Transformation of Smallholder Agriculture: the role of infrastructure Maximo Torero International Food Policy Research Institute (IFPRI) Brasilia, June 2 nd , 2010
Oct 19, 2014
Transformation of Smallholder Agriculture: the
role of infrastructure
Maximo ToreroInternational Food Policy Research
Institute (IFPRI)
Brasilia, June 2nd , 2010
Page 2
More than 75% of the extreme poor live in rural
areas where agriculture is 50 90% of household
income.
Smallholders face Inefficient markets lower
farm-gate prices & increase cost of inputs,
reducing input use, market access, and income
Challenges in Market Access
Page 3
Connecting poor farmers to markets has
become more important over time
because: agricultural markets have been liberalized
international trade has been liberalized
income growth and urbanization within developing
countries, is promoting a shift in consumer demand
supermarkets and processors are playing an
increasingly important role
Rising demand for quality & food safety
Challenges in Market Access
How good is the current market access for Africa relative to the rest of the world?
Country/Zone Global Agriculture Industry Primary (Not Agriculture)
World 4.5% 16.0% 3.7% 1.5%
Africa 4.2% 15.2% 3.9% 1.6%
America 5.3% 18.5% 3.7% 1.2%
Asia 5.1% 19.3% 4.9% 1.6%
Europe 3.6% 12.1% 2.9% 1.2%
Pacific 10.6% 32.1% 4.3% 2.5%
LDC 4.7% 15.3% 4.3% 2.0%
MIC 5.1% 20.0% 4.6% 1.5%
OECD 4.1% 14.0% 3.3% 1.3%
Angola 1.5% 6.4% 0.9% 1.5%
Congo (democratic)
1.2% 17.3% 0.7% 1.1%
Lesotho 1.3% 9.2% 1.3% 2.5%
Malawi 23.1% 27.4% 8.5% 6.1%
21 countries with better access than world average, 11
countries with duties to exports less than 2%, 32 countries
with worst market access and 13 countries facing average
duties greater than 10%
Page 5
Example: Marginalization of Africa in world trade – The snapshot view
0%
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8%1970
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20042005
Authors: Antoine Bouët, Devesh Roy and Santosh Mishra
Page 6
Paradox of smallholders
Efficiency argument
Lipton (1993) points that there is extensive empirical literature that point to the ‘inverse relationship’ between farm size and production per unit of land
Lipton (2005) says economies of scale are weak
Dyer (1991, 1996): Small farmers more efficient use of labor
Poulton (2005) says scale of farm operations affects transactions costs for different activities in different ways
Cornia (1985), Heltberg (1998) show small farmers employ more labor than large farmers (labor markets are imperfect)
Problems faced by small farmers
Changes in production methods are not scale neutral as were with the Green revolution
Economies of scale in agriculture may apply in input supply, processing of harvests and in transport
Modern food value chain impose new restrictions for smallholders as a result they are not linked to dynamic markets (e.g. auditing and certification costs, Raynolds 2004, and many papers of Reardon)
Market imperfections imply higher transactions costs
Market failure focus
Goal: making commodities markets function for the poor at local, regional, and international markets by:
Releasing constraints to participation Enhancing benefits from participation
Major Market Failures: Externalities (+/-) Merit and demerit goods Public goods Information asymmetry Monopoly (monopsony) power Government failure
inefficiency and high
transaction costs
Major Outcomes of Market Failures:
• High transportation costs• Information asymmetry• Missing input markets• Policy induced barriers• Non economic barriers
Results: Post harvest losses in fruits and Vegetables
Developedcountries
Developingcountries
Locations Range Mean Range Mean
From production to retail sites 2-23 12 5-50 22
At retail, foodservice, and consumer sites 5-30 20 2-20 10
Cumulative total 32 32
Source: Adel Kader, UC Davis; (2009)
Source: Kader, A. A. (2005). Increasing food availability by reducing postharvest losses of fresh produce. Proceedings of the 5th International Postharvest Symposium, Mencarelli, F. (Eds.) and Tonutti P. Acta Horticulturae, ISHS.
Location Developing countries
Farm 20-40% potential harvest
Processing, storage,transportation and distribution
10-15% in quantity25-50% in value
Broken links because of luck of appropriate infrastructure
Page 9
Production Supply Chain Processing Marketing
Poor extensionQuality inputsLow productivityNon demand linked production
Weak road infrastructureLack of storageHigh wastagesMultiple intermediaries
Low processingLack of qualityPoor returnsLow capacity utilization
Poor infrastructureLack of gradingNo linkagesNon transparency in prices
Page 10
What is the situation of infrastructure in SSA?
