Financial Flows into Agricultural Development

There are two major types of finance for agricultural production and growth. The first is medium- and long-term finance for investment in both private and public capital. The second is short-term finance for production or marketing. In this section we concentrate on finance for capital accumulation.

A recent State of Food and Agriculture Report by the Food and Agriculture Organization (FAO) (FAO 2012 , Fig. 7, p. 17) indicates that capital stock is directly related to agricultural GDP. The same report (Table 1, p. 17) indicates the enormous difference in agricultural capital stock per worker among developed and low- and middle-income countries. The ratio in 2005-2007 was almost 35:1. More worryingly the growth rate of agricultural capital stock per worker in developing countries has declined over the past 30 years, compared to a significant increase for developed countries. The decline is large and significant in sub-Saharan Africa and insignificant in South Asia, while in all other regions the agricultural capital stock per worker has increased.

The FAO (2012) suggests that the level of agricultural capital stock per worker is directly related to the level of agricultural public expenditure per worker. This makes a direct link between agricultural public expenditures and agricultural capital stock. However, not all public expenditure in agriculture is investment. The share of investment in agricultural public expenditures varies from 9 to 84 percent as per a review of relevant figures by the FAO (2012).

Concerning public expenditures for agriculture, the FAO (2012) reports that while total public expenditures have increased worldwide in absolute terms, but mostly in East Asia and the Pacific and Latin American regions, the share of public expenditures going to agriculture has declined over time. Moreover, within that declining share, the share of agricultural GDP going to R&D, a major determinant of agricultural productivity growth, has stayed the same in low- and middle-income countries at 0.54 percent, while the share in high-income countries has increased from 1.53 percent in 1980 to 2.37 percent in 2000 (FAO 2012, Table 7, p. 31). The food crisis of 2006-2008 may have changed these trends but no aggregate figures are available.

The financing needs of agriculture to achieve a world free of hunger by 2025 have been estimated by Schmidhuber and Bruinsma (2011), who provide estimates of incremental public expenditures on agriculture and safety nets needed. Over this period, incremental annual public expenditures were US$50.2 billion. Of this the bulk (US$18.5 billion or almost 40 percent) is for expansion of rural infrastructure and market access, 9.4 billion is for conservation of natural resources, 6.3 billion is for R&D and extension, 5.6 billion for rural institutions, and 10.4 billion for safety nets. They have also estimated the average total (public and private) annual investments (not only incremental) needs of agriculture in low- and middle-income countries for the period up to 2050 to reach the FAO long-term projections for food and agriculture that are consistent with global food adequacy. The investment needs are considerable, amounting to more than 200 billion constant 2009 USD annually.

Concerning resource flows into agriculture, Lowder and Carisma (2011) have made a review of all the available information sources on this and have arrived at some general findings. Comparing among datasets, the average spending on and investment in agriculture for low- and middle-income countries for the three most recent years for which data are available reveal the following:

  • • Government annual spending on agriculture (both current and investment) in low- and middle-income countries averaged US$160 billion dollars in 2005-2007.
  • • Foreign Direct Investment (FDI) inflows to the above countries averaged 3 billion current USD (2006-2008) to agriculture, forestry, fisheries, and hunting.
  • • Official Development Assistance (ODA) to agriculture averaged 7 billion constant 2005 USD during 2007-2009.
  • • All flows exhibited an increase in total levels as well as levels per agricultural worker, since at least the early 2000s.
  • • Levels of FDI were larger for the high-income country group than for the low- and middle-income country groups.

The above numbers suggest that annual investment flows into agriculture are much smaller than what is needed to achieve a world free of hun?ger. Among these flows, ODA to agriculture decreased from the 1980s to 2004 and from then on has increased considerably. Furthermore, the composition of aid to agriculture from 2000 to 2008 reveals that the bulk of aid to agriculture (more than a quarter) has gone into agricultural policy and administration management. Food production and extension, while small in the early 2000s, have seen a revival in the later years.

Concerning FDI flows into agriculture, Lowder and Carisma (2011) have reviewed available figures and showed that much of the apparent upward trend in total FDI is in reality due to an increase in the number of countries receiving FDI that are included in the dataset (from about 30 to 70), and because the data are reported in current dollar values, rather than constant dollar values. They also showed that FDI inflows to food and beverages are much larger than inflows of FDI to agriculture.

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