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Changes in emphasis in rural sector lending: As pressures on the agriculture and rural sectors are mounting in the developing countries, the Bank is increasing its assistance for these sectors

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
June 1975
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David J. Bates and Graham F. Donaldson

In the past few years the World Bank Group has channeled some 20 per cent of its annual lending into agriculture and rural development. This is in addition to the Bank’s indirect contributions through its technical assistance programs, through training by the Economic Development Institute, and through its support to international agricultural research centers. In this way, the Bank influences development of the rural sector beyond its own projects. This is the result of a conscious shift in Bank policy over the past decade resulting from, first, a different perception of development and its underlying processes, and, second, an awareness of the growing pressures on agriculture and rural sectors in developing countries.

In its early years the Bank was strongly oriented toward investment in basic infrastructure (ports, roads, dams and irrigation works), because of the general view that developing economies lacked the infrastructure to allow them to absorb investment capital productively and that infrastructure investment was therefore the first priority. Subsequently, the emphasis shifted toward lending for modern sector development (mainly urban based heavy industries). This reflected the belief that rapid industrialization was the key to economic growth. More recently there has been increasing recognition that absorptive capacity can be increased by technical assistance (especially institution building and manpower training) and that the growth of gross national product (GNP) is a necessary but not sufficient condition for successful development. The requirements for achieving GNP growth are now considered to include in addition to an increasing flow of capital, political stability, availability of technology, manpower training, and effective market organization. Also, a broader view is now accepted of the appropriate composition of development benefits, which includes employment creation, equitable income distribution, and improved living conditions. The extension of this approach to many client countries—notably those with limited borrowing capacities—has been facilitated since 1960 by the availability of funds from the International Development Association (IDA).

Sectoral emphasis

The proportion of Bank Group funds going to the rural sector has increased from 8.5 per cent for 1948–63, to 20.5 per cent for 1969–74 (see Table 1). Since the annual lending of the Bank has also expanded substantially—by some 240 per cent between the periods 1964–68 and 1969–74—the amounts allocated to agricultural projects have greatly increased. This reflects the Bank’s deepening involvement in rural sector development, although the amount involved remains only marginal in terms of the total investment in the rural sector of developing countries—probably no more than 2 to 3 per cent—and is minimal in terms of the investment that is needed. It is significant that of all rural sector lending by the Bank over 75 per cent has been in the last six years (see Table 2).

Table 1World Bank lending: all sectors and agriculture fiscal years 1948-74(Amounts In millions of U.S. dollars)
Fiscal yearsLending for

all sectors

by IBRD and IDA
Agricultural

lending by

IBRD end IDA
Agricultural

lending as

percentage of

total landing
1948–635,322.0451.48.5
1964–685,030.3620.812.3
1969–7417,263.03,544.820.5
Total27,615.34,617.016.7
Source: World Bank records, Programming and Budgeting Department
Source: World Bank records, Programming and Budgeting Department
Table 2World Bank lending for agriculture by region(Amounts in millions of U.S. dollars)
Fiscal

years
Eastern

Africa
Western AfricaAsiaEMENALACTotalAs percentage

of total

lending
1948–63
Amount44.7203.8117.685.3451.49.8
Per cent9.945.226.118.9100.0
1964–68
Amount33.018.9273.165.0231.7620.813.4
Per cent5.32.944.010.537.3100.0
1969–74
Amount405.6217.61,332.9808.8779.93,544.876.8
Per cent11.46.137.622.822.0100.0
Total

Amount
483.3235.61,809.8991.41,096.94,617.0100.0
Per cent10.55.139.221.523.7100.0
Source: World Bank records, Programming and Budgeting Department.Note: Percentages rounded.
Source: World Bank records, Programming and Budgeting Department.Note: Percentages rounded.

Regional orientation

The expansion of agricultural lending has been accompanied by a changing regional allocation, as shown in Table 2. In particular, lending to Eastern and Western Africa and to Europe, the Middle East, and North Africa (EMENA) regions increased throughout the 1960s. The absorptive capacity of these countries expanded with the increase in technical assistance, and more emphasis was placed on small farm development, as opposed to large-scale plantation and ranch investment. This was accompanied by a substantial increase in the number of Bank agricultural staff working in these regions. By contrast, the proportion of agricultural lending to Latin America and to the Caribbean (LAC) has declined from 37.3 per cent to 22.0 per cent, partly due to changes in the lending activity of the Inter-American Development Bank in Latin America, and to the larger flow of funds to Eastern and Western Africa. The proportion going to Asia has also declined, although total Bank Group lending to this region has still more than quadrupled between 1964–68 and 1969–74. This decline reflects in part the trend away from emphasis on heavy infrastructure especially hydroelectric power, toward a wider range of projects.

