Five big questions about five hundred million small farms, P Hazell

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Content: Five Big Questions about Five Hundred Million Small Farms Peter Hazell
Session 2 Opening Plenary Keynote Paper Five Big Questions about Five Hundred Million Small Farms1 Peter Hazell2 Paper presented at the IFAD Conference on New Directions for Smallholder Agriculture 24-25 January, 2011 International Fund for Agricultural Development Via Paolo Di Dono, 44, Rome 00142, Italy 1 Copyright of the paper is reserved by IFAD. The paper may not be reproduced in part or in full and in any form without written permission of the Conference Organisers at IFAD (e-mail: [email protected]) 2 The author is Professional Research Associate, School of Oriental and African Studies, London University and Visiting Professor, Centre for Environmental Policy, Imperial College London
1. Why should we care about small farms? Small farms matter because they exist in huge numbers, and cast their shadow over a whole range of development issues. There are nearly 500 million farmers today who farm less than 2 hectares of land and despite the prescription of large farm advocates like Paul Collier (2009), they are getting more numerous and smaller than ever (see Table 1 and Eastwood, Lipton and Newell, 2010). Small farms are predominantly concentrated in Asia and Africa, where they account for large shares of the total agricultural area and output. Small farms are home to some 2 billion people, including half the world's undernourished people and the majority of people living in absolute poverty (IFPRI, 2005). For poorer, land scarce countries, small farms bring several advantages over large farms, including their greater economic efficiency, their contributions to creating more employment, reducing poverty and improving food security, and their consumption patterns which help vitalize the rural nonfarm economy. The efficiency of smaller farms has been demonstrated by an impressive body of empirical studies showing an inverse relationship between farm size and land productivity (e.g. see Eastwood, Lipton and Newell, 2010). Moreover, small farms typically achieve their higher productivity with lower capital intensities than large farms. These are important efficiency advantages in poor countries where land and capital are scarce relative to labour. The greater efficiency of small farms stems from the absence of economies of scale in most types of farming3, and their greater abundance of family labour per hectare farmed. Family workers are typically more motivated than hired workers and provide higher quality and self-supervising labour. They also tend to think in terms of whole jobs or livelihoods rather than hours worked, and are less driven by wage rates at the margin than hired workers. Small farms exploit labour using technologies that 3 Some plantation crops are an exception (see Hayami, 2010).
increase yields (hence land productivity) and they use labour-intensive methods rather than capital-intensive machines. As a result, their labour productivity is typically lower than that of large farms. This is strength in labour-surplus economies, but it becomes a weakness for the long-term viability of small farms as countries get richer and labour becomes more expensive. In poor, labour-abundant economies, not only are small farms more efficient, but because they also account for large shares of the rural poor, small farm development can be a "win-win" proposition for growth and poverty reduction. Asia's green revolution demonstrated how agricultural growth that reaches large numbers of small farms can transform rural economies and raise enormous numbers of people out of poverty (Rosegrant and Hazell, 2000). Recent studies also show that a more egalitarian distribution of land not only leads to higher economic growth but also helps ensure that the growth that is achieved is more beneficial to the poor (World Bank, 2007). Small farms also contribute to greater food security, particularly in areas with poor infrastructure where high transport costs make locally produced foods less costly and less risky than many purchased foods. Small-farm households also spend higher shares of incremental income on locally produced goods and services, and this can stimulate employment intensive growth in the local nonfarm economy, including rural towns, which is beneficial to the poor (Mellor, 1976; Hazell and Roell, 1983). Small farms also provide a base from which rural households can diversify their livelihoods, slowing the need for rural-urban migration. Many of these advantages disappear as countries develop. As per capita incomes rise, economies diversify and workers leave agriculture, and rural wages go up. It then becomes more efficient to have progressively larger and more mechanized farms. Small farms survive longer into the transformation process if they can adapt to their changing economic environment. Key adjustments include buying or renting additional land, diversifying into higher value production activities (e.g., fruits,
