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Transformation of Smallholder Agriculture: the Role of Infrastructure


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Maximo Torero, Director Markets, Trade and Institutions Division (MTID)
International Food Policy Research Institute

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Transformation of Smallholder Agriculture: the Role of Infrastructure

  1. 1. Transformation of Smallholder Agriculture: the role of infrastructure <br />Maximo Torero<br />International Food Policy Research Institute (IFPRI)<br />Brasilia, June 2nd , 2010<br />
  2. 2. Challenges in Market Access<br /><ul><li>More than 75% of the extreme poor live in rural areas where agriculture is 50­90% of household income.
  3. 3. Smallholders face Inefficient markets lower farm-gate prices & increase cost of inputs, reducing input use, market access, and income</li></ul>Page 2<br />
  4. 4. Challenges in Market Access<br /><ul><li>Connecting poor farmers to markets has become more important over time because:
  5. 5. agricultural markets have been liberalized
  6. 6. international trade has been liberalized
  7. 7. income growth and urbanization within developing countries, is promoting a shift in consumer demand
  8. 8. supermarkets and processors are playing an increasingly important role
  9. 9. Rising demand for quality & food safety </li></ul>Page 3<br />
  10. 10. How good is the current market access for Africa relative to the rest of the world? <br />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% <br />Page 4<br />
  11. 11. Example: Marginalization of Africa in world trade – The snapshot view <br />Authors:Antoine Bouët, Devesh Roy and Santosh Mishra<br />1970<br />1971<br />2005<br />8%<br />1972<br />2004<br />1973<br />2003<br />1974<br />2002<br />6%<br />1975<br />2001<br />1976<br />2000<br />4%<br />1977<br />1999<br />2%<br />1978<br />1998<br />0%<br />1979<br />1997<br />1980<br />1996<br />1981<br />1995<br />1982<br />1994<br />1983<br />1993<br />1984<br />1992<br />1985<br />1991<br />1986<br />1990<br />1987<br />1989<br />1988<br />Page 5<br />
  12. 12. Paradox of smallholders<br />Efficiency argument<br />Lipton (1993) points that there is extensive empirical literature that point to the ‘inverse relationship’ between farm size and production per unit of land<br />Lipton (2005) says economies of scale are weak<br />Dyer (1991, 1996): Small farmers more efficient use of labor<br />Poulton (2005) says scale of farm operations affects transactions costs for different activities in different ways<br />Cornia (1985), Heltberg (1998) show small farmers employ more labor than large farmers (labor markets are imperfect)<br />Problems faced by small farmers<br />Changes in production methods are not scale neutral as were with the Green revolution<br />Economies of scale in agriculture may apply in input supply, processing of harvests and in transport<br />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)<br />Market imperfections imply higher transactions costs<br />Page 6<br />
  13. 13. inefficiency and high transaction costs<br />Market failure focus<br />Goal: making commodities markets function for the poor at local, regional, and international markets by:<br />Releasing constraints to participation <br />Enhancing benefits from participation<br />Major Market Failures:<br />Externalities (+/-)<br />Merit and demerit goods<br />Public goods<br />Information asymmetry<br />Monopoly (monopsony) power<br />Government failure<br />Major Outcomes of Market Failures:<br /><ul><li>High transportation costs
  14. 14. Information asymmetry
  15. 15. Missing input markets
  16. 16. Policy induced barriers
  17. 17. Non economic barriers</li></li></ul><li>Results: Post harvest losses in fruits and Vegetables<br />Source: Adel Kader, UC Davis; (2009)<br />Source: Kader, A. A. (2005). Increasing food availability by reducing postharvest losses of fresh produce. Proceedings of the 5thInternational Postharvest Symposium, Mencarelli, F. (Eds.) and Tonutti P. Acta Horticulturae, ISHS.<br />
  18. 18. Broken links because of luck of appropriate infrastructure<br />Page 9<br />
  19. 19. Page 10<br />What is the situation of infrastructure in SSA?<br />
  20. 20. Infrastructure coverage is low in SSA<br /> Lowest infrastructure coverage in SSA<br /><ul><li> Important rural-urban disparities
  21. 21. Electricity = lowest coverage of all infrastructures</li></ul>Source: Data from Estache and Goicoechea (2005)<br />Page 11<br />
  22. 22. Unequal access to infrastructures in Africa<br />Source: Data from Diallo and Wodon (2004), computed in Estache (2006)<br /><ul><li> Very large access disparities across income categories
  23. 23. Electricity is the most unequal</li></ul>Page 12<br />
  24. 24. Source: The Economist August 2007<br />Page 13<br />
