The Role of Agriculture and Rural Development in achieving the Millennium Development Goals

- a joint donor narrative

The Role of Agriculture and Rural Development in achieving the Millennium Development Goals
A joint donor narrative, prepared by Axel Wolz, Bonn, Germany

This document was commissioned by the Global Donor Platform for Rural Development (GDPRD) and sponsored through contributions to the GDPRD by the Canadian International Development Agency (CIDA), the Department for International Development (DFID), the European Commission (EC), the Food and Agriculture Organization (FAO), the German Ministry for Economic Development and Cooperation (BMZ), the Ministry of Foreign Affairs-France and the World Bank. This document does not necessarily reflect the views of all members of the Global Donor Platform for Rural Development. September 2005, Bonn/Germany

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FOREWORD In December 2003, the Global Donor Platform for Rural Development (GDPRD) was created from an emerging consensus among donors that collective action in rural development is required to achieve the Millennium Development Goals (MDGs). The 25 members of the GDPRD are committed to contribute to the MDGs through improved donor cooperation, collaboration and coordinated dialogue with partner countries for pro-poor growth in rural areas in the developing world, on the basis of locally-owned processes. The GDPRD has commissioned a review of various documents which were published in view of the UN MDG +5 Major Event in September 2005 on the role of agriculture and rural development in achieving the MDGs. The purpose of this condensed narrative is to provide a joint donor statement which highlights and critically discusses the role of agriculture, an integral part of rural development, for achieving the MDGs, in particular MDG 1 (to halve hunger and poverty by 2015). This review argues that without an improvement of agricultural productivity, economic growth in rural areas will not be achieved. The role of agriculture in its historical context is discussed and is compared to its major challenges in the future. Further on, the economic requirements as well as the most promising strategies for agricultural and rural development to promote pro-poor growth are highlighted. Finally, the main institutional and political requirements at international, national and local levels in making use of the full potential of agriculture are discussed. The narrative demonstrates clearly that, in order to attain the goal of the MDGs, the world community has to concentrate its efforts on the rural areas of the developing world, where the large majority of the world’s poor people live. Only more investments by national governments, the donor community and private enterprises in rural areas will help to reduce rural poverty by providing more equal access for rural women and men to resources such as land and water, local and international markets and financial, health and educational services. The key messages of this narrative are summarized in the GDPRD advocacy pamphlet ‘Targeting rural poverty to achieve Millennium Development Goal 1’ (available at www.rdxxl.org).

Christoph Kohlmeyer (BMZ)
Co-Chair GDPRD

Michael Wales (FAO)
Co-Chair GDPRD

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EXECUTIVE SUMMARY Introduction Three quarters of the world’s poor people live in rural areas of developing countries. Despite the diversity and complexity of the livelihoods of the rural poor, the majority of rural households depend mostly on agriculture and agriculture-related small industries and services. While urban poverty is growing fast and matters enormously, fighting poverty today means first of all combating rural poverty – by transforming rural lives and livelihoods. It is in the areas with the highest incidence of poverty – Sub-Saharan Africa and South Asia – that agricultural development can have the greatest impact on inclusive growth and poverty reduction. Reducing rural poverty will also have positive impacts on urban poverty and migration from rural areas, which are often direct consequences of the lack of rural opportunities. The material well-being of poor individuals and households is dependent upon the productivity of their cropping and livestock husbandry activities. To a large degree, poverty is a product of unproductive agriculture. Although in the longer term a broad transformation and diversification of rural economies away from a strong dependence on agriculture is desirable, more immediate gains in the welfare of poor households are most likely to come through the poor overcoming some of the critical constraints they are facing in meeting their basic needs through agriculture. Thus, a necessary component in meeting the MDGs by 2015 in many parts of the world is a more productive and profitable agricultural sector. Some modest progress has already been achieved at the global level during the last years, but strong efforts and commitments are still needed to reduce poverty and hunger by half by 2015. While income redistribution is a viable option to address poverty in many parts of the developed world, in the developing countries with large segments of their populations unable to meet their basic needs, income redistribution policies are unlikely to have much effect on general welfare levels. In those countries, higher economic productivity – economic growth enabling increased employment and rising wages – is the only means by which the poor will be able to satisfy their needs sustainably. Role of agriculture in economic development Classical theory tended to neglect agriculture as a leading sector and put an emphasis on import substitution, industrialisation and export promotion, resulting in a pronounced 'urban bias' in policy and investment decisions of the 1950s and 1960s. However, since the late 1960s, the Green Revolution brought rapid increases in agricultural productivity accompanied by substantial increases in the incomes of poor households as well as by lower food prices and more job opportunities. Since then, it has become clear that agricultural growth can have powerful leverage effects on the economy as whole, especially in the early stages of economic transformation when it accounts for large shares of national income, employment and exports. Furthermore, agricultural growth can generate patterns of development which are employment intensive – hence favourable for the poor – and which are favourably distributed between rural and urban areas as well as between rural towns and urban cities. Especially the effects of broad-based agricultural growth on non-agricultural

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sectors qualify agriculture as the “engine of growth” of countries in the early stages of development. Small farms play an important role in rural poverty reduction, due to their often higher economic efficiency compared with large farms, as well as their higher land productivity, lower capital intensities and expenditure patterns that promote growth. A vibrant small farm sector, thereby, helps prevent rapid rural-urban migration. Major challenges in fostering agricultural development and poverty reduction In the light of globalisation, the challenges facing the rural poor have changed and cannot be compared with historical experience in Europe, or the challenges of two or three decades ago. Today, economic development and poverty reduction have to take place in the context of global markets. Poor farmers face deteriorating terms of trade and changing marketing systems, and have to comply with rising standards for food quality and safety. International agricultural and trade policies are not favourable to farmers from developing countries. Furthermore, new challenges arise as the environment deteriorates, natural resources become scarcer, and the demographic composition of rural societies changes due to rural-urban migration and the spread of diseases, especially HIV/AIDS. These changes offer new opportunities to small farmers who can successfully access and compete in the globalised markets, but they are also a serious threat to those who cannot. Lessons from successful and less successful public interventions are critical in selecting the right priorities and approaches for poverty reduction strategies. While the local context is important, the key conditions for agricultural-led pro-poor growth can be summarised as follows: (1) The political environment must provide favourable incentives to farmers if they are to invest and to produce efficiently. Policies that distort the terms of trade against farmers hold back the entire economy, not just agriculture. (2) Small farmers need improved technologies appropriate to their needs if they want to survive in today’s market place. Farmers not only need to produce more output and income per unit of land, but also to do this in ways that increase their labour productivity. (3) The consumption patterns of small farmers promote pro-poor growth, since they typically consume non-tradable food staples and rural non-farm goods and services. Broadbased agricultural growth puts increased purchasing power into the hands of the rural masses, so that production of these non-tradables becomes a major source of employment and income for the landless rural poor. (4) Increased levels of public investment in rural infrastructure are essential for promoting growth not only of agriculture, but also of the non-farm economy and of rural towns. Investments are needed to improve access to transport and communication as well as the provision of human capital assets at the local level, i.e. education and health services.

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Requirements to promote agricultural growth and reduce rural poverty Economic requirements The future challenge for poor and slow-growing economies with limited opportunities for income diversification is to improve traditional staple crops and farming systems as well as to make the “new” high-value agriculture pro-poor. That will require critical public investments to raise productivity and to reduce production and marketing costs. The focal areas are infrastructural development, such as rural roads and irrigation, education, agricultural research and development as well as extension, land tenure security, rural financial services, and improved marketing systems. Particularly at the early stages of economic transformation, it is mainly the public investments that play a critical role in meeting the needs of small farms. The private sector is generally poorly developed and is not attracted to the sector due to poor profit margins, high risks and transaction costs, and the long payback period for investments. Nevertheless, the private sector is increasingly expected to fill investment gaps and to provide its skills in organising and executing business activities. Of course, farmers are by far the largest group of private entrepreneurs. Providing an enabling environment for them so they can mobilise their own resources, as well as encouraging joint ventures in the form of public-private partnerships, are important ways of increasing financial, human and social capital in rural areas. Institutional and political requirements However, lasting poverty reduction is not only a question of continuing resource transfers. A policy and capacity framework that poor people can use to better secure and use their own assets is required at all levels – global, national and local. At the international level, better harmonisation of donor support as well as a more focused pro-poor orientation of international agreements is necessary in order to foster development in developing countries. Better coordination and harmonisation of development aid and policies by the donor community and an open, rule-based, predictable, nondiscriminatory trading system will have a positive impact on the fate of the rural poor. At the national level, governments are required to mobilise more national resources and to set priorities to stimulate pro-poor growth. In order to achieve this goal, they have to review national budget priorities and must be committed to sound governance, and an enabling policy and institutional environment. Furthermore, ownership is an essential element of success of any policy change. Government policy is one of the key factors affecting the challenges and opportunities of the rural population. Decentralisation of administration and decision-making as well as participation and empowerment of the population also increase ownership of and accountability to the rural poor. Moreover, national governments have to provide an effective legal framework that enables the poor to participate in economic development. Access to water as well as tenure security and efficient land administration are essential to pro-poor agricultural growth. Trade, price and market access policies have to provide an enabling environment for the private sector by supplying rural financial services, a legal framework that ensures competition as well as by further liberalising trade in agricultural products in order to tap the full opportunities offered

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by internal, regional and South-South trade. Promoting rural organisations facilitates the political and economic empowerment of the rural poor. Finally, at the local level, it is the poor themselves who have to make use of these opportunities in order to improve their own socio-economic situation. They have to be actively involved in the planning and implementation of the activities, ensuring the sustainability of investments by developing a sense of ownership. The strengthening and empowerment of rural communities, of specific common-interest groups within communities (in particular women’s groups) and of federations of these groups should, therefore, be the starting point of any pro-poor development effort. Conclusions In the last decades, a lot has been learned about the pre-conditions that have to be met in order to successfully link agricultural development and rural poverty reduction. However, a blueprint for implementation does not exist; instead, successful strategies have to be carefully adjusted to each national and local situation. National, regional and local governments, civil society and, finally, rural poor themselves have to be involved in planning and implementing agricultural growth strategies, since in the end it is the poor themselves who have to make use of these opportunities in improving their own socio-economic situation.

1 INTRODUCTION ............................................................................................................................................1 1.1 1.2 1.3 1.4 1.5 IMPLICATIONS OF POVERTY ...................................................................................................................1 HETEROGENEITY OF THE POOR ..............................................................................................................1 ROLE OF MILLENNIUM DEVELOPMENT GOALS (MDGS) .......................................................................3 ACTUAL SITUATION IN REDUCING (RURAL) POVERTY OR MEETING MDG 1 ........................................4 OBJECTIVE OF THIS PAPER .....................................................................................................................5

2 ROLE OF AGRICULTURE IN POVERTY REDUCTION: EXPERIENCES FROM THE PAST AND MAJOR CHALLENGES FOR THE FUTURE.............................................................................................6 2.1 2.2 2.3 2.4 2.5 CLASSICAL ROLE OF AGRICULTURE IN ECONOMIC DEVELOPMENT .........................................................6 SECTOR FOR ECONOMIC GROWTH: AGRICULTURE AS A GROWTH ENGINE ...............................................7 MAJOR CHALLENGES IN FOSTERING AGRICULTURAL DEVELOPMENT AND POVERTY REDUCTION IN
LIGHT OF GLOBALISATION .....................................................................................................................9

RISING SIGNIFICANCE OF NON-AGRICULTURAL SECTORS DUE TO ECONOMIC DEVELOPMENT LEADING
TO GROWING ‘AGRO-PESSIMISM’.........................................................................................................13

KEY CONDITIONS FOR AGRICULTURAL PRO-POOR GROWTH: LESSONS LEARNT....................................18

3 ECONOMIC REQUIREMENTS TO PROMOTE AGRICULTURAL GROWTH AND REDUCE RURAL POVERTY .......................................................................................................................................20 3.1 3.2 EMPIRICAL EVIDENCE OF THE IMPACT OF INVESTMENTS ......................................................................21 FOCAL AREAS FOR HIGHER INVESTMENTS ............................................................................................22

4 PROMISING STRATEGIES OF AGRICULTURAL AND RURAL DEVELOPMENT TO PROMOTE PRO-POOR GROWTH ...........................................................................................................29 4.1 4.2 4.3 PROMISING STRATEGIES DEPENDING ON THE STAGE OF ECONOMIC DEVELOPMENT .............................30 PROMISING STRATEGIES DEPENDING ON THE DOMINANT FARMING SYSTEM ........................................32 PROMISING STRATEGIES DEPENDING ON THE REGION/ CONTINENT ......................................................34

5 INSTITUTIONAL AND POLITICAL REQUIREMENTS IN ORDER TO MAKE USE OF THE FULL POTENTIAL OF THE AGRICULTURAL SECTOR IN MEETING THE MDGS ....................39 5.1 5.2 5.3 INTERNATIONAL LEVEL .......................................................................................................................40 NATIONAL LEVEL.................................................................................................................................42 LOCAL LEVEL ......................................................................................................................................46

6 CONCLUSIONS.............................................................................................................................................49 7 BIBLIOGRAPHY ..........................................................................................................................................50

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Introduction

During the last half century, very impressive economic growth rates have been witnessed, which has led to a sharp increase in the number of economically prosperous people as never before in history. However, development has been very unequal, socially as well as regionally. The number and share of the poor and hungry is still highly depressing and by far too large. In 2001, about 1.1 billion people, being about 21 percent of the total world population, had to live on less than US$ 1 per day, i.e. the internationally recognised poverty threshold. Similarly, about 880 million people or 17 percent are still unable to acquire sufficient calories to meet their daily caloric requirements and can be considered undernourished. 1.1 Implications of poverty

Due to the high inequality of wealth and lacking opportunities to improve the situation of the poor, poverty has far-reaching implications. In general, poverty can be associated with low labour productivity, poor levels of health and education, and high rates of mortality. In short, poor people are denied the option to lead a life according to their physical and intellectual potential. Throughout history, poverty has led to unmanaged migratory currents and contributed to insecurity and conflict. In this respect, local insecurity of the poor and local social tensions have been significant factors in generating global insecurity and global social tensions. Extreme poverty creates environments that make the emergence of threats such as terrorism and civil conflict more likely: The UN High-Level Panel on Threats, Challenges and Change concluded that poverty was strongly associated with the outbreak of civil wars. Similarly, poverty is behind the devastating effects of natural calamities in developing countries. Poor people are most vulnerable to natural disasters and have the least ability to cope with them, given their limited access to safe drinking water, health care services and communication systems. The reduction of poverty is a global task for all societies. Every person has the right to a life in dignity as well as to an adequate level of food, shelter, education, health, etc. This is not a question of global charity: poor people are a resource of each society and economy that cannot be left on their own. The poor are an economic asset that, once having got better access to much needed resources, can contribute to economic growth and rising living standards. The UN and its members are committed to creating a more peaceful, prosperous and just world, to making the right to development a reality for everyone and to ridding the entire human race from want. 1.2 Heterogeneity of the poor

One characteristic of poverty is that the profiles of the poor differ considerably. The poor do not form a homogeneous group but experience very diverse living conditions and have very diverse interests. In general, the different groups of the poor can be distinguished according to three criteria: (a) regions or continents where they live; (b) location, i.e. rural or urban areas; and (c) access to resources. The poor are fairly unevenly distributed among the various regions, both with respect to their absolute numbers and their relative share to the total population. Of today’s 1.1 billion people living on less than one US dollar per day, there are about 430 million in South Asia (31 percent of the total population), 315 million in Sub-Saharan Africa (46 percent of the total

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population), 270 million in East Asia and the Pacific (15 percent of the total population), 50 million in Latin America (10 percent of the total population), 17 million in Eastern Europe and Central Asia (4 percent of the total population) and 7 million in the Middle East and North Africa (2 percent of the total population). In addition, reliable figures show that another 1.6 billion people live on between one and two dollars per day, often sliding temporarily below the one dollar per day threshold While these figures provide a broad overview, it is evident that in-between the regions and also on the national level, the incidence of poverty is unevenly spread. While each nation has to be looked at in more detail, another broad indicator refers to the place of residence within a country, i.e. whether the poor live in rural or urban areas. On a global scale, the picture is clear-cut: Poverty is mainly concentrated in rural areas. Three quarters of the world’s poor people live in rural areas of developing countries. The poor are often concentrated in areas where land and other natural resources are poor, or where infrastructure is poor and settlements are remote and inaccessible. While the poorest groups are often located in areas that are marginal because of their poor natural resources and remoteness, the absolute number of poor may be higher in regions with better natural resources but weak infrastructure or poor governance. In rapidly developing countries however, the poor generally tend to concentrate in less-favoured areas. Therefore, fighting poverty today means first and foremost transforming rural lives and livelihoods. Finally, it has to be looked at the poor themselves. Who are they? The poor can be broadly differentiated as follows: Half of them are smallholder farmers; landless rural people add another one fifth; and pastoralists, fishers and people whose livelihoods depend on forests make up a tenth. The rest is made up by the urban poor who are predominantly casual wage labourers and micro-entrepreneurs. This broad classification hides the fact that most of the poor are combining several sources of income at the individual as well as on the household level, i.e. in the location or outside (even internationally), as entrepreneurs or labourers, in the agricultural sector or non- and off-farm. Besides this first classification, the rural poor can be separated into seven functional classes: (1) smallholder farmers; (2) landless rural residents; (3) nomadic pastoralists; (4) ethnic indigenous groups; (5) artisanal fishermen; (6) displaced or refugee populations; (7) households headed by women who do not only have to manage their farms but also all the household activities. Out of this discussion a first very broad profile of the poor can be deduced: In some regions, such as South Asia, most of the poorest are landless labourers, who depend on agriculture for much of their work. In other regions, like in Southeast Asia, the poor are mainly rural smallholders with substantial portions of their income coming from agriculture, or rural landless, who rely primarily on farm and non-farm income. In much of Sub-Saharan Africa, the poor are mostly rural with the bulk of their incomes from agriculture. In Latin America, a large part of the poor are urban based, relying on informal enterprise activities and non-farm labour for income. At this stage, it can be concluded that the far majority of the poor resides in rural areas and that, despite the diversity and complexity of the livelihoods of the rural poor, the majority of rural households depend mostly on agriculture and agriculture-related small industries and services. It is in the areas with the highest incidence of poverty – Sub-Saharan Africa and South Asia – that agricultural development can have the greatest impact on inclusive growth and poverty reduction. There are strong, direct relationships between agricultural productivity, hunger and poverty. Hunger and child malnutrition are greater in rural than in urban areas. Moreover, the higher the proportion of rural population obtaining its income solely from subsistence farming, the higher the incidence of malnutrition. Therefore,

