Synthesis Brief – Opportunities for Transforming the Agricultural Sector in Timor Leste 1. Introduction Investing in agriculture is essential for Timor-Leste at this stage of development. Agriculture is an essential industry for the next stage of Timor-Leste’s development journey, where diversification and modernisation are the key priorities to producing a sustainable and inclusive economy that benefits the majority of the population. Here are some simple facts to illustrate: • The most recent National Accounts data (General Directorate of Statistics, 2022) show that Agriculture is clearly the largest non-Government economic sector in the Timor-Leste non-Oil economy. • According to the 2021 Labour Force Survey, more than 228,000 working-age adults work in agriculture, by far the largest sector of employment. • Despite the importance of agriculture to such a large proportion of the Timor-Leste society, productivity is very low. Estimates in Inder et al. (2017) show that agriculture contributes an average $240 per person per year of economic value for the average agricultural household. This amount is around 40% of the individual Poverty Line, an unsustainable level of low productivity. Trends presented below suggests things have not improved since this analysis. • Population projections (Nguyen et al., 2017) show that even into the 2040s, more than 50% of Timor-Leste’s population will still be rural and rely on agriculture for their livelihoods, either directly or indirectly. Any realistic path to inclusive economic development and broad-based employment creation must include a concerted effort to invest in agriculture. However, business-as-usual in agriculture will not be enough: productivity is so low that adequate livelihoods cannot be supported. The majority of agricultural households will be trapped in poverty unless their incomes can be increased through improved productivity and a transition to production of higher value commodities. This Synthesis report: • Provides an overview of the challenges facing the agriculture sector in Timor-Leste at present. • Provides a simple framework for transformation of the agricultural sector, that ensures the investments are coherent and aimed at the most critical issues. • Documents the main opportunities for investing in the future. We present investment opportunities that will produce lasting benefit, but with noticeable short-term impact. • For sustainability in agriculture in terms of fostering sustainable market linkage, a direct engagement between SMEs and farmers may be of paramount important. 2. Diagnosing the Challenges We first take a historical view of the agricultural sector. There are a few significant trends evident over the past 20 years, particularly the last 10 years, that give a good insight into the current situation and the way forward. Figure 1 shows that crop and animal production comprise the great majority of agricultural activity - above 94% in terms of contribution to GDP. Figure 1: Composition of Agricultural GDP 2020 Composition of Agricultural GDP 2020 3.4% 2.3% 23.7% 70.6% Crops Animals Forestry Fisheries The most striking trend in crop production is a significant decline in agricultural crop production in the past 10 years, driven almost exclusively by decline in area. Figure 2 shows this clearly, with a 35% decline in the average area harvested between the 2001-2005 5-year average, and the 2016-20 average. Figure 2: Crop Area Harvested Crop Area Harvested Source: FAOStat 300,000 250,000 200,000 150,000 100,000 50,000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Crop Area Harvested This decline in area cultivated is almost entirely driven by substantial drops in production of the three commodities with the highest share of total land use: staple crops (maize and rice), and the main cash crop (coffee). Maize and rice comprised 92% of the area cultivated in 2010, and both saw substantial declines in area cultivated in the 10 years since - 59% decline for maize, and 48% for rice (source: FAOStat). Figure 3 shows the subsequent decline in carbohydrate production since 2010, which has halved in real per capita terms between 2010 and 2020. Figure 3 also presents some positive news: there is significant growth in production of a range of vegetables and animal products. But this growth is relatively small in area and value, not making up for the trend decline in the major crops. This explains the overall decline in Agricultural GDP shown in Figure 3, from a real value of more than $280 per person in 2010 to below $240 in 2020. Figure 3: Real Agricultural GDP per Person by Food Category Source: INETL, plus author calculations It remains to explain this substantial decline in land area cultivated, and the subsequent fall in production. Below we argue the decline is driven largely by a movement of people away from agriculture, especially since 2010. A lower supply of labour, along with minimal investment in labour productivity, will inevitably lead to lower output. First, here is some of the evidence around the declining labour supply. • Labour Force Surveys suggest a very clear message: while employment grew by 30% overall between 2013 and 2021, employment in agriculture went in the opposite direction, falling by almost 15%. The agriculture shares of total employment fell from 40.8% (2013) to 26.9% (2021). Subsistence foodstuff producers also fell by 9.5%. Overall, the proportion of the working-age population participating in agriculture (either as