Meaning and Types of Agricultural Policy Instruments

 

Agricultural Policy Instruments is the replacement of measures designed to support and encourage production. By measures designed to provide income support to farmers not linked to production, hence measures that have less effect on the way in which actors.

In this article you will learn the meaning of agricultural policy instruments, which is a crucial aspect of agricultural policy and development and you will also learn the types of agricultural policy instruments, which is a crucial aspect of agricultural policy and development.

 

Read: Guiding Principles of Agricultural and Food Policy Formulation

Meaning of Agricultural Policy Instruments

Agricultural policy instruments are tools through which intended policy goals are achieved. They are the means, measures, or strategies available to policy-makers for achieving stated agricultural policy objectives.

An instrument is defined as something which the manager or actor can change or manipulate in order to produce a desired effect. It may be an economic quantity such as interest rate or it may be a part of the institutional framework such as nationalization of banks. An instrument, therefore, is the means by which the policy objectives are pursued.

Just as the scissors and tapes are instruments in the hand of tailors for cutting clothes, or the nails and hammer are tools in the hand of carpenters, policy instruments are the tools used by policy-makers to achieve stated policy objectives.

In order to achieve desirable results, policy instruments have to be properly tailored to the specific objective. In a fundamental sense, the relevant policy instruments for a specified objective guide the selection of programmes and projects for the achievement of that objective.

A policy instrument is an individual economic tool which can be used to manipulate an economic variable to achieve an economic objective. Instrument includes interest rates, tax rates, subsidies, minimum price and wages, and legislation.

Policy instruments are interventions made by government/public authorities in local, national or international economies which are intended to achieve outcomes which conform to the objectives of public policy. Policy instrument is a linkage between policy and policy formulation and policy implementation. The intention in policy formulation is reflected in policy implementation through instrument.

Policy instrument are often known as governing tools as well, particularly when they are applied with all conditions associated to them. Policy instruments are tools which can be used to overcome problems and achieve objectives.

They include conventional transport methods such as new infrastructure, traffic management and pricing policies, but increasingly they also involve attitudinal changes and use of information technology.

Read: National Agricultural Policy Objectives

Types of Agricultural Policy Instruments

The agricultural policy instruments that have been used in Nigeria and other parts of the world are as follow:

1. Subsidy

2. Agricultural commodity price support schemes

3. Taxes

4. International trade instruments

5. Monetary policy instruments

6. Agricultural insurance scheme

7. Agro-industrialization strategy

8. Agricultural sector budgets

9. Legislation

10. Infrastructure services

11. Research and extension

12. Direct payment

Let go into details

 

1. Subsidy

Generally, subsidy is a direct or indirect payment by a government to the agricultural sector to achieve specific objectives. More specifically, subsidy is a grant or payment (in cash or kind) by the state representing part of the cost of a commodity or input, and designed to encourage the use of that input or commodity.

Thus, there are input subsidy and food subsidy.

a. Input Subsidy: One of the most significant instruments of the agricultural policy is subsidy given to farmers on agricultural inputs.

Through this subsidy, farmers are encouraged to augment the application of subsidized inputs for raising crop yields and production.

The objectives of input subsidy are:

1. To make the farm produce cheaper for domestic consumers

2. To provide cheap raw materials to agro-industries.

3. To boost up the agricultural export.

During the green revolution period, input subsidies were provided to farmers for achieving self-sufficiency in food grains. Subsidies on fertilizer, power and irrigation are the major components of total subsidies given to the farm sector.

Now, you should understand how input subsidy as an instrument works to achieve the policy goals. Note that the subsidy given to a farmer per unit of an input is equivalent to a fall in the price of input by the amount of the subsidy. If other things remain the same, a fall in the procurement cost of an input due to subsidy would lead to increase the farm production, reduce output price and increase output demand for consumers for final consumption and agri-business companies for further processing.

For example, huge input subsidies provided by the US to their farmers indirectly benefit large agri-business companies which get the cheap farm produce for making processed food to be supplied at competitive prices in the domestic as well as global market.

Note that if this instrument is used along with output price stability, it would enhance farmers income. On the other hand, if market price of the agricultural product declines due to reduction in input-cost, it would benefit the consumers and agro-processing firms.

It is pertinent to note that the input subsidy as a policy instrument has become questionable on environment, equity, and efficiency grounds.

For example, irrigation subsidy promotes excessive use of irrigation and creates water logging and soil salinity problems.

In case of fertilizer subsidy, it is observed that its significant portion supports to an inefficient fertilizer industry.

