Platform Knowledge Piece 3 - The Strategic Role of The Private Sector in ARD

The strategic role of the private sector in agriculture and rural development
Global Donor Platform for Rural Development
Platform Knowledge Piece 3 The strategic role of the private sector in ARD About the Platform Knowledge Piece series
About the Platform Knowledge Piece series

The Global Donor Platform for Rural Development commissioned three comprehensive studies to capture Platform members knowledge on key issues affecting the delivery and impact of aid in ARD: PKP 1 PKP 2 PKP 3 Policy coherence for agriculture and rural development Aid to agriculture, rural development and food security Unpacking aid flows for enhanced effectiveness The strategic role of the private sector in agriculture and rural development
The PKPs are the products of extensive surveys of Platform member head office and field staff, visits to country offices, workshops dedicated to sharing findings and refining messages, and successive rounds of comments on drafts. On the basis of each PKP, separate policy briefs will be published For more information on the PKPs visit donorplatform.org
This publication can be downloaded from the website of the Global Donor Platform for Rural Development at: www.donorplatform.org/resources/publications Hard copies can be requested from the publishers: Global Donor Platform for Rural Development Secretariat Godesberger Allee 119, 53175 Bonn, Germany Email: secretariat@donorplatform.org The views expressed herein are those of the authors and do not necessarily represent those of individual Platform members. All rights reserved. Reproduction and dissemination of material in this information product for educational or other non-commercial purposes is authorised, without any prior written permission from the copyright holders, provided the source is fully acknowledged. Reproduction of material in this information product for resale or other commercial purposes is prohibited without written permission of the copyright holders. Applications for such permission should be addressed to: Coordinator, Secretariat of the Global Donor Platform for Rural Development, Godesberger Allee 119 53175 Bonn, Germany, or via email to: secretariat@donorplatform.org. Global Donor Platform for Rural Development 2011
Platform Knowledge Piece 3 Contents The strategic role of the private sector in ARD
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Contents
CONTENTS TABLES & FIGURES FROM THE PLATFORM LEAD ON PKP 3 ACKNOWLEDGEMENTS ACRONYMS SUMMARY 1.0 Introduction 1.1 Purpose of this report 1.2 Research methods 1.3 What is the private sector? 1.4 Limitations of the analysis 2.0 The policy environment and private sector development 2.1 Evolution of liberalisation policies 2.2 Impact of policy objectives 2.3 Policy instruments 3.0 The private sector response: global trends 3.1 Sources of agricultural investment 3.2 Trends in agricultural production 4.0 The private sector response: evidence from value chains and low-income households 4.1 Dynamism of rural value chains 4.2 Private sector responses to liberalisation 4.3 Impact of private sector development on low-income households 5.0 Donor approaches to private sector development in rural areas 5.1 Background 5.2 Macro-level interventions to improve the investment climate for business 5.3 Direct financial assistance to business 5.4 Market development programmes 5.5 Dialogue and partnership with private sector players 5.6 An evolving agenda 6.0 Conclusions 6.1 Policy and private sector development 6.2 Private sector response 6.3 Policy recommendations for donors BIBLIOGRAPHY 01 02 03 03 04 05 06 06 06 07 07
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Platform Knowledge Piece 3 The strategic role of the private sector in ARD Tables & figures
Tables & figures
TABLES Table 1: Table 2: Table 3:
Table 4: Table 5: Table 6: Table 7:
Country and chain selection Sample of countries used in agricultural investment analysis Total division of agriculture investment in the sample LIC & MICs countries, selected years, constant 2005 USD bn Composition of rural nonfarm employment by region Comparing Growth rates for rural push and pull scenarios Numbers of major discount stores in Thailand Summary of overall findings on impact and lessons learnt
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FIGURES Figure 1: FDI to agriculture compared to total FDI, all countries, 19902010 Figure 2: FDI to agriculture as a percentage of total FDI, 19902010 Figure 3: Global agriculture ODA as a percentage of total global ODA Figure 4: Global ODA to agriculture using the ODI measure USD Million Current & 2008 Constant Prices Figure 5: Global agricultural aid by function, constant 2008 prices, 1980 to 2009 Figure 6: Public expenditure on agriculture as a percentage of developing country public expenditure, 1980 to 2007 Figure 7: Estimate of agricultural investment in developing countries, 1981-2007 Figure 8: Components of agricultural investment in the sample MIC countries, 1981-2007, constant 2005 USDbn Figure 9: Components of agriculture investment in the sample LIC & MICs countries, 19812007, constant 2005 USD bn Figure 10: Total division of Agriculture Investment in the sample upper middle income countries (1981-2007) Figure 11: Total division of agricultural investment in the sample low income countries, 1981-2007) Figure 12: Cereal production for the least developed countries, 19802009 Figure 13: Value of exports from low and middle income countries for selected agricultural goods, 19882010 (nominal prices)
Figure 14: Value added per agricultural worker for low and lower middle income countries, 19802009 Figure 15: Income sources in rural areas Figure 16: The main stages of the Doi Moi in Vietnam Figure 17: Comparative rice yields in SE Asia, 19512005 Figure 18: Expenditure gains (as a percentage) from a 1 per cent GDP growth in the agricultural sector and in non-agricultural sectors Figure 19: Poverty headcount at rural poverty line for low and lower middle income countries, 19902010 Figure 20: The progression of private sector development approaches Figure 21: Varied donor approaches to ARD
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Platform Knowledge Piece 3 From the Platform lead on PKP3 / Acknowledgements The strategic role of the private sector in ARD
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From the Platform lead on PKP3
Brian Baldwin, Vice Chair Photo by Platform Secretariat
on low income rural households. Through country analyses in Tanzania, Ghana, Peru, Vietnam and Thailand and cross-referenced with dialogue and the different experiences of member institutions, the Platform initiative underpins the numerous initiatives of members and lessons of what has determined the success of donors, governments, NGOs and other initiatives to stimulate private sector development. There is no doubt that the Busan High Level Forum held in the Republic of Korea in December 2011 again emphasised, in plenary and side events, the role of the private sector per se in making development effective and I make the distinction between aid and development effectiveness has again highlighted the need for a better working relationship with the private sector. This was further stressed by those who focussed interventions on the agriculture sector with particular regard for developing better results setting, monitoring and reporting and, in parallel, the development of transparent processes for mutual accountability. This report sets the scene for a series of initiatives that the Platform members can take forward with the private sector some of which will be initiated through the Platform annual general assembly held in Berlin in January 2012 and I, and IFAD, look forward to contributing and supporting this.
For several years and highlighted by the Platform members' contributions to the Accra High Level Forum in 2008 members have emphasised the multi-stakeholder dimensions of the agricultural and rural development sector, including the role of the private sector. Subsequently, at both of the 2009 and 2010 Platform annual general assemblies, members expressed a strong interest in working further on issues relating to the role of the private sector in agriculture and rural development and how donors themselves could better understand and respond to both the potential and challenges, how to better engage effectively with the private sector and what practical and operational measures for donors could be considered. During 2011 the Platform commissioned the Overseas Development Institute (ODI), London to work with members on the impact of this private sector activity
Acknowledgements
This report is the product of a study commissioned by the Global Donor Platform for Rural Development. The report was written by Jonathan Mitchell with John Howell and Karen Ellis of Overseas Development Institute (ODI). Thanks to the ODI team in London: Emily Darko, Karen Ellis, John Howell and Alberto Lemma. Also the colleagues Steve Wiggins and Lidia Cabral for helping maintain the link to the other two Platform Knowledge Pieces PKP1 on policy coherence and PKP2 on aid to agriculture. Thanks also to the respondents in the five countries under study as well as the country team leaders: Frdric Kilcher in Tanzania, Peter Quartey in Ghana, Pham Thai Hung in Vietnam, Wyn Ellis in Thailand and Carlos de la Torre in Peru, whose work is being released as a series of Working Papers to accompany this report. Thanks to the colleagues of the Global Donor Platform for their unfailing support of this study and their commitment to making the research process as participatory as possible, especially to Brian Baldwin (International Fund for Agricultural Development) and Monika Midel of the secretariat.
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Platform Knowledge Piece 3 The strategic role of the private sector in ARD Acronyms
Acronyms
ACS AFF AGRA ARD AusAID BDS BRIC CIDA DAC DANIDA DFI DfID EC FAO FAOStats FAST FDI GDP GIZ GSO ICT IFAD IFC IFPRI KfW LICs M4P MFIs MICs NAFTA NGOs ODA ODI OECD PKP PSD RNFE SA SAGCOT SDC SE SMEs SNV TIC TNC UK UN UNCTAD UNCTADStat USAID VAT WB WDI WDR
Agricultural Capital Stock Agriculture, Forestry, Fishing Alliance for a Green Revolution in Africa Agriculture and Rural Development Australian Government Overseas Aid Program Business Development Services Brazil, Russia, India and China Canadian International Development Agency Development Assistance Committee Danish International Development Agency Development Financial Institutions Department for International Development European Commission Food and Agriculture Organisation Food and Agriculture Organisations Statistics Finance Alliance for Sustainable Trade Foreign Direct Investment Gross domestic Product Deutsche Gesellschaft fr Internationale Zusammenarbeit General Statistics Office Information and Communications Technology International Fund for Agricultural Development International Finance Corporation International Food Policy Research Institute Kreditanstalt fr Wiederaufbau Low-Income Countries Making markets work for the poor Microfinance Institutions Middle-Income Countries North American Free Trade Agreement Non Governmental Organisations Official Development Assistance Overseas Development Institute Organisation for Economic Cooperation and Development Platform Knowledge Piece Private Sector Development Rural Non-Farm Economy Sociedad Anonima Southern Agricultural Growth Corridor of Tanzania Swiss Agency for Development and Cooperation South East Small and Medium Enterprises Stichting Nederlandse Vrijwilligers (Netherlands Development Organization) Tanzania Investment Corporation Trans-National Companies United Kingdom United Nations United Nations Conference on Trade and Development United States Agency for International Development United States Agency for International Development Value Added Tax World Bank World Development Indicators World Development Report
Platform Knowledge Piece 3 Summary The strategic role of the private sector in ARD
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Summary
This Platform Knowledge Piece aims to improve the understanding of the role of the private sector in agricultural and rural development and proposes practical and operational measures for donors to engage more effectively with the private sector. This issue is addressed by examining: How the private sector has responded to the rolling back of direct state involvement in rural areas How private sector activity impacts on low-income households How donors and governments have tried to stimulate private sector development The implications for the way Platform members work with the private sector The work is based on a more detailed study and draws from empirical evidence from working papers on Ghana, Tanzania, Thailand, Vietnam and Peru as well as analysis of secondary data from a broader range of developing countries.
Key conclusions
1. Although there has been a general market deregulation and trade liberalisation since 1980, this trend is far from ubiquitous and inexorable. In some cases continuing state activity discourages the private sector and, in others, government has withdrawn - or not engaged with activities like the provision of hard and soft infrastructure which are critical to support private sector investment. There has been a successful private sector response, however, to changes in external trade policy, macroeconomic management and the role of subsidisation. In addition, large numbers of small scale producers have successfully responded to efforts to support their engagement with rural markets. 2. Agriculture is in a process of profound private sector transformation in developing countries. Value chains are becoming shorter with higher standards and stronger vertical integration and information flows. These changes, driven principally by domestic private investment in the South, together with domestic government spending, are fundamentally changing rural economies. 3. The impact of agricultural development on the livelihoods of low-income households is striking. The significance of aid is very limited. Foreign direct investment (FDI) has largely bypassed on-farm investment although it is growing fast. FDI has tended to focus on downstream nodes like agricultural processing and wholesale and retail functions. 4. We see a general progression in the way donors have sought to support private sector development from macro-level interventions to direct assistance to business. More recently several donors have pioneered approaches based upon market development and dialogue and partnership with business. Although some of these approaches look promising, the impact of these innovative interventions is not yet clear. Many donors are also struggling to engage with this emerging business engagement agenda. We propose a series of recommendations for donors to facilitate this transition.
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Platform Knowledge Piece 3 The strategic role of the private sector in ARD Introduction
1.0 Introduction
1.1 Purpose of this report
The aim of this third Platform Knowledge Piece1 is to improve the understanding of the role of the private sector in agricultural and rural development and to propose practical and operational measures for donors to engage more effectively with the private sector. This is important since private sector activity is transforming rural areas in the South. To engage effectively in this milieu, policymakers should understand the ongoing changes. In addition, most members of the Global Donor Platform for Rural Development are now formally committed to working more closely with the private sector. This partly reflects the emergence of conservative governments in some traditional donor countries. It is also a recognition that donors need to work more closely with the private sector to make aid more effective.2 To date pressure on donors to work more closely with the private sector has not been matched with guidance about how to make this change. This report is a modest contribution to filling this gap. What are the implications of this analysis for the way that Platform members support private sector development in rural areas?
1.2 Research methods