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improvements in agricultural productivity aimed at small-scale farmers will benefit the rural poor first. However, at this stage, it has to be stressed that income poverty is not the only dimension of poverty having a particularly high incidence in rural areas. Most development indicators related to education, health and gender equality show the same pattern. 1.3 Role of Millennium Development Goals (MDGs)

This high incidence of poverty could not be accepted by the world community. In order to establish a renewed commitment to human development at the start of the new millennium, in 2000 the member states of the United Nations adopted the Millennium Declaration. This Declaration established eight goals, the MDGs, which look as follows: 1. Eradicate extreme poverty and hunger, 2. Achieve universal primary education, 3. Promote gender equality and empower women, 4. Reduce child mortality, 5. Improve maternal health, 6. Combat HIV/AIDS, malaria and other diseases, 7. Ensure environmental sustainability, 8. Develop a global partnership for development. In contrast to previous such global policy statements however, the Millennium Declaration has set specific, measurable targets for each goal to motivate the international community and to provide a mechanism for accountability in undertaking action to enable millions of poor people to live lives of dignity, free from destitution. It is the clear intention of the international community to meet these targets by 2015. The goals aim to make definite improvements in the lives of the world’s poor people, usually in comparison to their situation in 1990. Measured against the levels of global economic expansion and integration, the MDGs might appear modest, in particular the first goal (MDG 1) of halving the proportion of people living in extreme poverty and suffering from hunger. Yet, the MDGs are far-reaching in a number of ways. For the first time, they call for a pact between developed and developing country governments, the United Nations system, civil society actors, the Bretton Woods institutions and the World Trade Organisation (MDG 8). Their interlinking nature requires each goal to be pursued not independently but as part of a unified whole. The MDGs draw on complementarities and establish synergies between growth and poverty reduction and, in doing so, promote inclusive and broad-based growth. MDG 8 emphasises the responsibility not only of national governments, but refers especially to the donor community. In order to improve and better harmonise their efforts in achieving the MDGs, most donor countries set up the Global Donor Platform for Rural Development (GDPRD) in December 2003. As shown above, the poor around the globe are disproportionately farmers and herders, and perversely, the hungry also mostly find their livelihoods through agriculture. Improving the agricultural sector is the key to alleviating poverty. Of the eight MDGs, the eradication of extreme hunger and poverty (MDG 1) depends on agriculture the most. Eradicating hunger and poverty requires an understanding of the ways in which those two interconnect. Hunger – and the malnourishment, which accompanies it – prevent poor people from escaping poverty because it diminishes their ability to learn, work, and care for themselves and their family members. If left unaddressed, hunger sets in motion an array of outcomes that perpetuates malnutrition, reduces the ability of adults to work and to give birth to healthy children, and erodes children’s ability to learn and to lead productive, healthy and happy lives. This truncation of human development undermines a country’s potential for economic development – for generations to come.

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Three other MDGs also relate directly to the agricultural sector: promoting gender equality and empowering of women (MDG 3), ensuring environmental sustainability (MDG 7), and developing global partnerships through increased market access (MDG 8). The remaining MDGs have important indirect linkages with agricultural growth. e.g., access to better quality food will improve health and reduce disease susceptibility, especially in women and children (MDG 4,5,6), and additional income from higher agricultural productivity will increase household investments in children's education (MDG 2). The most effective strategy for making steady, sustainable progress on the MDGs is to serve all the goals in an integrated way. Pursuing each goal separately without acknowledging its interlinkages with others will reduce the complex process of human and economic development to a series of fragmented, conflicting, and unsustainable interventions. A comprehensive and harmonious approach is required. The cause and effect relationships between the agricultural sector and the MDGs are not all one-way. While the agricultural sector provides critical inputs for attaining the MDG targets, broad improvements in human capital needed to reach those targets will also provide an important foundation from which a considerable more productive and resilient agricultural sector can be developed. Most MDG targets are complementary and reinforcing each other. However, there might be some tradeoffs, for instance enhanced access to improved drinking water sources might collide with the goal of reduced hunger through increased irrigated agriculture. Given that the majority of poor people live in villages or rely on agriculture, and that agriculture paves the way for economic growth in the poorer nations, agricultural and rural development will underlie progress on the broad array of economic and social indicators that the MDGs emphasise. Therefore, in the following discussion emphasis will be laid on the role of MDG 1. 1.4 Actual Situation in Reducing (Rural) Poverty or Meeting MDG 1

Five years after having adopted the MDGs, it is time to ask what has been accomplished so far, i.e. from 1990 up to now, in order to cut poverty and hunger by half. Similarly, it has to be assessed if and under what conditions they will be achieved at all. On a global scale, both the proportion and the absolute number of people suffering from poverty and hunger worldwide have declined during the last decade. There were 126 million fewer people living on less than a dollar a day in 2001 compared to 1990, reflecting a drop in the world’s share of poor people from 28 to 21 percent. According to the latest data (for 1999 – 2001), the proportion of people who suffer from hunger has decreased from 20 to 17 percent since 1990, which means 19 million fewer food-insecure people. Similarly, the global prevalence of malnutrition among preschool children has declined from 30 to 25 percent between 1990 and 2000. In absolute terms, 27 million fewer children are malnourished compared to 1990. However, progress has not been equally distributed over the regions and countries. Only East and South Asia are on track to cut the number of poor people by half. In East Asia, the number of poor declined by 200 million people between 1990 and 2001 (from 30 to 15 percent); in South Asia, the number declined by 30 million during the same period (from 41 to 31 percent). In the other regions, the absolute number of poor actually increased. Particularly concerning is the situation in Sub-Saharan African, where the number of poor increased by about 90 million, from 45 to 46 percent of the population. In Latin America, the number of poor increased slightly by one million people. Its relative share, however, has gradually decreased from 11 to 10 percent.

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The results have been mixed so far. Progress in meeting the targets of the first MDG is encouraging in East Asia, generally adequate in South Asia and Latin America, but disturbingly poor in Sub-Saharan Africa. If this trend continues, the prevalence of dollar-aday poverty in East Asia in 2015 should be considerably less than the one-half reduction from 1990 levels. In Latin America and South Asia, poverty rates should be close to the targets, if slightly above. In Sub-Saharan Africa, the proportion of the population living on less than US$1 per day in 2015 is quite likely to increase. The regional trends in reducing undernutrition, while all moving downwards, are not as clearcut as the trends in poverty. The undernutrition target is quite likely to be met in East Asia and Latin America. However, in both South Asia and Sub-Saharan Africa, undernutrition will likely remain at levels considerably above targets for 2015. In these regions, the number of malnourished people increased between 1990 and 2001 by about 52 million and 33 million respectively. Hunger is still endemic in most rural areas of the developing world and malnutrition levels are also consistently higher there than in urban zones. In this respect it can be stated that the reduction of poverty has been only modestly successful and without the impressive results achieved by China, the global picture would be quite gloomy. But for those countries that have not made any progress, the intervening years have not been ‘lost’ years. They have provided much experience and insights to question some of the premises, assumptions and development models that have been followed in the pursuit of accelerated poverty reduction. Countries with falling poverty levels today are most likely countries that have invested a lot in their rural areas in the past. The reduction of poverty is an achievement that owes a great deal to increased incomes from agriculture. Similarly, countries that are lagging behind are mostly those that have neglected their rural areas and peasantry. Indeed, very few countries achieved broad-based economic growth without agricultural or rural growth preceding or accompanying it. Experience also shows that, while urban poverty is growing fast and matters enormously, fighting poverty today means first of all combating rural poverty – by transforming rural lives and livelihoods. Such a strategy would also have positive impacts on urban poverty and forced out-migration, which are often direct consequences of the lack of rural opportunities. Therefore, it can be concluded that some modest progress has been achieved at the global level during the last years, but still strong efforts and commitments are needed to reduce poverty and hunger by half by 2015. However, even if these goals were met and the share of poor people came up to about 14 percent, the problem of hunger and poverty would not be solved. Because even then there still would be 890 million poor left, who do not have the bare minimum to live on. 1.5 Objective of this paper

From these introductory remarks it follows that three-quarters of those living on less than one dollar a day live in rural areas. For the majority of the poor in the world, agriculture is a critical component in the successful attainment of the MDGs. Although the rural poor pursue a range of strategies to assure their livelihoods, their dominant strategy is food production through cropping or raising livestock. The vast majority of people whose lives need to be changed the most in order to attain the targets specified in the MDGs are farmers and herders. The material well-being of these individuals and households is dependent upon the productivity of their cropping and livestock husbandry activities. To a large degree, poverty is a product of unproductive agriculture. Although in the longer term a broad transformation and diversification of rural economies away from a strong dependence on agriculture is desirable,

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more immediate gains in the welfare of poor households are most likely to come through the poor overcoming some of the critical constraints they are facing in meeting their basic needs through agriculture. Thus, a necessary component in meeting the MDGs by 2015 in many parts of the world is a more productive and profitable agricultural sector. In the following discussion, emphasis will be laid on the vital role of agriculture in alleviating poverty, the necessary preconditions and requirements. It is argued that without an improvement of agricultural productivity, pro-poor economic growth will not be achieved. In the next chapter, the role of agriculture will be critically assessed in discussing the experience from the past and the major challenges in the future. This is followed by a chapter about the economic requirements to promote pro-poor growth. The most promising strategies are deduced in Chapter 4. The main institutional and political requirements at international, national and local levels in making use of the full potential of agriculture are discussed in Chapter 5. Finally, conclusions will be presented. 2 Role of agriculture in poverty reduction: Experiences from the past and major challenges for the future

Basically, there are two economic mechanisms for reducing poverty, either income redistribution or economic growth. While income redistribution is a viable option to address poverty in many parts of the developed world, in the developing countries with large segments of their populations unable to meet their basic needs, income redistribution policies are unlikely to have much effect on general welfare levels. There are simply insufficient resources in such economies to assure the basic needs of all. For example, for 33 tropical African countries, GDP per capita averages only US$ 270, or a mere 71 cents per day. In those countries, higher economic productivity – economic growth enabling increased employment and rising wages – is the only means by which the poor will be able to satisfy their needs sustainably. However, under specific conditions it might be necessary to redistribute certain assets in order to stimulate pro-poor growth. The major engine of pro-poor growth has to be the agricultural sector as the majority of the poor depend directly on it. In most areas, the starting point should be the improvement of agricultural productivity. Trade is also a critical component in meeting rural food needs, but there is considerable scope to improve local agricultural productivity to reduce rural hunger. Similarly, due to socio-economic development, the role of agriculture has changed over time. During the last decades the significance of non-farm and off-farm activities as a source of employment and income for the rural poor has increased but could not replace agriculture as the major source of their livelihood. 2.1 Classical role of agriculture in economic development

Classical theorists viewed economic development as a growth process of relocating factors of production, especially labour, from an agricultural sector, characterised by use of traditional technology and low-productivity, to a modern industrial sector with higher productivity. Agriculture’s contribution to development was considered passive, acting more as a source of food and labour than as a source of growth. This strategy of growth tended to neglect agriculture as a leading sector and put an emphasis on import substitution industrialisation and export promotion. Under the assumptions that agricultural production would not suffer, given the inelasticity of aggregate agricultural supply with respect to price, and that industrial investment yields higher rates of return, the idea was to ”force” savings, food, and labour out

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of agriculture through explicit and implicit taxation in order to finance industrial growth. It only had to be taken care of avoiding a Malthusian trap characterised by rising food prices and real wages that would undermine industrial development. This theory was employed to support the industrialisation-led strategies adopted in many developing countries during the 1950s and 1960s, that resulted in a pronounced 'urban bias' in policy and investment decisions throughout this period. 2.2 Sector for economic growth: agriculture as a growth engine

This perspective has changed with the adoption and success of the Green Revolution since the late 1960s. The major reasons of its advantages will be discussed. 2.2.1 Experience of the Green Revolution in poverty reduction

It was only in the late 1970s and early 1980s that the role of agriculture as a leading sector was re-emphasised by socio-economists and politicians again. Rapid increases in agricultural productivity in areas benefiting from Green Revolution were accompanied by sharp increases in the incomes of poor households. Contrary to popular opinion, the benefits were often larger for landless labourers and small-scale farmers than for large-scale farmers. Increased agricultural productivity has also brought strong indirect benefits to the poor by reducing food prices and creating jobs. Poor households, rural as well as urban, spend a large percentage of their income on food staples. Increased productivity of staple crops makes them less expensive. With the dynamism of the Green Revolution, agriculture came to be seen as a growth sector that could: (a) generate more food and raw materials at lower prices; (b) free up foreign exchange for the importation of strategic industrial and capital goods; (c) provide growing amounts of capital and labour for industrial development; (d) provide, with rising rural incomes, a growing domestic market for nascent national industries; and (e) reduce poverty by increasing employment in rural areas, by generating more remunerative opportunities for rural-urban migration, and by lowering food prices for all. Due to the success of the Green Revolution, two basic conclusions have been drawn: (1) Agricultural growth has powerful leverage effects on the rest of the economy, especially in the early stages of the economic transformation when it accounts for large shares of national income, employment and exports. (2) It can generate patterns of development that are employment intensive (hence favourable for the poor), and are favourably distributed between rural and urban areas and between rural towns and urban cities. This contrasts sharply with most industrial-led growth strategies. This growth can be identified as being pro-poor, if it involves broad-based productivity growth in a sector dominated by small-scale family farmers. Of special importance have been the effects of this broad-based agricultural growth on the non-agricultural sectors, which qualify it as the “engine of growth”. This type of agricultural growth generates demand for locally produced non-tradable products, and thereby stimulates overall production and growth. By improving the productivity of agriculture a domestic massconsumption market developes and the fruits of improved productivity can be shared. The demand linkages generated by farmers, especially the low income ones, are stronger with domestic industries and other non-tradables, and domestic low capital intensity nonagricultural sectors. Higher farm and agricultural wage labour incomes led to increments of expenditures in local employment intensive goods and services, which in turn spurred the

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creation of many rural small scale enterprises to provide these goods with labour intensive techniques. Therefore, at that stage of development, higher shares of investment going to agriculture were advocated, in response to higher rates of returns there, compared to nonagricultural sectors. In light of the success of the Green Revolution, historical experiences from Europe in the 19th century to the impressive industrialisation in East Asia after World War II had to be reassessed. In a successful development strategy, technological progress must support both industrialisation and agricultural productivity. Similarly, the revolution in agricultural productivity is an indispensable base of modern economic growth. Also, in the more recent cases of China and Vietnam in the 1980s, agricultural growth has played a critical role in poverty reduction. 2.2.2 Major factors of influence in achieving this success

While the impact of the Green Revolution on poverty reduction had been tremendous, it had to be asked about the reasons why such technology-induced innovations had been so successful. As empirical evidence shows, high agricultural growth rates do not necessarily lead to poverty reduction as observed e.g. in Brazil or Zambia. It follows that the effects on poverty reduction are specific to local contexts. The following factors seemed to be of particular impact: (i) agriculture is important to the incomes of the rural poor; (ii) land distribution is more equitable; (iii) the poor consume local/domestic non-farm products, (iv) the poor consume non-tradable food stables, (v) low cost technological innovations are available, and (vi) there is a certain minimum of rural population density. It is precisely in those locations where the incidence of poverty is highest that agricultural development has the largest effect on overall poverty reduction. Beyond the direct effect on poor producers in form of higher farm incomes, there are other slower but powerful indirect effects: lower food prices, higher wages in the agricultural sector and increasing employment and income opportunities in the non-farm sector. There are particularly strong relations among agricultural growth, small farm development and rural poverty reduction. Small farms have a number of important economic and social advantages at the early stages of agricultural development. One advantage is their higher economic efficiency relative to large farms as has been demonstrated by an impressive body of empirical studies showing an inverse relationship between farm size and land productivity. Moreover, small farms often achieve their higher land productivity with lower capital intensities than larger farms. These are important advantages in those locations where land and capital are scarce relative to labour. Small farms are characterised by a greater abundance of family labour per hectare farmed that can be applied highly flexibly according to the farming calendar. Small farms exploit labour using technologies that increase yields and they use labour-intensive methods rather than capital-intensive machines. As a result, their land and capital productivities are higher and their labour productivity is, in general, lower than that of large farms. This is the strength in labour surplus economies. Another advantage is the fact that small farm households have more favourable expenditure patterns for promoting growth of the local non-farm economy and that of rural towns. They spend higher shares of their incremental income on rural non-tradables than larger farms, thereby creating additional demand for the many labour-intensive goods and services that are produced in local villages and towns. These demand-driven growth linkages provide greater income-earning opportunities for small farms and landless labourers.

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A vibrant small farm sector also helps prevent excessive or too rapid rural-urban migration. Excess migration contributes to growing urban ghettos, and all the poverty, environment, health and crime problems associated with them. The experience of the agricultural development in countries, as India, China and Taiwan, which have been successful in alleviating poverty shows that besides a relatively egalitarian farm size and the favourable expenditure patterns for promoting growth of the local non-farm economy, three other factors need to be stressed: (1) The major source of demand for the increased product of the agricultural sector was domestic, as there were substantial levels of initial poverty, and hence improved agricultural incomes directly led to increases in the domestic demand for the larger quantities of food produced domestically. Hence, the terms of trade for the increased agricultural product did not decline so as to negate the improvements in agricultural productivity. (2) Another important historical characteristic of these economies is that a substantial part of the cost of their agricultural productivity improvement was shouldered by external donors, including the substantial contributions of the international agricultural research centres, members of the CGIAR. (3) Finally, it appears that given the substantial rural population densities in those countries, the cost per agricultural producer of improving agricultural productivity was relatively low, as there was no need for experimentation in too many climatically different locations. The advantages of this small farm development approach slowly disappear as countries develop and labour becomes scarcer relative to land and capital. Agricultural growth now depends far more on expanding the knowledge base than on expanding the amount of land, water and external inputs dedicated to agriculture. Impressive gains in crop yields in developing countries in the 1970s and 1980s generally were followed by slower agricultural growth in the 1990s. Growth in yields in developing countries dropped from 2.8 percent annually in the 1970s to 1.5 percent in the 1990s. 2.3 Major challenges in fostering agricultural development and poverty reduction in light of globalisation

The extremely poor rural people of today face different challenges compared to the historical experience in Europe, and even different to those faced by the people who achieved sustained agricultural growth two or three decades ago. The future role of agriculture in pro-poor growth needs to be re-examined. On the one side, the share of agriculture has declined, which is actually a positive result of economic development. In Latin America for instance, it stands now at about 8 percent of the GDP only. On the other side, the agricultural sectors of the national economies are much more integrated in a global system than a decade or two ago. As shown above, the agriculture-led transformation of Asia could not been replicated in Africa during the last decades. The late development status of many countries and the changed global environment raises questions about the future of agriculture in pro-poor growth. The problem that confronts all poor people is that of improving their livelihoods in the context of global market relations and new forms of competition for influence and resources, including their own assets. Until the rural poor are in a position to better manage these challenges and competition, the risk is that what brings prosperity to others will bring continued and deeper poverty to them. In the following part the major, in general newlyemerging challenges are discussed in more detail.

