Agricultural Transformation in Nepal: Constraints, Migration, ADS and HIMALI

Chandan Sapkota and Arun Rana

Asian Development Bank

Nepal Resident Mission

Presented at South Asia Seminar Series, 26 June 2014

2014-06-26 1

The views expressed in this document are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank, or its Board of Governors, or the governments they represent.

Agriculture Sector at a Glance

Constraints to Agricultural Transformation

Impact of Migration and Remittances

Agriculture Development Strategy

Implementation Experience: HIMALI Project

2014-06-26 2

Presentation Outline

2014-06-26 3

1. Agriculture Sector at a Glance

2014-06-26 4

Declining share of GDP, but still a significant contributor to

GDP growth

65.2

71.6

33.1

0

10

20

30

40

50

60

70

80 Share of GDP

Agriculture Non-agriculture

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0 Contributions to GDP growth

Agriculture Non-agriculture

GDP growth (basic prices)

• Agriculture share of GDP has

dropped to 33.1% from a high of

71.6% in FY1975

• Agriculture sector is still an

important contributor to GDP growth. Around 2/5th of GDP growth

• Highly dependent on monsoon rains

for growth.

2014-06-26 5

Agricultural sector is the largest employer for 15+ years old

28.2

73 66.5

0

10

20

30

40

50

60

70

80

90

Male Female Total Male Female Total Male Female Total

Urban Rural Nepal

15+ years employed in agricutlure sector (% of total employed)

• Largest employer (among 15+ years old

employed population): 66.5% More employed in agriculture sector in rural areas

• Among all labor age groups, agriculture is the

most popular sector for employment 52.3% of workers in the 22-44 age group employed in

agriculture

• Except for those in the highest consumption

quintile, all others are mostly employed in

agriculture sector. 66.7% of workers in the middle consumption quintile

are employed in agriculture

60.1

52.3

70.8

0

10

20

30

40

50

60

70

80

15-24 25-44 45+

Agricultural employment (% of labor age group)

64.6 64.9 68.7

63.7

38.3

0

10

20

30

40

50

60

70

80

Lowest(First)

Second Middle Fourth Highest(Fifth)

Agricultural employment (% of consumption quintiles)

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Majority of households depend on agriculture for livelihood

• Agricultural HHs: 76.3% of total HHs

• Average size of agricultural HH: 5.1 (>4.9 overall avg)

• High share of agriculture employment

• Self-employment in agriculture sector is pretty high: 61.3% of total employment

• Avg size of holding: 0.68 hectares 77.8% of holdings were less than

2 hectares in 2011/12

52.3% of holdings were less than 2 hectares in 1991/92

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1995/96 2003/04 2010/11

Share of employment

Extended econoimcwork

Self non-agriculture

Wage non-agriculture

Self agriculture

Wage agriculture

0.96

0.80

0.68

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1991/92 2001/02 2011/12

Average area of holding (hectare)

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Share of farm income in household total income is declining

Declining size of holdings + declining share of farm income in household income + declining share of wage employment+ still high share of employed in agriculture = …?

Commercialization take-off?

Nascent/evolving stage of transformation?

Low growth trap? Low value added products

High land fragmentation+ high wage growth + low productivity growth = low competitiveness

Inadequate/unreliable supply of inputs

Migration and remittances

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

19

61

19

64

19

67

19

70

19

73

19

76

19

79

19

82

19

85

19

88

19

91

19

94

19

97

20

00

20

03

20

06

20

09

20

12

Cereals yield (Hg/Ha)

Bangladesh India Nepal

Pakistan Sri Lanka

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2. Constraints to Agricultural Transformation

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Why is agriculture sector not taking-off in Nepal?

General features: • Still stuck in subsistence agriculture • Negligible agro-business activities • Weak value chain development

(weak intra-sectoral linkages) • Lack of product specific, coherent

promotion strategies • Terai region the breadbasket of

Nepal Irrigation facilities Trade and transit corridors Large agricultural land

• Mid- and Far-West Least connected region Low agriculture potential (except may

be of region specific niche products) Persistent food insecurity

• Very weak inter-sectoral linkages (agriculture industry)

-Agri sector has to be linked to non-agri sector for meaningful transformation.

