World Development Report 2008 Agriculture for Development Outline of presentation I. WDR storyline

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1 World Development Report 28 Agriculture for Development Current trends in the global rural economy; implications for rural finance Outline of presentation I. WDR storyline 1. Agriculture has unique features for development 2. Cross-country/regional heterogeneity: three worlds of agriculture 3. Agriculture has a proven record of success for growth and poverty reduction 4. Yet, it has too often been under- and mis-used for development 5. Significant improvements are possible 6. Agendas for action differ by country categories 7. Implementation requires good governance and social engagement 8. Main messages II. Financial services for smallholder competitiveness 1. Financial constraints remain pervasive 2. The microfinance revolution is still incomplete for agriculture 3. Other approaches show promise 4. But large gaps remain that need to be addressed 1/29

2 WDR 28 Document still in progress, due June 15, 27 Yellow Cover publicly available March 26: comments welcome Extensive collaborations with participants to this conference: FAO IFAD Ford Foundation USAID-Basis CGIAR-Science Council DIFID CIRAD Individuals 2/29

3 WDR storyline 1. Agriculture has unique features for development 1.1. Agriculture is multifunctional Economic activity: growth, business Way of life: poverty, vulnerability User/misuser of natural resources, environmental services Powerful instrument for development, but complex to use and tradeoffs The scope of agriculture for development is huge Share of agriculture in GDP: can be 4-5% in poor countries 1 Share of Labor in Agriculture and Shre of Agriculture in GDP Share of Labo in agriculture/share of Agriculture in GDP NPL BFA BDI RWA Share of Agriculture in GDP Share of Labor in Agriculture.9 NER MWI GIN ETH MOZ MLI UGA TZA.8 TCD LAO KEN MDG SEN PNG AGO KHM ZMB.7 VNM CHN ZAR SDN ZWE TGO CMR IND.6 GHA BGD THA BEN ZAR LAO YEM CIV BDI IDN.5 PAK ETH GTM TUR LKA BOL TZA MLI RWA UGAGHA PHL.4 NER NPL KHMBEN MAR TGO NGA TJK EGY PRY NGA HND MDG SDN TCD CMR PER MWI MOZ TJK SLV BFA PNG SYR.3 UZB UZB AZE ECU PRY IRN BGD VNM KEN IND CIV DZA TUN PAK HND SYR IRN GTM POL YEM COL MEX GIN LKA PHL MYS.2 SEN DOM ROM BRA CHN CHL ZMB ZWE IDN UKR BOL MAR BLR COL AZE BLR EGY ROM TUN SLV TUR UKR DOM HUN AGO ECU ZAF DZATHA MYS ARG BGR SVK VEN.1 PER CZE BRA SVK CHL HUN CZE MEX ARG POL VEN ZAF Log of GDP per capita (constant 2 US$), Source: World Bank, DDP,September 26 3/29

4 People and poor: 3 billion rural people, 75% developing country poor rural. Rising number of rural poor in South Asia and Sub-Saharan Africa. Urban poverty constant. Decline in rural poverty: at least half not due to migration agriculture important Number of poor (million people) Urban East Asia - rural South Asia - rural Sub-Saharan Africa - rural Latin America and the Caribbean - rural Middle East and North Africa - rural Europe and Central Asia - rural 4/29

5 Environment: 85% of water use, 3% of GHG including through deforestation Percent of total GHG emissions 8% 6% 4% 2% % Energy Agriculture Deforestation Industrial processes Developing countries (Non-Annex I) Developed countries (Annex I) Waste Agriculture too important for development to be ignored; MDG will not be met in poorer countries w/o greater role for agriculture 5/29

6 1.3. Dualism is pervasive In agriculture: market participants (commercial farmers, smallholders), subsistence farming Typology of rural households based on the dominant source of income 1% % % 4% M L D Fm Fs 39 2% % 4 7 Ghana Vietnam Guatemala Source: RIGA project, FAO F: more than 75% of income from on-farm (Fs less than 5%, Fm more than 5% sold) D: no income source is more than 75% of income L: more than 75% of income from ag labor and the RNFE M: more than 75% of income from migration 6/29

7 Other dimensions of dualism: In the rural labor market: low labor skill-high labor skills, with large wage differentials In the RNFE: low value added-high value added firms: low value added firms are largely disguised unemployment In migration: pull and push migration Need differentiated policies for effectiveness: issues of design, balance, and targeting 7/29

8 2. Cross-country/regional heterogeneity: Three worlds of agriculture 2.1. Three country categories.8 Poverty data from Ravallion et al. 27 Other predicted poverty data Dynamic analysis Agriculture-based countries RWA BDI.6 CMR MWI Agricullture contribution to growth, CHL BRA VEN ARG Urbanized countries BLR SDN 65-7 IND BEN PRY NER NGA TZA BGR GHA TGO AZE CIV SYR ETH MDG BFA ZMB KEN UGA MOZ GINMLI TCD HND PAK IRN YEM IND 7-76 KHM GTM SEN DZA IDN PHL BOL BGD VNM IDN RUS PER AGO EGY 9-96 IND BRA UKR DOM MAR TUN CZE SVK THA LKA MEX TUR SLV BRA ROM ECU IDN ZAF POL HUN ZAR MYS TJK COL Transforming countries LAO NPL PNG 81- CHN CHN 95 CHN CHN 96-1 ZWE Share of total poverty in rural areas, 22 8/29

