Study report. CTA Number 8007. Wageningen: CTA. Roseboom, J., M. Cremers and B. Lauckner. 2000. Agricultural R&D in the Caribbean: An institutional and statistical profile. Research Report 19. The Hague: ISNAR. Sherlock, P. 1992. The Caribbean – A region in its own right. The Courier. No. 132. March/ April 1992, p. 50 Sutton, P. 1998. Small states and a successor Lomé Convention. ACP Seminar, Brussels, 1-2 September 1998. Brussels, Belgium: ACP Secretariat. Thomas, C.Y. 1998. Caribbean agriculture in the age of globalization and trade liberalization. In: Caribbean Agriculture: Strategic Responses to Trade Liberalization and Globalization, edited by L.B. Rankine and R.H. Singh. Caribbean Agro-Economic Society, UWI, St. Augustine, Trinidad, W.I. UNCED. 1992. The Global Partnership for Environment and Development – a Guide to Agenda 21. UNCED, Geneva. Valenzuela, E. 1999. FAO’s outlook for the food and agriculture sector in the context of trade liberalization. In Trade and Economic Liberalization: Implications for Agriculture and the Environment in the Caribbean and Latin America, edited by L. Rankine. Caribbean Agroeconomic Society. September. St. Augustine, Trinidad and Tobago: UWI. st
Chapter 15 The Impact of Globalization on the Agricultural Sector and Public Agricultural Research in Latin America and the Caribbean Jorge Ardila Vásquez*
Globalization in Latin America and the Caribbean The dynamic processes associated with globalization fostered stronger ties and greater interdependence among the economies of Latin American and the Caribbean (LAC). These processes also triggered a faster growth in trade with the other regions of the world. This is evidenced by the changing patterns of the region’s international trade. Between 1987 and 1997, LAC had the second highest growth rate of exports worldwide, with an annual growth rate of 12.1%, and the third highest growth rate of imports, with an annual growth rate of 12.9%. During that period, intra-regional trade grew at an average annual rate of 16%, and the region’s share in global agricultural exports rose from 11.7% in 1980 to 14.7% in 1997. Other indicators of the strengthened links with and the growing dependence on the global economy were the development of new regulatory frameworks that explicitly incorporated these links, the greater exposure to instability in the global financial markets, the increased use of new information and communication technologies, and the greater degree of political homogenization. The regulatory frameworks underwent unprecedented changes as a result of the Uruguay Round Agreements and the GATT, which led to the adoption of common rules for regulating trade and the protection of IPR. As a result of these advances, practically all countries (with the exception of Cuba) in the region modified their laws or are drafting new laws in the area of intellectual property, protection of cultivars, biodiversity, and access to genetic resources, in order to comply with these agreements, to avoid the imposition of economic and trade sanctions, to take advantage of new opportunities for attracting foreign direct investments and technologies, and to encourage local innovation. However, there are still disagreements on some issues regarding the position of the developed countries. For example, while developed countries have protected micro-organisms, animals, and plants and their parts via patents and breeders’ rights since the 1980s, the laws in most developing countries do not provide this protection. In a good number of LAC countries, the process of updating the regulatory frameworks is still seriously behind schedule.
* Jorge Ardila Vásquez: Inter-American Institute for Cooperation on Agriculture 307
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In recent years, enormous changes took place also in the area of international financial operations. Since World War II, “financial bubbles” grew very alarmingly— three to four times faster than the growth in production and in investment in real assets worldwide. Several LAC countries, including Brazil, Argentina, and Mexico, suffered massive speculative attacks in the past with significant and very devastating effects on their economies. To dampen these financial bubbles, many LAC countries introduced fundamental changes in their exchange rate regimes, and came up with strong disciplinary measures as an integral part of the exchange rate and monetary policies. In the area of information and communications technology (ICT), there has been speedy progress worldwide but only in few countries in the LAC region. While the number of Internet users worldwide increased by 100% in the last two years, LAC as a whole is still well behind in terms of Internet access and coverage. Many researchers in the region do not yet have access to the Internet, and some (mainly those working in remote areas and distant experimental centers) do not even have a computer to use in their work. There are many research stations in which only one computer is available for 10–15 researchers. One exception is INIA1 in Venezuela, where a project is under way to develop a technological platform that includes the installation of some 400 computers and the development of local and telecommunication networks, to be utilized mainly by researchers all over the country. EMBRAPA2 in Brazil, INTA3 in Argentina, and INIFAP4 in Mexico, among others, are also carrying out ambitious projects to connect their researchers to the Internet and develop their telecommunication facilities with research stations in remote areas. The large inequalities of access within and between the LAC countries are, however, a cause for concern, since most of the national research systems are still lagging behind and will have to make large investments and provide extensive training in order to close that gap. A number of specialized networks and cooperative research programs in the region try to take advantage of the new possibilities offered by ICT to close this gap.5 Serbin noted that in the LAC countries, globalization also has a socio-political dimension in that it gives rise to political homogenization by promoting the western democratic model, the exchange of values and information, and the internationalization of civil society. One important consequence is the strengthening of the political and economic integration in the region, which has led, in turn, to the deregulation and liberalization of the economy and has given rise to a profound transformation of the production structure within countries and the production and trade relations between
1. INIA: Instituto Nacional de Investigaciones Agrícolas (National Institute for Agricultural Research). 2. EMBRAPA: Empresa Brasileira de Pesquisa Agropecuária (Brazilian Institute for Agricultural Research) 3. INTA: Instituto Nacional de Tecnología Agropecuaria (National Institute for Agricultural Technology) 4. INIFAP: Instituto Nacional de Investigaciones Forestales y Agropecuarias (National Institute for Forestry, Agricultural, and Livestock Research) 5. Some of the specialized networks operating in the region are: REDCAHOR (vegetables); REMERFI (plant genetic resources, C.A.); FLAR (rice); REDARFIT (genetic resources in the Andean countries). There are also cooperative research programs in all the subregions, e.g., PROCIANDINO (Andean Countries), PROCITROPICOS (Amazon Basin); PROCINORTE (USA, Canada, and Mexico).
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countries. Globalization has therefore been a great stimulus for change in the region. Beginning with the debt crisis of the 1980s, the LAC countries embarked on a gradual process of abandoning the import substitution strategy, adopting instead an outwardlooking growth strategy and stronger links to the global market. While under the previous strategy priority was given to increasing industrial production for the domestic market, under the new strategy the focus of economic policies was on commercial opening. The results were profound changes in the economic structure and a much greater and more strategic role for technological innovation and productive specialization. These developments also made it necessary to reconsider the role and the mode of operation of the public sector. The public sector had to focus more on promotion and support rather than the direct execution of actions, to allow greater participation of the private sector, and to substantially reduce the size of public enterprises and institutions, especially those that were created to support the previous development strategy. This strategic change had a very strong impact on the public agricultural research institutes in most countries, due to significant reductions in their budgets and human resources and deep changes in the production structure in LAC as a result of economic opening and interaction with countries that were technologically advanced and more competitive. These changes made it necessary to redesign production, regional specialization, and market penetration strategies. Trade liberalization and the drastic reduction in the level of protection for agricultural products brought in cheap imports of food products from developed countries and forced many farmers in LAC out of the production of a number of traditional staple foods. These farmers now had to compete with foreign producers who were more efficient, used mechanized and highly advanced technologies, and had access to highly developed physical infrastructure (transportation, seaports, and airports), which enabled them to compete internationally. These developments contributed to an increase in the import of a considerable number of food products, such as rice, beans, some vegetables, wheat, and maize in many LAC countries. At the same time, however, the production and exports of many nontraditional agricultural products grew consistently in recent years, revealing important comparative and competitive advantages of the LAC countries that led to an increase in their share in the international market for these goods. During the past decade, 86% of the changes in the net value of agricultural exports in the LAC countries were in fruits, vegetables, soybeans, and meat. Over the past 20 years, the “agricultural frontier,” i.e., the land used for agricultural production (excluding pasture land), was extended by an additional 16.4 million hectares, an increase of 17%. For five products alone (soybeans, corn, tropical fruits, sunflowers, and sugar cane), the area under cultivation increased by 21.2 million hectares. At the same time, there was a drastic reduction of some 6.9 million hectares in the land used for growing cotton (in Brazil especially), rice, wheat, and cassava. The area under cultivation remained relatively stable for other crops such as starches, cereals, and annual pulse crops (Table 15.1).