What is holding back agricultural growth?

• Market failures? Self-discovery/information

externalities Coordination externalities

• Government failures? Land reforms Taxes/subsidies Governance/monitoring

• Access to finance? • Availability of inputs? • Inadequate and unreliable

infrastructure? Irrigation Transport Energy

Study focused on three specific impediments:

1. Land reforms and regulations

2. Availability of inputs

3. Access to markets

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Three constraints to agricultural transformation

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Land reforms and regulations [1]

0

10

20

30

40

50

60

Less than 0.5 ha 0.5 – 2 ha 2 ha and above

Agricultural holdings by size (percentage of total)

1995/96 2003/04 2010/11

Smaller agricultural holdings are increasing, while bigger holdings are declining.

• Economies of scale? • Productivity? (1/3rd of non-

agri sector)

Type of farming family

Land holding

Share of total

Landless 0-0.1 ha 10.1

Marginal cultivators 0.1-0.3 ha 23.6

Small farmers 0.3-0.5 ha 22.9

Medium farmers 0.5-3.0ha 39.9

Big farmers 3.0-10.0ha 3.3

Very Big farmers >10 ha 0.1

• Lack of scientific land reform Important for proper

utilization and distribution of land

Also seen as vital for sustainable reduction in poverty & inequality

• Very contentious issue • Absentee landlords

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Land reforms and regulations [2]

Recommendations • Implementation of the

amendments to Acts • Implementation of the

updated policy • Proper coordination

among relevant agencies • Increase productivity of

land • Dis-incentivize land

fragmentation

Legal framework • At least 62 Acts and 27

regulations for land governance

• Land Act 1964 first attempt Five amendments based

on various land reform commission reports

Ceiling on land ownership Scientific redistribution

of land proposed

• Land Use Policy 2012 7 categories of land

• Weak implementation

2014-06-26 13

Availability of inputs [1]

• Key inputs Chemical fertilizers

Seeds

Irrigation

Finance

Labor

Machinery/technology diffusion

Infrastructure (energy, roads, ICT)

• Unreliable/inadequate supply

• Shortage of labor in agriculture sector Growth of agri wage > Growth of non-agri

wage

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Paddy Maize Wheat Potato Sugarcane Vegetables

Number of agricultural households (million) using seeds by type

Local Improved Hybrid Total reporting HHs

• A majority of agricultural households still use local seeds

• Productivity is low

23

24

22

21

22

23

24

25

1991/92 2001/02 2011/12

Access to finance (% of agricultural HHs)

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Availability of inputs [2]

Key issues

• Institutional weaknesses Unreliable/inadequate supply by

public enterprises

Coordination failures: AICL, NFC, NSC, NARC, MOI, MOAD

• Misguided policies Fertilizer subsidies crowding out

private suppliers

• Low demand for or low supply of finance? BFIs: 9% of agri HHs

ADBL: 12% of agri HHs

• Low use of modern varieties of seeds

• Out-migration creating shortages of labor

Recommendations • Better institutional

coordination • Subsidy reform to correct

markets + genuine support • Expand microcredit and

microfinance services Matching grants Insurance services

• Investment in sustainable agri market infrastructure Access roads Micro-hydro electricity Irrigation (river/lake/pond

account for 48% of total irrigation by agri HHs)

R&D services

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Access to markets [1]

• Key constraint for expansion of agribusiness activities

• Intermediaries escalating prices Middlemen Transport syndicates

• Tariff, para-tariff and non-tariff barriers

• Lack of warehousing and storage facilities

• Lack of actionable information on market opportunities Capacities of farmers to exploit

available opportunities Timely market and product

information

0

10

20

30

40

50

60

70

80

90

To

mat

o

Pu

mp

kin

th

read

s

Pea

r

Bit

ter

mel

on

Cau

lifl

ow

er

Cu

cum

ber

Price difference bewteen Dharke (Dhading) and Kalamati (Kathmandu)

• Large difference between farm gate price and wholesale price Middlemen, market distortions