workers or subsistence farmers) fell by 23.3% over this period. • Census comparisons from 2010 to 2015 tell a similar story (details from the 2022 Census were not available at the time of producing this report). There is a significant decline in the proportion of people who report their main economic activity being in Agriculture, Forestry and Fisheries. Notably, the decline is greatest among the potentially more productive segments of the population - males and young adults. • Consistent with these labour force patterns is high levels of migration from rural to urban areas (mainly Dili), especially among working-age and young people. To illustrate the scale of this migration, Dependency Ratios (ratio of children and elderly to working-aged population) derived from Census (2022) shows a dependency ratio of 54% for Dili and a much higher 82% for non-Dili municipalities, reflecting the large numbers of working-age people who have left the non-Dili municipalities. Similarly, Table 3.4 of Census (2022) shows that Dili is the only municipality with a positive net migration rate (36.9%), all other municipalities are below zero. Growing levels of international out-migration have also contributed to this decline in domestic labour supply. While data on the number of migrants is not easy to compile, the explosion in remittances received in the country (growing from $33million in 2013 to over $180million in 2021, World Development Indicators) confirms the scale of this sizeable growth. What explains the decline in agricultural labour supply for Timor-Leste? • Standard economic models explain rural-urban migration with the relatively high expected urban wage. In this case, the increase in expected urban wage is almost entirely in government jobs - Business Activity Survey estimates from 2010 to 2022 suggest no noticeable growth in private sector employment. However, from 2010 to 2021, the Government wages and salaries bill has more than doubled, even after adjusting for inflation. The number of people on the Government payroll has grown by almost 40% from 2015 to 2022. This massive growth has raised the expected urban wage, which sits against a rural return-to-labour which has barely grown at all over the same period. • The expanded international migration opportunities offer substantially higher wages and further increase the incentive to leave low-return agricultural work. As noted, remittances data reveals rapid expansion in labour mobility, through Government-sponsored programs, business-sponsored employment opportunities and private international labour migration. • There has been steady growth in household non-labour income - access to the Veterans and other pensions (eg aged pension), and a range of other social transfers (World Bank, 2022, Figure 3.3, shows the share of non-Oil GDP allocated to social protection spending is the highest among ASEAN countries). Alongside very rapid growth in remittances received, this reduces the incentive for farmers to invest in low-income / low-return activities. These various alternative income sources all have the effect of increasing farmers’ reservation wage - the minimum return to labour that they expect in order to justify the effort to work in a particular activity. The higher reservation wage will usually mean that farmers reduce their supply of labour, usually by abandoning marginal land and/or reducing production of low-margin agriculture crops, along with potentially increased production of high-value crop. s. This is precisely the pattern we observe in Figure 3 above, with a decline in production / value- add from low-yield staple crops (carbohydrates), and some growth in vitamin-rich vegetables, meat products and other protein, most of which offer much higher returns to labour. Had there been improvements in yield / productivity due to improved use of inputs and equipment over the past 10 years, this would have avoided the decline and also produced growth in farmer incomes. This is the more standard story of the modernisation and transition of an economy from an agrarian to a more market-based economy: improvements in productivity produce higher incomes for farmers and lead to increased demand for non-farm goods and services, with commensurate increased demand for non-farm labour. The productivity increases also create surplus labour on the farm, and drive workers into other occupations. In other words, productivity improvements produce push and pull factors driving the mobility of labour out of agriculture. However, this is not the story in Timor-Leste: there has been minimal improved labour productivity (push factor), and pull factors are external to agriculture-led increased incomes and subsequent non- labour demand. A number of Timor-Leste specific studies have documented evidence from various sources on yields, productivity and daily return to labour from farming and selling a range of crops, given traditional farm practises and current market prices. The Development Partners Compendium (2022) provides a useful source. This report also explores areas where potential productivity improvements can be achieved. What is evident from this analysis is that the returns to labour for the major crops - rice, maize and coffee - are very low when traditional production methods and seed varieties are used (e.g. $3.20 per day for rice, $7.40 per day for coffee). Notably, these are the very crops where production has declined the most in the past 10 years. Conversely, the relatively