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(a) deteriorating terms of trade for poor farmers During the last decade, the prices for traditional cereal crops and traditional export commodities, the mainstay of hundreds of million of poor producers, have fallen dramatically. This trend has weakened local demand for non-tradables and its positive effects on consumption linkages and growth in rural areas. In many developing countries, the growing urban influence on policy makers has shifted the focus of development policy aims away from rural income generation and rural poverty reduction. Low world prices and poor rural transport systems make it cheaper and easier to supply major cities from international markets than to invest in local rural development to promote domestic production. In most LDCs, agricultural imports are higher than agricultural exports. There seems to be a clear trend that poor countries’ demand for agricultural products is being met less and less by poor countries’ producers. (b) changing marketing systems Ongoing urbanisation, trade liberalisation and globalisation are transforming the food supply chain from producers to consumers. Smallholders are seriously challenged today in ways that make their future precarious. Small farms increasingly have to compete in markets that are more demanding in terms of quality and food safety, more concentrated and integrated, and much more open to international competition. Marketing chains are changing. Direct links to exporters are often essential for accessing high value export markets. Small farms struggle to diversify into higher value products. They have to meet the requirements of these demanding (export) markets. Supermarkets play a much more dominant role in controlling access to retail markets. They were once on the fringes of food marketing in developing countries, but now they account for 45 to 75 percent of national food retail sales in six Latin American countries, 33 to 63 percent in Southeast and South Asia, and 5 percent in South Africa. These retailers are often multinational firms with highly centralised procurement and distribution systems. From their suppliers, they demand reliable flows of products of consistent quality, and they increasingly apply their own standards for quality, safety, traceability, and social values, such as prohibiting child labour and protecting animal welfare. Supermarkets create opportunities for producers who can meet their standards and can assure them security of supply. In this respect, it can be stated that these changes offer new opportunities to small farmers who can successfully access and compete in these transformed markets, but they are also a serious threat to those who cannot. Just at the stage when they had to be prepared in meeting those challenges, many small farmers lost access to key inputs and services, including farm credit and extension due to structural adjustment and privatisation programmes. While these parastatal services were not very effective in the past, they often used to be the only link between small scale farmers and the market. These state agencies have been abolished and left a vacuum as the private sector was not yet ready to fill the gap effectively. The removal of subsidies, without improvement in market access and reduction of transaction costs, has made some key inputs prohibitively expensive. Liberalisation and the dismantling of price stabilisation programmes have exposed farmers to much more volatile farm-gate prices. This increasing level of market-related risk and vulnerability is particularly detrimental to small farmers in remote regions with poor infrastructure and to those already exposed to climatic or agroecological risks. There is less support to the rural poor to adapt and diversify their products in the rapidly changing markets when it is actually needed most.

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In general, subsistence and marginal farmers are not directly linked to marketing chains. However, it will become more and more difficult for them in participating in those marketing channels. The hurdles for joining are becoming higher and higher in terms of knowledge and minimum investments. It might be suggested that there will be an increasing gap between those who are linked to these chains and those who are left out. (c) rising standards of food quality and safety Closely connected to the changing marketing systems, farmers all over the world face radical new demands with respect to the quality and traceability of their produce. In the past, quantity aspects used to be more relevant than quality aspects. For quite some time, however, more and more precisely defined high sanitary, phytosanitary and other technical standards of food production and processing have to be met not only at international, but also at national markets in order to sell agricultural products to the consumers. In addition, higher environmental and social-ethical standards have to be observed. The main problem of implementing those standards arises from the fact that most of the small farmers may not be aware of such standard requirements. They cannot be enforced to follow those standards, since the infrastructure necessary to introduce the requirements is just in the process of being set up or has not yet been established at all. These requirements include the development of laws and regulations, control, inspection and approval mechanisms as well as manpower needed to run the system. In this respect, developing countries and small farmers have to be prepared to struggle diligently that these standards will not be abused in establishing non-tariff trade barriers at national and international markets. Quite often, distributors and retail chains have incorporated legislative requirements into sector-oriented Codes of Practice that are very often going beyond the internationally agreed upon standards. Smallholders are likely to be left out since they lack the capital to implement “good agricultural practices”. (d) agricultural and trade policies of developed countries There is no denying that international agricultural support systems are in favour of farmers from the developed countries. In these countries, where the productivity of a few million producers reaches levels 100 to 1000 times that of developing-country smallholders, the largest amount of public resources is allocated to agriculture. With ever-increasing global competition for and through food markets, public agricultural policies and private agricultural investment capacities around the globe are in ever increasing direct interaction – and policies of the rich nations favour the rich rather the poor. Despite the fact that 75 per cent of the poor depend on agriculture and related rural activities for their livelihood, and despite the universal commitment to poverty reduction and food security, policies regarding agricultural trade and market regulations are the most distorted and the least supportive of reaching the MDGs. Therefore, improving the competitiveness of small farmers in developing countries is very difficult. These farmers have to cope not only with the erratic fluctuations of prices for their traditional exports and limited access to rich country markets but also with unfair competition in their own domestic market for basic foodstuff such as cereals and livestock products. Trade in agricultural products is unfair not only because of subsidies, but also because of tremendous inequity in access to those inputs that can increase competitiveness, such as capital for investment, technology and basic economic information. Left to market forces alone, the beneficiaries of the new high-value and liberalised agriculture are mostly the larger and commercially oriented farms, which are well connected to roads and markets.

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(e) environmental sustainability and natural resources The environmental challenges have multiplied during the last decades. Not only is the rapid rate of deforestation affecting agricultural production, but the production systems themselves are in many cases not managed sustainably. The natural resources needed to sustain agricultural production are not only increasingly scarce but increasingly degraded. More than 1.9 billion hectares of land, mostly in developing countries, have soils that have been degraded through human activity. Overgrazing, erosion, soil nutrient mining (particularly in Africa), nutrient overload, indiscriminate use of pesticides, soil loss, salinization, waterlogging and the siltation of rivers and reservoirs are degrading land, water and biodiversity. Waterlogged and saline soils threaten the productivity of many irrigated highpotential farming systems, including those that made dramatic productivity increases through the Green Revolution. On the other side, it can be foreseen that there will be a rising demand for agricultural production. In absolute volume, it needs increase by the same amount in the next 25 years as in the last 25 years. The challenge is that few new land or water resources are available in most parts of the world, so they cannot be an important source of growth. Per capita land area for agricultural production declined from 0.30 to 0.16 hectares between 1961 and 2001 in developing countries. Water supplies for agriculture are declining as competition from nonagricultural uses increases. In South Asia, the Middle East and North Africa, water shortages have already reached critical levels for agriculture. Producers will require new knowledge and technology to cope adequately with the challenges and opportunities that arise. Those changes will have severe repercussions on the rural poor. They will face new forms of competition for the resources upon which their existence depends. In response to scarcity,the underlying value of water, land and forests will rise. In principle, this should be of benefit as the value of ’their’ assets rise. In practice, it is a dangerous situation. On the one hand, small farmers are unable to leverage this increased value into greater access to investment capital because, in general, there are no financial service institutions available that are capable of providing medium-term credit for productive investments. On the other hand, this rise in value gives elite groups a greater incentive to try and capture the assets. Rather than increasing the livelihood security of the rural poor, changing asset values means greater competition with more powerful interests. (f) increased R&D activities to improve agricultural productivity Agricultural research and development is highly costly. In order to achieve a high pay-off of agricultural research, the large fixed cost of establishing and running technological facilities must be geared to producing results that can possibly be adopted by a large number of producers. This explains why returns to agricultural R&D have been so high in densely populated agrarian countries such as those in Asia, while they are lower in sparsely populated agrarian economies, such as those in Africa. Particularly, with respect to Africa, the task is most challenging. The stagnating agricultural productivity has to be overcome, which requires a strong emphasis on R&D to stimulate rising agricultural productivity that will transmit to lower food prices. There is some scope for optimism in Africa, but given the widespread household food insecurity, the major challenge in Africa is how to stimulate broad-based productivity growth in food staples and sustain overall productivity gains over decades if the Asian successful record of poverty reduction is to be repeated.

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(g) demography and health Contrary to the past, the demographic composition of rural societies is changing more rapidly over time. The major reasons, particularly for the poor, are economic ones and the spread of diseases. As more people migrate to urban areas in search of employment, the rural population declines and becomes older, and women will play an even more prominent role in agriculture. Similarly, HIV/AIDS is affecting household members in working age above proportion. The composition of rural households will also change considerably as the old and young ones stay behind. In both cases, particularly the more energetic members of rural households in working age are missing who under 'normal' conditions would have been the ones to adopt the needed measures for stimulating agricultural pro-poor growth. 2.4 Rising significance of non-agricultural sectors due to economic development leading to growing ‘agro-pessimism’

Due to impressive overall economic growth during the last decades, the role of the agricultural sector as a source of employment and income has declined on a global and on most national levels. In line with that development, a decline of public support to the agricultural sector in development co-operation could be witnessed. Similarly, voices became louder that questioned whether agriculture still had a role to play in alleviating poverty and whether alternative concepts might not be more effective in using the scarce resources. These three points will be discussed in the following sub-chapters. 2.4.1 Rising importance of non-agricultural sectors to GDP and employment

In a successful economic transformation agriculture’s share to national income falls and its importance for national economic growth diminishes. The economic challenge is then to absorb workers out of the agricultural sector at a sufficient rapid rate to stop their average productivity (and hence their incomes) from lagging behind levels achieved in the nonagricultural sectors. Typically, agriculture’s share of total employment falls much more slowly than its share of national income, with the inevitable result that labour productivity in agriculture, and hence per capita farm incomes, lag behind the non-agricultural sectors. Improvements in agricultural labour productivity require accelerated migration of workers to other sectors, either through rural-urban migration or economic diversification within the rural areas, investments in agricultural mechanisation, larger farm sizes and diversification into higher-value products. As those rural poor who have access to land are mostly producing with the objective of maximising their land and capital productivity, the need to increase their labour productivity will only become stronger over time. There is no denying that strong growth of the non-agricultural sectors is needed to absorb the rural poor in productive employment in the future. Agricultural productivity gains alone are not sufficient to bring about sustained economic growth. The rural non-farm sector is an important engine in economic development. On average, non-farm income which might also comprise remittances accounts to about half of the household income in the rural areas. During successful rural economic growth, the emergence and rapid expansion of the (mainly private sector) non-farm economy in rural areas and the towns they serve is a major source of growth in incomes and employment. From a relatively minor sector, often largely part-time and subsistence-oriented in the early stages of development, the rural non-farm economy can develop into a major engine of economic growth in its own right, not only for the countryside but for the economy as a whole.

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A profitable and productive agricultural sector is the main stimulus to rural non-farm growth, until late in the development process. However, there is already evidence in Asia and Latin America of increasing linkages to urban industrialisation, e.g. outsourcing of textile assembly, independent of agricultural growth. In any event, from a public policy viewpoint, investment in infrastructure and education is the key to a vibrant rural non-farm sector that supports both agricultural and non-agricultural sectors. For most countries, economic growth and sustained poverty reduction are unlikely to be achieved without initially stimulating sustained agricultural production growth. Only in exceptional cases, like e.g. in Singapore and Hong Kong or some energy rich countries, such a development path could be followed. 2.4.2 Decline on support to the agricultural sector at national and international levels

While the global environment is changing rapidly and the challenges, as shown above, are increasing, the past twenty years have witnessed a decrease in public support for the poorest rural economies. In many countries that are today off-track to meet the MDGs, there has been less domestic and international support for the rural poor to adapt and diversify their products in the rapidly changing marketplace – precisely when and where adaptation, diversification, intensification and effective supply chains are needed more. A dual reinforcing trend emerged: Both, the international donor community and national governments have cut their support to agricultural development. The decrease in official development assistance (ODA) to agriculture for least-developed and other low-income countries was continuous from 1985 to 2000. The average ODA per year to agriculture was US$ 5.14 billion (2002 prices) for the period 1983-1987. It fell to US$ 2.22 billion for 1998-2002; the decrease is even more striking when only LDCs are considered. Their yearly ODA to agriculture went from US$ 2.51 billion to US$ 0.94 billion; that is a 62 percent decrease over 15 years. Lending from international financial institutions followed a similar pattern. For example, in 2002, lending for investment in the agricultural sector reached 7.9 percent of total World Bank lending, compared to 30 percent in the early 1980s. In contrast, food aid and emergency assistance to least-developed and low-income countries, which had decreased from 1985 to 1993, started growing again during the second half of the 1990s. In 1999, it exceeded ODA to agriculture for the first time. These figures have to be seen as well in line with the support to the agricultural sector among the OECD countries (i.e. producer subsidy equivalent) which amounts to about US$ 246 billion annually and actually increased over the last two decades. Similarly, most governments of the LDCs cut back their support to the agricultural sector. In a sample of 43 developing countries, the share of agriculture in total government spending declined from 12 percent in 1980 to 9 percent in 1998. This decline was justified in countries experiencing rapid economic growth and strong structural transformation of agriculture, but elsewhere it is especially worrisome. It is a particular concern in Sub-Saharan Africa, where agriculture must serve as the main engine of growth, but where the share of the public budget allocated to agriculture dropped from 6.5 percent in 1980 to 4.1 percent in 2000. On the other hand, the rapid progress towards achievement of MDG 1 in Asia is correlated with high and increasing levels of government expenditure on agriculture per rural capita. 2.4.3 Emerging “Agro-pessimism”

During the last decades agriculture contributed greatly to reducing poverty and transforming economies after the Green Revolution. But farmers and economies have changed considerably

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since then. Given the agricultural challenges described above and given that agriculture is changing rapidly as economies develop, some have come to question whether agriculture remains a reliable pathway to pro-poor growth. There had been a growing scepticism in the international donor community and national governments about agriculture’s relevance to economic growth and poverty reduction. This "school of agro-pessimists" is reflected in the decline in aid, research and investment in support of agriculture in both absolute as well as relative terms, since the mid-1980s. The donor community seems to be tired of agriculture and has been trying to impose a postagricultural revolution strategy. High hopes are placed on market liberalisation, privatisation, agricultural diversification and good governance. However, public spending on the basic investments needed for agricultural growth and rural economic development has stagnated or declined. As the impacts of globalisation and trade liberalisation are felt around the world, there is a growing sense that the role of agriculture must also change and that this has important implications for agricultural development strategy. In the following, the main arguments of the agro-pessimists are discussed, whether and under what conditions they apply and when they have to be rejected. Bypass agricultural development through rapid industrialisation It had been argued that with cheap and plentiful food imports available, low-income countries, particularly in Africa, can leapfrog the need for agricultural development and proceed directly to industrialisation. Through trade, particularly food importing countries might eliminate the need to modernise their agricultural sectors and go straight to labourintensive manufacturing exports, using the proceeds to import food. Actually, this line of argument resembles the development approach of the 1960s and 1970s. These policies failed, in large part because the industries that were fostered proved to be highly inefficient, but also because growing food gaps induced foreign exchange constraints and higher food prices, which themselves dampened the industrialisation process. The argument is new today in a sense that globalisation and trade liberalisation provide more export opportunities and make industrial protection more difficult, and because food is even cheaper on the international market. The opening of economies does and should provide more possibilities to rely on imported food. Like in the past, this approach is connected with a number of problems. (1) Most lowincome countries are characterised by a small and inefficient industrial base whose growth performance is still less than stellar. These fledging industries, however, are expected to compete with the world’s best not only in export markets, but also on the domestic markets. It is highly plausible that imports will decimate whole swaths of industry before they have a chance to adjust and compete. In comparison, most Asian countries followed a different policy. They nurtured their industries through protected domestic markets and subsidised exports before opening up to international competition. (2) In addition, there is a scaling-up problem. The industrial sector, in general, employs about 10-15 percent of the labour force in low-income countries and its employment elasticity remains low compared to the agricultural sector. Even if growing at the kind of rates observed in Asian Tiger economies during their golden years, it would still take decades before a large enough share of the labour force could be pulled out of agriculture to seriously reduce poverty. (3) Finally, despite low world food prices, food costs remain high for rural consumers in low-income countries, particularly in Africa, because of high transport and marketing costs. Similarly, the large size of Asian countries and the imperfections of the world trading rules for agricultural commodities set limits to this strategy. Growing food where it is needed is still the least cost option for many countries. Moreover, growing food imports still pressure foreign exchange markets, leading to

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currency depreciation and higher food costs in local currencies. This, in turn, raises real wages and dampens industrialisation. In conclusion, due to the experience from the past and the present conditions, it is very doubtful whether a strategy led by non-agricultural growth will generate strong pro-poor growth linkages that are needed to address the immediate challenges of high rural poverty and hunger. Rethinking rural development Due to different natural conditions and socio-economic development, rural areas are highly heterogeneous and are permanently changing in the size, structure and capability of their populations, in the pattern of their economic activity and in the degree of their integration with national and international economies. In this process, agriculture becomes a relatively small production sector and is increasingly incorporated into national and international commodity chains. Most rural households already have diverse and geographically dispersed portfolios of income sources. Therefore, agro-pessimists question whether agriculture should any longer be viewed as the primary engine of rural growth. The reasons look as follows: (1) The long-term global decline in agricultural commodity prices has undermined the profitability of agriculture as a business. (2) The policy instruments which fostered Green Revolution in Asia, e.g. price supports, fertiliser and credit subsidies and public irrigation schemes, are not now available within currently accepted models of public sector intervention. (3) The increasing pressure on the natural resource base for agriculture is leading to worsening degradation and even declining productivity. In short, the role of small farms is increasingly questioned due to the complexity of recent technological changes, greater connectedness to markets, and globalisation of commodity chains. Instead, it is argued that development strategies should focus on migration and rural non-farm activities, diversification options for multi-occupation and multi-location households as engines of rural growth. However, income diversification and migration are long established coping strategies of the rural poor. The general experience with respect to income diversification strategies can be summarised that small-scale farmers remained poor despite this strategy. Hence, it is not clear why it should work better today, particularly in countries where the non-agricultural sectors are not actually thriving either. With respect to Asia before the Green Revolution, farmers had diversified income sources, but still it took dramatic changes in the agricultural productivity level to make any significant inroads into reducing rural poverty. Concerning migration, the results are mixed. In general, the rural poor are driven by low stagnant agricultural and rural environment. Often the productivity of the urban sector can be characterised as low as well. Hence, this type of migration can be called “migration of despair”. It depresses wage-rates, denudes rural areas of innovators, and hence might relieve extreme need, but seldom cuts chronic poverty. Similarly, it leads to rising social costs of urban poverty, concentration and agglomeration disadvantages which are in general not taken into account. If, however, migration follows as an outcome of industrialisation, it can be seen as an indicator of economic growth and structural transformation. But historical experience shows that this type of migration, in general, occurred after agricultural productivity growth, as e.g. in Europe in the 19th century and in Asia since 1960. The weakest point of this line of argument is, however, that it does not explicitly identify any other sector that can replace agriculture in its primary growth role in the early stages of development.

