10. Investment in agriculture:
evolution and prospects

Technical background document
Executive summary
FAO, 1996

3. Present and future levels and sources of agricultural investment

3.1 This chapter attempts to quantify agricultural investment made in the past and to forecast future requirements. Methodological problems, such as price distortions and the difficulty of attributing certain types of investment clearly to the sector under discussion, e.g. infrastructure, as well as the distinction between investment and recurrent costs, and data scarcity, make some of the estimates highly tentative.

Present levels

Aggregate investment

3.2 World GDP in 1992 was about US$23 trillion (current prices), of which less than one-fifth was generated in developing countries. Investment in the developing world as a whole was a little over US$1 trillion. Agricultural GDP at farm level in all the developing countries was about 16 percent of GDP, or approximately US$625 billion, produced by a human-made capital stock of US$1.7 trillion. Agricultural GDP in developing countries as a whole grew by about 3 to 3.5 percent, or on average US$20 billion annually during the decade 1980 to 1990.⁽¹³⁾

3.3 As can be inferred from FAO statistics on the growth of agricultural output and physical factors of production over the last ten to 15 years, output growth was achieved by investing in the order of US$77 billion annually at the farm level, of which some US$26 billion (net investment) have been used to expand production capacity, with the remainder (US$51 billion) for the maintenance of existing capacity (depreciation). About US$15 billion net (US$34 billion gross), excluding working capital, has been invested annually in post-harvest activities, and US$29 billion gross in public services benefiting agriculture (rural infrastructure, research and extension). The depletion of natural capital through the deterioration of the natural resource base which accompanied this process cannot be inferred at present on a worldwide scale, although progress is being made in including such costs within national accounting systems, and a few quantified estimates are available (see Box 4).

3.4 The above orders of magnitude⁽¹⁴⁾ illustrate that investment in primary agriculture, post-harvest and public support systems is a modest share of all investment taking place in developing countries. Relatively minor shifts of resources from other sectors into agriculture, for instance by redressing the anti-rural bias, could have a significant growth impact.

3.5 By definition, investment financing sources are either domestic savings or capital imports. Both types of resources vary considerably among countries, with the result that countries with similar per caput incomes can have very different investment and growth rates. Although some of these differences are the result of exogenous factors,15 much of the anti-investment bias, where it exists, is home-made, can be traced back to inappropriate policies, and is therefore remediable.

3.6 Most, but not all, countries rely overwhelmingly on local savings, both public and private. Table 2 shows investment and savings rates in selected developing countries. Variations in savings and investment among countries and regions are substantial. Much of sub-Saharan Africa, for instance, had savings rates that were negative or below 10 percent of GDP in the early 1990s. While it is natural for countries at early development stages to depend on capital imports, these can only be complementary, and prospects for sustained growth will remain limited if their savings capacity does not also improve. In contrast, countries in Southeast Asia that experience high growth rates often have domestic savings rates of over 30 percent in addition to attracting foreign capital. OECD countries, by comparison, saved on average 22 percent and invested 21 percent of their GDP in 1992 (IMF, 1994; United Nations, 1994; IFC, 1994).

Table 2: SAVINGS AND INVESTMENT AS PERCENTAGE OF GDP IN SELECTED DEVELOPING COUNTRIES (average, 1989-1992)

Private investment in agriculture

Private farm households

3.7 Over one-half of all investment in agriculture and related activities in the developing world takes place at the farm level. Most is in the form of household labour for land clearing, levelling and terracing, irrigation and drainage, tree planting, home construction and through building up livestock herds. In many rural areas household labour is primarily concerned with carrying out day-to-day chores for survival. Farm household labour is scarce where farms are at a low level of agricultural development due to low labour productivity in providing the minimum for survival. As a consequence, additional labour as an investment often needs to be withdrawn from household chores, cultural activities or from off-farm income earning; and labour opportunity costs are often underestimated by development workers.

3.8 Based on FAO databases, orders of investment at farm level and for post-harvest activities in recent years can be estimated (Table 3). At farm level the main investment is in land development for arable cropping, planting tree crops, irrigation, building up and housing the livestock herd, and mechanization and farm implements. These investments are likely to have been US$26 billion net (US$77 billion gross) annually on average over the period 1988 to 1992. Of the net investments, more than one-half was for mechanization and livestock, and around one-sixth for irrigation.

Post-production systems

3.9 In the post-harvest sector, essentially private marketing and processing, the investment estimate is based on a typical unit cost for investment in marketing and processing capacity, and assumptions on the proportion of agricultural output entering commercial channels (Table 4). The estimate of US$⁽¹⁵⁾ billion net investment (US$34 billion gross) excludes working capital.

Private foreign investment

3.10 International net private capital flows into developing countries have been rising from US$9 billion in 1986 to $167 billion in 1995. Official development finance, in comparison, transferred about US$64 billion net to developing countries in 1995.