These research questions were addressed by gathering data through five country case studies, telephonic donor surveys and desk-top research. Five country case studies were undertaken by Southernbased researchers from April to October 2011 in two Asian, two African and one Latin American country. Researched and written by local consultants, these examine the key research questions in a specific geographical context and in three different types of agricultural value chains since 1980. The research is based upon a rich mix of primary and secondary data collection with policy makers and actors at all nodes of the value chain. The five country studies are written up as working papers and can be downloaded at www.donorplatform.org/resources /publications. A member of the Overseas Development Institute team visited each of the Southern research teams and worked with counterparts to assure the quality of the output. The rationale for adopting a value chain approach is multifaceted. Most simply, it narrows down the evidence from five countries over the past thirty years into a manageable scope. It allows to look at the same commodity in different contexts and and comparative research helps to understand which results are specific to the type of commodity and which changes can be attributed to local context, i.e. policy, socioeconomic conditions or history. A focus on chain specifics is important since there are often very different dynamics for different types of chains from food staples to domestic markets and export markets. Finally,
Research questions
How has the private sector responded to the rolling back of direct state involvement in rural areas, the emergence of other opportunities, and what is the explanation for the different responses observed? What is the impact of this private sector activity on low-income rural households and the dynamism and competitiveness of the agricultural sector? What has determined the success of donors, governments, NGOs and other initiatives to stimulate private sector development?
Table 1: Country and chain selection AGRICULTURAL PRODUCT Food staples Commercial production for domestic markets Traditional exports
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TANZANIA Cassava Banana
GHANA Cassava Pineapple & mango Cocoa
VIETNAM Rice Organic vegetables Coffee
THAILAND Rice & cassava Chicken
PERU Rice Dairy
Coffee
Sugar
Coffee
Others are Platform Knowledge Piece 1 on policy coherence for agriculture and rural development and Platform Knowledge Piece 2 on aid to agriculture, rural development and food security, available at www.donorplatform.org 4th High Level Forum on Aid Effectiveness Declaration, available at http://www.aideffectiveness.org/busanhlf4/en/component/content/article/698.html
Platform Knowledge Piece 3 Introduction The strategic role of the private sector in ARD
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agricultural value chains are a useful organising concept to understand what is changing and why, and also capable of incorporating key development concerns, such as poverty environment and gender into what was initially conceived as a business tool (Mitchell and Coles 2011). In addition to the country case studies, specialist inputs were made in these areas: Policy environment for agricultural development (John Howell) Empirical evidence for the private sector response in rural areas (Alberto Lemma) Donor attempts to engage with the private sector (Karen Ellis) These background reports were mainly written on the basis of evidence collected from secondary data sources, including the country reports. In addition, the donor work involved teleconference interviews with multilateral donors: the Food and Agriculture Organisation (FAO), European Commission (EC), International Fund for Agricultural Development (IFAD) and World Bank (WB). Interviews were also conducted with several leading bilateral donors: Finland, Kreditanstalt fr Wiederaufbau (KfW), Department for International Development (DfID), Swiss Agency for Development and Cooperation (SDC), AusAID, Deutsche Gesellschaft fr Internationale Zusammenarbeit (GIZ). Additional secondary analysis was undertaken with non-traditional donors, with a focus on the activities of private foundations and Southern donors. The aim of this work will be to monitor innovation in the development sector and provide advice to development agencies on how best to support the private sector in rural areas.
In assessing impact, it is important to distinguish between policies designed to provide incentives to producers directly or, more often, policies to remove disincentives created by government policy itself , and policies that are designed to promote private business activity more broadly, particularly in agricultural processing and marketing. In both cases, the policy assumption is that private commerce will respond to new supply opportunities. However, the policies may differ. In the case of producers, incentives do not necessarily involve market deregulation and liberalisation. They often involve market intervention, particularly to stabilise earnings from production or to lower production costs. In the case of private commerce, however, incentives generally entail a removal of market intervention both to stimulate new business and to introduce competition in procurement and services. The importance of this tension between deregulation and intervention is discussed further in Section 2.
1.4 Limitations of the analysis

The analysis is based on five country case studies which seek to understand the role of the private sector in rural areas using a value chain approach for three different commodity chains. It involved collecting a range of primary and secondary data to gain an understanding of the commodity chains and their dynamics. We recognise that it is not possible for any sample of five developing countries to be representative of the South. This is particularly the case since the five country studies include two upper middle income economies, Peru and Thailand, and one of the most dynamically developing middle income economies on record, Vietnam. Therefore, the team collected secondary data for the least developed countries and lower middle income economies to set the country level data in context. The reason why private sector operators in one specific rural area behave in a particular way is always the result of a vast range of variables from policy to local context, structural factors and even the agency of the individuals involved. It is difficult to attribute a particular outcome to one particular factor. Recognising this, we have attempted, through the choice of chains for instance, to hold as many variables constant to help make better attribution judgements. Notwithstanding this, we are aware that the real world is complex and tried to avoid simplistic explanations in this report.
1.3 What is the private sector?

In this study, the term private sector includes agricultural producers, or farmers, and the private commercial activities that supply farmers, buy from them and process farm produce. However, in some sections of the study, we focus on private commercial activities where the promotion of such activities including the commercial activities of producer groups is the principal purpose of government or donor policy. In other sections, the focus is upon producers as we attempt to assess the impact of pro-private sector policies upon producers, and particularly low-income producers.
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Platform Knowledge Piece 3 The strategic role of the private sector in ARD The policy environment and private sector development
2.0 The policy environment and private sector development

2.1 Evolution of liberalisation policies
The narrative of policy reform over the last three decades, especially in those developing countries where smallholder agriculture is the principal economic activity (see below), is broadly in the direction of liberalising markets and removing controls. Partly because agriculture, especially export agriculture, represented the main source of government revenue and partly because of an absence of an indigenous private sector, post-independence governments established monopoly marketing boards and other parastatals. However, exchange rate and public sector employment policies designed to benefit urban groups had the effect of discriminating against rural producers. The consequent decline in agricultural output contributed to the drop of, or stagnation, in many economies. The policy response influenced by conditions set for continued international financial support, but often led by domestic reform pressures was to change economic course towards achieving fiscal and trade balances. The former meant less direct government support to agriculture but the latter, through exchange rate policy especially, provided incentives for production through higher returns from exports and the raising of prices of competing imports. This initial wave of structural adjustment reforms in the 1980s did not always elicit a strong supply response in agriculture however, partly due to weaknesses in both input and output markets. The policy response again influenced by conditions attached to external support, but often with weaker domestic reform pressures than in the earlier reform phase was to introduce more explicit promarket reforms. These reforms included either withdrawals from or adjustments to government monopolies in input supplies and procurement, divestiture of state assets, including production and processing plans, a retreat from administered pricing, and the encouragement of private investment in agriculture through both tax incentives and lowering of regulatory barriers. Most of the reform activity began in the 1990s. Over the past decade, additional policy measures have been introduced to stimulate both external and domestic investment. They include greater willingness to permit foreign investment in land development and, as part of efforts to promote exports, encouragement to higher value smallholder export production, often supported by external donors seeking to strengthen participation in international markets in an era of international or more often, bilateral and regional trade liberalisation. This narrative mixing both market deregulation and market intervention through publicly-financed incentives is clearly both Africa-centric and, largely because of the regions level of aid dependence, donor-centric. Much of the narrative can be applied directly to the case studies Ghana and Tanzania. The application to the other three country studies Peru, Vietnam and Thailand remains useful, but requires modification. In this respect, the World Banks categorisation of the three worlds of agriculture (World Bank, 2008) provides us with a useful framework for considering the different objectives of agricultural policy and how these impact on private sector development.
2.2. Impact of policy objectives

In the World Bank analysis, the agriculture-based countries (principally in sub-Saharan Africa) require production and productivity enhancement for economic growth in the economy as a whole. In the transforming countries (principally in South and East Asia), agriculture is no longer the major driver of economic growth, but agricultural development remains the most potent means of addressing largescale rural poverty and removing urban-rural income disparities. In Vietnam, for example, which has witnessed a major transformation in agricultural output and export growth under market liberalisation in just two decades, the focus of government investment and services has already moved to rural poverty alleviation. In the urbanised countries (mainly in Latin America), agriculture is less important overall in the economy but has specific policy relevance to issues such as land ownership, environmental conservation, labour markets and market access for smallholders in less favoured areas (a particular policy focus in Peru, for example). For this study, there are two important aspects of such a categorisation for examining public policies towards the agricultural private sector. First, in the agriculturebased economies typified by Ghana and Tanzania, there is a limited tradition of indigenous entrepreneurial activity in agriculture beyond petty trading. Hence any rolling back of the state in favour of private commerce faces challenges in terms of alternative provision, and hence some ambivalence towards the capacity of private business. In the transforming and urbanised economies, on the other hand, the entrepreneurial tradition normally has deeper roots allowing, for example,
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a relatively swift and strong private sector response in Vietnam to the abandonment of collectivisation and direct state control. Similarly, a long private enterprise tradition in Peruvian agriculture, especially estate agriculture, meant that when a period of state control in the 1980s was reversed, there was a strong private sector response. The second aspect of the three worlds categorisation relates to the different objectives of agricultural policy and the achievement of a balance between purposes such as increasing international competitiveness, maintaining food price stability, generating employment, redressing income disparities, adjusting land tenure, protecting the environment etc. In all three worlds the issue of producer incentives and market intervention is broadly similar. Most governments adopt measures to maintain producer incomes on commodities deemed important to national economic and political objectives and most, often at the same time, offer some protection to domestic consumers against any steep producer price increases stimulated by real or feared shortfalls in supply in the context of international market demand. Where there are strong policy concerns over alleviating poverty, urbanised economies tend to prioritise subsidising food consumers rather than producers more than is the case in agriculture-based economies, but the policy balance between price control and price incentives is not strikingly different across all countries. For instance, the elaborate and expensive subsidies for rice farmers in Thailand contrast with performance of the subsector itself. Thailand is the worlds largest rice exporter. It exports more than half of what is grows. There are more marked differences, however, with respect to policies towards the agribusiness sectors. The agriculture-based economies tend to be both more accommodating to external investment including investment in direct production and more willing to offer fiscal and preferential loan incentives to domestic investors. Donors have also been much more active, particularly in supporting efforts to establish business enterprises from within groups of producers. In transforming and urbanised economies, on the other hand, policies towards agribusiness are more closely related to external trade policy with relatively wellestablished industry interests lobbying for support in access to international markets and in some cases for domestic protection.
2.3 Policy instruments

Despite these differences, there are common policy trends across developing countries that impact, albeit in different ways, upon both producers and the agricultural private sector more broadly. They can be characterised as indirect policies (trade liberalisation and business incentives designed with the private economy as a whole in mind), and direct policies (production incentives and asset disposals) designed specifically for the agricultural sector.
International trade
International trade is clearly a major driver of agricultural development regardless of any liberalising policy measures. The limited impact on agriculture of the macroeconomic reforms of the 1980s although designed to adjust exchange rates that effectively taxed exports while subsidising imports has been attributed largely to declining prices in commodity markets just as the more favourable commodity prices of the 1990s then saw higher agricultural growth, especially in subSaharan Africa (World Bank, 2008). Trade policy reform is nonetheless important, especially with respect to private trade growth. Apart from the incentive effects of exchange rate reform, export taxes have generally been lowered (Easterley, 2006), eliciting both on-farm investment and an expansion in private sector marketing and processing activities in export commodities. In Ghana, for example, there was a trebling in pineapple production over ten years from the mid-1990s almost entirely in response to private business growth in the export of fresh and canned products (PKP3 working paper Ghana). In Vietnam, agricultural export growth has risen fivefold in value over the period 1995-2009 following the removal of most export and import controls (PKP3 working paper Vietnam). Similar levels of a supply response from both producers and private processors are evident in Tanzanias export crops such as coffee and cashews (PKP3 working paper Tanzania). Closely related to this agricultural sector supply response to trade liberalisation has been the rapid growth in the food retail industry, particularly in multinational supermarket, convenience foods and fast restaurant chains. Beginning in the 1990s, the growth in supermarkets food sales meant that by the early 2000s its market share had reached 50 per cent in major urban centres in developing countries (Reardon and Berdegue, 2008).
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One consequence of such trade-related foreign investment has been an emphasis on bulk sourcing and uniform standards that has generally favoured larger scale producers able to invest in packaging and processing plans. Partly in response to this challenge to smallholder farming, governments often with donor support supported limeted access to new higher value markets, either through contract farming, or establishing more technologically resourced producer organisations. In Thailand, for example, the rapid growth in poultry and horticulture production among smallholders has been facilitated by government investment incentives to large agribusiness food companies, supplemented by government research and field services that have supplied improved production technology for sales to suppliers (PKP 3 working papers, Thailand).
Production incentives
The principal policy instrument for production incentives since the 1960s has been the subsidisation of inputs, particularly seed and fertilizer. During the period of market liberalisation and due to concerns over the high public costs of subsidisation and the generally poor returns on investment outside of intensive irrigated agriculture in parts of Asia, there was a gradual phasing down of subsidy policies, particularly where donor influence on policy priorities was strongest. The political attraction of subsidies has remained, however. And there has been renewed interest in the role of subsidies under circumstances where, firstly, they can be rationed in ways that benefit low income farmers as part of wider efforts to promote household food security and, secondly, they can be used to promote market development. In the latter case, the focus is particularly upon stimulating demand in relatively thin markets in order to encourage private distributors that may also receive some underwriting of start-up costs in distribution (PKP3 working papers Ghana and Tanzania). In Ghana, for example, private companies are licensed to import and sell fertilizer but enter into agreement with government on administering subsidy schemes designed to lower prices to producers. This private sector development aspect of subsidisation policy is often compromised however by a continued policy bias reflected in favourable credit treatment for example towards government-supported rural input supply and marketing agencies such as co-operatives. In Tanzania, for example, the private coffee buyers are restricted from buying cherry as opposed to semi-processed parchment coffee even where cooperatives lack processing facilities. Whatever form it takes, this uncertainty over the level and nature of government intervention in input markets is further compounded by intervention in output markets. The 2007/08 food price crisis brought to the fore the policy problem of public intervention to reduce prices at times of sharp increases, in food staples especially, and to generally address price volatility. In a consensus report to the G20 prepared by all major international agencies (FAO/OECD, 2011), recommendations were made to mitigate the risks of agricultural price volatility without distorting market behaviour.
Business incentive schemes

