Financing agriculture for inclusive development

INTRODUCTION

At the heart of the current global development policy is how to sustainably ensure that there is enough food with the necessary nutrients available, accessible, and affordable to the world's seven billion people. This agenda is emphasized in United Nations (UN) Sustainable Development Goal 2 (SDG 2), which seeks to end hunger, achieve food security and improved nutrition, and promote sustainable agriculture by 2030. However, this goal cannot be realized without sufficient funding, particularly for smallholder agriculture. The UN recognizes that this goal can be achieved by, among other things, doubling agricultural productivity and smallholder incomes, making agricultural markets functional, and scaling up investments in agriculture to improve rural infrastructure, agriculture technology, and agricultural research and extension services. Thus, agriculture financing is crucial to the attainment of sustainable development.

However, conventional funding models bewildered with credit market imperfections cannot provide the funding required to take agriculture development to the next level. Traditional bank finance is known not to reach the people who need it most (the poorest of the poor). The financial system in most developing countries remains inaccessible, inefficient, and lacking in depth. Taking sub-Saharan Africa (SSA) as an example, the average private credit provided by deposit money banks as a percentage of gross domestic product (GDP) over the period 2011-2014 was 16.3% compared to a global average of 40% over the same period. Bank accounts per a thousand people in the region was 150.3 compared to a global average of 511.7, while bank net interest margin was an average of 5.7% in the region compared to a world average of 3.7%, over the period 2011 to 2014. Thus, both the SSA averages and global averages point to the inadequacy of conventional finance for private sector development in general.

Globally, and recently, the discussion has turned towards innovative financing models. The financing gap among smallholder farmers alone is projected at USD430 billion to USD440 billion worldwide (USAID, 2016). Innovative financing models are needed to bridge this financing gap and reach the poorest segments of the population with a wide range of affordable financial services and products at improved terms and conditionalities. In line with this thinking, this chapter discusses innovative ways of financing global agriculture to enhance its ability to deliver not just growth but inclusive or pro-poor development. It is important that inclusive development be distinguished from inclusive growth. While inclusive development focuses on 'social wellbeing and protecting the ecosystem services of nature through redefining political priorities' (Pouw & Gupta, 2017, p. 1), the inclusive growth perspective is 'confined to market participation (by creating jobs for the poor) and efficiency (of economic processes, policies, institutions), and builds further upon an economic paradigm that does not assign value to social or environmental sustainability in its growth models' (Pouw & Gupta, 2017, p. 2). Thus, whereas inclusive development relates to social, economic, ecological, and political inclusiveness, inclusive growth relates mainly to social, economic, and political inclusiveness with less emphasis on ecological indicators.

The aim of this chapter is to discuss ways that agriculture can be financed to ensure inclusive development. The chapter is structured as follows. First, we discuss some stylized facts on global agriculture. Second, we overview the challenges to accessing agricultural finance and then the financing opportunities in agriculture. Next, we discuss key innovative financing models for agriculture, and roles that could be played by banks, financial institutions, development agencies, and government. The penultimate section discusses how agriculture leads to inclusive development. We end the chapter with some concluding remarks.

STYLIZED FACTS OIM AGRICULTURE DEVELOPMENT

Globally, agriculture has gone through many shifts in terms of its contribution to economic growth, employment, productivity growth, and exports. This subsection explores some stylized regularities about agriculture development across the globe. Although these stylised facts do not necessarily establish causality, they are essential in shaping a research agenda and policy discourses (Christiaensen, 2017).