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Table 15.1. Area under Cultivation by Main Crops in LAC (’000 hectares). Group of products* 1. Starches 2. Cereals 3. Tropical industrial products 4. Temperate climate industrial products 5. Fruits (Total) 6. Vegetables 7. Annual pulse crops 8. Cotton, nuts and tobacco Total
1980 4.826,9 47.879,3 13.383,3 13.636,3 3.205,2 586,7 7.741,9 6.230,2 97.489,8
2000 4.631,1 48.867,6 15.422,8 27.613,1 5.254,2 786,3 8.311,8 3.003,8 113.890,9
Change (%) - 4.05 + 2.06 + 15.23 + 102.5 + 63.9 + 34.0 + 7.36 - 51.78 + 16.82
Sources: FAOSTAT * 1. Cassava, potato, plantain, sweet potatoes. 2. Rice, barley, corn, sorghum, wheat. 3. Cocoa, coffee, sugar cane. 4. Sunflower, soybeans. 5. In particular, bananas, avocados, broadleaf fruit trees, citrus, coconut, mangoes, papaya, strawberries, pineapples. 6. In particular, onion, garlic, cauliflower, asparagus, lettuce, cucumbers, tomato, carrots. 7. Beans, chick pigeon peas, lentil beans. 8. Cotton, nuts, tobacco.
Let us now examine what these changes mean from the perspective of four fundamental variables that must be considered in order to determine the potential for increasing agricultural production in LAC. These variables include the trend in agricultural production vis-à-vis population growth, the evolution of productivity, changes in the area under irrigation, and the capacity for research. Trends in food production vis-à-vis population growth In 1994, LAC emerged from a long period of stagnation, and for the first time the index of aggregate production per capita grew rapidly (Figure 15.1a). However, this increase was mostly attributable to modifications in the production structure, which led to an increase in per capita production and exports of sunflowers, soybeans, corn, fruits, vegetables, sugar cane, and meat (especially beef), but to a decrease in per capita production of sorghum, cotton, cassava, potatoes, wheat, coffee, and rice (Figure 15.1b). Clearly, in the LAC region, nontraditional products are enjoying growing success, while staple foods are losing ground. As a result of these developments, there has been more and more subregional specialization by product: The Southern Cone has developed a comparative advantage in the production of oil, grain, and meat complexes, while the Andean countries have gained a comparative advantage in the production of fruits and tropical products, and Central America and Mexico have gained a comparative advantage in the production of vegetables, certain fruit trees and coffee.
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(a) Index of per capita food production in LAC I n d i c e s
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SOURCE: Calculated by IICA from FAOSTAT data
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Kilos Produced/person
55 50 45 40 35 30 1
2
3
4
5
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9 10 11 12 13 14 15 16 17 18 19 20 21 22 Years
SOURCE: Calculated by IICA from FAOSTAT data.
Figure 15.1. Evolution of per capita food production indices in LAC
Evolution of productivity Raising productivity is the most important factor in overcoming limitations in production, attracting private investment, and enabling agriculture to make a positive contribution to economic growth. From this perspective, the situation in LAC is both promising and paradoxical: For most products with a large increase in yields, the total production is growing at a slower rate than that of the population, whereas for products that have higher rates of growth in per capita production and exports, the changes in yields are minimal. For example, consider the developments in two groups of products: staple grains and tubers, and fruits. In the first group, which includes rice, corn, beans, wheat, potatoes, and cassava, the changes in production are mainly due to
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higher yields. In the second group, which includes citrus, avocado, bananas, melon, papaya, pineapple, and mango (all tropical, with the exception of melon), the changes in production are due primarily to the increase in the area under cultivation. Also, in many of these fruits, yields have remained unchanged in many countries. One possible explanation for these differences can be the gap in the productivity and competitiveness in basic foods between the countries that are leading in their terms of trade and production worldwide and the LAC countries (Table 15.2). While a lot of agricultural R&D has been devoted in the region to these products in the past decades in order to increase their yields, other countries in the world manage to achieve higher technological and economic performance. With the opening of the economy to trade, the domestic production of basic foods for internal consumption must be able to compete with that of other countries; otherwise, the market solution will be to import these products at lower prices. It may well be the case that the effort and resources invested in R&D on these products in LAC were insufficient in the past; another possibility is that other countries already had a significant comparative advantage in their production, and this advantage could not be erased by the investments in R&D in LAC. Nevertheless, the increases in the production of basic foods in LAC represent savings of some 20.5 million hectares in the area under cultivation. In other words, the expansion of the agricultural frontier would have been much greater (almost double) had this change not been effected. Another possible explanation is that many tropical countries in LAC earmarked, several decades ago, a large part of their resources for research on products in which they do not have a comparative advantage, such as wheat, barley, fresh or processed corn for human consumption, and broadleaf fruit trees, while fewer resources were allocated for research on tropical products in which these countries may have a comparative advantage in the international market, such as tropical vegetables, fruit
Table 15.2. Relative Yields, Growth Rates, and Indicators of Comparative Advantage in LAC Products
Average yield in LAC (tons/hectare)
Average yield in the leading producing country (tons/hectare)
Rice Beans Corn Sorghum Wheat
3,18 0,64 2,56 2,70 2,34
6,19 1,83 7,71 4,18 6,76
Annual growth in Annual growth rate of average yields in LAC average yields in LAC (%) required to equal the leader* (%)
2,93 0,60 2,81 -0,39 1,83
5,26 8,45 8,85 3,41 8,49
Source: IICA, Area II, S&T and N.R. Original data from FAOSTAT. Note: The table indicates yields in LAC required to equal the yields in the world’s leading countries by 2010. The leaders are those countries that have yields above the world average and at the same time have an important share in the world trade of the product in question. * Based on the unlikely assumption that the yields of the leaders will not vary.
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trees, palm trees, or fruits of the tropical highlands. According to IICA6, only 10–15% of the budgets of the NARIs of the region is earmarked for tropical fruits and vegetables. In part, this is because the priorities and the allocation of resources for research in the past decades were greatly influenced by the import substitution strategy of the 1960s. This was the case with wheat and barley, where the goals were to produce cheaper foods for national consumption and to support the process of industrialization. Changes in the area under irrigation Traditionally, LAC has been behind other continents in the development of infrastructure for irrigation. During 1980–98, the total irrigated area in the region grew from 13.8 million hectares to 18.3 million hectares, a growth rate that exceeds those in other continents. Nevertheless, compared with other regions, LAC is still behind. In Asia some 170 million hectares are under irrigation, and in the developed countries there are some 70 million hectares of irrigated land. Furthermore, in LAC, nearly 90% of the increase occurred in only six countries (Mexico, Brazil, Chile, Colombia, Ecuador, and Venezuela). The potential in the region for increasing the area under irrigation is still very high. In Colombia alone, for example, there are 3.5 million hectares that are suitable for irrigation, versus a total of 0.8 million hectares that were irrigated in 1998. Capacity for research Agricultural research in the region will be determined by the availability of funds, specialized human resources, and the new agenda of priorities. In recent years, there has been a major contraction in the funding for agricultural research by the public sector in practically all the LAC countries. This has significantly reduced the operating capacity of the public research institutes and seriously reduced the capacity to generate effective results. There are many public research institutes in LAC that allocate around 95% of their resources to the salaries of researchers and support personnel and for general administrative costs, resulting, in practice, in forced but disguised unemployment of professionals. At the same time, however, there are clear and growing differences between countries in the resources available for agricultural research. Some 85% of all public research resources allocated for agricultural research in the entire region are accounted for by the expenditures in Mexico and the countries of the Southern Cone; only 15% of the expenditures are in all the other countries in the region, and these are the countries located in the tropics. In some research organizations, particularly Embrapa (Brazil) and INIFAP (Mexico), 30% to 40% of the total expenditure on research is spent on operating costs—and this rate is considered to be optimal. These, however, are the exceptions. The participation of the private sector in research has increased in recent years, as has the role of universities. However, private-sector participation does not yet exceed 10–15% of the total investment in agricultural research, and this figure is well below
