Small farmers in the developing world have been primary losers in agricultural trade. And now with agribusiness investments and commercialisation of agriculture taking place across the developing world, do you see a major shift in the gains accruing to small farmers from trade?
I don't agree that small farmers have, in general, been primary losers in agricultural trade. There are dozens of success stories from across the developing world, of how small farmers have benefited from the opening up of agricultural markets. Small farmers have experienced enhanced productivity and competitiveness in both cereal crops and high-value product export markets.
However, there have been a large number of cases where small farmers did lose out and often these stories get more attention than the successes. Small farmers have lost out not because of their size, but because national markets were opened to international competition before basic market institutions and infrastructure were set in place.
Where agriculture sector policy has been coherent with trade policy, small farmers have seen overall benefits from trade liberalisation.
The Draft World Development Report 2008 talks about a new market-driven agriculture led by high-value agriculture. How do you see the role of agribusiness firms in the new framework, and what are the challenges you perceive for small holders in this process?
The issue of agricultural commercialisation and the small farmers is by no means new. Most developed and emerging economies have had to deal with it at some stage during the process of economic growth. What's new today is the speed and scale at which agribusiness is influencing the process of change. Liberalisation of rules on foreign direct investment in food retail has driven the rapid movement of international agribusiness into the developing world.
As this process unfolds, we should anticipate a much greater degree of integration between producers and the output market, with a strong emphasis on standards in relation to quality and safety. Small holders trying to integrate into the “new market” need to be able to deliver products that meet the stringent supermarket requirements for timelines, quality and safety. These farmers should also have the capacity to negotiate contracts with the large companies, contracts that are at least not unfavourable to them.
What is the risk to traditional agriculture in the light of the growing agribusiness interest and trade?
One should expect to see a certain degree of dualism in developing country agriculture, even as countries move into middle income status. Areas that have favourable agricultural lands with good irrigation and market infrastructure tend to commercialise faster and become the focus of agribusiness investments. On the other hand, regions with low potential lands and poor infrastructure tend to get left behind. The challenge for national governments and the international donor community is to figure out ways in which these traditional farm communities can be served through better technology and infrastructure as well as by providing them with exit strategies that move them out of the agriculture sector into other income-earning opportunities.
How can an enabling environment be created in the light of the high asymmetries prevalent in agricultural trade?
Modern food systems are typically characterised by near-monopsonistic markets. While the number of potential suppliers (small farmers) is large, the cost of exchange -- the transaction costs -- between small farmers and a few large buyers can be substantive. When transaction costs become prohibitive, exchange will not take place and small farmers lose out. While some transaction costs are related to poor infrastructure, others are the outcome of informational asymmetries and contract enforcement problems.
Moreover, these costs tend to be higher for countries at lower levels of development. It is often extremely difficult for public policy to directly try to reduce the transaction costs associated with farmer participation in the agribusiness value chain. What governments can do is to focus on providing public goods and on institutional reform that leads to greater market efficiencies and encourages private sector participation.
The emphasis for public investments should be on improving general transport, communications, and market infrastructure, while allowing the private sector to invest in commodity-specific processing, storage and marketing facilities.
Accessible and cost-effective communication systems, such as mobile telephones, can help generate information and other market-related services. In the area of institutional reform, the emphasis ought to be on clear property rights to land and other resources, as well as transparent regulations for food quality and safety. Improved legal systems and rural financial services also provide protection for small farmers entering contractual arrangements with large companies and give them the means to make the investments necessary to benefit from the modernisation and commercialisation of the agricultural system.
(Professor Prabhu Pingali can be contacted at prabhu.pingali@fao.org)
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