Stylized fact 1

Agriculture is more important to the economies of developing and poor countries than it is to the economies of developed and wealthy nations, but generally, its contribution to the economy is declining across the globe. Even though this is a well-known fact (see Johnston & Mellor, 1961), the data behind this fact are often not presented alongside the claim. In Europe and Central Asia (ECA), agriculture plays a less prominent role in economic development, agriculture's share in GDP falling from 3.3% in 2000 to 2.4% in 2006 (Table 11.1) before stagnating at 2.2% in each year from 2012 onwards. This region is constituted by some European economic giants such as the United Kingdom, Germany, France, and Spain, whose economies are driven largely by sendees. For example, in the European Union in 2014, services constituted 73.9% of the GDP, industry 24.4%, and agriculture f.7%.1

1990

2000

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

10-year average (2006-2015)

5-year

average

(2006-2010)

5-year

average

(2011-2015)

East Asia & Pacific

13.4

70.9

60.0

50.8

50.8

50.7

50.7

50.7

50.6

50.5

50.4

50.2

50.6

50.8

50.5

Europe & Central Asia

N/A

30.3

20.4

20.3

20.2

20.1

20.2

20.3

20.2

20.2

20.2

20.2

20.2

20.3

20.2

Latin America & Caribbean

80.8

50.6

50.4

50.5

50.6

50.4

50.4

50.4

50.2

50.3

50.4

50.2

50.4

50.4

50.3

Low income

40.5

34.5

32.7

31.8

32.7

33.0

32.6

32.1

33.0

31.8

30.8

30.2

32.1

32.6

31.6

Middle East & North Africa

N/A

NA.

60.9

60.7

N/A

N/A

50.9

50.5

50.7

60.2

60.2

60.9

60.3

60.5

60.1

Middle income

20.0

12.6

10.1

90.9

90.9

90.9

90.6

90.6

90.4

90.4

90.3

90.2

90.6

90.9

90.4

High income

N/A

1.9

10.4

10.4

10.4

10.3

10.4

10.5

10.5

10.6

10.5

10.4

10.4

10.4

10.5

South Asia

29.9

24.1

19.3

19.3

18.9

18.9

19.3

19.1

18.7

18.9

18.5

18.0

18.9

19.2

18.6

Sub-Saharan Africa

23.4

19.6

19.9

19.8

20.3

21.3

17.8

17.2

18.1

17.8

17.3

17.4

18.7

19.8

17.6

World

N/A

5.2

40.1

40.0

40.0

30.9

30.9

40.0

30.9

40.0

30.9

30.8

30.9

40.0

30.9

Source: World Development Indicators (2017)

In contrast to ECA are South Asia (SA) and sub-Saharan Africa (SSA), where agriculture still plays a pivotal role in economic development. The share of agriculture in GDP fell from 29.9% to 24.1% over the decade 1990s in SA before falling to 18.0% by 2015. Similarly, in SSA the contribution of agriculture to GDP fell from 23.4% in 1990 to 19.6% in 2000 and then fell further to 17.4% by 2015. Notwithstanding the declining shares, agriculture's contribution to GDP is still significant in these two regions of the world. Interestingly, these two regions play host to the bulk of the world's poor population, who often eke out a living from subsistence agriculture.

Over the past decade (2006 to 2015), SA had the largest share of agriculture in GDP (18.9%), followed closely by SSA (18.7%). For the rest of the regions, the share of agriculture in GDP is far less significant: 6.3% in Middle East and North Africa (MENA), 5.6% in East Asia and Pacific (EAP), 5.4% in Latin America and the Caribbean (LAC), and 2.2% in ECA.

The correlation between agriculture's share in economic growth and a poverty profile is seen clearly when the analysis is done on the basis of income categorization. The average contribution of agriculture to the GDP of low-income countries (LICs) over the last decade was 32.1%, compared to 9.2% in middle-income countries (MICs) and just 1.4% in high-income countries (HICs). Again, even on the basis of income groups, the share of agriculture in growth has declined over the decades. Thus, the poor are dependent on agriculture, but their dependence is declining gradually as they seek alternative livelihoods in nonfarming enterprises.

