AT THE G20 meeting in Mexico, Julia Gillard committed Australia to contributing $20 million of our money towards the $100 million AgResults scheme, which aims to help farmers in developing countries achieve food security.
The scheme, first proposed at the 2010 G20 meeting, was launched at this year’s conference. Other participants are Canada, Italy, the UK, USA, plus the Bill & Melinda Gates Foundation. It will be administered by the World Bank.
The underlying facts are pretty straightforward. The world’s population is expected to reach 9 billion by 2050. Demand for food is accelerating due to rising prosperity in some countries, but almost a billion still suffer nutritional deficiencies. There is limited potential to increase production by expanding farming areas, so yields must go up.
AgResults proponents claim the scheme will use pull mechanisms to encourage innovation through results-based payments such as prizes that are typically paid out when certain objectives or milestones have been met. They say such financing mechanisms have seen success in generating innovation and market-oriented solutions in healthcare.
The plan is to establish a portfolio of pilot projects to test different types of pull mechanisms. Initial pilots will focus on maize production in sub-Saharan Africa, where agricultural yields are low and much of the area is stuck in grinding poverty. They include on-farm storage technology, aflatoxin control, and vitamin-A enhanced varieties.
The World Bank claims incentives of this kind work best when markets do not adequately reward innovators, information gaps and uncertainties prevent supply and demand from coming together in a market, markets do not function because of imperfect competition, and innovators are willing to accept some of the outcome risk.
While that might be true, it is absolutely true that the main reason markets do not reward innovators or they become risk averse, or there are information gaps and imperfect competition, is because of government failures. The rule of law, particularly certainty in relation to contracts, is fundamental to entrepreneurial activity.
And if the rule of law did apply, and the developing world was free to use modern agricultural technology and to sell its produce freely, none of these problems would exist.
Maize is a good example. In the United States, virtually all the maize grown is genetically modified. Originally it contained one new gene that conferred resistance to a particular type of insect pest or a certain types of herbicide. Then both traits were inserted into a single plant. Now there are up to 8 traits in some varieties comprising pest resistance, herbicide tolerance, agronomic attributes, processing attributes and nutritional qualities.
US farmers also have access to the latest chemicals for controlling pests and weeds as well as fertilisers tailored to the requirements of the crop. Not surprisingly, corn yields on US farms are very high.
It is obviously very different in sub-Saharan Africa, where many people depend on maize for survival. South Africa is the only country in Africa to grow GM maize. The governments of most of the other countries are strongly opposed to it, even when imported for food.
Many of those governments also have policies favouring organic production methods, which mean no crop chemicals or modern fertilisers. At the same time, local farmers are wary of expanding their crop areas because of market uncertainty and price fluctuations.
When there is a good season leading to a surplus of maize for export, they face substantial trade barriers. If they grow GM varieties, neighbouring countries, the EU, Japan and many others refuse to buy them. And if there is a poor season, there is a high chance foreign maize will flood the country as aid, eroding any chance of capturing high prices for their limited production.
In the context of all that, the AgResults scheme will be a drop in a bucket. Some of its schemes are probably sound and perhaps its incentives will make a tiny difference. But I believe the government could have saved our money and made a much bigger difference by promoting modern agricultural production methods and free trade, discouraging damaging foreign aid, and negating the harmful influence of western NGOs.
David Leyonhjelm is an agribusiness consultant with Baron Strategic Services. He may be contacted at firstname.lastname@example.org