SEASONAL FINANCE FOR STAPLE CROP PRODUCTION: PROBLEMS AND POTENTIAL FOR RURAL LIVELIHOODS IN SUB SAHARAN AFRICA

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1 DRAFT NOT FOR CITATION SEASONAL FINANCE FOR STAPLE CROP PRODUCTION: PROBLEMS AND POTENTIAL FOR RURAL LIVELIHOODS IN SUB SAHARAN AFRICA Andrew Dorward *, Sibusiso Moyo #, Gerhard Coetzee #, Jonathan Kydd * and Colin Poulton * * Imperial College of Science Technology and Medicine, Imperial College at Wye Ashford, Kent TN25 5AH A.Dorward@ic.ac.uk # Department of Agricultural Economics, Extension and Rural Development, University of Pretoria, Pretoria 0002 South Africa April 2001 This research was funded by the Department for International Development of the United Kingdom. However, the findings, interpretations and conclusion expressed in this paper are entirely those of the authors and should not be attributed to the Department for International Development, which does not guarantee their accuracy and can accept no responsibility for any consequences of their use. Seasonal finance for staple crop production in Sub Saharan Africa i

2 SEASONAL FINANCE FOR STAPLE CROP PRODUCTION: PROBLEMS AND POTENTIAL FOR RURAL LIVELIHOODS IN SUB SAHARAN AFRICA Andrew Dorward *, Sibusiso Moyo #, Gerhard Coetzee #, Jonathan Kydd * and Colin Poulton * * Imperial College of Science Technology and Medicine, Imperial College at Wye Ashford, Kent TN25 5AH # Department of Agricultural Economics, Extension and Rural Development, University of Pretoria, Pretoria 0002 South Africa April 2001 EXECUTIVE SUMMARY Background: livelihoods, poverty, agriculture and seasonal finance This paper is the first output of PRP project Diverse income sources and seasonal finance for smallholder agriculture: applying a livelihoods approach in South Africa. The project s purpose is to develop the sustainable livelihoods (SL) framework and increase its operational utility in a range of situations, particularly in encouraging coherence in understanding and addressing problems of access to seasonal financial assets by subsistence food crop producers and delivery of financial services to subsistence food crop producers. This interim report identifies initial lessons about application of the SL framework to analyse the effects of policies, institutions and processes on access to financial assets and issues to be addressed in the design and implementation of field studies. The paper begins with a review of the broader context and rationale for the project s focus on seasonal finance for agriculture. It briefly examines poverty in Africa from a livelihoods perspective, stressing the importance of rural poverty in sub Saharan Africa in terms of its large share of overall poverty in the region and its greater depth, incidence and rate of increase as compared with South Asia. It appears that policy reforms have tended to benefit the poor with access to public services and markets, but to have left behind those in remote areas, those growing subsistence crops, and those without work. Livelihoods analysis suggests that poverty reduction needs to involve improved access for the poor to assets, increased productivity of their assets, and reduced vulnerability. Access to assets may be increased by policy or institutional change that redistributes assets or reduces costs of access, or through increased income from existing assets. Section 3 examines the role of agriculture in rural livelihoods in sub Saharan Africa and its potential for increasing the incomes and reducing the vulnerability of the rural poor. A range of recent studies have demonstrated that rural livelihoods are more diversified than was previously recognised, and that the income share directly attributable to agriculture is generally below 50%, and falling. It is important, however, to consider the roles and patterns of diversification both within different household livelihood strategies and within rural economies (between households). While diversification between farm and non-farm activities within livelihoods is extensive and Seasonal finance for staple crop production in Sub Saharan Africa ii

