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Assumption II:  Greater Financial Investment in Agriculture Will Alleviate Poverty

More recent views on poverty alleviation have been pinning the focus on agriculture, since that is both how three quarters of those living under $1.25 per day earn a living (the official global poverty threshold) and also where they live (in Africa, upwards of 65% of its population lives in rural areas).   See also IFAD’s Farming First portal here.  The focus is now to drive investment towards this large group of people in rural areas with the expectation that this investment will address issues of poverty.  But what, then, is poverty other than a lack of income?  More progressive minds might find that poverty deals with more than just economics; poverty is impacted by class, culture, opportunities, race, education and economics.  Therefore, poverty cannot be addressed with a singular mindset, as the investment world sometimes would like to believe; it must be complemented with broader social and public investments.

Conventional Views

Again, the standard views are legion when it comes to money and poverty; our analysis will touch on just two of these.  The first is that more money (such as 10% of national budgets) invested in the rural base will correspond directly to poverty alleviation; that by putting additional resources into the sector that corresponds to where the masses are engaged, in their agrarian occupations, that this will help address issues related to poverty (which we know is multidimensional), of poor people’s experience of deprivation, such as poor health, lack of education, inadequate living standard, lack of income, disempowerment, poor quality of work and the threat of violence from others.  The reasoning behind this view is that if there are more people in rural areas dependent on agriculture for their livelihood, then investing money there correlates with greater direct benefits to GDP growth, in particular affecting their household income.  With a larger subset of the population in rural areas, there will be a more substantial impact – the theory goes.  And quite specifically, this relates to some export-growth assumptions; that since smallholders are the mainstay of rural populations, then their increased incomes will generate a multiplier effect, ultimately increasing both livelihoods and export growth prospects while decreasing a countries balance of payments (or need for imports).  Furthermore, it is assumed that the distribution of this investment to the rural base has limited costs and that some entity is able to bear those costs.

The second conventional view presumes that the 10% will actually be utilized within the proper channels of resource delivery and reach its intended beneficiary.  This presumes that institutions are able to support the financial transactions taking place and that creditors are able to have some security in recouping their losses, via legal contracts or government guarantees.  Taking this idea one step further, the origination of the funds to finance this program must come from somewhere.  If foreign investors are the target, which under CAADP they are, then these investors must find ways to protect themselves, since they are not comfortable nor familiar with the relationship oriented financing mechanisms typically found in developing economies.  The three things foreign investors will do include:  i) minimizing their risks by offering only short term loans so they can pull their money out at short notice, ii) denominating payments in foreign currency so that their claims cannot be reduced by domestic inflation or a currency devaluation, and iii) lending through the local banks so that if they pull their money out and the banks cannot repay it, the government will be drawn into supporting its banks to avoid widespread economic damage (see “Fault Lines” by Raghuram G. Rajan).

Unsound Assumptions

The reality is that pumping more financial resources at the problem in aggregate does not translate to poverty alleviation.  The macro analysis offered by economists is that on the whole people are better off now than 50 or 100 years ago just is not comparing ‘like’ concepts.  The poverty line itself, established at $.30 (30 cents) in 1973 by Robert McNamara (then World Bank president) translates to about $1.59 today (for private consumption, see calculator).  So our policy for extreme poverty set at $1.25 per day is not just.  Yet we have the tools to measure this such as MPI, which fundamentally offers us a better answer to this question.  Some have said that poverty does not have a cause, that it is just how life is; prosperity, on the other hand, has a cause and it is the ‘good life’ that must be pursued for there to be a difference in impacting poverty – not searching for growth in GDP figures.

So to invest additional resources where poverty is most prevalent and not at the source of poverty, i.e. investing more resources in agriculture in rural areas instead of investing in the root causes of poverty (education, health, infrastructure, etc.), then economists and policy makers are mistaking the target with the best approach to actually combat poverty.  In fact, it turns out that most folks in urban centers are relatively NOT impoverished; from this data we can conclude that urban centers where health, education, living standards, income, empowerment, and work quality are less dire can help fuel demand within rural areas for their goods and services and be a pathway to address rural poverty – not putting money into rural areas!  Remember, it was excessive rural credit that partly caused bank failures in the US’s Great Depression.  With deregulation and rapid expansion of banking in the US, small and medium-sized farmers found themselves falling behind the growing numbers of industrial workers, so easy credit was lobbied for and delivered at the time.  This excess credit of course overlooks the likelihood that cross-sector friction would occur within the services and manufacturing sectors.

