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POLICY SYNTHESIS
FOOD SECURITY RESEARCH PROJECT-ZAMBIA
Ministry of Agriculture & Cooperatives, Agricultural Consultative Forum, Michigan State University and Golden Valley
Agricultural Research Trust (GART) – Lusaka Zambia
Number 19 (Downloadable at http://wwwaec.msu.edu/agecon/fs2/zambia/index.htm) January 2007
RETURNS TO INVESTMENT IN AGRICULTURE
By Steven Haggblade
Key Messages:
• Investment in agriculture is necessary for ensuring rapid economic growth and poverty reduction in
Zambia, as elsewhere in Africa. Yet many of the key investments required to accelerate
agricultural growth – technological research, rural infrastructure and market standards,
organization and enforcement -- are public goods. Because the private sector cannot capture gains
from these investments, they will not invest in amounts sufficient to ensure broad-based
agricultural growth. Therefore, the public sector needs to provide the necessary research, transport
and market infrastructure necessary to stimulate agricultural growth.
• Zambia currently allocates 6% of government outlays for agriculture. This is less that the 10%
commitment Zambia has made under the CAADP agreement and far less than the 15% spent by
Asian countries at the launch of their Green Revolution.
• In allocating these funds, Zambia spends the majority of its discretionary agricultural budget on
recurrent subsidies for private farm inputs, primarily fertilizer, while spending far less on rural
infrastructure and technology development. Yet international evidence suggests that returns to
private input subsidies are typically lower than returns to investments in public goods, in part
because private input subsidies are prone to rent-seeking and in part because public input subsidies
substitute for private financing of these private inputs. Investment in public goods such as
agricultural research and extension, rural roads and irrigation typically produce returns two to six
times greater than spending devoted to input subsidies. Therefore, a reorientation of public
spending, away from private input subsidies and towards increased investment in public goods,
would likely accelerate agricultural growth in Zambia.
1. WHY INVEST IN AGRICULTURE?
1.1. Economic growth. Economic growth,
structural transformation and wide-scale poverty
reduction all require productivity gains in
agriculture. Economic growth in Africa, where
75% of the labor force works in agriculture, will
require significant improvements in agricultural
technology to bridge the startling gap in farm
productivity between African and developing
regions of Asia and Latin America (Table 1).
Structural transformation, the process by which
rich countries have developed diversified,
affluent economies, normally requires a transfer
of resources from agriculture to other sectors of
the economy. But this transfer cannot take
place without prior productivity gains in
agriculture, which permit the release of labor
and capital without reducing farm output and
raising food prices (Timmer, 1988).
1.2. Poverty reduction. Agriculture likewise
serves as a powerful engine of poverty
reduction. In Africa, where 70% of the poor
work primarily in agriculture, acceleration of
agricultural productivity growth offers a
potentially powerful tool for spearheading
broad-based income gains among the rural poor
(Christiansen and Demery, 2006). According to
Michael Lipton, “no country has achieved mass
dollar poverty reduction without prior
investment in agriculture” (Lipton, 2005).
England’s agricultural revolution of the mid-
1700’s set the stage for its subsequent industrial
revolution (Timmer, 1974). In India’s Green
Revolution of the 1960’s and 1970s, new
technology launched rapid agricultural growth
and significant poverty reduction from the
1970’s onwards (Hazell, Fan and Thorat, 1999).
In China, strong commitment to agricultural
research and complementary rural investments
triggered significant agricultural productivity
gains, setting the stage for large-scale rural
poverty reduction from the 1980’s onwards
(Fan, Zhang and Zhang, 2003) (Figure 1). In
Africa, recent evidence from Uganda suggests
that sustained agricultural productivity gains
have likewise triggered rapid poverty reduction
there (Fan et al, 2005). Even Africa’s urban
poor, who spend the majority of their income on
food, see their real incomes rise when growing
agricultural productivity and output enable
reduction in staple food prices. Only growing
agricultural productivity can simultaneously
reduce food prices, which govern real incomes
and poverty in urban areas, and increase
incomes of the majority of Africa’s poor, who
work in agriculture.
