First step in the way forward:

Uplifting agriculture industry

by Lloyd F Yapa

The subject, development of agriculture is much neglected in view of the readiness on the part of the country to undertake a major economic take off and achieve prosperity subsequent to the defeat of terrorism and the unification of the nation.

Why agriculture?

Agriculture contributes about 12 percent to the GDP. Over 70 percent of the population of around 20 million in the country still lives in rural and estate areas. Approximately 41 percent of the people are poor and lead a precarious livelihood on less US$ 2 a day (about Rs. 224).

The fact is that since most of these poor live in rural areas if the incomes of the mass of such people can be raised substantially the greater demand for goods and services that would result, without doubt, could drive up rates of economic growth. In fact most of the high performing economies of Asia such as those of Japan, Taiwan and South Korea, started their march towards prosperity through manufactured exports via land reform. (land consolidation and not distribution as under land reform in Sri Lanka).

Surprisingly when enamoured with more glamorous goals like industrialization, we tend to ignore this approach. It is therefore time; we paid greater attention to the development of agriculture to help in the realization of the economic growth rates of eight or more as envisaged in the Mahinda Chintana- Idiri Dekma.

Land consolidation

Today in Sri Lanka over 80 percent of the land is government owned and Governments have been parcelling out land to rural farmers under the Land Development Ordinance (LDO) and providing irrigation facilities to Dry Zone areas in the hope of raising the level of agricultural production. (However, a system of giving ownership has commenced recently.) The average extent of such parcels has been three acres, which is too small for obtaining economies of scale (reducing average or unit costs) and improving productivity/competitiveness.

The farmers do not own the land under this system. The farmers therefore engage in subsistence farming and are not inclined to invest in farming as a business. Even if they wish to do so, they will not be able to borrow any capital, as banks usually do not accept the LDO permits as collateral for loans. In the case of privately held land, the situation is no better as in most instances; there is acute fragmentation of holdings; the titles of the land they hold are not clear with the owners energies on interminable litigation. This leaves the State as the only source of capital for the development of arable land. However, the State is in no position to spare funds for such purposes.

What then is the way out?

The obvious solution is land reform and grant of freehold possession of State land to the farmers and the clarification of the titles of the privately held farming land. This may result in the amalgamation or consolidation of small parcels of land into more viable farming units due to the sale of land by those whose units are unviable and therefore want to exit from agriculture to those, who want to invest in agriculture for profit.

Exit they must, since agricultural productivity or value added per worker is low ($ 823 as against e.g. Mauritius $ 5222-World Development Report 2010) on account of the fact, too many people about 33 percent of employed persons- are occupying the land. In other countries, where agricultural productivity is high as in the USA, about 2 percent of the labour force till the land and produce enough food not only to feed the entire population but also for export. What is important here is the scale of production to reduce unit costs and being able to afford the acquisition of the necessary technical/managerial/ marketing expertise and technologies including machinery and equipment, to improve returns especially by adding value to products.

Those who sell their fragments of land with the implementation of land reform have to be provided with other job avenues such as in agro industries and services preferably in the rural areas itself. This process has to be carefully stage-managed. If not it could go wrong with undesirable consequences. Some of those who leave the land, may migrate to already beleaguered urban areas, proliferating shanty settlements and rank outsiders may enter rural areas upsetting the delicate social fabric, that still exists in the villages.

The consolidation itself has to be planned to obtain the desired outcomes, as in South Korea. This will include besides land reform, spatial planning such as changing the shape of the holdings to help in mechanization of farming operations, indicating roadways and urban centres. After this stage, physical and social infrastructure development has to take place with provision of extension and training services, of credit and insurance, sorting, storage, processing, packaging, marketing and transport facilities as well as supply of technical/managerial expertise.

State or private sector?

The State alone cannot bring about this transformation. Perhaps it could provide the planning, the (land reform) laws, appropriate policies/ incentives and the basic physical and social infrastructure to facilitate the process. The rest should be the responsibility of the private sector as plenty of opportunities to make profits exist, if (rural) agriculture were to be commercialized.

Company led model?

There are several models, that could be used to get the private sector involved; in order to obtain the optimum results, this step should be preceded by land reform to vest the ownership of holdings with the farmers. The first can be described as the 'Company Led Model' (CLM), where the parent companies could provide the inputs, extension services and marketing. The Ceylon Tobacco Company type of model may be suitable for products, where the only buyer is a parent company.

Out-grower model

However, there could be variations of the above model, where the parent company may have a nucleus farm and the others are out-growers adopted by the former.

Internet enabled model

With the development of information and communication technology, electronically net worked versions of the model have been making their appearance. For example, according to the article, 'Serving the World's Poor Profitably?, Harvard Business Review, September, 2002, the agro business division of ICT, one of the largest companies in India, had been connected with some 600,000 farmers through 970 internet-enabled kiosks. As reported there, the farmers of some 5000 villages in India, had been supplying the company with farm produce such as soya-bean, coffee, shrimp and wheat. The ICT, through this program had helped in increasing farmers' productivity by facilitating the farmers by various means such as supply of quality inputs. The kiosks also had served as an e-procurement system, helping farmers earn higher prices by minimizing transaction costs involved in marketing farm produce.

Joint stock company model

Joint Stock Companies (JSC) of farmers themselves is another model which is more feasible in the Sri Lankan context due to the opposition to the break up of the prevailing social fabric in rural areas and the capitalist sounding consolidation of land through the sale of small plots of land and evicting of poor farmers' as claimed by some. (The writer is opposed to the formation of co-operative societies as it is a misused and discredited instrument in Sri Lanka). The JSC, if adopted in the country in (say, an irrigation system in extent of about 4000 acres to obtain economies of scale), the small farmers could join it as shareholders.

The existing structures on the land such as roads, irrigation channels and warehouses could be vested with the company for them to be viable. This will be the contribution of the State to the shareholding of the companies. Being limited liability companies with substantial shareholdings, they will be able to attract both equity (if converted to public companies) and loan capital and enabled to recruit qualified technical/managerial personnel and other professionals. In this model high level management, technical expertise, inputs and marketing are provided by the officials and experts employed by the farmers themselves, unlike in the case of the CLM, perhaps with some guidance by relevant government agencies at the outset.

Besides these models, there will be of course proprietorships and partnerships of owners of medium to large holdings.

Each such large cropping area could accommodate a well located township planned by the State to supplement the economies of scale of holdings achieved after land reform. These townships should be concentrations of providers of various services and facilities such as housing, health and education (to motivate professionals to move into rural areas), R&D, extension, machinery hiring, banking, transport, communications, storage, processing, packaging, marketing and other relevant activities as well as support industries. For such thriving townships to come into being the area under each crop should be sufficiently large as these firms also have to be large operations to be viable. Development of peripheral regions of the country such as the North and the East could be accelerated, if many such townships are judiciously scattered in these areas and connected with each other and the main city of Colombo with highways especially to facilitate marketing.

Benefits

Such a process, if properly planned and co-ordinated could yield enormous benefits. Farmer incomes would rise. With rising incomes, food, clothing, shelter and other necessities of life would become available to most people in rural areas relieving them of poverty. The rise in purchasing power will create markets for industrial goods produced in the urban areas of the country and other businesses including Small and Medium Industries set up in the rural areas itself.