Disease losses to agriculture: The impact of malaria in north-east Nigeria

This brief summarises and sets in context findings from DEGRP-funded research project Malaria, productivity and access to treatment.

Led by Andrew Dillon at Michigan State University, the research looks at the impact of poor health on labour productivity in Nigeria’s agriculture sector.

Malaria medication. Nigeria. Photo: Arne Hoel / World Bank

Malaria medication. Nigeria. Photo: Arne Hoel / World Bank


Health and productivity in the agriculture sector

Labour productivity in agriculture is usually lower than that in other sectors, especially in developing countries. The differences in productivity can appear very large indeed: for example, for 113 developing countries since the mid-1980s, the mean difference between productivity in agriculture and that in other sectors was about four times — that is, workers in agriculture were producing just one quarter as much as those in other sectors (Gollin et al. 2014).

Questions have been raised over how well agricultural labour productivity is measured compared to that in other sectors. The size of the productivity differences between sectors falls if human capital, in the form of education, is taken into account (Gollin et al. 2014). Perhaps more important is the number of hours worked: owing to the seasonality of agriculture, farm labourers cannot work as long as those in other sectors.

McCullough (2015) computes agricultural labour productivity per hour in four African countries to find that when the shorter time spent farming is taken into account, productivity differences per hour worked disappear. In part, she attributes the short hours to the lack of work on offer in agriculture, which may understate the importance of seasonality.

Another factor, however, also affects labour productivity: ill health. This is not all that surprising: the same humidity that makes many rural locations particularly apt for farming also makes them unusually unhealthy, as humidity can allow vectors of disease to multiply. Malaria spread by mosquitoes is a prime example, but it is not the only one: sleeping sickness and river blindness are also common in humid areas. Moreover, rural areas often lack medical services, so diseases are not treated in the way they might be in urban areas.

Despite this, the effects of ill health on agriculture are rarely considered, and studies of the impacts of ill health on farming are uncommon, with a few notable exceptions.

When the prevalence of HIV/AIDS rose alarmingly in the early 2000s in parts of eastern and southern Africa, among the many studies of the disease were those that tried to assess the economic losses, including those arising in agriculture. Such studies often reported heavy costs. For example, when adults in prime age in Kenya died, the gross value of crops produced by the farm household typically fell by 57% (Yamano & Jayne, 2002). A similar loss was estimated by the Government of Swaziland, which reported a 54% fall in agricultural production in households where one or more adults have died by AIDS or other causes (Thurow, 2003).

These suggest that the economic costs of poor health in rural areas are significant, over and above the personal suffering of illness and the additional burdens on carers in the form of (almost always unpaid) care. All of this raises the question of whether more investment in health care might pay off directly in higher agricultural productivity and production.

This is not only a public concern; but it is also a private concern for employers of farm labour on a significant scale. Employers are encouraged to provide decent living conditions for their staff, but reports of estate labour living in poor housing with unhealthy water and unsafe sanitation can be found (Smalley, 2013). Would it then be in the employer’s own interest to improve the health environment, and provide treatment for common ailments?


The DEGRP research

Irrigated fields in Nigeria, an ideal breeding ground for mosquitos. Photo: Arne Hoel / World Bank

Irrigated fields in Nigeria, an ideal breeding ground for mosquitos. Photo: Arne Hoel / World Bank

The studies reported here set out to investigate the links between disease, work effort, output and earnings in agriculture. The team was made up of researchers from the universities of East Anglia, Michigan State, and Modibbo Adama University of Technology in Adamawa State, Nigeria.

The setting was a large, 5,700 hectare irrigated sugar estate in north-eastern Nigeria. The sugar cane is harvested by hand, cut by gangs of labourers during a season that runs from November to mid-April. Some 680 labourers are engaged, all of them men and most of them young, with an average age of 30 years. They are transported to the estate from surrounding villages every day, then taken home at the end of the day.

The labourers can opt for one of two tasks when they arrive in the morning. They can either cut cane, being paid a piece rate for the number of cane rods of a standard two-metre length they cut. Or they can opt to ‘scrabble’ - collect the cut cane rods, and bundle them ready to be transported to the mill. This work is paid by a day rate.

Cane cutting is hard work, but cutters can make the equivalent of US$7 a day. In an area where almost three-quarters of the local population live in deep poverty, living on less than US$2 a day per person, the chance to earn US$7 a day is attractive. Scrabbling requires less effort, but the day rate is roughly half what the cane cutters can make. Not surprisingly, then, most of the men bussed in to the estate opt for cutting, but have the scrabbling option if they lack energy.

This part of Nigeria has endemic malaria: the local population suffer frequently from the disease. Malaria manifests itself as fever, headaches, nausea and general malaise. Attacks generally last 14 days, including four to six days when the symptoms effectively leave the sufferer completely incapacitated. Hence the labourers on the estate lose possible work time to malaria, or in the lesser stages of the disease either have to opt for scrabbling or, if cutting cane, are less active, cut less cane and earn less.

To confirm the expected relation between malaria and worker productivity, and to measure the degree of the disease’s impact, the research team offered some of the workers a malaria test, based on a blood smear that was then put under a microscope in a laboratory to count the number of parasites seen in the blood. Beyond a threshold number of parasites, the workers were considered to be suffering from the disease. They were then offered Artemisinin Combined Therapy (ACT) to cure their malaria. ACT also usually protects the patient, for a time, from a recurrence. Those workers who were not found to have malaria were told that they were not suffering from it.

The selection of workers to be tested and treated was randomised with all workers eventually tested. Their disease status could then be compared to estate records of the workers that showed the days worked, the length of cane cut, and their earnings.

The study was carried out in such a way that it was possible to isolate the malaria diagnosis and treatment from other factors, and then compare this relatively precisely to the effects in work chosen, hours worked, cane cut, and earnings. For example, selection of workers was randomised through time. When a worker was diagnosed as having malaria, it could reasonably be inferred that they had had the disease in the days preceding the test.

This allowed the observation of the behaviour of workers suffering from the disease, who could then be matched against other workers who had tested negative for malaria and who could thus be considered to be free from the disease in the period immediately before and after the test.

In addition, the study team asked some of the workers if they would wear an accelerometer: the same sort of simple, relatively unobtrusive devices that have become popular for measuring fitness effort in high-income countries. This allowed the study team to measure the levels of activity of the workers who were wearing the devices.


What does this teach us?

This research confirms, with considerable rigour and precision, that disease has significant economic costs — and that for malaria, these are higher than the cost of treatment. From society’s point of view, health spending to diagnose and cure malaria is justified.

Since most of the benefits of treating malaria accrue to the sufferer, diagnosis and treatment may be seen as a private good, one where those affected should logically be prepared to seek out and pay for diagnosis and treatment. But that would over-simplify. Labourers with malaria may not realise just how much the disease costs them. Being tested may be seen as an unnecessary expense, especially by those who are told that they do not have the disease.

Moreover, some of the benefits of a cure accrue to others: employers who get more active labour, domestic carers who spend less time taking care of the sick.

