Cultivation by smallholders is the hallmark of agriculture in much of Sub-Saharan Africa, Latin America, and South Asia, where the intensity and density of poverty remains high. In these regions, most of these smallholders practice either subsistence farming or operate largely in local markets due to lack of access to more lucrative markets at provincial, national, or global levels.* Thus, incentives remain weak, investments remain low, and the level of technology adoption and productivity is at a minimum, resulting in a low-level equilibrium poverty trap.

Two instruments appear critical to break this deadlock for the smallholders: one is physical infrastructure—information technology, roads, ports, and so on—which connects smallholders to markets; the other is the role of accompanying institutions that can reduce the marketing risk and transaction costs in the exchange process between producers and consumers. Due to their small production surpluses, smallholders are generally exposed to higher risks and transaction costs, so innovative institutions that link “farms to markets” thereby reducing their transaction costs and minimizing their risk will increase the incentive for smallholders to participate.

The exact nature of infrastructure and institutions that can enable smallholders to transcend subsistence farming and actively participate in provincial, national, and international markets vary across countries and even across regions within countries. This project attempts to develop a framework that captures this heterogeneity, and identify and prioritize the types of institutions and infrastructure that various types of smallholders require to improve market links. Appropriate policies of investment in infrastructure need to be combined with well-functioning market institutions to take advantage of market opportunities that will sustain increased agricultural output and raise rural incomes.

Goals and Objectives

This project provides strategic inputs to strengthen the institutional and infrastructure base necessary to respond to the heterogeneity among smallholders and to support their competitiveness in rural areas both in the production and in the marketing of their products. It also aims to improve knowledge on the impact of complementary investment in rural institutions that can reduce the marketing risk and transaction costs (such as land titling, credit markets, contract farming, vertically integrated schemes, market information systems, commercial rules and laws, commodity exchanges, warehouse receipt systems, and producer and trader associations on economic coordination) and infrastructure—in terms of capital-intensive infrastructure (roads, electricity, potable water and drainage, water for irrigation, and telecommunications) and post-harvest technologies (storage services, processing infrastructure, and so on)—on market development and poverty reduction.

The specific objectives of this project are:
(a) identifying the bottlenecks (physical or institutional) and constraints faced by small farmers in developing countries in their attempts to raise income through agricultural commercialization;
(b) analyzing alternative policies, regulations, investments (public, private or mixed), and institutional arrangements that alleviate the identified bottlenecks and constraints;
(c) improving the knowledge on impact of complementary investments in rural infrastructure and institutions that allow small farmers to participate in agricultural markets, particularly markets for high-value agricultural commodities; and
(d) strengthening the capacity of policymakers and researchers in targeted countries to undertake policy research concerning the role of marketing policies, institutions, and investments in raising the incomes of small farmers and other poor households.

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* In South Asia, out of 125 million farm holdings, more than 80 percent have an average size of 0.6 hectare, and farmers with less than 2 hectares account for 40 percent of total foodgrain production according to IFPRI findings. In Sub-Saharan Africa, more than two-thirds of the holdings have an average size of less than one hectare and account for over 90 percent of agricultural output. In Latin America, the FAO estimated that the largest 7 percent of landholdings in the region (those above 100 hectares) accounted for 77 percent of the land, while the smallest 60 percent had only 4 percent of the land.