vegetables and intensive livestock, and niche markets like organics), and expanding into nonfarm sources of income or employment. Fortunately, opportunities to diversify into a broader range of farm and nonfarm activities also grow as countries become richer. This is because the demand for more diverse and higher-value foods increases with per capita incomes and urbanization, and the nonfarm economy grows more quickly than agriculture. 2. How fast should the transition to large farms be? Few small farms survive in the long run. Historical and cross country patterns provide a useful benchmark (Figure 1), but there is considerable variation around these trends. Exits tend to be slower in Asia, for example, than elsewhere, reflecting a more pronounced shift to part time farming (Figure 2). In Africa, the pattern seems to be for faster exits ­ perhaps too fast and reflecting the neglect of agriculture rather than the pull of productive nonfarm jobs (Headey, Hazell and Bezemer, 2010). A common mistake is to think that the exit of small farms is a driver rather than a consequence of economic growth, and that a shift to large, mechanized farms will induce faster economic growth. When economies grow, many small farmers (or their children) leave farming because they can find better paying jobs elsewhere. But consolidating land and pushing small farmers off the land before there are better jobs available simply leads to worsening poverty and unwanted levels of rural-urban migration Few countries handle their farm size transition well. Many countries have successfully developed their economies, but farm consolidation and rural-urban migration have lagged behind economic growth, leaving a situation with too many small farms whose incomes fall below the national average. This leads to pressures for governments to provide Income supports, leading to the kinds of farm policies found in many OECD countries. In much of Southeast Asia the number of small farms is still increasing despite rapid growth in per capita GDP. Unless these farms can successfully diversify into nonfarm sources of income, it is likely they too will be headed toward protectionist policies (indeed this is already happening in South Korea and China).
Other countries attempt the transition too soon. A naive belief that large-scale mechanized farming necessarily means greater efficiency and productivity has led some policy makers to seek to consolidate holdings, often through compulsory means or land seizures. These interventions have ranged from large state farms in some post­ Independence African countries, large settler farms in colonies or new territories, to cooperatives and state collectives in communist regimes. Many of these interventions have been costly failures, and have led to lost opportunities for more efficient growth and employment creation in agriculture (Eastwood, Lipton and Newell, 2010). This has contributed to dualistic patterns of development with high levels of rural poverty, such as found in South Africa and many Latin American countries. Today there are new forces at work that may accelerate the farm size transition in developing countries. Among the more powerful forces working against the small farmer is the shift toward consumer-driven markets as part of market liberalization and globalization. The small farmer is increasingly being asked to compete in markets that demand much more in terms of quality and food safety; that increasingly come under the sway of supermarkets, processors and large export traders; and that reflect far more international competition (Hazell et al., 2007). As small farms struggle to diversify into higher-value products, they must increasingly meet the requirements of these demanding markets, both at home and overseas. These changes offer new opportunities and pose serious threats to small farmers. Globalization has also exposed farmers to greater competition from international trade and to lower prices, even for their traditional crops. In Africa, for example, small farms are being squeezed out of their traditional food crop markets in urban and coastal areas by cheaper imports, while being undercut in their traditional tree crop export markets by new competitors from Asia. Although there are few economies of scale in farm production, recent trends in the privatization of markets and seed and input supply systems have created economic advantages for larger farms because they can trade at scale and more easily access credit and market information. Recent trends in the privatization of agricultural research have also led to the neglect of many small farm problems. Unless small farms can organize to capture similar benefits through collective action, they face a
growing disadvantage. The problem is especially challenging for women small farmers who were already disadvantaged in accessing credit, key inputs and markets. climate change is adding to the risks that small farms must manage, yet unlike large farms they typically have fewer assets to fall back on and are less able to procure credit or insurance to buffer their losses in bad years. 