Using Prize Rewards to Stimulate Innovation and Adoption in African Agriculture

William A. Masters Professor of Agricultural Economics Purdue University [email protected]

www.agecon.purdue.edu/staff/masters www.agecon.purdue.edu/prizes www.fara-africa.org

Prize rewards: the story ahead • African agriculture needs new innovation incentives • We propose a new system of “prize rewards”: – a fixed sum, paid proportionally to measured value, – to reward innovators for value they create but cannot capture – to recognize successful approaches and attract other funding • These slides detail our motivation and proposal – published in 3 refereed journal articles – discussed at >17 conferences and workshops – funded so far by Adelson Family Foundation and IFPRI – supported by 8-member advisory board – endorsed by NEPAD, for implementation through FARA

The problem: Africa’s ag technology is far behind

Average cereal yields by region, 1961-2004

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

RestWorld E&SEAsia SouthAsia SSAfrica 19 61 19 64 19 67 19 70 19 73 19 76 19 79 19 82 19 85 19 88 19 91 Source: calculated from FAO data, at http://faostat.fao.org.

19 94 19 97 20 00 20 03

There are diminishing returns to inputs, e.g. simply adding more fertilizer 1000 100

Fertilizer Use (N+P+K), 1961-2002

RestWorld E&SEAsia SouthAsia SSAfrica 10 1 19 61 19 64 19 67 19 70 19 73 19 76 19 79 19 82 19 85 19 88 19 91 Source: calculated from FAO data, at http://faostat.fao.org.

19 94 19 97 20 00

Sustaining growth requires new technologies, e.g. new varieties

Adoption of new varieties (pct. of cropped area)

90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 13% 8% 1% Asia Lat.Am.

SSAfrica 42% 23% 4% 62% 39% 12% 80% 52% 26% 1970 1980 1990 1998 Source: Calculated from data in R.E. Evenson and D. Gollin (2003), Crop Variety Improvement and its Effect on Productivity. Wallingford: CABI.

Africa has had remarkably low public investment in crop improvement

Public agricultural R&D per capita, 1971-2000

20 18 16 14 12 10 8 6 4 2 0 OECD Sub-Saharan Africa 19 71 19 73 19 75 19 77 19 79 19 81 19 83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99 Note: Sample varies from n=13 to 26 for SSA countries, and n=9 to 15 for OECD countries.

Source: Agricultural R&D is from IFPRI (2003), available online at www.asti.cgiar.org; total population is from FAOStat (2004), available online at apps.fao.org.

Private R&D builds on public investment Netherlands Sweden France UK US NZ 0 5 10 15 20 25 30 Public R&D per Capita (1993 US$) 35 Notes: Calculated from IFPRI (2003), available online at www.asti.cgiar.org

. Data refer to various years from 1971 through 2000, and exclude the chemical and machinery sectors.

R&D has varied but high payoffs in all regions, including Africa Estimated return to agricultural research and extension (%/year)

Almost all assessments show returns above 10% cost of capital A few studies document blockbuster discoveries

Source: Alston, J.M., M.C. Marra, P.G. Pardey, and TJ Wyatt. 2000. "Research returns redux: A meta analysis of the returns to agricultural R&D." Australian J. of Ag. and Resource Econ., 44(2): 185-215.

…but sustaining foreign aid for agricultural R&D has been difficult!

USAID Funding for Research and Extension in Africa, FY1961-2001

100 80 60 40 Total Research Extension 20 0 1961 1964 1967 19 70 1973 1976 1979 19 82 1985 19 88 Source: Gary Alex (2003), unpublished file data.

1991 1994 1997 20 00

Prize rewards can jump-start innovation • Agricultural innovation faces a severe market failure –value creation is measurable but dispersed among the poor –private investment is limited by cost of value capture –public investment is limited difficulty of predicting success • Innovation can be accelerated with prize payments – to reward successful innovators – to recognize successful strategies: • attract private investment for marketable innovations • attract public funding to proven approaches

Prize initiatives are important but short-lived • Prize programs are often needed – Rewards for personal accomplishment are widespread – Rewards for specific technologies arise as needed: • 1714-1773 British reward for computing longitude at sea • 1802-1809 French reward for food preservation • 1901-1940 Various rewards for civil aviation • 1995-2005 Ansari X-prize for civilian spaceflight • Technology prizes are a

temporary

instrument – by revealing what works best, they are replaced by • private investment when the innovation is marketable • public grants and contracts when it is a public service

