The Sahel and West Africa had a good agricultural season, so why does food insecurity persist?
Ousman Tall, Sahel and West Africa Club Secretariat (SWAC/OECD)
Every year the identification, analysis and mapping of areas at risk and populations affected by food and nutrition insecurity in the Sahel and West Africa are carried out. Conducted within the Food Crisis Prevention Network (RPCA), this process is co-ordinated by the Permanent Inter-State Committee for Drought Control in the Sahel (CILSS). It analyses country-level information of the 17 countries in the region using a harmonised, common framework called the Cadre harmonisé (CH). The CH analysis is based mainly on annual agricultural production and information from household and market surveys. Developed by West African actors, using international standards, the strength of the CH lies in its broad objectivity, consensual analysis and the incorporation of a wide range of stakeholder analyses.
The 2016-17 agro-pastoral season just ended in the Sahel and West Africa region and the agricultural and food situations are generally satisfactory. The CH analysis shows good rainfall and hydrological situations as well as crops and livestock production. Cereal and tuber production is estimated at 67.2 million metric tonnes and 166.7 metric tonnes constituting 17% and 15% increases compared to the past five year averages, respectively. Despite these gains, approximately 9.6 million people are in a food security crisis situation. The report published following the March 2017 RPCA Experts’ meeting in Dakar and based on the CH analysis, highlights some of the causes of food and nutrition insecurity to include prices, markets and the conflict along the Lake Chad basin. Building upon the report, there is a need to further expand on some of the other conjectural factors that affected food and nutrition security during the 2016-17 season.
The global economy has been faced with weak aggregate demand, decreasing commodity prices and high financial market volatility. There is a sharp decline in the prices of commodities such as rubber, crude oil, iron ore and gold that has led to substantial cuts in export values and fiscal revenues in the region. This has led to the depreciation of local currencies in Ghana, Guinea, Liberia, Nigeria and Sierra Leone; amid increasing rates of inflation. The Nigerian economy which represents over 65 % of West Africa’s GDP has been particularly affected by the continuous depreciation of the Naira, which has negatively impacted the economy of the region. Nigeria’s population is more than 167 million, representing over half of the total population in the region. With 60% of this population living below the poverty line, a general depreciation of the Naira leads to increased food prices and affects households’ access to food. This was the situation during the 2016-17 agricultural campaign.
The promotion of regional trade and markets in West Africa and the Sahel has helped to stimulate agricultural development and food security. National policies promoting regional integration have also helped to strengthen trade across the region through advocacy for the free movement of goods and services. Integrated markets and trade across the region have led to increased economies of scale in production, especially in the agricultural sector where surpluses produced by smallholder farmers are linked to local and regional markets. However, regional integration has been hindered by a number of constraints including inefficient transportation and trade barriers along corridors and at borders, resulting in high transaction costs and, inevitably, high food prices.
Rapid urbanisation is also impeding the attainment of food security in the region. In West Africa, it is projected that the urban population will reach 400 million in 2050. The youthful population is migrating to urban areas, leaving behind an ageing farming population in an agrarian economy that is highly labour intensive. The agriculture and food systems have not transformed adequately enough to take advantage of the youthful population migrating into urban areas. This is becoming a serious social and economic issue for most countries in the region. Unfortunately, information on the nature of the food insecurity situation in urban areas is limited due to the focus of the food security analysis on food availability and other rural indicators.
The RPCA has developed the efficient tools and platform needed for the analysis and discussion of food security in the Sahel and West Africa. The CH has been expanded from its use in the Sahel to gradually incorporate the rest of West Africa. Nigeria is the last country to be incorporated in the CH analysis, with 16 of its 36 States covered. The next challenge is to analyse other structural and conjectural drivers of food and nutrition security from a national and regional perspective in order to better explain why a large number of the population is always food insecure despite good agricultural campaigns. Policy makers need to broaden the food security interventions beyond food availability to include other dimensions of food security: access, utilisation and stability.
Despite the recent drought in California, farms have continued to supply water-intensive crops such as fruits and nuts to consumers both in the US and around the world. Doing so has not always been easy for farmers – or for the environment. Agricultural producers turned to groundwater to irrigate their crops, a change made so intensively that in some parts of the state the ground started sinking because the water table had fallen so much.
