Agriculture remains a major source of income and an integral part of the daily lives of the majority of Africa’s population. Yet, “Despite its central role, the agricultural sector represents only a quarter of African GDP due to the low productivity of the sector,” highlights Dr Akinwumi Adesina, President of the African Development Bank. Investment in agriculture has therefore been cited as one of the most important and effective strategies for realising food security and nutritional goals, and reducing poverty.
According to an FAO report, over the past 30 years, insufficient investment in the agricultural sector in most developing countries has resulted in low productivity and stagnant production. However, over the last 10 years this trend has changed, and the global focus has shifted to investing in the untapped potential of African agriculture. As a result, foreign direct investment (FDI) flows to developing countries doubled between 2006 and 2008. But the bulk of this investment goes to downstream activities in agricultural value chains (processing and distribution), and less than 10% of foreign investment goes to primary agricultural production. This pattern of investment has led to a lot of debates as to whether the benefits of FDI outweigh the risks. However, the lack of comprehensive statistical data limits understanding of the extent and nature of the impacts of FDI in developing country agriculture. It is therefore difficult for local communities, development agencies and policymakers to ensure that they maximise the benefits of foreign agricultural investment, while minimising the risks.
What are the benefits and risks of foreign investment?
Investment in agriculture is credited with several benefits, including employment creation, poverty reduction, technology transfer for higher productivity, increased food availability, and improved access to capital and markets. There are opportunities for both foreign and domestic investors to generate profitable returns and benefit farmers through exploring the potential of big data and its role in agribusiness. Additionally, there is a demand for increased investment in agricultural research for development, particularly in the use of renewable energy and biotechnology, which could have major impacts on Africa’s ability to sustainably meet growing food demands.
Though foreign investments have taken many forms, including capital, management and marketing expertise, and technology, a lot of the focus is usually placed on land investments. Investment in land is usually a delicate issue because land is often connected to national sovereignty and independence, which are both linked to the colonial history of many countries. Large-scale acquisition of agricultural land can also have adverse impacts, including the displacement of smallholder farmers and loss of pastoral grazing land, leading to a loss of incomes and livelihoods for rural people. In addition, it can result in the depletion of productive resources and adverse environmental impacts, in particular the degradation of land, water, forests and biodiversity.
How can developing countries mitigate the risks?
If FAO’s estimates are anything to go by, net investments into agriculture of more than €60 billion a year are needed for food production to keep pace with rising demand, as incomes increase and the global population reaches 9 billion in 2050. Most of the growth in population will occur in developing countries, where hunger and natural resource degradation are already rife. To achieve food security, crop and livestock production systems must not only be more intensive, but also more sustainable. This requires investment – whether foreign or local.
The focus should be on the development of agricultural investment policies that fit the country’s reality, which protect both the investors and local communities against risks that both may experience. Studies show that investments that take a participatory approach and view farmers as equal business partners, with an active role in the use of their land, have the most positive and sustainable impacts on local economies and social development. Such inclusive business models should be supported with better availability of ‘patient capital’, as financial returns are unlikely to materialise within the first 3-5 years. A thorough evaluation of the legal and institutional framework in a country, the terms and conditions of the investment contract and the social and economic conditions of the investment are also critical for mitigating the potential risks of FDI in agriculture.
Investors and governments should prioritise the scaling up and replication of successful agribusiness models and value chains, and examine the lessons that can be learnt from agricultural development interventions and policies in countries like South Korea, who have become agribusiness leaders. The benefits of foreign investment will not be automatic; first, it is important to strengthen the governance and capacity of institutions in developing countries to promote partnership and collaboration between government, the private sector (domestic and foreign) and rural communities. Such collaboration will facilitate the creation of innovative and competitive business models that benefit the host country, as much as the investors.