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Saturday, 14 April 2007

Land Reforms - Revisted

MrK when commenting on land reform proposes that “80% of Zambia's agricultural land is not under cultivation. We should strive for a position where every present day subsistance farmer has access to 100 hectares, instead of the present 2-3 hectares."

In my previous responses to those comments I had noted that empirical research had always shown that access to credit was one of the main constraint (education and good agricultural extension services being the other) that has contributed to the inability of Zambian farmers to increase their productivity. In that sense it was important to focus on that in the short run. What of course was missed in that exchange is the potential link between access to credit and land distribution, and the land reform implications that may flow from that.

Theory has previously suggested that credit markets in agricultural areas are poor because lenders do not have the full knowledge of farmers who look for finance, and hence require substantial "security" in order to lend them money. The absence of such "security" is a great impediment to making credit available to farmers. However, research as shown that land can potentially act as collateral - if so, then land re-distribution can help improve access to credit, and indeed by redistributing land, you are effectively redistributing credit in the economy, and allowing for a wider impact beyond agricultural related activities. Any new land owner should be able to use that as collateral for any economic activity.

If this is true, then indeed land redistribution has benefits not just in terms of equity or direct economic benefits to farmers, but also in terms of eliminating the “market failures” that prevents individuals from investing in agriculture and non-agricultural activities (e.g. tuntembas, small retail shops).

The IMF Working Paper on Land Distribution and Financial System Development published this month, provides some empirical evidence on this issue. Using evidence from a broad set of countries, Vollrath and Erickson show that unequal distribution of land generally has a significant and negative impact on financial development. In other words, land inequality leads to greater inefficiency in the financial market and is in line with previous research by Chakrabort and Ray (2006) which shows that "highly skewed distribution of land will lead to less overall credit, as large landowners are able to self finance their investments and landless workers are unable to provide he collaterall to borrow at all".

Vollrath and Erickson's does not fully address all the questions on how land equality actual transmits to financial development (aside from the impact on banking efficiency), but their evidence on the strength and direction of the relationship between the two is important because it provides further evidence of the additional benefits of land redistribution.

In terms of policy direction, it shows clearly land redistribution has a signficant role to play in our quest to improve credit access to farmers. And more importantly, the economic benefits of redistributing land is likely to go beyond the agricultural sector since it helps to develop the financial sector in general.

43 comments:

  1. I understand the idea of using land as collateral for credit. However, I think it is a bad idea to give people who have virtually nothing land, just so they can sell it.

    Land reform has to be tied to usage. Just as it should be aimed at creating as many farmers as possible, rather than aim at created a few corporate agri-businesses.

    Besides, other than using land as collateral, the future harvests of an established farm can also be used as collateral.

    Not that I am in favour of loans like that at all, because that is how people lose their land.

    However, if the state took the risk, and took the absolute priority to see a return on capital off the table, a lot of other types of loans or grants would be possible.

    For instance, the state could give an equipment loan, on a cost only basis (you borrow $50,000, you pay back $50,000). The state would still end up ahead, because of an increase in future income from taxation.

    In other words, there are a lot more and different kinds of financing possible, when the focus is shifted from return on investment (commercial banks), to getting people on the land and farming (the state).

    The state has a lot of interest, not just financial, in seeing it's citizens or land getting more productive.

    So I am not really in favour of using farm land as collateral for loans. But then, I'm already always cautious about borrowed money. It is much safer to receive an income from production instead.

    I am completely in favour of land redistribution, but we should always clearly keep in mind who it is supposed to benefit - the new farmer, the food supply, the state, in that order. And not the banks.

    " And more importantly, the economic benefits of redistributing land is likely to go beyond the agricultural sector since it helps to develop the financial sector in general. "

    And supports the food supply. And through surpluses, adds to foreign exchange earnings. And because of increased productivity, adds to the national revenues. And because of accumulation of wealth by the farmers, increases money spent in rural areas, increases employment, slows urbanisation, etc. :)

    The agricultural sector is the foundation of every healthy economy. And most people don't even have to be employed in it for this to be the case. Lower food prices have an especially positive effect on the poor, because they spend most of their income on food, energy and shelter to begin with.

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  2. A couple of thoughts.

    1. I agree that land should be tied to useage. Indeed redistribution for its own sake would be meaningless unless there mechanism to ensure that that land is utilised and used for something useful.

    2. I think the debate is on how to ensure that does not happen. And a key issue is to identify what is LIKELY to make make farmers who have the land still not being able to use it meaningfully.

    3. There's no doubt that access to finance is one those impediments. In rural areas for example, transaction costs (in terms of transportation to markets) are likely to significant and could dissuade farmers from using the land. Overcoming these challenges requires access to capital and inevitably credit!

    4. What we are saying is that to some extent that may not be a huge problem, since redistribution in itself will lead to greater development in the financial market as farmers and crucially others use land as collaterall AND evidently redistribution of credit. Farmers would be able to help shape how banks relate to them and improve the terms of credit.

    4. You concerns of over loans is justified and I accept your implicit point that one way of handling this "credit" problem is to transfer the risk of investment to the Government. But isn't your proposal essentially asking the Government to taker over the role of bankers?

    5. We should be seeking to develop the financial system as we seek to developing other aspects of the economy. It helps kill two birds with one stone. We don't really want Government to take over functions that the private sector can do.


    Land reform has to be tied to usage. Just as it should be aimed at creating as many farmers as possible, rather than aim at created a few corporate agri-businesses.

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  3. " 3. There's no doubt that access to finance is one those impediments. In rural areas for example, transaction costs (in terms of transportation to markets) are likely to significant and could dissuade farmers from using the land. Overcoming these challenges requires access to capital and inevitably credit! "

    A lot of the lack of capital is a direct result of the small size of their land. If a subsistence farmer has to use all the land he has, just to get by, he can't save and set money aside for re-investment in machinery. Which he has no use for, because he has so little land can be worked by hand. The farmer needs more land so he can have a decent living, for which he needs machinery, but doesn't have the money for either.

    This is a vicious cycle, that only an outside force can break through. And of course, it was an outside force that created it.

    If they had more land, even if they had one big harvest, they would have more than enough money to save and live very comfortably.

    So to me, the issues of capital and land are very closely related. And I think it would be in the state's own interest to intervene.


    " 4. You concerns of over loans is justified and I accept your implicit point that one way of handling this "credit" problem is to transfer the risk of investment to the Government. But isn't your proposal essentially asking the Government to taker over the role of bankers? "

    I think the state has the right to look at the greater good, and say - this is what we should stimulate - and choose putting land into productive use, over renting it out or speculating with it's price. The profit objective of the commercial banks isn't always the best way to go for the country as a whole.

