Conversations: Is Growing the Non-Farm Economy the Key to Reducing Rural Poverty?
Conversations: Is Growing the Non-Farm Economy the Key to Reducing Rural Poverty?
Conversations: Is Growing the Non-Farm Economy the Key to Reducing Rural Poverty?
Excerpts from an recent panel discussion about the role of the non-farm economy in alleviating poverty in rural areas, and what the World Bank Group can do to better support it
The majority of the world’s poor still live in rural areas, where non-farm activities account for 35 to 50 percent of their income. For the landless and the very poor, non-farm incomes are even more critical. However, for the poor to participate when opportunities present themselves in the rural non-farm economy, they must overcome several institutional, physical and social constraints.
Recently IEG hosted an expert debate on how the World Bank Group can support the rural non-farm economy to alleviate poverty. The dialogue bridged the WBG’s practices and included perspectives from Ede Jorge Ijjasz-Vasquez, Senior Director of the World Bank’s Urban, Rural & Social Development Global Practice, Lauren Kelly, a Senior Evaluation Officer at Independent Evaluation Group, Martien Van Nieuwkoop, Director at the World Bank Group’s Agriculture Global Practice, Juergen Zattler, World Bank Group Executive Director (Germany), Loraine Ronchi, a Lead Economist and the Global Agribusiness Lead at the Trade & Competitiveness Global Practice/International Finance Corporation, and Steven Haggblade, Professor, International Development, Agricultural, Food, and Resource Economics at Michigan State University. José Carbajo Martinez, Director of IEG’s Financial, Private Sector & Sustainable Development Unit, moderated the panel.
What is the rural non-farm economy and what role does it have in reducing poverty?
Lauren Kelly: There's increasing evidence that the rural non-farm economy can contribute to poverty reduction, to income diversification, and increased resilience. It also can contribute to labor market efficiency by pulling unproductive labor off the farm, and into the rural non-farm economy. As we discuss sustainable urbanization and migration, the rural non-farm economy deserves increased attention. Why? Because in effect, some of the tools we've used in the past won't work in the future. We all know, for example, there are changing patterns of migration. So in this evolving space the rural non-farm economy becomes extremely important.
For the rural poor to benefit we need to pay attention to not just the activities that we (the World Bank Group and other development partners) are financing, but to a host of enabling factors that need to be present for the rural poor to participate in this economy. These factors include everything from literacy to access to rural finance, to rural connectivity, and even to identity. We have to pay attention to exclusion, and identity, for example, gender effects, and other factors.
What are some of the major barriers to development specific to rural areas?
Ede Jorge Ijjasz-Vasquez: Part of the problem on rural development is not just agriculture, it is - how do you connect infrastructure? Is there connectivity between rural small towns, growth centers, cities altogether? Instead of looking at a specific sector, just because you are in the rural environment, how do you help, let's say, governors of provinces think about the development of territories?
Many of the issues that were separate in different parts of the organization are beginning to connect in really interesting ways. So for example, a lot of the conflict areas, the national conflicts that we see, are basically exclusions at the territorial level. Certain parts of the nation and territories are excluded because of generally either racial or religious, or cultural dimensions, and therefore levels of investments have led them into lagging regions.
Second, issues of indigenous people's development, or ethnic minorities development, is very much an issue of territorial rural development. So we tend to think a little bit of community driven development to build the services, that should be enough. In reality, that doesn't lift these communities out of poverty, and therefore how do you bring the social dimensions, the territorial planning, the infrastructure planning, into a single coherent structure to try to move into this process?
How has the World Bank Group performed in terms of addressing poverty through the rural non-farm economy?
Lauren Kelly: To give you a flavor I'm just going to run through some of our most frequently occurring programs. There's three main poverty approaches that we studied in our recent evaluation of the World Bank Group’s support for the rural non-farm economy. One was rural livelihoods in South Asia, the other was community driven development, which occurs globally, and also, we looked at the Bank Group’s social protection projects that have productive inclusion aspects.
What we find with the rural livelihoods approach is that these programs have had incredibly strong social outcomes. They have engaged millions of women, and they have empowered groups of women to be able to help themselves. We know that there's been increased access to credit, or access to credit for the first time. We know that there's been strong service delivery in this way. The data shows that we have consumption smoothing. Women are better able to weather shocks, and also invest in health and education for their children and their families.
What we see in this approach is that however, at the time of the evaluation, we hadn't yet moved these programs to a place where they could, across the board, say that they were achieving sustainable increases in income or asset creation for the rural poor. However, when we look at more advanced models we think that there is great potential to achieve more economic gains.
