Financial barriers to economic growth in low-income countries

Nairobi skyline c. Ninara/Flickr

Nairobi skyline c. Ninara/Flickr

This brief provides context and policy-relevant analysis of the DEGRP-funded research project Politics, Finance, and Growth.

Led by Svetlana Andrianova of the University of Leicester, the research investigated why many developing countries are experiencing low levels of economic growth, with a focus on how politics and finance affect pro-poor growth.


Financial development and economic growth 

As for market access, availability of diverse forms of finance is positively associated with entrepreneurship and higher firm entry, as well as with growth in innovation. Greater access to finance also allows firms to exploit investment opportunities, thus boosting growth (Beck, 2013).

Despite the importance of a robust and well-rounded financial system, many developing countries, particularly in sub-Saharan Africa, remain financially under-developed. Banks continue to lend little domestically and access to commercial finance, via bank deposits, remains low in the majority of low-income sub-Saharan African economies.

Yet even countries where financial development has occurred are not seeing as much growth – and particularly inclusive growth – as might be expected. Several explanations have been put forward, including the suggestion that low growth is a result of deregulation, or of successive banking crises. However an alternative but likely explanation is that the financial systems in these countries are ‘fragile’ in numerous ways, and that it’s this fragility that is eroding the previously observed link between finance and economic growth (Demetriades et. al, 2016). 

Finance is crucially important for developing countries. A well-functioning financial system is essential for economic growth, providing financial intermediation that boosts investment, transaction services that support firms and households, and tools to mitigate risk and guard against volatility at both the individual and national level. 

The healthiest financial systems are typically characterised by four key elements: high levels of financial depth, or the volume of financial transactions occurring in the system; inclusive financial market access, meaning a range of financial services are accessible to firms and households of varying sizes and income levels; high levels of banking sector efficiency, where financial institutions allocate credit to the most productive parties at the lowest cost possible; and financial stability, meaning the financial system is resilient to negative shocks. 

Financial development – the combination of these elements – is important for growth and, more importantly, pro-poor growth. Countries with higher financial development experience faster reductions in income inequality (Beck, Demirgüç-Kunt and Levine, 2007). More specifically, financial deepening can reduce growth volatility by alleviating liquidity constraints on firms and facilitating long-term investment (Aghion et al., 2010).


The DEGRP research

Aims

To test this hypothesis, the project team developed the following aims: 

  • to identify and examine financial systems that are not performing effectively across developing economies, particularly in Africa; and
  • to create measures of financial fragility at a country level that can then be used to address specific questions about the relationship between financial fragility and economic growth.

In addition, the research project also sought to contribute to existing understandings of the finance-growth relationship by analysing the consequences of banks’ profit-seeking behaviour on broader financial instability, and the effect of different types of financial reforms on bank soundness.

Methods

A range of methods were used in pursuit of these aims. A cross-sectional regression analysis was carried out on data from the World Development Indicators database and other sources to assess the importance of both financial liberalisation and financial deepening on the growth rate of real per capita GDP (Demetriades and Rousseau, 2015).  Additionally, to understand where and why inclusive growth has stalled, researchers analysed data from financial institutions in 124 countries spanning over a decade, (Demetriades et al. 2015), as well as creating and testing theoretical models using household-level data on income (Bumann and Lensink, 2013). 

From their analyses, the team developed a set of eight country level measures of financial fragility indicating different vulnerabilities in the financial system. Data corresponding to these indicators from their financial institutions analysis was then collated into a new financial fragility database, which was subsequently used as a tool for the investigation of questions such as: does financial liberalisation lead to financial fragility?; and does making the financial system more inclusive – in particular extending access to the poor – reduce or increase fragility? 

Particular attention was paid to the question of whether fragility is a predictor of financial crises, and also whether it can negatively affect growth even in situations where crisis has been avoided. 


Findings

The research has yielded several important findings, advancing understandings of financial sector development both in terms of its beneficial impacts on growth and development, and its negative impacts in the increased incidence of financial crises. 
Key findings include: 

  • Countries with low levels of financial fragility are less susceptible to experiencing financial crisis as a result of large inflows of foreign capital.
     
  • Financial depth is no longer a significant determinant of long-run growth: financial reforms can have sizeable growth effects, which can be positive or negative depending on how appropriately banks are regulated and supervised.
     
  • Financial fragility is shown to have a negative impact on economic growth above and beyond the negative effect that occurs due to a financial crisis: even if a financial crisis is avoided financial fragility is harmful to economic growth. 
     
  • Greater financial inclusion, or access to affordable finance, particularly for households, is shown to reduce financial fragility, therefore promoting financial inclusion may have beneficial impacts to the safety of the financial system.
     
  • Policies aimed at increasing the size of the financial sector should not be considered ‘one-size fits all’, particularly where the welfare of the poor is at stake. While financial development may be beneficial in raising the incomes of the poor in certain regions, it has been shown to reduce it in others. 
     
  • While a high rate of loan defaults typically reduces bank lending in Africa, once a certain level of institutional development is reached, variations in the loan default rate do not significantly impact underlying trends in bank lending.

Implications

The project has contributed to a greater understanding of how financial fragility can, in some instances, contribute to the breakdown between finance and growth in LICs. The project’s database on financial fragility for 124 countries from 1998 to 2012 contains a variety of financial indicators that allows for richer analysis and has been used to fruitfully address several issues.

In sub-Saharan Africa, though there has been limited understanding as to why financial systems have performed poorly, the project findings evidence that regional high default rates limit future credit supply thus preventing future lending and investment.

In the light of the findings pertaining to the role of financial fragility, the work of the research project has shown that strengthening institutions may be one way to overcome this issue. For example, in comparing the role of financial deepening and financial access in India, the research shows that their synthesis in rural areas contributed to poverty alleviation.


project publications

Recent outputs from the project include:

  • Andrianova et al. (2017) 'Ethnic Fractionalization, Governance and Loan Defaults in Africa', Oxford Bulletin of Economic Statistics (early online version). 
     
  • 'The changing face of financial development(2016) Panicos Demetriades and Peter L. Rousseau. Economics Letters, Vol. 141, pp 87–90.
     
  • Andrianova et al. (2015) 'A New International Database on Financial Fragility' (2015), Working Paper No. 15/18, Leicester: University of Leicester. 

For more, and access to the financial fragility database, visit the Leicester University project website. 


 

Adequate financial development matters when it comes to facing the challenges of globalisation. As developing countries liberalise and open their economies, it is important they do so in a sustainable fashion, with well-regulated and inclusive financial markets. Meeting these criteria will help ensure that the benefits of finance-led globalisation are evenly distributed, that income inequality in developing countries is reduced, and that the likelihood of financial and economic shocks as a result of liberalisation are minimised.

When accompanied by financial deepening, liberalisation measures, such as loosening of reserve requirements or of capital controls, can be associated with lower levels of income inequality (Bumann and Lensink, 2013). China, for example is likely to continue to pursue slow and steady liberalisation in order to mitigate the likelihood of crisis (Papadavid, 2016). This follows previous liberalisation successes in other large emerging economies such as India, where in 1991, such a process was embedded in a period of financial deepening that subsequently reduced poverty rates among the rural self-employed through fostering entrepreneurship (Ayyagari et al, 2013).

