TOPIC 1: REVIEW OF PRINCIPLES OF GROWTH AND DEVELOPMENT AN OVERVIEW The dominant feature of Less Developed Countries compared with

h the rest of the world is their relative poverty Relative poverty is a dominant feature of LDCs In this course we shall focus on both theory and techniques These skills will enable us to evaluate policy implications The first step is to distinguish between LDCs and DCs with respect to the following attributes: Structure and organization of agriculture The behavior of agricultural producers
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POVERTY AND ECONOMIC DEVELOPMENT Poverty is a key characteristic of traditional agriculture which is also the predominant form of agriculture in LDCs The major causes of poverty include: Inadequate access to land and capital for the majority of the farmers and technological backwardness In order to defeat poverty we need to tackle the two issues above Agriculture per se is fraught with risks and uncertainties particularly in fragile LDC economies hence the need for policy measures to reduce the risks and uncertainties Development theory postulates a progression from dominant primary production in agriculture to dominance in manufacturing industry Thus poverty reduction or elimination is central to Economic 2 Development

TOPIC 1: REVIEW OF PRINCIPLES OF GROWTH AND DEVELOPMENT

Less Developed Countries economic crisis presents an extraordinary challenge to the development community i.e. both intellectuals and policy makers Most LDCs have embarked on comprehensive programs of economic adjustment over the past few decades These include fundamental structural changes in both the agricultural and non agricultural sector The idea is to transform these LDCs economies and make them more competitive in an increasingly competitive world In order to achieve food security, provide jobs and register a modest improvement in living standards LDCs must grow by at least 4 to 5 % annually
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REVIEW OF PRINCIPLES OF GROWTH AND DEVELOPMENT Sustained growth will require efforts to protect the environment To this effect at least agriculture will be seen as the main foundation for growth The key to development will be to develop and apply new technologies as well as to slow population growth We recognize that sound macro economic policies and efficient infrastructure are essential to provide an enabling environment for the productive use of resources However they in themselves are not sufficient to transform the structure of LDC economies Macro economic policies are therefore necessary but not sufficient in providing an enabling environment
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REVIEW OF GROWTH AND AGRICULTURAL AND RURAL DEVELOPMENT Capacity building in human resources is key to the strengthening of institutional framework within which development can take place It is the milieu within which development can take place One of the root causes of weak economic performance in the past has been the failure of the public institutions Private sector initiative and market mechanisms are important but they must go hand in hand with good governance Regional cooperation and integration like the African Union, Common Market for Eastern and Southern Africa and Southern Africa Coordination Committee are key towards the development of African economies
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SCOPE AND NATURE OF AGRICULTURAL AND RURAL DEVELOPMENT Africa as a whole has over the years witnessed almost a decade of falling per capita incomes The question is does Africa face special structural problems More fundamentally is there a long term vision that is both credible and energizing? In order to understand this we need to perhaps look at a brief historical perspective of the LDCs story

HISTORICAL PERSPECTIVE Historically overall economic growth in Sub Saharan Africa has averaged 3.4% a year since 1961 This represents only a fraction above the population growth rate By 1987 the region of about 450 million people had a total Gross Domestic Product of around $135 billion about the same as that of Belgium which had only 10 million inhabitants The growth was unevenly spread across countries Between 1961-72 income per capita grew 1973-80 was a period of stagnation 1981-87 were years of decline

HISTORICAL PERSPECTIVES Africas deepening crisis is characterized by Weak agricultural growth, decline in industrial output, poor export performance, soaring debt and deteriorating social indicators, institutions and the environment Agriculture has grown annually by less than 1.5% on average since 1970 with food production rising more slowly than population Industry grew by three times as fast as agriculture in the first decade of independence since then deindustrialization has set in Since 1970s export volumes have barely grown with Africas share in the world markets falling by almost half This paints a sorry picture for Africas development as well as the development of other LDCs

TWO VIEWS TO DEVELOPMENT ABOUT PEASANT FARMERS One view is that despite their poverty, peasant farmers are allocatively efficient An opposing view to this is that because of poverty, risk minimization takes precedence over profit maximization Those who believe in the poor but efficient view believe that technological advance is virtually the sole means of raising output and incomes in peasant agriculture However opponents of this view believe that significant increase in output can be achieved through more efficient use of existing technology The upshot is that progress can be achieved by doing both i.e. improving production incentives as well as by encouraging farmers to make better use of present technique
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TWO VIEWS TO DEVELOPMENT ABOUT PEASANT FARMERS Gross inequality in the distribution of ownership of land gives rise to the demand of land reforms Land reform is regarded as a precondition for agricultural development Note that more land redistribution of ownership is necessary but not sufficient to transform agriculture What is needed is a more comprehensive agrarian reform This should tackle issues of extension, credit and marketing services (a holistic approach)

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TWO VIEWS TO DEVELOMENT ABOUT PEASANT FARMERS Due to high population density, it is quite unrealistic to view land reform as a panacea for abolishing rural poverty and unemployment You need to boost other sectors, like creating better non agricultural employment opportunities You also need to focus on the macro economy and not only the agricultural sector in order to resolve the problems The role of credit in agricultural development is especially important in facilitating the adoption of more appropriate technology to raise productivity

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WHAT IS DEVELOPMENT? Quote 1 While humanity shares one planet , it is a planet on which there are two worlds, the world of the rich and the world of the poor (Raanan Weitz, 1986) Quote 2 23% of the worlds people earn eighty five percent of the worlds income. In 1990 the richest 20 % of the worlds population were getting 60 times more income than the poorest 20%. United Nations Development Report, 1992. The above quotes will help us define what development is Development can be defined as the sustained elevation of an entire society and social system towards a better and more humane life
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WHAT IS DEVELOPMENT? The core values of development represent common goals sought by all individuals and societies These are sustenance ,self esteem (sense of worth), freedom from servitude and freedom to choose Development must have the following three objectives: To increase the availability and widen the distribution of basic life sustaining goods such as food , shelter ,health etc To raise levels of living standards i.e. higher incomes, better jobs, education and greater attention to cultural and humanistic values To expand the range of economic and social choices available to individuals and nations
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ECONOMIC GROWTH VERSUS ECONOMIC DEVELOPMENT Economic growth refers to the increase of a specific measure such as real national income, GDP or per capita income It is a positive change in the level of production of goods and services by a country over a certain period of time Nominal growth is defined as economic growth including inflation Real economic growth in defined as nominal growth minus inflation It is a period when business activity surges or grows Economic growth is the increase in the value of goods and services produced by an economy

ECONOMIC GROWTH VERSUS ECONOMIC DEVELOPMENT CONTINUED Economic growth in its broadest sense encompasses two major areas; Policies that Governments undertake to meet broad economic objectives Policies and programs to provide infrastructure job creation and services Economic Development refers to a sustainable increase in living standards Thus economic growth of any specific measure is not a sufficient definition of economic development Economic development includes economic growth plus structural changes in the economy

CLASSIFICATION OF DEVELOPING COUNTRIES The United Nations uses the Human Development Index (HDI) The HDI incorporates demographic and social indicators The United Nations uses three major groups Least developed nations, comprising 44 poorest countries Non oil exporting developing countries, comprising 88 countries Petroleum rich members of Oil and Petroleum Exporting Countries (OPEC) comprising 13 countries

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ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT (OECD) AND WORLD BANK CLASSIFICATION Low income countries (LICS) i.e. those with 1990 per capita income of less than $600 comprising 61 countries Middle Income Countries (MICS) comprising 73 countries 13 members of OPEC The World Bank divides 125 countries (both developed and developing with population in excess of 1 million ) into 4 categories according to their per capita income levels Low income Middle income Upper middle income and High income

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ORGANIZATION FOR ECONOMIC COPERATION AND WORLD BANK CLASSIFICATION The first three comprise 101 countries, mostly from developing countries and the last group consists of 24 countries Most third world economies share common goals. These are: Reduction of poverty, inequality and unemployment Provision of minimum levels of education, health ,housing and food The broadening of economic and social opportunities Common problems shared by these countries include: Chronic absolute poverty, high and rising levels of unemployment and under employment, wide and growing disparities in the distribution of income and low and stagnating 18 levels of agricultural production etc

COMMON CHARACTERISTICS OF DEVELOPING COUNTRIES Low levels of living Low levels of productivity High rates of population growth and dependency burdens Significant dependence on agricultural production and primary product exports High degree of vulnerability in international relations (Georgia, Zimbabwe ,Somalia, Afghanistan etc)

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EXTENT OF POVERTY The magnitude and extent of poverty depends on two factors: The average level of national income The degree of inequality in its distribution Absolute poverty represents a specific minimum level of income needed to satisfy the basic physical needs of food, clothing and shelter See figure 2.4 on page 43 Todaro People living in absolute poverty 1989(estimated) Source: United Nations Population Fund , Population Resources and the Environment, The critical challenge (New York UNFP 1991),p16

