Agribusiness: Africa’s way out of poverty

Patrick Kormawa argues that a shift to an agribusiness development growth trajectory is crucial for poverty reduction

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Photo: Sven Torfinn/Panos

It is estimated that Africa’s population reached 1.4 billion in 2010, with resultant consequences for food security, growing urbanization, and youth employment. African countries urgently need to refocus their agricultural and economic growth strategies. The continent’s agriculture is substantially under-capitalized, with extremely low levels of mechanization and value addition. Africa’s average of 13 tractors for each one hundred square kilometres of arable land compares unfavourably both with the global average (200/100km2 of arable land) and with the average for other developing regions, such as South Asia (129/100km2 of arable land). The same applies to irrigation: sub-Saharan Africa (SSA) has only 4% of arable and permanent cropland under irrigation, compared with 39% in South Asia and 11% in Latin America and the Caribbean.

African agribusiness’s present share of total GDP is very low. Data from the World Bank shows that the value of agribusiness production in Thailand matches that of the entire SSA region, while that of Brazil is nearly four times the African total. Crucially too, in all but two African countries (South Africa and Zimbabwe), agriculture’s share of GDP exceeds that of agribusiness by 10 percentage points, highlighting the region’s failure to add value to farm production. This relative inability to produce and process agro-industrial commodities limits the scope for industrialization, and means that these countries are failing to bene­fit from opportunities to add value and create jobs. While high-income countries add about US$180 of value by processing one tonne of agricultural products, African countries generate only US$40. Moreover, while 98% of agricultural production in high-income countries undergoes industrial processing, in African countries less than 30% is processed. Rural areas in African countries have limited agro-processing activity and capacity. As such, SSA countries in particular experience large post-harvest losses, especially for perishable commodities such as fruit and vegetables, with post-harvest losses averaging 35-50% of total attainable production. For grains, such losses vary from 15-25%.

Although high value and non-traditional agro-industrial production for export provides dynamic and growing market opportunities for some African countries, the most important demand driver in SSA is, and will remain, the domestic and regional market. Looking at the demographics and changing consumption habits for food and non-food agricultural products, domestic markets and intra-African trade will remain important, representing more than three-quarters of total market value at a continental level, with domestic markets alone constituting 80% of total market value in regions such as East Africa.

Agribusiness is labour-intensive, creating jobs in value-adding, agro-processing activities, particularly for those who will inevitably leave the land as economic development proceeds. In order to reap the benefits of job creation, it is important that policymakers and development partners target interventions along the entire agribusiness value chain, and not just agriculture on a stand-alone basis. Agricultural strategies cannot be framed – as in the past – in terms of a production-led strategy. It is demand, in part linked to value chain development, which must perform the pivotal role, and provide the driving force for investments.

An agribusiness-led development strategy, with stronger productivity growth throughout the entire agribusiness value chain system, offers the best opportunity for rapid and broad-based economic growth and poverty reduction in SSA. Indeed, the expansion of employment through downstream agro-industrial processing value chains may be one of the few local paths out of poverty for small farmers.

For this to have broad-based impact, there must be a structural transformation involving a shift in the economy from subsistence-oriented household production and household-based agro-industry towards a modern integrated economy, based on specialization and exchange, often relying on economies of scale. The off-farm elements of the agribusiness and food retailing system expand relative to farm-level production, both in terms of value added and employment. Such a shift is critical for poverty reduction, as between one and two-thirds of smallholder farmers appear to lack the resources to “farm their way out of poverty”, and will therefore eventually need to move to more remunerative employment in emerging sectors outside farming, such as agribusiness, industry and services.

A new agribusiness policy space

A new UNIDO study, Agribusiness for Africa’s Prosperity, warns of the dangers of “recycling failed ideas”. One of these is the belief that Africa must have a Green Revolution along the lines of those in Asia and Latin America. This is akin to stating that Africa will enjoy an industrial revolution as occurred in East Asia. It is important to note that the world has moved on since those events took place. It should also be recognized that because technology and markets have changed, there can be no guarantee that earlier agricultural development growth models can be successfully replicated in Africa today, or in the future. Thus, a new agricultural development policy approach is needed, the essence of which is to shift from past failures of production-led growth to an agribusiness development growth trajectory, taking into consideration the economic and social development needs of Africa. The UNIDO study proposes that a new strategic framework for agribusiness development be built around seven pillars, as follows.

