Proceedings of the Standing Senate Committee on
Agriculture and
Forestry
Issue 12 - Evidence
OTTAWA, Tuesday, April 28, 1998
The Standing Senate Committee on Agriculture and Forestry met this day at 5:37 a.m. to study the present state and future of agriculture in Canada.
Senator Eugene Whelan (Deputy Chairman) in the Chair.
[English]
The Deputy Chairman: Honourable senators, our guest tonight is Alex F. McCalla. His roots are Canadian, from Alberta, so he knows Canada and he knows many people in Alberta.
Please proceed, Mr. McCalla.
Mr. Alex McCalla, Director, Rural Development to the World Bank, Washington, D.C., and Professor of Agricultural Economics, University of California-Davis: Honourable senators, it is an incredible privilege for me to be here, not only to renew acquaintances with my college classmate, Senator Dan Hays, but more importantly to have the opportunity to share some thoughts with you on rural development and agriculture, both of which are high priorities to the World Bank.
It is nice to have the chance to talk to Canadians about the needs as we see them for a renewed international commitment to agricultural research, to agricultural and rural development as a major requirement in the overall process of economic development.
I would like to begin by quickly saying a few words about what I see as the challenge. Then I would like to talk a bit about what the bank is trying to do and what we are trying to elicit in terms of partnerships from other agencies in other countries, and thus the visit to Canada. I will then close my brief remarks by saying a few things about why I think it is in Canada's interest to be involved and supportive of the kinds of efforts we are undertaking, in collaboration with other partners.
If you think about the issue of poverty reduction on a global basis, which is one of the major goals of the World Bank; if you think about improved food security, decreasing the number of people who are malnourished, now somewhere in the neighbourhood of 850 million; if you think about providing better access to food for the 2.5 more billion people who will live in the world by 2025; and if you are concerned about natural resource management, then you must be concerned about what the World Bank does in the rural sector of many countries. These goals of poverty reduction, food security and natural resource management cannot be met unless policies and programs are in place which foster improvements in rural development and rural livelihoods. Central to that is improving the productivity and profitability of agriculture, and pivotal to that is research and technology development.
That is the nub of the story, as I see it. It seems to me a very obvious story. However, when I came to the bank three-and-a-half years ago, this story was not well understood. I went back, in some sense, to basics and asked why we should be concerned with rural development.
I should start by confessing that the World Bank's investments in rural development have declined substantially from a high of about $6 billion a year in new investments in the late 1980s to a low below $2.4 billion in the middle 1990s. We were concerned as to why that fall had occurred. I will say a few words about that as we proceed.
Why should we be concerned about rural development? Data suggests that poverty is still predominantly a rural issue. Seventy per cent of the world's poor in the developing countries we deal with live in rural areas, and the majority of that 70 per cent depend on agriculture for some or all of their livelihood. Therefore, if you are going to address the question of poverty, you must address the question of improving the well-being of rural people.
The second reality is that food security requires expanded access to food by poor people. The majority of the poor, as I have just argued, live in rural areas. Therefore, increasing food production directly affects those rural dwellers who are hungry. Food security also requires increasing food productivity and production, which in general brings with it more efficient production. This means lower prices for the urban poor. The urban poor in developing countries spend 70 to 80 per cent of their disposable income on food, so reduced food prices mean an increase in income. If you think about it in that context, not only from the point of view of improving food security on the farm, but improving food security in the city, increases in productivity and profitability in agriculture are crucial.
The third point is that nearly 80 per cent of the world's arable land is managed by millions of small farmers in most instances. Agriculture the world over uses more than 70 per cent of the available fresh water in terms of irrigation. In some countries it is as high as 90 per cent. India is an example. Therefore, if you are to have policies and programs to improve natural resource management, you must do it through the rural sector.
All of that seemed very obvious to me when I came to the bank, but it was not a story that was well understood by my colleagues there, nor was it well accepted by our developing country partners. Therefore, we set about to ask why we have had this reduction in interest in agricultural development and rural development when the issues remain significantly the same as they were 15 or 20 years ago.
Very quickly I discovered that people judged agriculture to be, if not unimportant, not a lead sector in the process of development. They saw agriculture in the process of development as a declining sector and in very rich countries as a relatively small sector. Therefore, it was a sector judged not to be one in which there should be significant investment. Yet the history of every country, including Canada and the United States, indicates that agriculture has played an absolutely critical role in the early stages of development. If you did not invest in agriculture, technology, education, infrastructure and market development, then the country developed much more slowly. The evidence of that, even in the developing world, is there. In Japan, Korea, Taiwan, Malaysia and Thailand, you find evidence of this, as well as in Latin America and Chile. Nevertheless, there was a perception that this was an unimportant sector that one could ignore.
When we talked to people in developing countries, they tended to see agriculture as a source of income and revenue, so they taxed the sector heavily through overvalued exchange rates, high levels of protection and by directly requisitioning food at low prices.
We also found a significant complacency about global food issues. There was not a full understanding that we are looking at 2.5 billion more people by the year 2025. With even modest rates of income growth, that will mean almost a doubling of food needs in the developing countries. Most of that increase in population will occur in developing countries, and the equivalent of that increase will occur in the cities of developing countries. There will be a three-fold increase in city population in the next 30 years in developing countries. This has enormous implications not only for food requirements, but for the food distribution and management system. How do you feed that increased number of people? Again, there was complacency about the fact that it has been easy to do for the last 30 years. We had the green revolution. We brought a lot more land under irrigation. We doubled yields and production, and we thought it would be easy to do again.
