Contracting Out of Poverty

IFPRI images

IFPRI images

MOTIVATION

Access to markets is challenging for smallholders who may not be able to compete with larger operations that can provide firms with consistent quantities of high-quality products. This barrier to entry may be due to the smallholders’ limitations to exploit economies of scale, but it can also be due to their apprehension to sign contracts. IFPRI’s research project, Contracting Out Poverty: Experimental Approaches to Innovation in Agricultural Markets with Small Farmers, explored three innovative contract structures to solve this problem, focusing on markets for high-value crops in three diverse locations: Peru, Tanzania, and Viet Nam. Using randomized trials, innovative contract designs were developed with private companies in each country (a mango producer in Peru and milk processors in Viet Nam and Tanzania).

RESULTS

IFPRI found that these innovative contracts had positive results. In Peru, higher price incentives increased the quality of the produce and the loyalty of the farmers to the contracting company. In Tanzania, farmers who received loyalty bonuses were more consistent in delivering milk to the company. In Viet Nam, the use of third-party testing resulted in significantly higher dairy output and improvement in the welfare of specific subgroups. Overall, the contract designs improved farmer retention and production.

OUTCOMES

  • The Inter-American Development Bank (IDB) used this research to grant US$2 million in technical assistance in support of private initiatives to reduce rural poverty and promote development in El Salvador, Guatemala, and Nicaragua. This grant aimed to increase economic opportunities for the rural poor through private initiatives that linked smallholder farmers to dynamic markets using contract-farming arrangements.
  • This study contributed to the global evidence on the effectiveness and potential of contract farming to raise product quality and producer incomes. In 2012, the World Bank conducted a study of Tanzania’s coffee market that took advantage of contractual arrangements in the Kilimanjaro region. The World Bank’s research drew from IFPRI’s findings in Viet Nam to show that contract farming can be effective in influencing production processes and improving product quality in developing countries.

For more information on IFPRI's partnerships with Germany, please go to this brochure.