Opportunities and Risks
5 Oct 2012
By Aslilhan Arslan, Setareh Khalilian, Mareike Lange for Kiel Institute for the World Economy
Part 2
Opportunities for host countries
Large scale investments in agriculture raise manifold expectations concerning their impact on the development of the world´s poorest countries. For years, the lack of investment in rural areas has been considered one of the main barriers to economic growth of developing countries. As these countries often do not have enough capital, they welcome foreign governments and companies to invest in their agricultural sector and may even put an emphasis on providing incentives for foreign investors.
For example the Zambian government - in particular the Zambian Development Agency (ZDA) - has various policy measures to attract foreign investors to acquire farmland in Zambia. The most elaborate of these incentives are fully developed “farm blocks,” which are offered for sale to investors. These farm blocks already have infrastructure developed by the government, and local farmers re-settled from other parts of the region into these farm blocks provide labor for the new commercial farms.
It is expected that the advanced agricultural technologies and knowledge of investors can generate spillovers into local production and thereby positively affect the productivity of local farmers (albeit the absence of this mechanism at the projects visited in Zambia indicates that this effect is not observed automatically in land deals). Specific action may be needed to realize these spillover effects, such as the out-grower schemes used by some investors that involve local farmers and provide an income source for the local population. It can also be expected that growth in the agricultural sector has positive spillover effects on other branches such as processing companies, seed and fertilizer companies or transportation. Depending on how mechanized the production is, these investments can create new employment opportunities in other sectors.
Some contracts for land acquisitions include obligations for the investor to develop rural infrastructure or construct schools and clinics. In addition, when land acquisition is complemented with compensation schemes for local farmers through community development funds, the investments can contribute to the improvements in local physical and social infrastructure.
A further benefit of large-scale land investments is the increased revenues for the government either by way of selling the land (though this is rare because quite often there is only a nominal price), or by growth of Gross Domestic Product (GDP) and tax revenues. Moreover, the rising productivity of the agricultural sector may improve food security and lead to lower prices that benefit the net consumers. In short, international agricultural investments may contribute to local economic development and livelihood improvements in rural areas, if it were not for the risks involved.
Risks involved
In theory, large investments in agriculture could be tremendously positive for the host countries, but due to large risks involved especially for the local communities, these investments have been negatively portrayed in the media and by NGOs that refer to them as “land grabs”. It does not help that most of the initial case studies conclude that the opportunities are usually overrun by the risks involved.
The critics of these investments point to the fact that host countries often have insufficient regulations to protect their population. For example, land tenure is complicated in many African countries and land rights are usually customary with no written evidence of usage of ownership – hence governments can sell the land often without consulting the local communities. Thus local farmers may be displaced when their land is sold to foreign investors – and they may or may not be compensated for it. When locals lose access to land, they may also lose an important means of sustaining their livelihoods. Even when there is a lot of idle arable land, investors may buy the most fertile lands and locals who were using it could be moved to other areas with less suitable characteristics for agriculture. Furthermore, when land is declared “unused” by the government, it may still be used by the locals for grazing animals, gathering fuel wood or medicinal plants. This type of land use often serves as a safety net against bad harvests for the communities, which vanishes when the land is sold to an investor and is consequently fenced off.
In addition to land use, water use may also be negatively affected, if rules of access to water are not clearly spelled out in contracts. In most contracts, there is no clear definition of water use rights, causing locals to have less water in areas with water shortage and affecting negatively both agricultural production and livelihoods at the same time. Case studies of large investments show that despite the initial claims, actual opportunities for employment are small and often limited to unskilled casual labor. Wages are low and they cannot substitute the loss of farmland. Moreover, if investors produce biomass for bioenergy, or if they export most of their production, the local food security may be worsened leading to civil unrest and instability. But this may be countervailed by export restrictions that are imposed to fight food insecurity.
In most countries targeted by investors, there is a lack of sufficient regulations for environmental protection and sustainability, which may be exploited. Overall, the fear is that governments of host countries enter deals that are not beneficial for their population – either because they lack the resources to do it differently, or due to corruption of the elites, or simply because of power differences in the negotiation process. Governments are eager to attract investors, keen to compete with their neighboring countries as hosts for investments and may enter deals that benefit the investors more than the local population. They may also lack the means to monitor and control the implementation of regulations and contract clauses.
Even though the foreign investments into agriculture may provide many opportunities, these risks must be carefully evaluated and avoided if the overall outcome for the population is to be beneficial.