6. IICA. Area II: Science, Technology and Natural Resources. Basic information for member countries.
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the optimum for the level of economic development in the region. There are already some countries (Brazil, Uruguay, and Mexico) in which the share of total expenditures on research exceeds 1% of the agricultural GDP, while the average share in the region is merely 0.4% of the agricultural GDP. Therefore, today it is no longer possible to evaluate the funding for research in the traditional way, i.e. by relying only on public-sector investments, or by focusing solely on research related to production. Clearly, public investment in research has declined quite sharply and is likely to continue to fall in LAC. This puts the region at odds with other regions, where growing private-sector investment in agricultural R&D has no effect on public investments and where public investment is considered to be a prerequisite for private investment. It can be expected that investment at the regional level will increase, since this is the most efficient way of conducting agricultural research. Several studies carried out in the region reveal internal rates of return on investment in regional programs that are considerably higher than those in programs conducted at the national level. One likely explanation for the low level of investment in research at the regional level in recent years, despite the higher rates of return, is the inertia of the earlier economic strategy in which the focus was on the “national” agenda, the possibility of investment in cooperative programs among countries was excluded, and technological spillovers in and outside the region were restricted or prohibited. Lastly, the resources for agricultural research contributed by the CGIAR, especially through CIMMYT, CIP, and CIAT, also play an important role. The results of such research are available to the countries of the region at no cost, and they have had a major impact on the productivity of basic foods. However, there are many LAC countries that believe that the CGIAR should have an even greater presence in the region and a greater impact on the regional agricultural sector. It is well known that the international centers of the CGIAR attach low priority to LAC. However, there are several reasons why these priorities should be reconsidered: 1. In basic foods, more research can be pivotal to meet the challenges of achieving competitive production and increasing the domestic supply, especially in the countries located between the tropics of Cancer and Capricorn. 2. In fruits and vegetables—crops in which the region has a competitive advantage— more research is necessary to maintain this advantage in the future, since these products are both important to secure the countries’ export earnings, and pivotal in the struggle against rural poverty. Many poor farmers in LAC are beginning to produce these crops as the best option to achieve substantive improvements in their income levels and, thereby, in the well-being of their families. 3. In natural resources there are two main issues: the need to conduct more research on how to use natural resources more efficiently, especially soil and water, and how to tap and use the region’s biodiversity more effectively. In these fields, much of the research is considered a public good, in that it involves the search for technologies for which there are no markets and therefore no possibility to recover costs on the basis of the market value of the research results. Natural resources are unequally distributed in the LAC countries, and in many of them, their degradation and/or depletion is a major contributing factor to rising urban and rural poverty.
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The problems raised by the scarcity of suitable human resources for research are similar to those raised by the scarcity of funds. On the one hand, the capacity to conduct research varies widely between subregions and countries in LAC, as can be observed in Table 15.3. On the other hand, the average age of the researchers in a considerable number of research organizations, especially in the public sector, is over 50, and in most cases these researchers cannot be replaced for administrative reasons. The capacity of public research institutions in LAC to conduct quality research is likely, therefore, to decline considerably during the next 5–10 years, when most of the currently employed researchers are retiring. The refusal to increase the personnel rosters of the NARIs also reflects a clear trend in the region to sharply reduce public-sector agricultural research by reducing funding as well as the number of researchers, even though the private sector in many countries still does not invest enough in this research. The problems associated with the scarcity of human resources are even more acute, because there is clearly a strong upsurge in the demand for research in the new fields arising from the change in production structure and from new market opportunities. In these new fields of research, which are necessary to support the introduction of new crops, the public sector must assume initial responsibility, as it should for any infant industry, because the results are uncertain and the initial investment can be high and may not be recovered for a long time. To respond to the new demands, research priorities must be adjusted, especially in the public sector. Some research organizations made progress in this area, developing new strategies that will enable them to make a more accurate evaluation of the needs of producers and to provide technologies that have been adapted to the specific agroclimatic and soil conditions in the country. This is the strategy of INTA in Argentina, a pioneer in the implementation of joint ventures with the private sector to develop technologies that can be appropriated, i.e., technologies that can provide economic benefits for the innovators and thus securing more resources for research. Other countries that have come up with innovative schemes are Brazil and Colombia, where Embrapa and CORPOICA, respectively, are developing strong alliances with the private sector to define priorities more accurately and develop the technologies that are needed by the producers and by the agents of the different agrifood chains.
Table 15.3. Differences between LAC Countries in Human-resource Capacities for Agricultural Research Subregions
Caribbean Central America Andean Countries Southern Cone
Researchers/ 100.000 inhabitants
US$ (thousands)/ researcher
Average # of researchers per program
0.53 3.30 1.86 2.16
29.5 35.4 47.1 71.3
1.3 4.5 9.2 14.5
Source: IICA, Area II. Original data from survey in 1993. The current situation may be worse in terms of differences between subregions.
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Other important innovative schemes that have been designed in the LAC region to secure the necessary resources for research are the accumulation of para-fiscal funds with the participation of the private sector, the introduction of competitive schemes to direct research to specific subjects, and the increased participation of producers and operators of agroindustries in the definition of priorities for, and the allocation of, resources to research. These innovations will be analyzed in greater detail below.
The New Institutional Arrangements for Agricultural Research According to Dosi, Teece, and Chytry (1998), research institutions must evolve over time, parallel to the trends in the rules and technologies that govern their sector, in order to be able to respond to the changing needs of their constituencies. In the case of agricultural research, the NARS must be able to evolve and adjust their operations to the underlying changes in the local and global market conditions, in government policies, and in producers’ needs and priorities. The globalization process has brought about major changes in the setting in which agricultural research is carried out, as farmers and producers in the agroindustries are developing new crops and products for new markets and demanding new technologies that have not been developed thus far by research organizations in the region. The most direct effects of these changes is the demand for institutional changes in the NAROs by governments and producers, and the new regulatory frameworks that have to be put in place at the international level. These institutional changes involve not only the establishment of new priorities in order to generate the needed technologies, but also of new organizational arrangements and strategies. This has major implications for the performance of the countries’ research systems. The general view in LAC is that the institutional transformation of the national research systems has thus far failed to keep pace with the needs of farmers and of the agroindustries. There is even a perception that this failure has created a wide gap between the technologies that the NARS are developing and the ones required by producers, as well as a communication gap between the demand for new technologies and the supply of solutions by the NARS, especially in state-run organizations. These problems are due in part to the sharp reduction in the financing for public research institutions, but also to the limited capacity for change in the organizations themselves. The resulting gap has prevented the vast majority of the NAROs from energetically undertaking the reforms needed. These reforms include: 1. redefinition of the institutional vision and mission; 2. reorientation of their lines of work to the new priorities; 4. reconstruction or transformation of core competencies and institutional redesign (policies and norms for the new paradigm). Over the last two decades, even though the number of programs aimed at transforming research organizations in LAC has increased, the changes they have managed to introduce have been rather timid and marginal and have not led to substantial changes in priorities or strategies for the allocation of resources to meet the new needs and demands of producers.