However, the reality is, in my judgement at least, that there is very little high quality land left to bring into production. If we do expand land area, we will expand it on to fragile and marginal areas that will have environmental consequences in terms of deforestation and desertification. I would also argue that there is relatively little space left for expanded irrigation.
The reality is that in the next 30 years we must double production on roughly the same land we have now and do it in a way that is environmentally non-degrading. I submit that most of that increase in production will have to occur in the developing world because the reality is that 90 per cent of the world's food supply is consumed in the country in which it is produced. That varies by commodity. It is 80 per cent in terms of wheat, but it is 96 per cent in terms of rice. That doubling of production will involve a significant increase in production in developing countries.
Even with that, there is likely to be a significant expansion in food trade. I would estimate that there will be a doubling of the food trade as well, but it will still remain a relatively small part of overall food needs.
The issue, therefore, was that somehow or other the perception was not there that doubling the yields would require continued and in fact increased investment in research when research investments were declining, both in developed countries and in the aid programs of which unfortunately CIDA is one. Emphasis on agriculture and rural development, in particular on research, has declined.
The third or fourth perception that we ran across was that the world was awash in food, that we were sitting on piles of surpluses that would be available to meet all these needs easily. Yet I think the price increase in 1995-96, when we ran stocks down to just 14 per cent of annual consumption and virtually eliminated publicly held stocks in the United States and in the European Union, made us realize that there was not a substantial cushion on which we could build. We are really talking about a growth in food production, not a utilization of existing stocks.
With those considerations, we explored what we had been doing internally. We discovered that our efforts in integrated rural development were not working that well either. We had a large portfolio, $6 billion of new lending per year in the late 1980s, but fully 50 per cent of the projects were judged unsatisfactory at conclusion.
We were also doing some things that we probably should not have been doing, and we were not doing them very well. These were things that the private sector would have done much better. We were subsidizing credit in large quantities, without recognizing that as soon as the subsidy was withdrawn, the credit stopped, since farmers had invested in things that were non-sustainable. Furthermore, we had placed relatively limited attention on the importance of policy. I am not talking about agricultural policy; I am talking about macro policy. Having macro policies in place that significantly tax agriculture, as was done in country after country after country -- with 30, 40, 50 per cent taxes on agriculture through exchange rate over-valuation, high levels of protection, direct requisitions of food -- meant that the best project in the world was not going to work if there were no incentives to make farmers do what was desired.
With those learning events, we put together a strategy with the strong support of our new president, Mr. James Wolfensohn, to revitalize and refocus the bank's interest in agriculture and rural development. I am pleased to say that our activities in the rural and agricultural sector have improved somewhat. Our lending in 1998 was about $3.8 billion, so it is up somewhat. I am not so concerned about the numbers as I am about the attention given to the issues and serious efforts that are ongoing in as many as 15 of our focus countries on improving the policy environment and refocusing attention on agriculture and rural development.
That strategy, Mr. Chairman, is here, and I will give you a copy. I alert the members of the committee that I have four or possibly more copies if you would like one at the conclusion of our discussion.
What we have then done, in taking this to the executive directors of the World Bank, is to get a commitment by the president, the senior management and the board to revitalize and refocus our attention on rural development, in a very different way than we did it before. We recognize that while you have to think about rural development as a coherent, integrated topic, it is not integrated at the national capital, nor at the provincial capital. It is integrated only at the community level, and it is the community people who bring all the pieces -- education, roads, production -- together. Yet we were operating rural development programs as if they did not matter because we were planning and staffing them in the national capital, and then letting what little bit was left trickle down to the bottom.
We have completely changed our attitude. We have said that policy matters, that we must have decentralized, participatory, community-based development, that technology is important, that we should not be doing things that the private sector does better. We really should be focusing more and more on investing in infrastructure and on creating an environment in which the private sector can function. After all, one of the things that I think we sometimes do not emphasize as much as we should is that the largest set of private sector operators in the world are farmers. Yet we tend at many times to treat them as if they are not entrepreneurs or farmers.
We have a new initiative. It is a very complex and difficult challenge that requires partnerships. It requires the effort of many more people than the World Bank. One of our reasons for visiting Canada is to elicit support for a new approach and more attention to rural development.
I should like to say a word about the centrality of research in agriculture to all this. There is an organization, chaired by Mr. Serageldin, called the Consultative Group on International Agricultural Research (CGIAR), which has been in existence since 1971. It is a system of 16 international research institutes scattered around the developing world. The nearest one to us is CIMMYT in Mexico, which does research on wheat and maize or corn. There are 16 others of these. The original two, the International Rice Research Institute and CIMMYT, were the originators of the so-called green revolution crops, the semi-dwarf rices and wheats which were very instrumental in significantly increasing output in the 1960s and 1970s. The CGIAR is a consortium of 22 developed country donors. Twenty-one developing countries now contribute to the support of this research, plus international organizations such as the World Bank and the Regional Development Bank.