Project diversification

The shift from large-scale capital intensive projects toward funding the concomitants of a science-based agriculture—research and extension, new seeds, fertilizers, irrigation facilities, credit and marketing programs, and other services—is reflected in the pattern of subsector lending (see Table 3). Although lending for irrigation development has declined from 77.7 per cent in 1947–63 to 33.2 per cent in 1969–74, it remains the largest single category, reflecting the importance of irrigation in the densely populated land-scarce areas of Asia and the Middle East. However, recent irrigation projects show a trend toward small scale schemes involving lift pumps and tubewells, as well as the development of other aspects of water resource use, such as ancillary roads, research farms, farmer credit, and related services, to take full advantage of the improved water supply.

Table 3World Bank lending for agriculture by subsector(Amounts in millions of U.S. dollars)
Fiscal

years
General

agriculture
Agricultural

credit
Area

development
FisheriesIrrigationLivestockAgro-

Industries
Perennial

crops
ForestryAgricultural

research
Total
1947–63
Amount43.920.219.7*350.97.04.7*5.0*451.4
Per cent9.74.54.4*77.71.61.0*1.1*100.0
1964–68
Amount*84.664.722.2276.0145.819.28.3**620.8
Per cent*13.610.43.644.523.53.11.3**100.0
1969–74
Amount52.5639.7359.944.11,178.4633.5243.6344.036.412.73,544.8
Per cent1.518.110.21.233.217.96.99.71.00.4100.0
Total
Amount96.4744.5444.366.31,805.3786.3267.5352.341.412.74,617.0
Per cent2.116.09.61.539.117.05.87.61.00.3100.0
Source: World Bank records, Programming and Budgeting Department.Note: Percentages rounded.

No funds allocated for this subsector.

Source: World Bank records, Programming and Budgeting Department.Note: Percentages rounded.

No funds allocated for this subsector.

Over the last few years new projects have involved the financing of fisheries, forestry, agro-industries, and area development projects. In 1974, for instance, the Bank made a $6.5 million credit to Indonesia for a fisheries project, designed to increase production for both domestic consumption and exports and to increase the employment opportunities and incomes of fishermen and their families. A joint Bank/IDA project amounting to $13.5 million in the Mangoro region of Madagascar involves planting 35,000 hectares of pine trees in presently unutilized areas that are unsuitable for livestock and crop production. The five-year afforestation program includes a survey of the area to be planted, land preparation, establishment of nurseries, fertilization, planting, weeding and disease control, and construction of about 56 kilometers of service roads. It is anticipated that the project will provide direct employment for over 1,600 laborers. In 1974, the IDA concluded a $13 million credit agreement with India, to improve the apple processing and apple-marketing industry in Himachal Pradesh. This will involve introducing technological innovations in processing, packing and grading fruit, establishing a commercially oriented marketing organization, and making infrastructure improvements capable of handling 55,000 tons of apples—25 per cent of estimated production on completion of the project in 1978. The Bank loaned $6 million to Brazil in 1973 for a $11.5 million scheme to settle 5,200 families on 100-acre farms in the northeastern State of Maranhão for increasing agricultural output and employment. All of these moves reflect a broader view of what comprises agriculture, together with an increased preparedness by the Bank to finance shorter-term inputs.

Almost 40 per cent of Bank agricultural lending goes to on-farm investments, largely under agricultural credit and livestock projects, which finance practically all aspects other than the transfer of existing resources such as land. The principal items include groundwater development, drainage, pasture improvement, tree-crop planting, livestock purchase (mainly cattle), farm machinery, buildings, fencing, on-farm processing, and storage facilities. Investments are also made in the essential prerequisites for making these programs effective, such as technical advisory services, feeder roads, distribution networks, collection systems processing facilities, storage capacity, and marketing arrangements. Frequently, an agricultural research component is included in these projects.

The Bank also helps promote the activities of the ten or so international agricultural research centers. It acts as chairman for the Consultative Group on International Agricultural Research for which it provides a secretariat and some funds.

New style projects

The change in emphasis and the aim of reducing poverty have resulted in the emergence of “new style” projects. The main elements of these projects are:

  • They are designed to benefit large numbers of the rural poor, while earning an economic rate of return at least equal to the opportunity cost of capital.

  • They are comprehensive in their approach to small scale agriculture and provide for a balance between directly productive and other components, such as education, health, and water supplies.

  • They have a low cost per beneficiary so that they can be extended to other areas, given the availability of additional resources.

The “new style” projects are intended to reach large numbers through area development, settlement, irrigation, and land improvement schemes. Most of the projects have an agricultural base and involve technological change—frequently the introduction of water, credit, improved seed, and fertilizer. Many of the projects also include some diversification in agricultural production. The area development projects often have a social component—health services, basic education, and water supplies. Whenever possible, cost has been held down through low cost delivery systems and use of intermediaries, such as farmers’ associations, cooperatives, and other groups which can reduce some of the overhead costs. Many projects include innovative approaches to project design and implementation. Some examples are the IDA credit, to Upper Volta which established a Rural Development Fund to finance the improvement of water supplies and livestock production of nomadic tribesmen; the Korea Seeds project, which finances establishment of a modern seeds industry in that country, including the capacity to undertake continuing research into a range of crops, in order to promote broad based income increases for a large group of farmers at very low cost; the Keratong Land Settlement project in Malaysia, which includes financing of the construction of project towns in the settlement area; and the Kigoma project in western Tanzania, which involves the use of a regional government authority for project management and includes agricultural and village services.

