How can DFID help to tackle risk and vulnerability factors that prevent poor people from engaging and investing in agriculture?

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

Efforts to “make markets work for the poor” are gaining ground rapidly. Markets (for products, labour or other inputs) are one of the two main mechanisms through which the benefits from growth can be transmitted to the poor – the other being transfers (e.g. social pensions, widows’ allowances, education allowances, orphans’ allowances, food for work, school meals programmes etc) which are funded either by internal taxes on growth, or by foreign aid. This latter group have traditionally been seen as welfare payments and still form part of the new “social protection” (SP) agenda. But SP is wider than this – it also encompasses measures such as insurance against risk which are very closely linked to the operation of markets (Conway and Norton, 2003). This note argues that earlier fears about the “welfare” element of SP – e.g. that it would be unaffordable in many countries, and perhaps inconsistent with production imperatives since it is operated by departments unrelated to the main production line departments such as agriculture – now appear less threatening.

If the poor are to benefit from growth through market mechanisms, then these have to function well for them. But there is plenty of evidence that markets fail in various ways. There is a substantial literature on conventional forms of market failure – high transaction costs attributable to weak infrastructure, poor information, weak insurance markets, weak contract enforcement mechanisms and so on (Omamo, 2003). What receives much less attention are failures attributable to the discrimination against women, ethnic and religious minorities, and lower caste groups that form the basis of segmented markets. Markets that are interlocked (as when the poor attach themselves to a local patron who provides them with advances in times of crisis but in return requires first call on their labour, and demands to be their sole supplier of credit and other inputs and marketer of outputs) have also received relatively little attention . But our concern here is not directly with these, but with the effects that risk and vulnerability can have on the capacity of the poor to engage in markets.

In what follows, I define risk as the likelihood of occurrence of shocks and stresses which can be either external or internal to the household (external include weather-based events, market crises and so on, internal include marriage expenses, sickness and death). Vulnerability is the susceptibility of households or individuals to specific risk events. According to their location, asset status, social networks etc, some households will be more vulnerable to these shocks and stresses than others.

Risks of different kinds are found among all types of agricultural producer: the most market oriented (as in commodities such as coffee and cocoa) will be highly susceptible to the current wild fluctuations in world market prices; the most subsistence-oriented will be susceptible to climatic shocks, to attacks by pests and diseases, and so on.

The central argument here is that risk management can be handled at four levels which need to be sequenced and “nested” appropriately.

• First, the highest levels of policy (on fiscal and monetary matters, including exchange rates and interest rates, and sectoral allocations of public expenditure) can be more or less risk-reducing for particular categories of farmers, depending on how they are formulated.
  
  
• Second, decisions within productive sectors involve trade-offs, often between growth and risk – for instance, a policy on agricultural technology which simply “goes for growth” may require levels of purchased inputs that are too risky for those farmers who cannot control production uncertainties through e.g. irrigation. To go for slightly less growth may leave space for crop varieties that are more resistant to pests and diseases and drought-avoiding.
  
  
• Third, innovative ways in which farmers can protect themselves through insurance (initially with government support, eventually through the private sector) are being developed (Hess, 2003).

All three of these mechanisms can be handled either by central departments such as finance or planning, or production-focused government departments such as agriculture. These have far higher budgets than social welfare departments, and it makes sense to cover as much risk as possible through a combination of the efforts of these, plus private sector coverage such as insurance.

• Fourth – SP in the welfare sense – then becomes a “residual”, focusing on those who cannot be covered adequately by the first three of these provisions. A range of measures may be needed to cover different shocks and stresses – microsavings to help in building up assets, publicly-supported insurance of various kinds against sickness, injury and death, school feeding schemes, food (or cash) for work, and so on. Many of these will help to reduce both risk and vulnerability. Just as growth promoting measures within line departments such as agriculture can be more or less risk-reducing, the same applies to welfare measures, only in reverse – several can be more or less growth-promoting. Thus, cash-for-work may stimulate local staple food markets in ways which food-for-work cannot.

The World Bank’s Social Risk Management (SRM) Framework (World Bank, 2001) covers much of this ground, but does not adequately highlight the need to sequence interventions. Nor does it pay enough attention to the need to treat domestic and entrepreneurial spheres simultaneously – shocks or stresses within the household will drain resources out of farming if they cannot be covered separately.

There is a big agenda here: the risks facing the rural poor need to be reduced if they are to engage effectively in markets. The old fears that welfare departments will have insufficient resources to do this and/or will work in ways inconsistent with production-focused departments remain valid to some extent, but as respective roles become clearer, so also do the challenges facing governments and donors to “mainstream” risk reduction into macro- and sectoral policy, making them coherent with efforts to reduce domestic risk and provide welfare transfers where needed. PRSPs provide a forum for discussion and planning on these issues as a first step in what will be the long haul of seeing them through to implementation.

References

Conway, T. and Norton, A. (2002) ‘Nets, Ropes, Ladders and Trampolines: The Place of Social Protection within Current Debates on Poverty Reduction’, Development Policy Review 20 (5): 533–40. London: Overseas Development Institute.

Farrington, J., Slater, R. and Holmes, R. (2004a) ‘Social Protection and Pro-poor Agricultural Growth: What Scope for Synergies?’ Natural Resource Perspectives 91, London: Overseas Development Institute.

Farrington, J., Slater, R. and Holmes, R. (2004b) ‘The Search for Synergies between Social Protection and Livelihood Promotion: the Agriculture Case’, Draft Working Paper. London: Overseas Development Institute.

Hess, U (2003) Innovative Financial Services for Rural India: Monsoon indexed lending and insurance for smallholders. Agriculture and Rural Development Department Working Paper 9, Washington DC: World Bank

Omamo, SW and Farrington, J (2004) Policy research and African agriculture: time for a dose of reality? Natural Resource Perspectives No. 90. London: ODI

World Bank (2001) Social Protection Sector Strategy: From Safety Net to Springboard, Washington DC: OUP for the World Bank.