Public Goods In South African Agriculture Economics Essay

Public Goods In South African Agriculture Economics Essay Public goods are goods that are produced in order to serve communities, where all members of the community are served equally. This is possible since the consumption by one member of a community does not decrease the quantity or quality of the public good for another member of the community. In it pure form, public goods can therefore not be divided into pieces for every member of the community, but is a collective good, being indivisible. (Loehr Sandler, 1978, p. 12) To produce these public goods in a manner that will serve the communities that needs it and to allocate public goods efficient, policies are used to provide the structure. These policies are installed by government in order to correct the failure of the market. In order to understand this interrelation between market failure, government intervention, policies and private goods, one should start at the beginning, namely market failure. This should originally be the reason why there is government intervention by means of policies. In this paper market failure will be used to start the argument on policies on public goods in agriculture. Government intervention through policies to correct the malfunction of the market will be discussed after which there will be a discussion on public goods in agriculture as a result of the above mentioned and how these public goods are delivered in agriculture. Market Failure and Government Intervention 2.1 What Market Failure is Market failure exists when the market are unable to produce at a level which is Pareto optimal, Pareto optimality being a position in the market where one person in the market cannot be better off without at least one other person in the market being worse off. (Loehr Sandler, 1978, p. 11) According to Philip Black in Public Economics for South African students (2003, pp. 21-23) there are six reasons for market failures. Lack of Information A lack of information can cause market failure, since the information available to customers and producers are not necessarily at a level to equip them to make rational decisions. A possible solution to this problem is that governments should provide this information to society, but by definition private institutions are driven by profit, making them better at obtaining and distributing information than government agencies. (Black, Calitz, Steenekamp, 2003, pp. 21-22) Lags in Adjustments Lags in the adjustment of markets exist, even if lack of information is not the only reason. Time lagging can also occur if resources are not very mobile, meaning that it cannot adapt instantly to new information. Labour, for example, can only move from one job to another with some time passing, even though new job opportunities are available. Physical capital, like machinery, cannot be moved from one place to another at any moment, but can only happen at highly irregular time periods. (Black, Calitz, Steenekamp, 2003, p. 22) Incomplete Markets When supply of certain products cannot meet the demand for those products, incomplete markets arise. For these reason public goods, such as street lighting, defence security, etc. is installed. Markets can also not take full responsibility for the external cost and benefits that are associated with individual behaviour and therefore markets are incomplete. (Black, Calitz, Steenekamp, 2003, p. 22) Non-competitive Markets Markets fail when it is characterised by non-competitiveness. By this, which happens more often than not, is meant that the competitiveness is taken out of the market. These reasons are monopolies and oligopolies in commodity markets, minimum wage restrictions on labour, and many more. (Black, Calitz, Steenekamp, 2003, p. 22) Macroeconomic Instability Markets can fail because of instability in the economys macro environment. The macro environment includes attacks on the countrys currency and other factors. This macroeconomic instability can cause markets to take too long to adjust to the exogenous shocks and government intervention through policy might be needed to rescue the situation. (Black, Calitz, Steenekamp, 2003, pp. 22-23) Distribution of Income The distribution of income is and will probably never be reasonable and fair in a sense that it will be satisfactory to the wide community or government which represents that community. Therefore Pareto optimality in the allocation of resources will not happen, thus leading to classification of market failure. This issue of skew distribution of wealth has been addressed by governments by creating wealth in a growing population through policy. (Black, Calitz, Steenekamp, 2003, p. 23) Government Intervention Government intervention in the market can be done in three different ways, the approaches being an allocative function, distributive function, and stabilisation function. Allocative Function The allocative function of governments who are intervening in the market is to address the issues of incomplete markets and non-competitive markets, as discussed previously. Through direct intervention in the market, governments