P. A. Reid

In the course of history no problem has been more real to more people than that of hunger. A paradox of our technological age is that advances in the agricultural sciences have not been applied as rapidly as those of the medical sciences which have dramatically increased the rate of population growth. Despite a vast potential for increased food production, we are still confronted with serious malnutrition and hunger in many parts of the world.

During the last decade, world population has increased by 22 per cent, while agricultural production, excluding that of Mainland China, has increased by 29 per cent. But agriculture’s 7 per cent margin is frighteningly small in relation to the efforts being made to improve living standards in the developing countries. Moreover, agricultural growth has been unevenly distributed and has been, in general, slowest in the more overpopulated countries where nutritional levels are lowest. The world is faced with a major challenge for the rest of this century in producing enough food for people.

To meet this challenge, the rate of agricultural growth must be greatly accelerated. The world has the land for this, and it has the labor, while vast new knowledge from science and technology awaits application. Capital too is available, but its investment has been retarded by a variety of structural weaknesses, both economic and social.

Some Difficulties

Capital, of course, is vital. But it is not all that is required to bring about a substantial increase in food production. It is only one of the essential elements, and it can be applied only as effectively as other elements of the agrarian structure permit. And improvements in these other elements, unfortunately, are often difficult to achieve. Traditional customs and practices, resistant to innovation, hold back advances. To counter these, great efforts are needed in many of the different kinds of activity that come under the broad heading of “agrarian reform.” In some countries the first need is land reform, improvement of tenure conditions, or other changes in land policies. Almost invariably reforms are needed in agricultural administration, research and extension services, the supply of farm requisites, and market opportunities. Farmers generally need both better markets and better access to them. In addition, it may be necessary to change government pricing and marketing policies and, conceivably, foreign trade policies. Shortcomings in any of these prevent the proper use of farm credit—i.e., of capital in the form generally needed by individual farmers. The provision of credit, where other agricultural needs’ are seriously lacking, is often more harmful than beneficial.

Irrigation offers an example of the difficulty many countries have in absorbing the capital that their agriculture needs so badly. There are far too many investments in irrigation projects not giving projected yields, not leading to anticipated intensification of production, or not leading to multiple cropping. Irrigation is an ancient practice that does not necessarily require a change from traditional to modern farming. Only for new cash crops, intensification, or multiple cropping does a change become essential. Multiple cropping, in particular, may require a series of changes, including the introduction of early-maturing crops, mechanization of field work, application of fertilizers, use of pesticides, new marketing facilities, and provision of adequate credit. When such radical changes are called for, the knowledge of farmers becomes the limiting factor. This knowledge, in turn, depends on the availability of professional staff organized into efficient agricultural services.

Nor do such services represent the only way in which the provision of capital must be coupled with agricultural policies and actions that extend far beyond finance. There must be agricultural administrations able to plan development programs and projects. Where changes in policies are required, the administrations must be able to formulate the new policies, and the governments must be prepared to introduce them. Lastly, the administrations must be capable of carrying out the proposed programs or projects, including the strengthening of supporting agricultural services and facilities.

Some Successes

While the complexity of agricultural development is formidable, it is often ignored. But this rather gloomy picture has another side. Where the complexity of a particular situation has been recognized, and the multifarious requirements for investment have in fact been met, the injection of capital can lead to spectacular improvement. A program of land consolidation in Kenya provides an example of the successful application of agrarian reform through an integrated approach. Traditionally, the lands had been farmed under the tribal system; use of them was allocated to the members of the tribe at the discretion of the chief. They had no security of tenure or incentives to husband the soil and to improve their holdings.

In carrying out the reform, the Kenya Government first enlisted the cooperation of the tribal authorities in the consolidation and demarcation of holdings and registration of titles. The next step was the provision of extension services to prepare a farming plan for each holding and to guide the farmers in the use of the new techniques. Water supplies were provided along with other farm requisites. Feeder roads were constructed or improved, and market outlets were developed, largely through marketing cooperatives. During the early stages of the program, credit to farmers was provided on a relatively minor scale. Emphasis was given to placing the farmer in a productive agricultural setting in which he could, in succeeding years, make efficient and intelligent use of credit.

These principles were applied in. Kenya under the Swynnerton Plan, which commenced about 1955. In 1959, a World Bank loan was made to help finance the last three years of the work. By the end of 1962, some 2½ million acres of land had been consolidated into registered holdings and about 250,000 farm families were in a position to farm much more effectively. Since independence, this work has been successfully continued, mainly by African administrators. A second World Bank loan, which would give more emphasis to farm credit, is under consideration.