Such considerations suggest that services should be free, or subsidised. They may be offered by public clinics, the calculus being that overall benefits of treatment to the economy will generate tax receipts that will cover the costs of free or subsidised public services. Employers, however, might also consider offering the services, perhaps making deductions from the overall wage bill to cover the cost — workers might see a small cut in the piece rate, but their better health would see their earnings rise.

 

 

 

 

FINDINGS

Just over one third of the workers tested were found to be suffering from malaria. After treatment, they worked more days than those who were not treated, and showed a small gain in productivity when at work. The accumulated additional earnings over three weeks was worth US$9. This exceeded the cost of the ACT treatment at US$5–7.

This probably understates the full value of diagnosis and treatment. The benefits of treatment may well extend past three weeks. Wages gained understate the full value of extra work, since the estate does not pay out the entire value of cane cutting in wages. No monetary value, moreover, is assigned to the clear and simple benefit to the workers of feeling better. Finally, some benefits may well accrue to the rest of the household from having a member who is not sick: it saves on time spent caring — usually by women who often have heavy work-loads in any case.

What about the workers who tested negative for malaria? Interestingly, they also produced more once they knew their status. They did not necessarily work more days, but when they were at work they cut more cane and earned more as well.  Since in their case no treatment was given, their health was unchanged. It is then curious that they apparently worked harder.

The explanation may lie in the value of accurate information. Workers who may have been feeling under the weather for all manner of reasons, might well have inferred they had malaria, and hence believed they could not fully work. Given the diffuse symptoms of malaria, several other conditions could resemble the disease. Once they learned they did not have malaria, they presumably felt then that they could work harder.

The data from the accelerometers proved to correlate with work performance. Those whose devices showed higher levels of activity were those who cut more cane and earned more.


key project outputs

Dillon, A., Friedman, J., & Serneels, P. (2014) ‘Health Information, Treatment, and Worker Productivity. Experimental Evidence from Malaria Testing and Treatment among Nigerian Sugarcane Cutters’, Policy Research Working Paper 7120. Washington DC: World Bank.

Akogun, O., Dillon, A., Friedman, J., Prasann, A. Serneels, P. (2017) ‘Productivity and health: alternative productivity estimates using physical activity’, Policy Research Working Paper 8228. Washington DC: World Bank.

 

 

 

 

REFERENCES

Gollin, D., Lagakos, D., & Waugh, M.E. (2014) ‘The agricultural productivity gap’, The Quarterly Journal of Economics, 129 (2): 939-993.

McCullough, E. (2015) ‘Labor Productivity and Employment Gaps in Sub-Saharan Africa’, Policy Research Working Paper 7234, Washington DC: World Bank.

Thurow, R. (2003) ‘AIDS fuels famine in Africa as Swaziland farmers die, their land goes unplanted’, Wall Street Journal, 9 July 2003.

Yamano, T. & Jayne, T.S. (2002) ‘Measuring the impacts of prime-age adult death on rural households in Kenya’, Staff Paper 2002–26, Department of Agricultural Economics, Michigan State University.

Smalley, R. (2013) ‘Plantations, Contract Farming and Commercial Farming Areas in Africa: A Comparative Review’, Working Paper 055, Brighton, UK: Future Agricultures Consortium.


    Financial volatility, macroprudential regulation, and economic growth in low-income countries

    This brief summarises and sets in context findings from DEGRP-funded research project ‘Financial volatility, macroprudential regulation and economic growth in low income countries’, led by Professor Pierre-Richard Agénor of University of Manchester with researchers from Manchester, Fondation pour les Études et Récherches sur le Développement International, Université d'Auvergne, International Monetary Fund, and the African Development Bank. 

    Addis Ababa c. DFID/Flickr

    Addis Ababa c. DFID/Flickr


    Volatility and growth

    The global financial crisis of 2007-2009 has led to renewed interest in managing economic shocks and their impact on growth and development. Whilst the crisis emerged in developed countries and affected these countries most, developing countries were also affected. And given the systemic nature of financial shocks in developed countries, there is no reason to think that developing countries will be immune to them in the future. It is therefore important to think about how financial crises can be managed (Griffith-Jones and Gottschalk, 2016).

    Managing shocks is a delicate balance. On the one hand, less volatility raises the investment rate, but on the other hand, reducing risk-taking to promote stability will also remove incentives for private actors to invest in future projects with high returns. The choice between highly volatile but high mean growth and low volatile and low mean growth can be a difficult one, even when we know how to regulate financial crises.

    Economic volatility more generally is a key issue in development. Low-income countries (LICs), defined as such on the basis of their 2008 GNI per capita, increased their per capita GDP by only 0.2% annually between 1960 and 2007, but they could have increased it by 2.0% if they had eliminated years with negative growth rates (Winters et al., 2010).

    These countries remain poor partly because they are plagued by volatile growth, with frequent periods of deeply negative growth, or downturns, that more than cancel out prior periods of positive growth. They are also often poorly equipped to deal with, and recover from a range of adverse shocks, from global economic shocks, to severe commodity price volatility, domestic financial shocks, to famine and other devastating natural disasters. These shocks can have long term impacts on growth by deferring investment in human or physical capital.

    The development community has also long debated the effects of aid on growth, and the conditions under which aid’s growth effects can be enhanced. Whilst there are many facilities at the IMF, World Bank and EU aimed at reducing volatility (te Velde et al., 2011), questions remain around aid’s efficacy in reducing economic volatility. It has also been asked whether the volatility in aid itself contributes to economic volatility in LICs, rather than mitigating it (Agénor and Aizenman, 2010). 


    The DEGRP research

    Aims

    The DEGRP project’s aims were threefold.

    First, it aimed to shed light on the links between financial volatility (e.g. through international capital flows including foreign aid) and economic growth, and how macroprudential regulatory rules (including those embedded in the Basel III banking agreement) affect this link.

    Second, it aimed to provide new evidence on the determinants of financial volatility and the impact of financial volatility on economic growth, specifically in relation to low-income countries in sub-Saharan Africa.

    Finally, it aimed to develop case studies for Francophone sub-Saharan African countries focusing on the links between financial volatility, macroprudential regulation, and growth.

    Key terms

    Financial volatility refers to the degree of variation in the level of financial flows (including e.g. domestic credit and international financial flows) from their average (trend) levels.

    Macro-prudential regulation refers to regulation aimed at reducing or mitigating systemic financial risks through instruments such as bank capital requirements or reserve requirements.

    Credit information sharing refers to the process where credit providers (including bank and non-bank financial institutions) exchange information on their outstanding lending portfolios.

    Methods

    The project used a range of methods in pursuit of these aims. These include a number of theoretical contributions analysing the impact of macro-prudential regulation. For example, one paper explores one channel through which aid volatility may adversely affect growth (and possibly welfare) in a model where the decision to invest in skills is endogenous.

    The project also used a number of statistical methods, based on panel data analyses, and dynamic Generalised Methods of Moment system estimators (which address potential endogeneity of the explanatory variables) to obtain policy-relevant insights. One paper used panel data from 142 countries for five year averages over 1973-2012 to estimate economic volatility through aid and a range of other factors. Another empirical paper uses a probit estimation of financial vulnerability in a sample of 159 countries over 2008-2014, yielding a maximum of around 1000 observations.

