Enhancing Private Sector Involvement in Agricultural and Rural Infrastructure Development

This is the fifth of a series of five papers outlining the policy priorities of the Global Harvest Initiative, a partnership united under the common goal of addressing hunger and food insecurity by sustainably closing the global agricultural productivity gap.


As food prices have increased and become more volatile, global concern about poverty and hunger has grown sharply. Food price pressures are especially worrisome for the poor, many of whom must spend as much as two-thirds of their income on food.

These concerns have prompted renewed attention to the importance of increasing and sustaining global agricultural productivity, especially in developing countries. USAID Administrator Dr. Rajiv Shah said at the September 2010 Clinton Global Initiative, “….we know that economic growth that comes from increasing agricultural productivity is nearly three times more effective in raising incomes of the poorest than increases in manufacturing or service productivity.”[1]

Stimulating the required acceleration in agricultural productivity, raising global incomes and reducing hunger require large capital investments. Yet, economic growth today is significantly hindered by persistent, sizable under-investment in most developing countries. A critical issue in meeting the food needs of the future is how to attract the capital needed for agricultural and rural development, especially from the private sector.

To this end, the Global Harvest Initiative recently examined investment flows and key development indicators in Global Food and Agriculture Productivity Review: The Investment Challenge [2], a paper which reviews the available literature to identify and assess the magnitude of investment needs and flows required to modernize agriculture and the food systems in developing countries. Key results of that review are outlined in this paper along with recommendations for mobilizing the necessary additional investment.

The GHI review concludes that the overall developing country investment gap in the agricultural sector approaches $90 billion annually. This is a highly conservative estimate, but provides a clear indication of the enormity of the task of doubling agricultural output in 40 years time.

This gap reflects a massive investment need and emphasizes the importance of finding effective ways to channel capital into developing country agricultural systems.  While part of the needed investment can be met by increasingly robust public and private donor programs, the only feasible source that can effectively fill this gap is private investors, both from within developing countries and from outside.

This recognition raises the obvious question of how to mobilize more private support for agricultural productivity growth—how can the existing constraints on this investment be removed?

Investment from the private sector in the agriculture and food industry already is significant and vital in a handful of developing countries, and the attraction of those markets is clear.  This suggests that successful efforts to fill investment needs must include stronger measures to improve both the business climate and the level of effective competition.

DEFINING THE INVESTMENT GAP

Investment capital for stimulating economic growth can come from several different sources:

  • Domestic public spending by developing country governments;
  • Donations from developed countries and donor organizations;
  • Remittances from workers overseas[3]; and
  • Domestic and international private-sector investors.

To help identify the magnitude of the investment gap, even in the most approximate terms, the sources and magnitudes of current investment flows were examined. The review found that:

  • Official development assistance from public donors and multilateral institutions reached $128.6 billion in 2008[4], although the share of those funds that actually focused directly and indirectly on agriculture was modest—just $12.3 billion, about 10 percent of the total (See table below). [5]
  • Non-official donations—gifts from foundations, corporations, private voluntary organizations , individual volunteers, religious organizations and colleges and universities—were also substantial and amounted to about $53 billion globally in 2008 ($37.3 billion from US donors). These gifts also were for a broad range of purposes.
  • Private remittances amounted to $181 billion in 2008 for a wide variety of uses and purposes, and although there is little specific information about these flows, they tend to be highly concentrated in a few countries rather than distributed widely across the developing world.
  • Direct investments by the private sector of $121 billion were reported, spread across all economic sectors.  These investments tend to be highly concentrated in Brazil, Russia, India, China, and a few other countries.

In sum, capital flows for development purposes from public and private sources to developing countries totaled $483 billion in 2008 (See table below).

Developing Country Support for Overall Development And Agriculture by Source: 2008

Overall Ag and Rural 1/bil$
Official Development Assistance 128.0 12.8
Donations 53.0 5.3
Remittances 181.0 18.1
Direct Private Sector Investment 121.0 12.1
Total Support 483.0 48.3
Source: Based on World Bank and Other Development Indicators, 2010

1/Ag and Rural share for ODA based on OECD estimates; for other categories, the same approximately 10% share is assumed.

Tracking the capital invested in developing country economies to its final use is extremely difficult, but it is clear that only a small portion of the total flow of assistance is actually focused on rural and agricultural development. In fact, it would appear generous to assume that the proportion of all support funds available to agriculture is about the same as the amount estimated for Official Development Assistance funds, around 10 percent. If accurate, this would suggest that approximately $48 billion was invested in agriculture in 2008. Although there is strong evidence from OECD and others that this estimate significantly overstates international investments aimed specifically toward agriculture, it is presented here to emphasize the point that the investment gap is formidable.

Compared to the total capital flows to the developing nations, estimated to be $483 billion, what are the total development capital requirements and how much is needed for agricultural and rural development?