strong growth in production of certain vegetables over the past 10 years corresponds to comparatively high returns to labour - well over $20 per day in some cases. It also follows from this trend decline in use of arable land, that land is not the binding constraint for the foreseeable future. The binding constraint is labour, but only because of the low returns to labour. Future investment to growing agriculture needs to focus on improving farmer incomes via improvements in productivity and by continuing the trend towards high-value commodities. This will resolve the labour shortage problem and see significant increase in farmer incomes and overall contribution of agriculture to economic growth. Importantly, the selection of sub-sectors and commodities to support needs to be in commodities and associated technologies that guarantee adequate return to labour, above the reservation wage. Otherwise, the supply of labour constraint will be binding, and production will not grow. 3. Transformation of the Agricultural Sector: A Framework This section provides an overall framework for how the sector can be steadily transformed. It is based on the diagnostic given in the previous section and focuses on crop selection and productivity as the key to attracting labour, utilising land better, and making local products more competitive. The framework also seeks to give more clarity to the process by which these productivity improvements can be achieved, implemented and scaled. Figure 4: The Process of Agricultural Transformation In simple terms, the transformation process can be described in two stages: Stage 1: Deciding the best paths to modernising Under a traditional agriculture system, household farms usually select commodities to produce based on their consumption needs, and not so much for generating income from sale at market. Once markets are introduced, the criteria for commodity selection needs to focus on market returns. Decisions about the paths to modernising require information about: • Current levels of productivity and economic returns • Potential innovations that can deliver productivity improvements • Guidance for selecting priority commodities, based on the current and potential productivity • Best approaches to adoption and scaling the best innovations Stage 2: Implementation to Improve Incomes and Productivity An understanding of the best commodities to produce and the best use of innovations and inputs is a good start, but implementation is key. With so many farmers spread across the country, facing so many constraints with access to inputs, limited finances, difficult access to market, limited knowledge of innovative practises, etc etc, there need to be well developed and implemented plans to address systemic challenges and to support farmer adoption of best practises. This means: • investing in programs that support adoption and scaling of the best innovations in the priority sub-sectors / commodities. • addressing some of the systemic issues that particularly affect the efficient functioning of the value chain in priority crops and animal systems. 4. Next Steps of Transformation for Timor-Leste Timor-Leste’s agriculture sector has made significant progress in some aspects of this process, but also has sizeable gaps. Strategic investments will best operate in 3 areas. 1. Implementation: For several commodities, Stage 1 (Paths to modernising) has already progressed well. There is already clear evidence in place about what are suitable commodity selections and what technologies can produce very good farmer incomes. The other reports in this series highlight several examples. In these cases, Timor-Leste is ready now for the Stage 2 implementation phase and there is scope for well-designed investments that scale up and accelerate growth in key sectors. 2. Sector-Wide Reform: There are sector-wide obstacles that increase costs and affect productivity across several commodities. Investing in addressing these blockages will produce strategic benefit for several commodities and sub-sectors. Details are given in Table 1 below. 3. Strengthening Research and Planning: For many commodities, understanding of best practice is limited. Current practice is based on traditional farming methods, or on the limited experiences and ideologies of supporting organisations. Local adaptive research is needed to provide an evidence base about what technologies and inputs produce the greatest benefits for farmers. Furthermore, even where there is current consensus about the best commodities to produce and technologies to adopt, these do not remain fixed. New innovations take place, new pests or diseases emerge, market demand evolves, so there is a need to continue building the evidence base about future improvements. Long term development of the Sector will require investments that improve the local research, analysis and planning capacities of Government and the Private Sector. We emphasise that these research and planning investments are not necessarily transformational in the short term - based on current learning, much can be done already to implement improved practices and guide commodity selection. The sector is ready for implementation and action. Section 5 will give more details on these investment opportunities for Timor-Leste. 