This set of international centres is making a contribution far beyond its 4 per cent of the global investment in research to the issues of global food security. Unfortunately, with the decline in support for research and agriculture in general, the CGIAR has faced serious financial constraints in the 1990s. I am here in part to persuade Canada, an original CGIAR member, and for most of its duration a contributor to all of the centres, to revitalize its contribution. You used to stand third in the donor queue, so please come back up from your present seventh place behind countries such as Switzerland and Denmark, who have significantly increased support for agriculture research in the 1990s.
The CGIAR, to us as an institution, is a very crucial investment because, as I said before, technology of relevance to poor farmers in developing countries is absolutely central to our poverty reduction strategy in the World Bank. Therefore, I see this investment in the CGIAR as being critical to us, and we do invest about $50 million a year in the CGIAR, by far the bank's largest granting activity because we are, after all, a lending institution.
Why, then, should all of this be of interest to us as Canadians? First, I would say it should be of interest to us because this country has a proud heritage of being interested in improving the well-being and welfare of those who are less well-off than ourselves. There are also obviously foreign policy and other dimensions which are important in being seen as a positive force in the overall development of the world. We have a long-standing history in that regard. I would also say it is in our own direct interest. The United States foreign agricultural service has studied the past 50 years of investments in agriculture and agricultural development and what subsequently happened in terms of trade. Their study suggests that people who were down and out, and in whom we were investing in the 1950s and 1960s, are now very good customers of U.S. agriculture. I can start with Japan and talk about South Korea, Taiwan, Malaysia Indonesia, and several other countries, so there is a substantial benefit that comes about from improving the welfare of people and making them better participants in international markets. They buy more of our stuff.
That is pretty good investment, I would say. There been studies done in the United States and in Australia about the benefits of research from these international centres that apply directly to the agriculture.
The United States study, recently completed by a colleague of mine from the University of California at Davis, suggests that the U.S. has a 19-per-cent return on every dollar invested in rice research in the international centres and 190-per-cent return in wheat.
When I went to California in the middle 1960s the California wheat industry was on its deathbed. It was down to less than 300,000 acres and had yields around 50 bushels per acre. It is now 1.25 million acres, yields well in excess of 100 bushels to the acre and it is all CIMMYT wheat that is being grown in California. It is a wheat that has been high yielding and dwarfed and so on. I am sure there are comparable benefits for farmers in Canada from wheat research, from bean research and from other research that has gone on nationally and internationally.
It is in our interest as a country and as citizens of the world and as trading partners and it is in our interest in direct research benefits. It seems to me that if we can generate the improved incomes that allow the poor people of the world to have access to a meaningful, useful and sufficient food supply, even though they will continue to produce the most of their food themselves, there is no question but that trade in the international market will increase substantially.
A study done by the International Food Policy Research Institute, one of the CGR centres in Washington, suggests that by 2020 -- they call it 20-20 vision -- trade in grains will double in the world market. I would hope that Canadian farmers will have a part of that doubling. As Prairie boy I feel that should be a pretty good prospect.
Senator Hays: What I hear from you is that between the green revolution and the work that you and others are doing now Canada has lost its way in terms of the attitude we had towards the importance of rural issues, research in particular and policy that affects the development of rural areas. I wonder why that has happened. You said that we were the number three supporter of the work of the consultative group and now we are seventh and that this prompted you to be here today to draw our attention to the importance of making a bigger contribution.
Specifically, what are we contributing? Where is it going and what do you think we should be doing?
Mr. McCalla: If I remember correctly it is approximately $12 million U.S. a year, so that would be $17 million Canadian. That is down from about $20 million at an earlier stage in the process. At the moment, and throughout the history of Canadian contributions, it has been distributed among all of the centres in an unrestricted fashion. Canada has not, unlike many other donors have, said I will give IRRI so much money provided that you work on upland rice. We have, I suppose at some point in our history, supported some things that were fairly special. Canada did support the triticale program at CIMMYT, I think, under a special program. In general, we have been generic contributors, which means that we have been supporting the priorities of the system and the priorities of the centres. The unrestricted character of our contribution is an important distinction. I would guess, though I do not have the figures with me, that the contribution has been, roughly, proportional to the size of the institution supported.
Why did it go down? My own judgement is that there are reasons.
One is there has been an overall fiscal concern about budgetary costs and, therefore, constraints on aggregate ODA -- official development assistance -- which I think has decreased significantly in Canada. I must also say that my impression is within that overall decrease the decrease in agriculture and related activities has been even greater, which suggests that in the development community in Canada there has been a perception that there are other activities with higher priorities than agriculture and rural society.
Concern has been expressed that research has a long-term payoff. It is much easier to get people to commit to building a road between A and B because it will be finished next year -- and you can see the results -- than it is to say we are investing in a research process that will take 10 to 15 years to pay off and the return will show up in the long term, along with many other benefits in improved agricultural productivity.
Second, I think there has been, in many developing countries and probably in some of the developed countries, a view that agriculture is an unimportant sector. It is an attitude that has struck me and it exists in developing countries, where it is hard to explain because agriculture may account for 60 or 70 per cent of employment, and in developed countries.
Third, it may be that there is some degree of aid fatigue in the sense that we have been investing in these things for 28 years now and enough is enough. However, it seems to me that what that attitude fails to take into account is that if this kind of research were not being done internationally it would not be done at all. In particular, there is the fact that the CGIR holds perhaps one-third of the world's germ plasm collection in the commodities in which it acts: 600,000 accessions in germ banks available freely to the entire world. It would not be in any country's interest to hold that. Canada benefits from that germ plasm collection. It is hard to explain why, when the story I am telling is, I hope, a compelling story, it has fallen in priority.