Page 11
Infrastructure coverage is low in SSA
World Low Income SSA
Rural Urb. Total Rural Urb. Total Rural Urb. Total
% hh with electricity 31 71 45 19 63 32 8 54 23
% hh safe water 73 91 80 56 83 65 54 83 64
% hh improved sanitation 54 78 64 30 60 41 28 54 37
Telephone subscriber / 1000 people
213 29 31
Cellular subscribers / 1000 people
296 37 73
Km of road / 1000 km2 840 181 155
Source: Data from Estache and Goicoechea (2005)
Lowest infrastructure coverage in SSA
Important rural-urban disparities
Electricity = lowest coverage of all infrastructures
Page 12
Unequal access to infrastructures in Africa
Quintiles
1st 2nd 3rd 4th 5th
Safe water 34% 49% 54% 67% 85%
Network electricity 0% 4% 12% 28% 71%
Transport to school (% in less than 30mn)
62% 65% 66% 68% 72%
Transport to Health(% in less than 30mn)
56% 60% 70% 73% 79%
Source: Data from Diallo and Wodon (2004), computed in Estache (2006)
Very large access disparities across income categories
Electricity is the most unequal
Page 13Source: The Economist August 2007
Page 14
High Transportation costs
Notes: The extent of agriculture includes areas with at least 10 percent irrigated, cultivated or grazing lands, net of areas with a growing season of zero days.
Source: Nelson (2006) and Sebastian (2007b).
Page 15
Access to roads
Page 16
Access to roads
GSM Coverage, 1999
Source: GSM Association
GSM Coverage, 2008
Source: GSM Association
477 million people covered by mobile
2.98%
30.95%
43.97%
10.14%
42.20%
59.99%
0%
10%
20%
30%
40%
50%
60%
70%
1999 2004 2008
% N
etw
ork
Cove
rage
Coverage (by area)
Coverage (by population)
This represents 477 million people
This represents 11.2 million square
kilometres
Source: GSMA 2009
Page 21
On irrigation
Sub-Saharan
Africa
South Asia
All Developing countries
Middle Income
High Income
World
Agricultural land (as % of land area) 44 54 38 36 38 38
Irrigated land (as % of cropland) 3.6 40 20 18 12 18
Source: International Bank for Reconstruction and Development / Worldbank, The Little Green Data Book 06 (Washington DC, 2006)
Page 22
On Ports
Location constraint for the sustainability of certain ports
Port capacity usually results from inadequate maintenance
Impact of port efficiency on port productivity and costs (dwell time may vary between a reported average of 7 days in Abidjan and 17 days in Douala)
Importance of a legal setting: the institutional framework of a port in WCA has depended primarily on its inheritance of either the French or the British models.
Cumbersome procedures and poor links to the hinterland reduce port efficiency
In addition, there are the traditional “non-infrastructure” and “non-official” barriers
Africa’s infrastructure services several times more expensive than elsewhere
100%
80%
60%
40%
20%
Efficiency gap $17
Existing spending $45
0%
Spending needs $93
All figures in US$ billion a year
Infrastructure will require an additional US$31 billion a year and huge efficiency gains
100%
80%
60%
40%
20%
Efficiency gap $17
Existing spending $45
0%
Spending needs $93
All figures in US$ billion a year
100%
80%
60%
40%
20%
Efficiency gap $17
Improving operationalefficiency $7.5
Existing spending $45
0%
Spending needs $93
All figures in US$ billion a year
100%
80%
60%
40%
20%
Efficiency gap $17
Increasingcost recovery $4.7Improving operational
efficiency $7.5
Existing spending $45
0%
Spending needs $93
All figures in US$ billion a year
100%
80%
60%
40%
20%
Efficiency gap $17
Increasingcost recovery $4.7Improving operational
efficiency $7.5
Prioritizingpublic spending $3.3
Existing spending $45
0%
Spending needs $93
All figures in US$ billion a year
100%
80%
60%
40%
20%
Efficiency gap $17
Increasingcost recovery $4.7Improving operational
efficiency $7.5
Spending budgetedresources $1.9
Prioritizingpublic spending $3.3
Existing spending $45
0%
Spending needs $93
All figures in US$ billion a year
100%
80%
60%
40%
20%
Funding gap $31
Efficiency gap $17
Increasingcost recovery $4.7Improving operational
efficiency $7.5
Spending budgetedresources $1.9
Prioritizingpublic spending $3.3
Existing spending $45
0%
Spending needs $93
All figures in US$ billion a year
Page 31
Is just an issue of building new infrastructure?
Example of the role of transportation value chain
Example of the role of transportation value chain
Improvementhours
Original road (km)
Improved road (km)
Cost ofimprovement($)
Ayauca 4.34 308.32 204.45 $6,137,455.71Satipo 0.73 464.14 504.53 $17,728,322.39
What we know on infrastructure
Page 35
Complementarities of infrastructure
Peru, 2002
Pipeline water0%
10%
20%
30%
40%
50%
60%
% c
hang
e of
PC
HH In
com
e
Water +electricity
Water + elect +phone
Water + elect +phone + road
Source: Escobal and Torero, 2004.
Infrastructure does seem to have an impact on household’s welfare
There exists complementarities in the provision of different types of infrastructure
Bangladesh, 2000-2004
Electricity0%
10%
20%
30%
40%
50%
60%
% c
hang
e of
PC
HH E
xp
Elec + phone Elec + road Elec + road +phone
Source: Chowdhury and Torero, 2006
Page 36
How does infrastructure affect welfare?
