Opportunity Amid Austerity: Three Principles for Resilient Agricultural Growth

We are living through an era of historic disruption, with international aid and development budgets getting cut across both the United States and Europe, which has generated an intense debate among thought leaders on eliminating dependency. In this environment, a more resolute focus on doing more with less becomes ever more critical. We must strip complexity out of the system, and donors should shift from issuing top-down prescriptions of priorities to becoming catalytic investors that identify entrepreneurs who can drive economic growth in their local communities, countries, and regions. We need to move away from a “soviet” model of development, where projects are centrally and bureaucratically planned, and move towards a “Shark Tank” model, where ideas with the greatest potential for scale and impact prove themselves as deserving of the most financing.

Focusing on agricultural development is key to this effort. Investments in agriculture are two to three times more effective than other sectors at reducing poverty, and thus at helping countries transition from “aid to trade.” To accelerate this transition, I propose three principles and provide a case study that can guide a novel approach to putting smallholder farmers—an estimated 600 million people producing a third of the world’s food—at the center of creating resilient communities, food systems, and ultimately economic growth.

The first of these principles is that social enterprises offer the most realistic path to both scale and sustainability. Social enterprises balance financial returns with generating a social impact. They are embedded locally, close to their clients, and drive business to other private sector players. Given their dual focus, they are designed to deploy blended finance: earned revenue from clients, debt from private and public lenders, and grants. The earned revenue and debt sit at the core of this financial model and give them the ability to scale services to large numbers of clients. Agriculture is ideally suited for market-based approaches to development because it centers on growing new assets and, therefore, makes the ability to earn revenue inherent to the system.

However, agriculture is a deeply unpredictable industry, subject to large seasonal fluctuations and shocks, and governments around the world help farmers adapt to this uncertainty by deploying public funding to catalyze private investment. For example, the U.S. Department of Agriculture runs several programs to help U.S. farmers manage risk. A pillar of this support is the subsidies they offer to make crop insurance affordable. These government risk mitigation subsidies, of course, do not mean that U.S. farmers are not profitable, hardworking businesspeople who fundamentally earn their livelihoods.

Embracing greater use of blended finance will help serve as a bridge between donor support today and a sustainable system in the future. Given that social enterprises are inherently local, they can form long-term partnerships with national governments where they work and should eventually shift donor grant funding to the local citizen-funded tax base. In the current system, however, a good amount of international agricultural development aid has centered on nongovernmental organizations using grant money to give away services to farmers for free, but not effectively building a role for the private sector (and where direct support to governments exists, often struggling to show sustained value). If the right social enterprises exist, a different vision for sustainability is possible: hyper cost-effective service delivery, that is mostly paid for by clients, working with local small- and medium-sized enterprises, but not shying away from targeted grant money to de-risk farmer resilience.

But to do this effectively, two additional principles should guide the sector. To prove the value of this more strategic use of grant funding, social enterprises should embrace the use of rigorous social impact evidence as a type of currency to sustainably unlock capital from global public and philanthropic donors. If a premium is put on rigorous measurement—including the use of comparison groups to prove attribution (e.g., for yield and income increases and proxies for soil health)—and the sector can adopt the use of this measurement, social enterprises will prove the value of their services over less efficient approaches to funding resilience. An innovative new donor market will consolidate, complementary to the farmer markets where the enterprises sell services. If they can prove that the farmers they support are growing bigger harvests and can sustain this growth for years through the right practices, and earn more from them, they can reliably “sell” this impact to a set of donors who care about these outcomes. National country governments where the social enterprises work can eventually use this same logic with their own citizens to justify taking on this donor support, using analysis tools like this one from MIT’s Poverty Action Lab.

The need for a narrow focus on these rigorous outcomes introduces the third principle: Donors should prioritize efficiency over complexity. Currently, most agricultural development projects are centrally designed by donors and technocrats—sometimes cocreated with “implementing partners”—building 5-year plans to transform bespoke sections of agricultural markets. To execute these plans, complicated project structures are designed to ensure the plan is implemented as per the original design. While a noble goal, and certainly one that can deliver value in certain situations, this fairly static approach to agricultural development is not well suited to tackling the world’s persistently high hunger rate in an era of dynamic and often extreme weather impacts. A key role of government is to facilitate well-functioning markets, in which entrepreneurs figure out for themselves how to organically and nimbly create products and services to fill the needs of citizens. When the aid sector is designed more around complex bureaucracies, this more market-shaping role of government is ignored.

To effectively establish this new ecosystem, donors should shift to a more entrepreneur-led funding approach, where the donor plays the role of investor. Instead of designing programs, they should establish a limited set of outcomes they want to see improved at a large scale, and that are suited for rigorous measurement. While focusing on outcomes is not a new concept, many donors still express strong preferences on how organizations should reach these outcomes. Less common are program-agnostic venues for social entrepreneurs to pitch the plans they have developed, based on their localized understanding of client demand and needs. For enterprises receiving investment, the donor ultimately should only hold them accountable to the achievement of the priority outcomes and not micromanage how they achieve them (outside of ensuring fiduciary compliance to verify good stewardship of the funds). Donors should also include host governments—or regional consortia of governments—on investment panels, to ensure complete alignment with their priorities.

