Improving Agricultural Market Performance:
Creation and Development of Market Institutions
18
which in addition to food security often include attracting large-scale investment in agriculture
and agro-processing, linking smallholders to global market systems, and enabling domestic
agro-food producers to compete with imports and succeed in export markets.
Government interventions - and the market institutions that implement them - are in most
cases a Government response intended to mitigate or overcome these failures. It is important
to emphasize again that non-Government institutions and interventions (e.g. private sector
participation as explained in Section 1.2.2) also can play an important part in overcoming
some market failures, especially when they are coordinated with public sector interventions
and institutions. Moreover, the nature of these Government interventions in a given country is
determined by high-level political and economic objectives and development strategies.
The nature of Government intervention in the agri-food sector can be classified into five forms
of market intervention:
1. Input subsidization and taxation mechanisms
Inputs such as planting seeds, fertilizers, pesticides, machinery, and other agricultural
equipment may be (partly) subsidized by Governments to ensure equal and fair access to high-
quality inputs to improve the agricultural market system’s performance – both in quantity as
well as in quality. Input subsidization practices have a long tradition across the globe but take
many different shapes and forms. Examples include Malawi, provided fertilizer subsidies since
the mid-1970s, which were suspended in the early 1990s as part of liberalization efforts.13
However, the Government of Malawi introduced targeted starter packs of seed and fertilizer in
the late 1990s, complemented by universal subsidies on fertilizer in 2005 and 2006. Sri Lanka
has subsidized the cost of fertilizer since 1962 with a short interruption in the early 1990s.
India initially introduced subsidies in the 1960s to support the implementation of the green
revolution, with major subsidies to keep down the costs of fertilizer, irrigation water from
public systems, and rural electricity.
2. Output price control mechanisms
Price supports and controls on agricultural commodities are also common. The OECD
estimates that output price controls and similar mechanisms account for about 60% to 70% of
total agricultural assistance in OECD countries while countries like Brazil and Pakistan and a
number of North African and Transition Countries apply price support mechanisms to control
consumer prices.14 Governments may fix or control prices, through price caps or price support
mechanisms complemented by quantity restrictions (e.g. customs tariffs and trade
restrictions), depending on whether their objective is to guarantee low consumer prices,
provide low-cost inputs to domestic food processors, or encourage domestic production of
primary commodities. It is common for countries to apply one set of instruments to one
commodity and a different set of instruments to another.
13 Wiggins, S. & Brooks, J. (2010), “The Use of Input Subsidies in Developing Countries,” OECD Working Paper, presented to
the Working Party on Agricultural Policy and Markets, 15-17 November 2010, pp. 10-14.
14 Lundberg, M. (2005), “Agricultural Market Reforms,” in World Bank Group (eds.), Analyzing the Distributional Impact of
Reforms, pp. 145-153, Wageningen: World Bank Group.