3.11 Much of the private foreign capital was attracted by interest rate differentials and driven by recession in developed countries during this period. This resource flow has often been volatile, as experienced during the Mexican peso crisis in late 1994. However, in contrast to the petrodollar loans of the late 1970s, in 1995 about US$90 billion were foreign direct investment (FDI) and one-quarter was portfolio investment, of which some US$22 billion were for equity. Such capital transfers indicate a desire for longer-term engagement of investors, and is favoured by improved country performance and prospects, economic growth, large markets, political stability and a well-advanced structural adjustment process.

Table 3: INVESTMENT IN PRIMARY AGRICULTURE IN DEVELOPING COUNTRIES, 1988-2013 (annual average during period)

3.12 Most international private investment benefited about ten countries. In 1994 China absorbed the largest share, US$38 billion, with the remainder going to India, Malaysia, Mexico, Chile, Argentina and Turkey. Africa did not participate much in this development. Foreign private investment amounted to US$3 billion to $3.5 billion annually between 1992 and 1994, nearly all in the form of FDI, portfolio investment being negligible in Africa. North Africa received most FDI. Main beneficiaries were seven of the nine oil-exporting countries (Algeria, Angola, Egypt, Gabon, Libyan Arab Jamahiriya, Nigeria and Tunisia). Morocco and Seychelles attracted substantial investment in the tourism sector. The least-developed African countries, mostly in sub-Saharan Africa, received together only US$300 million to $400 million annually over the same period, although Equatorial Guinea and Namibia stood out in terms of FDI received as a share of GDP and on a per caput basis. The United Nations Conference on Trade and Development (UNCTAD) lists various reasons for the relatively poor performance of sub-Saharan Africa in attracting FDI. They include political unrest and civil strife, small markets, sluggish or negative growth, poor infrastructure, high indebtedness and low labour skills.

3.13 Available data do not allow for the separation of foreign private investment by category. It is unlikely, though, that much international private investment went into primary agricultural production. Where agriculture-related sectors are targeted at all, international investors are more likely to get involved in input supply, agroprocessing and exploitation of forestry and fisheries. In some Latin American countries, however (Argentina, Chile and Mexico), external private investment also concerned high-value export crops, although investment volumes are unknown.

Table 4:INVESTMENT IN PRIMARY AGRICULTURE IN DEVELOPING COUNTRIES, 1988-2013 (annual average during period)

Public investment in agriculture

3.14 A combination of political process and anticipated social returns usually determines public-sector investment in agriculture. In the poorest countries most public investments in agriculture are externally financed. Statistics do not always distinguish public expenditure by origin, domestic or foreign, so that double counting may occur. Furthermore, much investment which aids the agricultural sector passes through ministries other than those of agriculture, e.g. health, education and public works. Rural roads in Ghana, for instance, absorb three times more public investment than does agriculture directly.

3.15 Available data show that public expenditure on agriculture is typically only a modest percentage of total public expenditure and that, although the distinction is blurred, public investment is a small share of public expenditure on agriculture.

3.16 Public expenditure on agriculture as a share of agricultural GDP and of total public expenditures has been analysed for a sample of developing and developed countries based on data for the 1970s and 1980s (van Blarcom, Knudsen and Nash, 1993). It was found that agriculture�s share in public expenditures was 3 percent in developed countries versus 7.5 percent in developing countries, but weighted by the importance of agriculture in GDP, developed countries devoted twice as much public funding to agriculture as developing countries. The bias indicator, i.e. the share of public expenditure on agriculture as a proportion of agriculture�s share in GDP, has been estimated at 0.3 for developing countries and 0.7 for developed countries.

3.17 Such proportions can only be very approximate indicators of a possible anti-agricultural bias and cannot be used in isolation to determine a �right� proportion of public expenditure on agriculture and in other sectors. Other aspects include, for instance, the relative social cost and returns of investing public funds in rural and urban areas.⁽¹⁶⁾ Nevertheless, extremely low figures of such an indicator are a clue to likely neglect of rural areas by the public sector. While in many developed countries agricultural lobbies are strong and can shift the balance of political attention in their favour, the opposite is often true in less-developed countries.

3.18 Much public expenditure for agriculture in both developed and developing countries is made up of subsidies that are of low or negative social net benefit. Subsidies for fertilizer, credit, food price supports and contributions to cover losses of parastatals have been calculated in India as, for instance, 11.6 percent of agricultural and 3.4 percent of total GDP.⁽¹⁷⁾ In Mexico, of US$11 billion in agricultural public expenditure in 1986, two-thirds were for subsidies. By 1992, subsidies still represented 37 percent in a budget which was reduced by one-third. In Ghana, the cocoa sector absorbed until recently 80 percent of the agricultural sector budget, most of it spent on the Cocoa Board. Subsidies notwithstanding, in most developing countries direct and indirect taxation of agriculture usually causes a net transfer of resources out of the sector.

