sector framework document on agriculture and natural resources management

PUBLIC

DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK

SECTOR FRAMEWORK DOCUMENT ON AGRICULTURE AND NATURAL RESOURCES MANAGEMENT

ENVIRONMENT, RURAL DEVELOPMENT AND DISASTER RISK MANAGEMENT DIVISION

May 2013

This document was prepared by Héctor R. Malarin (RND/CHF) and Pedro Martel (INE/RND), with the contributions of INE/RND specialists. Rosario Gaggero (INE/RND) assisted with the production of the document.

The unauthorized commercial use of Bank documents is prohibited and may be punishable under the Bank’s policies and/or applicable laws.

Copyright ©2013 Inter-American Development Bank. All rights reserved; may be freely reproduced for any non-commercial purpose.

Under the Access to Information Policy, this document is subject to public disclosures.

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CONTENTS I.

AGRICULTURE AND NATURAL RESOURCES MANAGEMENT IN THE CONTEXT OF THE BANK’S SECTOR STRATEGIES ....................................................................................... 1 A. B.

II. III.

Sector Framework Document on Agriculture and Natural Resources Management as part of existing regulations ...................................................... 1 Sector Framework Document on Agriculture and Natural Resources Management as part of the Strategy for Mitigation and Adaptation to Climate Change and for Sustainable and Renewable Energy (GN-2609-1) ................... 1

INTERNATIONAL EVIDENCE ON THE EFFICACY OF POLICIES AND PROGRAMS IN THE SECTOR AND IMPLICATIONS FOR THE WORK OF THE BANK .......................................... 2 PRINCIPAL CHALLENGES IN THE REGION AND PROBLEMS THAT THE BANK WOULD LIKE TO ADDRESS IN THIS SECTOR....................................................................................... 12 A. B. C.

Productivity increases in agriculture are low and very heterogeneous............ 13 Agricultural growth has not been of equal benefit to the rural population in LAC ................................................................................................................. 14 Agriculture and natural resources are very vulnerable to climate change, but their improper use also generates most of the GHGs in the region ................. 15

IV. LESSONS FROM THE BANK'S EXPERIENCE IN THIS SECTOR .......................................... 16 A. B. C. D. V.

Reports of the Office of Evaluation and Oversight (OVE) ............................. 16 Results of the Development Effectiveness Matrix (DEM) .............................. 17 Lessons learned from Bank projects in this sector .......................................... 19 Comparative advantages of the Bank in the region ......................................... 21

GOALS, PRINCIPLES, AND DIMENSIONS FOR SUCCESS AND LINES OF ACTION THAT WILL GUIDE THE BANK'S OPERATIONAL ACTIVITIES AND RESEARCH ......................... 22 A. B.

The Bank’s goal and working principles in Agriculture and Natural Resources Management ................................................................................... 22 Dimensions of Success and their lines of action ............................................. 22

REFERENCES ............................................................................................................................

iii

ACRONYMS AND ABBREVIATIONS LAC IDB-9 WB ECLAC DEM FAO FAUSAC IFAD GHG IARNA IFPRI INTA OECD OVE GDP PCR PES SFD UCAMYMA WDR

Latin America and the Caribbean IDB Ninth General Capital Increase World Bank Economic Commission for Latin America and the Caribbean Development Effectiveness Matrix Food and Agriculture Organization of the United Nations Facultad de Agronomía de la Universidad San Carlos de Guatemala International Fund for Agricultural Development Greenhouse Gases Instituto de Agricultura, Recursos Naturales y Ambiente de la Universidad Rafael Landívar International Food Policy Research Institute Instituto Nacional de Tecnología Agropecuaria Organization for Economic Cooperation and Development Office of Evaluation and Oversight Gross Domestic Product Project Completion Report Payments for Environmental Services Sector Framework Document Universidad Católica Madre y Maestra de Santo Domingo World Development Report

I.

AGRICULTURE AND NATURAL RESOURCES MANAGEMENT1 THE BANK’S SECTOR STRATEGIES

A.

Sector Framework Document on Agriculture and Natural Resources Management as part of existing regulations

1.1

This Sector Framework Document on Agriculture and Natural Resources Management has been prepared in accordance with GN-2670-1, which regulates the strategies, policies, sector frameworks and guidelines in order to present the Bank’s goals in agriculture and natural resources management, and to guide its work in the creation of knowledge and in dialogue with countries.

1.2

According to what is indicated in paragraph 1.25 of document GN-2670-1, once the Sector Framework Document (SFD) on Agriculture and Natural Resources Management is approved, the following sector policies of the Bank shall remain without effect: Agricultural Sector Policy (OP-721); Forestry Development Policy (OP-723); Rural Development Policy (OP-752); Fisheries Development Policy (OP-724); and Mining Policy (OP-725); as well as the Agricultural Development Strategy (GN-2069) and the Rural Financing Strategy (GN-2022). The Bank will prepare an update of this SFD three years after its approval.

1.3

This SFD offers the Bank a concrete, but flexible orientation for meeting the diverse challenges and institutional contexts facing, at different levels, the Bank’s 26 member lender countries in the agriculture and natural resources management sector, hence directing the Bank's financing for operations with and without sovereign guarantee in the sector. In this context, this SFD will be a fundamental input in the preparation of the Bank’s Country Strategies. Within which specific interventions in the sector will be established for each country, in line with the country’s own needs and conditions.

B.

Sector Framework Document on Agriculture and Natural Resources Management as part of the Strategy for Mitigation and Adaptation to Climate Change and for Sustainable and Renewable Energy2 (GN-2609-1)

1.4

The proposed SFD is framed within the Strategy for Mitigation and Adaptation to Climate Change and for Sustainable and Renewable Energy (hereinafter the “Climate Change Strategy”), whose purpose it is to contribute to low carbon development and deal with fundamental vulnerability factors in connection with the consequences of climate change in Latin America and the Caribbean. Seeking

1

2

IN THE CONTEXT OF

For the purposes of this document, agriculture is understood to refer to the economic sector that includes farming activity, livestock, fisheries and forestry, while natural resources are all of those production factors that contribute to the competitiveness of such activities (i.e., earth, water, forest and fisheries biomass). Aspects related to conservation and preservation of natural resources will be addressed in the SFD on Environment and Biodiversity, to be presented in the last quarter of 2015.

The outlook of this SFD will also be consistent with the Infrastructure for Competitiveness and Social Welfare Strategy, currently in preparation.

2 to contribute to the institutional priority of environmental protection, the response to climate change and the promotion of sustainable energy and food security established by the Ninth General Capital Increase of the IDB (IDB-9), said strategy establishes five strategic lines of action for the Bank: (i) strengthening its knowledge base; (ii) strengthening the capacity of institutions and the public and private sectors; (iii) developing instruments to integrate the cross cutting mitigation of climate change and increase resistance to it; (iv) identifying and implementing loans and technical assistance for activities related to climate in key sectors; and (v) bringing investments to scale, filling gaps in financing and leveraging investment in the private sector.

1.5

The Strategy for Climate Change recognizes the following activities associated with agriculture and natural resources management as key drivers of the Bank’s climate change agenda: (i) reducing changes of soil use and deforestation in pristine landscapes or high value landscapes in terms of the services they provide, since these are the main sources for the emission of Greenhouse Gases (GHG) in the region; (ii) increasing and improving the protection of water resources and the management of water resources, since this is a sector that is highly vulnerable to climate change impacts; and (iii) to foster the development of sustainable agriculture, including security of land tenure and sustainable management of natural resources that will translate into higher rural productivity and an improvement in the living standards of the rural population. In this regard, the lines of action set forth in this SFD include activities that will contribute directly to expected results of the said strategy, based on the existing empirical evidence (Section V).

1.6

This document has been broken down into five sections seeking to address the seven elements that are to be contained in an SFD, according to document GN-2670-1. This section places the SFD in the context of existing regulations and the institutional strategies in effect. Section II presents the empirical international evidence on policies and programs in the sector of agriculture and natural resources management as the basis for mapping out this SFD. Section III identifies the challenges that the Bank will address while this SFD is in effect.

Section IV synthesizes prior sector evaluations of the Office of Evaluation and Oversight (OVE), the most recent results of the Development Effectiveness Matrix (DEM), and lessons learned for Bank projects in this sector. Based on the empirical evidence and lessons learned, Section V presents goals, working principles and dimensions of success, lines of action and concrete activities that are to be prioritized in the Bank’s sector work with countries during the next three years, the period that this SFD is in effect, to meet the challenges identified.

