This post was written by IPD Research Affiliate Tiffany Wang.
The agriculture sector is often the largest contributor to GDP and largest source of employment for many developing countries. In addition, many of the world’s poorest live in rural areas and often depend on agriculture for their livelihoods. Sufficient agricultural investment is therefore critical for both encouraging economic development and reducing poverty rates for many of the neediest (Mogues 2008).
A study by Fan and Saurkar in 2008 identified public sector spending on agriculture as one of the most important policy instruments for promoting economic growth and alleviating poverty in rural areas for developing countries. However, an increasingly popular way to supplement this public domestic spending is to attract private foreign direct investment (FDI). According to the OECD Factbook, FDI is defined as “cross-border investment by a resident entity in one economy with the objective of obtaining a lasting interest in an enterprise resident in another economy.” Developing countries value agricultural FDI because it can increase productivity, encourage the transfer of technology, and open new capital markets (OECD Statistics, 2013).
But do higher levels of domestic agricultural investment and higher levels of foreign investment really improve the wellbeing of the rural poor? I explored this question using data from the Ending Rural Hunger (ERH) project developed by the Brookings Institution. My principal hypothesis was that public domestic investment in agriculture is more effective at reducing rural poverty rates than private foreign spending in agriculture.
In my first model, I tried to find the relative effects of public and private spending on agriculture on rural poverty, controlling for the amount of access to land for the rural poor and the investment climate for rural businesses. I was specifically interested in seeing the relative effectiveness of the two types of spending when considering how strong of a position the rural community had for doing business (as approximated by the rural community’s access to land and the strength of their business climate).
Since I used a log-log model, I found that for every 1% increase in government spending, there was a 0.475% drop in the rural multidimensional poverty headcount. This result was significant, and made sense because an increased amount of government spending should lead to less rural poverty. The surprising result was for my estimate for the effect of foreign direct investment in agriculture on rural poverty. I found that for a 1% increase in foreign direct investment, there was a 0.014% increase in rural poverty. Although this estimator was not significant, it raised interesting questions. Why would an increase in foreign direct investment in agriculture hurt rural communities? This would support the “Land Grabbing Theory” described in the literature where increased levels of FDI to agriculture can potentially be harmful to developing countries because the type of FDI to agriculture these days are resource seeking rather than long-term investment.
For my second model, I decided to interact the terms of foreign direct investment to agriculture and access to land. This is because I believed the efficacy of FDI to agriculture could change significantly depending on the strength of measures for amount of access to land a rural community has. This is in line with a lot of the literature related to the Land Grabbing Theory because social scientists believe that if communities have stronger access to land, then they can bargain better with foreign investors and this would lead to better development outcomes.
The new results are very compelling. I found that for every 1% increase in government spending, there was a 0.478% drop in the rural multidimensional poverty headcount. This result was significant, and very similar to the estimator we found from the first model. The FDI to agriculture variable interacted with access to land changed signs from positive in Model 1 to negative in Model 2. The interaction also became significant, which suggests that access to land can really influence how effective FDI to agriculture is for the rural poor. I found that for a 1% increase in FDI interacted with Access to Land, there was a 0.332% decrease in rural poverty. This estimator was significant and showed that while increased levels of FDI to agriculture can be harmful to the rural poor, there is more to the story. We have to consider the amount of access to land. We can best see how the coefficient of FDI to agriculture changes as you measure the access to land with this graphic:
The graphic above shows that the estimated coefficient for FDI is positive until around 3.5 on the 1-6 scale of the “Access to Land” measure created by the IFAD Rural Performance Assessments. The interpretation is that when the access to land is between 1 to 3.5, increased FDI to agriculture actually increases rural poverty, hence the positive slope coefficient. When access to land is 3.5 and above, increased FDI to agriculture decreases rural poverty. The policy implications of these results is that governments need to take steps to improve the rural poor’s access to land in order to prevent negative effects from incoming FDI. This means improving mechanisms for access to land for rural households, women, indigenous groups, and enforcing land rights so that the majority of land holdings are titled or registered.
In summary, I found that FDI to agriculture could be harmful to the rural poor in developing countries unless there is some measure of access to land for rural communities. Possible next steps for research include adding public domestic investment and foreign aid into the analysis as other independent variables. I would also be interested in going into the data and finding out where exactly the money from foreign direct investment and public domestic investment is being spent.
Fan, Shenggen, and Saurkar, Anuja. “Tracking Agricultural Spending for Agricultural Growth and Poverty Reduction in Africa.” RESAKSS Issue Brief No. 5. 2008.
Mogues, Tewodaj, Bingxin Yu, Shenggen Fan, and Linden McBride. “The Impacts of Public Investment In and For Agriculture.” Agricultural Development Economics Division, Oct. 2012. Web.
"Statistics / OECD Factbook / 2013 /." OECD Library: Organisation for Economic Co-operation and Development. N.p., n.d. Web. 02 Dec. 2016.