3 important, higher income households often have access to higher return non-farm activities, and much of the recent increase in diversification out of agriculture may be due to declining opportunities within agriculture rather than to increasing opportunities in non-farm opportunities (a process of push rather than pull ). This leads to a consideration of broader relations between farm and non-farm activities within rural economies. Theoretical and empirical arguments from the linkage literature suggest that agriculture is likely to provide the major opportunities for getting growth going in most African rural economies, through its contribution to production of both tradables and non-tradables, but expansion in non-farm activities will be increasingly important in supporting such growth to benefit the poor. Given the importance of agriculture in poverty reducing growth, the recent performance of agriculture in sub Saharan Africa is a matter of much concern, as regards both its slow rate and its reliance on extending cultivated area rather than on intensifying production. An important element in the lack of intensification and growth is low use of inorganic fertilisers, particularly in smallholder production of food grains in more remote areas. A major problem (but not the only problem) is the difficulty that these farmers have in financing seasonal input purchases. Current delivery of rural financial services Problems in sustainable delivery of seasonal finance to smallholder farmers are well understood. A wide range of institutional models and financial products within sub Saharan Africa and beyond are currently serving, or attempting to serve, the poor s demands for savings and loan services, with varying success. However, very few of these operate in lower density rural areas or in areas where there has not already been some agriculturally based growth in the rural economy, and virtually none are operating in the conditions faced by the majority of poor farmers in sub Saharan Africa. This is partly due to the high costs and risks in the supply of such services, but may also reflect high risks and relatively low returns for borrowers investing in agriculture. However, loan products are often structured in ways that make them particularly unsuited to seasonal lending, unless households have access to alternative cash sources which are not related to agricultural seasonality. There has been a similar lack of interest in and development of micro-insurance services and products, and there appears to be very little in the literature on financial transmission services. Livelihoods in rural South Africa are marked by high poverty incidence and a large share of national poverty, limited importance of agriculture in terms of income share, and high dependence on remittances and state transfers among some poor households. Wage labour is an important component of rural livelihoods, but its high average income share is partly a reflection of high incomes from wage earning among a relatively small but better-off section of the rural community. Despite its relatively low share in income, agriculture is practiced by a significant proportion of the rural population, as part of a survivalist strategy, to provide for at least some household food needs, or (amongst a minority of commercial farmers) as a major source of income. Limited work on agricultural growth multipliers in South Africa also suggests that in some areas at least they are likely to be of similar magnitude as elsewhere in Africa (although building on a lower initial share of the rural economy). There appears, therefore, to be potential for a significant proportion of the rural poor to gain from increased agricultural productivity in terms of both reductions in vulnerability and increases in income. However, this will need increased and more secure access to land and to a wide range of financial services, with the latter being tailored to fit the different roles of agricultural production in the varied livelihood strategies of the rural poor. The high incidence of HIV/AIDS in South Africa has very severe implications for rural livelihoods and access to and viability of financial services, beyond its direct effects on infected individuals. High mortality and morbidity rates among the economically active, and demands on the household for care and medical expenditure, will lead to high dependency rates, labour shortages, and erosion Seasonal finance for staple crop production in Sub Saharan Africa iii

4 of assets. These will have adverse effects on household productivity, incomes, ability to invest, and ability to service loans. There are many similarities between South Africa and in the rest of sub Saharan Africa as regards supply and demand in rural finance. Similarities are evident in the range of different types of financial institutions found in rural areas (although South Africa is unusual in the wide range found within one country); in the relative lack of financial services in remoter rural areas and serving poorer households and seasonal agriculture; in the lack of insurance services and common separation of savings, lending, and transmission in different organisations; in the decline of conventional supply led agricultural development organisations; in the absence of current working models to address these gaps; and in the need for wider developments in infrastructure, in property rights and in productive opportunities for the poor to invest in (although the extent and historical basis of inequity in South Africa makes this particularly important). There are, however, also very important differences between rural financial services in South Africa and in the rest of the continent. The special features of rural financial markets in South Africa present both opportunities and threats for the development of rural financial services. Opportunities arise from very strong performance of a vibrant micro-finance sector; a wide variety of private, formal and informal financial microfinance institutions; a high degree of sophistication of commercial banks and some other institutions; the strong national infrastructure; the diversification of rural livelihoods and strong urban/rural linkages; and the policy framework provided by the Strauss Commission Threats include likely withdrawal of conventional formal private sector institutions from rural areas; new formal private sector financiers focus on wage and salary earners; slow progress in increasing access to land, infrastructure and services for rural people; the impact of AIDS; and, with the low shares of agriculture in rural livelihoods, difficulties in identifying productive investments that will lead to significant growth in the rural economy. Lessons for delivery of financial services Taken together, these opportunities and threats suggest an agenda for research and development in rural financial services. Development is needed of financial service products and of the institutions offering them. Greater attention needs to be paid to understanding demand for micro-insurance services and to the development of institutional models and micro-insurance products and technologies. Similarly, access to savings services need to be improved, in view of the current limited services and their likely decline with withdrawal of commercial banks from rural areas. One response to this scenario may be a greater emphasis on institutional models based on group or collective action. Links to high levels of technical expertise and sophistication within the South African financial sector may offer exciting opportunities here, but these need to focus on the use of appropriate technology to overcome the basic problems of maintaining client confidence and loyalty together with effective but low cost transaction and portfolio management systems for small deposits, loans and transactions. Further issues in the development of locally owned and managed institutions are the balance between savings and loan portfolios, relative importance of locally mobilised deposits and outside funds, membership of different household types, management structures and control, and the speed at which these institutions can expand to meet demand. Other institutional models are also likely to be important. There may be potential not only for backward links between group managed institutions and commercial banks, but also for forward links with targeted MFIs, for both savings and loan products. Flexible linking of non-farm income to seasonal loan repayment probably holds the most promise for increasing access to seasonal crop finance for survivalist and subsistence farmers - although there may be problems with the reliability of remittance income, and this approach is unlikely to work well where non-farm income provides a smaller share of household income. It is also unlikely to meet the seasonal needs of small-scale Seasonal finance for staple crop production in Sub Saharan Africa iv