5. An Agenda for Reform and Investment 5.1 Implementation with Selected Commodities Firstly, several quick win investments have been documented in the accompanying reports, across specific crops and animal systems. As noted, all are evidence-based, proven to deliver significant improvements in daily return to labour / farmer incomes, better yields per hectare and improved market competitiveness. However, virtually all require investment of public and private resources and expertise to address market failures at various stages of the value chain. The main point to reinforce here is that the options for commodity investments should be guided in broad terms by the patterns identified in this report. The trend is away from investments in staple crops that produce low yields and low return per labour day. Farmers want higher incomes, and this is found in improved practices, use of external inputs, and moving towards high-value horticulture and animal production. 5.2 Sector-wide Issues relevant to multiple Value Chains Table 1 gives a brief overview of key sector-wide issues that can support growth in the priority commodities. • Focus area: the focus areas documented in Table 1 are relevant to several of the priority crops or animal systems and could be addressed on a sector-wide basis. • Institutional reforms: these are places where Government can move to provide a more supportive environment for growth in the key value chains. • Investment opportunities: these are interventions for Government, Development Partners or the Private sector to consider supporting. Table 1: Sector-wide strengthening of Value Chains Focus Area Institutional Investment Opportunities Reforms (Expertise or Capital) More access to inputs - National Seed Government and DPs: provide Improved seed varieties, Policy incentives for key private sector animal feed, fencing, importers / distributors to improve tools and equipment, National Policy on supply chains for fertiliser, herbicide, inputs to deal with weeds safe use of animal feed protein, vaccines, fencing and improve soil quality, chemical products • Storage: farm-based and centralised etc storage to reduce waste, deal with Trade reforms to seasonal shortages, and improve supply facilitate imports of chain (eg facilitates farmers to store key inputs surplus production; enables use of corn as an input for animal feed) • Water: includes restoring and expanding irrigation structures to reduce water insecurity and encourage investment in higher productivity. • Risk mitigation - Stronger DPs: provide technical support and dealing with institutions within equipment to strengthen MAP biosecurity risks MAP • Addressing credit DPs and Private Sector: Expanded constraints to use of agriculture-based micro-credit, including external inputs selective trial of insurance products • Digital innovation as Enhanced digital DPs: introduce an Incentive Scheme for source of information approaches in adopting best practice international digital about practices and government innovation, focused on accessing and markets. extension service sharing information • Traders and Government: Incentives for Private sector aggregators / Traders to participate in selected value processors - improve chains efficiencies for selected commodities 5.3 Medium Term Institutional Reforms The Framework in Section 3 highlights that the strategy starts with locally relevant research, and then needs to move to implementation via an effective extension program. The current situation in Timor-Leste comprises a low level of research into best agricultural practices, and poor integration between research and extension. Some internal structural MAP work can help reshape this. First, there needs to be a strong Department of Agribusiness that has skill to develop appropriate gross margin and return to labour calculations to guide priorities, policy and practice. Together with an Agency that focuses on locally adaptive research, this supports economic analysis that identifies optimal uses of the different agro-ecosystems. The level of funding for Agricultural research in Timor-Leste is extremely low. Rich countries typically spend about 3% and poor countries about 0.3% of Agricultural GDP on research. For Timor-Leste, spending is an even lower 0.06%, (Agricultural GDP $237 Million, Ag research spend $137,000). The delivery of Extension work also needs to be redesigned. The current model relies on geographically located extension workers who provide general extension services to farmers. A new model can be developed that addresses some of the current limitations. First, having a strong feedback loop from extension work to research, so that extension work can be well guided by research and can also provide on-the-ground feedback to the research team. Secondly, extension work needs to be targeted and specialised, in support of the particular commodities and technologies that have been identified. This suggests at least some move to introduce private extension work, with Government coordinating private providers to deliver specific extension work for designated commodities, and to support adoption of specific inputs or technologies. Table 2: Institutional Reforms Activities Institutional Reforms Investment Opportunities (Expertise or Capital) Local adaptive research and This agenda can be: DPs: Strategic or technical analysis that • led by the Agribusiness support for the establishment • measures current Directorate in MAP, along and strengthening of the levels of productivity with a well resourced Agribusiness Directorate and and economic returns Agricultural Research Research Institute • evaluates innovations Development Institute for their ability