The Role of Government and Donors

The first and foremost role of government is to refrain from undue interference in agricultural finance by adopting a “do no harm” principle. Admittedly, this is easier said than done. However, politically motivated loan waivers, and other such drastic and damaging interventions, have no place in an environment of responsible finance. Governments around the world should finally move away from the old paradigm of directed lending, interest rate controls, and massive subsidies, and should adopt lessons learned and support good practices that have emerged under the new paradigm of rural and microfinance.

A positive role for the government is seen in creating an enabling environment and legal framework as outlined in the previous section, developing the risk market infrastructure, enforcement of regulations, and a supportive rural infrastructure. This would eventually lead to lower but sustainable interest rates by reducing risks and transaction costs and increasing competition. The primary role of government should be to address market and regulatory imperfections in order to encourage participation by the private sector in providing not only agricultural credit but the whole range of financial services including savings facilities and insurance.

As insurance instruments and other risk transfer mechanisms are being developed and tested, some public support and limited subsidies may be required. However, in the medium to long term the government's role should be confined to catastrophic risk as a result of severe events like natural disasters. This is when the market fails and the government is needed in a last resort function of disaster relief and social safety net provision.

Donors and development finance institutions (DFIs) have an important advocacy role by engaging in a dialogue with governments on conducive policies and frameworks for agricultural finance and by facilitating exchange and learning on lessons and good practices. Donor support is most valuable in venturing and pilottesting innovative approaches to risk management. The World Bank's lead initiative in developing and promoting index-based insurance in numerous pilot projects is an example in this regard. Furthermore, donors and DFIs can facilitate and catalyze public-private partnerships (PPP), especially for developing mechanisms of risk transfer to the international and global markets. Finally, dealing with catastrophic events like the Tsunami in Southeast Asia or the 2010 country-wide flooding in Pakistan is beyond the scope of national governments and thus require concerted relief efforts of the international donor community.

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