    And unlike the IMF, I don't object to the state owning a bank. :)

    The way I see it, is that the state has a way of benefiting from financing successful ventures, that commercial banks do not have. The state will receive future income from taxation of the very business it helps set up, indefinitely. And that taxation will depend on the success of that venture, so the state has an interest in setting up successful ventures or backing successful entrepreneurs, especially in times of high unemployment.

    And of course there are different kinds of bankers. When it comes to development of the basic economic infrastructure of the country, why shouldn't the state have a role?

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  4. Interesting thoughts!

    "If they had more land, even if they had one big harvest, they would have more than enough money to save and live very comfortably".

    But my point is that even with larger farmers they cannot use the land productively without hiring labourers, transporting the goods to often distant places, etc to be. All these things require capital or some stimulus and that requires a bit of access to a lender! So redistribution of land is a necessary but not sufficient condition to greater and more productive agriculture. It needs access to credit.

    "And unlike the IMF, I don't object to the state owning a bank.

    …And of course there are different kinds of bankers. When it comes to development of the basic economic infrastructure of the country, why shouldn't the state have a role?"



    I think we agree that there's a failure of the market here that needs to be resolved - but we are still distance apart on how this should be resolved

    The question for me (and possibly for the IMF) is whether Government is best placed to provide the credit, or whether an alternative approach can be found? My natural inclination is that Government has no real incentive to be efficient. It seeks larger and unquantifiable social goals. Contrast this to the market with its motivation for profit, and it is clear that with Government a noble intent could lead to mismanagement and in the end hurting the very farmers that it is seeking to help! I am not saying there's no role for Government, rather that it is difficult to come up with Government interventions that will deliver long term efficiency for society. May be Government should be giving banks loans to start up in rural areas? It's a complicated position.

    The good news I think from the IMF working paper is that with redistribution, the problem is probably not as bad because redistribution in itself should lead to land owners have a greater say in the development of the banking system and ultimately increased access to credit!

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  5. Talking about Agriculture productivity...this story last week is quite interesting..

    http://allafrica.com/stories/200704120521.html

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  6. " It is obvious what needs to be done: Zambia must open its market if it is to provide an incentive for large-scale maize farmers to develop the industry and secure its food supply, and South Africans must forget about flogging its barren soil and begin exporting its expertise and its capital. "

    This is the obvious neoliberal answer, of course.

    This is not the big difference between South Africa and Zambia, by the way.

    The best thing the government can do are

    - land reform
    - mechanization in agriculture
    - infrastructure creation (roads, irrigation, storage)

    The prescription in the article is just another appeal for corporate business to take over. Instead, if the people are involved, you are looking at:

    - much greater agricultural diversity of crops
    - much more efficient use of the land
    - much healthier use of the land (less pesticides, more attention to the soil, organic farming techniques)
    - real dispersion of money and wealth among the population



    This is an interesting article - mainly interesting that they too do not understand the fundamentals involved.

    There is huge official unemployment, over 80% of arable land is not under cultivation. The obvious answer to have a bigger harvest, is to get more land under cultivation, using a people oriented approach. 100 hectares for every farmer.

    Another problem is depending on rain for irrigation, instead of actual riverine irrigation and rainwater catchment/storage methods; and the fact that so little arable land is under cultivation, which is a major issue in agriculture, poverty, food security, etc.

    Here is an interesting article about a farming project in Zimbabwe, which has a much different take on land use. They call it 'Conservation Farming', which I guess helps smooth things over with the environmentalists. They don't use more land to cultivate, just more intensive techniques, which is possible when the people are involved. Large, commercial agri-businesses would look at which continuous piece of land they can exploit most easily. And most individual commercial farmers simply have too much land for them to cultivate.

    Ok. The techniques are basic and already known though - crop rotation, intercropping and cover cropping, green manuring (using nitrogen fixating crops to improve the fertility of the soil by drawing out nitrogen and making it available for plant use), and other soil management techniques, like creating miniature environments.

    http://www.leisa.info/index.php?url=show-blob-html.tpl&p%5Bo_id%5D=87906&p%5Ba_id%5D=211&p%5Ba_seq%5D=1

    And a project in Toronto, Ontario:
    http://www.erca.org/soil/cfarming/soilcf.htm


    If you want to go to the real extreme, check out the 'Zen' approach to farming, by Masanobu Fukuoka.

    http://www.mulandscaping.com/ArticleThePlowboyInterviewMasanobuFukuoka.htm


    Greening The Desert - Applying natural farming techniques in Africa,
    an interview with Masanobu Fukuoka, by Robert and Diane Gilman

    http://www.context.org/ICLIB/IC14/Fukuoka.htm


    For P.A. Yeomans version of sustainable agriculture, called Keyline Design.

    http://www.keyline.com.au/ad1ans.htm
    http://en.wikipedia.org/wiki/Keyline_Design
    http://en.wikipedia.org/wiki/Yeomans_P.A.


    On Permaculture, see

    http://www.thefarm.org/permaculture/


    I think these are really exciting opportunities, to make agriculture in Zambia and Africa

    - sustainable
    - useful and relevant to the entire population
    - independent of world events or global economic cycles
    - supportive of the people's needs and aspirations
    - a factor in slowing urbanisation
    - a great way for everyone to make their fortune

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  7. " But my point is that even with larger farmers they cannot use the land productively without hiring labourers, transporting the goods to often distant places, etc to be. All these things require capital or some stimulus and that requires a bit of access to a lender! So redistribution of land is a necessary but not sufficient condition to greater and more productive agriculture. It needs access to credit. "


    Labourers, transportation, etc, could be paid on a credit system backed by a well financed independent state agency.

    What we are really talking about are the upfront cost of operations, before cash is made from the sale of their products, and risk in case of crop failure or other calamities.

    Again, the more farmers there are, the more security there is because the risk can be spread more widely. It is unlikely that all farmers will go bankrupt at the same time, or that all products will drop in price at the same time. Also, this agency itself can take insurance on certain events, so it wouldn't actually have to take on all the risk itself. Which in itself would stimulate the financial industry.



    " I think we agree that there's a failure of the market here that needs to be resolved - but we are still distance apart on how this should be resolved The question for me (and possibly for the IMF) is whether Government is best placed to provide the credit, or whether an alternative approach can be found? My natural inclination is that Government has no real incentive to be efficient. "


    I have seen some very motivated and efficient government employees though. I think the big difference is modern management techniques, where (government) employee rewards are very clearly connected to greater productivity.

