Investing On Agriculture to Reduce Poverty


Investing HEAVILY On Agriculture to REDUCE Poverty

Background

Over the years Nigerian economy was formally depending on agricultural output and a major source of income to the economy. The discovery of huge revenue from oil export in the late 1970s and early 1980s made agricultural productivity to fall drastically. This paper proposes a simple methodology to estimate the agricultural spending that will be required to achieve the Millennium Development Goal of halving poverty (MDG1) in Africa countries.

This method uses growth-poverty and growth-expenditure elasticities to estimate the financial resources required to meet the MDG1, considering both the direct and indirect impacts of agricultural spending on poverty reduction. The paper attempts to address a key knowledge gap by improving estimation of MDG costs at both the regional and country levels.

Introduction

Developing countries and the international development community are presently increasing and redirecting their resources in order to achieve various development objectives such as reductions in poverty, hunger and malnutrition. At the United Nations Millennium Summit in September 2000, world leaders made a huge commitment to reducing poverty. As part of the process, specific indicators were adopted for measurement of quantifiable progress, and an agenda was enacted for reducing poverty, and its causes and manifestations. At the Monterrey Conference of 2002, rich countries renewed their pledge to increase their development assistance, raising it from 0.4 percent in 2004 to 0.7 percent of their GDP.

Conceptual and theoretical issues

In 2005, the UN Millennium Project, headed by Jeffery Sachs, also called for a ‘big push’ in donor support to meet the MDG challenge in the same year, the Commission for Africa asked rich countries to double their aid to Africa and cancel the debts of poor African countries. Many developing countries have also adopted the concept of the Poverty Reduction Strategy Papers (PRSPs) or an equivalent, in order to formulate strategic plans and earmark financial resources for achieving their poverty reduction goals. In 2001, the New Partnership for Africa’s Development (NEPAD) was formed by the Assembly of Heads of State in Africa as part of an explicitly political and resource commitment to foster growth and development and addresses the challenges facing the African continent.

However, despite these international, regional and national efforts, several key questions remain. For example, it is yet unclear whether the pledged resources are sufficient to achieve the stated objectives of growth and poverty reduction, nor is it clear how and under what conditions these resources should be allocated in order to have the largest impact on growth and the poor. Several studies have attempted to estimate the overall amount of resources required across all MDGs. However, no prior study has explicitly focused on examining the required spending in agriculture and breaking it down by individual country.

The importance of the agricultural sector in reducing poverty and serving as an engine of growth was demonstrated throughout the Green Revolution in Asia, particularly in India and China. Africa cannot bypass this development pathway, as the bulk of the African population lives in rural areas. Recent evidence from the International Food Policy Research Institute (IFPRI) showed that promoting higher agricultural growth will be key in reducing poverty, promoting overall economic growth and achieving the first MDG go

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al of halving the number of poor people (Diao et al., 2007).

There is a range of instruments that governments and donors can use to promote the required agricultural growth in Africa. Among them, government spending is one of the most direct and effective methods, yet agricultural spending in Africa remains very low when compared with that in other developing regions. For example, Africa still spends only 4-5 percent of its total national budget on agriculture, compared with 8-14 percent in Asia. During the Green Revolution period in Asia, this share was even larger (upwards of 15 percent). Agricultural expenditure as a percentage of agricultural GDP is a more appropriate measure of a government’s support for agriculture, as it measures agricultural spending relative to the size of the sector. However, even by this measure, African countries spend only 4-5 percent compared to 8.5-11 percent in Asia (Fan et al., 2008).

The importance of increasing government spending for agriculture has been recognized by African leaders as a fundamental pre-requisite for achieving a 6 percent annual growth rate in agricultural GDP, a goal that has been adopted by NEPAD through the Comprehensive Africa Agriculture Development Programme (CAADP). This is evident in the Maputo Declaration, wherein African leaders called for a 10 percent budget allocation to agriculture by 2008, as part of their commitment to the MDG1 and CAADP goals. These well-intentioned efforts have generated debate in the international development community regarding the level and utilization of resources, especially given that agriculture is a neglected sector, with problems that may be exacerbated by drought, insecurity and unfavourable policies towards farmers.