PERU, 2002PSM (kernel); control group: HH with no assets
A) Households work more hours B) Households increase non-agricultural hours of work
2 infrastruct 3+ infrastruct1 infrastruct0
0.5
1
1.5
2
2.5
3
3.5
4
addi
tiona
l wee
kly h
ours
of w
ork
-25
-20
-15
-10
-5
0
5
10
15
% c
hang
e in
tim
e al
loca
tion
Ag salaried Non-ag salariedAg self-empl Non-ag self empl
1 infrastr
2 infrastr3+ infrastr
Source: Escobal and Torero, 2004.
Page 37
Infrastructure seems to have different impacts on men and women
Bangladesh, 2004: ATT effects of infrastructure among men and women(PSM among men and women)
ATT
Treatment: 1 infrastructureControl: No infrastructure
0
2
4
6
8
10
12
14
16
-0.1 0 0.1 0.2 0.3 0.4
dens
ity
Male Female
Diff =
0.02
Treatment: 2 infrastructuresControl: No infrastructure
0
2
4
6
8
10
12
14
16
-0.2 -0.1 0 0.1 0.2 0.3 0.4 0.5ATT
dens
ity
MaleFemale
Diff =
0.04
Treatment: 3 infrastructuresControl: No infrastructure
-1
0
1
2
3
4
5
6
-0.4 -0.2 0 0.2 0.4 0.6 0.8ATT
dens
ity
MaleFemale
Diff =
-0.08
Empirical Research on the Impact of Mobile Phones
Fisheries in India (Abraham 2007, Jensen 2007) Grain markets in Niger (Aker 2008, 2010) => sell Farmer participation in Uganda (Muto 2009) Internet kiosks and soybean prices in India
(Goyal 2009) Labor markets in South Africa (Klonner and Nolen
2009) Market Information Availability and Potato
Producer Prices in West Bengal (Mitra, Mookherjee, Torero and Visaria 2010)
Mobile Phones and Fish Price Dispersion (Jensen 2007)
Trader-Level Outcomes (Aker 2008)
Probit Estimate
Dependent variable:Coeff (s.e.) %∆
Coeff (s.e.)
Coeff (adj s.e.)
Coeff (df/dx) (s.e.)
Coeff (s.e.) %∆
# of Markets Searched .91**(.46) 26.26%
.22**(.11)
.22**(.05)
.91**(.47) 26.49%
# of people consulted for market information
1.5***(.50) 39.95%
.33***(.11)
.33**(.08)
1.7***(.71) 45.14%
Use personal contacts to obtain market information
.07***(.02) 7.99%
.61***(.09)
.07*(.04) 7.57%
Change sales markets (Yes=1, 0=No)
.08(.06) 57.14%
.08*(.05)
.09*(.05) 64.29%
# of Sales Markets 1.02**
(.71) 25.37%.22**(.09)
.22***(.02)
1.13*(.70) 28.04%
OLS Estimate Poisson Estimate Nearest Neighbor
Search in .91 more markets
Sell in one more market
Page 41
Final comments
Page 42
1. Regional coordination to boost supply capacities- corridor concept
Africa’s economic geography is a serious challenge infrastructure is inherently regional• 20+ countries with populations of <5 million• 20+ countries with economies of <US$5 billion• 60 international river basins• 15 landlocked countries
Need of evaluation and prioritization based on ERR and PRR (result of wealth creation)
Prioritized infrastructure corridors with Economic development corridors (potentially use a typology of development domains).
Need to learn from existing information by systematizing it and developing concrete plans to implement it.
Page 43
Page 44
2. Economic crisis is a challenge and an opportunity
Economic crisis will generate excess capacity (see fall in industrial production in 2009)
This imply that infrastructure building could be cheaper
Investment returns in countries which significant bottlenecks on infrastructure like Africa could be crucial
Learn from what China did and not from what Japan did during the crisis
Page 45
3. Financing
Multilaterals HAVE to play a crucial role but they need to think regionally – Need to change their way of operation
Public – Private partnership for infrastructure development
Innovations to broaden and deepen markets including niche and preferential markets
4. Complementarities
Significant evidence of importance of complementarities
Need to think on a value chain approach Need to learn from experience with compacts
on infrastructure• In Africa roads and electricity are
extremely costly for users• One of the major restrictions to trade
underachievement is infrastructure
Page 47
5. On regulation
Recommend regulatory changes to enable the market to work better
increased competition
open to new technologies
open to new business models
Outline an approach to subsidies to extend services beyond the market
using market forces
minimal regulation
Page 48
5. On regulation (cont)
Distinguish two types of service shortfalls: market efficiency gap real access gap
For the market efficiency gap: identify current regulatory problems and issues that
regulatory agency can address (example EU remedies for regulation)
examine new technologies that could help to reduce costs
For the real access gap: draw on best practices developed in rural areas complement and extend these for application in rural and
peri-urban areas.
6. Leapfrogging
Not need to repeat what happen in the past and what was done in developed countries – clear example is the cellular industry
Use best technologies Use green infrastructure – this could be an
advantage in SSA
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Thanks!