I also discovered in the bank that there are many new agendas -- the environment, social issues, health issues -- which have become very competitive. Until fairly recently agriculture was seen as being on the negative side of the environmental ledger, not on the positive side, where it ought to be.
Senator Hays: What is the relationship of that kind of research to private research in the same area? Has that had an effect on our concern about public-funded research, whether it is research for developing countries or for ourselves? We have seen a dramatic decline in public funds spent on, for example, plant breeding. In a developed country such as Canada, one of the rationales may well be that this is being funded privately. I would appreciate your comment on that.
Mr. McCalla: You are absolutely right. I am more optimistic about the challenge I just described, because we are going through an absolute revolution in biological research. Molecular biology and biotechnology have enormous potential to breed stress resistance and disease resistance. They may also be able to tailor plants to the particular needs of an environment.
That revolution in molecular biology has been by accompanied a significant change in the way in which research has been treated. We now have the capacity to patent plants and plant breeders. Proprietary science recognizes that an investment can be recouped if you patentability of products and processes is in place. Molecular biology has made that process more substantial.
While public sector investment in agriculture research has decreased, there has been a phenomenal increase in private sector investment in agricultural research in biotechnology. That does not take care of the problem, however. Most of that research has addressed applications in crops which are internationally and commercially valuable, such as wheat, maize, and corn. You see all of the round-up-ready commodities -- cotton, soybeans, et cetera. These are markets in which there is a significant potential pay-off from the development of improved varieties through propriety research.
Very little, if any, of that technology is being applied to commodities important to the Third World. No one is doing biotechnology research on casaba, pearl millet, sorghum, cowpeas, or chickpeas. The challenge on the research side is to bring the fruits of molecular biology and biotechnology to farmers in parts of the world where such benefits could have a significant impact.
Private sector research investment in commodities important to the north is not a substitute for declining public sector investment in commodities important to the south.
Senator Stratton: You said that production on existing land needs to double. I suppose that you expect that research will develop products that will allow that to happen. To be able to do that in 22 years is a pretty far stretch. You feel fairly confident about that?
Mr. McCalla: There has been a big debate over that in the literature. Lester Brown of the Worldwatch Institute -- you may recognize that name -- has published books called Full House: Reassessing the Earth's Population Carrying Capacity and Who Will Feed China?: Wake-Up Call for a Small Planet. The author says that we have loss of land from production, that yield increases have flattened out, that we are overgrazing and overfishing, that we have severe water constraints, and that we are not going to make it. He has a particular concern for China; by 2025 he foresees China importing almost double the current volumes of international trade.That is the pessimistic view.
There is another view that says technology did it before, and it will do it again. I suppose a name associated with that view would be someone like Dennis Avery. He has a book out called Farming with Pesticides and Plastics as a way in which to deal with this. Avery argues that we can continue the chemical-intensive monoculture agriculture ad infinitum, and that will take pressure off the marginal land. I do not agree with either one of the authors. Mr. Brown is entirely too pessimistic, and Mr. Avery is being flip when he says that we did and before and we can do it again.
While we did do it in the last 30 years, it was primarily through conventional plant breeding, focusing on commodities, and improving the productivity of single-commodity production systems. We focused on wheat, rice, or maize. Doubling the capacity of fragile farming systems in the tropics and subtropics, in addition to increasing productivity in the U.S., Canada, Europe, and the former Soviet Union, is a more complex challenge.
It will not be possible to realize that aim without significant and continued investment in research and technology development. It will not be possible without appropriate policy environments in developing countries. It will not be appropriate without an effective trading system that will allow countries to participate in international markets, rather than trying to always be self-sufficient.
If any of these things do not come into place, then I will be very pessimistic. If they are in place, I am cautiously optimistic. It can be done, but it is an enormous research-and-development challenge.
Senator Stratton: If we have to double grain production by 2020, we are stuck with the fact -- as we have been hearing from farmers and organizations throughout this bill -- that, since 1972, the return on grain farming has been 3 per cent. Grain prices have been, and are continuing to be, low. It is not very encouraging for farmers.
In my province of Manitoba, there was an article in the Winnipeg Free Press last week about a movement called ABW, grow "Anything but Wheat," simply because the prices will be low. We have been told that those prices are primarily due to the subsidies, not so much in the U.S., but in the European Community.
Do you have any optimism that the farmer will get an increased return on his investment, that he will get better grain prices in the long term? The younger farmers have become impatient with this way of doing business, and they want a greater return on their investment. They want a bigger dollar for their bushel of grain and they want it now. They do not want to wait. If they could see these things changing in the future in the long term, there would be more optimism on their part to stay the course rather than doing some of the radical things they are doing now. Could you respond to that for me?
Mr. McCalla: I suppose I could respond in a flip way, which I should not.
When I was a youth in Alberta, I was an active member of the Farmers Union of Alberta. I was president of the Junior Farmers Union of Alberta and used to attend the Farmers Union conventions in all 14 districts in the 1950s. At that time, we were faced with very low prices and were concerned about the fact that we would not survive another decade as an industry. Yet the industry did survive in no doubt a changed form.
When I was a young graduate student going to the University of Minnesota, I went to visit many farms and heard the same story from farmers, except the commodities were different. Instead of wheat and barley, it was soybean and corn.