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By and large, the institutional arrangements developed over the past three decades have been similar in all the LAC countries. In recent years, however, significant differences between the solutions of different countries have emerged, and they suggest new trends in the institutional transformation process and the determination of the basic characteristics of the new institutional developments in the region. In broad terms, these can be grouped into the following five categories (Ardila 1999): 1. Transformations to improve coordination and to mobilize national research capabilities There are two dimensions to this category of transformations. The first concerns the formal organization of the NARS, and it involves the development of networks and the creation of consortia to work on projects regarded as a priority by the system as a whole rather than by individual organizations. The first country to formally organize such a system was Costa Rica, beginning in 1989. The system in this country is made up of an assembly of the representatives of different sectors (the public sector, universities, the private sector and organizations of professionals), a board of directors, a foundation that funds research projects, and a series of PITAS, or research and technology transfer programs, each of which groups together all the organizations connected to the research in the specific field concerned. Several countries are engaged in initiatives of this kind, including Guatemala, Honduras and El Salvador in Central America, Colombia and Bolivia in the Andean region, and most of the Southern Cone countries. Many of these national systems are developing the concept of competitive funds. Generally speaking, this is regarded as a positive development, not only because they promote greater competition and excellence in research, but also because they make the process of allocating resources for new priorities more flexible. 2. Transformations to develop appropriate technologies based on the availablity and the needs at the international or regional level The region’s research model has so far been based on the transfer, adaptation, development, and use of technology from outside the region, primarily for staple foods (corn, rice, wheat, beans, potatoes, and cassava) through coordinated actions between the INIAs7 and the international agricultural research centers of the CGIAR. The research activities and priorities of the CGIAR Centers in LAC have therefore been very important. However, the contribution of INIAs in research on genetic resources and in technologies for production has also been very significant. In any case, the region used this collaboration with the CGIAR system very successfully to gain access to technologies that have been developed outside LAC. In other cases, especially in technologies related to post-harvest handling and marketing, the region has traditionally conducted less research, and, as a result, access to these technologies was, for a long time, through contracts and licenses for the development, transfer, and use of post-harvest technology already available outside
7. INIAs are the national institutions of agricultural research in LAC, all public.
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the region and mostly involving the private sector. In this area, a major process of deregulation is currently under way, especially in the public sector, making it possible to do “technological business” more easily. This means that more and more INIAs are working with private enterprises and foreign consulting firms in the transfer of technologies related to agroindustrial and product transformation processes, which, in many cases, cannot be used without special contracts and licenses. The programs that prove to be the most successful in the transfer of technologies from other regions into LAC are the cooperative agricultural research programs supported by the LAC countries and by IICA. However, so far these programs account for only 0.02% of the annual research expenditure of the countries in the region, a figure that is far too low considering the potential benefits.8 At the national level, there is a growing trend of forming research and/or technology transfer initiatives with multinational companies and with the research centers of developed countries. In addition, there are “technology radar” programs, under which a country or a regional organization establishes formal links with research centers in developed countries. The most ambitious and advanced example of this program is the cooperative program established by EMBRAPA in Brazil with research centers and Universities in the United States and France, and there are plans for other programs. The basic purpose of this program is to capitalize on scientific developments that may be of interest to Brazil and to establish research agreements and other types of scientific cooperation with developed countries. Almost all the funding for these programs comes from the participating countries. The advent of FONTAGRO is also a plus for the region as far as the appropriation of available technologies is concerned, since experience is acquired in preparing research proposals that can involve the technology inventories of several countries. 3. Transformations to increase the participation of the private sector in the financing and/or implementation of agricultural research Significant institutional transformations in this direction have taken place in recent years with considerable variations between countries. The main models that are being developed are the following: < Private national research centers (CENIs) in Colombia. These centers are funded by the private sector. The government is involved in their management in some cases, and initial financial support is provided by CORPOICA for the design and implementation stages. The most notable examples are the National Sugar Cane Research Center (CENICAÑA) and the National Oil Palm Research Center (CENIPALMA). Other centers in Colombia are in the process of implementing 9 this model.
8. The remaining 0.03% are the resources of FONTAGRO. 9. A special case is CENICAFE, a specialized center that has functioned for several decades and is totally funded by the members of the National Coffee-Growers Federation (FEDERACAFE) of Colombia.
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Technological joint ventures (public/private) for the development of technologies in Argentina. Under this arrangement, which has been operational for over a decade, the public and private sectors work together to develop marketable technologies. If the products are successful commercially, the profits are shared. This system has also led to the modification of certain organizational components of INTA, particularly the ones that require the institution to learn new procedures and create new capabilities. One example is the procedure to administer the royalties generated by commercially successful technologies; another example is the requirement to develop the capability to negotiate mutually beneficial partnerships with the private sector. Para-fiscal funds. Several types of funds in this category exist in different countries. Basically, they involve collecting a certain percentage of the production value, usually around 1–2%, and allocating it for research on the specific product concerned. The NARI of Uruguay and the para-fiscal funds in Colombia are two of the most developed models. In Uruguay, the resources are administered by the NARI, while in Colombia the producer organizations administer the resources and commission the research. Multiple cofinancing model. In Mexico, Fundaciones Produce is a tripartite arrangement (central government, producers, and State governments), under which the parties contribute to a research fund administered by producers in the form of a foundation. The foundation organizes an open bidding process and all the country’s research organizations can participate and compete for resources. Priorities are announced in advance, and the bidding process involves a painstaking project selection procedure. This arrangement looks very promising, although it functions better in regions where producers are better organized and have more economic resources. One important variation can be the creation of a national research council with the participation or representation of all the regional foundations to identify the most pressing priorities and help the government determine its policy instruments and the allocation of resources for research and agroindustrial technological development.
4. Transformations to enhance the efficiency of the public-sector model of the NARIs The list of alternative options under this category is a long one. The following are some of the most important transformations: < Deregulation. Modifications to their public legal status have been proposed for most of the NARIs. Broadly speaking, these call for the adoption of the status of public organizations governed by private law, which in some cases allows for greater autonomy in the management of resources and greater flexibility in hiring. < Partial decentralization or radical decentralization. Partial decentralization took place in Mexico and Argentina, and a proposal for radical decentralization in Bolivia has been made but has not been consolidated or implemented. For over a decade, the region’s centralized research models have been changing with the adoption of different degrees of decentralization. These range from the delegation
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of functions to the regions and/or experimental centers located in the regions, to more radical transformations, such as those of INTA and, more recently, Bolivia’s Instituto Boliviano de Tecnología Agropecuaria (IBTA), under which the regions enjoy a great deal of autonomy. IBTA has essentially disappeared and been replaced by ecoregional research centers that are not linked to any headquarters in the capital. Privatization of administrative services. This arrangement has been used successfully for educational organizations in El Salvador and is to be implemented by research organizations in that country. Under this arrangement, administrative functions are delegated to a private company that assumes full responsibility for managing resources and implementing the policies and strategies established by the respective boards of directors. Public research organizations may find this kind of arrangement very attractive, because it eliminates entirely the possibility of political influence over technical decisions related to strategic variables, such as the recruitment and selection of researchers. Technical professionalism and political considerations. Under this arrangement, which is used by NARI in Uruguay and INTA in Argentina, the public research institute has a president and a national director. The president is selected by the minister or the secretary of agriculture, in consultation with the country’s presiden.The national director is appointed in a prequalification process for a term of four or five years. Thus, if there is a change of government, the president of the institution is replaced, but the national director completes his/her term. This arrangement is very important for state-run organizations in which senior officials change frequently whenever a new president takes office or a new minister is appointed, with all the disadvantages that these changes bring with them to organizations engaged in scientific and technological work. Social control by users. Under this arrangement, users in Argentina and Mexico are allowed to have a much greater say in the management of the organization and much greater control over its research priorities. The users are represented by companies and by producers’ organizations. Under the traditional model of public research employed in the region, the NARIs set the priorities and managed the allocation of resources. Under the new model, representatives of the users are allowed to participate (in some cases, fully) in both the identification of priorities and the allocation of resources. INTA (Argentina) and the Fundaciones Produce (Mexico) are two good examples of these arrangements. Hiring human resources from outside the region: Given the growing difficulties of finding research specialists for certain fields in some countries, experts from other countries have been appointed to positions of responsibility in some state-run organizations. The Southern Cone has been a pioneer in permitting these arrangements, but little progress has been made elsewhere. Further opening is to be expected, however, in the future, and this will permit a more efficient use of the human resources in the region. This arrangement can be more important in countries that have difficulties to find scientists and researchers with a high degree of specialization. In the long run, however, contracts will have to be more flexible
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and salaries at the national organizations will have to match those paid in the international, or at least the subregional research institutes. 5. Transformation to improve policy instruments and set priorities at the national level Transformations of this kind are, at the present, the least common, but, in the long run, they will be the most significant for the strategic plan of the organization. The core objective of this transformation is to reorganize the allocation of public resources as part of a comprehensive change in the functions and priorities of the public sector. A second objective is to mobilize the different research actors at the country level and encourage them to play a more active role. A third objective is to institute the concepts and mechanisms of competition for resources among state-run organizations to enhance their efficiency, speed up change, and enhance their capacity to respond to the needs of users. Moscardi (2000) noted that as resources for public research become scarcer, the NAROs will have to restructure their operations so that they can make more efficient use of their shrinking resources. Organization failures are often the main reason for the failure to make efficient use of the resources available, and all too often research is duplicated within and among countries. Unlike market failures, the true scope of organizational failures has not been studied and the need to eliminate these failures has not been properly internalized. The process of combining national research plans for establishing priorities with competitive mechanisms to determine the allocation of resources tends to reduce organizational failures and make the public sector more efficient in implementing and orienting research.