II.

INTERNATIONAL EVIDENCE ON THE EFFICACY OF POLICIES AND PROGRAMS IN THE SECTOR AND IMPLICATIONS FOR THE WORK OF THE BANK

2.1

In this section a literature review is presented that cites the main findings of international studies and research on agricultural policy and natural resources management, based on which the goal, the principles, dimensions for success and

3 lines of action are to be built to guide the Bank’s operational activities and analytical work in this sector, as described in Section V. 1.

2.2

Macroeconomic stability and trade openness are necessary conditions for the growth of agriculture, which in turn has a bearing on poverty reduction

Between 1990 and 2011, the real agricultural Gross Domestic Product (GDP) of Latin America and the Caribbean (LAC) grew at an annual average rate of 2.7% (Figure I-1). This rate is greater than the 2% achieved in the 1980’s, although it is lower than the 3.5% of the 1970’s (ECLAC, 1997).

Figure I-1. Average annual growth rate of agricultural GDP in constant prices by country, 1990-2011 (%) 5

4

3

2

1

CH BL PR NI EC AR PE CR BO BR GU ALC HO CO PN ES ME GY RD VE SU UR JA TT BH BA HA

0

-1 Source: CEPALSTAT

2.3

The stability of macroeconomic policies following the reforms initiated in the mid 1980’s contributed to the increase in agriculture’s rate of growth in LAC. Particularly noteworthy is the neutrality of the effect monetary policy has had on exchange rates and a trade regime that reduced anti-export biases (including the protection of importable categories) in improving incentives for private investment in the field and, finally, in the expansion of agricultural exports (Dewbre et al. 2011; Foster and Valdés, 2010; ECLAC, 2007). The region went from extracting nearly US$10 billion in annual revenue from the sector in the 1980’s to supporting farmers with more than US$5 billion annually after the reforms (Anderson and Valdés, 2008). Nonetheless, the countries in the region must still confront the distortionary policies that affect their agriculture, especially through price support measures that have exhibited poor performance in terms of increasing farm family income (OECD, 2001). The average trade protection

4 covering products such as milk, rice, chicken and sugar to the detriment of products such as soybeans, beef or corn, are affecting the comparative advantage of agriculture in LAC and the efficiency of the allocation of resources originating in the private sector (Anderson and Valdés, 2008).

2.4

The growth in agriculture has been shown to contribute to reducing poverty in LAC. Between 1990 and 2011, the level of poverty in the region’s rural areas fell from 65% to 50%, while rural indigence went from 40% down to 29%. In analyzing the 1990-2005 period, Valdés et al. (2010) found that: (i) real agricultural income (measured by GDP deflated by different indexes) actually underwent a real increase in Brazil, Chile, Colombia and Paraguay although less than the growth of agricultural GDP; and (ii) whereas in Colombia and Paraguay small producers benefited most from agricultural growth, in Brazil, Chile and Mexico farm laborers were the ones who took in a growing proportion of agricultural income. Similarly, from 1980 to 2005, econometric analyses and counterfactual simulations found that growth in agricultural GDP per work contributed significantly more to poverty reduction in Brazil, Chile, Costa Rica, Nicaragua, Mexico, the Dominican Republic and Panama than non-agricultural GDP per worker or remittances (Dewbre et al. 2011). Both analyses would corroborate the datum that for LAC aggregate growth based on agriculture would be 2.7 times more effective at poverty reduction than growth of non-agricultural GDP (Foster and Valdés, 2010), or that, on average, the contribution of agriculture to the increase in earnings of the poorest is at least 2.5 times that of the non-agricultural sector (Bravo-Ortega and Lederman, 2005). The greatest impact would be observed in Chile, followed by Panama, Jamaica, Guatemala and Nicaragua (de Ferranti et al., 2005).

2.

2.5

3

Public expenditure on rural public goods has greater economic returns than that spent on private goods

The evidence, both in and outsider the region, shows that public expenditure on agriculture allocated towards the provision of public sector goods (e.g., rural infrastructure, technological innovation, agricultural health, market information) have greater returns and greater coverage than public expenditures allocated towards the provision of private goods (e.g., purchase and distribution of inputs, subsidies for production)3. For example, returns on investment in rural infrastructure, agricultural innovation and rural education tend to be higher than returns on public expenditure destined to private goods, both in LAC as well as in other parts of the world (Fan et al., 2008; López, 2004; Foster et al., 2011).

Moreover, a high proportion of public expenditure destined to private goods compromise the productive efficiency of public rural expenditures (i.e., diminishing per capita agricultural income). One study reported that maintaining The provision of public goods intended for agriculture can be done both by the State as well as by the private sector. When there are market failures that prevent the provision of such goods by the private sector (e.g., technological innovation), the State can apply alternative instruments to offset such failures, which may include subsidies. A discussion of such instruments will be presented in the SFD on Innovation, Science and Technology, to be approved at the end of 2013.

5 constant overall expenditures, a reduction of approximately 10% of the portion public expenditures in private goods brought about an increase on the order of 2.5% in per capita agricultural GDP (Rocha et al., 2006). Along the same lines, a time series analysis of public agricultural expenditures in India between 1960 and 2000 found that subsidies for agricultural inputs are less effective in improving income or reducing rural poverty (Fan, 2008).

2.6

Despite the evidence on the impacts of investment in rural public goods, in LAC there is still room for improvement in the structure of agricultural public expenditure. Recent studies prepared by the Bank on estimates of agricultural supports in 18 countries in the region, show that the magnitude of expenditures on public goods and services in general is low and heterogeneous (Figure I-2). At least eight countries, six of which are small and vulnerable, allocate less than half of their public expenditure on these kinds of goods, placing greater emphasis on direct fiscal supports as an instrument of sector policy.

Figure I-2. Breakdown of agricultural public expenditure by country in LAC (2010-2011) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% CO RD ME PR HO JA EC HA PE CH ES BO AR GU BR UR NI CR %Apoyos fiscales directos (1)

%Bienes públicos (2)

% Direct fiscal supports (1)

% Public goods (2)

Source: IDB

3.

2.7

Public expenditure on private goods has a low social return and is regressive, but in a process of its transitory reorientation toward public goods, “smart subsidies” can do better than the purchase and direct distribution of inputs by the State

Public investment in programs for the purchase and direct distribution of inputs, as an instrument to overcome constraints on access to inputs and/or modern technology among small producers, has a low social return, restricts private sector investment and is regressive. At the aggregate level, in Sri Lanka and Guatemala, fertilizer programs showed a negative cost/benefit ratio (Valdés, 2012; IARNA, 2013). Moreover, this type of programs is thought to be displacing private sector activity in the purchasing and distribution of inputs in Guatemala given that marginal net private benefits from the use of fertilizers are positive (Cannock, 2012). Furthermore, these programs tend to be regressive, with most of the supports going to larger producers. In Paraguay, as part of the preparation of the “Modernization Program for Public Management of Agricultural Supports”

6 (1800/OC-PR), the Bank estimated that between 2003 and 2004, 60% of the direct fiscal supports allocated for the purchase of cotton seeds benefited only 9% of the producers4, the largest.

2.8

If a country wishes to initiate a process of transitory re-orientation of its public expenditures from private to public goods, a mechanism for supports based on “smart subsidies” via vouchers or coupons can be a more effective way of focusing beneficiaries’ access to inputs, maximizing marginal production as well as economic and social benefits, and fostering public-private associations in the development of the market for inputs. In the cases of Kenya and Malawi, smart subsidy programs for fertilizers and improved seeds generated positive impacts on yields for small producers, improved their food security and increased the participation of the private sector in the distribution of inputs (IFPRI, 2009; Minde et al., 2008); but it could be displacing private investment in the supply of these inputs (Ricker-Gilbert, J. et al., 2011). Similarly, evaluations of the “Program for Support of a Competitive Agro-Food Transition” in the Dominican Republic showed that subsidies for the adoption of technologies had positive impacts on producers’ yields of rice and beef cattle, at the same time that they fostered the development of private suppliers (González et al., 2009; UCAMYMA, 2010). Based on this evidence, the Bank has been promoting more cost-effective “smart subsidy” schemes that seek to correct for elements that restrict the development of private markets in the provision and distribution of inputs and technologies, promote competition to reduce costs, encourage technologies with a positive economic return and include exit strategies from this kind of program. The evaluations scheduled for these interventions will make it possible to shed light on their effectiveness in the near future.

