ARC/00/4


 

TWENTY-FIRST
FAO REGIONAL CONFERENCE
FOR AFRICA

Yaounde, Cameroon 21-25 February 2000

PUBLIC ASSISTANCE AND AGRICULTURAL DEVELOPMENT IN AFRICA

Table of Contents


I. THE AGRICULTURAL SITUATION IN AFRICA

II. NATURE AND SCOPE OF PUBLIC AGRICULTURAL INVESTMENTS

III. THE NEED FOR PRICE AND PUBLIC INVESTMENT POLICY REFORMS

IV. CONCLUSIONS AND ACTIONS REQUIRED

Annex

 


I. The Agricultural Situation in the Africa Region

  1. Agriculture dominates the economies of most African countries and is the prime vehicle for economic growth. It produces the bulk of food consumed in Sub-Saharan Africa and accounts for 70% of total employment, about 40% of total merchandise exports and 34% of African GDP.

  2. This sector is the major source of raw material for industry, the main purchaser of simple tools (farm implements) and services (transport), and farmers are the main consumers of locally produced consumer goods. In fact, one to two-thirds of manufacturing value-added in most African countries is based on agricultural raw materials, and many services are linked to agriculture (Barghouti, Garbus and Umali, 1993).

  3. Agriculture will remain, in the foreseeable future, the most important sector for addressing food security and poverty in Africa. Transforming agriculture and expanding its productive capacity is the prerequisite for improving living standards in Sub-Saharan Africa.

  4. Unfortunately, since the 1960's Africa has been the only region of the developing world where per capita food production has been declining, putting large segment of the population in a precarious situation in terms of food security and nutrition. To reverse this trend, most African Governments undertook, two decades ago, extensive economic policy reforms, nevertheless, without achieving any perceptible improvement in food security and reduction in poverty.

  5. The declining role of the agricultural sector is symptomatic of inadequate capital formation, coupled with heavy de-capitalization, making the sector one with a high cost structure and low-productivity . This situation compels most farmers and other economic agents to engage in practices which promote degradation of land resources, depletion of forest and other natural vegetation, and that of marine and other aquatic resources, including water.

  6. A few indicators suffice to illustrate the extent of decline of the sector and the marginalization of African countries in the global market. Most countries in the region continue to rely on one or two traditional commodities for the bulk of their export earnings. The production and market shares of these commodities claimed by Africa have been falling since the 60's.

  7. For cocoa, the production share fell from 71.6% in the 60's to 58.7% in the 90's, while the market share dropped from 78.9% to 64.7%. For coffee, the production and market shares declined from 25.9% and 28.8% in the 60's to 18.6% and 18.5% in the 90's respectively. The situation is even more worrisome for groundnut and palm oil. In the 60's, Africa claimed respectively, 33.8% and 88.4% of world production and market shares for groundnut. In the 90's, these shares fell to 21.4% and 7.6% respectively. For palm oil, the production and market shares declined from 84% and 36.8% in the 60's to 23.3% and 2.6% in the 90's respectively.

  8. Asia, on the contrary, increased its production and market shares for cocoa from 0.7% and 0.4% in the 60's to 16.9% and 18.5% in the 90's respectively. With respect to coffee, its production and market shares moved from 6.6% and 6.5% in the 60's to 18.9% and 16.7% in the 90's respectively. With regard to groundnut, Asian production and market shares were 51.7% and 54.0 % in the 60's respectively and in the 90's, these shares are about 69.0% and 48.5% respectively. With respect to palm oil, Asia claimed 11.1% of world production and 58.8% of the world market in the 60's. In the 90's, the continent improved its performance and its production and market shares for palm oil stand at 69.8% and 91.5% respectively.

  9. With regard to food crops, it is observed that the rate of growth of cereal output achieved by the region during the 1961-97 period, was lower than that achieved in other developing regions of the world. The food situation in Africa, compared to that in other regions of the world, is observed to be deteriorating, as a result of the growing gap between the rate of growth in output and the rate of growth in the population, while other developing regions of the world, with low and declining population growth rates, have achieved significant productivity gains.

  10. During the 1961-97 period, the annual growth rates of cereal yields in Africa were 1.1%, 0.6%, 0.2% and 0.4% for maize, rice, sorghum and millet respectively. In Asia, the same cereal crops experienced annual growth rates of 3.4% for maize, 2.2% for rice, 1.7% for sorghum and 1.2% for millet. South America also achieved respectable levels of productivity growth with 2.0% annual growth rates for maize, 1.8% for rice, 2.0% for sorghum and 0.6% for millet during the period.

