ECONOMIC OPPORTUNITY

How can DFID help to support access to productive assets, and secondly, make agricultural markets work for the poor?

The consultation aims to seek views, opinions and examples of innovative and established practice in order to inform future DFID policy and investment. Your moderator will lead the debate with the short introductory paper below, provide regular summaries and guide the dialogue.

Theme Outline

With equitable access to productive assets and to well functioning markets, it has traditionally been believed that smallholder agricultural and livestock producers in low income countries can expand their production in a competitive manner based on their flexible, low cost and well motivated family labour supply. In turn, this will have significant benefits for economic growth (rural and urban) and for poverty reduction, with rural households that do not benefit directly from increased agricultural production and incomes nevertheless benefiting from consumption multipliers and additional rural employment opportunities. Here we ask what needs to be done to create equitable access to productive assets and to make markets work for the poor, but we also ask whether these are sufficient conditions for smallholder agricultural growth to occur. We note that the goal is not simply increased smallholder agricultural production. Rather, it is intensified production, generating rising returns to labour and land, that will make a lasting impact on rural poverty.

Improvements in access to land and water have made important contributions to agricultural growth and poverty reduction in the past, particularly in Asia. However, in neither case is further progress straightforward.

The problem of inequality in land holdings has long been recognised in Asia and Latin America and in settler economies in Africa, but is also now being recognised in communal areas in Africa. More successful reforms of private land ownership in the 20th century were generally associated with radical political change – not something easily built into development strategies – and sit uneasily with market led approaches to economic development. Meanwhile, ‘market friendly’ land redistribution has only had mixed success, as have titling programmes. Encouraging land rental markets may be a cheaper and politically easier way of expanding access to land for poor households. In addition, preserving access to common property resources is vital both for poor livestock keepers and for households (again, often including the poorest) that derive an important part of their livelihoods from so-called “environmental services”.

A much higher proportion of cultivable land is irrigated in Asia than in Africa. However, increasing the area of land under irrigation faces both technical and institutional difficulties in both continents. Many existing irrigated areas face threats from increasing salinity, ground water depletion, and poor management of water and infrastructure. Whilst proposals to invest in new, large scale irrigation projects have to show how they will deal with similar challenges, many areas simply do not have suitable sources of water to support large scale irrigation schemes anyway. In such areas farmer led investments in small scale irrigation can be very successful, but are difficult to extend at the rate necessary to make a dramatic impact on agricultural production and rural poverty. Improved rainwater harvesting and control offer possibilities for sustainable increases in production even in semi-arid areas.

Expanding access to finance (seasonal and longer-term) was an important factor in the spread of Green Revolution technologies in Asia. However, there are few successful models of large-scale credit provision to smallholder agricultural producers where output markets are highly competitive. The importance of savings services is now axiomatic in microfinance circles, but it is far from clear that promotion of savings alone will enable the majority of small producers to intensify their agricultural production.

Markets can benefit the poor by facilitating access to human, financial social, physical and natural assets; by improving the returns on their assets, and by meeting consumption needs. In the following paragraphs we focus on the latter two of these. Liberalisation is often now thought to be a necessary, if not sufficient, condition for a well-functioning markets. However, it is worth noting that there are very few examples of a transformation of smallholder agriculture occurring under a liberalised market regime. Conversely, raised production levels and marketed surpluses create attractive conditions for private sector participation in markets.

In Africa useful progress with rural poverty reduction has been observed in countries (e.g. Uganda) where cash crop production has increased significantly post-liberalisation. Even in cash crop sectors, however, challenges remain, including how to: maintain produce quality, provide inputs to producers on credit (and recover that credit!); control price volatility, and invest in research and extension. Meanwhile, food crop production has just about kept pace with growing (and increasingly urbanised) populations, despite an end to the costly fiscal support previously provided to parastatal agencies. Net food consuming households – the majority, even in most rural areas, and including most of the poorest - have benefited from lower food prices. However, prices are often more volatile than they were prior to liberalisation and private investment in grain storage remains limited. Regional specialisation in production is often quite evident, with significant surpluses of grains and other staples concentrated in a few districts or regions. Yet, many poorer households in other regions fail to achieve a sufficient degree of basic self-provisioning to even consider investing in higher value crops that would generate more attractive returns to their meagre land and labour resources.