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Concentrate on large farms This line of arguments agrees to support agricultural development in order to alleviate rural poverty, but the focus should be on large farms only. Due to the dramatic changes of agricultural marketing chains, the small farmer is increasingly asked to compete in markets that are much more demanding in terms of quality and food safety, more concentrated and integrated, and much more open to international competition. Direct links to exporters are often essential for accessing high value export markets. But most small farms cannot compete and remain viable in today’s globalised markets. Since small farms will not survive economically, development strategies should therefore concentrate on larger and commercially oriented farms. But this transition normally begins when countries have grown out of low-income status, and it typically takes several generations to unfold. Therefore, the question arises how to create employment at this stage. Concentrate on high-value products Again, this line of arguments agrees that there is an option to alleviate rural poverty through agricultural development. It is argued that in today’s globalised economy, agricultural development should focus on high value commodities and value added processing rather than food staples production. When looking at agricultural markets, the best opportunities for small farmers for rising farm income seems to be the production of high value commodities such as fruits, flowers, vegetables and livestock. In successfully transforming countries the domestic demand is growing steadily. In many low-income countries domestic demand is weaker, and the opportunities are seen in export markets. In reality, the market opportunities for small farmers in low-income countries are more nuanced. There is no denying that there are opportunities for non-traditional commodities. However, there are risks involved, particularly with respect to prices, that small farmers cannot influence. Price trends for avocados, green beans, etc. demonstrate this risk. In addition, non-traditional products still constitute such a small share of the agricultural sector that they will have a limited impact on overall growth on the agricultural sector in the near term, even with rapid growth. A related concern is that an over-emphasis on higher value markets will crowd out investments in the traditional commodities on which most poor farmers continue to depend. In this respect, it has to be emphasised that market prospects are not all bleak, however, even in the traditional commodity sector. Low income countries that continue to experience rapid population growth will fuel growing demand for cereal crops for food, and real prices for grains in world markets are projected to remain stable after a prolonged period of decline. This trend will provide a significant market opportunity for many low-income countries where a majority of poor farm households depend on cereal production. For example, the greatest market potential for most African farmers still lies in domestic and regional markets for food staples. For Africa as a whole, the consumption of these foods accounts for about 70 percent of agricultural output and is projected to double by 2015. This will add another US$ 50 billion per year to demand in 1996-2000 prices. Moreover, with increasing commercialisation and urbanisation, much of the additional demand will translate into market transactions and not just additional on-farm consumption. What is required is to double the presently very low yield level of 0.8 t/ha. There are no other agricultural markets that offer growth potential on this scale and which could benefit huge numbers of Africa’s small farmers. The fastest way to reduce poverty by 2015 is through productivity growth for food staples.

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High value products will be a niche market for far the majority of the rural poor. Larger farms will benefit more from these products which are mainly for export and a developing urban consumer market. The employment and income effects are too small in order to qualify for a broad-based growth strategy. Dominant role of the private sector In the past, governments and parastatal organisations used to influence agricultural production and marketing to a large extent, albeit not very efficiently. Therefore, it is argued that the public sector has a relatively minor (enabling) role to play in agricultural development, while the private sector should be in the driving seat. In light of globalisation and changing consumers’ demands, it is claimed that the private sector and producer organisations can perform most market chain functions. On the other side, the government’s role should be limited to creating an enabling environment, such as setting and regulating grades and standards, ensuring food safety, and registering and enforcing contracts. This is in sharp contrast to the Asian experience where governments played a very strong role, including the heavy support in R&D, extension, improved seeds, fertiliser subsidies, financial service provision, storage and marketing. Price interventions played a key role in launching the Green Revolution and helped to ensure that small farmers were able to participate, and this contributed greatly to the levels of poverty reduction achieved. It has to be admitted that there are limits to this type of support, e.g. India is now subsidising its farmers by about $10 billion per year. In principle, this type of arguments calls for the launch of a Green Revolution, which is so desperately needed in Africa, without these kinds of interventions. It should just rely on the private sector. However, there is hardly any credible evidence to suggest that the private sector can take the lead in market chains for staple foods during the early stages of agricultural development. At this stage, the amount of profit to be made in market chains for food staples remains low and unattractive for much private investment. This is no advocate for a return to costly and inefficient parastatals or to hefty and poorly targeted subsidies. Also this is no argument against the strong role of the private sector where this can work, e.g. in many high value chains. However, governments still have an important role to play in lowincome countries. In concluding this discussion it is suggested that the position of the "agro-pessimists" fails to address the diversity of small farm situations around the world, and hence misses out on the excellent prospects for small farm development in many of the poorer countries. Nor does it suggest how a rapid exodus of small farms could be managed without resulting in much larger number of people becoming trapped in rural poverty and urban ghettos. 2.5 Key conditions for agricultural pro-poor growth: Lessons learnt

Out of the discussion so far, it becomes evident that poverty reduction has been successful in some countries while in others it stagnated or even failed. Lessons from successful and less successful public interventions are critical in selecting the right priorities and approaches for the appropriate poverty reduction strategies. These might be very specific to the local context. Therefore, the issue is not only what is to be done, but how it is to be done. The central conclusion of the last decades is that hunger and poverty can be cut by half over the coming decade in every country committed to the MDGs. Practical solutions exist. The cost is affordable. What is needed is political will and focused, concerted action. Agricultural growth still has a central role in achieving this objective. But the objective is not only to stimulate

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agricultural growth per se, but also to do it in a poverty-alleviating manner. While the local context is important, the key conditions for agricultural-led pro-poor growth can be summarised as follows: (1) The political environment must provide favourable incentives to farmers if they are to invest and produce efficiently. Policies that distort the terms of trade against farmers hold back the entire economy, not just agriculture. (2) Small farmers need improved technologies appropriate to their needs if they want to survive in today’s market place. This typically means more labour intensive technologies than large farms, though as small farms get smaller and/or labour becomes relatively more expensive, it becomes increasingly important to develop technologies that increase total factor productivity. Farmers not only need to produce more output and income per unit of land, but also to do this in ways that increase their labour productivity. Otherwise, they will simply work harder, but not earn higher incomes. In this regard, two aspects have to be taken into account: Technological improvements must result in a decrease in real food prices while the increase in total factor productivity must be faster than the decline in food prices in order for both farm incomes to rise and for poor consumers to benefit. However, new techniques should neither be risk increasing, nor should they require substantial private capital to be implemented. The other aspect concerns the initial distribution of assets, particularly land. Access to land must be equitable and property rights must be well specified. This is probably the major factor causing differences in the poverty reduction strategies among the various countries. On the one side, it has been observed in a vast number of studies that small and medium sized farms are typically more efficient producers than large farms in developing countries. On the other side, the effects are more pro-poor growth-oriented. Only under relatively egalitarian conditions, agricultural growth will be more equitable and relatively evenly distributed. This will allow a large number of rural people to increase their income and hence demand, particularly for non-farm products. In areas where agriculture remains important but the distribution of assets, especially land, is extremely inequitable, overall growth in agriculture may contribute little to reducing poverty. For example, in Latin America, where land ownership is highly unequal, a one percent increase in yields is estimated to reduce the number of poor by only 0.1 percent. On the other hand, in Sub-Saharan Africa, rapid growth in a large number of areas with the conditions for broad-based agricultural growth could make an enormous contribution to the MDG of reducing poverty. (3) Closely connected to increasing farm incomes for a large number of small-scale farmers are their consumption patterns which, in general, are also more pro-poor growth-oriented. Broad-based agricultural growth puts increased purchasing power into the hands of the rural masses, and not just a privileged few. The poor typically consume non-tradable food staples and rural non-farm goods and services. Particularly during the early stages of economic development, when infrastructural development is poor, labour-intensive local non-tradable goods and services tend to dominate rural consumer spending. The production of these nontradables becomes a relevant source of employment and income for other non-landed rural poor. Hence, the pattern of the distribution of increased incomes from initial stimulus is the most important determinant of subsequent growth. Agricultural development can thus contribute to both growth and poverty reduction if the fruits of the initial productivity stimulus are concentrated on those who re-spend it domestically (through consumption or investment) on

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labour intensive products with low import dependence. The rich usually spend a higher share of their incremental incomes on imported luxury goods with little growth stimulus. (4) Adequate levels of public investment in rural infrastructure are essential for promoting growth not only of agriculture, but also of the non-farm economy and rural towns. Access to transport and communication means is the first condition which has to be achieved in order to integrate the rural poor with markets. Better rural infrastructure will also strengthen ruralurban demand linkages. In addition, there must be complementary improvements in the provision of human capital assets at the local level, i.e. education and health services. Small farmers have to be supported in overcoming the risks involved when improving their farming systems. Access to yield-increasing inputs and techniques, financial services (often in the form of micro-credit) and agricultural extension have to be built up. The development of markets is an essential precondition to integrate the rural poor in local and regional circular flow of the economy. (5) These four conditions are required to achieve an agricultural revolution with the right kinds of growth linkages to the rest of the economy. However, markets and trade must be gradually liberalised if the agricultural revolution is to translate into rapid and sustained national economic growth. In general, the private sector will gradually fulfil this function. A competitive environment has to be created. Failure to liberalise the economy slows growth and encourages long-term inefficiencies. In conclusion, in a large number of studies it could be proven that improving the productivity of and the economic returns to agriculture will have immediate effects in eradicating extreme poverty and reducing hunger. In addition, subsistence farming households will enjoy immediate benefits from increased food production. But more importantly, increased food production will lead to real reductions in food prices, improving the purchasing power of the poor throughout the economy. Furthermore, economy-wide effects will occur when the focus on agriculture increases. Agricultural growth will, therefore, have ripple effects into other sectors - enhancing the productivity, increasing the returns and enhancing the incomes of those working in the other sectors of the economy. There are also strong effects in reducing urban poverty. Population pressures in urban slums will be alleviated to a significant degree if profitable agricultural systems are developed in the rural hinterlands. Although broad agriculture-led economic growth should lead in time to a significant movement of workers out of rural, agricultural occupations and into the manufacturing and service sectors located permanently in urban centres, such migration will be of a different quality than that most commonly seen at present where an unproductive agricultural sector forces many farmers and herders to the cities to search for employment that are only marginally more attractive in terms of economic opportunity. 3 Economic requirements to promote agricultural growth and reduce rural poverty

Consensus is emerging on the centrality of rural and agricultural development to achieving the MDGs. In 2003, the Evian summit of the Group of Eight strongly reaffirmed the importance of agriculture in poverty reduction and support to agriculture as a crucial instrument in ODA. The UN Millennium Project has selected rural development as the first of seven public-investment clusters to achieve the MDGs in order to pursue four main objectives: (i) making farms more productive (a “twenty-first century Green Revolution”); (ii)

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raising farmers’ incomes by getting farm products to the markets; (iii) improving the lives of the rural landless and (iv) expanding essential services in rural areas to meet the other goals. This comprehensive proposal is consistent with the fundamental point that achieving the MDGs is not about a safety net for the poor but rather a ladder for the poor to climb out of poverty. This, however, can only be accomplished if much higher volumes of investments are being made both by public and private sectors. 3.1 Empirical evidence of the impact of investments

The consequences of agricultural development for the poor can be direct through improved agricultural incomes, or indirect through the impacts on employment, wages, prices of products, and productivity of non-farm assets. A major contribution of the research on agricultural growth and poverty over the past decades has been to point out that the indirect impacts can be as large or, even, larger than the direct ones, but may take some time to be realised. Evidence from studies in Asia shows that the elasticity of agricultural employment growth to agricultural output is typically 0.3 to 0.6 percent, and the elasticity of employment growth outside agriculture with respect to agricultural output growth is around 0.9. Nevertheless, the contribution of the agricultural sector in reducing poverty is still enormous. There is a large econometric literature that uses cross-country or time series data to estimate sectoral and sub-sectoral growth-poverty elasticities. These studies, in general, find that poverty falls as agricultural productivity rises. For example, a one percent increase in crop yield reduces the number of poor people by 0.72 percent in Africa, by 0.48 percent in Asia, but just by 0.1 percent in Latin America. In India, this effect on poverty reduction has been estimated at 0.4 percent in the short run and 1.9 percent in the long run, the latter through indirect effects of lower food prices and higher wages. In-depth analysis has shown that in those countries with successful increases of agricultural productivity, public investments in agricultural research and development (R&D) and rural infrastructure were the most important drivers for growth, and there is much evidence of the high payoffs of these investments in the future. The overall results largely confirm the mass of evidence already available on the central role of increasing agricultural productivity on propoor growth, especially in the early stages of development and if productivity growth is transmitted to lower food prices. However, to achieve higher agricultural productivity in a pro-poor manner higher financial investments are needed. As shown above, the support to agricultural development by both international donor community and national governments declined during the last two decades. With exception of some Asian economies, most countries have not given agriculture and rural development a high priority in their national development strategies. Underinvestment in core public goods, especially infrastructure, R&D and increasingly education, has limited countries’ ability to reduce poverty effectively. For example, expenditures on public agricultural R&D amount to only 0.6 percent of agricultural GDP in the developing world, compared to 2.6 percent in the industrial world. In Africa, investment in agricultural R&D has actually fallen in about half of the countries in the 1990s. However, there are encouraging signs that this trend has been reversed recently. Since the last Millennium Summit, total ODA (i.e. all sectors, all donors) grew from US$ 50 billion a year to US$ 68 billion in 2003. Nevertheless, in addition to mobilising their own resources, poor countries will still need at least US$ 100 billion a year in ODA to achieve the MDGs. Key players from developing countries have understood that greater levels of resources need to be made available to agricultural development. However, budgetary allocations are by far

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inadequate. For example, the Comprehensive Africa Agriculture Development Programme strategy of the New Partnership for Africa’s Development (NEPAD) proposes investments of US$251 billion over the period 2002 to 2015, being under US$ 18 billion per year, to reduce the incidence of hunger and raise farm output. Such a budget faces some stark constraints as it actually requires tripling the total annual government expenditures on agriculture, which in the late 1990s were roughly US$ 6.2 billion. It is evident that the agricultural development needs of Africa alone can be neither met by the national governments nor under current levels of ODA. While almost all agree that higher volumes of investments are needed in order to achieve the MDGs, particularly MDG 1, it is difficult to estimate them precisely. Preliminary results show that the three main areas of investment alone under the “MDG scenario”, i.e. rural roads, irrigation and education, will require US$ 405 billion more between 1995 and 2015 than the “business-as-usual” scenario. The increase in irrigation investments is not only due to the expansion of irrigated area, but also to the increase in the cost of irrigation under the MDG scenario as a result of expansion in more costly areas, such as Sub-Saharan Africa. Agricultural research investments account for US$ 108 billion, and US$ 78 billion of investments towards increasing access to safe water are required. Due to long lags in the generation of impact of agricultural research, increases in research expenditures, even beginning now, will have relatively small impacts on crop yields by 2015. Increased investments in agricultural research are likely to be essential to meet crop and animal production needs beyond 2015 however. 3.2 Focal areas for higher investments

Quite a large amount of additional financial resources will be needed in order to achieve the MDGs. The focal areas are infrastructural development, like rural roads and irrigation, agricultural research and development (R&D), i.e. developing technologies that increase labour intensity and total factor productivity, extension, education, marketing and credit. In this chapter, the most important areas1, the options and the bottlenecks will be discussed in order to achieve pro-poor agricultural growth. 3.2.1 Major areas

In pursuing poverty alleviation policies poor countries are confronted with a dilemma. They have to invest more funds than in the past into the agricultural development and rural areas. Unlike the rich countries, however, which can afford to subsidize their small farms, the preponderance of small farms in most developing countries requires that, net of the costs of assisting them, they add rather than detract from national economic growth. This requires public policies and investments that create an enabling environment for small farm development. Therefore, countries with dynamic and growing national economies and rising per capita incomes can offer small farmers many more opportunities to diversify into higher value products, non-farm sources and to exit farming. But in poorer and slower growing economies, opportunities for income diversification and exit strategies are much more limited. Clearly, a “one-size-fits-all” approach will not work across these very different situations.

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At this stage, the discussion refers to the more technical aspects of investment. It is evident that any pro-poor growth strategy requires institutional and political innovations including investments which will be discussed in Chapter 5.2 and 5.3, respectively.