can correct incomplete markets, such as supplying street lights, etc. Through indirect government, also known as the regulatory function of the government, non-competitive markets are regulated, with policies such as the competition policy which is intended to prevent monopolies from acting abusive. (Black, Calitz, Steenekamp, 2003, pp. 24,26) Distributive Function This function of the government is especially angled at the market failure of income distribution. The government use a model to determine how it should spread wealth. This models outcome is positively correlated with the participants in the markets original distribution of labour and capital. This model, however, is does not determine how fair this distribution is. This distributive function of the government comes in the form of direct intervention in the market through taxes and as a regulatory function it makes use if subsidies and transfer payments. (Black, Calitz, Steenekamp, 2003, pp. 24-26) Stabilisation Function To correct the market failure of the inability of the economy to react adequately to macro environment factors, governments intervene by means of its stabilisation function. Stabilisation of the market to reach the macroeconomic objectives is also part of this function. The appropriate monetary and fiscal policy would be installed by government to keep the market from failing to accomplish price stability, an acceptable economic growth rate, sound balance of payments, etc. This can be done through direct intervention in the market as well as through a regulatory function where indirect taxes and subsidies help to achieve fiscal objectives indirectly. (Black, Calitz, Steenekamp, 2003, pp. 25-26) Public Goods in General Types of Goods There are two properties that indicate the type of goods, namely excludability and rivalry. These two properties can be used in a table form (see Table 1) in order to differentiate Private goods, Common goods, Club goods, and Public goods from each other. Table : Different types of goods (Solum, 2009) From Table 1 the following can be drawn: Private goods are goods where the benefits are fully rival and excludable, for example fuel. Common goods are goods where the benefits are rival but non-excludable, for example fish. Club goods are goods where the benefits are non-rivalry but excludable, for example cinemas. Public goods are goods where the benefits are non-rivalry and non-excludable, for example national defence. Common goods and Club goods are part of the larger impure public goods group, since in pure form they do not have excludability or rivalry. Pure private goods are therefore goods of which the benefits are pure rival and excludable. Pure public goods are thus goods of which the benefits are pure non-rival and non-excludable. (Cornes Sandler, 1986, pp. 6-7) Characteristics of Public Goods There are 5 characteristics of public goods that will be discussed, two of which defines it from other type of goods, as mentioned above. Non-rival Public goods are non-rival, meaning that consumption by one person does not influence the consumption by another person. There is therefore no competition between consumers for the use of the specific product. (Moeti, Khalo, Mafunisa, Makondo, Nsingo, 2007, p. 24) Non-excludable Public goods are non-excludable, making it practically impossible to abstain it from one person if it is allowed for another. The problem that comes with non-excludability is the free-rider problem, where people who do not pay for the product still benefit from it, since they cannot get excluded from it. It is therefore necessary for governments to intervene and produce these products, since it cannot be produced profitably by the private sector. (Moeti, Khalo, Mafunisa, Makondo, Nsingo, 2007, p. 24) Non-apportionable Public goods are non-apportionable since it cannot be measured in order to provide it in units which can have a price attached to it and sold for that price. In this case, it is possible for water to be either a public good or not, since water can be made available to a whole community at no charge or it can be sold in bottles in a shop. (Moeti, Khalo, Mafunisa, Makondo, Nsingo, 2007, p. 24) Monopolistic Public goods can be monopolistic, making it products where there is only one role player in the market, namely the government. Governments can produce the goods that the public demand by making use of the structure of a natural monopoly. In a natural monopoly it is more efficient to have only one player (producer) in the market than more than one. (Moeti, Khalo, Mafunisa, Makondo, Nsingo, 2007, p. 25) No Direct Quid Pro Quo Quid pro quo is a Latin term which means something for something. Public goods are therefore goods with no direct quid pro quo, meaning no something for something, it this case a public good in return for money (quid pro quo is very much applicable for private goods). By paying taxes, tax payers do not receive public goods to the same value of the tax they paid, but receive whatever any other person receives, irrespective of the amount of tax they pay. Progressive scales for taxes and fiscal spending are installed