THE REGULATION OF AGRICULTURE IN DEVELOPING EAST ASIA by Raian Divanbeigi and Marina Kayumova eba.worldbank.org Enabling the Business of Agriculture Structural change and poverty reduction many developing countries aimed at rapid industrialization with a strong “urban bias” (Lipton 1977, Economic growth and poverty reduction rates in East Asia Bezemer and Headey 2007). have been remarkable over the past four decades.i Over a single generation, newly industrialized economies like Figure 2. Size of agriculture in East Asian economies Value Added (% of GDP) Hong Kong, China; Singapore; Taipei, China; and the Republic of Korea, undertook a process of socioeconomic development that took centuries to achieve in Western Europe. The dramatic improvement in the quality of life that accompanied this remarkable economic transformation has virtually abolished extreme poverty in these societies. More recently, a number of developing countries in South East Asia have also made impressive progress in economic development. Despite the effect of the 1997-98 financial crisis, poverty among East Asian developing countries went down from 38% in the 80s to 11% on average in the 2000s (Figure 1). Employment (% of total employment) Figure 1. Poverty reduction across regions Poverty Headcount Ratio at 1.90 $/day (% of total population) Source: Authors’ calculations based on WDI data Source: Authors’ calculations based on WDI data. This process has been outstanding in China and Indonesia where poverty fell by 62% and 49% An alternative view emerged drawing on the success of respectively over this period. Poverty rates have fell the Green Revolution and highlighting agriculture’s role as significantly also in other East Asian economies such as a driver of growth in the early stages of industrialization Thailand, the Philippines and Vietnam. The role of (Johnston and Mellor 1961). Its advocates did not oppose agriculture throughout this process has been debated. As agriculture’s relative decline in size, but rather rejected economies in the region developed, agriculture’s relative the notion of its marginality with regards to the size reduced in favor of other sectors (Figure 2). Such development process (Timmer 1988). Some emphasized decline has often led analysts to downplay agriculture’s agriculture’s modernization potential, in contrast with the contribution to East Asia’s development. These views traditional view of agriculture as an inherently less result from classical dual economy models, which posit productive sector (Hayami and Ruttan 1985; North 1959; capital accumulation as a result of growth of the Schultz 1964). Others called attention to agriculture’s manufacturing sector (e.g., Lewis 1954, Jorgenson 1967). growth linkages and multiplier effects to highlight the The deriving notion of the implicit backwardness and sector’s importance for broader economic development limited potential of agriculture greatly influenced (Adelman 1984; Hsieh and Sadoulet 2007; Mellor 1998). policymakers. In fact, postwar development strategies in The Regulation of Agriculture in Developing East Asia 2 Enabling the Business of Agriculture Agriculture’s contribution to East Asia’s success goes agriculture and agroindustry. Following this beyond its contribution to growth and industrialization. categorization, most East Asian economies fall in what’s Indeed, agricultural development has been characterized considered an intermediate – namely “transforming” – by a close link with poverty alleviation in these countries. phase. Agriculture’s contribution to growth has declined Rapid growth has been generally accompanied by while poverty is still overwhelmingly rural (Figure 3). development strategies that emphasized the role of the rural economy. In China, agriculture growth in the early Figure 3. Agriculture’s weight in growth and poverty 1980s – thanks to the household responsibility system, the liberalization of markets and rapid technological change – was largely responsible for the precipitous decline in the official rural poverty rates, from 33 percent in 1978 to 11.1 percent in 1984 and 3.7 percent in 2000 (Christiaensen 2007). The reduction in poverty was 3.5 times higher from GDP growth originating in agriculture than from GDP growth originating in industry or services. This was largely thanks to the relatively equal distribution of land (Ravallion and Chen 2007). Rapid agricultural development is likely to remain an important pathway out of poverty for many of Vietnam’s poor as well (van de Walle and Cratty 2004). Econometric evidence from the Philippines also shows that growth in agriculture is more Source: Authors’ calculations based on WDI data. poverty reducing than growth in industry (Balicasan and Fuwa 2004). In transforming countries with rapid growth in nonagricultural sectors, the reallocation of labor out of The transformation of agriculture agriculture is typically lagging. This creates a mismatch between agriculture’s shares of GDP and employment, The economies of most countries in East Asia leaving large numbers of poor people in rural areas and