Monday, January 28, 2008

Blame it on the liberalization?

Following the recent soy bean and other food commodities price hike, some people blamed globalization and liberalization of agriculture market as the main culprit. This is the logic (the abridged version): low import tariff drove down domestic prices so local farmers had little incentives to produce more. This creates high dependency on imports, which is bad because we are very vulnerable to global price fluctuations, like what we are experiencing now.

If we are talking about soy bean, then this kind of argument is fallacious. We have been a net importer of soybean since mid ‘70s. Long before the agriculture sector is liberalized. In other words, we have been dependent on imports since long ago. The second line of argument said that if we protect our farmers, at least our domestic production could have been higher so we can have a buffer stock as a cushion against global price fluctuation.

Actually, that can be true only if we are a big enough player in the global market. If we are a small player, like the case of soybean, then at best buffer stock can only ensure that domestic prices do not exceed global prices. But the overall trend of price increase may not be altered.

Now move to the food commodity in general. The fact is straight: the productivity of our agriculture sector is lower than that in the ’80-90s. Again, the question is whether liberalization of agriculture sector to blame. Let’s say that liberalization has got something to do with that. Nevertheless, these other factors have also affected productivity, and they have nothing (or less) to do with liberalization:
  • Public investment in irrigation infrastructure is inadequate and has been declining. It needs about a third of the current central government budget to improve the irrigation infrastructure just to return to the mid-90s level.
  • Investment in roads, especially rural roads, has also been declining. In 1994, public expenditure by all levels of government was 1.4% of GDP. In 2002 it was less than 1%. More than 40% of roads are in damaged or severely damaged conditions. Without proper roads available, it is difficult for rural farmers to reach the market it nearby towns.
  • Real expenditure on agriculture research is only 0.1% of GDP (Bangladesh spends 1% of its GDP), and it is less than that in 1995. That explains the lack of invention in new, more productive crops or farming techniques.
  • Only around 20% of land plots are certified. This explains the lack of access to credits that is still a problem among poor farmers.
  • Domestic market failures resulting from imperfect or asymmetric information, bureaucracy, distribution chain etc. that creates a significant gap between the price consumers pay and farmers’ revenue.
Some of the problems are side effects of decentralization. There is still an unclear division of authority and responsibilities among central, provincial and district governments on infrastructure spending, farmer training or credit provision. But it’s sexier to be anti-liberalization than anti-decentralization, isn’t it?

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