4.

Investment in rural infrastructure contributes to the increase in production, productivity, employment and income in the agricultural sector

2.9

The empirical evidence shows that investing in infrastructure is essential to facilitating the integration of less developed rural areas into markets for products and inputs (Pinstrup-Andersen and Shimokawa, 2006), thus helping to increase production, volumes of products sold, employment and rural income.

2.10

Transport and freight services. Recently, the causal relationship between investment in rural highways and productivity gains has been studied, revealing a 1.57 multiplier effect (Fan and Chang-Kang, 2005). In turn, improvements in rural access routes have demonstrated effects on employment (Rand, 2011) and income (Escobal and Ponce, 2008; Webb, 2013). With respect to product access to markets, distance to market, measured in units of time or physical distance, has a

4

Problems with regressiveness have also been observed in the application of offset mechanisms in agriculture. In Mexico, while 70% of direct supports under the “Program for Direct Supports to the Countryside” (PROCAMPO) are received by 40% of the poorest municipalities, in the case of the “Income Objective Support Program,” that same percentage is received by only 6% of the municipalities in question (Scott, 2008).

7 negative effect on the probability of selling in markets (Vakis et al., 2003; Nkhori, 2004). For example, for Peruvian farmers, an additional hour of travel time reduces the probability of selecting a particular market by 29% (Valkis et al., 2003). Investment in infrastructure to improve and increase the availability of rural highways must be analyzed in conjunction with the supply of transportation services. Reducing transport costs depends not only on physical infrastructure, inasmuch as the quality and quantity of freight services, particularly post-harvest, are determining factors. In this light, research conducted by the Bank shows that reductions in the cost of transport significantly increase exports: in Chile and Peru a reduction of 1% in transport costs would allow for a 4% to 5% increase in exports from the most remote regions, whereas in Colombia it is estimated that a 10% reduction in transport costs would boost exports by 5% to 7% (Mesquita Moreira et al., 2012).

2.11

Irrigation. Irrigation is one of the biggest determining factors in productivity and yield stability (Turral, H., 1995). An analysis of the portfolio of irrigation operations financed by the World Bank shows that, between 1998 and 2008, 92% of the projects analyzed reported increases in agricultural production, and 80% of the projects to increase producers’ access to water for irrigation through investments in irrigation infrastructure reached their proposed goals. (IEG, 2011).

Nevertheless, the effectiveness of such investment depends on an appropriate scheme for the administration of irrigation systems. While irrigation systems under public administration tend to be operated and maintained inefficiently (Holden and Thobani, 1996), and to have inadequate cost recovery mechanisms (World Bank, 1995), the management of such systems through irrigation associations encourages efficient use of water (World Bank, 1995) and may increase demand for labor, the sale of agricultural products and, in general, increase economic activity in the regions of influence (IEG, 2009). On the other hand, irrigation can generate dynamism on on-farm technological change by fostering the use of supplementary inputs such as high yield seed varieties and agrochemicals (Smith, 2004; Bhattarai and Narayananmoorthy, 2003; Hasnip et al., 2001; Hussain and Hanjra 2003, 2004; Huang et al. 2006). Environmentally, access to water on a regular basis via irrigation systems reduces the seasonal and inter-annual variability of production (Wood, You and Zhang. 2004), although special attention to negative environmental externalities, such as soil salinity or overexploitation of aquifers, is necessary.

5.

2.12

Technology creation and transfer is essential to achieving sustained increases of productivity in agriculture

Research has been one of the key determining factors of improvements in agricultural productivity over the past 40 years (Heisey, 2001). Research in improved crop varieties in developing countries from 1960 to 2000 gave rise to substantial increases in agricultural production and benefited consumers by reducing prices for food (Evenson and Gollin, 2003). Similarly, strengthening processes of innovation and agricultural research represents one of the most important and enduring solutions for promoting agricultural growth and reducing poverty (Fan, 2008). In the case of the LAC region, the evidence suggests that

8 investments in agricultural research are closely related to increases in economic growth, agricultural development and poverty reduction (IAASTD, 2009; BID, 2010).

2.13

Economic returns on investment in the generation and transfer of technologies demonstrate the potential for public investment in this area. For developing countries, on average such returns come to 43% (Alston et al., 2000), with a range of fluctuation between 5% and 50% (Evenson, 2001). Similarly, in studies that have analyzed the context of the research and agricultural extension, studies at the global level have concluded that improvement in technology transfer capacities makes it possible to increase the dissemination of relevant technologies for the needs of the sector (Pardey et al., 2008). Evidence on the economic benefits of innovation in the field of forestry is provided by Argentina’s Instituto Nacional de Tecnología Agropecuaria (INTA). The application of improved genetic material in eucalyptus brought about a 20% increase in volume in thinning and shallow cutting, compared to materials used previously, and also achieved significant advances in the handling of Pinus Taeda (Norberto, 2005). An economic assessment of these cases, taking into account planting done at sites of adequate quality and projecting growth on the basis of INTA’s technical growth simulators, results on rates of return among producers of 22% for eucalyptus and 17.3% for pine (Ceruti, 2012).

6.

Investments that facilitate connection with markets render effective the increase in production and revenues

2.14

Access to timely information and communications technology, adjustments of productive organization and improvements in commercial quality are critical elements for facilitating timely connection to markets for producers. Access to price information for a specific market increases the probability of taking part in that market (Goetz, 1992; Valkis et al., 2003; Nkhori, 2004). From the point of view of on-farm transaction costs, in the case of Mexican producers, access to producers’ organizations had a positive effect on production (Key et al., 2000); whereas in the case of Peruvian producers, supervision and access to information had such an effect (Escobal, 2000). The results suggest that improvements in access to information and in participation in producers’ organizations/associations increase the amount of agricultural production sold by small producers (BID, 2010). Similarly, transaction costs inversely affect the probability of small producers accessing and adopting new technologies, thereby reducing their final production volume (Zeller et al., 1997); whereas better access to markets for inputs has a positive effect on agricultural yields and on agricultural biodiversity on-site (Salazar and Winters, 2012).

2.15

Greater product quality is also essential to accessing external markets. The increase in international trade in products from this sector has led countries to reduce risks on natural assets and the health of their consumers, establishing regulations on health and safety measures for access to their markets. In this regard, a compilation of studies analyzing the impact of different programs of agricultural health financed by the Bank in Peru, Ecuador, Uruguay and Belize

9 presents positive evidence of the impact that this kind of intervention has (OVE, 2009). In the case of Peru, the assessments conducted suggest that these interventions significantly reduced the prevalence of zoo sanitary diseases (for llamas) and reduced the presence of Fruit Flies. In the latter case, the improvements translated into higher prices and better yields of agricultural products (GRADE, 2008a). Furthermore, the improvement in Peru’s sanitary status improved its bargaining power with respect to other countries, creating opportunities for commercialization in international markets (GRADE, 2008b).

For forestry, a study in Chile demonstrated that the economic benefits of pest control through biological factors, focusing on small and medium producers, were greater than 2 million pesos per hectare, way above the cost of treatment of 2,000 to 4,000 pesos per hectare (Baldini et al., 2003).

7.

2.16

The inadequate supply of financial services specifically designed for the needs of the region’s small agricultural producers is one of the most limiting factors for the growth of productivity since it restricts the capacity for physical expansion, connection with value chains and the adoption of long term investment horizons.

Empirical evidence from Nicaragua and Ghana shows the connection between the provision of credit to small agricultural producers and the increase in their incomes (Carter et al., 2012; Karlan et al., 2012). The primary causes of the deficit in the supply of financial services are related to the risks inherent to agricultural activity, but also to the costs associated with acquiring of sufficient information on each producer to consider him or her bankable, and avoid adverse selection and moral hazard risks (informality, physical dispersion, irregular property rights and difficulties in the enforcement of contracts).

8.

