EMERGING CHALLENGES FACING SMALLHOLDERS 9
FIGURE 3 Agricultural investment needs, investment flows, and the financing gap in developing countries, 2008
Financing gap, US$107.5 billion
Foreign direct investment (private), US$22.8 billion Remittances, US$17.4 billion Official development assistance (ODA), US$12 billion
Global private philanthropy, US$5.3 billion Domestic savings (private and public), US$110 billion
Investment needs US$275 billion
Source: Authors, based on data from Motes (2011) and Center for Global Prosperity–Hudson Institute (2011). Note: These data do not include investment in infrastructure.
LIMITED ACCESS TO FINANCE AND CAPITAL
Current capital flows to the agricultural sector as a whole remain grossly insufficient in the face of upcoming agricul- tural demand (Figure 3). Many smallholders are excluded from productivity-
enhancing financial services and are unable to secure much-needed fixed and working capital, which ranges from land and buildings to machinery, high-yielding seeds, and fertilizer. One of the major financing challenges facing smallholders is their limited access to financial options and services for keeping their savings in formal accounts. Te absence of financial savings services contributes to the low savings rate among smallholders and their lack of buffers against adversity and shocks. China and other countries in Asia record higher savings rates than Africa. For exam- ple, the savings rate of the rural poor is 20–30 percent in China (Horioka and Wan 2007; Dewen 2010), compared with 3 percent in Nigeria (Obayelu 2012). Savings are also frequently invested in social capital (weddings and funer- als) to secure participation in the local community and to help cope with adversities such as accidents or illness at the individual level, but this approach loses its effectiveness when the whole community is affected. A survey among Ghanaian cocoa farmers showed that median spending on funerals equaled the median savings (Hainmueller, Hiscox, and Tampe 2011). On average, more was spent on funerals
than on tertiary education, vaccination or other medi- cal expenses, home improvements or construction, and rent combined. Te indirect cost of funerals may be even higher because they divert time away from labor—an aver- age funeral takes three days, and all villagers are expected to come. Another challenge to smallholder financing is the lim-
ited number of loans from commercial banks to agricul- ture and the rural poor in many developing countries: for example, only a quarter of agricultural loans in Africa south of the Sahara originated from a bank (Banerjee and Duflo 2007). Reasons for this situation include the dispersed demand and high cost of service in low-population areas; the weak administrative capacity of rural banks; agriculture- specific covariate risks such as variable weather paterns, pests, and price fluctuations; and lack of formally defined property and land-use rights to act as collateral for loans. In recent years, the financial crisis has forced the bank- supervising authorities in many countries to raise reserve requirements, making it even more difficult for small farm- ers to secure loans. Over the past several decades, microfinance designed
to improve rural smallholders’ access to credit has gained prominence as a poverty-reduction tool, but the reality has been mixed (Bateman 2011). Te small size and short maturity of microcredit loans do not adequately address the seasonality of smallholders’ production and income
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