In Green Revolution Asia, the subsidies that usefully encouraged adoption of new technology in the past are now just a fiscal burden and market liberalisation is, therefore, appropriate. As in Africa, the challenge remains of how to enhance productivity in remoter and lower potential areas. In remote areas, fewer traders operate and an input-output price scissors may make production for anything but the local market unattractive. In parts of Asia, the scope for accumulation by poor households can be further restricted by unequal market (e.g. tied credit) and social (e.g. share tenancy) relationships. In many countries of Africa, restrictions on cross-border trade dramatically restrict legal opportunities for households in “remote” areas. Meanwhile, areas of low agro-ecological potential may nevertheless support significant and growing populations. With limited production of tradable products to drive consumption multipliers, non-farm opportunities (other than migration) may also be limited. As populations expand, production intensification may be needed simply to prevent degradation of the natural resource base from undermining basic food security.

Private sector response to input market liberalisation in Africa has, if anything, been weaker than that to output market liberalisation. Beyond a few high potential areas and cropping systems, there are question marks over the strength of effective demand for inputs after the withdrawal of subsidies and with the collapse of input credit. On the supply side, limited finance constrains business expansion. Few private players are willing to invest in promoting adoption of new seeds, fertilisers and chemicals, given the public good nature of this task. Rates of fertiliser use in Sub-Saharan Africa have scarcely changed over the past decade, remaining well below levels observed in South Asia and well below the level required to maintain the already seriously depleted fertility of Africa’s soils.

What are the over-arching priorities for improving the functioning of agricultural markets? Some would say removing enduring state interference in market functioning that discourages major private investment. There is widespread agreement that, in both Africa and lower potential areas of Asia, improved transport infrastructure would be of great benefit. Improving traders’ access to finance is also an issue, especially where private trading has not historically been strong. In areas of low population density and/or low (current) agricultural productivity, non-market coordination of investment may also be needed to kick-start agricultural markets. This rests on two propositions:

• equitable access to productive assets and to remunerative output marketing opportunities may not be sufficient to encourage a significant intensification of production by smallholder producers. To be able to respond, smallholders need access to a range of support services, including technical advice, input supply (embodying access to improved technologies) and finance. Some of these should be privately provided, but others may be partially or exclusively provided by public service providers;
• the returns to private investment in any one of these services will be dependent on the existence of the other, complementary services. Hence, unless all services are planned together, levels of private investment will remain small – insufficient to generate the higher marketed surpluses that will in turn encourage more competition in output markets.

Farmer groups and associations do not feature strongly in Green Revolution narratives, yet in areas of low population density and/or low (current) agricultural productivity can play a central role in improving smallholders’ access both to markets (input and output) and services. As such, strong groups and associations may be one of the keys to overcoming the coordination challenges outlined above.

Much has been made recently of the rapid rise of supermarkets in many parts of the world. Their requirement for predictable quantities of assured, high quality foods threatens the competitive position of smallholder farming systems based primarily on low labour cost. Whether – and how quickly - the rise of supermarket systems will threaten the viability of smallholder farming systems in South Asia and Africa remains to be seen. However, if smallholders are to respond to supermarket-driven changes in market systems, they will require more effective support services than they receive today. The challenge of intensification and the challenge of supermarkets call for similar policy and investment responses.

Finally, for intensified smallholder agricultural and livestock production to stimulate broader rural (and urban) economic growth and poverty reduction, other markets must also function well. Efficient rural labour markets are critical (but remain a seriously under-researched area), whilst support to rural non-farm activities can multiply the benefits of growth in tradable goods production.

Questions to consider:

1. What are the policy and investment options and priorities for improving access to land and water resources for poor households?
   
   
2. Is agricultural supply capacity just about access to assets and better transport and communications infrastructure? If not, how should policy seek to achieve coordination across relevant support services, and between these and output market opportunities?
   
   
3. Is there any progress in developing replicable models for financing smallholder agricultural production? If so, what role, if any, is there for public policy in promoting these?
   
   
4. Does the key challenge for making rural markets work for the poor lie in ongoing liberalisation or in improved governance within the agricultural sector, permitting a more constructive role for the state in responding to market failures and creating the conditions for increased private sector investment?
   
   
5. What role can farmer groups and associations play in improving smallholders’ access to markets and to support services? How can public investment support their development without distorting incentives to group formation and membership?
   
   
6. How large a threat does the rise of supermarket systems pose to smallholder farming systems in Asia and Africa? How can smallholders best be equipped to respond to more demanding volume and quality requirements even in domestic markets?
   
   
7. What can be done to support agricultural intensification in remote and/or low potential areas? Should policy focus on these areas or develop under-exploited potential in higher potential areas first?
   
   
8. How can better integration of crop agriculture and livestock be achieved?
   

Colin Poulton, March 2004