The south-western United States is not an isolated case. The green fields of India’s Punjab state hide a similar problem. Groundwater supplies around 60% of India’s water needs for agriculture but the country suffers from depletion and pollution of this water resource in approximately 60% of its states. In Punjab, India’s breadbasket, demand for water already outstrips supply by 38%.
These countries are only examples of a growing global policy challenge. The disruption that climate change poses to water supplies in many parts of the world only increases the importance of correctly managing this resource. Getting groundwater policy right could ensure that farmers have supplies of water to last them through dry periods.
The OECD and the International Food Policy Research Institute (IFPRI) have organised a panel discussion on groundwater and agriculture at the Global Forum for Food and Agriculture (GFFA) 2017 on Friday 20 January in Berlin. The speakers will discuss how this vital resource for agriculture around the world can be properly managed to ensure that policy decisions taken today will protection future food production. The outcomes of the discussion will feed into the following day’s GFFA meeting of agriculture ministers where the topic of water and agriculture will be discussed.
Groundwater supplies need to be properly managed because this resource has the potential to provide a reliable, on-demand source of water to irrigate crops, and has become central to agricultural production in a range of countries. Groundwater accounts for over 40% of global irrigation on almost 40% of irrigated land and has become indispensable for agriculture production in many countries. It accounts for half of South Asia’s irrigation and supports two-thirds of grain crops produced in China. OECD countries alone extract an estimated 123.5 km3 of groundwater each year to irrigate semi-arid areas.
This heavy use of groundwater has become unsustainable in many regions. High rates of extraction may boost production today but doing so also causes problems such as land subsidence, salinisation, and other forms of land and water quality degradation.
These knock-on effects may be putting global food security at risk.
Already a number of OECD regions are facing challenges in pumping water out of the ground. A quarter of surveyed irrigating regions in the OECD that use groundwater are seeing a major reduction in well yields as well as significant increases in pumping costs (see Figure 1).
Importantly, there are efforts that policy makers can implement that can ensure that groundwater can continue to feed billions of people around the world.
“You can’t manage what you can’t measure” has become a mantra for groundwater campaigners in California. The same approach must be applied in countries around the world. Greater information needs to be collected about stocks and flows over time – data without which it becomes almost impossible to implement effective management.
And where groundwater stresses are identified, governments must put in places measures that not only reduce water demand, but also take into account how surface and groundwater interact. These measures would go some way to preventing collapses in water supply for agriculture. Excess groundwater demand in Punjab could be curbed by providing information on best practice to farmers and by realigning economic incentives away from electricity and crop subsidies and instead encouraging sustainable irrigation systems.
A locally-focused package of regulatory, economic and collective-action approaches should be introduced in areas of intensive groundwater usage. This package should support a well-defined groundwater entitlement system, incentive efficient resource use and, importantly, involve the local users. In California, the state government introduced the 2014 Sustainable Groundwater Management Act, under which local agencies are being formed that will develop regionally-specific and long-term water management programmes with defined sustainability objectives.
Groundwater has the potential to act as a natural insurance mechanism for farmers, so that they are not reliant on surface water to continue to produce in times of drought. This resource would support them in an increasingly volatile climate and allow us to keep producing the food demanded by a growing global population.
More information on the GFFA panel discussion can be found here together with a list of the speakers.
The OECD’s review of groundwater policies in agriculture, which includes 16 country profiles, can be found here
An overview of the OECD’s work on water use in agriculture can be found here.
IFPRI’s work on water policy can be found here.
Laurent Bossard, Director, OECD Sahel and West Africa Club (SWAC) Secretariat
In launching the new “West African Papers” series produced by the OECD Sahel and West Africa Club Secretariat, T. Allen and P. Heinrigs have reflected on the region’s food economy opportunities, providing us with a useful and necessary occasion to look back and measure the extent of changes that have taken place.