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LOW AGRICULTURAL PRODUCTIVITY Agricultural productivity is low in LDCs because agriculture in these countries is characterized by primitive technologies, poor organization and limited physical and human inputs Technological backwardness persists because third world agriculture is predominantly peasant farming Lack of ownership of land. Most peasants rent land thus no economic incentives for output and productivity improvements

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LEADING THEORIES OF ECONOMIC GROWTH Post world war 2 literature on economic development has been dominated by 4 major and sometimes competing strands of thought; The linear stages of growth model Theories and patterns of structural change The international dependency revolution and The neoclassical free market counter revolution In the past few years we have witnessed the emergency of a new fifth approach associated primarily with the so called new theory of economic growth
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LINEAR STAGES OF GROWTH MODEL Theorists of the 1950s and early 1960s viewed the process of development as a series of successive stages of economic growth through which all countries must go through They believed in an economic theory of development in which the right quantity and mixture of savings investment and foreign aid were all that was necessary to enable third world nations to proceed along an economic growth path that had been followed by now developed nations The linear stages approach was largely replaced in the 1970s by two competing economic schools of thought

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THEORIES AND PATTERNS OF STRUCTURAL CHANGE This approach used modern economic theory and statistical analysis in an attempt to portray the internal process of structural change that LDCs must undergo

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INTERNATIONAL DEPENDENCY REVOLUTION This approach was more radical and political in orientation It viewed under development in terms of international and domestic power relationships It also views underdevelopment in terms of institutional and structural economic rigidities and the resulting proliferation of dual economies and dual societies both within and among nations of the world

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SUMMARY OF THE DEPENDENCE THEORIES Dependence theories tended to emphasize external and internal institutional and political constraints on economic development Emphasis was based on the need for major new policies to eradicate poverty, provide more diversified employment and reduce income inequalities Economic growth per se was not given the excellent status accorded to it by the linear stages and the structural change models

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THE NEO CLASSICAL COUNTER REVOLUTION In the 1980s we had a fourth approach emerging. This was the Neo Classical Counter revolution This emphasized the beneficial role of free markets, open economies and privatization of inefficient enterprises According to this theory government intervention and regulation were the key to failure to development

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ISSUES IN AGRICULTURAL AND APPLIED ECONOMICS

International trade has often played a crucial though not necessarily a benign role in the historical development of LDCs Primary products have accounted for a sizeable proportion of individual GNP from (25% to 40%) in some of the smaller nations GNP is derived from the overseas sale of agriculture and other primary products Most LDCs depend on non mineral primary product exports for the vast majority of their foreign exchange earnings Markets for these products are largely unstable, hence primary product export dependence carries with it a degree of market risk and uncertainty that few nations desire. 28

ISSUES IN AGRICULTURAL AND APPLIED ECONOMICS In addition to the export dependency many LDCs rely generally to an even greater extent on the importance of raw materials, machinery and capital goods, intermediate producer goods and consumer products to fuel their industrial expansion and satisfy the rising consumer aspirations of their people For most non petroleum rich developing countries e.g. Malawi, import demand has increasingly exceeded the capacity to generate sufficient revenues from the sale of exports This has led to chronic deficits in the balance of payments position vis avis the rest of the world In a number of LDCs severe deficits on current and capital account s have led to rapid depletion of their international 29 monetary reserves and a slowdown in Economic growth

ISSUES IN AGRICULTURAL AND APPLIED ECONOMICS

Thus a chronic excess of foreign expenditures over receipts can significantly retard development efforts It can also greatly limit a poor nations ability to determine and pursue its most desirable economic strategies By opening their economies and societies to world trade, third world countries invite not only the international transfer of goods, services and financial resources but also the developmental or anti developmental influences of the transfer of technologies, technological, economic, social and cultural transfers The volume, value and structure of world trade has undergone considerable change over the past three decades 30

ISSUES IN AGRICULTURAL AND APPLIED ECONOMICS

The principal reason for the 1980s contraction of real exports after a rise in the 1960s and 1970s include: The effects of the severe global recession (general downturn in economic activities) of the 1980s which was followed by an extended period of slow economic growth The extraordinary rise and fall of the value of the US dollar i.e. fluctuation of the US currency The continuous decline in the third world commodity prices The rise of protectionism in the developed countries The on going debt crisis throughout Latin America , Asia and Africa
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ISSUES IN AGRICULTURAL AND APPLIED ECONOMICS

Faced with these problems, many LDCs have had to curtail imports as part of fiscal and monetary austerity measures This has in turn led many (LDCs) to experience a slow down in overall economic growth, a rise in unemployment and a general increase in the incidence of severe poverty Most LDCs still depend heavily on their exports of primary products whereas the developed nations export primarily manufactured goods We can observe why export performance of the majority of LDCs have been relatively weak compared with the export performance of rich countries
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ISSUES IN AGRICULTURAL AND APPLIED ECONOMICS

This relates to the concept of elasticity of demand Most statistical studies of world demand patterns of different commodity groups reveal that in the case of primary products the income elasticity of demand is relatively low The percentage increase in quantity demanded will rise by less than the percentage increase in national income By contrast for fuels and manufactured goods, income elasticity is relatively high For example it has been empirically estimated that a 1% increase in developed country incomes will normally raise their import of foodstuff by 0.6%
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ISSUES IN AGRICULTURAL AND APPLIED ECOMNOMICS

Agricultural raw materials such as rubber and vegetables by 0.5%, Petroleum and other fuels by 2.4%, Manufactured goods by 1.9% Consequently, when incomes rise in rich countries their demand for food , food products and raw materials from the third world nations goes up relatively slowly whereas their demand for manufactured products , the production of which is dominated by the developed countries goes up very rapidly Finally , the concentration especially in Africa of export production on relatively few major non cereal primary products such as tobacco, cocoa tea etc renders them vulnerable to market fluctuations in the prices of specific products

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ISSUES IN AGRICULTURAL AND APPLIED ECONOMICS Nearly half the third world nations earn over 50%of their export receipts from a single primary product About three quarters of the third world nations earn 60% or more of the export receipts from no more than three primary products Significant price variations for these commodities can render development strategies highly uncertain This explains the birth of international commodity agreements

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TERMS OF TRADE

The question of changing relative price levels for different commodities brings us to another important quantitative dimension of the trade problems faced by third world countries The total value of export earnings depends not only on the volumes of these exports sold abroad but also on the price paid for them If export prices decline, a greater volume of exports will have to be sold merely to keep total earnings constant Similarly on the import side , the total foreign exchange expended depends on both the quantity and the price of imports (Check the J curve effect and elasticity marshall lerner conditions) 36

TERMS OF TRADE CONTINUED Clearly if the price of a countrys exports is falling relative to the prices of the products it imports, it will have to sell that much more of its export product and enlist more of its productive resources This will be merely to secure the same level of imported goods that it purchased in previous years In other words the real or social opportunity cost of a unit of imports will rise for a country when its export prices decline relative to its import prices Economists describe the relationship or ratio between the price of a typical unit of exports and the price of a typical unit of imports as the commodity terms of trade: Px/Pm where Px and 37 Pm represent export and import price indices respectively

COMMODITY TERMS OF TRADE The terms of trade are said to deteriorate for a country if Px/Pm falls i.e. if export prices decline relative to import prices even though both may rise A good deal of the argument against primary product expansion and in favor of diversification into manufactured exports for developing countries during the 1950s and 1960s was based on the secular deterioration of the non oil commodity terms of trade

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POLICY MARKETS AND PUBLIC ACTION GOVERNMENT INTERVENTION AND ROLE OF MARKETS AND INSTITUTIONS GHATAK CHAPTER 5 p90 Today mainstream debates about development in poor countries are centered on globalization of economic policies and institutions and issues such as privatization and sustainability There are two views with regard to modern economic growth (Yujiro Hayami) The first is the community yoke thesis . This considers the traditional institutions in pre capitalist and pre industrialist communities to be the feudal yokes preventing realization of both the economic and moral potential of mankind In this philosophy the market is efficient in resource allocation and provides the rules of justice Free market is the easy way forward
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POLICY MARKETS AND PUBLIC ACTION GOVERNMENT INTERVENTION AND ROLE OF MARKETS AND INSTITUTIONS The second view is that called the evil market thesis In this view the morals that are considered necessary for the efficient functioning of market economy are based on contracts among free individuals such as honesty, trust and restraint These are issues that are not learnt from commerce and market but are virtues nurtured through social interaction in precapitalistic communities bound by common religion and mutual love Since the traditional virtues are undermined by market forces based on the unrestricted release of self interest and material social greed the capitalist market system is demoralizing hence self destructive 40

POLICY MARKETS AND PUBLIC ACTION GOVERNMENT INTERVENTION AND ROLE OF MARKETS AND INSTITUTIONS Governments should expand their efforts in the spheres in which both the community and markets fail to achieve socially efficient resource allocation To this effect, government should try to supplement rather than replace indigenous community and market systems

