Feed the Future
This project is part of the U.S. Government's global hunger and food security initiative.

Making the Rules Work for Private Sector Agricultural Growth

The enabling environment for agriculture — the formal and informal rules in markets — has a direct bearing on the conditions for private sector growth. And getting it right can be tricky. Too little regulation can lead to inadequate food safety protections, higher risk of counterfeit or adulterated products and ultimately discourage investment. Overly burdensome regulations can stifle private sector ingenuity and drive up the costs of compliance, affecting value chain competitiveness. Market-distorting sector policies push investments into less productive uses. Poor enforcement by weak institutions can create barriers to investment and growth.

Good rules — formal and informal — that are fairly upheld can lay the foundation for virtuous cycles of private agricultural sector growth. Strong property rights are central to an enabling environment for agriculture. Farms and firms that feel assured of their property ownership have the incentive to undertake the capital investments necessary to maximize their long-term gain. Unsurprisingly, researchers have observed an economically large and statistically significant link between the strength of property and contracts systems and access to finance for enterprises.

Effective contracts enforcement, whether formal written contracts or informal handshake deals, can decrease counterparty risk and enable scaling up operations beyond trust circles of family and friends. In Mali, the vast majority of transactions between cereal traders take place without written contracts. Malian traders expressed frustration that this makes proving breach of contract difficult and further constrains the expansion of business to new partners without personal guarantees or relationships. Informal systems relying exclusively on trust work well within small, homogenous communities but break down without clear rules and sound enforcement.

Complex, burdensome regulations can lead to high compliance costs and can ultimately drive up the costs for firms and farms. In Ghana, overlapping inspection and licensing mandates for food imports cause overlaps and ambiguity in institutional responsibilities, especially in inspection and laboratory testing, leading to delays. On food import control alone, our team observed in 2014 that Ghana had over 18 different laws covering food imports for either revenue or food safety concerns.

High compliance costs can also have direct bearing on access to inputs. In Uganda, a fertilizer compound was required to be registered separately by each vendor, even if multiple companies sell the same product. Registration took an average of three years due to mandatory field tests and delays in the approval process. There was no preferential screening process for a product approved in a neighboring country and no harmonization within the East African Community for fertilizer policy.

Inefficient rules make agricultural products less competitive. In Kenya, traders indicated that it could take three to four weeks for agricultural product shipments to clear Mombasa port. The Kenyan government is implementing a single-window customs clearance system and has approved construction of a new port at Lamu to address backlogs and inadequate port infrastructure. Delays persist, however, due to unpredictable inspections of agricultural goods by multiple regulatory authorities. On average, each day in transit for agricultural products adds what is equivalent to a one percent ad valorem tariff on the products, directly affecting the competitiveness of products in the market.

Sound government policies, equitably and reliably enforced, can lower costs and reduce risks that can enable business start-up and growth. Clear, predictable rules create a foundation that can help firms and farms to better identify and manage risks, secure finance, and experience improved access to higher-value end markets.

Smart regulations can enhance sectoral competitiveness and boost productivity. By reducing policy, legal, regulatory and social constraints to market entry, competitive pressures can encourage innovation, drive down prices and enhance productivity within a value chain. Through a market systems approach, better rules can help lead to sustainable, inclusive improvements for a more food-secure future.