Business incentive schemes are generally tax or duty exemptions directed towards types of business such as new enterprises and export industries, or towards business practices such as youth employment, research and development, worker or supplier equity. Specific schemes directed towards agricultural production and processing may also have an indirect tax element such as VAT exemption on vehicles and fuel largely used in farming. But the more common form of business incentive is a publicly-subsided interest rate on agricultural loans. In Africa especially, investment promotion agencies have expanded their work and have been offering a range of inducements, including tax free periods, and exemption from import duties. The Tanzania Investment Corporation (TIC) does this selectively, favouring what it terms lead industries. Export promotion agencies have also expanded from their traditional roles in trade fairs and export market intelligence. The Ghana Export Promotion Council, for example, administers an Export Development Fund and provides business and technical assistance to companies trying to access foreign markets. In circumstances where restrictions on private business have been politically embedded, as in Vietnam under a command economy, the formal elimination or simplification of business license registration illustrates the possibly greater importance of removing disincentives as opposed to introducing incentives as a factor in business growth. Furthermore, the importance of the more informal role that government plays in license approval is illustrated in Tanzania where growth of large private milling, brewing and food processing industries has been facilitated by favourable treatment in trade licensing.
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But given the political sensitivity of food prices within countries, internationally coordinated actions to mitigate volatility without market distortion are unlikely in the short term at least. The principal market distortions referred to are principally the export restrictions introduced in response to price increases that had the effect of amplifying price movements. But such restrictions are also a disincentive to private producers and traders as short term interventions can introduce uncertainty and discourage investment, including seasonal investment in production inputs. In Tanzania, for example, domestic rice production generally receives favourable treatment from high import duties on imported rice. However, duties can be substantially lowered by government in the face of price increases. Similarly, export bans on maize can be introduced if price rises elsewhere in neighbouring Kenya for example lead to a sudden surge in exports. This uncertainty over government policy not only inhibits investment. It also promotes illegal trading and reinforces the view of those in government who still regard most private agricultural trading as economic sabotage. One consequence of such official concerns over the operation of deregulated markets has been a partial return to regulation under the Board for Cereals and Other Produce with authority to buy and sell on commercial terms. In Vietnam, the domestic rice market is fully liberalised but government concerns over national food security still influence market behaviour. Rice exports are subject to quotas that largely benefit state-owned enterprises operating in the sector, and these are also subject to reserve stock levels determined by the Vietnam Food Corporation. Import restrictions on food staples can also be a form of food security related subsidy policy and hence a form of market distortion designed to incentivise domestic agricultural production in the long term. In practice, however, short term concerns with food prices and inflation tend to favour lower cost importers. In Peru, for example, zero tariffs on rice imports have been introduced well ahead of NAFTA disciplines despite lobbying from domestic rice growers and millers. Price controls do not necessarily inhibit private sector growth however. Thailand, for example, remains one of the worlds large rice producers and exporters despite price controls on domestic markets. It is, however, in a position where it can afford to both protect consumers and support producers. The support mechanisms have varied with the flow of politics, but all governments have encouraged production either by offering guaranteed prices (within limits on size of holdings) or buying into government stocks.
Disposal of public agricultural assets

The most visible sign of government retreat from agriculture under liberalisation has been the disposal of public agricultural assets. Broadly speaking there were and still are, in several countries, two types of asset. First, there were marketing agencies created to supply inputs, and purchase and sell products, normally with monopoly powers to administer prices. Second, there were the state-owned enterprises engaged directly in production such as ranches and seed farms or agro-processing facilities such as sugar mills, breweries, abattoirs, with the latter being part of wider industrialisation strategies in centrally-planned economies. In general, the former agencies have remained in place although with private sector competition encouraged and normally with responsibilities adjusted to matters such as export quality control or price stabilisation. In Ghana the government still exercises control over the cocoa industry even though private buyers and input suppliers have replaced the earlier Cocoa Board monopsony. Hence, price determination is a government responsibility albeit with private sector consultation and export standards compliance is government- rather than industry-led. The issue of control for export standard purposes may, of course, be welcomed by private business where the objective is to maintain the reputation of a geographically branded commodity, and hence influence price. Unlike cocoa in Ghana which is subject to Cocoa Board quality, coffee in Vietnam is not produced under government or industry-wide quality controls and is not traded as premium quality, entering the international market through lower priced manufacturers. Peru, on the other hand, aims for both geographical branding and different forms of speciality. Notably fair trade, organic, and gourmet. This involves both government (National Coffee Board) and industry (Peru Chamber for Coffee) in export market development to secure favourable prices. The state-owned enterprises, on the other hand, have largely been sold to private investors, including producer groups. In Tanzania cotton ginneries, sugar mills, fruit canneries, breweries, abattoirs etc. have been sold off to domestic and foreign investors. Part of the reason for sales, in Tanzania and elsewhere, has been to secure revenue, but another factor has been the need for capital investment and technological innovation in failing industries and schemes. In practice, many of such enterprises have been abandoned as their commercial viability has been exposed. In Tanzania there has been a relatively high failure rate in small ginneries for example. Similarly, smaller irrigation schemes have had a generally poor record of performance under new forms of cooperative or farmer association ownership, with the term public-
12
private partnership disguising the fact that it is only government support that keeps some schemes in operation. In Ghana, where there has been large expansion in the number of private traders and processors, one area of business that has not found widespread commercial interest has been the supply of farm machinery and equipment. As a consequence, there is still a demand on district agricultural services for tractor hire, pesticide sprayers and irrigation maintenance. The probable explanation is the high capital costs of providing such services and the transaction costs of serving large numbers of small scale producers. In Tanzania, there are similar limitations in the private sector response to the supply of farm input services, particularly mechanisation services for irrigated agriculture.
cern, with foreign investment especially, is that output from investment whether food, biofuel or forestry products is destined for specific overseas markets and the attainment of domestic food self-sufficiency in the leasing country is thereby impaired. Evidence on the nature and scale of land leasing is difficult to come by, but the Committee on World Food Security has endorsed a report (Committee on World Food Security, 2011) that suggests some two thirds of transactions since 2006 have been in sub-Saharan Africa with the principal investments emanating from countries such as South Korea, China, Saudi Arabia and the Gulf States most of which are close to their resource limits for farm production. There is much less willingness to permit foreign land investment in other regions, and in countries such as Peru and Vietnam after Doi Moi much less land is available for the state to lease. But this is not simply a matter of African governments colluding in land grabbing. In both Tanzania and Ghana there is a commitment to modernise much of traditional farming systems through irrigation and mechanisation. The cost and technological demands of this strategy have encouraged interest in attracting large capital-intensive agribusiness.
Land lease for large scale private investment

Another policy trend in private sector development much more controversial has been the willingness of governments to lease land for large scale private investment, often foreign or domestic investment with foreign equity. The controversy largely relates to claims of governments disregarding customary tenure arrangements and offering long leases on state land in return for immediate financial support (Cotula, L., 2011). A further con-
Platform Knowledge Piece 3 The private sector response: global trends The strategic role of the private sector in ARD
13
3.0 The private sector response: global trends

3.1 Sources of agricultural investment
Sometimes simple questions are the most difficult to answer. We found this when we tried to quantify who is investing most significantly in rural areas in the South? The relatively easier financial flows to identify are those which cross national boundaries, principally foreign direct investment (FDI) and official aid or official development assistance (ODA) it was much more difficult to quantify domestic investment flows into agriculture.
Foreign direct investment

FDI has made a significant contribution to the recent growth of several countries in the South. In 2010, for the first time, developing economies absorbed more than half of the global FDI inflows of USD 1.24 trillion. The role of the South as an outward investor is also growing. Globally, developing countries account for the great majority of FDI to agriculture (UNCTAD 2011). However, Figure 1 illustrates that FDI for all countries is low compared with the volume of FDI to other sectors. In 2009, FDI to developing countries only accounted for USD 3.3bn.
Figure 1: FDI to agriculture compared to total FDI, all countries, 19902010

2,500000 USD million 2,000000 1,500000 1,000000 500,000 5,450 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 2009 2007 2010 1,970940
Agriculture FDI
Total FDI
Source: UNCTAD (2009) & UNCTAD FDI TNC Database (2011)
The trend in figure 2 suggests that not only is agricultures share of total FDI very small, it is also declining. In the mid-1990s, almost 0.5 per cent of total FDI flows were to agriculture. Ten years later the share of agri-
culture was about half this level. UNCTAD attributes these low levels of FDI in the agricultural sector to restrictions made on foreign ownership, particularly of land (2009).
Figure 2: FDI to agriculture as a percentage of total FDI, 19902010

0.50 0.45 0.40 0.35 0,30 0.25 0.20 0.15 0.10 0.05 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
% of total FDI
A sgriculture FDI trendline
Agriculture share of FDI

Source: UNCTAD (2009) & UNCTAD FDI TNC Database Stat (2011)
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Platform Knowledge Piece 3 The strategic role of the private sector in ARD The private sector response: global trends
Official development assistance

ODA or aid to the agricultural sector accounts for a greater volume of investment in developing country agriculture than FDI. Notwithstanding that donors have been moving an increasing proportion of their funds away from agriculture over the past thirty years, there is evidence of a reversal since 2005.
More revealing than examining the share of ODA is to see the amount of money spent on agriculture. Using the ODA measure of agriculture elaborated in Platform Knowledge Piece 2 3 spending appears to have been fairly stable at USD 15bn to 20bn (at 2008 prices) over that last thirty years, with a noticeable dip in the 1990s. This does belie the implicit suggestion in Figure 3 that the funding of agriculture is being reduced. The more nuanced reality appears to be that very large amounts of ODA funding are made available to agriculture but that the sector has missed out on the tremendous expansion of total ODA over the last thirty years.
Figure 3: Global agriculture ODA as a percentage of total global ODA

20 18 16 % of total global ODA 14 12 10 8 6 4 2 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: ODI, OECD DAC (2011)
It is clear though, that agricultural aid is being spent with different priorities. In the early 1970s most agricultural ODA was spent on agricultural production, followed by rural socioeconomic development. Over time the importance of aid for emergency purposes has grown significantly and rural socioeconomic development has
remained fairly constant. Until recently, agricultural aid was on a twenty-year-trend of changing from an activity focusing upon production to one with an increasingly share on consumption. For the purposes of estimating the contribution of ODA to agricultural investment, we have excluded emergency relief and welfare.
The ODI measures uses 56 DAC purpose codes, thus adding 24 more purpose codes to AFF+ which is a broad measure of ODA to agriculture as defined in the DAC/OECD Creditor Reporting System and is the sum of agricultural aid (itself the sum of aid to agriculture, forestry and fishing) as well as three additional components which include rural development, food security programmes and emergency food aid. The aim of the ODI measure is to create the broadest possible measure of ODA to agriculture.
15
Figure 4: Global ODA to agriculture using the ODI measure,USD million current & 2008 constant prices
25,000 USD million 20,000 15,000 10,000 5,000 0 7,270 17,296 20,382 20,164 13,594 12,093 8,708 6,168 10,097 14,067 21,363 21,876
Figure 5: Global agricultural aid by function, constant 2008 prices, 19802009

16,000 14,000 12,000 USD million 10,000 8,000 6,000 4,000 2,000 0 179 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Agriculture production, processing and marketing Emergency relief and welfare Rural socioeconomic development
Public expenditure on agriculture

The International Food Policy Research Institute (IFPRI) maintains a database of public expenditure, disaggregated by sector and country of which 64 are developing economies. Looking over the past thirty years, it is clear that public expenditure on agriculture was at a low level
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Current prices Constant prices
14,078 11,928
4,618
during the rolling back of the state in 1980s. There is clear evidence of a significant increase in public expenditure on agriculture since 2005. In 2007, public expenditure by developing country governments was USD 810bn some 250 times larger than FDI and 37 times larger than all ODA flows.
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Figure 6: Public expenditure on agriculture as a percentage of developing country public expenditure, 19802007
16 % of total public expenditure spent 14 12 on agriculture 10 8 6 4 2 0 1980 1981 1982 1983 1984 1985 0,713 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2006 2007 200 200 USD billion 150 100 50 0 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2007 36 36 170 6,672 5,446 13,346
Source: IFPRI, SPEED Database (2011)
Public spending on agriculture in developing countries is not mainly on investment. The payment of civil servants in the agricultural ministry and fertiliser subsidies are, for instance, recurrent costs. A joint DfID-World Bank study shows that on average about 42 per cent of agricultural budgets in the South are spent on investment with the majority of spending being on recurrent activities. Estimating the total level of agricultural investment in developing countries is a challenge. The most credible approach is to use the FAOStats database to estimated agricultural capital stock (ACS) for each year. Clearly a change in the real value of ACS between years indicates the level of new investment. In addition to this, and importantly for an asset intensive sector as agriculture,
significant investment is required each year to account for maintaining the existing rural assets. In a seminal paper, Cramon-Taubadel et al. (2010) estimate that a five per cent depreciation rate is appropriate, given the composition of agricultural assets in developing countries. This approach results in an estimate of total (or gross) investment in the developing countries of about USD 200bn in 2007 even though there was only a USD 36bn change in the level of agricultural capital stock through new (or net) investment between 2006 and 2007 (so that USD 164bn investment is estimated to simply maintain the existing capital stock). The statistics suggest a gentle rise in the real value of total investment through time, but with a slight decline in new investment each year.
Figure 7: Estimate of agricultural investment in developing countries, 19822007

250
Net
Gross
Trendline
Source: FAOStats 2011
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Table 2: Sample of countries used in agricultural investment analysis