I’m old enough to remember the West African agriculture – and especially that of the Sahel – that existed in the middle of the 1980s. One could (already) witness the power of demographic growth. Between 1960 and 1985, the population of the Sahel had doubled and the urban population had increased fivefold. But farming did not keep pace. Excluding weather variations (people were just emerging from the terrible drought of 1983), this 25-year period revealed an increase in imports to the tune of 8% per year. In his 1987 book, Le sahel face aux futurs (The Sahel: Facing the Future), Jacques Giri was already sounding the alarm: “Overall, the Sahelian food production system has remained very traditional, very vulnerable to drought and not all that productive. It has not adapted in terms of quality, quantity or needs […]. The region is increasingly dependent on outside sources and, in particular, on food aid. The return of more favourable weather conditions has not led to a decrease in this dependence.”
A significant portion of the region’s “imports” were, in reality, related to food aid, which had practically become institutionalised since the middle of the 1970s. While it’s true that Europe – whose grain production had doubled between 1970 and 1985 – was not averse to providing this type of aid, this state of affairs was not sustainable and the prospects were worrisome.
Farmers in the Sahel and in West Africa were clearly divided into two extremely unequal halves. On the one hand, the majority practised subsistence farming, and a large proportion of that majority did so with self-sufficiency in mind. Markets only played a marginal role in producers’ lives, especially as, in a number of countries, prices were set by ministries and commercialisation was – in theory, at least – a state monopoly.
On the other hand, export crops were enjoying a major boom, compelling a minority of small farmers to “modernise”. Stabilisation funds supported by the international community guaranteed purchase prices for producers, irrespective of global prices. This was the case for cotton, the production of which surged from the beginning of the 1970s onwards, or for cocoa and coffee in Côte d’Ivoire and Ghana. Groundnuts, meanwhile, offered great benefits for Senegal, Gambia and Niger, until the northern countries realised that they could produce oilseed crops at home at a lower cost.
But overall, the prospects were poor: demographics and towns would lead to a relentless increase in the food deficit. Revenue from export crops would not be sufficient to fund imports; structural food aid could not last.
More than three decades later, it appears that what we believed to be the cause of the problems (urbanisation) has in fact been the driving force behind spectacular agri-food development. By growing and multiplying, towns polarised a large part of the farming world, dragging it into the market. In doing so, they sparked the emergence and development of a large number of essential professions, all along the increasingly complex food chain, both upstream and downstream of production: tool manufacturers and repairers, fertiliser and grain sellers, traders (collectors, wholesalers and retailers), labourers, packers, transporters, processors and restaurant owners. And this is not taking into account all the activities that enable the aforementioned to perform their jobs – take for example, those that wait by the side of the road to replace the punctured tyres of passing lorries.
In 2010, this food economy represented USD 178 billion, which equates to 36% of the combined GDP of all the countries in West Africa (likely around USD 240 billion in 2015). It is the top economic sector of the region and is experiencing strong growth. The move to extend the market has opened up new opportunities both upstream and downstream of agricultural production, which now represents just 60% of the food economy.
Today, the great challenge for farming lies less with crop exports and more with the economic opportunities offered by the regional market. Two-thirds of what West Africans consume is commercialised. A significant and fast-growing part of it is processed. The future of the agri-food sector is highly promising in terms of development and jobs. Taking more of an interest in the new activities developing along these value chains will also offer opportunities to women, who are especially prevalent in the processing and food distribution segments.
Public policies must be adapted to match these real-world changes.
West Africa: Security crisis and food crisis Laurent Bossard on OECD Insights
Moving beyond agriculture: It’s food that matters Thomas Allen on OECD Insights
Job, in the book of the Bible he gave his name to, was a whiner’s whiner. His version of Happy Birthday includes the catchy lines “May the day of my birth perish and may God above not care about it; may no light shine on it. May gloom and utter darkness claim it once more.” Not a man to see a glass as half full or half empty, for Job it would be smashed on the floor and slice open your foot. So his words on precipitation are pretty much as you’d expect: “If He holds back the waters, there is drought; if He lets them loose, they devastate the land”.
To be fair, that was in the days before governments played “a key role in developing targeted policy responses to market failures that impede the efficient mitigation and allocation of drought and flood risks”, as the OECD Studies on Water report on Mitigating Droughts and Floods in Agriculture puts it. These responses, plus progress in agricultural methods and technology, mean that in most countries, droughts and floods don’t have the terrible impact on economies these days they’d had since biblical times.