2.17

Access to rural financial services makes it possible to increase revenues, especially among small producers

The adoption of agricultural technologies and practices to adapt to and mitigate climate change could increase production if barriers to entry are overcome

There is a variety of agricultural practices and technologies (e.g., agroforestry, soil and water conservation, improved pasture management) that have the potential to improve production, and at the same time reduce emissions or improve carbon capture capacity in farming soils. However, capturing these benefits may entail high costs, especially for small producers. In LAC, the Bank’s recent studies on the impact of agricultural technology adoption projects in Uruguay, Argentina, the Dominican Republic and Panama showed that greater adoption of technologies by producers has a positive effect on on-farm yields (Winters et al., 2010) and allows for greater soil conservation (Gonzalez et al., 2009). A review of the empirical evidence of 16 cases at the global level, including the case of agroforestry systems in Colombia, found that initial investment costs, risks due to limited information on alternative techniques or transaction costs when the technology requires community work, can pose

10 significant obstacles to the adoption of certain kinds of practices (McCarthy et al., 2011).

9.

Secure land ownership rights promote better productive and sustainable use of the resource, and help to fight rural poverty

2.18

Security of land ownership rights encourages farmers to undertake productive and sustainable use of the resource and to make long-term investments, and contributes to a more dynamic land market (World Bank, 2007). Investments in cost-effective systems for land management that seek to reduce the insecurity of ownership rights increase investment, and as a result, productivity and income; and by facilitating the use of the asset as a guarantee, help to improve access to less onerous sources of credit. With the “Land Titling Program in Peru” (906/OC-PE) positive long-term effects were found on farms and in the value of the land (Torero and Field, 2005; Antle et al., 2003; Aldana and Fort, 2001), as well as significant positive impacts on agricultural income (Zegarra et al., 2008).

In Nicaragua, investment in land titling had a positive effect on the security of land tenure, generating greater investments in land (Deininger and Chamorro, 2004). Positive effects on agricultural productivity as a result of investments to improve the security of land tenure have also been recorded in Ethiopia, Vietnam and Uganda (World Bank, 2007). In Nicaragua, producers with full ownership rights have accumulated more assets than producers with restricted property rights, underscoring the significance that investment intended to clarify land ownership rights has for investment in beneficiaries’ assets (Hernández and Reardon, 2012).

2.19

On the other hand, the modernization of land management systems helps to lower costs for the recording of real estate transactions and to promote a more dynamic market for land. Investments in online information systems and in improvement in the legal framework for the registration of property in Georgia reduced both the time and financial costs of registering property from 39 to 9 days, and from 2.4% to 0.6% of the value of the properties, while there was also evidence of greater activity in real estate markets and a greater number of mortgages and credit operations undertaken by producers and private lenders (World Bank, 2007).

10.

2.20

Governance, the policy Framework and property rights are also essential to ensure the sustainability of natural resources

Property rights and policy instruments for the management of renewable natural resources are central elements that affect their exploitation. In the case of fisheries rights, there is evidence of estimated losses due to over-exploitation of said resource at the global level as the result of an inefficient definition of property rights over this resource (Wilen, 2006; World Bank, 2009). On the contrary, the experiences of Canada, Iceland, New Zealand and the United States suggest that institutions with solid governance, with economic instruments that eliminate the characteristics of open access to fisheries resources are capable of arranging

11 things so that individual interest can be reconciled with the public interest. (World Bank, 1992).

2.21

In the case of forestry resources, a weak institutional setting for the definition of property rights, land use and natural resources does not help to reduce deforestation rates (World Bank, 2009). A more recent review of 131 empirical cases on results in the management of forests under different land tenure conditions, 56 of which were in countries in Central and South America, found that land tenure security is associated with less deforestation, regardless of the kind of ownership (Robinson et al., 2011). Moreover, clear property rights and security of land tenure are key to being able to maintain forest biomass in REDD+ (Reducing Emissions from Deforestation and Degradation) programs, as well as to an equitable distribution of its benefits (Bruce et al., 2010).

11.

The empirical evidence on the effectiveness of Payment for Environmental Services (PES) as an instrument for the management of forestry resources is still limited

2.22

Both inside and outside the region, national systems for natural resources management have been strengthened, with the aim of reversing trends towards the degradation of natural resources. Lessons from economic and institutional analyses of experiments in soil conservation in Central America and the Caribbean show that, given the long period for maturation, issues such as land tenure security and lack of access to credit can be critical factors for the success of such investments (Lutz et al., 1993).

2.23

With regards to PES and other instruments for the management of forestry resources, even less is known on whether and under what conditions they are effective. The cases studied with rigorous assessment methods for Colombia, Mexico and Costa Rica would seem to indicate a certain effectiveness of PES in the reduction of deforestation (Miteva et al., 2012). Nonetheless, the effectiveness of PES would appear to depend on the design of the mechanisms for intervention, their location, the degree of compliance and the possibility of observing spillover effects in the areas of intervention (Pattanayak et al., 2010), as well as of property rights over the land where they are implemented (Bruce et al., 2010). Some studies also indicate that a deficient focusing scheme of PES can negatively affect impacts for this type of intervention (Arriagada et al., 2012).

2.24

Summary. The empirical evidence demonstrates that macroeconomic stability and trade openness are necessary conditions for private investment and the growth of activities associated with agriculture and consequently, with rural poverty reduction. In sector policy matters, public expenditures on rural public goods is more effective in fighting rural poverty, the improvement of sector productivity and sustainability of natural resources than public expenditures on private goods such as the monies destined to the purchase and/or distribution of inputs or products. Public and private investment in rural infrastructure and agricultural services as well as access to financial products, directly contribute towards this

12 result. Furthermore, establishing clear property rights on key resources such as land, water, forest biomass and marine biomass ensure their efficient exploitation and, ultimately, their sustainability in the long-term. Finally, more empirical evidence is needed to demonstrate the effectiveness of alternative direct fiscal support mechanisms, such as “smart subsidies” to promote the adoption of technologies or PES for the sustainability of forestry resources.

III.

PRINCIPAL CHALLENGES IN THE REGION AND PROBLEMS THAT THE BANK WOULD LIKE TO ADDRESS IN THIS SECTOR

3.1

Latin America and the Caribbean stand out for their wealth in natural resources.

Their forest biomass adds up to nearly 900 million hectares, equivalent to half of its land surface and nearly a quarter of the world’s forest coverage. More than 30% of the world’s fresh water and around 40% of its renewable aquatic resources are in LAC (UNEP, 2010). In this context, agriculture is the region’s main economic sector based on natural resources. Accounting for 11% of global production in this sector on 28% of the planet’s arable land, agriculture in LAC contributes almost 8% of the region’s GDP (20% or more of the GDP of Haiti, Nicaragua and Paraguay)5, employs one out of every five workers (the biggest employer in rural areas), while its exports account for nearly 30% of the region’s total trade, the highest absolute value in all regions of developing countries. LAC contributes 14% of the world’s food exports, and generates 52% of the world’s soybean exports, 45% of its coffee and sugar, 44% of its meat, 42% of its chicken, 70% of its bananas, 12% of its citrus fruits and one third of its corn. On the other hand, it is expected that world population will grow by more than one third (2.3 billion people) between 2009 and 2050, with the greatest part of this growth in developing countries, and so it is expected that demand for food will increase substantially during this period (FAO, 2009a). LAC will play a key role in satisfying this demand6.

3.2

The Report on the Ninth General Capital Increase (AB-2764) identifies the achievement of sustainable growth, along with poverty reduction and inequality as key components for LAC development in coming years. Given their economic, social and environmental importance in the region, agriculture and natural resources are called upon to contribute to these components, but will only manage to do so if economic activities associated with this sector are more competitive, more socially inclusive and develop in a manner that is environmentally sustainable. Within this context, the present framework identifies three challenges that must be met in this sector in order to achieve this objective: (i) the low and

5

6

This value underestimates the relevance of agriculture’s links to other sectors. In the cases of Chile, Colombia, and Mexico; Valdés and Foster (2005) report that the value of the sector’s GDP can increase 89%, 28% and 52%, respectively, if agriculture’s link to other sectors are accounted for.

The SFD on Food Security, to be approved in 2014, will establish the Bank’s working guidelines for meeting the challenges of a possible increase in world demand for food, especially in countries that are net importers such as those of Central America and the Caribbean.

13 heterogeneous increase of its productivity; (ii) the unequal contribution of its growth to rural population; and (iii) its vulnerability to climate change and its contribution to the GHG emissions.

A.