Our analysis of the components of agricultural investment is based upon a data set of only 31 countries, listed here. These are the countries where we have robust time-series data for not only public expenditure (64 countries) but also for FDI (31 of the 64 countries). Data on ACS and ODA is available for all countries. Although our analysis is based upon a small number of countries, they do constitute 70 per cent of the population and 69 per cent of the agricultural production of the developing world. This analysis is clearly not a census of all the 153 developing countries (as defined by the International Monetary Funds World Economic Outlook Report of 2011). However, as a sample, it does include nearly three-quarters of the Souths agriculture. Our estimate is based upon data which substracts from total agricultural investment figures, the known contributions to this total from: FDI (UNCTAD); public expenditure (IFPRI SPEED database); ODA (OECD). Our hypothesis is that, having taken account of these known contributions to the total, what is left approximates the value of domestic private sector investment in agriculture. It is also the case that domestic private sector investment itself is a composite which includes investment by farmers themselves and also national investors. However, after exhaustive consultation with agricultural statisticians, this appears to be a good compromise to estimate the scale of domestic private investment in the South.
Low income Bangladesh Bolivia Egypt El Salvador Ethiopia Fiji India Indonesia Malawi Moldova Morocco Pakistan Philippines Syria Uganda Vanuatu Zambia
Middle income Argentina Brazil China Costa Rica Jordan Kazakhstan Kyrgyz Rep. Mauritius Mexico Oman Panama Thailand Tunisia Turkey
Figure 8: Components of agricultural investment in the sample of LIC and MIC countries, 1981-2007, constant 2005 USD billion
100 80 Per cent 60 40 20 0 1981 18 8 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 74 61 35 2 2007 1
Domestic private sector investment
FDI
Public expenditure
ODA
Source: FAOStats (2011), UNCTAD (2011b), IFPRI (2011), World Bank (2011), ODI (2011)
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On the basis of this estimate, the overall trend of domestic private sector participation in agriculture has been very significant fluctuating between 61 and 74 per cent of total agriculture investment in our sample of developing countries. The increase in public investment in agriculture since the mid-1990s is also striking. The very
limited contribution to total agricultural investment of aid (where the long-term trend is one of relative decline) and FDI (where the trends is of a rapid increase from a very low base) is clear. Foreign inflows are simply not very significant at an aggregate scale.
Figure 9: Components of agriculture investment in the sample of developing countries, 19812007, constant 2005 USD billion
200 180 160 140 USD billion 120 100 80 60 40 0 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
FDI
Public expenditure
ODA
The figure above shows the absolute contribution of different sources of investment to the total investment in agriculture for all the sample countries. Total investment increased from USD 110bn in 1981 to USD 176bn in 2007, a total growth over the 26 year period of 60 per cent. Comparing total agricultural investment in our sampled countries (Figure 9) with the estimate for all developing countries (Figure 7) provides confidence that our sample of countries has captured the bulk of Southern agricultural activity with our sample capturing some 88 per cent of our estimate of USD 200bn agricultural investment in 2007 for all developing countries. Although domestic private sector investment is overwhelmingly large, it has increased rather slowly over time from USD 82bn in 1981 to USD 108bn in 2007. When more recent figures become available, it would be
very interesting to see whether this trend has changed. In particular, the food price spike of 2008, rapid economic growth in the South post-global financial crisis and environmental policies have, anecdotally, significantly changed the viability of private sector investment in agriculture in recent times. The rapid growth of FDI into on-farm agriculture in developing countries is striking and it would also be interesting to see how the global financial crisis (together with more obvious investment opportunities in the South) has impacted upon the volume of FDI flows post-2007. Within the public sector, the contribution of Southern governments to agricultural investment is one-and-ahalf orders of magnitude larger than the aid spend on agricultural investment.
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Table 3: Total division of agriculture investment in the sample LIC & MICs countries, selected years, constant 2005 USD billion
Year Domestic Private Sector Investment FDI Public Expenditure ODA Total 1981 82.1 0.1 19.5 8.8 110.5 1986 99.5 0.2 21.6 6.1 127.4 1991 93.0 0.5 25.5 5.9 124.9 1996 78.1 0.9 30.0 4.0 2001 89.8 1.4 38.6 4.1 2006 116.6 1.7 59.3 3.0 180.6 2007 108.2 2.2 61.9 4.0 176.3 Total Growth 31.8% 210% 217% -55% 60%
112.9 134.0
The table above shows overall positive annual growth rates for all four categories, except ODA which showed negative annual growth rates in the 1990 to 1999 period as well as an overall negative annual growth rate throughout. FDI growth is clearly the highest, outpacing the growth rates in both public expenditure and capital investment by around 14 per cent and 17 per cent respectively.
Obviously, there are differences in the sources of investment capital in different types of developing country. Figure 10 illustrates that middle-income countries are, surprisingly, still heavily-dependent upon government funding of agriculture and comprise a high share of total developing country investment in agriculture.
Figure 10: Components of agriculture investment in the sample of middle income countries, 1981-2007
180 160 140 120 USD billion 100 80 60 40 20 0 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
FDI
Public expenditure
ODA
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Figure 11: Components of agricultural investment in the sample of low income countries, 1981-2007
12 10 USD billion 8 6 4 2 0 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 147 2007
FDI
Public expenditure
ODA
Conversely, Figure 11 illustrates that low-income countries have much lower total levels of agricultural investment. Public spending and aid are more important and FDI is virtually absent in the LICs but domestic private sector investment still dominates. This analysis demonstrates that what is driving agricultural growth in the South is mainly the domestic private sector with strong support from the domestic public sector. This also suggests that, if the rather modest and declining ODA flows into developing country agriculture are to have any significant impact, they will need to leverage the much more significant domestic private sources of investment funds.
3.2 Trends in agricultural production

Agricultural production
Agricultural production has been steadily growing in developing countries. As Figure 12 shows, even for cereal production in the least developed countries there is a positive trend. Between 1980 and 2009, production increased by 140 per cent and is growing by an average of around three per cent per year, which is nearly twice as high as the average annual growth of 1.7 per cent for crops globally. Hence developing country cereal production has actually outpaced global production in terms of growth rates. Production has increased partly as a result of an increase in land area used for agriculture. However, in addition, there is evidence of intensification and rising yields.
Figure 12: Cereal production for the least developed countries, 1980-2009
160 150 140 130 Million tonnes 120 110 100 90 80 70 61 60 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Trendline
Source: FAOStats (2011)
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Figure 13 shows the trend in exports for a selected number of goods. The value of this trade has grown progressively, with an initial spike in the mid-1990s and the more recent food price spike in 2008. Following this, trade in the majority of the commodities declined between 2009 and 2010, due to the second round effects4 of the global financial crisis which caused a de-
crease in the volume of export goods. It is also important to note that food prices have also increased from the late 1980s with the FAO (2011) estimating that the food price index5 increased from 105.4 in 1990 to 223 in 2011, an increase of more than 100 per cent in food prices over the last twenty years which have also contributed to the increasing value of agricultural exports.
Figure 13: Value of exports from low and middle income countries for selected agricultural goods, 19882010, nominal prices
60 50 USD billion 40 30 20 10 0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Edible Fruit
Rice
Cocoa
Live poultry
Coffee
Source: World Bank WITS (2011)
Increasing yields are a consequence of improved agricultural inputs, better agronomy and improved market linkages. A consequence of this has been that labour
productivity has risen, which has released labour into the rural non-farm economy (RNFE) and the expanding urban labour market.
Figure 14: Value added per agricultural worker for low and lower middle income countries, 19802009
1,400 Constant USD billion 1,300 1,200 1,100 1,000 900 800 700 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Trendline
Source: World Bank WITS (2011)
4
1,350,164
756,739
The economic downturn in developed countries would also have significant impacts on developing countries through second round effects which can be seen as: 1) A decrease in imports from developed countries. 2) A reduction in remittances to developed countries. 3) A fall in foreign direct investment into developing countries as corporate finance weakens. 4) Reductions in commercial lending from banks in developed countries, leading to a reduction in riskier investments in developing countries. 5) A decrease in foreign aid due to pressures on government budgets in developed countries. 6) A reduction in other types of official monetary flows. (Calli et al. 2008) Based on an index of the years 2002 to 2004 = 100
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Figure 15: Income sources in rural areas, aggregate
2,6% 15,2% 29,4%
I Agriculture crops
I Agriculture livestock I Agriculture wages I Non Farm wages I Transfers I Other
13,0%
I Non-farm self-empoyment wages
16,2%
11,0%
12,6%
Low income
4,2% 32,9% 11,9% 15,1%
Low middle income

2,1% 11,0% 35,5% 26,9%
Upper middle income

1,7% 15,1%
10,9%
14,5%
12,1% 16,8% 17,1% 10,8% 9,1% 10,2% 10,5% 12,2% 19,0%

Source: FAO (2007)
Examining the breakdown of the income generating activities, we can see that nearly one-third of all income for rural households comes from the production of agricultural crops. This is followed by non-farm wages, i.e. employment in non-agricultural activities, and by transfers mainly remittances from relatives working in urban areas. Hence even though agricultural activities are the main drivers of income in many rural areas, non-farm earnings account for between 35 per cent and 50 per cent of rural household incomes. Changing patterns between low, lower middle and upper middle income countries suggest a fairly rapid reduction in the share of rural income from agricul-
tural crops and the increase in income from transfers when countries move into the upper middle income country (MIC) category. Rural non-farm activities are however becoming more important to rural economies, with non-farm activities accounting for around 30 per cent of full time rural employment in Asia and Latin America, 20 per cent in West Asia and North Africa and around 10 per cent in Africa (see Table 4). Wiggins (2009) states that despite there having previously been an emphasis on policy promoting rural industry, manufacturing in rural areas only accounts for around 20 to 25 per cent of rural non-farm employment, whilst the rest is made up of trade, construction, transport and other services.
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Table 4: Composition of rural non-farm employment by region

Rural non-farm employment shares Region Non-farm share of rural workforce Manufacturing Trade & transport Financial & personal services Construction, utilities, mining & other 12% 14% 21% 20%
Africa Asia Latin America West Asia & North Africa
9% 24% 31% 21%
19% 27% 22% 23%
31% 29% 23% 22%
35% 31% 34% 36%
Source: Haggblade et al. (2011)
Rural non-farm activities are diverse and include a number of activities such as trading, agro-processing, manufacturing, the provision of commercial services. Activities can also differ drastically within the same country, with different activities enjoying higher levels of prominence in different regions. Similarly, the scale of non-farm activities also greatly varies and can range from self-employment in rural households to large scale agro-processing activities undertaken by large multinational companies. Non-farm activities also tend to be highly seasonal and dependent on the availability of agricultural raw materials or the financial flows between farm and nonfarm activities (Haggblade et al. 2011). According to Wiggins (2009) the state of the agricultural sector is an important determinant to the success of most rural non-farm activities. Agriculture tends to be the largest producer of raw materials, as well as the largest employer in most rural areas. Hence rural development tends to revolve around the provision of goods and services required by farming households or enterprises. Hazell & Wiggins & (2010) state that the growth rates of non-farm rural activities also tend to be determined by the dynamism of the agricultural sector. Where there is an active and growing agricultural sector, there will be increased agricultural production, which in turn will lead to surpluses in certain agricultural commodities and thus increased opportunities for trade.
Agriculture in such a scenario will stimulate rural nonfarm incomes through certain key linkages. Increases in labour productivity will increase per capita food supplies in rural areas, allowing more people to undertake non-farm activities, for example in India the green revolution helped the agricultural labour force fall from 75 to 65 per cent of the rural labour force. In addition, farmer incomes will also rise due to increased productivity, which coupled with high savings rates (reaching 25 to 35 per cent in Asia) in rural areas help to create capital for investments. As farm household incomes grow, their expenditure on non-food products (such as clothing, schooling, entertainment etc.) will also increase, further stimulating local providers. In order to meet an increased demand for such products, rural households increasingly diversify into the provision of non-farm services. On the other hand, where there are push factors, mainly increased populations but without agricultural technological innovations to support them, there will be sluggish agricultural growth, which in turn leads to decreases in rural non-farm incomes and rural wage rates in general. Table 5 contrasts the push/pull situations, showing that where there is innovation in agriculture there is overall growth in total incomes whilst there is a decrease in incomes and employment where there is a push mainly through migration away from rural areas due to overpopulation. The posited argument is that there needs to be technical support to agriculture in order to help the sector to positively contribute to growth in rural economies as technical support can help increase rural employment as well as rural wages and incomes for non-farm activities.
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Table 5: Comparing growth rates for rural push and pull scenarios
Pull improved agricultural technology Rural non-farm employment Total rural employment Rural wage rate Non-farm income Total real per capita income 1.9% 6.6% 6.6% 1.1% 7.4% Push population growth 1.9% 2.1% -3.9% -4.7% -4.4%
Source:Hazell & Wiggins (2010)
Thus, growth in agriculture supports growth in rural non-farm activities; This theory is also supported by Haggblade et al. (2007) who state that each dollar of additional value added in agriculture creates an extra USD 0.6 to USD 0.8 of additional rural non-farm income in Asia and an additional USD 0.3 to USD 0.5 in Africa and Latin America. Hence agriculture can be seen as one of the main motors of growth in both low income countries where it accounts for the majority of rural incomes as well as for middle income countries, where it drives the growth of rural non-farm activities and incomes.
Platform Knowledge Piece 3 The private sector response: evidence from value chains and low-income households The strategic role of the private sector in ARD
25
4.0 The private sector response: evidence from value chains and low income households
4.1 Dynamism of rural value chains
The country case studies indicate that agricultural value chains are dynamic and undergoing very rapid change. To understand this context the seven most striking changes to agricultural value chains are listed below. 1. Agricultural value chains can grow very fast indeed if the dynamism of the private sector is combined with a conducive enabling environment. Transformation in Vietnam from condition of famine in the mid1980s to one of the largest exporters of agricultural products is now definitive as a rural response to liberalisation. Between 1990 when the private sector was recognised in the Vietnamese constitution and 2010, national paddy rice production doubled from 19.2m tonnes to nearly 40m tonnes. The area expanded modestly, so most of this output growth is associated with increasing productivity. Similarly, between 1990 and 2009, Vietnamese coffee production increased more than 11-fold from 100,000 tonnes to 1.1m tonnes per year making Vietnam the worlds leading exporter of Robusta coffee. Both rice and coffee are normally grown on small farms of about one hectare so that the growth of the rice and coffee subsectors have directly benefitted the livelihoods of several million rural households in just one country. It is true, however, that the ethnic minority groups who are indigenous to the highlands have been displaced by coffee production and have not shared in the prosperity which it has generated. It is also the case that large numbers of Vietnamese farmers are highly dependent upon a single commodity.
Figure 16: The main stages of Doi Moi in Vietnam