In that respect, it’s interesting to look at the findings of Rudolf Brázdil from Masaryk University, Brno, in the Czech Republic and his colleagues in their study of data going back a thousand years on droughts in the Czech Lands. Nearer modern times you get data from instruments, but the earlier chronicles, diaries, tax data and so on describe a series of issues the OECD report talks about, too, such as competition for water resources and the way different impacts can interact. In the Czech case lack of rainfall is often described as not only damaging crops, but also making it impossible for water mills to grind what the farmers did manage to harvest.
It may seem odd taking Europe as an example when there are so many striking (and tragic) cases elsewhere. But one of the surprises for me in the OECD data was the figure below, showing the number and duration of droughts by continent. Europe is similar to Africa, and North America is worse than both of them. But their levels of resilience and vulnerability to risks, whether drought or flood, are very different. The report provides brief summaries of what these different terms mean: risk is the combination of the probability that something will happen and the impacts if it does; vulnerability is the capacity of a system to cope with a risk or combination of risks; and resilience is the system’s ability to recover after a shock.
Number and duration of droughts
Intuitively, you’d think that for risks you can’t eliminate, reducing vulnerability is the best policy. It’s not so simple: “Physical and economic interdependencies associated with specific characteristics of water imply there can be synergies and trade-offs in vulnerability reductions across water users and uses” says the report. Lord Smith, Chairman of the UK Environment Agency summed it up in February 2014 after particularly bad floods hit England, pointing out that flood defences cost money and the question was how much the taxpayer should be prepared to spend on different places, communities, and livelihoods. Or, as he put it, “this involves tricky issues of policy and priority: town or country, front rooms or farmland?”.
There can even be trade-offs between shorter and longer term vulnerabilities. Increased irrigation could help farmers cope with a drought, but over time groundwater reserves may be used up and the land become damaged irremediably by erosion and over-exploitation.
Fortunately, there are also ways to make everybody better off, by improving the efficiency with which water is used for instance. Given that agriculture accounts for 44% of the groundwater withdrawn in OECD countries, even relatively small changes by farmers could have a significant impact, although if the water allocation system gives them cheap, plentiful water they would have little or no incentive to change their ways of doing things.
Dams and other hydrological infrastructures could help. The Aswan High Dam for example saved Egypt from the impacts of the droughts and floods that provoked so much misery before it was built, but the OECD report argues that big hydrology projects should complement water policies that try to influence demand rather than replace them. It argues, too, for the need to reconcile environmental, social, and economic objectives (or sustainable development as it’s sometimes called).
Even with all the best policies in place, though, the OECD thinks drought and flood risks are likely to become a growing concern in the future for three reasons: increased population and associated rising demand for food, feed, fibre, and energy in the context of rising competition for water resources and increasing water-related vulnerability; increased demand for flood protection and mitigation for urban areas; and climate change increasing the frequency and magnitude of extreme weather events.
And the report reminds farmers of the need to look after themselves by taking out insurance and not just wait for help, for as Job so rightly pointed out, “Those who are at ease have contempt for misfortune”.
Thomas Allen, Sahel and West Africa Club (SWAC)/OECD Secretariat
We have to face facts: agriculture’s role in the food economy of West Africa isn’t as important as it used to be. Today, 40% of the agro-food sector’s value added is no longer produced by agriculture. Agriculture remains a pillar of economies in the region, but the food chain’s downstream segments are evolving in line with changes in society. West African politicians need to take note of these evolutions and act accordingly if the region is to take full advantage of its domestic market growth potential. Food and nutrition issues are no longer solely agricultural in nature, and agricultural policy no longer addresses them all.
In West Africa today, as many people depend on non-agricultural activities for their livelihoods as are engaged in agriculture. This is the major transformation of the past 60 years. It is inextricably linked to the explosion in towns and cities that one can see just by looking at a map of the region. Never in the history of humanity have as many people moved and have as many cities emerged in such a short time. Today there are 2000 towns with over 10,000 inhabitants; in 1950, there were 150.
There are now 150 million urban dwellers, 30 times more than in 1950. Between 2000 and 2015 alone, the West African urban population grew by over 60 million people. That’s like adding a country the size of France to the region. And this growth is no longer only fueled by rural migration: most of these people were born in cities.