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MARKETS, MARKET FAILURES AND DEVELOPMENT One key question in development is how can we account for differences in the levels of income and rates of growth between the developed and less developed economies The 1950 and 60s answer was that the poor are like the rich except they are poorer, have less human and non human capital Therefore the solution was to increase the resources of LDCs either by transferring capital to them (either direct aid or education) or by encouraging them to save Today the answers are less convincing than they did two decades ago If the problems were primarily a shortage of physical capital , the return to capital should be much higher in LDCs than in DCs and the natural avarice (tendency or balance of capitalists would lead to a flow of capital from the more developed to the LDCs 42

MARKETS, MARKET FAILURES AND DEVELOPMENT Secondly if the problem was primarily a shortage of human capital, then the educated in LDCs would receive a higher absolute as well as relative) income than the educated in DCs How then can we account for the higher levels of unemployment among the educated and the migration of the educated from LDCs to more developed economies In order for us to answer this let us discuss why markets do not work in LDCs

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WHY MARKETS DO NOT WORK IN THE WAY HYPOTHESISIZED BY NEOCLASSICAL THEORY A. Learning and information: Knowledge is like a public good 1.Among the commodities for which markets are most imperfect are those associated with knowledge and information (Stiglitz 1987b) 2.Learning by doing : LDCs find it impossible to acquire the learning of the DCs given their initial disadvantage they find it optimal to specialize in technologies or products with lower learning potentials (risk minimizing behavior) B. CAPITAL MARKETS The problem of adverse selection, moral hazard and contract enforcement imply that even in developed economies markets do not look like perfect markets 44

WHY MARKETS DO NOT WORK IN THE WAY HYPOTHESIZED In Adverse selection between buyers and sellers In moral hazard there is an increased risk of problematical (immoral) behavior and thus a negative outcome because the person who caused the problem doesnt suffer the full consequences or may actually benefit B : PRODUCTS Informational imperfections affect producers directly and indirectly through their effect on consumers Imperfect information (asymmetry of information) is one the reasons why most developed countries as well as LDCs face downward sloping demand curves for their products as opposed to the perfectly elastic demand curve postulated in the 45 neoclassical theory

WHY MARKETS DO NOT WORK IN THE WAY HYPOTHESIZED For LDCs the downward sloping demand curve has two implications: Lowering exchange rates may not have large immediate effects on sales There appears to be important externality effects across producers with regard to quality Imperfect competition impedes entry into markets for two reasons First because consumers may be concerned about the quality of the good produced and new entrants may have the difficulties in establishing themselves in new markets Firms in LDCs may face great uncertainties about their ability to produce and market new goods
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MARKET FAILURE AND GOVERNMENT INTERVENTION Market failures particularly those related to imperfect and costly information may provide insights into why the LDCs have a lower level of income What is at stake here is more than just differences in factor endowments but basic aspects of the organization of the economy including the functions of the markets Markets are an important set of institutions in the organization of modern economies Market failures are particularly pervasive in LDCs

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MARKET FAILURE AND GOVERNMENT INTERVENTION Good policy requires identifying them , asking which ones can be directly attacked by making markets work more effectively and which cannot There is need to identify which market failures can be ameliorated through non market institutions (with government perhaps taking instrumental role in establishing these non market institutions) We need to understand both the limits and strengths of markets as well as the strengths and limits of government interventions aimed at correcting market failures

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THE POLITICAL FRAMEWORK OF AGRICULTURAL POLICY DECISIONS Why do governments act as they do? Agricultural policy can be defined as the set of decisions taken by government that influence the prices farmers confront in the markets which determine their incomes The level of farm revenues is determined in part by the prices at which sales are made in markets for agricultural commodities The prices which farmers must pay for farm inputs help to determine their costs thus in combination with revenues, the net money value of their incomes from farming The real value of farm incomes in turn is determined by the prices which farmers must pay for consumer items
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THREE APPROACHES TO POLICY ANALYSIS Research throughout the developing world suggests that government policy tends to be antithetical ( not supportive or eventually work against) to the interests of farmers Governments tend to lower prices that farmers receive for produce Governments tend to shelter domestic manufacturers from competition thereby raising the prices farmers must pay for consumer items While governments subsidize farm inputs, these tend to be captured by large farmers and not the majority of the poor farmers Incomes of those farmers are thus adversely affected by agricultural policies of third world governments
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THREE APPROACHES TO POLICY ANALYSIS Government policies tend to weaken production incentives for farmers When governments do offer positive incentives for increased production they tend to do so by lowering costs rather than by increasing gross revenues That is by subsidizing the prices of farm inputs rather than raising prices of farm commodities

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APPROACH ONE : MAXIMIZING SOCIAL WELFARE The first approach is the most often adopted by economists It treats governments as agencies of maximizing social welfare Public policy is viewed as a set of choices made by governments to secure societys best interests which is best served by development This approach suffers from problems as follows; Lack of explanatory power, Noting the underlying objective of a policy program often does not account for the particular choice of instrument For example , to secure increased food production governments could either pay higher prices to farmers or expending the same amount of resources (as on food) on 52 projects

MAXIMIZING SOCIAL WELFARE Under normal circumstances, the former would be the more efficient way of securing this social objective but the later is more often chosen Governments who want low priced food may often strive to improve low food prices This choice of policy instrument may weaken economic incentives This may lead to lower production and higher food prices

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SECOND APPROACH: POLICY AS A BARGAINING OUTCOME FOR PRIVATE PRESSURE GROUPS

According to this approach, governments do not pursue transcendental (beyond the realm or reach of the senses) social interests; rather they respond to private demands Public policy is regarded as an outcome of political competition among organized groups Urban consumers are geographically concentrated and strategically located and are easy to organize and therefore are an influential force in politics hence the consumer power as opposed to the producer power reigns supreme However the question remains. How do govts. get away with institutionalizing the interests of political minorities in countries where over 50% of GDP and over 70% of the labor force are in agriculture How can govts. remain in power while maintaining agricultural programs which violates interests of most farmers?

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USING PUBLIC POLICY TO RETAIN POLITICAL POWER The third approach views govts. as agencies that seek to stay in power It underscores the features of agricultural programs that let govts organize political followings and disorganize political opposition particularly in the rural areas Also known as hegemonic approach to policy analysis It stresses two general points: That economic efficiency can be politically useful and that Govts controlled markets can be employed as instruments for political power e.g. food distribution and development work
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USING PUBLIC POLICY TO RETAIN POLITICAL POWER Economically suboptimal programs can be politically attractive This approach explains some puzzling aspects of agricultural policy (subsidies for example) For example in seeking increased food production govts. Often favor project based policies over price based policies This is because price based policies can be politically costly They are also usually resisted by urban interests Project based programs often provide superior resources to those who seek to organize rural areas (rural roads constr.)
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TOPIC 2: AGRICULTURAL TRANSFORMATION AND RURAL DEVELOPMENT TODARO CHAPTER 9 p281 Quote 1: It is in the agricultural sector that the battle for long term economic development will be won or lost Gunnar (Myrdal, Nobel Laureate Economics) Quote 2: The main burden of development and employment creation will have to be borne by the part of the economy in which agriculture is the predominant activity, that is the rural sector (Francis Blanchard, Director General of International Labor Organization)

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AGRICULTURAL TRANSFORMATION AND RURAL DEVELOPMENT CONTINUED If migration to the cities in Asia ,Africa , Latin America and America is proceeding at technically unprecedented rates, a large part of the explanation can be found in the economic stagnation of the outlying rural areas Over 2 .2 billion people in the 3rd world grind a meager living from agriculture Over 3 billion lived in rural areas in 1993 out of about 6 billion people in the world Almost 70% of the worlds poorest people are located in the rural areas and are engaged primarily in subsistence agriculture Their basic concern is survival 58

AGRICULTURAL TRANSFORMATION AND RURAL DEVELOPEMNT CONTINUED If development is to take place and become self sustaining , then it must start in the rural areas in general and the agriculture sector in particular The core problems of widespread poverty, growing inequality, rapid population growth and rising unemployment all find their origins in the stagnation and often retrogression of economic life in rural areas

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TOPIC 3: THE TRADITIONAL ROLE OF AGRICULTURE IN ECONOMIC DEVELOPMENT

This has been viewed as passive and supportive Economic development was seen as requiring a rapid structural transformation of the economy from one predominantly focused on agricultural activities to a more complex modern industrial and service society Agricultures primary role was to provide sufficient low priced food and manpower to the expanding industrial economy which was thought to be the dynamic leading sector In an overall strategy of economic development Lewiss famous two sector model is an outstanding example of a theory of development that places heavy emphasis on rapid industrial growth with agriculture fuelling the industrial expansion by means 60 of its cheap food and surplus labor

THE TRADITIONAL ROLE OF AGRICULTURE IN ECONOMIC DEVELOPMENT Today development economists are less sanguine about the desirability of placing such heavy emphasis on rapid industrialization They now advocate the view that the agriculture sector in particular and the rural economy in general must be the dynamic and leading elements in any overall strategy, at least for the vast majority of the contemporary third world countries An agricultural and employment based strategy of economic development requires at a minimum three basic complementary elements

