2. Redefining the Role of the State

The move towards freer markets has required governments to surrender control over many of the policy instruments that were used as the pillars of the import substitution industrialization (ISI) strategies that prevailed until the introduction of the reforms, and that served to either tax or compensate the agricultural sector, with a net bias against agriculture (Schiff and Valdés). Examples of policy instruments no longer at the disposal of governments adhering to the FMFT orthodoxy cover the spectrum of public policy. Tariff rates and quantity restrictions on trade have in principle been eliminated or subjected to international regulation under the terms of particular trade agreements. Many countries have moved from fixed, and often multiple, exchange rates to floating or "pegged" rate regimes. In regards to product and factor markets, subsidies, price controls, and quantity restrictions have been eliminated or greatly descaled, with prices and output increasingly market determined. Credit subsidies and special credit programs have been reduced, with interest rates and the composition of borrowers removed from policy discretion. Land markets have been deregulated and agrarian laws changed, freeing the land market to respond to market forces.

In practice, however, governments have had varying degrees of success in surrendering control over these policy instruments. Quantity restrictions have effectively been removed and tariffication has been widespread, including the use of tariff-rate quotas as instruments compatible with elimination of quantity restrictions. However, uneven progress toward freer trade is due to both pressures of farm producers and fiscal interests of governments. In general, the dilemma of agricultural trade liberalization in the early 1990s is that it has occurred in an adverse context of falling international commodity prices, appreciating real exchange rates, high interest rates, and falling subsidies, all of which have combined in creating serious profitability crises for agriculture (Valdés, 1996; Gardner, 1996). This is generating pressures on governments to either restore protection of the import-competing sectors or seek direct income transfers decoupled from price interventions. For governments, trade interventions were sources of economic revenues (export taxes and import tariffs) and political power (discretion over the allocation of exemptions and compensatory subsidies; see Bates, 1981) for policy makers and bureaucrats, and have economically benefited politically influential vested interest groups who appropriated the compensations through rent seeking activities. As a result, Valdés (1996) observes that the effective rate of protection remains sizeably negative on exportables in many countries (Colombia, the Dominican Republic, Ecuador, Paraguay, and Uruguay) while there is protection for the import competing sectors. Progress toward reducing the anti-agriculture bias in price policy has thus been highly uneven across countries and commodities. Most particularly, the anti-agriculture bias of direct price interventions has, except where there are transitory foreign exchange crises as in Mexico, been replaced by indirect taxation as a consequence of appreciation of real exchange rates associated with capital inflows. Indeed, the chronic weakness of domestic savings creates a strong policy dilemma between growth and appreciation as foreign capital inflows must be relied upon as the primary source of investable funds.

To a great extent, agricultural policy reforms in the last decade can be characterized as a process of "rationalization" of sectoral policy with macro policy, i.e., of trimming and cancelling government programs and policies in agriculture that could not be justified under the FMFT paradigm. Hence, there has been a paring down, if not the complete elimination, of government functions not satisfying the classical rationalizations for state intervention in a market-oriented system. The role for government is increasingly limited to the promotion and regulation of free and competitive markets, and to the provision of goods and services where markets fail - as in the cases of public goods, negative externalities, natural monopolies, asymmetric information, economies of scale, and very high start-up costs. In terms of agricultural programs, the public goods character of infrastructure - such as transportation, marketing, and irrigation - and services such as research, extension, and export promotion justify at least partial public provision. Negative externalities call for government intervention in environmental protection and resource management. Asymmetric information may cause markets to fail and may justify a public role in, for instance, the certification of seeds or product quality. Government is also expected to provide the legal institutions to enforce property rights (land titling, patents on technological innovations), enforce anti-trust legislation, and regulate rural financial and crop insurance systems.

With the loss of policy domain over many classical instruments of agricultural policy resulting from market liberalization and the submission of agriculture to macroeconomic policy reforms, the scaling back of government programs through the process of rationalization and privatization, and the downsizing of government intervention due to fiscal austerity measures, the state has played a less active role in agricultural policy during the last decade, both in terms of economic and social objectives. The ascendancy of the market paradigm has caused the role of the state and agricultural policy to be increasingly determined by the needs and limitations of the market system. Beyond its role of facilitating a competitive market system, agricultural policy has been defined negatively by that which the market cannot accomplish either because markets fail or do not exist, or because they produce socially undesirable outcomes. In addition, while macropolicy has been typically proactive (e.g., the promotion of regional trade agreements, greater independence of central banks), agricultural policy has all too often been a passive appendage of macropolicy initiatives, seeking adjustments of sector to macro initiatives as opposed to pursuing proactively specific sectoral policies. Instead of focusing on differentiated complementary microeconomic reforms to promote the competitiveness of the different classes of farm producers, policy reforms have had a tendency to focus on macro-level adjustments and on the design of government interventions to compensate losers in the transition to FMFT policies in order to make the reforms politically feasible.