As a result of urbanization and income growth, the West African diet is changing. This is in turn impacting food security and nutrition. Diets are diversifying, especially in urban areas. More fruits and vegetables and more processed foods are being consumed, with the latter now representing at least 39% of urban households’ food budgets. Even more surprisingly, the poorest rural households devote 35% of their budget to processed foods, showing that these are not limited to the urban middle class.
These figures remind us of a simple truth: Almost all foods are processed in some way. We do not eat wheat or maize, but rather bread and a multitude of other products from their flour. Millet is crushed, cassava is soaked, shredded, crushed, dried, roasted, fermented, etc. Millions of women have participated in these sometimes laborious tasks, and today some devote all their energy to them. This is, for example, the case of Georgette* in Cotonou, who specializes in the preparation and sale of mawé or “dried aklui“, granules of maize flour that can easily and quickly be used to make a kind of porridge. The form that this market development takes can come as a surprise to those who automatically associate processed foods with supermarkets or frozen foods; do not expect the streets of Bamako or Niamey to be covered overnight by the franchises of a famous fast food chain!
More and more men and women work in the logistics and marketing of food products. Quantities exchanged on the agricultural and food markets have exploded: households now turn to markets as their main source of food supply, providing at least two-thirds of their food consumption. Total transactions amounted to $120 billion in 2010. It is by far the largest West African market. If you add the fact that urban populations consume 50% more than rural populations and that there is no sign of urbanisation slowing over the next two decades, it is easy to understand investor interest. Helping to co-ordinate these various actors is more important than ever before.
However, there is an additional difficulty: the largest share of this economy is informal. And it would be unrealistic to seek to formalise it today. We need to be more creative than simply suggesting investment frameworks. Experiences elsewhere can inspire ways forward, such as the Qali Warma programme in Peru that revised public procurement procedures so that local food producers could supply school meals for children between the ages of 3 and 6. This initiative is a good illustration of the challenges to public action today, namely how to simultaneously release people’s energies and devise institutional mechanisms that ensure the coherence of an increasingly complex agro-food system.
*Names have been changed
Changes in the agro-food economy and their implications OECD/SWAC and ECOWAP+10
Settlement, Market and Food Security, West African Studies, OECD/SWAC
Please visit the SWAC blog for more views on regional issues in West Africa.
Here are some things we started doing in the year 2000 and have been doing ever since: taking photos with digital SLR cameras; saving data to USB drives; watching Big Brother; and negotiating the WTO Doha Round. In fact the Doha Round, or the Doha Development Agenda to give it its full name, only started officially at the WTO meeting in Doha, Qatar, in 2001, but negotiations on agriculture had started a year earlier. As a new OECD book, Issues in Agricultural Trade Policy, Proceedings of the 2014 OECD Global Forum on Agriculture puts it, “agriculture has proven to be a critical element in the effort to reach agreement”. Another way you could put it would be to say, as the WTO did, that talks collapsed in July 2008, because of the failure to agree on agriculture and NAMA (non-agricultural market access).
The failure came at a particularly bad time. When the talks had started, food prices were at historically low levels, but 2007/8 saw high volatility and high prices. Issues in Agricultural Trade Policy proposes both structural and more short-term reasons for this. Demand for food for humans and feed for animals was rising steadily as the world population grew and the economy expanded. Stocks were falling and biofuels production was increasing. The short-term shocks included key grain producing regions hit by droughts and other weather effects; exchange rate movements; and hoarding.
Governments have to take their share of the blame too. For a start, many of them encouraged biofuel crops, a measure that “contributes little to reduced greenhouse-gas emissions and other policy objectives, while it adds to a range of factors that raise international prices for food commodities” according to an OECD assessment. When the food price crisis hit, the trade restrictions and import measures, coupled with panic purchases by some governments, made matters worse. In fact a report by the International Food Policy Research Institute (IFPRI) concludes that “trade events were pervasively important in all of the major grain markets and arguably provide the most tangible explanation for the […] price series data.”
The price rises provoked food riots in a number of developing and emerging countries. The reaction in many cases was to adopt “a more defensive stance towards international markets”. Countries tried to become more food self-sufficient by for example subsidising production and penalising imports. One of the biggest changes noted by the new OECD report is the evolution of “agricultural support” – the subsidies, tax breaks and other ways governments help the sector. In 1995, the seven emerging economies for which the OECD collects information on agricultural policies accounted for just under 4% of the total support for OECD and emerging economies combined. By 2012, these seven countries accounted for over 45% of the total.