Conclusions There is no doubt that the policy changes and market adjustments associated with the globalization process have had a major impact on the agricultural sector in the LAC region, both directly on its structure and performance, and indirectly on the national and regional research and development systems. Some of the main conclusions that can be drawn are as follows: < Under the new, more open system of trade, the region’s agricultural sector has made a very important contribution to economic growth in recent years, and this contribution is likely to increase in the future, especially to the region’s international trade. However, the above analysis shows clearly that there is a need to make the production of staple foods more competitive and to raise productivity levels for nontraditional crops, as a means of maintaining and even enhancing competitiveness in the future, thereby contributing further to the goal of food security. < Although the region has a fairly well-developed institutional research system at the national, regional, and subregional levels, the communication and exchange of knowledge, information, and technologies between institutions is still quite limited. Existing mechanisms and strategies, therefore, need to be redesigned in
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order to encourage the exchange of knowledge and the formation of collaborative research. This will lead not only to more efficient use of the resources available for research at the national and regional levels, but also to increased capacity to transfer and appropriate technologies available within and outside the region. In this area, the promotion of more extensive interaction, communication and collaboration with the international research system will be strategically important. At present, the capacity of the agricultural sector in the region varies considerably from country to country, both in terms of its contribution to international trade and the production of staple foods. It is suggested that the tropical region of the western hemisphere be given special priority because of its relative weakness compared to other regions. The institutional infrastructure in this region needs to be strengthened, especially with regard to technology R&D, so that all the region’s potential can be maintained over time. Only a few countries have so far made any progress in securing private funding for research. For the most part, the participation of the public sector is still essential in financing and/or in conducting research. In most cases, the present level of financing for the NARIs is clearly inadequate. As a result, the generation and/or adaptation of technologies (mostly public goods), a prerequisite for greater participation of the private sector, is lagging behind. Studies show that the ex ante internal rates of return for both public- and private-sector research are quite high, and they clearly indicate that the allocation of additional resources to agricultural research in the region is highly desirable. However, further work is needed to show the negative effects of underinvestment in research and thereby convince policymakers and planners of the desirability of allocating more resources to R&D at a level commensurate with the economic development of the region. Many more actors are participating in agricultural research today, in particular in the private sector (both at the national and multinational levels) and the universities. This is an important development, particularly at a time when the available public resources are limited. However, direct and indirect incentives for achieving greater participation by these actors, especially the private sector, have not been developed sufficiently. There are even cases in which the private sector would have been willing to contribute more to the financing and/or direct implementation of research had the mode of operation been adjusted to the rules of the market and had the information on this mode been available and known to all. The transformation process of the public research institutions must therefore be speeded up, as part of a concerted effort to achieve both greater efficiency in public research and greater participation of the private sector in the national research.
References Ardila, J. 1999. Diagnostico y perspectivas tecnológicas de la agricultura Latinoamericana. IICA. Ardila, V. 1999. Jorge: Problemas institucionales en la investigación agropecuaria en ALC. Campinas.
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Cortes, Lombana, Abdon, et al. 1983. Zonificacion Agroecologica de Colombia. Bogota, Colombia: IGAC. Dosi G., J.D. Teece, and J. Chytry. 1998. Technology, organizations and competitiveness. Oxford University Press. IICA. 1999. Balance del estado general y la evolucion de la agricultura y el medio rural de America: Retos y oportunidades en el Siglo XXI. Serbin, A. 1996. Impacto de la Globalizacion en el Gran Caribe. Opiniones, April-June. IICA. 1995. Area II, Science, Technology and Natural Resources. Results of evaluations of the cooperative programs PROCISUR and PROCIANDINO. 1995. San Jose, Costa Rica: IICA. Moscardi, E. 2000. Reflexiones sobre el financiamiento de la investigación y el desarrollo tecnológico en las Américas: Diálogo con un hipotético formulador de políticas. Mexico, September 6-8, 2000. Paper presented during the second international meeting of FORAGRO.
Acronyms ADP
agricultural development programs
APC
African, Pacific, and Caribbean countries
APCC
Agricultural Program Coordinating Council, Ghana
APEC
Asia Pacific Economic Cooperation
ASARECA
Association for Strengthening Agricultural Research in Eastern and Central Africa
CAAS
Chinese Academy of Agricultural Sciences
CAPSiM
Agricultural Policy Simulation and Projection Model of the Center for Chinese Agricultural Policy
CARDI
Caribbean Agricultural Research and Development Institute
CAS
CGIAR Central Advisory Service on Intellectual Property
CBD
Convention on Biological Diversity
CCAP
Center for Chinese Agricultural Policy
CENICAÑA
National Sugar Cane Research Center, Colombia
CENIPALMA
National Oil Palm Research Center, Colombia
CGIAR
Consultative Group for International Agricultural Research
CIMMYT
International Maize and Wheat Improvement Center
CMB
Cocoa Marketing Board, Ghana
COMESA
Common Market of East and Southern Africa
CRIN
Cocoa Research Institute of Nigeria
CSIR
Council for Scientific and Industrial Research, Ghana
EAC
East African Community
Embrapa
Empresa Brasileira de Pesquisa Agropecuária (Brazilian Agricultural Research Corporation)
FAO
Food and Agriculture Organization of the United Nations
FEDERACAFE National Coffee-Growers Federation of Colombia GATT
General Agreement on Tariffs and Trade
GDP
gross domestic product
ICAR
Indian Council of Agricultural Research
ICT
information and communication technology
IMF
International Monetary Fund
INIA
Instituto Nacional de Investigaciones Agrícolas, Venezuela
INIA
blanket term for the national agricultural research institutions in LAC
INIFAP
Instituto Nacional de Investigaciones Forestales y Agropecuarias (National Institute for Forestry, Agricultural and Livestock Research), Mexico
INTA
Instituto Nacional de Tecnología Agropecuaria (National Institute for Agricultural Technology), Argentina 325
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IPR
intellectual property rights
ISNAR
International Service for National Agricultural Research
ISO
International Organization for Standardization
KARI
Kenya Agricultural Research Institute
KCC
Kenya Co-operative Creameries
KSC
Kenya Seed Company
LAC
Latin America and the Caribbean
LDCs
least developed countries
MENA
Midde East and North Africa
MOFA
Ministry of Food and Agriculture, Ghana
MTA
material transfer agreement
MTP
Medium Term Agricultural Development Program, Ghana
NARI
national agricultural research institute
NARO
national agricultural research organization
NARP