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TRADITIONAL ROLE OF AGRICULTURE IN ECONOMIC DEVELOPMENT Accelerated output growth through technological institutional and price incentive changes designed to raise the productivity of small farmers Rising domestic demand for agricultural output derived from an employment oriented urban development strategy Diversified non agricultural labor intensive rural development that is directly or indirectly supported by the farming community To a large extent the 1970s and 1980s witnessed a remarkable transition in development thinking in which agricultural and rural development came to be seen by many as the sine qua non of national development 62

TRADITIONAL ROLE OF AGRICULTURE IN ECONOMIC DEVELOPMENT Without such integrated rural development industrial growth either would be stultified or if it succeeded would create such severe internal balances in the economy that the problems of widespread poverty inequality and unemployment would become even more pronounced To this effect 5 questions need to be asked about third world agriculture and rural development as these relate to overall national development Question 1: How can total agricultural output and productivity per capita be substantially increased in a manner that will directly benefit the small farmer and landless rural dweller, while providing sufficient food surplus to support a growing urban radical sector? 63

TRADITIONAL ROLE OF AGRICULTURE IN ECONOMIC DEVELOPMENT Question 2 : What is the process by which traditional low productivity peasant farms are transformed into high productivity commercial enterprises? Question 3 : When traditional family farmers and peasant cultivators resist change, is their behavior stubborn and irrational or are they acting rationally within the context of their particular environment? Question 4 : Are economic and price incentives sufficient to elicit output increases among peasant agriculturalist or are institutional and structural changes in rural farming systems also required?
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TRADITIONAL ROLE OF AGRICULTURE IN ECONOMIC DEVELOPMENT Question 5 : Is raising agricultural productivity sufficient to improve rural life or must their be concomitant off farm employment creation along with improvements in educational medical and other social services? In other words what do we mean by rural development and how can it be achieved?

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A FRAMEWORK OF ANALYSIS Following the classic analysis of Kuznets (1961) the agric sector in LDCs may be seen as being potentially capable of four types of contribution to overall economic growth and development First, expansion of the non agric. sectors is strongly reliant on domestic agriculture not only for a sustained increase in the supply of food but also for raw materials used in manufacturing products such as textiles Kuznets termed this the production contribution Secondly, because of the strong agrarian bias of the economy during the early stages of economic growth, the agric. population inevitably forms a substantial proportion of the home market for the producer goods as well as consumer goods. 66 This is termed the market contribution by Kuznets

FRAMEWORK OF ANALYSIS Thirdly, because the relative importance of agriculture in the economy inevitably declines with economic growth and development, agric is seen as the principal source of capital for investment elsewhere in the economy Thus the development process involves the transfer of surplus capital from agric to the non agric sector Similarly, development also entails the transfer of surplus labor from agric to the non agric sector especially over the long term Kuznets termed this as agricultures factor contribution

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A FRAMEWORK OF ANALYSIS Fourthly, domestic agric is capable of contributing beneficially to the balance of overseas payments either by augmenting the countrys export earnings or by expanding the production of agric import substitutes This foreign exchange earnings is not explicitly identified by Kuznets but is implied in his market contribution We begin exploring the framework of analysis by going through each one of these four approaches in detail We begin by analyzing the product contribution and then proceed with the other three approaches in the next slides

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FOOD CONTRIBUTION In LDCs, domestic agric sector is the principal source of food for consumption by non agric workers Diversification of the economy is therefore contingent upon food producers producing a surplus in excess of their own subsistence requirements Imports can make up for the shortfall save for foreign exchange problems scarcity Unlike capital goods food imports are consumed and do not augment the capital stock Opportunity costs of food imports are therefore higher than capital goods in terms of lower investment and consequently reduced rate of economic growth
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FOOD CONTRIBUTION How does industrialization and urbanization affect the demand for food? As industrialization and urbanization proceed, the rate of increase in the off farm demand for food tends to exceed the rate of growth in industrial employment for two reasons: The first is because the real earnings of industrial workers are usually higher than those of agricultural workers Secondly because in LDCs the income elasticity of demand for food is relatively high So the migration of workers from higher paid industrial employment may cause a relative scarcity of food unless the productivity of those remaining in agric. rises fast enough to provide the migrants of higher per capita food consumption 70 than previously

FOOD CONTRIBUTION Failure to expand food surplus quickly results into higher prices if free market operates or rationing if govt. intervenes to prevent prices from rising Due to the primacy of food as a wage good as reflected by the high ratio of food expenditure to total H/h expenditure in LDCs rapid food price inflation frequently leads to serious socio political instability which is inimical to economic growth Again because rising food prices increase the pressure for employment to concede higher wages which are correlated to productivity, industry terms of trade deteriorate Hence due to falling profits and lower investment there is drastic decline in industrial development
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PRODUCT CONTRIBUTION
In a developing economy where per capita incomes are rising, growth in the agric sector can be expected to lag behind non agric sector growth for three reasons: The demand for food and other agric products is generally less income elastic than the demand for non agric products due to the Engel effect (changes in dd as a result of rising incomes) Due to scientific advances and associated technological innovation in agriculture, farmers become increasingly reliant on inputs purchased from the non farm sector of the economy This is termed the changing resource structure of agricultural effect

PRODUCT CONTRIBUTION
Because the demand for off farm marketing services distribution, storage and processing is more elastic than the demand for agric products at farm gate ,the farmers share of food expenditure at retail prices declines with time. This is what is called urbanization effect Taking into cognizance of the above three points, developing countries should Take note that the they should not fall into the trap of rapid industrialization without parallel development in agriculture

PRODUCT CONTRIBUTION
There are two basic reasons why LDCs development based on structural diversification of the economy is constrained by the rate of growth in the marketed output of domestic agriculture The first reason is that the domestic farm sector is an important source of raw materials for use in industries such as textiles and food processing, as well as being the principal source of food for consumption by growing numbers of non food products employed in industry As agric becomes more and more closely integrated with other sectors of the economy due to the changing resource structure and urbanization effects ,the multiplier effects of increased agric production and incomes assume an ever increasing importance in relation to the growth in demand of labor and other industrial inputs

PRODUCTION LINKAGES BETWEEN AGRICULTURE AND OTHER INDUSTRIES There is a natural long term tendency for agric. Sectors share of GDP to decline as real GDP per capita rises But because of the income elasticity of demand for the value added to agricultural raw materials by agro industries is usually higher than for the raw materials themselves , the agribusiness sector declines at a much slower rate The inter-industry linkage (which describes the inter-sect oral interdependence) measures the effect of an autonomous increase in final demand for the product of a given industry not only on the output of that industry and the outputs of industries supplying the first industry with inputs but also the outputs of yet other industries supplying the suppliers in a second round of transaction 75

BACKWARD FORWARD AND TOTAL EFFECTS The second round leads to a third and so forth and so on The first round of effects are sometimes termed the direct effects The second round etc are called the indirect effects Backward linkages measure the ratio of intermediate input purchases from other industries to a particular industrys total value of production Forward linkages measures the ratio of intermediate output sales to other industries to a particular industrys total sales including sales to the final consumer) Total linkage is the sum of backward and forward linkages(Yeotopoulos and Nugent 1976, ch 16)
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BACKWARD AND FORWARD LINKAGES CONTINUED It has been established that as a primary industry, agric lacks backward linkages Secondly, because much agric production goes directly for home consumption or for export without intermediate processing especially in LDCs ,backward linkages tend to be rare This means that forward linkages are likely to be weak In practice, LDC agric is rarely so primitive as to be without backward linkages with input supplies

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MARKET CONTRIBUTION Imagine a closed single sector agrarian economy on the threshold of sectoral diversification Though the per capita incomes of those employed in the industries may be expected to be somewhat above those of farmers, the farm sector because of its sheer size must initially be the major market for domestic industrial products Farmers expenditures on industrial goods both consumer goods and producer goods represent one aspect of agric market contribution to general economic development The agric sector s market contribution also includes the sale of agric food and other products to the non agric sector
78

MARKET CONTRIBUTION Kuznets describes the first as the marketization of the production process And the second as the marketization of the agricultural net product Both are accelerated by the adoption of new agric technology Adoption results in higher agricultural output and large marketed surplus of farm products

79

FACTOR CONTRIBUTION Whereas agric product contribution is derived from agric production per se and the market contribution is derived from trade with other sectors, the factor contribution is derived from resource transfers to other sectors The resources transferred are capital and labor including human capital. Here let us discuss why the net transfer of capital is a credible means of development. The main arguments against intersect oral capital transfers are based on considerations of equity Is it not fair that farmers should be deprived of part of their wealth in order to fund developments in other sectors from which they derive no direct benefits? 80