    The team also developed an econometric methodology for analysing the impact of macroprudential policies on growth, using dynamic panel data techniques and accounting for threshold effects and interactions among variables. 

    In addition, the project included qualitative case studies on the implementation of macroprudential regulation in Francophone West African countries.   


    FINDINGS

    The project has conceptual and empirical findings which can be categorised into the following broad areas.

    Aid volatility, economic volatility, and growth

    The project also has new findings around aid and economic volatility. In a conceptual paper Agénor (2016b) examines the incentives to invest in skills. Aid has become more volatile at country level and such volatility can have harmful impacts on growth if increased volatility leads households to choose not to invest in human capital, because of low expected returns from education.

    An empirical paper by Chauvet et al. (2016) uses a data set of 142 countries over 1973-2012. They find that whilst output volatility has an adverse effect on income distribution, inequality and poverty, aid in time of heightened volatility, tends to dampen this adverse effect of output volatility. Thus aid, through the pro-poor impact of expenditure and stabilising purposes, is found to reduce income inequality by smoothing the adverse impact of output volatility. This has implications for the optimal allocation of aid.

    Capital flows and exchange rate management

    A number of important empirical findings relate to the impact of international capital flows and associated macroeconomic policies. The empirical paper by Combes et al. (2016) examines a large sample of 77 low- and middle-income economies over the period 1980-2012 and finds that capital inflows have a direct and positive impact on growth, but they indirectly lower growth prospects by appreciating the real effective exchange rate (REER) and weakening the recipient country’s competitiveness. Low-income economies need to understand that capital inflows, while critical to finance development needs and to spurring economic growth, can also lead to significant REER appreciation and loss of competitiveness, thereby complicating macroeconomic management.

    The paper also compares how different types of capital flows relate to the REER, arguing that the impact of remittances on the REER is twice as big as aid, and ten times as big as the impact of FDI. Finally, the project estimates that a doubling in new capital inflows raises growth by 2 percentage points, but if there had been no negative effects on the REER, they could raise growth 3.5 percentage points. These findings have implications for how countries need to balance the need for capital inflows with management of the REER.

    The finance-growth link, macroprudential regulation and banking fragility

    On macroprudential regulation, the project develops a model to think about choosing the required reserve ratio that maximises growth and welfare (Agénor, 2016a).  It helps us to think about the trade-offs between short-run and long-run effects of stabilisation policies through a formal framework, arguing there is a potential trade-off between the stability and growth effects of reserve requirements which can be addressed through the optimal setting of reserve requirements.

    Analysis of cross-country data over 1973-2013 for more than 80 countries showed that macro-prudential regulation promotes growth by mitigating adverse effects of capital flows volatility on growth (Neanidis, 2015). This effect relates specifically to middle-income countries and to sub-Saharan Africa. On the other hand, macroprudential regulation is less effective in countries more open to trade and with deeper financial systems.

    In addition to macroprudential regulation, credit information sharing (CIS) may also help to stabilise economies by reducing the likelihood of banking fragility. In conceptual terms, CIS could (i) reduce moral hazard by borrowers and improve the incentives to repay; (ii) reduce adverse selection around credit applications; and (iii) reduce over-borrowing.

    An empirical paper (Guérineau and Léon, 2016) based on 159 countries and some 1000 observations suggests that CIS reduces financial fragility by a reduction in non-performing loans, reduces the detrimental effects of credit booms, and leads to fewer credit booms in the first place, although this latter effect is not present in the sub-sample of developing countries.

    Guérineau et al.’s ( 2016) review of existing macroprudential regimes in Western African Economic and Monetary Union (WAEMU) countries helped to highlight the current limitations of the prudential framework in low income countries: (i) low financial development; (ii) the lack of consistency in the overall financial stability framework, i.e. between the macroprudential scheme and others tools of financial stability, micro-prudential framework, information sharing system, crisis resolution schemes, but also monetary policy, and (iii) the potential undesired effects of countercyclical tools, for instance through a signalling effect. All these issues need further attention when designing appropriate macro-prudential regulation.


    Implications

    5094762958_ec8d87258f_o.jpg

    The project findings have major implications and relevance for the debate on the link between finance and growth, the management of capital flows, and the link between aid and volatility.

    The project contributes to other DEGRP findings (e.g. the work led by Griffith Jones) and related policy debates around the finance and growth link. There was a prevailing view prior to the financial crisis that more credit (financial development) is always good for growth. This view has been refined significantly in recent years, including by previous DEGRP research.

    This project contributes to this, by arguing: (i) that macro-prudential regulation is essential in striking the right balance between financial stability and increasing credit; (ii) the setting of macroprudential instruments should go beyond short-run financial stability considerations and internalise potential trade-offs between financial stability and growth; and (iii) that credit information sharing schemes should be developed further even though they on their own are not sufficient in reducing harmful credit booms and busts in the poorest countries. Every central bank should consider next steps on these policy lessons.

    The potential for international capital flows to contribute to growth and development is not in doubt. The financial landscape faced by the poorest countries is also changing rapidly as even low-income countries access the market for international sovereign bonds or, as is the case with sub-Saharan Africa, receive finance from China. However, capital inflows are not without challenges for recipient countries and more thought needs to go into how capital flows are attracted and managed.

    More specifically, capital inflows which may contribute to growth initially often lead to a significant appreciation in the real effective exchange rate which in turn hampers competitiveness and reduces the growth impact of inflows. Different flows tend to have different impacts on the REER. However, the fundamental question is what can be done to ensure that capital inflows are used productively and raise efficiency. This is very important as the impact of capital flows on growth can be doubled only if the REER remains constant. This raises significant challenges for the quality of governance.

    As for the aid question, aid can itself be volatile, which can have major effects on economic volatility in countries dependent on aid (especially project aid). Given this risk, aid should ideally become more predictable. However, the current circumstances are unlikely to be conducive to this, as aid disbursements are determined by uncertain political factors in donor countries (e.g. around sectoral or geographical allocations) and in recipient countries (ability to absorb capital, especially in the most fragile contexts). In addition, much of the recent debate on aid effectiveness emphasises adaptive aid and the importance of flexibility to local needs, circumstances and achievements, as opposed to predictable aid based on inflexible log frames (Booth, 2016).

    That said, the finding that aid dampens the impact of economic volatility on poverty reduction suggests that aid can play a very useful role in countries vulnerable to shocks, contributing to growth and resilience building. Future research (both analytical and empirical) on this issue would be beneficial, to clarify exact pathways and mechanisms through which this could happen, or already does.


    REFERENCES

    Guérineau, S., Goujon, M., and Relwende, S. (2016) ‘Macroprudential Policies in WAEMU Countries’. Unpublished study. France: CERDI - Université d'Auvergne.

    Guérineau, S., and Léon, F. (2016) ‘Information Sharing, Credit Booms, and Financial Stability’. Unpublished study. France: CERDI - Université d'Auvergne.

    Neanidis, K. C. (2015) ‘Volatile Capital Flows and Economic Growth: The Role of Macro-Prudential Regulation’, Centre for Growth and Business Cycle Research Working Paper 215. Manchester: University of Manchester.  

    te Velde, D.W., Griffith-Jones, S., Kingombe, C., Kennan, J. and Tyson, J. (2011) Study on Shock-absorbing Schemes in ACP Countries – FLEX Study. Study for the European Commission. London: Overseas Development Institute.

