Mobilizing public resources for agricultural development

3.31

Resources at the national level for agricultural development and the promotion of food security may be private or public, domestic or external. In countries with a high incidence of undernourishment, private savings are likely to be limited by low per capita incomes. For the same reason, the tax base from which governments derive revenues is likely to be small. Although some governments can raise additional domestic resources through fiscal reforms, a number of countries will still have to rely on external resources to generate funds for agricultural development. In many countries, important adjustments are being made to the form and level of public intervention in a move towards a generally shrinking resource base and new conditions of the international playing field. To be effective, however, increased resource mobilization should take place in an enabling environment characterized by macroeconomic and political stability, peace, strong legal and agrarian institutions, transparent and accessible local markets, and access to export markets. In the following sections, the role of public expenditure in the agriculture sector and the role of foreign finance for agricultural development and food security are examined.

Government expenditures on agriculture

3.32

The role of government in support of economic activities in general, and agriculture in particular, has been drastically revisited and often scaled down over a decade of structural reforms in most countries. The tendency in the new development paradigm is for governments to concentrate their resources on delivering indispensable public goods and services and providing an environment where private initiative can flourish, instead of endeavouring to replace or compete with private enterprise. Yet, government expenditure remains an indispensable condition for economic and social development. Examples of public functions that continue to be required from the public sector, often increasingly in a decentralized fashion and in partnership with the private sector and civil society, include agricultural research and extension, public infrastructure and services, safety nets against transitory shocks and programmes to facilitate adjustment of particular sectors or regions and to enable innovations that may involve risk but that ensure environmental sustainability and food security.

3.33

The forms of taxation used by governments have an impact on the level of resources available to governments, while also constituting an effective instrument for redistribution. Reforms in the tax systems should also be geared, inter alia, towards ensuring a conducive environment to both foreign and domestic private investment.

3.34

Time series data on government expenditures by sector are scarce. The only comprehensive data source documenting government expenditures on agriculture (at the central, local and state levels) is IMF.¹³ Unfortunately, only a minority of countries report useable data, often with long delays, as seen in the low and declining number of available observations in this source (see Annex Tables 3, 4 and 5). In terms of prevalence category, the paucity of observations in Category 2 (only three countries or fewer reported) prevents the use of data for this category.

3.35

The first observation is that the share of expenditures on agriculture in total government expenditures is extremely dispersed, with observations ranging from 0.015 to 23 percent, and the share being lower than 10 percent in 90 percent of cases (see Annex Table 7). These data are summarized by region and undernourishment prevalence category in Table 3.5.

TABLE 3.5 Government expenditure on agriculture as a share of total expenditure, by developing region and undernourishment prevalence category
Region	1990	1991	1992	1993	1994	1995	1996	1997	1998
	(Percentage)
Latin America and the Caribbean	2.46	2.22	3.16	3.84	2.85	2.70	2.96	3.84	2.54
Near East and North Africa	4.12	4.28	4.13	3.80	3.30	3.89	4.26	7.43	5.04
Sub-Saharan Africa	6.53	6.16	6.31	5.14	5.23	4.29	5.40	5.27	4.21
East and Southeast Asia	6.81	7.13	6.46	6.40	6.33	6.74	6.55	6.00	4.57
South Asia	7.65	7.98	7.75	7.81	8.86	8.70	7.49	6.42	4.87
Prevalence category
Category 1	5.47	5.11	4.77	4.30	4.33	5.16	4.91	4.29	n.a.
Category 2	2.46	1.96	1.90	1.91	1.97	n.a.	n.a.	n.a.	n.a.
Category 3	4.77	4.48	4.30	4.80	4.79	5.38	5.53	5.48	3.73
Category 4	6.84	7.23	7.15	6.75	6.42	6.59	6.91	8.64	6.99
Category 5	7.53	7.40	7.70	5.71	5.41	4.70	4.89	n.a.	n.a.
Source: IMF. 2000. Government Financial Statistics Yearbook 2000. Washington, DC.

TABLE 3.6 Government expenditure on agriculture as a share of agricultural GDP, by developing region and undernourishment prevalence category
Region	1990	1991	1992	1993	1994	1995	1996	1997	1998
	(Percentage)
Latin America and the Caribbean	4.70	8.16	7.61	12.70	14.64	14.03	6.14	10.01	4.45
Near East and North Africa	19.24	11.20	19.10	17.88	16.67	16.55	13.91	26.18	n.a.
Sub-Saharan Africa	14.10	15.49	16.88	13.12	14.36	16.75	20.94	24.59	23.40
East and Southeast Asia	12.49	10.24	9.88	10.08	9.49	11.16	11.40	12.59	6.71
South Asia	8.51	9.11	11.31	12.17	12.02	14.84	9.57	5.38	4.82
Prevalence category
Category 1	9.01	9.28	8.81	9.38	10.84	11.33	10.46	10.74	n.a.
Category 2	38.20	7.93	36.03	29.89	24.25	n.a.	n.a.	n.a.	n.a.
Category 3	6.32	5.69	5.92	10.50	13.27	13.73	10.51	12.67	7.62
Category 4	11.45	13.80	14.45	10.37	10.62	12.30	17.64	18.74	14.81
Category 5	4.64	3.84	4.94	7.11	4.92	5.34	4.07	n.a.	n.a.
Note: Years for which there are fewer than two observations have been omitted from the averages. For the second category, data are available for only three countries (Egypt, Kuwait and Uruguay). If Kuwait, which displays an exceptionally high value, is excluded, then the average for the group oscillates around 6.5 in the years for which information is available. Source: IMF. 2000. Government Financial Statistics Yearbook 2000. Washington, DC.

