Authors: Dr. Katrin Glatzel, Emily Alpert, Stephanie Brittain and Professor Sir Gordon Conway
Site of publication: Agriculture for Impact (ag4impact)
Type of publication: Report
Date of publication: June 2014
Why entrepreneurship?
“African agriculture and food systems are changing rapidly in positive and exciting ways. Africa has the agricultural potential not only to feed itself but also to grow a surplus to help provide global food security. However, fulfilling this potential requires…. a broad perspective – looking at the needs of smallholder farmers as part of food systems and supply chains and considering agricultural productivity, food security, and nutrition in the context of overall economic development and social stability.”
Drivers and opportunities in Africa
By 2050 the total population of SSA, 1.7 billion, will be equal to roughly half of the additional global population by that time. Not surprisingly, SSA also has the youngest population in the world. Between 2010 and 2050, the number of young people is set to more than double from 126 million to 265 million. Further, more than 70% of the young population lives on less than US$2 per day and youth underemployment is high. Currently unable to absorb its young population, Africa’s urban labour markets are breaking under the pressures of young people migrating from rural areas into cities.
Even with rural to urban migration occurring in Africa, many young people, especially girls and women, still live in rural areas. According to the International Labour Organisation (ILO), youth are two times more likely than adults to be unemployed and the growing mismatch between the supply and demand for skills is the main driver of high youth unemployment rates. The lack of jobs for young people presents both an immense challenge and great opportunity.
Fortunately, the growing urban population and middle classes are demanding more nutritious, varied and processed food, generating new jobs and entrepreneurial opportunities for farm households, rural communities and young people through expansion along the African agribusiness value chain. Responding to this demand, national agricultural research systems (NARS) are developing new crop varieties that are high yielding, nutrient enriched or stress resistant as well as improving livestock breeds.
Harnessing the entrepreneurial spirit
“Entrepreneurship is the mindset and process to create and develop economic activity by blending risk-taking, creativity and/or innovation with sound management, within a new or an existing organisation” (European Commission).
Entrepreneurs are a special group of people, but they can manifest anywhere, in rural and urban areas; among farmers and shopkeepers, among the barely literate and the highly educated. Entrepreneurs may not have been trained formally, but they all have an instinct for innovation and business opportunity – they have a certain mindset. Turning entrepreneurial spirit into a business primarily requires access to micro finance, the provision of relevant higher education or vocational training together with business management training, and better links to markets for individuals and groups. Although entrepreneurship may be a common trait, highly successful entrepreneurial development is more likely to occur in a country that is economically stable with well-developed institutions, infrastructure, and health and education systems. Once these pre-requisites for a well-functioning business environment are sufficiently established, government and private funding can be focused on financial market sophistication, technology development and usage, education, training and labour market efficiency – the essence of harnessing and catalysing the entrepreneurial spirit.
Opportunity awaits young entrepreneurs
“With almost 200 million people aged between 15 and 24, Africa has the youngest population in the world.” Estimates suggest that Africa’s total labour force will be 1 billion strong by 2040, making it the largest and youngest worldwide. Furthermore, Africa is the only region in which the rural population will be increasing. Young people are often dynamic, inquisitive and challenging. Everywhere in the world they create a distinctive culture, are innovative and often invent new forms of independent work. Young entrepreneurs are also more likely to hire fellow youths and pull even more young people out of unemployment and poverty. They are particularly responsive to new economic opportunities and trends and are active in high growth sectors. Further, entrepreneurship offers unemployed or discouraged youth an opportunity to build sustainable livelihoods and a chance to integrate into society.
Yet, there are many barriers and pitfalls. Young entrepreneurs are stifled by limited access to finance, low levels of skills and education, few market opportunities and a lack of broader institutional support, particularly if their businesses get into difficulties.
Innovation, often regarded as a pre-condition for successful entrepreneurship, is usually positively related to an entrepreneur’s level of education in most developed and emerging countries.9 However, the lack of access to educational opportunities, especially for women, disadvantages the pursuit of an entrepreneurial career. Highquality school and university programs, particularly in areas such as the applied sciences, technology, and engineering, could dramatically increase Africa’s competitiveness, productivity and growth.
Developing young entrepreneurs
Although Africa’s youth on the whole are increasingly better educated, rural youth are still plagued by low levels of literacy, poor numeracy, high drop-out rates, particularly in secondary education, and low levels of tertiary enrolments. Based on current trends, 59% of 20-24 year olds will complete secondary education in 2030, compared to 42% today. This will translate into 137 million young people with secondary education and 12 million with tertiary education by 2030. Ironically, the most educated people often confront a mismatch between their training and available employment opportunities. While 26% of students enrolled in university in Africa study humanities, only 2% of students are enrolled in agricultural programmes. Further, more than half of the rural youth pursue activities other than farming, but often end up underemployed or unemployed. The gap between skills and available jobs also explains why Africa’s youth resort to employment in the informal, rather than in the formal sector. For those women and young people without access to higher education, vocational training and skill development are instrumental. While women make up about half of the African labour force, only 45% of women in Africa are literate, compared to 70% of men and about 1.5% of women achieve higher education. By focusing on building the capacity of young people and women in particular, African governments will be able to increase the productivity of a large proportion of their labour forces.
