Agriculture Reference
In-Depth Information
Policies to Facilitate Public Intervention Programs
Historically, a range of government regulations has supported parastatals or
other government agencies involved in food intervention programs. Monopoly
controls in international trade, restrictions on movements of foodgrains by the
private sector, cheap credit and preferential access to transportation for the para-
statals, and limits on private storage have been extensively used in all of the coun-
tries studied. A summary is presented in Table 2.6, and the economic arguments,
current practices, and the relevance of the regulations are discussed below.
MONOPOLY IN INTERNATIONAL TRADE
. There are two arguments com-
monly cited to justify government monopoly of international trade in food-
grains: (1) to keep a control over scarce foreign currency reserves and (2) to
take advantage of scale economies. The first argument is that, because the for-
eign exchange reserves were limited and food imports accounted for a major
share of them, there had to be a mechanism to monitor and regulate reserve ex-
penditures. Therefore, it was assumed that by making an administrative rather
than a business decision, for import, governments would be in a better position
to optimally spend the countries' scarce foreign currency reserves. The second
argument is that, because governments were large buyers, and there were many
sellers in the international markets, they would have greater bargaining power
(some degree of monopsonistic power) to negotiate lower import prices. By
contrast, if private traders were allowed to import, they would have no bar-
gaining power (pricetakers) and hence would have to pay higher prices. This
situation would, the assumption goes, not only increase domestic prices, but
would also drain out precious foreign currency reserves.
Because the foreign exchange reserves have improved dramatically, the
first argument is no longer persuasive. Regarding the second argument, the re-
ality has been quite contrary to its central assumptions. The empirical evidence
suggests that, instead of enjoying scale economy, the policy has actually served
as an easy avenue of rent seeking by bureaucrats and politicians who were en-
trusted to make import decisions. For example, analysis of historical data of
wheat imports in India suggests that, in most years, the government has actu-
ally paid higher import prices than the private sector would have paid.
13
An-
other empirical example comes from Bangladesh, where both government
and the private sectors imported foodgrains to address the crisis following the
1998 flood. Although the size of government imports was much larger than
that of the private sector (the size of each consignment of public imports was
about 82,000 tons compared to 300-400 tons by the private sector), the gov-
ernment paid substantially higher prices and took much longer times to com-
plete the transactions.
14
Our country case studies suggest that similar evidence
13. In India, there are reports that some bureaucrats have been implicated for rent seeking
in grain imports.
14. These numbers are based on Annex 4 of Ali and Jahan (2003), who provide transaction
details obtained from three major banks in the country.