In India, a steep rise in agriculture subsidy during I990s and 2000s has crowded out the real investment in the farm sector, as the resource-striven central and state governments find it difficult to increase public investment in the sector.

b. Food Subsidy: Government subsidy on food grains to the consumers can also be used as a policy instrument. Although food subsidy is targeted for poor people to ensure their food security, it can also be used to increase the farm income. If issue prices of food grains crops are lowered due to heavy food subsidies, it would generate more demand for the food grains, indirectly benefiting the growers.

Like in India, food subsidy has three components consumers’ subsidy, implicit producers' subsidy, and subsidy pertaining to the maintenance of buffer stock.

The amount of consumers subsidy depends on the quantity of food grains distributed through the Public Distribution System (PDS) while carrying cost on maintaining the stocks at buffer norm level is the price for food security.

The carrying cost in excess of stocks over and above norms may be considered as a kind of implicit producers' subsidy. The problem with a subsidy scheme is to ensure proper targeting so that benefits do not leak to unintended beneficiaries.

 

2. Agricultural commodity price support schemes

A commodity price support policy entails fixing minimum producer prices as well as periodic interventions to stabilize such prices.

These policy instruments can help to achieve several objectives including:

i. Securing fair and reasonable incomes for farmers

ii. Stabilizing agricultural commodity markets

iii. Ensuring reliable supply of agricultural products

iv. Encouraging the adoption of profitable new technologies, etc.

These policy instruments were popular during the era of Commodity Marketing Boards in Nigeria.

 

3. Taxes

Taxes are payments made either directly or indirectly by individuals and co-operate citizens to the state in return for the enjoyment of citizenship and other rights. Taxation can be used to redistribute income in the economy.

For instance:  

A progressive income tax policy may reduce the income inequality between the poor rural residents and the more well-off urban population.

Corporate tax holidays policy can be used to encourage rural industrialization and investment in agriculture in the country.

Indirect taxes imposed on certain goods and services, e.g. cigarette and alcohol, are intended to discourage their consumption for health reasons and as well generate revenue for the government.

Import and export taxes are associated with international trade policies and transactions.

The value added tax (VAT) is a form of indirect tax on goods and services in the domestic economy.

The effectiveness of indirect taxes on goods and services depends on the market structure, and the demand and supply elasticity’s of the goods and services being taxed.

 

4. International Trade Instruments

Several policy instruments are intended to control the free flow of goods and services across country‘s international borders. These instruments may be fiscal instruments, monetary instruments, or outright legislation. They include:

i. Export control instruments are intended to regulate the flow of goods and services from the domestic economy to other countries. They include export subsidy, export duties and taxes, export quotas, and export bans.

Export duties and taxes are imposed to discourage the export of certain crops, while export subsidies have the opposite effect, that is, to encourage the export of certain crops. Commodity export promotion was the general direction of Nigeria‘s agricultural policy during colonial period. Export quotas and outright bans are commodity export restriction instruments intended to meet especially short-term objectives.

ii. Import Control and promotion instruments include import duties and taxes, import subsidy, import quotas and bans. In general, import control instruments are trade policy instruments intended to regulate the inflow of goods into a country.

For example, landed border closure policy in order to encourage local production of agricultural produce especially rice and frozen poultry products. Import duties and taxes are imposed in order to discourage importation of such goods as well as generate revenue for government.

Import quotas and outright bans may be employed to meet short-term objectives; such as encouraging domestic production, and the development of domestic production capacity for agricultural products involved.

iii. Exchange rate management is also used to influence the flow and composition of a country‘s imports and exports. The devaluation of a country‘s exchange rate renders her agricultural exports cheaper relative to her agricultural imports. Such a policy will have both input and commodity effects.

When a country‘s inputs are cheaper relative to the value in international exchange, there will be a trend towards increased export of those inputs, or the attraction of foreign direct investments and multinational firms to take advantage of the cheap inputs.

For example, the devaluation of Nigeria‘s currency following the Structural Adjustment Programme (SAP) has induced a trend towards trans-border migration of labour from the country.

a. Agricultural Trade Regulations: Trade regulations comprise quotas, import duties, and export subsidies, applied to imports or exports to increase or decrease amounts traded internationally and thus increase or reduce domestic prices.

 

5. Monetary Policy Instruments

The monetary policy instruments of interest in agricultural policy analysis are those intended to control the direction, composition, and flow of credit to the agricultural sector, as well as those used to control the general price level or inflation in the economy.