    Winters, L.A., Lim, W., Hanmer, L., and Augustin, S. (2010) ‘Economic Growth in Low Income Countries: How the G20 Can Help to Raise and Sustain It’, Economics Department Working Paper 08-2010. Sussex: University of Sussex.

    Griffith-Jones, S. and Gottschalk, R. (eds) (2016) Achieving Financial Stability and Growth in Africa. Abingdon: Routledge.

      Agénor, P-R., (2016a) ‘Growth and Welfare Effects of Macroprudential Regulation’. Centre for Growth and Business Cycle Research Working Paper 218. Manchester: University of Manchester.

      --- (2016b) ‘Aid Volatility, Human Capital, and Growth’. Centre for Growth and Business Cycle Research Working Paper 219. Manchester: University of Manchester.

      Agénor, P-R., and Aizenman, J. (2010) ‘Aid Volatility and Poverty Traps’, Journal of Development Economics 91: 1-7.

      Booth, D. (2016) Politically smart support to economic development: DFID Experiences. London: Overseas Development Institute.

      Chauvet, L., Ferry, M., Guillaumont, P., Guillaumont Jeanneney, S., Tapsoba, S. J-A., and Wagner, L. (2016) ‘Economic Volatility and Inequality: Do Aid and Remittances Matter?’ FERDI Working Paper Number 158. France: Fondation pour les Études et Récherches sur le Développement International.

      Combes, J-L., Kinda, T., Ouedraogo, R., and Plane, P. (2017) ‘Does It Pour when it Rains? Capital Flows and Economic Growth in Developing Countries’, FERDI Working Paper Number 157. France: Fondation pour les Études et Récherches sur le Développement International.

      Related content

      The project produced a range of papers, reports, and policy briefs, all of which are available on the project website and summarised in a final report and two briefings. Key outputs include:

      • Agénor, P-R. (2016a)
      • Chauvet et al. (2016)
      • Combes et al. (2016)
      • Neanidis (2015)

      Chinese investment and knowledge transfer in Africa

      This brief summarises and sets in context emerging findings from DEGRP project ‘Chinese FDI and structural transformation in Africa’.

      Led by Deborah Brautigam, Director of Johns Hopkins’ China-Africa Research Initiative, the project is studying the potential for Chinese investment to enhance structural transformation in Africa, with a focus on knowledge transfer between Chinese and African firms. So far studies have been completed on Madagascar, Kenya, Zambia, and Malawi.   

      Manufacturing in Kenya c. Lydur Skulason/Flickr

      Manufacturing in Kenya c. Lydur Skulason/Flickr


      Foreign investment and knowledge transfer

      Foreign investment can be an important catalyst for economic growth in developing countries. Under certain conditions, these investments can create employment and help increase production in the host country (Moran, 2006). 

      One of the most important ways in which foreign investment benefits host countries is the diffusion of productivity-enhancing knowledge into the domestic market. Knowledge can be transferred – both intentionally and unintentionally – from foreign to domestic firms in the form of skills, technology, and ‘tacit knowledge’ related to production, including management and organisational practices. 

      Training of the domestic workforce, either formally or informally, is a common channel for knowledge transfer. Labour circulation between firms then allows technical and managerial skills to move from one firm to another. Knowledge and ideas can also spill over to local firms through imitation of foreign firms, acquisition of new machinery, and subcontracting. Backward linkages (using inputs produced in the host country) and forward linkages (producing input for use in the host country’s production processes) are also vehicles for knowledge transfers. 

      However, knowledge transfer is not a given. If foreign firms have limited contact or connection with the local environment (for instance, if they use only imported inputs and hire only foreign workers), their impact on host countries will likely be limited.
      China partly owes its recent success to the degree to which it has managed to obtain these skills and technology transfers from inward foreign investment (Tseng & Zebregs, 2002; Yao, 2006).  As an outward investor, is China fostering similar skills transfers and technological upgrading in the countries in which it is investing?


      The DEGRP research

      Aims

      Since September 2015, DEGRP-funded researchers from Johns Hopkins’ China Africa Research Initiative (CARI), have been collecting data on and comparing the experiences of selected African countries hosting Chinese firms, to assess the extent of knowledge diffusion between the firms and the host countries. 

      So far, three case studies have been completed on four countries: Madagascar, Kenya, and Zambia and Malawi. The studies on Madagascar and Kenya focused on a sample of agriculture and manufacturing firms, whereas the combined study on Zambia and Malawi focused on the cotton sector, comparing the business model of a Chinese-owned cotton firm with that of an American counterpart.

      Sourcing accurate data on Chinese investments in Africa

      For the Madagascar and Kenya case studies, researchers compared firms’ lists provided by both Chinese and host countries’ authorities. Interestingly, in both cases the lists did not match. 

      There are several possible explanations for these differences. The Chinese Ministry of Commerce (MOFCOM) list generally only includes companies who engage with or seek support from MOFCOM. Therefore, Chinese firms operating at a smaller scale or at the informal level might not be included. In addition, the MOFCOM lists might include investments approved by the Chinese government but not materialised in country. 
      Investment data provided by host countries also present problems. Lists often include closed or non-operational investments, as well as approved or pledged (but not realised) investment. Sometimes they also list investment incorrectly in terms of origin, and might not include all investment occurring in the country. 

      This lack of accurate data can create confusion about the magnitude of Chinese investment in Africa, which is important to dispel. Often the confusion surrounds not only investment data but also data on China-Africa aid, loans, trade, migration, contracts, and land acquisition. The China-Africa Research Initiative is working to collect and compile more accurate and accessible data for these areas. For more information see sais-cari.org/data/.

      Methods

      The project is using a mixed-method approach comprising both quantitative and qualitative data collection and analysis. The three case studies conducted so far are based on semi-structured qualitative interviews with Chinese managers and workers, government officials, and representatives of the Chinese business community, with the goal of identifying examples and modalities of knowledge and technology transfers from Chinese to African firms. 

      In Madagascar and Kenya, the researchers identified Chinese firms to be interviewed through a two-stage process. During the first stage, they collected a list of Chinese firms operating in these countries from the Chinese Ministry of Commerce (MOFCOM) and compared these with lists obtained from the countries of research. The researchers then drew data from these lists, but also used snowball sampling to identify additional firms and stakeholders to interview. 

      The third study, a combined investigation into the cotton sector in Zambia and Malawi, differed from the first two, in that the team identified in advance a Chinese company, the China-Africa Cotton Company (CAC), and an American counterpart, Cargill, both operating in Zambia and Malawi, to assess their business model and their knowledge transfer effects. For this study, semi-structured interviews were carried out with government officials, company managers, cotton associations, extension workers, research institutions and other donor agencies. In addition to this a survey was carried out among contracted cotton farmers, and data on input distribution and cotton production was collected from the firms.


      FINDINGS

      The case studies conducted so far have yielded evidence of knowledge transfer and spill-over in three areas: training, machinery and equipment, and backward and forward linkages.