The Millennium Development Goals (MDGs) its impact

The adoption of the MDGs as a development framework among developing countries has engendered various efforts to estimate their achievement costs. Most such estimates have been made at the global or regional levels, with some country-level studies emerging only recently.

One of the earliest of such studies is the Report of the High-Level Panel on Financing for Development (or the “Zedillo Report”) published by the United Nations. Subsequent studies by the World Bank, the United Nations Development Program (UNDP), and the IFPRI’s IMPACT model also estimate the costs required to reach the MDGs. The various estimates of the total cost to halve poverty and hunger by 2015 (the MDG1) differ significantly, ranging from $8.5 billion to $62 billion per year. This wide variation in cost estimates arises from differences in methodological approaches, data quality and sources, underlying assumptions about future population growth, target interpretation, countries covered, unit costs of investments, and the parameters used in linking investment to growth and poverty reduction. The most commonly used approach is the standard unit cost method based on estimates of a minimum expenditure requirement per person or sectoral cost estimates.

In the Zedillo report, resource requirements (or investment gaps) for achieving growth in Africa are estimated from the capital account deficit (investment minus savings). The calculation assumes that a 22 percent investment ratio as a percentage of GDP would be required to sustain an economic growth rate of 6 percent over the next 10-12 years, from a baseline of data from 1994-98. This assumption is derived from the Latin American experience.3 Using this approach, the study estimates that an additional $10 billion per year over current spending will be needed to achieve a 6 percent economic growth rate and meet the MDG1 in Africa.

The World Bank study by Devarajan, Miller, and Swanson (2002) first estimates the additional income growth required to meet the MDG1, then estimates the resources needed to achieve this growth. This is done with a “two gap” model in which growth in mean income depends on the level of investment and the efficiency with which investment is turned into the output, i.e. the incremental capital-output ratio (ICOR). The growth in mean income is calculated using a Lorenz curve estimated for each country, based on current poverty levels and income distribution. The estimates for Africa range from $54 to $62 billion per year.

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IFPRI’s IMPACT model employs unit costs to estimate global- and regional-level requirements necessary to meet the MDGs. For example, total irrigation investments are calculated by multiplying the estimated increase in irrigation area and then adjusting for cropping areas by the average cost of irrigation per hectare. Similarly, rural road investments are calculated by multiplying the incremental road length by road investment costs per unit. The model projects a total required investment of $238 billion during 1997-2025 for Africa (Rosegrant et al., 2005).4 The total agricultural investments, i.e. the sum of the estimated costs for irrigation, rural roads and agricultural research, amounted to roughly $140 billion, an average of $5 billion a year. Achieving these projections would entail a 94 percent increase in total investments for Africa over the business as usual (BAU) scenario;5 rural road investments would rise 56 percent above the BAU levels of $95 billion, while irrigation and agricultural research investments would increase by 141 percent and 44 percent above the BAU estimates of $49 billion and $28 billion, respectively.

The UNDP has also commissioned several studies, including a background study by Pettifor and Greenhill (2003) that draws on the approaches used in both the Zedillo and World Bank reports to come up with global estimates of $46 billion per year needed to meet the MDG1 among 42 heavily indebted countries. Another UN effort, that of the Millennium Project, developed a Hunger Model that uses the unit cost approach to estimate the country-specific resource needed to achieve the MDG1 through agricultural productivity growth, rural income generation and nutrition improvements. The Hunger Model is one of only a few efforts that have attempted to generate cost estimates at the level of individual countries. The model allows users to calculate inputs, the per capita and total costs of providing interventions, and the human resources and physical infrastructures required to achieve the targets. These parameters are projected based on the change in coverage required and unit cost. Country-level studies have been carried out for Ghana, Tanzania and Uganda, yielding estimates that the annual public investments needed per capita in these countries to achieve the MDGs would be $80, $96 and $92 in 2006, respectively, and increase to $124, $161 and $143 by 2015 (UNDP, 2005).

