Rural Development and Poverty Alleviation Robert L. Thompson Gardner Professor of Agricultural Policy University of Illinois October 19, 2005

2 Outline Millennium Development Goals The Rurality of Poverty in Low Income Countries The World Bank –What it is and isn’t –Drop in agricultural and rural development lending –Rural strategy review and update Limits to agriculture’s potential contribution to poverty alleviation Why we need to get agriculture back on the development agenda Outcome of the World Bank’s new rural strategy

3 Millennium Development Goals Eradicate extreme poverty and hunger Achieve universal primary education Promote gender equality & empower women Reduce child mortality Improve maternal health Combat HIV/AIDS, malaria & other diseases Ensure environmental sustainability Develop global partnership for development

4 Extent of Poverty and Hunger

5 Projected Population Growth (U.N. medium projections) Region World 6,378 8,919 High Income 1,206 1,220 Low Income 5,172 7,699 Africa 869 1,803 Asia 3,871 5,222 Latin America

6 Population Density, 2050

7 One and Two Dollar a Day Poverty CountryPop’n (mill)% < $1/day% < $2/day China India Indonesia Brazil Pakistan Russia Bangladesh Nigeria Mexico Source: World Bank. World Development Indicators database

8 One Dollar Per Day Poverty

9 Two Dollars Per Day Poverty

10 Poverty Is the Root of Household Food Insecurity and Hunger 840 million people suffer under-nutrition or hunger billion people live on less than $1 per day; 70% of them are rural, and most of these depend on farming, forestry or fishing for their meager incomes 3 billion (half of the world’s population) live on less than $2 per day. Hunger is due mainly to poverty except in times of war, natural disaster or politically-imposed famine. The rich in no country go hungry. To solve the hunger problem, the poverty problem must be solved.

11 Avoid Exaggerated Expectations of Ag Dev Solving Rural Poverty Problem Productivity growth in agriculture is necessary, but not sufficient, to solve the problem of rural poverty Small-scale farming has limited potential in reducing rural poverty. You cannot grow enough on one acre to feed a family and generate enough cash income to escape poverty. No country has solved the problem of rural poverty in agriculture alone. Rural-urban migration is normal and essential; the number of farmers must fall, and size of small farms must grow. All presently rich countries created non-farm rural employment so that most farm families earn most of their income off the farm.

12 Dynamics of Food Demand 1.25 billion people live on less than $1 per day, of whom 840 million suffer under-nutrition or hunger 3 billion (almost half of the world’s population) live on less than $2 per day. By $2 per day, most hunger (calorie) problem is solved Between $2 and $9 per day people eat more animal protein, fruits, vegetables & edible oils, causing rapid growth in raw ag commodity demand After $10 per day, people buy more processing, services, packaging, variety, and luxury forms, but not more raw ag commodities How many presently low income consumers are lifted out of poverty will be the most important determinant of the future size of world food and ag product demand

13 World Food Demand Likely to Double by 2050 Population growth creates need; income growth creates effective demand. Taken together, world food demand could double by How many hundreds of millions of presently low income people are lifted out of their poverty will be the most important determinant of the future size of global food and agricultural product consumption. This will depend heavily on –how “pro-poor” a development strategy each LDC follows, including the majority of the poor who live in rural areas –how open high income countries are to import goods in which LDCs have a comparative advantage –how positive an investment climate an LDC maintains – for both local and international investors

14 The World Bank International Bank for Reconstruction and Development (IBRD) International Development Association (IDA) International Finance Corporation (IFC) Multilateral Investment Guarantee Agency (MIGA) International Center for the Settlement of Investment Disputes (ICSID)

15 World Bank Operation Operates like a commercial bank (It has to get repaid with interest; interest mark-up pays for operating budget) What it lends it gets by selling bonds in internat’l. financial markets (AAA rating) Its stockholders are national governments, who provided basic capitalization Board of directors votes weighted by stock ownership (U.S. = largest stockholder)

16 Drop in Ag & Rural Dev Lending Low international commodity prices Competition from “hotter” sectors Greater perceived risk for rural lending Skills & resources of WB staff Higher cost projects in time of tightening WB budget Lack of rural political clout in LDCs (WB’s local counterpart = Ministry of Finance)

17 Long-Run Rural Dev Goals Poverty reduction – 70% rural Ag dev – necessary, but not sufficient Allow each country’s agricultural sector to contribute as much as possible to national development as consistent with economic efficiency and environmental sustainability –Food supply –National Economic Growth (GDP) –Foreign exchange earnings –Employment

18 Three Levels of Food Security Individual/household food insecurity –Extent –Caused mainly by poverty –Rurality of Poverty National Food Security –Potential for self-sufficiency that is economically efficient and environmentally sustainable –To import food a country has to be able to sell the goods in which it has a comparative advantage Global Food Security –Land and water constraints –Potential for research to relax the physical constraints –Essential that public policy not impede new technology

19 Global Food Security: Challenge of Doubling World Food Production by 2050

20 The Land Constraint There is at most 12% more arable land available that isn’t presently forested or subject to erosion or desertification – and degradation of many soils continues. The area of land in farm production could be doubled… But only by massive destruction of forests and loss of wildlife habitat, biodiversity and carbon sequestration capacity The only environmentally sustainable alternative is to double productivity on the fertile, non- erodible soils already in crop production.