9 Table 1 Country characteristics by category Agriculture-based countries Transforming countries Urbanized countries Rural population (million) 368 2, Share of agriculture in GDP growth (%) Agricultural growth (% annual) Non-agricultural growth (% annual) Number of rural poor ($2/day, in million) 278 1,53 91 Share of rural poor in total poor (%) /29

10 2.2. Contrasted roles of agriculture for development and policy problems across country categories Agriculture-based (mainly SS-African countries) Role of agriculture to kick-start growth and for mass poverty reduction. Food problem: how to get agriculture moving and keep food price low (Non-tradable sector) Transforming (mainly Asian, MENA, and ECA countries) Rural-urban disparity problem (political pressures) Major unresolved challenge: address disparity without protection and subsidies Urbanizing (mainly LAC and ECA countries) Sub-sectors with comparative advantage (tradables) Farm subsidies problem and social incorporation 1/29

11 2.3. Sub-national regional disparities: FAR (agricultural potential and market access) and MAR; most of the poor are in FAR (poverty maps) Most of the poor are located in favorable areas (Brazil and Thailand) Share of rural poor by access to city and agricultural potential Brazil.6 Share of rural poor by access to city and agricultural potential Thailand.6 % of poor population % of poor population Good Access Moderate Access High Medium Low Potential Low Access High Medium Low Potential The challenge of low rural population density: dispersed population in Zambia, concentrated in India Proportion of population Brazil India Proportion of population Good Access Zambia Moderate Access Cambodia Low Access Population per sq km Population per sq km Brazil: Share below 15sq km: 25% Share of rural (UN): 19% India: Share below 15sq km: 9% Share of rural (UN): 72% Zambia: Share below 15sq km: 65% Share of rural (UN): 65% Cambodia: Share below 15sq km: 31% Share of rural (UN): 83% 11/29

12 3. Agriculture has a proven record of success for growth and poverty reduction 3.1. Special powers in reducing poverty GDP growth originating in agriculture benefits most the poorest two-thirds Income gains induced by 1% GDP growth (%) Expenditure deciles Agriculture Non-Agriculture 3.2. Agriculture as a source of growth in agriculture-based countries Arithmetic of agriculture: a large sector with under-used potential Source of growth: TFP growth in agriculture can be high Multiplier effects on rest of the economy larger than reverse Comparative advantage is in primary sectors (current spurt of growth) 12/29

13 4. Yet, agriculture has too often been under- and mis-used for development 4.1. Global trade policies have been costly on developing country agriculture Real international commodity prices have been suppressed by current global trade policies (% of price) Trade share losses to developing countries due to current global trade policies (% point loss to developing country trade shares) -2.8 Cotton Cotton Oilseed Oilseed Dairy products Dairy products Other grains Course grains Wheat Wheat Processed meat Processed meat Rice Rice Fruit and vegetables Fruit and vegetables Other crops Other crops Sugar Sugar Livestock Livestock Vegetable oil and fats Vegetable oils and fats -1 13/29

14 4.2. There has been under-investment in agriculture Estimated returns to agricultural R&D are high: above cost of money All countries (1673) All developed countries (99) All developing countries (683) Sub-Saharan Africa (188) Asia (222) Middle East/North Africa (11) Latin America (262) Percent Declining share of ag. in public expenditures in SS-Africa, 198 and 24 SS-Africa Asia Public spending on agriculture as a share of agricultural GDP (%) Share of agriculture in GDP (%) /29

15 4.3. There has also been mis-investment in agriculture 7 6 Food Reserve Agency maize marketing (15%) Food Security Pack and EDRP (11%) Irrigation investment (3%) Percentage of AgGDP Public Inv Subsidies Infrastructure (2%) Personal emolmuments (2%) 1 Fertilizer Support Program (37%) Operational funds (11%) Subsidies in India have risen from More than a third of Zambia s 24/5 public 25 to 6% of agricultural GDP budget for agriculture went to fertilizer subsidies 15/29

16 4.4. Donors have turned their back on agriculture The share of agriculture in official development assistance has been low and has fallen much faster than rural poverty % poverty in rural areas % ODA % poverty % ODA to agriculture 16/29

17 The consequence: a rising cereals yield gap between SS-Africa and the rest of the world 5 4 Developed Countries Developing Countries 5 4 SSA SAS EAP MNA Yields (ton/ha) 3 2 Yields (ton/ha) 3 2 LAC Sub-optimal contribution to growth and poverty reduction (agriculture-based countries). And permanence of high rural poverty and rising disparities (agriculture-based and transforming countries) 17/29