3.36

The share of expenditure on agriculture is not related in any simple way to the size of the agriculture sector, and it depends, inter alia, on the overall importance given to economic functions in government budgets. However, countries where agriculture plays a dominant role might be expected to allocate a greater share of expenditures to this sector. This is examined in relation to two principal indicators: the importance of agricultural labour in total employment, and the share of agricultural value added in total GDP.

TABLE 3.7 Government expenditures on agriculture per agricultural worker, by developing region and undernourishment prevalence category
Region	1990	1991	1992	1993	1994	1995	1996	1997	1998
	(Constant US$)
Latin America and the Caribbean	668	709	623	416	494	959	398	505	677
Near East and North Africa	1 596	544	1 044	998	1 061	1 370	1 105	851	363
Sub-Saharan Africa	104	104	61	61	68	203	244	298	n.a.
East and Southeast Asia*	244	251	260	286	414	463	481	539	n.a.
South Asia	32	58	75	97	96	151	73	29	25
Prevalence category
Category 1	417	477	508	517	658	814	873	855	n.a.
Category 2	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Category 3	187	197	200	315	355	458	396	380	n.a.
Category 4	75	76	87	92	93	107	147	114	58
Category 5	19	23	26	33	26	32	37	n.a.	n.a.
* Excluding Singapore (where expenditure per agricultural worker is in the range of US$8 000). Source: IMF. 2000. Government Financial Statistics Yearbook 2000. Washington, DC.

3.37

The data for government expenditure on agriculture in relation to agricultural GDP are presented in Table 3.6. Averages for groups of countries derived in the Table are unweighted in order to reflect a picture of government behaviour for the particular group in this respect. On a regional basis, the Near East and North Africa and sub-Saharan Africa allocate a greater share than the other regions. By prevalence of undernourishment, the category with the highest prevalence is consistently allocating the lowest share to agriculture over the period reported.

3.38

The resource constraints facing countries with high levels of undernourishment can be better illustrated by relating government expenditures to agriculture to the size of the agricultural labour force (Table 3.7). The Table shows an inverse relationship between the prevalence of undernourishment and government expenditure.¹⁴ The countries with the highest prevalence of undernourishment spend much less per agricultural worker compared with the countries with the lowest incidence. The average expenditure per agricultural worker in the highest undernourishment prevalence category is at least 30 times lower than that of the category with the lowest prevalence (in years for which data are available). For the developing regions, spending per agricultural worker is lowest in the regions with the highest incidence of undernourishment, namely South Asia and sub-Saharan Africa.

TABLE 3.8 Expenditures on agriculture as a share of total expenditure and other indicators of agriculture's importance in developing countries, by undernourishment prevalence category
	Undernourishment prevalence categories
	1		2		3		4		5
	<2.5 percent undernourished		2.5-<5 percent undernourished		5-<20 percent undernourished		20-<35 percent undernourished		35 percent undernourished
	1990-93	1996-99	1990-93	1996-99	1990-93	1996-99	1990-93	1996-99	1990-93	1996-99
	(Percentage)
Share of agriculture in total government expenditure	4.9	4.7	2.1	n.a.	6.0	5.5	7.0	7.8	7.0	4.9
Share of agriculture in GDP	9.1	7.7	10.4	9.9	14.4	15.1	22.3	20.5	32.4	31.1
Share of agricultural exports in total exports	8.2	7	12.6	12.6	15.1	12.9	16.7	13.7	25.9	30.6
Share of rural population in total population	29.8	24.8	45.7	45.4	63.1	59.7	72.6	70.3	76.5	71.7
Note: As data for 1999 are not available for several countries, in these cases averages for 1995-98 were used in calculations. Source: FAO.

3.39

To what extent do the changes (over time and by country and category) in the share of government expenditure on agriculture "track" differences in agriculture's importance in the economy? The share of agriculture in total government expenditures compared with other indicators of the importance of agriculture in developing countries, grouped by prevalence of undernourishment, are given in Table 3.8. For the countries and years covered by the data on expenditures, the share of agriculture in GDP and in total exports increases with the number of the prevalence category, highlighting again that poorer countries are agriculture-based. The available data do not provide strong evidence of a decline over time in the share of agriculture in total GDP, possibly because of the short time period.

3.40

The share of agriculture in expenditures is slightly higher in countries where undernourishment is high and where agriculture plays an important role. However, the expenditure shares for groups of countries reporting in each category are low compared with the shares of agriculture in economic and demographic indicators for those countries (see Table 3.8). By bringing together the data on agriculture's share in GDP and total expenditure, it is possible to construct an Agricultural Orientation Index, which reflects the extent to which government expenditures on agriculture are commensurate with the importance of agriculture in the overall economy. To construct the index, the share of agricultural expenditure in total government expenditure is divided by the share of agriculture in GDP. The higher the index the closer the share of agricultural expenditure is to the share of agriculture in GDP.¹⁵ The index is shown in Figure 3.5.

FIGURE 3.5 Agricultural Orientation Index by undernourishment prevalence category

3.41

Figure 3.5 illustrates that the countries in Category 1 (with a very low prevalence of undernourishment) exhibit the strongest agricultural orientation relative to the other categories, with a distinct upturn in 1993. On the other hand, for countries in Category 5, the share of government spending devoted to agriculture is substantially lower than agriculture's importance in the economy and, in the period covered, showed no signs of improvement. This constitutes a worrisome trend, given the dependency of Category 5 countries on agriculture for overall income and nutrition.