3.19 The level of public spending on agriculture has fallen in recent years mainly because of structural adjustment. This may be beneficial if it reflects a switch of expenditure from the public to the private sector, or a reduction of unproductive subsidies, or closure of loss-making parastatals. A comparison between adjusting and non-adjusting countries shows that, often because of persisting subsidies, the percentage of the total budget spent on agriculture remains higher in non-adjusting countries.

3.20 Thus it may be argued that expenditures on agriculture in many cases are not insufficient, but are poorly allocated. By reallocating ineffective subsidies and other unproductive spending, public agricultural investment could be increased and would, in many cases, provide public services equitably to rural areas.

3.21 Budget reforms to make public spending in agriculture more effective would need to focus on a number of principles:

• finance more growth-producing services, phase out subsidies that have achieved their goal (or which are inefficient) and target the rest to specific development objectives, making them at the same time transparent;
• increase the provision of public goods, and privatize the supply of private goods;
• halt the fiscal drain of State enterprises;
• allocate sufficient funding to recurrent costs;
• recover the full cost of those goods and services supplied by the State which benefit individuals (certain veterinary drugs, specialized extension advice, individually apportionable utilities);
• streamline the budget process.

3.22 Total infrastructure investment in developing countries in 1993 was estimated at US$200 billion gross (World Bank, 1994a). The main items were power, roads, telecommunications, railways, water and sanitation. In the least-developed countries, as much as one-third of this investment was spent on irrigation. In countries with higher incomes, investments in energy become typically the most important infrastructure item.

3.23 The proportion of infrastructure investment that benefits the agricultural sector cannot easily be identified, since much public infrastructure is multipurpose and only indirectly supportive of agriculture. If an anti-agricultural bias of 0.4, somewhat higher than that estimated by van Blarcom, Knudsen and Nash (Paragraph 3.16), can be applied to all recorded public infrastructure investment in developing countries,⁽¹⁸⁾  one might attribute to rural infrastructure some US$12 billion annually in developing countries, of which possibly some US$4 billion are in public irrigation works and the rest in rural roads and electrification. To this ought to be added the more readily identifiable expenditures targeting agriculture and the rural population directly, such as agricultural research and extension (US$10 billion) and health and education (possibly US$7 billion). Total broadly agriculture-related public investment may therefore be estimated at some US$29 billion.

External assistance to agriculture

3.24 Official development finance is a relatively well-documented source of financial flows into developing countries� agriculture. It is debatable which proportion of this fund flow can be considered investment in the defined sense. For many of the poorer developing countries, external assistance is almost the only source of public investment in agriculture and to a large extent also of recurrent cost. About two-thirds of such assistance is on concessional terms. Concessional loans, which may carry an implicit grant element of 70 percent or more (FAO, 1991), are mainly extended by multilateral financing institutions; full grants by bilateral sources.⁽¹⁹⁾

3.25 The share of agriculture in total development finance has been declining for some time. World Bank lending to agriculture, as a share of total lending, has fallen from 30 percent in the 1970s to 16 percent in the 1990s. This reflects the declining share of the agricultural sector of the bank�s developing member countries as their economies grew. However, there has also been a recent and disturbing absolute decline in external assistance to agriculture. After the food crisis in the early 1970s annual commitments rose to around US$12 billion. This was maintained through the first half of the 1980s and increased to US$15 billion towards the end of the decade. Thereafter commitments fell back to US$12 billion in 1992 and have continued to decline since, falling to around US$10 billion per year in 1994 (see Tables 5 to 10). The fall appears even more dramatic if adjusted for inflation, from US$19 billion to $10 billion (in constant 1990 US dollars), and when it is considered that sectoral statistics increasingly include support for environmental protection and natural resources management, which, essential as they are, have less direct and immediate impact on food production.

3.26 Reasons given for the decline in external assistance to agriculture have been the low average performance of some types of agricultural projects; the complexity and cost of lending to agriculture; the influence of farming and environmental lobbies in developed countries; crowding out by lending for structural adjustment in the 1980s; the reduction of specialized agricultural staff in external assistance agencies (von Braun et al., 1993); and until recently, falling international agricultural commodity prices. On the other hand, part of the decline reflects the phasing out of programmes that have performed poorly, such as those concerned with integrated rural development and agricultural credit. Weeding out non-performing investments slows the growth of indebtedness of countries, improves manoeuvring space for private-sector initiatives and raises the overall efficiency of the loan portfolio. The reduction in external assistance which has had probably the most harmful effect on agricultural output has been in funding for irrigation.