Stylized fact 2

Although there are diversities in agricultural productivity and agricultural productivity growth across the regions of the world, agricultural value added per worker (productivity) is generally ascending. Not only is agricultural productivity higher in ECA, LAC, and MENA, but it also increases faster in these regions (see Figure 11.1, Table 11.1) relative to EAP, SSA, and SA. ECA is the most productive region in the world, followed by LAC, and SA is the least productive region, followed closely by SSA. Agricultural productivity has been twice as fast in ECA than it has in SA over the last 15 years (2000-2015). In ECA, agriculture value added per worker increased from USD8,801.8 in 2000 to USD14,309.1 in 2015, an increase of about 63% over the period. In SA, agriculture value added per worker increased from USD871.7 in 2000 to USD1,131.7 in 2015, an increase of about 30% over the 15-year period. Thus, not only is agricultural value added per worker higher in relatively wealthy regions of the world, but it also grows faster in these regions, showing a correlation between productivity and welfare status.

The link between agricultural productivity and poverty is seen clearly in Figure 11.2, where the trend line for agriculture value added per worker for HICs is not only far above those of MICs and LICs but is

Source: World Development Indicators (2017)

FIGURE 11.2 Agriculture value added per worker, constant 2000 USD

Source: World Development Indicators (2017)

also the only line trending upwards. Thus, a substylized fact is that poor economies have both low agricultural productivity and low agricultural productivity growth relative to rich economies. The implication of this stylized regularity is that substantial welfare gains can be made in poor countries by simultaneously increasing both agriculture productivity and productivity growth.

Stylized fact 3

Although agriculture remains an important employer of the labour force, especially in economies outside ECA, for most regions of the world, the services sector is by far the largest employer of the workforce (SA and SSA being the exceptions). According to Figure 11.3, in 2014 the services sector had the largest share in total employment (69.5%) in LAC, followed by industry (22.8%) and agriculture (13.9%). Next to LAC is ECA in terms of the size of the contribution of the sendee sector to employment. In ECA, the services sector (66.5%) was the largest contributor to employment, followed by industry (24.8%) and agriculture (8.3%) in 2014. In EAP, the agriculture sector's share in employment has been larger than that of the industry sector's contribution but lower than that of the services sector. Figure 11.3 further reveals that as structural shifts occur in the economy, the share of agriculture in employment declines over time, while the employment shares of industry and services rise.

SA and SSA break the dominance of the services sector in total employment. Agriculture has remained the largest employer over the years in SA even though the sector's employment share is declining with time, whereas the service sector is picking up. On the basis of a series of reports from the United Nations Survey of Asia and the Far East, agriculture's share in the SA region declined from 70% in 1970 to 51% in 2010, while the services share increased from 20% to 35% over the same period. Thus, agriculture's share is a little over half of total employment in SA.

Among all the regions of the world, SSA has the most dominant agricultural sector in terms of contributions to employment. This dominance

FIGURE 11.3 Employment shares by sector (% in total employment)

Source: World Development Indicators (2017) is prevalent in both LICs and HICs in the region. According to Fox, Thomas, and Cleary (2017), agriculture contributed 68.5% and 57.5% to employment in LICs and HICs respectively in SSA in 2010. Household enterprises are the next most significant contributor to employment in SSA (18.2% for LICs and 29.1% for HICs in SSA). These household enterprises are often capital-constrained micro and small enterprises. Wage employment in services and industry form a small proportion (13%) of total employment in the region, an indication of the region's large informal sector.

Stylized fact 4

Agricultural raw materials exports' share in merchandise exports is small and generally quite stagnant. In all the regions of the world, the share of agricultural raw material exports in total merchandise exports was below 3% in 2015 (Table 11.2). This might not be a bad statistic so long as there is a corresponding increase in the exports of processed goods. Understandably, SSA (3.7%), the poorest region of the world, has been more reliant on agricultural raw material exports over the last decade than any other region has. This is followed by LAC (2.1%), South Asia (1.6%), EAP (1.3%), and ECA (1.3%). The reliance of SSA and poor countries in general on raw material revenues has been of concern to policymakers in this region, but not much progress has been realized in terms of policies aimed at adding value to exports. Relying on raw material exports is a source of economic vulnerability because raw material outputs and prices are highly volatile. Agriculture raw material exports as a percentage of merchandise exports grew from 3.4% over the five-year period of 2006-2010 to 4.0% in the subsequent five-year period, 2011-2015. This was the largest growth over the period. Marginal growth in agricultural raw material exports' share in merchandise export was recorded over the same period in EAP, ECA, and LAC, while no growth was recorded in MENA and SA. The MENA region is the least reliant on agriculture raw material exports, ostensibly due to huge foreign exchange revenues from crude oil exports.