5 commercial farmers, although Latin American models may be relevant here, combining interim repayments from non-farm income with non-traditional collateral covering balloon repayments. Finally, the diversity of rural livelihoods leads to demands for a range of different financial services. Further investigation is needed of the aspirations and opportunities for and constraints to agricultural development amongst different farmer types in different areas, with regard to differentiated and targeted development of insurance, savings, transmission and loan products and services for survivalist, subsistence and small-scale commercial farmers, for example. Lessons for the SL approach In the process of the review, important strengths of the SL approach and framework were noted, in its emphasis on putting people first, recognition of the importance of different assets and of livelihood diversification, the concept of livelihood strategies, stress on vulnerability, and the importance of institutions. However, it was also apparent that the approach gives inadequate attention to diversification between households and the dynamics of market and non-market demand. Minor modifications to the existing SL framework are proposed to allow this to be addressed without any appreciable increase in complexity or loss of current strengths and emphasis. The SL approach and framework also currently lack formal consideration of the various roles of assets within livelihood strategies and of the attributes of assets in fulfilling these roles. This is problematic when considering interventions and services affecting asset investments. An existing conceptual framework is put forward to distinguish between productive, consumption, and convertible assets, and the attributes of assets in fulfilling these roles. Finally, despite the recognition of institutions within the SL framework, there is generally insufficient consideration of the nature of these institutions and of the ways that they relate to each other and to other components of the framework. Institutional arrangements, in particular, are not commonly discussed despite their being the subject of much attention in the microfinance sector. The importance of these relations needs to be given more prominence with a more explicit analytical framework to consider their strengths and weaknesses in different institutional environments, and of the necessary conditions for different forms of institutional arrangement to work for the benefit of the rural poor. Seasonal finance for staple crop production in Sub Saharan Africa v

6 TABLE OF CONTENTS 1 Introduction Rural poverty from a livelihoods perspective The role of agriculture in rural livelihoods in sub Saharan Africa The extent of rural livelihood diversification in sub Saharan Africa Relations between farm and non-farm activities in sub Saharan Africa Farm: non-farm activities in diversified livelihoods Farm: non-farm linkages in the rural economy Patterns of rural livelihood diversification in sub Saharan Africa The role of agricultural development in rural livelihoods and poverty reduction in sub Saharan Africa Constraints to agricultural development in sub Saharan Africa Seasonal crop finance in smallholder agriculture: issues and models Rural financial markets Particular issues in smallholder agricultural finance Liquidity in poor rural livelihoods Alternative means of accessing seasonal finance Means of Saving up Means of borrowing or saving down Means of insuring or saving through Transmission services Access to seasonal crop finance: conclusions Rural livelihoods in South Africa An overview of rural livelihoods in South Africa The impact of HIV/AIDS on rural livelihoods Introduction History of HIV/AIDS in South Africa Demographic implications of HIV/AIDS Social implications of HIV/AIDS Policy implications on strengthening the household s coping capacity Conclusion Overview of financial services in South Africa Introduction Aggregate supply...51 Seasonal finance for staple crop production in Sub Saharan Africa vi

7 7.3 Public sector Land Bank Provincial parastatals Post Office Savings Bank Private sector NGOs Village banks Credit Unions Co-operatives Commercial Banks Retail stores TEBA Cash Private sector agricultural firms Registered small loans industry Pawn Brokers The Informal sector Mashonisas Stokvels and Burial Societies Financial services in South Africa: discussion Rural and small farmer finance The recent history of rural and small farmer finance in South Africa The current supply of and access to rural and small farmer finance Conclusion Applying the SL Framework Strengths of the SL approach Gaps and Weaknesses in the SL approach Extending the Sustainable Livelihoods Framework Extending the SL Framework: Growth and Linkages Extending the SL Framework: the Functions of Assets Extending the SL Framework: Institutions and Institutional Arrangements Conclusions and lessons Current poor provision of seasonal finance and its importance in pro-poor growth Potential for different mechanisms and ways forward/ necessary conditions Lessons for further work The SL framework...87 References 90 1 KwaZulu Natal Case study Northern Province case study Western Cape case study Seasonal finance for staple crop production in Sub Saharan Africa vii

8 Tables Table 1 Regional Incidence and Distribution of Poverty...2 Table 3.1: Potential of Farm and Non-farm Productivity Growth in Reducing Rural Poverty...16 Table 3.2 Agriculture Sector Performance by Income Level and Region ( )...21 Table 3.3 Production and Productivity Changes (% change 1979/81 to 1995/97*)...21 Table 4. 1 Performance Indicators of BAAC, Calpiá and CMACs...34 Table 4.2 Features of lending technologies...37 Table 4.3 Options for Seasonal Crop Financing...41 Table 5.1. Features of rural livelihoods in South Africa...43 Table 5.2 Characteristics of commercialisation groups in KaNgwane in Mpulumanga...44 Table 5.3 Typology of households, central zone of the Eastern Cape...45 Table 5.4 Access to land, livestock and pension income by poor and non poor in KwaZulu- Natal...45 Table 5.5 Estimated multipliers, Eastern Cape...46 Table 7.1 Living standard measurement categories...50 Table 7.2. Summary of retail outreach in the micro-finance market in South Africa (1999/2000)...51 Table 7.3. Summary of type, number and volume of accounts (Aug. 98)...53 Table 7.4: Profitability of NGOs in South Africa compared with a Latin American Survey54 Table 7.5 Illustrative profile of farming households based on recent surveys in two provinces...69 Table 7.6: Illustrative profile small business households from recent surveys in two provinces...70 Table 8.1 Asset Attributes and Components...80 Seasonal finance for staple crop production in Sub Saharan Africa viii

