‘Farmers are also entrepreneurs’

You have investigated in more than thirty countries whether and how they have succeeded in transforming their agriculture sectors. Can you share a particularly informative example?

Sara Boettiger: At some point, every developed country has undergone a transformation of the agriculture sector. In most cases, it develops hand in hand with the industrialisation of the country and this can have a big impact on poverty. In Thailand, for example, 57 percent of the population was living in poverty in 1963. Eighteen years of agricultural transformation later, it was only 24 percent.

How did they do it?

Lutz Goedde: Thailand modernized its agriculture sector while also laying the foundations for growth in manufacturing. There were building blocks. For example, public sector investments in new maize varieties in the 1970s took off. This enabled cost-effective production of poultry feed to contribute to private sector growth in Thailand’s chicken industry. The Thailand conglomerate CP was built on the great competitive position. First locally, then regionally and eventually it established itself globally as one of the leading companies in this industry. Through its own growth, Thailand CP acted as a driving force for countless suppliers: smallholder farmers who shape agriculture in Thailand.

Who exactly made these decisions?

Lutz Goedde: Economic transformations are complex and master plans do not work very well. Government leadership in enabling policies and investments is critical. Then, built on those, a number of ‘change agents’ understand the opportunities and limitations of growth. Modernizing agriculture in a developing country requires change among thousands of farming households with small plots and not much income. Going back to Thailand, change agents reached farming families with new varieties of cassava. This allowed a new industry of exported cassava-based starch products for the country.

What can we learn from past examples of agricultural transformation?

Lutz Goedde: While no example can simply be transferred on a one-for-one basis, we know a lot about the principles of agricultural transformation. For example, Thailand took bets on a few critical value chains. Individual countries cannot be good at everything. They need to specialise in products that can be produced at regionally or globally competitive prices. But countries often make the wrong bets. There are a number of crops, such as rice or sugar cane, which are very popular for government support in some countries. This is based on the following logic: ‘Importing these products is expensive. If we grow them ourselves, we'll be much better off!’ But this strategy goes wrong more often than it succeeds. Cultivation of rice and sugar, for example, requires high water consumption. But when there is not enough water, production is expensive and yields are low. In our analyses, we have found examples almost everywhere where the wrong value chains are being prioritized, but especially in rice and sugar.

So then what can governments do? 

Sara Boettiger: Governments that are successful in this recognize the complexity and uncertainty in agriculture. They innovate to see what works in their own country. That involves focusing on competitive crops or livestock, but it also involves land policies, infrastructure investment, trade policies, education and lots else. Also, for a successful transformation of the economy, agricultural policy must be coordinated with broader industrial policy. The more efficient the agricultural sector becomes, the more jobs with increasingly higher pay will have to be created in other areas.

Lutz Goedde: The Ministry of Agriculture is usually not the most powerful department, and the other ministers usually try to claim as much of the budget as possible for themselves. It is therefore all the more important to spend the money wisely. There are so many examples of well-intentioned but failed policies. One example is fertiliser subsidies. They are as old as civilisation itself. There are usually contract award centres where farmers pick up bags of subsidized fertiliser. This is not a good distribution method. Many countries, like Nigeria, experimented with electronic tokens: The farmer receives the credit on a card and decides for himself what he needs. Fertiliser, seed or a plow? S/he can spend the money where it can work most productively. This also creates demand for local dealers and a sustainable cycle. More and more countries are relying on such systems.

Do you work directly with farmers?

Lutz Goedde: For the kind of work we do, that would not be efficient. We provide advice at the following junctions: the Ministry of Agriculture or the Federal Ministry for Economic Cooperation, private donors, or agricultural companies, both multinational and regional. The farmers 'associations are also important if farming methods and behaviour of the farmers are expected to change in the long term. They have a huge impact on the farmers.

Farmers are not known to be particularly reform-minded ...

