PROMOTING INVESTMENT IN AGRICULTURE FOR FOOD SECURITY AND AGRICULTURE DEVELOPMENT Policy Assistance Support Service, TCSP TC Knowledge-Sharing Session 7 July 2011
What is investment? Before we can plan to promote investment, the question that seeks an answer is: What is investment? It is not easy to give a clear definition of the frequently used word “investment”. We can repeat what Augustine Hippo said 1,500 years ago in reference to Time : “What then is investment? If no one asks me, I know what it is. If I wish to explain it to him who asks, I do not know” TC Knowledge-Sharing Session 7 July 2011
Defining Investment It can be defined (as done in Economics ) as a change in the stock of existing capital : I = δK Increase in capital is necessary for growth and development, but what kind of capital? TC Knowledge-Sharing Session 7 July 2011
Capital comes in many forms: The different forms are not mutually exclusive Physical Physical Financial Financial Human Human CAPITAL Natural Natural Fixed Fixed Working/ Working/ Environmental Environmental financial financial TC Knowledge-Sharing Session 7 July 2011
Who invests and why? There are different agents of investment and Factors/motivations influencing investment decisions of the different agents are often different : Individuals/HH/ Entrepreneurs Public Sector Corporate private Farmers Mainly in fixed For Profit with Public goods/ Profit for share assets and Risks holders/ economic human capital return Financial return TC Knowledge-Sharing Session 7 July 2011
Investments by different agents • Investments by different agents are complementary. This is very well recognised. • What is not well recognized is that they are not easily substitutable. Public sector and/or Private corporate can not substitute for investment that needs to be made by farmers themselves. TC Knowledge-Sharing Session 7 July 2011
Policy Implications Given that reasons for investment by different agents are different and almost every one invests: • There are no unique set of policies for promoting investment. • It needs enabling environment and cannot be planned or promoted by decree • Only public sector investment (a small proportion of total investment ) in any economy can be planned by the government. TC Knowledge-Sharing Session 7 July 2011
Capital formation at farm level For investments to have a positive impact on production and productivity, they must contribute to capital formation at the farm level. Capital/land and/or capital/labour ratio must increase. What determines capital formation at farm level? TC Knowledge-Sharing Session 7 July 2011
Determinants of farm level capital formation/investment The main agent of investment for farm level capital formation is farmers and the main sources of financing farmers’ investments are: • Own savings • Credit: (Using fixed assets as collateral for Loans/credits ) Implications of the findings: • The farmers who can not save (and/or without fixed assets) can not invest. • Public and Private corporate can not substitute farmer’s investment (or compensate for lack of investment by the farmers) . TC Knowledge-Sharing Session 7 July 2011
Role and limitation of credit sources for financing investment at farm level � Credit provides less than 25 percent of the investment in Agriculture as well as other sectors. � Borrowing more than 40-50 percent of the total investment contributes to increased indebtedness. � Without fixed assets, access to credit is almost impossible ( exception : micro credit –but very little in agriculture production ). TC Knowledge-Sharing Session 7 July 2011
Sources for financing investment WB survey for more than 32,000 firms from 100 developed, developing and transition economies • Retained earnings are the main source of investment finance in all the regions. About two thirds of firms’ investments. • Bank loans account for another 16 to 23%. • Equity financing accounts for only 3% of investment financing, that is even smaller than financial support from family and friends. TC Knowledge-Sharing Session 7 July 2011
Savings, growth and generation of fixed assets: • Increased domestic savings is essential for sustainable development and poverty reduction. • No country has succeeded in achieving high growth, reduction of poverty and hunger, without increasing domestic savings [the Growth Report]. • Generation of fixed assets also depends on savings. TC Knowledge-Sharing Session 7 July 2011
Sources of farm-level investment. Evidence from India • More than 98 per cent of investment is funded by domestic savings. • With about 90 per cent share, households dominate the private investment activity. • These investments enable farmers to grow existing crops more productively and intensively and take up non-conventional/high value crops. TC Knowledge-Sharing Session 7 July 2011
Policy Implications of the findings • The findings demonstrate that generation of savings and creation of fixed assets are fundamental for promoting investment. Questions: • Should investment policies shift in favor of farmers with positive savings? • How to generate fixed assets? TC Knowledge-Sharing Session 7 July 2011
Savings and generation of assets • Most individuals invest their savings in generation of assets, such as real-estate, and human capital [education]. • The assets subsequently contribute to generation of financial markets. • Among several other factors, opportunities to generate assets and develop human capital encourage savings. TC Knowledge-Sharing Session 7 July 2011
Policy Implications of the findings Factors that allow fixed capital formation are: • Clearly defined property rights; and • Rule of law to uphold those rights. Unless these issues are addressed, attempts to increase farm level capital formation will be encumbered. TC Knowledge-Sharing Session 7 July 2011
Foreign and Domestic Corporate Private Investment in Agriculture • Available information/data show that in agricultural production, they are negligible. • They are important in the higher level of the value chain and in high value cash crops. • They may have significant impact at local level and contribute to Non-farm income . TC Knowledge-Sharing Session 7 July 2011
What is TCSP doing to promote investment? TCSP Policy work investment is largely funded by the Japanese Trust Fund Project GCP/GLO/267/JPN and MDF. Major activities include conducting of analytical work, in collaboration with other divisions to: Clarify: • the concepts and definition of investment and contributing to the preparation of the SOFA Special Chapter on Investment TC Knowledge-Sharing Session 7 July 2011
What is TCSP doing to promote investment? Collect: • information and data on level of investment and capital formation by sources, such domestic, FDI and ODA • Information on policies, rules and regulations related to investment in agriculture in various countries. TC Knowledge-Sharing Session 7 July 2011
What is TCSP doing to promote investment ? Identify: • Who invests in agriculture and why • What drives their motivation to invest • Factors influencing their decisions • Sources of investment financing Prepare • Policy configuration which will reinforce the decisions/motivation to invest by farmers, domestic and foreign private corporate and public sectors. TC Knowledge-Sharing Session 7 July 2011
What is TCSP doing to promote investment ? Assess: • Countries capacity to formulate and implement policies for promoting investment • Training needs for formulation and implementation of the policies • TCSP’s capacity to provide the required training to the countries TC Knowledge-Sharing Session 7 July 2011
What is TCSP doing to promote investment ? Prepare: • Handbook on policies for promoting investment • Training materials for providing training to countries as well as FAO policy officers at HQ and Decentralized offices • A web-based information system on policies, data, and others related to agricultural investment TC Knowledge-Sharing Session 7 July 2011
Investment Policy Support Website http://www.fao.org/tc/policy-support/investment-policy/en TC Knowledge-Sharing Session 7 July 2011
Thank you! TC Knowledge-Sharing Session 7 July 2011
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