Module 1 - Building Agricultural Policy and Institutional Capacity

Public policy is anchored in a set of values defining societal goals and a set of beliefs about the best way of achieving those goals. Institutions are the rules, enforcement mechanisms, and organizations supporting market transactions. Institutions help transmit information, enforce property rights and contracts, and manage competition in markets, thus giving people the opportunity and incentives to engage in fruitful market activity. Together, public policy and institutions create the enabling environment in which markets guide the allocation of resources for efficient outcomes. Although specific policies relevant to various subsectors within agriculture (for example, land administration, natural resource management, and agricultural research) are addressed throughout this Sourcebook, the means by which policy is established, and the structure of the institutions devised to do this and to promote overall sector growth, are addressed here.

Past Investments

Support for policy and institutional development in the agricultural sector has evolved dramatically. In the 1970s and 1980s, much investment went to building state organizations to manage agricultural development programs. Ministries of agriculture, often starting with very limited capacity, expanded their range of agencies and programs, many of which attempted to supply inputs, credit, and services directly to producers and to purchase and market agricultural products. Some of these public sector investments had high payoffs. Now, however, the economic returns to many of these investments (such as large-scale irrigation) are lower, and some interventions (such as subsidies) are very costly in terms of the distorting effect that they have on domestic markets.

The failure or lack of sustainability of many programs caused the state’s role in the agricultural sector to be reconsidered. This process led to a surge in adjustment lending (that is, lending to support policy and institutional reforms conducive to growth) by the World Bank in the 1980s, when such annual lending averaged over US$900 million. From 1990 through 2003, Bank agricultural adjustment lending totaled US$5 billion. In FY04 it was US$180 million, and in FY05 US$218 million.

Although adjustment lending and associated policy and institutional reforms have significantly influenced the development of public policies for the agricultural sector, the reform process is not complete in many countries. Second-generation policy adjustments are needed in many cases, and the capacity to implement many of the reforms effectively is lacking. Rapid changes in global markets and technology make it imperative for the public sector to renew its focus on correcting persistent market failures,¹ efficiently providing core public goods,² establishing the supporting systems that encourage private initiative and investment, and protecting the interests of the poor 

² Public goods are defined as those for which private suppliers cannot fully appropriate the benefits of their initiatives—they are nonrival (meaning that one person’s consumption of a good or service does not reduce its availability to others) and nonexcludable (meaning that individuals cannot be excluded easily from consumption). Interventions relating to goods that are undersupplied because of positive externalities (for example, agricultural research and roads) differ from interventions where economies of scale and natural monopolies create a rationale for public investment (for example, irrigation and rural electrification).