9 Figures Figure 3.1 Farm: non-farm linkages in the rural economy...8 Figure 3.2 Farm: non-farm linkages and leakages in the rural economy...10 Figure 3.3 Linkage and Leakage Effects of Change on the Rural Poor...12 Figure 8.1. Introducing Markets into the SL Framework...76 Figure 8.2 Asset functions in livelihood strategies...78 Figure 8.3 Policies, Institutions and Processes and Sustainable Livelihoods...84 Seasonal finance for staple crop production in Sub Saharan Africa ix

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11 SEASONAL FINANCE FOR STAPLE CROP PRODUCTION: PROBLEMS AND POTENTIAL FOR RURAL LIVELIHOODS IN SUB SAHARAN AFRICA Andrew Dorward *, Sibusiso Moyo #, Gerhard Coetzee #, Jonathan Kydd * and Colin Poulton * * Imperial College of Science Technology and Medicine, Imperial College at Wye Ashford, Kent TN25 5AH # Department of Agricultural Economics, Extension and Rural Development, University of Pretoria, Pretoria 0002 South Africa April Introduction This paper is the first output of PRP project Diverse income sources and seasonal finance for smallholder agriculture: applying a livelihoods approach in South Africa. The project s purpose is to further develop the sustainable rural livelihoods (SRL) framework and increase its operational utility in a range of situations, particularly in encouraging coherence in understanding and addressing problems of access to seasonal financial assets by subsistence food crop producers and delivery of financial services to subsistence food crop producers. This interim report explicitly aims to identify (a) initial lessons about application of the SRL framework to analyse the effects of policies, institutions and processes on access to financial assets and (b) issues to be addressed in the design and implementation of field studies in South Africa. In order to identify these lessons and issues, the paper begins (after this introduction) with a review of the broader context and rationale for the project s focus on seasonal finance for agriculture. In section 2 it briefly examines poverty in Africa from a livelihoods perspective, before moving on to consider (in section 3) the role of agriculture in rural livelihoods and poverty reduction in sub Saharan Africa. Consideration of the importance of access to seasonal finance for smallholder agriculture leads on, in section 4, to examination of difficulties in its supply, and the record of responses to this in sub Saharan Africa. The paper then moves on from this initial broader review of problems in sub Saharan Africa to consider specific conditions in South Africa. Section 5 describes features of rural livelihoods in South Africa and section 6 discusses the impact of HIV/AIDS on rural livelihoods. Section 7 then provides an overview of financial services in South Africa, leading on to a discussion of rural livelihoods and finance. The final two sections draw together two sets of conclusions from the material covered in the paper. Section 8 discusses the application and contributions of the sustainable rural livelihoods (SRL) framework to the analysis in the paper, identifying strengths and weaknesses and suggesting ways of taking it forward. Section 9 then draws together lessons from the paper as a whole for the conduct of the rest of the research project. These principally concern the design and implementation of the field studies in the next phase of the project. Seasonal finance for staple crop production in Sub Saharan Africa 1

12 2 Rural poverty from a livelihoods perspective The extent and severity of poverty in Sub Saharan Africa, and the challenges to poverty reduction are well documented (eg World Bank, 2000a) and will not be discussed in detail here, beyond setting out the main stylised facts on the extent of and contributory factors to poverty. The World Development Report 2000 World Bank, 2000c estimates that there were approximately 290 million people living in poverty in sub Saharan Africa in This represented just under 25% of the global number of poor people. Although there are fewer poor people living in Africa as compared with South Asia, the depth and incidence of poverty in Africa is greater than in South Asia, and poverty is increasing more rapidly in sub Saharan Africa (see table 2.1). Poverty in Africa is largely a rural phenomenon: a little over 70% of the African poor are estimated to live in rural areas, where again the extent and severity of rural poverty are greater than in urban areas. There are also close links between urban and rural poverty. Many poor urban people have strong links with rural areas, and cyclical transfers between urban and rural people are increasingly important (Bryceson, D. F., 1999b). There are no clear patterns of change in poverty incidence across Africa in recent years, with increases and decreases in the incidence and severity of rural and urban poverty observed in different countries. Policy reforms appear to have benefited the poor with access to public services and markets, but to have left behind those in remote areas, those growing subsistence crops, and those without work (World Bank, 2000a p 95). Table 1 Regional Incidence and Distribution of Poverty (people living on less than $1 a day) Poverty incidence Number of poor (millions) % increase East Asia & Pacific 26.6% 15.3% % excluding China 23.9% 11.3% % Europe and Central Asia 0.2% 5.1% % Latin America & Caribbean 15.3% 15.6% % Middle East and North Africa 4.3% 1.9% % South Asia 44.9% 40.0% % Sub Saharan Africa 46.6% 46.3% % Source: World Bank, 2000c There are a number of contributory factors to the high levels of poverty in Africa and the poor performance of Africa in economic growth and poverty reduction as compared with other countries. These include low savings and investment rates; poor health, education and infrastructure; high dependency ratios; poor management of and access to public services; the spread of HIV/AIDS; poor economic and policy management; worsening terms of trade and continuing dependence on primary exports; poor agricultural performance; low population density; erratic rainfall and limited irrigation potential; ethnic diversity; poor governance; and conflicts. Seasonal finance for staple crop production in Sub Saharan Africa 2