Another nuance to this argument that more is better when alleviating poverty, is Jeffrey Sach’s view that more money will solve the problem (no, it doesn’t).  In End of Poverty, he argues for additional capital – up to the 7% of GDP for foreign aid by developed countries instead of mere fractions of 1% offered today – but this has never been realized.  The argument is Keynesian in nature, that credit to an economy would support investment and growth – however, the other metrics (governance, corruption, basic infrastructure, etc.) were never taken into consideration.  Nina Munk offers a more detailed analysis showing how Sach’s Millennium Villages Projects have failed to deliver the promises claimed in his book.  This story itself leads to how easy it is to create grand policy ideas but that translating them to the local level remains a mystery.

For example, CAADP pillars mix up correlation and causation in that for a country to sign on to a country compact to increase agriculture spending does not automatically translate to greater investment in agriculture.  In the case of Ethiopia, over the years the percentage of the national budget for agriculture has steadily dwindled in spite of being an ardent supporter of CAADP.  From 1995-2003, Ethiopia’s average agriculture budget share was 7.9% and from 2003-2010 it was 15.2%.  Today it hovers above 20%.  But is it CAADP or a long history of political malaise with food, hunger, and its people that have shifted institutional responses to these issues?  What is more important is that the country’s share of investment into agriculture has not been correlated with agriculture growth.  Since 2004 both Ag growth and GDP growth have both been steadily decreasing.  Underlying these examples are the incentive structures that are at play with CAADP.  Why should a country invest a greater share of their resources into a sector when additional external resources via foreign aid are about to step in?  For the most part, when CAADP country compacts are signed, national budgets begin to erode (see Table 2 below).

The table below identifies larger and more established economies investing significantly larger shares of their national budgets to agriculture; and that proportionally, smaller and less established economies are investing far less in their agricultural sectors.  Is there a connection to poverty here?  If you look at poverty figures in terms of the total share of population below the suggested income indicators, countries like the US, Canada, and Australia each have poverty rates far below the likes of African nations; however, utilize GINI and MPI, and the story changes.

Any relationship to poverty could be considered correlated but not causal.  Remember, developed nations produce upwards of 4x the food supply needed which is why they can invest excess capacity into protectionist policies and expansion of their corporates and MNC’s into developing markets – ultimately offloading this excess supply with low prices and limiting the developing country’s ability to invest in their agriculture sector (since the cost of these imports even undercuts the local prices – mostly for commodities).

Table 2

International Comparison of Budgets for Agriculture, Average 2002-2004

Income group & country Ag Output as% of GDP(A) Ag Budget as% of GDP(B) Ag Budget as% of GDP(B/A) (adjusted)*
High-Income Country      
   Australia 3.0% 0.31% 10%
   Canada 2.3% 0.51% 22%
   EU 2.3% 0.65% 28%
   USA 1.6% 0.73% 46%
Middle-Income Country      
   Turkey 13.0% 2.0% 15%
   Mexico 4.0% 0.7% 18%
   China 15.0% 1.2% 8%
   Brazil 9.3% 0.7% 8%
   Russia 6.0% 0.95% 16%
   Ukraine 11.6% 1.3% 11%
Low-Income Country (Average 2002-2004)
   Uganda 32% 1.5% 5.0%
   Tanzania 45% 1.2% 3.0%
   Ethiopia 44% 2.7% 6.0%
   Kenya 29% 1.3% 4.5%
Low-Income Country (Updated figures, Average 2007-2010)
   Uganda 24% 0.4% 1.7%
   Tanzania 29% 0.9% 2.9%
   Ethiopia 47% 1.2% 2.6%
   Kenya 21% 0.5% 2.2%

*adjusted to the size of the agriculture sector in each country

Source:  Estimates derived from:  Organization for Economic Cooperation and Development (2004):  Agricultural Policies in OECD Countries:  At a Glance. Paris; Tangermann, S. (2006): OECD Work on Agricultural Policies in Brazil, China, India, and South Africa.  Presentation at Rural Week of the World Bank, Washington, DC, February 27, 2006; Zorya, S. (2006):  Improving Agricultural Fiscal Policy in Ukraine.  World Bank ECSSD Working Paper 36970, Washington, DC; World Bank (2006):  Ethiopia Agricultural and Rural Development:  Public Expenditure Review for 1997-1998 and 2005-06. Washington, DC

The second conventional view can just as easily be challenged.  It is too easy to presume that mere statements affecting new policies will in fact be carried out by existing institutions in Africa – like the US, there are all too many stakeholders with varying interests, throw on top the colonial past and things get even more complex.  Ensuring that budgets and policies are adhered to, are not solely an African dilemma; countries the world over face the challenges of rent seeking, political campaign contributions, top-down approaches, principal-agent relationships, ‘isms’, and misinformation.