Productivity increases in agriculture are low and very heterogeneous

3.3

Between 1961 and 2007, the total productivity of factors of LAC agriculture grew at an average annual rate of 1.9%, the highest among developing regions, but still low compared with the 2.4% reached by the OECD (Ludeña, 2010). Although global figures show a favorable performance, this performance is heterogeneous when comparing countries and sub-regions. The countries with a high endowment of land (more than 10 hectares per agricultural worker) show better performance than countries with a small endowment of land (Table III-1). Among the first, Argentina, Chile, Mexico, Colombia and Venezuela have shown annual rates of productivity growth equal to or greater than 2%, while countries with limited land showed an average annual rate of 1.5%. For countries with a high endowment of land there is still potential to reach the levels of productivity of the OECD countries compared to the countries of Central America and the Caribbean, where the gap in productivity compared to the major net food exporters is significant.

Table III-1. Annual rate of agricultural productivity growth 1961-2007 Countries with high endowment of land Countries with low endowment of land (ha/EAP < 10) (ha/EAP > 10) Country Argentina Bolivia Brazil Chile Colombia Guyana Mexico Nicaragua Paraguay Uruguay Venezuela

Country % Bahamas 1.6 Barbados 0.5 Belize 1.9 Costa Rica 3.7 Ecuador 1.0 El Salvador 0.3 Guatemala 1.9 Haiti -0.2 Honduras 1.3 Jamaica 0.4 Panama 1.1 Peru 1.2 Dominican Republic 0.8 Suriname 1.5 Trinidad and Tobago 0.5 Note: ha/EAP = hectare per member of population economically active in agriculture Source: Ludeña (2010).

3.4

% 2.4 1.9 1.8 2.1 2.1 -0.1 2.1 1.4 1.8 0.9 2.1

This gap in the region’s productivity is associated with a situation of under investment in connection with resources for financing activities of research, rural infrastructure and disease and pest eradication. With regard to agricultural research, in absolute terms, Brazil represents on average 50% of the resources allocated to agricultural research in the region, Mexico 20% and Argentina 8% (Stads and Beintema, 2009). However, in recent years only Uruguay and Brazil have invested close to 2% of their respective sector GDP, a percentage considered acceptable, while only five countries in the region exceeded the regional average

14 of 1% (ECLAC, FAO and IICA, 2011). With regard to rural infrastructure, in the period 1981-2006 there has been an increase in the allocation of resources to these activities, in particular through significant investments by Brazil and Argentina.

However, the annual growth rate of this investment has been relatively low: 1% (Gert-Jan and Beintema, 2009). Similarly, diseases and pests that affect agricultural activity also have a direct impact on the sector’s productivity. The Fruit Fly, Coffee Rust and Borer Beetle, the Cotton Weevil, the Black Sigatoka fungus on banana plants, and the Huanglongbing that attacks citrus trees in farming activities; or Foot-and-Mouth Disease, Bovine Brucellosis, Classical Swine Fever or Avian Influenza, in livestock activities; negatively impact yields in greater or lesser degrees in the countries of the region.

B.

Agricultural growth has not been of equal benefit to the rural population in LAC

3.5

Notwithstanding the aggregate positive impacts of the growth of agriculture on poverty in LAC (¶2.4), agriculture’s capacity for rural poverty reduction has tended to be greater in those areas where producers have had access to improved technology, technical and managerial assistance, as well as access to the market for capital, infrastructure, secure property titles or export opportunities (FAO, 2010). In some areas, such the Pampas of Argentina, the coast of Peru, Brazil’s central western region, the central zone in Chile or Guatemala, the northwest of Mexico or the South Atlantic of Nicaragua, the sustained growth of agriculture has made possible rural poverty reduction through new employment opportunities.

3.6

To achieve greater equality of access to resources and a greater contribution to rural poverty reduction involves meeting the challenges facing producers who have less access to resources for production. These producers, called “small producers” or “family farmers,” account for 80% of the farms in LAC and are characterized by the preponderant use of the family work force, with agriculture as their main source of income (FAO, 2012). Furthermore, the incidence of poverty among these producers tends to be greater than that for the rural sector as a whole (Schejtman, 2008), appears to be more vulnerable to the effects of climate change, would include indigenous groups and suffers from a gender gap.7

3.7

The challenges facing small producers vary depending on their ability to generate a tradable surplus. For producers with this capacity, limitations to invest are a result of market failures (including property rights that are not very clear over natural resources), size or territorial location that make it difficult to access markets or prevent them from connecting to value chains due to restricted access to rural public goods of quality, such as rural infrastructure and agricultural

7

In LAC, women account for 20% of the agricultural labor force, and between 15% and 40% of the heads of household in rural areas. Women engaged in agriculture consistently have better access to productive resources for production. In the case of access to land, women only account for 19% of the total property title holders in LAC (FAO, 2011).

15 services, particularly involving innovation, information and agricultural health, as well as suitable financial products (FAO, 2012). This makes transaction costs for producers higher than those faced by other producers, affecting their profitability.

3.8

For those producers whose production is exclusively for their own consumption (subsistence agriculture), usually the poorest in rural areas, a solution based solely on agriculture is not viable. An analysis of the complementarity of assets in developing countries would appear to indicate that joint interventions in education, land and infrastructure could serve to improve income levels for these producers (Foster et al, 2011). Furthermore, an active policy of social protection, with a focus on areas of subsistence agriculture, would allow for improvements in the capacity to generate income for these households. (FAO, 2012).

C.

Agriculture and natural resources are very vulnerable to climate change, but their improper use also generates most of the GHGs in the region

3.9

The Climate Change Strategy (GN-2609-1) indicates that it is probable that the increase in vulnerability to climate change produces adverse effects on agriculture and natural resources such as water resources, marine-coastal and fisheries resources. In agriculture, variability of weather, elevation of temperatures and alterations in hydrological precipitation and evapotranspiration cycles will directly affect harvest yields and communitiesâ&#x20AC;&#x2122; living standards, and may have significant direct economic impacts on this sector. In Colombia, Chile, Ecuador, Paraguay and Peru, climate change could reduce agricultural productivity by affecting up to 66% of the area of the continent through soil degradation (ECLAC, 2009). A similar situation could occur in Mexico, where agricultural yields would be significantly reduced to 2100, with rates of as little as 35% of the 2007 level for corn (Galindo, 2009). Similarly, in Brazil, yields of oil crops and grains could be reduced by more than 20% by 2020 in a modest emissions scenario (Fernandes et al., 2012). In 2009, the International Food Policy Research Institute (IFPRI) estimated that annual financing needs for the adaptation of the agricultural sector to climate change in Latin America are on the order of US$1.2 billion by 2050.

3.10

With regard to water resources, the strategy indicates that the expected changes in precipitation patterns could affect the availability of water in many watersheds, which would place at risk meeting the growing demand for water both for agricultural purposes as well as for human consumption. In the Andean subregion, climate change simulation models indicate that the glaciers of the Andes at lower altitudes (which supply water for approximately 70 million people) could disappear in a few decades, having a negative impact on the populationâ&#x20AC;&#x2122;s quality of life, economic activity and delicate ecosystems.

Furthermore, it is expected that eastern Central America would suffer from water tensions, which would severely affect water availability and the generation of hydroelectricity (IPCC, 2007).

16 3.11

On the other hand, changes in soil use and deforestation, which includes intensive changes in vegetation, destruction of forests, agricultural expansion and soil degradation, generate 67% of the GHG emissions in LAC (Vergara et al., 2013).

Between 2000 and 2005, the region lost 4.5 million hectares of forest cover (FAO, 2005). When forests are brought down to grow pasture and crops, or are cut down for commercial purposes, the carbon stored in the trees and part of the carbon in the soil, are released into the atmosphere. It is estimated that for all of the tropics, emissions due to deforestation accounted for 1.5 billion tons of CO2 per year for the period from 1990 to 2005, i.e.; 17% of global emissions of GHG. The highest volumes for emissions were produced by Latin America (71 billion tons of CO2 per year). Global climate stabilization goals would require efforts to cut the carbon signal for this sector and reduce forest biomass.

3.12

Summary. This section presented the three challenges in agriculture and natural resources management that the Bank believes must be confronted in LAC if a contribution to sustainable growth and the reduction of poverty and equality for the region is to be expected from this sector. The low and heterogeneous productivity of agriculture, which affects its competitiveness; the reduced coverage of the benefits of the sector’s growth among rural populations; and the vulnerability of natural resources to climate change, which affects its environmental sustainability in the long-term will later define the Dimensions for Success of this SFD. IV.

LESSONS FROM THE BANK'S EXPERIENCE IN THIS SECTOR

A.