13 From a livelihoods perspective, poverty may be characterised as low and vulnerable streams of income and of other social and material benefits accruing to individuals as an immediate result of lack of access to assets and of low and uncertain productivity of the assets that they do control. Access to assets and their productivity in turn depend upon the social, economic and institutional environment (determined by local, national and international policies, institutions and processes), the natural environment, and complementarities between asset holdings. These interactions are helpfully illustrated in the sustainable livelihoods framework (Carney, 1998), relating assets to livelihood outcomes, vulnerability and policies institutions and processes, and considering the interactions and complementarities between different types of asset (natural, human, physical, social and financial). Livelihoods analysis suggests that widespread and sustained poverty reduction needs to involve some combination of (a) improved access for the poor to a balanced set of assets, (b) increased productivity of the assets that they hold, and (c) reduced vulnerability to shocks. Key and complementary components of this include improving health and education services to expand human capital, increasing the social capital of disadvantaged and marginalised groups, expanding income opportunities, and reducing vulnerability to seasonal and other variation and shocks. This study focuses on expansion of smallholders access to seasonal crop finance as a contribution to improving income opportunities for the rural poor in Sub Saharan Africa (and also to reducing vulnerability), recognising that effective income gains and vulnerability reduction both require and are needed for wider gains in secure access to human and social capital. We begin from the position that expanded income opportunities and reduced income vulnerability for large numbers of people may be achieved by some combination of directly or indirectly increasing (a) secure access to assets that are both constraining large numbers of people and potentially productive for large numbers of people, and/ or (b) the productivity of these assets. Poor people s access to assets may be increased by changes in policies, institutions or processes that redistribute assets within society, or that reduce the costs of access through subsidy or through infrastructural or institutional change (reducing risks or transaction costs, for example). Access to assets may also be improved through increased income from or productivity of existing assets, as a result of changes in technology, in access to complementary assets, in costs of inputs, or in demand for goods and services supplied by poor people (affecting the volume of demand and/or prices). The next two sections of this paper address two related questions. First we ask how expanded access to seasonal finance for staple crop production can contribute to improved livelihoods for the rural poor in sub Saharan Africa. This requires consideration of patterns of livelihood strategies and diversification, of the role of agriculture (and specifically crop production) in rural livelihoods in sub Saharan Africa, and of the role and nature of seasonal crop finance as a livelihood asset in these rural livelihoods. Second, we ask how access to seasonal crop finance can be expanded. To address this question we review specific problems in the delivery of smallholder agricultural finance before relating this to lessons from historical experience with different institutional innovations in rural financial markets. This provides a platform for subsequent consideration of specific issues in agricultural finance in South Africa. 3 The role of agriculture in rural livelihoods in sub Saharan Africa A major contribution of recent emphasis on livelihoods thinking about rural development has been the recognition that poor rural people often engage in a highly diversified portfolio of activities (Reardon, 1998b; Bryceson, Deborah Fahy, 1999a; Barrett et al., 2000; Bryceson, Deborah Fahy, 2000; Ellis, 2000a; Reardon et al., 2000). This literature has shown the extent of Seasonal finance for staple crop production in Sub Saharan Africa 3