3.42

Although data are limited, the above analysis shows that, in countries with a very high incidence of undernourishment, public expenditure on agriculture does not reflect the importance of the sector in overall income or its potential contribution to the alleviation of undernourishment. Given the scarcity of data, this chapter can only address the amount of government expenditure, and not the quality or effectiveness of these expenditures. Fan, Hazell and Throat,¹⁶ in a study on government spending in rural India, quantify the effectiveness of different types of government expenditures and conclude that government spending on productivity-enhancing investments, such as agricultural research and development, irrigation and rural infrastructure (including roads and electricity), has a significant impact on growth in agricultural productivity while also contributing to poverty reduction. These results imply that, if effectively directed to the right channels, government expenditures can at once reduce poverty and enhance growth.

External financial resources

3.43

External financial resources provide an important part of the overall resources available for promoting economic and social development and food security, especially in LIFDCs. Resources flows can be from either official or private sources. Table 3.9 provides a comprehensive picture of external resource flows and their composition during the 1990s.

TABLE 3.9 Total net resource flows from DAC member countries1 and multilateral agencies to developing and transition countries
	1990-92	1993	1994	1995	1996	1997	1998	19992
	(Current US$ billions)
Total net resource flows	141.7	165.7	225.5	265.1	353.7	321.4	230.8	248.0
Official development finance of which:	79.9	82.4	84.5	87.6	73.5	75.3	88.4	84.9
- ODA3 of which:	55.4	55.5	59.6	59.1	55.8	47.7	49.7	51.3
- Bilateral	40.0	39.4	41.3	40.6	39.1	32.4	35.2	37.9
- Multilateral	15.5	16.1	18.3	18.4	16.7	15.3	14.5	13.4
Total export credits	3.7	-3.0	6.3	5.6	4.0	4.8	8.3	4.0
Private flows	58.2	86.3	134.7	172.0	276.2	241.3	134.0	159.2
- Direct investment (DAC)	26.8	41.6	52.1	59.6	68.9	102.3	119.8	131.8
Ref. item: Total net ODA4 from DAC	56.8	56.5	59.2	58.9	55.6	48.5	52.1	56.4
1 Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, the United Kingdom and the United States. 2 Provisional data. 3 Excluding forgiveness of non-ODA debt for 1990-1992. 4 Includes bilateral ODA as well as contributions to multilateral organizations in place of ODA disbursements from the multilateral organizations shown above. Source: OECD. 2000. Development Cooperation Report 2000. Paris.

3.44

The net flow of external financial resources to developing countries increased from nearly US$142 billion to US$248 billion between 1990-92 and 1999. At the same time, there has been a dramatic change in the composition of these resources in terms of their source. By the end of the period, ODA (the overall net flow from official sources) stagnated at about US$85 billion (in current prices), while private flows increased almost threefold from US$58 billion to US$160 billion during the same period. A small residual component is made up of export credits. As a result of the shift in the composition of external flows, ODA declined from 39 percent of net total external flows in 1990-92 to 20 percent in 1999.

BOX 3.2 Private foreign direct investment

Worldwide FDI inflows reached US$1.3 trillion in 2000, an increase of 18 percent from 1999. Developing countries accounted for 19 percent of FDI flows, with a total of US$240 billion, an increase of 8.2 percent over 1999. Compared with the stagnation in 1998, this increase is encouraging, but it is still concentrated in a small number of countries. Most of the increase in FDI in the developing world occurred in countries of South, East and Southeast Asia, where FDI inflows rose by 42 percent to reach US$137 billion in 2000. This increase was mainly in East Asia, as FDI in the subregion of South Asia declined in 2000 by 11 percent. South, East and Southeast Asia accounted for 57 percent of all flows to developing countries and about 11 percent of total FDI. Latin America was second, with similar levels of FDI inflows. Africa received below 1 percent of total FDI and 3.4 percent of FDI flows to developing countries (see Figure). In 2000, 20 countries accounted for 98 percent of FDI inflows in developing countries. Hong Kong Special Administrative Region and the mainland of China together received 48 percent, followed by Brazil and Mexico. The poorest countries have difficulty in attracting FDI because their financial markets are underdeveloped, the information available to potential investors is imperfect, and the risks associated with longer-term investments are high. FDI inflows to developing countries by region, 2000

3.45

The almost fivefold increase in FDI flows from DAC countries to developing countries is an important development, but a more detailed analysis of the destination of these flows worldwide shows that the allocation of FDI is not based on need (see Box 3.2). For those countries most in need of resources for agriculture and food security, official finance, and indeed ODA, will continue to be the major source of external flows for the development of their agriculture sectors. On the other hand, emergency and distress relief from DAC countries has increased more than sixfold since 1989, reaching US$4.4 billion in 1999. The combination of the stagnation or decline in long-term development assistance and the sharp increase in emergency relief shows how perceptions of hunger and food security in donor countries are increasingly associated with disasters and emergencies rather than with chronic food insecurity.