Yet, there are many barriers and pitfalls. Young entrepreneurs are stifled by limited access to finance, low levels of skills and education, few market opportunities and a lack of broader institutional support, particularly if their businesses get into difficulties
Young people in the countryside are the most enthusiastic about creating their own businesses; nearly one-quarter of the rural youth have plans to start a business, compared to 19% of urban youth. With knowledge about new and innovative production methods and opportunities for on and off-farm skill development young people could be more productive. Tailored support and an environment that allows young people in the informal sector to develop professionally could help them to reach their full potential. Furthermore, young people struggling with their own businesses, but showing potential in the form of managerial skills, can benefit from targeted training, support for technical assistance and mentoring. Adapting education curricula and skills training in rural areas to particular needs would be an important step in supporting the rural youth in becoming entrepreneurs along the agribusiness value chain.
Financing entrepreneurship
Without access to adequate and affordable financing to complement their education and vocational training, budding youth and women entrepreneurs will not be fully equipped to thrive in the agribusiness marketplace. As much as in any other sector, financing and credit are required to form viable farming businesses at all stages of enterprise development. Yet, financial support is often difficult to access due to the inherent risky nature of farming. Access to microfinance should be made available for starting and growing enterprises, while bridging products are needed to address the ‘missing middle’ – businesses that reach a level of growth beyond the capacity of microfinance. Value chain finance can ultimately help entrepreneurs in growing sustainable businesses.
Growing up
While start-up funding is sometimes available from micro-credit institutions, once enterprises have grown beyond the threshold of microfinance they face an absence of credit providers; they fall into a ‘missing middle’ of credit-worthy businesses. For those businesses that grow beyond the limits of microfinance, but have not yet satisfied eligibility criteria for commercial bank loans, bridging products are needed. Facilitating access to financial services in the informal sector and helping traditional and informal operators acquire business skills for leveraging finance can be beneficial. For example, the Uganda Development Trust (UDET), supported through financing from AGRA amongst others, assists SMEs to prepare business plans and access credit. From this support, enterprises such as grain warehouses AgroWays (U) and Upland Rice Millers and food companies SESACO and East African Basic Foods all improved their profits, operating margins, production volumes and number of smallholder farmer suppliers, to name a few achievements.
Without access to adequate and affordable financing to complement their education and vocational training, budding youth and women entrepreneurs will not be fully equipped to thrive in the agribusiness marketplace
Taking root
A key to sustainability is having a viable business model that enables growth from micro to small, from small to medium and from medium to large. In addition to becoming credit worthy through the successful repayment of start-up loans, enterprises need well-designed business plans and marketing strategies to ensure a long-term demand for their goods and services. Continued technical assistance and business management training are central during this stage. Governments also need to ensure that the wider economic and financial environment is conducive to on-going enterprise development.
Creating an appropriate enabling environment requires strong political leadership. This should go beyond short-term initiatives; it requires implementation of policies and regulation reflecting a long-term vision
Sharing risk throughout the supply chain further reduces the burden for smallholder farmers. Exposed to lower levels of risk, farmers can receive higher returns and improve profitability. Value chain financing allows borrowers to benefit through higher lending at better terms and obtaining loans that reflect the cash flow pattern of their producing, processing or trading activities. An example for successful value chain financing is the Caisse des A!aires Financières (CAF) in Isonga in Northern Rwanda. The CAF has introduced several instruments such as production and marketing loans, voucher systems and leases for transport that ultimately led to productivity increases of approximately 30% between 2007 and 2008. Furthermore, all farmers in Isonga now have bank accounts and the farmers’ cooperative was able to acquire a truck to reduce transport costs.
An enabling environment for entrepreneurship
Political leadership
Creating an appropriate enabling environment requires strong political leadership. This should go beyond short-term initiatives; it requires implementation of policies and regulation reflecting a long-term vision. For example, John Kufuor, former President of Ghana, is recognised for his personal commitment and visionary leadership to alleviate hunger and poverty. President Kufuor funded research to increase yields, but claimed “While increasing crop yields is vital, it is of little use if the product cannot be stored safely or transported to markets.” Therefore, along with supporting irrigation, improved seeds, and crop diversification, the government pursued an integrated rural development policy: building feeder roads, silos, and cold stores for crops, such as pineapples, mangoes, and bananas. The government also made mechanization, such as tractors, more affordable for farmers through favorable loan terms. As a consequence Ghana was the first country in SSA to reduce the proportion of people suffering from hunger and living on less than a dollar per day by half.
More generally, a government’s responsibilities include building capacity and encouraging broader public participation in policy processes, establishing a culture of learning and innovation, and supporting coordination along the agribusiness value chain. There is also much to be gained from improving collaboration between government ministries for agriculture, education, energy, infrastructure and environment.
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