There has also been support for continuing programs of rural development. These include the Mauritius Rural Development project supporting the rural works program there; a project supporting the Government’s remedial program for drought-prone areas in India; and the Mexican Government’s Program for Integrated Rural Development. Many of these are nation-wide programs or have the potential to become nation-wide programs.

Institutional arrangements

Having recognized the importance of delivery systems and institutions, and the difficulties in organizing these for large numbers of small farmers, the Bank Group is giving greater attention to these problems. More care is being exercised in fostering the establishment of the local institutions responsible for implementing rural based projects. A high degree of government commitment is being made a prerequisite to lending, which often involves prolonged dialogue with the national authorities.

Since institution building has long been an integral aspect of its agricultural projects, the Bank Group has participated in the creation of new farm credit institutions and in the rehabilitation of existing ones. It is increasingly ready to finance lending through cooperatives, farmers’ associations, and other existing channels, as well as lending to tenants, farmer groups, agricultural contractors, and others apart from individual owners, in order to increase the range of rural people with access to credit facilities and related services. The Bank also stresses the need for terms of lending and interest rates that take account of the production needs and repayment ability of the farm-level borrower.

Land settlement is supported whenever unexploited land is made available. This has been done most recently in Colombia, Papua New Guinea, and Tanzania. The Bank is prepared to finance the concomitants of land reform wherever governments see fit to initiate such a program, providing that the program meets certain minimum requirements.

A series of comprehensive area development projects have been supported, some of which have involved changes in land holding patterns, especially in Africa. The Lilongwe project in Malawi and the Wolamo project in Ethiopia were among the first of a new trend toward integrated smallholder development programs organized on a regional or subregional basis, or around the production of a specific cash crop, such as tea in Kenya, Uganda, and Tanzania. They have involved a large degree of innovation and point the way toward likely developments in the future. The Bank has clearly outlined all these policy objectives in the recently published policy papers on agricultural credit, land reform, and rural development.

Target groups

The Bank’s rural sector lending is increasingly moving toward projects that reach the poorest groups and largest numbers of people. More emphasis is being placed on the lower-income areas; lending to countries with per capita annual incomes less than $150 has increased sixfold and almost doubled in proportion (see Table 4). This is in keeping with the policy aims outlined in Bank President McNamara’s address in 1973 at the Annual Meeting of the Bank and the Fund in Nairobi “to direct an increasing share of our lending to programs which will directly assist the small farmers to become more productive.” This type of lending is especially dependent on the availability of IDA funds, since most poor people live in developing countries where repayment of foreign loans is a real burden. The Bank estimates that agricultural projects had over 10 million direct beneficiaries in 1973–74, including the dairy project in India with some 2.5 million direct beneficiaries.

Table 4World Bank lending for agriculture by income groups fiscal years 1964-68 and 1969-74(Amounts in millions of U.S. dollars)
Per capita GNP of

borrowing countries
Fiscal years 1964–66Fiscal years 1969–74
Agricultural loans

by IBRD and IDA
As percentage of

agricultural loans
Agricultural loans

by IBRD and IDA
As percentage of

agricultural loans
Number

of projects
Amount

of loan
Number

of projects
LandingNumber

of projects
Amount

of loan
Number

of projects
Lending
Less than $1509139.920.522.51011,354.243.738.2
$151-$37518175.240.928.2781,068.333.830.1
$376-$70013253.329.640.830781.013.022.1
Over $700452.49.08.522341.39.59.6
Total44620.8100.0100.02313,544.8100.0100.0
Source: World Bank Atlas, 1973 and World Bank Annual ReportsNote: Percentages rounded.
Source: World Bank Atlas, 1973 and World Bank Annual ReportsNote: Percentages rounded.

The emphasis on reaching the poor is based on several realizations. First, that GNP growth was not benefiting the growing masses of people in the rural sector and that the supposed “trickle down” of development effects from GNP growth was largely illusory. Second, many countries were experiencing population pressure and employment problems in rural areas. Third, smallholdings comprised a ready combination of resources (land, labor, and often some capital), and smallholders were responsive to economic incentives and achievable goals.

Among the things needed were an appropriate science-based smallholder technology, the service systems to support it, and an adequate rural infrastructure. The new orientation toward rural development, which aims at providing these ingredients, has resulted in a new concern with agricultural research, increased attention to technical assistance activities, and the need for new Bank procedures for project formulation and appraisal and for supervision and implementation.

The need for new procedures is being explored through the activities of a rural development unit which is involved in developing projects of an innovative kind. Such projects necessitate more careful preparation and attention to problems of implementation as the human factor grows in importance.

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