TABLE 3.10 External aid as a share of GDP, government expenditures and domestic investment, by undernourishment prevalence category
	Prevalence category
	1	2	3	4	5
Share of aid1	<2.5 percent undernourished	2.5-<5 percent undernourished	5-<20 percent undernourished	20-<35 percent undernourished	35 percent undernourished
	(Percentage)
In central government expenditure
1990-952	2.1	6.5	11.7	33.1	51.2
1995-98	0.9	2.1	5.4	19.2	50.5
In GDP
1990-95	1.0	1.8	6.9	10.8	19.4
1995-98	0.4	0.6	4.3	9.0	12.9
In gross domestic investment
1990-95	5.0	9.1	31.3	51.2	151.8
1995-98	1.6	3.4	18.6	38.5	86.9
1 Net ODA and net official aid (the actual international transfer by the donor of financial resources or of goods or services valued at the cost to the donor, minus any repayments of loan principal during the same period). 2 Averages refer to simple group and period means. Source: FAO calculations based on World Bank data (World Development Indicators, 2000).

TABLE 3.11 Total ODA and ODA commitments to agriculture and rural development1
Year	1990	1991	1992	1993	1994	1995	1996	1997	1998	1999
	(1995 US$ billions)
Total ODA commitments	102.689	94.487	81.643	84.737	84.575	79.326	79.552	75.519	82.636	83.898
Commitments to agriculture
(narrow definition2)	8.655	6.102	6.947	5.068	6.394	5.819	6.010	6.689	4.579	4.487
Commitments to agriculture
(other components)	4.438	3.517	3.640	2.895	2.723	2.806	2.846	3.948	5.016	4.591
Total commitments to
agriculture (broad definition3)	13.093	9.673	10.587	7.963	9.117	8.625	8.856	10.637	9.640	9.078
	(Percentage)
Share of agriculture
(broad definition) in total ODA	13	10	13	9	11	11	11	20	12	11
1 FAO calculations from OECD/DAC data. 2 The narrow definition of agriculture includes the following sectors: land and water; research; training and extension; supply of production inputs; agricultural services; crop production; livestock development; fisheries; and forestry; others. 3 The broad definition of agriculture includes the sectors in the narrow definition as well as manufacturing of inputs; environment protection; agro-industries; rural development and infrastructure; and regional and river development.

3.46

Table 3.10 shows that, in countries where food insecurity is prevalent, so is the importance of external assistance to overall resource mobilization and economic activity. For the countries with the highest prevalence of undernourishment, ratios of external resources to various measures of resource mobilization and to GDP fell in the second half of the 1990s. However, external aid still constitutes more than 86 percent of gross domestic investment and about 51 percent of government expenditures. For the group of countries in this category, external aid is an indispensable source of funding for development.

3.47

Table 3.11 shows that total ODA commitments from the major bilateral and multilateral donors to developing countries for agricultural development amounted to US$9.08 billion in 1999 (see last column in Table 3.11). This is almost the same as was recorded in 1994 but still lower than the 1990 level. Moreover, the share of agricultural and rural development (using both the broad and narrow definitions) in total ODA was lower in the mid-1990s than at the beginning of the decade, and while a recovery was recorded in 1997-98, 1999 levels show a decline.

3.48

When measured in constant 1995 prices, total commitments for agriculture have increased since 1995 but still remain about 30 percent below the level that opened the decade in 1990. The contributions made by bilateral donors, mainly DAC countries, remained at about US$4.3 billion in both 1997 and 1998. The increase in levels of assistance in 1997 and 1998 compared with 1996 was accounted for entirely by increased multilateral assistance, particularly from the International Development Association (IDA), while bilateral assistance was actually lower than in 1996 (see Figure 3.6 and Annex Table 8).

FIGURE 3.6 Total commitments to agriculture, by main bilateral and multilateral donors

3.49

The share of concessional assistance in total commitments to agriculture is estimated to have been 65 percent in 1998, well below the shares of 1988 (77 percent) and 1996 (74 percent). The share of grants in total commitments has remained relatively stable throughout the 1990s and represented 28 percent in 1998.

3.50

From 1990 to 1999, there was a decline in the share of funds allocated to primary agriculture out of total ODA commitments to agriculture (broadly defined) while the share allocated to fisheries and forestry remained stable. There has been increasing attention to other areas, in particular environmental protection (which rose from 5 percent in 1990 to 10 percent of the total in 1998), rural development and infrastructure (from 14 to 25 percent of the total) and research, extension and training (from 6 to 14 percent of the total).

3.51

As for the geographic distribution of flows of external assistance to agriculture, throughout the 1990s there has been a declining trend in the share directed to Africa and an increase in the share directed to Latin America and the Caribbean. In 1998, the largest share of commitments went to Asia (46 percent), with Latin America and the Caribbean in second place (23 percent) and Africa third (21 percent). A smaller share went to Europe (3 percent) (see Figure 3.7).

FIGURE 3.7 Total ODA to agriculture by main recipient groups, 1990 and 1998

3.52

Table 3.12 presents data on external resource flows to agriculture in the form of loans by the principal international and regional financing institutions. Total lending to agriculture in both absolute terms and as a share of total loans declined substantially between 1990 and 1997.¹⁷ World Bank lending for agriculture declined from US$3.656 billion in 1990 to US$1.337 billion in 2000. While lending to agriculture represented 18 percent of total lending by the World Bank in 1990, by 2000 this figure had been reduced to 9 percent. Except for the International Fund for Agricultural Development (IFAD), where all lending is to agriculture, and the European Bank for Reconstruction and Development (EBRD), where the shares of lending to agriculture vary substantially by year, all financing institutions have reduced lending to agriculture (Table 3.12).