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Nevertheless, the most intervening areas for much needed investments can be deduced from the experience in the past. Basically, four different target points for improving agricultural productivity can be identified: (a) traditional food staples; (b) diversification into other (traditional) crops and livestock; (c) traditional export crops; and (d) diversification into highvalue crops. An improvement of agricultural productivity can be achieved either through increasing the productivity of each individual plant and animal variety and/or the integration of various crops and livestock species into more productive farming systems. What is often required is a set of public policies and investments to fully unleash this potential. With respect to food staples, it had been shown above that particularly in Africa, average yields are very low and the potential for improvement very high. During the early stages of economic transformation, the increase of productivity of food staples, particularly cereals, pulses and root crops, can play a very significant role in reducing poverty. But even in countries where food staples offer good market potential, one cannot assume that local farmers will capture a large share of that growth. That will require critical public investments to raise productivity and to reduce production and marketing costs. The integration of various crops and animal species into viable cropping and farming systems has a long tradition in improving agricultural productivity all over the world. Due to the varying natural, social and economic conditions, farming systems have to be fine tuned to the local circumstances. Similarly, traditional export crops, like coffee, rubber, cocoa, etc. played a prominent role in for a large number of smallholders in the tropical countries. Following the implementation of stabilisation, liberalisation and structural adjustment policies, the biggest responses have been in the export crop sector, especially in Africa, where devaluation, removal of export taxes, and (often) closing of parastatal marketing boards have substantially improved the incentives for traditional export crops, such as coffee and cotton. These reforms also stimulated new export sectors, both for traditional commodities (e.g. coffee and tea for Vietnam and cotton for Zambia) and for non-traditional ones, especially horticulture and high value niche products (e.g. cut flowers in Uganda, horticulture in Ghana and India, and quinoa in Bolivia). Farmers producing export crops experienced the fastest pace of poverty reduction. However, the fall of commodity prices in the late 1990s has reduced agricultural growth in countries heavily dependent on export crops and led to an increase in poverty among households that specialised in these crops. But, in general, it has to be concluded that, while the achievements are significant, the effects on pro-poor growth have been narrowly confined to areas with suitable agro-climatic conditions and/or access to infrastructure. In general, larger farmers have benefited more. Therefore, if left to market forces alone, the small farms will be bypassed by this development option. The challenge for the future is to improve traditional staple crops and farming systems as well as to make the “new” high-value agriculture pro-poor. There are opportunities to do just this in favour of small farmers and backward regions. Key requirements will be improving infrastructure and education in those regions, ensuring that small farms get the technologies and key inputs that they will need, and the promotion of adequate information and marketing systems. It is understood that small farmers cannot do all these things on their own, and the public, private and NGO sectors all have important roles to play. In order to provide the opportunity to the poor to participate in agricultural development, investments have to be increased particularly in the following areas: rural infrastructure, agricultural research and development, land tenure security, rural financial services, and improved marketing systems. It is evident that all these activities have to be implemented in a complementary manner.

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Rural infrastructure Any approach of poverty reduction will end in a failure in the absence of basic and appropriate rural infrastructure, which ranges from roads, communication, electricity and energy to education, health and sanitation facilities to access to safe drinking water. Although the importance of establishing adequate road networks is widely recognised, governments have often allocated the preponderant share of their transport budgets to prestige projects, while skimping on secondary and farm-to-market roads in agricultural areas and their maintenance, both of which generally have much more favourable cost-benefit ratios. The impact of rural infrastructure is of particular concern as it is one key input whose achievements will support quite a number of MDG targets in addition to poverty reduction. For example, in Sub-Saharan Africa where less than half of the population has access to safe drinking water, child mortality may depend on the availability of clean water, and attainment of universal primary education of girls may also crucially depend on access to piped water. Lack of access to it is not only a serious constraint to long-term productivity, but it also saves time for women who have to fetch and carry water. There is an ample number of studies about the aggregate links between poverty reduction and infrastructural development. In particular, the literature about the impact on poverty alleviation by specific infrastructure components, such as the role of rural roads, telephones, or access to electricity is very extensive. A study about Kenya shows that the ineffective infrastructure actually adds up to another value added tax of about 15 percent, which impedes access to product markets by small-scale farmers. Besides rural roads and communication systems, more investments in irrigation is another way out of poverty as it reduces climatic risk in dry regions and increases yield and cropping intensities. An important way in which the poor can expand their own assets is through acquisition of human capital such as education and better health. The role of governments in the provision of such assets is crucial and has been reviewed extensively. There are complementarities between human capital variables and the productivity of physical capital. This implies that agricultural productivity enhancing measures, such as provision of infrastructure and new technologies, will produce higher returns when implemented by more educated producers. In addition, investments in human capital formation can assist small farm households diversify into non-farm activities both locally and through migration, opportunities are also conditioned by the rate of growth of the non-agricultural sector. In general, more educated people are better prepared to meet the challenges of their new life and work in different sectors and at other locations. It can be concluded that structural impediments have to be overcome. It will be difficult to achieve sustained growth in production by price incentives alone unless countries develop serious strategies to reduce them. Therefore, strategies for infrastructure development are needed to be able to move towards poverty reduction. Agricultural research and development (R&D) Agricultural growth is no longer a matter of finding more land or water to produce crops. Instead, growth will depend on the capacity to innovate. It will rely on science and technology to make best use of existing resources to raise agricultural productivity and intensify and diversify agricultural production. However, agricultural research for the adoption of improved staple food crops, higher value crops and livestock on small-scale farms, and for post harvest handling, is under-funded in many developing countries.

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To obtain higher agricultural productivity will require seeds and other agricultural technologies matched to the local agroclimatic, labour and market needs of small-scale farmers. These technologies which must be environmentally friendly, will come from both conventional and newer scientific approaches, including scientifically sound and environmentally safe genetic modification. Agricultural innovation must raise yields and reduce environmental costs, and be affordable to small-scale farmers. In any regions, the land itself needs regeneration because soils have become less productive due to loss in nutrients. This problem requires research on methods for reducing nutrient loss and replenishing soils. There is a special need for catering the special needs of women farmers or labour-scarce households in general. These households typically need technologies producing foods that use relatively little labour, but without the expense of mechanisation. About 80 percent of the world cultivated land is rainfed and it produces 60 percent of world food and fibre needs. How can it become more productive for the poor? The ways forward are complex and vary from region to region, but the opportunities for increased productivity and for diversification are considerable. Reversing declining soil fertility is one of the biggest challenges for the future of agriculture in many poor regions. Fortunately, arresting and reversing soil degradation through the introduction of inexpensive technologies and practices is a real possibility, e.g. through soil conservation and water harvesting technologies. Similarly, soil nutrient depletion can be addressed with soil amendments and appropriate farming systems. More generally, improved management practices can substantially increase the efficiency with which water and nutrients are used. Since access to water becomes more and more a critical factor in agricultural production, there is a need to improve not only yields in general, but also drought and pest resistance in crops and help to develop better ways to conserve soil moisture. Although R&D is much more developed with respect to crops in irrigated areas, there is still a strong need for further improvements. Because yield gains have such a significant impact on reducing poverty, e.g. a one percent increase in yields translates into a 0.5-0.8 percent decline in poverty, the need to sustain growth in yields is acute. How will this occur, especially if the easy gains have been made? Exponential progress in molecular biology and information technology promises to raise yields for farmers in developing countries and at the same time alter global patterns of competitive advantage. Although conventional crop breeding still offers considerable potential to increase yields, especially in neglected regions such as Africa, the tools of biotechnology - including genetic engineering - could help achieve such complex goals as enhancing the nutritional quality of staple food crops, reducing crop and livestock losses to pests and diseases, and stabilising yields against drought and other climatic risks. In the past, the international agricultural research centres by the Consultative Group on International Agricultural Research (CGIAR) have played a special role in developing and spreading the technology of the Green Revolution. This support must be sustained as it will ensure that the CGIAR continues to focus on international public goods of most benefit to the poor and that it secures partnerships with the private sector to gain free or low-cost access to the new scientific tools that are critical for solving problems faced by poor farmers. New knowledge adopted through agricultural R&D, such as improved methods for breeding more nutritious crops or conserving soil moisture, has public good elements that spill across national boundaries. Therefore, it is much more efficient to organise this kind of strategic research at the international than at national level in order to capture significant economies of size. Particularly, there is a need for more long-term oriented strategic research that will enable agriculture to grow in the future. This urgency is increasing as the private sector now

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accounts for 70 percent of the research spending on genomics and 80 percent of the intellectual property emanating from it. Private companies supplying agricultural inputs, such as seeds or veterinary medicine, spend at least 20 times more on agricultural research globally than the CGIAR. Because the private sector naturally tends to focus on commercial agriculture and restrict access to research results, the knowledge and technology divide between the developed and developing world and between private and public research organisations is becoming far more extreme. However, the link between setting the research agenda of agricultural R&D and the poor themselves has to be closer than in the past in order to be of a lasting manner. The adoption of improved agricultural production technologies requires accessible systems integrating local knowledge and secure land (and water) tenure systems that enable the poor to put their knowledge into action and make it worthwhile to invest in land improvement. The links between research, extension and poor farmers need strengthening in new and innovative ways that encourage two-way communication rather than the traditional top-down approaches. Land tenure security The initial distribution of agricultural assets in the economy is a critical feature in whether or not agriculture-led growth will reduce poverty. Where land ownership is concentrated, as in parts of Latin America, such economic development is unlikely to reduce poverty greatly. In contrast, in most of Africa and many parts of Asia where the poor continue to have access to land, agriculture-led growth should lead to significant reductions in poverty. But besides the aspect of distribution of land among the farming population, land tenure security is an important factor determining agricultural growth. When rights to land and water are poorly defined, rural people have very insecure control over their assets. Unclear property rights spark conflict, promote resource degradation and discourage investment. They have a disproportionate impact on the poorest of the poor, who rely most on communal or open access resources. Well-defined, secure and transferable property rights are a prerequisite for efficient land and water markets. Therefore, small-scale farmers need (1) assured long-term access to land if they are to pursue sustainable farming practices and make long-term investments in improving the productivity of their resources. Many of the indigenous land tenure systems seem to provide reasonable tenure security to those who have access to land and they seem to evolve to accommodate changing needs as population and commercialisation pressures increase. (2) Many resources are owned and managed as common property, e.g. grazing areas, woodlands, water, and wetlands. There are usually good reasons for this. But if these resources are to remain in common ownership and to avoid being privatised or over-used, then governments need to recognise local rights and capacities to manage these assets. (3) Small farms also need access to efficient land markets for sale and rental purposes. This need is growing as small farms become increasingly smaller in many land-scarce economies. Land markets facilitate land consolidation as some farmers seek to migrate to urban areas. They can also provide a way of facilitating land redistribution in countries where land is excessively concentrated. Governments have to invest in order to ensure secure access to land by the poor. On the one side, there is a need for a strong land administration component that establishes land rights and the complementary mechanisms of titling, registration, transfer, dispute resolution and revenue collection, in addition to supporting the development of land markets. On the other side, a land reform component has to be implemented in areas of quite a number of countries where injustices have led to inefficient or highly inequitable land distribution. As there is generally an inverse relationship between farm size and productivity, redistributing land in a

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way that favours smallholders can provide both efficiency and equity benefits. However, it is important to emphasise that land reform programmes cannot be limited only to the transfer of land. In order to be successful, complementary investment and support is needed. Rural financial services One of the limiting factors in improving agricultural production is the limited access of poor farmers to financial services. In general, private banks are servicing the needs of large commercial farms, and micro finance institutions have mushroomed to cater for the financial household needs of the poor. The seasonal nature of farm credit needs and the highly covariate nature of most agricultural production, marketing risks and inadequate collateral undermine the viability of borrowing for farm credit purposes. Hence, small-scale farmers often rely on self- or family financing, using livestock and other assets as well as remittances from family members in non-farm employment. An alternative might be the local moneylender or pawnshop which is highly costly. Improving small farmers’ ability to save and invest requires the full range of financial services, including credit and deposit banking at competitive interest rates. Although a return to the inefficient and highly subsidised agricultural development banks is not to be recommended, there is a clear need for some form of public intervention to help fill this void. New types of institutional innovations are badly needed. The poor are particularly vulnerable to any shocks. Climatic shocks are reflected in sharp fluctuations in food prices, which are especially important for poor producers (when there is a collapse in prices) and poor consumers (where there is sudden surge in prices). The high degree of vulnerability forces the poor to adopt insurance mechanisms, which often undermine their production potential. Under vulnerability and in response to external risks, the poor may devote a considerable portion of whatever savings they have into liquid forms of non-productive assets, as insurance, e.g. grain stocks, animals, jewellery, etc. Thus, the need for precautionary savings may reduce their investments in more productive activities and hence, their growth opportunities. Similarly, the need to maintain some income when adverse shocks occur induces parents to pull their children out of school (an acknowledged profitable investment) and send them to work. This clearly prevents human capital accumulation and leads to persistent poverty across generations. It is clear that what is needed under such conditions is some institutional mechanism to provide cheaper insurance to the poor in a reliable and credible way, in order to let them utilise their own savings in a more productive way. Therefore, efficient financial services have to be built up in the rural areas. They have to be responsive to the needs of poor producers, for both agricultural and non-farm activities. Resource-poor private producers cannot invest without having access to reliable financial services. There is no universally effective model of rural finance, but there is a universal need for saving and credit services. Improved marketing systems Small rural producers face major challenges in selling their products, including high transportation costs, low economies of scale, lack of information, high risk, legal and illegal taxes, too many intermediaries, excessive physical losses. Marketing margins are lower for export crops where competition tends to be greater. Marketing costs are highest for farmers in remote or less accessible villages, where buyers can exert monopsony buying power. Little has been done to reduce the obstacles that producers face in terms of information requirements, training, capacity-building and development of managerial skills, which restrict

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their participation in local and international markets. Such participation requires above all the organisational and knowledge empowerment of poor rural people to negotiate better relations in the marketplace and influence policies and institutions that regulate these relations. Another option to improve marketing systems and to cover the financial needs of small-scale farmers are commodity futures markets. They offer the opportunity to provide forward price contracts to small farms. Rather than expecting farmers to trade in these markets on their own account, market intermediaries, such as large traders, processors or exporters, might be induced to offer farmers forward price contracts, and then to hedge the assumed price risk on their own account in the futures market. For this to happen, governments must establish mechanisms to ensure that contracts are enforced and, where appropriate, establish domestic futures markets for key commodities. 3.2.2 Sources of Investment

After having discussed what has to be done in order to alleviate poverty and the financial requirements have been assessed, it has to be asked who is actually to cover the costs. Very roughly, it is the public sector on the one side including national governments and international donors and the private sector on the other. Their respective roles have changed over time. During the 1960s and 1970s, governments in most developing countries used to play a dominant role in economic development, which left a minor one for the private sector. During the 1980s most governments had to reduce or even give up their roles while the private sector was supposed to run the economy effectively. In many cases, it has not been in the position to do so. In these days, it is understood that there is no “either – or”, but both have to act in a complementary manner. The role of the state in providing basic infrastructure and social services is largely uncontested. Arguably, there is an important role it can play in helping poor farmers reduce risks in the transition to market-based agricultural and rural systems and adapt to changing market conditions. It is evident that risks and uncertainty have an adverse effect on rural investment and constrain productivity gains in agriculture. No significant investments can be expected from poor farmers in a context of volatile and unpredictable prices for agricultural products. Price stabilisation schemes might be an option whereby farmers will be encouraged to invest more. It might be implemented in close collaboration with the private sector, but it might be rather costly. Nevertheless, the experience from Asia shows that it had been a key condition to develop the production of many agricultural commodities. In general, it had been realised that particularly at the start of economic transformation, public investments play a critical role in meeting the needs of small farms. At that stage, the private sector is mostly poorly developed and, even if being operational, not attracted to step in due to poor profit margins in agrarian countries and regions characterised by frequent market failures and high risks and transaction costs. Another factor is the long time horizon of investments promoting agricultural productivity. Investments in agricultural research, education and rural infrastructure are often the most effective in promoting agricultural growth and reducing poverty, though a significant amount of time often passes between the initial investment and its visible impact. Even in less favoured agricultural areas, public investment can lead to high returns for the poor. In general, the private sector does not have enough resources to finance all these needed long-term investments. Therefore, public investments must be targeted carefully in order to (1) favour the poor, (2) stimulate private investment and market

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development, and (3) have the maximum effects on productivity growth and the profitability of the private sector. However, the tasks to reduce poverty and develop the national economy are that challenging that the vital role of the private sector cannot be neglected. The public sector simply does not have enough financial resources in doing so and, in general, is not prepared to play a dominant role as a business organisation. The private sector is increasingly called upon to fill investment gaps and to provide its comparative advantage in organising and executing business activities. Since private investors are cautious to invest in activities which might easily fail and have limited financial resources themselves, joint ventures in form of publicprivate partnerships are an important way to increase financial, human and social capital in rural areas. Partnerships range from publicly provided training for small and medium-scale enterprises, partnerships in education, agricultural research, the provision of information and communication technologies, the expansion of rural infrastructure, including roads, to the development of rural industrial clusters. With public funds increasingly scarce, private-public partnerships are one important means to enhance investments in rural areas. At this stage, it has to be specified who actually is making up the private sector. For too long, it had been associated with formal registered companies, both national and international ones, focusing on the industrial and service sectors. It had been overseen that in most countries farmers are forming, by far, the largest group among the private entrepreneurs. Particularly, small farmers constitute the bulk of the private sector economy in many developing countries. Similarly, most of the landless poor work as micro-entrepreneurs in the non-farm sectors, either formally or in general informally. Hence, it can be stated that the poor form a vital part of the private sector. Their investment decisions are not only important for their own life, but influencing economic development of the whole economy. Therefore, a major part of all needed investments will have to be borne by the poor themselves. They will have to mobilise their own resources, which are contributing to private sector investments, but need the appropriate environment. 4 Promising strategies of agricultural and rural development to promote pro-poor growth

As discussed above, the rural poor are not forming a homogeneous group. They have varying access to resources due to differences of sex, age, education, health, etc. Similarly, the natural, economic and social conditions are highly different in the various regions. Therefore, agrarian systems and rural worlds are highly diversified and at different stages of development. That is why there can be no blueprint for pro-poor rural development but rather a need for strategies that reflect the differing and even competing objectives of the poor themselves as well as the differing conditions. Due to the large number of influencing factors, development strategies have to be designed for each location. It also calls for a wider range of policy options than what has been available in many low-income and least developed countries during the last 20 years, under the constraints of debt, aid dependency and structural adjustment programmes. But first conclusions from the last years show that there is a need of policy innovation for rural poverty reduction and more space for rural poverty within the national poverty reduction strategies. While there are an ample number of strategies available, five basic approaches can be deduced from the farmers’ point of view: (1) Intensification occurs when production from existing systems is increased. It can be differentiated between intensification that is driven by the generation of new technologies for existing enterprises, and intensification led by

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investments that relax key binding constraints, such as an investment in irrigation. (2) Diversification is a change in resource use patterns and outputs that enables producers to take advantages of market opportunities. Diversification may or may not lead to specialisation at the farm level, but throughout local regions it is likely to result in a greater diversity of enterprises, because the quality of resources and access to them will vary within the region. The potential gains from diversification come from improving crop rotations, spreading labour demand, improving cash flows and reducing risks. (3) Expansion of farm size can occur when land is consolidated among a declining farm population or when farming expands into previously non-agricultural areas. Farm expansion is generally the least important strategy in irrigated and marginal systems, but it is still quite relevant in high-potential rainfed areas, such as those in Brazil and parts of Africa. (4) Off-farm income can be obtained through seasonal migration as well as part-time employment in the local non-farm economy. Typical income-earning activities include work in local agricultural processing plants, smallscale handicraft production, participation in the local service industry, remittances from migrants at distant locations and employment in public works. (5) Exit is the abandonment of farming for non-farm occupations. While exit can imply migration to a new location, usually a town or city, it can also simply mean the reallocation of labour to the rural non-farm economy within the local area. While it is understood that the focus of any poverty reduction strategy has to reflect the local conditions, there is a long experience with the elaboration and execution of practical strategies. The most relevant starting points and major factors to achieve pro-poor growth have been identified. These broad-based strategies can basically be distinguished according (a) to the stage of economic development, i.e. the significance of agricultural production in society and economy, (b) the dominant farming system, and (c) to the major regional settings, i.e. continents although some overlapping might be possible. They will be outlined below. 4.1 Promising strategies depending on the stage of economic development