FACTOR CONTRIBUTION Arguments for transferring capital are fourfold: The incremental demand for capital in the non agric sector may be higher in a developing economy because the demand for the non agric products and services is generally more income elastic than the demand for food and other agric products In effect the transfer reflects the declining relative importance of agriculture in the economy Secondly, the incremental capital output ratios in LDC agric may infact tend to be lower than in LDC industries hence scope exists for raising productivity in agric using means that require only a moderate outlay of capital For instance adopting high yielding crop varieties and improved strains of livestock and intensifying use of fertilizers and pesticides 81

FACTOR CONTRIBUTION For instance adopting high yielding crop varieties and improved strains of livestock and intensifying use of fertilizers and pesticides Thirdly, as the dominant sector in the economy of LDCs, agric is virtually the sole domestic source of savings and investment during the initial stages of development Foreign private investment and overseas aid are only supplementary sources of investment capital Fourthly, farmers are likely to benefit indirectly from non agric type investments such as improvement of communications and provisions of public utilities
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FACTOR CONTRIBUTION Having argued a case for some transfer of capital from agric to other sectors we proceed to discuss the alternative means of transfer Governments can either rely on voluntary decisions of private investors in a free market situation or governments can resort to compulsions (interventions) Griffin (1979,p109) summarizes the conditions governing free market transfer of capital from the agric sector to the non agric sector.as follows: Farmers must sell part of their output outside of their own sector i.e. a market surplus of agric products must exist
83

FACTOR CONTRIBUTION Farmers must be net savers i.e. they must consume less than they produce Farmers savings must exceed their investment agriculture If these conditions are satisfied agric will have a balance of payments surplus with the rest of the economy

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URBANIZATION AND RURAL URBAN MIGRATION: THEORY We now turn our attention to one of the perplexing dilemmas of development The move enmasse of people from rural to urban areas Current rates of urban population growth range from under 1% per annum in two of the worlds largest cities, New York and London to over 7% per annum in many African cities e.g. Nairobi, Lagos and Accra In Asia and Latin America it is 5% per annum in urban growth Given such high urban growth rates, how will these cities cope economically, environmentally and politically with such acute concentrations of people
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URBANIZATION AND RURAL URBAN MIGRATION: THEORY While it is true that cities offer the cost reducing advantages of economies of scale, the social costs of progressive overloading on housing and social services can be overwhelming Former World Bank President Robert McNamara said that these sizes are such that any economies of location are dwarfed by costs of congestion Rapid urbanization has brought along with it the prolific growth of huge slums and shanty towns Today slum settlements represent over one third of the urban population in all developing countries

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URBANIZATION AND RURAL URBAN MIGRATION: THEORY For instance Metropolitan Cairo is attempting to cope with a population of 10 million people with a water and sanitation system built to serve two million people. The urban sector is comprised of the formal and informal sector The question that arises is that Is the formal sector merely a holding ground awaiting entry into the formal sector and as such is a transitional phase that must be made comfortable without perpetuating its existence or has it come to stay? In order to answer this question let us examine the urban informal sector.
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URBAN INFORMAL SECTOR The existence of an unorganized, unregulated and mostly legal but unregistered informal sector was recognized in the early 1970s following observations in several developing countries that massive addition to urban labor force failed to show up in formal modern sector unemployment statistics Studies have shown that the share of urban labor force engaged in informal sector activities ranges from 20% to 70% Failure of the rural sector and urban sector to absorb additions to the labor force are lending credence to the role played by the informal sector as a panacea for the growing unemployment problem The informal sector is characterized by a large number of small scale production and service activities that are individually or family owned and use labor intensive and simple technology

88

URBAN INFORMAL SECTOR They tend to operate like monopolistically competitive firms , with ease of entry , excess capacity and competition driving profits (incomes) down The are usually self employed ,workers have little formal education and are generally unskilled and lack access to capital As a result the worker productivity and income tend to be lower in the informal sector than in the formal sector They do not enjoy the measure of protection afforded by the formal sector Most entrants are recent migrants from rural areas unable to find employment in the formal sector They use labor saving and simple technology
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THE LINKAGES BETWEEN URBAN INFORMAL SECTOR AND THE RURAL SECTOR AND THE FORMAL SECTOR The informal sector is linked with the rural sector in that it allows excess labor to escape from rural poverty and underemployment though for not much better life It is closely connected with the formal sector in the sense that formal sector depends on the informal sector for cheap inputs and wage goods for its workers The informal sector in turn depends on the growth of the formal sector for a good portion of its income and clientele The informal sector also subsidizes the formal sector by providing raw materials and basic commodities for its workers at artificially low prices maintained through the formal sectors economic power and legitimacy granted by Government The informal sector undoubtedly provides income 90 opportunities to the many poor

THE LINKAGES BETWEEN URBAN INFORMAL SECTOR AND THE RURAL SECTOR AND THE FORMAL SECTOR

The formal sector in LDCs has a small base in terms of output and employment For it to absorb employment it must grow at a high rate of at least 10% per annum according to ( ILO report ) This means that output must grow at an even faster rate, since employment in this sector increases less than proportionately in relation to output With the current trends in LDCs , this seems unlikely Thus the burden on the formal sector to absorb more will continue to grow unless other solutions to the urban employment problem are provided Moreover the informal sector has demonstrated its ability to generate employment and income for the urban labor force 91 (about 50%)

FURTHER ARGUMENTS IN FAVOUR OF INFORMAL SECTOR Scattered evidence indicates that the informal sector generates surplus even under the currently hostile policy environment despite a lot of constraints and hardships The informal sector surplus could provide an impetus to growth in the urban economy As a result of its low capital intensity only a fraction of the capital needed in the formal sector is required to employ a worker in the informal sector. This offers considerable savings to developing countries which are often plagued by shortages of capital

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FURTHER ARGUMENTS IN FAVOUR OF INFORMAL SECTOR By providing access to training and apprenticeships at substantially lower costs than that provided by formal institutions and the formal sector the informal sector can play an important role in the formation of human capital The informal sector generates demand for semi skilled and unskilled labor whose supply is increasing in both relative and absolute terms and is unlikely to be absorbed by the formal sector with its increasing demands for skilled labor force Informal sector also plays a role in recycling waste materials via collection of scrap materials Finally the promotion of the informal sector plays an important role in the increased distribution of benefits of development to the poor. The majority of whom are concentrated in the informal sector( Van Der Walt)

DISADVANTAGES OF THE PROMOTION OF THE INFORMAL SECTOR One of the disadvantages lies in the strong relationship between the rural urban migration and labor absorption in the informal sector Migrants from the rural sector have both a lower employment rate and a longer period before obtaining a job in the formal sector. Promoting income and employment opportunities in the informal sector could therefore aggravate the urban unemployment problems by attracting more labor than either the informal or formal sector could absorb There are concerns about the environmental consequences of a highly concentrated informal sector in the urban areas ( pollution, congestion etc)

WHAT TO DO
There is very little empirical evidence as to what measures must be undertaken to promote the informal sector ILO has made some general suggestions: Governments have to soften their hostile attitude towards the informal sector and maintain a positive attitude Governments should facilitate training in the areas that are most beneficial to the urban economy They should provide capital and technology to the informal sector. This would permit their enterprises to expand and produce more profit and hence generate more income and employment Provision of infrastructure and suitable location for work( Flea Markets) Promotion of informal sector outside the urban areas (often resisted by informal sector)

WOMEN IN THE INFORMAL SECTOR Women often represent the bulk of the informal sector labor supply working for low wages in unstable jobs unlike men The increase in the number of single female migrants has also contributed to the rising urban households headed by women These tend to be poorer, experience tighter resource constraints and retain high fertility rates The changing composition of migration flows has important and demographic implications for many urban areas in LDCs They are more likely to be poor and with high dependency ratios and less likely to obtain formal education and health, clean water and sanitation

WOMEN IN INFORMAL SECTOR

Many women run micro enterprises which require little or no start up capital Though womens restricted access to capital leads to high rates of return on their tiny investments, the extremely low capital labor returns confine women to low productivity undertakings Studies in Latin America and Asia have found that women are able to make more productive use of capital and that the rates of return on investments often exceed those of men Despite this, they remain few in number and face problems in accessing credit which is usually channeled through the informal sector Governments must create by design pro active policies towards women if they are to develop and succeed in informal sector

URBAN UNEMPLOYMENT MIGRATION AND DEVELOPMENT

The major consequence of urbanization is an increase in unemployment in both the formal and informal sector in the urban areas Until recently rural urban migration was viewed favorably in the economic development literature Internal migration was thought to be a natural process in which surplus labor shifted to the urban sector from rural areas because its social marginal productivity of labor was assumed to be zero This was the Lewis thinking which no longer holds in this age This is because it is now abundantly clear from recent LDC experiences that rates of rural urban migration continue to exceed rates of urban job creation and surpass greatly the absorption capacity of both industry and urban social services