Reports of the Office of Evaluation and Oversight (OVE)

4.1

The IDB’s 2003 Program Evaluation document for the Agricultural Sector 1990-2001 (RE-291) is the most recent one by the OVE in which the Bank’s actions in the rural areas are examined, emphasizing analysis of the main groups of projects most closely tied to agricultural production8. The document sought to answer questions on the strategic focus, the pertinence and coherence of actions, the evidence on products and results, and the main areas of opportunity for renewed Bank action in the rural areas, particularly in the agricultural sector.

4.2

Although the opportunities and recommendations indicated in document RE-291 were presented in a context of little empirical evidence, some are still relevant for the strategic orientation that is outlined in this SFD: a. The Bank should pay special attention to monitoring results obtained, to the sustainability of interventions adopted and the implementation of required adjustments to systems for research and agricultural extension systems in the

8

OVE has been preparing for 2013 an assessment of the Bank’s programs in land management, as well as a new and broader assessment of the Bank’s work in the agricultural sector for 2014.

17 region, due to their importance in the development process and the active role played by the Bank in their organization. b. The Bank should consider in its agricultural agenda support for programs to improve the productivity of basic crops in the family food basket, particularly in low-income countries that are engaged in processes of trade liberalization, where a significant proportion of the rural population has small holdings and research systems are weak. c. In its actions to relieve rural poverty, the Bank should especially increase support for agricultural research, rural education and the improvement of rural roads. d. The Bank should re-examine how to approach the issue of rural financing, giving a prominent role to small and medium-sized agriculture, fostering the development of a regulatory and institutional framework that facilitates the expansion of financial institutions in rural areas and the adaptation of financial technologies used in micro-finance programs in urban areas.

4.3

In response to these recommendations, this SFD is proposing strategic guidelines for prioritizing prioritize Bank action in areas that include issues such as agricultural innovation, support to improve the productivity of family farming or financial mechanisms. The three Dimensions for Success proposed in Section V include specific activities that address these recommendations.

B.

Results of the Development Effectiveness Matrix (DEM)

4.4

The impact evaluations of the Bankâ&#x20AC;&#x2122;s projects in the sector, using rigorous evaluation methodologies, will be essential to determine the effectiveness of the interventions proposed in this SFD, as well as to make future adjustments in the proposed lines of action. In this context, since 2009, significant progress has been registered in the levels of evaluability of projects in agriculture and natural resources management with sovereign guarantee. Such progress has been reported in all four dimensions included in the DEM9: evidence based assessment and solutions, monitoring and evaluation, ex-ante economic analysis and risk management. Using a maximum score of 10, Table IV-1 shows that scores for approved projects have not only improved in a sustained fashion since 2009, but that they were always above the Bankâ&#x20AC;&#x2122;s general average for each one of the dimensions assessed for each year analyzed. Since 2010, all projects in this sector are highly assessable. It should be underscored that all projects approved in 2012 for this sector showed the maximum score achievable in the prior economic analysis and risk management.

9

As results of the recommendations stated in the document Overview: Mid-term Evaluation of the Commitments of the Ninth General Increase in the Resources of the Inter-American Development Bank (RE-425), the Bank has been making adjustments in the DEM for projects without sovereign guarantee, so that as of now, there are no results on the evaluability of such projects.

18 4.5

The Bank’s commitment to a results-based agenda is reflected in the substantial increase in the use of rigorous methods to evaluate projects in agriculture and natural resources management with sovereign guarantee. This explains the number of projects that, attempting to specify their direct contribution to the challenges of this sector and using impact evaluation methods (which establish counterfactuals and thereby, net effects or results), have increased from 12% to 83% between 2009 and 2012, percentages that are above the Bank’s average (Table IV-1). Many of the methods proposed in the respective assessment plans are innovative in their implementation, have been adjusted to the project setting and follow the guidelines prepared by the Bank for such purposes (e.g., Guía Técnica para el Diseño de Evaluaciones de Impacto de Proyectos Agropecuarios, Guía Técnica para el Diseño de Evaluaciones de Impacto de Proyectos de Administración de Tierras). For example, in the case of agricultural supports, whereas the assessment of the “Program in support of Subsidies for Innovation in Agriculture Technology” in the Dominican Republic will be based on random allocations and will explore desirable spillover effects to measure impacts on productivity, in the “Direct Farm Support Program” in Mexico a Propensity Score Matching methodology, instrumental variables and panel data will be used (BID, 2010). Progress on key issues such as agricultural health should also be emphasized. The “Agricultural Health and Food Safety Program” in the Dominican Republic proposes a unique comprehensive focus, simultaneously addressing problems and incentives at the producer, consumer and government levels, and its assessment design will make it possible to fill significant knowledge gaps concerning the true effectiveness of public intervention in this area (BID, 2010). As for forestry projects, the evaluation of the “Forest Sustainability and Competitiveness Program” in Argentina proposes a methodology of Random Encouragement Design, whereby certain producers will receive random incentives that increase their probability of participation without affecting the variables of interest, thus creating a source of exogenous variability.

The basic idea behind this design is that forestry units should be randomly allocated to the treatment group since, although the program is available to everyone, this group receives an additional incentive to participate.

Table IV-1. Summary of Development Effectiveness Matrixes (DEM) for sovereign guarantee projects in agriculture and natural resources management with (Ag&RN)

ASSESSMENT DIMENSIONS 1. Evidence-based assessment & Solution 2. Monitoring and Evaluation 3. Ex-ante Economic Analysis 4. Risk Management AVERAGE ASSESSABILITY % highly assessable projects % projects with impact evaluation at the time of approval

2009 Ag&RN Bank

2010 Ag&RN Bank

2011 Ag&RN Bank

2012 Ag&RN Bank

7.3

6.7

9.1

7.6

8.8

7.9

9.3

8.3

5.3

5.0

7.2

5.9

9.2

6.9

9.1

7.5

6.8

3.9

9.5

6.0

10.0

8.9

10.0

9.8

7.5

7.3

8.3

7.7

9.6

9.2

10.0

9.8

6.5

5.7

8.4

6.8

9.4

8.2

9.6

8.7

62%

22%

100%

41%

100%

86%

100%

99%

12%

11%

50%

27%

86%

31%

83%

38%

19 C.

Lessons learned from Bank projects in this sector

4.6

The Bank’s sovereign guarantee projects in the agriculture and natural resources management sector offer a series of lessons learned that have been compiled in numerous Project Completion Reports (PCR), and enunciated in various Loan Proposals, as well as in knowledge products created by the institution. Table IV-2 sums up the main lessons learned by type of intervention performed.

Table IV-2. Lessons learned from Bank projects by area of intervention

Forest Resource Management  The strengthening of forestry governance, the clarification of land ownership rights and mechanisms to improve agricultural productivity in deforested areas are necessary conditions for reducing the advance of deforestation. The elimination of the characteristic of open access to forestry resources, combined with incentives to stop the advance of extensive agriculture of low productivity, could effectively control the cutting down of primary forests.  A move towards forestry activities of high value added that are competitive and sustainable depends on the provision of high quality public goods and services. Information systems and inventories, research and technology transfer, health risk management and fire prevention are essential.

Land Resource Management  Any process of land tenure regularization, including the issuance of land titles, should involve granting full ownership of the land to the occupant. The issuance of land titles to occupants that do not provide clear and full ownership of their property end up subsequently giving rise to irregular situations of land tenure.  In areas with irregular land tenure situations, investment in property registration without legal clarification of land property rights proves to be of little value. The legal reconciliation of the reality in the field with the legal information in the register at the time of property registration increases its reliability and transparency.  Transaction costs for the service of recording real estate property affect the sustainability of investments in clarification of ownership, particularly in impoverished rural areas. Lack of access and cumbersome and costly procedures for registration discourage the registration of future real estate transactions for properties with clear title, giving rise to irregular land tenure.  Technical and methodological elements are a crucial part of any program of land regularization. If regularization is done efficiently and at low cost, transaction costs are reduced and participation by beneficiaries is encouraged.

Fisheries Resource Management10  The creation of conditions and incentives to establish property rights over the resource will ensure its sustainability in the future, and prevent open access to the resource, which leads to its over-exploitation.

A regime that grants property rights based on socio-economic and scientific information, has adequate oversight, and does not contain subsidies for fishing will ensure biomass levels for future extractions.