More recently, an increasing number of individual country-level estimates have emerged. That of Kakwani and Son (2006) is especially noteworthy, as it uses simulations to project required annual growth rates, investment rates and per capita aid across 15 Sub-Saharan African countries. The simulations consider the distribution aspects of growth in each country by linking growth, poverty and inequality through three scenarios: pro-poor, anti-poor and distribution-neutral growth scenarios. The utilized growth elasticity of poverty differs across years and countries based on these three conditions of growth. For example, the magnitude of growth elasticity for poverty reduction is greatest under the pro-poor scenario, implying that a lower growth rate would be required to achieve the same percentage reduction in poverty. This approach reveals that the pattern of growth and initial conditions of development are important to calculations aimed at estimating the costs of the MDGs. For the 15 African countries studied, the average per capita growth rate required to achieve the MDG1 is much lower under a pro-poor than an anti-poor development strategy, at 1.5 percent and 5.4 percent, respectively. The investment rates needed to achieve these growth rates are then calculated using an elasticity of investment with respect to growth and an output-to-capital ratio. The results estimated using this strategy show that the required average per capita aid needed is about $35.4 per person under a pro-poor growth strategy, increasing to as much as $129 per person under an anti-poor strategy. Comparison of these results with those from the UNDP Report (2005) reveals a large divergence among individual country estimates, underscoring that there is a lack of consistency at any level of analysis, due to the use of different assumptions, data, and analytical approaches.

One of the key determinants for costing the MDG1 includes the assumptions made about future economic growth and its effects on poverty. In the World Bank study (Devarajan, Miller, and Swanson, 2002), for example, the required investment is calculated based on a per capita growth elasticity of poverty, which is used to first determine the rate at which national income (or GDP) will need to grow in order to achieve the poverty reduction target of the MDG1. Using this approach, a variety of studies estimate the growth rates needed to lift people out of poverty in order to meet the MDG1 but fail to estimate the cost required to achieve the necessary growth.

Since there is no ‘one size fits all’ in meeting the MDG and other development goals, needs assessments can only be properly made at the country level. The Poverty Reduction Strategy Papers (PRSPs) are supposed to provide a framework for calculating the additional amount of resources required, but very few countries have done so to date. Furthermore, the studies that include relevant costing calculations often lack a consistent and integrated analytical framework.

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Investing in African agriculture to halve poverty

The principal objective of this study is to estimate the agricultural spending require to achieve the agricultural growth needed to meet the MDG1. The key feature of this study is the examination of potential country-level differences that have been largely ignored by the previous estimates. To accomplish this, we use both growth-poverty and expenditure-growth elasticities to estimate required agricultural growth rates and corresponding public expenditures needed to achieve this goal, separating this out by individual country. The required agricultural growth rates are estimated using elasticities of poverty with respect to both agricultural and non-agricultural growth, and the additional spending needed in agriculture is calculated based on these growth rates and the expenditure elasticities of growth. The model simulations account for the impact of the non-agricultural sector by using non-agricultural growth elasticity of poverty. The share of the non-agricultural sector is expected to increase over time, and thus its impact on poverty reduction may also increase.

Therefore, we also consider the non-agricultural sector in order to avoid overestimating the agricultural growth and spending required to achieve the MDG1. The simulations are conducted for the 30 countries in Sub-Saharan Africa (SSA) in which the agricultural sector contributes at least 10 percent of the gross domestic product (GDP) and where the majority of the poor depends upon agriculture for their livelihood. Although the choice of countries is governed by the availability of expenditure data, the included countries broadly cover the whole of SSA. Below,

Resources required

Before we analyze what additional resources will be required for African countries to achieve the MDG1, we review the progress of poverty reduction in the past, particularly between 1990 and 2004. Africa as a region has achieved relatively little progress in poverty reduction; indeed, poverty actually increased between 1990 and 2004 in 10 countries (Burundi, Central African Republic, Guinea-Bissau, Kenya, Lesotho, Madagascar, Malawi, Niger, Togo and Zimbabwe). Thus, the African countries must accelerate their economic growth if they are to reach the MDG1. Using growth elasticities and projected growth rates, we can simulate whether a country will be able to halve the number of poor by 2015.