URBAN UNEMPLOYMENT MIGRATION AND DEVELOPMENT Migration exacerbates the rural urban structural imbalances in two ways: On the supply side, internal migration disproportionately increases the growth rate of urban job seekers On the demand side urban job creation is generally more difficult and costly to accomplish than rural job creation because of the need for substantial complementary resource inputs for most jobs in the industrial sector We must recognize therefore at the outset that migration in excess of job opportunities is both a symptom of and a contributor to LDC underdevelopment

CONSEQUENCIES OF MIGRATION FOR RURAL AND URBAN ECONOMIC AND SOCIAL DEVELOPMENT? Factors affecting migration decisions are varied and complex. There are non economic (social , cultural psychological) and economic factors NON ECONOMIC These include the desire of migrants to break away from traditional constraints of social organizations (e.g.. Arranged marriages) Physical factors include climate, floods droughts Demographic factors , reduction in mortality rates and the concomitant high rates of rural population growth The allure of bright lights Good infrastructure, communication and modernity

MIGRANT CHARACTERISTICS ECONOMIC REASONS: Standard push from subsistence agriculture and the attractive pull of relatively perceived high urban wages but also the potential push back towards rural areas as a result of high urban employment DEMOGRAPHIC REASONS : Young women 15-24 moving across borders EDUCATIONAL REASONS: People with higher education are more likely to migrate Migrants both male and female seem to come from all socio economic strata with the majority being very poor ( Todaro)

SUMMARY AND CONCLUSIONS OF A COMPREHENSIVE MIGRATION AND EMPLOYMENT STRATEGY Most Economists agree that: We need to create an appropriate rural urban economic balance i.e. we need an integrated development of the rural sector Expansion of small scale labor intensive industries Eliminate factor price distortions e. g. capital subsidies Choose appropriate labor intensive technologies (low cost) Reduce population growth. The question is how??

THE ECONOMIC NATURE OF TRADITIONAL AGRICULTURE : RESOURCE USE EFFICIENCY AND TECHNICAL CHANGE IN PEASANT AGRICULTURE :CH 6 GHATAK

Here we discuss the scope for increasing agric output and incomes in LDCs from three aspects We consider how efficient farmers are in utilizing their existing resources and the feasibility of agric progress and development without technical change We shall also consider how agric technical change is generated How it affects agric output and incomes including distributional effects (welfare effects) Finally we shall consider policy implications particularly for agric research and for farm mechanization

EFFICIENCY OF RESOURCE ALLOCATION We shall attempt to clarify the various concepts of efficiency We shall also examine how efficiency relates to farm size in LDCs CONCEPTS OF EFFICIENCY: We begin by distinguishing the difference between technical efficiency and allocative (price efficiency) then How economic efficiency combines the two Consider a simple production function in which land and labor are combined to produce a single homogeneous product Q= f (L,K) Refer to Fig 1 on Board (Allocative Technical and Economic Efficiency)

ALLOCATIVE,TECHNICAL AND ECONOMIC EFFICIENCY SS is an outer bound production function given current state of knowledge It is not technically feasible to produce the level of output represented by SS on an alternate isoquant which is closer to the origin O. Any farm lying on SS is technically efficient e.g. Q* or Q1 But any farm in the space above SS e.g. Q2 or Q3 is not technically efficient Allocative efficiency demands that factors be combined in the same ratio as their relative prices. The land labor ratio is given by the slope of the isocost curve AA

ALLOCATIVE EFFICIENCY CONTINUED Thus Q* is allocatively efficient whereas Q1 is not Q1 is technically efficient but allocatively inefficient Q2 and Q3 are both technically inefficient and may be allocatively inefficient as well Only Q* is both technically and allocativelly efficient If we define economic efficiency as the combination of technical and allocative efficiency only Q* is economically efficient

EFFICIENCY AND FARM SIZE The theory of returns to scale is concerned with the relationship between firms level of output and its long run average costs when all factors are varied in the same proportion In agric scale theory has got limited relevance because of factor rigidities and indivisibilities even in the long run In seeking to gain profit or utility by changing the level of output farmers typically vary the proportions in which factors are combined e.g. the fertilizer rate alters the fertilizer land ratio An important source of cost saving in agric is the fuller utilization of spare capacity or excess capacity embodied in indivisible factors such as machinery and buildings

EFFICIENCY AND FARM SIZE The term economy of size embraces not only economies of scale in the strict sense of constant factor proportions but also economies derived from using indivisible factors more efficiently Indivisibility applies more to capital inputs However principal inputs of traditional agric are land and labor These are relatively easy to divide If the price of land declines with increasing farm size whereas the price of labor increases, the land labor ratio will tend to vary directly with the farm size i.e. ceteris paribus Labor will be used most intensively on the smallest farms

EFFICIENCY AND FARM SIZE Under a labor intensive system of agric where output per unit of land is closely and directly related to labor input ,the productivity of land as reflected by crop yields will tend to be inversely related to farm size If land is scarcer than labor which is often the case in LDCs, this argument carries the important policy implication that smaller farmers may utilize resources more efficiently than larger farms Moreover there may be a direct link between a countrys farm size structure ad its level of aggregate agric prod In LDC context a large farm structure may not be consistent with efficient resource utilization or with achieving the optimum level of aggregate production

EFFICIENCY AND FARM SIZE Due to measurement problems empirical evidence of differences in prices of land and labor between large and small farms in LDCs is virtually impossible to obtain. However there are apriori reasons for expecting labor to be relatively cheap and land to be relatively dear to operators of small farms Dear labor and cheap land applies to large farm operators Results of two major empirical studies support the hypothesis that in traditional agric output per unit of land area does tend to be inversely correlated with farm size ( Youtopoulis and Nugent 1976, ch6) It was deduced that the observed difference in economic efficiency in favour of the small farms was due to their superior technical efficiency since all the farms covered by the study appeared to be price efficient

TECHNOLOGICAL CHANGE IN AGRICULTURE We shall focus on the following aspects: The character of agric technical change with specific reference to technology e.g. (high yielding varieties) We consider the generation of technological change in agric including the theory of induced technical and institutional change We shall also review the origins, spread and economic consequences of HYV technology in LDCs including both direct and indirect effects altogether We shall also consider the distributional consequences of factor biases embodied in new agric technology Finally we shall consider policy implications of the selection of new agric technologies that are appropriate to the economic circumstances of LDCs emphasizing the role of governments

THE NATURE OF TECHNOLOGICAL PROGRESS A technological improvement possesses two general properties First, a new production function is created such that any given quantities of resources yields a larger product Secondly the proportion in which resources are combined to produce a given output at least cost are generally changed Technological progress is commonly conceptualized as a shift variable It shifts the production function positively or vertically Refer to fig 2. (on board page 8 in notes)

THE NATURE OF TECHNOLOGICAL PROGRESS

Suppose that X is the fertilizer application rate and Y is the yield of wheat. P1 might represent a traditional wheat variety and P2 a new wheat variety, a higher yielding variety NOTE: In this case technological improvement is not embodied in the variable input (fertilizer) but in one of the fixed inputs, the seed The new higher yielding variety is more responsive to fertilizer than the more traditional variety in two senses (1) The yield per unit of fertilizer is higher above the threshold application rate (2) The economic response to fertilizer extends to a higher rate of application. Profit is maximized

NATURE OF TECHNOLOGICAL PROGRESS IN AGRICULTURE There is no reason why the technological improvement should not be embodied in the variable input (rather than in one of the fixed inputs) The improvement might be embodied in the fertilizer and not the seed Any innovation increasing the available crop nutrients per unit weight of fertilizer would have this effect Empirically it may be difficult to identify precisely sources of technological improvement Production functions are estimated and are observed to shift dynamically but the reasons for the shifts are unknown

THE NATURE OF TECHNOLOGICAL PROGRESS IN AGRICULTURE Technological improvement effectively become disembodied The bottom line is that technological progress is beneficial both to individuals and society as a whole There tends to be losers ad gainers from technological progress Possible losers include landless farmer, farmers who re unwilling to adopt better methods Gainers would include farmers who adopt and have land It is also recognized that the benefits of technological progress are more certain for landowners than for tenant farmers because tenants risk dispossession by their landlord

THE NATURE OF TECHNOLOGICAL PROGRESS IN AGRICULTURE The increased profits afforded by technological advances give landlords an added inducement to repossess tenanted land in order to farm it themselves Thus a principal argument for the land reform is to achieve a more equitable distribution of the benefits of technological progress in agriculture

GENERATION OF NEW AGRICULTURAL TECHNOLOGY

Technological innovation is a two stage process of; Invention or discovery and Adoption of the improved input or method of production by producers Innovation without adoption can have no economic impact unless and until it is adopted Adoption is preceded with invention Traditionally there has been no theory of invention or technological improvement But in as far as agriculture is concerned there is a new approach to the generation of new technological discoveries

This is the theory of induced technical and institutional change (by Hayami and Ruttan 1971)