Figure 1: External assistance to agriculture, 1990

Table 5: External assistance to agriculture, 1980-1994: Total concessional and non-concessional, at current prices

Table 6: external assistance to agriculture, 1980-1994: total concessional and non-concessional, at 1990 constant prices

Table 7: External assistance to agriculture, 1980-1994: Total concessional and non-concessional, by region, at current prices

Table 8: external assistance to agriculture, 1980-1994: total concessional and non-concessional, by region, at 1990 constant prices

Table 9: External assistance to agriculture, 1980-1994: total commitments, by purpose, at current prices

Table 10: external assistance to agriculture, 1980-1994:total commitments, by purpose, At 1990 constant prices

3.27 The proportion of external assistance for direct support of food production could fall further as donors continue to focus on social and environmental issues. In the longer term, these extra concerns ought, however, to reflect positively on agricultural output.

Quantity of investment

3.29 Based on assumptions on the future production structure in different countries, regions and agro-ecological zones (AEZ), the WAT2010 study projected physical factor requirements for the majority of developing countries. Applying standard unit costs⁽²⁰⁾ to these physical projections, and to estimates of existing human-made capital invested in agriculture, average gross fixed investment requirements in primary agricultural production at farm level can be inferred. They amount to US$86 billion annually in constant 1993 US dollars through the period to 2010 (Table 11). The total includes replacements of existing capital stock in the order of US$61 billion and net investment of US$25 billion. This compares with the US$77 billion total, US$51 billion replacement and US$26 billion net in the period 1988 to 1992 (see Paragraph 3.8). The approximate regional allocation of this investment is shown in Table 3. The three main categories of investment in primary agriculture are breeding livestock, mechanization (including animal traction) and irrigation. These items absorb the great majority of all investment in primary-production factors worldwide in developing countries.

Table 11: Gross fixed investment in agriculture in developing

3.30 Physical needs for post-production facilities have been derived from projected output increases assumed in the WAT2010 study, assuming typical market shares of different commodities as well as unit costs of processing and distribution facilities. Necessary post-production investments would thus be a minimum of US$43 billion gross and US$17 billion net (Table 4).⁽²¹⁾ Extra working capital has not been included in the estimate.

3.31 It is important to note that, on a global scale, net investments in primary production in the developing world as a whole do not need to increase over past levels; and that gross investments, however, must increase as capital stock, and with it replacement needs, grow. The relatively modest increase projected for gross investment in primary and post-production sectors takes account of all relevant factors and their different effects on the level of investment, e.g. real price changes for capital items, technological progress and disinvestment in the past. It can be assumed that the resulting incremental investment needs estimated for primary production, post-production and public support services and infrastructure of US$31 billion annually represent a conservative estimate of the amount needed to achieve the output growth reflected in the WAT2010 study. The overall stability of net investment requirements, comprising increases in sub-Saharan Africa and Latin America and compensated by estimated declines in North Africa and Asia, is consistent with a general reduction in the overall rate of growth of effective demand for agricultural products in many developing countries, and follows from the WAT2010 model which is based on slowing population increase and decreasing income elasticities of food demand as disposable consumer incomes rise.

Figure 2: Private investment in primary production and post-production systems

3.32 To the above figures on productive investment in primary production and the post-production chain, need to be added public investments in improved rural infrastructure, public services to agriculture and social support in rural areas. It is assumed that research and extension (US$6 billion and $5 billion respectively, at present) would need to be expanded by 50 percent, or by US$5.5 billion, in order to pursue the required two-pronged approach in technology generation and transfer (systems and green revolution technology). A further shift of an additional US$6 billion per year of total annual infrastructure investments of some US$200 billion per year towards rural needs might be considered a reasonable target. It would represent only a modest reduction in urban bias, but it would add 50 percent to current investments in rural infrastructure and social services.

3.33 Finally it would be necessary to redress the serious underfunding of regional and global initiatives for monitoring resource trends, assessing threats relating to world food supplies and to generating the new intensification technology through the IARC/CGIAR system. For this an additional US$500 million per year of ODA might be assumed. Total annual public investment would thus have to rise by US$12 billion from the recent $29 billion to $41 billion towards the year 2010.

3.34 It is debatable whether the objective for agriculture to be sustainable while producing the extra food needed by a growing and, on average, wealthier world population, would also imply extra investment and recurrent costs. If so, most would be incurred at farm level in connection with modified agricultural practices and very little would be needed as formal finance (see Box 5). Partial orders of magnitude for achieving sustainability where there was none before have been estimated by the World Bank (1992) and the Asian Development Bank (AsDB) (1995). According to these estimates, environmental protection and rehabilitation of the natural resource base in AsDB�s developing member countries could cost US$13 billion (of which US$3.6 billion are agriculture related) annually under a base scenario, and US$70 billion (US$15.4 billion agriculture related) if accelerated clean-up and prevention were decided on. The World Bank has estimated the extra cost of sustainable soil management at US$10 billion to $15 billion annually worldwide, including low-cost soil stabilization works and practices of over 100 million hectares per year and watershed stabilization of over 2 to 4 million hectares per year.