TABLE 3.12 Lending for agriculture, by principal financing institutions
Year	1990	1991	1992	1993	1994	1995	1996	1997	1998	1999	2000
	(Current US$ millions)
Total loan approvals for agriculture
World Bank/IDA1 (Fiscal years)	3 656	3 707	3 894	3 267	3 868	2 752	2 063	3 541	2 637	2 763	1 337
AfDB	683	854	502	592	106	14	105	228	238	458	228
AsDB	1 242	1 035	753	361	486	897	802	1 004	421	430	1 051
IDB	319	570	735	77	210	552	580	156	122	100	310
IFAD	308	276	324	336	349	392	408	398	413	433	409
EBRD						256	268	398	204	222	327
GRAND TOTAL 2	6 208	6 442	6 208	4 633	5 019	4 607	4 226	5 726	3 035	4 406	3 663
Agriculture as percentage of total lending
World Bank/IDA	18	16	18	14	19	12	10	19	10	10	9
AfDB	21	25	17	24	7	2	13	13	14	27	27
AsDB	31	21	15	7	13	16	14	11	7	9	9
IDB	8	11	12	1	4	7	8	3	1	1	1
IFAD	100	100	100	100	100	100	100	100	100	100	100
EBRD						7	8	16	7	10	13
1 World Bank and IDA figures are for fiscal years; figures for all other banks are for calendar years. As of fiscal year 1998, the World Bank reclassified the figures used. 2 Excluding EBRD. Note: Figures in bold indicate peak lending years. Source: Annual reports; for 1998 figures (other than World Bank) are based on personal communication from the financing institutions.

3.53

Given that domestic resources are scarce and required levels of domestic investment exceed the amount that most countries can finance out of their own savings, most depend heavily on external assistance - a dependency augmented by heavy debt burdens. Until countries with a high incidence of undernourishment are able to increase their incomes to the level where they can generate sufficient savings to meet their own needs, external transfers will continue to play an important role in the struggle to eliminate food insecurity. Most LIFDCs will need to draw on some measure of official finance for many years to come.

3.54

A major question arising from the above discussion concerns the reasons for the decline in external resource flows to the agriculture sector despite its critical importance for growth and food security in developing countries. Following are some possible reasons that may hold to different degrees, depending on the country or region and source of aid or lending:

a) The current abundance in world food availability (reflected in low agricultural commodity prices) masks the plight of those who cannot satisfy their daily food needs even with the prevailing low prices.

b) Donors and financing institutions are giving increased attention to health, environmental, education and social issues without adequate additional funding to reflect the new emphasis. Primary agriculture must compete for resources with these other sectors and activities. This refocusing of attention has been brought about by shifts in the predominant development paradigm towards the various manifestations of poverty; the move has been reiterated by resolutions of summits and as an outcome of high-level meetings, conferences and reports.

c) Those concerned with agricultural and rural development lack sufficient political power to pressure national governments to direct resources, including aid and/or lending requests, towards agriculture and the rural sector. In particular, increasing urbanization may have further strengthened the political voice of urban populations and their claim on both domestic and external resources.

d) The "mechanics" of aid and lending favour sectors and activities with short turnaround times. They have therefore discouraged programme and project managers from undertaking agricultural and rural projects, which tend to have long gestation periods.

e) Negative experiences with the performance (rate of return) of the agricultural and rural loan portfolios of some lending agencies have further discouraged lending. Agricultural and rural development loans are inherently complex and risky, and they imply high transaction costs. Furthermore, the growing number and rigour of safeguards prescribed to avoid or minimize environmentally and socially harmful side-effects of investments have created disincentives and risk aversion among lending agency staff and clients.

f) The actual and impending loss of professional capacity of a number of institutions to formulate, analyse and evaluate agricultural and rural development projects and programmes. Owing to budget constraints, specialists leaving institutions are not being replaced adequately. The decline of rural programmes has also reduced the availability of trained and experienced professionals in this field.

3.55

It is important that the reasons behind the reduced resource flows to the agriculture and rural sectors be analysed and a concerted effort made to reverse the decline on the part of stakeholders, their allies at the national level and international bodies concerned with agricultural growth and the food security of those who derive livelihoods from them.

Resource needs to meet the World Food Summit goal

Investments for agricultural and rural development¹⁸

3.56

The World Food Summit had called for a drastic departure from the policies and inaction that had failed to dislodge the persistent high levels of undernourishment. The Rome Declaration on World Food Security is emphatic:

"We consider it intolerable that more than 800 million people throughout the world, and particularly in developing countries, do not have enough food to meet their basic nutritional needs. This situation is unacceptable.... The problems of hunger and food insecurity have global dimensions and are likely to persist, and even increase dramatically in some regions, unless urgent, determined and concerted action is taken, given the anticipated increase in the world's population and the stress on natural resources....

" We are determined to make efforts to mobilize, and optimize the allocation and utilization of, technical and financial resources from all sources, including external debt relief for developing countries, to reinforce national actions to implement sustainable food security policies."

3.57

It is enlightening to compare the observed slow growth of resources for agricultural development and food security with an estimate, uncertain as it may be, of investment levels required to reach the World Food Summit goal. This estimate, initially calculated by FAO in preparation for the Summit, was subsequently updated and provided to the Committee on World Food Security (CFS) at its 25th session in 1999. The total annual gross investment required for the agriculture sectors of the developing countries, including primary agriculture as well as storage, processing and support infrastructure, was estimated by the FAO study¹⁹ to be US$180.4 billion for the period up to 2015 (see Table 3.13).