Table 1. Differences in Agricultural Productivity and Welfare Across Developing Regions
Africa,
Sub-Saharan South Asia* East Asia Latin America
Cereal yields, 2005 (tons/ha) 0.9 2.8 3.0
Value of agricultural production per farm population $198 $393 $1,856
Undernourishment, 2004 (% of population) 32 21 12 10
Malnutrition, 2004 (% children under 5, weight for age) 29 45 15 7
Poverty headcount, 2001 (% under $1 per day) 44 31 12 9
Per capita income, 2004 ($US) $607 $598 $1,417 $3,584
* Agricultural data refer to developing Asia
Source: World Development Indicators, 2006.
Figure 1. Trends in Agricultural Production and Poverty in China
0
50
100
150
200
250
300
350
400
450
1980
1985
1990
1995
Agricultural production index
0
5
10
15
20
25
30
Percent in poverty
1.3. Sustainability of agricultural growth. In
domesticated agricultural systems, humans
assume responsibility for the survival of plant
species. Yet plant breeders note that
domestication by humans has generally
involved deselecting for traits critical to species
survival in nature (Evans, 2000; Harlan, 1997).
While plants stagger germination of their seeds
2
to ensure survival in the face of uncertain
weather, humans breed for uniform germination.
While plants devote large energy to
development of roots and other organs
necessary to ensure plant survival across
seasons, humans select for disproportionate
biomass concentration in the edible reproductive
organs. While natural selection among wild
plants favors maximum seed dispersal, to
enhance prospects for reproductive success,
humans select for non-shattering varieties to
reduce labor costs and increase harvested yields.
Because human farmers and researchers have
deliberately bred key natural survival traits out
of the plants and animals they domesticated,
these species typically cannot survive in the
wild. As a result, the survival of domesticated
agriculture depends fundamentally on well-
functioning human agricultural research
institutions, both on-farm and off.
Given rapid mutation of pests and diseases,
domesticated animals and plants rapidly
succumb to these predations unless human
research systems can develop resistant varieties
or chemical and biological controls. In the US
agricultural research system, over 50% of all
wheat research is devoted to maintenance
breeding, simply to maintain yields in the face
of ever-evolving strains of wheat rust. In
Uganda, cassava production fell 75% in five
years following the outbreak of a new strain of
cassava mosaic virus in 1989 (Otim-Nape,
2005). Zambian cassava production fell over
30% during the early 1980’s following invasion
of the cassava mealybug (Chitundu, 1992). In
both cases, rapid response by research systems
responded successfully, in Uganda through
introduction of resistant varieties and in Zambia
and elsewhere through internationally supported
biological pest control. For domesticated
agricultural systems, investments in agricultural
research are not only necessary for the growth
of agricultural systems, but for their very
survival.
1.4. Public goods. Many of the investments
necessary to sustain agricultural productivity
growth are what economists refer to as “public
goods”. The private sector will not supply them
because they cannot recoup their investments.
Private seed companies will produce hybrid
seeds for sale because farmers must return to
them each season to purchase more seed. But
with closed-pollinating crops, such as rice, or
cross-pollinating varieties of maize or
vegetatively propagated crops, such as sweet
potatoes and cassava, farmers can retain
planting stock from prior seasons. Because
private companies cannot make money selling
seeds year after year, they inevitably
underinvest in research for these important
crops. Roads provide another example. Private
firms will not invest in road construction or
maintenance, except on their own plantations,
because they cannot exclude people from public
roadways to defray their investment costs.
Where externalities arise, as with plant and
animal diseases, private farms and firms will
typically underinvest in preventative measures.