3.35 Because of incomplete research in this field and methodological difficulties of translating into cost elements what are essentially attitudinal changes by millions of small farmers, no attempt has been made here to quantify any additional private on-farm expenditures for rendering farming sustainable. The public cost of technology generation and transfer includes the costs of devising, testing and extending the necessary new, more sustainable technology and farming systems. Additional public expenditure may be needed to assist farmers to adopt these systems where new machines or other relatively costly innovations are involved. Further, the public sector has to subsidize when a high proportion of the benefits of improved sustainability accrue to society at large rather than to the private individual.

Quality of investment

3.36 Evidence of quality can be deduced from evaluations of returns on past public investments. They show above-average returns on agricultural research, which would suggest underinvestment. According to the World Bank�s Operations Evaluation Department (Evenson, 1944; Umali, 1992), investment in extension also appears generally profitable. Irrigation and specific rural infrastructure projects usually show acceptable rates of return, while livestock, agricultural credit and integrated rural development often fare poorly. The conclusion is not necessarily that there is a lack of investment potential in a given subsector or activity. Poor quality of project design often contributed to low performance. For instance, the modest results obtained by integrated rural development projects in the 1970s and 1980s are now explained by the operational complexity and the top-down approach in planning in such projects which prevailed at the time. With decentralized financing and greater stakeholder participation in planning and implementation, results are expected to improve in the future.

3.37 A further important consideration, if quality is equated with high economic return, is the benefit conferred by earlier investments (sunk costs). To rehabilitate an existing irrigation system, for instance, will usually generate higher returns on the marginal money invested than would be the case if that money were used to build new irrigation systems. Such rehabilitation investments should be sought out and favoured.

3.38 Increasingly, it is being realized that conventionally calculated rates of return can ignore important impacts, negative or positive, which must also be considered as contributing to investment quality. Both natural resource and social accounting are advancing methodologically, and need to be applied to the extent which will give a broader assessment of the quality of investments. Doing this it is also possible to highlight perverse effects of government sectoral policy on the quality of private investment; where, for instance, subsidized credit or fiscal incentives encourage land clearing for types of farming which are technically unsustainable or inimical to traditional users, or where the losers from irrigation development outnumber the beneficiaries.

3.39 Understanding has also grown in recent years that the key to investment quality is participation and project ownership by beneficiaries. Any investment undertaken on the behalf of rural communities and individual farmers which does not closely match the subjective aspirations of the people with their objective management capabilities and the resource potential, and is therefore not accepted and owned by the beneficiaries, is a waste of effort and resources. Despite general acceptance of this notion by development workers and governments, it is rarely followed systematically in practice. The transfer of funds and decision-making power from the central level to the stakeholder at grassroots level, and the extra work, time and change of mental attitude needed to take into account the expressed needs of the beneficiaries, are still resisted by many State bureaucracies and donors. Although NGOs and some international financing agencies, such as the International Fund for Agricultural Development (IFAD) and United Nations agencies such as FAO, have made considerable progress in integrating participatory approaches into their routine development work, and have been at the forefront in developing methodologies, much educational and promotional effort is still needed to generalize bottom-up development concepts among those responsible for rural development, external assistance agencies and government services.

Future role of the public sector

3.40 Many of the poor results obtained from investments made in the past reflect an inappropriate balance between the commitment of private- and public-sector resources. Over the last ten years or so much attention has been given to this issue. Most governments are now committed to recognizing the primacy of private operators in agricultural investment and are unable to perpetuate types of investment which are unprofitable or crowd out the private sector. It is particularly important that these principles continue to be applied to those new public investments on which future growth in food supply depends. The aim must be to maximize the efficient commitment of private resources for each unit of public investment. The various postures that this implies for the public sector as bystander, facilitator, partner, regulator or actor of last resort depend on the topic concerned. They have been discussed in Paragraphs 2.62 and 2.63.

Matching investment cost and funding sources

3.41 Because data are limited, the estimate of investments needed to generate the increases in food production required by the developing world under the WAT2010 scenario is no more than a working hypothesis. The available evidence suggests, however, that most of the incremental gross investment of some US$9 billion to $10 billion per year each in primary production and in the post-harvest and marketing chain, as well as any additional working capital, would be funded privately if encouraged by a steadily improving economic macromanagement and public infrastructure environment. The additional public investment of US$12 billion annually would be shared, as in the past, between domestic and overseas funding sources, both multilateral financing institutions and bilateral agencies, in the approximate ratio of 60:40.

3.42 On the basis of these hypotheses, the agricultural investment balance would show incremental commitments over the 1988 to 1992 level of US$19 billion per year for private investment, US$7 billion per year of public investment from domestic sources (over one-half of it derived through redirection of infrastructure resources from other sectors) and US$5 billion of incremental ODF, much of it in the form of concessional ODA. Incremental ODF in total would add 50 percent to the present reduced levels of support for agriculture, and would take it back to the level of the late 1980s.

4. Towards an international investment strategy

Priorities for action

4.1 If global food supply is to advance in step with the world's growing population and its demands, it is essential that agricultural investment keep pace. As agricultural investments concern biological systems and changes in futures should therefore recognize two basic facts. First, it is necessary to invest what is required sufficiently ahead of time. Second, investment alone is too slow-moving and instrument to supply immediately the needs of those who are undernourished.