14 non-farm activities 1 in rural livelihoods and has begun to examine the way that diversification out of farm activities varies between different types of households, reasons for such variation, and the potential for different types of household to benefit from growth in farm and non-farm activities. Our discussion of different patterns of rural diversification in this section addresses three important and related questions regarding the relative roles of farm and non-farm activities in poverty reduction: How are rural livelihoods diversified between different farm and non-farm activities, considering diversification both between different households (in the rural economy as a whole) and within household livelihood strategies? Is it possible to determine if growth in one sector yields greater returns in overall economic growth in rural areas? How do the poor benefit from growth in the different sectors? We address these questions by first considering evidence regarding the extent of diversification in rural livelihoods. We then examine the possible nature of linkages between farm and non-farm activities. This leads on to consideration of (1) empirical evidence regarding these linkages and (2) different patterns of diversification. We then draw conclusions from this analysis about the role of agricultural development in poverty reduction in sub-saharan Africa. 3.1 The extent of rural livelihood diversification in sub Saharan Africa A number of recent papers have estimated the balance between farm and non-farm activities in rural livelihoods in sub Saharan Africa (Reardon, 1998b; Bryceson, Deborah Fahy, 1999a; Barrett et al., 2000; Bryceson, Deborah Fahy, 2000; Reardon et al., 2000). A common theme running through these papers is that many rural households in sub Saharan Africa, and particularly poor rural households, obtain a large part of their income, and devote a large part of their resources (especially labour) to non-farm activities. Thus Reardon, 1998b summarising results from a large number of case studies in the 1970s to 90s finds average non farm income shares of 42% in Africa (45% in East and Southern Africa, and 36% in West Africa), although this may mask wide variation in the importance of non-farm income between households with different incomes and livelihood strategies in the same area, and between households in different areas (Barrett et al., 2000). Bryceson, D. F., 1999b finds even higher non-farm income shares of 55 to 80% across a range of case studies in sub Saharan Africa, with evidence that non-farm income shares have increased dramatically in many areas in the late 1980s and in the 1990s 2. An immediate conclusion that might be drawn from these data is that if rural households, and especially poor rural households, derive a large part of their incomes from non-farm activities, then actions that are targeted to benefit poor rural people should focus on expanding their opportunities in non-farm activities. Such a conclusion may resonate with policy makers disenchantment with the difficulties and disappointments experienced with large investments in agricultural development in Africa over the last 30 years and with enthusiasm for the successes of microfinance initiatives in improving the livelihoods of the poor in Asia and in (largely) non-farm 1 Unfortunately different authors definitions of non-farm and off-farm income are not always consistent. Whereas farm income generally refers to income from a household s own farming activities, and non-farm income refers to income that is not gained from direct engagement in agricultural activities, off-farm income sometimes refers (narrowly) to agricultural wage employment but may sometimes also be used to include nonfarm income as well. 2 South Africa was an exception to the pattern of rising non-farm income shares, but these were already high several studies indicate non-farm income shares as high as 90% for the rural poor. Seasonal finance for staple crop production in Sub Saharan Africa 4

15 activities in Africa. However, theory and empirical evidence on the nature of relations between farm and non-farm activities demand caution in arguing for concentration on non-farm activities as the major route for the poor to climb out of poverty. 3.2 Relations between farm and non-farm activities in sub Saharan Africa Relations between farm and non-farm activities need to be examined at two levels or scales of analysis: the relations between farm and non-farm activities within the livelihoods of people or households who engage in diversified livelihood strategies, and relations between these activities within the local economy, irrespective of the degree of integration within individual or household livelihood strategies Farm: non-farm activities in diversified livelihoods There are a number of reasons why households or individuals may find it beneficial to integrate both farm and non-farm activities within an overall livelihood strategy. Farm activities (and particularly staple crop production) are often characterised by highly seasonal demands for labour and inputs, delayed and seasonal returns from investment of these resources, uncertainty in yields, dependence on access to land (which may be limited for poorer and more marginalised groups), need for substantial seasonal capital for higher productivity, and poor market opportunities, with high price variations between and within seasons. Engagement in non-farm activities alongside farm activities may allow complementary use of labour in slack agricultural seasons; the allocation of labour to different activities according to skill, productivity and earning differentials of different household members; a better spread of income across the year to match consumption needs; opportunities for different patterns of income in farm and non-farm activities to cross-finance seasonal expenditure (for example Reardon et al., 1994a, Reardon, 1997) and larger medium to long term investments (see for example Govereh et al., 1999); diversification of risk by spreading involvement across activities with different production risk characteristics and across markets with different price risk characteristics. On the other hand, retaining some farm activities (rather than leaving agriculture completely) may allow domestic food production that reduce risks from local price hikes for food items, provide very high marginal returns to labour at particular times of year, be important as a means of retaining social and land tenure rights, and maintain skills, social networks and access to land to provide a safety net which although offering relatively low returns represents a survivalist strategy offering a fall back if nonfarm income opportunities fail (e.g. if a member of the household loses a job or if economic conditions worsen and non-farm earnings decline). The benefits from such diversification are likely to be highest where risk aversion is high, where activities are highly seasonal in terms of production and resource demands, and where markets are thin and poorly developed, detracting from the benefits of specialisation and exacerbating problems of risk and seasonal shortages of labour and capital. However, Reardon et al., 2000 and Barrett et al., 2000, note that paradoxically the poorest households, who have these characteristics and the greatest need to diversify out of agriculture, also have the most difficulty in engaging in higher return non-farm activities as they lack the necessary financial, social and human capital to enter Seasonal finance for staple crop production in Sub Saharan Africa 5