As a Dean of Agriculture at Davis I remember going to many farm meetings and hearing the same story, only they were talking about tomatoes and sugar beets and a lot of other commodities.
I am saying that because one of the things that has happened and continues to happen is that real prices of grain and other commodities have decreased. In part, they have decreased because technology and efficiency of production has occurred at a more rapid rate than expansion in demand. That means that you have had generally downward pressure on prices. However, falling real prices does not mean that farmers must lose money. The good farmers make money in that kind of environment.
We must recognize that one of the things that keeps this process working is the fact that we are constantly churning out new methods of doing things that are more efficient, cost effective, and which lead us to produce more. This sets prices on the downward trend. As I argued for the developing countries, that is a plus. Quite frankly, one of the great contributions that agriculture and agricultural science have made in the 20th century is to make food more generally available at lower prices and still have a viable agricultural industry.
Having said all of that, what is my prognosis for the future? Economists are almost always wrong in making projections. They want to make them a long way ahead, and they have selective amnesia. That is the best way to make projections. My sense is, and the predictions and models that have been done show, that the long-term decline in real prices will certainly slow up and may plateau. Nominal prices are therefore likely to flatten out or go up.
I would think that the long-run prognosis, if in fact trade doubles, is that we will certainly not see the rate of decline in prices that we have seen over the last 30 or 40 years, and we may plateau in prices. If we have continued output of technology that increases the efficiency of agriculture, profitability should improve.
Canadian agriculture, if it is efficient, should be well placed to benefit from that in international markets, particularly in the trade regime and the outcomes that I am talking about.
Senator Spivak: Senator Stratton mentioned that farmers' incomes have not gone up since 1971, not 1972. They have gone up 3 per cent. You said it is mainly because of the technology. However, the point is that their net profits have not gone up. Their gross profits are way up, and out of those gross profits the input costs have gone up tremendously. Many of those input costs are exactly the technology you are talking about, pesticides and so forth, or whatever they are using.
I am not as confident as you are, based on the literature, that technology will be the answer in terms of either the cost of food or its availability. I would like to know what you have to say about the price and also about the balance between the increase in population and food production. Lester Brown, for one, says that the green revolution is over, and he makes a very convincing case for why it is over.
Mr. McCalla: Yes, I would agree that input costs have, in some instances, gone up. The solution to that, in part, is to design plants and animals and production systems which make more efficient use of inputs. Pesticide use in North America decreased substantially in the 1980s and 1990s with the advent of integrated pest management and other approaches. Overall chemical use in agriculture in North America has gone down.
Senator Spivak: But the cost has gone up.
Mr. McCalla: The costs per unit have gone up, but if your aggregate use is down, your gross cost is down.
The most effective form of pest control still remains resistant breeding plants. When you think back on what we have been doing over time, the early plant breeders were trying to do that. Again, in my youth in Alberta, one of the major breakthroughs in the late 1930s was soft fly resistant wheat. That was a very cost effective way of controlling soft flies. They could not saw through a solid wheat stem and get inside and be harboured.
One of the promises of biotechnology is being able to be much better at designing outcomes that reduce the necessity of using chemical inputs. You will not make plants that do not need nutrients, because if you are going to get more out, you must put more in. That is the nature of a plant. However, perhaps we can find ways to manage agriculture so that we preserve more of the inputs in terms of nitrogen, for example.
Clearly the no-till or low-till approach has had a significant impact on both wind and water erosion. The erosion figures in the American Midwest and in Canada, where we have been doing trash cover for a long time, are significantly reduced.
I am arguing that there are many ways in which you can progressively, with technology and improved research understanding, reduce the necessity of doing things that require a lot of expensive inputs. You can do things that are less damaging to the environment. I am somewhat of a technological optimist. I do not see this as the be-all and end-all. There are other things that must go with it. Corn yields in the United States have quadrupled in 40 years. There are still possibilities.
The Deputy Chairman: I should tell you that Senator Spivak was born on a farm in Manitoba, so she has a strong interest in farming.
Senator Taylor: You were talking about the investment in agriculture and how it has gone down a bit. How about the north-south ratios? Where do we make our investment, and has investment in the Southern Hemisphere gone down at the expense of investing in the north? Where are you putting your money? Are you putting it where the rich are already rich to make them richer, or are you putting money in the emerging countries?
Mr. McCalla: As an institution, the World Bank is constrained by its constitution to lend only to developing countries. Therefore OECD countries are off the list; we do not lend to any of them.
We have two lending windows. The first is a commercial lending window through which we borrow money on the market, float bonds and re-lend it with a relatively small margin. We also have a concessional window called the International Development Association which provides loans with a significant grace period and a low interest rate.
In our portfolio, as we decreased our investment in agriculture and rural issues, we increased our investment in education, health and the environment. We still invest a significant amount in infrastructure: roads, ports, telecommunications, water supply and sewage systems. We lend to countries that do that sort of thing. We have not shifted our focus to areas in which rich people are getting richer.
Senator Taylor: I am thinking primarily of African versus Asia. Asia has come on like gangbusters. Has the money been pouring in there? I have a feeling that the World Bank is not doing much for Africa. I may be wrong.
Mr. McCalla: I would never say that a senator is wrong, but your analysis of the situation may be incomplete.