4.2 In future most of the required investment must come from domestic sources. Those parts of sub-Saharan Africa where the savings potential is extremely low should make extra commitments to policies that stimulate domestic investment in agriculture at the farm household level. Continued efforts are needed in all less-developed countries to identify and remove distortions that discriminate against agriculture. Eliminating the urban bias means abandoning industrial protection and overvalued exchange rates, and giving equitable treatment to urban and rural areas in respect of infrastructure and services.⁽²²⁾ Generalized income transfers through subsidies and public market interventions should be replaced by targeted assistance to the poor and by growth-inducing development expenditure. To increase efficiency and a sense of ownership, local governments and rural communities should be empowered to plan and implement their own investments. Governments should continue to adapt their roles to the new post-structural adjustment mandate. Privatization of support services should be sought unless the service is a public good. This would be the case for research and extension directed at smallholder production systems, or which deals with longer-term issues of sustainability, provision of rural roads and sanitation, education and health. Rural financial markets should be strengthened to handle the financial services needed by rural communities. Public financing of services does not necessarily mean public delivery. Often contracting out to the private sector under competitive bidding will be cheaper.

Immediate improvements in household food security

4.3 In practical terms the only way of dealing with the immediate problems of those who are hungry today is to increase targeted food assistance.⁽²³⁾ The means of achieving this, whether through school feeding programmes, programmes aimed at mothers and infants or displaced persons, or food-for-work projects, are well understood. The theoretical quantity of food required for targeted programmes to meet total requirements, some 30 million tonnes per year at present, appears small relative to world supplies (close to 2 billion tonnes of cereals); but the targeting itself, the organization and the logistics to reach all the needy, is a formidable challenge. If favourable general conditions for agricultural growth can be maintained, the amount of food needed to meet acute deficits is likely to diminish rather than increase in future. What is lacking is neither food supplies nor investments, but the political commitment, nationally and internationally, to mount targeted feeding programmes on the scale required. The more prosperous developing countries can mobilize the food for such national programmes from surplus national production or from commercial imports. Low-income food-deficit countries (LIFDCs) would be the major beneficiaries of targeted food provided through international assistance in the short term.

Increasing food security in low-income food-deficit countries

4.4 The chronic food deficits of LIFDCs are a major challenge to global efforts aimed at improving food security. To minimize potentially unsustainable dependence on purchased food imports or continuing needs for targeted food aid, LIFDCs should launch priority investment programmes to bring domestic food output as close to national requirements as their resource endowments and comparative economic advantages allow. In many cases the conditions can be created which stimulate a relatively quick increase in output. Policy changes which improve farm-level profitability can have the earliest impact. With better incentives in place, farmers can be assisted to take up intensified, sustainable production technologies or novel approaches to storage, processing and marketing. This can, in cases where chronic food insecurity is essentially a rural problem, have an important impact on both national and individual food security. It needs to be complemented by other measures, not necessarily agricultural, but of a productive nature, aimed at raising the incomes of the poorer members of both the urban and rural populations, so as to improve their access to food (see Box 6).

4.5 Wherever possible, targeted emergency food assistance should be integrated with the above initiatives to reduce the chronic food deficits of LIFDCs. Food-for-work programmes can be used to build the new transport links, markets or irrigation infrastructure on which subsequent growth in output will in part depend.

4.6 The LIFDCs will mostly continue to have very low domestic savings ratios and access to international commercial credit. Thus, both private and public sectors will have difficulty, at least in the short and medium term, in raising the investment funds needed to respond to new production opportunities, even when they do have a comparative economic advantage. There will be a continuing role for external assistance on grant or concessionary lending terms. Government incentives to, or support for technological change will be particularly important, to encourage beneficiaries who are mostly vulnerable, near-subsistence farmers in resource-poor areas, to accept the perceived risks of intensifying their traditional systems. In parallel, poor living conditions in these countries demand that particular prominence be given to investments in rural health, education and social welfare services.

Increasing global food supply

4.7 After having met the urgent requirements of the undernourished poor and the chronically food-insecure countries, the next step is to raise the extra investment fundamental to bringing about food production increases and allowing the populations of developing countries to gain access to these increases. Incremental investment of some US$31 billion per year over and above current investment levels would be needed over the next 20 years, with US$19 billion of this annual total expected to be private investment. The key to mobilizing the extra private resources will be the provision of incentives and signals at the farm household level by appropriate policies which stimulate private savings and increase small farmers� confidence in the future.

