The World Bank projects that agriculture and agribusiness in Africa will grow to be a US$1 trillion industry in Africa by 2030. To promote this outcome, the continent must review its incentive structures.

Agriculture averages 24% of GDP across the continent. With post-harvest activities taken into account, agriculture-related industry accounts for nearly half of all economic activity in sub-Saharan Africa.

The region holds about half of the world’s fertile and as-yet-unused land – and yet it spends US$25 billion annually importing food. It also uses only a tiny percentage of its renewable water resources.

The role of the small players

The potential growth of Africa’s food and beverage markets will only be possible with adequate investment in small and medium-sized agribusiness enterprises.

Small African firms engaged in agribusiness greatly outnumber the large players. Former Malawian president Bingu Wa Mutharika observed:

“In West Africa, 75% of agriculture-related firms are micro or small enterprises, 20% are semi-industrial, and 5% are industrial.”

Value chains in many African countries feature an informal chain that serves lower-income consumers and a formal chain that caters for high-income domestic consumers or exports. In many sectors the vast majority of the volume moves through the smaller, less formal businesses. More than 95% of the fruit and vegetables produced in Kenya move through smallholders and small and medium enterprises (SMEs).

Policymakers need to support agribusiness and technology incubators, export-processing zones and production networks. They must also sharpen the skills associated with these sectors.

Banks and financial institutions also play key roles in fostering technological innovation and supporting investment in homegrown businesses. Unfortunately, their record in promoting technological innovation in Africa has been poor.

Capital markets have played a critical role in creating SMEs in developed countries. They bring money to the table and also help groom small and medium-sized start-ups into successful enterprises. Venture capital in Africa, however, barely exists outside South Africa.

African countries also need to make a concerted effort to leverage expertise in the diaspora. This cohort provides links to existing know-how, establish links to global markets and train local workers to perform new tasks.

Much is already known about how to support business development. The available policy tools include:

direct financing via matching grants;

taxation policies;

government or public procurement policies;

advance purchase arrangements; and

prizes to recognise creativity and innovation.

These can be complemented by simple ways to promote rural innovation that involve low levels of funding, higher local commitments and consistent government policy. For example, China’s mission-oriented “Spark Program”, created to popularise modern technology in rural areas, had spread to more than 90% of the country’s counties by 2005.

What China did for small businesses

There is growing evidence that the Chinese economic miracle is a consequence of the rural entrepreneurship which started in the 1980s. This contradicts classical interpretations that focus on state-led enterprises and receptiveness to foreign direct investment.

Millions of township and village enterprises were created in provinces like Zhejiang, Anhui and Hunan. This played a key role in stimulating rural industrialisation. Over the past 60 years, China has experimented extensively with policies and programmes to encourage the growth of rural enterprises. These include providing isolated agricultural areas with key producer inputs and access to post-harvest, value-added food processing.

By 1995, China’s village enterprises had helped bring about a revolution in the country’s agriculture. They had evolved to account for approximately 25% of GDP, 66% of all rural economic output and more than 33% of total export earnings. Most of them have become private enterprises that focus on areas outside agricultural inputs or food processing.

China’s initial rural enterprise strategy focused on the so-called five small industries it deemed crucial to agricultural growth:

chemical fertiliser;

cement;

energy;

iron and steel; and

farm machinery.

With strong backward linkages between these rural enterprises and Chinese farmers, agricultural development in China grew substantially in the late 1970s and 1980s. This happened through farmland capital construction, chemical fertilisation and mechanisation. This expansion, coupled with high population growth, led to a surplus of labour and a scarcity of farmland.

As a result, China’s rural enterprises increasingly shifted from supplying agricultural producer inputs to labour-intensive consumer goods for domestic and international markets.

From the mid-1980s to the 1990s, China’s township and village enterprises saw explosive growth in these areas. At the same time they continued to supply agricultural producers with access to key inputs, new technologies and food-processing services. The most successful were those with strong links to:

urban and peri-urban industries with which they could form joint ventures and share technical information;

those in private ownership; and

those who were willing to shift from supplying producer inputs for farmers to manufacturing consumer goods.

China’s experience provides a mechanism for enhancing rural access to agricultural inputs such as fertilisers and mechanisation, as well as post-harvest food processing. Rural enterprises may make the most sense in areas where farm-to-market roads cannot be easily established.

Along with sparking agricultural productivity, rural enterprises may also help provide employment for farm labourers who have been displaced by agricultural mechanisation.

By keeping workers and economic activity in rural areas, China has helped expand rural markets and limit rural-urban migration. This has also helped create conditions under which it is easier for the government to provide key social services such as health care and education.

Township and village enterprises enjoyed government support, but retained a degree of autonomy in their operations.

The way forward

Some non-profit organisations and foundations are experimenting with promoting rural entrepreneurship by donating cows or other livestock to rural communities. Organisations like Heifer International provide cows, along with training about how to raise them and profit from animal husbandry.

But the impact of these programmes is relatively limited. In Malawi, for instance, Heifer International is implementing a programme alongside USAID that is designed to stimulate a dairy industry. But it serves only 180 smallholder farmers.

The lesson from China’s experience is that development must be viewed as an expression of human potentialities, not as a product of external interventions.

This article is published in collaboration with Quartz Africa. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Calestous Juma is Professor of the Practice of International Development at Harvard Kennedy School (HKS).

Image: Koos Mthimkhulu inspects his crop at his farm in Senekal, about 287km (178 miles) in the Eastern Free State, in this February 29, 2012 file photo. REUTERS.