 

 

 

 

 

wider relevance

The need for effective financial development is likely to persist, particularly for LICs, given their ongoing vulnerability to economic and financial shocks. Policy reform for financial development should therefore continue to be a priority, especially for LIC governments, although policy reform is also necessary at the international level. 

Long-term policies should focus on institutional change. There is a need for institution building, and of particular importance is support for and fostering of information networks and contractual frameworks at a microeconomic level. Additionally, there is a need to understand and facilitate growth in different segments of the financial system including banks, capital markets and contractual savings institutions, bearing in mind the changing needs for financial services in a developing economy. Finally, although ‘long-term finance’ has seen limited research, its development can be seen as critical to improving and deepening shallow financial markets in many developing countries. 

Policymakers need to target the channels and mechanisms through which financial deepening, in its different forms, can influence and transform the real economy, particularly considering that these channels might vary across different levels of economic, financial and institutional development. While there are several indications that finance can contribute to structural transformation, more research in this area is needed. Such structural transformation can have important distributional consequences. Additionally, the relationship between finance and distribution of opportunities is still to be researched (Beck, 2013). 


 

Demetriades, P., Fielding, D., and Rewilak, J. (2015) ‘A new international database on financial fragility’. Voxeu.org. Available online: http://voxeu.org/article/new-international-database-financial-fragility.

Demetriades, P. and Rousseau, P. (2015) ‘The changing face of financial development’ University of Leicester Working Paper. Online: http://www.le.ac.uk/economics/research/RePEc/lec/leecon/dp15-20.pdf?uol_r=d307e306.

Demetriades, P., Rousseau, P., and Rewilak, J. (2016) ‘Finance, growth and fragility’, University of Leicester Working Paper. Online: https://research.aston.ac.uk/portal/files/21806804/FINANCE_GROWTH_AND_FRAGILITY_Demetriades_et_al._2017_WP.pdf

Papadavid, P. (2016) ‘China’s balancing act’. ODI research report. London: Overseas Development Institute. Available online at: https://www.odi.org/publications/10268-chinas-balancing-act

 

References

Aghion, P., Angeletos, G.-M., Banerjee, A. and Manova, K. (2010) ‘Volatility and Growth: Credit Constraints and the Composition of Growth’. Journal of Monetary Economics 57: 246 – 265.

Ayyagari, M., Beck, T. and Hoseni, M. (2013) ‘Finance and Poverty: Evidence from India’. CEPR Working Discussion Paper 9497. Available online at: https://assets.publishing.service.gov.uk/media/57a08a54e5274a27b200053f/61070_Finance_Poverty_India.pdf

Beck, T., Demirgüç-Kunt, A. and Levine, R. (2007) ‘Finance, Inequality and the Poor’. Journal of Economic Growth 12: 27– 49.

Beck, T. (2013) ‘Finance for development: A research agenda’. DEGRP Research Report. London: DFID-ESRC Growth Research Programme, Overseas Development Institute.

Bumann, S. and Lensink, R. (2013) ‘Financial Liberalisation and income inequality: channels and cross country evidence’. Working paper for DFID-ESRC project ‘Politics, Finance and Growth’. Available at: https://assets.publishing.service.gov.uk/media/57a08a3de5274a31e00004d2/61070_BaumannLensink.pdf

Dairying in Malawi

In this Research in Context, agriculture theme lead Steve Wiggins provides context and analysis for DEGRP-funded project Assessing the contribution of the dairy sector to economic growth and food security in Malawi.

Beginning in 2012 and led by Dr Cesar Revoredo-Giha of Scotland’s Rural College, the project used supply chain analysis to assess the potential for dairy to aid economic growth and food security in Malawi. 


The promise and challenges of dairy development

Milk collection c. Prepaid Africa/flickr

Milk collection c. Prepaid Africa/flickr

Dairying is one of the most promising farm enterprises for development. Demand for milk, butter, cheese, yogurt and ice cream tends to grow out of proportion to income as countries advance from low to middle income, and as populations urbanise.

Keeping dairy cows can generate high margins per unit area, making them particularly suited to small-scale farms. Cows can be kept at relatively low cost, since they can be fed largely on grass and by-products.

Dairying is also labour intensive, not least in twice daily milking, so it suits densely settled rural areas where labour is relatively abundant compared to land. The need to transport and process the milk creates additional jobs in the local economy too. Lastly, more dairy consumption can improve diets in developing countries for people who eat mainly grain and tuber staples (McDermott et al., 2010).

The challenge is to realise this potential. Some countries, such as India (Staal et al., 2008) and Kenya (Baltenweck et al., 2011), have successfully developed their dairy industries, creating many jobs in the process. But doing this is not without its challenges. On the production side, cows have to be kept healthy, fed appropriately, and bred for milk productivity. Transport and processing have to keep milk fresh and safe. On the consumption side, the challenge is to raise demand by broadening the range of products offered, by developing and promoting items such as such as yogurt, flavoured milks, and pizza-topping cheeses.

If domestic production falters, demand for dairy products can readily be met by imports. Milk powder has often been cheap on world markets, especially when the European Union was dumping its excess production. So a domestic dairy industry also has to compete on cost.


Potential for dairy development

Malawi’s dairy industry holds much potential for further development.

Average per capita consumption of milk is currently one of the lowest in the world, at 4.9 kg per person, per year (FAOSTAT, 2010). By comparison, neighbouring Tanzania consumes milk at the rate of 40 kg per person, while in only slightly more distant Kenya the figure is 98 kg per person (FAOSTAT, 2012). But dairy consumption will most probably rise significantly with economic growth and urbanisation.

Moreover, the increase in demand for dairy will likely grow more than proportionately to the increase in incomes: the income elasticity of demand for dairy is 1.5 in urban Malawi (Revoredo Giha and Renwick, 2016).  The low average consumption conceals significant differences between those on low incomes and those, mainly urban people, who are better off.

Malawi also has several areas of cooler highlands where specialised dairy cows could be kept without heat stress, where animal disease is less likely, and where feed can readily be grown and collected for the animals. One of these areas, the Shire Highlands of the south, is close to the major urban centres of Blantyre and Zomba, and therefore close to potential consumers. Moreover, given the lack of other rewarding agricultural opportunities in the Shire Highlands, dairy is particularly promising.

 

 

Key features of dairying in Malawi

Malawi is estimated to have 10,000 cows of (Bos Taurus) breeds specialised for dairying. Some additional milk comes from the 1.2 million head of Zebu (Bos Indicus) cattle that are kept primarily for meat and draught power, and only to a lesser extent for dairy. Milk from the specialised dairy cows in the national herd is produced by between 5,000 and 7,500 dairy farmers who typically have one or two cows each.