Recommendations • Effectively implement the ban syndicates • Market supervision and monitoring against anti-

competitive practices • Link farmers directly with markets to limit

middlemen activities • Favorable trade policy

Tariffs on agricultural inputs should be lower than tariffs on final products

Concerted promotion high potential export products NTIS 2010 identified 7 agro-food products: Cardamom, ginger,

honey, lentil, tea, instant noodles, medicinal herbs and essential oils

• Storage and warehousing facilities • Market research and information availability

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Access to markets [2]

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3. Impact of Migration and Remittances

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Migration, remittances and NELM

• Study focused on the impact of migration and remittances on agriculture productivity

• New Economics of Labor Migration (NELM): Migration leads to a decline

in agri productivity beyond surplus labor

Remittances augment financial resources available to acquire agri inputs and capital assets, i.e. eases HH liquidity constraints

0

5

10

15

20

25

30

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

FY

199

5

FY

199

6

FY

199

7

FY

199

8

FY

199

9

FY

200

0

FY

200

1

FY

200

2

FY

200

3

FY

200

4

FY

200

5

FY

200

6

FY

200

7

FY

200

8

FY

200

9

FY

201

0

FY

201

1

FY

201

2R

FY

201

3P

Rem

itta

nces (

% o

f G

DP

)

Num

ber

of

mig

rant w

ork

ers

Migration and remittances

Number of migrants Remittances (% of GDP)

Remittances inflows amounted to 25.7% of GDP in FY2013

Large out-migration is putting pressures on agriculture sector wages

2014-06-26 19

Data sources and model

Data and general stats

• Use the recent cross-sectional national level household survey data 2,918 migrant households growing

paddy and receiving remittances

Distilled from 5,988 sample households

• Agriculture productivity measured by paddy production per hectare

• Average paddy yield is just 2,842 kg per hectare

• Use of chemical fertilizers is relatively higher among migrant households than non-migrant households; same with ownership of farming assets

Basic model • Migration and remittances are

endogenous to household income and yield.

1. 𝑄𝑐 = 𝛼 + 𝛽1 𝑀 + 𝛽2 𝑅 +

3𝑧𝑄 + 𝜀𝑄

2. 𝑅 = 𝜕0 + 𝜕1 𝑀 + 𝜕2 𝑧𝑅 + 𝜀𝑅

3. 𝑀 = 𝛾0+ 𝛾1 𝑧𝑀 + 𝜀𝑀

• 3 SLS estimate • Instruments:

Avg remittance received in PSU Proportion of migrant population

in PSU Highest education completed by

family member

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Migration, remittances and agriculture yield

Remittances and paddy yield

Migration and paddy yield

Migration • Negative impact of migration on paddy yield

(statistically significant) • One additional migrant labor in the

agriculture household is associated with a loss of about 163 kg per hectare of paddy

• NLSS III: Agricultural wages increased by 127% between 2004 and 2011.

Remittances • Negative impact (but statistically not

significant) • Remittances received by households may

not have been used to acquire capital goods (or agriculture technology) to boost yield

• NLSS III: Almost 80% of remittance income is used for consumption purpose & just 2.4% for capital formation

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Model output and interesting findings

• A person increase in migration is associated with NRs11,644 increase in remittance inflows to agricultural households.

• Proportion of year-round irrigated land and the use of chemical fertilizers positively and significantly affect paddy yield.

• More number of children below 15 years of age is associated with low paddy yield (More working age household members associated with high paddy yield).

• Central region has significantly higher paddy yield compared to the Far-western region.

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Recommendations

• Enact policy measures aimed at channeling remittances to investments in productivity-enhancing agricultural capital assets and inputs. An enabling investment climate helps farmers & entrepreneurs take manageable risk

Legal, policy, institutional, regulatory, political stability, infrastructure

• Enhance skills of both outgoing and returning migrants Migrants earn more abroad and remit more income to households,

Enables agri HHs to acquire more productivity-enhancing capital assets even after discounting for the high share of consumption expenditure.

Skills enhancement of returning migrants would help them engage more productively in the agriculture sector, potentially helping to increase agriculture yield.

• Help migrants convert remittance savings into productive investments by Bridging skills gap

Diversifying economic activities (hence income generating sources)

Creating a financial system that is able to mop up small amounts of savings from multiple sources and channel them into productive business purposes

• Reducing the cost of remitting money, financial literary, lowering barriers to entrepreneurship, and maintaining overall macroeconomic stability.