National Agricultural Research Project, Nigeria
NARS
national agricultural research system(s)
NCPB
National Cereals and Produce Board, Kenya
NGO
nongovernmental organization
NPMB
National Produce Marketing Board, Cameroon
NPT
national performance trial, Kenya
NRM
natural resource management
OECD
Organisation for Economic Co-operation and Development
OFAR
on-farm adaptive research
PBR
Plant Breeders’ Rights
PPP
purchasing power parity
PROCICARIBE Caribbean Agricultural Science and Technology Networking System R&D
research and development
REFILS
Research Extension-Farmer-Input-Linkage System
SPS
Sanitary and Phytosanitary Agreement
SSA
sub-Saharan Africa
TBT
Technical Barriers to Trade
TFP
total factor productivity
TRIPS
Trade-Related Aspects of Intellectual Property Rights
UPOV
International Union for the Protection of New Varieties of Plants
USAID
United States Agency for International Development
VASKHNIL
Soviet Academy of Agricultural Sciences
VAT
value-added tax
WTO
World Trade Organization
Contributors Aloysius Ajab Amin Deputy Director & Head of Training Institut Africain de Développement Économique et Planification (IDEP) B.P. 3186 Dakar Senegal E-mail:
[email protected] or
[email protected]
Cletus K. Dordunoo Team Head Ghana Institute of Management and Public Administration Greenhill P.O. Box 50 Achimota Accra Ghana E-mail:
[email protected]
David Bigman International Service for National Agricultural Research P.O. Box 93375 2509 AJ The Hague The Netherlands E-mail:
[email protected]
Emmanuel Douya Senior Lecturer Faculty of Economics and management University of Yaounde II P.O. Box 1365 Yaounde Cameroon
Lawrence Busch Department of Sociology Michigan State University 422 Berkey Hall East Lansing, 48824-1111 Michigan USA E-mail:
[email protected]
Cesar Falconi Economist División de Administración Inter-American Development Bank 1300 New York Avenue, NW Washington, DC 20577 USA E-mail:
[email protected]
Joel I. Cohen Leader, Management of New Technologies for Agricultural Research Project International Service for National Agricultural Research P.O. Box 93375 2509 AJ The Hague The Netherlands E-mail:
[email protected]
Victoria Henson-Apollonio Project Manager CGIAR Central Advisory Service on Intellectual Property International Service for National Agricultural Research P.O. Box 93375 2509 AJ The Hague The Netherlands E-mail:
[email protected]
Godwin Yao Dogbey Research Fellow/Consultant PASSD Ghana Institute of Management and Public Administration Greenhill P.O. Box 50 Achimota Accra Ghana E-mail:
[email protected]
Jikun Huang Professor and Director Center for Chinese Agricultural Policy, Chinese Academy of Sciences Building 917 Datun Road Anwai North Asian Games Village 100101 Beijing China E-mail:
[email protected]
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John Komen Associate Research Officer ISNAR Biotechnology Service International Service for National Agricultural Research P.O. Box 93375 2509 AJ The Hague The Netherlands E-mail:
[email protected] Shikha Jha Team Head Indira Ghandi Institute of Development Research General Vaidya Marg. Goregaon (East) Mumbai 400 065 India E-mail:
[email protected] Joseph Karugia Department of Agricultural Economics University of Nairobi P.O. Box 29053 Nairobi Kenya Alexander Mbeaoh Researcher Rural Development Group P.O. Box 14173 Yaounde Cameroon E-mail:
[email protected] Hezron O. Nyangito Team Head Kenya Institute for Public Policy Research and Analysis P.O. Box 56445 Nairobi Kenya E-mail:
[email protected] Foluso Okunmadewa Team Head Department of Agricultural Economics World Bank Resident Mission P.O. Box 2826 Garki, Abuja Nigeria E-mail:
[email protected]
Joseph K. Olayemi Center for Rural Development and Cooperatives University of Nigeria Nsuka, Enugu State Nigeria E-mail:
[email protected] Michael Morris Economics Program International Maize and Wheat Improvement Center (CIMMYT) km. 45 Carretera Mexico-Veracruz El Batan, Texcoco Edo de Mexico CP 56130 Mexico E-mail:
[email protected] Compton Paul Executive Director Ag Caribbean Agricultural Research and Development Institute, University Campus St. Augustine Trinidad and Tobago E-mail:
[email protected] Silvia Salazar P.O. Box 91-3100 Santo Domingo de Herediaia Costa Rica E-mail:
[email protected] P.V. Srinivasan Professor Indira Ghandi Institute of Development Research General Vaidya Marg. Goregaon (East) Mumbai 400 065 India E-mail:
[email protected] Jorge Ardila Vasquez Specialist in Research IICA Del cruce Ipis, 400 mts noreste Carretera a San Isidro de Coronado San José Costa Rica Larry Zuidema Consultant Indijksterleane 9 8551 NR Woudsend The Netherlands E-mail:
[email protected]
Index Note: Abbreviations and Acronyms are also listed separately on pages 325 and 326 Africa see also sub-Saharan Africa exports, public R&D 237–257 NAROs 248, 250–251, 256–257 African, Pacific and Caribbean (APC) countries 156, 164–165 Agricultural Development Programs (ADP), Nigeria 287–291 Agricultural Policy Simulation and Projection Model of the Center for Chinese Agricultural Policy (CAPSiM) 91–99 Agricultural Program Coordinating Council (APCC), Ghana 132 agriculture see also research and development Cameroon 155–164 China 84–85, 87–99 frontiers 309, 312 growth rates 62–63 India 104, 105–114 inputs 141, 143, 151, 280 intellectual property R&D 219–234 supply chain 250–251 anti-globalization movements 1, 28 arid/semi-arid areas, Kenya 149–150 Armenia 18–19, 259–274 Asia see East Asia; South Asia authentication of products 175–176 Azerbaijan 18–19, 259–274 banana industry 164, 165, 295, 297 biotechnology access 49 CGIAR 221–227 developing countries 179 India 118 Kenya 146 NAROs 227–232 patent protection 219–220 seed industry 109, 118, 213 bound tariffs 239 Brazilian Agricultural Research Corporation see Empresa Brasiliera...
Cameroon 12, 155–166 capacity building, intellectual property 226–227, 229, 231–232 capital-labor ratios 46 Caribbean 19–20, 295–305 see also Latin America and ... Caribbean Agricultural Research and Development Institute (CARDI) 300, 301 Caribbean Agricultural Science and Technology Networking System (PROCICARIBE) 300–301 Caucasus 18–19, 259–274 Center for Chinese Agricultural Policy (CCAP) 91–99 central advisory service, CGIAR 226–227 Central Advisory Service on Intellectual Property (CAS), CGIAR 225, 226–227 cereal industry 145, 146, 262–263, 309, 310 child mortality trends 44 China 10–11, 83–102 cocoa industry 130–133, 157–159, 161, 163, 284–287, 295 Cocoa Marketing Board (CMB), Ghana 130–131 Cocoa Research Institute of Nigeria (CRIN) 284–287 coconut industry, Caribbean 295 coffee industry 137, 139, 143, 157–159, 163, 249 collaboration African research 254, 255 Caribbean R&D organizations 299–300 Caucasus 273 intellectual property rights 193–194, 195 public/private research 191 commercialization, public research 185–198 commodity systems approach 300, 301 comparative advantage 45–51, 100, 312–313 competition 5, 9, 47–48, 173–174, 269, 309 compilation certificates 157 Consultative Group for International Agricultural Research (CGIAR) 5 Central Advisory Service on Intellectual Property 225, 226–227 genetic resource guidelines 221–222 329
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intellectual property issues 196–198, 221–222, 225, 226–227 LAC countries 314, 317 proprietary technology 222–225 Convention on Biological Diversity (CBD) 219 corporate governance 35 Cotonou Partnership agreement 165, 302–303 Council for Scientific and Industrial Research (CSIR), Ghana 132 credit systems 160, 276–277 Cuba 297 dairy adaptive research, Kenya 147–148 defensive patenting 222 demographics 37, 92 developed countries agricultural subsidies 63, 66 GDP per capita trends 40–42 global income inequality 42, 43 tariff bias 4–5 trade barriers 4–5, 244 developing countries global standards consequences 179–180 globalization debate 27–79 intellectual property rights 185–199 national agricultural research systems 197 supply chains 250, 251 development strategies agricultural sector 62–68 Asia model 58–62 debates 31–36 outward/inward-oriented 51–58 social/political aspects 70–74 diversification see nontraditional crops divestiture, Ghana 125, 127–128 Dominica 301–302 East African Communities (EAC) 139 East Asia 1997-98 crisis 58–59, 61–62 ‘Asian Model’ 58–62 China 83–102 GDP per capita trends 40–42 global income inequality 42, 43 globalization benefits 3, 4, 28 industrialization 37 institutions 58–62 poverty reduction 32–33, 37