16 these activities, and thus tend to crowd into low return, seasonal labouring activities. Reardon et al., 2000 summarising evidence from a number of studies in Africa suggest a rough pattern (with exceptions) of a positive relationship between non-farm income share (and level) and total household income and/or landholding in much of Africa (p272). Barrett et al., 2000 and Toulmin et al., 2000 note a common (but not universal) U shaped relationship between the proportion of income earned and total income, with poorer and better off households with a higher proportion of off-farm income, but with very different returns to these activities. Intermediate households, on the other hand, often have lower proportions of earning from off farm activities, as they are able to gain more from farm activities than the poorest households, but are not able to engage in the highest return off farm activities open to the better off households. In this context a number of authors make the helpful if often not precise distinction between push and pull factors promoting diversification out of agriculture into non-farm activities (for example Reardon, 1998b, Ellis, 2000a, Bryceson, Deborah Fahy, 2000). Push occurs where households or individuals engage in low return non farm activities because of inadequate returns in agriculture (as a result of chronic low productivity or lack of assets or following shocks such as drought), or where despite higher average returns from agriculture they are forced to diversify out of agriculture to overcome seasonal shortages of capital for consumption or farm investment in seasonal inputs or to reduce the overall risk from their portfolio of activities. The latter situations (where households diversify out of agriculture despite its higher returns) typically occur because of a lack of market or non-market arrangements for savings, credit and insurance, and typically are a reason for diversification by poorer households or by households located in areas with lower or more risky agricultural production. Pull occurs where diversification into non-farm activities offers higher returns than agriculture. Bryceson, Deborah Fahy, 2000 argues that much of the diversification into non farm activities in the late 80s and 90s can be characterised as push, as smallholders have been caught between the scissors of declining profitability of and support for commercial smallholder agriculture on the one hand, and increasing needs for cash to pay for school and health fees and for increasingly expensive consumer goods on the other. As mentioned earlier, the balance between push and pull is affected by the ability or inability of the poor to engage in non-farm activities that yield higher returns to labour: thin and poorly developed markets may not only encourage diversification by the poor but may also result in barriers to entry in some markets (as a result, for example, of demands for social, physical, natural, human or financial capital where markets for these types of capital are weak or missing). These barriers may then prevent the poor from engaging in higher return non-farm activities that are less crowded and yield higher returns than activities without barriers to entry, which more people can engage in, pushing up supply and pushing down prices Reardon et al., These effects of these barriers to entry and the ways that they may vary between households and areas are illustrated by Barrett et al., 2000 who compare livelihood diversification across different income groups under different agro-socio-economic conditions. They find that in higher potential areas households with little land have a higher proportion of off farm agricultural income, but this declines with increasing farm size until at higher land access, non-farm income suddenly increases dramatically due to access to higher value activities, as with denser financial systems and good market access, commerce becomes extremely competitive and the wealthy often invest in primary agriculture and tertiary sector activities associated with trade or commerce'. Under these conditions there is high correlation of cash crop and livestock income with total income. There is generally greater income diversification in more risky areas, and with greater liquidity constraints and significant transport costs in marketing, high income individuals are more heavily engaged in trade than lower and middle income households, and the correlation of non-farm income with total income increases with poor agro-ecology. Unsurprisingly, the better off earn incomes from cash crop and livestock and non-farm earnings (depending on the area) while the poor are more reliant Seasonal finance for staple crop production in Sub Saharan Africa 6

17 on wage labour, especially in higher potential areas (although Barrett et al., 2000 find wage labour does not account for more than 10% of income in their study sites in Cote d Ivoire and Rwanda, the discussion by Whiteside, 2000 of off-farm employment in Malawi suggests that such figures underestimate the importance of off-farm income in the livelihoods of the poor). Four generic livelihood strategies are identified: On Farm Only requires access to land and labour and high potential areas and land/ income correlation leads to an association with wealth and access to output and input markets; the poorer On and Off Farm Only strategy is also found in high potential areas, but includes off farm agricultural wage earnings and describes vulnerable households not able to diversify out of agriculture; the Mixed with Skilled Employment Only strategy is concentrated among the better off; finally the Mixed strategy involving farm, low return and some high return non farm activities is found among poorer households and also better off households with larger families (where some often younger members engage in low return non-farm activities). This discussion of the way that opportunities, returns and barriers to entry for on- and off- farm and non-farm activities vary between areas with different agro-ecological and economic characteristics shows that diversification also needs to be examined at a wider scale that considers determinants of local demand for the goods and services produced by low barriers to entry activities. This requires examination of wider demand and supply relations between different activities within the local economy, to which we now turn Farm: non-farm linkages in the rural economy A long-standing literature theoretical and empirical literature has examined the linkages between farm and non-farm activities within rural economies (see for a recent example and summary of the literature Delgado et al., 1998). Four types of linkage are commonly identified between agricultural and non-farm activities: direct upstream and downstream production linkages; investment linkages; and indirect consumption (or expenditure) linkages. These linkages are not unique to farm and nonfarm activities, but may arise between any sets of activities, as illustrated in figure 3.1. Starting at the left hand side of the diagram, exogenous change in policies, technologies, markets, infrastructure and capital, for example, may set off changes in prices and productivity in a rural economy. A distinction is made between tradable and non-tradable goods and services, tradable goods and services being those that may be imported or exported to or from the area 3. The lower part of the diagram suggests that productivity increases in non-tradable activities will normally lead to a fall in price, as local demand will be constrained by local incomes. A fall in price of tradable or non-tradable goods and services will then lead to an increase in consumers real incomes if the good or service commands a high average budget share (for example staple foods in poor communities). A consumption multiplier or linkage may then kick in as these increased real incomes lead to increased demand for local (non-tradable) goods and services and this expanded demand generates local employment opportunities. This further raises incomes, contributing to a virtuous circle multiplying the benefits from the original gains in consumer incomes from lower prices. 3 In practice the distinction between tradables and non-tradables is often not distinct, varying with (a) the scale or the boundaries of an area (the larger the area the greater the proportion of non-tradables), (b) its accessibility (the less accessible the greater the proportion of non-tradables) and (c) the comparative production costs inside and outside the area. These factors together determine the relationship between local costs on the one hand and the spread between import and export parity prices on the other. Although these terms are often associated with international trade, they are equally applicable to intranational trade between different districts or between rural and urban areas. Seasonal finance for staple crop production in Sub Saharan Africa 7

