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3. The investment climate

Possible policy indicators: (rural) investment climate

  • Are property rights recognised and protected?
  • Are taxes affecting agricultural investors, including smallholder farmers, relatively low and spread over a wide base? Are inflation, interest and exchange rates stable and at manageable levels?
  • Is an effective system of contract enforcement in place, and is it accessible and affordable to all investors, including smallholder farmers?
  • What are perceptions of sovereign risk? Are farming communities at risk of conflict which could result in destruction of lives and livelihoods and/or forced migration? 

32. A supportive overall business environment provides the basis on which entrepreneurship can flourish and encourages investment, including in the agriculture sector which could create both value chain and off-farm work opportunities for smallholder farmers.  It could also increase the availability of essential private sector-provided farm inputs such as seeds, fertiliser and credit.  Small businesses also benefit from a strong enabling environment, creating the scope for further job creation and increasing the linkages from farming to the rest of the rural economy.

33. Features of a supportive enabling environment include: (Shepherd 2007, Wiggins 2011, NEPAD-OECD 2011)

  • Macro-economic stability and good monetary policies, where inflation is under control, the exchange rate is competitive, and interest rates are fairly low.
  • A regulatory environment that ensures good governance and quality standards but does not deter investors; where property rights are protected, contract law recognised and the justice system functioning; and where taxes are modest but broad-based. 
  • Peace and security, law and order, and political stability with no rampant corruption.

34. The NEPAD-OECD draft Policy Framework for Investment in Agriculture recognises that sustainable growth in agriculture relies on policies that go beyond agriculture itself, and identifies nine policy areas that are key to improving a country’s environment for agricultural investment (FAO 2012), including taxation. Taxation can be a disincentive and create high transaction costs for small-scale producers; and taxes are often applied without enough consideration of how they will harm the competitiveness of a value chain. How local taxation policy plays out at district and state level can deeply affect the efficiency of the value chain and returns to producers.  Issues highlighted in the draft Policy Framework include questions around how taxation is administered and co-ordinated between the federal/central and state/local levels, and whether taxes paid by entrepreneurs, producers and investors accrue to local government so as to fund the provision of local public goods, such as basic infrastructure needed for agricultural development (NEPAD-OECD 2011).

35. Investment is more likely to take place in an environment where investors trust in the integrity of the markets, and a crucial component of such integrity is a legal framework capable of ensuring the enforcement of contracts, the protection of property rights and the fair resolution of disputes.  The system of contract enforcement needs to be effective and widely accessible to all investors, including smallholder farmers.  Governments should establish mechanisms for dispute settlement to ensure the widest possible scope of protection at reasonable cost (NEPAD-OECD 2011). Ensuring contract enforcement is identified as one of the key functions of government in ensuring a supportive investment climate in the 2005 World Development Report (cited in FAO 2012).

36. For smallholder farmers the issue of land use rights is particularly critical, with lack of secure land tenure one of the main factors inhibiting their own investment in increased productive capacity. The subject of rights to land and other natural resources is dealt with separately under Pillar 1 of the framework (see Chapter 4).

37. A lack of peace and stability can prevent longer-term investment; or prevent successful smaller-scale projects from being scaled up. Farmers who experience instability are unlikely to make the necessary investments in productivity-enhancing assets. Christian Aid reports that in South Sudan, conflict and the resulting constant migration means that few people are willing to invest in farms, which has major impacts on local markets and livelihoods. A recent article in the Guardian newspaper describes how an NGO-supported project in the DRC to improve cassava yields using simple technologies delivered impressive results, while also empowering local women; but instability in the region prevented it from being scaled up (Tran 2013). On the other hand, when peace and security returns and the investment climate improves, this can create enormous new opportunities for farmers, as seen in the dramatic improvement in the welfare of Rwanda’s coffee producers after the end of the genocide in 1995 (Wiggins 2012).

38. Wiggins (2012) points out that the investment climate need not be perfect, and that even small improvements can have a dramatic effect: “The important point is to remove the more egregious obstacles to investment, such as rampant inflation, insecurity, threats of expropriation, red tape, or very high taxation”.  Wiggins quotes the example of China’s reforms in 1978 which were “far from ideal” and centred on only four policy levers out of a much larger set of issues; but they managed to remove some of the worst obstacles that were preventing private endeavour, with dramatic results.

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