Defining Practical Guidelines for Evaluating Long-Term Smallholder Decision-Making in Developing Countries

Abstract

Upon developing a new agricultural technology, national agricultural research services (NARSs) and international agricultural research centres (IARCs) need to determine whether the innovation will provide long-term, sustainable benefits to their targeted stakeholders, usually smallholder farmers in developing countries. To determine this, researchers employ private investment analysis to assess the net benefits to smallholders of adopting the new technology. Private investment analysis often concludes that investments with distant future benefits, such as resource conservation, pasture improvement and livestock breeding programs, are not profitable because the short-term costs outweigh the long-run benefits. Yet, it is not uncommon to find smallholders making long-term investments of this type. This apparent contradiction between investment analysis and investment behaviour suggests there may be flaws in the methods used to assess private investment decisions in such contexts. The problem with the standard method of investment analysis is that it may not properly account for how smallholders in developing countries value their own (non-monetary) labour and capital costs and how they value future outcomes. In standard investment analysis, non-monetary benefits and costs are converted into monetary (cash) terms using a seemingly appropriate measure, such as market wage or rental rate. In developing countries, however, the opportunity costs of labour and capital, such as bullocks or tractors, may be near zero, unobservable, or simply difficult to estimate due to the presence of imperfect or failed labour and capital markets. Opportunity costs may also vary significantly through the year due to the seasonality of production. Using costs associated with a harvest period may not be appropriate for the off-season. Furthermore, in these circumstances a premium is placed on cash since market imperfections make cash a scarce commodity. In this context, using the market wage or rental rate for non-monetary costs and putting a cash value on these inputs may overestimate the costs of projects. Additionally, by assuming that all activities can be directly converted to cash assumes that the value of these activities may be discounted in a manner similar to cash, which for standard analysis is done using the interest rate on borrowed funds. However, given the premium placed on cash in these economies, such an assumption may be incorrect. Future outcomes from these activities may need to be evaluated using an alternative method.