3. What is a viable small farm? There is a continuum of small farms ranging from commercially oriented small farm businesses that are market driven and provide the major if not sole source of livelihood for the family, through part time farmers who combine farming with other sources of employment, to poor people who are trying to subsist on a farm base and who are net buyers of food. The motives and contributions of each differ. Commercially viable small farms are market driven, and in Asia and Africa they generate significant marketed surpluses, and are a powerful engine of rural economic growth, creating jobs for others in both the farm and rural nonfarm economy. Investing in them is also an indirect way of helping many of the poor, much as happened during Asia's green revolution. Small farms do not need to be full time to provide a viable farm business opportunity, but they do need access to markets and an entrepreneurial spirit. Judgments about who are viable farmers based on existing patterns of farming can be misleading because they are circumscribed by existing opportunities. There are countless examples of subsistence oriented small farms seizing new commercial opportunities when given the chance. The best small farm business opportunities are likely to be found in areas with good access to markets and low transport and marketing costs. Agro-climatic conditions can be less important, particularly for small farms that can diversify out of cereals. The required size of a commercially viable farm depends on expected living standards, and the type of farming that is possible. A "viable" small cereal farm, for
example, might vary from one or two hectares of irrigated land in parts of Asia to 10 or 100 times as large in dryland areas or in parts of Latin America. To prosper over time, small farms need to get bigger, switch to high value production, or go part time by diversifying into nonfarm sources of income. They soon find they cannot make much of a living from a couple hectares of land with cereals, even at today's prices. Subsistence oriented farming plays important social roles in feeding and employing many poor people and providing them with a home base form which they can diversify their livelihoods. If neglected, small scale subsistence farming can become a poverty trap for many and a cause of considerable environmental damage. Smallness in combination with poverty can, over time, cause downward spirals of worsening degradation and poverty (Cleaver and Schreiber, 1994). Yet investing in this type of farming is not much of a growth strategy and is often little more than a productive safety net approach, particularly in remote regions, or regions afflicted with HIVAIDS or conflict. In effect, investments are a holding strategy until such time as fundamental constraints can be overcome to create more viable business opportunities in or outside farming. 4. What help do small farmers need? Small farms typically face a tilted playing field compared to large farms in terms of accessing land, inputs, credit, technology, and markets. These problems have become more pronounced with the removal or scaling back of the many state agencies that served agriculture prior to the market liberalization programmes of recent decades. Left to themselves, liberalized markets and private agents tend to serve larger farms that are favourably located near roads, while smaller farms are neglected because they are more costly or difficult to serve. The problems are especially challenging for women farmers. If more small farmers are to have a viable future, then there is need for a concerted effort by governments, NGOs and the private sector to create a more equitable and enabling economic environment for their development. This conference will address this agenda. Key issues to address include the following:
How can small farms be linked to modern market chains? Small farms may be the more efficient producers, but they face major disadvantages in accessing modern market chains. These include low volumes of produce to sell, variable quality, seasonality and limited storage, high transactions costs, poor market information and contacts, and limited ability to meet the high credence requirements of many high value outlets. Although many local market outlets still exist, the best business opportunities often lie with farmers who can organize for urban and export markets. Promising alternatives include contract farming arrangements with large farms or marketing/processing agents, voluntary producer groups, marketing cooperatives, and fair trade . Another key issue is how to make food staples markets work better for small farms, particularly in countries where the private sector has not adequately filled the gap left by the demise of state marketing organizations How can the productivity and sustainability of small farms be improved? Shifting to higher value products can add significantly to land and labour productivity, but small farms also need access to improved technologies and knowledge to remain competitive, raise productivity and improve environmental stewardship. Since small farms typically put food security first, improving the productivity of their food staples is also an important step in freeing up resources for other higher value activities. A key issue is how to make agricultural research and knowledge systems work for small farms, particularly in an age of privatization and financial retrenchment. Another is how to improve the sustainable management of natural resources on small farms. Higher cash incomes from farming may help relieve the pressure on land and provide capital for investing in resource improvements, but a market led approach also presents its own challenges if it requires greater specialization and more intensive production practices. How to improve small farm access to modern inputs and financial services? Since the demise of heavily subsidized public input delivery systems and agricultural development banks, many smallholder farmers have been left with inadequate and costly access to these basic services. The private sector has taken up part of the slack, but has a bias towards servicing larger commercial farms and those located in regions favoured by good agro-climatic conditions and market access. Recent years have seen new innovations in developing public-private partnerships (e.g. loan guarantees to
