The past decade has been one of agro-pessimism. The promises that agricultural development seem to hold did not materialise. This pessimism seemed to coincide with pessimism about Sub-Saharan Africa. Especially for Sub-Saharan Africa the hope was that economic development would be brought about by agricultural development. After the success of the green revolution in Asia, the hope was that a similar agricultural miracle would transform African economies.

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But this hope never materialised, agricultural productivity did not increase much in SSA (figure 1), and worse, the negative effects of the green revolution in Asia became more apparent, such as pesticide overuse and subsequent pollution. Also in Asia the yield increases tapered off. The sceptics put forward several arguments why agriculture is no longer an engine of growth2. For instance, the liberalisation of the 1990s and greater openness to trade has lead to a reduction in the economic potential of the rural sector: cheap imported Chinese plastic buckets out compete the locally produced pottery.

On the other hand, it does mean cheaper (imported) supplies. With rapid global technical change and increasingly integrated markets, prices fall faster than yields rise. So, rural incomes fall despite increased productivity if they are net producers3. The integration of rural with urban areas means that healthy young people move out of agriculture, head to town, leaving behind the old, the sick and the dependent. It is often also the men who move to urban areas, leaving women in charge of the farm.

This has resulted in the increased sophistication of agricultural markets (and value chains) which excludes traditional smallholders, who are poorly equipped to meet the demanding product specifications and timeliness of delivery required by expanding supermarkets. The natural resource base on which agriculture depends is poor and deteriorating. Productivity growth is therefore increasingly more difficult to achieve. Finally, multiplier effects occur when a change in spending causes a disproportionate change in aggregate demand.

Thus an increase in spending produces an increase in national income and consumption greater than the initial amount spent. But as GDP rises and the share of agriculture

Page 2 Agriculture importance Essay

typically decreases, the question is how important these multiplier effects are, especially when significant levels of poverty remain in rural areas, which is the case in middleincome countries4. The disappointment with agriculture led many donor organisations to turn away from agriculture, looking instead to areas that would increase the well-being of poor people, such as health and education.

Those organisations that still focused on agriculture, such as the CGIAR, were put under pressure to focus more on reducing poverty, besides increasing agricultural productivity. However, since the beginning of the new century, there seems to be a renewed interest in agriculture. A review of major policy documents5, including the well-publicised Sachs report and the Kofi Annan report, show that agriculture is back on the agenda again. The most influential report, however, has been the World Development Report 2008 of the World Bank6.

This report argues that growth in the agricultural sector 1 contributes proportionally more to poverty reduction than growth in any other economic sector and that therefore alone, the focus should be on the agricultural sector when achieving to reach MDG 1. A reassessment of the role of agriculture in development seems to be required. This policy paper addresses several timely though complex questions: • First, how can or does agriculture contribute to economic development, and in particular how does it relate to poverty?

Second, the agricultural sector has changed considerably in the past decades: what are the main drivers of this change? • Third, what is the relationship between economic or agricultural growth and pro-poor development? • Fourth, how does agriculture relate to other sectors in the economy? • Fifth, who is included and who is excluded in agricultural development, specifically focusing on small farms? • And finally, if agricultural development is indeed important to economic development, then why, despite all the efforts and investments, has this not led to more successes?

Agriculture and economic growth This section presents a number of factual observations describing how the agricultural sector changed in terms of productivity, contribution to economic growth, and indicating the relevance of the agricultural sector for poverty alleviation in different regions. Background: some facts In the discussion of the role of agriculture in economic development, a leading question is how agriculture contributes to economic growth, and especially to pro-poor growth. There seems to be a paradox in the role of agriculture in economic development.

The share of agriculture contributing to GDP is declining over the years (see figure 1). At the same time, the productivity of for instance cereal yields has been increasing (see figure 2). It seems that as agriculture becomes more successful, its importance declines in the overall economy. Of course, other sectors in the economy can be even more successful, such as the Asian Tigers. Figure 1: Share of agriculture (value added) in GDP7 South Asia East Asia & Pacific Sub-Saharan Africa Europe & Central Asia Middle East & North Africa Latin America & Caribbean 50 45 40 35 30 25 20 15 10 5 0 1960 1965 1970 1975

Much effort has been put into trying to raise productivity in agriculture, and calls have been made for more investment in agricultural science and technology, especially for Africa15. The reasons for this seem evident when one considers the productivity growth in developing countries (see figure 4). In many regions (much) progress has been made in raising land and/or labour productivity measured in output quantity units16 (see also figure 2 for cereal productivity). When productivity is measured as value added per hectare arable land or labour, Sub-Saharan Africa has not made much progress.

East Asia and the Pacific, as well as South Asia experienced productivity growth in terms of value added per unit of land, but not much in terms of value added per unit of labour. Thus although progress has been made in some regions in raising productivity, many other regions have lagged behind. 17 Figure 4: Labour and land productivity in agriculture 1961-2003 East Asia & Pacific 3500 Labour productivity (value added per ag worker) Latin America & Caribbean South Asia 3000 Sub-Saharan Africa Middle East & North Africa 2500 2000 1500 1000 500 0 0 200 400 600 800

When a country liberalises its economy and trade policies, it can participate more easily in the international economy. Thus, globalisation and liberalisation go hand in hand, and we will discuss the implications of both. In the past, the state played an important role in shaping agricultural production and marketing in most developing countries. Governments were often heavily involved in agricultural marketing and food processing through the creation of parastatals (marketing boards, government-controlled cooperatives and parastatal processing units).