  11. The data given above emphatically show that food and export crop sub-sectors in the sub-Saharan region have performed very poorly during the period. This has resulted in a significant loss of market share for traditional export crops and in a substantive increase of market share for food (cereal) imports and food aid.

  12. The institutional base and the entire economic policy framework are central in explaining the poor performance of both internal and external sectors of African economies. Countries in other developing regions which have succeeded in claiming large shares of the world markets of traditional export crops have worked hard to eliminate or at least to reduce significantly both supply and demand-side constraints. On the supply side, they have made substantive efforts to: (1) improve agricultural productivity by promoting research, training, and extension; (2) reduce transaction costs by developing both infrastructure and institutions, and by promoting the private sector and stimulating it to undertake a number of upstream and downstream support functions essential to the agricultural sector; (3) reduce agricultural (explicit and implicit) taxation; and (4) diversify the export base. The overall outcome of these actions has been a significant improvement in trade competitiveness, and the hedging of the export sector against world market volatility and other unfavourable shocks.

  13. On the demand side, world competition and domestic price support (agricultural subsidies) can hardly be regarded as significant factors in explaining the marginalization of Africa in world trade. It is the inability of African economies, to significantly increase the productivity of the agricultural sector and to reduce transaction costs, that has substantively reduced the ability of these economies to compete in the world market. Domestic prices of agricultural exports paid to producers were and continue to be well below their world market levels as a result of both direct and indirect taxation. The real producer prices of their primary commodities are still a small fraction of the real world market prices. Input (fertilizer) subsidies, which have already been eliminated as prescribed by structural adjustment programmes, were limited in volume and scope for them to offset the negative impact of price-distorting policies.

  14. Trade and exchange rate policies associated with severe structural and institutional deficiencies have worked to maintain the producer prices of export crops at a level significantly low not only relative to the world market price level, but also relative to other producing regions of the world. The overvaluation of African currencies especially during the 60's, 70's and 80's also contributed as an implicit tax levied on export crops.

  15. Strategic investments in infrastructure and institutional development in the region, including capacity building and strengthening, have remained abnormally low compared to those in Asian countries, which have achieved high level of economic growth and significant poverty reduction (Ragayah, 1998; Kiran 1998; Falusi, 1998; Kouassy and Diop-Boaré, 1998).

II. Nature and Scope Of Public Agricultural Investments

  1. Since the 60's, the level of public resources allocated to agriculture has been consistently low relative to the sector's size and contribution to the economy. The sector has received in most countries less than 10% of the public (recurrent and investment) expenditures during the 1961-97 period while its contribution to gross domestic output has been between 30% and 80%. What makes this situation even more disturbing is the fact that direct and indirect transfers of income from agriculture to government and the rest of the economy continue to be significantly larger than the amount of public resources allocated to the sector.

  2. By providing inadequate levels of public resources to the sector, public expenditure policy has constrained the development of public goods (basic infrastructure, institutions, human capital and support services) and public assistance to the private sector. Consequently, the policy has not only affected negatively the agricultural growth and development process, but also the rest of the economy. It is well established that 1% growth in agriculture causes economic growth of 1.5 times this amount due to the stimulus to industry, transport and services (Cleaver, 1993).

  3. Not only is the level of public resources expended to agriculture low relative to other sectors of the economy, but also public expenditure policy which presents a number of other weaknesses. In Africa, public investments are not often matched up by adequate level of recurrent budget. This situation limits the maintenance and management of these public capital goods. Examples abound in Africa, be it for roads, irrigation infrastructure or other public structures. Even in countries where significant investments were made to develop public agricultural capital goods, governments have often failed to provide adequate resources required to maintain and properly manage these capital goods. The example of irrigation infrastructure characterised by poor management and utilisation is spread across.

  4. The intra-sectoral allocation of these public resources among sub-sectors and within sub-sectors, among commodities, is at best based on little economic rationale. Within the crop sub-sector the overwhelming share was devoted to one cereal crop e.g. rice, maize or wheat and little to roots and tubers, pulses and oil seeds.

  5. Regarding the geographical coverage, the allocation of the public resources was also very inappropriate. Factors such as agro-ecological potentials, natural constraints, level of development of infrastructure, human resources, institutions, the demographic base and the contribution of the area to gross domestic product are not often considered during the process of regional allocation of public resources in most African countries.

  6. As a matter of economic principle, the allocation of public resources among different areas of the country has to be guided by the factors noted above. In an area characterised by serious constraints, heavy investments do seldom generate a commensurate level of output. On the contrary, they require important recurrent costs to maintain the capital goods developed. In high potential areas however, the economic returns to investments are generally high. The surplus generated can then be redistributed between high and low potential areas. This enables the country to contribute to its own investment efforts in a meaningful way, instead of relying almost exclusively on external sources for investments. This long-term vision needs to be carefully examined.

