Large land deals, outsourcing, and responsible development

Vox | 24 July 2009

Daniel D. Bradlow

Land deals involving poor countries are booming and have been met with some scepticism. This column says that these transactions can bring many benefits to the host country if undertaken responsibly. It recommends rules including adequate transparency, social and environmental standards, a grievance mechanism, and a fair local distribution of the benefits.

Few economic issues generate more heated debate than trade in agriculture and foreign investment in land. When these two issues combine, the consequences can be profound and politically explosive. For example, one of the causes of the recent political turmoil in Madagascar was that the government was planning to reach an agreement with a Korean company, involving 1.3 million hectare of land, approximately half the country’s arable land. The company intended to use the land to grow maize and palm oil for export to Korea. Similar deals, each involving hundreds of thousands of hectares, have been concluded with foreign investors in countries like Sudan, the Democratic Republic of Congo, Ethiopia, Ukraine, and the Philippines (see Cotula et al 2009). Research by the International Food Policy Research Institute (IFPRI), cited in The Economist (2009), indicates that 15-20 million hectare of farmland in poor countries, primarily in Africa, have been the subject of either transactions or talks involving foreign investors since 2006 (von Braun and Meinzin-Dick 2009). They estimate the total value of these deals at $20-30 billion.

Foreign investments in agriculture are certainly not new. But these land transactions, which include outright sales, leasing arrangements, and contract farming arrangements, can be distinguished from the “standard” foreign investments in agriculture by more than just their scale.

Causes and consequences

Their purpose is strategic rather than purely commercial. The primary motive for many of these transactions is to insulate the foreign investor’s home country from the consequences of possible international food or energy crises. In many cases, the foreign investor seeks to secure a food supply so that its home state is not affected when there are disruptions in world food markets. In other cases, the goal is to produce crops for biofuel consumption in the home country. This means that, in effect, these transactions are a form of outsourcing – countries that are short of land and/or water are meeting their agricultural needs in poor countries that are willing to trade their land, water, and food supply for cash. In the case of Ethiopia, for example, this means that its land and water are being used to grow wheat for Saudi consumers, while some of its citizens rely on the World Food Program for their food.

To be fair, these transactions can bring benefits to the host country in addition to foreign exchange and potential tax revenue. Some of the labour on these large-scale farms is likely to be local. There will be some technology transfer between the foreign producer and local farmers. The Chinese, for example, have set up several agricultural research stations in Africa. Finally, there should be scope for local suppliers to provide goods and services to the new entity.

These transactions raise a number of important trade and development policy issues. They highlight the need for an agreement on trade in agricultural products. As long as rich countries continue to distort agricultural markets with subsidies of various kinds, it will be impossible for developing countries to freely trade and earn a fair return on their agricultural products. It also leaves them with no choice other than to consider deals that, regardless of their long-term costs, offer quick money.

In addition, these deals should be more transparent. Currently, there is not a lot of publicly available information on these transactions. This is troubling for two reasons. There is a not-inconsiderable risk of corruption associated with deals of this size and importance. Greater transparency would help mitigate this risk. Furthermore, the host state population, which will have to live with the consequences of these arrangements, are entitled to information on their expected social and environmental impacts.

In fact, these transactions are likely to have substantial environmental consequences. For example, the key driver for some of these transactions is water. Instead of buying wheat on an open market, a water-poor country like Saudi Arabia uses its wealth to gain control over the land and water of one of its potential wheat exporters. Similarly, the Chinese decision to produce palm oil in the Democratic Republic of Congo allows it to take advantage of another country’s land and water to produce relatively clean fuel for its own use, thereby reducing its need to make trade-offs between food and fuel in using its natural resources to meet its own needs.

The social consequences will also be significant. For example, given the scale of these transactions, it is probable that they, like many large projects, will result in the involuntary relocation of people. In addition, as is often the case in development projects, it is possible that the people being relocated will have lived for generations in the area, with or without clear legal title. Some of them are also likely to belong to minority or indigenous groups. Moreover, in many cases this land will contain sites of cultural and spiritual significance to these people and others in the region.

Failure to adequately account for these social and environmental consequences not only raises the risk that the transactions will cause serious human and environmental damage but increases the chance that the project will fail.

What should be done?

These transactions may remind some of colonial-era natural resource concession agreements. However, this would be misleading. For one thing, the host countries are now independent states. It is their sovereign right to manage their natural resources, including land, as they see fit. Thus, they are free to enter into arrangements with foreign investors regarding the use of their arable land.

However, the rights of sovereign states are not unlimited. Their land use policies and operations must be consistent with their international legal obligations, including those arising from international human rights and international environmental law. In addition, despite the temptations to make quick returns, both best international practices and prudence should convince host countries and potential foreign investors to ensure that the transactions are undertaken in an economically, socially, environmentally, and culturally responsible manner. This means that they should:

If the host state and foreign investors act in conformity with these suggestions, they will maximise the prospects that any large-scale land transaction benefits all stakeholders and minimise the chances of concluding harmful deals. As both the former President of Madagascar and the President of Daewoo Logistics have learned, failing to do so can have very unpleasant consequences indeed.

References

Cotula, L. S. Vermeulen, R.Leonard, J. Keely (2009) “Land Grab or Development Opportunity: Agricultural Investment and International Land Deals in Africa” (FAO, IIED and IFAD).

The Economist (2009) “Buying Farmland Abroad: Outsourcing’s Third Wave”, 21 May 2009.

Braun, J. von and R. Meinzin-Dick (2009), “’Land Grabbing’ By Foreign Investors in Developing Countries: Risk and Opportunities” IFPRI Policy Brief #13.
URL to Article: https://farmlandgrab.org/post/view/6519

Source: Vox 
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