A second example of the successful injection of capital took place in a vastly different setting. This was a project for pasture improvement and expansion of livestock production in Uruguay. Natural conditions in Uruguay are ideal for the type of pasture improvement that has more than doubled livestock production in Australia and New Zealand. Yet in Uruguay production had been stagnant. The results of research, which had shown what might be done, were not being adopted by ranchers. Two things were needed to exploit a generally favorable situation: credit, and extension services to carry technical knowledge to the ranchers.

A World Bank loan, beginning in 1960, provided the credit. The loan also called for the establishment of a Livestock Commission with sufficient powers and technical staff to prepare development plans for ranchers and to supervise the execution of the plans. Progress since 1960 has been rapid. After five years, more than 1,400 properties have improved pastures, and production from this land has already increased threefold. A second World Bank loan of $13 million was made in 1965. A major increase in Uruguay’s pastoral output is anticipated during the next decade.

Public and Private Investment in Agriculture

Broad distinctions may be made between the functions of public and private investment in agriculture, but they are, in general, complementary. Public investments are mainly concerned with financing of infrastructure and land improvement. Infrastructure investments in roads, railways, ports, and electrification usually benefit the entire economy, and not least the agricultural sector. For example, many of the large investments in transportation facilities are essential to the marketing and distribution of the farmers’ products. Smaller investments in the construction of access roads make new lands available. In addition, infrastructure investment in the capital needs of research and education is essential to create an atmosphere in which farmers will be willing to try new methods. Public investments in land improvement are usually concerned with irrigation and drainage works, land reclamation, and land clearance.

Private capital investment is largely directed toward improving the production of lands under use. On-farm investments include land leveling, pasture improvement, farm buildings, water supplies, etc. Provision of agricultural machinery and equipment falls usually to private investment. The farmer requires working capital for fertilizer, labor, and so on. Normally he must turn to credit institutions for financing at least part of these private investments. The funds that are channeled through credit institutions to meet private on-farm requirements usually come from the public sector. To be effective, the public investments must be accompanied by adequate recurrent public expenditures for administration and services.

Requirements of Capital

No accurate estimates are available of how much capital the developing countries require to meet their production targets in agriculture. Groenveld ¹ has illustrated the order of magnitude, basing his projections on available national accounts, national development plans, and specific projects. He estimated that in Africa, Latin America, and Asia, excluding Mainland China, an average annual investment of about $7.6 billion had been required during the period 1948 to 1957 to increase food production by 2 per cent per annum. Making the assumption that it will be necessary for the production rate in the period 1960 to 1980 to increase 10 per cent faster, which appears unduly modest, Groenveld concluded that the necessary annual investment might be about $8.6 billion.

How much of this must come from the developed countries? This varies widely with the nature of the investment and the extent to which goods and services can be produced domestically. For example, in a country which has no cement, steel, or machinery industries, and few indigenous engineers and technicians, more than half the funds required for an irrigation project may have to come from abroad. By contrast, this “foreign exchange component” constitutes less than 5 per cent of the public investment in agriculture and community development under India’s Third Five Year Plan. The foreign exchange component of the Indian investment in large and medium-sized irrigation projects approximates 7 per cent. For the developing countries as a whole, the foreign exchange component of public investments for agriculture averages about 25 per cent; the figure is lower for private investments. On this basis, and using Groenveld’s estimate of requirements, the developing countries seem likely to need about $2 billion in foreign exchange for each year’s agricultural investment program.

The Supply of Capital

How are the capital requirements of the developing world’s agriculture met? Domestic savings have represented some 75 per cent or more of investments throughout most of the countries involved. Usually, the level of investments has been determined primarily by a country’s own success in mobilizing savings. Although the rates of savings among countries show great variation, the general trend is upward, even in countries where the incomes are low.

The total net capital flow into the developing countries, including aid from the communist countries, is estimated at $9.5 billion for 1964. Official bilateral aid from the United States provided about 40 per cent of the capital flow; similar aid from other countries about 25 per cent. Private aid provided some 25 per cent and multilateral aid about 10 per cent. But by no means all of this inflow was available for investment. About one fifth of the bilateral aid was in the form of agricultural commodities. At the same time, the developing countries have reimbursed the industrial countries between $4.5 billion and $5 billion in 1964 in debt service and dividends on public and private capital. As a result, the net financial transfers to the developing countries were probably less than $5 billion. This represents about 12 per cent of their import expenditures for goods and services.