in order to guide the receiving and spending of tax money of public goods. (Moeti, Khalo, Mafunisa, Makondo, Nsingo, 2007, p. 25) Public Policies Theory on Public Policy towards Externalities Externalities can cause markets to allocate resources in an insufficient way, externalities being the impact of one persons actions on a bystanders wellbeing without compensating the bystander for it. To correct the cause of externalities, governments can make use of command-and-control policies by which behaviour is directly regulated, or it can make use of market-based policies which is indirect and provides incentive to decision makers to correct the problem themselves. (Mankiw Taylor, 2006, pp. 198,464) Direct Regulation of Externalities By regulating the market directly, governments enforce certain boundaries or restrictions onto role players in the market in order to counter externalities. For example, by installing an upper limit on the amount of pollution that a factory is allowed, governments adopt a command-and-control policy. (Mankiw Taylor, 2006, p. 198) Indirect Regulation of Externalities By indirectly regulating the market, governments make use of market-based policies to counter an externality. In doing this, governments provide better alignment of private incentives with social efficiency at a lower cost to society. Pigovian taxes, named after Arthur Pigou, are taxes which are used to counter the effect of negative externalities. By this method of taxing, pollution, as the example is in the direct regulation of externalities, will be taxed per unit of pollution. The more the factory pollutes, the higher the tax payment and therefore this method creates an incentive to pollute less, since it decreases profit. (Mankiw Taylor, 2006, pp. 198-199) Policies on Public Goods Richard Cornes and Todd Sandler argues in their book, The Theory of Externalities, Public Goods, and Club Goods (1986, p. 69) that public goods in its pure form a special case of an externality is. This would mean that the policies on public goods should be aligned with the policies on externalities discussed in the previous section, namely command-and-control policies and market-based policies. In this section it will become clear whether that is the case as well as what exactly the policy methods are that are used for public goods. According to Leonard Champney (1988, p. 989)in his article, Public Goods and Policy Types, governments can either make use of regulation policies, where the incentives of the government are coercive, or of distribution policies, where the incentives of the government are economic. Coercive can be defined as intimidating people to comply. By further looking at the difference between productive indivisibilities and consumptive indivisibilities, it will be possible to describe the eight types of policies that Champney refers to in his paper. Champney describes productive indivisibilities as products that are produced for one, and because of the indivisibility of public goods, is therefore produced for all. An example of a productive indivisibility product produced by government is a light house. Consumptive indivisibility refers to the consumption of a product produced by government where the consumption by one has a positive influence on others, even though they are excluded from the direct consumption. An example of a consumptive indivisible product produced by government is education. The government can choose to whom education is made available to consume, but the whole society will benefit from it, being more politically stable, economically productive, and technologically advanced. Governments can decide to produc e productive indivisibilities or consumptive indivisibilities. (Champney, 1988, p. 988) Now the eight types of policies can be illustrated and discussed. Table : Government policies for individual targets Table : Government policies for group targets (Champney, 1988, p. 989) Type 1: Internal and External Security Products produced under Type 1 are productive indivisible products and is enforced through regulation onto individuals; the government thus make use of coercive powers as a monopoly and use taxation of individuals (compulsory) to pay for the public goods. Example: national defence. (Champney, 1988, pp. 989-990) Type 2: Compulsory Education Products produce under Type 2 are consumptive indivisible and is enforced through regulation onto individuals. Public goods, such as education which is forced onto young people, are type 2 public goods, since they (the young people) are forced to consume the product. Also, occupational licensure plays a role to ensure that an incompetent physician do not give medical care so that the whole community are forced to consume this product which have indivisible consequences. (Champney, 1988, p. 990) Type 3: Subsidies to Individuals Governments are able to move away from regulatory policies by making use of compulsory taxation in order to provide distributive policies which are more economically aligned. Direct subsidies to individuals, which are productive indivisible and distributive, are type 3 products. Example: soldiers