Agricultural Technological Innovation  Integrating research and agricultural technology transfer is necessary to ensure the link with the productive sector and achieve results. Experimentation and validation in demonstration parcels for producers is a good practice for such integration.  Capacities for research and agricultural technology transfer are strengthened through international cooperation, especially in small countries. The connection with international research centers and the private sector make it possible to take advantage of the latest scientific information and maximize the identification of new demands for innovation.

10

For a broader discussion of lessons learned from Bank projects in the fisheries sector, see Christy, 1997.

20  Recruitment of researchers and high level extension workers is necessary to strengthen the system of agricultural innovation. This strategy should be accompanied by sustainable mechanisms for financing remuneration in the long term.

Agricultural Health and Food Safety  The promotion of collective action schemes among farmers is key to their participation in actions for agricultural health, with a view to prevent a small minority from thwarting the realization of its benefits.

It is fundamental for producers and their organizations to join health campaigns and participate in the decision process.  Technical autonomy of the executive agency is crucial due to the nature of the threats dealt with by health services. The local and international credibility of the agency demands that its decisions be taken solely on scientific basis, with no other interference.  A policy of sharing costs with beneficiaries is important for sustainability. Health actions require an extended time horizon to be effective; therefore, contribution from beneficiaries helps to mitigate natural fluctuations in public financing.  A legal framework is needed for agricultural health with clear competency to regulate and implement corrective measures that are harmonized with international standards. Framework legislation and specific regulations on quarantine and health oversight help to make campaigns flexible and effective, offering certainty and clarity for the private sector.

Adoption of Agricultural Technologies  Agricultural supports have greater impact when they are based on instruments that reduce economic distortions, are managed in a cost-effective manner, and the level of subsidy encourages self-selection by small producers. Direct support through income transfer, decoupled from specific commodities, use of inputs or prices, are more efficient policy mechanisms than price supports or delivery of inputs, creating fewer market distortions.  Agricultural technological innovations with positive environmental effects in the long-term have a higher degree of adoption among producers if they exhibit sufficient profitability in the short term. The adoption of technologies for soil conservation may be limited among small producers if the time gap between investment in such technologies and reaping their benefits is too wide.  The provision of agricultural technical assistance services is more effective if it involves the introduction of on-farm technological changes. The economic impacts of agricultural technical assistance or agricultural extension are limited if they are unaccompanied by technological packages geared towards increasing farm yields.

Water Resources Management and Irrigation  Transferring the management of irrigation systems to the actual users or to specialized companies is a measure that effectively helps to increase possibilities of project success. Decentralized governance models in the irrigation subsector, usually through irrigation associations, are more successful at cost recovery than public agencies.  Meeting the challenge of water scarcity requires integrated resource management at the watershed level for efficient allocation of resources among sectors, and greater efficiency in their use for irrigation.

Resource management policies should combine economic instruments that assign value to the resource and ensure its sustainability, with special adaptation to local conditions.  An appropriate framework of incentives ensures the use of technologies for water conservation among farmers. More realistic tariffs, without distortionary subsidies or under-valuations, not only foster efficient use of the resource at the farm level, but will also permit improvements in the quality of service.

Rural Development  Projects with multi-sector interventions at the rural level involving different government agencies have problems with execution and achievement of objectives. Interventions to address problems in rural areas should have strategic planning with a focus that is primarily territorial. However, their execution should be carried out through individual programs and/or projects, with mechanisms for execution that minimize transaction costs between public sector institutions.

21 4.7

Furthermore, a cross-cutting lesson learned in all projects in this sector is the need to strengthen capacity for monitoring and evaluation of results of interventions.

This is particularly relevant for the sector’s projects without sovereign guarantee.

The need to continue increasing our knowledge on the effectiveness in the implementation of projects in the sector is still substantial, although efforts the Bank has made to include impact evaluations in the design (¶4.4) should provide useful information to this end11.

4.8

Investment projects with sovereign guarantee in the sector reflect a pattern of disbursements similar to that of the Bank. As of 2012, 75% of these projects were disbursing funds at the same level or above the average measured by the historic curve of country disbursements (Bank = 77%), while the remaining 25% is disbursing funds below this average (Bank = 23%) (Álvarez et al., 2012).

Furthermore, internal calculations indicate that in the last five years, the average annual rate of disbursements for such projects with respect to the undisbursed balance at the start of the year was 28%, demonstrating their level of execution was adequate. To date, the active sovereign guarantee loan portfolio for the sector consists of 37 operations, 26 of which are in small and vulnerable countries.

D.

Comparative advantages of the Bank in the region

4.9

Since its founding, the Bank has maintained a strong commitment to agriculture and natural resources management in LAC. Through its operations for technical cooperation and financing with and without sovereign guarantee, the Bank has been contributing to the development of the sector. The lessons learned (Table IV-2) indicate the wealth of experience gained by the Bank, which has made it possible to develop comparative advantages with respect to other multilateral agencies, allowing it to position itself in the last five years not only as one of the principal sources of financing for this sector12, but also as a key repository of knowledge on the matter.13. Looking forward, the Bank’s commitment to measuring the effectiveness of its interventions in the sector

11

12

13

In 2012, the Bank began to implement a follow-up strategy of the impact evaluation plans of its projects in the sector approved since 2009. The first step was to identify flagship projects in key subject areas (i.e., agricultural health and food safety, generation and transfer of technology, supports for technological adoption and business plans, and land titling), which were selected based on criteria of heterogeneity and importance in the portfolio. For those projects, the Bank will pay special attention to the compilation of base lines, design of questionnaires and samples, as well as subsequent estimation of determining factors and to the effect of these projects on key issues such as gender and diversity.

Between 2008 and 2012, the Bank approved a total of US$2,481 million in loans for this sector, while the World Bank approved US$3,623 million and the FIDA, US$1,167 million.

Since 2008, the Bank has focused on its knowledge program in the agricultural sector on the estimation of supports for the sector, using a methodology developed by the OECD (PSE, or producer support estimates). This methodology, which makes it possible to understand supports both in terms of prices as well as through fiscal measures classified by asset type (private or public), has already been applied to 14 countries in the region, which together with what is being applied in Chile, Mexico and Brazil, has not yet provided the Bank with a unique database of key regional information for its sector dialogue. This database will be available to the public in the second half of 2013.

22 (Table IV-1) will provide it with assessments that will improve the quality of its projects, while also strengthening its knowledge base and capacities.

V.

GOALS, PRINCIPLES, AND DIMENSIONS FOR SUCCESS AND LINES OF ACTION THAT WILL GUIDE THE BANK'S OPERATIONAL ACTIVITIES AND RESEARCH

A.

The Bank’s goal and working principles in Agriculture and Natural Resources Management

5.1

The Bank’s goal in this sector is to promote development including agriculture and the sustainable exploitation of natural resources in Latin America and the Caribbean. Four basic principles will govern possible Bank interventions that are enacted from both its public and private funding sources in the sector: a. Economic principle: the comparative advantages in this sector for the countries in the region will be enhanced, seeking to ensure factor (land, water) and product markets that are conducive to an efficient allocation of private and public resources (without creating economic distortions) for their sustainable growth. b. Profitability principle: efforts will be made to achieve high rates of economic return at efficiency prices in the interventions, in order to contribute to an increase in the welfare of rural families. c. Social principle: social inclusion will be encouraged, seeking to benefit the majority of the population that depends on the sector, with particular emphasis on small and medium-sized producers. d. Environmental principle: the services of the ecosystems in which the sector’s economic activities are undertaken are to be preserved14.

B.

Dimensions of Success and their lines of action

5.2

To promote the inclusive development of agriculture and sustainable use of natural resources it is necessary to deal with the three challenges confronted by the LAC region as described in Section III: (i) the low and heterogeneous agricultural productivity, which affects its competitiveness; (ii) the reduced reach of the sector’s growth benefits among rural peoples, which affects its social inclusion capability; and (iii) the vulnerability of natural resources to climate change, which affects its environmental sustainability in the long run. In this regard, this SFD proposes three Dimensions of Success, or expected results to be achieved through the foreseen interventions. First, an agricultural sector with high productivity, whereby climate impacts are managed, demonstrating an overcoming of the competitiveness challenge. Second, rural families’ incomes

14

This principle makes it possible to ensure that the guidelines of the Bank’s Special Program for Biodiversity and Ecosystem Services (GN-2703) are assimilated into the interventions projected for this sector.

