Transformation of Smallholder Agriculture: the Role of Infrastructure

Transformation of Smallholder Agriculture: the

role of infrastructure

Maximo ToreroInternational Food Policy Research

Institute (IFPRI)

Brasilia, June 2nd , 2010

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

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%

Example: Marginalization of Africa in world trade – The snapshot view

0%

2%

4%

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8%1970

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20042005

Authors: Antoine Bouët, Devesh Roy and Santosh Mishra

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

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

What is the situation of infrastructure in SSA?

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

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

Source: The Economist August 2007

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).

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

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)

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


0%

Spending needs $93


100%

80%

60%

40%

20%

Efficiency gap $17

Improving operationalefficiency $7.5


0%

Spending needs $93


100%

80%

60%

40%

20%

Efficiency gap $17

Increasingcost recovery $4.7Improving operational

efficiency $7.5


0%

Spending needs $93


100%

80%

60%

40%

20%

Efficiency gap $17


efficiency $7.5

Prioritizingpublic spending $3.3


0%

Spending needs $93


100%

80%

60%

40%

20%

Efficiency gap $17


efficiency $7.5

Spending budgetedresources $1.9



0%

Spending needs $93


100%

80%

60%

40%

20%

Funding gap $31

Efficiency gap $17


efficiency $7.5

Spending budgetedresources $1.9



0%

Spending needs $93


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

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

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.

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

Final comments

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.

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

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

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

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

Page 49

Thanks!

Transformation of Smallholder Agriculture: the Role of Infrastructure

Education

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