Government intervention

2.64 In circumstances where private supply of goods and services remains below the social optimum and where market, contractual, and cooperative mechanisms fail to effectively coordinate production and marketing activities, there may be justification for government interventions. Interventions by the State can reduce the risks and transaction costs faced by private firms and individuals, can compensate for missing or deficient markets, and can influence the organization and performance of commodity systems so as to enhance the benefits to the country or to particular interest groups (e.g. consumers, farmers, manufacturers). Government intervention need not entail direct government provision of goods and services. Regulation, taxation, and subsidization are alternative modes of intervention. As relatively few food marketing activities have public good properties, it is these types of interventions, rather than direct government participation, which are usually more appropriate.

2.65 The government has certain fundamental roles to play, these being either areas where only a sovereign body has the legitimacy or capability to act or areas where, for economic or technical reasons, the private sector will have insufficient incentives to provide a good or service at socially optimal levels. One of these fundamental roles lies in the definition and consistent enforcement of a reasonable set of property rights and regulations pertaining to acceptable and non-acceptable competitive and cooperative actions. Such property rights and regulations should not only facilitate production and trade, but also protect consumers against misleading claims and health-threatening foods.

2.66 A second fundamental role of government is to negotiate and define the rules for international trade and market entry. Governments can negotiate, either in bilateral or multilateral forums, to facilitate a particular commodity transaction (e.g. a deal with a state importing company) or to arrange longer term access for national firms to foreign markets on terms equal or superior to those accorded to competitive suppliers. At the same time (and usually under the influence of domestic interest groups), governments must determine the general rules for foreign entry into domestic input, financial, and commodity markets. Such rules will influence the competitiveness of food commodity systems vis-a-vis imported products as well as the availability and costs of production and other resources.

2.67 A third fundamental role of governments is to directly undertake or support the provision of goods and services which have public good properties, give rise to significant externalities, or feature economies of scale which are so significant as to result in natural monopolies. This pertains to several forms of physical and social infrastructure, including roads, rail and port facilities, power and water systems, technical research and training, and selected quality control and market information services. Because of the inherent economic properties of such goods and services, private supply may not be profitable or at least may not result in a socially optimal level of supply. While many governments have directly provided such goods and services, other options are to subsidize private supply, contract out supply to the private sector (thus assuring payment for services), or provide particular private or cooperative organizations with exclusive supply rights (e.g. on utility supply) or coercive powers (e.g. on quality control).

2.68 There are many other common types of government interventions in commodity systems. While of a less fundamental nature, these interventions can serve to counter market imperfections, reduce or alter the distribution of risks, influence the volumes and prices of traded products, and/or influence the distribution of opportunities and income. Comments follow on a sample of such common interventions.

2.69 Governments sometimes attempt to compensate for missing or deficient markets. This is particularly common in the area of credit where risk factors and major information imperfections are at play. Weak credit markets may result in limited funds available for small-scale farmers, cooperatives, and commodity traders, and for farmers and firms seeking to invest in assets carrying long gestation periods or being 'lumpy' in character. Being less risk-averse, governments may be better positioned to extend credit for these and other commodity system participants. An 'infant industry' argument for government support may be applicable in the early stages of development of particular commodity systems.

2.70 Another service commonly provided by governments is price stabilization. Stabilized prices can be regarded as a public good for farmers, consumers, processors, or other commodity system participants. Price stabilization-involving such instruments as price controls, floor prices, buffer stocks, variable taxes, and quantity controls-- is ostensibly undertaken in order to lower the risks and stabilize the incomes of producers and/or consumers. However, price stabilization is often very costly to undertake, generates allocative distortions, and can adversely affect producer or trader incentives.

2.71 Still other government interventions are geared toward influencing the competitive structure of markets, thereby affecting the volume and value of trade and the distribution of income. Regulations may be geared toward promoting or protecting a competitive market structure or conversely, toward promoting the concentration or monopolization of trade. The former would be more common in a domestic market setting-in the interface between farmers and processors or at wholesale or retail levels. The latter is more common in export-oriented industries where economies of scale and improved bargaining power can be achieved through some degree of trade concentration.

2.72 Where voluntary cooperation fails to control 'free riders', capture the benefits from scale economies, or enable suppliers to exercise market power, governments can institute schemes for compulsory cooperation. The most common and well-documented forms of compulsory cooperation are one-channel procurement and sales through marketing boards, and supply and pricing controls through marketing orders (Jesse (1979); Hoos (1979). Both marketing boards and marketing orders can be used to control physical commodity flows, enforce quality standards, and pool market risks.

2.73 With monopoly export marketing boards, an entire commodity system can 'behave' like a single firm vis-a-vis the world market, regulating the mix and quality of products going to different markets and negotiating with transporters and buyers with a single voice. While export marketing boards can achieve certain economies of scale, pool producer and processor risks, and provide a means for asserting or countering international market power, the boards can become a major barrier in the flow of information between foreign buyers and local producers and processors. In addition, export marketing boards can become either the tool of certain vested interest groups (e.g. the political leadership, influential farmers, or processors) or an unstable arena in which various interest groups battle over policies and the spoils of trade (Bates (1981); Arhin et al. (1985)). In either case, marketing board policies may result in reduced production incentives and a processing and marketing strategy which is not demand-oriented and thus not sustainable in a competitive world market.

2.74 Table 5 summarizes this discussion by indicating whether the noted technologies or institutional mechanisms facilitate improved commodity and other flows, reduce raw material procurement and market risks, internalize externalities, etc.

Technological/Institutional Measures to Facilitate Commodity System Coordination, Efficiency and Market Power