3. SOUTH AFRICA
3.1 Introduction
Agriculture is an important part of the South African economy because of its contribution to domestic consumption and employment and its contribution to exports. Historically South African agriculture has been heavily regulated and the sector has been significantly influenced by the existence of many statutory boards. During 1996 the South African Government passed legislation to abolish the existing boards as part of a major reform of agriculture. As a result the industry has been rapidly adjusting to the new legislative environment. It is important to note the reforms are part of a wider set of reforms (eg trade liberalisation); the reforms have impacted a diverse set of boards; and they have in large part involved the removal of a legislative framework developed in the 1930s.
3.2 Context and History
Deregulation of agricultural marketing structures in South Africa has been part of a careful government strategy to restructure the South African economy post the Apartheid era. A major concern driving the restructuring was the historic emergence of "two agricultures", i.e. commercial and subsistence farming. The emergence of "two agricultures" was widely seen as a result of the 1937 Marketing Act, agricultural finance institutions, the Land Acts (1913 and 1936) and labour policy.
The Land and Agricultural Bank of South Africa (formed in 1910) and the Agricultural Credit Board provided loan finance to farmers who did not have access to the commercial banking sector. "These financing institutions administered a range of de facto and de jure sanctions on lending to black farmers" (Kassier Report, 1992). The Land Acts acted as major instruments of segregation of access to land in South Africa. The 1913 Act set aside six per cent of the land for blacks; the 1936 Act increased this by a further seven to eight per cent of the land. Homelands tenure forms were effectively frozen by proclamations issued at the same time. The Subdivision of Agricultural Land Act of 1970 further affected access to land in commercial areas. Labour policy also contributed to the division of agriculture. In addition to direct instruments, "influx control measures, the Land Act, subsidies on farm worker housing, the Group Areas Act, [and] the Physical Planning Act." (Kassier Report, 1992) were important. The combination of these measures with the Marketing Act, 1937, led to "the large scale conversion of peasant farmers into farm labourers" (Kassier Report, 1992).
3.3 Why the Changes?
The reforms of 1996 came about primarily as a result of domestic and international political pressure along with influential economic analysis. The overthrow of apartheid led to great pressure to destroy the "two agriculture" system. The historic arrangements were perceived to be disadvantageous to blacks and to exclude blacks. The formation of the new government gave the opportunity for a new start. The external pressure came in large part from the GATT/WTO. South African trade has been associated with substantial distortions and externally it was seen that removal of the boards would facilitate the freeing up of trade to and from South Africa. The influential economic analysis was that of the Report of the Committee of Inquiry into the Marketing Act, December 1992, (Kassier Report, 1992) which provides a comprehensive review of the background to the establishment of the Marketing Act 1968 and its predecessors (dating back to the original Act 1937).
3.4 The Kassier Report
The Kassier Report documents intervention in agricultural industries in the areas of technology, agricultural support and factor and commodity policy instruments. The Marketing Act (1968) constituted the influence on the sector through commodity policy. The fore-runners of the Marketing Act involved the establishment of commodity related marketing arrangements from the early 1930's. The conventional wisdom at the time was that "a small body of responsible and well-informed individuals could perform better than the market consisting of a large number of poorly organised and financially weak producers with conflicting interests". This perception resulted in the recommendation by the Viljoen Committee of 1934 for the establishment of a Marketing Act. This Act was first passed into law in 1937. The Act was strongly opposed by "various parts of agri-industry and academic economists".
However, by the 1990s this system was considered unsatisfactory with the development of the "two agricultures" system with one section of the industry dominated by large commercial agricultural development and the other involving subsistence farming. A common perception emerged that the Board structures favoured the commercial agricultural sector to the detriment of the "second" agricultural sector.
During the 1980's, substantial shifts in farm policy began with a more liberated political economy. The farming sector became more exposed to market forces with, for example, "market related interest and exchange rates resulting from financial market liberalisation in the early 1980's; the decline in real producer prices of commodities such as maize and wheat; an extensive deregulation of controlled marketing; a shift away from settlement schemes to farmer support programmes in the homelands; the (imminent) introduction of certain elements of labour legislation to agriculture; and the scrapping of the Land Acts in 1991." (Kassier Report, 1992).