private banks that lend to smallholder farmers), farmer cooperatives, NGO involvement in social enterprise (e.g. franchised suppliers of veterinary services), credit and training programs for small seed and fertilizer distributors (e.g. AGRA), and use of smart subsidies (e.g. fertilizer-seed packs in the Millennium Development Villages). What can be learned from these and similar experiences, and can successful approaches be scaled up to achieve the levels of support needed for large number of smallholder farmers without incurring substantial financial costs for the state? How to improve access to land and water? Many smallholder farmers do not have secure access to land and water, making it difficult for them to pursue new business opportunities or to farm on a sustainable basis. Conditions vary widely across cultural, economic and social contexts, but seem particularly challenging in many contexts for women farmers and other disadvantaged groups. Recent years have seen new innovations and experiences in reformulating national land laws to reconcile overlapping and competing rights between the formal and informal systems, and of ways of strengthening the access and rights of women and other disempowered groups. What can be learnt from these experiences and which ones are worth scaling up and how? How to create more entrepreneur farmers? Many small farmers respond spontaneously to new market opportunities, but improved education and training and organization into producer groups can be important as they struggle to adjust to a more commercial and competitive business environment. Another concern is the ageing and feminization of farming because relatively few young men find farming an attractive alternative. How can more young people be mobilized to take up farming? Providing attractive new business opportunities would help, but what kinds of schooling, specialized training and support (e.g. young farmers' clubs) are also needed? Empowering women and vulnerable groups to become successful farmers. In many societies, poor people and especially poor women farmers are disempowered and have limited options for developing new business opportunities. They are often excluded from access to land, water, credit and other financial services, extension advice, and markets (Quisumbing and Pandolfelli, 2009). Some NGOs (including with IFAD
support) have developed successful and innovative programs for organizing such groups and helping them to develop market opportunities. What can be learnt from these experiences and which ones are worth scaling up and how? What can be done to help small farmers prosper despite climate change? Many small farmers will need to be nimble in adjusting their choice of farm enterprises and technologies to remain competitive and sustainable as climates change, and this in turn will require that markets and agricultural R&D systems also adapt and serve their needs. Can new forms of weather insurance play a useful role? Are there new opportunities for small farmers through mitigation? For example, might carbon markets provide opportunities for some small farmers to receive compensation for farming practices and reforestation that sequester large amounts of carbon? Might bioenergy offer new business opportunities for small farmers? What can be done to create more rural nonfarm opportunities? Given that many small farms will not be able to provide full time livelihoods in the future and farmers will either need to sell up or diversify their incomes, how can more business and employment opportunities be created in the rural nonfarm economy? Well functioning labour markets play an important role, but only where the rural nonfarm economy is growing, and if there are not significant supply side constraints. skill levels are an important constraint, as are barriers to the employment of women and minority groups, and the cost of commuting to local towns. In many countries, growth in the rural non-farm economy is constrained by local demand and either needs to be driven by agricultural growth or stronger backward linkages from urban areas. The business environment for small rural firms is also important, and as with smallholder farms, many may need to be nurtured through the supporting activities of large private firms and NGOs, or organized into producer groups of their own. What types of education and training best prepare small farm families for successful nonagricultural jobs? What can be dome to support growth of the rural nonfarm economy, to create more small firm business opportunities, and to help establish and support small businesses? What can be done to help families find new opportunities in towns or regions where they may have no connections, and how to help them resettle?
