Investment in human development: The way forward

by Lioyd F Yapa

There appears to be agreement on the fact that investment in people and human capital through development of rural agriculture and land, education, health and physical infrastructure is one of the speediest ways to improve living standards and alleviate poverty.

Present position

According to the World Bank about 23.9% of the population of the over 20 million people in the country earn less than US$ 2 a day per person (2010). These are the poor. In Malaysia which gained independence a couple of years after Sri Lanka (SL) the figure was 2.27%. Nine out of 10 of the poor in SL live in rural areas (Rural Poverty in SL, Rural Poverty Portal), the rural population being about 17 million.

Undernourishment and malnutrition are rampant among them. “25.2% of the children, 22.2% of the women and 16.4% of pregnant women are anaemic (R. Jayatissa, MRI, 2009). She attributes these problems mainly to unavailability of adequate food (hunger).

The main reason for this serious situation is low productivity. Productivity or value addition per employee in SL was US$ 999 as against $9,291 in Malaysia, $8,155 in Mauritius, $ 42,943 in Japan. (2011, World Bank). Sujan Piya et al. say, “Pakistan represented the highest land productivity growth, while Sri Lanka represented the lowest land productivity growth” in South Asia. (Sources of Agricultural Production in South and South East Asia ,University of Tokyo, 2011).

Restrictive tenure conditions

Thus agriculture and land provide 31% of the employment opportunities in the country, while the sector contributes over 11% to GDP. (Exports by the rural sector were only 4.7% of total exports of about US$ 11 billion in 2013). It can generate higher output and return with lower material inputs (higher productivity) if restructured.

Most of the farmers are tied down to low output. The bulk of land (over 80%) especially in rural areas is owned by the government which has leased (later most of it converted to grants) it out in small lots under the Land Development Ordinance (LDO, 1935). The tenure conditions are so restrictive that holders find it difficult to improve productivity of the land. Since most of the lots are not owned by the farmers they find it difficult to access bank loans and invest.

Sub-division of the land among those who inherit it is so heavy that there are reported to be more than 1.4 million lots which are less than 40 perches in extent (out of 3.3 million land parcels, 4 .7 million acres in extent), held by 3.6 million households. Census of Agriculture, DCS, 2002.

Fragmentation

This is mostly subsistence farming and mixed cropping. This is one of the reasons for low value-addition in rural agriculture. The use of machinery on small, scattered irregular plots needs long journeys and is often inefficient and for the same reason consolidation to increase output and reduce unit cost is difficult. As small quantities are produced, it is infeasible to undertake further processing and provide for export.

As fragmentation of holdings becomes worse with each generation and incomes decline, the youth especially the educated leave the land in droves due to poor returns and low wages and migrate to the already crowded urban areas, or go abroad legally or illegally to work under harsh conditions, leaving the children and the elderly behind.

Undeveloped value chain

The situation is further worsened by the fact that little attention is paid to strengthen the value chain for agricultural produce that should consist of quality planting material, well maintained irrigation works, warehouses, cold rooms, paved rural roads, marketing and research institutions. Research programs and extension services being undertaken are ineffective in controlling disease, pest attacks, increasing yields and indicating remunerative crops.

Worse still, the price the subsistence farmer gets from the market for his produce does not compensate him adequately and the farmers are frequently in debt. Consumers too are affected unfavourably as the transporters and traders demand high prices to compensate for high wastage (30-40%) in transit. Heavy imports are needed to make up for shortages, leading to a worsening of the trade balance. Agricultural prices also fluctuate because of weather and natural disasters.

Incomes, therefore, do not remain stable. According to the Household Income and Expenditure Survey 2012-13, the average monthly income of a household (of about four persons) among the poorest 20% of households was Rs. 10,245, that of the poorest 40% was Rs. 15,760 and that of the richest 20% was Rs. 121,368, the average monthly household expenditure of a rural family being about Rs 38,000.

The other problems include soil erosion, pollution of underground water resources, widespread illicit felling of trees and sand and gravel mining in rain water catchment or forest areas, land grabs often aided and abetted by politicians and encroachment of forest land by land hungry farmers resulting in human-animal conflicts, the land-man ratio being high.

Additional problems

The usual solution resorted to by the authorities has been to set up at central and provincial government level numerous ‘top-down’, under-funded, poorly co-ordinated, inefficient and mostly corrupt public institutions to service the sector with underpaid and de-motivated officials.

Samurdhi payments and guaranteed prices at enormous expense have been thrown in through these institutions. Other subsidies such as low-priced fertiliser, planting material and disaster relief often get diverted, are of low quality and are not delivered on time.

While this was happening “there was government withdrawal of investment on productivity-enhancing activities, such as research and extension services, and development of infrastructure (which generate non- farm employment) including irrigation.” (B.M. Sumanaratne, Public Expenditure Reforms and Rural Poverty in Sri Lanka, 2011).

Details of lower government expenditure as a percentage of GDP cited by him are: on agriculture and irrigation 1.4%, health 1.5%, education 2.8% (now about 1.7%), transport and communications 3.5%, electricity and water 1.3%. As of 2009, these allocations have not been carefully distributed into the needy peripheral areas.

