Download Poverty Literature Review Brief: Primary Farming (Agriculture

Poverty Literature Review Brief:
Primary Farming (Agriculture1)
Background
This review focuses on primary agricultural production. This relates to sector codes AA in IFC
classification. By the nature of its products, IFC invests directly in companies of a minimum size;
most investments in that category are therefore for large agricultural enterprises including
traditional field crop agriculture, plantations (fruits and vegetables, flowers, tea, rubber,
sugarcane, palm oil) as well as a couple of projects dealing with greenhouse agriculture. Some
primary agriculture activities are by nature (perishability, transportation costs, etc) integrated
with some processing, so the figures most likely overstate the actual investment in primary
agriculture.
As of Feb 2012, commitments in this sector amounted to US$599m for 49 projects spread as
follows:

SSA: (US$36m)

LAC: (US$365m)

ECA: (US$97m)

CME: (US$3m)

CEA: (US$8m)

CSA: (US$89m)
Not surprisingly, a disproportionate portion of IFC's investments was in Latin America and
Eastern Europe, where farm structures tend to be larger, and more appropriate for IFC's direct
investments. IFC recognizes that it does not have a comparative advantage in the direct
financing of smaller size farms. They are better served through local financial institutions (banks,
insurance companies), through processors and traders and input suppliers. The Corporation
has therefore scaled up its intervention in that space, particularly in countries where most of the
farms are located.
Additionality
IFC’s additionality in this sector has had several dimensions:
Financial risk mitigation
In this note, the terms “Agriculture” and “Primary Farming” are used to designate the science and practice of
producing crops and livestock from the natural resources of the earth. The primary aim of agriculture is to cause the
land to produce more abundantly and at the same time to protect it from deterioration and misuse.
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
Longer tenor financing that is usually available in local markets. Some projects
(e.g. plantations, forestry) have particularly long gestation and risks in the first years of
operation and require significant upfront financial commitment in volume and tenor.

Financing in a crisis. Agricultural production is by nature “working capital
intensive” due to the production cycle and seasonality of production. Investments must
be made upfront (seeds, fertilizers, chemicals, etc) that are only realized at the earliest
at harvest. Marketing takes place over several months so that inventories must be
financed well after harvest. Agriculture is therefore extremely sensitive to constraints in
pre and post financing by banks, suppliers, traders, who tend to reduce their exposure in
times of crisis.
Knowledge

Technical and industry knowledge/global knowledge. IFC has a complete and
global view of the food supply chain which allows clients to better assess risks and
opportunities. IFC’s long experience in the sector and in various countries allows a
benchmarking of performances and practices that is highly valued by clients.

IFC has a view of agricultural production technology and experience getting
improved technology such as improved production methods and improved agricultural
inputs into the hands of smallholder farmers.
Standard-Setting

Agriculture is by its very nature at the core of E&S considerations (water, energy,
land, deforestation, GHG, child labor, etc). Naturally, IFC’s appraisal of agricultural
projects focuses heavily on environmental and social performance and compliance with
its Performance Standards, which usually set the standard in countries of investment.