Index
The East Asian Miracle (1993), World Bank 55–56, 58 eco-labeling 176 ecology, Kenya 150 Economic Community of West African States (ECOWAS) 277 economic growth Caucasus 260–261 GDP per capita 38, 40–42 global variation 1–2, 4 globalization effects 31–45 LAC countries 307 Nigeria 281–282 poverty reduction relationship 29 economic reforms Cameroon 161–164 Ghana 124–128 Kenya 136, 137, 139 economic research, Kenya 146 economic stability 49, 58–62, 70–74 ECOWAS see Economic Community of West African States education and training 47, 181, 301 employment 31–32, 36, 63–64, 280–281 Empresa Brasileira de Pesquisa Agropecuária (Embrapa) 229, 231–232, 308, 313, 315 environmental protection Caribbean 302 competitive disadvantage 50 India 104, 114, 120 Kenya 150 standards role 174–175 threats 104, 296, 298, 314 Ethiopia 240, 241 European Union, trade agreements 67–68, 164–165 exports Africa 244–246 Cameroon fraud 157 Caucasus 266, 268–269 Ghana 125 income reduction 4 LAC countries 309 Nigeria 278, 281 promotion 51–58, 125, 295, 309 extension services 250, 254, 255, 279, 287–291
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fair-trade labeling 176 Farmers’ Services Companies (FSCs), Ghana 131 FDI see foreign direct investments fertilizers 141, 151, 240, 241 ‘financial bubbles’ 308 financial institutions, East Asia 59, 61 financial reforms, Cameroon 160–164 fiscal policies, Nigeria 276 food production 142, 309, 310–313 food safety standards 166, 174, 298, 299, 303 food security Cameroon 162, 164 Caucasus 270 China’s trade liberalization 83–100 Ghana 130 India 110, 114 Kenya 136, 149 seed industry 202 foreign direct investment (FDI) 3, 29, 52–53, 267 foreign exchange policies 124, 155–156, 161–164, 278, 308 Forestry Research Institute (FRIN) 284, 287 free trade agreements 93–99, 238–239 FRIN see Forestry Research Institute fruit production 263, 309, 310, 311–313, 314 GCC see Global Commodity Chain gene banks 196–197 General Agreement on Tariffs and Trade (GATT) agricultural sector 5, 66–68, 239 Caribbean 297–298 India 105–106 LAC countries 307 Seattle (1999) 1, 5, 244 uneven benefit distribution 28 Uraguay (1994) 5, 66, 67–68, 238, 307 Generalized System of Preferences 243 see also Lomé Convention genetic resource issues 188–189, 221–222 Georgia 18–19, 259–274 Ghana 12, 37, 38, 123–134 Global Commodity Chain (GCC) 249 global standards 171–184 global trends 39–45 “Globalization and Poverty” online debate 27–28, 29–30 governance, institution strength 36
governance institution strength 34–35, 71–72 government policy bias against agriculture 65 China 83, 85–88, 99–100 Nigeria 281–283 poverty action/economic growth relationship 32–34 government role see also public sector R&D abdicating responsibility 144 African production and export 246–247 ‘Asian Model’ 60 encouraging investment 50 Ghana 124–125 Kenya marketing 136–137 outward-oriented growth strategy 53–56 grain markets 100, 137, 140 China 93, 98–99 grain production China 88, 94, 97, 97–99 India 105, 110 LAC countries 309–310, 311–313 Green Revolution 63, 107, 110, 203 griculture, Cameroon 155–164 gross domestic product (GDP) trends 38, 40–42, 261, 282 groundnut research, Kenya 147–148 growth rates, agricultural sector 62–63 growth strategies 51–58 see also development strategies neo-classical prescription 36–39 Guyana 297, 301–302 Haiti 297, 301–302 health and safety standards 174–175 Heckscher-Ohlin model, comparative advantage 46–47 history Caribbean 295–296 development strategies 31–36 globalization 2 maize seed industry 212 household survey data, income inequality 39–45 human resources, research 274, 284, 291, 315 IAR see Institute for Agricultural Research imports Caucasus 266 LAC countries 309
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Nigeria 281 substitution 53–54, 56–57, 162, 309, 313 India 1, 11, 15, 18, 37, 103–122 Indian Council of Agricultural Research (ICAR) 109–113, 115 industrialization, ‘Asian Model’ 31, 51, 53–58, 58–62 industry standards setting 178 inequality 34, 38, 39–45 information availability 69, 298, 300 information and communication technology (ICT) Caucasus 267–268, 273 LAC countries 308 Least Developed Countries 68–69 Nigerian national agricultural research system 284 infrastructures 104, 241, 243, 291 Institute for Agricultural Research (IAR) 284, 287 institutions Caucasus 274 East Asia 58–62 LAC research 316–321 political 71–72 social/political 70–74 standard setters 176–179 Instituto Nacional de Technologia Agropecuaria (INTA), Argentina 308, 315 intellectual property rights (IPR) developing countries 14, 179, 185–199 India 108–109, 120 Kenya 150–151 LAC countries 307 legislation 186–193 management 219–233 national agricultural research institute survey 193–196 interest rate policies, Nigeria 278–279 International Maize and Wheat Improvement Center (CIMMYT) 202–203 international monetary fund (IMF) 2, 28 international research centers 221–227 International Service for National Agricultural Research (ISNAR), India 113–114 international standards 171–183 international trade see also General Agreement on Tariffs and Trade; World Trade Organization
Index
Africa 240, 242 Caucasus 266–267 China 89–91 developed country agreement bias 5 developing countries 45–62, 70–74 India 107 Nigeria 277, 281 world prices 93, 107, 269 inward-oriented growth strategy 53–54, 56–57 irrigation 92, 99, 147–148, 280, 313 Jamaica 301–302 Kenya 11–12, 17–18, 37, 135–153 Kenya Agricultural Research Institute (KARI) 17–18, 135, 142, 144–152 Kenya Plant Health Inspection Service (KEPHIS) 142 knowledge gap 69 Korea 37, 38, 57 Kuznets, S. 38–39 label standards 175–176 labor market 49–50 labor-abundant countries 31–32, 36–39, 45 labor-intensive production 46 land use Caucasus 262 Kenya 147–148 LAC countries 309–310 Nigeria 280 Latin America and the Caribbean (LAC) 307–323 GDP per capita trends 38, 40–42 intellectual property rights 227–232 maize seed industry 205–209 Least Developed Countries (LDCs) development strategy failure 62–68, 70–74 EU trade agreements 165 seed industry development 203–204 UN conferences 54 licenses, proprietary technologies and materials 232 ‘life cycle’ theory, maize seed industry 209–212 livestock industry 130, 264 China 95–97 Lomé Convention 164–165, 243, 299, 302–303
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maize breeding research impacts 202–203 Cameroon 163–164 Caucasus 263 Kenya 146, 147–148 national seed industries 204–217 reproductive biology 203–204 market place fairness 173 market systems, developing countries 10, 29–30, 50 marketing boards 72–73, 135–136 material transfer agreements 232 Medium Term Agricultural Development Program (MTP), Ghana 128 MFN see most favored nation ‘modern sector’, urban industrialization 31–32 monopoly power 186 most favored nation (MFN) principle 67 multinational corporations 5, 13, 48, 172 multinational supply chains 5, 248–251 multinational trade agreements see General Agreement on Tariffs and Trade; World Trade Organization nation-states strategies, standards role 175 national agricultural research institutes (NARIs) Ghana 129, 132 India 113–114 intellectual property rights survey 193–196 national agricultural research organizations (NAROs) 13–14, 16, 22–24 Africa 248, 250–251, 256–257 Caribbean 299, 302 commercialization of research 190–193 global standards role 180–183 intellectual property rights 187, 227–232 ISNAR survey 6–7 LAC countries 14, 316–321 patents 229, 230 proprietary technology 227–230 national agricultural research system(s) (NARS) developing countries 197, 202, 205 India 103, 109–110, 113–114 LAC countries 316–321 Nigeria 283–292 National Center for Agricultural Economics and Policy Research (NCAP), India 110