THE THEORY OF INDUCED TECHNICAL AND INSTUTUTIONAL CHANGE The crux of the theory is that research and investment which precedes new discoveries leading to technical progress is induced by market forces In agric changes in relative scarcities of resources (as expressed by price changes ) especially land and labor induce a derived demand for technological innovation to facilitate the substitution of relatively less scarce and cheap factors for more scarce and expensive ones For example in a labor scarce economy there is a tendency for capital in the form of labor saving machinery to be substituted for human labor But in a land scarce economy , yield increasing and land saving inputs such as fertilizers, irrigation and HYV are substituted for land

INDUCED TECHNICAL CHANGE Hayami and Ruttan have evolved a production function hypothesis to explain how induced technical change increases the elasticity of response to factor price changes Consider first varying the amount of a single input factor such as fertilizer in response to change in the factor (product price ratio Although farmers can normally be expected to increase fertilizer inputs in response to a decline in fertilizer crop price ratio, the amount of the fertilizer increment and crop yield increment corresponding with it may both be only comparatively small Unless new crop verities are developed which are more responsive than traditional varieties to fertilizer application

INDUCED INSTITUTIONAL CHANGE In LDC s according to Hayami and Ruttan s theory ,induced technical change tends to be impeded by institutional barriers Lack of agricultural research institutions to foster the discovery and application of new scientific and technical knowledge is a major setback Institututional innovation is consequently a sine qua non to break the bottleneck In other words technical innovation and institutional innovation are complementary Governments should take a leading role here

INDUCED INSTITUTIONAL CHANGE Institutional property rights should be guaranteed It should be labor intensive biological innovations such as HYVs Research in private sector is likely to be biased towards capital intensive and labor saving mechanical innovations hence the need for governments to come in and cater for peasants who are capital scarce

WEAKNESSES OF THE INDUCED TECHNICAL AND INSTITUTIONAL CHANGE THEORY

Underlying behavioral assumptions are neo classical . These do not fit into the conditions of peasant agriculture in LDCs Barriers to technical change in the short run may be insurmountable in LDCs due to cultural and social reasons as well as uncertainty and risk version and lack of knowledge Some of the reasons for technological stagnation include Lack of appropriate alternative technology Farmers ignorance of better methods Farmers lack of innovation The risks and costs of adoption Barriers to adoption due to market failures

POVERTY DYNAMICS FOOD AND THE ENVIRONMENTAL NEXUS The relationship between population and food has been the subject of major economic debate for at least 200 years Malthus published his famous essay on Principles of Population in 1789 Malthus was responding to Adam Smith s more optimistic view of the economic implications of population growth as expressed in the Wealth of Nations published in 1776 The declining importance of the agriculture sector in many developed countries due to modernization of the agriculture sector itself has diminished the relative importance of the land as a factor of production

POPULATION AND FOOD SUPPLIES Secondly most developed countries generally enjoy the advantage of a relatively stable and low rate of population growth The situation is very different in LDCs where agriculture and primary industries are still dominant Population growth prevails and agriculture is still very traditional Thus there is less reason to discard the pessimistic Malthusian view of the prospects for improving the economic lot of the broad mass of a countrys population

THE CLASSICAL MODEL OF MALTHUS The key tenets in the Malthusian population theory include the following: Increased population causes a parallel increase in the demand for food The increased demand for food can be met either by bringing new land into cultivation or by cultivating existing land more intensively than before. Land is not only scarce but is also variable in fertility The most fertile land is cultivated first in line with population pressure If additional labor is applied to existing land (at the intensive margin) its marginal productivity will again decline due to diminishing returns

CLASSICAL MODEL CONTINUED Since diminishing returns to agricultural labor are inevitable and unavoidable, food production will always tend to grow less rapidly than population In the long run population will always expand to the limit of available food supplies at the subsistence level This means that continual population growth must inevitably force per capita food supplies back to subsistence level in the long term More formally, the classical model implicitly assumes that the production function expressing the relationship between population (as a proxy measure of agricultural labor input) and agricultural output is continuous through time

POLICY IMPLICATIONS OF THE CLASSICAL MODEL In predominantly agrarian societies curtailment of population growth is the sole feasible means of materially improving the living standards of the majority of the population The classical economists did not foresee the extent to which European countries would be able to expand the agricultural production at both intensive and extensive margins of cultivation( by means of land improvement, improved communication and adoption of scientific methods of farming) At Malthus time major scientific advances were not in sight Also the extent to which population pressure in the old world would be relieved by the emigration was not foreseen

ECONOMIC LOCATION THEORY ARGUMENTS Economic location theory postulates that the rent of land is jointly determined by its fertility and its distance from the market Land is valueless unless it is accessible So contrary to the basic premises of the classical model , there is no reason to expect declining marginal physical productivity of labor at the extensive margin due to declining soil fertility The principal constraint on expanding production at the extensive margin is likely to be rising marginal costs (especially transport costs ) rather than declining marginal returns

ECONOMIC LOCATION THEORY ARGUMENTS Despite these technical criticisms, the Malthusian model may still have policy relevance for some LDCs These countries lack the population pressure safety valves of massive oversees emigration( its now changing In Malawi not many people go to the RSA mines) They are also unable to import large quantities of foodstuffs unless available on concessional terms ( due to lack of forex) In LDC s birth rates have remained at or very close to traditional high levels In DCs they have actually declined e.g. in Austria

MALNUTRITION IN LDCs OVERT AND SILENT FOOD PROBLEMS Malnutrition refers to a state in which diet is inadequate either in quantity or quality or both for normal health and physical well being In a market economy an individuals food consumption primarily depends upon his income and tastes Assessment of nutritional adequacy of per capita food supply for a country is done through the food balance sheet The balance sheet compares the per capita food supplies including imports and after making some allowance for wastage with objectively determined per capita nutrients The nutritional status of country is judged to be adequate only if per capita supplies are exceeded by per capita requirements

CONTINUED This approach assumes per capita requirements are homogeneous But this is not true amongst different sexes and age groups Under reporting can lead to underestimation of available supplies because farmers will under estimate to avoid taxes and also due to statistical errors The food balance sheet ignores the whole problem of mal distribution of food supplies They assume equal distribution per capita which is not realistic

OVERT AND SILENT FOOD PROBLEMS The conventional explanation of hunger focuses on the supply of food and physical scarcity as signified by an average or per capita shortfall of surplus below consumption requirements ( termed the overt food problem by Reutlinger, 1977) Thus assuming that members of the relevant population group are either hungry or are adequately fed, this explanation overlooks the possibility of when a proportion of the people are being adequately fed whilst the remainder are hungry due to unequal distribution of the available food supply ( Reutlinger calls this the silent food problem)

CONTINUED
The key to who goes hungry regardless of whether aggregate supplies are scarce or plentiful is the distribution of effective demand or what (Sen. ,1981) calls Exchange entitlements Any economic change causing a reduction in per capita real income such as reduced working hours , unemployment or a sharp rise in price of food or other necessities will tend to squeeze the consumption of low income households The scale of the cut in per capita consumption will be inversely related to family income Rich families my scarcely need to curtail their food consumption Some poor families will be virtually priced out of the market If aggregate food supplies are curtailed then families start experiencing HUNGER

CONTINUED In its extreme form hunger becomes famine and people die of starvation According to (Sen. 1980) who uses the term food availability decline to signify famine the causes of famine are as follows: People starve because per capita food supplies are suddenly reduced to starvation levels by crop failure or other causes Sen. argues that food availability does not explain completely the causes of hunger An alternative explanation of famine is that those that starve suffer from lack of means to obtain sufficient food to remain alive Sen. calls this Entitlement Failure

CONTINUED
Entitlement failures are of two kinds; Direct entitlement failures in which the food producer fails to produce enough and he or she is unable to feed himself or herself either by self supply or by trade Trade entitlement failures, These relate to those who can normally purchase a sufficient quantity of food but are priced out of the market by a sudden increase in demand In a slump famine direct entitlement failure predominates whereas trade entitlement failures are the overriding factor in explaining a boom famine The entitlement failure explanation of famine suffers from being less amenable to measurement than Food availability decline Note that FAD and entitlement failures are not mutually exclusive

AMELIORATION OF MALNUTRITION POLICY OPTIONS Lowering population growth rate Augmenting food supplies (domestic and /or imported) Re- distributing available supplies from the adequately or overfed to the underfed Some poverty reduction strategies include: Food for work Money for work Food stamp programs Targeted subsidies Nutritional educational programs

THE ENVIRONMENT AND DEVELOPMENT QUOTE: Much of the environmental degradation witnessed today is primarily due to two groups of people The top billion richest and the bottom billion poorest( Nafis Sadic Executive Director , United Nations Population Fund 1991) The environment has become an important issue to economists over the past few decades as far the success of the development efforts are concerned The interaction between poverty and environmental degradation can lead to self perpetuating process of communities inadvertently destroying or exhausting the resources on which they depend for survival This can lead to severe consequences of self sufficiency, income distribution and future growth potential

THE ENVIRONMENT AND DEVELOPMENT

Environmental degradation can also detract the pace of economic development by imposing high cots in developing countries through health related expenses and reduced productivity of resources The poorest 20 % of the worlds population ( 6.7 billion , 2000) are the ones that experience the consequences of environmental ills most acutely because they are the most vulnerable Environmentally sustainable growth is synonymous with the definition of economic development because it enhances production of resources and living conditions of the poor Though there is considerable disputes concerning environmental costs associated with various economic activities ( Gautrain and The great dam in China projects) Development economists believe and acknowledge that environmental considerations should form an integral part of policy initiatives.