Prominent among these instruments are:

i. The interest rate structure

ii. Sectorial credit quotas.

For example:

i. Below market rate of interest may be charged for agricultural loans with the aim of increasing borrowing for agricultural projects.

ii. Mandatory sectorial credit quotas aimed at specifying the minimum percentage of all loans and advances by the banking system that should be channeled to agricultural sector is also used to increase lending for agricultural projects.

In Nigeria, these sectorial credit quotas are usually specified in the periodic monetary and credit guidelines of the Central Bank of Nigeria.

These instruments could be complemented by smallholder credit guarantee schemes, micro-credit schemes, soft-loan programmes and grants to the agricultural sector.

 

6. Agricultural Insurance Scheme

It is widely recognized that agricultural enterprises are prone to risks and uncertainties. A risk is defined as a situation where all possible outcomes of an activity are known along with the probability associated with the occurrence of each possible outcome.

Uncertainty, on the other hand, arises either where all the possible outcomes of an activity are not known, or the probabilities of the outcomes are not known, or neither the outcomes nor their probabilities are known. There is often the underlying recognition that agricultural practices may not yield expected results.

This is because, unlike manufacturing, farmer‘s decisions at the ploughing and planting stages do not yield instantaneous results, thereby giving room for unpredictable intervening factors such as weather, pests and diseases, natural disasters, etc to influence outcomes.

There is need to reduce the risk of losses or total failure of farmer‘s investment through a well-designed programme of agricultural insurance.

Insurance also helps to rebuild farmer‘s confidence and incentives to produce. The major objective of agricultural insurance is to protect farmers against natural hazards, through a mechanism that ensures prompt indemnity sufficient to keep farmers in business, as to provide necessary back-up to government policies on agricultural development.

For instance, it is expected that a well-administered programme of agricultural insurance will improve the flow of credit to agriculture, as insurance cover can be used by farmers to secure their loans.

Conceptually, insurance involves the exchange of a small known cost for the possibility of a larger but uncertain future loss. It is an institutional device for accumulating funds to meet unexpected losses; and the purchase of insurance policy by individual or business serves to shift the financial burden of loss to the insurer in return of periodic premium payments by the insured.

However, implementing a programme of agricultural insurance in developing countries has been problematic due to the following reasons:

i. Lack of accurate and reliable farm records or data for the assessment of farmer‘s losses

ii. Uneconomical size of farm holdings

iii. Absence of deliberate efforts by farmers to protect their investment

iv. Unreliable property rights system which gives farmers ‘unclear titles to farmlands

v. Problem of determining appropriate compensation package (indemnity) for farmers in the event of losses

vi. Problem of establishing clear insurable interest over farmers ‘investments

vii. Conceptual and measurement problems related to separating farm and household activities for purposes of income determination.

Agricultural insurance can be used to achieve the following policy objectives:

i. Ensuring adequate and reliable food supplies

ii. Increasing the flow of credit to agriculture

iii. Securing fair and reasonable income for farmers

iv. Adoption of profitable modern technology

v. Stabilizing commodity markets

vi. Achieving stable food prices

vii. Encouraging investment in profitable agricultural enterprises.

 

7. Agro-industrialization strategy

The essence of agro-industrialization is to promote functional linkages between the agricultural and industrial sectors of the economy to enhance growth.

There are three alternative strategies under this policy instrument, namely:

a. Import substitution industrialization

b. Export promotion industrialization

c. Rural industrialization.

a. Import substitution industrialization: Is essentially intended to encourage the domestic manufacturing and servicing of agricultural inputs, spares, and supplies in order to promote stable supply and availability to farmers, increase affordability of the inputs, and the adoption of modern inputs. 

It also encourages the creation and strengthening of domestic capacity for the servicing, spares and adaptation of the relevant inputs.

The policy instruments under this strategy might include:

i. The domestic manufacturing of fertilizers and other agro-chemicals, feeds, etc.

ii. The assembling and manufacturing of tractors, ploughs, equipment, and other agricultural implements

iii. The development of the relevant skills in the delivery, repairs, and servicing of inputs.

Such policies help to:

i. Stabilize the domestic input market by shielding it from the effects of foreign exchange induced procurement problems.

ii. Conserve foreign exchange, that otherwise would have been used to import these inputs.

iii. Ensuring the timely availability of inputs, this policy instrument promotes the adoption of recommended innovations and inputs by farmers at a much faster rate than otherwise.

iv. Encourage domestic production of previously imported agricultural products such as fruit juices, canned foods, baked foods and confectionary, etc, which help to conserve foreign exchange, as well as create profitable employment opportunities for domestic resources.

b. Export promotion industrialization: This is intended to encourage the export of agricultural products to improve farmers‘revenue, as well as the international quality and competitiveness of farm products. 