Energy efficiency and renewable energy. In selected cases, IFC has advised
clients on identifying opportunities to exploit the potential of by products (e.g. rice or
sunflower husks, palm kernels) to generate renewable energy and reduce fossil energy
consumption.
Findings: Agriculture and the Pathways out of Rural Poverty
Agriculture’s contribution as a source of growth and poverty reduction differs widely depending
on the country’s development status, which the World Bank defined as “the three rural worlds”1.
The World bank classifies countries in three groups: agriculture-based, transforming or
urbanized, based on the share of aggregate growth originating in agriculture, and the share of
aggregate poverty in the rural sector. The large share of agriculture in poorer economies
suggests that strong growth in agriculture is critical for fostering overall economic growth. As
GDP per capita rises, agriculture’s share declines and so does its contribution to economic
growth. Even with rapid urbanization, the developing world is expected to remain predominantly
rural in most regions until 2020, and the majority of the poor are projected to continue to live in
rural areas until 2040.
Many rural households move out of poverty through agricultural entrepreneurship; others
through the rural labor market and the rural non farm economy (RNFE); and others by migrating
to town, cities and other countries.
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Direct Transmission Links to Poverty
Agriculture plays an evolving role in development and, while its contribution to growth and
poverty alleviation is well established, the magnitude and distribution of these benefits has been
shown to be largely context specific and to depend on such parameters as the level of
development of the country, the tradability of its products, the labor intensity of production and
the structure of farms (e.g. smallholder vs. commercial farms). To a large extent, these
variations can be summarized in what the World Bank named the Three Worlds of Agriculture:
•
•
•
Agriculture-based economies;
Transforming economies; and,
Urbanized economies.
Agriculture-based countries (mostly Sub-Saharan Africa) are characterized by a low GDP per
capita, a high contribution of agriculture and employment to GDP. Producers are mostly
smallholders and the staple crop sector is typically the largest sector and produces mostly for
the domestic market ;further, women make up a substantial majority of the agricultural workforce
and produce most of the food that is consumed locally. The non staple sector typically produces
for export and is often dominated by traditional commodities, but increasingly it includes new
dynamic subsectors of high-value products such as fruits and vegetables, flowers and fish.
At the other extreme, in urbanized economies, production agriculture contributes to a small
portion of the GDP, however, with associated activities such as agribusiness and the food
industry, it can still represent up to 30% of GDP. Only 18% of the labor force still works in
agriculture, but 45 percent of the poor are still in rural areas. Most countries in Latin America
and many in Europe and Central Asia fall into this category.
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An autonomous growth of the agricultural sector, brought about for instance by a total factor
productivity (TFP) increase due to a technology jump will have direct impacts on:
•
Farm incomes. The immediate impact of productivity growth is a rise in farm
income and aggregate supply. The second round impact however will depend on the
tradability of the product. For tradable products, TFP improvements will benefit mostly
farmers. The poverty-reducing effects of developing tradable (export) agriculture depend
on the participation of smallholders and poor households in production.
Impact of Agricultural Productivity on Poverty in India
India, Uttar Pradesh: IFC Supports Productivity Improvements and Income
Enhancement for Sugarcane Farmers
Sugarcane is a leading cash crop for farmers in Central Uttar Pradesh, one of the
poorest states in India, with over 4 million cane farmers. IFC provided advisory support
to its investment client, DCM Shiram Consolidated Limited (DSCL), one of the major
sugar producers in the state, with four sugar plants and 150,000 farmers in its supply
chain, to address the challenge of low farm productivity, which prevent the optimization
of crushing capacity in its plants.
IFC partnered with DSCL by working with 2,000 farmers supplying to two of DSCL’s
sugar plants, to develop a comprehensive training program composed of improved
course content and training materials for farmers over a 36 months period. The project
intervenes at three levels:
 Farmer level. To enhance sugarcane farm productivity of sugarcane growers and
increase farmers’ incomes.
 Company level. To provide technical assistance and capacity building to DSCL
for enhancing skill and competency levels of cane extension workers.
 Stakeholders/institutions. To build institutional capacity in DSCL catchment area
to strengthen cane extension and productivity enhancement efforts.
In the first year of the project, farmers who received training saw their productivity
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increase 23% vs. -11% for farmers who had not received similar training. As a result of
the project’s success, DSCL has requested IFC to jointly scale up the project to the
Company’s other two sugar mills.
•
Employment. Poverty is increasingly reduced through the employment of
unskilled labor. Much of the expansion of Chile’s agricultural GDP, for instance, can be
attributed to a labor-intensive agricultural export boom over the past two decades. The
rural poor benefited indirectly through their employment by large-scale farmers and
agroprocessors, with many jobs filled by women. Each percent expansion of agricultural
and agroprocessing output is estimated to have reduced national poverty by 0.6-1.2%.
•
Food prices. Some regions, however, may be practically isolated from global
markets due to their remote location, as well poor or expensive logistics. In that situation,
aggregate supply increase may result in downward pressure on food prices, the
magnitude of which depends on the elasticity of demand. Food consumers will therefore
benefit directly. Whether farmers will be better off will therefore depend on the relative
magnitudes of TFP improvements vs. lower prices. The poverty-reducing effects of
enhancing production in the farm sector depend on the net marketing position of the
poor and the price elasticity of food demand. In practice, it has been shown that
increasing staple productivity usually reduces poverty overall, because in addition to the
urban poor, more than half of poor rural households are typically net food buyers.
The magnitude of the impact of food prices on BOP consumers cannot be overstated.
Food represents the largest share of BOP household spending, often accounting for
more than half of BOP household budgets in many countries, particularly in Africa and
Asia2.
The BOP share of the measured food market is also significant: Asia also has the
largest BOP share of the measured food market, at 89%. Africa follows with 80%. Latin
America has a markedly smaller BOP share, at 51%—as does Eastern Europe, at 50%.
And, finally, any impact of food prices will have a disproportionate impact on the poorest
income segments within the BOP population. Indeed, in 17 of the 18 countries in Africa
and Asia with bottom-heavy BOP food markets, the bottom three BOP income segments
account for more than 50% of measured national food spending. The bottom two BOP
groups alone account for more than 50% of national food spending in 8 of these
countries in Africa (Burkina Faso, Burundi, Cameroon, Côte d’Ivoire, Malawi, Nigeria,
Rwanda, and Sierra Leone) and 5 in Asia (Bangladesh, Indonesia, Nepal, Pakistan, and
Tajikistan). Only one country in Eastern Europe (Uzbekistan) shows this concentration,
and none in Latin America.
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Indirect Transmission Links to Poverty (same as above)
In addition to its direct sectoral contribution to overall growth, agricultural development can play
an important role in fostering development in the rest of the economy, the indirect growth effect.
Three broad types of mechanisms have been identified:

Production or inter-sectoral linkages, forward to agro-processing activities,
and backward to input supply sectors - indirect impact in the Input/Output (I/O) literature.
On the input side, linkages will be significant with all suppliers of inputs such as credit,
fertilizers, seeds, agrochemicals; but also suppliers of services such as transportation,
and storage. In the most evolved forms of farming, observed for instance in Mercosur
countries, some of the main unit functions of farming (agronomic advice, crop cultivation,
chemical treatments, harvesting, etc) may be outsourced to specialized service
enterprises, resulting in the emergence of “virtual farms” which only keep as core
competencies the management and coordination of the supply chain.
On the output side, agriculture will be functionally linked to a number of activities
(processing, marketing, trading, transportation, storage and warehousing) that are
necessary steps to reach the consumer or export market.

Consumption linkages or final demand effects arising from an increased
demand for locally produced non-traded goods and services (induced impact in the I/O
context); and,

Wage-goods effects, by reducing the price of food, agricultural productivity
growth would lower the real product wage in non agriculture, thereby raising profitability
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and investment in other sectors. Lower food prices would also raise real wages, thus
directly benefiting the poor (urban and rural) wage earners.
The level of development will largely determine the relative contribution of production
and consumption linkages. As countries develop, production linkages typically gain in
importance as input intensity in agriculture rises and the demand for processed foods
increases. In general, however, consumption linkages are typically four to five times
more important than production-based linkages. For consumption linkages to be
significant, (I) agriculture must be a sufficiently large sector in employment terms for the
income-generating effects to be significant in the aggregate; (ii) income gains from
agricultural growth must be reasonably widespread; (iii) consumption patterns of people
in agriculture must favor locally produced non-tradable goods; and, (iv) the non-traded
sector must have underutilized resources and appropriate institutional arrangements to
be able to respond to the new demand coming from agriculture.
In practice, a review of the multitude of agricultural multipliers effects concludes that
“best guess generalizations of the agricultural multiplier probably lie in the range of 1.6 to
1.8 for Asia and 1.3 to 1.5 for Africa and Latin America.”. Every dollar in direct income
generated in agriculture triggers another 30 to 80 cents in second round income gains
elsewhere in the economy. The strength of the multiplier effect will also depend on a
country's economic structure: a small economy with large tradable sectors have smaller
multipliers than large economies with a large share of nontradable agriculture and
services.
Assessing the Impact of IFC Agricultural Investments on Poverty:
An Impact Evaluation of Agrokasa (Peru):
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The Relative Performance of Agriculture for Poverty Alleviation
A large number of studies have reviewed the relative performance of agriculture (vs non
agriculture) in contributing to poverty alleviation. Although the debate is by no mean closed,
a consensus appears to be emerging34:
First, irrespective of the setting, agriculture is much more powerful in reducing poverty
among the poorest of the poor ($1-day) when inequality is not too high. In China,
characterized by rather equal land distribution, growth in agriculture has been estimated to
be up to four times more poverty reducing than growth in industry and services. In resource
poor low-income countries (excluding SSA), agricultural growth was found to be more than
five times as poverty reducing than growth outside of agriculture. For SSA countries, it was
more than eleven times more poverty reducing.
Second, non-agriculture is more powerful in reducing the $2-day poverty headcount in
countries where the extractive industry makes up less than 10 per cent of GDP. The relative
advantage is strongest in middle-income countries.
Third, in resource-rich countries, agriculture is usually more powerful in reducing poverty,
especially when it comes to $1-day poverty.
Fourth, the advantage of agriculture in reducing $1-day headcount poverty declines as
countries become richer and inequality increases.
Impact on the Base of Pyramid ($8) and the Absolute Poor ($1.25)
While it is difficult to translate these findings to the $8-day “base-of-the-pyramid” (BOP)
population, the figure above5 provides some avenues for extrapolating. Even defined by that
higher level of income, poverty remains a majority rural phenomenon: almost 70% of the
poor so defined live in rural areas, and more than 40% of them are associated with
agricultural smallholdings activities.
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The implications are that:
(i)
Agriculture remains a powerful instrument of poverty alleviation across the globe
and its growth through productivity improvements for instance will continue to have a
direct and lasting impact on incomes and poverty alleviation. This legitimizes in particular
the emphasis on supply chains to break the vicious circles of low productivity and
household incomes by improving access to inputs, technology and financial services
while improving producer capacity and overcoming infrastructure gaps.
(ii)
The impact of agricultural growth on poverty alleviation will likely be much more
substantial in low income countries and, in particular, in SSA due to the higher multiplier
effects identified in the literature, owing to the indirect effects through production and