Our largest portfolios remain in Eastern Asia: China is our largest borrower, India is our second largest borrower, Indonesia was a large borrower. However, in terms of lending per capita we lend far more in Africa than we do in any other region. The population sizes numbers are very different.
The type thing we are lending for and the relative share we have of lending in Asia has changed substantially. Roughly 10 years ago the international capital flow consisted of $50 through government to government transfers, $25 billion from the World Bank and $50 billion from the private sector.
Last year private sector flows were $280 billion and official development transfers were less than $50 billion. What has been happening in Asia, and I suppose this is part of the origin of the present crisis in Asia, is that there has been an enormously rapid increase in private sector capital flows into Asia and also into Latin America. You have seen nothing comparable to that in Africa. Africa remains much more dependent on official development assistance and intergovernmental lending agencies such as World Bank.
Our experience and the experience of many other donors and lenders is that it has been very difficult to be successful in Africa, especially in agriculture.
Senator Taylor: So much of the rural population in Asia and Africa is close to oceans. Are there any major projects focusing on aquaculture?
Mr. McCalla: Historically we have lent significantly in what we call capture fisheries, mainly ocean capture fisheries, and we have lent to the private sector to build fishing fleets in countries like Peru and Côte d'Ivoire. Basically, we have stopped that lending on the basis of two arguments. The first is that that is more of a private sector activity than a public sector activity and we lend only to governments. The second is we are very concerned about the depletion of the maritime fisheries resources.
On the other hand, we have substantially increased -- and we continue to increase -- our lending for aquaculture, particularly in Asia. We have been criticized because much of our lending for aquaculture has been for shrimp and oysters on the grounds that this is food for the rich.
In fact, our loans for aquaculture have been to small farmers. This is a very profitable way to improve their income. I see lending to generate income as an appropriate thing for us to do. I suspect that our lending for aquatic resources remained level, but the emphasis has shifted from capture fisheries to aquaculture.
Senator Taylor: Have you considered the proposition that in an industrial world which has a carbon emission problem it might be appropriate to pay farmers in the developing nations to leave trees alone, to abandon the slash-and-burn agricultural techniques which, by and large, only result in marginal farm land? As a source of income you could pay them to conserve the trees, and trees absorb the carbon that the Northern Hemisphere churns out.
Mr. McCalla: The World Bank is actively engaged in trying to foster carbon emission certificate trading initiatives. In the near future we will probably be even more involved. We are, for example, encouraging reforestation and we are encouraging companies and cities, North or South, which have excessive emissions to trade with areas and countries which have less than the designated levels of emissions. It seems to us that a market in these kinds of things is preferable to some other mechanisms.
Senator Spivak: I am wondering about the funding to the shrimp farms. In Thailand that is destroying the mangrove forests. That kind of activity is very environmentally destructive.
Mr. McCalla: I agree. It can be destructive, if it is done indiscriminately and without attention to the impact on the environment.
At the same time, as I understand it, there are ways in which one can manage shrimp aquaculture so it is neutral to the surrounding environment. What we are trying to in these cases is to make loans with conditions attached. After all, we are lending to governments and governments provide resources either through loans or grants to the entrepreneurs who establish the shrimp farms. We are trying to put conditions on loans but we all know money is fungible. This is one of the more difficult problems we have.
Senator Spivak: What sort of evaluation techniques do you have to ensure that your money is being spent for the purposes you intend? Some of the horror stories about the shrimp farming are unbelievable. If you go into trading emissions certificates without some overall control you will have a very chaotic and potentially destructive situation because of the prevalence of corruption, particularly in Southeast Asia.
Mr. McCalla: Every project that we lend to must generally meet three criteria. It must be technically feasible; in other words, it must have the best technology available. It must be financially feasible, in that it must have income generation possibilities that will pay back the financial flows. It must have an identifiable economic benefit.
Before it goes to the board of the bank, the potential environmental impact of each project must be assessed. A preliminary environmental assessment is required. It determines whether the project is likely to have a significant environmental impact, a marginal environmental impact, or no environmental impact. If it has significant environmental impact potential, there must be a substantial science-based evaluation before the project is approved, which makes it an environmental project category A. These projects now are falling in category A, which means there will be a substantial evaluation in advance. On the basis of that evaluation, conditions for implementation into the loan.
The third point I would make is that we are, by the Bretton Woods constitution under which we operate, an ex-post disbursing institution. In other words, we do not disburse money until it has been spent in a way that we judge to be appropriate. We do have the ability to withhold disbursement in cases where the loan commitments are not fulfilled.
Senator Spivak: I know that that has been a change in policy at the World Bank since the arrival of Mr. Wolfensohn. The bank has been highly criticized in the past, but I understand that there is a change.
In view of the fact that most of the 17 major fishing areas are overfished or at capacity, is it not a little late to withdraw funding for fishing fleets? The industrialization of fishing, particularly in Canada, has caused the decline of the fish stocks. It may cause their collapse. What good will aquaculture be once our seas no longer contain any fish?
Mr. McCalla: It is closing the barn door after the horse is gone.
Senator Spivak: Right. If you continue, will fishing be feasible in the future? In spite of these facts, I do not see any diminution of fishing in the world. People are still out there fishing like crazy.
Mr. McCalla: I would agree with you that we probably were involved in fishing for too long. Perhaps we should not have been in it at all, but we were. To a significant extent, however, we are driven by what our borrowing countries want to use the money for. It is a lender-lendee arrangement, but we really should be driven by what they want the money for. We are doing better than we were 10 or 15 years ago, because we are now looking at our lending in terms of its environmental consequences. We were not doing that before.