Insufficient as the net inflow may be for the needs of the developing economies, it is difficult—it may be said to have become notoriously difficult—to increase it without adding to external debt problems. For instance, in 1963 alone, Pakistan’s external debt increased by 43 per cent and India’s by 38 per cent. Such increases have been possible only because of the liberal terms of credits from the International Development Association (IDA) and increasingly in other forms of aid. There is still need for further expanded sources of aid on concessionary terms.

For economic development as a whole, a sizable gap exists between the absorptive capacity and the capital available for development. A recent World Bank study suggests that an additional $3 billion to $4 billion of external capital could be used each year by the developing countries. However, insofar as agricultural development is concerned, the gap is largely a latent one. This latent need can become an effective demand for capital only as farmers increase their capacity to use and benefit from investments.

We do not know how much of the total capital inflow to the developing countries goes to agriculture. According to the Organization for Economic Cooperation and Development, bilateral and multilateral capital financing of projects for developing agriculture amounted in 1962 to no more than $430 million. If it is indeed correct that only 5 per cent of all capital financing went into the land, this was not due to a shortage of funds for this purpose. Rather, projects ready and suitable for financing were simply not to be found. These circumstances persist in countries where the physical opportunities for agricultural investment are almost boundless. Another reason for the low agricultural investment was that the terms and conditions of available funds were not tailored to the needs of agriculture.

Financing by the World Bank Group

A significant proportion of the foreign investment for agricultural development is provided by the World Bank and the International Development Association. The bulk of Bank/ IDA lending has been for infrastructure, but increasing attention is now being given to direct investment in agriculture. About one third of total loans and credits granted have been for transportation with major benefit to agriculture. A further 12 per cent has been lent directly for agriculture.

The World Bank and IDA lend only for ventures which they consider sound in the technical sense and capable of being executed effectively. They must also be satisfied that the investments will yield an adequate return and strengthen the economy. Up to February of this year, about $950 million of Bank and IDA lending has been allocated for agricultural projects. Of this total $167 million was lent during 1964–65. The rate of lending for agriculture is accelerating and may exceed $200 million in 1965–66. There are now some 70 agricultural projects under way, ranging from support for agricultural credit institutions, livestock improvement, land settlement, grain storage, forestry and fishery development, and promotion of small-holder tree crops, to support for irrigation, drainage, and flood control.

Most Bank and IDA lending has been to finance the foreign exchange costs of projects. In recent years, however, greater emphasis has been given to inclusion of part of the local currency costs. During 1964–65, 26 per cent of all Bank and IDA lending was for local currency expenditures. Lending policies for agriculture have been liberalized in other ways. Repayment and grace periods are more closely adjusted to the needs of the project. In appropriate circumstances, annual farm inputs and other recurrent costs may be financed—the provision of fertilizers, for example, has been financed on a revolving fund basis—and loans may also provide for financing the recurrent costs of foreign technical personnel during initial periods of project operation. These changes in lending policies have widened considerably the scope for agricultural investments.

Improving the Climate for Investment

The first step toward financing a project is to study the proposal thoroughly and to prepare a “feasibility” report which can form the basis of appraisal. Since technical, financial, organizational, managerial, and economic aspects of the project must be examined during appraisal, these questions should be covered during project preparation. Various measures are being taken within the United Nations family and under bilateral aid to assist governments in the preparation of agricultural projects. The World Bank helps considerably in this field, both as part of its regular operations and through regional offices established in East and West Africa. Of major significance is the partnership which the Bank and IDA has formed with the United Nations Food and Agricultural Organization (FAO). This should become an important factor in helping developing countries absorb more aid in their agricultural sectors. The cost of the Cooperative Program, which is designed to increase Bank/ IDA agricultural investment, is shared between the Bank (75 per cent) and FAO (25 per cent). Ministers of Agriculture of the developing countries have acclaimed this arrangement and are keen to take full advantage of the services.

A special team has been established within FAO headquarters for this task. This team works with the Bank across the whole field of agriculture in the developing countries, including reviews of the economy and agricultural sector planning; the identification of project opportunities; assistance to governments in planning and preparing such projects to the feasibility report stage; and collaboration in the appraisal of projects and in the supervision of loans. The FAO team has as its prime responsibility and emphasis the identification and preparation of projects. The Bank continues its responsibility for the appraisal of projects and for the supervision of loans.

