Microfinance for Food and Development

VIDEO: Pardee House Seminar

January 21, 2009

A panel of experts discussed the merits and challenges of using microfinance tools as a means of assisting poor farmers in developing countries during the first Pardee House seminar of the new semester on January 21. This seminar was the second in a series of seminars related to food and development organized by the Frederick S. Pardee Center for the Study of the Longer Range Future with support from The Netherlands’ Ministry of Agriculture, Land and Food Quality (LNV). (The first was held in December in Islamabad). The panel discussion moderated by Dr. Pablo Suarez, Research Fellow at the Boston University Pardee Center who works with the Red Cross/Red Crescent Climate Centre. The other panelists were Dr. Ann Helwege, Adjunct Professor at the Department of International Relations at Boston University and a Senior Research Fellow at Global Development and Environment Institute (GDAE) at Tufts University, and Marjorie Victor, Senior Policy Advisor for Oxfam America’s Private Sector Team.

Ann Helwege, whose research focuses on anti-poverty measures in Latin America, noted that today more than enough food is produced to feed the world and yet more than 900 million people – or roughly 14 percent of the world’s population – remain under-nourished. This number is continuing to rise despite a goal set in 1996 at a food summit of the UN’s Food and Agriculture Organization (FAO) to dramatically reduce undernourishment within a decade.

She noted that a recent FAO study found that three-quarters of the rural poor around the world are net food buyers, and with rising food prices, landless wage laborers who work on small farms are especially hard hit. While economists argue that rising food prices will help poor rural farmers and workers in the long run as the farmers can sell their crops at high prices, wages don’t increase as quickly as food prices.Traditional government lending programs offering low-interest loans tend to focus on particular crops types and otherwise favor larger farms that serve urban centers, and typically don’t reach the small rural farmers.

Microcredit – or small-scale loans targeted to small farms with a relatively short payback period – reach a more diverse set of borrowers with varying levels of income, and provide payments that are smaller but more frequent.  “This is a great alternative to traditional government credit programs,” Helwege said.

Marjorie Victor, whose work with Oxfam on microfinance and microinsurance programs currently focuses on  smallholder farmers in Ethiopia, called microfinance tools “part of a complex solution” but said such tools have proved to be both effective and important in Ethiopia, where the government mandates that microfinance lenders specifically must serve the rural poor. Seventy percent of farmers in the rural northern region of the country where Oxfam is working report that  micro credit has helped to improve their situation, Victor said.

Oxfam is now working with insurance companies to develop a “climate insurance” tool to provide support for small farms in the event of droughts, which may become a more serious threat in a changing climate.Victor said that the severe famine in Ethiopia in 1984 that killed more than one million people was triggered not by one massive sudden, unexpected drought event but by a not-so-extreme drought preceded by several years of poor rains that had eroded farmers’ ability to withstand the continued reduction in crop yields.Farmers need “the ability to absorb the small shocks” and microinsurance may be a way to do that.

Pablo Suarez discussed the need to tie microfinance tools and programs to increased knowledge about future climate conditions on food production at small farms as well as to connect microfinance programs to technologies and institutions that can help farmers survive difficult times.

He cited an example in Malawi where, in response to learning that scientific climate change reports suggest that severe floods were likely to occur more regularly, subsistence farmers decided to switch from raising chickens, which drown in floods, to raising ducks, which are able to survive in floods. With access to small loans, farmers were able to purchase ducks and eventually make additional money by selling the ducks to surrounding communities.

Suarez also described a pilot project in Malawi in which farmers, banks and insurance companies are working together to provide drought insurance to small farmers. Beneficiaries will use microfinance loans bundled to insurance to get high-quality seeds. When rains are good, the improved seeds increase yields and farmers can use a fraction of the additional profits to pay back the loans (cost of seeds plus insurance premiums plus interest). In bad years, insurance companies will repay the loan.

“We need aggressive innovation – we need to be much more risk-taking,” said Suarez, adding that partnerships among the public and private sectors and academic researchers, and across geographic scales will be important factors moving forward.

The seminar is one of three that the Pardee Center will hold on food security and development issues in connection to the agenda of the forthcoming meeting of the UN Commission on Sustainable Development (UN CSD).

Video of the seminar will be available here soon.  A preview was featured in BU Today on January 21.