G20 support agricultural assistance to low-income countries and financial services to the poor
26th September 2009
Background: the G20 statement
The G20 leaders called for the World Bank to establish a trust fund to scale-up agricultural assistance to low-income countries. This follows the announcement made by the G8 finance ministers in July to provide an additional $20bn in agricultural investments to poor countries to boost global food security.
Separately the G20 committed to finding ways to provide the poor with access to financial services including micro-finance and financing for small and medium sized enterprises (SME’s). The leaders launched the “G20 SME Finance Challenge”, a call to the private sector to put forward proposals as to how public finance could be used to support these financing requirements on a “sustainable and scalable basis”.
Our comments:
- The G20 statements on agriculture and micro-finance are a positive step. They imply a more considered view of developing agriculture and the micro-finance areas.
- The G20 should move away from their traditional approach, namely donating food (except in humanitarian crises). The US has historically donated 25 times more food that funding for agricultural development. The emphasis should be on developing business structures that make the agricultural sector self-sustaining in these countries.
- The G20 funding should come with strings attached. One example is that it could be used in conjunction with the training of small scale farmers in low-income countries so that their productivity is raised. Another example is to use the capital as loans rather than donations. That way the capital can be recycled.
The example of agriculture in Africa
1) Problems with the current donor approach
We believe that the G20 nations should review their previous approach to supporting food security in lower income economies. Previously this support has been simply the donation of food, typically large volumes of maize or wheat. Some estimates show that the US, as an example, donates 25 times more food than developmental capital for the agricultural sector.
This approach has the following disadvantages:
i) It is an inefficient use of donor funds. It typically costs a donor $500-1000 to deliver 1 ton of maize to central Africa. One ton is approximately sufficient for one family for one year. Our approach shown below has approximately one tenth of the cost. Put another way, the donor money can feed ten times the number of people if donor funds are used more efficiently.
ii) Donations or gifts are not sustainable. An approach which helps develop the agricultural sector in Africa is far more likely to lead to sustained local production of food.
iii) Donating food undermines the prices for farmers who produce food in Africa. It is hard to compete with a free alternative.
2) Our approach to developing agriculture in Africa
The G20 statement is somewhat ambiguous but seems to imply support for the agricultural and micro-finance sectors rather than the blunt instrument of food donation used in the past. We believe this to be a positive step forward and it echoes the Danish government African Commission initiative announcement in May this year.
We believe that supporting small-scale, largely subsistence farmers in Africa is an excellent place for the G20 to start. An efficient and sustainable use of G20 capital is, in our view, to focus it on the commercialisation and development of small-scale farming.
In sub-Saharan Africa more than two-thirds of the population live in rural areas, typically relying on subsistence farming for survival. These farmers achieve sub-scale yields on their land. Maize yields are typically 0.5-1 tonne per hectare compared to 5-10 tonnes on nearby commercial farms.
The gap in yield exists for three main reasons and addressing these three issues can help to bridge the gap in yields and greatly improve food security and the income of these small-scale farmers:
i) Lack of seed and fertiliser inputs.
This exists because these farmers have no access to credit. Their crop is planted late, often with no fertiliser, and yields are inevitably reduced.
The solution here is the provision of micro-finance in the form of lending these farmers seed and fertiliser in a timely way, in exchange for part of their crop at the end of the season.
Donor focus should be on helping underwrite some of the risk in the early years of these micro-finance businesses and in insuring the small-scale farmers’ crops for weather-related risk.
ii) Lack of training and technical expertise.
The techniques of conservation farming are now well established and the benefits widely understood. Yields can be easily improved to the 3-4 tonnes per hectare range relatively quickly with the right training. This approach also maximises environmental protection and sustainability of farming in that area.
This training can be provided through establishing training hubs at nearby large scale commercial farms. Financing this training is a useful and efficient use of donor funds – it helps lead to more than a trebling in food production.
iii) Access to markets.
Small-scale farmers typically lack access to markets because of the physical distances and lack of local storage facilities. In our view this is best dealt with by utilising the large scale commercial farming infrastructure and helping these two groups cooperate in a commercial way.
3) Advantages of this approach
This approach implies a collaboration between the donors and the commercial sector. It implies on-the-ground training of small-scale farmers. It implies a new way of thinking for the donor nations.
It also has a far greater likelihood of achieving a sustainable benefit for low-income nations. The injection of G20 funds would be focused on helping these nations to become self sufficient in food and therefore not reliant on the ongoing generosity of donors.
This approach is also cost-effective. Lending a farmer $150 worth of seed and fertiliser and providing training should lead to the farmer delivering 3-4 tons of maize on one hectare of land. This is far more cost effective than the $1500+ that it would cost the donors to get this volume of food to these families.
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