Finally, important to this framework is the concept of cost-effectiveness, or a “social return on investment,” so every dollar invested to achieve an outcome is judged against the dollar value for farmers it helps catalyze (e.g., 1 dollar of donor support leads to 5 dollars of farmer value). The success of the portfolio of projects donors invest in should be linked to this ratio, tied to clear scale targets, and over time, they should deploy investments where this ratio is highest.

Case Study: How This New Approach Could Improve Agricultural Insurance for African Smallholders

Access to effective crop insurance underpins the productivity of the largest agricultural economies in the world. Unfortunately, hundreds of millions of smallholder farmers around the world, who feed billions of people, lack access to effective agri-insurance. This problem is especially acute in Sub-Saharan Africa, where, as a seminal report from ISF Advisors finds, only 3 percent of farmers have access to any coverage. As the population of Africa rapidly grows, so does its need to dramatically increase its food production. It is hard to envision this goal being met if a significantly larger share of its farmers cannot access insurance.

To find innovative ways of achieving this goal, the three principles outlined above offer a different way of centering insurance as an effective resilience tool for African farmers:

1. Reclaim the “s” word: As part of a blended approach, subsidy can serve as a catalyst for change, but donors don’t need to perpetually provide it: to build robust agri-insurance in Africa, the world cannot turn away entirely from targeted uses of grant subsidy despite the more limited aid dollars in the system. As rigorous studies have found, a massive constraint to smallholder uptake of insurance is simply cost (given the lack of price support that U.S. and European farmers receive). The goal of donor subsidies should be to prove the value of insurance to farmers, the industry, and the wider society so that national governments feel a political incentive to take on this cost in the long term, replicating what developed countries provide their citizens, but funded by a domestic tax base. To achieve this end state, the sector requires more transparent structures to ensure that subsidy money is put to effective use (i.e., donors are not just underwriting company profits but using grants to deliver more proven resilience outcomes to farmers, through efficient service delivery). These structures, in turn, should catalyze a lasting domestic political consensus in the host country on the value of this subsidy.
    
2. Define a “social impact” currency for the African insurance industry: Currently, the value of insurance products to farmers has received little attention in the African agri-insurance market. This despite the fact that, as the ISF report concludes, “The majority of smallholder farmers still do not see value in insurance services.” Effectively, the core measurement of success in the system is the bottom-line profit of insurance brokers and providers. Looking at the claim or loss ratios in the industry (measurements of what percentage of every dollar is paid back to farmers), far less value ends up going to farmers across Africa than in more developed markets. While little data exists in Africa for this ratio for just agri-insurance, across all microinsurance, the mean is 48 percent. In the United States, just for crop insurance, the loss ratio average is a much more farmer-beneficial 86 percent. Even with these much higher payout rates in the United States, insurers still make a profit, but farmers also secure clear utility from the sector. 
   
   It would not be hard to define outcomes that will incentivize more farmer-focused products. Simply demanding a farmer-focused loss ratio floor is a good starting point, although ideally, insurance providers should also be rewarded for the quality of their products (e.g., speed of payouts) or, ultimately, even higher yields among farmers who take advantage of better coverage to purchase more inputs.
    
3. Don’t overthink the complexity of the system—find impactful local or regional enterprises that are figuring out how to change it (with the potential for scale): This gap in insurance access is certainly not being ignored, despite the complexity of challenges. The ISF report outlines a range of changes in the sector, from a broadening of the finance landscape, a maturing of the products being offered, more government attention, and more disruptive leadership from insure-tech pioneers. Many of the most pioneering of these organizations are known as “aggregators,” which offer more comprehensive service delivery to farmers, beyond just insurance, as they grapple with the interlocking challenges that limit farmer adoption of products. Any donor interested in this space must avoid reinventing the wheel and, rather, identify, from this pool of innovators, the ones best placed to meet the outcomes defined above, and then get out of their way, only judging whether they contribute to an insurance system that puts farmers’ needs at the center.

There are hundreds of millions of smallholder farmers in the world, producing a large portion of the food the world eats, and driving economic growth in their communities. Yet their potential to contribute even more is untapped. While the principles outlined here certainly are not an exhaustive list of priorities that will do this, they would provide a strong foundation for a new approach to serving farmers, that builds on lessons from agricultural growth in the developed world, but which empower less developed countries, where smallholders live, to establish their own path to prosperity. Ultimately, that is the kind of promise that the new development paradigm should deliver.

Colin Christensen is a senior associate (non-resident) with the Sustainable Development and Resilience Initiative at the Center for Strategic and International Studies in Washington, D.C.