Quantifying investment needs for agricultural development in Asia - J. Poulisse

J. Poulisse, Senior Economist
Land and Water Development Division, FAO, Rome

PURPOSE OF THIS DOCUMENT

In order to support World Food Summit: five years later (WFS: fyl) and in particular to draw attention to investment needs in agriculture, FAO proposes a method to estimate investment required to accelerate agricultural development in Asia and the Pacific region particularly regarding land and water development and production intensification. This method would enable ministries of agriculture to dialogue more effectively with designated national financial authorities regarding investment requirements for agricultural development. The methodology proposed is straightforward, transparent and adaptable to country circumstances.

Though empirical and still approximate, the advantage of the method over more global approaches is that it enables governments to track relationships between investment in a range of selected items contributing to development (Table 3), and chosen development indicators such as growth, poverty reduction and food security. Attention is thus focused on trying to demonstrate how investment in agriculture influences development rather than assuming this the case. The method can be tailored to individual country circumstances and choices by selecting a preferred development goal, by including investment items most likely to influence the goal and by applying country - specific unit costs for each investment item. The method does not prescribe investment items or the source of funding for investment.

The method’s greatest value is likely to be that it provides the agricultural sector with an instrument to quantify the likely costs and benefits of investing in the sector. Such quantification - particularly as it becomes more refined with use - should serve to strengthen agriculture’s case for greater prominence in policy debates and investment allocation with those who control finances in countries, with donors and with potential investors. Greater insight into the linkages between investment in agriculture and desired development outcomes at country level will hopefully help reverse the downward trend in agricultural investment which seems to have been little influenced by general (though true), statements about the centrality of this sector for growth, development and food security.

The purpose of this document is thus to present the method to participants for comment, at the same time requesting them to apply it at country level using national costs per item to thereby assist generating more reliable and thus credible global investment figures for Asia. The example used in the document to demonstrate the use of the method estimates agricultural investment needed for the Region as a whole to achieve the WFS objective of halving the number of hungry people by 2015. A range of investment items most likely to affect primary agriculture as well as food processing and distribution are used, and estimated average costs per item are applied.

METHOD

Increased demand

It is assumed that WFS:fyl, is inspired, at least in part, by the need to improve the effectiveness of efforts to achieve the goals of the WFS, particularly to reduce the number of hungry by half by 2015.

Since the purpose of the exercise is to develop scenarios for country specific investment in land and water development, and production intensification, additional food needs have to be quantified before possible investments to meet these increased needs can be established under various assumptions. The purpose of the exercise is thus to estimate investment required to generate incremental production needed to meet the WFS goal by 2015 as illustrated in the 'on track' projection in the following diagram.

Figure 1: Estimates of investment required to archieve WFS:fyl goals

Source: The state of food insecurity in the world 2000, FAO

TABLE 1

Food production increments required by 2015 (%)

The anticipated additional demand for food is expressed by FAO in a revised per capita kcal food intake for each country that would achieve the goal of halving the number of undernourished people - assuming that the WFS target applies to each country and that the per capita calorie consumption pattern remains the same as the base year (1995/1997). The Agriculture Towards 2015/30 scenario is based on the UN 1998 Assessment for population projections and on FAOSTAT data as known in June 1999. It is currently being revised for the final AT2015/30 report. The enhanced daily per capita calorie food intake is distributed proportionately over the 28 food commodities that constitute the FAO AT 2015/30food basket; i.e. no change in the composition of the food basket is assumed. Additional per capita calorie intake is thus converted into volume of food items by allocating additional calorie demand proportionately to the food items in the 2015/30 - food basket. This additional demand or enhanced daily per capita calorie food intake (consumption) multiplied by projected population size provides the anticipated increased demand for food at national level.

Increased domestic production

The need for increased domestic production is arrived at by subtracting FAOs latest estimates of likely food supply in 2015^[1] from the anticipated increased demand for food. The portion of the increased demand to come from increased domestic production is established by maintaining the projected AT 2015/30 Self - Sufficiency Ratios (SSR) constant. Doing this assumes that net imports of foodstuffs will increase at the same rate as domestic production.

TABLE 2

WFS 2015 added land requirements ('000 ha, base AT2015)

Increased production requirement to achieve the WFS goal for countries and commodity groups expressed as a percentage of the projected AT 2015/30 year 2015 production is presented in Table 1. The increased production requirements itself vary, however, according to country specific planning assumptions and is not presented here. In addition, ongoing policy and investment interventions, likely to have a substantial impact on eventual domestic production are not considered. It would appear that increased production to achieve the established goal, under the assumptions made, is substantial in most countries.

Yield increases and harvested land expansion

Increased harvested area (rainfed and irrigated) and higher yields provide the required increase in production by country. The AT 2015 Crop Growth Factors (yield increases and harvested land expansion) for each of the 34 crops under the ‘business as usual scenario’ were used. Major efforts will also be required under the assumptions made to expand irrigated agriculture. Increased yields will also need to be supported by increased fertilizer inputs. Fertilizer use in the region is low; however, farmers can only achieve higher ‘national’ yields when fertilizer use becomes more profitable. This implies that increased demand for food becomes effective, that increased food supply originates primarily from domestic production and that improved fertilizer response, for which investment in soil fertility is a prerequisite, materialises. Increased fertilizer use to support the higher yields was estimated using the procedures described in Fertilizer Requirements in 2015 and 2030, FAO 2000.

Investment

To relate increased production to investment, 27 capital items contributing to agricultural production, developed by FAO, are proposed. These cover resource and input requirements for primary agriculture, marketing and processing facilities and include other elements of rural development such as infrastructure. No direct provision has been made for investment in technology development and transfer because of the difficulty of establishing a basis to estimate this for Africa as a whole. Individual countries may thus choose to add research and extension as a capital item contributing to agricultural development. When countries complete their cost table (Table 3), the compilation of the investment cost is straightforward (Table 4). A provisional indication of the magnitude of the required investment in land and water development as a percentage of the total investment in the primary sector (crop and livestock production) is presented in Table 5. It is again emphasized that these results come from indicative investment costs expressed in calibrated 1994 US dollars while some investment items have not been included at all due to lack of data. This points to the need for countries to use the best information at their disposal when completing Table 3 to ensure a meaningful outcome.

TABLE 3

Provisional average investment unit costs in 1994 US$

NOTE: * mt = metric tonne; ** Stoutjesdijck, November 1994 (1992 US$);

TABLE 4

Net Investment requirements US$ million (1994)