In community driven development (CDD) we looked at programs that had an income generation focus, not all CDD. Some CDD just delivers services. They also work in conflict affected spaces. These projects though had an income increasing aim. A couple of things about this product line that are very interesting. One is they're often in the agriculture and rural space. They often have agricultural interventions and rural non-farm interventions. What we can say about these interventions is that they're doing well in measuring the agricultural parts of those projects. We know that there's increased agricultural productivity. What we don't know necessarily is how the rural enterprises are doing, because we're not measuring the profitability or sustainability of the rural investments in these CDD projects that are outside of the agricultural space. When we do have evidence we know the gains are often not sustained after project close, and when we do have evidence we know that the reason why we don't have more sustained income effects over time is that they are confronted with several binding constraints related to rural market integration, rural infrastructure, and governance issues.
Lastly, the last kind of typology that we discovered was a new approach in social protection called productive inclusion. Productive inclusion goes beyond transfers. It seeks to build income and asset creation in rural areas, and particularly to graduate folks out of poverty. The idea here is that, in effect, the World Bank is trying to go beyond the transfer system. Here we found the same kind of binding constraints that we found in our CDD portfolio. So in effect we feel there's a lot the two programs can learn from one another.
On the growth side most of the bank's work is in the value chains. Here what we find is that, again, like I said earlier, a lot of good evidence on the fact that there's increased sales revenues and even income creation. But what we found is that there's a lack of attention ex-ante to poverty and gender in these projects. We also found that there's a lack of analysis of value chain efficiency - meaning we know that there's more production, we know that there's increased sales, but what about the value chain itself? What do we know is happening across the chain in terms of bringing more value down the chain? Also what about the middleman? So in effect, what we're really looking for in these projects is to learn over time how are we getting more value chain efficiency?
What can you tell us about the role and the relative importance of the links between farm and the non-farm economy - the so-called bidirectional angles?
Steven Haggblade: The three major kinds of linkages you need to be thinking about are consumptional linkages, production linkages, and factor market linkages. They run bidirectionally. In most places, with the exception of Latin-America broadly, the consumption linkages dominate. When you measure empirically when agricultural growth happens, you've got a productivity boost in agriculture, what happens in the non-farm economy? In most places the answer is consumption linkages. That's the most powerful stimulus. It's a demand stimulus to rural non-farm activity.
You really find this in the cotton boom areas, or after the green revolution, you see big changes— housing investments, health investments, people sending their kids to school. You see video rental kiosks sprouting up in small little places. A lot of it is local service activity. So there's very clear consumption linkages from the farm to the non-farm. The same is true if you have new mining activity or a subcontract, weaving villages, like you find in Thailand. You get big reciprocal demands in farming. There it tends to be into high value agriculture, horticulture, fresh fruits, vegetables, and dairy, poultry, that kind of thing.
The production linkages, I'll just give a quick example, Bangladesh, Green Revolution, paddy production doubled in a 10-year period, starting in the mid-'80s, from 10 to 20 million tons—astounding growth in rural husking mills. We went out there after that, found over 90,000 of them. This is a lot, there's a lot of production links that take place. The same is true in the non-farm economy, if you set up a tomato canning plant, it increases the input demand for tomatoes. You find a lot of unexpected links too when you start looking at these production links.
The third set of linkages is what I think you need to concentrate on most, and probably not only the World Bank, but I'd say the world in general has been the weakest on is the factor market linkages. For poverty concerns, those are probably the most important set of linkages. So you've got labor and capital I think are the two that really cut across sectors that you need to look at. It's extremely powerful. In South Asia, the green revolution hits—you get big changes in labor demand in agriculture, you get rising wage rates in agriculture, and if you look, what does that do to the non-farm economy? Massive shift in the composition of non-farm activities. It comes through the wage effect. This is the most powerful tool you have, I think, for reaching the poor is these rural labor markets.
So the agriculture wage goes up, and when you look at these rural non-farm activities, you saw a complete collapse of these very mindlessly labor intensive cottage industries. The embroidery and the weaving things, where women go blind working by candlelight late at night. They didn't have to do that anymore because they had better opportunities. The wage rate in agriculture completely changed the opportunity cost of labor in non-farm activities. You saw a massive shift in the composition of non-farm activities. You saw exactly what you want to see, a collapse of the very low return dead-end opportunities, and really a flowering of the higher returns activities. These are often in service activities.
Now institutionally, the World Bank has a problem, and it's the same problem everybody on planet earth has, it is that the non-farm economy is an institutional orphan. You need infrastructure, you need agriculture, you need regional planning. You need education. So there are a lot of things that have to go into it. No one institution has found an ideal model for coping with that.
How do we see the rural non-farm economy evolving after 2030?
Juergen Zattler: Perhaps first I say a few words about what this means—structural transformation for regions like Africa, and what role the rural non-farm economy can play in that context. I think we all assume that structural transformation takes place like we have seen it in many countries, industrialized countries, but also in China, and perhaps in Vietnam. It means that there is some productivity increase in agriculture, but there's surplus labor, and the surplus labor goes to the urban centers. Then there is some demand coming. This gives a boost to agriculture, gives a boost to the non-farm economy in the rural areas. But this means that agriculture has a central role to play because then the demand comes from the agriculture. The first step is to increase productivity in agriculture.