Even so, most countries comply with current WTO commitments and would have little trouble complying with what is proposed. Countries where the government is becoming more active in domestic markets are usually developing countries whose agricultural sector has a large number of poor farmers, low productivity and lack of access to well-functioning markets. Their main policy options are similar to those elsewhere – interventions in markets; provision of public goods such as roads or other infrastructure; income transfers; and reform of institutions, including land reforms and property rights, financial sector reforms, and legal frameworks – but the actual mix should depend on national circumstances.
In the case of developed countries, the OECD has established a basic principle for choosing among these instruments, stemming from the notion that policy objectives can be divided into two categories. The first is a matter of efficiency and is concerned with correcting “market failures”, for instance, if the cost of water pollution from pesticides or other agricultural chemicals is not accounted for in the market price of produce. The second set of objectives is concerned with the distribution of income (an equity issue). The principle is that policy should first seek to address market failures – ideally by tackling them at source – and then address distributional concerns with targeted policies such as payments for those affected.
However, in poorer countries where market failures are more widespread, it is often difficult to tackle them directly. For example, farmers may have low incomes partly because they have no access to credit. Subsidies to buy fertiliser or other inputs have been suggested as a practical solution to the problem of developing markets for inputs and providing financial services to small farmers. Similarly, price stabilisation has been proposed as a relatively simple way of mitigating the impacts of price shocks on poor households, as opposed to market-based forms of risk management such as insurance or the provision of income safety nets. The OECD argues that while there may be plausible reasons for governments to intervene in agricultural markets in poorer economies, the short-term benefits from the money spent may be far less than benefits from investments to support long-term agricultural development. In other words, policies that have been abandoned by OECD countries because they are inefficient and inequitable are unlikely to prove successful elsewhere.
But what do you do in the meantime? For Issues in Agricultural Trade Policy, the way to help the poor cope with sudden price movements is not agricultural policy but redistributive measures. Apart from anything else, sudden price increases or collapses do not have the same consequences for poor farmers selling food and poor urban (or rural) dwellers buying it. A policy that helps them all to maintain or improve their standard of living makes sense.
More generally, the book argues that a more open trading regime can help the agricultural sector achieve its goals, including food security, in the face of demographic and economic growth and possible threats such as climate change, by providing a greater diversity of products for consumers and by allowing the benefits from changing patterns of specialisation to be realised. Or: “The key challenge for governments in the period ahead will be to maintain a clear focus on the benefits of further reform, to renew efforts to integrate agriculture into the multilateral trading system, while addressing legitimate domestic policy interests in ways that are effective and minimise distortions to production and trade.” That’s the OECD-FAO Agricultural Outlook for the year 2000.
In the framework of the 2015 Global Forum on Development, which focused on “Financing sustainable development”, the OECD Development Centre, the United Nations Capital Development Fund (UNCDF) and the Better than Cash Alliance have developed a series of articles exploring the key issues and dimensions of financial inclusion. Improving citizens’ access to financing is key to support more inclusive social and economic development. Today’s post from Kameshnee Naidoo of UNCDF highlights the challenges of ensuring financial inclusion for smallholder farmers.
Joacquim is a subsistence farmer from Etatara in Mozambique. At 46 years, he is his family’s sole breadwinner, responsible for supporting his wife and three orphaned grandchildren. He lives in a traditional house, which he is unable to use as collateral and grows maize, sorghum, cassava and beans. They consume a lot of the produce themselves, and what is not consumed is sold. Joacquim earns $300-500 per month depending on the season and his produce.
In the attempt to understand the real livelihoods of lower-income individuals and households in markets such as Mozambique, the lack of data and field-based insights are challenging. UNCDF’s Making Access to Financial Services Possible (MAP) project, for instance, seeks to place demand-side analysis at the centre of the research process to focus the minds of multiple stakeholders on the end consumer. Better provision of appropriate financial services is an ancillary tool to wider development goals of enabling more sustainable livelihoods for low-income populations.