  7. The case of Malaysia, a country whose level of economic development was comparable to that of most Sub-Saharan countries at the eve of its independence from Britain in 1957, deserves to be noted for the purpose of enhancing our understanding of issues, and providing useful lessons to policymakers and other stakeholders. Development strategies adopted by Malaysia during the 1957-70 period, included a mix of import-substitution, industrial policy, extensive intervention by government to promote the rural sector and provision of social and physical infrastructure. The agricultural and rural sector received 22.3 percent of public expenditures, while industry claimed only 2.4 percent during the period. This economic policy regime helped Malaysia to enjoy an average economic growth rate of about 6 percent per year, but failed however, to reduce income inequality and poverty, whose incidence was about 52.4 percent at the end of the period.

  8. In 1970, a new economic policy framework was adopted whose main features were diversification of agriculture, intensive use of natural resources, integration of agricultural, rural and commercial development in selected regions, promotion of cocoa, and oil palm production and forestry. About 16.0 percent of Malaysia's Federal Government Development expenditures is allocated to agriculture. This figure is even much higher if figures for recurrent budget were also considered. Industrial policy shifted from import-substitution to export-oriented activities. Prices were regulated and private sector development was encouraged in export-oriented industries.

  9. A strong growth averaging almost 8 percent per year was achieved during the 1971-1990 period. In terms of welfare, the policy was a great success. At the end of this policy episode in 1990, the incidence of poverty fell to 16.2 percent. This experience has been widely hailed as a success example of strong economic growth coupled with equity (Bhalla and Kaharas 1992; Ragayah 1998). In 1991, the National Development Policy was adopted to cover the period up to 2000. This policy attempts to attain a balanced development marked by growth in equity. The share of agriculture and rural sector in Federal Government's expenditures was about 11.3 percent during the 1991-1995 sub-period. The economy grew at 8.7 percent and the incidence of poverty fell to 9.6 percent at the end of this sub-period.

  10. The experience of most African countries has been rather disappointing in many respects. These countries have failed to achieve a sustained agricultural and economic growth, improved income distribution, and reduced incidence of poverty. Even in countries known to have made significant efforts in reforming their economic policy regimes, the achievements have been limited and most notably associated with massive external public assistance, while the share of domestic public resources expended to agriculture has remained negligible, not exceeding 5% of the domestic public resources allocated to the economy.

  11. The diminishing involvement of the public sector in economic activities dictated by market-based economic policy reforms and the rather weak response of the private sector to such reforms has raised increasing concern about how the sector could best be supported to enable it meet its socio-economic obligations, fulfil its role, and make the necessary contributions to meet the economic growth of most African countries. To this end, African governments should adopt a policy mix to improve the structure of both price and non-price incentives. It is under these conditions that the sector can respond effectively, achieve a desirable level of growth, and contribute significantly to the overall economic development of the region.

III. The Need for Price and Public Investment Policy Reforms

  1. The extent of farmers' response to price policy reforms has been found to be severely constrained by structural and institutional deficiencies. Removal of price distortions through macro-economic and sectoral policy reforms has only had a limited impact on farmers' response as market infrastructure, institutions and support services continue to be grossly undeveloped. This situation puts the farmer at a double disadvantage as he/she is compelled to incur high costs for his/her inputs and to sell his/her produce at a much lower price. It is also true that the removal of structural and institutional constraints alone will only have limited impact on the farmers' response if price distortions continue to be significant.

  2. It has been proved that the removal of price distortions coupled with the elimination of structural and institutional constraints increases the synergy between price and non-price determinants of the supply response such that the total impact on output is greater than the sum of the impact of each group of supply response fundamentals taken separately. Consensus on the importance of both price and non-price factors for the response of agricultural supply is shared by an increasing number of economists (Elamin and El Mak 1997; Tshibaka 1997; Binswanger 1989).

  3. In Sudan, a comparison of two farming systems based on the mode of production -- irrigated versus rain-fed agriculture -- clearly shows that the synergy exists between price and non-price factors in affecting the agricultural output response. Rain-fed agriculture, characterised by limited public investments per unit of cropped area, was found to exhibit a low level of response to price and non-price factors relative to irrigated agriculture, characterised by a high level of public investments per unit of cropped area. This was also found to be true for cereals and non-cereal crops. Most public agricultural investments are allocated to non-cereal crops1 (Hag Elamin and El Mak, 1997).