Agriculture’s role in the economic development of a country changes as the transformation proceeds. In the beginning, the agricultural sector dominates both work and life of the population. With economic development and the spread of the division of labour, its importance declines and the industrial, manufacturing and service sectors determine economic development. People’s livelihoods are less and less influenced by the agricultural sector. Similarly, society becomes more and more urbanised. The transformation is continuing gradually. Nevertheless, agriculture still plays an important role for the livelihood of the poor. In the following, the main factors of poverty reduction strategies for an agricultural as well as for an industrial economy are discussed. 4.1.1 Areas of low economic development: Society and economy dominated by the agricultural sector

At the start of economic transformation, the factor capital is in very short supply. Hence, agricultural production technologies are determined by the availability of agricultural labour. Roughly, areas can be distinguished with respect to poverty reduction strategies in either labour-abundant or labour-short regions. (a) Labour abundant regions When looking at numbers, the poor live predominantly in densely populated areas where the number of labourers is large while land is relatively in short supply. In order to reduce

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poverty agricultural development has to focus on labour-absorbing technologies. In such settings, agricultural research should try to increase the productivity of land. The major starting points are the introduction of labour-intensive, but more productive crops, highyielding seeds, short-maturing varieties in order to enlarge the cropping index, the productive applications of fertilizers and pesticides, the integration of livestock into crop production systems, etc. Under a relatively egalitarian distribution of land, this will not only lead to higher economic growth, but also helps ensure that the growth that is achieved is more beneficial to the poor. In this way, small farm development can be win-win for growth and poverty reduction as has been witnessed with the Green Revolution in Asia. In addition, the local non-farm sector will get a much needed boost for employment and income creation. A major issue, however, is the security of land ownership or tenure rights. These rights are far from secure in many developing countries, and this may be a major impediment to land productivity augmenting technical change that will enhance the value of land. If land ownership is very unequal, the benefits tend to worsen income distribution, if most of the poor are landless. Thus the poverty and growth implications of any land productivity augmenting technical change in agriculture will depend considerably on the existing land tenure system because it is the appropriation of the benefits of technical change that is at issue. (b) labour-short regions Traditionally, most agricultural areas were not densely populated. There was an open land frontier and the classical approach had been the cultivation of unused land. But even today quite some regions, e.g. in Africa, are still below their carrying capacity. In these areas there is a need for labour augmenting technologies, like simple and adapted tools and equipment, high-yielding seeds that for the same or even lower labour input ensure a higher level of yield, varieties that are more pest-resistant and therefore save time for pest control, etc. However, this type of technical chance has to be widely adoptable as research costs per affected household might be quite large. Labour-shortage might not only be a relatively long-term feature of a certain area, it might also affect farm households relatively quickly. Due to the rapid spread of diseases like HIV/AIDS malaria and others, but also of uprisings and civil wars, the number of able adult workers might decline very quickly. In general, this would lead to a sharp increase of femaleheaded households. In order to overcome poverty, these households will be in need of labourextensive technologies that are not capital-demanding at the same time. Already under ‘normal’ conditions, domestic time demands upon women are, in general, greater than for men due to farming and household responsibilities. Therefore, agricultural technology has to be developed with close attention to alleviating some of the labour constraints experienced by rural women. This has the potential to improve not only the wellbeing of the women farmer, but also that of others within her household who are dependent upon the care she provides. Similarly, it might provide some time for pursuing some other gainful employment opportunities. 4.1.2 Economically more advanced countries but still plagued by a high incidence of rural poverty

The contribution of the agricultural sector to growth naturally declines with structural transformation from an agricultural economy to an urban-based non-agricultural economy, although even well into middle-income status, agriculture continues to “pull beyond its

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weight” as measured by its contribution to GDP, due to its unique ‘externalities’. The role of the rural non-farm economy increases as a source of growth, initially led by linkages to agricultural growth, but later tied increasingly to urban-industrial development, especially in areas of good infrastructure and high population density. As average per capita incomes rise, economies diversify and workers leave agriculture, rural wages go up, and capital becomes relatively cheaper. It then becomes more efficient to have progressively larger farms. This is accentuated by the economies of scale, which emerge with more capital-intensive forms of farming. The rate of transition to larger farms depends critically on the rate of rural-urban migration, and hence on growth in the non-agricultural sector and on agricultural policies. Small farms survive longer in the transformation process if they can adapt to the changing economic environment. Key adjustments include buying or renting additional land, diversifying into higher value production activities and expanding into non-farm sources of income or employment. Fortunately, opportunities to diversify into a broader range of farm and non-farm activities also grow as countries become richer. This is because demands for more diverse and higher value foods, such as fresh fruits and vegetables, livestock products, fish and processed and pre-cooked foods, increase with rising per capita incomes and urbanisation, and the non-farm economy grows more quickly than agriculture. Poor farm households also have to adapt to the changing economic situation at the individual and household levels. Farm income, including agricultural wage income, is just one source of income among other, particularly non-farm sources. Non-farm employment might be taken up either in the rural areas, but also in the urban areas or even in foreign countries. Pluriactivity of one person and/or a specialisation of labour activities among the various members of the family can be observed. Generally, small-scale farms will remain an important source of their livelihood, albeit managed on a part-time basis. Even as the role of agriculture in growth declines with structural transformation, it still has an important function in times of high risk. This time, these risks are not the classical ones, like climatic and price risks, but risks due to economic slow-down or uncertainty. For example, during the crisis in the mining and manufacturing sectors in Zambia or after the start of the Asian Crisis in Thailand and Indonesia, a large number of urban workers used to return to “their” farms in order to survive. Similarly, with the change of the central-planning system to the market-economy in quite a number of former socialist countries, the number of agricultural population has increased rapidly, e.g. in Albania, Romania, Kyrgyzstan or Mongolia. This implies that also in middle-income countries the agricultural sector still fulfils the important function of an economic safety net. In general, it becomes evident that even as the role of the agricultural sector in growth declines with structural transformation, rural development continues to be critical in reducing poverty and inequality. Differences in natural resources and access to markets and assets often result in uneven growth and growing inequality within the sector, between small and large farms and between regions, which result in even wider rural-urban inequality and ‘poverty traps’ within rural areas, unless explicitly addressed through poverty-oriented rural development strategies. 4.2 Promising strategies depending on the dominant farming system

Agricultural production contexts are distinguished by a host of variables, but natural and human resource endowment, access to input and output markets, and the use of technologies are among the primary ones. Based on these variables, three very broad types of agricultural systems on a world-wide scale can be delineated: (1) high-potential irrigated systems, (2)

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high- and medium-potential systems with limited access to markets, and (3) marginal drylands. These “mega-systems” provide another focal point in discussing pathways for encouraging economic growth and reducing poverty. Together, these systems account for over 3.3 billion people, or about 73 percent of the population in agriculture in developing and transitional economies, and about 6 billion hectares. In the following, each of the megasystems will be discussed. (1) Irrigated areas have driven agricultural growth and catalysed much wider macro-economic growth in many developing countries. These areas are estimated to cover 18 percent of cultivated land, but 43 percent of the total agricultural population in developing countries resides there, mainly in Asia. These areas are well endowed with natural resources. Their fertile soils and flat plains seem designed for high-yielding, intensive agriculture. Crops can often be grown year round, for up to three harvests per year. People generally have more equitable access to land and water than they do in other agricultural systems that face greater constraints. In irrigated high-potential areas with good infrastructure, the most important strategy is to diversify on and off farm. On farm, higher value products can be produced, while off farm, diversification presents new opportunities for adding value, and industrialisation creates employment opportunities that spill into rural areas. Growth in high-potential areas is driven basically by the private sector, so that the priority for public policy is to eliminate any remaining policy constraints on trade and markets and to invest in public goods that encourage private investments. The greatest policy challenge is to include the poor, especially in expanding markets for higher value commodities. (2) Of the total agricultural land in developing countries, 27 percent has high or medium agroecological potential but suffers from limited access to markets. The biophysical endowments of these systems, especially their good climate and soils, give them great potential to increase agricultural production, but this potential has been offset by barriers to transportation and communication. Agriculture in these areas encompasses mixed maize farming systems in Eastern and Southern Africa, extensive mixed farming systems in Latin America, and rainfed systems in Central and Southern India. Medium- to high-potential areas with limited market access, especially in Africa, represent a major priority and challenge for the development community. Intensification and diversification are the two primary strategies for these areas. Both strategies are fostered by better access to input and output markets, complemented by the development of effective systems to generate and disseminate technologies. Aside from investing in infrastructure and technology, the main entry points should be to support options for managing risk, the development of land markets, and improved land management to mitigate land degradation. It is critically important to sequence these interventions carefully, especially to get markets working. (3) Marginal drylands are sparsely populated and often remote, with highly limited agroecological potential and poor access to markets. These areas are distributed relatively evenly throughout the developing world. Some 2.8 billion hectares, or about 30 percent of the total land area in developing countries, can be described as marginal drylands, but only four percent of this land is cultivated and only eight percent of the agricultural population in developing countries lives in these areas. Farming systems range from the sparsely populated arid and agro-pastoral millet/sorghum systems of Sub-Saharan Africa to the mixed intensive highlands of the North Andes in Latin America. Livestock production is often the most important enterprise, with extensive pastoral systems being the most common. The rural

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population consists largely of subsistence-oriented households that lack most types of assets. The incidence and severity of poverty in these areas is generally high and getting worse. Marginal drylands, populated by some of the world's poorest, constitute especially difficult challenges. Exit from agriculture is by far the most important strategy, followed by growth in off-farm employment. As exiting agriculture is generally a longer-term proposition, those agricultural systems that remain viable must be developed in the short- and medium-term to reduce poverty. The main hurdle for marginal areas (and their often minority populations) is to involve them in the policy dialogue and to design safety nets that do not encourage dependency or crowd out local initiatives. A new generation of agro-pastoral projects shows much promise in fostering community management, risk management and access to markets in these difficult environments. 4.3 Promising strategies depending on the region/ continent

Another way of discussing the main outlines of agricultural development as the engine of propoor growth can be done by comparing the respective continents, i.e. Africa, Asia and Latin America. Comparing the development trend during the last twenty years reveals a striking correlation between regional patterns of agricultural growth and the patterns of poverty reduction. Again, at this stage, only the most striking factors will be discussed below. 4.3.1 Sub-Saharan Africa

Sub-Saharan Africa is the most problematic continent. The rate of poverty actually rose between 1990 and 2001. In 2001, about 46.5 percent of the inhabitants (314 million) were living below the international poverty line. If the region follows current trends, 39.3 percent of the population will remain below this line by 2015, and Sub-Saharan Africa will be the only developing region where the number of poor people has actually increased from the 1990 level. Sub-Saharan Africa’s relatively small low-income countries are still at the early stage of structural transformation, with generally low land and labour productivity, and agricultural growth is identified as the most important means for reducing Sub-Saharan Africa’s hunger and poverty. Agriculture is the primary source of livelihood of approximately 65 percent of the region’s population, represents between 30 and 40 percent of the region's GDP, and accounts for almost 60 percent of its income from exports. As shown above, the share of public expenditure directed towards agriculture has declined during the last two decades. In Africa, this measure is especially worrisome as agriculture's share in economic production has risen, largely because farmers and consumers has had only limited political clout and because more emphasis has been placed on education, health and social security. Expenditures for agriculture had begun to fall in Africa long before agricultural R&D and rural infrastructure received sufficient resources for growth to occur, and expenditures have fallen despite much recent empirical evidence that the economic and social payoffs to agricultural investments are quite high. In general, Africa is blessed with abundant natural resources on a per capita basis, and yields are so low that there are plenty of opportunities to raise them through technological change. Some sixty percent of the rural population in Africa live in areas of good agricultural potential and poor market access, while only 23 percent live in areas of good agricultural potential with good market access. The remaining 18 percent live in the most difficult environments with poor agricultural potential. Yet revitalising the sector will not be easy. Africa still has much lower densities of rural infrastructure than India had in the 1950s. The development of

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agricultural production is primarily constrained by the limited access to markets, caused by one or more of following three factors: (1) physical location: producers are isolated by long distances or difficult topography from densely populated areas with large, active markets; (2) inadequate infrastructure and support services, such as roads, communication systems, and extension services; and (3) weak purchasing power and demand in the markets themselves. High transportation costs, often exacerbated by the existence of transport monopolies, discourage the commercial production of bulky products such as cereals. Lengthy transit times limit sales of agricultural products to non-perishable commodities. These problems are neither new nor insurmountable. While the strategy of agricultural led growth has not yet worked in Africa on a broad basis, success stories can be found already. There are grounds for cautious optimism, as the experience from Ghana and Uganda shows. Both managed to turn negative per capita agricultural growth from the 1980s to positive growth in the 1990s. Both achieved similar levels of poverty reduction, although with regard to growth rates, Ghana did better. This may reflect Ghana’s better performance in the food sector, where the growth linkage effects for both rural and urban poor are typically higher than for export crops (as e.g. in Uganda). In both countries, agricultural households accounted for a larger share of poverty reduction at the national level. Similarly, in both countries mutually reinforcing growth in both the agricultural and non-agricultural sectors could be observed, driven by productivity. Where the non-agriculture sector did not grow (e.g. Senegal) or suffered from major declines (e.g. Burkina Faso, Zambia), agriculture maintained some momentum and acted as a ‘safety net’ for the increasing number of urban poor and for economic growth more generally. This function is rarely recognised by policy makers. For most African countries, agricultural growth still offers the most promising avenue to propoor growth. While achieving agriculture-led growth faces several constraints, many of them, like poor infrastructure and underdeveloped markets, are also faced by the economy as a whole. It will be difficult for countries to find a sector that better employs their existing resources and that creates enough job opportunities and pathways out of poverty for the population as a whole. In areas with reasonable agricultural potential but poor market access, where about 60 percent of the rural population live, agricultural growth has to start with slight improvements of the existing farming systems. In a first step, emphasis has to be put on the improvement of food staple production to satisfy domestic demand, which is projected to double over the 15 years. Because of poor market access, these areas are effectively insulated from world markets. Production for home consumption and local markets will remain important to ensure household food security but there will be soon a limit for local demand, unless market development and investment in infrastructure connect farmers to wider markets. In a second step, as the productivity of food crops increases, priorities should shift toward enabling diversification to relatively low volume, higher value non-perishable crop and livestock products. Diversification also presents opportunities for developing the nonfarm economy through further value-adding and thus off-farm incomes and exit. In areas of better market access, where about 23 percent of the rural population live, growth strategies already focus on export of traditional and non-traditional commodities. However, high transport and marketing costs constitute the biggest challenge in improving these systems. For example, African farmers still receive a farm-gate price of coffee that is 30 percent lower than the one faced by their Vietnamese colleagues. Production of many nontraditional export commodities, such as horticulture, is much more labour-intensive than traditional agriculture and is a potential future source of pro-poor growth in areas with the best market access. However, it is unrealistic to believe that such opportunities can become the principle engine of growth and poverty reduction for most countries over the next decade.

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In the marginal areas with both poor agro-climatic potential and poor market access, where about 18 percent of the rural population live, the avenues for pro-poor growth are more difficult. These environments characterise areas of growing poverty concentration. The natural resource base in these areas often cannot support the current population leading to a classical “poverty trap” and high food security risks. Seasonal and permanent migration from these areas undoubtedly will increase. In the short- to medium-term, strategies for improving local livelihoods should aim to enhance food security, conserve natural resources, and, where possible, enter markets for selected products in which these areas have a comparative advantage, e.g. spices, herbs, honey, small animals, etc. Where feasible, the build-up of smallscale irrigation and a more sustainable utilisation of common property resources can improve livelihoods. In conclusion, there is ample evidence that agricultural and rural development can provide the “engine” of pro-poor growth and transformation in most African countries, even in the changing global context of the 21th century. However, this will require a long-term commitment to redress the urban bias and invest heavily in rural areas. The key elements look as follows: (1) Massive investments in physical infrastructure for improved market linkages: in most areas, investment in feeder roads is the first priority, but small-scale irrigation has much potential in drier and riskier areas. In countries with low population density, infrastructural investments may have to be geographically concentrated, in efforts to reduce costs and create agro-industrial growth poles. (2) Institutional innovations, particularly the build-up of rural financial services, and smart subsidies for market development such as redressing co-ordination failures along the market chain, matching grants for development of agri-business, and targeted input vouchers to develop input markets. (3) Investment in R&D to develop technologies tailored to diverse rainfed situations. Given the low stock of knowledge resulting from past underinvestment, the small size of most countries, and the number of ‘orphan crops’ and ‘orphan pests’, massive investments are needed at regional, national and local levels. (4) Improve natural resource management to reverse soil fertility depletion, which is, after the elimination of subsidies, the major constraint on productivity gains, especially with the decline in fertilizer use in many areas. (5) Management of production and price risks by investing in financial innovations such as warehouse receipts systems, in novel insurance schemes such as weather-index based systems, and in social safety nets. (6) Development of poverty-focused programmes for the poorest marginal areas, combining elements of household food security and safety nets, mitigation of risks, exploitation of specific products with comparative advantage, and management of community natural resources. 4.3.2 Asia

The greatest advances are taking place in East Asia and South Asia. Progress in the two most populated countries, China and India, tips the scales for the developing world averages. The headcount poverty rate in China dropped from 33 to 17 percent between 1990 and 2001, while in India it dropped from 42 to 35 percent. In India, however, poverty reduction rates have been offset by population growth, yielding roughly a constant number of 360 million people. Other parts of the continent have made good progress, too. Still, the number of extremely poor people in Asia remains vast: 270 million in East Asia and 430 million in South Asia. Actually, in absolute figures, the greatest number of poor people can still be found in India. In addition, maternal mortality remains extremely high in South Asia and the spread of HIV/AIDS is increasing in both East and South Asia.