      In Kenya, some workers have gained skills at the technical and managerial level via on-the-job training, and managed to leverage those skills to start their own business. A firm noted that some of its former workers started working independently, either with their old firms, as contractors for smaller projects or as distributors, bringing in local clients. 

      The Zambia and Malawi study revealed a similar pattern. As well as its cotton production, CAC also has a small factory in Zambia with around 100 workers working on cotton ginning, oil extraction and other activities. Local workers trained on the job have been running the factory since around 2014, with only a few Chinese staff remaining for supervision purposes.

      Inputs, machinery and equipment

      Technology transfer is another important aspect of knowledge diffusion from foreign firms to host countries, either in the form of machinery, equipment, production processes, or organisational processes and models (Sönmez, 2013). Examples of this type of transfer by Chinese firms are found in all three case studies. 

      In Zambia, CAC has contributed to technology improvements and upgrading. For example, the company introduced improved seed varieties, cost-efficient chemical products and digital scales that can increase productivity in cotton production. 

      In Madagascar, the researchers found one Chinese firm selling agricultural machinery primarily to domestic buyers.  Chinese firms also brought new biotechnology to Madagascar, including the high-yield rice mentioned earlier, as well as cotton. However, the cost and lack of effective distribution channels have prevented local firms from taking full advantage of these new technologies. 
      Technology transfer is not only about transferring pre-existing foreign technologies, however. In some cases, foreign firms also introduce innovation developed in and for the local market. It has already been shown how CAC adapted Cargill’s outgrower model for its cotton production in Zambia. In Kenya, Yishan Agriculture employs Chinese agro-technicians to develop new technologies that are more suitable to the local environment, then train farmers in these technologies and supervise them in their adoption.

      Linkages and clustering

      Linkages between Chinese and domestic firms can also result in skills and technology transfer. Working to provide input for, or to use input provided by Chinese firms, African firms can learn new production and management skills, and increase their productivity. Moran (2006) argues that foreign firms show a strong motivation to develop supplier networks close to their plants in the host countries, and describes how this process encourages local firms to increasingly upgrade their production to supply foreign firms located in their country. These effects are further amplified if foreign firms cluster around certain geographic areas (Thompson, 2002).

      So far, the experience of the three case studies has shown limited examples of the formation of backward and forward linkages. For instance, in Kenya, the team found that most Chinese firms operating in Kenya source their inputs from Chinese or East Asian firms, either based in Asia or in East Africa. Similarly, in Madagascar, there are a small number of Chinese-owned export-oriented firms importing raw materials and exporting finished products. Apart from the employment they generate, these firms have a limited impact on the domestic economy, both in terms of income generation and knowledge transfers.  

      In Madagascar, the strongest linkages have formed in the agriculture and agribusiness sector, where Chinese firms source material from domestic producers. For example, Tianli Agri sources Malagasy cotton for processing in its spinning plants in Mauritius. Another successful example is the agricultural machinery company supplying domestic and foreign firms, mentioned above.

      Evidence of clustering of firms encouraged by Chinese investment is also limited. In Madagascar, clustering of Chinese firms is taking place in certain sectors (cotton and textiles, rice, aquaculture, and window production) but the domestic political situation continues to pose a challenge for the growth of Chinese firms. There are plans to establish industrial zones, especially for the production of construction material, but these have stalled due to bureaucratic and political challenges. 

      Training

      Training is one of the most common and immediate ways to achieve knowledge transfer. In all the countries analysed, firms provide training to their local workers, either through formal programmes or on-the-job training and mentoring.

      Training centres and formal programmes

      In Madagascar, research revealed that Hunan Agri (an agricultural firm, and one of the largest Chinese investors in the country) had set up an agro-technology demonstration centre outside Antananarivo to teach local farmers how to produce a new variety of hybrid rice. Started as a Chinese development cooperation project in 2007, the centre is still active in providing training and demonstration programmes, and in producing training material in the Malagasy language. Another Chinese company, Tianli Agri, has set up 15 training centres run by Chinese technicians to teach cotton planting and farming techniques to locals. 

      The team also found that other training activities are provided through aid programmes, both Chinese and non-Chinese. In Malawi, the China-Africa Cotton Company (CAC) manages an agricultural technology demonstration centre tasked with showing local farmers how to improve the productivity of their crops, for example through improved field management. Originally set up as a Chinese aid programme, the centre has now been transferred to the Malawian government, but it is still run by Chinese staff. 

      The Zambian arm of CAC also provides some training to its workers and suppliers. CAC cotton buyers, for example, receive a one to two days’ training from Zambian managers twice a year. The buyers in turn provide some training to their farmers, and also provide ad hoc advice when they visit them. In contrast to training in the other countries studied, this training is not based on Chinese knowledge, because the contract farming model is not used in China’s cotton sector, although it is used for other crops. The Chinese executives leave it to the Zambian managers to develop the trainings themselves, based on other courses they have attended or resources they find online. 

      Compared with that of its American counterpart Cargill, however, CAC Zambia’s training is quite limited in scope. Meanwhile, Cargill provides longer trainings to its buyers and farmers, as well as in-house training for managers. That said, CAC did seem interested in expanding its training offerings. In addition, Cargill’s training is supported by the German Development Cooperation (GIZ)’s ‘Competitiveness for African Cotton Initiative’ programme. 

      While CAC does not pay very much attention to training to its farmers and suppliers, it does a better job providing training to employees and managers through both Chinese and non-Chinese institutions. For example, employees and managers can attend courses and training provided by CAC, both in-country and in China, funded either by the company itself or through Chinese aid programmes. 

      However, some are sceptical about the value of these opportunities: several interviewees suggested they are simply for show, with little practical application in Zambia. Workers in the cotton sector can also benefit from training provided by the Farmers’ Field Schools, funded by the Food and Agriculture Organisation of the United Nations.

      On-the-job training

      On-the-job training is also common in Africa. In many African countries, the technical and vocational training on offer is often outdated, or does not respond to the business needs of the private sector. Offering on-the-job training resolves these issues. It also has the advantage that it can be tailored to the machines and technologies used by a specific company, and then administered flexibly according to how much support the workers need. All case studies found some form of on-the-job training being given. 

      In Madagascar, research showed that Chinese firms train workers on the job for a period ranging from a few days to three months. Some firms pair new workers with more experienced colleagues, who assist them in performing their tasks until they are able to continue unaided. 

      Chinese firms in Kenya also train their workers on the job, often during the probation period. The training is usually conducted by experienced Chinese or local workers, but there is a general preference to retain the Chinese workers for as little as possible, as they are more costly than their local counterparts. 


      What does this teach us?

      Agri-processing in Kenya c. USAID Kenya/Flickr

      Agri-processing in Kenya c. USAID Kenya/Flickr

      It is still too early in the project to form a detailed picture of how much knowledge transfer is occurring between Chinese companies and their African host countries. However, these initial findings already show that while knowledge transfer is taking place in the four contexts examined so far, it is happening to different extents and in different ways. 

      Training programmes seem to have succeeded in upgrading skills in the short term. Training and demonstration centres, especially in the agricultural sector, have been part of Chinese aid programmes for a long time, and their positive impact in terms of knowledge transfer is also substantiated by other research (Jiang, Harding, Anseeuw, & Alden, 2016). But when disconnected from aid budgets, the financial sustainability of these centres remains an issue. 