There very well may be an inefficient allocation of resources due to the poor coordination that tends to take place between government agencies.  Because there is a lack of infrastructure in many of the CAADP member countries, not just physical infrastructure, but informational and educational infrastructure, the money may not be spent in the most fruitful way once it reaches the countryside. Another issue to take into consideration is there may be a divergence of opinions on who should spend the money, and how that money should be spent. There are a wide variety of small stakeholders that exist.  For instance, an entrepreneur who wants to set up an enterprise may have all-together different needs than say, a thousand other small stakeholders who have varying other objectives.

Coordination between government agencies and foreign aid organizations is also rare, and bound terms and conditions even more rare, which makes operations within the agriculture sector haphazard and the implementation of project management extremely difficult.  When policymakers decidedly divert funds towards agriculture, they ignore other facets of society that need development.  There is a significant information gap between small stakeholders and policymakers.  In Uganda, for example, pastoralism, in addition to agriculture, is a major driver of growth for the country’s economy.  The lack of enforceable property rights within the country has created friction between agriculturists and pastoralists, and the issues of contention were brought to the forefront with the creation of the East and Southern African Farmers Forum (ESAFF) – a platform for open dialogue within trade.

The creation of ESAFF also reflects the shortcomings of trying to build agriculture via the rural base.  The information gap that exists between policymakers and civilians cannot be properly addressed in a rural area, when many of the small stakeholders are dispersed throughout various parts of the countryside. The absence of information concentration and physical infrastructure creates various hurdles for the small stakeholder, and therefore, generating a multiplier effect in these economies will not be an easy feat.

Because various stakeholders reside miles apart from each other, rural areas are not a conducive environment to conduct intra-regional trade given the absence of physical and information infrastructure.  Transaction costs are indeed a problem, and conducting business from rural facilities is not cost effective given their distance from major markets.  In his research on agricultural productivity gaps, Douglas Gollin talks at length about how, on average, the value added per worker is markedly higher within non-agricultural sectors as opposed to agricultural sectors; agriculture workers feel more inclined to exit the sector because agriculture is not as commercially viable.

The premise of investing 10% of the country’s budget to agriculture makes sense if the funds that are generated from agriculture in fact will be invested back into agriculture in some form – whether it be research, market intelligence, or infrastructure support to agriculture.  One illustration of how this is significant is the state’s ability to reallocate revenues based on where revenues are coming in.  In Zimbabwe, for example, farms are taxed about Z$1,450 per hectare of cotton production.  During the 1994 farm season cotton production levels reached 248,000 with the government realizing revenues of Z$359 million from producers whereas the total agricultural research budget for the 1994 year was only Z$37 million or a tenth of revenues generated only from cotton producers (Sukume 2000, 41).  In short, very little revenues earned from agriculture are in fact reinvested back into agriculture.  With this bureaucratic behavior, the 10% investments in agriculture will never lead towards long run economic prosperity without revenues being allocated back into agriculture (this does not mean rural agriculture).  More importantly, another significant factor that must also be considered is that increasing expenditure to the agriculture sector means forgoing expenditures in other areas of the budget, ultimately affecting health, education, transportation, communications, social security, and security among other sectors.  The largest growth sector of government public spending in Uganda is its public administration.  If this is the case for other countries, then it will be difficult to get leaders to shift funds away from their own chiefdoms.  To ensure the government is allocating responsibly, greater criticism must be placed on African leaders by the public – while waiting for institutions to become transparent through benevolence or peer pressure may take longer.

The last argument on the economics of increased spending in agriculture refers to the incentive structure in place for African leaders to move resources towards the sector.  There are two parts to this analysis.  First, it is not enough solely to look at the level of agricultural output as a percent of GDP (CAADP’s primary target) and trend this to the income level of the country; doing so tells us that the greater share agriculture has in an economy (see Table 2), the less likely it is developed.  In addition, the metric of total agriculture expenditure as a percent of GDP (CAADP’s other primary target) does not explain trends in income either, as multiple sectors of the economy influence the analysis.  However when the agriculture expenditure as a percent of GDP is adjusted to the size of the agriculture sector of the country, then a fairly consistent indicator emerges.  Using this metric, there is a relationship between the amount allocated towards agriculture and overall economic prosperity – higher income countries all have much higher levels of adjusted agricultural budgets as a percent of GDP and lower income countries have the lowest levels of expenditure.  Understanding that this is a crucial factor for CAADP to function for member countries (Note:  updated figures were provided for the 2007-2010 period, the initial implementation years of CAADP).  Excessive investment in agriculture leads to policies which promote exporting foods that suppress prices for smaller and less developed countries; yet the right balance of investment into food security and non-commoditized exports, can be helpful.