National Cereals and Produce Board (NCPB), Kenya 136, 137, 138, 140 National Institute for Agricultural Technology (INTA), Argentina 308, 315 National Institution Renewal Program (NIRP), Ghana 125 national seed industries 201–217 national standards 177–178 negative effects 3 neoclassical theory 36–39, 45 new technologies see biotechnology; information and communication technology Nigeria 275–293 NIRP see National Institution Renewal Program nongovernmental organizations (NGOs) Kenya 146–148 world development issues 35 nontariff trade barriers 67, 179, 239 nontraditional crops Africa 237–238, 247–248, 256 Caribbean 296, 298, 302 India 105 LAC countries 309–314 on-farm adaptive research (OFAR), Nigeria 288–290 open economies, growth advantage 45 outward-oriented growth strategy 51–58, 309 patents 187–189, 194, 223–225, 229, 230 petroleum prices 126 petroleum production 155 phytosanitary standards 174–175 Plant Breeders’ Rights (PBR) 150, 187, 189–190 plant breeding research impacts 202–203 policy reforms Africa 238–247 Cameroon 156–160 Caucasus 274 China 83, 85–88, 99–100 Kenya 135–144 Nigeria 276–283 research project inputs 195–196 seed industry challenge 215–217 social/political effects 71, 73 policy-based lending, IMF/World Bank 32 political effects of trade liberalization 71–74 political research, Kenya 146
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political stability 49, 58–62, 70–74 population growth 31–32, 310–311 ‘post-Washington consensus’ 29, 70–72 poverty see also “Globalization and Poverty” online debate Caribbean 301–302 definitions 35 global area trends 44, 45 globalization influences 1 Nigeria 282 safety nets 117–118, 120 poverty reduction East Asia 32–33, 37 economic growth relationship 29 Ghana 123, 125, 130 priorities 35 Poverty Reduction Handbook (1993), World Bank 33 prices African export commodities 246 international 93, 107, 269 maize seed 205, 207 Nigerian policy 280 petroleum 126 trade reform effects 4 primary commodities, African production and export 240, 244–246 primary product sector, development disadvantages 65 private sector R&D see also research and development Caribbean 299, 300 Indian 111, 113–114, 115–117 intellectual property rights 190–191 Kenya 144, 152 LAC countries 309, 313–314, 318–319 private seed companies 201–202 privatization Cameroon 157–158 Ethiopian fertilizers 240, 241 Ghana 125, 128, 131–133 Kenya 144 marketing boards 72–73 Nigeria 280, 284 seed industry 204–205, 206 product authentication 175–176 production, African diversification 237–257 production efficiency 49–51, 241, 243 productivity 99, 297, 311–313 proprietary technology 194, 195, 219–233
Index
protected markets 179, 299, 302–303 see also Lomé Agreement public sector R&D see also research and development African priorities 252–255 agricultural research role 235 commercialization 185–199 India 114–117, 120 intellectual property rights 220 LAC countries 309, 315, 319–321 public services, privatization 69, 72–73 purchasing power parity (PPP) trends 40 quality export products 157–158 food production 296, 297 seeds 146, 149 redistribution development strategies 32, 38–39 Regional Economic Partnership Agreements (REPAs), ACP/EU 165 regional trade agreements, Africa 239, 243 reproductive biology, seeds 203–204 research and development (R&D) Africa 237–257 Caribbean 298–301 Caucasus 264–265, 270–274 China 92, 99, 100 genetic patents 188 Ghana 123–134, 129, 132–133 global standards, implications 171–184 globalization 5 India 108–117 institutions 264–265, 316–321 intellectual property management 219–234 intellectual property rights 108–109, 188, 220 investments 68–69 Kenya 144–151 LAC countries 312–322 Nigeria 279, 283–291 standards issues 180–182 surveys 6–7, 193–196, 252–255 Research Extension-Farmer-Input-Linkage System (REFILS) 289–290 rural associations 160–161 rural credit system, Cameroon 160 rural development 62–66
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safety nets, India 117–118, 120 sanitary and phytosanitary (SPS) agreement 13, 172, 174–175 Savings and Credit Cooperatives, Cameroon 160 scientific cooperation, Caucasus 268 sectoral development 62–68 seed industry case studies 205, 209 development 15, 201–217 evolution driving forces 212 India 107–108, 109, 115–116, 118 intellectual property rights issues 188–189 international breeding research impacts 202–203 Kenya 137, 141, 142, 146, 148–149 life cycle theory 209–212 recent changes 204–208 structural changes 213–217 seed-to-grain price ratios 205, 207 small plot adoption technique, Nigeria 288–289 small-scale farmers, Caribbean 295, 298, 302 socio-political globalization 71–74, 308 South Asia global income inequality 42, 43 globalization burden 3, 28 India 103–120 rural development 62–66 South Korea 37, 38 Soviet Academy of Agricultural Sciences (VASKHNIL) 265 stability 49, 58–62, 70–74 stakeholders, Nigeria 290 standards developing countries 179–180 food safety 166, 174–175, 298, 299, 303 global 171–184 NAROs role 180–183 role of 173–176 setting 176–179 State Seed Corporations (SSCs), India 107–108 structural adjustment 33–34, 124, 136 sub-Saharan Africa (SSA) GDP per capita trends 40–42 Ghana 123–133 global income inequality 42, 43 globalization burden 1, 3, 28
governance institutions 60 growth strategies 58 institution weakness 36, 70–74 Least Developed Countries 54 production and exports 16–17, 237–257 rural development 62–66 subsidies 63, 66, 158–159 subsistence farming 103–104, 117–118, 209–211, 296–297, 302 sugar industry 295, 297, 309, 310 Suriname 297 surveys 6–7, 39–45, 193–196, 252–255 sustainability 150 agricultural growth 1, 104 T&V see training and visit tariffs see also General Agreement on Tariffs and Trade bound 239 EU imports 165–166 fiscal budget reliance 156 reduction effects 4–5 taxes, Ghana 126 technical barriers to trade (TBT) 13, 172 technology see also biotechnology; information and communication technology agricultural sector transfer 63 Caribbean 300 Caucasus 268, 270, 271–272, 273 India 103–104, 118 intellectual property rights 108–109 LAC countries 316, 317–318 Nigeria 288 telephones 69 Tinidad and Tobago 297, 298 TLS see Trade Liberalization Scheme total factor productivity (TFP) 56 trade agreements see General Agreement on Tariffs and Trade; World Trade Organization trade liberalization Africa 238–244 benefits 29 China’s agricultural economy 83–100 negative effects 4, 8–9, 71, 73 outward-oriented growth strategy 54 transitional period 3, 29 Trade Liberalization Scheme (TLS), West African 277
336
Trade-Related Aspects of Intellectual Property Rights (TRIPS) 108–109, 189, 219–220 training and visit (T&V) extension service system, Nigeria 288–291 transitional period Caucasus 259 inward-oriented growth strategy 53–54, 56–57 Kenya 143 social and political effects 71–74 trade liberalization 3, 29 unemployment, rural–urban migration 31–32, 36 United States, EU trade war 67–68 urban populations, economic growth 4 Value Added Tax (VAT) Ghana 126 Nigeria 276 vegetable production, Caucasus 263–264 Vision 2020, Ghana 123, 129, 132 wage policies, Nigeria 279 ‘Washington Consensus’, failure 29, 70–72 water resources see irrigation
Index
wheat 202–204, 263 women-in-agriculture (WIA), Nigeria 289 World Bank controlling globalization 28 development strategy reports 33–34, 53 The East Asian Miracle (1993) study 55–56, 58 expanding goals 35 Globalization, Growth and Poverty: Building an Inclusive World Economy (2002) study 1 “Globalization and Poverty” online debate 27–28 study conclusions 29 World Development Reports 1, 33, 34, 35, 53 World Trade Organization (WTO) 2 Africa 239 Caribbean 297–298, 303 China 83 controlling globalization 12, 28 India 106 Lomé Convention 164–165 trade agreement principles 66–67 yields 65–66, 311–312