I think now there is a big debate, did this change, this concept, because of new technology? That's the big discussion at the moment. I think most would assume it won't happen in the future like that, because of the new technology, because of many things. You can also see many countries that this growing manufacturing sector doesn't happen. It doesn't happen in Africa. There are some promising signs in Rwanda, as you said, in Ethiopia. But it will not happen at that scale. So this is a problem. But what does this mean for agricultural and the non-rural farm economy? To my point of view, it means that this is even more important, because if it's not agriculture as we know it, for example textile, then perhaps the sources of growth are closer to the rural area, and it could be agri-business, it could be agri-industry.
Martien Van Nieuwkoop: I reckon in 2030 you will see very strong rural non-farm economy. At the same time, probably the boundaries of the rural non-farm economy will be less clear, viz a viz urban, and viz a viz farming. The point is that the driving force, I think, is urbanization. Urbanization is causing the agriculture production and consumption to be increasingly geographically dispersed and causing a rapid rise in the growth of the urban food market, and a very strong demand for convenience, and therefore for agro-processing. We've done some studies, and if you look at the value-added on farm, versus the value-added off farm, or post-harvest, typically in Africa and South Asia the ratio is about one to one. So basically the same value-added on farm as off farm. But if you look, if you take the extreme example of Europe and the United States, that ratio is one to eight, or one to 10. So most of the value added is actually happening off the farm, and post-harvest. So imagine if Africa and South Asia between now and 2030 could move halfway— I mean where Europe and US are now to a kind of ratio of one to four, that would potentially reflect a significant potential for growth and jobs creation.
Loraine Ronchi: Some estimates put the investment needed to achieve food security in the agriculture SDGs in the 15 years between 2015 and 2030 to $480 billion per annum. That's a lot. The lion's share will obviously have to come from the private sector. That's been recognized in the World Bank Group through the initiatives such as the cascade, through IFC’s 3.0 strategy. So private sector investment's needed to move the development agenda in agribusiness for sure.
Given the anticipated trends in the rural non-farm economy in the coming years, what approaches should the World Bank Group consider?
Steven Haggblade: The three models I've seen that can work very well, first one has to do with regional development. Rural towns, spatial planning. This is not new, urban functions and rural development, some places call them agro-poles, territorial development. A lot of different terms have been used. But the basic idea is sound, that there are connections between farming and non-farm activities, and a lot of them take place in these rural towns. Some of the most effective rural development work I've seen anywhere has come in this vein. Where you've come in, and you have a coordinating diagnostic exercise. The World Bank is big, but it is not big enough to handle this alone. So you not only have to collaborate internally, you have to collaborate externally--often with local governments, regional governments, and so on. You have to think about how you're going to build bridges to the outside as well as internally.
The best I've ever seen was what the Norwegians did in Botswana in the 1970s, it was incredible. Town and regional planning going into some of these little towns that they thought had potential, and they did the basic planning. Sighting of infrastructure, the zoning, the sanitation, and they had the good fortune to do that right before the Jwaneng diamond mine went on stream. Everybody thought they were nuts to go out into these places, but they were there. You can do things in these middle-sized towns that you can't do in the capital city. In the capital city your vegetable markets you're getting these huge losses because you have traffic congestion and pollution and no sanitation. In the rural towns you don't yet have the population, you don't have to move people out of squatter settlements, so you can get in on the ground floor there. You can really have an impact.
I think this whatever you want to call it, regional planning, territorial development, this is something you want to get involved in, it's a good way to go.
The second model that does work is about value chains, and the World Bank has a lot of experience with that. These can be powerful tools for increasing growth, but not always, for helping poor people. In fact, one of the best ways to crush poor people is with a strategic value chain intervention that favors certain category of technology or procurement that limits access by the poor. So the value chain is a powerful tool for good and for evil. So you have to be careful how you apply that one.
The third model where not a lot has been done, and where I would encourage the World Bank Group to do some hard thinking, is in these factor markets. I think somebody really needs to look at rural labor markets and how they work. This is the vehicle that connects poor people with opportunities. What poor people need is opportunities and access to them. It's a kind of a complicated thing, so you need the opportunities, but then you need skills and assets to be able to access them. I've seen some very interesting examples coming out of Macquarie University. Cotton companies have done some of the best work on this that I've seen. You need very focused training. You need some basic agriculturaleducation in Africa … you don't need a very high level of education, but you need basic numeracy and basic literacy. From there then you need some technical skills and aptitudes.