The program team, now 30 strong, calls on experts from the other divisions of FAO, and is supported by the accumulated knowledge of these divisions. Since the partnership commenced in June 1964, FAO has participated in 110 missions to 50 countries. More than half of the missions were to assist governments in the identification or preparation of projects; the remainder covered participation in Bank missions for economic review, appraisal, or loan supervision work. Loans arising from these missions now total $156 million, and many others are near completion.

There are other cooperative endeavors which will have impact on agricultural development. FAO has concluded an agreement with the Inter-American Development Bank for project preparation work. Similar agreements with other regional development banks appear probable. This linkage of FAO’s experience and technical services to sources of finance will certainly lower the existing barriers to investment in agriculture. The World Bank also has a Cooperative Program with the United Nations Educational, Scientific and Cultural Organization (UNESCO) to increase Bank/ IDA lending for education which, in the long run, will greatly benefit agriculture.

The UN Development Program

A major source of UN assistance in the preparation of projects for financing comes from the UN Development Program, previously the UN Special Fund. The Special Fund began operations in 1959 with the main purpose of helping the developing countries acquire knowledge, skills, and institutions essential to a fuller use of their resources. Up to February 1966, it had approved 604 operations representing a cost to the Fund of over $580 million. FAO administers 241 of these projects which are concerned with agriculture. About 80 projects are preinvestment studies in the sense of preparation of agricultural projects for financing. The work in project preparation by the United Nations is rapidly increasing. Moreover, this effort is augmented on a major scale under bilateral aid programs of many countries and by private institutions.

After project preparation, the next need for widening investment opportunities is to assist governments in strengthening their agricultural administration. Three lines of action are likely to be involved before effective measures can be taken toward strengthening the institutional aspects of agriculture: the training of personnel, improvements in organization of administrations and services, and provision of recurrent funds to employ additional personnel. The UN provides considerable help. UNESCO devotes major attention to the grave needs for improved and wider general education. Approximately 50 Special Fund agricultural projects are designed to establish or strengthen training institutions. Almost all of the other Fund projects have important elements of training, including on-the-job training of local counterparts by foreign technicians and the award of fellowships for more advanced training. Various other agencies, including FAO, also devote high priority to training with funds from the UN Program of Technical Assistance or from regular budgets. Other international bodies such as the Colombo Plan, the Organization of American States, and the OECD give high emphasis to training of skilled manpower.

The effective use of skilled manpower within administrations, services, and institutions demands that these bodies have appropriate legal powers and organizational structures. Some of the newly independent countries have inherited an administrative framework that has been well built for the task ahead. In many others, however, the administration must be reorganized. Ample help is available to governments for this purpose. The Development Program is active in this area, while a full division of FAO is working on the improvement of rural institutions and services. Other UN agencies are concerned with improvements across the whole field of public administration. Much of the technical assistance forthcoming under bilateral and private aid is also directed towards the training of personnel and the strengthening of rural institutions.

Greater Effort Needed

Despite the breadth of technical assistance now available, progress lags in the enormous task of meeting the world’s mounting demand for food. Agricultural administrations, services, and institutions are not being strengthened with the speed required to enable more capital to be used effectively. Most of the developing countries are now in a position to command the facilities necessary to meet reasonable requirements for the training of skilled manpower and for the improvement of their administrative structures. Why, then, are they not taking fuller advantage of these opportunities? One reason could be the resistance of interests within the agricultural sector which are vested in the status quo. In other cases, the answer lies largely in the inability or reluctance of governments to provide sufficient recurrent budgetary funds for the employment of all the necessary skilled manpower that they have available or could obtain.

One way toward overcoming this problem of agricultural development would be for such institutions as the World Bank and the International Monetary Fund, in their assistance to countries in economic planning, to emphasize more strongly the need for allocating current funds for agriculture in national budgets. If the existing pattern of budget expenditures is optimal and an increased internal fiscal effort is not economically feasible, external financial assistance will be required. Most of the sources of aid either finance the provision of, or actually provide, foreign technical experts to work within local administrations. On the other hand, there are relatively few sources of foreign finance to supplement national budgets in the provision of recurrent funds for the employment of local technical personnel. Some funds have been made available for this purpose under bilateral aid but more needs to be done if this deficiency is not to continue as a crippling handicap to development.

The developing countries must build sound national administrations and institutions before they can reduce the existing gap between capital available for investment in agriculture and their absorptive capacity. But this goal would be reached far more rapidly if capital aid funds could be supplemented by recurrent aid funds for development-promoting purposes.