  25. 25. High Transportation costs<br />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.<br />Source: Nelson (2006) and Sebastian (2007b).<br />Page 14<br />
  26. 26. Page 15<br />Access to roads<br />
  27. 27. Page 16<br />Access to roads<br />
  28. 28. GSM Coverage, 1999<br />Source: GSM Association<br />
  29. 29. GSM Coverage, 2008<br />Source: GSM Association<br />
  30. 30. 477 million people covered by mobile<br />This represents 477 million people<br />This represents 11.2 million square kilometres<br />Source: GSMA 2009<br />
  31. 31. Mobile Coverage, 2008<br />Source: GSMA 2009<br />
  32. 32. On irrigation<br />Page 21<br />
  33. 33. Page 22<br />On Ports<br />Location constraint for the sustainability of certain ports<br />Port capacity usually results from inadequate maintenance<br />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)<br />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.<br />Cumbersome procedures and poor links to the hinterland reduce port efficiency<br />In addition, there are the traditional “non-infrastructure” and “non-official” barriers<br />
  34. 34. Africa’s infrastructure services several times more expensive than elsewhere<br />
  35. 35. Infrastructure will require an additional US$31 billion a year and huge efficiency gains<br />Spending needs $93<br />100%<br />80%<br />60%<br />Efficiency gap $17<br />40%<br />Existing spending $45<br />20%<br />0%<br />All figures in US$ billion a year<br />
  36. 36. Spending needs $93<br />100%<br />80%<br />60%<br />Efficiency gap $17<br />40%<br />Existing spending $45<br />20%<br />0%<br />All figures in US$ billion a year<br />
  37. 37. Spending needs $93<br />100%<br />80%<br />60%<br />Efficiency gap $17<br />40%<br />Existing spending $45<br />20%<br />0%<br />Improving operational<br />efficiency $7.5<br />All figures in US$ billion a year<br />
  38. 38. Spending needs $93<br />100%<br />80%<br />60%<br />Efficiency gap $17<br />40%<br />Existing spending $45<br />20%<br />0%<br />Increasing<br />cost recovery $4.7<br />Improving operational<br />efficiency $7.5<br />All figures in US$ billion a year<br />
  39. 39. Spending needs $93<br />100%<br />80%<br />60%<br />Efficiency gap $17<br />40%<br />Existing spending $45<br />20%<br />0%<br />Increasing<br />cost recovery $4.7<br />Improving operational<br />efficiency $7.5<br />Prioritizing<br />public spending $3.3<br />All figures in US$ billion a year<br />
  40. 40. Spending needs $93<br />100%<br />80%<br />60%<br />Efficiency gap $17<br />40%<br />Existing spending $45<br />20%<br />0%<br />Increasing<br />cost recovery $4.7<br />Improving operational<br />efficiency $7.5<br />Prioritizing<br />public spending $3.3<br />Spending budgeted<br />All figures in US$ billion a year<br />resources $1.9<br />
  41. 41. Spending needs $93<br />100%<br />80%<br />Funding gap $31<br />60%<br />Efficiency gap $17<br />40%<br />Existing spending $45<br />20%<br />0%<br />Increasing<br />cost recovery $4.7<br />Improving operational<br />efficiency $7.5<br />Prioritizing<br />public spending $3.3<br />Spending budgeted<br />resources $1.9<br />All figures in US$ billion a year<br />
  42. 42. Page 31<br />Is just an issue of building new infrastructure?<br />
  43. 43. Example of the role of transportation value chain<br />
  44. 44. Improvement<br />Original <br />Improved<br />Cost of<br />improvement($)<br />hours<br />road<br />road <br />(km)<br />(km)<br />Ayauca<br />4.34<br />308.32<br />204.45<br />$6,137,455.71<br />Satipo<br />0.73<br />464.14<br />504.53<br />$17,728,322.39<br />Example of the role of transportation value chain<br />
  45. 45. What we know on infrastructure<br />
  46. 46. Bangladesh, 2000-2004<br />60%<br />60%<br />50%<br />50%<br />40%<br />40%<br />% change of PC HH Exp<br />% change of PC HH Income<br />30%<br />30%<br />20%<br />20%<br />Pipeline water<br />Water +<br />Water + elect +<br />Water + elect +<br />10%<br />10%<br />electricity<br />phone<br />phone + road<br />0%<br />Source: Chowdhury and Torero, 2006<br />0%<br />Electricity<br />Elec + phone<br />Elec + road<br />Elec + road +<br />phone<br />Complementarities of infrastructure<br />Peru, 2002<br /><ul><li>Infrastructure does seem to have an impact on household’s welfare
  47. 47. There exists complementarities in the provision of different types of infrastructure </li></ul>Source: Escobal and Torero, 2004.<br />Page 35<br />
  48. 48. Page 36<br />3+ infrastr<br />15<br />4<br />2 infrastr<br />10<br />3.5<br />1 infrastr<br />5<br />3<br />2.5<br />0<br />2<br />additional weekly hours of work<br />% change in time allocation<br />-5<br />1.5<br />-10<br />1<br />-15<br />Ag salaried<br />Non-ag salaried<br />0.5<br />-20<br />Ag self-empl<br />Non-ag self empl<br />0<br />-25<br />2 infrastruct<br />3+infrastruct<br />1infrastruct<br />How does infrastructure affect welfare?<br />PERU, 2002<br />PSM (kernel); control group: HH with no assets<br />A) Households work more hours<br />B) Households increase non-agricultural hours of work <br />Source: Escobal and Torero, 2004.<br />