12 10 GDP growth rate (%) 8 6 4 2 0 -2 -4 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 800 700 600 500 300 200 100 0 -100 -200 -300 Inflation rate 400
Since 1989: Market-oriented reforms Before the 1980s: Centrally planning economy During 1980-1988: Crisis of centrally planning mechanisms; fence-breaking initiatives Up to 1996: Strong market reforms In 1997-1999: Asian crisis; Reform slowdown Since 2000: Further commitments to reforms
GDP growth rate
Inflation rate
Source: GDP growth, inflation rates are from GSO Statistical Yearbook (various years)
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Platform Knowledge Piece 3 The strategic role of the private sector in ARD The private sector response: evidence from value chains and low-income households
2. Policy matters for the functioning of value chains. There are examples where the capacity of the state to implement policy is so ineffective that it appears that policy does not matter. An example of this was in Ghana in the 1980s where the input and output markets for cassava where notionally subject to price control, but these were simply ignored by traders and farmers in Ghana. However, where the state has the capacity to implement policy, the nature of this policy has a clear impact on the response of the private sector. Section 2 outlines examples of this in detail. However Figure 13 illustrates the transition of Vietnam from a country suffering from starvation in 1986 to a major food exporter within a decade and links this explicitly with the policy shifts which have enabled this transformation. 3. Value chains have shortened as a sizeable urban middle class has emerged in the South. In Peru in 2006, for example, it was estimated that 46.9 per cent of the entire population was middle-class. One of the implications of this has been that rural areas no longer have to export goods to find a viable market. These are emerging in urban areas in the domestic market. The organic vegetable market in Hanoi in Vietnam is being created by the discerning demand of health-conscious, high-end income earners. Table 6: Numbers of major discount stores in Thailand
4. There is increasing concern with food safety and quality certification of standards and traceability started internationally but is also moving into domestic space. This trend is also arising from the emergence of functionally shorter supply chains. Reardon and Minten (2011) have catalogued the role of brokers in India decreasing as food processing firms buy directly from farmers and wholesale markets have been replaced. These relate to the emergence of large lead buyers in value chains in the South (for instance supermarkets) linking directly with, and imposing increasing risks and responsibilities upon, producers. The emergence of supermarkets and the impact of their supply chains are clear in the Thailand country case study from the table below. What is striking in the Thai example is the extent of FDI in the retail node of the value chain which is so conspicuously absent from the production node (Tesco, Carrefour and Macro are among the largest retail chains in the UK, France and Germany).
Discount stores Tesco Big C Carrefour Macro Total
1996 5 11 2 13 31
1998 14 20 6 16 56
2000 24 23 11 19 77
2002 n.a. n.a. n.a. n.a. n.a.
2004 60 40 20 n.a. > 120
2006 91 53 23 29 196
Source: Cited in Siriporn Yodkamolsart and Wiset SuchinPrum (2008), Countervailing Power of Small Retailers to Promote Income Equality, In Faculty of Economics, Chiang Mai University, The study on Countervailing Power to Promote Income Equality, Final Report submitted to the National Economic and Social Advisory Council, p. 18.
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5. There were several examples of vertical integration in the country case studies with producers establishing longer-term business relationships with purchasers. As relationships deepen beyond the anonymous and instantaneous spot transactions, lead buyers will often provide support to producers traditionally associated with the public sector to secure their supply chains. Gloria Group, the largest milk processor in Peru, has a loyalty scheme with suppliers, which includes the provision of technical assistance and vet services to small-scale dairy farmers. Pineapple and mango out-growers in Ghana also support the capacity building of farmer business organisations. The entire chicken subsector in Thailand is predicated on the contract farming model. Unusually for a staple crop, Peruvian rice millers routinely enter commercial forward contracts with rice producers. These arrangements are not uncommon for higher value commodities, but much less so for staples which can be consumed by the producers household or sold to a large number of potential buyers. Forward contracts are valuable to producers since they provide a guarantee that produce can be sold and can be used as collateral against which to raise working capital. Another example of vertical coordination with a staple crop was seen with Cargill one of the worlds largest agricultural commodity companies providing agronomy support for cassava producers in Thailand, traditionally the preserve of government extension services. 6. The emergence of better informed value chains is everywhere apparent. ICT, almost universally in the form of private sector provision of mobile telephones, is clearly reducing one of the main market failures facing rural producers inadequate market information. Das Gupta (2010) found 80 per cent of surveyed farmers in India using mobile phones to conduct business and almost 50 per cent settled on a selling price using the mobile telephone. Research in Niger has indicated how the presence of real time market information from mobile telephones has had tangible market outcomes the difference in grain prices across markets has decreased by 20 per cent and the intra-annual variation of grain prices by 12 per cent. The price dispersion effect has been greatest for the most remote, rural areas (Aker, 2008). As mobile telephone coverage rates in Africa exceed 50 per cent, the impact on agricultural value chains of farmers having access to reliable market intelligence may well be transformative. In the Ghana case study, mobile phones were used to seek market information by all cocoa, pineapple and mango farmers interviewed. Even more striking is that 70 per cent of cassava farmers use mobile phones.
7. The change in balance of power between supply and demand from a pre-2008 context of low food prices and a largely rural South to the post-2008 context of urbanisation and high food prices is striking. None more so than some excellent primary data collection in remote rural villages in Kenya, Zambia and Malawi. This evidence shows large numbers of traders combing the countryside to source access to the supply of basic food crops. In the Michigan State University project, the median distance of travel from the farm to the point of sale in Kenya and Zambia is now zero kilometres (Chapoto et al 2011). What is happening is that the market, in the form of private traders with pick-up trucks are bringing the market to the producers and purchasing directly from the farm gate. Although these transactions can be exploitative, the combination of improved ICT and the larger number of traders visiting even the most remote villages reduces the scope for exploiting smallholder farmers.
In summary
It is clear that rural value chains are in a period of profound transformation. Chains are developing dynamically and becoming shorter, more specialised, experiencing stronger vertical integration and coordination, are better informed and with better market access and market power. What is striking is that it is the private sector in the form of supermarkets and other lead buyers, the private governance of supply chains, ICT providers, primary aggregators and traders and customers that drives this transformation. This does not mean that public policy and public action is irrelevant. There is clear evidence that public policy can either create or undermine the capacity of private agents to transform rural areas.
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4.2 Private sector responses to liberalisation

The country case studies suggest that there are six key features of the response of the private sector to liberalisation since 1980. 1. Whilst it is very clear that clumsy and inappropriate state intervention can have a devastatingly negative impact on rural economies, there are many essential roles which the public sector provides in rural areas. The case studies reveal several examples where heavy state intervention (price controls, input and credit subsidies, credit allocations, heavy state intervention in production, distribution and marketing) has seriously undermined productivity. In 1982/3 Ghana cocoa production hit an all time low at 159,000 tonnes in response to this rather crude and pervasive state intervention. Even in fast growing and dynamic economies, inappropriate state intervention can impede progress.
For instance, in Thailand the poor performance of the rice sector in comparison with her neighbours has been linked to the degree of state intervention where, for instance, the Prime Minister is the official chair of the Rice Policy Committee. However it is also clear that, although the private sector will on occasion provide goods and services to fill the gap left by the retreating state there is a broad range of public goods which the private sector cannot be expected to provide. And further, that if this infrastructure is not provided by the public sector, it is a major constraint on private sector development. For instance, the successful rural development of Thailand has been facilitated by an active developmental state which has facilitated access to rural finance for small rural business, roads to the North-East region, rural electrification, and research and development. The opening-up of roads in the jungles of Peru has allowed the very poor to participate in rice and coffee chains.
Figure 17: Comparative rice yields in South East Asia, 19512005

5.00 4.50 4.00 3.50 tonnes/hevttare 3.00 2.50 2.00 1.50 1.00 0.50 0.00 1951 1965 1971 1974 1982 1986 1992 1996 2001 2006
Source: Ellis (2011)
Thailand
Indonesia
Philippines
Malaysia
Laos
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2. An appropriate role of the state extends beyond simply providing public goods infrastructure. The effective regulation of trading standards is, of course, especially important to agricultural business not only to enhance consumer confidence but also for trade within the sector (for example, seed supply, produce grading, veterinary inspection). Failure on the part of government to establish and enforce regulations can inhibit private sector growth and the costs of regulation that are recovered by government from producers and traders can inhibit sector growth at least according to the evidence of cocoa producers in Ghana that seek alternative, illegal, sales in neighbouring country markets. On the other hand, industry self-regulation is often more effective in promoting business growth. This is not only the case in export market sectors as is illustrated by Perus Chamber for Coffee. In Tanzania, for example, some 250 banana wholesalers, operating in an industry that has achieved rapid business growth independently of government policy incentives, have established their own business association that manages urban market facilities. On the whole, however, the level of industry self-regulation found in developed country agriculture has not yet been established in developing countries. Marketing boards engaged in economically, and politically, important commodities often remain in some form under liberalisation, often to the benefit of the private sector. 3. The inability of rural areas to capture the benefits of more generalised business investment schemes is clear from the country case studies. For an agriculture-based economy such as Ghana, the tracking of foreign direct investment by the Ghana Export Promotion Council indicates that over the past decade only five per cent of investments have been to the sector, representing one per cent of the value. Similarly in Tanzania, it has been the sectors offering less risk and more immediate returns (telecommunications, energy, tourism, retail for example) that score well above agriculture, although the more recent increase in land leasing (see below) may signal a change in investor behaviour. The Tanzania Investment Centre suggests that lack of infrastructure and policy uncertainty are factors in the low rate of FDI in agriculture in Tanzania (only 2.9 per cent of FDI stock was in agriculture in 2005). But there are also supply limitations with land tenure and poor financial services among the factors inhibiting onfarm investment.
Vietnams reform of foreign investment laws led, by 2007, to 55 per cent of total capital investment in that country being FDI. However, even in Vietnam which is a best practice case study for its liberalisation process, less than 6 per cent was in agriculture, fisheries and forestry combined. This suggests that, in addition to the general lack of business confidence in sub-Saharan Africa, there is something inherent to the production node of the agricultural sector which deters foreign investors. 4. Liberalisation has been a better success for output than input markets, particularly in Africa. The private sector has generally responded very positively in areas such as marketing, processing and export. Liberalisation has generally resulted in a vibrant response in output markets with traders and other downstream market intermediaries. However, partly due to heavy state intervention in input markets which undermines private markets and the lack of foreign direct investment in agricultural production, the private sector response in input markets has been muted. 5. The country case studies suggest that in several instances perceptions are as important as official policy in determining the development outcome. For example, the Tanzanian state has a very negative conception of rural traders and investors even though the official policy is pro-private sector. SMEs have gone from being criminalised in 1980s, then ignored or tolerated with insufficient support and now being squeezed for local or national taxes. Private agents are frequently accursed of economic sabotage. This dissonance between official policy and perception has led to the undermining of liberalisation processes. Vietnam provides a powerful example of the same point in reverse. Before the Doi Moi market reforms of 1986 and the Enterprise Law of 2000, the private sector was officially illegal and termed the black market. Notwithstanding this, business felt sufficiently confident to invest heavily in the agricultural sector which, as we have seen, is particularly vulnerable to the vicissitudes of the state, well before the regulatory and enabling environment had been fully liberalised.
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4.3 Impact of private sector development on low income households

The 2008 World Development Report states that growth in agriculture is especially effective at reducing rural poverty. A recent study by Ligon et al (2008), based upon panel data for 42 developing countries between 1981 and 2003, suggests that growth in agriculture is more effective in benefitting the poor than growth in any other non-agricultural sector. The figure below shows that for a one per cent GDP growth in agriculture, there is a much higher benefit to the expenditure levels of people in the lowest expenditure deciles than
for non-agricultural sectors. Growth in agriculture tends to benefit the poorest more than growth in any other sector of the economy. Agriculture has a relatively greater positive effect on expenditure for all deciles, excluding the uppermost deciles, suggesting that growth in agriculture has wider positive effects on an economy than just on the poorest households. A similar study conducted by Hasan & Quibria (2004) shows that there are regional differences, with agricultural growth showing larger positive effects in sub-Saharan Africa and in South Asia than in East Asia and Latin America.
Figure 18: Expenditure gains as a percentage from a one per cent GDP growth in the agricultural sector and in non-agricultural sectors
7 6 Income growth % 5 4 3 1 0 -1 -2 10% 20% 30% 40% 50% 60% Expenditure deciles 70% 80% 90% 100%
Agriculture
Non-agriculture
Source: WDR, 2008 & Ligone et al. (2008)
Research by Christiansen et al. (2011) looking at the links between growth in agriculture and poverty reduction show that agricultural GDP growth has the greatest positive effects on extreme poverty represented by the USD 1 per day poverty line for both the poverty headcount ratio and the poverty gap.
Non-agricultural sectors are more effective at reducing poverty at the USD 2 a day poverty line for the poverty headcount ratio with the exception of growth driven by the extractive sector which is shown to be less effective.
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Figure 19 illustrates the significant reduction of extreme poverty in developing countries over the past twenty years. Much of this historic advance can be attributed to the transformation of rural areas into more productive farms which are releasing labour into tightening rural and urban labour markets. Our case studies revealed this link between buoyant private sector and predominantly agricultural development and rapidly reducing poverty in Vietnam, Thailand, Peru and to a lesser extent Ghana. The reduction in headcount poverty in the rural areas of low income countries from almost 90 per cent in 1990 to a little over one-third in 2010 is a remarkable achievement.
However, the persistence of very high levels of poverty in rural Tanzania and Northern Ghana reinforce the same point with a counter example. Where private sector activity has not flourished for the reasons outlined in section 4.2 low income households have left poverty in much smaller numbers.
Figure 19: Poverty headcount at rural poverty line for low & lower middle income countries, 19902010
95 Rural population % 85 75 65 55 45 35 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Lower middle income
Lower income
Source: World Bank WDI (2011)
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Platform Knowledge Piece 3 The strategic role of the private sector in ARD Donor approaches to private sector development in rural areas
5.0 Donor approaches to private sector development in rural areas

5.1 Background
As was shown in Figure 4, donor spending on agriculture fell in the early 1990s, but has risen again to about the same level in real terms although aid expenditure on other sectors has grown faster, so the share of spending on agriculture has fallen significantly. Explanations for these trends abound, including: Changes in priorities of development assistance away from productive to social sectors and away from sectors to general budget support The perception that many of the current agricultural problems can be addressed outside the agricultural sector, such as transport and communication infrastructure, international trade regulations, etc. Overall the loss of confidence in the sector, due to poor performance of investments in agriculture, particularly in Africa In more recent years, however, there has been much talk about how these trends need to be reversed, and how agriculture is key to both poverty reduction and economic growth. At the same time, donor approaches to market and private sector development have been evolving, and this has been reflected to some extent in approaches to ARD. Although this progression in donor activity also reflects the evolution of the agriculture sector itself, and the challenges that have been faced at each step of the transition from state led to market led approaches.
Figure 20: The progression of private sector development approaches