New contractual models and new forms of information technology are emerging, and they have the potential to better link farmers to markets and to enhance this rural poverty alleviation that we are all after. To what extent has the World Bank Group been innovating recently? Can those approaches address issues such as agriculture, value chains?
Loraine Ronchi: There has been a lot of innovation on the coordination side. Getting it together in order to deliver in this space is precisely the impetus that informed the formation of the Global Solution Groups, the GSGs, and the one on value chains and agribusiness, all of them actually in 2015. As you said, it quickly grew to a large membership across many different units across the Bank and IFC. The idea was to share approaches from other parts of the bank, and from other regions to other regions. But it also represented kind of a dedication or a commitment across the different units, and across a body of staff who are really focused on joint solutions when that made sense.
There's real need to think about what elements constrain private sector investment. Whether that investment comes from farmers, from SMEs, from IFC type of investors, or from large commercial agribusinesses at large, private sector all of them. But there's this mix of public investment, regulation, and policy to be tailored that can unlock these elements. That unlocking, those keys are supported by multiple teams across the World Bank Group. I think that what's needed, since we have this very supportive framework, we have experience around this, is a kind of integrative diagnostic. A diagnostic that's looking at not so much what one can do or the other can do, but what's needed, and who can contribute to that from across the World Bank. There too, in regards to innovation, I think the World Bank Group is innovating there. There are those kind of integrating diagnostics being developed now where you can piece the elements of a solution from across the World Bank Group, and that's pretty much what's needed in this upstream development around the cascade, and around IFC 3.0.
How is the World Bank Group’s agriculture practice working to address the challenges to growing the rural non-farm economy, particularly the binding constraints and regulatory barriers?
Martien Van Nieuwkoop: if you look at agro-processing and agribusiness type of employment it is attractive very often you see women and youth actually in those enterprises, so we're very upbeat about that potential. Of course the big question then is how do you unlock that potential? What are the binding constraints to do that? Our view here is a little bit that probably we're not sure whether it actually makes sense to take a binding constraint, and try to prioritize what is the most binding constraint, and then move onto the next binding constraint. We think there are many binding constraints. If you resolve one binding constraint, something else very quickly becomes the next binding constraint.
So basically we need approaches and solutions that enable multiple constraints to be addressed in a kind of parallel and simultaneous fashion. I think this is where you come to the models that Steven was mentioning. Of course the most obvious model is the value chain approach. I think when we talk about value chain approach now, compared to maybe four or five, 10 years ago, I think we see a shift—there's a very much stronger focus on how can we actually access farmers to market, on the one hand, how can we attract the financing to invest in the process and capacity that is needed to unlock the post-harvest value addition potential.
There various ways of going about it. On the one hand we going a little bit global, we are working on the enabling business of agriculture program, which now covers 40 countries, and compares the regulatory quality across these countries in six areas—seeds, fertilizer, machinery, finance, markets and transport. That helps facilitate a kind of a dialogue on policy improvements to promote private sector investments in agriculture and agribusiness. So that's one area. What you also see is that we are increasingly moving away from ... our investment operations towards kind of more sector development policy operations (DPOs) or agriculture as part of a budget support operation. Also increasingly we are doing work with the where we actually directly engage in those policy reforms that are needed actually to provide incentives to the private sector to invest. That also relates very much to the cascade.
Also with the finance and markets Global Practice, we have a community of practice on agriculture finance, to share experiences and lessons learned on agri-finance. We also had an agri-finance program until not too long ago-- it actually worked with commercial banks to improve their capacity to lend to the agriculture sector. Another interesting thing is our work with IFC in some countries where we work where IFC works, and the World Bank is engaged with private sector companies to generate credit ratings for agriculture cooperatives and producer companies that don't have a history of borrowing from the financial sector.
On our investment financing, we have a growing set of agribusiness projects that take actually a value chain approach, promoting out-grower schemes, promoting off-take arrangements with private sector. We think that those arrangements also are useful platform or tool to kind of resolve multiple constraints in simultaneous fashion. Now when it comes to the private sector, the question is do you work with the established companies, or also the small-medium enterprises? So a lot of the policy work that we do probably benefits the established enterprises. What you also see increasingly is that we support project agribusiness innovation centers and incubators to provide business development services and facilitate access to finance for SMEs.
Now on the question on the factor markets, the question is how can we then actually make sure this is translated in income growth for the poor? What I see here is also is a convergence with our livelihoods programs. In our livelihoods programs I would say that initially a lot of the focus was on women empowerment and capacity building. I think that has been very successful, but what I see now when I look at the second generation of our livelihoods projects, is actually that they're focusing much more on income generating activities supporting the establishment of micro, small and medium enterprises with those beneficiaries.
Now the lesson learned is that you need patience, maybe our patience is also an issue that we could do better on. Because this is demand driven, in the end, If you can stay the course, I think you will see the type of impacts I think that the IEG report was looking for.