18 5. Significant improvements are possible 5.1. New opportunities exist (1) Improved price incentives Agriculture-based countries lower net agricultural taxation in a majority of countries Nominal Rates of Assistance Kenya Uganda Cameroon Ghana Sudan Nigeria Ethiopia Tanzania Zambia Cote d'ivoire /29

19 (2) The new agriculture is driven by dynamic markets High value exports from developing countries are growing rapidly % 32% $ billion 2 prices % 13% 49% 21% 16% 21% Cereals Traditional Exports Meat, Fish, Dairy & Eggs Fruits, Vegetables and Beverages 19/29

20 (3) The rural non-farm economy: a source of income diversification Percent of income Other Remittances Nonfarm business Nonfarm wages Farm wages Farm Diversification of sources of income among rural households in Bangladesh, /29

21 5.2. But there are new challenges (1) Asset squeeze on smallholders: Falling farm size: from Ethiopia to India Very low educational levels increasingly act as poverty traps Selective migration: young and educated migrate more Labor and knowledge losses due to HIV/AIDS in SS-Africa Rising water constraints Av size Farm size in India 21/29

22 (2) Challenges to smallholder competitiveness in the new agriculture Economies of scale in marketing, meeting phytosanitary standards Household participation in French bean export production in Senegal Incidence of poverty and extreme poverty among participating hh Share of participating households 5% 4% 3% 2% 1% % Share of households (%) non-participants estate farm workers contracted farmers Contract farmers Total participants Estate farm workers Incidence of poverty Incidence of extreme pover 22/29

23 (3) A huge employment challenge in rural areas Rising labor force and insufficient migration: 4 million new workers every year in India, 1 million in Bangladesh. The agricultural labor force is increasingly wage earners Distribution of rural employment by sector of activity, in selected countries Sector of activity Sub-Saharan Africa South Asia East Asia and the Pacific (excl. China) Europe and Central Asia Middle East and North Africa Latin America and the Caribbean Men Agriculture, self-employed Agriculture, wage earner Non-agriculture, self employed Non-agriculture, wage earner Women Agriculture, self-employed Agriculture, wage earner Non-agriculture, self employed Non-agriculture, wage earner /29

24 (4) RNFE: Important for farm income diversification, but most rural non-farm enterprises have only two or three workers, mostly unpaid, with low value added (Indonesia 25) Total number of workers 4, 35, 3, 25, 2, 15, 1, 5, Unpaid labor Paid workers Median value-added / worker Value-added per worker (US$) 1,6 1,4 1,2 1, >1 Number of workers in firm 24/29

25 .4 (5) Wages are higher in rural nonagricultural employment but mainly due to skills Uganda, 22 1 India, 2 Ag Non Ag.6 Mexico, (5) The investment climate for RNFE depends on: Demand side: a dynamic agriculture, access to external markets Supply side: financial services, business services 5.3. And new uncertainties Trade, GMO, climate change, higher energy prices, biofuels, diseases New role for the state in insuring catastrophic events 25/29

26 6. Agendas for action by country categories: Widen pathways out of poverty Four generic components of an agricultural for development agenda 26/29

27 7. Main messages: Message 1. Implement a Green Revolution in Africa. Successful agricultural growth is fundamental for poverty reduction in the agriculture-based countries. For Africa: A Green Revolution for Africa, different from Asia: need a comprehensive approach with greatly increased investment in public goods, based on decentralization and participation to manage heterogeneity Differentiated policies: market entry (assets), competitiveness of market participants (including financial services), and support to livelihoods in subsistence farming (resilient farming systems, social assistance) Message 2. Use agriculture to meet the disparity problem in transforming countries, but not alone Diversification into high value activities and extend green revolution to rainfed areas. Improve the investment climate for the rural non-farm economy. Massive investment in human capital for exit from agriculture. 27/29

28 Message 3. Make agricultural growth more sustainable and provide environmental services. This requires adjusting incentives, defining property rights, improved technologies, community devolution and local management capacity, and markets for environmental services. Message 4. Improve governance for agriculture. Agriculture is a private activity but it is highly dependent for success on the provision of public goods and regulation. Yet, good governance is lacking most in the agriculture-based countries, and in agriculture relative to other sectors in all country categories. Message 5. Successful national agriculture-for-development strategies are conditional on delivery of a global agenda Key role of international organizations in addressing an inter-related agenda, together with new actors: multinational agribusiness and philanthropy. 28/29

29 II. Financial services for smallholder competitiveness: Main conclusions 1. Financial constraints and lack of insurance remain pervasive for smallholders, and highly costly on growth and well-being 2. The microfinance revolution has yet had limited success in agriculture outside high turnover activities 3. New approaches show promise Financial intermediation among interlinked agents in value chains. Public-private reorganization of former public agricultural banks (Banrural). Links between savings and loan services, and between credit and insurance. Weather indexed insurance, but few successes (Mexico, Mongolia). Self-help groups and financial cooperatives. Rural leasing firms. Role of information technologies to reduce transactions costs. MFI credit reporting bureaus to open credit ladders. 4. But large gaps remain, requiring a major effort to give a chance to smallholder farming, particularly in the new agriculture and to diversify in the RNFE. 29/29