MACRO LEVEL INTERVENTIONS Structural adjustment and regulatory reform DIRECT ASSISTANCE TO BUSINESS Social & patient venture capital
MARKET DEVELOPMENT
DIALOGUE AND PARTNERSHIP WITH BUSINESS Partnership in strategic initiatives
Overcome barriers to market entry
Infrastructure Business development services
Challenge funds & equity/loan financing Credit enhancement
Supporting producer groups achieve viability Incentivising commercial sector to engage smallholder sector
Policy engagement Core corporate strategy
This progression is discussed below, although it is of course a simplification of a complex story. We discuss four broad stages in the evolution bearing in mind that this is an ongoing process, and new ways of working will continue to be developed:
Macro-level interventions to improve the investment climate for business Direct financial assistance to business Market development programmes Dialogue and partnership with private sector players
Platform Knowledge Piece 3 Donor approaches to private sector development in rural areas The strategic role of the private sector in ARD
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Under each heading we have listed some of the main types of donor interventions, although in practice some of them fit under more than one heading. Indeed many of the interventions themselves have evolved in line with new thinking, and have been adapted to fit in with new frameworks and development paradigms. Many of the interventions including the earlier forms remain valid and important, and are still being implemented. It is clear that there are a wide range of different types of intervention that can be used to promote private sector solutions in agricultural and rural development that donors can choose from, depending on their areas of competence and comparative advantage. But there are also many lessons from experience and evaluation, and it is important for donors to learn from this in order to maximise the effectiveness of their spending. Table 6 provides a summary at the end of this section.
It also became more widely recognised that tackling macro level market barriers would not be enough to stimulate market development if other key ingredients were absent, such as adequate infrastructure and access to business development services. As a consequence a wide variety of policy interventions have been implemented to reduce the costs and risks of doing business and create an enabling environment for business so as to underpin market development, including those designed to contribute to macroeconomic and political stability, the creation of property rights, regulatory and legal reforms, trade, competition and industrial policy, access to finance, and infrastructure development. Of these, three are of particular importance to agriculture.
Infrastructure development
5.2 Macro-level interventions to improve the investment climate for business

Structural adjustment and regulatory reform
As discussed in section 2, the structural adjustment programmes implemented by the international financial institutions in the 1980s and 90s contained a set of standard reforms with the aim of promoting market development, including privatisation, market liberalisation, deregulation and the removal of trade barriers. Evidence from the country case studies in Vietnam and Ghana clearly show the strong positive impact on agriculture due to a general improvement in the business environment. While the donor community has moved away from this kind of conditionality, with more emphasis upon increasing government involvement in policy development, market liberalization, promotion and development is still the ethos underlying many donor programmes which can also be seen as an implicit form of conditionality. The liberalisation of the 80s and 90s generated a set of new problems, however, partly relating to the absence of a clear legal and regulatory framework to guide private sector behaviour in the newly liberalised market, such as failing to provide effective contract enforcement or clear regulatory standards. Thus over time more effort was put into supporting these kinds of frameworks. In Tanzania, for example, there is a progression of donor support for the institutions to support liberalisation, notably the establishment of the Parastatal Sector Reform Commission in 1993, to the Tanzania Investment Act of 1997, that reduced regulatory barriers to business and established the Tanzania Investment Centre, to the creation of a Fair Competition Commission and a Commercial Court in Dar es-Salaam.
Infrastructure development is an important component to strengthen the links of farmers and the rural economy to local, regional, and international markets. The perishability of many agricultural products imposes particular requirements, such as the need for cold storage and refrigerated transport, and rapid delivery to consumers. In many developing countries long supply chains, poor transport and energy infrastructure cause quality deterioration and high levels of spoilage. The case studies of Thailand and Peru demonstrate particularly clearly the positive impact of rural road investment in peripheral rural areas, in bringing economic development to lagging regions. Many donors have supported rural infrastructure development. Impact evaluation studies suggest that infrastructure projects can successfully support rural development. For example, the WDR (2008) cites several examples where rural road development has helped to generate market activity: In Vietnam, road rehabilitation increased the variety of goods that households sold in the market and encouraged greater participation in trade and services In Georgia, the construction and rehabilitation of roads increased the opportunities for off-farm activities and employment of women But experience also generates lessons. Improving infrastructure has strongest impact where it is the binding constraint to participation in viable markets. Where there are other major constraints such as poor climate, lack of electricity or disaster prone locations, the impact is more limited. Careful monitoring of the use of funds is also important for ensuring impact, and the lack of funding and institutional arrangements for maintenance can also significantly reduce the positive impacts (see WDR, 2008; Limao and Venables, 2001; and Van der Walle, 2007).
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Whereas previously donors have provided financial support to governments to support infrastructure for ARD, there has been a shift towards using new forms of infrastructure-financing and contracting to broaden the role of the private sector through partnership models (Warner & Kahan, 2008).
Promoting access to business development services

Business development services (BDS) include training, consultancy and advisory services, marketing assistance, information, technology development and transfer, business linkage promotion and support to financial institutions with a mandate to finance otherwise unbankable entrepreneurs. Donors have often provided these in developing countries to promote small enterprise development and improved performance. However, the efforts were generally found to be ineffective, with low take-up rates, cost overruns, and difficulties in tailoring services to the needs of clients (World Development Report, 2005: 166). A donor evaluation process coordinated by the Donor Committee for Enterprise Development concluded that: Direct support to business was usually ineffective, producing few benefits The interventions were not sustainable, relying on ongoing subsidy The core task of agencies should be to facilitate markets for BDS, not to subsidise delivery directly and continually This was in line with a growing recognition that donor interventions should be careful not to undermine the market solution. Thus where BDS are still provided, the aim is usually to catalyse market development in the longer term. A review of EC private sector development programmes between the years 1994-2003 concluded that EC programmes often focused on the direct provision of services for immediate impact, rather than addressing the constraints that preclude correct functioning of the market, and that as a result, private sector development activities are not designed to improve the competitiveness of the private sector in a sustainable manner (ADE, 2005). Since then however, there has been a growing recognition of the need to focus on promoting rather than replacing market solutions.
A wide range of formal and informal financial services providers exist, from banks, to savings and credit cooperatives, to microfinance institutions (MFIs), and donors have supported this agenda in various ways. Financial liberalisation was a component of the structural adjustment programme set of policy prescriptions, but did not generate the hoped for gains in access to financial services for SMEs and low income groups, thus other mechanisms have been sought. In the past much donor effort has been focused on support for MFIs, but microfinance lending in agriculture remains small, sustainability has proved hard to achieve in many cases, and this in combination with limited evidence of a positive impact at the macro level (Stewart et al. (2010), Duvendack et al. (2011)), has meant the focus has begun to shift in recent years towards other ways of promoting access to finance at a larger scale, for example through banking sector reform and the promotion of semi-formal providers such as cooperatives, or through supporting the development of financial infrastructure such as credit bureaux. Donors have also occasionally supported agricultural and development banks in the past. However, these have rarely proved effective; they have been inefficient and frequently politically captured, expensive and unsustainable, and have distorted market prices and crowded out private financial markets (Adams et al. 1984, World Bank, 1989). Thus they came under severe criticism in the late 1980s and many were closed down. However, donors have also supported structural reform and partial privatisation of such organisations, with some success. For example, in 1997, a poorly performing public agricultural bank in Guatemala called Bandesa was closed down, and in its place, Banrural SA was formed with 70 per cent private ownership, but with restrictions on changes in the board and equity ownership. It offers financial services to poor, rural and agricultural clients, and has remained highly profitable (Trivelli 2007). In summary, creating an enabling environment for business is still considered very important, but there is now a much greater awareness that liberalisation by itself is not enough, and that supply side constraints must also be tackled if developing country producers are to take advantage of the opportunities afforded by market liberalisation.
5.3 Direct financial assistance to business

Access to finance has long been considered one of the most important constraints to market development. Thus donors have sought to tackle it in a number of ways, partly by supporting financial sector development as discussed above, but also by providing funds directly to busi-
Savings and credit cooperatives and microfinance initiatives

These initiatives are designed to help often low-income rural entrepreneurs to undertake productivity enhancing investments and manage risks.
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ness. For example, donor support to the Ghana Export Development Fund has allowed individual businesses to secure both technical assistance and capital for a highly successful pineapple and mango export industry. There are a range of forms that donor assistance takes: Social venture capital which helps businesses get established by shouldering the earliest stage costs and risks, in order to create commercially viable business investment opportunities, bringing them to the point where they can attract private investment Patient capital long term debt, which leverages in private capital. Assets with a long lifetime or payoff can be funded this way Investment and working capital which is needed for expansion once a business is beyond start up. This can include a range of things, from equity investment provided by development finance institutions to matching grants or interest free loans as project finance, provided to businesses that wish to implement innovative, commercially viable projects in specified sectors. The African Enterprise Challenge Fund is an example of this. Hosted by the Alliance for a Green Revolution in Africa (AGRA) it provides matching investment to successful applicants Credit enhancement mechanisms designed for example to facilitate local bank lending and reduce costs such as credit guarantees Looking at the experience of more innovative funding mechanisms, experience with some of these types of interventions is fairly limited, as there are not many such interventions particularly of the first two types.
to provide the last mile extension of economic infrastructure which is necessary to link low-income communities to viable agricultural markets and government infrastructure budgets. Filling this infrastructure gap is often important to translate promising initiatives into sustainable development outcomes. A recent evaluation of IFCs investment in agriculture and agribusiness showed performance comparable with or surpassing that in other sectors in East Asia and Latin America, but well below average in sub-Saharan Africa in terms of both investment returns and development impacts. The additionality of DFI funding compared with commercial funding is often questioned, and recently a stronger focus on potentially less profitable but more developmentally impactful projects has been proposed for development finance institutions.
Challenge funds
Challenge funds have attracted some criticism as they may distort the market and undermine competition. However, they have had some notable successes, particularly in relation to linking farmers to value chains (WDR 2008)7. In Tanzania and Ghana, for example, challenge fund mechanisms have been successfully deployed by individual donors in supporting market development in coffee, cocoa and fruit exports, as illustrated below. Internal evaluations of challenge funds have shown they can have very positive impact, but the failure rate of projects can be quite high. This raises the question of which failure rate should be acceptable, and in light of that, how to assess the rate of return vis-a-vis alternative kinds of development interventions. Unlike most donors, commercial venture capital firms are able to accept a failure rate that reflects market uncertainties. Yet there is a strong case for donor support for institutional and technological innovations which will accept the risk as well as reduce the cost of doing business in the agriculture sector. Successful innovations are likely to have a public good element, as they may be adopted by others. Since the private gains to such innovation may not be fully captured by the firm in question, it will be underprovided by the market. This provides the rationale for public support to promising start-ups and innovative new investments. However, it is important that this support is provided for a temporary period only, to ensure sensitivity to market incentives and disciplines, which will be important for ongoing sustainability. Apart from grant assistance, support can also be provided for:
Social venture capital or patient capital

There appear to be relatively few donor interventions providing social venture capital or patient capital, or other forms of catalytic funds. AgDevCo is an example of a social venture capital initiative6, but was established only two years ago and none of the projects funded are yet profitable. It is too early to judge impact as these are long term interventions whose impacts are expected to take a while to come through. However, the need for organisations such as AgDevCo providing patient capital to support initiatives which are based upon a partnership between the private and public sectors is clearly demonstrated in the Southern Agricultural Growth Corridor of Tanzania (SAGCOT). The corporate backers of this initiative are generally unable
6 7
See http://www.agdevco.com/about_us.php WDR 2008 pp. 136-7
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Market information systems, and the provision of extension services based on advances in communications technology such as mobile telephony, internet Information technologies which offer a number of different ways to extend financial services to rural areas at relatively low cost Weather-based insurance
ket mechanisms and institutions, rather than promoting local incentives and ownership and hence sustainability. (De Ruijter de Wildt et al. 2006). The key characteristic of the M4P approach is the emphasis on understanding the entire market system within which the poor must operate. It seeks to identify the fundamental problems in the system that are hampering progress, and then make targeted interventions that can achieve a positive, sustainable and potentially large systemic change, which makes those market systems work more effectively for the poor. In practice, however, the market development approach can mean a wide range of interventions to assist poor farmers into higher value markets. In our study countries, we have identified five different types of intervention: Support for technology improvements, in cultivation, handling, processing etc., and technical services such as plant protection that provide improved prospects for higher value market entry Measures to address information and regulatory barriers to market entry, including inspection and certification systems, and market information services Assistance to producer groups and federations of producer groups that sets them on a path of commercial viability that is, the groups and associations are providing marketing and other services that their members are prepared to pay for Incentive measures to encourage private traders and processors to expand their business activities in response normally to supply from low income farmers previously regarded as unreliable sources of supply or demand Collaboration with large retailers and agribusiness to open up new opportunities to producers in higher value export markets
Credit enhancement mechanisms

Evidence on the effectiveness of credit enhancement mechanisms such as loan guarantee schemes is mixed, with questions being raised both about their additionality and the sustainability of their impact. Thus there is no consensus that they are an effective means to promote market development. To be successful they need to be run by competent, financially sound banks, with the capacity to effectively manage SME loan portfolios to acceptable levels of performance a condition that is not always met (Levitsky, 1997). In summary, some argue strongly for the need for more forms of soft funding to be made available by donors, particularly in the form of social venture capital and patient capital. Indeed, with the growth of philanthropic investment in recent years, this may well prove to be forthcoming. Challenge funds also provide strong benefits in some cases, though failure rates are high. There seems to be significant unmet demand for this kind of support. However, experience highlights the difficulties of achieving commercial success in many agricultural markets in developing countries, particularly in Africa, even where finance is readily available and subsidised. This raises the question as to the extent to which it is really a lack of access to finance which is hampering the development of markets, or whether it is unviable markets which are hampering access to finance.
5.4 Market development programmes

The market development approach, often termed making markets work for the poor or shortened to M4P, has emerged in the last decade. It was a response to the experiences of many development agencies, in a range of unrelated sectors, including agriculture, finance, water and health, that many market-related interventions have proved unsustainable, and that the poor have often remained excluded from markets. The main causes of these problems were seen to be (a) a failure to understand market systems and where the poor fit in to them and (b) inappropriate interventions, which actually distorted and displaced indigenous mar-
Technology improvements and improving market systems

In terms of number of interventions, support for technology improvements and improving market systems are by some way the main types of intervention. It should be noted, however, that market development and private sector development are complementary, but not synonymous. Of course, these two types of market development intervention are expected to elicit a private sector response. But they are not direct interventions to promote PSD. The other three (commercializing producers, incentivising private traders, supporting large retailers) are, of course, direct interventions and it is evidence on these that is of most interest in this study.
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Improve market access

