The Global Context: Major Forces Shaping Our World
The main message of this paper is that our world is undergoing a profound transformation in multiple aspects. These, at a minimum, include the following: (i) the degree and manner of our acceptance of or opposition to increased integration as trading nations (ii) the constantly evolving technologies we use, the way we work, play and interact as social groups and entire societies (iii) the very climate that conditions our living environment.
Given these profound uncertainties, we should all revisit the soundness of what we call “business as usual” approach. In uncertain times, the best investments are structural, which improve human capital among the population as well as in governmental and public bodies (e.g. education and health). Investment should be concentrated in knowledge and learning in all its forms particularly in sectors such as education, research, knowledge dissemination, skill acquisition, skill training, promotion of debate, discussion, the performing arts, and much more, to encompass all effective forms of communications. As the saying goes, “education breeds confidence, confidence breeds hope, hope breeds peace” (attributed to Confucius, 551-479 B.C.).
Modern economic growth is increasingly knowledge-based. Knowledge, deep and broadly shared, good health, and resilience are the best tools to equip nations, households, and individuals to compete successfully in this increasingly complex and competitive world and to realize the full promise of all its amazing resources, both human and material.
For developing countries for which the agriculture and rural sector are still important components of the national economy, there are three structural trends that stand out. These are increasing urbanization, income growth and interdependence among economies. These constitute both good and bad news. The good news is increased market demand for agricultural and food outputs. The bad news is the need to successfully address the continuing challenge for governments of broadening and sustaining agricultural productivity, and accessing markets in an increasingly competitive and interdependent world.
In our increasingly globalized world economy, a basic question we all have is: what are the major forces that are likely to shape both opportunities and constraints presented by world trade? At this high level of aggregation, only the major forces can be identified, with particular reference to countries where the agriculture and rural sector are still important. This is the main purpose of this policy brief.
1. Key Features of the Globalizing World Economy: Short and Longer Terms
Short term (2018-20) -- Global economic prospects
Global economic prospects are positive though fragile. The positive factors are the continued recovery in several major country groups. Specifically,
(i) Global growth is expected to increase to 3.1 percent in 2018 above 3 percent in 2017, and then to moderate to 3 percent for 2019-20.
(ii) Growth in the EURO area is projected to slow down from 2.4 percent in 2017, to 2.1 percent in 2018 and 1.6 percent in 2019-20. In the United States, with the recent tax cut, growth is expected to reach 2.5 percent in 2018. However, major policy uncertainties remain on health care, infrastructure, and trade negotiations over NAFTA. In the event of no major policy changes, growth is projected to average 2.1 percent over 2019-20.
(iii) Growth in emerging market developing economies (EMDE) is projected to accelerate to 4.8 percent in 2018 as commodity prices are expected to firm up for commodity exporters; and as activity in commodity importers remain robust although the positive impact of lower commodity prices is waning; and
(iv) Growth in low income countries (LICs) is projected to rise to 5.4 percent in 2018, up from 5.1 percent in 2017; and to average 5.6 percent in 2019-20. Growth in non-resource-intensive LICs in Sub-Saharan Africa (SSA) is projected to be robust due to expanding infrastructure investment. A key downside risk for these LICs is weaker-than-expected commodity prices due, for instance, to weaker Chinese demand; sharp reduction in foreign aid, and large declines in remittances following tightened immigration policies in industrialized countries (but also weak economic performance during the few past years). Metal-exporting LICs in SSA remain vulnerable to negative terms of trade shocks.
The overall recovery in global growth and trade is however vulnerable to:
- The rise in protectionism which will undermine the expansion of global growth and trade in general; and global value chains in particular. A case in point is the renegotiating of a major trade agreement like NAFTA which can lead to a significant decline in trade not only among the United States, Mexico and Canada but many other trading nations also likely to be deeply affected.
- Economic policy uncertainty and geopolitical risks remain at high levels. For example, uncertain outcomes of the negotiation following the Brexit vote (June 23, 2016) has the potential to undermine confidence in investment and therefore growth in the United Kingdom and the Euro area. In the United States, considerable uncertainty surrounds the outcomes of trade, and immigration negotiations. Major geopolitical risks arise from the tensions on the Korean peninsula – North Korea’s rising nuclear threat and how best to confront and contain it.