Development investment needs are difficult to define or measure, in part because development includes such a large number of economic and social components—social investment needs such as education and health, for example, together with infrastructure needs—most notably facilities to support communications, power, transport, water systems and irrigation—among many others must be considered. Because development investments typically compete directly with other priorities, including defense, any definition is especially complex, although these are widely discussed in the development literature, often in terms of the impacts of particular investments on poverty amelioration.[6]

Such concepts also are difficult to specify because available data are far from complete and are frequently given in qualitative terms, especially for social goals.[7] For example, two key programs focused on education and health are described qualitatively in the Millennium Development Action Agenda, 2010-15,[8] which calls for supporting the “Education for All, Fast Track Initiative,” by funding education programs at 20-percent of public spending. It also calls for achieving the “African Union Abuja Declaration” target of 15 percent of public spending on health.

For infrastructure, the range of needs identified in the literature varies widely. For example, for Sub-Saharan Africa, infrastructure needs are identified at about 8 percent of domestic GDP annually (for operations and capital) but range widely to more than 35 percent for “fragile low income countries.”[9] For Latin America and the Caribbean, UNCTAD suggests that development infrastructure needs require some 3 to 6 percent of GDP.

Against these needs, estimates of developing country spending for development purposes from their own resources also are highly imprecise. However, reviews of numerous analyses by development institutions and others suggest that a reasonable estimate is about 4 percent of GDP (in 2008). This assumption suggests that developing countries spent about $696 billion of their own resources on development purposes in 2008. This amount of domestic spending, plus the reported international development assistance of $483 billion, amounts to $1.179 trillion. Even so, a huge investment gap of perhaps $562 billion annually remains (see table below).

There is no means to precisely determine what percentage of this reflects critical needs for agriculture and rural development. Not only is agriculture complex, but its economic setting in individual countries varies on the basis of specific needs in each location. Clearly, agriculture is centrally important in largely rural economies—in the 110 developing countries for which the World Bank has data for 2008, agriculture accounted for an average 15.8 percent of GDP.  Clearly, the number is much higher for some countries—in 36 countries agriculture accounts for 25 to 61 percent of the GDP.  However, the developing-country average reflects the basic investment needs for agriculture as a proportion of development spending from national budgets.

Development Spending, Developing Countries and Overall and Agricultural Investment Needs

Development Spending Needs, 10% of GDP
Development Spending, Own Resources, 4%

International Assistance & Investment

2008 bil $
1,740.8
696.3

483.0

Development Spending Gap 561.5

Agricultural Needs, 15.8% of Development Gap

88.7
Source: Based on World Bank and Other Development Indicators, 2010.

Based on these findings and assumptions, the review concludes that overall developing country investment needs for agricultural total at least $88.7 billion annually  This very conservative estimate is almost twice the $48 billion in agricultural support that was available from international sources in 2008. 

RECOMMENDATIONS

Given the enormity of this gap, it is clear that new approaches must be explored that can more effectively stimulate additional private sector involvement.  GHI suggests the following measures for consideration:

  • Developing countries must help themselves by devoting more resources for overall development.

In 2008, developing countries spent an estimated 4 percent of their GDP—about $696 billion—on development from their own resources. The needs, however, are closer to 2.5 times that level, reflecting an annual development investment gap of many billions. Based on investment guidelines and performance estimates reviewed, GHI suggests that developing countries strive to spend at least 10 percent of their GDP on overall development efforts—some $1,741 billion annually. Included in this need is a share for rural/agricultural development, although electricity, water, health, education and many urban needs traditionally attract the bulk of the development spending.[10]

  • Improve governance and reduce corruption.

Private investors cannot be expected to put scarce capital at risk in nations where corruption is rampant and the government untrustworthy, or where essential infrastructure is missing.  Good central governance is fundamental to increasing private support for the development of agricultural systems.  The Obama Administration could make such concerns more prominent and integral to the Feed the Future initiative, and in most other areas of engagement with developing countries.

Likewise, GHI urges the Obama Administration to leverage its development assistance programs as incentives for developing country governments to improve their business climate, for both the indigenous private sector and foreign investors.

  • Improvement of the business climate in developing countries should be a threshold requirement for global food security initiatives offered to any nation.

Investment in developing countries entails greater risk, and capital flows to business environments with clearly defined and uniformly administered rules and regulations.  Likewise, businesses tend to minimize their exposure to environments characterized by official favoritism and uneven application of taxes, regulations, ownership limits, discretionary tariffs, and customs practices.  Such conditions stymie the flow of investment, as firms seek more favorable alternatives.  Additionally, the developing country civil service should be supported and strengthened in order to help administer and oversee new investments and provide support to programs and policies within the context of developing countriesmany ministries involved in agriculture lack staff capacity to absorb, administer and manage new programs that can benefit their countries.

  • Establishing an effective government/industry partnership could buttress efforts to achieve sustained agricultural development, with the potential to lift millions out of poverty and significantly reduce the number of malnourished—now approaching 1 billion worldwide.

