Telling The Two Transformations Tale: Emerging Challenges to Poverty Reduction Kostas Stamoulis Prabhu Pingali Ellen McCullough Agricultural and Development Economics Division (ESA) FAO, Rome

Objectives and Structure Poverty Focus Describe fundamental changes in food systems Identify the forces which drive those changes and the role of trade Underline the importance of heterogeneity What are emerging challenges for poverty reduction ?

Transformation and Food System Changes Transformation process: The process in which the share of agriculture declines in favour of other sectors Changes in Food Systems : the changes in the organization of food markets at all levels as a result of changes in demand patterns and technology

Agricultural Transformation: a global phenomenon Source : Pingali ( 2006)

Transformation Process Source : Bravo, Ortega and Lederman (2004)

The Changing Food System Inputs Primary production Processing and packaging Distribution and retail Consumption IndividualsEnterprises Governed by Institutions: Rules and regulations Markets (Contracts) TransportServices

Food Systems Changes: Driving Forces Rising incomes –Diet diversification out of staples (Engels Law, Bennett Law) Demographic Shifts –Urbanization –Rising food prepapers opportunity cost Technology –Transportation and food handling –Chain management (logistics ) Globalization –Foreign direct investment (in retail and production) –Trade liberalization

The other face of globalization FAO: State of Food Insecurity, 2004

The Emergence of Large Retail

New Rules for a New Game Centralization of procurement –Squeezing of supplier lists Shift from spot markets to specialized wholesalers to guarantee q and q –New intermediaries and logistics Contract farming –Preference for limited transactions Rise of private standards –Quality, safety not common for internal trade

The contribution of International trade Trade links and interactions have not been explored in a systematic way Trade has not been the primary mover –Stable shares of imports in total consumption of dev.ing countries –Small relative to sales of processed by subsidiaries –Meat, F and V trade shares in total consumption unchanged in a 20 years The Reardon U hypothesis of the role of trade

Relative Importance of Trade, (Share of imports and exports in domestic food supply) CerealsFruitsVegetables source: FAOSTAT 2006

The U hypothesis

Transforming Food Systems : Challenges for Rural Poverty Reduction Rapid spread of the chain model expected in future Competition for market share is at the chain level ( margins) Standards, quality and stability not just for exports More generalized impacts than on small farmers

Food System Transformation: Country-level heterogeneity Traditional Agriculture Modernizing Agriculture Industrialized Agriculture Share of Ag in GDP >30%10%-30%<10% Share of Ag labor in total >50%15-50%<15% Market Orientation SubsistenceNationalInternational Output Mix Food Staples Food Staples + high value Highly differentiated Scale Economies Not ImportantMay be ImportantImportant

Transformation Process: Country Classifications URBANIZED Economies CAT 2 CAT 1

Agricultural transformation: Heterogeneity across production systems Increasing scales of production Reversal of the farm size productivity relationship Declining competitiveness of marginal lands Increasing risk of biodiversity loss and environmental sustainability

Rural Non Farm Income Shares

Rural Income Generating Activities ( cont)

Conclusions Rapid transformations change the balance of concerns between domestic factors and international trade. Heterogeneity of impacts and focus Commodity focus: narrow Agriculture focus : narrow Up-stream and downstream activities

Conclusions ( cont) Under-researched aspects, hard to capture in global models Several policy prescriptions overlap Balance of awareness much lower.. until today. Thank you

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Food System Transformation: Household Level Heterogeneity Access to assets, credit Management skills (source of rents) Access to services, such as appropriate production and marketing extension and technology Institutions Pluriactivity and Diversification

Regional food Trade

Rural Income Generating Activities

Country Groupings and Ag. Performance (ag gdp/caput 2000UD$) WB : WDR 2008, Outline

Transformation Process: Country Classifications URBANIZED Economies CAT 2 CAT 1

Agricultural transformation: Heterogeneity across production systems Increasing scales of production Reversal of the farm size productivity relationship Declining competitiveness of marginal lands Increasing risk of biodiversity loss and environmental sustainability

Contribution of agriculture to Economic Development Market Mediated linkages: 5 propositions 1.Food for an expanding population with higher incomes 2.Export earnings to pay for imported capital 3.Providing labor for an industrial labor force 4.Savings for industrial expansion 5.Markets for industrial output (Johnston and Mellor, 1961)

Agricultures Evolving Roles in the Development Process Total benefits generated by agriculture Getting agriculture moving Agriculture as an engine of growth Industrializing agriculture Agriculture in industrial economies Environmental quality (willingness to pay for it) Rural viability Poverty and food security Buffer Per capita income

Will globalization make a difference?

Globalization consequences Exposure of domestic agriculture to international competition Growth of non-agricultural sector and its impact on demand for agricultural products Urban middle class life style changes, including diets

Globalization impacts Rising food imports in developing countries Competitiveness and diversification of domestic production systems Vertical integration of the food supply chain

The least developed countries are relying more on food imports … Billion US $ DEFICIT

Globalization impacts Rising food imports in developing countries Competitiveness and diversification of domestic production systems Vertical integration of the food supply chain

Improving the competitiveness of domestic staple crop production while diversifying

Globalization impacts Rising food imports in developing countries Competitiveness and diversification of domestic production systems Vertical integration of the food supply chain

The Changing Food System Inputs Primary production Processing and packaging Distribution and retail Consumption IndividualsEnterprises Governed by Institutions: Rules and regulations Markets (Contracts) TransportServices

Emerging concerns for production systems Increasing scales of production Reversal of the farm size productivity relationship Declining competitiveness of marginal lands Increasing risk of biodiversity loss and environmental sustainability

Globalization Impacts: by stage of agricultural transformation

Countries at the low end of the agricultural transformation process Age old constraints –Low demand –Poor public good provision –Lack of technology R&D –Low agro-climatic potential –Institutional barriers New issues –Declining competitiveness –Availability of lower priced food imports –Niche markets?

Countries in the process of agricultural modernization Enhancing cereal crop productivity Diversifying out of staple crops Inter-regional differences Future of small farms?

Countries at the high end of the transformation process Movement away from protective policies Emergence of markets for non-commodity roles of agriculture

Public policy for managing the transition Dealing with old problems while facing new challenges Policy focus and agenda needs to be differentiated by the stage of transformation Coherence between agriculture and other sector policies

Policy Focus Continued emphasis on food security/ poverty reduction Re-orienting agriculture R&D Enable smallholder transformation Coherence between trade and domestic policy Establish safety standards and regulations

Conclusions The globalization process can contribute to agricultural and overall growth The transition is not frictionless and is painful Governments need to concentrate on being facilitators, regulators and providers of safety nets Pay attention to inter-regional and intra- societal differences

For low income countries with a high share of rural populations, if not agriculture then what?