      The Kenyan case has shown how some workers have gained skills at the technical and managerial level, and even attempted to leverage those skills to start their own business. 

      There is also evidence of increased productivity through technology transfer, particularly in the agricultural sector. Machinery and inputs provided by Chinese companies are widely used and have brought benefits in terms of productivity, as demonstrated in the Zambia and Madagascar examples. 

      So far, the area where progress has been slower is the creation of linkages with local firms. This is not surprising, as this is the effect that takes the longest time. Domestic firms need to learn what products foreign firms want, and adapt their processes to produce something that fits the customers’ specifications. This learning process usually works through trial and error, and it can take a few attempts before the new product or service is mastered. 

      The positive effects are more visible in the agricultural sector, where Chinese firms make use of local primary inputs. In the manufacturing sector, the creation of linkages is lagging, and in some cases non-existent. This issue is less prominent for countries that have limited involvement in global production networks, such as Madagascar. For countries involved in global value chains, linkages can remain limited if all inputs are imported, processed and the final product is exported with little gain beyond the employment impact. To enhance the positive effect of these firms on the host countries, linkages need to be created with the domestic private sector.


      Related content

      Publications: 
      Chen, Y. and Landry, D.G. (2016) ‘Where Africa Meets Asia: Chinese Agricultural and Manufacturing Investment in Madagascar’, SAIS-CARI Working Paper 5. Washington D.C: Johns Hopkins University.

      The working papers on Kenya and Zambia and Malawi are forthcoming, and will be published on the SAIS-CARI website: www.sais-cari.org

      Video: 
      Foreign Direct Investment & Structural Transformation – Interview with DEGRP project lead Deborah Brautigam

       

       

       

       

       

       

       

       

       

       

      REFERENCES

      Buckley, P., Clegg, J., & Wang, C. (2007). ‘Is the relationship between inward FDI and spillover effects linear? An empirical examination of the case of China’. Journal of International Business Studies, 38(3): 447-459.

      Jiang, L., Harding, A., Anseeuw, W., & Alden, C. (2016). ‘Chinese agriculture technology demonstration centres in Southern Africa: the new business of development’. The Public Sphere, 2: 7-36.

      Lin, P., Liu, Z., & Zhang, Y. (2009). ‘Do Chinese domestic firms benefit from FDI inflow? Evidence from horizontal and vertical spillovers’. China Economic Review, 20(4): 677-691.

      Moran, T. (2006). Harnessing Foreign Direct Investment for development. Washington, DC: Centre for Global Development.

      OECD. (2002). Foreign Direct Investment for development: Maximising Benefits, minimising costs. OECD report. Paris: OECD.

      Sönmez, A. (2013). Multinational Companies, Knowledge and Technology Transfer. Cham: Springer.

      Thompson, E. (2002). ‘Clustering of Foreign Direct Investment and enhanced technology transfer: Evidence from Hong Kong garment firms in China’. World Development, 30(5): 873-889.

      Tseng, W., & Zebregs, H. (2002). ‘Foreign Direct Investment in China: Some lessons for other countries’. IMF Policy Discussion Paper PDP/02/3. Washington, DC: International Monetary Fund.

      Yao, S. (2006). ‘On economic growth, FDI and exports in China’. Applied economics, 38: 339-351.


      How extension influences the spread of agricultural innovations in DRC

      This brief summarises and sets in context the results of the DEGRP-funded research project Agricultural innovations: which farmer(s) should we target?

      Led by Erwin Bulte at Wageningen University in the Netherlands, the research investigated the effectiveness of agricultural extension efforts in South Kivu, Democratic Republic of the Congo. 

      c. Axel Fassio/CIFOR

      c. Axel Fassio/CIFOR


      Agricultural interventions in sub-Saharan Africa

      Crop yields per hectare are often low on many farms across sub-Saharan Africa. In some cases, low yields reflect poor soil and indifferent climate, but often the yields seen are considerably less than can be achieved by making use of better agricultural technology, whether this be physical inputs such as improved seed varieties, fertilisers, irrigation, or techniques for managing crops, soils, weeds and pests. 

      Data source: Actual yield – You et al. 2012; potential yield – author’s calculations. Note: Bars indicate the average yield in each annual rainfall category weighted with maize harvest area, and the error bars indicate one standard deviation. Percentages in parentheses indicate the approximate share of maize production area in each rainfall category.

      Data source: Actual yield – You et al. 2012; potential yield – author’s calculations.

      Note: Bars indicate the average yield in each annual rainfall category weighted with maize harvest area, and the error bars indicate one standard deviation. Percentages in parentheses indicate the approximate share of maize production area in each rainfall category.

      For cereals such as maize, average yields in 2012/14 in Eastern and Western Africa were estimated at 1.5 to 1.7 tonnes per hectare: yet by using better techniques it is not hard to achieve four or more tonnes per hectare in places with reasonable rainfall.

      Making sure that farmers, and especially smallholders, know about the latest productivity-enhancing technologies and can apply them to their fields is therefore a longstanding concern for those interested and engaged in African agricultural development. 

      Since the 1950s if not earlier, agricultural extensionists have striven to find the most effective ways to offer farmers useful advice on their crops and animals.


      The DEGRP research

      Aims

      The DEGRP-funded research led by Professor Erwin Bulte from Wageningen University aimed to assess the impact of agricultural extension services offered as part of the N2Africa programme in South Kivu, Democratic Republic of the Congo (DRC). More specifically, the project aimed to assess the effect of the programme’s extension of technical advice and products on farmers’ crop yields, production, income, and food security.

      It also aimed to investigate the processes by which extension information is passed from farmer to farmer, and with what results.

      Boosting agricultural productivity with legumes

      N2Africa promotes growing legumes as a way of enhancing crop productivity. Legumes, such as beans, peas, lentils and peanuts, can fix nitrogen in the soil. They capture nitrogen – a nutrient critical for plant growth – from the atmosphere, and fix it in the soil, so that both they and other plants can use it to flourish.

      They do this with the help of a particular soil-dwelling bacteria, rhizobia, with which they live in symbiosis, the rhizobia (which reside on the plant’s roots) pulling nitrogen from the air and feeding it to the host plant. When the host plant dies, it releases the nitrogen into the soil around it, acting as a natural fertiliser for other plants.

      However, simply planting legumes doesn’t guarantee nitrogen fixation. Although rhizobia are naturally-occurring in most soils, they aren’t always present in high enough numbers to help their hosts capture atmospheric nitrogen. In addition, as there are several different strains of rhizobia, each suited to interacting with a particular legume, nitrogen fixation only occurs if the right kind of bacteria are present in the soil. Fixation is also affected by external stress on the plants, such as bad weather, water availability and deficiencies of other nutrients aside from nitrogen.