I would like to make a point regarding your comment on corruption. I agree, it is a huge issue. Until very recently it was an issue that most development agencies, including the World Bank, tended to ignore. Mr. Wolfensohn has been very courageous in saying that the bank is on a public anti-corruption campaign, and it is starting to have some impact. It will take a long time.
Senator Hays: When you were with the committee of the other place you started to get into a discussion of the strong desire to be self-sufficient in food, which can be a motivator for policy development that can have a distorting effect on, for example, world wheat prices.
Can you explain that phenomenon in terms of how we might deal with it? The general belief here is that that situation is harmful, the common agricultural policy being a classic case in point. Can we do something about that, or will this inevitably develop in regions such as Europe and be followed in developing countries?
Mr. McCalla: The proposition I was making is that one does not necessarily accomplish food security by pursuing policies of food self-sufficiency. Food production is a land-based, climate-influenced activity, and some places are good at producing some things, while others are good at producing other things. To me it makes no sense to distort policies, and to manage the border so as to produce things at twice the cost of someone else's production. The classic case involves Saudi Arabia and wheat. Saudi Arabia invested substantially in centre-pivot groundwater irrigation, and expanded production until it was producing 4 million metric tonnes of wheat per annually. With an export surplus of 2 million tonnes, the country became self-sufficient. The cost $1,200 U.S. per metric tonne, however -- six times the world price. To me, that is the ultimate stupidity in a self-sufficiency policy.
We should be doing those things that we do well; what economists call comparative advantage. The meaning is that you produce more of some things than you need, and then trade the surplus for things that you produce less well. That is why a good trading system is important. As far as I know, there is no country in the world that is truly self-sufficient in food. Canada is not self-sufficient. The United States is not self-sufficient. Europe is not self-sufficient.
In the political environment of an uncertain world, however, uncertainty about one's food supply is a very powerful political force. The experience of Europe and Japan in World War II and its aftermath had a powerful impact on the way in which those countries think about agriculture and agricultural policy.
The origins of European common agricultural policy in the 1960s demonstrate that there was a very powerful sense that they could never again be dependent on an overseas food supply. That is also behind the Japanese policy on rice. Japan has pursued a policy of rice support which has meant that it is virtually 100 per cent self-sufficient in rice. For 60 per cent of the rest of its food supply, however, it depends on international markets. There is a schizophrenic dimension to that.
The rising concern within the European Community about the fiscal cost of the CAP, and the cost to consumers of high internal prices, is driving an internally based reform. There are also developments under the WTO, and the GATT or Uruguay Round negotiations which, for the first time, have brought agriculture under the rules of GATT. This has also led to a movement towards a more level playing field in international markets.
I do not see the trend of going back on the old European policy. In fact, as the European Community considers the possibility of expanding to take in the countries of Eastern Europe, it will discover there is no way it can afford to continue to have the same common agricultural policy for this new broadened community.
I am hopeful, and I know that I have been hopeful before, that we have in some sense turned a corner. The developed countries are going to get away from significant distortions in the name of food self-sufficiency and go to a more effective working international market.
Senator Taylor: We discussed the East Europeans. How about the Eastern Canadians with their supply management of dairy and poultry?
Mr. McCalla: This morning in the other place I was asked if I wanted to comment on the Canadian Wheat Board and I said no. My better judgment again tells me to say no, because I am not as fully informed any more as I should be about what is going on domestically.
The Deputy Chairman: Senator Hays's father, and previous ministers of agriculture, were the creators of research. The Fathers of Confederation in Canada, before they settled, put the demonstration farms into effect, so they were very forward looking people. I could not agree with you more when you talk about how great the returns on research are. I have visited CIMMYT, Cali, the one in Costa Rica, Ethiopia; you name them and I have been there. I spoke to researchers in Manila and they said they could not believe that a person in elected office could be such a strong supporter of research. In Canada, for a long time, we regarded it as the most important thing.
Since you have been here, have you had a chance to visit Treasury Board or Finance?
Mr. McCalla: Mr. Serageldin in fact visited the Ministry of Finance this afternoon.
The Deputy Chairman: I have found that the Minister of Agriculture must always struggle with Finance and Treasury Board to do research, but we built the biggest research branch of any branch of government because we had a prime minister at that time who believed everything the Minister of Agriculture said about research. I believed everything my scientists told me about research.
You said that the World Bank's attitude towards agriculture was not good?
Mr. McCalla: That is right.
The Deputy Chairman: That is why I asked if you read any of my old speeches, because I was always shocked at the attitude of the World Bank towards agriculture. At world meetings I saw the poverty. As president of the World Food Council I visited Africa and Asia and saw all these terrible situations. Then I realized what we could do.
You mentioned in one of your answers a 19-per-cent return on rice research. What is the return on wheat?
Mr. McCalla: It is 190 per cent.
The Deputy Chairman: You mentioned the tremendous increase in production in California. If in my memory serves me right, if California was a country by itself it would be the fourth largest agricultural producing country in the world. Is that right?
Mr. McCalla: That is probably right, yes.
The Deputy Chairman: In Canada, in research here, we always felt that for every dollar we invested we received $7 in return. We were a strong supporter of CIMMYT and the triticale program. When triticale was advanced in biotechnology, it was a real advancement.