Cows in the dairy herd produce between 8 and 15 litres a day when in milk, depending on feed and health of the cow. Of this, an estimated 19% of milk is retained by dairy producers for household consumption. Of the remaining 81%, just over half is sold through milk buying centres that deliver to formal processors, with the other half sold to informal traders. As of 2010, the amount of milk delivered to processors has risen from 15,000 to almost 20,000 tonnes of milk a year.

Processing is dominated by three large companies, two based in Blantyre that collect milk from the south, and one in Lilongwe that sources milk from central Malawi. The processors, however, also import milk powder to augment their supplies: between 1,000 and 2,000 tonnes in the 2010s, apparently mainly to make yogurt, which requires a higher fat content than is typically possessed by the fresh milk collected.

The processing plants pasteurise milk (33% of milk supplied), produce UHT long-life milk (50%), ferment milk to produce ‘chambiko’ (a popular soured milk drink), and make yogurt. Retailing is through supermarkets and smaller stores.

Informal milk traders also sell unpasteurised ‘raw’ milk directly to consumers, most of whom boil this milk before consuming it.


The DEGRP Research

Preparing cheese curds for processing c. USAID/flickr

Preparing cheese curds for processing c. USAID/flickr

Realising the potential of dairying in Malawi is the subject of the research carried out under the DFID-ESRC Growth Research Programme between June 2012 and May 2015. The research team was made up of researchers from Scotland’s Rural College (SRUC), Lilongwe University of Agriculture and Natural Resources, Bunda Campus, and The African Institute of Corporate Citizenship (AICC), Lilongwe.

The research had two main objectives:

  • to identify factors hampering the contribution of dairying to economic growth and food security; and
  • to assess whether revamping the formal dairy supply chain would be more effective in stimulating dairying than promotion of less formal channels.

The approach taken was to analyse the functioning of the supply chain from producer to consumer. To this end, data were collected from questionnaires completed by 460 dairy farmers. Semi-structured interviews were carried out with managers and members of 25 Milk Bulking Groups in the north, centre and south of the country; managers of processing plants; and policy-makers and implementers from government, non-governmental organisations, and development partners. Visits were also made to retailers.

The research found the following:

  • Most dairy producers were not technically efficient: the median farmer in all three zones achieved considerably less than 50% of the efficiency of the best of their peers. Higher efficiency was associated with having pure-bred cows, more experienced farmers, and larger scales of dairying — although bear in mind that this analysis was only for small-scale producers who would rarely have more than half a dozen cows.
  • Milk buying centres often suffered from electricity cuts, and since fewer than half had back-up generators, milk could not be cooled when power was cut and hence spoiled. Spoilage was further increased by the failure of tankers from milk processing plants to pick up the milk on scheduled collection days.
  • Milk quality was a major problem. It emerged that farmers were used to adding water to their milk to make it go further, as well as bicarbonate of soda to reduce acidity. Poor hygiene at the milking stage and unsterile collection containers also meant that much of the milk delivered carried a high load of bacteria. While the milk centres tested for watering down and acidity, they did not check for bacteria. Of the milk sent to the processors, on average 17% had to be poured away on account of excessive bacteria. When farmers had their milk rejected at the buying centres, they sold it on the informal market.
  • Milk processing plants ran at very low capacity: well below 50%, and possibly as low as one third or even one quarter of capacity. This, together with the high rate of milk that had to be discarded, pushed up plant operating costs.
  • Despite high costs from underuse of capacity, processing plants seemed to make profits, because they targeted their milk at middle class customers prepared to pay for safe milk.
  • Processors, nevertheless, seemed to operate competitively both in paying for milk from farmers and in selling to retailers.
  • Most of the processed milk was sold to domestic retailers. Mark-ups over the price at the processing plants were often very high indeed, between 17% and 149%, especially for small packs of milk preferred by those on low incomes.

Debates over dairy development strategy in Malawi

c. Adam Cohn/flickr

c. Adam Cohn/flickr

The DEGRP supply chain analysis feeds into a wider debate about how best to enhance the dairy industry in Malawi.

Two approaches to development are currently being followed. Improvement of the formal supply chain is one of them. Raising quality and cutting costs in the chain allows higher prices to be paid to farmers and lower prices to consumers, and encourages both more supply from smallholders and more consumption of (good quality, safe) milk.

Some donors, including USAID, Oxfam and the EU, and the Flemish government, have worked with producer groups to set up milk buying centres for smallholders, and worked directly with the smallholders themselves to stimulate production. Support for the latter includes lend-a-cow schemes in which farmers are given a pure or cross-bred in-calf heifer of a high milk-yielding variety, on the condition that they return a similar animal when the cow produces its offspring. The returned heifer is then lent to another local farmer, in theory until all local farmers have been able to upgrade their cows.

An alternative approach is being promoted by the Malawi government in cooperation with the Japan International Cooperation Agency. Using the ‘one village, one product’ strategy, originally developed in Japan as a means of encouraging municipalities to focus production on one distinctive item in which they have comparative advantage, they have been working with village groups to install micro-scale milk processing to raise the quality of the milk that gets sold into informal channels. Many of the producer groups would like, given the chance, to turn their buying centres into micro-processors.

To some extent, these approaches can work at cross-purposes: stimulating the formal channel could divert milk from the informal channel, and vice versa.

The DEGRP study posed the question of whether the formal channel was technically inefficient, or whether it was anti-competitive, or both these things. The study concluded that the processors were not able to use market power to set prices, either those paid to farmers, or those charged to retailers. But technical problems were significant: the collection of milk was costly owing to poor roads, as was the processing of milk owing mainly to low use of capacity and power interruptions. Since both the Malawian government and most donors have backed the first strategy, which can potentially reduce these costs, the finding that the processors act competitively is reassuring.


Unanswered questions

Although wide-ranging, the DEGRP research leaves several questions unanswered.

Retailer margins

One concerns the high retail margins observed.  Do these stem from retailers having the power to set prices, without being undercut by rivals? Or are there high costs for retailers in holding dairy inventory with produce that needs to be kept cool, where inevitably some will be lost since it cannot be sold in time?

Food ethics

Another concerns opportunism in the formal processing chain, where farmers — and perhaps employees of the milk buying centres — are tempted to water down and adulterate milk to get higher volumes accepted for processing. Is the solution simply technical: that the centres will have to test milk for bacteria, as well as for watering and acidity? This is not done currently for reasons of cost and quite possibly because the centres do not bulk enough milk to reach a threshold at which such testing becomes economic.  Are there institutional innovations that could be tried to incentivise farmers to deliver better quality, unadulterated milk? Or, would it benefit all in the long run if enforcement of standards were more systematic and stringent? If such possible solutions exist, they look to be promising candidates for a randomised trial.

Economics of milk production

Further questions surround the economics of milk production on smallholdings. Dairy specialists tend to focus on raising milk yields per cow. Economically optimal yields, however, are often well below the technical maximum, since the marginal costs of achieving very high yields outweigh the value of increased production.