5. Does it pay to invest in small farms? As the issues listed above suggest, assisting small farms is a challenging task that requires that governments play key facilitating roles. Critics of small-farm development are doubtful whether many governments have the capability to effectively implement these kinds of agendas, and whether the returns are worthwhile. A key question for any intervention is whether the net economic and social benefits of intervening are sufficient to justify the costs. In some cases small-farm development might be more costly and challenging than alternative development strategies based, for example, on delivery of health and education services. They must therefore be justified on the basis of significant win-win benefits or poverty reduction (Maxwell, Urey, and Ashley 2001). Public investments in small scale subsistence farming may be a more cost-effective alternative to other forms of income transfers and social safety nets. For example, food aid typically costs more than US$250 for each metric ton of cereals delivered in rural areas, compared with typical smallholder production costs of US$100 or less.4 But this will not always be the case. Moreover, it is important that support policies for nonviable small farms do not encourage too many workers and poor people to stay in agriculture or for too long. The best evidence on returns to public investments in small-scale business oriented farming comes from the green revolution era in Asia. Fan, Gulati and Thorat (2008) have estimated the returns to different types of public investment in agriculture in India over a four decade period, beginning in the 1960s (Table 2). India invested heavily in a small farm led green revolution strategy and the marginal returns to these investments in terms of growth and poverty alleviation were very favourable in the early stages of the green revolution. Many, especially additional investments in rural roads and agricultural R&D, continued to give high returns through the 1990s. Although the returns to most input subsidies were initially high, they declined sharply over time to the point where their benefit/cost ratios fell below one. This suggests that while input subsidies played a useful role during the early stages of the green revolution in promoting small farm led growth, the government should have had a 4 Cited in Hazell et al. (2007, page 23).
more effective exit strategy once the subsidies had fulfilled their original purposes. Similar analyses for China and Thailand also show high marginal returns to public investments in agricultural R&D, infrastructure and education, and very favourable poverty impacts (Fan, Zhang and Zhang, 2002; Fan and Rao, 2008). Conclusions The case for smallholder development as one of the main ways to reduce poverty remains compelling. The policy agenda, however, has changed. The challenge is to improve the workings of markets for outputs, inputs, land and financial services to overcome market failures that discriminate against small farms. Meeting this challenge calls for innovations in institutions, for joint work between farmers, private companies, and NGOs, and for a new, more facilitating role for ministries of agriculture and other public agencies. New thinking on the role of the state in agricultural development, wider changes in democratization, decentralization, and participatory policy processes, and a renewed interest in agriculture among major international donors do present opportunities for greater support to small-farm development. But unless key policymakers adopt a more assertive agenda toward small-farm agriculture, there is a growing risk that rural poverty could increase dramatically and waves of migrants to urban areas could overwhelm available job opportunities, urban infrastructure, and support services.
References Cleaver, K. M., and Schreiber, G. A. 1994. Reversing the spiral: The population, agriculture and environment nexus in Sub-Saharan Africa. Washington DC: World Bank. Collier, Paul. 2009. Africa's organic peasantry: Beyond romanticism. Harvard International Review, Summer 62-65. Eastwood, R., Lipton, M. and Newell, A. 2009. Farm size. In: Pingali, P. and R. Evenson (eds.), Handbook of Agricultural Economics, Volume 4. Elsevier: Amsterdam. Fan, S., Gulati, A. and Thorat, S. 2008. Investment, subsidies, and pro-poor growth in rural India. Agricultural Economics 39(2): 163­170. Fan, Shenggen and Neetha Rao. 2008. Public investment, growth and rural poverty. In Shenggen Fan (Ed.), Public Expenditures, Growth and Poverty: Lessons from Developing Countries. Baltimore: Johns Hopkins University Press. Fan, Shenggen, Linxiu Zhang and Xiaobo Zhang. 2002. Growth, inequality and poverty in rural China: The role of public investments. IFPRI Research Report 125. Washington DC: International Food Policy Research Institute. Hayami, Y. 2010. Plantations agriculture. In: Pingali, P. and R. Evenson (eds.), Handbook of Agricultural Economics, Volume 4. Elsevier: Amsterdam. Hazell, P., Poulton, C., Wiggins, S. and Dorward, A. 2007. The future of small farms for poverty reduction and growth, 2020 Discussion Paper 42, Washington DC: International Food Policy Research Institute. Hazell, P., and Roell, A. 1983. Rural growth linkages: Household expenditure patterns in Malaysia and Nigeria. Research Report 41. Washington, DC: International Food Policy Research Institute. Headey, D., Bezemer, D. and Hazell, P. 2010. Agricultural employment trends in Asia and Africa: Too fast or too slow, World Bank Research Observer 25, 57-89. IFPRI. 2005. The future of small farms: Proceedings of a research workshop. Washington, DC. Maxwell, S., Urey, I., and Ashley, C. 2001. Emerging issues in rural development: An issues paper. London: Overseas Development Institute. Mellor, J. W. 1976. The new economics of growth: A strategy for India and the developing world. Ithaca, NY: Cornell University Press. Quisumbing, A. R., and Pandolfelli, L. 2010. Promising approaches to address the needs of poor female farmers: resources, constraints and interventions. World Development, 38(4): 581-592.