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In general, the large emerging low-income countries of Asia have undergone wide structural transformation, generated by rapid growth in agricultural productivity, especially land productivity. There has been a high degree of consistency in the development trajectories, although from different initial levels. Agricultural GDP has grown in most countries in a remarkably stable manner. Differences between the experiences depend on (i) whether countries started relatively early (e.g. India – with regional differences – or Indonesia) or relatively late (e.g. Bangladesh or Vietnam) in their structural transformation process and (ii) on the impact of the Asian crisis. The rapid structural transformation of the Asian economies raises the question on whether agriculture continues to be a lead sector in pro-poor growth. Here, the evidence is mixed. Indonesia, for example, has been relatively more advanced in terms of structural transformation with significantly higher rates of urbanisation, a lower dependence on agriculture for employment and value-added, and much lower poverty rates. Synergistic and parallel evolution of both the agricultural and non-agricultural sectors helped to reduce poverty. But agricultural growth accounted for much of the poverty reduction up to 1996. On the other side, in India, agriculture was attributed a major role in rural poverty reduction up to the early 1990s. Since then, the biggest impact on poverty came from secondary and tertiary sectors, with the agricultural sector still being the most important in five states, mainly “late starters” in economic transformation. Low levels of infrastructure, education and initial conditions in agriculture played an important part in explaining divergence among the Indian states. Since the early 1990s in India and since the Asian Crisis in 1997 in Indonesia, the rural-urban poverty gaps are widening. But one important insight from most Asian countries is that overall growth at the national level can bring about substantial poverty reduction. Nevertheless, agricultural growth and rural development will continue to be critical for poverty reduction in Asia although overall economic growth is now largely dominated by growth in the non-farm sectors. Rapid industrialisation means that agriculture now has to compete more directly with labour, as wage rates rise in the non-farm sector as well as land and water prices due to urbanisation. Moreover, the linkages between agricultural growth and poverty reduction may be weaker now, as mechanisation reduces employment and liberalised trade policies have greater influence on food prices than domestic productivity growth. Therefore, a more diversified strategy is needed to realise the potential for pro-poor growth. In the irrigated areas, a three–pronged approach is needed. First, although growth in the demand for food staples has slowed significantly, the feasibility of importing large volumes of food from world markets, without substantially increasing world prices, remains limited in large Asian countries. Therefore, efforts to improve the productivity and profitability of food staple production must continue, and the increasingly observed yield plateaus require increased public investment in R&D to break the yield frontier. The second and most important element is to promote diversification of both on-farm and off-farm income and the management of exit from agriculture. Rapid income growth and urbanisation are driving consumer demand for higher value products, most of which are also labour intensive. Rapid globalisation of horticultural markets and other niche products also provides opportunities for growth in exports. The first priority is to complete policy reforms to remove disincentives for diversification, especially import protection and subsidies to food staples. A second challenge is to connect small farmers to this diversification process, given the rise of co-ordinated supply chains and potential economies of scale in these chains. The other major component is the diversification to non-farm activities. This will become more important in the future as agricultural diversification presents new opportunities for value-adding, and as industrialisation creates employment opportunities through small and medium enterprises that spill into rural areas.

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In more remote and marginal areas, relative poverty, although not absolute poverty, is highest. The rapid growth in the more favoured areas has widened the disparity. These areas require specifically targeted programmes. However, growth-equity trade-offs may be small. In fact, there is evidence from India and China that the marginal returns to public investments in these areas may be higher than in the more favoured areas where much of the past investment has been concentrated. In sum, the key policy issues for a pro-poor contribution of agriculture and rural development are: (1) Support R&D to ensure moderate productivity gains in cereals and diversification to higher value products. (2) Provide the macro-environment and institutional environment for agricultural diversification, paying particular attention to how small scale farmers can participate in rapidly expanding market opportunities. (3) Foster regional development approaches that diversify rural non-farm incomes by facilitating rural industrialisation, with an emphasis on infrastructure, skill development and education. (4) Focus more support on ‘backward regions’, many of which have considerable potential to be new sources of growth or to provide valuable environment services. (5) Invest in education and labour market reforms to facilitate exit from agriculture to both the rural and urban non-farm sectors. (6) Expand safety nets and transfers for the chronically poor. 4.3.3 Latin America

Most countries of the Latin-American continent are middle-income countries. The number of poor people stagnated at around 50 million, while it dropped slightly from 11 to 10 per cent of the population between 1990 and 2001. The GDP per capita grew by only 1.5 per cent a year during the 1990s. This disappointing growth performance and the fact that it is the most unequal region in the world in terms of income distribution are the main factors behind the limited progress in poverty reduction. However, the average country indicators mask wide local disparities in social conditions by ethnicity, gender and geographic location. The countries in Latin America are very divers in size and other aspects, but generally characterised by highly unequal land distribution and a dualistic agriculture - a dynamic largescale commercial sector and a stagnant sector of small-scale farmers, often regionally concentrated in marginal areas with high levels of poverty. Their experience with respect to poverty reduction is very different. El Salvador, for instance, rural poverty fell largely due to increasing non-farm incomes and remittances, despite weak agricultural growth and negative productivity growth per worker. Brazil on the other hand, experienced one of the highest agricultural and labour productivity growth rates while non-agricultural growth has been slow. However, rural poverty rates fell only marginally. Two reasons seem to be responsible: First, agricultural growth is concentrated in a dynamic export-oriented sector while, second, the rural poor are increasingly likely to reside in the marginalised rural North East of the country, which benefited little from agricultural growth. The relatively low and declining share of agriculture implies that it will make a smaller contribution to overall growth than in the past. Nonetheless, many countries have a comparative advantage in agriculture, with huge potential in world markets. While the contribution to growth has been substantial, the large-scale mechanised technology means that the contribution to pro-poor growth has been much less. Large-scale commercial agriculture has the potential to be pro-poor where it is labour intensive, e.g. horticulture and cut flower industries. Direct employment in production and especially in post-harvest operations like grading, cleaning and packing are increasing. A stable macro-economic policy conducive to

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private sector investment, combined with investment in infrastructure and skill development are the key public policy issues for promoting the competitiveness of this sector. Nevertheless, there are clearly trade-offs between growth driven by commercial agriculture and efforts to address poverty in more marginal environments where the extreme poor are concentrated. Unless more resources are allocated to more marginal areas, rural inequality and the rural-urban gap will increase. However, unlike in Asia, the low agro-climatic potential of most of these areas will not allow rapid growth, so that investment must be motivated by the objective of reducing poverty. In these areas, rural incomes are already quite diversified and in some areas a growing demand for environmental services and agro-tourism provides an opportunity for further diversification. However, in many marginal areas, exit from agriculture is the only viable long-term strategy facilitated by investment in education and skill development. Land reform is another strategy that will have strong pro-poor effects, but it has to be integrated into a set of additional services to the farmers. The key policy issues for a pro-poor contribution of agriculture and rural development in Latin America are: (1) Provide the macro-environment for continued agricultural commercialisation while at the same time removing constraints to well functioning markets, including the labour market. (2) Support the small farm sector in areas with potential for agriculture and environmental services, with a focus on poverty reduction rather than growth through investments in technology, infrastructure and market development, many of which can be community led. (3) Foster regional development approaches that integrate agriculture, rural non-farm and environmental services, with an emphasis on rural communities and associations, infrastructure and education. (4) In areas of little economic potential, low population density and declining population, invest in education and labour market reforms to facilitate exit. (5) Provide safety nets and transfers for the chronically poor, especially in the areas of low economic potential. 5 Institutional and political requirements in order to make use of the full potential of the agricultural sector in meeting the MDGs

Out of the discussion so far, it has become evident that in order to successfully implement pro-poor strategies, more funds will be needed for the necessary investments. As has been shown above, the challenge of the volume of assistance has yet to be overcome although increased awareness of the acuteness of rural poverty has led to an increase in aid for agricultural and rural development during the last few years. However, lasting poverty reduction is not only a question of continuing resource transfers. The transfer of financial resources is very important in achieving poverty reduction, but more than money is needed to accomplish this task. A policy and capacity framework at all levels is required that poor people can use to better secure and use their own assets. There is a need for enabling policies at global, national and local levels respectively. Because opportunities for the poor are not only shaped and circumscribed by national governments, but also by decisions made in developed countries. Numerous studies have shown that what has been mostly missing to allow for the maximum impact of investment is an enabling, supportive and consistent policy framework, both at the national and international level. The poor must be motivated and encouraged that they themselves can overcome their lot by their own means and can become active participants of economy and society. The experience of the last years has shown that rural poverty shrinks fastest when poor rural people are taken out of the ‘niche’ of poverty reduction, and have a secure position in the

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mainstream of economic change, growth and development. In some senses, it is as much a political as an economic issue: Deciding to address the challenges confronting the poor not against economic logic, but within a logic in which creating the conditions for rural development becomes one of the pillars of growth, equity, respect of human rights and food security. In the following chapter the main aspects referring to the institutional and political requirements at global, national and local levels will be addressed. 5.1 International level

Due to their economic resources and potential, the developed countries have a very important role in reducing poverty and stimulating a pro-poor growth policy on a global level. They can contribute to making global policy more responsive to the real constraints and opportunities for the poor (rural) people. In that respect, there are two major starting points, a better harmonisation of global donor support on the one side and a more focused pro-poor orientation of international agreements on the other. 5.1.1 Global partnership: Better harmonisation of donor support

During the past, development support of donor countries has too often not only been determined by the objective to support a recipient country in overcoming a specific problem, but also in following their own respective agendas. Hence, a lot of competitive and overlapping projects as well as development approaches used to be implemented within the same country. In general, most countries have administratively not been in a position to integrate these varying approaches into their national development policies effectively, which themselves are often rather vague. Hence, the success of international donor support has not been as high as hoped for. The reduction of poverty needs continuous learning and adaptation as all strategies have to be developed and adapted to the local constraints and potentials. A number of previous strategies have failed and new factors of influence have to be taken into account. The global partnership for development, as called for in MDG 8, requires a more coherent policy towards the creation of a level playing field for rural development initiatives. This process has to be simultaneously started at two levels: The donor countries have to better co-ordinate among themselves their respective development strategies concerning the respective recipient country. In addition, they have to co-ordinate their own (harmonised) development strategies with the one of the recipient countries in order to achieve the maximum synergetic effects of international and national resources. In general, this approach requires that the country-owned poverty reduction strategies, which have to be based on broad consultation of rural stakeholders, are supported by the donor community. In this regard, two aspects have to be taken into account. As discussed above, any viable poverty reduction strategy requires large investments in support of the agricultural sector. While MDG 8 specifies several ODA related targets, the sectoral allocation of such assistance is not specified. However, clearly, this is not a tangential issue. If agriculture is to be effective in broadly improving the human condition and particularly that of rural residents, considerably greater levels of resources need to be made available to agricultural development. In addition, there seems to be a link between improved governance and the share of funds allocated by national governments to the agricultural sector. This might have repercussions on donor support: donor countries and international aid agencies should focus their resources on those countries where good governance structures will ensure that the rural poor will be reached.

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5.1.2

Pro-poor orientation of international agreements

Besides a much better co-ordination and harmonisation of development aid and policies by the donor community, the development dimensions of international trade and fiscal policies have a much larger impact on the fate of rural poor. The developed countries have a major responsibility when defining and implementing international policy and trade agreements. Globalisation is leading to greater interdependency between countries and to the development of international agreements and treaties that govern the provision of regional and global public goods and services. These agreements, which are especially important to agriculture, increasingly regulate agricultural activities involving common resources, protect intellectual property rights, promote collective action in areas such as agricultural research and development, and regulate global markets. Special priority of these treaties is given to the objective to level the playing field in agricultural trade. In the past, many of these international agreements seemed to favour the developed countries, and many poor countries were bypassed. However, high-income countries and international agencies have a major responsibility – and the needed capabilities – in ensuring a pro-poor orientation of the DohaDevelopment Round and regional trade agreements in line with the Monterrey negotiations, which not only called for substantial increases in official development assistance, but also for foreign direct investments, reforms in the international monetary, financial and trading systems and decisive external debt relief. Concerning global agricultural trade, an open, rule-based, predictable, non-discriminatory trading system is called for. Trade regulations must be harmonised and rationalised in a manner that includes consideration of the special needs of poor agricultural producers and how they might derive maximum benefit from global agricultural trade. So far, trade liberalisation has not brought the potential benefits because with respect to agriculture not much has been implemented, quite contrary to other economic sectors. Particularly, three areas have to be improved in order to support pro-poor growth in the developing countries: (a) rules and regulations, (b) tariff barriers on processed agricultural products, and (c) export subsidies. With respect to rules and regulations, it has been shown above that food standards are steadily increasing and supermarket chains even apply more strict criteria. Many developing countries understand these high standards like sanitary and phytosanitary, but also technical standards as forms of non-tariff barriers. Small farmers and also the agricultural support services do not have the technical and financial means to meeting them. Up to now, most OECD countries apply higher tax rates for processed agricultural products than for raw materials. Tariff rate quotas still protect 28 percent of OECD's agricultural production. Hence, processed products imported from developing countries are more expensive than the same type of products processed in the developed country. Therefore, investors are not encouraged to invest any funds in agricultural processing facilities in developing countries. In this way, these tariffs protect processing industries in industrialised countries and amount to a tax on development, because they limit developing countries to producing low value-added primary products. Finally, there is the need for a quick reduction and even abolishment of the trade-distorting agricultural subsidies by OECD countries, which have a serious impact on small-scale producers and processors in the developing world. Export subsidies of the developed world clearly undermine the world market prices of many products in which small-scale producers in the developing world have a comparative advantage.

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Due to this high level of protection and subsidies, poor farmers face an unfair competition that is affecting them twice. On the one side, they have limited access to rich country agricultural markets. They are more or less squeezed out of export markets for tropical crops like cotton, sugar and tobacco. In addition, they face unfair competition in their own domestic markets from subsidised imports. They are put under pressure in their own domestic and regional markets for staple foods, like cereals and livestock products. In this way, the situation of a system inherited from colonisation, which consists in exporting raw material, is consolidated. Something must be done in order to remove both tariff peaks and export subsidies. 5.2 National level

As it has been discussed above, national governments will be required to mobilise more national resources and to set the priorities right to stimulate pro-poor growth. In order to achieve this goal, they do not only have to adjust the national budgets, but must be committed to sound governance and an enabling policy and institutional environment. However, in order to be of a lasting nature, these changes have to be country-owned and -led, not pressed upon governments through prescriptive recommendations and conditionalities under the constraints of debt and aid dependency. The whole political-institutional framework of a country has to be set in such a stage that it will be in a position to ensure pro-poor growth. In this chapter, the major pre-conditions will be discussed. The main areas of intervention can be distinguished into the more long-term oriented institutional side and the more short-term oriented political side. 5.2.1 Institutional development enabling pro-poor growth

Government policy is one of the key factors affecting the challenges and opportunities of poor rural people. The institutional setting and the policies based on it are key factors in both public and private economic processes. In general, the poor are poor because policies, laws and regulations (or absence of them) circumscribe their opportunities. What is needed is a change of the institutional setting to enable pro-poor growth. This change affects intersectoral relations because rural development and rural opportunities are necessarily part of larger national economic systems, and the overall economic policy must provide space and support for rural development reflecting the possibilities of the rural poor. Change at the sectoral level is essential, for it is here that the critical, but narrower, agricultural issues are determined. At the national level, there are two interdependent processes that have to be built-up and implemented over time, i.e. decentralisation of administration and decision-making on the one side, and participation and empowerment of the (rural) population on the other. Most developing countries used to be centralised states where in most cases decisions were taken by the elites in the capital. The local population was only marginally involved in the decisionmaking process. For about a decade, decentralisation has progressed in many countries, mostly in a larger political context of democratisation. Much of the responsibility, capacity for delivering the needed services and the decision-making process have been transferred to the regional (provincial) or even local levels. In general, this process aims at strengthening local governments. This shift of power actually requires two pre-conditions: (a) There has to be a shift of budget allocations; i.e. the local decision-takers must have access to financial resources in order to take decisions effectively. (b) The capacity of the local administration has to be built-up in order to handle this enlarged responsibility effectively. However, decentralisation of the administrative authority does not ensure fair and transparent decision-making. In this respect, it is just a necessary precondition for pursuing poverty

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reduction strategies. Local governments will have to become accountable to the local population or their representatives. Unless the poor, as part of the rural population, can influence policies, regulations and public investments, they will not realise all of the benefits from agricultural growth. When the responsibility and capacity for delivering services is shifted to the local level, communities can shape public support to match local circumstances, and service providers can become more accountable to users. For decentralisation to bring true empowerment, disadvantaged groups such as ethnic minorities, indigenous populations, women, the landless, the disabled and refugees must gain greater participation in communitylevel decision making and prevent local elites from capturing all of the benefits. However, it is imperative to develop grass roots capacities to better articulate demand, effectively interact with and monitor local government authorities. First experience with decentralisation and pro-poor growth has shown that policies are more consistently implemented if they arise out of national processes and the interaction of national actors at all levels. Among other developments, the provision of institutional requirements leading to the adoption of Poverty Reduction Strategies (PRS) in many Highly Indebted Poor Countries (HIPC) has been a positive step in this direction but overall experience has been mixed. Although consultative decision making has been a great improvement compared to the previous, purely top-down-driven process, agricultural stakeholders are still notoriously under-represented. In general, they were well represented in the preparatory phases when issues were diagnosed and studied, but their involvement in actually setting policy priorities was much weaker. The capacity of the local poor in participating effectively in the local decision-making process needs to be strengthened. 5.2.2 Laws and regulations enabling pro-poor growth

Concerning the more short-term oriented policies, governments have to provide the poor with the opportunity to improve their situation and contribute to the overall economic growth. This affects their relations to assets and asset security as well as market relations. The major areas of intervention look as follows: (a) access to land and water as well as tenure security, efficient land administration Secure access to resources is the key to pro-poor agricultural growth. Tenure security is essential for ensuring sustainable practices and improving productivity through appropriate investment. The general global trend has been one of weakened land rights of the rural poor (and particularly of women) in the context of growing population, increased trade and urbanisation. Outsiders are often in a better position to profit from market development and to manipulate the legal system to gain titles to land previously controlled under traditional usufruct system. Therefore, failure to ensure security of tenure for the poorest in a situation of increasing land and water values is likely to lead to a displacement of the most vulnerable groups by the better connected and more affluent. Basically, the improvement of land tenure security has to focus on three levels: (1) Concerning indigenous land tenure systems governments should seek ways of strengthening existing systems rather than imposing new ones. Legal registration of land by community groups and simple measures for recording land transactions and resolving disputes can often increase security. In general, registration of individual plots will only be worthwhile in areas of high population density, where land has a high value and where formal lending institutions are also well developed and land is already effectively privatised. (2) Concerning common property rights, governments need to recognise local rights and capacities to manage these assets. Without this legal recognition, assets are easily degenerated. A number of studies have