transformed drastically over the last half-century. As widening the rural-urban income gap (Trimmer 2008). incomes per capita raised and economic activities shifted Historically, several governments have attempted to towards services and manufacture, agriculture’s function address the rising rural-urban income gap through of generating surplus to finance industrialization became protective measures and subsidies in favor of agriculture. less relevant. Economic literature has introduced the In line with previous experiences, East Asian economies notion that agriculture’s role changes at different stages progressively shifted from taxing agriculture to finance of a country’s development (Trimmer 1988; Christiaensen industrialization to subsidizing it at later stages of et al. 2011). This was further articulated by the World development (Anderson 2009; Byerlee et al. 2005). Development Report 2008 which linked the role played by Protective measures in support of agriculture are a agriculture to its contribution to overall growth and to the rational policy response to emerging issues. Their effects proportion of poor people in rural areas and thus, have however been mixed, given the high economic costs categorized countries into “agriculture-based”, that they impose. An alternative approach to address the “transforming” and “urbanized”. In “agriculture-based” widening inter-sectorial gap is facilitating migration of farm countries agriculture is essential to growth and poverty workers to off-farm jobs, from rural to urban areas. The reduction. In these countries increases in agricultural persistence of rural poverty in rural areas of transforming productivity can significantly reduce poverty and enable countries indicates a general inertia of the workforce to the sector to generate enough surplus to support migrate. A number of factors can explain this, including industrialization. Conversely, growth in “urbanized” skill gaps and mismatches, imperfect information, countries originates mostly outside agriculture. While migration costs and cultural ties. In some countries this is marginal in relative terms, the sector can help reduce the further exacerbated by statutory constraints to rural labor remaining rural poverty by including smallholders into mobility (Cervantes-Godoy and Dewbre 2010; modern food markets and creating good jobs in Christiaensen and Todo 2013). The Regulation of Agriculture in Developing East Asia 3 Enabling the Business of Agriculture Removing the obstacles to rural-urban migration is key to developing countries. In 2013 this figure fell by 13 overall poverty reduction in many developing countries. In percentage points, with countries like China, Vietnam and others, however, focusing on urbanization by itself is likely Myanmar showing the greatest shift away from cereal to intensify urban unemployment, congestion and urban production. Over the same period, the weight of livestock poverty (Ravallion et al. 2007). Urbanization efforts must over total agricultural output increased by 18 percentage be matched by investments in rural development. On one points in China and 13 percentage points in Myanmar. hand, these should facilitate migration out of agriculture Likewise, horticulture’s contribution to agricultural into the rural economy and secondary towns, which tends production increased by 25 and 10 percentage points to be more poverty reducing than rapid urban respectively in China and Lao PDR.ii agglomeration (Christiaensen and Todo 2013). On the The pace of economic development throughout East Asia other hand, governments should continue to reform their has been unprecedented. Agriculture has played an agricultural sectors to bridge the productivity gap that still important role in promoting industrialization for early exists with respect to the early developers in the region developers in the region and it continues to do so. As (Figure 4). today’s developing economies grow and transform, the role and nature of their agricultural sectors is also Figure 4. Agriculture value-added per worker in East changing. Regulation can affect the speed of such Asia (logarithm) transformation and determine the pathways of agricultural development in the years to come. The Regulation of Agriculture in East Asia Regulation is a key business environment component due to its impact on costs, risks and barriers to competition for various players in the value chain (Christy et al. 2009). Agricultural production has unique and evolving dimensions through which it interacts with relevant laws and regulations. These include agricultural input markets such as seed and fertilizer, and regulations that enable small scale and remote farmers to access finance and markets. By setting the right institutional and regulatory framework, governments can help increase the competitiveness of farmers and agricultural Notes: Values expressed in constant (2010) US dollars. Source: Authors’ calculations based on WDI data. entrepreneurs, enabling them to integrate into regional and global markets. The World Bank Group’s Enabling A modernized agricultural