Agricultural exports are mainly of two types, namely:

i. Raw produce/materials

ii. Semi-processed and processed products.

The export of processed products tends and helps to:

i. Add greater value to domestic production and is particularly encouraged on account of this.

ii. Link the farm sector to the agribusiness and manufacturing sectors, thereby creating inter-industry and/or inter-sectorial linkages.

iii. Build capacity in agro-industrial processing and domestic industrialization through a strategy of domestic utilization of agricultural raw materials.

iv. Create self-reliance in food and industrial production, employment, and stabilization of domestic commodity markets.

c. Rural industrialization: This entails a conscious strategy of encouraging the establishment of cottage processing and manufacturing agro-based industries in the rural areas. This strategy is anchored on the belief that although agriculture is the major occupation of rural people, the processing of agricultural products before transporting them to the urban centres will considerably create value-added to agricultural production, create non-farm employment opportunities for rural residents, as well as facilitate the meaningful integration of the farm and non-farm sectors of the rural economy.

Rural industrialization usually attracts such ancillary services to the rural area as rural health, educational, financial, infrastructural, and other social amenities.

This strategy helps to:

i. Discourage the rural-urban drift.

ii. Stabilize agricultural production

iii. Improve the terms of trade between agriculture and other activities

iv. Promote the adoption of profitable agricultural technology and alleviate poverty

 

8. Agricultural sector budgets

Annual budget represent one of the most important instruments through which the government directs the performance of the economy in general, and the agricultural sector in particular. The budget is a government‘s expected revenue and expenditure plan in the current fiscal year.

Thus, budget shows which sector(s) of the economy the government expects to obtain revenue for her operations, and also which sector and projects receive (greater) allocation of these resources. Budgetary allocation is therefore one way of determining the extent of priority attention accorded to the different sectors, and sub-sectors by the government.

In essence, the budgetary allocation to agriculture relative to the other sectors indicates the extent of priority accorded to agriculture in the economy by the government in the fiscal year. 

Also, within the agricultural sector, the degrees of priority accorded to the different sub-sectors will be reflected in the size of their budgetary allocations, as well as the range of programmes and projects to be undertaken in each sub-sector.

Some of the typical sub-sectors of agriculture include crops, livestock, fisheries, rural development, research, extension, etc.

The budgetary allocations to each of these sub-sectors reveal government‘s priority preference for their respective programmes in the fiscal year.

In reading the budget, it should be realized that agricultural production could be serviced or facilitated by the agencies in other departments of government. The sub-sectorial distribution of programmes and projects in the annual budget serves to indicate the underlying strategy for the sector.

For instance, governments may prefer directly productive activities in the sector by encouraging programme interventions intended to achieve this objective.

Such programme may include: farm settlement schemes, school-to land projects, input delivery progammme, national livestock transformation programme, etc. This type of policy strategy by the government will be reflected in the budget by the programmes.

In Nigeria, these may include for instance land resources development (e.g. the defunct National Agricultural Land Development Authority (NALDA), River Basin Development, Fadama development, and the community and cooperative operative mobilization schemes. The budget is also a major instrument for regulating inflation.

For example, if inflationary pressures are too strong, a restrictive budget will be introduced. This implies that taxes will be raised and/or government expenditure reduced. 

This contractionary fiscal policy, as it is often called, helps to check inflationary pressures in the economy.

It should be realized that a government budget is legislation. When approved, it becomes an act of parliament to be enforced by the relevant authority.

Thus, a budget is one of the legal instruments for realizing the agricultural policy objectives of a country.

 

9. Legislation

Legislation is one of the instruments for realizing the objectives of agricultural policy. Legislation provides the institutional framework for the achievement of stated objectives. Special laws, rules, and regulation may be required to control behavior, direct outcomes, mobilize resources, procure inputs, create incentives, regulate behavior, or to direct the activities of economic agents to desirable ends. 

For instance, special laws may be promulgated to discourage smuggling or restrict imports so as to realize the import substitution policy of government.

In particular, the ban by the Federal Government of Nigeria on the importation of rice and frozen chicken are intended to encourage the growth of the domestic rice and poultry sub-sectors of agriculture.

Certain agricultural projects and progarmmes may require an enabling legislation for their implementation. The enabling legislation is intended to accord such projects a separate legal identity for the channeling of benefits and use of resources, as well as to insulate their operations from the general bureaucracy.