4.8 The aim of public investment should be to transfer and create conditions for application of the new production technologies on which growth, both in incomes and output, will depend. Progress will depend on two avenues of advance: maintaining the gains of the green revolution and pushing them forward where resource endowments and socio-economic conditions permit; and introducing new systems for sustainable intensification at lower levels of productivity in less-endowed areas. Both the knowledge and the physical means to produce need to be assured. Common to both avenues will be the move towards greater efficiency in the use of the limiting factors of production, whether natural resources or human-made. The balance which each country strikes between new investments in high-potential versus lower-potential areas, should reflect the relative efficiencies in use of production factors which can be obtained in different contexts, together with the desired policy balance between gains in output and gains in social welfare. Much of the perceived inferiority of agriculture as a destination for investment is due to persisting policy distortions and the prevailing anti-agricultural bias. There is ample room to improve the relative attractiveness of agriculture by adopting unbiased policies and acknowledging its role as a social buffer under conditions of rapid population growth.

4.9 Private investment will remain dominant in on-farm fixed and movable assets, manufactured input supply and distribution, processing, storage and transport. It should move increasingly into other areas where benefits can be privately appropriated and from which, therefore, the public sector should continue to withdraw. Given the opportunity and facilities, the agricultural sector is also well-able to respond to new opportunities such as switching to higher-value products (fruits and vegetables, meat and dairy products), and offering processing services which are increasingly in demand in growing and urbanizing economies.

4.10 Potential private initiatives include some parts of agricultural research, extension to those who can afford to pay, a larger share of irrigation infrastructure as well as its operation and maintenance, more farm-level services, some items of economic or social infrastructure in rural areas, and rural finance. It may be groups of individuals or communities rather than individuals or commercial enterprises who take over from government institutions. NGOs can also play an important role in helping individuals and communities organize themselves to assume their new responsibilities.

4.11 The public share in investment should remain flexible and adapted to individual country situations, but be diminished where possible. Despite a reduced financial contribution, the public role is likely to increase rather than decrease in importance. If the envisaged expansion of private-sector participation in agricultural growth is to become a reality in more developing countries, there is an overwhelming need for enlightened and conducive public policy, backed by effective governance. Neither is the specific subject of this paper, but the implications have been seen at many points: adequate incentives, acceptable patterns of risks and a stable framework for commercial transactions should be in place. Beyond this, there remain many necessary investments in agricultural growth, the benefits of which can only partly be appropriated by private operators, or which cannot be privately appropriated at all. Perforce, these will remain public responsibilities which governments cannot afford to neglect. In some cases, such as the development and testing of new systems for sustainable production in resource-poor areas, the expansion of major irrigation, or the upgrading and operation of minor rural infrastructure, investments will be shared with the beneficiaries. Other investments, notably extension services to the rural poor, and the monitoring, regulation and protection of natural resources in agricultural zones, will have to be fully funded by governments. The division of public and private responsibilities discussed in Paragraphs 2.62 and 2.63 needs to govern these choices.

Renewed commitments for progress

4.12 The priorities listed above represent a continuation of trends which are already gaining momentum in many countries. At issue is not only whether an increase in ODF in the face of growing food insecurity of the least-developed countries is a realistic prospect, but whether countries have the political will to restructure their policies in favour of agriculture, and whether or not extra external assistance is forthcoming. Such resolve would lead towards greater economic maturity and independence irrespective of the mood and policies within the international donor community. Workable decisions and successful implementation of efficient investments will only be made through consensus between all stakeholders, private and public, within and outside the country. Because of the long-term nature of agricultural investment, consensus has to be durable; and commitments, once made, must be adhered to. Only then will the envisaged private investment contribution be forthcoming and the facilitating programmes of governments have their expected impacts.

4.13 Key alliances should be strengthened and new ones made.

• Public institutions need new approaches to connect them with private entities. These can range from their joint participation with farmers and farmers� groups in evolving new technologies or in designing irrigation schemes; through integration of State plans for rural roads, electrification or markets with those of local entrepreneurs; to joint ventures with multinational companies to develop and market the new inputs or inventions which are critical to the sustainable intensification of agriculture. The challenge in the case of many developing countries is enormous. It is of no less importance in most of the developed countries where huge obstacles have to be overcome, especially at the middle level of government bureaucracies, to achieve a synergy between public- and private-sector activities. There is a need not just for hardware and training, but for changes in national perceptions, institutional structures and in the status and rewards of public service.
• Donors and financing agencies need to work more closely with governments in bringing about fundamental changes in the role and attitudes of the public sector. They should help build national capacities for better interaction, for brokering consensus and for project and programme development and monitoring with a minimum dependence on expatriate assistance, thus increasing ownership by national institutions of their development programmes. Donors should concentrate scarce resources on countries and project types which are unable to attract commercial funding. They should coordinate their assistance to maximum effect and focus on national goals and aspirations. Once assured that investment plans are relevant, efficient and implementable, donors and financing agencies should respond first by renewing their financial engagements, and second by sustaining them over the long periods generally needed for change.
• Governments should strengthen their commitment to regional cooperation with their neighbours on matters of mutual interest such as agricultural trade, resource management and technology generation.
• The global community should strengthen its monitoring of potential global emergencies in the agricultural sector in order to avert or reduce the impact of such threats faced by global agriculture, such as land degradation, water scarcity, shrinking biological diversity, climate change and rapidly shifting conditions in world trade. The international community should pool its intellectual resources, through bodies such as the CGIAR, in leading the search for the new technologies vital to the sustainable intensification of agriculture.