However, keep in mind here there are not just pricing distortions of larger countries fueling the Ag sectors growth, but also inequalities among large and small firms.  Across East Africa (Ethiopia, Kenya, Tanzania, and Uganda) the share of funds being directed towards agriculture has dropped precipitously since the 2000-2004 period.  As described in the Kenya country analysis above, rent seeking incentives are still at play under CAADP – as long as external agencies with significant resources are there to be exploited, local African leaders will find a way to take advantage of the opportunity, even pledging to agreements they know they will not fulfill.

The second part of this economic analysis suggests that the CAADP target of 10% agriculture expenditure is not entirely a true argument.  Contrary to what Table 2 explains, lower public spending does not always translate into lower agricultural competitiveness.  In the US and the EU, government support of the agriculture industry is widely known, with subsidies making the bulk of competitiveness for these countries whereas in Brazil, Australia, and New Zealand with low expenditure in agriculture farmers are quite competitive.  What separates the effectiveness of public expenditure in agriculture are three things, namely:  i) enabling environments must be supportive of sensitive food prices, so that distortions via public investments do not negatively impact private markets, ii) what is spent in agriculture should go to the most efficient or comparative advantageous sector within agriculture to make a positive impact, and iii) the technical capacity of public funds to be used for their intended purposes is, of course, key.  With each of these conditions, even small levels of public expenditure can help nations meet CAADP objectives (see Botswana for an example).

Emergent Views Supporting Small Enterprise

The multiplier effect will be greater if resources are directed to small urban businesses promoting food related enterprise than if it were to be invested in rural areas, even with higher unemployment in cities.  Investing resources in urban centers will stimulate the growth of small businesses and enable a larger subset of the population to unleash their creativity to propel the growth of new enterprises, ultimately fueling demand from the rural base (and creating a market for farmers).

Based on our analysis, it would be better to create policy which presumes that greater investment in small urban (food) businesses and rural infrastructure (other than roads) is what will drive economic growth, not that greater investment in rural agriculture will alleviate poverty.

One thought on “Series: A Primer on African Agriculture Policy III

  1. A recent article by Agnes Kalibata, the former Rwandan Minister for Ag states “The issues start in the field. African farmers use a smaller fraction of fertilizers, high quality seeds and basic farm machinery like tractors than their peers in other developing regions. Only 6% of cultivated land in Africa is irrigated. And when production challenges are addressed and yields increase, farmers often struggle to capitalize on their surplus.”

    http://bit.ly/1NkI8Hf

    I’m not so sure I would agree to this statement. Yes, more irrigation would be great to alleviate the risk of relying solely on rain-fed farming, no question there. But that is about it.

    Linking farmers directly with market is a tough way to do business – anywhere. The technology, education, resource, and time required – all on top of actual farming – would be a heavy task for even Superman or any other hero figure, let alone a peasant farmer or small scale (<100 acres) farmer. I think this is where we could better understand what really happens in the supply and value chains and the people along the way that add-value to product so consumers can enjoy what they purchase.

    The first part of the comment is where I have my biggest qualms. Usage of fertilizer and farm machinery are only measured as purchases from other companies who would sell those products. That means a fairly large company processing and packaging fertilizers which are (highly) likely not the best for the environment nor the health of our bodies. But this also means that all the ‘good’ fertilizers which our soil, crops, trees, etc. require are NEVER included in the yield (productivity) calculation. They are what we refer to as ‘inside inputs’. Things such as composted manure that the farmer made, a natural tea concoction for application of pest control, varying forms of cover cropping, zero or low tillage, etc.

    This even extends to farm machinery. The only items calculated in the yield formula are ‘outside inputs’ or those made and then purchased. So any animal powered plows – such as oxen or mules – are never included in this calculation, preventing the true cost of ever emerging and also the true yield.

    I feel that if we continue to stick to our outdated methods of measuring – which are not based on reality on the ground for small holder farmers and which do not from their foundation consider the culture of small holder farmers – then we will continue to have this conversation for many years to come since if we measure the way we do, we will end up with agriculture like that in the West/North which is very large, very unequal, very unhealthy, and very unjust.

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