In terms of number of activities, support to producer groups to improve market access, has been the largest area. It is also an area in which considerable progress has been made, albeit largely in export horticultural and beverage crops and generally under conditions of rising commodity prices. Support to producer groups whether services co-operatives or group marketing arrangements for example have a very long history in agricultural aid. However, the more recent business approach does represent a shift in emphasis towards building the commercial viability of such groups so that they can not only achieve financial self-reliance but also develop the capacity to raise finance for productivity-enhancement, establish quality control arrangements, hedge against price volatility etc. Groups can also act to overcome market entry costs for example, in Thailand FAO has assisted vegetable growers to obtain group certification. Value chain financing offers the opportunity to make the resources available to integrate smallholders into higher value marketing chains (Miller and Jones 2010). There are several examples where progress towards such self-reliance is being achieved. In Vietnam, the DE Foundation has successfully promoted coffee farmers organizations that have increased their bargaining position with major buyers as well as lowered production costs through collective buying. In northern Peru where coca leaf production has often offered high high (if illegal) returns, there has been not only a growth in coffee production (assisted particularly by USAID) but also business growth in the producer associations. GIZ is among several organisations that have facilitated access to international buyers of speciality coffee produced in the highlands. Tanzania has gone a stage further as the USAID assisted farmer business groups have formed an umbrella company successfully trading as Kili Caf. In Ghana the growth in horticultural exports is similarly matched by the growth in commercially viable producer associations. In some cases, such as the Power Pineapple Growers company, associations have evolved into processing and packaging enterprises. As with Kili Caf, donor support has been instrumental in such private sector development. The natural business development of such producer-based enterprises is to federate and form industry associations, partly to lobby government. This has also been an area of broadly successful donor intervention. In Ghana, for example, the Horticultural Association of Ghana is now largely self-financed. Other donor assisted initiatives, such as the Agricultural Council of Tanzania, still require donor support as membership income is insufficient to finance its development programmes.
Direct support from private traders and small scale processors

This is much less evident in the country studies. In Ghana, Tanzania and poorer regions of Thailand and Peru the absence of such agents or the absence of competition between buyers of produce or suppliers of inputs is generally held to be a factor in constraining agricultural production growth. This is a difficult area for donor intervention at the individual firm level since it can mean introducing unfair competition and lead to unintended market distortions. There are examples of successful intervention such as seed trader development in southern Africa, but this is less evident in the country studies. However, in Vietnam, as part of its market development programme in coffee, DfID identified the insufficient availability of local wet processing enterprises (sourcing from smallscale growers) as constraint and successfully cofinanced such enterprises. Similarly in Ghana, both USAID and GIZ have helped to establish businesses in the mango and pineapple trade that have ensured growers are in a position to access export markets with necessary certification and reliability of delivery.
Collaboration with large business interests

The third area of private sector-led market development focuses upon collaboration with large business interests, normally in the retail food industry. This is a relatively new donor interest with DfID, for example, establishing a fund to work with major supermarkets in fresh produce importing. To a large extent, this new interest involves the deployment of various business challenge funds described in the previous section. But in our country studies, we have found different forms of collaboration that are not simply the supply of capital or equity to successful challenge fund bidders. For example, in Vietnam, DANIDA has worked with the Big C supermarket chain to promote consumption of organically-certified vegetables that have been the production support focus of several donors. Also in Vietnam, SNV have collaborated with a major food manufacturer to produce organic tea for export, thereby assisting smallscale growers. SNV has also been successful in Peru in collaborating with another major food manufacturer, the Gloria Group, in developing cheese exports sourced from dairy associations supported by other donors, including IFAD. Finally, in Ghana, local subsidiaries of large fresh and processed fruit companies, Global Exotica and Blue Skies both of which source from small scale producers have been assisted by GIZ, DANIDA and USAID at different phases in their business development.
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5.5 Dialogue and partnership with private sector players

Increased dialogue and partnership with business can take many different forms, from consulting specific industries on a new market development programme to the establishment of sector-wide consultative mechanisms. In Ghana, for example, donors have been closely involved with international buyers in assisting the cocoa industry, and with government in establishing institutions such as the Private Enterprise Foundation. As with the similarly donor-supported Agricultural Council of Tanzania, the expectation is that public policies will become more supportive of agricultural sector interests, and hence private investment. A number of examples discussed above illustrate how traditional interventions have evolved in this direction. However, more innovative forms of partnerships can potentially deliver much bigger development gains, by combining the strengths of different players to tackle strategic barriers to development. This appears to be happening for example in the context of the various trading corridors which have been established, and which emphasise the importance of collaborative and coherent strategies to tackle the constraints to business and trade. These strategies involve business investments, underpinned by government commitments to undertake particular reforms or infrastructure development projects which will help to make those investments profitable. These public investments may only be possible if they are supported by donors. For example, the Southern Agricultural Growth Corridor of Tanzania (SAGCOT) is a collaboration of the Tanzanian Government, international business (including Unilever, Yara International, Diageo, Monsanto, etc.), development agencies, and farmers groups, and aims to promote clusters of profitable agriculture and services businesses, transforming the fortunes of hundreds of thousands of farmers. Recent progress on the SAGCOT corridor has been impressive, but this is not matched in others, so while the corridors approach is generating much excitement and appears to have the potential for significant impact, it is still early days to judge performance. Our caution is partly informed by the long history of spatial development corridors in Africa failing to deliver tangible and sustainable development outcomes. Business is itself increasingly interested in engaging with the development agenda, either on its own or in partnership with others. This reflects a growing awareness by the private sector about the commercial benefits of such engagement. Leading companies are beginning to move beyond corporate social responsibility, and to develop a more sophisticated approach which emphasises strate-
gic and indirectly commercial benefits to engagement, such as securing a sustainable source of supply particularly important in a world which faces growing natural resource scarcity in future , better risk management, reducing costs, securing competitive advantage, or developing new markets for their products, and the contribution it can make to securing a licence to operate from government and society in countries in which they operate. Many such corporate sustainability initiatives now exist, such as the Cadbury Cocoa Partnership which was established to support sustainable cocoa farming in developing countries and improve the conditions in cocoa farming communities. Another is the Sustainable Agriculture Initiative which brings market players from the food and beverage industry together to support sustainable agriculture practices by stakeholders in the supply chain in developing countries. Unilever, Nestle, Kellogg and Heineken are all members. Corporate initiatives are often carried out in partnership with government, donors or NGOs. The private sector is not well suited to coordinating itself, as it is more used to competing than collaborating with other firms in its industry. Thus either the public sector or donors may have an important role to convene and coordinate private sector actors, as long as the latter are strongly supportive of the goals of the initiative in question. This role may be particularly important to prevent coordination between otherwise competing market players from becoming too close and causing concerns about the potential for collusion. Development agencies or NGOs can also collaborate with private players in a facilitative role, to help them engage with governments and resolve local concerns relating to new investments, such as access to resources and land use rights. Agencies such as GIZ already play a facilitator function, providing neutral brokership between different parties. They also provide technical knowledge, thus offer a one stop shop to businesses wishing to engage. It seems that it is these skills and capacities that add the most value to the partnership, rather than the funding that these donors bring. GIZ have sent development cooperation scouts to businesses to try and improve understanding of how to engage with the private sector and bridge the cultural divide. Other examples of direct donor/NGO support to private sector solutions include projects such as the DfID and IDH project with Unilever to support their Rainforest Alliance project in Kenya, and the Finance Alliance for Sustainable Trade (FAST), which is a collaboration of financiers and producers with the objective of helping producers to overcome the financial barriers related to adopting sustainable practices. Donors can also support
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the development of improved assessment methodologies and mechanisms, in order to build the evidence base on the development impact of corporate activity and sustainability initiatives. Innovative methods to incentivise corporate reporting are also needed, along with help to develop and establish appropriate reporting requirements and to fund bodies that monitor compliance with private sector initiatives, in order to assess and strengthen their impact and learn lessons over time. Thus many new modalities of public/private/donor engagement are now emerging, and although evidence of impact is as yet weak, these collaborative initiatives offer the exciting prospect of a new and perhaps far more effective way to pursue development goals, which leverages and capitalises on private sector drive, skills and resources.
This also reflects to some extent political trends which are now beginning to re-emphasise the advantages of promoting national businesses abroad, as well as reduced public resource availability in difficult economic conditions. But the overarching objective is to improve the effectiveness with which aid funds are used. However, while some donors have made considerable progress on this agenda, others are finding it very hard to make the transition. A wide range of different reasons were given for this during the donor consultation, including:
Making the transition to more market-based donor approaches

ARD and PSD specialists have often not worked together very closely in the past, which has made a private sector-focused approach to ARD difficult to achieve Donor agencies are wary of providing funds to support the private sector they do not want to see business failures since that implied money had been wasted, but at the same time they may be uncomfortable contributing to business profits, as that is not seen as pro-poor Recipient country governments would rather be given the money directly, and do not want to lose control of the outputs Setting up partnerships with business is difficult as there is a culture clash between business and donor agency staff which makes it hard to work together: Donors do not understand business objectives, or have the skills to work with them Donors are too bureaucratic and move too slowly Donors have political objectives and their projecs are often too complex for private sector partners who want quick solutions and gains There is limited trust - private sector partners are viewed with scepticism There are concerns about distorting competition by working with individual firms, or about undermining competition if promoting cooperation between firms PSD is less tangible than other goals such as health or education, and impact assessment is hard due to the long term nature of the impacts sought, difficulties in attribution and establishing clear additionality, accepting the risks of business failure etc. so making a strong case for a private sector focus is difficult.
5.6 An evolving agenda

The preceding section has outlined the evolution of thinking and favoured approaches to private sector development in ARD over time. This evolution has reflected lessons from experience largely and unfortunately, lessons derived from interventions that have not worked well. A recurring pattern has been seen in relation to many of these interventions, whereby approaches started with macro level policy prescriptions promoting liberalisation, moved on to direct provision to fill gaps when liberalisation failed to generate the expected market response, and then more recently shifted again, towards an approach which emphasises the facilitation of market solutions through market development programmes. There is now a growing emphasis on ensuring that such programmes promote substantial engagement with, and are ideally led by, private sector players often downstream buyers with the capacity and resource to develop and implement sustainable solutions. Even where ongoing public subsidy seems necessary such as in relation to research or extension, private sector partnership or delivery generates better results than public provision. This experience has increased the desire of many donors to engage much more systematically and directly with the private sector to achieve development goals. This was highlighted by the Bilateral Donors Statement in Support of Private Sector Partnerships for Development" which was announced at the UN Private Sector Forum on the Millennium Development Goals in September 20108.
See http://www.enterprise-development.org/page/public-private-partnerships
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Table 7: Summary of overall findings on impact and lessons learnt Annex II: Comparison of definitions of aid to ARD and food security
Intervention Main lessons Structural adjustment programmes and associated conditionality Infrastructure development Policy prescriptions still largely supported, and now with recognition that by themselves they are not always enough to generate private sector led market development Potential sustainability needs to be considered when implementing infrastructure development projects, e.g. arrangements, capacity and funding for on-going maintenance should be identified. Evidence from Peru and Thailand indicates the importance of rural road infrastructure in encouraging market access from peripheral rural areas. The impact of mobile telephones in sub-Saharan Africa illustrates the impact of ICT on rural areas. Many different approaches with varying success. Beyond standard measures to promote financial sector development, market-friendly policies to encourage the provision by the financial sector of wider access to financial services specifically, are needed Availability is limited, and there is significant unmet demand, though potential investment returns are unclear. However, overall project failure rates may be higher than donors are willing to accept Clear rationale and demand, and some success stories, but also raising questions as to the failure rate donors should be/are willing to accept. Investment performance has often obscured other challenges associated with creating viable markets raising questions as to whether access to finance is the binding constraint. Concerns with extent of additionality and distributional effects of equity investments Mixed evidence on the effectiveness of credit enhancement mechanisms in terms of their additionality and sustainability Some significant successes, such as the pineapple sub sector in Ghana. Much work has been done in the case study countries with using technology improvements to upgrade the output of farmers Important advance to not regard supporting farmer groups as an end in itself but as a means to allow farmers to access viable value chains on a sustainable basis. Some examples of important successes Where this has been successful, donors have achieved significant impact at relatively low cost. To achieve this donors need to adjust to a more facilitative role which is based on good quality sub sector and microeconomic analysis Requires donors to allow private sector to play a leading role and for private sector to be willing to take on that role. However, partnerships raise the prospect of limited donor funds leveraging private sources of funding to increase development impact and the sustainability of initiatives Consultation mechanisms for private sector stakeholders in the design of policies to promote market development are an important area for donor assistance to maximise success rates and sustainability
Macro-level interventions to improve enabling environment
Promoting access to business development services
Direct financial assistance to business
Social venture capital and patient capital
Challenge funds and loan and equity investment through DFIs
Credit enhancement
Overcome barriers to market entry Market development
Supporting producer groups to achieve viability
Incentivising commercial sector to engage smallholder sector
Dialogue & partnership with business
Partnerships and strategic initiatives
Policy dialogue
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A tentative indication of the position of different donors with regard to their approach to ARD is shown in Figure 21.
Figure 21: Varied donor approaches to ARD, according to increasing innovation
FAO & EC
> > > > > > > > > > > > > > > > > > > > > > > > > > INCREASING INNOVATION > > > > > > > > > Value chains
> > >