sector will enable countries to the Business of Agriculture (EBA) project measures take full advantage of emerging trade opportunities. regulatory good practices and transaction costs affecting Rising incomes and urbanization are shifting the agribusinesses. EBA indicators cover a range of composition of domestic food expenditure from basic and regulatory domains: seed, fertilizer, agricultural unprocessed staple foods to meat, horticulture and machinery, water, access to markets, finance, transport, processed foods (Reardon 2015). Relative to cereals, information and communication technology (ICT). For these products have considerably higher returns on land. each of these areas EBA indicators provide an aggregate What’s more, they generate more employment on and off picture of how supportive regulation is for the farm through related processing, packaging, and agribusinesses.iii marketing activities. Similarly, high yield rates, suitability The EBA overall score provides a first indication on East to local climatic conditions and low production costs have Asia’s performance. Compared to other regions, East intensified the production of biofuels from palm oil in Asia is outperformed by OECD, Europe and Central Asia, Malaysia and Indonesia (Mukherjee and Sovacool 2014). Latin America, Middle East and North Africa. However, In 1970 cereal production accounted on average for 45 the countries across the region show varying results with percent of total agricultural output in East Asian Vietnam displaying the most supportive agribusiness The Regulation of Agriculture in Developing East Asia 4 Enabling the Business of Agriculture regulation and Myanmar the least supportive one (Figure Figure 6. Efficiency VS Legal indicators 5). Average Efficiency scores Figure 5.Overall EBA scores Average Legal scores Source: EBA data. Notes: A score of 0 (100) reflects the worst (best) performance. EBA data feature two types of indicators. Legal indicators reflect the number of regulatory good practices that countries enact to correct market failures. Conversely, efficiency indicators measure the transaction costs regulations impose on businesses. Disaggregating the overall scores into these two components highlights how regulatory shortcomings in East Asian economies pertain mostly to the legal dimension (Figure 6). This is particularly acute in Myanmar, Thailand, and the Philippines. For example, Vietnam has one of the most efficient fertilizer registration system among the 62 countries covered by EBA. It requires only 15 days to Source: EBA data. register a chemical fertilizer product, which is the second best performance after Uruguay where it takes 11 days. In particular, private sector companies are not required to This efficiency is also supported by a very strong legal register as importers and a per-shipment import permit framework for fertilizer registration in Vietnam. On the valid for one month only is mandatory in order to import other hand, legal provisions on importing and distributing fertilizer products. Such a short term import permit validity fertilizer products do not contain many good regulatory restricts departure and arrival time of shipments with practices which not only undermine the monitoring of the fertilizer products and poses additional administrative supply of fertilizers imported into Vietnam, but also pose barriers to importers. complications to importers on logistics and negotiating power. The Regulation of Agriculture in Developing East Asia 5 Enabling the Business of Agriculture Input market regulations Agricultural mechanization boosts the expansion of cultivated areas and enhances the adoption of improved Seed, fertilizer, machinery and water are key inputs to seed varieties, fertilizers and water for irrigation (Negrete agriculture and are highly interrelated. The returns to 2014). Regulations can support agribusinesses by fertilizer are greater when combined with the use of improving how key agricultural inputs are made available improved seeds and efficient water management to smallholders (Oseni et al. 2014). Topic-level EBA (McArthur and McCord 2015; Harou et al. 2014). indicators reveal that countries in East Asia regulate agricultural inputs differently (Figure 7). Most of them Figure 7. EBA input markets scores perform better than the global average with regards to Seed regulation score fertilizer regulation while the same is not true when it comes to seed market regulation. Looking at agricultural machinery and water management regulation, Vietnam and the Philippines display several good practices, while Myanmar lags on both dimensions. Private sector participation in seed systems An important feature of seed regulation worldwide is to allow for private sector participation in new variety Fertilizer regulation score development to spur innovation and technological adoption. Several countries in East Asia present regulatory barriers in this regard. In Lao PDR, the law does not allow private sector to be involved into production of breeder and foundation seeds. Moreover, private sector representatives are