Photo: Aubrey Wade/Panos

Enhancing agricultural supply for value addition: If agriculture is to provide a development path out of poverty, it is crucial that African countries fully integrate into global agribusiness. It is important to learn from the policy experience of emerging economies, where agribusiness development resulted from deliberate but targeted public policies and strategies, and from institutional support and development. Factors contributing to market failures must be well understood and speedily addressed by key stakeholders such as national and local policymakers, as well as development partners. African countries must also de-emphasize low input agriculture as a panacea for ending hunger in Africa in the 21st century. The era of low food prices is over. African countries must embrace new farming approaches, like the “sustainable intensification” proposed in Foresight. The Future of Food and Farming (2011). This will require enlisting all modern technologies and agro-industrial inputs, mechanization, and genetically modified crops and livestock, in order to increase productivity.

Upgrading value chains: Upgrading the competitiveness of farms and firms, irrespective of size, will be crucial. African countries need to invest in competitive value chains, taking into consideration local, regional and international market demands and requirements. Value chain participant councils could play a crucial role in coordinating the functions and activities of producers and other key stakeholders. This would require the promotion and development of efficient agri-input value chains, mechanization, processing, and of related ago-industries.

Exploiting local, regional, and international demand: Many African countries have yet to gain greater access to dynamic global agribusiness markets due to lack of competitiveness and inability to adjust supply to changing market opportunities. In this regard, Aid for Trade can play a crucial role in building capacity to trade, overcoming supply-side rigidities to market opportunities and strengthening standards and compliance systems. It is also crucial to promote agribusiness cooperation by reducing intra-African tariff and non-tariff barriers, negotiating the reduction in such barriers with the South and the North. A fresh approach will be required in order to foster agro-industrial cooperation within the South in the field of value chain participation, technology transfer and foreign direct investment, as well as to align “Africa’s commodity processing priority” with the resource needs of major trading partners such as China.

Strengthening technological efforts and capabilities for agribusiness: There is an urgent need to strengthen Science, Technology and Innovation (STI) policies, with an emphasis on improving the coordination mechanism for learning and innovation, promoting national and regional innovation systems, strengthening human resource development, and generally improving STI infrastructure. It is essential to enhance the link between know­­ledge created by universities, exploited by laboratories, and commercialized by private enterprise.

Promoting effective and innovative financing: Traditional financing mechanisms comprising domestic resource mobilization, sovereign wealth funds, funding from diasporas and development finance institutions, leasing, and collateralization, must be explored with renewed vigour. Some of the more innovative financing tools, such as risk mitigation for bank lending through insurance schemes, finance through large lead firms in value chains, equity, venture and hybrid capital, have proven to be workable and should be explored. Here it is important that the enabling conditions for local resource mobilization and utilization are created to permit the “crowding in” of private investment in agribusiness.

Creating a favourable business environment: The creation of an overall enabling environment for developing and promoting private agri-enterprises requires a favourable business environment – macroeconomic stability; favourable exchange rates; efficient financial systems and institutions; political and social stability; good governance; transparent land tenure arrangements; a climate for business; etc..

Improving infrastructure and energy access: It is essential that agribusiness expansion be promoted in areas where the required infrastructure and energy services are available and which are linked to transport and highway corridors. In this regard, public-private partnerships will be particularly necessary. A focus on clean, renewable, efficient, low-carbon, and sustainable, energy services, as well as a reduction in greenhouse gas emissions, will be important parts of the strategy. The promotion of information and communication technologies is also a precondition for participation in value chains. Finally, the Clean Development Mechanism, which promotes projects that reduce greenhouse gas emissions in developing countries, could be a future driver of technology diffusion processes in Africa and assist with the creation of green jobs and investment opportunities.

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● Patrick Kormawa is one of UNIDO’s senior experts in agribusiness development, and is currently director of the regional office in Abuja, Nigeria. He is the co-editor of Agribusiness for Africa’s Prosperity, published by UNIDO in May 2011.