Promoting Investment in Agriculture for Increased Production and Productivity. Saifullah Syed
most countries with acute food insecurity and poverty, most of smallholder farmers are not in a position to save. To promote farm-level investment, land consolidation needs to be facilitated to enable farmers to attain a level of income adequate for positive savings. Land consolidation, however, needs to be supported by an exit strategy for those who cannot make a living in agriculture, which generates non-farm income opportunities and provides appropriate social protection measures.
THE ENABLING ENVIRONMENT
The enabling environment for making investments depends on essential public goods, such as rural infrastructure, including roads and electricity, which farmers and the private sector cannot be expected to provide. This requires government action and supportive policies and institutions. Market forces that shape investment decisions, which are largely determined by the private sector, can also be influenced by government policies.
For enhancing the capacity of business to promote agro-industry investment, government can consider a hierarchy of enabling conditions. Essential enablers include land tenure and property rights, infrastructure, and domestic and foreign trade policy. Important enablers include norms, standards, regulations and services relating to production, research and development, and financial services for agro-industries. Useful enablers include the ease of doing business in a country, the business development services available to prospective investors, and the general intensity and effectiveness of business linkages between enterprises in value chains.
PUBLIC SECTOR INVESTMENT
Public investment is deemed to be exogenously determined in the sense that political economy compulsions determine the level and composition of public investment. Therefore, increasing attention is being paid to improving budget and the policy making process. The political economy considerations influencing agricultural policy choices includes, among other things, ideas and ideology. These play an important role in explaining agricultural policy choices.
In many countries, the public sector is making concrete efforts to guide and improve investment in agriculture by developing country investment plans (CIPs), based on predefined development strategies and national priorities. It is important that the development strategy leads to the adoption of policies and programmes that will contribute to increasing farm household savings and investment.
This report proposes a three-pronged strategy for pro-poor agricultural growth that involves:
i. Promoting the growth of commercial agriculture and its value chains, using public policy to enable the private sector (farmers and agro-industrialists) to take the lead.
ii. Shaping the engagement of the public sector in ways that enable as many small farms as possible to link to markets and successfully commercialize by investing their own savings.
iii. Putting in place support programmes targeted to those small farms that cannot succeed as viable businesses (e.g. facilitating exit strategies for those who cannot succeed in agriculture and enacting measures to promote rural non-farm employment).
SAVE, INVEST AND GROW
Farmers who cannot save cannot invest, and any economic activity that does not generate positive savings is not sustainable. Savings are essential not only for increasing the level of capital, but to cover the depreciation of the current level of capital stock. Farmers’ capacity to invest depends on their capacity to save. This report proposes strategies to enhance farm household savings, leading to increased investment in agriculture. They are aimed at facilitating farmers’ own efforts to increase their savings and investment in order to break away from the vicious cycle of poverty and enter the virtuous cycle that can be described as ‘save, invest and grow’.
CHAPTER 1
Introduction
The beginning of the third millennium has witnessed a number of initiatives to eradicate poverty and food insecurity. The United Nations Millennium Summit in September 2000, which followed the World Food Summit of 1996, agreed on eight Millennium Development Goals (MDGs). One of the key MDGs is halving global poverty and hunger. The MDGs are part of a broader attempt to encourage the international community to join forces in making a difference in the developing world. Driven by these initiatives, development cooperation entered a phase of renewed growth and emphasis. The Organisation for Economic Cooperation and Development (OECD) and the Group of Eight (G8) countries made commitments to increase assistance to the developing world. During the United Nations Conference on Sustainable Development (Rio+20) in June 2012, the Zero-Hunger Challenge was launched, which calls for an end to world hunger.
The development concerns of developing countries also formed an integral part of the 2001 Doha Ministerial Declaration. Recognizing the fundamental principles of the World Trade Organization (WTO) and relevant provisions of the General Agreement on Tariffs and Trade (GATT) in 1994, the Doha Ministerial meeting agreed to pay special attention to the concerns of the developing countries. On the assumption that global food supply was sufficient to meet the global food demand, the WTO agricultural negotiation focused on how to improve market access of food-importing countries.
However, in 2008, soaring food prices changed the world food security situation. The crisis cast doubt on the belief that the global food supply was sufficient to meet demand. The introduction of export bans on food items in response to soaring prices also created severe hardship for poor food-importing countries. To address this critical situation, world leaders gathered in Rome in June 2008 for the High-Level Conference on World Food Security: The Challenges of Climate Change and Bioenergy. The world leaders recognized that reductions in food insecurity and poverty are positively related to overall economic development. They also recognized that due to its strong linkages with the other economic sectors, growth in agriculture is crucial. The Joint Statement on Global Food Security, which came out of the G8 meeting in L’Aquila, Italy in July 2009, acknowledged that consistent underinvestment in agriculture, combined with economic instability, were some of the main reasons for the persistence of food insecurity.
Every country that has made the transition to development, reduced poverty and increased food security has done so during periods of high agricultural growth. Empirical evidence shows that higher levels of economic development and non-farm activities are positively correlated with agricultural development, particularly with improved efficiency of the sector in terms of land and labour productivity and its aggregate value added. Conversely, the persistence of poverty and food insecurity is often associated with, and can largely be attributed to, lower growth of agriculture as well as low land, labour and total factor productivity.2 The experience of developing countries strongly suggests that a sustained increase in agricultural production and productivity is required to make the transition from economic stagnation to self-sustaining growth in the agricultural sector and consequently in the overall economy.
The latest UN estimates suggest that by 2050 the world’s population will have increased from 6.8 billion people to 9.1; a 34% increase over the next 41 years. FAO has estimated that agricultural production needs to grow by 70% over the same period to feed this population. This increased production is required because of a shift in demand towards higher value products of lower caloric content and a greater use of crop output as feed to meet the rising demand for meat. These estimates for additional output are likely to be low, as they do not take into account increases in agricultural production to meet the expanding demand for biofuels (FAO, 2009).
In the same study, FAO calculates that the investments needed in developing countries to support the required expansion in agricultural output far exceed the current trend. Another challenge is to increase capital stocks in areas that are lagging both in terms of hunger reduction and agricultural productivity.
A study looking at the long-term record of investment in agriculture since the 1970s showed that, in general, the countries that performed best in terms of reducing hunger were also countries that manifested higher net investment rates per agricultural worker. Throughout the 1990s, in countries where less than 2.5% of the population