    I see the ideal state working in cooperation with (non-corporate) business, not as it's competitor.


    " It seeks larger and unquantifiable social goals. Contrast this to the market with its motivation for profit, and it is clear that with Government a noble intent could lead to mismanagement and in the end hurting the very farmers that it is seeking to help! "

    But the same thing can be said for markets. Also, there should be a very clear distinction made between different kinds of businesses. Agribusinesses, corporations have so much money, that they have special access to government policy, etc. They often have their own lobby firms to influence policy.

    Look at the kind of free markets the IMF is trying to create. And local products are still being squeezed out by heavily subsidized, imported products. Many local economies have been killed that way, all over the world.

    My point, is that big business and government aren't that different. They both deal in large scales, and they are both inefficient.

    " I am not saying there's no role for Government, rather that it is difficult to come up with Government interventions that will deliver long term efficiency for society. May be Government should be giving banks loans to start up in rural areas? It's a complicated position. ' "

    I think there is nothing un-capitalist about the government saying: 'we need a strong agricultural industry', and using it's money and legislation to support starting farmers and create a great environment for SMEs, including in the farming industry.

    Most of the economies of Southeast Asia developed with very strong government involvement. And although the government there ususally set up huge corporations, those were still preferrable by far to foreign corporations. And those Keiretsu and Chaebol *always* used local suppliers, stimulating the economy of the country with their expenditures.


    " The good news I think from the IMF working paper is that with redistribution, the problem is probably not as bad because redistribution in itself should lead to land owners have a greater say in the development of the banking system and ultimately increased access to credit! "

    I still think that a cooperative of hundreds of farmers with 100 hectares is a great way to upgrade farming practics, get people money from their $20k or more harvests, and create a type of farmer who uses machinery, and is ready to move beyond the cooperative and take his or her operations into the rest of the country.

    Anyway, I'm working on a business model.

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  8. "There is huge official unemployment, over 80% of arable land is not under cultivation. The obvious answer to have a bigger harvest, is to get more land under cultivation, using a people oriented approach. 100 hectares for every farmer. "

    Not to mention “rural unemployment”. Your approach has the merit of killing two birds with one stone.


    "Another problem is depending on rain for irrigation, instead of actual riverine irrigation and rainwater catchment/storage methods; and the fact that so little arable land is under cultivation, which is a major issue in agriculture, poverty, food security, etc."

    This is a real problem in Zambia.
    We seem to be so dependent on rains – my brother is an Agricultural Scientist at Mount Makulu and he tells me rains are a big issue. What I don’t understand is why when we have so many rivers and lakes this presents a problem?


    Interest link on Conservation Farming….

    It does appear that it requires very little inputs….but to roll it out widely would require educating farmers etc. It appears quite painstaking!....but very interesting….

    I’ll follow up the other links you have provided…thanks….
    …it seems to me that these are indeed exciting ways to look at agricultural reform….

    Do you know if there’s some sort of Agricultural White Paper that sets out Government’s strategy on Agriculture?...or are we stuck with 5th NDP?

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  9. “Labourers, transportation, etc, could be paid on a credit system backed by a well financed independent state agency”.

    I think this can work. I have given this further thought….

    I agree that a farming agency can do that lending role and a cheaper rate, essentially acting as a bank for “new” farmers only. Sounds like that would be essentially equal to a bank, although you are keen to restrict the level of credit. I understand your point to mean you would restrict any credit access to just start ups.

    This is very similar to taking out a student loan to fund your education, and then pay it back latter. In the UK we have the Student Loan Company. It is basically a UK public sector organisation established to provide financial services, in terms of loans and grants, to over one million students annually, in colleges and universities across the four education systems in the UK.

    We are essentially talking about a Farm Loan Company for Zambia. Strictly to help them address the upfront costs and lending them for future use only. But you would need to think about how you guarantee they pay back..I think it is easy because land will be the collateral….they also need credit breaks..say 2 years before they see the returns…

    I am happy to look at the business case. It can work :)
    Very possible.

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  10. What I don’t understand is why when we have so many rivers and lakes this presents a problem?

    I think it is part of the general lack of investment in infrastructure. The same lack of investment that has caused Zambia to have only one fuel refinery, which was built under UNIP.


    It does appear that it requires very little inputs….but to roll it out widely would require educating farmers etc. It appears quite painstaking!....but very interesting….

    The Conservation Farming article on Zimbabwe is great for smaller pieces of land, because it is relatively labour intensive.

    If you have the chance, check out: "Making Your Small Farm Profitable: Apply 25 Guiding Principles/Develop New Crops & New Markets/Maximize Net Profits Per Acre" by Ron Macher.

    Still about smaller scale farming than what we're talking about, but the amounts of money being made from these plots is still pretty amazing.


    However, check out the P.A. Yeomans website, which deals with much larger pieces of land in Australia. The techniques are not that different, except that the emphasis is on the use of the contours of the land, mainly to reduce erosion and capture rainwater runoff.

    Modern farmers are custodians of the soil, more than anything else. They spend much of their time keeping their soil fertile, through large scale composting, water management, and cropping techniques. I guess in a way, they are returning to more ancient farming techniques, instead of depending en chemicals.

    And this is what Africa has both the space and the people to do.


    Do you know if there’s some sort of Agricultural White Paper that sets out Government’s strategy on Agriculture?...or are we stuck with 5th NDP?

    I don't know. The most I heard that this government did well is that they expanded irrigation through some project.

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  11. We are essentially talking about a Farm Loan Company for Zambia. Strictly to help them address the upfront costs and lending them for future use only. But you would need to think about how you guarantee they pay back..I think it is easy because land will be the collateral….they also need credit breaks..say 2 years before they see the returns…


    The government could do it, and they didn't even need to be loans. They could be (partial) grants.

    The government has many incentives for seeing new farmers get started, over and above getting the loan paid back, as commercial banks would.

    The government will see an increase in money paid to it in tax revenues; there will be more maize, so there will be no need to spend foreign exchange to buy maize in times of food shortages; there will be greater social stability (no food riots); it will alleviate some poverty, because food will be cheaper and the poor spend most of their money on food to begin with.

    In other words, the government could give this money away (in grants), and still be financially rewarded many times over.

    The agricultural sector is that important to the country.

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  12. "The government could do it, and they didn't even need to be loans. They could be (partial) grants".

    I agree, but loans provide better incentives than grants.

    We want to encourage farmers to be productive, so a loan will ensure that they work hard to use the land!