These parastatals constituted often monopolies, sole buyers of agricultural products, including basic food crops as well as important export crops (such as cotton, coffee and cocoa). Important objectives of the parastatals were to obtain tax incomes for the government and in some cases also to gain political control. In the 1980s and the 1990s most of these systems of state intervention and control came under pressure to liberalize, often under guidance of the World Bank. In many countries, the process of liberalisation and privatisation was by no means smooth.

The withdrawal of the state often led to a vacuum – the private sector that was expected to fill up that vacuum and improve service delivery (inputs, output marketing, credit, etc. ), did not arise, or only slowly. As production, processing, marketing, the provision of inputs and credit, and retailing were all directed and controlled by the government, vertical coordination (VC) in agro chains already existed in many developing countries. The dominant form of state-controlled VC was that of seasonal input and credit provisions to small farmers in return for supplies of primary produce.

Often they were the only source of input and credit provision for small-scale farmers21. The dismantling of state-controlled VCs led to the decline of input and credit supply to farms. The liberalization of the investment regimes did induce foreign investments in agribusiness, food industry, and further down the chain, with major implications for farmers22. Yet, the overall picture is quite patchy – some countries do well with FDI, others suffer from FDI (i. e. mining sector), others are not able to attract FDI at all.

A well-known example of these investments is the rapid growth of modern retail chains (supermarkets) in some developing countries and which was triggered by the reform process in former state-controlled economies23. We will discuss these implications in the paragraphs on “increased vertical coordination” below. Trade liberalisation also led to an increasing share of developing countries in world agricultural trade. In addition to an increasing volume of global agricultural trade, also the structure of this trade changed considerably during the past decades.

There has been an increase in the share of high-value products – mainly fish and fishery products, and fruits and vegetables in world agricultural trade. Especially developing countries experienced a sharp increase in such high-value exports while the importance of their traditional tropical export commodities – such as coffee, cocoa, and tea – has decreased. Analysis of agricultural trade for developing countries now needs to focus on the new commodities, such as seafood, fruits, vegetables, cut flowers and on other processed products, which together constitute almost 50 percent of the exports of developing countries24.

However, it is important to keep in mind that the traditional crops still play a role of importance for many countries. Associated with increasing international trade is the spread of (private and public) food standards. Consumers in the North are increasingly demanding specific quality attributes of processed and fresh 6 food products and are increasingly aware of food safety issues. Food-standards are increasingly stringent, especially for fresh food products such as fruits, vegetables, meat, dairy products, fish and seafood products, which are prone to food safety risks.

These food quality and safety demands are most pronounced in western markets (and increasingly in urban markets of low-income countries25) and affect traders and producers in developing countries through international trade. Vertical coordination in international value chains Recently, new forms of vertical coordination26 (VC) have emerged, through private vertical coordination systems. These are growing rapidly as a response to consumer demand for food quality and safety on the one hand and the problems that (small) farms face to supply such products reliably, consistently and timely on the other hand.

Reasons for these problems of small farmers include financial constraints, as well as difficulties in input markets. Specifically for high-standard products, farmers might lack the expertise and have no access to crucial inputs such as improved seeds (see also chapter 4). Major institutional constraints occur: the importance of VC in developing countries is further explained by the lack of efficient institutions and infrastructure to assure consistent, reliable, quality and timely supply through spot market arrangements27. VC can therefore be seen as a private institutional response to the above described market constraints.

These new forms of vertical coordination are also an effect of the globalisation and liberalisation trends. They are made possible by the liberalisation of the economy, in which governmental vertical coordination is replaced by private efforts, the integration of the economy in the global market, which enables the production of high value export crops and increased foreign investment – the private vertical coordination system is owned by international companies. Despite their increasing importance, these international value chains still cover a small share of total agricultural sectors in the world.

Urbanisation The share of population living in urban areas has been increasing steadily over the past decades (see section 2. 1). For the agricultural sector, there are various positive effects of urbanisation. Urbanisation increases the scope for economies of scale in food marketing and distribution, while reductions in transaction costs increase the size of the market for distributors and retailers. The result has been a remarkable increase in the volume of food marketing handled by supermarkets, but also substantial organisational and institutional changes throughout the food-marketing chain28.

The effects are not only in agricultural processing and marketing but in production as well. The types of crops demanded by urban population differ, increasing the market for vegetables and horticultural crops. Hazell29 underlines that “while much of the attention today is on high value market chains and the challenges of linking farmers to those chains, we should not overlook the importance of food staples markets and their own particular support needs.

Given the global glut of food staples and historically low prices, it is tempting to conclude that developing countries can neglect their food staples sector and rely more on food imports while focusing their efforts on producing higher value products. This would also be consistent with the notion that few small farmers are going to get rich growing food staples at current prices. In reality, market opportunities are more nuanced than this, and food staples (cereals, roots and tubers and traditional livestock products) actually offer more important growth opportunities for small farmers in many low-income countries.

Urbanisation means not only an increased market for agricultural (food) products, but also for labour. Off-farm labour activities have increased considerably over the past decades in all developing countries, even in remote areas. 30 Not all off-farm employment can be found in urban areas, in rural areas they also play an important role, but in urban areas the wages are often higher. In general the boundaries between rural and urban areas are disappearing in many areas, as rural and urban areas are becoming increasingly integrated, not only geographically (with urban sprawl into rural areas) but also economically.

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