the impact of regulations on economic performance has been consistently covered by economic literature. A far less often considered aspect is which policies and regulations matter for agricultural markets and the relationship between these regulations and agricultural transformation. Do regulations play a role in promoting (or hampering) agricultural transformation processes? What type of regulation impacts which of the components of agricultural transformation – i.e. productivity, composition and market integration? Answering these questions is challenging due to the lack of comparable data on business regulation and on agricultural activities. Agriculture’s nature warrants a fresh and comprehensive examination of what constitutes an enabling regulatory environment, which we propose in section V. Nonetheless, the channels through which business regulations affect overall economic performance are also relevant for agriculture. Several factors point in this direction. A first consideration stems from the predominance of externalities in agriculture. As stressed by the World Development Report 2008, regulation in agriculture is critical in a number of areas including biosafety, food safety, grades and standards, intellectual property protection, agricultural input quality, groundwater extraction, and environmental protection. Due to agriculture’s importance for human health and food security, political stability, and environmental sustainability, it is not unusual for governments to implement more stringent agricultural regulations (Diaz-Bonilla, 2014; USAID, 2015). More pervasive regulations demand continuous evaluation to ensure effectiveness in correcting market failures and monitoring their implications for firms.

The Regulations?

Another factor that highlights the relevance of business regulations for agriculture pertains to risk and predictability. Farmers face considerable risk due to their susceptibility to exogenous elements such as weather, plague of insects, and diseases, all of which play a fundamental role in agricultural production. Moreover, biological processes often make intermediate production phases unobservable, limiting the scope for corrective actions before harvest. Similarly, farmers must make production decisions before they know the market price of their crops. What’s more, uncertainty is exacerbated by the inherent volatility of agricultural markets (Aimin, 2010). As highlighted above, regulations can enable businesses to operate in a context where the outcomes of their decisions are more predictable by setting clear and easily enforceable rules. Predictability is critical in the farming business where risk is typically inherent. Transaction costs represent another dimension where regulatory efficiency is key to agriculture. Transport costs can make up one-third of the farm gate price in some Sub-Saharan African countries (World Bank, 2007) and prevent farmers from specializing in the goods where they have a competitive advantage (Gollin and Rogerson, 2010). What’s more, high marketing costs due to isolation from markets and roads, lack of means of transport or inefficient transport services often discourages farmers from commercializing their production (Gebremedhin and Jaleta, 2012). Finally, credit is often rationed in rural areas and financial services are often low quality and do not respond adequately to the demand of producers (Hoellinger, 2011). Well-designed regulations can support farmers by limiting their transaction costs in accessing transportation, marketing, and financial services. Finally, while the studies cited above focus on the impact of regulations on manufacturing activities, many elements of an enabling regulatory environment for agriculture are not sector specific. Therefore their conclusions extend to the agricultural sector as well. Lio and Liu (2008), show that a more market-friendly regulatory environment contributes to higher agricultural productivity. What’s more, a friendly investment climate can support the development of agribusiness. This comprises private agro enterprises that provide inputs and other services such as handling, processing, transportation, marketing, and distribution of food and other agricultural products (FAO, 2007). Like traditional manufacturing firms, these businesses would benefit from secure property rights, efficient taxation, increased access to finance and balanced entry.

Further, efficiency indicators measure the transaction costs that firms have to bear to comply with national regulations on the ground

A number of countries combine low transaction costs with a high number of regulatory good practices. This points against the argument that improvements in regulatory quality involve high-efficiency costs. Spain displays good practices across several regulatory areas. It imposes sound requirements on the registration, labeling, and monitoring of new fertilizers.

Leave a Reply

Your email address will not be published. Required fields are marked *