Finding ways to reduce costs, while not overly reducing production, is often profitable. Feed costs, in particular, are an area worth investigating. Farming by-products, such as bran, straw and maize stover (the residue of maize plants left in fields after harvest); fodder from rough grazing land; and planted grasses such as Napier grass, which can give very high yields from small areas, can all be considerably cheaper than feeding grain to cows. Better understanding of the unit costs of production achieved by farmers following different strategies, rather than overall measures of technical efficiency, could be instructive both for advising farmers and for plotting the long-term strategy for dairying.

Competitiveness of Malawian dairy farmers

Following the latter point, how competitive are Malawi’s smallholder dairy farmers compared to benchmarks for similar parts of Africa? And compared to world prices? The DEGRP research shows that farmers delivering to processors saw their prices fall, in real terms, between 2008 and 2014. By the latter year, the price was just over MK16 a litre in 2000 values, when the exchange rate was MK60 to one US dollar: hence a 2000 price of $0.27 a litre, equivalent to $0.43 in 2015 prices, or around $460 a tonne of milk.

Since 2007, world milk prices have fluctuated considerably, within a band of $200 to $500 per tonne (IFCN, 2013). At first sight, then, Malawi’s dairy farmers are getting a price commensurate with world averages. If farmers are still producing at this price, and they are, then it suggests that their unit costs may be internationally competitive. Indeed, Dairibord Malawi, one of the milk processors researched, exports some of its output, suggesting that the Malawi dairy industry can and does compete. But it would be useful to confirm this by more detailed enquiries into dairy farm accounts.

Informal dairy marketing

A final question concerns the informal dairy marketing channels. How carefully do consumers boil their raw milk and how effective is this in rendering the milk safe to drink?

As can be seen, the DEGRP study does not (yet) answer all the questions, but it has shed useful light on some questions, and in doing so revealed other questions for consideration. Ultimately, it looks as though improvement of small-scale dairying could form the basis of improved livelihoods for some smallholders in Malawi, as has been the case in the highlands of Kenya and Tanzania. 


References

Baltenweck, I., Yamano, T. and Staal, S.J. (2011) ‘Dynamic Changes in the Uptake of Dairy Technologies in the Kenya Highlands’, in T. Yamano, K. Otsuka and F. Place (eds.) Emerging Development of Agriculture in East Africa: Markets, Soil, and Innovations. Netherlands: Springer.

IFCN (2013) Combined IFCN world milk price indicator. Online data resource. Kiel, Germany: International Farm Comparison Network. Online: http://www.ifcndairy.org/en/output/prices/milk_indicator2013.php

FAOSTAT (2010) Online data resource. Rome: Food and Agriculture Organisation of the United Nations. Available at: http://faostat3.fao.org/home/E

FAOSTAT (2012) Online data resource. Rome: Food and Agriculture Organisation of the United Nations. Available at: http://faostat3.fao.org/home/E

McDermott, J. J., Staal, S.J., Freeman, H.A., Herrero, M. and Van de Steeg, J. A. (2010) ‘Sustaining intensification of smallholder livestock systems in the tropics’, Livestock Science 130 (1):  95–109.

Staal, S.J., Nin Pratt, A. and Jabbar, M (2008) ‘Dairy development for the resource poor. Part 1: Pakistan and India dairy development case studies’. ILRI/FAO Pro-poor Livestock Policy Initiative Working Paper No. 44-1. Rome: Food and Agriculture Organization. 

Related content

The research project’s website has a long list of outputs to date. Of particular note are the following:

Revoredo-Giha, C. and Renwick, A. (2016) ‘Market structure and coherence of international cooperation: the case of the dairy sector in Malawi’, Agricultural and Food Economics 4:8. Available at: http://agrifoodecon.springeropen.com/articles?query=revoredo&volume=&searchType=&tab=keyword

Revoredo-Giha, C. et al. (2015) ‘Identifying Barriers for the Development of the Dairy Supply Chain in Malawi’. Symposium paper from the 29th International Conference of Agricultural Economists in Milan, August 2015. Available at: http://ageconsearch.umn.edu/handle/21229

Diffusion of innovation in low-income countries

c. World Bank/Flickr

c. World Bank/Flickr

In this Research in Context, innovation theme lead Dirk Willem te Velde and innovation grant holder Xiaolan Fu provide context and analysis for DEGRP-funded project The Diffusion of Innovation in Low-Income Countries (“DILIC” project).

Beginning in 2012, the DILIC project was led by Xiaolan Fu, Professor of Technology and International Development at Oxford University. Combining broader cross-country analysis and a narrower focus on Ghana - until recently a low-income country- it explored the determinants and transmission channels for effective innovation creation, diffusion and adoption in low-income countries (LICs) under institutional, financial and human resources constraints.


What is innovation?

Innovation is critical for economic transformation and sustained increases in jobs and incomes in LICs. It can improve health, social and environmental outcomes, and is relevant to many dimensions of development goals. 

There are various definitions of innovation. The Oslo Manual (OECD, 2005) - international source of guidelines for the collection and use of data on innovation activities in industry - defines innovation as the implementation of:

  • a new or significantly improved product (good or service) or process;
  • a new marketing method; or
  • a new organisational method in business practices, workplace organisation or external relations. 

In the context of LICs however, most researchers use a broader definition of innovation, which encompasses not only new-to-the-world invention but also the spread, adaptation and adoption of pre-existing know-how and techniques, services, processes and ways of working. 

The DILIC project takes this broader approach. It considers both technological and managerial innovation, exploring not only brand new-to-the-world products, processes, and practices, but also those that are new to a country, or new to a firm.

Measuring innovation

There are a number of ways to measure whether innovation has taken place. Signs of innovation implementation can be large-scale or relatively subtle, and might include:

  • Total factor productivity change at firm or sector level
  • The presence or introduction of new technology such as computers, mobile phones or other equipment
  • A firm receiving internationally-respected quality certificates
  • Sales of new or significantly improved products
  • Adoption of new management or marketing practices

The research

Blue Skies drinks factory, Ghana c. World Bank/flickr

Blue Skies drinks factory, Ghana c. World Bank/flickr

Aims & methods

The objectives of the DILIC project were to:

  • understand the barriers to the creation of innovation in low-income countries (LICs);
  • analyse the determinants of knowledge diffusion in LICs; and
  • examine the effect of external knowledge diffusion to LICs. 

To meet these objectives, PI Xiaolan Fu collaborated with a number of innovation specialists, including Professor Pierre Mohnen (Maastricht University), as well as investigators and advisors from: Oxford University; United Nations University – Maastricht Economic and Social Research Institute on Innovation and Technology (UNU-MERIT); the Ghanaian Science and Technology Policy Research Institute (STEPRI); University of Cape Town; Tshwane University of Technology; and the United Nations Conference on Trade and Development (UNCTAD).

Mixed methods were employed, including: 

  • Literature review
  • Cross-country economic study
  • New firm-level survey of 500 Ghanaian businesses
  • In-depth case studies of 32 firms in the textile/apparel, food processing, mineral processing, wood/furniture, and construction sectors in Ghana
  • Statistical analysis of secondary longitudinal firm-level data

Findings

The project yielded a number of findings relating to the nature, impact, and sources (both national and international) of innovation in LICs.
 