TABLE 3.13 Level of investments in agriculture required to reach the World Food Summit goal
	Asia	Latin America and the Caribbean	Near East and North Africa	Sub-Saharan Africa	Total
	(1995 US$ billions)
Primary agriculture
Net	14.3	6.3	2.5	3.8	27.0
Gross	53.3	19.4	12.0	8.6	93.3
Storage and processing
Net	10.4	4.2	1.5	2.4	18.5
Gross	26.4	10.7	3.9	6.1	47.1
Support services and infrastructure					40.0
Total gross					180.4
Source: FAO. 1999. Committee on World Food Security (25th session). Investment in agriculture for food security: situation and resource requirements to reach the World Food Summit objectives. (CFS:99/Inf.7). Rome.

3.58

The same study, using a comparable estimate of actual investment in primary agriculture for 1986-95, showed that a continuation of these annual investment rates until 2015 would be insufficient to achieve the World Food Summit goal (see Table 3.14). The expected shortfall was 12 percent for the average of all developing regions, varying from 38 percent in sub-Saharan Africa to 0 percent in the Near East and North Africa. Comparisons for storage, processing, support and infrastructure could not be made owing to the absence of statistics on actual investment levels.

TABLE 3.14 Past investments in primary agriculture and future needs in developing countries
	Asia	Latin America and the Caribbean	Near East and North Africa	Sub-Saharan Africa	All developing regions
	(1995 US$ billions)
Annual average investment, 1986-95
Net	16.0	3.8	4.0	1.7	25.4
Gross	34.2	11.4	11.4	3.4	60.4
Past gross investment as a percentage of future requirements
Current trend	94	87	103	82	94
World Food Summit goal	88	86	101	62	88
Source: FAO. 1999. Committee on World Food Security (25th session). Investment in agriculture for food security: situation and resource requirements to reach the World Food Summit objectives. (CFS:99/Inf.7). Rome.

3.59

It is important to reiterate that the largest share of investment in primary agricultural production is undertaken at the farm level; therefore, it depends above all on a climate that is conducive to private investment, i.e. on sound policies for sustainable agricultural and rural development. On the other hand, public investment plays the main role in providing essential public goods without which private initiative cannot flourish: knowledge generation, information, education and infrastructure. For many LIFDCs, the provision of these public goods cannot be achieved in the foreseeable future without resorting to external assistance. Recipient countries and donor institutions, bilateral or multilateral, need to allocate resources as required into these areas if the objective of food security is to be achieved.

3.60

In pursuit of this objective, over five years FAO has mobilized US$230 million for the Special Programme for Food Security (SPFS), which is operational in several countries around the world. The main aim of the SPFS is to improve food security through rapid increases in productivity and food production, reducing year-to-year variability of production and improving access to food on an economically and environmentally sustainable basis. A major objective of the SPFS is the resolution of institutional and policy constraints that restrict productivity at the farm level. In order to be effective and achieve its goals in approximately 80 LIFDCs, the Programme requires annual financing of about US$1.4 billion, which is equivalent to an average of about US$17 million per country. Of the total amount, US$500 million could come from FAO's SPFS Trust Fund, US$67 million from recipient countries, US$134 million from bilateral donors and US$670 million from multilateral financing institutions.

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The widening resource deficit is greater still when one considers the additional task of attending to the transitional needs of the poor and food-insecure who are on the road to development.

Investments for transitional assistance to the food-insecure

3.62

In order to reduce poverty and food insecurity, more attention must clearly be paid to investments that can improve the capacity of people to better their living conditions on a sustainable basis. As an example, the importance of the agriculture sector and the problem of rural poverty have led many countries to pursue strategies focused on reducing chronic food insecurity by increasing the productivity of small farmers. Such strategies require the availability of financial resources and institutional capacity, access by the rural poor to productive land and affordable inputs, and the capacity of the non-farming poor to express their unsatisfied food needs in terms of effective demand. In most LIFDCs, however, the feasible scale of such a strategy is constrained by the lack of domestic and external resources as well as institutional capacity.

3.63

Since adequate nutrition, health and elementary education are prerequisites for inclusive economic growth, investments ensuring the broadest possible access to essential food needs, safe water, primary health care and primary education may well be the most effective use of scarce resources available to achieve the World Food Summit target. Therefore, direct interventions aimed at reducing current malnutrition and at creating conditions for healthy living should be accompanied by policies (including public investment priorities) aimed at overall development. Indeed, the 20/20 target (20 percent of national budgets and 20 percent of international assistance directed towards social goals), agreed at the World Summit on Social Development, is premised on these twin requirements.

3.64

This twin-track approach to addressing food insecurity (at once a humanitarian and developmental goal) has been recognized as necessary in the technical documentation prepared by FAO for the World Food Summit, as well as in the World Bank's paper, Rural development: from vision to action, IFPRI's document, 2020 vision for food, agriculture and the environment, and IFAD's Rural Poverty Report 2001. Translating this approach into reality in all the LIFDCs, however, will require the mobilization of resources as well as institutional capacities that far exceed those currently committed to addressing food insecurity.

3.65

The level of resources needed for a twin-track approach are difficult to quantify. The cost of providing the food required to feed the world's undernourished at a minimally adequate level has been estimated²⁰ to be about US$13 per person per year. For 800 million people, this means US$10.4 billion per year, but the cost would decline to US$5.2 billion if the Summit goal were to be achieved. UN agencies²¹ have calculated the cost of ensuring sound nutrition and health in developing countries to be between US$70 billion and 80 billion per year - in addition to the US$136 billion currently spent. With the constraints on the domestic public budgets of the poorest developing countries, and the need for fragile macroeconomies to be cushioned from the full cost of such an effort, the case for increased and sustained international assistance cannot be overstated. While the fruitful outcome of foreign assistance depends on its appropriate orientation and utilization by both donors and recipients, beyond a certain point no improvement can substitute for a lack of resources. Thus, new forms of resource mobilization must be explored.