Millions of smallholder farmers like Joacquim live in or close to poverty and rely on agriculture for their livelihoods. Agriculture is fundamental to poverty reduction, driving economic transformation and ensuring growth includes the poor. Pathways out of poverty – whether through farming, employment, non-farm processing and trade or migration – are all heavily reliant on agriculture. As stressed in a report to the G20 co-ordinated by OECD and FAO, improving agricultural productivity — while conserving and enhancing natural resources — is an essential requirement for farmers to increase global food supplies on a sustainable basis and enhance their livelihoods. Over the longer term, increasing agricultural productivity plays an even greater role in economic development by enabling economic transformation through a new green revolution.
For agriculture to work better and improve the livelihoods of the rural poor, however, financial services need to work better in helping the poor to diversify their source of livelihoods and reduce hunger, become more resilient to periodic shocks, and prevent them from falling into poverty traps. The rural economy requires a wide range of financial services and products, and no single type of financial institution is capable of efficiently providing such a range. Microfinance, for example, can help to meet the short-term needs of farmers and other low-income residents and help to finance microbusinesses but it is not so suitable for larger businesses or for the accumulation of capital and innovations to raise productivity.
The OECD’s Multi-dimensional Review of Myanmar found that of all the segments of the country’s economy, the rural sector is the most underserved by the formal financial system. Only about 2.5% of total loans go to the rural sector, even though it accounts for 30% of GDP and two-thirds of employment. The rural population has considerably less access to formal financial services than the population in urban areas and some groups, such as landless farmers, are effectively cut off from such services.
The current rural financial system is unlikely to be able to support the broader development of the rural economy in Myanmar, particularly the improvements in productivity and the creation of non-farm job opportunities that will be necessary to allow the rural population to share in rising living standards and to avoid a disruptive exodus from rural to urban areas.
Apart from the basic loan products, other financial products and services have been quite limited. For instance, remittance services are particularly important to Myanmar’s rural sector, given that an estimated 2-5 million of its citizens are working in other (mainly ASEAN) countries and annually send a substantial amount of funds back to their families.
Finance is also needed for the agricultural investment that is a major catalyst for job creation, higher incomes and increased productivity across the economy as a whole. Financing agriculture and rural development more broadly, however, is complex. All of the challenges that hinder financial outreach in regular markets are larger in a rural context. Rural populations are poor, sparsely distributed, poorly literate and mostly engaged in informal activities. Data from the FinScope surveys and the MAP diagnostics indicate that agricultural activity — mostly smallholder farming — has low returns and is subject to high risks. Information failures like moral hazard, adverse selection, poor enforcement and danger of exploitation all exist on a large scale. For suppliers of financial services, the cost of operating in rural areas is often extremely high which, when combined with the low and risky returns available, leads to a large under-supply of financial services.
If financial services are to work better for rural and agricultural populations, they need to be based on an understanding of the needs of the users, which can be very different to those of urban populations. But financial service providers, governments and donors do not have a good understanding of the financial behaviour, usage and needs of rural populations and this restricts the effectiveness of rural outreach.
On the supply side, an increasing number of traditional and non-traditional financial service providers are innovating in the agricultural space, driven by a combination of declining profitability in more advanced markets and the huge potential offered by the unbanked millions in rural areas. Innovation is taking place in delivery models led by technology and building alliances between those who have assets and those who have low cost outreach; in risk management enabled by big data and leveraging existing relationships within the value chain (buyers and sellers, farmers’ associations, co-ops); in products driven by a better understanding of what farmers need, matching tenor and interest and repayment schedules to agricultural cash flows and addressing agricultural development with finance.
If the goal is to alter the dynamics of markets so that they work more effectively for the poor and economic transformation, we need to recognise the interaction of these market systems. In this regard, understanding how agriculture shapes the demand for financial services and how the rural context in which it takes place affects the costs, risks and returns to supplying financial services is central. A key component of the MAP diagnostic is to build a target market profile based on the main income generating activities of consumers, and their financial services access, usage and needs. The analysis is informed by the context of the country and ultimately seeks to meet the policy objectives of financial inclusion as a tool to improve welfare and poverty alleviation. As a large number of the countries in which the MAP diagnostics have been undertaken are LDC’s reliant on agriculture, it is able to present a more complete picture of the nature of demand and usage of financial services and potentially inform better ways of serving farmers ‘s needs.