The nature of innovation

  • Innovation takes place everywhere; in developed countries and in LICs, in formal and informal sectors. During 2011-2013, 80% of firms surveyed in Ghana had introduced some form of innovation. 
  • But, not all innovation is measured using conventional indicators such as patents and research and development. It is often “under the radar”. (Zanello et al., 2013).

The impact of innovation

  • In LICs, innovation often takes the form of transfer, adoption and adaptation of existing technology, rather than new invention. This is one reason why patent activity and research and development (R&D) measures are often low in LICs. R&D expenditure to GDP ratios also vary considerably among country groups, from close to zero expenditure in LICs and 0.61 in lower-middle-income countries (LMICs) to 0.96 in upper-middle-income countries (UMICs) and 2.32 in higher-income countries (HICs) in 2011. The share of R&D spending from foreign sources is larger at lower per capita income levels. 
  • Diffusion and learning-based innovation has enabled firms in LICs to survive and grow. The DILIC survey of 500 firms in Ghana suggests that innovation raises labour productivity of firms through learning (Fu et al., 2014). However the low level of investment in technology-intensive innovations results in a slow process of structural change and industry upgrading.

The sources of innovation in LICs are often external

  • Innovative export upgrading (increased product sophistication) in LICs depends on capital deepening, engagement in knowledge creation, knowledge transfer via investment in education and R&D, and foreign direct investment and imports. Cross-country analysis for 171 countries over 1992-2006 shows that the effect of a country’s domestic R&D on export sophistication is insignificant for low and low-middle income countries, while the effects of imports, foreign direct investment and education are positive and significant (Zhu & Fu, 2013). 
  • Analysis of region-specific firm and industry data for Ghana in suggests that import of Chinese products has a significant positive impact on total factor productivity at the firm level, which in turn suggests that Ghana is learning useful lessons from its interaction with China (Fu et al., 2015). 

Innovation depends on participation in value chains and the formation of national/regional (if not global) production networks

  • Forming national or cross-African vertical production networks allows firms to produce more sophisticated products, whereas single firms typically don’t have the capacity to do so (Fu et al., 2014).

Support systems are often inadequate or unknown to investors

  • The survey in Ghana suggests that whilst firms are often innovative, and the Ghanaian government well-regarded as an innovation partner, most firms do not benefit from extension services such as loans or training. On the one hand, firms have little knowledge of the policy instruments available to them. On the other, innovation is not always recognised and/or measured by government, who therefore do not sufficiently support innovation efforts within the firms (Fu et al., 2014).  

Interpretation

Sleek Garment Factory, Ghana. C. World Bank

Sleek Garment Factory, Ghana. C. World Bank

Some of these findings confirm existing knowledge on innovation that emerged in the 1970s, 1980s and 1990s. For example, the project’s econometric findings confirm that technology diffusion and adoption depends on targeted technological efforts, sufficient human and financial resources and absorptive capacity and competitiveness achieved through international integration and competition (Lall, 1992, 2001; Cohen & Levinthal, 1989). 

A number of other findings, however, represent new contributions to this existing body of knowledge. The finding that Chinese imports have actually led to firm upgrading in Ghana, for example, goes contrary to the traditional concept that exports are good and imports are bad. In highlighting the positive yet indirect effects of Chinese imports it shines a different light on Sino-African trade relations, and is therefore a valuable addition to the increasing amount of research being conducted on the impact of Chinese trade with LICs. 

The originality of this study also lies in the collection and use of new data and applications in specific empirical contexts. The survey used for DILIC’s firm-level analysis of Ghanaian businesses and resultant dataset of up-to-date information provide new opportunities for the study of innovation behaviour and creation of new initiatives and improved innovation policies.


Wider relevance

In highlighting the crucial role of innovation as a means of firm survival, the DILIC research is relevant on a national, regional and global level. 

Regional
As underlined by the African Union 2063 agenda, structural transformation is crucial for Africa, and innovation and industrialisation are key tools for achieving it. Yet there is often a temptation for LICs to take a mercantilist approach and develop their industries behind closed doors. Nigeria’s drive for industrialisation, for instance, has often come with more restrictions on foreign exchange and imports.

Similarly the Rwandan government has recently reacted to increased Chinese imports by raising import barriers, a move likely to damage Rwandan industrial development in the long term. DILIC project findings on the benefits to Ghana of free flows of trade and information are valuable evidence to the contrary, as they indicate that upgrading can be achieved without erecting barriers.  

National
It is anticipated that the findings will inform national policy decisions, and in fact this is already occurring. The survey data on Ghanaian innovation activity suggested a lack of significant linkages between innovators and universities in Ghana. Having learned of this, the government of Ghana is now using the findings of the research programme to inform future programmes that link universities and innovators. 

Additionally, the DILIC survey instrument can be used to conduct similar research in other countries. The resulting enhanced dataset can then be used to analyse innovation behaviour, forming the basis for new initiatives and improved innovation policies. 



Global
Until last year, global development debates had largely ignored the importance of innovation. Now, under the leadership of a range of developing countries, and supported by international organisations such as UNIDO, the Sustainable Development Goals include a goal on innovation (SDG9). The research team interacted with these debates, with findings playing an important role in shaping high-level decision-making about the new SDG innovation goal.


Conclusions

This research project has major implications for practically-oriented research into the nature and scope of innovation activity and the determinants of its creation and diffusion.

It finds that learning-based and low cost technological and managerial innovations do take place across a wide spectrum in the Ghanaian economy, but that they have yet to spur the structural change previously achieved in many East Asian countries. A key question, therefore, is how can this be done?

Lack of finance and skills are found to be the major constraints to innovation in low-income countries. Specifically, the research reveals that collaboration in general, and business-university collaboration in particular, is limited in LICs. Further research will be helpful for understanding the factors (structural, policy and institutional) that could strengthen such linkages.

The research also confirms that collaboration along the value chain at national/regional level brings significant benefits, enabling LIC firms to produce more sophisticated products. This helps product diversification and structural change. More research is also needed therefore, into the development and impact of regional value chains.

Finally, the project has begun to examine differences in innovation between firms managed by women and men. Findings suggest that firms managed by women are less likely to introduce technology based innovation, but are more active in adopting other types of innovation.  Understanding the major constraints to women entrepreneurs and how policies can help foster more innovation and empower women in LICs would be a valuable contribution to innovation knowledge.


References

African Union Commission (2015) Agenda 2063. AU Commission. Available online at: http://www.un.org/en/africa/osaa/pdf/au/agenda2063.pdf

Cohen, W. and Levinthal, D. (1989) Innovation and learning: The two faces of R&D. The Economic Journal. 99 (397): 569 - 596

Fu, X., Hou, J., Mohnen, P. (2015) The impact of China-Africa trade on the productivity of African firms: Evidence from Ghana. Working paper. Oxford: Oxford Department of International Development.