to (TLARDI), as proposed in Private Sector: Provision of deliver productivity the SDP contracted research and improvements • supported by Development analysis • based on the current Partner analysis and trials and potential with specific commodities. productivity measures, selects priority commodities • develops approaches to adoption and scaling the best innovations Improved Extension Services Requires developing improved DPs: Support for GoTL to Programs that support systems within MAP to link design strong extension implementation research and extension for: services and undertake • national campaigns national campaigns promoting technologies proven to increase effective Private Sector: Developing farm income. capacity to provide private • rapid deployment of extension services tested/improved technological options. 5.4 Other Longer Term Directions The roadmap for investment outlined in this report are targeted at a next-stage transformation of the agricultural sector. The focus is on supporting small farmers to increase incomes via better selection of what to produce and how to produce it (productivity and competitiveness). There are several other issues that need to be addressed for long term modernisation of the sector. In the long term, it is likely there will be: • increased reliance on large commercial farms and agricultural processing, • increased reliance on mechanisation, • consolidation of small land holdings so that small farms grow from a typical 1-2 hectares to more like 5-10 hectares, • increased export focus, likely primarily in specialty products targeting health-conscious consumers among the middle class. Whilst this kind of transformation is likely very much in the long term, consideration can be given to opportunities for policy reform and investments that point in that direction. For example: • opportunities may arise in the short term for establishing large farms or improved agri- processing facilities. • Similarly, progress towards implementation of Land Laws and associated administrative processes will assist the gradual land consolidation process. • Progress can be made in building an export strategy that establishes a comparative advantage for Timor-Leste’s potential exports, and continuing to improve trade facilitation efficiencies. All of these longer term topics require more detailed analysis, beyond the scope of this report. 6. Broader Policy Issues 6.1 A Political will to invest in Agriculture. There is a narrative often stated that the drift away from agriculture is simply a natural adjustment between the traditional and modern sectors of the economy, and that “the future of the economy is not in agriculture�. This argument then suggests that there is little value in investing in agriculture. The problem with this conclusion is that it misinterprets the underlying drivers of the drift away from agriculture. The factors providing incentives for people to move away from farming are not sustainable - the Government is spending at unsustains. ble levels on public sector salaries, on social transfers and on other expenditure areas that artificially inflate the expected non-agricultural / urban earnings. As fiscal constraints are encountered, there is likely to be a reduction in the size of the public service, and cuts to social transfers. Unless there is rapid growth in other sectors of the economy, this will lead to a greater reliance on agriculture. Without improvements in return to labour in agriculture, high poverty rates and associated high levels of undernutrition will persist, and potentially increase. The other argument against treating this transition as natural adjustment is that there is not the capacity to absorb the labour in other sectors such as urban services, light manufacturing, etc. There are already high levels of youth unemployment and underemployment in the urban areas. In a whole-of-economy growth strategy, the most obvious sector in which to absorb this labour and generate incomes growth is the agriculture sector, and in the regional economic growth that accompanies a growing rural sector. In fact, even with the most optimistic growth projections for other sectors such as tourism, manufacturing or labour mobility, there is nowhere near the capacity to absorb the large amount of surplus labour. 6.2 A focus on Productivity and Use of External Inputs In this series of reports we argue for a shift in agriculture support towards investments that help farmers work more productively - this will produce the income and productivity increases that make farming attractive. A key obstacle to this shift is with the views of some who are opposed to the use of external inputs. There appear to be two key issues of concern that are raised: 1. Risks for farmers. For example, consider a farmer who pays for animal feed instead of using food scraps that involve no financial outlay. What if the animals become diseased and produce no income in future? The farmer cannot even recover the costs they have incurred. 2. Opposition to chemical fertilisers and herbicides. There is an awareness of the experiences of other countries of the harmful effects of these to human health and the environment. 