    Also loans ensure that the programme is self financed. What I think you can do is to ensure that loan repayments may be only occur after 5 years or so...and like the Student Loan Company the rates are basically near to 0% (but not zero for incentive purposes). You basically ensure they don't have to resort to the market.

    How about that?

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  13. I'll check out the new links....

    By the Hammer Simwinga is doing some interesting work check out the latest blog....

    http://zambian-economist.blogspot.com/2007/04/celebrating-searchers-2nd-edition.html

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  14. " I agree, but loans provide better incentives than grants. "

    I think the biggest incentive is going to be keeping 80% of their $10,000 + income.

    " We want to encourage farmers to be productive, so a loan will ensure that they work hard to use the land! "

    I don't think the government needs to ensure that the farmers work hard. Or that being in debt will ensure hard work.

    As long as they keep most of what they make, money is enough incentive. The rest we'll have to leave to their wives. :)


    Also, these grants could be part of the cooperative we talked about.

    Lastly, there are many ways of ensuring you only lend to people who are dedicated and work hard.

    You can...

    1) check their resume beforehand, so you lend to people with a long track record of farming

    2) make sure they have a financial incentive, by making sure they keep most of what they make (by for instance limiting total PAYE/business tax, etc. to 20% of their profits).

    3) the grant doesn't need to be cash, it can be paying a bill for farming equipment, fertilizer, etc. In other words, a repayment free, interest free line of credit. Startup capital.

    It isn't to the government to go into immediate panic mode and ensure that people work hard.

    Lastly, when loans are made to a lot of farmers who fit the above criteria, odds are on the government's side. They don't have to win them all and see to it that each and every loan is paid up.

    Farmers don't have to make sure that every seed they plant sprouts. After making all their preparations (plowing, fertilising), they just count on most of them doing so.

    And most of them will.

    I don't think using debt as an incentive to work hard is very positive or sustainable. What happens when they pay off their debt?

    I guess what I'm saying is that there are many ways to incentivize people to work hard.

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  15. ”I guess what I'm saying is that there are many ways to incentivize people to work hard”

    Quite right!
    The tax system is definitely one way of stimulating production. As long as it is properly targeted it can have much more significant effects.

    I guess what I am keen for is to ensure that the system is self financed and does not increase the liability of the tax payer. I am also keen on governance. All the points you have made though address these issues, so I see no reason why they cannot work.

    The other point we have to keep in mind is that we are interested in productivity. The issue as you have repeatedly stated is that 80% of the land is unused. However that is not to say 80% is not in people’s hands. So we need to think about how to move the land that is currently owned by people to be used productively. I think the mechanisms we have been discussing can contribute to that. Because essentially we are seeking to make capital available and ensure new farmers have all the support they need!

    I think your model calls for a paper, sent directly to the Permanent Sec and LPM!!

    This is how policies are made...direct lobbying!

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  16. The other point we have to keep in mind is that we are interested in productivity. The issue as you have repeatedly stated is that 80% of the land is unused. However that is not to say 80% is not in people’s hands. So we need to think about how to move the land that is currently owned by people to be used productively. I think the mechanisms we have been discussing can contribute to that. Because essentially we are seeking to make capital available and ensure new farmers have all the support they need!

    You know, when Zimbabwe shifted gear from it's unworkable 'willing buyer, willing seller' land reform program, to 'fast track' land reform, they did it by farm invasions and political cadres.

    However, the peaceful way to do it, would have been through a land tax.

    Parliament would have to pass a law that taxes unused arable land over a certain size, so present day small scale farmers are not affected. Also, by limiting this real estate tax to unused arable land, no one interferes with present day commercial operations.

    So this act would specifically target:

    - unused arable land
    - estates over 1000 hectares in size
    - exempt all land already in use plus 25% (for crop rotation, etc.)

    If the government would institute a stiff $5,- per hectare tax, either the present owners would have to make this land profitable, or let it default to the government instead paying tax over it.

    In Britain, it was the land tax that broke the power of the aristocracy.

    There would be resistance from present day land owning politicians of course. However, a government that wouldn't mind going against them could carry it through parliament.

    I think your model calls for a paper, sent directly to the Permanent Sec and LPM!! This is how policies are made...direct lobbying!

    Thanks, that would be great.

    And I'm still working on a business plan. I think that will spell out profitability, but it still needs detailing.


    Interesting article: Artificial Land Shortage In The UK? Note that the UK seems to have some of the same land problems as it's former colonies in East, Central and Southern Africa have. And I don't think it is a coincidence.

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  17. "In Britain, it was the land tax that broke the power of the aristocracy."

    Good observation.
    Indeed the problem in the UK even now is land banks. People have built up sufficient land banks and are unwilling to bring this land for development, which has constrained housing supply heavily. Leading to the rise in house prices.

    You are absolutely right, a land tax would incentivise people to either use the land or give it back to the state who would then redistribute it through the co-operative!

    But what can be done about those holding onto customary land? Would a tax apply to land held by chiefs? A large bulk of unproductive land is the land owned by chiefs.

    By the way, I am struggling with the link to the British article. Is it correct?

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  18. The link works for me (internet explorer 6.0).

    However, you can also copy and paste this complete line into google:

    "Artifical land shortage in the UK?"

    I haven't completely looked into the roles of chiefs yet, but I think that something could be worked out there too.

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  19. Thanks! I have got the link now via google.

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  20. Fascinating discussion gentlemen, many thanks for your diligence and dedication to the pursuit of this issue (among many others I might add)! I wish that I had more time to contribute in some small way to your efforts, however I will not let scarcity prevent me from doing what I can besides cheering you onwards.

    Here is a link to KickStart, a Kenyan company dedicated to innovative, low capital, low maintenance tools for agriculture and small business tailored to the type of land usage you are advocating: http://www.kickstart.org/home/index.html

    Similar technologies are available via International Development Enterprises' PRISM programs, which may provide a proven model for organization of rural co-ops in support of land reform and distribution efforts: http://www.ide-international.org/method/prism_methodology.php

    This project in Gwembe district provides a model for livestock distribution programs with enormous potential for growth and widespread participation on relatively small capital outlays: http://www.humana.org/Articel.asp?NewsID=156

    Many reputable sources on sustainable agriculture are freely available via sites such as: http://www.gaia-movement.org/TextPage.asp?TxtID=84&SubMenuItemID=105&MenuItemID=47 The costs of distributing such material to farmers and aiding in implementation would be more than offset by the resulting decreased operating overhead, increased crop yields and potentially enhanced export marketability.