Fu, X., Zanello, G., Essegbey, G., Hou, J., Mohnen, P. (2014) Innovation in low-income countries: A survey report. London: DEGRP.

OECD/Eurostat (2005) Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data. 3rd Edition. Paris: The Measurement of Scientific and Technological Activities, OECD Publishing.

Lall, S. (1992) Technological capabilities and industrialization. World Development. 20 (2): 165-186.

Lall, S. (2001) Competitiveness indices and developing countries: An economic evaluation of the global competitiveness report. World Development. 29 (9): 1501-1525.

Zanello, G., Fu, X., Essegbey, G. (2013) Innovation under the radar in low-income countries: Evidence from Ghana. PowerPoint presentation from UNU-WIDER Conference, Helsinki, Finland. Oxford: Oxford Department of International Development.

Zhu, S. and Fu, X. (2013) Drives of Export Upgrading. World Development. 51: 221-233.

Risk aversion among smallholder farmers in Uganda

c. CIAT/Flickr

c. CIAT/Flickr

In this Research in Context, agriculture theme lead Steve Wiggins provides a background to DEGRP-funded project A Behavioural Economic Analysis of Agricultural Investment Decisions in Uganda.

Starting in 2012 and wrapping up in 2015, the project – led by Dr Arjan Verschoor and Dr Ben D’Exelle from University of East Anglia – investigated how smallholder farmers in Eastern Uganda perceived financial risks, and whether this influenced decisions to invest in productivity-boosting technologies such as fertiliser, seeds and irrigation. 


Raising agricultural productivity: the broader issue

Recent interest in African agricultural productivity has been stimulated by debates over the nature of renewed growth seen across much of Africa since the mid-1990s (Radelet 2010, IMF 2014). While in many countries the economy has grown, much of that has been driven by primary production — agriculture, mining, oil and gas — aided by commodity price increases from the mid-2000s onwards; rather than through growth in manufacturing and services. Moreover, productivity, whether it be of land, labour or all factors, in agriculture has grown slowly. Growth, it seems, has not been accompanied by economic transformation (ACET 2014).

If development and transformation are to take place, then agricultural productivity needs to increase, both to raise farm incomes as well as to allow labour and capital to be transferred to manufacturing and high value services.

While agricultural output has grown faster than population since the early 1990s, at just under an average of 1% a year across the continent, productivity gains have been modest at best. The value of crop output per unit area increased by just 45% over 19 years,  while the more critical labour productivity rose by only 25% (Figure A). Moreover, these limited gains come from a low base. By 2009/11 on average each person employed in agriculture generated less than US$1,000 of gross value a year, from which must be deducted costs of inputs and tools, so that farm work typically did not provide incomes sufficient to escape poverty. 

Figure A: Labour productivity of agriculture, Africa and regions, 1990/92 to 2009/11 Source: FAOStat

Figure A: Labour productivity of agriculture, Africa and regions, 1990/92 to 2009/11
Source: FAOStat

Obstacles to productivity

Several reasons for low agricultural productivity have been advanced, as summarised in DEGRP report Raising agricultural productivity in sub-Saharan Africa. The following arguments stand out:

First of all, farmers may not have access to technology suited to their particular farming systems, crops and livestock. The agricultural research that drove the green revolution seen in Asia from the late 1960s onwards focused initially on maize, rice and wheat often grown under irrigation, ignoring staples important in Africa such as cassava, yams, millet and sorghum, which are usually cultivated in rainfed fields.

Finger millet c. CIAT/flickr

Finger millet c. CIAT/flickr

Research on these crops and cultivation methods has subsequently produced suitable technologies. Yet these technologies are still not widely used despite widespread awareness of their existence. This is evident from the large gaps between the yields achieved in farm plots managed according to research recommendations and those operated by most smallholders (Nin-Pratt et al. 2011).

It may result, second, from economics of production, when the marginal returns to higher-yielding techniques do not cover the marginal costs. This can happen when seeds, fertiliser, irrigation etc. are costly, and output prices are low. Transport costs in rural Africa are notably higher than in other parts of the world (Gollin & Rogerson 2013; Livingston et al. 2014), and when costs of transport to and from market are high, farm gate input costs rise while output prices fall.

A third reason may be reluctance to invest in new technology when property rights are insecure. There is longstanding controversy in Africa surrounding collective tenure systems and the security they offer farmers with customary rights. Some studies report less investment and conservation of land under such tenure, but more provide contrary evidence that smallholders do feel sufficiently secure of their rights to invest. For example, Place and Otsuka, 2002 and Deininger & Ali 2008, both on tenure in Uganda, give contrasting results.

Fourth, farmers face failing markets for agricultural inputs and finance in rural areas, so they either cannot get the inputs they need and credit to cover their costs, or only at very high cost, well beyond the costs of supply. These failures stem in large part from high transaction costs because suppliers and bankers do not sufficiently know the needs, character and competence of potential client farmers, while the latter for their part know too little of what may be on offer (Poulton et al. 2006).

Fifth, farmers may be reluctant to invest in higher-yielding inputs since this entails risks: the subject of this research. Crops may fail owing to poor weather, pests, disease and damage by wild animals. When these failures occur spending on inputs and hired labour converts into losses. In addition, prices in markets may prove to be lower than expected.

Current responses to risk

Farmers respond to the risks they face in several ways (Fafchamps 2003):

  • They accumulate savings which may be in unproductive assets (such as jewellery or cash under the mattress) thereby reducing the capital they have to invest in farming.
  • They diversify their farming, growing some crops that are more resilient to bad weather, pests and diseases but which yield less than varieties bred primarily to optimise yields. Diversification may prevent them from specialising in high value crops.
  • They tend to invest less in inputs such as improved seed, fertiliser and hired labour. This effect may be minimal when farmers have the wealth to withstand such losses; but for farmers who live in or close to poverty, the deterrent may be significant.

Formal insurance might offset risks, but it is rarely available for agriculture: market failures are often too severe for formal insurance in rural Africa. Instead, farmers seek protection by forming strong networks of relatives and neighbours, or by allying themselves with richer patrons. These associations may help with idiosyncratic risks, but may break down when covariant hazards — such as drought — affect all within the network.


The research 

In the area of Eastern Uganda studied, the productivity of different crops varies considerably between good and bad years. As Figure B shows, though average net returns were higher for cash crops in good years, losses from these crops can be substantial in a bad year. In comparison, while low-yield crops such as maize and beans may result in consistently poorer returns, financial losses are also consistently lower.

Figure B: Expected returns to different crops in eastern Uganda, 2013, US$ an acre

Figure B: Expected returns to different crops in eastern Uganda, 2013, US$ an acre

Aims & methods

Verschoor and D’Exelle’s project explored the issue of low adoption of more productive agricultural technology in Uganda. The research aimed to address two questions:

  1. How do farmers assess the riskiness of investment prospects, and how does this influence their propensity to invest?
  2. Are farmers' investment decisions influenced by (anticipated) peer responses?

To this end, the team conducted experiments with 1,803 smallholders in 100 villages in eastern Uganda.