23 from the sector sustainably growing over time, demonstrating an overcoming of the social inclusion challenge. Third, natural resources used sustainably, whereby the carbon footprint is low, demonstrating an overcoming of the environmental sustainability challenge.

5.3

Each of the proposed dimensions of success give rise to lines of action which will guide the operative and knowledge activities that the Bank will undertake through both its public and private sector windows in agriculture and natural resources management in LAC during the timespan of this SFD. These lines of action were identified based on interventions that have empirically proven to be more effective in promoting an inclusive development of agriculture and a sustainable use of natural resources: (i) a favorable set of policies for private investment in the sector, that fosters its comparative advantages and grants it competitive advantages, and a sustainable use of natural resources; (ii) the promotion of investments geared towards the provision of public goods such as rural infrastructure, and the agricultural services and financial services; and (iii) when justified, a transitory and limited orientation of the public expenditure to direct payments focused on cost-effective instruments.

5.4

In the lines of action of each Dimension of Success, this SFD proposes a set of operative and analytical activities that the empirical evidence and lessons learned and evaluations of Bank financed projects have shown to have larger impact to achieve the proposed goal. Based on the set of activities, Country Strategies will specify operative activities to be implemented in each case, in accordance with the particular needs and conditions of each country. Such activities will be executed in a cross-cutting manner by both public and private sector divisions with organizational responsibility in the subject matter. The proposed analytical activities, in turn, seek to strengthen the Bankâ&#x20AC;&#x2122;s capacity for sector dialogue at the regional and country level, by identifying key knowledge and areas for capacity building through a knowledge program focusing on (i) consolidating the agricultural support estimates started in 2008; (ii) initiating a similar endeavor in the area of natural resources governess for LAC, within the scope of the Special Program for Biodiversity and Ecosystem Services; and (iii) to use information from impact evaluations of our flagship interventions with and without sovereign guarantee in each one of the Dimensions for Success to keep on deriving lessons in the future.

1.

5.5

Dimension 1. Agriculture in the region reaches high levels of productivity, and climate impacts in the sector are managed

The Dimension 1 for Success addresses the challenges both of productivity in agriculture as well as reduction of the sectorâ&#x20AC;&#x2122;s vulnerability with respect to climate change. Based on the international evidence presented in Section II, the activities indicated in the lines of action for this Dimension will prioritize interventions from the Bankâ&#x20AC;&#x2122;s public and private funding sources geared towards increasing growth and investment in the agricultural sector. The emphasis of actions by the public funding source will be on helping to improve the quality of

24 rural public expenditures, emphasizing allocations for public goods. A territorial focus is proposed on investment in quality rural infrastructure in those geographic areas lacking access to it, as well as an orientation towards investment in agricultural services based on an analysis of the structure and behavior of value chains, hoping to help improve effectiveness in the promotion of a more inclusive productive development. While it is expected that the Bank’s private sector funding source will take part in providing public goods, it is anticipated that it will particularly serve private demand for investment in transformation and agro industrial innovation processes. The line of action of support for the management of climate risk and related activities is consistent with those established in the Climate Change Strategy (GN-2609-1) for the sector.

5.6

Three lines of action are proposed for this dimension: a. To support processes for the reform of sector policies geared towards promoting efficient factor and product markets, encouraging private investment and prioritizing the efficiency of agricultural public expenditures. b. To expedite the provision of rural infrastructure and agricultural services with public goods characteristics, intended to improve the sector’s competitiveness. c. To support risk management by producers in the face of natural threats such as floods and droughts.

5.7

During the period covered by this SFD, it is proposed that the Bank should prioritize the following activities in its country dialogues: a. Preparation and dissemination of updated country-level studies on agricultural support estimates as an instrument for sector dialogue with the countries. b. Modernization of national systems for agricultural health and food safety to promote schemes of collective action and cost-sharing among farmers, as well as regulations with a regional vision, ensuring uniformity of quality standards between domestic and external markets. c. Modernization of national systems for agricultural innovation, emphasizing international cooperation in small and vulnerable countries, and the generation of technology for adaptation to climate change by producers, mainly small ones, and based on analyses of value chains. d.

Investment to improve producers’ access to rural infrastructure, with a territorial focus.

e. From the Bank’s private sector funding source, investment in agribusiness geared towards agro industrial product transformation and innovation in the sector encompassing entire value chains, as well as companies that favor development of alliances or business chains with an emphasis on small and medium-sized producers and their access to credit, basic inputs or capital for productive investment.

25 f.

Modernization of information systems for producers regarding both prices as well as agro-climatic information, including studies on efficient mechanisms to transfer risks associated with climate change.

g. Carrying out and disseminating impact evaluations of flagship projects in these lines of action to arrive at better practices, focusing on key determinants in each case and gender and diversity distinctions.

2.

Dimension 2. Agricultural earnings for rural families are increasing in a sustained fashion

5.8

This Dimension seeks to meet the challenge of the unequal impact of the growth of agriculture on rural income. To this end, the focus of its attention is on correcting market failures that currently impede small producers from getting to market or connecting to value chains. It is hoped that many of the lines of action indicated in the Dimension 1 for Success will help to overcome those market failures associated with a lack of access to rural infrastructure or agricultural services; in the context of the Dimension for Success 2, it is proposed that the lines of action prioritize attention to market failures associated with liquidity constraints that affect the earnings of these producers. It should be noted that the impact of the proposed activities will depend exogenously on opportunities that can be generated for social investment in rural areas, particularly where agriculture is not viable.

5.9

Within this dimension the following lines of action are proposed: a. Help to overcome liquidity constraints in the sector using financial instruments, with special attention to correcting market failures and providing access for groups that are excluded, such as women and indigenous people. b. When justified, ensure that public expenditure on private goods focuses on a reduced number of cost-effective mechanisms of direct support through income transfers decoupled from the production of specific commodities, use of inputs or prices, and with an emphasis on small producers.

5.10

In the period covered by this SFD, it is proposed that the Bank prioritize the following activities in its country dialogues: a. From private and public sector funding sources, fostering credit and guarantee mechanisms to finance key links in value chains, or directly finance small and medium-sized producersâ&#x20AC;&#x2122; needs for working capital and/or capital investment, including technical assistance to intermediary financial institutions. b.

Implementation of cost-effective mechanisms for incentives to adopt profitable technological innovations that are environmentally appropriate to help producers adapt to climate change, with special attention to excluded groups such as women and indigenous people.

26 c.

Carrying out and disseminating impact evaluations of flagship projects in these lines of action to arrive at better practices, focusing on key determinants in each case and gender and diversity distinctions.

3.

Dimension 3. Natural resources in the region are exploited in a sustainable fashion and the region's carbon footprint is shrinking

5.11

This Dimension meets the challenge of the vulnerability of natural resources, as well as the generation of GHG resulting from changes in land use and deforestation. Taking into account empirical evidence and lessons learned, the two proposed lines of action and their activities are consistent with those set forth in the Climate Change Strategy (GN-2609-1), in prioritizing specific actions for the period that this SFD is in effect.

5.12

Within this dimension, the following two lines of action are proposed: a. To promote sector policy and governance frameworks that favor the sustainable use of natural resources and that do not encourage their overexploitation or degradation, in the context of climate change. b. To establish clear and secure property rights regarding critical natural resources such as land, water, fisheries and forestry resources.

5.13

In the period covered by this SFD, it is proposed that the Bank should prioritize the following activities in its country dialogues: a. Carrying out studies on the quality of governance of natural resources. b.

Regularization of land tenure and modernization of cadaster and registration systems, making them more accessible to the poorest people and to vulnerable groups such as women and indigenous people.

c. Fostering fisheries management regimes adapted to local conditions, based on the granting of property rights to the resource, as well as monitoring systems based on socio-economic and scientific information for adequate oversight. d. Promotion of policies for the management of water resources adapted to local conditions that emphasize property rights over the resource and prioritize the use of economic instruments that foster the efficient use of water, especially for agricultural purposes. e. Provision high quality public goods and services for the forestry sector with emphasis on information systems and inventories, research and technology transfer, management of health risks and forest fire prevention. f. Support for pilot schemes of payments for environmental services or other transfer mechanisms aimed at managing forestry resources in areas with clear property rights and adequate systems of governance. g. Carrying out and disseminating impact evaluations of flagship projects in these lines of action to arrive at better practices, focusing on key determinants in each case and gender and diversity distinctions.

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