    I hope that resources like these may help assuage skepticism over the viability of your proposals and further strengthen the arguments against corporate agri-business as the primary source of development.

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  21. Yakima,

    Thanks, those are great links. Especially the resettled farmers program in Zimbabwe.

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  22. For a low cost introduction to the possibilities of farming, check out:

    "Making Your Small Farm Profitable: Apply 25 Guiding Principles/Develop New Crops & New Markets/Maximize Net Profits Per Acre" by Ron Macher

    "Earth User's Guide to Permaculture" by Rosemary Morrow

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  23. Yakima,

    Thanks for the links!

    Mrk,

    Off to Amazon.co.uk to purchase the Macher book. I am sure it will make an interesting read on the train journey to work! I'll provide feedback in due course.

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  24. Cho,

    That's great. The Macher book will give a lot of information about prices, costs, etc. (mainly with regards to the American market).

    The Morrow book will give you a great reference on sustianable agriculture, permaculture and the interaction of trees/forests, soil erosion (and the prevention thereof), raising the water table by digging swales, etc. It is especially relevant, because Morrow's experience is in Eastern Australia,which is relatively dry like much of Zambia.

    The important force in permaculture worldwide is the late Australian P.A. Yeomans. His book "Water For Every Farm" is extremely influential. He invented and coined the phrase 'Keyline Designs'.

    But it is great to have you reading about agriculture. With less than 80% of Zambia's arable land under cultivation, this should be the big growth industry of the 21st century in Zambia and Africa.

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  25. Thanks, MrK

    Agriculture is indeed very important. Land is our greatest asset and therefore we must make full use of it.

    I looking forward to reading these books.

    Thanks.

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  26. Cho,

    I'm looking forward to reading your reviews. :)

    And I'm still working on a business plan. I'm through the concept part.

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  27. Just finished the Ron Macher book. A great read.
    Its very practical and has some very good principles.

    As someone new to farming, he has put some fire in my belly now to look at this as a serious investment.

    There are a number of points he makes on added value that are quite interesting. Also he seems to say that it is a matter of logic that you avoid mainstream crops dominated by big farmers. He is very much of the view that the greatest benefits come from niche markets, added value and crop diversification.

    It was extremely accessible.

    The only problem is that is focused on the USA experience.

    I am very keen to pick up the other book you recommended - you suggested it has some read across to the African experience because it is based on similar climates.

    The other thing about the Macher book is the emphasis on animal husbandry. I slighly struggled with that a bit because clearly it is hardly a niche market - so some potential questions there. Can you really develop a niche market with rearing animals? Unless of course the benefits come through added value...e.g. milk or some other.

    Now I'll turn to the Morrow book :)

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  28. Cho,

    Great that you read the book, and I knew you'd like it. :)

    Macher writes about niche farming in the context of America, where a lot of family farms are struggling and a lot of farming is done by multinational corporations (agribusiness).

    What is extremely relevant for Zambia, is that it is very easy and cheap to grow various tropical products that in the west would require greenhouses, lots of gas and other fossile fuel to keep the temperatures high and supply (inefficient) artificial lighting, things that come free of charge in the tropics.

    Also, his book gives good examples and tips on the commercial use of sustainable agriculture techniques, like intercropping, crop rotation, etc.

    If the politicians would get on board, and start exempting EU or NAFTA import regulations from tropical products, Zambian farmers could access European and American markets with niche tropical products.

    However, within the context of what we talked about in making sure every farmer has access tp 100 hectares, half of that could be dedicated to growing staple crops, mainly maize.

    These 100 hectares could easily be a middle ground between having a substantial portion dedicated to maize (a turnover of $20,000 from 50 hectares at 2 tonnes per ha and $200 per tonne), with the remaining 50 hectares dedicated to small, more labour intensive projects.

    These farmers could easily spare a couple of acres here or there for niche products, such as described in Macher's book, and other products specific to Zambia. If the worker received 80% of what he produced (by national law or by contract), this would not be an exploitative situation. In fact, the more these workers produce, the more they earn, and the more the farmer earns as well. This could also be great for their children or local kids to make an income raising rabbits, horses (where suitable), etc.

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  29. I gree land and tax reform are the key.

    I was also struck by his emphasis on knowledge - basically how much research into methods and skills you need to know before you plunge yourself into the activity. In one example he quotes a couple who spent 3 to 4 years gathering information?

    Again emphasing the need for better educational infrastructure perhaps. More focused on practical tips and marketing ideas as opposed to complicated research.

    ReplyDelete
  30. That is why I would propose a farm school to go with these farm cooperatives. Like a reviewer of Ron Machers' book on Amazon says, way too many people presume that farming doesn't take much knowledge or thinking skills. Permaculture techniques and land management have to be learned, mostly through experience, but also through reading and classroom teaching.

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  31. Several of the bottlenecks in the delivery of land reform require specialized skills which are already too scarce for the current system (especially for farming, but also for housing and enterprise needs). As MrK has pointed out, farmers who receive support in irrigation and agronomy should be able to begin producing on larger plots of land relatively quickly, and could conceivably collateralize production or investment credit from crop futures and farm improvements instead of land tenure.

    Widespread and rapid distribution of new leases to farmers will have to be accompanied by appropriate numbers of skilled professionals to promote and implement "best practices". One way to expand service capacity in these skills is through tax credits for effective apprenticeship. For every employee who is trained and licensed to perform the same tasks as the professional, s/he receives a large tax credit (in exchange for training their own competition). Professionals who successfully train large numbers of skilled operators in targeted areas could conceivably see their entire tax burden forgiven.

    Such a system could greatly augment the number of graduates which vocational training is currently able to supply in bottleneck professions like surveyors, plumbers and electricians. Evidence already suggests that there is a shortage of agronomists being formally trained. Large numbers of such trained professionals will be necessary to implement standardized farm irrigation and integrated local water retention programmes like the digging of swales, installation of dams, and protection of drinking water from agricultural runoff.

    Procedures which emphasize self-help labour from local communities, and standardized low-tech project inputs like manual pumps and animal-powered traction devices, can reduce the need for direct professional involvement and oversight. However, even with minimal requirements for skilled labour inputs, the current economy does not effectively stimulate training of the specific skillsets needed to support widespread housing and agricultural reforms.

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  32. https://www.blogger.com/comment.g?blogID=2705183461541363969&postID=2648951841796160129


    Cho,

    Again emphasing the need for better educational infrastructure perhaps. More focused on practical tips and marketing ideas as opposed to complicated research.