This creates a strong case for public investment
in combating these types of agricultural pests
and diseases. As a result, broad-based
agricultural growth cannot take place without
ongoing government commitment to supply the
technology, infrastructure, markets and disease
control systems that are essential for sustaining
agricultural growth.
2. NEPAD–THE MAPUTO COMMITMENT
African leaders, through the New Partnership
for Africa’s Development (NEPAD) initiative,
have increasingly underlined the importance of
accelerating agricultural growth in Africa. They
believe that enhanced agricultural performance
will constitute a necessary centerpiece of broad-
based poverty reduction efforts across the
continent (CAADP, 2005). For this reason,
NEPAD’s Comprehensive African Agricultural
Development Programme (CAADP) calls for a
6% growth rate in agriculture.
Recognizing the critical need for public
investments to enable this agricultural growth,
African Heads of State and Government, have
agreed to increase their budgetary allocations
for agriculture to 10% of total outlays by 2008.
This represents a substantial increase from the
current average of 6% (CAADP, 2005; Fan and
Rao, 2004).
Zambia, like other governments, has pledged to
increase spending on agriculture to 10% of
budget outlays. But since 2003, Zambia has not
attained this level of agricultural spending.
During the past three calendar years, allocations
3
for agriculture have ranged between 5 and 6%
of total spending (Govereh et al., 2006).
The quality of agricultural spending matters as
much as the quantity. Clearly, spending in
some areas and activities will prove more
productive than in others. Currently, Zambia
spends over 60% of its discretionary agricultural
budget on recurrent subsidies, with half going to
subsidize fertilizer for selected individual
farmers and a further 12% for maize price
supports through the Food Reserve Agency
(Table 2). Roughly 5% of discretionary
spending goes for investments in roads and
irrigation, while the remaining on-third finances
recurrent costs necessary for operating the
ministry administrative functions as well as its
agricultural research and extension programs.
Without more specific details, it is difficult to
say how much of these recurrent expenditures
are invested in supplies and materials required
to finance Zambia’s agricultural research
system. What is clear, however, is that the
single largest line item in the agricultural budget
goes for fertilizer subsidies to individual
farmers.
As an aid in ongoing budget deliberations, this
brief summarizes available evidence on the
returns to various forms of agricultural
spending. Because comparatively few detailed
benefit/cost studies have been conducted in
Zambia, this brief relies primarily on available
evidence from around the developing world.
3. RECURRENT SUBSIDIES FOR
PRIVATE INPUTS
In general, recurrent subsidies for private inputs
generate low returns. Studies from Latin
America reveal negative returns in many cases,
due to high levels of corruption, crowding out of
private input purchases, resource misallocation
and consequent inefficiencies in input use.
Estimates from 15 Latin American studies
indicate that a 1% increase in budget share for
agricultural input subsidies reduces per capita
agricultural income by 0.3% to 0.5% (Lopez,
2005).
In some instances, however, input subsidies to
individual farmers produce positive returns.
This was particularly true in the early decades
of the Green Revolution in Asia, where
subsidies were used to enable small farmers to
adopt new irrigated technology packages (Table
3). In general, input subsidies work best where
new technology becomes available, farmers
control water and have good extension support.
None of these conditions currently holds in
Zambia. Even in Green Revolution Asia, where
these conditions did prevail, returns to input
subsidies have typically trended downwards
over time (Table 3).
Table 2. Zambian Government Budget Allocation for Agriculture, 2006
Spending category
b
illion Kw
a
percent billion K percent
Subsidies
Fertilizer 214 33% 214 51%
Output prices 50 8% 50 12%
Operating expenditure
personnel 84 13% 84 20%
operating costs 51 8% 51 12%
Donor supported development and poverty reduction 227 35%
Public investments
capital spending 1 0% 1 0%
irrigation 18 3% 18 4%
Total 645 100% 418 100%
Source: Govereh, Malamo and Shawa (2006).