get paid for their duty instead of being forced to enrol. (Champney, 1988, p. 990) Type 4: Subsidies to Individuals Type 4 subsidies to individuals are subsidies which are consumptive indivisible and distributive, therefore being promoting the consumption of a product by means of a subsidy. An example of this is grants for individuals to further their studies to a higher education level. (Champney, 1988, p. 990) Type 5: Environmental Regulations Groups are targeted with this type. Environmental regulations are regulative and productive indivisible by nature. Governments make use of this type of policy to attempt to make the environment better. As an example, corporations must comply with the limit that a government sets on pollution of air and water. (Champney, 1988, p. 990) Type 6: Regulation of Natural Monopoly Regulation of natural monopolies are done by governments in order to assure that provision of a good or service is reasonable and not subject to price setting, price discrimination, and other destructive activities. These types of consumptive indivisible and regulated products are often products which the economy cannot run properly without, such as communication services, and for which there are no substitutes readily available. (Champney, 1988, p. 990) Type 7: Subsidies to Corporations Type 7 subsidies are subsidies to corporations which are productive indivisible and are executed by the distribution function of the government. These subsidies are given to corporations directly or indirectly for leading activities which helps with the production of public goods. An example will be a subsidy to a corporation which produces weapons for usage in a public service, namely the military force. (Champney, 1988, p. 990) Type 8: Subsidies to Research Development Consumptive goods which are indivisible and promoted by distribution form the last of the eight types. By giving subsidies/grants, the government ensures that the necessary research and development is done in order to provide communication services and transportation in the economy. The objective is to give subsidies/grants to key strategic industries, which other sectors in the economy depend on, to do research and development. Through the subsidising of research and development, technical knowledge spreads throughout societies. An example will be subsidies for agricultural RD. (Champney, 1988, p. 990) South African agriculture Public goods in South African agriculture Public goods or services provided by the South African government include a list of 55 services under its Department of Agriculture (see Annexure A). These services are available under the five programmes of the Department of Agriculture (DoA), namely: Administration Livelihoods, Economics and Business Development Bio-security and Disaster Management Production and Resources Management Sector Services and Partnerships (DoA, 2009, pp. 18, 64-65) The purpose and budget of each of these programmes will be discussed. Administration The administration programme of the DoA provides the overall administrative as well as performance overview, with a focus on strategic leadership and management in die DoA. Capital investments are also managed under Administration. This programme had a budget of R 301 627 000 for the financial year 1 April 2008 to 31 March 2009. (DoA, 2009, pp. 24, 29) Livelihoods, Economic and Business Development Food security for households, shared growth and commercial viability for emerging farmers are the objective of the programme. To achieve the objective, this programme makes use of targeted programmes and appropriate policies in the agricultural sector in order to support equitable access to this sector, which in return will make it possible to achieve its (the programmes) objective. This programme had a budget of R 751 451 000 for the financial year 1 April 2008 to 31 March 2009. This money was allocated in the following manner to the subsections of this programme: Management R 1 208 000 Livelihoods Development Support R 604 056 000 Trade and Business Development R 92 461 000 Economic and Statistical Services R 31 267 000 National Agricultural Marketing Council R 22 459 000 (DoA, 2009, pp. 18, 80) Livelihoods Development Support as a sub-programme of Livelihoods, Economic and Business Development, contribute to communities by supporting them through public goods/services, which includes policies, norms, programmes, legislation and information in order to provide post-settlement support to emerging farmers, finance agricultural development, promote farmer cooperatives, start village banks and provide food security. The largest part of the budget for this sub-programme was spent on transfers to provinces and municipalities where they used this money, amongst other programmes, under the Comprehensive Agricultural Support Programme. (DoA, 2009, pp. 34, 81) Trade and Business Development aids the process of making international and domestic markets more accessible by South African products, promotes BEE in agriculture and interacts with National Agricultural Marketing Council (NAMC). The largest part of this budget goes towards transfers