Promoting Investment in Agriculture for Increased Production and Productivity. Saifullah Syed
value added per worker was about 20 times higher than in countries where more than 35% of the population was undernourished.
In view of this, FAO, with financial support from MAFF, Japan initiated a project: Support to Study on Appropriate Policy Measures to Increase Investment in Agriculture and to Stimulate Food Production. The aim of the project is to identify a policy framework for promoting, facilitating and supporting the acceleration of investment by the public and private sector to achieve domestic capital formation for stimulating sustainable food production.
The process of formulating a policy framework for promoting investment requires a clear understanding of what conditions drive investment. Appropriate policies and measures must then be designed to promote and facilitate these conditions. This report identifies drivers of investment and then analyses policy options that cause those drivers to channel investment into agriculture.
Chapter 2 presents the concept and definition of investment in general, and Chapter 3 analyses investment in agriculture. Chapter 4 presents levels and trends of current investment in agriculture at the global and national level. Chapter 5 describes the different investors who invest for capital formation at the farm level and their relative contributions. It focuses on the private sector, the public sector, official development assistance (ODA) and FDI. Chapter 6 discusses the drivers of investment for farm-level capital formation and in agro-industry. Chapter 7 looks at ways to promote investment for on-farm capital formation, investment by the public sector, investment in agro-industry and FDI.
CHAPTER 2
The concept and definition of investment
2.1 WHAT IS INVESTMENT?
The term investment refers to forgoing consumption in the present to pursue a higher level of income in the future. Investments include: the purchase of stocks, shares, bonds and securities; the purchase or building of real property, such as residential or commercial land and/or real estate; and the purchase of machinery, equipment and transport for commercial purposes.
Farmers and governments invest in order to build capital, which allows the agricultural sector to become more productive in the future. Investment is generally defined as activities that result in the accumulation of capital, which yields a stream of returns over time. In economic growth theory, initiated 70 years ago by Harrod and Domar, investment is simply a change in capital stock or fixed inputs used in a production process (Harrod, 1939; Domar, 1946). From the 1940s to the present, the Harrod and Domar growth formula has been widely adopted and used for calculating target rates of investment in economic planning and development. In the words of Joan Robinson, ‘By investment is meant an addition to capital, such as occurs when a new house is built or a new factory is built. Investment means making an addition to the stock of goods in existence’ and it is the part ‘of the production not merely replacing past sales, but is directed to increasing the rate of output in the future’ (Robinson, 1956).
In official national accounts, investment is mainly referred to as gross fixed capital formation (GFCF), a macroeconomic concept. This concept does not make any adjustments to exclude the consumption of fixed capital (depreciation of fixed assets) from the investment figures. Regarding land, GFCF includes only the value of land improvement as a net addition to wealth. Investment is largely about changes in produced non-financial assets, the stock of which can be increased through economic activities. Annex 3 gives a full description of the non-financial assets in the System of National Accounts.
In the System of National Accounts 2008, apart from GFCF, investment includes: changes in stocks of inventories, including raw materials and final products; acquisition less disposal of valuables; depreciation; and acquisition less disposal of natural resources and third party property rights.3
2.2 DISTINCTION BETWEEN INVESTMENT AND EXPENDITURE
As elaborated in the State of Food and Agriculture (SOFA) 2012 (FAO, 2012a), some of the ways farmers invest in their farms include: acquiring farm equipment and machinery; purchasing animals or raising them to productive age; planting permanent crops; improving their land; and constructing farm buildings. Government investments include building and maintaining rural roads, and large-scale irrigation infrastructure. These assets generate returns in terms of increased productivity over a long period of time. Governments also invest in other, less tangible, assets such as the legal and market institutions that form part of the enabling environment for private investment. Determining whether expenditure, public or private, constitutes an investment can be both conceptually and empirically difficult. In some cases, the determination is not clear-cut.
In agriculture, a distinction is usually made between investments and spending on inputs. This distinction is based rather arbitrarily on the length of time required to generate a return. Planting trees is typically considered an investment because it takes more than a year to generate a return. However, applying fertilizer to a maize crop is not considered an investment because it generates a return during the immediate crop cycle. More important from a conceptual point of view, trees are a capital asset that yields a stream of returns over many years. Even in this seemingly simple case, the distinction between investments and spending on inputs may not be clear. If fertilizer use helps maintain and build soil fertility in the long run, it may also be considered an investment. Similarly, in public expenditures, a distinction is generally made between investment and current expenditures. Again, this distinction is not always clear-cut because current expenditures are required to maintain the value of capital assets, such as roads and other physical infrastructure.
Perspective also matters for what is perceived as investment. From a farmer’s point of view, the purchase of land may represent an important investment in his productive capacity. From society’s perspective, however, this purchase simply involves a change in ownership of an asset rather than a net increase in capital stock, which occurs for instance when land improvements are undertaken.
Investment therefore is a flow and involves the formation of capital. It does not represent the stock of capital in an economy, but rather the changes in that stock of capital that are intended to increase future production, output or income. If it is accepted that the general definition of investment is the increase of capital goods in a given period of time, then the next question to be asked is: what is capital?
2.3 WHAT IS CAPITAL?
The term capital means purchasing power or a fund of generic wealth, owned by individuals or firm and destined to earn its return. In everyday speech the linkage between possession of capital and attainment of a return is emphasized, but the devil is in the details. In general, the definition of capital is a group of ‘products that serve towards production’ or as groups of ‘produced means of production’. This excludes products that serve for immediate satisfaction of needs, as well as land, since it is not a produced item.
However, it is difficult to conceptualize capital for productive investment because it is a diverse set of physical items, such as plants, machinery, buildings, tools and vehicles that are used in the production process. Capital includes human-made goods (or means of production) used in the production of other goods and services. It includes physical items of different kinds and ages, with different technological content (and different levels of obsolescence), which are not conceivable as a homogenous group. It is, however, possible to make the distinctions between fixed (or physical) capital and working capital.
In addition to the above classification of capital, the French sociologist Pierre Bourdieu proposed another distinction of various types of capital. According to Bourdieu, capital acts as a social relation within a system of exchange