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Friday, 9 May 2008

A new Government bank for farmers? revisit'd....

BOZ Governor Caleb Fundanga has now officially dismissed the idea of a new government bank proposed by Agriculture Minister Ben Kapita last year. Moral hazard appears to be his main worry. The government, with the help of IFAD, last year adopted a NABARD style programme. This is probably the future of rural and agriculture finance.

6 comments:

  1. Dr Fundanga said what was needed was to have institutions at district level that could mobilise funds from commercial banks, and then lend the money through input or commodity lending schemes to farmers.

    “Perhaps we can invest in cooperatives. But we should have cooperatives driven by the private sector rather than the Government, because Government funds are mostly just abused,” he said.


    I would say the problem is that he is just a neoliberal.

    Private funds are not abused? Tell that to the shareholders of Enron and Worldcom.

    There is nothing about government that makes it inherently corrupt or inefficient, and there is nothing about the private sector that makes it inherently efficent or corruption and fraud free.

    Whatever happens, there still have to be strong systems of oversight.

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  2. Surely all he is saying is that activity must be private sector driven to reduce the government balance sheet?

    Of course the Government could run the bank (like Northern Rock?) and operate it like a commercial entity (Northern Rock fired a few people). But the risk to the tax payer is huge...and also there are issues of competition....(Northern Rock is facing state aid issues in Europe).

    For this reason..I think a private bank is probably better and then government could simply subsidise certain products for certain groups...e.g. credit to certain farmers could be offered cheaper and so forth..but as we have discusssed...there's a problem on the demand side for credit....incentives need to be realigned there as well..to incentive private sector to lend to farmers...

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  3. Another thing...

    “Perhaps we can invest in cooperatives. But we should have cooperatives driven by the private sector rather than the Government, because Government funds are mostly just abused,” he said.

    Why are senior government officials so powerless to make sure that government funds are well spent??

    because Government funds are mostly just abused

    I don't get that. It is an admission that they (neoliberals) shouldn't be in government. They are basically saying that they are not competent to run the affairs of state, which includes keeping track of the taxpayer's money.

    Who is in charge of government funds?

    By the way, 'Moral Hazard' = 'government bailouts', such as the Japanese government bailout of Toyota, and the recent US government bailout of Bear Stearns (with the usual argument - 'it is too big to fail').

    What a slap in the face that was to all the African and Asian governments who bought the neoliberal lie that these institutions should be allowed to fail and that the market would take care of it.

    That the governer of the BOZ would say dismiss an agricultural bank because the state might have to bail it out in the future, and that it is because the state cannot ensure that it's funds are not absused, that seem to be very strange statements coming from a senior government official.

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  4. Mrk,

    Good financial management I think involves three critical elements.

    - Good systems: which allow money to be tracked effeciently. Technology here helps I think and part of the problem is that most government departments are a bit weak on the IT side. The staff is rural areas are not very competent in this area, I think. Of course some training would solve this.

    - Transparency - that allows the PUBLIC to become agents for change. If the government hasn't got the capacity to track the money, it should allow members of the public to become its eyes and hears. This for me is a critical part of effective public sector reform. See the blog here.

    - Evaluation : I really believe the key is that government needs to put in place adequate measures that "evaluates" what is working and what isn't. If a project is not finished on time, we need to learn lessons why that was the case.

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  5. By the way, 'Moral Hazard' = 'government bailouts', such as the Japanese government bailout of Toyota, and the recent US government bailout of Bear Stearns (with the usual argument - 'it is too big to fail').

    Moral hazard issues comes how the bail-out would be understood, not from the bail-out itself.

    If the message sent is "you can mess up, we'll be there", there is a moral hazard. That can be avoided or reduced by adding punitive elements to the bail-out. Persecution for mismanagement or nationalizations are a good way to save the institutions while not encouraging recklessness from those who manage the institution.
    Europeans usually nationalize banks they bail out. The odd thing with the US is that they have ideological hang-ups preventing them to do so and they end up with Bear Stearns situations where moral hazard is a strong possibility (though once could argue that forcing it to be sold for such a low price is a punitive measure).

    What a slap in the face that was to all the African and Asian governments who bought the neoliberal lie that these institutions should be allowed to fail and that the market would take care of it. 

That the governer of the BOZ would say dismiss an agricultural bank because the state might have to bail it out in the future, and that it is because the state cannot ensure that it's funds are not absused, that seem to be very strange statements coming from a senior government official.

    I agree it is strange since it's admission of the inevitability of mismanagement from someone part of the machine but it's also to an extend realist.

    The kind of risks that may lead to a bail-out of something similar can only be limited, not totally avoided, especially in the financial sector.

    However, to limit mismanagement, there has to be an incentive structure that does so. It's always possible to put one in place but with a polity more interested in maximizing immediate benefits (yes, I mean you), it may not be politiclly viable.

    And I'm not sure his main concern is the possibility of future bail-outs anyway. In Africa, the big issue, especially (but not only) with public money is mismanagement, misallocation and funds diversion. Putting controllers, administrators in place would reduce the misallocation within those institutions but what about the politically-driven misallocations emanating from the parliament or the president's office ? Could those controllers say no when the president orders to allocate funds or personnel to an unefficient project in a vote or influence buying operation ? Similarly, would he dismiss whoever he nominates to a position when it's someone influential who can bring him votes and support from an entire region ?

    Once you start including daily politics in the equation, things get tough and complicated and such daily politics explain a lot of mismanagement, corruption and incompetence. It's safe to say that private institutions who use their own money have less of those issues. And thinking or saying so does not make someone a "neo-liberal".

    (weren't you saying a few weeks ago that the governor of the BOZ rejected neo-liberalism anyway ? is this some ideological purity test in which one is an "other" as soon as he has disagrees with even 1% of the "program")



    Cho,

    I recommend this this post (and the whole blog in general) if you're interested in issues surrounding government services and how to improve them.
    The fact that the context is India makes it even more interesting since India is like a magnified Africa, lol.

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  6. Mrk,

    The public sector reform blog URL has wrongly input. This is the correct one.

    Random,

    The blog is interesting (i'll add it to my regular read), though the specific post does not offer anything beyond saying the usual recommendations don't work. As I indicate in the link above, its really a question of value for money.

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