3. Conservation Agriculture comprises a package of crop production technologies and practices that can achieve sustainable agriculture and improve livelihoods. How do we respond to these concerns? • The international and local evidence is clear that if the sector refuses to adopt external inputs, farmers will be trapped in a cycle of poverty. The best next steps for productivity improvements need to focus on low-risk and low-level use of external inputs, so the financial risks and outlays are low. Over time this will build trust and confidence in the technologies. • Chemical fertilisers and herbicides are gaining popularity in Timor-Leste, with significant growth in imports in the past few years. The worst development would be growth in an unregulated environment, leading to irresponsible use that damages human health and the environment. A strategic response is to develop knowledge and systems that support a balanced and safe use of external inputs. • The issue of affordability and financial risk are genuine concerns, and there are opportunities for targeted subsidies of specific inputs in selected value chains, as well as the development of risk- sharing financial products, to protect the most vulnerable in the supply chain. • Conservation agriculture (CA) boosts crops productivity and farm profitability when combined with other climate-smart agriculture methods like agroforestry, integrated livestock farming, pest and disease management, soil and nutrient management, and on-farm water management (FAO, 2018). 6.3 Rethinking Existing Investments The Government has undertaken various initiatives aimed at stimulating growth in agriculture. This is not the place for a thorough critique, but rather to make a few general points. • Priorities need to be clear about which are the best commodities to support - encouraging expansion in production of low-yield staple crops is likely to be ineffective if there is not the reward for farmers in the form of higher incomes / returns to labour. • The focus of Government on improving the value chain for key commodities has led to a number of benefits. Our general comment is that interventions to support the value chain with subsidies need to be evidence-based, targeting the most high-yield commodities and at the points of greatest impact. Government funds are scarce, so need to be invested wisely to produce maximum benefit. • A number of Government programs have sought to provide stimulus to the sector by increasing demand for local product - Cesta Basica and associated local content requirements, etc. The problem is that if there is not an equal focus on increasing production (supply), the increased demand can have the effect of diverting consumption to imported products, and/or temporarily inflating prices. There may be temporary stimulus effects on the sector and on farmer incomes, but it is often the case that there is no lasting benefit. Lasting benefit comes from improved productivity and competitiveness. 6.4 Issues and Policies beyond Agricultural Sector Here we briefly discuss some key non-Agricultural policies that are affecting the Agricultural sector, and hence need to be addressed in order for sector-wide development to thrive. • Social transfers and other government support programs, which inject significant amounts of cash into the economy and indirectly reduce the incentive to work in agriculture – can these be tailored to stimulating domestic demand and supporting growth in productivity? • Labour mobility programs, and their associated remittances – can these be leveraged to provide the skills and capital to stimulate rural development? An emphasis on reintegration is a useful step in this direction. • Growth in public sector employment – can this be oriented to supporting investment in productive sectors such as agriculture? • Rural roads and communications infrastructure - roads and digital connectivity are critical to well- functioning markets and value chains. These pieces of national infrastructure are the main bottleneck to the emergence of significant improvements in the off-farm commodity value chain - access to input and output markets and access to information. • The use of US$, which has made Timor-Leste’s commodities increasingly uncompetitive in the export market or in import substitution. For example, a 50% depreciation of the Indonesian rupiah against the US$ over the past 10 years has given an enormous competitive advantage to imports from Indonesia, making competitive import substitution increasingly difficult. As policy discussion moves towards introducing a local currency, it is vital to consider the implications and opportunities for the agriculture sector. References Food and Agriculture Organization of the United Nations. (1997), FAOSTAT statistical database, FAO. Government of Timor-Leste (2021), Compendium - Adapted Technologies and Practices for Climate Resilient Agriculture, Toward sustainable and climate resilient crop intensification in Timor-Leste. Government of Timor-Leste (2023), Population and Housing Census 2022: Main Report. International Labour Organisation (2013), Timor-Leste Labor Force Survey 2013, ILO. International Labour Organisation (2021) Timor-Leste Labor Force Survey 2021, ILO. Brett Inder and Katy Cornwell (2017), Labour Markets and Productivity in Timor-Leste, Monash University Research Paper Series on Timor-Leste, RP TL-7. Food and Agriculture Organization – FAO Timor-Leste) (2018). Promoting Conservation Agriculture in Timor-Leste. Paul Nguyen, Katy Cornwell, Brett Inder, Nan Qu (2017), An Economic Perspective on People Movement in Timor-Leste, Monash University Research Paper Series on Timor-Leste, RP TL-6. World Bank (2022), Timor-Leste Economic Report December 2022: Honoring the Past, Securing the Future, World Bank.