Rosegrant, M., and Hazell, P. 2000. Transforming the rural Asian economy: The unfinished revolution. Hong Kong: Oxford University Press. World Bank. (2007) World Development Report 2008: Agriculture for Development, (Washington DC: World Bank).
li)(ftrscgaehbunoN% ag. share in employment (%)
Figure 1: The inverse relationship between per capita income and the agricultural employment share
100 80 60 40 20 0 6
7
8
9
10
ln(GDP pc)
Figure 2: Alternative development paths: agricultural exits and economic growth from 1960-2000. 70 Nigeria, 2000 Philippines, 2000 60
Indonesia, 2000
50
1980
Other
India, 2000
Asia*, 2000
40
SSA*, 2000
China, 2000
30
20
1980
10 500
1000
1500
2000
2500
3000
GDP per capita (constant PPP$)
3500
4000
4500
Source: Headey, Hazell and Bezemer, 2010
Table 1. Changes in average farm size and number of small farms in South Asia
Country
Census year
Average farm size Number of small farms*
(Ha)
(millions)
India
1971
2.3
49.11
1991
1.6
84.48
1995/96
1.4
92.82
2001
1.3
98.10
2005/06
1.2
107.64
Bangladesh
1977
1.3
1996
0.6
17.03
Nepal
1992
1.0
2.41
2002
0.8
3.08
Pakistan
1971/73
5.3
1.06
1989
3.8
2.40
2000
3.1
3.81
Sri Lanka
2002
0.8
1.61
Estimated total, circa 2005
130 million
Source: This is an updated version of the table in Headey, Bezemer and Hazell (2010).
Small farm are 2 hectares or less.
Table 2: Returns to agricultural growth and poverty reduction from investments
in public goods and subsidies in different phases of the Asian green revolution
1960s 1970s
1980s
1990s
-------------------------------------------------------------------------------------------------------
--------------
Returns in Agric GDP (Rupees per Rupee spent)
Agricultural R&D
3.12
5.9
6.95
6.93
Road investment
8.79
3.8
3.03
3.17
Educational investment
5.97
7.8
3.88
1.53
Irrigation investment
2.65
2.1
3.61
1.41
Irrigation subsidies
2.24
1.22
2.38
NS
Fertilizer subsidies
2.41
3.03
0.88
0.53
Power subsidies
1.18
0.95
1.66
0.58
Credit subsidies
3.86
1.68
5.2
0.89
Decrease in the number of poor people per million Rupees spent
Agricultural R&D
207
326
345
323
Road investment
1272
1346
295
335
Educational investment
411
469
447
109
Irrigation investment
182
125
197
67
Irrigation subsidies
149
68
113
ns
Fertilizer subsidies
166
181
48
24
Power subsidies
79
52
83
27
Credit subsidies
257
93
259
42
Source: Fan, Gulat and Thorat (2008).

P Hazell

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