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4. Agricultural Development Strategy (ADS)

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ADS and agricultural transformation

ADS is designed to guide agricultural sector over the next 20 years and structurally transform agriculture sector by achieving the following outcomes and outputs.

Improved governance Credible policy commitment Improved institutional

coordination Effective implementation

support; M&E

Higher productivity Decentralized extension system Strengthened agri edu system Adequately sized farms to use

land efficiently and sustainably Improved irrigation efficiency Timely and quality agri inputs Mechanization through pvt sector

Profitable commercialization Improved investment climate Contractual farming Supportive tax policy Financial & agri insurance

products Competitive agri value chains Rural roads networks

Increased competitiveness Agri market information ITC products for market

intelligence Develop market infrastructure Rural electrification Increased agri exports

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5. Implementation Experience: HIMALI Project

HIGH MOUNTAIN AGRIBUSINESS & LIVELIHOOD

IMPROVEMENT PROJECT (HIMALI)

2014-06-26 26

• $20 million ADF grant

• Approved in 2011 (effective Sep. 2011) Closing: Oct 2017

• Grants for agribusiness development ($10.6 million)

- 80% grant share (<$50,000 value)

- 50% grant share (>$50,000 value)

- Max. grant amount $250,000

• Registered cooperatives, companies, individuals

• Livestock, horticulture, vegetables & cash crops, fisheries, medicinal & aromatic plants

• Finance business establishment/development cost (operational cost on limited basis)

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WHAT’S HAPPENING?

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• To date, around 400 proposals received, 100 contracted

- Livestock, horticulture, aquaculture, vegetables, medicinal

and aromatic plants

• Total grants committed: $1.6 million

• Average size of agribusiness: $23,000

• Two new projects recently approved

High-density apple farming ($0.5 million)

Medicinal herb processing ($0.6 million)

2014-06-26 29

IMPROVED CATTLE FARMING: RASUWA Total investment: $28,000

Grant share: $$22,500

Expected revenue: $54,000 per year

RAINBOW TROUT FARM: RASUWA

2014-06-26 30

Total investment cost: $35,000

Grant share: $28,000

Revenue: $26,000 per year

COMMUNITY-BASED NAK FARMING

2014-06-26 31

Women-led cooperative

60 Naks purchased with project grant supplying

milk to the DDC cheese factory

Revenue: $14,000 per year

MOBILE CHEESE FACTORY:

GATLANG, RASUWA

2014-06-26 32

Production: > 9 MT per year; capacity to

Processing capacity: 1,000 liters of milk per day

CHALLENGE # 1: ACCESSIBILITY

2014-06-26 33

CHALLENGE #2: LACK OF INPUTS

2014-06-26 34

• Lack of improved breeds of cattle, sheep, goats for livestock development (stringent quarantine to import)

• Degraded/declining pastureland in alpine areas

• Fertilizers and organic manure

• Weak extension services (pest control & other improved practices)

• Lack of irrigation

• Feed for trout imported from Kathmandu (high cost due to protein content from shrimp imported from India or Bangladesh)

CHALLENGE #3: LACK OF HUMAN RESOURCES

& IDEAS

2014-06-26 35

• High cost of labor makes labor-intensive agribusinesses not viable

- Affecting livestock businesses

• Lack of mechanization/skills

• Innovative businesses lacking despite potential

- Processed meats

- Cheese

- Medicinal and aromatic plants

• Cultural factors

- Entrepreneurs with money have no idea what’s out there

- Weak linkages with local people who have no money but know what’s available, but they don’t know the global market and demand

CHALLENGE # 4: LAND ISSUES

2014-06-26 36

• Traditional land use rights not accepted formally

• Local control land in many areas

• Protected areas: Unclear government policies

CHALLENGE # 5: ACCESS TO FINANCE

2014-06-26 37

• Banking sector confined to Kathmandu and urban

areas

• Lack of knowledge of mountain resources

• Willingness to take risk low

CHALLENGE # 6: CERTIFICATION & QUALITY

CONTROL

2014-06-26 38

• No certification agency

• Weak quality control mechanisms

• Hampering exports

2014-06-26 39

THANK YOU!