18 Figure 3.1 Farm: non-farm linkages in the rural economy Policies (inc. taxes, subsidies), Technology, Institutions, Markets (inputs & outputs, national & international prices, price transmission), Infrastructure, Capital Increased productivity of farm & non-farm tradables Higher prices of tradables Increased revenues from farm & non-farm tradables Higher volumes Input & processing demands Producer benefits PRODUCTION LINKAGES Increased employment Producer benefits CONSUMPTION LINKAGES Local supply response Lower prices of tradables Increased productivity& lower prices of non-tradables Lower prices of goods & services with high budget shares Consumer benefits Increased earnings / real wages Demand for local nontradable goods and services SAVINGS & INVESTMENT LINKAGES Seasonal finance for staple crop production in Sub Saharan Africa 8

19 The extent of these gains, however, is limited by leakages which are shown in figure 3.2 (as additions to the right hand side of figure 3.1). Thus if local consumers use their extra income to buy tradables (goods and services that are imported from other areas or that are produced locally but would otherwise be exported) then there is reduced stimulus to local demand. Even if there is stimulus to local demand, if local producers cannot respond to the increased demand (due to limited supply of labour or capital, or poor market development and high transaction costs), there will be inflationary pressure on prices, off-setting consumers increased incomes. Finally, even if there is a local supply response, if production systems are capital intensive, import intensive or provide returns to a only a limited number of local people, then there will be reduced gains from increased local employment and earnings 4. The effects on producers of the initial increase in non-tradable productivity are more mixed. Lower prices may largely off-set producers gains from higher productivity 5, unless demand is relatively elastic or cost reductions or changes in technology are sufficient to allow expanded labour demands and/or entry of new (poorer) producers into the market. Higher volumes produced and marketed may also provide increased employment opportunities through upstream demand for inputs or downstream processing opportunities, depending upon the extent of such demand associated with the particular non-tradable whose productivity has increased. Production linkage benefits to labour incomes may however also be limited by capital or import intensive production systems, capture of income by elites, or an inelastic supply response. Lower prices for tradables do not benefit existing net producers of these tradables. The negative effects of lower tradable prices on producers are not explicitly shown in figure 3.1, but may be deduced from the positive effects of higher prices. Thus lower prices may depress production and upstream and downstream activities, with associated losses of producer income imposing a drag (in the right hand side of figure 3.1) on the positive consumption linkages that may arise from lower prices and increased consumer incomes. Higher prices for tradables have opposite positive effects on producer incomes, similar to the positive effects of increased productivity in tradable activities. The latter, however, does not have the same negative effects on consumers as do price increases (again, figure 3.1 does not explicitly show consumers losses from the negative effects of higher tradables prices). Finally, we consider savings and investment linkages which may arise where increased real incomes allow increased savings and investment in capital, in turn reducing vulnerability and increasing both the productivity of local activities and the potential elasticity of supply responses crucial to consumption linkages (the latter linkage is shown later in figure 3.3 but not in figures 3.1 and 3.2). Leakages arise if the returns to local savings and investment are very low, due to lack of secure productive investment opportunities or due to lack of local financial markets linking savers with productive investment opportunities. They may also arise if there are effective financial markets linking the local economy with other economies, so that either local activities are already able to access outside sources of capital or locally generated capital is invested outside the area 6 All these linkages are affected by transaction costs. High transaction costs will generally depress supply responses to increased demand for tradables and non-tradables. Differences in transaction costs for different suppliers may also affect the relative importance of tradable and non-tradable supply responses (Machethe et al., 1997), and hence the extent of leakages. 4 Taxes and savings can be further leakages, not shown in figure Where productivity increases result from some form of innovation, early adopters are likely to gain from higher productivity before more widespread adoption lowers prices. 6 Under these latter circumstances finance is tradable. Seasonal finance for staple crop production in Sub Saharan Africa 9