Agricultural transformation entails considerable financial needs. This is because the demands for productivity improvements necessary in the course of the transformation require considerable capital upgrading, and also short-term financing for production inputs, the demand for which increases with technical change. Also, lack of finance can choke off agricultural development and poverty reduction. This is because of the reasons indicated above.
Government expenditures and financial flows into agriculture are inadequate in most developing countries. The investment financing needs for agricultural transformation in low-income countries are very large, and current lending accounts for a very small share of total needs. The bulk of financing flows into agriculture is private, and public flows are very small compared to the total. Donor ODA flows into agriculture are small compared to the needs, and have fluctuated considerably over the past two decades.
Most agricultural transformation and poverty reduction must be based on a smallholder model of development. Large gaps exist in smallholder financing needs compared to existing flows. Traditional rural financial institutions are inadequate to meet needs. There are several promising rural financial innovations that are emerging and that could address the serious finance gap for agricultural development.
In summary, the lack of adequate amounts of agricultural capital and short-term finance can slow down the agricultural transformation and consequently the growth rates in low-income countries, but new institutional structures could alleviate the problem considerably.