Total spending Discretionary Spending
4
Table 3. Returns* to Private Input Subsidies and Long-Term Investments in Public Goods
1960's 1990's
Recurrent subsidies on private farm inputs
Farm credit 3.9 0.0
Fertilizer 2.4 0.5
Irrigation costs 2.2 0.0
Power 1.2 0.6
Long-term Invesment in public goods
Roads 8.8 3.2
Education 6.0 1.5
Agricultural research 3.1 6.9
* Increase in agricultural GDP (rupees) per rupee of spending
Source: Fan, Thorat and Rao (2004).
India
Even where they are positive, returns to private
input subsidies are typically lower than returns
to investments in public goods. During the
1960’s, public investments produced returns
roughly double those of private input subsidies,
while during the 1990’s public investments
produced returns six times as great (Table 3).
This difference arises, in part, because input
subsidies for private goods encourage rent-
seeking as farmers lobby to receive the income
transfer these subsidies represent. Moreover,
government subsidies tend to undercut private
input sales. In Zambia, FSP fertilizer subsidies
reduce private fertilizer sales by roughly 75% in
accessible areas that are well-served by private
sector fertilizer distributors (Govereh and Jayne,
2007).
In addition, because fertilizer and other farm
inputs are private goods, subsidies to individual
farmers displace funds that these farmers would
otherwise spend purchasing inputs. Evidence
from Zambia’s FSP indicates that fertilizer
subsidy recipients are typically the better off
farmers (Table 4). Their counterparts, who
receive no input subsidy, purchase fertilizer and
produce for the market at roughly comparable
rates to the subsidized farmers.
Table 4. Characteristics of Households Receiving Fertilizer Subsidies in Zambia, 2002/3
Fertilizer source Income Assets Land net sellers net buyers
ha/capita
No fertilizer used 266 173 0.15 20% 48%
Private sector purchase 774 342 0.2 46% 32%
Subsidized public supply (FSP) 804 425 0.23 51% 22%
Source: Govereh, Jayne, Black et al. (2006).
000K/capita
Household welfare Maize marketing
5
So the incremental output gain produced by
these targeted subsidies appears to be quite
small. For this reason, returns to fertilizer
subsidies in Zambia appear to be quite low
(Precise estimates of returns to FSP subsidies
are currently under way and will be published in
the near future by FSRP and MACO).
4. INVESTMENTS IN PUBLIC GOODS
Agricultural research and extension typically
generate the highest returns of any form of
agricultural spending. A recent summary of
over 600 rate of return studies suggests that
returns to agricultural research average 50% in
Africa, 78% in Asia and 54% in Latin America
(Allston et al, 2005). Variability of outcomes is,
however, highest in Africa, and, in specific
instances, returns may even prove negative.
The diversity of Africa’s farming systems and
frequent reliance on rainfed crop production
contribute to this high variability. Median
returns, however, remain consistently higher
than any other form of public investment. In
Zambia, for example, investments in root and
tuber crop research during the 1980’s and
1990’s has led to several rounds of new varietal
releases of cassava and sweet potatoes,
triggering a productivity surge in both of these
food staples (Govereh et al. 2006).
Public investment in roads and irrigation,
likewise, generates generally strong returns
(Table 5). As a general rule, investments in
secondary roads prove more productive in
stimulating agricultural growth than do
investments in paved roads (Fan et al, 2004).
Investment in irrigation infrastructure, likewise,
proves profitable in many circumstances,
although returns vary considerably by location
(Table 6) and over time (Table 3)
Table 5. Returns* to Investment in Agricultural Public Goods
Spending category China India Thailand Uganda Viet Nam
Research 9.6 13.5 12.6 12.4 12.2
Irrigation 1.9 1.4 0.7 0.4
Roads 2.1 5.3 0.9 3
feeder 1.5 7.2
paved n.s. n.s.
Electricity 0.5 0.3 4.9 n.s.