- Slowing of total factor productivity growth in both advanced and EMDE groups during the 2010-14 period as compared to the 2001-08 period (World Bank Group: June 2017: Fig 1.17) due to lower investment growth and slower rate of innovation among major companies of advanced economies. Moreover, population aging in both industrialized and EMDEs is projected to dampen global potential growth by 0.2 percentage point over the 2018-27 period compared to the 2013-17 period (World Bank Group, Jan 2018:34). Aging depresses labor supply and total factor productivity growth.
- China’s management of its financial vulnerabilities accumulated from years of rapid credit growth and high debt levels as it is changing its growth model from manufacturing to services, from investment to consumption, and from exports to domestic spending. Although China has undertaken a wide range of difficult reforms recently; e.g., addressing imbalances between revenue and expenditure responsibilities across different levels of government, improving the viability of state-owned enterprises; additional structural reforms are required in land and labor (hukou system) markets (World Bank, June 2017: 31-32).
- Continued major sources of violent conflict threatening the whole world. Since 2010, violent conflicts have spiked dramatically. Some 2 billion people now live in zones of high conflict. The fear of nuclear conflict is on the rise. The share of the extreme poor living in conflict-ravaged zones are 17 percent of the global total and this share is expected to rise up to 46 percent by 2030. The causes of these conflicts are complex. The flood of refugees - some 65 million victims of terrorism and violent conflict in 2016 - has been “a constant test of the moral compass of the stable societies on whose doors they are knocking” (Miliband: 2017 TED talk). In addition, the stresses of climate change, rising inequality, rapidly changing technologies, illicit financial flows are interconnected. These promote fragility and instability; violence, and tragic loss of lives.
Longer term global trends impacting on the supply and demand for food and agricultural inputs and outputs
For EMDE countries where agriculture and agro-industry are still important (typically, low to middle income countries), several global structural trends are of note. These are:
1) Urbanization and income growth: In 2015, the urban population was around 54 percent of total; by 2050, this is projected to rise to 66 percent, to surpass 6 billion by 2045, with the largest urban growth expected to come from India, China, and Nigeria. More generally, most of the urban growth will be in developing countries, particularly Africa. One of the greatest challenges will be managing urbanization in a sustainable way; as well as feeding urban areas, small towns and big cities alike. Urban areas are completely dependent on purchased food. In line with global trends, urbanization in Morocco itself is also proceeding apace with important short and longer term implications for growing markets for fresh and processed agricultural products. The opportunity for adding value and incomes, by linking with value chains is therefore both domestic and global. Urbanization, notwithstanding the global rural population, remains substantial. Thus, though the world’s rural population has been growing slowly they are and will remain a significant number – an estimated current of 3.4 billion will decline to 3.1 billion by 2050
2) Youth and productive employment: The productive employment of youth, variously defined as 15-24 years old (UN); 15-29 (S4YE), 15-35 (African Youth Charter) is a growing socio-economic and political concern. Currently, there are 1.8 billion (2014/15) youth with 85 percent living in developing and emerging states, as well as in fragile states. In Africa (North and South of the Sahara) and South Asia, youth make up one third of the total population. Youth accounts for 40 percent of the world’s unemployed and are up to four times more likely to be unemployed than adults. According to the ILO, one third of the young people worldwide are NEETS (Not-in-education-employment-or-training). One in four cannot find a job paying more than 1:25 USD/day, the international threshold for extreme poverty (S4YE; 2015: 1-2). In Sub-Saharan Africa, the stagnant state of much of its agriculture is such that many young people are leaving agriculture such that the average age of the African farmer is more than 60 years old (ACET, 2017: 144). The urban sector to which they flock to is no more welcoming. Africa is experiencing a youth and urban bulge. About 70 percent of Africa’s population is below 30. Africa’s 1.1 billion people are likely to double by 2050, with 80 percent occurring in cities, mainly in slums (World Economic Forum on Africa, 2016). Elsewhere, the recent series of social upheavals, from the Arab Spring, rise in economic insurgency and youth-led uprisings in many countries, are widely regarded as signs of an entire generation in crisis.