to public entities, such as the ArgiBEE Charter Council and NAMC. (DoA, 2009, pp. 8, 34) Economic and Statistical Services grant money in order to aid the process of collecting and analysing agricultural statistics as well as interact with Statistics South Africa. This sub-programme is also responsible for monitoring and evaluating the economic performance of the agricultural sector, with reports on the economic performance issued quarterly. (DoA, 2009, p. 34) NAMC as a part of the budget for Livelihoods, Economic and Business Development solely focus on statutory measures in agriculture. The changes to the constitutional measures are presented to the Minister of Agriculture and are done by NAMC. The application of these constitutional measures is also revised every two years and presented to the Minister of Agriculture. (DoA, 2009, p. 15) Bio-security and Disaster Management This programme of the DoA main functions are to manage the risks involved in animal diseases, plant pests and GMOs as well as to handle the registration of products that are used in the agricultural field. This is done to safeguard human health and to ensure food safety and security. Reducing the risks of natural disasters through management planning of agricultural risk and disasters is also part of the programme. This programme can be divided into two sub-programmes, excluding general management: Management R 1 551 000 Plant Health and Inspection Services R 138 225 000 Food, Animal Health and Disaster Management R 470 367 000 (DoA, 2009, pp. 43, 82) The Plant Health and Inspection Services sub-programme is responsible for the development of systems and policies in order to manage the risks involved with plant pests and diseases and GMOs. These systems and policies are also developed to enhance the trading of products of plant origin, to manage the movement of regulated articles and good quality control of regulated products. The largest part of this sub-programmes budget goes towards employee compensation and the goods and services provided. (DoA, 2009, pp. 43, 83) The management of food, health and disasters by this sub-programme consists of the reduction and management of risk with which animal diseases are associated. It also manages the promotion of trading in animal products of origin and ensures food safety. Lastly it entails the development of management strategies for agricultural risks and disasters. Disaster management is the most significant part of the transfers to provinces and municipalities as well as to households. (DoA, 2009, pp. 43, 83) Production and Resource Management The sustainable use and protection of water and land is important to this programme of the DoA. Through this programme this objectives are strived towards by the identification of opportunities and development of strategies for the agricultural sector to be profitable and to optimise agricultural productivity. The sub-programmes are Agricultural Production, and Engineering Services and Resource Management. The budget for are allocated as follows: Management R 1 525 000 Agricultural Production R 275 734 000 Engineering, Energy, Resource Use and Management R 202 778 000 (DoA, 2009, pp. 47, 84) Agricultural Production, as a sub-programme, focuses on assisting the process of improving agricultural productivity, especially in the field of sustainable aquaculture, animal, and plant systems. This sub-programme is also responsible for administrating various acts that apply to this field. The largest part of the budget for Agricultural Production goes towards provinces and municipalities for programmes in the different regions. (DoA, 2009, p. 47) The Engineering Services and Resource Management sub-programme has a treble focus, namely to assist infrastructure development in agriculture, to facilitate agricultural resource use, and to promote the community-based programme, LandCare. The facilitation of agricultural resource use includes the auditing of natural resources, the control of migratory pests, as well as agricultural land protection and rehabilitation. The largest single expense is the LandCare Programme. (DoA, 2009, pp. 47, 66) Sector Services and Partnerships This programme ultimately consists of two parts, the one focusing of services to the sector, the other on partnership with parties outside the sector. The purpose of this programme is therefore to execute the work set out for each of its sub-programmes, the sub-programmes being Sector Services, and International, Intergovernmental and Stakeholder Relations. Together with the management of this programme and the Agricultural Research Council, this above mentioned two sub-programmes forms the core around which the Sector Services and Partnerships budget is spent. Spending is allocated as follows: Management R 10 691 000 Sector Services R 196 518 000 International, Intergovernmental and Stakeholder Relations R 72 370 000 Agricultural Research Council (ARC) R 514 556 000 (DoA, 2009, pp. 51, 86) Sector services as a sub-programme provide direction and support to education, training, extension, research and advisory services in agriculture. The purpose of this