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shown that local groups seem to be most successful institutions to manage them. But government policy needs to support local management by such user groups, while at the same time ensuring that poor people are adequately represented in their management. (3) Concerning efficient land markets under private ownership, there is a need of an enabling legal environment, both in terms of legal recognition of the right to sell, rent or mortgage land, and also effective means of enforcing contracts. In general, more complete land administration systems are needed for cost-efficient land transfer and the application of property taxes. Similarly, during the last decades, it has become evident that water is not a public good but a scarce resource. Given its growing scarcity, the development of parallel private markets for water presents a major challenge in many countries. On the other side, particularly in many irrigated areas, water is still often managed by administrative mechanisms that lead to inefficient and inequitable allocation and use. Incentive structures may not exist or are distorted. Service providers may have little incentive or accountability for quality service, and farmers - faced with subsidies and institutional inflexibility - also have few incentives to manage water more efficiently. Water subsidies are not only inefficient but also generally inequitable. (b) trade, price and market access policies Governments have to provide an effective legal framework that enables the poor to participate in economic development. In addition, the state has to provide basic support services that cannot be offered by either the private sector or organisations of the poor themselves due to low profitability and/or low levels of capacity. In the following, emphasis is put on the role of the government in promoting agricultural markets and rural finance services. The implementation of effective market reforms is an ongoing task. In the past, farm profitability and the performance of the agricultural sector were greatly weakened by overvalued exchange rates, high inflation, and food prices that were to favour urban consumers. Although most of these distortions have been removed, in some countries, inappropriate macro-economic policies remain a major barrier to agricultural performance and economic growth. In addition, there is a growing consensus that creating high import barriers (tariff or non-tariff) in the name of food security or to support an import-substitution agricultural development strategy is bad policy for long-term growth. In general, the effects look as follows: (1) The cost to poor consumers from protectionism is higher for food than for many other products, since the poor spend a much larger share of their limited income on food; (2) the rural poor benefit from the protection of food crops less than it would appear, because the poorest are often small-scale farmers who are net food purchasers or landless labourers, who are hurt by higher food prices; and (3) food security is less a supply-side problem caused by insufficient food crop production than a demand-side problem caused by insufficient purchasing power. A further liberalisation of trade in agricultural products generally provides gains to the poor. The natural markets are in general not the developed countries, but the national economies. Policies have to facilitate access to the growing urban markets of the developing world itself, which seems to be of greater potential to many smallholders and agri-food industries. Surprising little has been done to overcome the internal, regional and South-South trade obstacles, with respect to infrastructure, effective taxation, tariff and non-tariff barriers, even though this would be the market segment that offers the greatest potential for most smallholders. For example, the removal of the many barriers to agricultural trade between

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African countries offers significant employment and income opportunities to small-scale farmers. The results of a number of detailed analyses suggest that trade policy reforms between developing countries boost their overall welfare but also create distributional impacts among those developing countries that gain most from trade openness and those that gain less. It also creates distributional effects between food consumers and producers within (poor) countries. There is a need to better understand these distributional effects. However, the overall welfare benefits are important as well: they extend to poor food consumers, including poor farmers and landless rural workers, who use non-farm income to buy food, i.e. a very significant share of all poor people. A very important aspect of all market policies refers to an improved domestic regulatory framework that ensures competition between suppliers of essential inputs as well as purchasers of agricultural products. In general, poor farmers should have a choice to whom they sell their products and from whom they might get any inputs. In general, they are weak in exercising any market power with respect to the upstream and downstream sectors. The public sector has to provide an appropriate enabling environment for the private sector to operate efficiently. While this concerns the input and output markets in general, there is, in particular, a need for efficient and viable rural financial services. Governments have to facilitate access to broader financing options by continuing development of domestic financial markets coupled with skill-building for regulators and private financial institutions. Even poor people have the capacity to save some funds over time which they need at certain periods over the year. They are in need of viable saving facilities, but also of access to credit. The current priority for public policy is to create the conditions under which financial institutions and markets can grow, rather than to provide credit directly to agriculture. New models that encompass a range of financial services and risk management instruments appear promising. Innovative micro-finance institutions in the rural sector have helped smallholders, particularly the poor and women, expand their productive activities. (c) setting up rural organisations In general, the rural poor, contrary to the situation of the urban poor, are spread over large areas. While they belong to certain networks, they do in general not organise in order to overcome their situation. Governments have to provide the necessary legal framework that makes it easier for the poor to organise themselves. In this regard, two aspects of the organisation of poor have to be distinguished: (a) The poor are organising themselves as lobbying groups, associations or organisations in order to participate in the decentralisation process. This refers to political empowerment of the poor. (b) The poor also have to organise themselves economically. In order to get recognised as market partners, they are in need of a legally recognised entity able to represent a group of individuals as an economic actor. This will contribute to an economic empowerment of the poor. There is a long tradition of service cooperatives, saving and credit cooperatives, producer associations, etc. It is the objective to change the role of the rural poor from passive market partners to active participants. Both, formal and informal groups of the poor help address the imbalance of power between individual farmers and powerful public and private operators, which often diminishes poor people's ability to adjust to new economic conditions. These organisations are the product of social capital, but at the same time might foster it even further among the members. Social capital affects economic development mainly by facilitating transactions between individuals, households and groups in society. This facilitating function can take the following forms: (1)

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Participation by individuals in social networks increases the availability of information and lowers its cost. This is true in the rural villages, especially when the information can increase the returns from agriculture and trading. For example, prices, location of new markets, sources of credit, treatment of plant or livestock diseases can be easily exchanged among members. (2) Participation in local networks and attitudes of mutual trust make it easier for any group to reach collective decisions and implement collective action. Since property rights are often imperfectly enforced in developing countries, collective decisions on how to manage common or communal resources can help maximise their access, use and benefits. (3) Networks and attitudes reduce opportunistic behaviour by community members. Social pressures and fear of exclusion can make individuals behave in certain community-beneficial ways. This effect is often the basis for any viable marketing co-operative or savings and loan group. (d) promotion of the private business sector in agricultural development Another important aspect refers to the provision of a legal environment that encourages the development of the private sector, including the poor's own organisations. The public sector's direct role in markets is decreasing. This will require a fundamental shift in thinking in many public agencies that are still geared towards the dominant role that the state played until recently in the market chains for food staples. However, the development of private markets depends on whether the public sector can provide an effective and streamlined regulatory environment, including provisions for grades and standards as well as food safety, biosafety, and environment protection. An effective regulatory environment serves to lower transaction costs, reduce the risk of doing business and improve the marketability of products. The role of the private sector in providing investments and delivering services is receiving increased attention in the agricultural as well as the rural non-farm sector. The government can assist the private sector to develop and broaden its outreach. This will provide more competitive and efficient services to smallholders, particularly for input supplies, produce, marketing and agro-processing. This approach is also vital to support the development of micro-enterprises. Ideally, the public and private sectors complement each other, with the government providing an appropriate enabling environment for private initiatives to develop. Good governance principles for both public and private service provision are crucial to achieve both effectiveness and efficiency in resource allocation. From the poor farmers' point of view, it is important that a competitive environment will be created so that former government monopolies will not be transformed into private ones. 5.3 Local level

In the end, regardless of the volumes of funds available and the enabling environment provided by national governments and the international community, it is the poor themselves who have to make use of these opportunities in order to improve their own socio-economic situation. Experience clearly shows that investments aiming at poverty reduction have only achieved their objective if the poor themselves have been actively involved in the planning and implementation of the activities. The poor must develop a sense of ownership to ensure that investments are sustainable. Any poverty reduction strategy has to start with people and their ability to overcome their poverty rather than in terms of top-down transfer of knowledge, technology and investment in physical capital, which has been the prevailing practice. This requires us to shift our development from “beneficiaries” or “recipients” – and the implied patronage – to partnerships.

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However, the poor will not develop this necessary sense of ownership if they get involved as an amorphous mass of individuals. They have to get organised in order to participate effectively, either informally or formally. Only in this way, they will become empowered to act as a viable partner of any poverty reduction strategy. Therefore, local bottom-up processes and local groups and organisations managed by or accountable to the poor are essential if sustainable results are to be achieved. Consequently, the support for local processes of group formation, i.e. institutionalised and organisational capacity-building, is one of the most important elements of any poverty reduction strategy. The strengthening and empowerment of rural communities, of specific common-interest groups within communities (in particular women’s groups) and of federations of these groups should, therefore, be the starting point of any pro-poor development effort. Empowerment means providing poor rural people with the support they require in order to develop the knowledge, skills and organisational capacity needed for accessing resources and services, negotiating with private-sector market intermediaries and influencing government policies and investment. In the following, both sides, i.e. the economic and the political one will be discussed in more detail. Economic development Small farms have always been at a disadvantage in the market place. They only trade in small volumes, often have variable and sub-standard quality products to sell, lack market information and have few links with buyers in the marketing chain. These inefficiencies in general offset the efficiency advantages of small farms as producers. The problem has been exacerbated by market liberalisation and globalisation. Not only has the state been removed from providing many direct marketing and service functions to small farms, leaving a vacuum that the private sector has yet to fill in many countries, but now small farmers must also compete in ever more integrated and consumer driven markets where quality and price are everything. Small farmers need to organise themselves to overcome these problems and exploit the new opportunities that these market changes offer, otherwise they risk losing market access. The private sector, e.g. traders or trading companies, is supposed to take over these functions, but in most cases it is either not available or there is no interest or ability to deal with smallscale farmers on an individual basis. Voluntary farmers’ organisations, in form of service and marketing association (co-operatives) and savings and credit groups (co-operatives), have an important role in filling this gap and in linking small farmers with food processors, traders, manufacturers, supermarkets, etc. First of all, farmers’ organisations are, in general, in a position to negotiate better terms for their members in the marketplace. Such organisations can help organise production, improve market information and pool risks. Similarly, they can help serve businesses by providing an efficient conduit to reach small-scale producers, and help improve the quality and timeliness of small farmers’ production and their access to agricultural research and extension, input supplies and agricultural credit. In general, farmers require having an efficient outlet for their products at all, and if there is one already, to create some form of competition on the input supply and marketing side. In addition, organisations of smallholders have shown to be very effective in managing resources more efficiently. The formation of local water user associations (WUAs) to operate and manage irrigation systems has often proven to be the most important step in improving and sustaining irrigation systems. There is a long history about farmers’ organisations. They have to fulfil certain criteria in order to become effective. They have to be of a voluntary nature, i.e. there is the principle of free entry and exit. They have to be managed by the members themselves. In this way, they

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are transparent and responsive to their members. The assets have to be accumulated by their members and business activities. These organisations have to be economically viable and competitive at the market. They have to be free of any outside interference. In general, all state dominated co-operatives in the transition and developing countries had been failures. Nevertheless, governments have to provide a legal framework so that farmers’ organisations can develop smoothly as part of the private sector. In addition, these organisations will need help in developing business and management skills, establishing information systems and connections to domestic and global markets, in creating good governance practices, and in creating the infrastructure to connect small farmers to finance and input supply systems. Political development Poverty is not merely a lack of resources. In general, poor people lack political power locally, nationally and globally. Excluded from the debates that could improve their circumstances, the agricultural poor have suffered from decades of urban favouritism in development strategies. The rural poor have experienced much discrimination, even compared to the urban poor, in access to such basic services as water, health, sanitation and education. The poor in more remote and sparsely populated areas, and disenfranchised groups, such as women and indigenous people, are especially deprived of these services. The ultimate guardians of the interests and futures of the poor are the poor themselves. As shown above, there is an increasing ‘re-recognition’ of the role of the state in economic change and rural development, but the state itself, even a well decentralised one, reflects the balance of power and interest. The state is only an effective means of helping poor people respond to internal and external challenges if poor people and their organisations have a strong voice in the decision-making process. The issue of pro-poor rural development is not one of community-led investment at the local level and pro-poor policy at the national level. It is the articulation of the interests of the poor by the poor at both levels. In order to alleviate poverty, the poor must be in a position to construct their own solutions and to negotiate new terms with private and public entities. It has to be understood that rural poverty is an economic fact with social underpinnings, and that the organisational and institutional empowerment of the rural poor is just as much an element of economic empowerment as rural roads and electrification. They are both sides of the same coin. The need for investment and assistance is enormous, but such inflows can have perverse results without a concrete framework of representation and influence by the poor. A special group of the poor are female farmers and female headed households. But unlike men, who have greater opportunities for non-agricultural work, women depend mainly on agriculture to secure food or earn money for their families. Improvements in agriculture, therefore, can contribute in a fundamental way to increasing incomes and economically empowering women. In addition, improvements in labour-saving technologies in agriculture that reduce the number of hours worked and enhance income per hour of work (especially for high-value crops) will free up poor women’s time, benefiting them and allowing them more time for child care. More time away from farming would also allow women the option of choosing skilled work in the non-agricultural sector. Therefore, it is essential that women form their own groups and associations to articulate their specific needs and interests. In addition, legal and economic rights that extend equality to women have to be ensured by national governments. Women can be empowered by getting secure access to the resources and property rights they need to make a living from agriculture, and by having control over the food or money they produce. There are strong indications that gender equality will boost agricultural productivity.

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6

Conclusions

Extreme poverty is spread over large parts of the rural areas in developing countries. During the last 15 years, some modest achievements in reducing poverty had been made, but poverty remains a problem of extraordinary scale. The world has realised that rural poverty becomes not just a national or local concern but a global challenge. However, recent experience shows that rapid poverty reduction can take place in the field of small farmer development, by securing rights to assets and managing relations with the global economy. Agricultural productivity enhancement can be both growth promoting as well as poverty reducing. So we have evidence that rural poverty can be reduced very quickly, and that empowering the small farmer is a critical element of that. However, in order to continue with agriculture-led pro-poor growth strategies, there is a strong need for a concerted effort by donor community, national governments and private sector to create a more equitable and enabling environment. This support must include assistance in forming effective marketing organisations of the poor, targeted agricultural research and extension, revamping financial systems to meet small farm credit needs, improved risk management policies, tenure security and efficient land markets, and where all else fails, targeted safety net programmes. In addition, the public sector needs to invest in the provision of basic infrastructure, health, education and other human capital to improve market access and to increase the range of non-farm opportunities available to small farm households, including permanent migration to urban areas. These interventions are possible and could unleash significant benefits in the form of pro-poor agricultural growth. The associated public investments could also more than pay for themselves in terms of their economic and social returns. In this way, it can be concluded that we know a lot about the pre-conditions that have to be met in linking agricultural development and rural poverty reduction successfully. However, we also know that there is no blue-print for successful strategies but that they have to be carefully adjusted to each national and local situation. National, regional and local governments, civil society and, finally, rural poor themselves have to be involved in planning and implementing agricultural growth strategies, since in the end it is the poor themselves who have to make use of these opportunities in improving their own socio-economic situation.

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Bibliography

This is based on the following reports and publications: Braun, Joachim von, M.S. Swaminathan, Mark W. Rosenberg (2004): Agriculture, Food Security, Nutrition and the Millennium Development Goals. In: IFPRI Annual Report 2003/4. Washington DC, 2004 Hazell, Peter (2004): Smallholders and Pro-Poor Agricultural Growth. Unpubl. Manuscript. Washington DC, IFPRI, 2004 Hazell, Peter (2005): The Rural Contribution to Pro-Poor Growth in Low Income Countries. Paper presented at the World Bank’s ESSD Week Session “How Important is Agriculture and Rural Development for Pro-Poor Growth”, Washington DC, 28 March 2005 IFAD (ed.) (2005): Achieving the Millennium Development Goals: Rural Investment and Enabling Policy. Panel Discussion Paper. Rome, IFAD, 16-17 February 2005 IFPRI (ed.) (2004): Agriculture and Achieving the Millennium Development Goals. Draft Report. Washington DC, November 2004 OPPG Team (ed.) (2005): Agriculture, Rural Development, and Pro-Poor Growth. First Draft. London, DFID, 4 February 2005 Ouattara, Seriba (2005): WTO and the real interest of OECD Member Countries. The viewpoint of a developing country. In: Entwicklung und ländlicher Raum, Vol. 2 (2005) Sarris, Alexander (2001): The Role of Agriculture in Economic Development and Poverty Reduction: An Empirical and Conceptual Foundation. Paper prepared for the Rural Development Department of the World Bank. Athens/Greece, University of Athens, January 2001 World Bank (ed.) (2005): A Review of Rural Development Aspects of PRSPs and PRSCs, 2000-2004. Washington DC, Agriculture and Rural Development Department, 21 January 2005 World Bank (ed.) (2005): Agricultural Growth for the Poor: An Agenda for Development. Washington DC, Agriculture and Rural Development Department, March 2005

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Every human being is entitled to live in dignity with adequate food, shelter, education and health. The rural poor are denied that fundamental right. Basic human rights are being violated and individual and collective potential to act on their own behalf is not being recognized. Unless action is taken to reduce poverty by increasing agricultural productivity, the prospects for economic and social development will be lost. Hunger spawns social and political instability, rising crime, civil war and terrorism, and environmental destruction.

Contact: Secretariat of the Global Donor Platform for Rural Development, c/o Federal Ministry for Economic Cooperation and Development (BMZ) Friedrich-Ebert Allee 40 53113 Bonn Germany Phone: + 49 228 535 3276 Fax: + 49 228 535 4276 Email: Info@rdxxl.org Website: www.rdxxl.org Members of the GDPRD: French Development Agency (AFD), Asian Development Bank (ADB), Austrian Development Agency (ADA), Canadian International Development Agency (CIDA), Department for International Development (DFID), Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ), European Union, DG for Development (EU), Federal Ministry for Economic Cooperation and Development (BMZ), Food and Agriculture Organization (FAO), Interamerican Development Bank (IADB), International Fund for Agricultural Development (IFAD), Italian Ministry of Finance and Economy (MFE), KfW Entwicklungsbank (KfW), Ministry of Foreign Affairs-France (MAE), Ministry of Foreign Affairs-Luxemburg (MAE Lu), Ministry of Foreign Affairs-Finland (MFAF), Ministry of Foreign Affairs-Austria (MFA), Organisation for Economic Cooperation and Development (OECD), Swedish International Development Cooperation Agency (SIDA), Swiss Agency for Development and Cooperation (SDC), Ministry of Foreign Affairs-Norway, The Netherlands Ministry of Foreign Affairs (NMFA), The World Bank (WB), United States Agency for International Development (USAID)

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