3) Biofuels use and price volatility on the rise? -- Complex interlinkages between gasoline prices on one hand and prices of feedstocks on the other are a powerful new reality. Feedstocks are currently from food crops such as palm oil, rapeseed, soy, beets, and cereals such as corn and wheat. The European Commission is researching other non-food sources of feedstocks. The 2007-08 food-fuel-financial crisis and price spikes constituted a “perfect storm” as a confluence of factors, climatic and man-made (public and private) converged. Successive droughts in major wheat exporting countries and a low ratio of stocks-to-use contributed to tight demand-supply of wheat, rice and white maize in world markets. Export bans and panic buying exacerbated an already tight market situation. The tighter linkages among food, commodity, and fuel prices through policy-supported bio-fuel production meant that disturbances to the fuel markets got quickly transmitted to food markets and vice versa. A longer-term cause for the tightness of world markets is the severe underinvestment in the productivity of smallholder agriculture in much of the developing world. Furthermore, higher incidences of sharp weather fluctuations expected from climate change increase the risk of further destabilizing impact on harvests and prices. The challenge for food importing countries is clear: promote broad-based and sustained agricultural productivity growth; develop methods of price and quantity risk management; and promote inclusive macroeconomic growth to strengthen food security at national, household and individual levels.
4) Increased interdependence among nations largely due to the communications revolution (ITC), and the backlash against it: ITC has drastically reduced transactions costs, expanding access to information to millions, and promoting more competitive markets. It has facilitated the Supermarket Revolution and the expansion of value chains. The speed, magnitude and depth of market interdependence among nations is likely to continue, even accelerate, unless a majority of peoples and nations fearing a loss of control over their economies and their borders retaliate even more forcefully through erecting barriers. The tug o’ war between protectionism on one hand and the forces for deeper interdependence on the other has already begun. This tug o’ war will inevitably impact global trade, including on food and agricultural materials.
5) Robots increasingly taking jobs away from humans? The mechanization of routine and not so routine jobs is proceeding apace. Whether this seemingly inexorable process will destroy more than create high productivity, well-paying jobs is still being debated. Some point out that although the recovery from the 2008 recession was slow, the jobs created in the aftermath were plentiful. McKinsey Consulting Company points out that over the past 25 years, about a third of the new jobs created did not exist 25 years ago. If we judge from historical experience, these observers are correct: the industrial revolution created a new world with many new jobs of higher productivity and incomes. Nevertheless, the jury is still out on whether robots will inflict a net loss of jobs on us humans, and even if net jobs will be created whether they will be primarily of high productivity. However, what is not in doubt is that continued use of robots in more areas of our economies will profoundly change the nature of the work place; the skills needed, the terms of employment as well as its rewards and costs.
6) The growing demand for water in a warming world facing increased variability of rainfall due to climate change: With world population expected to reach 9.7 billion by 2050, demand for water will rise exponentially while climate change as projected entails increased variability of rainfall – both prolonged droughts and floods, with increased frequency and severity of these extreme weather events. The deep scars of prolonged water deprivation are already very evident in areas labelled as fragile today. Already more than 60 percent of humanity live in water stressed areas; rainfall shocks already affect 25 percent of humanity (Unchartered Waters, 2017: Executive Summary). In most developing countries, agriculture uses the lion share of water resources. The problem of increasing water scarcity was emphasized way back in 2005. Over a decade ago, the U.N. estimated 1.2 billion people were already living in areas of physical water scarcity. Sub-Saharan Africa has the largest number of water stressed countries of any region. The challenge for agriculture is to dramatically increase the efficiency of water use and to increase the productivity of water. Indeed, agriculture’s very survival is at stake.