service is to support the targeted groups. Managing of the funds transferred to the ARC is also part of Sector Services. The largest part of the budget for Agricultural Production goes towards provinces and municipalities for programmes in the different regions. (DoA, 2009, pp. 51, 86) International, Intergovernmental and Stakeholder Relations as a sub-programme supply leadership and coordination in agricultural international relations. Furthermore is the purpose to create an environment in which all stakeholders can have a positive relationship. Budget is mostly spent on compensation to employees, and foreign governments and international organisations. (DoA, 2009, pp. 51, ) Policy on public goods in South African agriculture The policies in place on public goods in the South African agriculture are policies which promote government spending on various programmes, goods, and services. The way in which this government spending is allocated is described in the previous section under the five programmes of the Department of Agriculture of the South African Government. Each of the five programmes has a very distinct role to play in order to execute the policies that are in place in agriculture. In this section the public goods and services which have the largest amount of money allocated to them will be discussed, as well as the five public entities which report directly to the Minister of Agriculture. From this discussion the policies for implementing the use of these public goods and services in South African agriculture will become clear. Policy types for the top 5 public goods and services in the DoA budget The different types of policies that are used to implement the top five items of highest spending in the DoA budget will be discussed. Two of them will be discussed together. See Annexure B for a complete list. Agricultural Research Council (ARC) R 514 556 000 was allocated to the ARC in the 1 April 2008 31 March 2009 financial year. This public service establishes and controls research, development, and the transfer of technology facilities in order to provide the private sector in agriculture with information. ARC is also promoting cooperation between other countries and South Africa with regards to the above mentioned. (DoA, 2009, pp. 15, 67) The type of policy that is used is a type 8 according to Champney, namely Subsidies to Research and Development, which are promoted by distribution (economic incentive) and are consumptive indivisible (consumption by one influence other in community positively). The ARC therefore plays an important role in providing facilities, such as research, development and transfer of technology in order to contribute to the agricultural sector. (Champney, 1988, p. 990) Comprehensive Agricultural Support Programme (CASP) and CASP Extension Services During the 2008-2009 financial year R 438 124 000 was budgeted for CASP and R 100 000 000 for CASP Extension Services. These two budget items are spent together, thus R 538 124 000. CASP Extension Services are the fourth largest item in die DoA budget. By this programmes, the DoA primarily wants to support the targeted beneficiaries from the land and agrarian programmes implemented by the DoA. By granting money to CASP, the DoA wishes to install improvement in 6 areas, namely: The access to and quality of agricultural support services available to the targeted beneficiaries of land and agrarian programmes, such as advice and information, financial infrastructure, etc., The ability of the DoA to deliver the above mentioned agricultural support services, The number of beneficiaries to benefit from accessing agricultural support services, The timeliness of technical and market information available to resource-poor farmers, The infrastructure available to targeted beneficiaries, on and off the farm, e.g. dipping and fencing, The number of LRAD reform beneficiaries accessing market information, markets and training for markets. (DoA, 2009, pp. 27-28) The policy type that would suit the grants given to the above mentioned improvements can be categorised as type 4 Subsidies to Individuals according to Champney. These grants are targeting individuals, such as the beneficiaries from the land and agrarian programmes, and are consumptive indivisible, since the consumption (use) of these land and agrarian programmes is promoted by grants available to beneficiaries. (Champney, 1988, p. 990) Classical Swine Fever A budget of R 163 900 000 was allocated to the control of classical swine fever breakouts and the necessary compensation to households when animals are killed in order to remove classical swine fever from of area. (DoA, 2009, pp. 4, 67, 138) The type of policy that is used to implement this service to public is a type 4, according to Champneys model. Subsidies to Individuals as a type of policy suit this case, because the individuals whose pigs are slaughtered in order to restrict the spreading of the disease are compensated by means of payment, which is correlated with the number of pigs slaughtered. There is therefore an incentive for farmers who have infected pigs to have them slaughtered, since th