      In these cases, fixation can be stimulated by choosing legumes with a strong natural fixing potential, but above all by treating the seeds to be planted – or the soil they will be planted in – with the correct strand of rhizobia bacteria, termed ‘inoculant’ or ‘inoculum’, in advance. Meanwhile other strains on plant growth can be addressed through, for example, irrigation, fertiliser use, and changes to planting and harvesting methods

       

       

       

       

      N2Africa programme

      The N2Africa programme has been operating in eight countries in Africa, including a site in South Kivu, since 2009. Funded by the Bill & Melinda Gates Foundation and led by Wageningen University, the International Institute of Tropical Agriculture (IITA) and the International Livestock Research Institute (ILRI), the programme partners with local NGOs in rural Africa to encourage smallholder farmers to grow soil-improving legume crops as a means of stimulating their yields in an ecologically and economically sustainable way.

      In South Kivu, N2Africa works through six local NGOs to extend packages of technical advice on this issue to smallholders, along with starter packs of fertiliser, improved seed varieties for cassava, soybean, and maize, and legume seed inoculant. 

      The technical advice offered includes information on: the use of inoculants to boost soybean productivity; crop planting techniques, such as line sowing and seed spacing; use of mineral and organic fertilisers; use of plants to combat erosion; soybean processing; harvest management; and seed conservation. This advice is mostly disseminated via farmer training and plot demonstrations.

      Country context

      South Kivu is in the far east of the Democratic Republic of the Congo (DRC), where the country borders the Great Lakes of central Africa (Figure B). This largely agrarian region is relatively undeveloped, with high rates of poverty and food insecurity. Severe conflicts arose in 1996–97 and 1998–2003, with hostilities persisting to the present. War destroyed crops, livestock, and homes, and thousands fled to escape the fighting.

      Yet South Kivu has good agricultural potential. Much of the soil consists of fertile volcanic matter, while the region receives plenty of rain (over 1500 mm a year) relatively reliably. Although close to the Equator, most of the province is located at 1,400 metres or higher and so benefits from altitudinal cooling, which prevents the equatorial high temperatures from inhibiting crop growth. 


      Demonstration maize plot, Kabare, South Kivu

      Demonstration maize plot, Kabare, South Kivu

      Each household could thus be scored for number of contacts they had, so that households could then be defined by their centrality to social networks: central, middling or isolated. Games were then played to explore levels of trust and community-mindedness, where the players were of various different levels of centrality.

      Another study compared the centrality of households as measured to community choices of who should be appointed as contact farmers. Extension services inevitably have to choose to work with a selection of farmers, rather than the whole village, so choosing those who are most likely to pass on new ideas matters.

      A final study in the set saw the research team distribute fertiliser packs through selected farmers who were then expected to pass on the packs, with messages on use of fertiliser, to three farmers, who in turn would be expected to distribute to another three farmers. In this study, the selected farmers were variously either socially central, or isolated, to see what difference this made to diffusion.

      By carrying out this variety of studies, with differing aims and methods, the researchers built up a rich picture of agricultural extension impacts and processes than had a single study been conducted.

       

      Methods

      Two sets of studies were carried out in pursuit of the project aims, comprising a range of methods.

      The first set looked at the differing impacts of technical advice and provision of agricultural inputs. Some 92 villages in South Kivu were studied. In 31 villages, participating farmers received N2Africa extension messages and training, plus the offer of seed, fertiliser and inoculum to be sold to them with a 25% subsidy on their actual cost. Another 33 villages received only extension messages.

      The remaining 28 villages received nothing and were taken as controls. Ten randomly-selected households were surveyed in each village before the interventions in mid-2013, then later in late 2014 to see what had changed. Possible spill-over effects from the treated to control villages were investigated by examining what had happened in control villages within one kilometre of the treated villages.

      This set of studies also involved qualitative enquiries, carried out from October to December 2014 in six villages — one for each of the six NGOs N2Africa works with. Interviews with key informants and with focus groups of farmers, mainly women farmers, were held to investigate how ‘contact’ farmers – the farmers who first received the extension from the NGOs, and who were expected to share knowledge and inputs with the rest of the community – had been selected and who they were; how much they and farmers they contacted had learned from the programme; and how social relations influenced flows of knowledge and seed from contact farmers to others in the communities.

      The second set of studies was specifically focused on social networks and how information and fertiliser packs flowed among households in a given community.

      In preparation for this set, 40 villages in South Kivu were selected, and a census of all households in each village carried out. The census captured: the basic characteristics of each household; the members’ knowledge of fertiliser; and — most importantly — which other households formed part of their social network, either through family ties, being neighbours, or those they met as part of agricultural groups. 


      FINDINGS

      The farmers also reported that they could see that the seed inoculum provided by N2Africa was working, but few understood how it worked. Manufactured fertiliser was appreciated, but few farmers used it on their field crops owing to cost or unavailability. They understood the economics, however: fertiliser was almost always applied to small plots for planted with more valuable crops such as aubergine, cabbage, tomato, as too was pesticide.

      In addition, those NGOs that had encouraged participation, built capacity locally, and empowered women, seemed to get better spread of innovations. The farmers they worked with were more confident in discussing their experiences both with the researchers and among themselves.

      The interviews revealed that agronomists from the NGOs were also enthusiastic: they wanted more contact with the research station and the innovations that were being trialled and developed.

      Role of social networks

      What did the studies that explored social networks find? [Hofman et al. 2017a, b, Ross et al. 2017] The households most central to networks tended to be male-headed, with more years of schooling, and were long-term residents rather than recent migrants.[1]

      The experimental games played showed that players from households more central to social networks shared more and were more cooperative; but the differences between them and the more isolated players were small. When observed, players tended to be more generous towards others, suggesting that reputation stimulates cooperation.

      When residents were asked to nominate who they thought should be contact farmers, they chose people who were central to networks and seen to behave pro-socially. Those chosen tended to be ‘male, older, head of larger household, educated, in a community leadership position, and of greater wealth.’ In other words, choices were based on social characteristics: agricultural proficiency or expertise was not considered.

      When the researchers used network analysis to identify who might make the best contact farmer so as to maximise contact with other households, little difference was seen to the community choices.

      In the study on fertiliser pack distribution, the first contact ambassadors did indeed distribute their packs, but only 20% of the second-stage contacts then passed on the packs they were entrusted with to other farmers. The effect was a small increase in the use of fertiliser. This did not depend on the centrality of the contact: indeed, choosing more isolated households led to quicker and slightly wider distribution of packs.

      Contact farmers tended to share with those close to them, especially fellow members of farm groups. Socially isolated households tended to share with both other isolated as well as central households, but the latter tended not to share with those on the periphery of their social networks.

      Attenuation of effects, however was strong: ‘First stage ambassadors used chemical fertiliser in about 40% of the cases, while those who receive from first-stage ambassadors the adoption rate drops 8% points (32%). For those receiving from the second stage ambassadors the percentage is 20%. For non-receivers it is 10%.’ (Hofman et al. 2017b)

      [1]   Owing to conflict, around one third of households in the villages were recent migrants who had fled from their original homes.

      Impact of N2Africa programme on knowledge, yield, and food security

      The quantitative survey [Leuveld et al. 2017] revealed some welcome changes: farmers who had been in contact with the N2Africa programme knew more about crop management, fertilisation and use of seed inoculants. They obtained higher bean yields – worth about US$40 a hectare – and felt less anxious about their food security. The higher yields, however, were not related to any significant increase in use of fertiliser or other inputs: they came from better crop management.