3.66

The costs incurred in reducing undernourishment to achieve the Summit target will depend very much on the strategy adopted. Sustainable improvements in food security can result from, but also contribute to, broad-based economic growth. However, the magnitude of the number of undernourished - even if it were to be reduced from 800 million to some 400 hundred million in the span of 15 years - calls for direct, targeted measures aimed at reducing these people's current undernourishment, in addition to policies and programmes that will improve their well-being in the future. In considering the costs and benefits of such measures, it is essential to take into account the economic benefits resulting from their implementation as well as their humanitarian justification.

3.67

Poor health and malnutrition impair people's physical and mental capacities and, therefore, their ability to carry out productive work. This has been amply demonstrated at the individual level.²² Recent research conducted over three decades to assess the economic performance of 100 countries in relation to their food insecurity status suggests that the economic losses incurred by the national economy when a large share of its labour force is handicapped by poor nutritional status are indeed significant - reaching magnitudes in the order of one point of growth in GNP per annum. Such are the conditions prevailing in countries with 30 percent or more of their population undernourished, countries estimated by FAO to have an aggregate of 600 million inhabitants. Indeed, since the mid-1980s, the economic growth rate (measured in GDP per capita) has been negative or nil in all countries with more than 50 percent of their population undernourished, and in a majority of those with 20 to 50 percent of their population undernourished. Only in the category with less than 20 percent undernourished did a majority of developing countries experience positive growth per capita.²³ Despite the fact that the cause and effect relationships are difficult to disentangle (from growth to nutrition and from nutrition to growth), these findings nevertheless suggest that fighting hunger is a growth-promoting economic investment, not only a human rights obligation.

Conclusions

3.68

Despite the solemn commitment made at the World Food Summit, there are no signs of a significant increase in the rate of reduction of undernourishment, which remains far too slow. Unless drastic actions are taken, current projections for 2015 still set the expected number of undernourished for that date at 580 million people, with the Summit goal of a reduction to 400 million people not being achieved before 2030. Having reached this intermediate target, the ultimate aim is to eradicate hunger in all countries.

3.69

Urgent action should be taken on several fronts, but it is indispensable that increased resources be mobilized for agriculture, which is of crucial importance for the livelihoods of the hungry and food-insecure in developing countries. In this chapter, it is recognized that financial resources are only one element of the necessary actions to promote food security, and sustainable agricultural development is one of several indispensable components of a strategy to alleviate poverty and food insecurity. Yet the mobilization of resources in favour of agriculture, especially in countries where the great majority of the poor derive their livelihoods from this sector, is significant as a proxy for positive action taken in other areas of poverty allevation.

3.70

The information and analyses presented do not provide evidence that a sufficient move towards a new path has taken place. Investment in agriculture in developing countries appears to be continuing at the same pace that has resulted in the unsatisfactory progress observed since the beginning of the 1990s. This chapter has shown that low productivity of agriculture in poor countries is associated with a low level of agricultural capital stock per worker, and both of these factors are associated with a high prevalence of undernourishment.

3.71

Countries with low savings and investment capacities remain dependent on ODA as their main external financing source, but there is no evidence of a shift in ODA in response to this pressing need. Although public transfers have been steadily replaced by FDI, the direction and magnitude of the latter does not correspond to actual needs and so it is not channelled to the poorest countries that have high levels of undernourishment.

3.72

With respect to domestic public spending on the agriculture sector, the data point to the fact that governments' allocation of public resources to agriculture remains well below the share of agriculture in income and employment generation. Yet, 70 percent of the poor and food-insecure in developing countries depend on agriculture, fisheries or forestry, directly or indirectly, for improving their livelihoods.

3.73

There is now ample evidence to support the fact that not only humanitarian considerations but also economic reasoning should lead to greater efforts being made to alleviate the plight of the poor and food-insecure. Hunger greatly compromises the productivity and health of individuals as well as the growth potential of nations. Immediate food assistance to the hungry, in the case of emergencies caused by climatic conditions or conflict, brings individual and collective economic rewards, since it enables the under-nourished to enhance their contribution, in the short and long term, to economic growth and the prosperity of the nation. This chapter advocates a twin-track approach to food security, which includes the development of productive sectors and the creation of appropriate mechanisms for short-term relief.

3.74

In terms of priorities in the allocation of ODA and technical assistance, countries that fare the worst in terms of food insecurity indicators should be first on the list. Although, in terms of poverty and food insecurity, countries indicated as having the highest prevalence of undernourishment are located primarily in sub-Saharan Africa, others are to be found in Asia and Latin America and the Caribbean.

3.75

Types of intervention and the specific areas of agriculture targeted for increased resources will depend on the needs of each priority country. The identification of priority areas for resource mobilization must be based on more detailed analyses of potential and constraints - analyses that must be carried out in a participatory manner at the national, regional and local levels.

3.76

Resources can be channelled through both new and existing mechanisms, including the agricultural and rural components of the PRSPs, UNDAF and the ACC Network for Rural Development and Food Security. Important mechanisms in this respect are the recently created FAO Trust Fund for Food Security and Emergency Prevention of Transboundary Pests and Diseases of Animals and Plants, as well as the SPFS, which aim to assist LIFDCs in overcoming technical, economic, social, institutional and policy constraints that prevent farmers from meeting their basic needs and from seizing opportunities that may arise.