CIDA, WB/IFC, AuSAID GIZ, SDC, IDH, USAID, DFID
Market development
Challenge funds
Partnership
Market transformation
Non-traditional donors
Non-traditional donors have significantly increased their engagement in ARD in recent years. This category includes donors from emerging markets such as Brazil, India and China, and private foundations such as the Gates Foundation and the Gatsby Charitable Trust. Their spending and influence is increasing rapidly, and has the potential to generate significant shifts in political and commercial influence and power going forward. The BRICS are currently very interested in promoting South-South cooperation on agricultural issues, and take a more business-focused approach than traditional donors, emphasising the achievement of mutual business benefits and strategic, often geopolitical interests. For example, Brazil is increasingly engaging with African countries to develop biofuels production for export by Brazilian companies, and also emphasising the energy security benefits for the host countries. Most emerging donors have also invested heavily in their own agricultural research, and are now sharing that with other developing country partners through capacity building and skills transfer. They aim to develop new markets for their own businesses, and to ob-
tain access to natural resources and new sources of supply to fuel their growth. Other developing countries including countries in Africa could potentially gain considerably from this trend, if it is managed appropriately, as it could drive up the price of many of their assets. However, their ability to manage this investment well is often questioned. There are particular concerns around the fact that such emerging donors and particularly China emphasise the non-interference and non-conditional aspects of their assistance which could exacerbate problems of poor governance, and also the tying of aid and the explicit linking of aid to strategic, diplomatic and economic goals. A clear motivating factor for Chinese development assistance is the need to secure the energy and raw materials needed to sustain the Chinese economy going forward. Jury is still out on the positive or negative effects of BRICS assistance and investment on the economic prospects of other developing countries, but there is a generally positive view (e.g. Goldstein et al. 2006; Asche & Schller 2008).
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Private foundations are also growing in size, and some Gates and Gatsby for example are heavily engaged on the ARD agenda. Indeed, agriculture is one of the four key focus areas of private foundation funding according to Witte (2008). The Gates Foundation provided grants of more than USD 242m for agricultural development in 2010, dwarfing many individual traditional donors. They focus mainly on R&D, agricultural policies and access and market systems, but tend to be philanthropic rather than business-focused, despite their business underpinnings. Nonetheless, they are well placed to engage with business in implementing programmes. Foundation investments in agriculture have often had a strong research component such as the Alliance for a Green Revolution in Africa (AGRA), which seeks to substantially increase agricultural productivity on the continent which was set up by the Rockefeller Foundation and the Gates Foundation jointly. The financial and decisionmaking autonomy that foundations generally enjoy may also represent an advantage in allowing for longer-term commitments to be made, and this could be particularly conducive for achieving successful market development programmes. Like the emerging powers, these non-state actors might also present new challenges for DAC donors. They may have priorities that may not correspond to donor objectives and their implementation mechanisms may not correspond to those promoted in the international consensus on development. At the same time, these private actors might also represent major donors in particular sectors or regions, and thus wield corresponding influence. Traditional donors may find themselves having to work around the projects and programmes being implemented by these new donors going forward.
The often decentralised nature of the private foundations approach represents an important challenge to the traditional state donors, as it differs greatly from the traditional donors emphasis on aligning development interventions with national-level development strategies to achieve a greater coordination of donor investments in the process (Grimm et al. 2009). These emerging donors are becoming a force to be reckoned with and this is likely to change traditional power relationships, geopolitical dynamics and market opportunities. It will also challenge the predominance of western multinationals in developing countries over time, and thus may create new incentives for them to engage more proactively in development, in order to compete with the new players. Traditional donors may themselves find the influence previously associated with their funding reduced. They will need to adapt quickly to the new international landscape all of these changes will generate.
Platform Knowledge Piece 3 Conclusions The strategic role of the private sector in ARD
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6.0 Conclusions
6.1 Policy and private sector development
It is clear that the era of market deregulation and trade liberalisation has led to a diminishing role for the state and that public agricultural policies are much less focussed than in the past upon managing prices, arranging inputs and buying and storing farm produce. But it is not the case that governments no longer seek to influence markets and, especially in strategic food crops and traditional exports, the level and nature of government intervention remains central to private sector response. This intervention is sometimes beneficial to individual industries and it should not be regarded as an inherent obstacle to private sector development. Nonetheless, much of the intervention reflects political pressures to manage the sector in ways that create uncertainty and there often remains some of the distrust of markets, particularly traders that influenced earlier policies of state control. The most important aspects of deregulation in terms of private sector response have been overall policy changes towards external trade, macroeconomic management and the role of subsidisation in generating growth. The net effect of such changes in public policies has clearly elicited increases in agricultural production and productivity that would not otherwise have occurred. In terms of specific private sector support however, the picture is less clear. Foreign direct investment in agriculture, even when subject to specific incentives, has lagged behind other sectors. Local investment, similarly incentivised, has largely focused on export commodities that are vulnerable to demand fluctuations and over supply. There have, however, been large numbers of small scale producers that have successfully responded to external support (from business and donors as well as government) designed to improve market access and participation in mainstream markets. One possible concern over donor support for such propoor market development is that assistance efforts focus on the potential quick returns (in terms of development results) to investment in specific areas and specific commodities where private sector development opportunities are most evident.
The infrastructure development necessary for longer term and sustained private investment such as in roads, power and irrigation) could be relegated in the drive for shorter term evidence of successful market development. The importance of soft infrastructure development for the private sector is also evident from some of the country studies. The regulatory and market information systems that are important to private sector confidence and growth can be developed by individual industries. However, these are generally still the responsibility of governments in most developing countries, and generally they remain weak in terms of facilities and in terms of adherence to produce standards and business practices.
6.2 Private sector response

In our assessment of who is financing the transformation of rural areas in the South, we conclude that it is not foreigners. The flows of both FDI and ODA to agriculture are rather limited. The analysis reveals that the major contributor to agriculture in the South is the domestic private sector and in many cases farmers themselves. This implies that, if development assistance is to have an impact on agriculture at scale, it is very important to work with the private sector in order to leverage their funding. Without this, ODA is simply a rather insignificant flow of funding into the Southern agricultural sector. The second most important actor is the domestic public sector. Agriculture is in a process of profound transformation. Growth has been steady over the past 30 years but has been rapid and transformative for specific commodities in specific countries. In some of the case study countries increases in production have been achieved through driving up yields as a result of higher quality inputs and better agronomy. In some areas this has been achieved with the shedding of labour from agriculture into the rural non-farm economy and into urban labour markets. This is how agricultural development can support the transition of countries from a predominantly agricultural to a more productive and urban context. There is evidence of agricultural value chains shortening geographically and functionally; developing higher quality standards; creating longer term relationships between producers and buyers; becoming better informed and experiencing a strengthening of the power of producers in the last very few years.
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Platform Knowledge Piece 3 The strategic role of the private sector in ARD Conclusions
The country case studies suggest that clumsy state intervention can destroy agricultural value added but that the public sector has a vital role in the provision of public goods in which the private sector has loathed to invest, i.e. hard and soft economic infrastructure. Several of the countries with the most successful record of agricultural development have had a very active government supporting private sector development. Agriculture has generally failed to capture the benefits of more general business incentives, which have stimulated FDI. This reflects the additional risk profile of primary agriculture as an economic activity on top of the higher risks of investing in the South. There is considerable evidence that liberalisation has resulted in a more significant private sector response for output markets than input markets. Although policy change has been an important driver of liberalisation in rural areas, it is striking that the culture and perceptions of private sector development also have a significant impact on the development outcomes. There is clear evidence that agricultural and rural development is an inherently inclusive sector of the economy. However, there is no room for complacency and our country case studies do reveal instances where agricultural development has not benefitted particularly vulnerable members of rural society.
Donors are coming to this issue from very different starting points and are constrained in terms of the funding instruments which they have available and their internal capacity to work effectively with the private sector. To support private sector development, there is a need to provide public goods investments in the enabling environment, i.e. hard and soft infrastructure, as well as engaging more directly in value chains. There is scope, therefore, for donors to support the private sector with a portfolio of interventions which match their comparative advantage as donor organisations from more traditional public goods investments to more innovative approaches.
For the Global Donor Platform for Rural Development

There is a clear need to strengthen knowledge sharing on approaches to working with the private sector in rural areas. A number of donors are experimenting with innovative approaches but the level of impact assessment and the sharing of credible evaluation material are poor. The Platform should partner with organisations such as the Donor Committee on Enterprise Development to develop better methodologies for, and undertake more systematic impact assessment of both market development interventions and business engagement strategies, both to facilitate lesson learning and to provide comparison of aid effectiveness and value for money. The provision of guidelines for assessing impact, and collection and synthesis of such evidence is one role the Platform could potentially play. Donors should identify ways to work with each other to develop coordinated approaches to promoting market development in particular countries or sectors or value chains, to avoid conflicting or duplicative interventions. They should also learn from each others experience in order to inform the development of good practice on this agenda, and how challenges associated with business engagement have been overcome such as through the development of knowledge sharing networks. Several donor organisations are considering adopting more market-orientated approaches to supporting rural areas, but are constrained by their lack of knowledge on how to transform their approach, their institutional capacity and the instruments available. The Platform should provide support to the institutional innovation required to allow agencies that wish to engage more effectively with the private sector to do so.
6.3 Policy recommendations for donors

For donor organisations
The key recommendation is that working more closely with the private sector in ARD is compelling. Most investment in rural areas in developing countries is from the domestic private sector so donors should aim to support rather than replace market solutions. An assessment of the potential market impact of all donor interventions would help avoid donors unwittingly damaging rural markets through their interventions. Donors should develop diagnostic approaches which identify the key binding constraints in specific situations to help prioritise market development interventions. This would require donors working more systematically with the private sector to identify and design programmes to promote private sector development in ARD. In addition, donors should explore ways they can support private sector led initiatives that can promote development, such as the New Vision for Agriculture, or the Corridor Initiatives, or by supporting company or sector specific initiatives such as the Sustainable Agriculture Initiative.
Platform Knowledge Piece 3 Bibliography The strategic role of the private sector in ARD
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UNEP (2008) CCCC Kick the Habit: A UN Guide to Climate Neutrality UNEP, Nairobi Van der Walle, Dominique. 2007. Impacts of Road Infrastructure on Markets and Productivity. Background note for the WDR 2008. Von Braun, J. & Meinzen-Dick, R. (2009) Land Grabbing by Foreign Investors in Developing Countries: Risks and Opportunities IFPRI Policy Brief 13, Washington DC Von Braun, J. (2007) Biofuels and the Poor: Findings and Win-Wins IFPRI Paper presented at the International Conference on Biofuels, July 2007, Brussels Von Cramon-Taubadel, S. Anriquez, G. De Haen, H. & Nivyevskiy, O. (2009) Investment in Developing Countries Food and Agriculture: Assessing Agricultural Capital Stocks and their Impact on Productivity Paper prepared for the Expert Meeting on Hot to Feed the World in 2050, FAO, Rome Warner & Kahan, 2008. Market-Oriented Agricultural Infrastructure: Appraisal of Public-Private Partnerships ODI Project Briefing 2008 Wiggens, S (2009) Transforming the non-farm rural economy: opportunities and threatsin the developing world Journal of Agrarian Change Vol 9, Issue 4 pp595-598 Witte, Jan Martin (2008): Private Geber in der internationalen Entwicklungszusammenarbeit: Trends und Herausforderungen. GPPi Research Paper No. 9. Berlin: Global Public Policy Institute. Available at: http://www.gppi.net/fileadmin/gppi/GPPi_Private_Ge ber_20080505.pdf Woods, J. (2006) Science and Technology Options For Harnessing Bioenergys Potential IFPRI, Washington DC World Bank (2005) World Development Report 2005. World Bank (1989). World Development Report 1989. Financial Systems and Development. New York: Oxford University Press World Bank (2008) World Development Report 2008 World Bank (2011) World Development Indicators Website, accessed August 2011
WorldWatch Institute (2006) Biofuels for Transportation: Global Potential and Implications for Sustainable Agriculture and Energy in the 21st Century Washington DC
Prepared by: Platform Secretariat Published by: Global Donor Platform for Rural Development - Secretariat Godesberger Allee 119 53175 Bonn, Germany Study conducted by: Overseas Development Institute, London Author: Jonathan Mitchell Photo credits: www.123rf.com/haak; www.dreamstime.com/Eriapriadi/Bjlongmore/ Paop ; www.fotolia.com/Ivan Gulei; www,pixelio.de//Rainer Sturm December 2011
donorplatform.org
Contact: Secretariat of the Global Donor Platform for Rural Development, Godesberger Allee 119 53175 Bonn, Germany Phone: + 49 228 24934 166 Email: secretariat@donorplatform.org Website: www.donorplatform.org Publication date: December 2011

Platform Knowledge Piece 3 - The Strategic Role of The Private Sector in ARD

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The strategic role of the private sector in agriculture and rural development

Global Donor Platform for Rural Development

About the Platform Knowledge Piece series

Tables & figures

TABLES Table 1: Table 2: Table 3:

Table 4: Table 5: Table 6: Table 7:

From the Platform lead on PKP3

Brian Baldwin, Vice Chair Photo by Platform Secretariat

1.2 Research methods

TANZANIA Cassava Banana

GHANA Cassava Pineapple & mango Cocoa

VIETNAM Rice Organic vegetables Coffee

THAILAND Rice & cassava Chicken

PERU Rice Dairy

1.4 Limitations of the analysis

1.3 What is the private sector?

2.0 The policy environment and private sector development

2.2. Impact of policy objectives

2.3 Policy instruments

Business incentive schemes

Disposal of public agricultural assets

Land lease for large scale private investment

3.0 The private sector response: global trends

Foreign direct investment

Figure 1: FDI to agriculture compared to total FDI, all countries, 19902010

Source: UNCTAD (2009) & UNCTAD FDI TNC Database (2011)

Figure 2: FDI to agriculture as a percentage of total FDI, 19902010

A sgriculture FDI trendline

Agriculture share of FDI

Official development assistance

Figure 3: Global agriculture ODA as a percentage of total global ODA

Figure 5: Global agricultural aid by function, constant 2008 prices, 19802009

Public expenditure on agriculture

Source: IFPRI, SPEED Database (2011)

Figure 7: Estimate of agricultural investment in developing countries, 19822007

Source: FAOStats 2011

Table 2: Sample of countries used in agricultural investment analysis

Domestic private sector investment

Domestic private sector investment

Domestic private sector investment

Domestic private sector investment

3.2 Trends in agricultural production

Figure 15: Income sources in rural areas, aggregate

2,6% 15,2% 29,4%

I Agriculture livestock I Agriculture wages I Non Farm wages I Transfers I Other

I Non-farm self-empoyment wages

Low middle income

Upper middle income

12,1% 16,8% 17,1% 10,8% 9,1% 10,2% 10,5% 12,2% 19,0%

Table 4: Composition of rural non-farm employment by region

Africa Asia Latin America West Asia & North Africa

9% 24% 31% 21%

19% 27% 22% 23%

31% 29% 23% 22%

35% 31% 34% 36%

Source: Haggblade et al. (2011)

Figure 16: The main stages of Doi Moi in Vietnam

GDP growth rate

Discount stores Tesco Big C Carrefour Macro Total

2002 n.a. n.a. n.a. n.a. n.a.

2004 60 40 20 n.a. > 120

4.2 Private sector responses to liberalisation

Figure 17: Comparative rice yields in South East Asia, 19512005