The Committee of Inquiry concluded that the interventions in the agricultural system, including commodity policy interventions, i.e. the Marketing Act, resulted in the following farm sector characteristics:
- An inequitable farm production structure displaying an imbalance between the commercial and subsistence farming sectors;
- the ability to export surplus basic foods (often at a loss);
- the development of a workable information system;
- the development of a wide range of export markets;
- the development of quality seeds, plant material and breeding stock;
- despite apparent food self sufficiency, the prevalence of widespread poverty, malnutrition and hunger in rural areas;
- a lack of food security at the household level;
- a high level of input prices relative to product prices as a result of the import substitution policy;
- a high rate of inflation in the price of processed foods as well as high absolute price levels;
- an unsustainable impact on the budget in time of high budget deficits;
- a financial crisis among commercial farmers in many parts of the country;
- an inflexible structure and skewed geographical patterns of production;
- increased mechanisation and falling employment with higher wages and better working conditions for permanent workers and impoverishment among seasonal workers;
- a relatively low rate of increase in total factor productivity;
- a process of "arrested urbanisation", high current rates of urbanisation and resulting underdeveloped markets for food;
- an output pricing policy biased in favour of producers; and
- extensive environmental degradation in many parts of the country, partly related to input and output pricing policies.
Report of the Committee of Inquiry …, 1992
The Marketing Act provided for "an extraordinarily wide spectrum of activities with extensive powers vested in Boards and the Minister". However, over time, the activities under the Act became concentrated on only a few of the provisions of the Act, namely, the imposition of levies, surplus removal schemes, single-channel schemes ("single desk selling") and the manipulation of prices. A summary listing of boards is presented in Appendix 4. During the late 1960’s, a perception developed that the interventionist policies had not succeeded and the trend towards deregulation became established.
In assessing the success or otherwise of the Act in terms of its original objectives, the Committee of Inquiry (drawing on Groenewald, 1992) decided that the objectives had not been met. The goal of efficient production had not been achieved; stabilisation of producer prices had been achieved but this had not led to income stabilisation; fair and equal access to as many producers as possible "was thwarted by discriminatory legislation as well as a bias in favour of large scale farming"; and the promotion of demand and consumption had also not been achieved.
Considering the future structure of agricultural policies, the Committee adopted the view that "an instrument of agricultural policy such as the Marketing Act should meet the objectives of efficiency, equity and sustainability, and that for the good of all concerned, a consumer orientated production and marketing structure is called for." In working to identify such a structure, the Committee established the following criteria:
- sufficient supplies at affordable prices;
- efficient production and distribution;
- increase in productivity;
- equitable opportunities and rewards;
- access to international markets and local constraints on imports;
- foreign exchange earnings; and
- employment opportunities.
Committee of Inquiry …, 1992
An important conclusion of the Committee was that "whereas the implementation of the Marketing Act has in the past been directed largely towards the benefit of the producer, a more dynamic consumer orientated approach, based on the principle of comparative advantage, is called for. Appropriate measures to support competition in order to enhance efficiency, equity and sustainability should be based on the … criteria (as set out above)"
The Committee considered many submissions in formulating its views and, given the perspective described above, it was perhaps inevitable that the recommendations of the Committee were to establish an Agricultural Marketing Council to advise the Minister on future developments and to recommend the abolition of the producer board organisations as statutory authorities. It was concluded that where the Boards were exercising "single desk selling" arrangements, that where those arrangements were commercially successful, they would continue on a voluntary basis with farmers choosing to market their products through the commercial derivatives of such Boards.
It should be noted that the numerous Boards within the South African system were responsible not only for export marketing of agricultural products but also the domestic supply of such products. The review of the Boards did not concentrate on the perceived advantages of single selling agencies, with respect to international market power, but rather concentrated on the internal effects of the Boards in terms of the negative local market, distribution channel and production effects. It was largely the perceived internal deficiencies and the concern that the interests of consumers should be at least considered equally in the marketing arrangements for agricultural products which led to the recommendations for the removal of the statutory powers. Further, there was the strong perception that where real benefits accrued to producers through centralised activity, such benefits would be sought and voluntary co-operation would result. The "problem" of free-riders, i.e. exporters gaining benefits from the central organisation without having to pay or participate, was significantly "downplayed" by the Committee which concluded that entrepreneurs demonstrated the ability to develop new markets and this could be significantly enhanced by individual operators within markets as opposed to large centralised organisations. ""Free-riding" takes place daily throughout the economy and is precisely the manner in which progress, growth and development is stimulated." (Kassier Report, 1992).
Contact for Enquiries
Rural Affairs Coordinator
Sector Performance Policy
MAF Policy
Ministry of Agriculture and Forestry
PO Box 2526
Wellington
NEW ZEALAND
Phone: +64 4 894 0675
Fax: +64 4 4 894 0745
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