The role of FAO

4.14 FAO will continue to assist member countries in capacity building for the creation of an enabling framework for investment generation through services such as sector work, policy analysis, commodity studies, establishment and improvement of early warning systems, crop forecasting and legal advice. All these activities are means to improve investment decisions and reduce risks in a manner to attract capital into agriculture. FAO is further directly involved in investment project preparation on behalf of its member countries, utilizing its wide range of highly trained staff. As a globally operating organization, FAO is well positioned to serve as a forum and source of expertise and assistance to the international community on transnational issues, including investment support in the fields of agriculture and the environment.

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Notes

⁽¹³⁾ Figures have been estimated using data from World Bank (1993a, 1993b, 1994a) and FAO agricultural production indices.

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⁽¹⁴⁾ Although too much should not be read into these figures, it is noteworthy that in 1993 the average capital/output ratio in agriculture of developing countries was higher (2.6 if referred to as net output) than the incremental capital/output ratio (about 1.0). This would suggest a rising productivity of agricultural capital over time, the opposite of what might be expected from the law of diminishing returns. Rising capital productivity would, however, be consistent with agriculture being largely technology driven (Paragraphs 2.37 to 2.46), technology itself being treated as an exogenous factor.

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⁽¹⁵⁾ According to a recent World Bank paper (Edwards, 1995) national savings ratios tend to rise with a population structure featuring a high share of working-age people, good economic growth, low urbanization, high development of the financial sector and political stability. Except for its relatively low urbanization, sub-Saharan Africa appears disadvantaged on all counts. The extent to which a country�s savings potential translates into productive investment in the agricultural sector depends on returns and risks relative to other sectors and on investment opportunities abroad. Limited agricultural growth prospects, high direct and indirect taxation, adverse terms of trade, and private risk aversion cause savings to move out of agriculture into other sectors. In high-income developed and many middle-developing countries this is partly compensated by transfer payments.

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⁽¹⁶⁾ There is empirical evidence that investment in rural areas may have a higher multiplier effect than investment in urban areas. In Kenya, for instance, it was found (Block and Timmer, 1994) that the agricultural growth multiplier was 1.64 versus the non-agricultural multiplier of 1.23. An explanation might be that induced demand in rural areas targets imported goods and services less than urban demand. If this were generally confirmed it would provide a strong argument for investing in rural areas despite conventionally calculated lower returns.

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⁽¹⁷⁾ India was reported to have an effective protection coefficient for agriculture of 0.87, despite enormous subsidies, versus 1.4 for industry (see van Blarcom, Knudsen and Nash, 1993).

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⁽¹⁸⁾ The bias indicator of 0.3 for public expenditure in agriculture in developing countries (Paragraph 3.16) was calculated on a larger share of developing countries� agricultural GDP in total GDP (25 percent) than applies at present (15 percent) after rapid industrial growth, especially in East and Southeast Asia. Furthermore, in the last decade or two many agricultural subsidies, included in public expenditures in the 1970s and 1980s, have been abolished. In general, the decline in agricultural public expenditures which have a high labour content has been less pronounced than overall public expenditures. The opposite is the case for infrastructure, which, being capital intensive, suffered heavier cutbacks. For instance, in a representative sample of adjusting countries, at an average fall of government spending of 10 percent, agriculture suffered 7 percent, infrastructure 18 percent and manufacturing, mining and construction 14 percent (van Blarcom, Knudsen and Nash, 1993). The declining share of agricultural GDP within GDP from 25 percent to 15 percent would tend to raise the bias indicator, but the falling share of public rural infrastructure in government spending would tend to lower it. A bias indicator of 0.4 seems plausible.

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19) Concessional transfers (grant element above 25 percent) are termed official development assistance (ODA).

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⁽²⁰⁾ The estimates are based on unchanged real unit costs and capital productivity over time and are consequently conservative. Technological progress would be expected to lead to rising capital productivity [falling increment capital output ratio (ICOR)] and less investment per unit of output would be needed than in the past. There is also evidence that real prices of some capital items (agricultural machinery, livestock) have fallen in recent decades, and there is reason to believe that this decline will continue. This strengthens the argument below (Paragraph 3.31) that radical increases in investment to cope with future demand will not be needed.

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⁽²¹⁾ No attempt has been made to estimate the likely rising share of marketed output in response to urbanization. Post-production investments are therefore a required minimum.

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⁽²²⁾ See also WFS companion paper 3Socio-political and economic environment for food security.

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⁽²³⁾ See also WFS companion paper 13Food security and food assistance.

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