      Little evidence was seen of consistent differences in effects by gender of household head, or by security of land tenure. Villages distant from markets seemed to value information more than those close to markets: perhaps because the better-connected villages could buy and apply more inputs, while more remote settlements had to make do with their local resources, so that technical knowledge was correspondingly more valuable.

      While some knowledge did spill over from treated to nearby untreated villages, this did not seem to have any impact on practice or production in the latter. That was probably because the messages being transmitted were quite complicated: they were probably only going to be internalised by those who had not only heard the messages, and seen the demonstrations, but who had also tried out new techniques on their own fields.

      Sharing behaviours of contact farmers

      The qualitative studies on extension impacts [Kendzior et al. 2015] showed that all six NGOs working with N2Africa adopted a similar model to disseminate extension advice, first passing information to contact, or ‘master’ farmers, who were then expected to share knowledge and any inputs with satellite farmers. Although the NGOs thought that this model worked, not surprisingly there were reports that a few master farmers had hoarded inputs, or only allowed others access in return for labour.

      Asking about seed was revealing: most farmers saw seed as a community resource. If asked for seed, they said, one was usually obliged to share with others. That was not necessarily entirely altruistic: sharing seeds ensures the community has a safe supply of seed of a particular variety, even if the original seed owner loses their harvest.

      Farmers tended to share with family, neighbours and others close by. Seed was given with varying expectations, from immediate cash payment, or in return for work on fields, to forms of deferred reciprocity, to pure gifts.

      The villages were egalitarian in some ways: farmers did not see hierarchies among themselves as farmers. Indeed, they preferred to share with fellow members of farmer groups, rather than through other community structures such as the churches and official chiefdoms, which were seen as hierarchical.

      While knowledge was shared, people were reluctant to volunteer knowledge: that, they said, would be too forward, too arrogant, and meant carrying some responsibility for someone else’s harvest. If asked, one shared; but only if asked.

      The farmers interviewed appreciated and shared messages on: line sowing (even those who had not seen demonstration plots picked up the idea after seeing it applied on neighbours’ fields); on producing and applying compost; on the benefits of soybean, valued for its protein; and on how to process it.

       


      What does this teach us?

      This suggests that, to succeed, agricultural extension work needs prolonged and regular contact with farmer groups, to accompany farmers as they try out innovations, then come to incorporate what they see as beneficial into their practice. It is not a question of delivering and message and then leaving the farmers to it.

      Building social capacity pays off

      Those NGOs that had encouraged their clients — farmers, and women in particular — to develop their agency through raising their skills in team work and leadership, were most effective in agricultural extension. It is not always clear that the painstaking work of some NGOs to build capacity with individuals and groups in villages is worth the cost. The little evidence that we have in this case, however, suggests that it does pay off.

      Multi-stranded research yields richer insights

      The studies reviewed here inherently exhibit a tension between the demand for the internal rigour of the studies, and the desirability of understanding the detail of process and the importance of context. In this case, by using a variety of methods across a series of studies, the research team has created a richer picture of agricultural innovation in South Kivu than they might have, had all the resources been focused on a single question or method.

      Randomised controlled trials can be powerful in establishing causality, but not only do they require considerable resources; they may also miss out on aspects of the context that allow appreciation of the external validity of the results. In this case, the temptation to put all the eggs into this basket has been resisted, to good effect.

      Not all of the studies carried out have produced equally useful insights. That is to be expected: tests of some hypotheses will produce indistinct results. That happened here: the games to look at trust and cooperation did not necessarily reveal much. That was always a possibility. This is one more reason to favour research that pursues more than one line of investigation.

      Resilient farmers

      South Kivu is striking for the context: the scene of almost a decade of some of the worst civil war seen in modern African history. Despite this dreadful past, as more peaceful times are established, farmers are once again growing their crops and looking for ways to improve their production. The programme seems to have had some success not least because active farmers and farmer groups are highly receptive to innovations that promise higher yields, larger harvests, more food and income.

      Functioning communities and NGOs

      The programme has been able to operate since local communities are functioning, despite the enforced dislocations of war. Moreover, NGOs are working with them to help improve lives. Although these studies were not directly assessing the social fabric of the rural areas, neither the programme nor the research could have taken place without functioning communities and NGOs.

      Community selection of contact farmers works — up to a point

      The network studies show that community selection of contact farmers leads to those centrally placed in social networks being chosen. This ensures that people with good social networks and some influence are the ones selected to spread information about innovations.

      That said, it seems that centrally-placed individuals may not be the best persons to interact with more isolated households. If the aim of programmes is to reach a broad spectrum of farmers, and those likely to have low incomes, then additional effort will need to be made to select contact farmers from less well-connected households.

      Agricultural extension requires protracted engagement

      When technical messages are not that simple and straightforward, which so often applies to agricultural innovations, then attenuation of messages from the first provider to subsequent hearers is strong.


      REFERENCES

      Reports from the research

      Hofman, P., Larson, J., Ross, M.,Van der Windt, P. and Voors, M. (2017a - forthcoming) Social Networks and Technology Diffusion: evidence from a field experiment in the Congo. Netherlands: Wageningen University.

      Hofman, P., Larson, J., Ross, M.,Van der Windt, P. and Voors, M. (2017b – forthcoming) Social Networks and Social Preferences: A Lab-in-Field Experiment in Eastern DRC. Netherlands: Wageningen University.

      Kendzior, J., Zibika, J.P., Voors, M. and Almekinders, C. (2015) Social relationships, local institutions, and the diffusion of improved variety seed and field management techniques in rural communities: six case studies in South Kivu, DRC. Netherlands: Wageningen University.

      Leuveld. K, Nillesen, E., Pieters, J., Ross, M., Voors, M. and Wang Sonne, E. (2017) The impact of agricultural extension and input subsidies on knowledge, input use and food security in Eastern DRC. Netherlands: Wageningen University.

      Ross, M. (2017) Raising Farmer Yields in Eastern D.R. Congo: social learning and reduced cost experiential learning on farmer productivity. Netherlands: Wageningen University.

      Ross, M., Hofman, P., Van der Windt, P., and Voors, M. (2017) Selection of Targets in Network Diffusion Interventions. Netherlands: Wageningen University.

      Other

      Sebastian, K. (ed) (2014) Atlas of African agriculture research and development. Washington DC: International Food Policy Research Institute.

      Policy implications

      The research yields a number of messages for policymakers, of which the most important are:

      • Farmers are interested in new ideas, so long as they can see that they produce results. This applies even in areas of considerable poverty that are recovering from conflict, such as South Kivu. Agricultural extension, done effectively, is valued and useful.
      • Training trainers and thereby using social networks to help diffuse new technical ideas can be effective, although engagement with farmers need to be sustained, since some technical innovations require hands-on learning by farmers.
      • Building the capacity of ordinary people to engage with ideas and actors from outside of the village pays off sooner or later. The returns to such work are not always immediately apparent, but empowering citizens can help all manner of development interventions.

      Related content

      For more information on this research project on the DEGRP project page.

      The most recent highlight from this project is the Share the Seed documentary and website, about project researchers' return to South Kivu to further explore seed sharing among smallholder farmers via the medium of participatory theatre. 

      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