    The British educational system is too focused on creating academics. Very early specialisation, and great universities to catch the best and the brightest.

    Which is fine for creating academic excellence, but it doesn't really help society at large as much as it could.

    What is needed is much more teaching of practical (entrepreneurial) skills. There should be more farm schools, technical schools, etc, whose graduates should be as respected as anyone coming from university. And these graduates should have academic credits, so if they want to, they can go through university at an accellerated rate.

    But that again takes professionals to teach, instead of more graduates.

    I have thought that one way of tapping into actual knowledge, is to offer Western retirees the opportunity to enjoy their retirement and teach in Zambia. Electricians, builders, farmers, business owners, etc. That would be a way of skills transfer that could benefit both sides of the equation. Of course it would be a stop gap measure, but it could be done for a very low cost, if any. They could simply enjoy their pension in a warm location with a much lower cost of living. And it would represent a minor influx of foreign exchange into the economy. If handled sensitively, this could benefit all sides.



    Yakima,

    and could conceivably collateralize production or investment credit from crop futures and farm improvements instead of land tenure.

    Which is much better than borrowing against land, which in the end can only be sold once, leaving the farmer unemployed.

    ReplyDelete
  33. "and could conceivably collateralize production or investment credit from crop futures and farm improvements instead of land tenure". - Yakima

    Presumably the rate of interest on this would be higher given the uncertainty in future production? The beauty of using land as collateral is that the rates of borrowing may be lower. Whats your view?

    "I have thought that one way of tapping into actual knowledge, is to offer Western retirees the opportunity to enjoy their retirement and teach in Zambia." - Mrk

    Its an interesting idea!
    I think this could easily be advanced by the Government to western nations especially the UK. We are losing a lot of our nurses and other qualified people. A few pensioners in exchange would not be bad :)

    ReplyDelete
  34. "Presumably the rate of interest on [investment credit from crop futures and farm improvements instead of land tenure] would be higher given the uncertainty in future production? The beauty of using land as collateral is that the rates of borrowing may be lower. Whats your view?" -Cho

    That ought to be the case only if default rates for loans collateralized with "futures" demonstrated a measurably higher lending risk than default rates on land-backed loans. The first assumption in either case is that loans will only go to farmers capable of paying them off in a timely manner, presumably from the increase in production derived from the borrowed capital.

    If any collateral is being liquidated to satisfy the default terms of unpaid development loans, then that is a failure of the system to some degree. While the type of collateral may be a factor in the viability of any given set of loan terms, difficulties in the transfer and realisation of profits off of collateralized land may in fact show that the more liquidly tradeable "futures" are the more desirable option.

    I suspect that except in cases of natural disaster, honest lenders and honest borrowers will come to accomodation over repayment difficulties long before default is reached. The loan magnitudes and terms should be well with the farmers' abilities from the outset.

    Land makes good collateral for low-default-risk loans largely because it is usually an otherwise unleveraged equity asset, whose market valuation for collateral purposes is largely theoretical due to its relative illiquidity. The assessed collateral value of land may not be favorable to the owner for longer term loans, and borrowers may find themselves losing a billion kwacha asset over default on a decade-old million kwacha loan. Of course in Zambia we must substitute "lease rights" for "ownership" when it comes to land, which may render land collateral less liquid than in other places by inserting a third-party "owner" into the transfer process.


    MrK, I think your idea, "to offer Western retirees the opportunity to enjoy their retirement and teach in Zambia", is great! It would not take very many such persons to make a real difference in skill development and micro-enterprise, at least on a localized basis. The only thing that worries me is their health care expectations, which may exceed their economic contributions over time.

    Perhaps there is some way to have them invest in health care pensions in advance and at a rate sufficient to add the capacity to serve them before they need it, so as to avoid adding patients to an already overstressed healthcare system? Would that make it less attractive for retirees to move?

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  35. Yakima,

    I wonder whether we are making some assumptions here about how "developed" the lending market is?

    Does your explanation still hold in a simple ruralmarket with limited information on borrowers? Or would I be right that where information is limited "land" based collateral will carry a lower interest?

    The policy solution of course is to improve credit information if that is the case - rather than encourage people to use land as collateral [ Mrk's fears on that issue appears justified - am assuming they are based on a view that land is a "right"]

    On credit information - I hear that the setting up of a credit bureau is underway. Should improve the knowledge that lenders have on people - assuming it is rolled out to rural areas. [One would think the Government would have to fix the electoral system first - and of course set up a proper post code system . A certain friend of mine thinks there's cash to be made if a person can design one for Zambia and sell it to the authorities - but that is another topic! :) ]

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  36. Cho,

    I have been trying to think in terms of lending institutions of the savings and loan type of new rural bank we have been discussing elsewhere. I think that once deposits exceed KW$500M (double the starting capital for a deposit taking MFI), then the bank can begin issuing investment credit to local agricultural improvement projects.

    The small scale of the bank and the community which it serves may help banks to better "know their customers" and craft loans accordingly even without formal credit references.

    What I imagine as a typical loan (other than single season production credit for the cost of seed, fertiliser, or other consumable inputs, repaid with proceeds from the harvest) would finance the addition of some long term improvement in productivity for the farm. That covers most anything from planting a grove of fruit trees, to establishing a vermiculture operation which would eliminate fertiliser input costs, to straightforward equipment purchases like plows and pumps. A responsible lending institution will not knowingly allow borrowers to arrange terms which would result in default, under all but extraordinary circumstances.

    However in cases of sufficient risk and scale where collateral security is likely to play a role in determining borrower's interest rates, then in a european or north american context I would say you are absolutely correct in your inference that the "fixed asset" value of land makes it attractive to lenders. In the Zambian context the land "belongs" to the nation as a whole, and is administrated on the nation's behalf by the President and the Chiefs. Therefore the only transferable asset which a bank can claim as collateral against default is the lease rights to use the land.

    In the current circumstance the process for establishment of clear lease tenure, let alone transfer of tenure, is running literally years behind demand. Even if the process for granting tenure is sped up through the institution of Land Boards to grant sub-leases of land leased to them in large blocks, then banks will still have to face the possibility that land use restrictions would prevent conversion of the farm to any other use. In such cases the only means by which the bank could recover would be to operate the farm itself or resell the sub-lease only to a third party who is acceptable to the Land Board.

    In similar circumstances banks may prefer to issue loans collateralized by production futures from the start. The "fixed" nature of land as collateral loses some of its luster in the light of third party ownership and/or use restrictions. It is my hope that tenure rights to land leases will be sufficiently robust to support their use as collateral against investment credit. But I can envision circumstances where the costs associated with the transfer of insufficiently secure tenure would cause lenders to prefer the risks associated with production futures due to their much higher liquidity.