When Dr. Downey at Saskatoon and a few others were developing canola, I spent a Sunday with him in his research plant in the summer of 1973. I learned more about canola than I ever knew before. Western Canada is now the triticale capital of the world. We did the reverse of what you did. We brought an American to Canada to do research for us on triticale and it cost us $750,000 at that time.
Senator Hays, I want to congratulate you for bringing your old university colleague here, but it is too bad we do not have about five hours for our discussion because his knowledge of the World Bank and his viewpoints are refreshing.
Senator Pearson has said that some of these forecasts about world population are wrong, that the population will not be as high as expected in 2020. She uses population figures from Africa and interesting statistics from the former Soviet Union which indicate that for every three people who die, only one person is born. In 20 years the Soviet Union will have a very difficult time being a productive nation. An African example shows that their birth rate is down due to AIDS and other diseases. She cites Uganda, in particular. Senator Pearson predicts that it will not be so difficult to feed the world. Do you have any comment on that?
Mr. McCalla: Most people use United Nations population projections. They produce a low variant, a medium variant, and a high variant. Those are based on projections about population: birth rates, death rates and life expectancy. Demography is a very imprecise science. It is probably as imprecise as economics, though I think we tend to think that demographers are absolutely correct.
The median variant population projection for 2025 over the last five years has been decreased from approximately 8.3 or 8.4 billion to now slightly under 8 billion, 7.9 billion. The projection is lower because the birth rates, particularly in the Asian subcontinent, have been coming down more rapidly than the earlier projections suggested. The declining birth rates appear to be driven by growth in income and the education of women, which are the two most powerful forces for reducing birth rates.
The population growth rate right now in India, for example, is down and is approaching 1.5 per cent. It was 2 per cent 10 years ago. There are, however, still countries in Africa where the birth rate is still at the level of 4 per cent a year, which doubles their population in 17 years. The African average is still well over 2 per cent. I do not foresee a significant diminution of the African population growth rate for another generation.
Senator Spivak: How about China?
Mr. McCalla: China is slightly more than a steady state. China is still growing. The populations of India and China in 2025 are projected to be the same; approximately 1.5 billion people, 1.6 billion people each. That means that China will grow from 1.2 billion to 1.6 billion, India will grow from 900,000 million to 1.6 billion. That will give you some sense of the birth rates.
The numbers that she has for Russia are not correct. There is a negative population growth rate in Russia, but it is very small. It might be that for every ten people who die, only nine are born, or something in that order of magnitude.
The Deputy Chairman: Senator Pearson's husband was ambassador to Moscow. They lived there, and she wrote a book on Russia. I have been to Russia several times, and the figures she gave me were startling.
Agriculture Canada in Lethbridge and Swift Current developed the no till approach. It was not Archer Daniels Midland.
Mr. McCalla: I know that.
The Deputy Chairman: The scientists corrected me on that.
I remember the scientists saying how important soil research is, and how little we know about our soils and microbes. If you pick up a handful of soil, it contains millions of microbes, and we know something about maybe two of them. Do you have a comment on soil research?
Mr. McCalla: We know a lot more about soils in Canada and the United States than we do about those in Nigeria or the Ivory Coast. In fact, we know very little about tropical soils. In particular, we do not know what the consequences of deforestation are, nor do we know what the implications of switching from a multi-storeyed forest canopy to an annual crop are.
Even in Canada and the United States, we do not have a full understanding of the complex interaction between the biota of soils, the microbes, the plants, and the temperature of the water. Many of my best friends are soil scientists, but, rather than thinking about soils as an integrated subject, they have tended to divide the research into pieces -- soil chemistry, soil physics, soil microbiology and soil morphology. They have not really thought about the living canopy of plants on top of the soil. We do not know nearly as much about soils as we ought to.
The Deputy Chairman: Three years ago, I spent seven weeks in the Ukraine. The World Bank official that I met there was a farmer, and a former teacher at the Lenin Institute of Socialist Economics. The Ukraine was once a tremendous food producer. I do not pretend to know all that much, but the man who went with me was Dean of Business at the University of Windsor. He came to Canada from the Ukraine when he was nine years old.
In my opinion, some of the things that the bank was imposing on those people before they would loan them money were excessive. Things such as enforcing their idea of democracy, and the concept of making people come into line with their way of marketing were very bad. Could you talk about some of the bank's projects in the Ukraine?
Mr. McCalla: Under the strategic compact that the president of the bank put in place to focus on world development, one of the focus countries was the Ukraine. Everyone agreed that the Ukraine had enormous agricultural potential in terms of its natural resources base and its climate.
We have invested in the Ukraine. We have engaged in what we call sector adjustment lending in the Ukraine. We recently stopped that practice, not because we were trying impose any kind of overall issues on them. However, we do have a structural adjustment program with them. They were pursuing retrogressive agricultural policies. They were requisitioning grain, and they were changing policies mid-year, which, in terms of marketing and distribution chains to acquire the product, was making it impossible for people who had borrowed money.
In terms of trying to deal with the government on issues of agricultural development, the Ukraine has turned out to be a very difficult case.
The Deputy Chairman: On behalf of the committee, Mr. McCalla, I want to thank you very much for being here today. It has been refreshing to hear your points of view, and what you think should be done in the world of agriculture.
The committee adjourned.