  4. The results summarised in Annex show that the sum of output elasticity estimates with respect to price and public capital goods, is higher for the agricultural mode of production (irrigated agriculture) or group of commodities (non-cereals) which has a high level of public investments (public capital goods). The sum of short-run output elasticities with respect to price and non-price factors is about 0.4 and 0.8 for rain-fed and irrigated agriculture respectively. The sum of long-run elasticity estimates is about 0.6 and 0.8 for rain-fed and irrigated agriculture respectively. For cereals and non-cereal crops, the sum of output elasticity estimates is about 0.94 and 1.2 in the short-run respectively. In the long-run the sum of these estimates is about 1.3 for cereals and 1.8 for non-cereals. These results suggest a synergy between price and non-price factors affecting the level of agricultural output response.

  5. Recent empirical studies conducted in Africa lend support to the need for policy reforms that should result in improved price and non-price incentives. The pricist paradigm maintains that an improvement in domestic agricultural terms is expected to lead to a significant improvement in resource allocation to agriculture. In most African countries, the improvement in agriculture's domestic terms of trade consecutive to structural adjustment policy reforms did not result in any improvement of agriculture's relative share of investments and labour flows in the economy (Dike 1998). Even, governments in these countries did not increase their resource allocation to agriculture. Instead, what was observed was the de-capitalisation of the agricultural sector, as reflected in a steeply declining agricultural capital/labour ratio during the period, contrary to expectations.

  6. The inability of price reforms to enhance the flow of investment resources needed to develop agricultural capital goods suggests that both price and non-price policy reforms are not only required, but are also complementary. Conclusively, getting price right and improving non-price incentives are a twin goal to pursue if the growth of the agricultural sector is to be enhanced and sustained.

  7. Research has shown that not only the domestic terms of agricultural products, but also the content of capital input are the key determinants of labour allocation to agriculture. The elasticity of labour time allocated by farmer to farm activities was found to be about 0.4 with respect to the domestic terms of trade of farm products and 0.3 with respect to the capital input (Tshibaka, 1998). This finding suggests that improvement in real agricultural price and in capital input will induce farmers to substantively allocate more labour to farming. Put differently, the finding suggests that poor structure of price incentives and poor level of capital goods and services will lead farmers to allocate their labour time in favour of non-agricultural activities, including the migration out of farming.

  8. Countries that have succeeded in maintaining a relatively high level of price incentives and in developing public capital goods and services, have not suffered agricultural labour shortages compared to those that did not follow the same course of action. Most African countries continue to suffer agricultural labour shortages as a result of significant rural-urban labour migration due to significant de-capitalisation of the agricultural sector. Even where heavy agricultural investments made in various parts of the country, the migration of labour out of agriculture continues unabated as a result of worsening domestic agricultural terms of trade. These observations suggest that price and non-price incentives are complementary. It is therefore imperative for policy makers to adopt policy measures and actions to enhance the structure of price incentives facing farmers and other economic agents involved in agriculture-related activities, to promote the development of public agricultural capital goods and services, and to stimulate private agricultural investments.

  9. It is also important to note that from past public programmes of assistance directed at the agricultural sector, limited successes have been achieved in Africa in the following areas:
  1. The above notwithstanding, a number of areas in which public assistance to the agricultural sector appears to have failed include the following:

IV. Conclusions and Actions Required

  1. This paper shows clearly that countries which maintain a high level of public resource allocation to agriculture over a long period of time, in terms of both financial and human resources (volume and quality) have promoted private sector involvement and significantly enhanced agricultural growth and development. This has helped to achieve better income distribution and consequently has reduced poverty. In this connection, the following actions need to be carefully considered:
  1. In doing so, the following considerations have to be kept in mind:

 


Annex

Agricultural Output Elasticities, Sudan, 1970-1993

Mode of production/
Commodity Composition
Level of Public investments per ha of cropped area Elasticities with respect to agricultural price Elasticities with respect to public investments (public capital goods) per ha of cropped area Sum of elasticity estimates
    Short-run elasticity estimate Long-run elasticity estimates Short-run elasticity estimate Long-run elasticity estimate Short-run

Long-run

Rain-fed agriculture Low 0.23 0.40 0.13 0.22 0.36 0.62
Irrigated agriculture High 0.29 030 0.47 0.48 0.76 0.78
Cereals Low 0.45 0.63 0.49 0.69 0.94 1.32
Non-cereal crops high 0.34 0.49 0.89 1.27 1.23 1.76

Source Drawn from: Hag Elamin, N.A. and E.M. El Mak (1997): Adjustment Programs and Agricultural incentives in Sudan: A comparative study. Research Paper 63, African Economic Research Consortium (AERC), Nairobi, Kenya

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1 Non-cereal crops include export crops such as gum, groundnut, cotton and sesame. While cereals primarily produced for domestic consumption, are mainly made up of sorghum, wheat and millet