It is clear that even under the more optimistic scenario, many African countries will not reach the MDG1 by 2015. Only Ghana, Uganda, Mozambique, Mali, and Cameron will reach the MDG1, while the more conservative scenario has Mali joining the countries that will fail to meet the MDG1. Even if all of the surveyed countries reach the target of 6 percent annual growth in agriculture, most will be unable to reach the MDG1. Even under the more optimistic scenario, only one-third of the countries (Burkina Faso, Mauritania, Mozambique, Cameroon, Ethiopia, Ghana, Guinea-Bissau Mali, Nigerian, Rwanda, Togo, and Uganda) will reach the MDG1 if they succeed in achieving 6 percent annual agricultural growth from 2004 to 2015. Under the more conservative scenario, the number of countries that will reach MDG1 is further reduced to 7 (Mozambique, Cameroon, Ethiopia, Ghana, Guinea-Bissau, Togo, and Uganda).

Before we calculate the agricultural spending that will be required to achieve the desired level of agricultural growth, we review what African countries have actually spent on agriculture. Agricultural spending as a share of total government spending is about 5 percent, only half of the 10 percent called for by the Maputo declaration. The majority of African countries are far from this target, although many have made significant progress in boosting their government spending on agriculture in recent years. A more appropriate measure is agricultural spending as a percentage of agricultural GDP since the size of the agricultural sector varies by country and this measure is size-neutral. For Africa as a whole, this percentage is 4.6 percent (2004), which is very low when compared with Asia, which often spends 8-10 percent of its agricultural GDP on agriculture (Fan et al., 2008).

Conclusion and recommendations

A significant body of literature notes the central role of agriculture in reducing poverty, especially in the African context. Despite this, none of the existing strategies for estimating the costs required to achieve the MDG includes agricultural growth requirements or quantifies the public resources needed to support this growth. Furthermore, the required growth and financial resources vary based on past progress in poverty reduction and the role of agriculture in the overall economy.

Several findings clearly emerge. First, in the ‘business as usual’ scenario, Africa will not be able to achieve the MDG1 at the regional level. At the country level, only a handful of countries will succeed, while the majority will fall short, indicating that the African countries need to accelerate their economic growth, particularly in the agricultural sector. At the regional level, an annual agricultural growth rate of 7.5 percent per annum is required. However, this masks a large variation among countries; Lesotho, Niger, Kenya, Madagascar, Guinea Bissau and Burundi will require at least 10 percent growth in agriculture, while Ghana, Mozambique and Uganda will achieve the goal if they continue at their present growth rates. Nigeria stands out as the only country with a high level of poverty that has the required agricultural growth rate close to 6 percent.

In order to achieve the MDG1, our analysis indicates that African governments will need to increase their agricultural spending by 20 percent per year. At the country level, this requirement ranges from achievable levels (e.g. Ghana, 9.5 percent) to far more difficult levels (e.g. Madagascar, 33 percent). The worsening situation in recent years in Zimbabwe leads to a required 50 percent annual growth rate in spending.

For Africa as a whole, the required investments are 32-39 billion per annum. These estimates are comparable to previous estimates at the regional level. However, our country-level estimates are significantly lower than those of other studies, thereby underlining the importance of agricultural growth in achieving the MDG1. While the aggregate totals are quite high, half the countries will require less than half a billion dollars per annum to achieve the goal. However, while it is vital to estimate the public resources needed to reach particular agricultural targets, it is equally important to prioritize investments.

Limited evidence shows that investments in agricultural research and extension, rural infrastructure and rural education have the greatest impact on agricultural growth and poverty reduction (Fan, Zhang and Rao, 2004).

However, as with the costing simulations, the particular context of each country will determine the investment priorities. The efficient use and targeting of these large public expenditures will require a complementary strengthening and reformation of governance and institutions.

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