In a typical experiment, participants were asked to play a lottery game where ten coins were allocated between one safe option or multiple riskier options; where funds could either increase or be lost according to the luck of the draw — as indicated by selecting a coloured ball from a bag.

Starting choices were framed in different ways — most coins were already in either the safe or risky options, or not allocated. In some runs the participants knew what choices others had made. Later, the participants played in pairs either with people they knew or relative strangers from other villages.

Experiments were repeated to generate enough results to identify factors which might explain variations in choices, including the characteristics of the participants. They were complemented by a survey of participants’ livelihoods and social networks, plus interviews with key informants and others interested in agricultural development in the villages and district headquarters.


IMPLICATIONS

More broadly, this research is about risk and vulnerability in a rural society. Risks in farming are but one of a wider set of risks that people face, including some personal, idiosyncratic risks that can have very serious consequences, for instance disease, accidents, crime and addiction. These latter are hazards with considerable losses, and no potential benefits.

Risks in farming differ from these in that they may not be as catastrophic as some of the life risks; but above all, the risky investments have a potential upside that should apply more often than the relatively uncommon downsides.

Hence the policy question for agricultural development concerns how to protect those who are vulnerable against the occasional losses that occur as a result of increased risk-taking. That comes down to at least three things, as the research team discovered when discussing their findings with local and national stakeholders:

  • Make it possible for the risk-averse to make small investments and so limit their vulnerability to loss. One practical recommendation, aimed at agricultural input dealers, is to make and market fertiliser in smaller packs to appeal to more cautious individuals.
  • Shift the framing of decisions so that investing on the farm is seen as a venture more likely to end in profit rather than loss. Ensuring that people can see the results of investment and innovation, and encouraging farmers to mix with those who have invested and prospered are two practical proposals from the consultations.
  • Invest in insurance to limit occasional losses. This has sparked interest in the possibility of index insurance against bad weather, with the insurance bundled as part of the price of seeds, fertiliser and other inputs — a model already in use in Kenya and Rwanda by the One Acre Fund. When the weather is poor, farmers get the costs of their inputs refunded. 

 

 

 

 

FINDINGS

The key results can be summarised as eight findings:

  1. Low investment in the experiments is associated with low fertiliser use, but not with growing cash crops
  2. Farmers who grow cash crops, unlike semi-subsistence farmers, downplay a small probability of investment failure.
  3. A priming task designed to induce learned helplessness reduces persistence in an investment task by about 20%.
  4. People take more risks when risk-taking is naturally expected.
  5. The social mode has a very strong pull on risk-taking.
  6. People take fewer risks when losses are shared.
  7. People take more risk when profits are shared.
  8. Divergent risk attitudes are associated with interpersonal conflict.

It was no surprise that many participants were significantly risk averse, a finding that could help explain why most did not specialise in cash crops such as cabbages, coffee, onions and tomatoes that would, over the medium term, maximise their earnings from their farms.

Three findings, however, are particularly interesting:

  • Personal experience: Personal experience and knowledge of what others do modifies reactions to risk. Those who grow cash crops become less averse to risk, as do those who know others who take on risk.
  • Social contexts of risk: The experiments with participants in pairs showed that people take fewer risks when this may impose costs on others within a shared social network, and, conversely, take more risks when expected gains would be shared. This result may reflect the strength of peer pressure, or individuals being unwilling to burden others with their problems, or individuals fearing that being forced to ask for help would impose a reciprocal obligation on them in the future.
  • Risk in group decision-making: The third notable result is that differing degrees of risk aversion tend to put people in conflict with one another. For those interested in forming farmer associations, this is quite a finding. If collective decisions involve a risk, then it may be hard to reach agreement if there are variations in risk aversion among individuals in decision-making groups. 

Conclusions

What else has the research uncovered? The social dimensions are fascinating, particularly the reluctance to impose losses on others and willingness to share gains. That said, the interpretation of this can be debated, while the practical implications are not obvious. But at least it reminds policy-makers of just how strongly social bonds can affect productive decisions.

The implication of conflict when risk aversion differs matters for collective action. A framework for assessing the likelihood of effective collective action was proposed by Johnston & Clark (1982). It hypothesised that successful associations worked when they produced valued benefits that could not be produced by individual effort; and when these benefits exceeded the costs of collective action. Costs were seen as those of coordination: costs mounting when the collective pursued multiple objectives; when it included members from diverse backgrounds with varying motivations for membership; and when the relation of individual input to the collective and outcomes was hard to discern.

This study sheds more light on the diversity of membership, in that aversion to risk may be added to the list of characteristics that may divide members. 


References

African Center for Economic Transformation (2014) ‘Growth with depth. 2014 African Transformation Report’. Accra: ACET.

Deininger, K. and Ali, D.A. (2008) ‘Do Overlapping Land Rights Reduce Agricultural Investment? Evidence from Uganda’, American Journal of Agricultural Economics. 90 (4) 869–882.

Fafchamps, M. (2003) Rural poverty, risk and development. Cheltenham: Edward Elgar.

Gollin, D. and Rogerson, R. (2010) ‘Agriculture, Roads, and Economic Development in Uganda’. unpublished paper

International Monetary Fund (2014) ‘Regional Economic Outlook Sub-Saharan Africa. Fostering Durable and Inclusive Growth’. Washington DC: IMF

Clark, W. C., and Johnston, B. (1982) Redesigning rural development: A strategic perspective. Baltimore, Md.: Johns Hopkins University Press.

Livingston, G., Schonberger, S. and Delaney, S. (2014) ‘Right Place, Right Time: The State of Smallholders in Sub-Saharan Africa’. In Hazell, P. and Rahman, A. eds., New directions for smallholder agriculture. Oxford: Oxford University Press. pp. 36-68.

Nin-Pratt, A., Johnson, M., Magalhaes, E., You, L., Diao, X. and Chamberlin, J. (2011) ‘Yield Gaps and Potential Agricultural Growth in West and Central Africa’. Research Monograph. Washington DC: International Food Policy Research Institute

Place, F. and Otsuka, K. (2002) ‘Land tenure systems and their impacts on agricultural investments and productivity in Uganda’, Journal of Development Studies. 38 (6), 105–128

Poulton C., Kydd J., Dorward A., (2006) ‘Overcoming market constraints on pro-poor agricultural growth in sub-Saharan Africa’. Development Policy Review. 24, 243–277

Radelet, S. (2010) ‘Emerging Africa: How 17 Countries Are Leading the Way’. Washington DC: Center for Global Development

RELATED CONTENT

D’Exelle, B. and Verschoor, A. (2015) Risk-taking, risk-sharing and underinvestment in agriculture in eastern Uganda – Policy lessons’. DEGRP: London

Balungira, J., D’Exelle, B., Perez-Viana, B., and Verschoor, A. (2016) Co-producing policy recommendations: Lessons from DEGRP project “A behavioural economic analysis of agricultural investment decisions in Uganda”’. DEGRP: London

Clist, P., D’Exelle, B. and Verschoor, A. (2015) ‘Nature’s Frames, Reference Lotteries and Truly Risky Choice: Evidence from a Ugandan Field Lab’. Norwich, UK: University of East Anglia

D’Exelle, B. and Verschoor, A. (2015) ‘Investment Behaviour and Network Centrality: Evidence from Rural Uganda’.