consumption linkages. This will particularly hold for land-locked countries where high
transport and other marketing costs, partly due to considerable geographic distances
between markets, prevents transmission of price signals. This would in effect render
most commodities non tradable; any improvement in agricultural productivity would
therefore contribute to lowering the price of products and therefore further reduce
consumer poverty.
Making the Case for IFC Operations
Although poverty alleviation has not been an explicit justification of IFC’s agricultural
investments in the past 6 7 , they have by and large demonstrated coherence with that
objective. This dimension is better represented however in the recent Agribusiness Strategic
Action Plan FY11-14 (ASAP), which prioritizes: (i) food security; (ii) inclusive growth with
specific focus on smallholders and women2; and, (iii) transforming environmental and social
standards into business drivers.
The three ASAP priorities are not necessarily aligned in all circumstances; for instance
contribution to global security may lead IFC to support investments in urbanized countries
which make a growing contribution to global food security, but do not necessarily make a
notable contribution to poverty alleviation. We must therefore accept that IFC’s agribusiness
portfolio will represent a number of priorities, not only poverty alleviation.
The discussion of poverty alleviation through agriculture illustrates the critical role of some
countries (agriculture-based and transforming), and sectors where opportunities for IFC
direct investments in agriculture are extremely limited and, sometimes controversial (Land
Grabbing debate). The experience of the Africa Enterprise Fund (AEF) has also
demonstrated the financial risks of directly investing in SMEs without the proximity required
to monitor these investments. IFC has therefore long preferred supporting smallholders
through indirect instruments by focusing on: (i) processors with significant linkages to
farmers; (ii) financial intermediaries and traders with significant upstream linkages to
smallholders; and, (iii) market developments with a systemic impact (e.g. warehouse
receipts or collateral financing, index-based weather insurance, price risk management)
although for some of these instruments (insurance, price risk management) much remains to
2
The 2008 World Development Report showed that agriculture is a critical source of livelihoods for women in many
developing countries, and a key pathway out of poverty.
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be done. The ASAP also recognizes the key importance of improving smallholders’ access
to critical inputs such as improved seeds, fertilizers and agrochemicals which is a major
constraint in agriculture-based countries; here also much remains to be done however on
supporting the development of commercially viable input distribution systems in these
difficult environments.
Conclusion
1. IFC investments in agriculture (and agribusiness in general although this is not the subject
of this note) have a unique ability to reach the poor, irrespective of the definition used
($1.25/d or the BOP definition of $8/d). Indeed (i) most of the global poor live in rural areas;
and (ii) in locations where agriculture continues to play a critical role in economic growth and
local development. A corollary is that agriculture is also a key pathway out of poverty for
women.
2. Agricultural investments in these countries provide a solid foundation for people to escape
poverty. The main pathways in this regard are:
i.
ii.
iii.
iv.
v.
better farming incomes through increased productivity and better market access;
better employment prospects as a waged worker in agriculture, a sector which offers
particular opportunities for unskilled laborers;
production linkages upstream and downstream for the suppliers of goods and services to
the sector (fertilizers, chemicals, seeds, transportation, storage), as well as the
marketing of agricultural products.
consumption linkages through the development of local communities. Impact evaluation
studies seem to indicate that this may be the dominant poverty impact of IFC’s
investments.
In some selected cases, agricultural investments can also have a powerful impact on
poverty alleviation through a reduction in food prices.
3. The extent to which agricultural investments impact poverty alleviation is very context specific3
and depends on a number of parameters including but not limited to: (i) the stage of
development of a particular region; (ii) the tradability of products; (iii) the structure of farming;
and, (iv) the labor intensity of particular productions.
World Bank. 2008. Agriculture for Development, World Development Report 2008, Washington,
D.C.
2
WRI. 2007. The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid,
Washington, D.C..
3
Christiaensen, L., Demery L. and J. Kuhl. 2010. “The (Evolving) Role of Agriculture in Poverty
Reduction”, UN World Institute for Development Research, Working Paper No 2010/36.
1
3
For instance, in Indonesia there are strong in-country, regional dimensions to the links between agriculture and
poverty, with different islands and provinces showing different agricultural growth and poverty rates.
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Dewbre, J., Cervantes-Gody D., and S. Sorescu. 2011. “ Agricultural progress and Poverty
Reduction”. Food, Agriculture and Fisheries Working Papers No 49, OECD.
5
WEF. 2009. The Next Billions: Business Strategies to Enhance Food Value Chains and
Empower the Poor. Geneva.
6
IEG. XXXX. IFC and Poverty Alleviation, The World Bank, Washington, D.C..
7
IEG. 2010. Growth and Productivity in Agriculture and Agribusiness, The World Bank,
Washington, D.C..
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