Getting policies right for investment in African Agriculture

This blog is part of the Agriculture and Ecosystems Blog’s month-long series on Restoring Landscapes.

Understanding the Problem

Food security is one of the most urgent issues on Africa’s development agenda. Some 226 million are chronically undernourished, about 250 million suffer from micronutrient deficiency, and 3.5 million children die from under-nutrition annually in the continent. Despite its vast agricultural potential, Africa has remained a net importer of agricultural products in the last three decades. The region’s food production increases annually at about 2%, less than the population growth rate of 3%.

A woman applies fertilizer on a maize crop in Kenya. Photo: B. Das/CIMMYT

Where can investments in African agriculture have the potential to help the most?

One of the major issues in realizing Africa’s food production potential is the lack of organic materials to adequately enrich the soils, making mineral fertilizers most crucial to replenish soil fertility. More than 40 percent of Africa’s 220 million ha of farmland are losing at least 30 kg per ha of nutrients yearly, leading to annual losses of more than $4 billion.

Africa is the only region in the world in which per capita food production has decreased over the past 30 years. Between 1970 and 2010, while per capita global food production grew by 17%, that of Africa fell 10%, as population growth outstripped agricultural output. Restoring degraded lands in Africa by replenishing nutrients, reducing soil erosion, and increasing water retention capacity will be critical in meeting escalating food demands.

Investing in agriculture is one of the most effective ways to reduce poverty; growth in the agriculture sector is 2.5 times more effective in reducing poverty than growth in other sectors. Investment in African agriculture in the past two decades has been critically low and governments in the region have not provided the kind of support the sector needs to make food production keep pace with the increasing population.

To meet the targets set in the 2006 Abuja Declaration on Fertilizer for an African Green Revolution, and accelerate food production, the use of fertilizer in Sub Saharan Africa must increase five-fold from its current average rate of 10 kg per ha. It is vital that government policies and investments address the demand and supply sides of input use.

The demand side interventions include strengthening soil-crop research and extension, improving farmers’ ability to purchase inputs, providing farmers with risk management tools, improved quality and dissemination of market information, and protecting farmers against low and volatile output prices. Supply side interventions entail reducing input sourcing costs, reducing product distribution costs, strengthening business finance and risk management, and improving supply chain coordination mechanisms.

Market failures in rural areas often are the result of asymmetric information, high transaction costs and imperfectly specified property rights. Addressing these constraints requires innovative institutional arrangements and partnerships that improve effective market linkages and offer more stable and better prices to producers.

Governments can help catalyze the formation of stronger producer organizations such as cooperatives to better manage risks and achieve economies of scale in accessing markets, in addition to addressing secure property rights to encourage investment in agriculture.

The special case of fertilizer subsidies

Price support is most often channeled through subsidies for inputs such as fertilizers and seeds. In the 1970s and 1980s, most state-owned African enterprises sold fertilizer at subsidized prices. In response to the high fiscal cost, ineffective implementation, and pressure from international financial institutions, most of the countries liberalized their fertilizer markets as part of the structural adjustment programs of the 1980s and 1990s.

Currently, there has been a renewed interest in fertilizer subsidies for countering nutrient depletion, restoring degraded agricultural land and boosting agricultural production in Africa. Yet fertilizer subsidies remain controversial.

Many development economists and international development organizations (opponents) point to the high cost, limited effectiveness, and significant opportunity costs of fertilizer subsidies. Proponents on the other hand believe that fertilizer subsidies are the only way to startup African agriculture, reverse nutrient depletion, and deliver food security and income benefits to the rural poor. A central question therefore is under what conditions do fertilizer subsidies make sense?

Studies indicate that an economic case for fertilizer subsidy is probably justified to encourage innovation and learning, compensate for missing market, stimulate input market development, offset domestic policy distortion and create a level playing field in world markets.

A social case is merited when fertilizer subsidies are used to help poor households overcome considerable hardships. Such subsidies are usually in the form of emergency assistance for the temporarily poor or as regular income support for the chronic poor.

An environmental case is warranted when fertilizers are used to offset environmental externalities such as countering nutrient mining and preventing deforestation or agricultural extensification.

The major drawbacks of a fertilizer subsidy include the fact that it may encourage inefficient fertilizer use and crowd out private distributors.  It is substantially difficult to target needy farmers with subsidies and oftentimes such schemes are subject to rent seeking.  Additionally, subsidies is difficult to implement consistently and can be expensive.

Market-smart subsidy

Intensive use of fertilizers can also contribute to the degradation of the ecosystem services on which agriculture depends.  An alternative to the traditional subsidy, where government (or donor) payments are used to reduce the price paid by farmers for fertilizers is the market-smart subsidy.

Market-smart subsidies are time-bound interventions implemented as part of a comprehensive, long-term fertilizer promotion strategy that promote market development and encourage private investment. They may be applied at various points in the market chain to resolve critical constraints.

Examples include demonstration packs, vouchers, matching grants, and loan guarantees. Each of these has its own merits and demerits. For instance, while demonstration packs are good for extension, they may require substantial government logistic capacity. It is also difficult to target needy farmers using this technique, and it may quickly become perceived as an entitlement, with the implication that it may be hard to phase out eventually. Vouchers on the other hand allow targeting of needy farmers, but may be expensive to design and implement. It is subject to leakage as coupons may be transferable to farmers outside of intervention areas.

While traditional fertilizer subsidies are costly, inefficient, and usually unsustainable, market-smart fertilizer subsidies may be justifiable for pursuing some clearly defined objectives. Subsidies must be part of a broader productivity enhancement strategy. A more effective intervention is fertilizer market development which involves improving the policy environment, strengthening and expanding the network of private agro-input dealers, providing training and credit, and providing information about fertilizer use through advisory services and demonstration programs.

The Role of Smart Policies and Investment

Food security enhancement and long-term economic development cannot be achieved without smart policies. Key policies issues include raising the level of investment in agriculture, mainstreaming integrated soil fertility management (strategically combined use of improved seeds, mineral fertilizers and organic materials) into the broader development agenda, creating enabling environments for private sector participation, placing a strong emphasis on value chain development, and developing novel agricultural extension and knowledge management systems.

African governments and donors need to channel their public funds towards the provision of essential public goods with high economic and social returns. Investment in public goods such as productivity-enhancing agricultural research, rural roads, sustainable natural resources management  and education have consistently higher payoffs for society than spending on untargeted fertilizer subsidies which may be subject to inefficient fertilizer use and rent seeking by rural elites.