excluded from variety release committees in all countries with the exception of the Philippines. Here, private sector representatives constitute less than one half of the committee size. Although a variety release committee is established by Machinery regulation score law in Cambodia, it is not functional and does not meet in practice. Only in the Philippines and Vietnam private seed companies are accredited in practice for the performance of certification activities. Market oversight of fertilizer products Global fertilizer production is consolidated among few countries. As most countries rely on imports, fertilizer registration procedures are important to ensure that the Water regulation score products entering domestic markets satisfy health and environmental standards. All countries in the region require fertilizer products to be registered in order to be commercialized with the exception of Malaysia. Regulations not only set up a formal registration process, they also establish how long – once obtained – a registration certificate is valid for. In Lao PDR, Myanmar, Cambodia, Thailand, and the Philippines fertilizer registration is valid for less than 10 years. This increases Source: EBA data. the burden on companies which have to undergo the registration process again. Conversely, in Vietnam the validity of fertilizer registration is not time-limited which The Regulation of Agriculture in Developing East Asia 6 Enabling the Business of Agriculture indicates a good regulatory practice. Moreover, regulation services. EBA scores for all East Asian countries are plays an important role in ensuring fertilizer quality and comparatively low with regards to access to agricultural preventing adulteration. For example, it is common for markets and financial services. The picture is more countries to interdict the sale of mislabeled or open nuanced for transport and ICT regulations. Vietnam fertilizer bags and to set penalties for retailers that violate displays the most advanced regulatory framework scoring such provision. In East Asia, however, only Lao PDR well above the world average in both areas (Figure 8). prohibits the sale of fertilizer products from opened bags while it doesn’t establish penalties for non-compliance. Figure 8. EBA enabling regulations scores Markets regulation score Agricultural machinery Agricultural machinery is another agricultural input where countries often rely on imports. Cumbersome tractor import procedures increase the cost of agricultural machinery and discourage its use. In Lao PDR and Myanmar importers are required to obtain an import permit for each individual tractor shipment. Conversely, Cambodia, Malaysia, Thailand and Vietnam do not Finance regulation score impose individual import permits – the practice which streamlines import procedures and trade. Further, regulation can ensure performance, durability and safety of agricultural machinery through quality standards and certification procedures – many of which are harmonized internationally. In Malaysia and the Philippines, the law requires tractors to be equipped with protective structures and seatbelts to ensure operations safety. Cambodia, Myanmar and Lao PDR, on the other hand, do not Transport regulation score regulate tractor standards which undermines technical reliability and poses safety threats to farmers. Water allocation Water withdrawals for agricultural use account for 90% of total renewable water resources in East Asia with Vietnam and Cambodia reaching more than 94%. Regulating water use permits effectively allows farmers to access water while ensuring better management of scarce resources. In Thailand and Myanmar water use permits ICT regulation score are not regulated, which increases the risk of insufficient water supply for future crop cycles. Vietnam and the Philippines, on the contrary, enact advanced regulatory frameworks which promote efficient water use by allowing water permit transfers among farmers. Non-input regulations A second set of EBA indicators focus on areas where Source: EBA data regulation can enable smallholders and remote farmers to participate to agricultural markets. These include access to export markets, financial, transportation and information and communication technology (ICT) The Regulation of Agriculture in Developing East Asia 7 Enabling the Business of Agriculture Access to agricultural markets financing tool for creating liquidity and easing access to Agricultural products can access markets after satisfying credit. Only Thailand and the Philippines have regulations several regulatory provisions such as registrations, on the operation of warehouse receipts systems. licenses and sanitary standards. Trade is facilitated where these are limited in number, quick to comply with and Access to transport economical. Many countries, however, impose additional Transport of agricultural goods has food safety regulatory burden on agricultural traders. Traders in the implications. Malaysia and Lao PDR have specific Philippines, Vietnam, Malaysia and Thailand need to regulatory provisions governing transport