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  37. Yakima,
    Okay I see where you are coming from.
    There are actually three threads on this issue.
    I'll attempt a summary

    1. This thread the key issue we have identified is the need for reforming the lease system - otherwise what Vollarath et al argue may not work. However, you have identified that farmers would also be able to borrow against future yield. All of this leads to greater development of the financial system.

    2. The "A new Government bank for farmers" - identified that a NABARD style system would be a good way forward as opposed to centrally organised system.

    3. The "Access to financial services in Zambia" - is dealing with the issue of credit access to everyone in rural areas (farmers and non-farmers). Land reform does not really help. Here we are looking for a government push and then the NABARD system would stand on its own. So we identified that it is possible for the BOZ to provide grants at bond rates and still pay an interest much lower than is being charged.

    Is this an adequate summary? [would be interested in yours as well as they tend to be more refined than mine!]

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  38. Yakima,

    Perhaps there is some way to have them invest in health care pensions in advance and at a rate sufficient to add the capacity to serve them before they need it, so as to avoid adding patients to an already overstressed healthcare system? Would that make it less attractive for retirees to move?

    You live in the US, but as you know, in Canada, the EU etc. there is universal healthcare already. I don't see how, if necessary, a deal can't be struck between the governments to make sure their healthcare coverage continues in Zambia. This might actually add to the healthcare provision in Zambia.

    ReplyDelete
  39. MrK,

    Absolutely! If the value of their domestic health care plans can be transferred to the Zambian system when they move, then it will almost certainly increase the ability of hospitals to support a wider range of health services.

    One place which might be interested due to a surplus of retirees in the system is Japan. A thousand retired industrialists and engineers from the twentieth century's most prolific industrialization effort to act as mentors for Zambian light industry startups? Um, yes please? It's a good idea. :)

    ReplyDelete
  40. Cho,

    Slowly the individual strands begin to align into a cohesive web, a hopeful sign! :)

    You asked, "Is this an adequate summary?"

    I find it to be quite accurate and succinct, so rather than attempt to reiterate your summarization I will instead indulge myself in exploration of some of the apparent linkages and dependencies.

    One big one is that the success of a new wave of rural banks is going to depend on changing the way small depositors are treated. It is a wonder that Zambia's domestic banking system contains even the paltry US$1.7B it has, given that the interest paid to all but the largest of depositors is actually negative compared to inflation. That means people must pay to leave their money untouched in a savings account. Apparently the banks don't realize how much this hurts them too.

    The new rural banks we have been envisioning will have very small starting capital bases (as low as KW$250M), and will need to make the most of whatever deposits they can accumulate from local savers. Inflation is currently running at around 12%, and the 5yr bond rate is hovering around 14.6%, therefore if all of the initial KW$250M is so invested the operating margin for the bank is only KW$6.5M per year.

    Without larger startup capital or a riskier investment portfolio, the only source of additional capital to invest for income are local savers, who currently keep their excess in cash (or more likely in consumer goods in order to preserve its value against inflation). Instead of the 0% interest (an inflation adjusted -12%) being offered to small deposits currently, these banks must offer interest above inflation (eg. 13%, or an inflation adjusted 1%) in order to attract some savers.

    If we suppose the bank is successful at scraping together some deposits, say KW$10M, then the bank could make some small loans to local farmers, say 10 loans of KW$1M each at 20% interest. The bank pays 13% to the depositor and pockets the remaining 7%, gaining KW$700K, not bad but not enough.

    This is where the NABARD refinancing facility does its thing. Assuming that all ten loans meet the requirements for appropriate development projects, NABARD agrees to loan the bank additional funds equal to 90% of the loan amount at 13% interest. That means the bank now has enough capital on hand to issue another nine KW$1M loans, which when refinanced will in turn enable eight more and so on. With refinancing and reliable borrowers, the KW$10M in small savings deposits can generate capital sufficient for 50-some KW$1M loans, and generate an annual income of KW$3.5M for the bank.

    So with just 4% more capital, the bank's theoretical gross annual income can be raised from KW$6.5M to KW$10M, more than 50%. More savings deposits, more loans. More approved loans, more cheap refinancing. More refinancing, more loans.

    With 50M in deposits, annual gross income jumps to 24M [8% of total capital of 300M, up from 2.6% of the first 250M] and the bank begins to look more viable. With 500M in capital the bank could be taking in as much as 94M per year with which to conduct its operations and still safely back 100% of all 250M in local savings deposits with government bonds. [This gives the bank an annual operating margin of 18.8% of capitalisation, which will persist with growth if the 50/50 low-risk bond to medium-risk loan ratio is continued. On a large enough scale, this style of rural banking could become quite lucrative.]

    By paying depositors inflation-positive interest, the real lending power of the savings base of the bank is not eroded from year to year, allowing the same deposits to be reinvested over and over in local businesses and homes during the saver's lifetime. [And even at only 1% over inflation, the real value of the deposit still doubles in 70 years.]

    Borrowers are getting access to investment credit at just 8% over inflation, putting the means to implement small productivity increases into the hands of farmers and entrepreneurs. [This means that a farmer who can boost productivity by around 20% by borrowing an entire year's income, will be able to pay off their loan, plus interest, in about six or seven years using the effects of the boost alone.]

    NABARD gets to exert control over what sorts of projects most farmers pursue first, by designating to banks which categories of investment are eligible for refinancing. They also turn a modest profit on each loan they support, which with hundreds of banks each issuing hundreds of loans adds up pretty rapidly to a substantial operating budget. This has the added benefit of reducing the long term dependence of development finance on government or donor aid flows.

    It seems a bit unreal, but all four groups: savers, borrowers, lenders and the refinancer all wind up making money on the deal. A fifth group, call it "the nation", gets a functioning backbone of rural credit institutions on which to base social investment funds, housing projects, local government pensions, academic scholarship trust funds, [and diversified investment mutual funds for miners looking to cash in on company stock options ;)], to name just a few.

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  41. One big one is that the success of a new wave of rural banks is going to depend on changing the way small depositors are treated. It is a wonder that Zambia's domestic banking system contains even the paltry US$1.7B it has, given that the interest paid to all but the largest of depositors is actually negative compared to inflation. That means people must pay to leave their money untouched in a savings account.