3.77

The support required from developed countries involves not only the transfer of financial resources but political, policy and legal reform. For instance, the effectiveness of resources directed to agricultural development in developing countries will be severely compromised if these countries do not have access to foreign markets. A reduction in trade protection in OECD countries has enormous potential for production, exports and, ultimately, poverty reduction in poor countries. Benefits from trade liberalization will be uneven unless small-scale farmers are able to take advantage of new market opportunities.

3.78

Enabling small-scale farmers to face the challenges of globalization will require special attention to rural capacity and institution building as well as efforts to improve rural infrastructure, including roads, communications, marketing, transport, storage and processing facilities. Appropriate agrarian institutions are essential, such as those that facilitate credit and technology transfer, as well as a legal framework to defend land and water claims and access rights. The key player in providing the commercial components of such infrastructure and the ensuing management of downstream activities is the private sector, itself highly responsive to an enabling macroenvironment and public investment in rural infrastructure.

3.79

The overall message should be clear: there can be no hope of meeting the Summit target if the political will to direct sufficient resources to hunger reduction is not strengthened. It is essential that resources are mobilized to food and agriculture so as to foster productivity gains and enhance employment generation and access to food, especially in the rural areas where most of the world's food-insecure people are located. Many countries are in critical need of investable resources. Supportive international assistance, starting with a lasting solution to the debt problem, would be a tangible sign that the commitments made at the Summit are being honoured. Efforts should continue at all levels to ensure that policies create appropriate incentives for investments by farmers and other private investors as well as an enabling environment comprising peace, democracy and political and social stability.

¹ The term "undernourishment" is used to refer to the status of people whose food intake does not provide enough calories to meet their basic energy requirements. The term "undernutrition" denotes the status of people whose anthropometric measurements indicate the outcome not only of inadequate food intake but also of poor health and sanitation conditions that may prevent them from deriving full nutritional benefit from the food they eat (FAO. 2000. The State of Food Insecurity in the World 2000. Rome).

² Including the economies in transition of Eastern Europe and Central Asia. Calculations are based on 1985 prices using the US dollar adjusted for purchasing power parity (PPP) for that year.

³ World Bank data.

⁴ FAO. 2001. Undernourishment and economic growth: the efficiency cost of hunger. By J.-L. Arcand. FAO Economic and Social Development Paper No. 147. Rome.

⁵ FAO. 1995. Report of the Twenty-eighth Session of the FAO Conference , 20-31 October 1995. (C95/REP). Rome.

⁶ FAO. 1996. Investment in agriculture: evolution and prospects. Document No. 10; and Assessment of feasible progress in food security, Document No. 14. In World Food Summit Technical Background Documents, Vols 2 and 3. FAO. 1999. Committee on World Food Security (25th session). Investment in agriculture for food security: situation and resource requirements to reach the World Food Summit objectives. (CFS:99/Inf.7). Rome.

⁷ The more correct term would be "national average apparent food consumption", since the data are drawn from national Food Balance Sheets rather than from consumption surveys. In this chapter, the term "per capita food consumption" is used in this sense.

⁸ Well above 5 percent per annum, according to FAO. 1996. Op. cit., footnote 6, Document No. 14.

⁹ USDA. 1999. United States Action Plan on Food Security. Solutions to hunger. Washington, DC.

¹⁰ OECD. 1996. Shaping the twenty-first century - the contribution of development cooperation. Paris.

¹¹ World Bank, World Development Report 2000, Attacking Poverty. Oxford University Press, 2000.

¹² The prospects for food and agriculture until 2010 had been presented by FAO. 1995. World agriculture: towards 2010. An FAO study. Rome, FAO and Chichester, UK, John Wiley.

¹³ Source: IMF. 2000. Government Financial Statistics Yearbook 2000. Washington, DC. Fifty-nine countries are documented as reporting in the IMF source for at least one year over the period 1990-98, and 52 countries at the most reporting in any given year, with only 20 reporting in 1998.

¹⁴ Again, Category 2 is excluded because of the prevalence of one country, Kuwait, whose data dominate the simple average.

¹⁵ It should be noted that the "support" ratio is valid for comparisons among countries or country groups and does not indicate the treatment of agriculture (in terms of government expenditures) relative to other sectors within a country. Not all budget allocations go to functional categories of activities.

¹⁶ S. Fan, P. Hazell and S. Throat. 1999. Linkages between government spending, growth and poverty in rural India. IFPRI Research Report No. 110. Washington, DC, IFPRI.

¹⁷ The reduction in total lending for "traditional" developing countries is more pronounced if lending by the World Bank and EBRD to transition countries is excluded.

¹⁸ This section is taken from FAO. 1999. Committee on World Food Security (25th session). Investment in agriculture for food security: situation and resource requirements to reach the World Food Summit objectives. (CFS:99/Inf.7). Rome.

¹⁹ Op. cit., footnote 17, p. 80

²⁰ FAO. 1996. Food security and food assistance. Document No. 13. In World Food Summit Technical Background Documents, Vol. 3. Rome. This estimate is based on the assumption, even if unrealistic, that food can be perfectly targeted.

²¹ World Bank/UNICEF/UNESCO, quoted in Ending malnutrition by 2020: an agenda for change in the millennium. Final report of the ACC/SCN Commission on the nutrition challenges of the twenty-first century.

²² See, for example, a review of available research in: J. Strauss and D. Thomas. 1998. Health, nutrition and economic development. J. Economic Literature, 36(2): 766-817.

²³ FAO. 1998. The State of Food and Agriculture 1998. Rome.