Enhancement of productivity

Nothing much has happened so far to improve the well-being of some 17 million people who depend directly or indirectly on rural agriculture.

Why? Is it an absence of visionary and caring leadership, maintaining poverty and ignorance to catch votes with subsidies or corruption that takes away even the subsidies? Could be all of them and more. The way out is to rethink the intricacies of the problem and find solutions particularly for improvement of productivity, further processing, to create employment opportunities and for export.

First, it may be necessary to study the land reform movements adopted in Japan, Taiwan, Iran and particularly the semaul un dong land reform movement adopted in South Korea. Apparently the first step was the preparation of a Land Utilisation Plan (LUP) to identify the arable and non-arable land, soil, water resources and weather patterns.

Crop budgets

The other objectives of these projects were enlarging the scale of farming through consolidation, collectivisation, long-term lease, exchange, transaction, purchase by the government of the farms owned by non-cultivating land-owners, retired farmers and occupation-changing farmers to sell them to professional farmers after re-plotting (to enable mechanisation) and construction of paved agricultural roadways, to improve rural productivity. (Doug Young Chung Chungnam National University, Taejon, APO Seminar on Impact of Land Utilisation Systems on Agricultural Productivity, 2003).

‘Crop budgets’ indicating the profitability of growing crops in the different climatic and soil regions of the country after completing a Land Utilisation Plan (LUP) could be published by the State. The reason for this suggestion is that Sri Lanka should grow, on a large mechanised, commercial scale, the crops, that would give the maximum returns by way of primary and processed value-added products not only for farmers but also for export at competitive prices.

Institutional arrangements

The relevant State agencies have to be restructured as leaner better-funded organisations, with better paid personnel recruited on merit alone, to formulate planning, policies, incentives and regulations to provide quality inputs including credit (lending on collective guarantees of groups of creditors like the ‘grammeen’ banks of Bangladesh since the poor do not possess assets of high value to offer as collateral), research and technical expertise, information especially on markets and extension services.

This has to be done in consultation with Community Based Organisations (CBO) such as farmer organisations which should be motivated to better their own lot rather than carrying out orders of officials.

Infrastructure and services

Rural areas could be provided with infrastructure facilities by the central and provincial government agencies, such as well-maintained roads (after re-plotting of holdings to provide easy access to the farms and enable mechanisation), irrigation works, electricity and transport, packaging, storage including refrigeration facilities and information using perhaps mobile phones.

It was said that SL should start producing crops on a large commercial scale, not only to increase returns but also to attract investors to undertake further processing and value-addition for export as well.

Each large scale cropping area could accommodate a well located urban cluster and industrial area consisting of manufacturing and service oriented enterprises (most of them SME) to absorb the excess employment and the landless in rural agriculture.

The planning and the provision of infrastructure in the clusters is the responsibility of the State. The private sector could be incentivised to undertake the rest of the work - setting up of units of production and services.

An open market will not always ensure that farm produce is sold at a fair price.

The State, therefore, has set up various support schemes such as the GPS which achieve neither of the objectives. Out of the various types of price support adopted by various countries the best is supposed to be insurance schemes to provide for the losses incurred by farmers and to provide them a stable income, along with a well-targeted social security system for the needy.

Another alternative is the setting up of joint-stock companies of small farmers (corporatisation), after a LUP and re-plotting, under which they can go in for large-scale cropping, further processing and marketing schemes to get a better return.

In such a case, the farmer is in control of the management of production, processing and marketing and could recruit skilled people like any other company.

The second best solution is to incentivise marketing companies to purchase the farmer’s produce at reasonable prices while inputs and technical assistance are provided by the companies, like some of the models operating at present.

Benefits

Large-scale operations such as the consolidated versions of rural farming with urban clusters could contribute to increases in rural productivity, supported by the competition and rivalry among the firms in the clusters and generate investment and employment opportunities as demonstrated for instance by Iran. (Report of the APO Seminar 2003). They will also provide better paid jobs in manufacturing and services, which will discourage people especially women from going abroad for menial employment.

Such large operations would also enable an increase in food production that could reduce hunger, malnutrition, anaemia and sickness among people in rural areas, while increasing the income of rural populations. More could be earned by exporting the surplus. Higher rural incomes will increase the demand for various industrial goods and services and speed up economic growth.

Sri Lanka could do better if development of rural agriculture is accompanied by improvements in education and training (and health) as currently there is a scarcity of technical and soft behavioural skills (such as leadership, creativity, working in a team, communication especially in a world language) that hold back investment.

A further need is to significantly reduce the cumbersome procedures and documentation involved in setting up and running businesses in SL. Getting the basics right such as low inflation, low interest rates, avoidance of overvalued and undervalued exchange rates and good governance are essential to create the right business climate.

It has been a disastrous long nap and it is time to take action – first design a new land policy to replace the LDO (1935) and formulate other human development policies.

These need to be followed by development programs such as the ones suggested, especially education, with clear objectives and frequent evaluation of implementation, to usher in higher (real, inflation adjusted) income, alleviation of poverty and reduction of inequality of income.

(Extracts from a book to be published by the writer)