Legislation and the associated quarantine services may be promulgated to control the spread of debilitating diseases and pests of crops and livestock.

Land reforms: This is an example also of legislation. Agricultural policy goals can also be achieved through bringing various acts, rules and regulations.

Land Reform Act was enacted for making reform in the land tenure system and for equitable distribution of land. The act was intended to achieve economic, social and political objectives.

For example, political objective was to change the rural power structure. The economic objectives were to reduce poverty and increase agricultural productivity. Policy makers should clearly weigh the benefits and costs of legislation along with alternative instruments, before proceeding to promulgate one.

 

10. Infrastructure services

Government’s investments in irrigation, land improvement, soil and water conservation, roads, and electricity, water and pasture land improvement are the major elements of infrastructure services. 

In addition, general services provided to producers either free or at subsidized costs include inspection services, and pest and disease control services.

 

11. Research and extension

Agricultural research represents one of the most cost effective, easily available and adaptable, but surprisingly less frequently utilized technique for achieving the objectives of policy. 

National agricultural research is undertaken to solve identified problems in any area of policy, and therefore assists in the making of informed decisions.

All aspects of agriculture are amenable to research, on the basis of which recommendations are drawn to guide policy formulation, analysis, and implementation. The major output of scientific research is knowledge, and as such, it should constitute an important component of other policy instruments.

Thus agricultural research while being an instrument in its own right, should serve as a complementary tool to other policy instruments.

For instance, the use of legislation to control water pollution should be preceded by a research survey of the likely reactions of major stakeholders in the water sector to the legislation. 

Research on the effectiveness of legislation relative to alternative strategies for the control of water pollution (e.g. taxes, public health enlightenment, sanitation, etc) will also be beneficial to the decision-making. In the developing countries, research is not frequently used to guide decision making.

This accounts for the low impact of policy on people‘s welfare and productivity. The agricultural policy document for Nigeria, prepared by the Federal Ministry of Agriculture specified the following objectives of agricultural research in the country‘s agricultural development process.

They include promoting the:

i. Development of improved and high-yielding production materials such as seeds, seedlings, livestock-breeds, fingerlings, etc

ii. Development of appropriate technologies in the different areas of agricultural production, processing, and storage to increase efficiency and reduce the usual drudgery associated with farming

iii. Development of appropriate and sustainable technologies for the optimum utilization of farm resources without adverse effects on the agro-ecosystem

iv. Provision of appropriate technology and package of practices for optimum production and for the general improvement of the quality of life of the rural farming communities.

Closely related to research is agricultural extension or technology transfer. Research results or technologies developed at research institutes have to be made available to farmers for their application, adaptation, or even rejection.

It is the duty of the agricultural extension to ensure that proven research results are taken to farmers and problems of farmers are relayed back to the research stations for proper attention and solution. 

Extension can be used to:

i. Promote the objective of encouraging the adoption of desired technologies

ii. Encourage particular cropping patterns

iii. Improve the education, enlightenment and awareness of the farming population.

 

12. Direct Payments

Direct payments are given to the farmers to achieve the multi-functionality objective of agriculture. They are designed to maintain the agricultural output within the predefined output quota.

Common agricultural policy of European Union (EU) uses this instrument. USA also transfers direct money to the farmers for not to grow crops. These payments are directly transferred from taxpayers to farmers without raising prices to the consumers.

The objectives of direct payments to the farmers may be to achieve price stability, protect farm income and conserve the soil. In many developing countries (e.g. Nigeria), this instrument is not generally used.

Read: Conflicts and Resolving Conflict in Agricultural Policy Objectives

Conclusion on Meaning and Types of Agricultural Policy Instruments

In this article you have learnt the meaning of agricultural policy instruments. A policy instrument is an individual economic tool which can be used to manipulate an economic variable to achieve an economic objective.  Instrument include: interest rates, tax rates, subsidies, minimum price and wages, and legislation.

Agricultural policy instruments are tools through which intended policy goals are achieved. They are the means, measures, or strategies available to policy-makers for achieving stated agricultural policy objectives.

Policy instruments are interventions made by government/public authorities in local, national or international economies which are intended to achieve outcomes which conform to the objectives of public policy.

Policy instrument is a linkage between policy and policy formulation and policy implementation. The intention in policy formulation is reflected in policy implementation through instrument. Policy instrument are often known as governing tools as well, particularly when they are applied with all conditions associated to them.