D’Exelle, B. and Verschoor, A. (2015) ‘Investment Behaviour, Risk Sharing and Social Distance’. Economic Journal 125(584): 777–802.

Lahno, A.M., Serra-Garcia, M., D’Exelle, B. and Verschoor, A. (2015) ‘Conflicting Risk Attitudes’. Journal of Economic Behavior & Organization.118: 136-149.

Verschoor, A., D’Exelle, B. and Perez-Viana, B. (2015) ‘Lab and Life: Does Risky Choice Behaviour Observed in Experiments Reflect That in the Real World?’ 

Tanzania: Irrigation, formal institutions & water governance

CNFA- Rice Field

CNFA- Rice Field

In this 'Research in Context', DEGRP agriculture theme lead Steve Wiggins focuses on findings from a DEGRP project on irrigation management led by the University of Sussex. The findings, from Tanzania, are presented in their September 2014 working paper.

The project examines the rules and norms governing access to and control over water by smallholder farmers, considering how these are influenced by externally-induced innovations and the effects of climate change. 

Key questions include:
•What are the ‘local rules’ for governing access to water and what shapes these?
•What is the relationship between ‘local’ rules and ‘outside’ influences such as government, business and NGO initiatives?
•How are the politics of water control changing?


Findings

The full research findings appear in the working paper, but in a nutshell, the paper reports the following:

Two contrasting sites in central Tanzania have been compared:

  •  Choma lies in the Uluguru mountains just east of Morogoro where small-scale farmers water their plots of vegetables using hosepipes from the numerous nearby streams. Unregistered, the scheme operates according to local norms and face-to-face negotiations between resident community members.
  •  Dakawa lies on plains some 60 km north of Morogoro where a formal irrigation scheme started in 1981 pumping water from the Wami river on to 2,000 hectares (ha) cultivated by 1,000 farmers. Water flows through canals to 4.85 ha (12 acre) blocks by rotation, most of which are sub-divided into plots of 1.2 ha on average, although some larger-scale farmers occupy multiple blocks. Rice is the main crop.

Data were collected in 2013 from both qualitative investigation, such as semi-structured interviews with key informants and farmers, as well as surveys of 102 households in Choma and 115 households in Dakawa.

Key results reported:

  • Vegetable irrigation at Choma functions well. Farmers grow fruit and vegetables that command good prices in markets in Morogoro, Dar and other cities. Although the streams generally have enough water for the small plots cultivated, urban users in Morogoro compete for water that comes off the mountains. City authorities have tried to restrict water use in the mountains, but have been rebuffed by the farmers.
  • At Dakawa rice yields can be high, as much as 10 tonnes/ha, so agronomically the scheme is quite successful. Questions arise, however, about the financial sustainability of the scheme since the costs of pumping that are not covered by the charges levied on users by the scheme management. 
  • Dakawa has received aid from several donors as well as government support. At times the level of the river Wami falls so low that not all the scheme can be watered, a problem that is worsening owing to abstractions from the river upstream, mainly by large-scale farms. Disputes over land rights on the scheme have broken out between farmers and pastoralists.

Interpretation

Two related issues stand out from this comparison.

  • One concerns formality and local institutions. Irrigation at Choma functions with little or no external assistance, producing incomes for farmers, and supplies fresh fruit and vegetables to Morogoro and other cities. Yet despite this apparent success, some authorities look askance at the informality of the scheme and seek to restrict farmers’ access to water. At Dakawa, the scheme is engineered both physically and socially, with top-down management. Agronomically it usually works, but socially there are tensions among users and between them and their neighbours.
  • The other issue is water governance. In both cases, demand for water is rising, but the water basin authority lacks the power and capacity to allocate water either efficiently or fairly. At most, it issues permits and tries to monitor use, but it cannot resolve competition for water between the farmers and Choma and the urban users of Morogoro, or between the Dakawa scheme and upstream irrigators. 

Gates Foundation

Gates Foundation

Wider relevance

These insights reflect Tanzania’s challenges with irrigation. The country is rich in both land and water, yet very little of the cropped area is irrigated. In late 2005, the President proposed a target of another one million hectares to be irrigated within five years. Some donors have supported this, with the World Bank providing US$ 65M for irrigation.

Irrigation has been expanded, with the area covered rising from an estimated 264,000 ha in 2006 to 332,000 ha in 2010, but the increase of 68,000 ha is a small fraction of the target set. Funding may not have been adequate to achieve that target, but an assessment by Ole Therkildsen signals two equally or more important shortcomings that are inter-related and borne out by the results of this study.

One is the limited technical capacity of government to implement schemes, or to support private and collective initiatives. The other reason may be more important, however: the politics of irrigation. Therkildsen argues that political goals matter more than economic ones to elites. For irrigation, then, it was enough to be seen to be doing something (mainly with formal schemes), rather than following through to deliver results.

Tanzania decentralises responsibility for ministry of agriculture activities to district level. When the funds for irrigation development were sent to this level, funds were spread over many sites to maximise the number of those benefiting, but with little consideration of priority and irrigation potential. Funds were used for physical investment: often for the rehabilitation of existing (presumably formal) schemes that — tellingly — were not operating well or even at all. Crucially, attention to how the schemes would be operated and maintained was limited, as were considerations of rights to land and water.

In part that probably reflects the difficulties of the latter compared to comparatively straightforward engineering, but also may reflect professional orientations towards technical rather than social questions, with concomitant discounting of farmer views. From interviews of technical staff, Therkildsen reports that:

How to change the ‘mind-set’ of smallholders to make them accept extension advice was regarded as the key challenge facing local bureaucrats, according to interviews with them.

At a higher level, these orientations correspond to the commitment of the ruling party to modernisation of agriculture, to be achieved by quite dramatic step changes, rather than marginal increments. This is a longstanding motif of Tanzanian development that can be traced back to colonial times, and later seen in the emphases on state control of the economy and the idealistic but flawed experience of village development (ujamaa vijijini) in the two decades following independence (Hyden 1980).

It is not surprising, then, that the informal irrigation at Choma with its rudimentary rubber hoses not only receives little encouragement, but on the contrary is treated with suspicion by authority. Dakawa, on the other hand, with its electrical pumping station and its orderly canals has received lavish attention from government and a succession of donors.

The danger is that as competition for water increases in Tanzania, informal uses will be suppressed, no matter what their economic efficiency and social benefits, in favour of formal schemes that will automatically be assumed superior.


References

Hydén, Göran. (1980) Beyond Ujamaa in Tanzania: underdevelopment and an uncaptured peasantry. Univ. of California Press

Therkildsen, Ole. (2011) Policy making and implementation in agriculture: Tanzania’s push for irrigated rice. DIIS Working Paper 2011:26, Copenhagen: Danish Institute for International Studies