7) Use, non-use, or partial use of Genetically Modified Organisms (GMOs)? The controversy over the potential of GMOs for productivity increases but at the cost of heath, biodiversity, and the environment, continues unabated. Is the pro-GMOs evidence scientific, transparent and credible and the anti-GMOs position based on primarily political economy protectionist positions or not? Many developing countries must decide for their agricultures and their people the GM issue (in particular, producers, processors, and consumers). How should they weigh the short and long run costs and benefits of GMOs? Among other things, these include (i) the financial cost and dependency or non-dependency of supplies from a handful of multinationals; (ii) the potential productivity-enhancing and input-reducing impact of GMOs; (iii) impact on the environment, and health, considering the context of a warming climate. Given the complexity of the issues involved (in particular the intersection of private and public goods; positive and negative externalities; and widespread distrust of dominant multinationals especially in developing countries, it is no surprise that the controversy over GMOs between the pro- and anti-GMOs groups continues even after 20 years of releasing (1995/96) first generation GM crops with herbicide and insecticide tolerance traits (EU, 2006). The main ones were: soybean (HT, 1995); maize or corn (Bt, HT, Bt/HT, 1996); cotton (Bt, 1996); and canola (HT, 1999). Over time, this list has expanded to include widely consumed (by livestock and humans) fruits and vegetables. These include alfalfa (2006); squash (1995); papaya (1997); sugar beets (2006); potato (2016); and apples (2017). To date (March 2017), only four countries in Africa allow the cultivation of GMOs – Bt cotton in Burkina Faso, Egypt, Sudan and South Africa. South Africa also cultivate GM corn and soybeans. But the low rate of acceptance seems to be changing (AFK Insider, Jan 31, 2018).
2. Opportunities, Constraints, and Challenges for Sub-Saharan African Agriculture
High productivity commercial agriculture is demand-driven. For producers of food and agricultural products, primary and processed, the major opportunities lie in capturing expanding and lucrative markets at different levels - domestic, regional, and global. Since the demand for food security is universal and enduring at any level of per capita income, governments will continue to be politically sensitive to the millions more who will be totally dependent on farms to be productive and supermarkets to deliver affordable and quality food as urbanization and income growth proceed apace.
In much of Sub-Saharan Africa (SSA), constraints for smallholders to access the potentially lucrative markets are largely structural. Use of basic factors of agricultural production – land and water; labor and capital – is problematic. Although SSA is land abundant – it possesses nearly 60 percent of the world’s uncultivated land (ACET, 2017: 35) – its smallholders are crowded on small plots (1-2 ha) and do not have land tenure security. Land markets, both sale and rental, are thin and segmented. Much of agriculture is rain-fed, as irrigated land constitutes a tiny portion – around 5 percent of total cultivated land (2006) as compared to 20 percent globally and 40 percent in Asia (ACET, 2017, Overview: 7). With the unfolding of climate change, variability of rain is likely to increase. The average age of African farmers is 60 and the majority of youth is not interested in farming, especially as it is widely practiced today. Agricultural extension and research services are weak – weakened under the structural adjustment cutbacks of the 1980s in government delivery of basic public services; cutbacks which were not compensated for by private sector as was hoped. Without land as an asset and a collateral, farmers do not have the ability to raise credit for investment. Thus, much of SSA agriculture seems to be stuck in a vicious circle – land tenure insecurity undermining incentives and ability to invest which then perpetuates a low investment-low productivity agriculture.
For any low productivity subsistence agriculture with extensive poverty, the challenge is to put in place and sustain the key conditions which have existed in all cases of successful agricultural transformation. These five conditions are (1) a stable framework of macroeconomic and political stability; (2) an effective technology transfer system; (3) access to lucrative markets; (4) an ownership system, including usufruct rights, that rewards individual initiative and toil; and (5) employment-creating non-agricultural sectors. While each of the conditions are “obvious”, what is not obvious is why so few governments have managed to create and sustain them for decades. Decades of maintaining these conditions are needed for successful agricultural transformation.
One basic challenge for Sub-Saharan African leadership is to support and shape a political economy environment that will enable it to “move fast”.
“If we can fix our politics, we can move fast!” - Oby Ezekwesili (Nigeria), co-founder of Transparency International. (Atlantic Dialogues, 2017)