How prize rewards can help jump-start African agriculture • Pre-specifying a traditional prize won’t work – farmers need a changing portfolio of new techniques – success requires location-specific knowledge • but we can measure value with verifiable data – controlled experiments for output/input change – farm surveys for extent of adoption; – input and output prices • so donors can reward social value like a market sale – announce funding, eligibility and measurement rules – assist innovators to compile data after adoption – verify data and pay out in proportion to measured gains – visibility of rewards leads others to imitate success

New technologies often involve multiple innovations Genetic improvement Agronomic improvement (by researchers, using controlled trials) (by farmers, using land & labor)

Successful innovations are often surprising traditional “flat” planting labor-intensive “Zai” microcatchments For these fields, the workers are:

Prize rewards can stimulate any kind of innovation whose value is measurable improved fish-drying in Senegal using hermetic bags to store crops

Implementing Prizes:

Schematic overview

Step 1:

donors specify lines of credit for target domains (e.g. $1 m. for food crops)

Step 2:

innovators submit data on gains from new techniques after adoption (e.g. $36 m. over 7 submissions) Prizes would be a small fraction of total activity, but a key market-like signal of value

Impact:

other donors, investors and innovators imitate successes (e.g. 1/36 th

Step 3:

secretariat verifies data and computes reward payments of measured gains)

Implementing Prizes:

An example using case study data

Example technology 1. Cotton in Senegal 2. Cotton in Chad 3. Rice in Sierra Leone 4. Rice in Guinea Bissau 5. “Zai” in Burkina Faso 6. Cowpea storage in Benin Measured Social Gains (NPV in US$) 14,109,528 6,676,421 6,564,255 4,399,644 2,695,489 1,308,558 Measured Social Gains (Pct. of total) 39.2% 18.6% 18.2% 12.2% 7.5% 3.6% Reward Payment (US$) 392,087 185,530 182,413 122,261 74,904 36,363 7. Fish processing in Senegal Total 231,810 $35.99 m.

0.6% 100% 6,442 $1 m.

Note: With payment of $1 m. for measured gains of about $36 m., the implied royalty rate is approximately 1/36 = 2.78% of measured gains.

Implementing Prizes:

Data requirements

Data needed to compute each year’s economic gain from technology adoption

Price P D

K

(cost reduction) (input change)

I

Q

J

ΔQ Q’ S (output gain) S’ S”

Variables and data sources Market data

P,Q

National ag. stats.

Field data

J

Yield change × adoption rate

I

Input change per unit Economic parameters

K

Supply elasticity (=1 to omit) ΔQ Demand elasticity (=0 to omit)

Quantity

Implementing Prizes:

Data requirements

Data needed to estimate adoption rates across years

Fraction of surveyed domain First survey Other survey (if any) Projection (max. 3 yrs.) First release Linear interpolations Application date Year

Implementing Prizes:

Data requirements

Computation of cumulative economic gains

Discounted Value (US$) First release “Statute of limitations” (max. 5 yrs.?) Projection period (max. 3 yrs.?) NPV at application date, given fixed discount rate Year

Implementing prizes:

What’s done, what’s next

• Refinement and endorsement of the proposal – many meetings, publications and citations since 2003 – formal Advisory Board formed October 2004 – formal FARA commitment September 2005 • Funding for project development – Adelson Family Foundation (New York), 2004-06 – IFPRI (Addis Ababa), 2006-08 • Funding for prize rewards – significant interest from various donors – could be funded directly through FARA

For more information…

[email protected]

www.agecon.purdue.edu/staff/masters www.agecon.purdue.edu/prizes www.fara-africa.org

Advisory Board

Simeon Ehui (World Bank) Robert Evenson (Yale) Richard Nelson (Columbia) Phil Pardey (Minnesota) Carl Pray (Rutgers) Jeffrey Sachs (Columbia) Pedro Sanchez (Columbia) Brian Wright (Berkeley) David Zilberman (Berkeley)

Other endorsements to date

Walter Alhassan (Ghana, former DG of CSIR) Julian Alston (UC Davis) Jock Anderson (World Bank) Alain de Janvry (UC Berkeley) Bruce Gardner (U of Maryland) Anil K. Gupta (Natl. Innovation Found., India) Michael Kremer (Harvard) Jenny Lanjouw (Berkeley) Richard Mkandawire (NEPAD) Oumar Niangado (Syngenta Fndtion) George Norton (Virginia Tech) Rob Paarlberg (Wellesley) Prabhu Pingali (FAO) Per Pinstrup-Andersen (Cornell) Jim Ryan (Australia, former DG of ICRISAT) Eugene Terry (former DG of WARDA)