Sara Boettiger: But that is understandable. We need to be aware of the risk a farmer takes in a poor country when changing seeds or fertiliser. In our highly developed world, risk may mean that some money is lost, but for a smallholder farmer in Africa taking a risk means putting your family’s food supply and livelihood on the line. It's so crucial to remember that we need to listen to the farmers. We have a lot to offer them (like new technologies and better seeds) but we rarely understand their risk calculus. It’s also important to work with the ‘agents of change’ that farmers trust, including farmers' associations. And equally important is that we support smart social safety nets that allow farming households to climb out of poverty. For example, their harvests must be insured so that they can safely take the risks and make the change possible.

McKinsey is perceived in public as a consulting firm for large private companies. Can your private sector expertise even be used for rural development in Africa?

Sara Boettiger: McKinsey has always advised the public sector as well. And in recent years, we have built a team of over two hundred agricultural experts. We advise in the USA and in Europe, but also in Africa, Asia and Latin America. We have six offices in Africa alone.

Lutz Goedde: Of course, when it comes to rural development in Africa, we cannot treat it the same as advising a profit oriented multinational agricultural corporation. That is not how we approach it either. Economic considerations must be reconciled with social and political aspects. Our experience in both areas is often welcomed as a fresh approach, bringing different stakeholders together around a common goal.

What role do private investments play in the development policy debate today?

Lutz Goedde: There is a growing conviction that the private sector is critically important for rural development. There are hardly any examples of sustainable transformation in agriculture without private investment. It requires capital, infrastructure, and market forces.

Sara Boettiger: Smallholder farmers have long been seen as financial aid recipients instead of small business owners. But that is exactly what they are: They produce goods that they want to sell afterwards. Development workers and researchers today have a much more pragmatic view of the private sector – seeing business principles in everything from farmers themselves, to small local enterprises up to large companies. The governments feel it even more strongly, because their budgets are enormously burdened. They prefer to create good conditions for private investment rather than having to finance everything themselves.

What happens to farmers who simply cannot prevail in the market?

Lutz Goedde: Any successful agricultural transformation that we have analysed leads to more efficiency in production, but ultimately this also entails new opportunities for people outside of farming.  

Sara Boettiger: There are good types of agricultural transformation and bad ones. In bad cases, farmers are forced to leave their land because it is too small or the soil quality has deteriorated. In good cases, while some farmers remain who are able to increase their yield and modernize while expanding their operations; other farming families are able to find better paid work in other sectors of the economy.

Lutz Goedde: People everywhere have a desire for change – for improving their family’s situation. On my travels in Africa or Asia, I meet with farmers and always ask them the same question: ‘What are your hopes for your children?’ And the answer is almost always the same: ‘I want them to become lawyers or accountants or doctors!’

This brings us back to the point that agricultural policy and industrial policy must be balanced.

Sara Boettiger: Exactly! Some agricultural economists only talk about agriculture. But we really have to think about how agriculture is connected with the general economic development. Agriculture is at the heart of a larger economic transformation. So many people earn their incomes in agriculture in developing countries that you have to start there – you can’t leap-frog it.

Lutz Goedde: Twenty years ago, the World Bank still painted this image of a ‘hollow Africa’. According to that notion, agriculture did not help Africa. Growth was projected only along the coast and above all through industry and services. Of course, there was a certain logic to this notion, because the growth rates in agriculture were lower. But today it has become completely clear that without agriculture, transformation of the economy will not succeed. Otherwise, the food supply of a country is not secured, people get pushed off the land rapidly, giving rise to social conflicts.

In which phase of the transformation is Africa currently?

Lutz Goedde: We speak of Africa in general terms, because that is so easy to generalize. However, the continent is extremely diverse and every country and sub-region has to be looked at individually. This also applies to the agricultural transformation: The countries are in very different stages of their development.

Sara Boettiger: Our job is to support African governments and companies in using the best available evidence to tackle the complexities so they can transform their agriculture sectors and ensure that the many families depending on agriculture for their livelihoods have better access to nutritious food and more income in their pockets.