of perishable obtain individual export licenses with time validity as low agriculture products safeguarding against food waste, as one year. Additional costs and time are required to degradation, contamination and foodborne diseases. In obtain these licenses. Strong plant protection regulations particular, Malaysian food regulations impose minimum ensure reliable pest management in the field and robust vehicle cooling and refrigeration standards, mandatory inspection and verification practices at the border. Pest cleaning and disinfection of truck containers, prohibition and disease outbreaks can lead to infested products, of co-mingling of certain food items as well as packaging reduced yields or even crop failures. The laws of and sealing requirements. Efficient cross-border Myanmar do not include any of the plant protection transportation is essential to facilitate agricultural trade. aspects on the control of pests and diseases hindering When domestic and foreign trucks are granted similar cross-border agricultural trade marketability of agricultural transport rights competition in the sector increases. In products. Malaysia, Myanmar and Thailand foreign trucks are restricted from providing services in their territory. On the Access to finance contrary, in Vietnam this is allowed. Further, Vietnam is Farmers require working capital, seasonal loans, and the only country in the region without a quota on cross- medium-to long-term credit to finance production, border licenses granted indicating openness to foreign harvest, storage, transport and marketing. In addition to competition. loans, farmers need access to payment services to expand operations. However, rural and agricultural Access to ICT in rural areas finance are among the most challenging fields of ICT services are instrumental for farmers to access a key financing. Agricultural production activities are seasonal, information on market prices, weather forecasts and weather-dependent and spatially dispersed, making planting techniques. Mobile operators however have agricultural loans riskier and costlier. Microfinance often no incentive to invest in network roll-outs to institutions are critical for rural finance since they provide undeserved areas where much of agricultural production financial services otherwise not accessible through the takes place. Easing market entry can mobilize the traditional financial system. Countries which allow necessary investment. Several countries, for example, deposit-taking microfinance institutions tend to have establish a general authorization that allows mobile higher levels of financial inclusion. In this respect operators to start functioning directly and with minimum Cambodia has included most of the regulatory good additional administrative steps. In East Asia no country practices related to the prudential regulation and risk has adopted this practice. Vietnam is the country that management of its microfinance institutions. In contrast, regulates ICT most effectively thanks to predictable in Malaysia, Thailand and the Philippines deposit-taking renewal licensing conditions, publicly available license microfinance institutions are not allowed by law. Financial costs and voluntary spectrum trading among mobile instruments such as agent banking, electronic money and operators which ensures optimum use of available and warehouse receipts can be particularly beneficial for scarce radio frequencies. farmers excluded from the financial system. Effective supervision of these sectors manages liquidity risks and protects customer funds. However, agent banking activities are not regulated in Lao PDR, Myanmar, Vietnam and the Philippines. Further, Cambodia and Myanmar lack a framework to regulate e-money. Warehouse receipts as movable collateral are an effective The Regulation of Agriculture in Developing East Asia 8 Enabling the Business of Agriculture Conclusions unprocessed staple foods to meat, horticulture and processed foods. In order to take full advantage of these Developing countries across East Asia have made emerging trade opportunities policy makers across East impressive progress in economic development. Despite Asian countries must support agribusinesses with the effect of the 1997-98 financial crisis, poverty rates in effective regulations. Benchmarking regulatory the region have been consistently declining. Agriculture frameworks in East Asian economies through the EBA played a key role by driving growth in the early stages of indicators suggests few general trends. First, these industrialization. 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Enabling the Business of Agriculture 2017. Washington, DC, World Bank. i For an extensive discussion see World Bank (1993) and ADB (1997). ii Authors’ calculations based on FAOSTAT data. iii EBA data covers seven developing economies in East Asia: Cambodia, Lao PDR, Malaysia, Myanmar, the Philippines, Thailand, and Vietnam. For details on the EBA methodology see World Bank’s Enabling the Business of Agriculture 2017 report. The Regulation of Agriculture in Developing East Asia 10