    It’s even worse, as I found out with my Barclays Account in Ndola (an ‘urban’ area!). I opened my account with Barclays Zambia about 2 years ago. I was very keen to get an account on the ground as it were, so I decided to open an account with Barclays with an initial deposit of K1.2 million. Because at the time I had no immediate plans to do anything with it, I never really bothered to transfer any money there – in fact I found out when I got back to London I couldn’t set up a standing order [the barclays in the UK, is somehow not aligned with the Barclatys there] and so forth which contributed to my not attending sufficiently to the account. To my horror when I went back to Zambia over Xmas last year (a year later), I found my account had a balance of K500,000. [The bank had for whatever reason not been sending me statements to my London address] I asked what happened. They said we charge you monthly for keeping an account with us! It appears not only was my saving being eroded by inflation relative to any interest I was paid on it, I was also being charged a monthly lump sum. Now these are the challenges our poorest people in rural areas who bank with Barclays for example have to go through!

    By paying depositors inflation-positive interest, the real lending power of the savings base of the bank is not eroded from year to year, allowing the same deposits to be reinvested over and over in local businesses and homes during the saver's lifetime. [And even at only 1% over inflation, the real value of the deposit still doubles in 70 years.]

    "Borrowers are getting access to investment credit at just 8% over inflation, putting the means to implement small productivity increases into the hands of farmers and entrepreneurs. [This means that a farmer who can boost productivity by around 20% by borrowing an entire year's income, will be able to pay off their loan, plus interest, in about six or seven years using the effects of the boost alone.]"

    The model is fantastic.

    Question: NABARD presumably is lending the money to the institution with understanding that 8% premium is charged to farmers over and above inflation. Are we accepting this as a price of progress? I think any interest on loans above 13% would work as long as it remains competitive. But of course the rate of expansion may be slower.

    If I have understood your model, I think your model could possibly simulate the appropriate deposit interest rate payed to people, loan rate charged to farmers, loan rate paid to NABARD and the 'size of push from NABARD' that would allow us to predict the number of people (farmers / non-farmers) that can be reached and within what timescale. It would require a couple of iterations, but one can certainly imagine the timescale and number of people to be reached as dictacting the intial loan, deposit and NABARD rates! We of course would need to constrain these by what is competitive and floor ceiling (i.e. the NABARD bond rate and positive real interest/loan rates).

    Its a brilliant dynamic model.

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  42. In reading elsewhere on the importance of Seed Banks to protect farmers against crop diseases and climate change, I got to wondering if it would overburden the new MFIs to add local species banking to their mandate. I rather like the idea of putting reserves of crop biodiversity in the "vault" alongside farmers' financial savings, so I'm going to start calling the proposed new rural banks Seed Banks (SBs).

    I have no idea how practical or expensive that would actually be, but in talking with some of the people from Warmsprings about their museum project it became clear that spending the money to secure their cultural heritage [They had to match the existing preservation standard for any artifact held by any other institution, even if by tradition they were going to rebury it upon recovery. So they saved up and built the biggest and best storage and preservation facilities in the region and promptly demanded all of their ancestral artifacts and human remains back now thank you very much!], had strengthened the connection between the people and their local government. Perhaps SBs that combine provision of credit services with registration and protection of local crop species will bind better with their target communities.

    "Question: NABARD presumably is lending the money to the institution with understanding that 8% premium is charged to farmers over and above inflation. Are we accepting this as a price of progress? I think any interest on loans above 13% would work as long as it remains competitive. But of course the rate of expansion may be slower. " -Cho

    I chose 8% more or less arbitrarily, as the actual margins required by the SBs and NABARD to cover their operating expenses will depend largely on loan volumes. The government's "visible hand" initial push could cover some of these expenses at first, but the growth of the SBs is almost as important as the success of the farm loans themselves, so margins should be high enough and flexible enough to allow SBs to profit from sound management.

    NABARD should also have some flexibility in its terms for refinancing to SBs, so as to have the full range of subtlety available to it in providing competing incentives for targeted project sectors. For example NABARD in India charges a lower refinancing rate for smaller loans than for larger ones (about 0.5% to 1% less), on the theory that the smaller loan amounts go to the neediest people with the least collateral or earning power. This boosts the SBs profit margin on small loans, hopefully offsetting the higher relative overhead costs (it takes longer and costs more to write ten small loans than one big one), and encouraging lending a wider range of borrowers.

    At some point it is to be hoped that savers will have multiple choices of financial institutions which are competing for their deposits. Then the rates paid on savings will also come under market pressure to rise, so placing a ceiling there could constrain SBs from long term competitiveness. Putting a hard floor on interest paid to depositors, say inflation + 1%, is only fair and should be law, and as your outrageous experience shows regulators will have to examine fees in detail as well. There is no reason why depositors should pay a fee for an account that has no activity, especially since deposits that just sit for long periods are the basis for loans which make the bank more money than they are getting by eroding savings with pointless fees. [I mean what are they doing with your money each month that costs so much, are they paying some old man to sit and watch your stacks of cash all night and then take them for a bit of light exercise in the morning? You'd think it was a dog kennel. Did you at least get a nice calendar or a toaster for opening the account?]

    So yes, I agree that the model looks capable of determining an initial set of rates based on desired outcomes and the degree of government "push", as well as outlining an acceptable "float" range within which SBs and NABARD can manuever to suit marhet forces and project specifics. If the first few sets of borrowers must pay a few points more to cover the costs of expanding SBs, freeing NABARD from donor reliance to cover operating budgets, or increasing costs of capital from small depositors who are shopping for better rates, then I do not think they will be unduly harmed in the process. Most of the barriers to lower rates will disappate with increased total loan volume.

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  43. "For example NABARD in India charges a lower refinancing rate for smaller loans than for larger ones (about 0.5% to 1% less), on the theory that the smaller loan amounts go to the neediest people with the least collateral or earning power. This boosts the SBs profit margin on small loans, hopefully offsetting the higher relative overhead costs (it takes longer and costs more to write ten small loans than one big one), and encouraging lending a wider range of borrowers."

    Turning economics on its head!
    Its clearly a system focused on development. Very impressive!

    The rationale of this approach also being that it is also fair. The rich are subsidising the poor with lower borrowing rates :) But in doing so, an eye on the economies of scale is also useful I guess. I am sure the good people at NABARD have thought about.

    "Did you at least get a nice calendar or a toaster for opening the account?

    Not a chance!
    I never got anything apart from longer waits in the bank while they saved the more richer clients who incidentally use a different door to get into the bank! Literally.

    I think nearly every bank in Zambia charges a fee for having an account I think. Some obviously much lower than others.

    I just don't understand the rationale for doing so.

    ReplyDelete

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