Telephones 1.9 n.s.
Education 3.7 1.4 2.1 2.7 2.1
Health 0.9 0.9
* Returns = $ increase in agricultural output per $ of incremental spending.
n.s. = not statistically significant
Sources: Fan, Zhang and Zhang (2002); Fan, Hazell and Thorat (2000), Fan, Zhang
a
Agricultural growth requires continual
improvements in farm technology, well
functioning markets and infrastructure adequate
to move goods at reasonable cost from farm to
market. In all three areas, public goods are
essential. Technology development in closed
pollinating and vegetatively propagated crops
requires publicly funded research and extension
services. Well-functioning markets require
property rights, grades and standards and
enforceable contracts, which are typically public
goods. Infrastructure, such as farm-to-market
roads, power lines and ports are, likewise,
normally public goods. So, in general, public
good remain critical to ensuring agricultural
productivity and income growth.
5. IMPLICATIONS
Quantitatively, Zambia spends about 6% of its
budget on agriculture, significantly less that the
10% CAADP target to which Zambia
committed in 2003. Nor does current spending
come close to the 15% Asian countries devoted
to agriculture during the Green Revolution years
(Fan and Rao, 2003).
6
Table 6. Regional Variation in Returns to Public Investment in Agriculture
R&D Roads* Education Irrigation Telecoms
Uganda
East 10.8 8.7 3.5 - -
North 11.8 4.9 2.1 - -
Central 12.5 6.0 2.1 - -
West 14.7 9.2 3.8 - -
all Uganda 12.3 7.2 2.7 - -
China
Coastal 8.6 8.4 9.8 2.4 7.1
Central 10.0 3.8 3.7 1.8 2.6
Western 12.7 4.3 5.1 1.6 4.1
all China 9.6 8.8 8.7 1.9 7.0
* In Uganda, refers to feeder roads.
- not evaluated for Uganda
Sources: Fan, Zhang and Rao (2004) and Fan et al. (2003).
Qualitatively, Zambia spends the majority of its
discretionary resources on recurrent subsidies
for private inputs. Though politically popular,
these subsidies are typically less effective at
stimulating agricultural growth than investments
in research, extension, roads and other public
goods, because the input subsidies displace
private spending that would otherwise occur.
They are also prone to diversion and
manipulation.
Recurrent spending on input subsidies for
private goods competes directly with long-term
investment allocations for public goods such as
roads, rural education, and agricultural research.
Given the extremely low level of public
investment in agricultural research in Zambia,
the cost of this neglect is likely to be high. The
gradual decay of Zambia’s public agricultural
research system leaves Zambian farmers
increasingly vulnerable to the emergence of new
pests and viruses. Without a steady stream of
new genetic material, productivity of crops and
livestock will fall over time. Available
evidence suggests that investment in public
goods such as agricultural research, extension
and roads constitutes one of the most effective
tools available for stimulating economic growth
and poverty reduction. Therefore, a
reorientation of spending, away from private
input subsidies and towards increased
investment in public goods, would l
________________________________
ikely
ccelerate agricultural growth in Zambia.
Alston, Julian M.; M Pardey, Philip G.;
a
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df
__________________________________________
The Food Security Research Project is a collaboration between the Agricultural Consultative Forum, the Ministry of
Agriculture and Cooperatives, and Michigan State University, and is funded by the United States Agency for International
Development in Lusaka.
The Zambia FSRP field team comprises J. Govereh, M. Hichambwa, M. Nyembe and S. Kabwe. MSU-based researchers
in the FSRP are C. Donovan, T.S. Jayne, D. Tschirley, S. Haggblade, M. Weber, A. Chapoto and N. Mason. Please direct
all inquiries to the In-country Coordinator, Food Security Research Project, 86 Provident Street, Fairview, Lusaka; tel: 260
1 234539; fax: 260 1 234559; e-mail; goverehj@msu.edu