21 Growing Demands on Forests, Too The same forces of population and income growth that increase demand for food also increase demand for things made out of wood, e.g. paper, furniture, building materials; poles. In rich countries, growing demand for environmental amenities and preservation of (especially old-growth) forested areas.

22 Water A Growing Constraint Farmers use 70% of the fresh water used in the world. They are both the largest users and the largest wasters of water. Water is priced at zero to most farmers, signaling that it is much more abundant than in reality. Anything priced at zero will be wasted. With rapid urbanization, cities are likely to outbid agriculture for available water. The world’s farmers need to double food production using less water than today.

23 Need to Relax Physical Constraints The physical environment – soils, climatic conditions (averages as well as variances) and topography – constrain what can be grown where. Investments in agricultural research and irrigation can relax some physical constraints and expand productive potential. Public policy then determines whether it is profitable for farmers to adopt a new technology.

24 Prophets of Doom Underestimated Power of Technological Change Argued population growth would increase food demand faster than agricultural production could grow Public and private sector investments in agricultural research have increased productivity faster than demand growth Where adaptive research investments have been made, surplus, not scarcity, has prevailed 150 year downward trend in real price of grains

25 National or Regional Food Security

26 Growing World Agricultural Trade The world’s arable land is not distributed around in the world in the same proportions as are population and poverty. (No way Asia can be self-sufficient) Underperformance of LDCs’ agriculture reduces its contribution to their national food supply. With population growth and urbanization in LDCs, a larger fraction of world food production is expected to move through world trade. Broad-based economic development in LDCs will accentuate this via growing commercial trade. Greater trading opportunities will accelerate the rate of national economic growth.

27 The World’s Arable Land (left) Is Distributed Very Differently than Its Population (right)

28 The Global Trading Environment Hurts LDC Agriculture OECD protectionist barriers to LDC goods reduces their foreign exchange earning capacity and economic growth. Continuing large agricultural production and export subsidies in rich countries depress world market prices below long term trend; binding quotas increase variance around that trend Food aid is most available in years of OECD surplus, not LDC deficit. LDCs haven’t gotten much out of past international agricultural trade agreements.

29 OECD Producer Support Estimates, 2004, in Percent Switzerland 68 Japan 56 European Union 33 Canada 21 United States 18 Mexico 17 Australia 4 New Zealand 3 30 Countries Overall 30 Source: OECD Agriculture Directorate

30 Average Producer Support in OECD Countries, 2004, in Percent Rice 75 Sugar 58 Milk 36 Beef & Veal 34 Wheat 33 Corn 31 Oilseeds 27 Pork 21 Overall 30 Source: OECD Agriculture Directorate

31 Effects of Producer Supports Distort what gets produced where and, in turn, ag trade flows Depress world market prices below long- term trend Reduce price and/or income risk to one country’s farmers while increasing price volatility in world market Largest producers and farm land owners get most of the benefits

32 OECD Policies Depress Commodity Prices Below Long Term Trend Rice % Sugar 20 – 40 % Dairy Products 20 – 40 % Cotton 10 – 20 % Peanuts 10 – 20 % Source: World Bank. Global Economic Prospects 2002, Chap. 2.

33 The Agricultural Sector in Most Developing Countries Underperforms Relative to Its Potential

34 Constraints to LDC Agricultural Development Difficult physical environments – soils, climatic conditions (averages as well as variances) and topography – limit what can be grown where (made worse in the Tropics by global warming). Under-investment in public agricultural research, which could relax physical constraints and expand productive potential. Local and international public policy undermines potential profitability for farmers to adopt new technologies. Underperformance of agriculture in most LDCs slows national economic growth.

35 LDCs’ Own Policies Also Impede Their Agricultural Development Corruption and/or macroeconomic instability Lack of definition or enforcement of property rights and contract sanctity Underinvestment in public goods, such as rural infrastructure and ag research (Green Box) Cheap food policies to keep urban consumers quiescent – often reinforced by food aid or subsidized exports from OECD Lack of technology adapted to local agro- ecological conditions (soils, climate; slope)

36 Key Outcomes Developing Countries Need In Doha Round A more open trading environment that can stimulate faster economic growth Market access for goods in which developing countries have a comparative advantage Eliminate import barriers and domestic and export subsidies which depress world market prices and increase their variance Foreign aid and international lending for investment in necessary infrastructure, technology, know-how, etc. and to facilitate adjustment.

37 The Private Sector Could Help (“Doing Well by Doing Good”) Foreign direct investment and tech transfer to LDCs Raise internal food safety standards in LDCs Create marketing opportunities for LDC small-holders Be advocates in OECD countries for food and agricultural trade liberalization Be advocates for LDC development strategies that lift the maximum number of people out of poverty Advocate public investment in enabling environment in LDCs, including from ODA and World Bank Stop implicitly affirming the anti-trade, anti-business, anti-growth and anti-science agendas of transnational NGOs which purport to speak for LDCs and the poor.