A more structured mechanism to support this interaction would enhance the exchange of ideas between the government and private companies on an ongoing basis—a process that could help harness private-sector capital.

The Obama Administration’s global food security initiative Feed the Future is an important place to start, and GHI applauds the administration for providing strong leadership in this area.  However, while Feed the Future represents a rhetorical nod to the importance of private-sector involvement, a clearer focus is necessary to achieve the program’s ambitious goals.

  • Greater focus must be given to the development of rural infrastructure as the foundation upon which business climates can be improved with fully functioning markets.

For example, investment in road improvements is vital. Without adequately maintained roads, producers and communities are often isolated, leading to high costs and low returns. Roads, however, are just one essential infrastructure component for sustained development and accelerated agriculture productivity.

The GHI review observes the compelling logic behind the development model of the Millennium Challenge Corporation, which recognizes that balanced development, including many types of infrastructure, is crucial to agricultural modernization and productivity enhancement. GHI suggests that a more robust Millennium Challenge Corporation (MCC) could help stimulate the needed expansion of private sector business activity in developing countries. Significantly expanded funding for FY 2011 and beyond would leverage an established program and make MCC a far more complementary approach to the Feed the Future initiative.

  • Other non-traditional approaches and tools should be explored.

One example involves using the concepts underlying the Orphan Drug Act to develop a Neglected Crop Act that could induce additional investment in food crop genetics, possibly using patent extensions and tax incentives to encourage companies to develop more productive crops where commercial market potential is limited and would not warrant the required expenditures. Examples of such work exist through the Neglected and Underutilized Species work of CGIAR.[11] Encouraging collaboration and joint efforts also would be productive, and could extend to processing, irrigation and harvesting technologies specific to a particular part of the world.

CONCLUSION

There is much to be done to close the enormous gap between developing country investment needs and capital availability—a critical objective in meeting the food, feed, fiber, energy and other agricultural needs of the world’s rapidly growing population.

The role of private capital in this struggle is paramount. While private investors clearly are prepared to engage and invest in developing countries, additional efforts to support and sustain this investment are needed. To that end, the recommendations offered in the foregoing sections to help fill the current gap.

These lead to three concluding observations. The first concerns the scale of developing country needs and the fact that agriculture and related infrastructure are but one of many priorities each country must consider. This underscores the reality that current efforts, significant as they are, have little prospect of closing—on their own and with currently available resources—the investment gaps they face.

Second, helpful as they are, donations and gifts alone simply cannot reasonably be expected to fill an investment void of the magnitude described above.

Finally, any development program from any nation or international organization must include a significant role for the private sector. No country in history has succeeded in generating the capital necessary to effectively achieve its development goals without broad, effective and continuing mobilization of private capital. This lesson is essential in the current setting of huge needs, limited resources, lagging progress and growing social concerns regarding vital economic and social goals.


[] USAID: http://www.usaid.gov/press/speeches/2010/sp100921.html
[] Paper prepared for the Global Harvest Initiative by Dr. William C. Motes. http://www.globalharvestinitiative.org
[] Remittances, typically from family members working overseas, are most important for capital investment decisions that are made by local grower families.
[] 2008 is the most recent year for which comparable data are available.
[] Examples include individual donor country programs such as USAID (Feed the Future initiative), and Millennium Challenge Corporation development programs; World Bank-led global and food security programs, regional development bank programs, and dozens of other multilateral agency programs; Hybrid public-private partnerships such as the Global Health Initiative that raise and disburse funds for particular purposes such as HIV-AIDS, child health and many others; Private foundation efforts, such as AGRA, the Clinton Global Initiative, Bill and Melinda Gates Foundation, and the William P. and Flora Hewlett Foundation, among others.
[] Public spending in developing countries; trends, determination, and impact, Fan and Rao, IFPRI, 2004.
[] Public spending in developing countries; trends, determination, and impact, Fan and Rao, IFPRI, 2004.
[What Will It Take to Achieve the Millennium Development Goals? An International Assessment. United Nations Development Program, June 2010.
[Africa’s Infrastructure: A Time for Transformation. Study by a partnership in institutions including the African Union Commission, African Development Bank, Development Bank of Southern Africa, the New Partnership for Africa’s Development, and the World Bank.
[] At the Second Ordinary Assembly of the African Union in July 2003 in Maputo, African Heads of State and Government endorsed the “Maputo Declaration on Agriculture and Food Security in Africa” (Assembly/AU/Decl. 7(II)). The Declaration contained several important decisions regarding agriculture but prominent among them was the “commitment to the allocation of at least 10 percent of national budgetary resources to agriculture and rural development policy implementation within five years”. http://bit.ly/gMNvUJ. Nine additional countries are within the 5-10 percent range (in increasing order): Chad, Gambia, Mauritania, Sao Tome and Principe, Zimbabwe, Tunisia, Sudan, Namibia, and Togo – http://www.resakss.org/.
[] Bioversity International: http://bit.ly/fZQYF4

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