Stylized fact 5

GLOBALLY, FOREIGN DIRECT INVESTMENT (FDI) TO AGRICULTURE IS SMALL According to the data available for 43 countries around the globe, the average FDI to agriculture was only 2.7% of total FDI in 2011. This supports the widely held belief that the agricultural sector is generally underfunded and is less attractive to investors than are industry and services (IFC, 2012; Ruete, 2015). The outliers include Malawi (18.86%), Uruguay (15.27%), Ghana (15.75%), Cambodia (13.7%), and Lao PDR (12.3%), where agriculture's share for each in total FDI exceeds 10% (see Figure 11.4). At least the outlier countries are all developing countries that have a real need for FDI to unlock the potentials of the agriculture sector. Thus,

1990

2000

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

10-year

average

2006-2015

5-year

average

2006-2010

5-year average 2011 2015

East Asia & Pacific

30.3

10.4

10.3

10.3

10.3

10.2

10.5

10.8

10.5

10.5

10.3

10.3

10.4

10.3

10.5

Europe & Central Asia

20.2

10.7

10.4

10.4

10.2

10.3

10.4

10.4

10.4

10.4

10.4

10.3

10.4

10.3

10.4

Latin America & Caribbean

30.5

20.9

20.0

20.2

20.0

20.0

20.0

10.9

20.0

20.0

20.3

20.7

20.1

20.1

20.2

Middle East & North Africa

N/A

00.4

00.3

00.2

00.1

00.2

00.3

00.2

00.2

00.2

00.2

N/A

00.2

00.2

00.2

South Asia

40.8

10.4

10.7

20.0

10.7

10.3

20.1

10.9

20.0

20.1

10.6

10.6

10.8

10.8

10.8

Sub-Saharan Africa

N/A

50.3

30.5

30.4

40.0

30.0

30.0

50.2

50.5

30.3

20.2

N/A

30.7

30.4

40.0

World

30.1

10.8

10.6

10.5

10.4

10.4

10.6

10.8

10.6

10.6

10.5

10.5

10.6

10.5

10.6

Source: World Development Indicators (2017)

Source: FAO (2017)

overall, poor countries have a higher share of agriculture FDI in total FDI than do rich countries. According to Figure 11.4, the share of advanced countries' (e.g. France, Greece, Hungary, and Spain) agriculture FDI in total FDI is minuscule.

Stylized fact 6

GLOBALLY, THE AGRICULTURE SECTOR RECEIVES MARGINALLY LESS PRIVATE SECTOR CREDIT THAN IT DESERVES The share of agriculture sector credit in total credit is almost insignificant. On the basis of data available for 103 countries across the globe (see Figure 11.5), the average private sector credit to agriculture was only 4.5% of total credit in 2015. The corresponding agriculture orientation index2 is 97.8%, which means that credit to the agriculture sector is marginally below the contribution of the sector to economic growth (i.e. agriculture sector receives marginally less credit than it deserves). Although the agriculture orientation index gap is not that big, the funding gap that this entails can be of significant consequence to the sector. There are significant cross-country variations in agriculture credit ratios across the world. On the one hand, we have countries with high agriculture credit ratios: agriculture shares of credit of at least 15% (e.g. Kyrgyzstan, Zambia, Sudan, and New Zealand). On the other hand, there are countries with infinitesimal agriculture shares of credit (e.g. UAE, Turkey, Trinidad and Tobago, Togo, Oman, and Niger). Clearly, however, countries congregate towards low credit ratios.

Source: FAO (2017)

 
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