  49. 49. 16<br />Treatment: 2 infrastructures<br />16<br />Treatment: 1 infrastructure<br />Diff = <br />Diff = <br />14<br />Control: No infrastructure<br />14<br />Control: No infrastructure<br />0.04<br />0.02<br />12<br />12<br />10<br />10<br />8<br />density<br />8<br />Male<br />density<br />Male <br />6<br />Female<br />6<br />Female<br />4<br />4<br />2<br />2<br />0<br />0<br />-0.2<br />-0.1<br />0<br />0.1<br />0.2<br />0.3<br />0.4<br />0.5<br />-0.1<br />0<br />0.1<br />0.2<br />0.3<br />0.4<br />ATT<br />ATT<br />Treatment: 3 infrastructures<br />6<br />Control: No infrastructure<br />Diff = <br />5<br />-0.08<br />4<br />3<br />density<br />Male<br />2<br />Female<br />1<br />0<br />-0.4<br />-0.2<br />0<br />0.2<br />0.4<br />0.6<br />0.8<br />-1<br />ATT<br />Infrastructure seems to have different impacts on men and women<br />Bangladesh, 2004: ATT effects of infrastructure among men and women<br />(PSM among men and women)<br />Page 37<br />
  50. 50. Empirical Research on the Impact of Mobile Phones<br />Fisheries in India (Abraham 2007, Jensen 2007)<br />Grain markets in Niger (Aker 2008, 2010) => sell<br />Farmer participation in Uganda (Muto 2009)<br />Internet kiosks and soybean prices in India (Goyal 2009)<br />Labor markets in South Africa (Klonner and Nolen 2009)<br />Market Information Availability and Potato Producer Prices in West Bengal (Mitra, Mookherjee, Torero and Visaria 2010)<br />
  51. 51. Mobile Phones and Fish Price Dispersion (Jensen 2007)<br />
  52. 52. Trader-Level Outcomes (Aker 2008)<br />Search in .91 more markets<br />Sell in one more market<br />
  53. 53. Page 41<br />Final comments<br />
  54. 54. Page 42<br />1. Regional coordination to boost supply capacities- corridor concept<br />Africa’s economic geography is a serious challenge infrastructure is inherently regional<br />20+ countries with populations of <5 million<br />20+ countries with economies of <US$5 billion<br />60 international river basins<br />15 landlocked countries<br />Need of evaluation and prioritization based on ERR and PRR (result of wealth creation)<br />Prioritized infrastructure corridors with Economic development corridors (potentially use a typology of development domains).<br />Need to learn from existing information by systematizing it and developing concrete plans to implement it.<br />
  55. 55. Page 43<br />
  56. 56. Page 44<br />2. Economic crisis is a challenge and an opportunity<br />Economic crisis will generate excess capacity (see fall in industrial production in 2009)<br />This imply that infrastructure building could be cheaper<br />Investment returns in countries which significant bottlenecks on infrastructure like Africa could be crucial<br />Learn from what China did and not from what Japan did during the crisis<br />
  57. 57. 3. Financing<br />Multilaterals HAVE to play a crucial role but they need to think regionally – Need to change their way of operation<br />Public – Private partnership for infrastructure development <br />Innovations to broaden and deepen markets including niche and preferential markets<br />Page 45<br />
  58. 58. 4. Complementarities<br />Significant evidence of importance of complementarities<br />Need to think on a value chain approach<br />Need to learn from experience with compacts on infrastructure<br />In Africa roads and electricity are extremely costly for users<br />One of the major restrictions to trade underachievement is infrastructure<br />Page 46<br />
  59. 59. 5. On regulation<br />Recommend regulatory changes to enable the market to work better<br /><ul><li>increased competition
  60. 60. open to new technologies
  61. 61. open to new business models</li></ul>Outline an approach to subsidies to extend services beyond the market<br /><ul><li>using market forces
  62. 62. minimal regulation</li></ul>Page 47<br />
  63. 63. 5. On regulation (cont)<br />Distinguish two types of service shortfalls:<br /><ul><li>market efficiency gap
  64. 64. real access gap</li></ul>For the market efficiency gap:<br /><ul><li>identify current regulatory problems and issues that regulatory agency can address (example EU remedies for regulation)
  65. 65. examine new technologies that could help to reduce costs</li></ul>For the real access gap:<br /><ul><li>draw on best practices developed in rural areas
  66. 66. complement and extend these for application in rural and peri-urban areas.</li></ul>Page 48<br />
  67. 67. 6. Leapfrogging<br />Not need to repeat what happen in the past and what was done in developed countries – clear example is the cellular industry<br />Use best technologies<br />Use green infrastructure – this could be an advantage in SSA<br />Page 49<br />
  68. 68. Page 50<br />Thanks!<br />