Input Supply Risk as a
Constraint on Agricultural Development
in Developing Countries
A number of philosophies and viewpoints exist relative to the major constraints
to more rapid agricultural development in Developing countries. These, of course,
vary from country to country, but nearly always range from constraints which retard
production, itself, to marketing and product flow as a bottleneck, to malallocation
of resources, to lack of technology, to lack of capitalor credit and many others.
Granted that all these factors are interrelated and interdependent and all act as
restraints in one form or another. In this paper, another viewpoint is expressed.
The constraint discussed is closely associated with most of those described above,
and yet is distinct. It is-a constraint which is not covered in the bulk of liter-
ature or practice in development problems, and one which was never of great con-
sequence in the history of agricultural development in the United States. (This
latter fact is one reason for its lack of discussion in much of the literature on
development). This constraint involves the supply of productive inputs-quantity,
quality and timeliness.
The developing countries today face a problem with modern inputs which never
existed in the United States and had little impact on most of the presently developed
world during its history of development. This is the almost universal need for
importing many of the inputs which are critical, either directly or indirectly, for
agricultural production as it must be practiced in a modern, developing economy.
Owing to problems of scarce foreign exchange, amplified by fluctuating exports, to
relatively rapid changing governments and the resultant changes in policies, and to
a generally insecure environment for conducting business, the availability of modern
inputs in most developing economics is subject to wide variations, and, at times
great fluctuations in price.
The central hypothesis of this paper is that the risk of doing business in an
environment where the supply of inputs is highly unstable, is the single most important
constraint to more rapid development. And this factor, alone, affects all facets of
the agricultural complex from manufacturing of other inputs to production, to
marketing, processing, transportation and export development/ This occurs because
it not only leads to a lower rate of growth, but because it also results in a wider
variation in supply of agricultural products and, hence, the demand for items of
production and consumption in the farm sector. Further, there is a circular conti-
nuity of this impact in all other aspects of the entire economy.
The effect of a fluctuate input supply on the supply of products is self evident
and will not be further pursued. It is the impact of an unstable input supply on
rate of growth of the economy in general and agriculture in particular which is of
primary concern. ~f e
In one form, risk can be considered as a part of the cost of doing business. In
this form it manifests itself costs, necessitated by purchasing when the inputs are
available; higher prices, required to outbid competitors during times of short supply;
larger quantities, owing to poorer qualities or lower content material; increased
transportation costs when a supply is found at distant points; or even higher manage-
ment costs associated with locating inputs which are not readily available.
The risk from an unstable input supply can also manifest itself in the form of
reduced output. A machinery breakdown at inopportune times; the lack of or the
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inadequate supply of fertilizers; anIthe unavailability of pesticides when needed
all can (and usually do) result in lowered yields or even no production whatsoever.
The risk of an unstable input supply, then, must be viewed as a factor which both
increases costs and decreases production. Consider the impact from the point of
view of an entrepreneur contemplating either the establishment of a new business or
expanding an old business. It makes no difference if the business is a farm or a
factory nor whether it is large or small. Under the best of conditions in a de-
veloping country, a business must earn 25 to 50 percent return to remain viable.
he effect of the risk factor can easily increase this to 100 percent or even higher.
And there are only a limited number of businesses which promise this kind of return.
Hence, the rate at which new businesses are established or old businesses are expanded
must necessarily be lower than would be the case in the absence of input supply risk.
The most evident manifestation of this phenomenon is in an apparent scarcity of
capital. But it is almost always true in an economy beset by these problems that
the importation of luxury goods (cars, appliances, etc.) must be strictly controlled
to prevent disastrous outflows of capital from the country. Why, then, is there
an apparent shortage of capital (that is, investment capital) Because a person with
some surplus money, unable to find a high return business, prefers to have a targible
consumable good, rather than risk losing his capital in a lower return enterprise.
This apparent shortage of investment capital often tempts government planners
into the position of pushing credit as one of the most important cures to the ailing
economy. To a limited extent, of course, this approach will work because it places
part of the risk on the lending agency. The reduced risk to the entrepreneur, re-
duces his requirements for return from the enterprise, and, therefore, opens up more
opportunities. But it is a corollary of this hypothesis that investment is not the
restriction it appears to be that by reducing the risk associated with the input
supply, an increased private capital investment would be forthcoming. That is to
say that while increased credit is a substitute for reduced risk, it is not the only
method (and probably not the best method) of increasing development investment.
Another path by which government agencies attempt to expand investment capital
is by establishing public or quasi-public firms such as processing, storage and
marketing facilities businesses which are usually run much more efficiently under
private management. Bv.t here again, lack of private interest in such firms can
probably be traced to the risk factor and the fact that return is not sufficiently
high to attract private capital. Hence, public investment in this sense is also a
substitute for the reduction of risk and a substitute which in the long run usually
reduces efficiency of operation.
The historic reluctance of latifundistas to invest in the intensification of their
land is due in large measure, to input supply risk. Assuming he invests in a tractor
to plant a crop, it is by no means certain he can obtain the spare parts to keep it
running. But if he is successful in getting the crop planted, he may or may not be
able to find the fertilizer needed to have high yields. Even more important, he is
not sure he will have the proper pesticides to prevent the complete loss of his crop.
Hence, when his income is already adequate, he is justified in being reluctant to
make a risky investment for land development.
The small farmer at the subsistence level faces the same problem. In this era
of mass communication he most certainly aspires to owning a transistor radio, a
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better pair of shoes (or a first pair) and at least some education for his children.
Many subsistence farmers, if not most, could intensify the production of their farm
or expand the area under production even if on a small scale. To do so would allow
some produce for sale and permit them to enter the market economy. In many mini-
fundista areas, a few more potatoes would almost always be feasible. But potatoes
require seed, fertilizers and pesticides. And in the face of an unsure input supply,
a subsistence farmer would hardly be justified in risking the minimum well being of
his family by investing his few pesos in the hope of a little more cash.
The same line of reasoning applies equally to a manufacturing firm, a processing
firm or any other business dependent either directly or indirectly on imported inputs.
Hence, under this hypothesis it is unnecessary to enter into the argument of whether
it is marketing or production which is restricting development. This is so because
a reduction of risk will open up investment opportunities at all levels of the a-
gricultural industrial complex.
If the hypothesis argued in this paper is sound, the highest priority government
action in a developing country must be to assure a stable, adequate and balanced su-
pply of all the inputs required in productive uses in the economy. Stability depends
on import policies made at the national level. The proper balance or distribution
of inputs is best left to market pressures but may require some governmental super-
vision particularly where foreign exchange is a severe restriction. The adequacy of
supply is a function of the rate of expansion desired in the economy modified by
availability of foreign exchange considerations. Within limits, the adequacy of
supply is quantifiable if appropriate data are available.
A second level priority for government action is to provide the services and
infrastructure which connot be supplied by private enterprise. But essential publicly
ciay provided infrastructure should not be competitive in enterprises which could be
Undertaken by private capital. And if, as hypothesized, the opportunities for private
investment are expanded by a stable input supply, the reduction of this risk will
alleviate the need for such competition in the government investment budget.
P. E. Hildebrand
10 June 1968