ENVIRONMENT AND DEVELOPMENT BASIC ISSUES Seven basic issues define the environment and development Concept of sustainable development and linkages between the environment i.e. Development plans should incorporate environmental accounting into policy Population and resources , slow pop. Growth will ease pressure on environment For environmental policies to succeed 3rd world countries must address issues of landlessness, poverty and lack of access to institutional resources Reduction in environmental destruction will lead to economic growth which will enhance incomes of the poor

ENVIRONMENT AND DEVELOPMENT BASIC ISSUES

The increased accessibility of agricultural inputs to small farmers and the introduction of sustainable methods of farming will help create attractive alternatives to current environmentally destructive patterns of resource use Land augmenting investments can greatly increase the yields from cultivated land and ensure future food self sufficiency As total population grows and incomes rise , net global environmental degradation is likely to worsen. Some trade offs will be necessary to achieve sustainable world development Research reveals that the urban environment appears to worsen at a faster rate than urban population size increases so that the marginal environmental cost of additional residents rises over time The most pressing environmental challenges in developing countries in the next few decades will be caused by poverty. There will be health hazards created by lack of access to water, sanitation, air pollution, deforestation and severe soil degradation and loss of biodiversity

THE NEED FOR POLICY REFORM There is growing evidence that insufficient action has been taken to reduce environmental hazards through primary health care education and the provision of services such as clean water and sanitation There is need for better pricing policies and efficiency requirements in order to lead to improvements in the allocation of resources There is need to design environmental policy which takes into consideration the important role of women in the management of resources This is because through their roles as managers of fuel and water supplies , agricultural producers and guardians of household health, women control the fate of many of the worlds resources

GLOBAL ENVIRONMENT, RAIN FOREST DESTRUCTION AND GREENHOUSE GASES Although the early Malthusian prediction of environmental calamity proved to be overly pessimistic, recent scientific studies indicate that there is cause for concern with respect to the limited ability of the earths ecosystem to regenerate itself Increasing evidence regarding the extent of the ozone depletion and encroaching global warming present alarming implications of global climate change Concerns include an increase in the incidence of skin cancer , desertification and rising oceans It is through changes in patterns of land use that the developing countries currently make the largest contribution to global concentrations of green house gases

CONTINUED It is estimated that deforestation alone accounts for roughly 25% of all carbon dioxide emissions world wide Clearing the forests will reduce the environments absorptive capacity of carbon dioxide

WHAT ARE THE POLICY OPTIONS IN LDCs and DCs? LDCs can embark on the following measures Proper resource pricing Community involvement Clearer property rights and resource ownership Programs to improve economic alternatives of the poor is a must e.g. programs to build roads, credit provision and creation of jobs in these areas. Raising the economic status of women through education, empowerment and health improvements Put up industrial emission policy in place to reduce pollution

CONTINUED DCs can embark on the following measures: Encourage trade liberalization Promote debt relief Provide financial and appropriate technological assistance e.g. debt for nature swap Take a leadership role in research and development efforts

MAINTANING PRODUCTIVITY GAINS IN POST GREEN REVOLUTION ERA World food security depends to a large extent on the productivity of Asian farmers With approximately three billion inhabitants, Asia is home to 55% of the worlds population and produces 40% of the global cereal supply (mainly wheat and rice) Asias irrigated lowland cropping systems in which most cereal production is concentrated were transformed in the early 1960s by the so called green revolution Green Revolution was based on input response semi dwarf varieties of rice and wheat referred to as modern varieties

MAINTAINING PRODUCTIVITY GAINS IN POST GREEN REVOLUTION ERA When grown with increased levels of fertilizer and an assured water supply , modern varieties led to a sharp jump in yields and provided significantly higher incomes for millions of farmers who adopted the technology Today there are signs that the recent period of growth in Asian agriculture may be ending For example areas planted to cereals has declined in China and India

STAGES OF TECHNICAL CHANGE: A STYLIZED VIEW The process of agricultural intensification in Asia can be depicted as occurring in several steps distinguished by

the development of and diffusion of technologies to substitute for emerging factor scarcities According to this view technical change in Asias land intensive cereal production systems proceeds through the following stages

PRE GREEN REVOLUTION PHASE Traditional varieties are cultivated using negligible amounts of external inputs and productivity growth is modest The main source of production increases is more extensive use of land and water resources e.g. expansion in area planted, a shift to more fertile land investment in irrigation infrastructure

GREEN REVOLUTION PHASE (INPUT INTENSIFICATION PHASE) A technological breakthrough in form of input responsive modern varieties provides the potential for a dramatic increase in land productivity, expressed in the form of higher crop yield

FIRST GREEN REVOLUTION PHASE Farmers increase their use of purchased inputs ( e.g. fertilizer and capital like tube wells, machinery) to substitute for increasingly scarce land and labor

SECOND POST GREEN REVOLUTION PHASE (INPUT EFFICIENCY PHASE) Farmers use improved information and management skills to substitute for higher input use, leading to more efficient utilization of inputs while contributing to the sustainability of the resource base These stylized stages of technical change can be depicted in framework of conventional production functions

CONCLUSIONS The potential of the green revolution technologies is now largely exhausted hence there is a need to develop new technologies to ensure continued productivity growth in Asias intensively cultivated cropping systems. Distinct features of these new technologies will require: Significant changes in the organization of agricultural research Significant changes in the design of technology transfer strategies Significant changes in the implementation of policies to encourage technical change In particular it will be necessary to shift the bulk of public expenditures from input subsidies to increased investment in public good aspects of technology development and dissemination

INSTITUTIONAL CONSTRAINTS ON AGRICULTURAL DEVELOPMENT AND REMEDIAL POLICIES Here we discuss constraints imposed on agricultural development by defects in the institutions controlling the distribution of land, access to agricultural capital and credit and the competitive structure of agricultural markets We consider the motives for and possible effects of reforming policies in these areas We examine the system of landownership and land tenure The meaning and motives for land reform The possible benefits and costs of land reform Its effect on farm output and marketed surplus Limitations of land reform And cooperative farming and tenancy reform as policy alternatives to individual farm ownership

LAND OWNERSHIP AND TENURE SYSTEMS Systems of agricultural land ownership and tenure are both diverse and complex We can distinguish two systems into traditional and modern systems Under traditional systems the ownership of land could be either communal or private Under communal or tribal ownership farmers have individual rights of cultivation but not necessarily exclusive use of land e.g. grazing rights are often held in common Under private ownership, the rights of ownership and cultivation may either be exercised by the same person (owner farmer0 or separately by landlords or tenants In the traditional mode , the landlord-tenant system has generally been feudal in character with tenants paying and landlords receiving rent

MORDERN SYSTEMS OF LAND OWNERSHIP Under modern systems of land ownership the dichotomy is capitalism versus socialism In the capitalist system land ownership is private with land owners exercising the option of either farming the land themselves or letting it to a tenant usually paying a fixed cash rent In the socialist model, the land is owned by the state , although the responsibility of cultivation is often given to cooperative groups or collectives The collective farmers are required to meet production norms and delivery quotas set by the state

WHAT IS LAND REFORM? The use of the word land reform most commonly refers to the redistribution of landownership from traditional and feudal type landlords to their previous tenants or wage laborers In principle the meaning of land reform can be extended to cover any socially beneficial change in a countrys system of agricultural landownership or tenure arrangements For example, the change from a primitive system of communal land ownership to private ownership might yield a substantial social gains in terms of more intensive use of land and a larger marketed surplus In the short run land reform may be economically and socially disruptive Time is needed to establish a new structure of agricultural production with supporting ancillary services such as credit, marketing and agricultural extension Thus in the short run there is bound to be some decline in agricultural production as an aftermath to land reform

EMPIRICAL EVIDENCE OF LAND REFORMS Empirical evidence of net benefits of land reforms mixed Records indicate a variety of results ranging from successful to unsuccessful reforms with other cases undecided The group of countries with successful reform s include Egypt, Taiwan South Korea and Iran In all these countries an effective redistribution of land ownership was combined with improved agricultural productivity and higher output Unsuccessful group includes Mexico where the ejidos have lagged behind private farms in productivity and output growth Peru is another example where economic viability of small farms have been difficult to establish despite the formation of cooperatives In Bolivia and Iraq output decline was dramatic and persistent following land reforms

SUMMARY AND POLICY CONCLUSIONS The motives for land reform, as seen by its beneficiaries, derive primarily from the social and political aspirations of the rural population Farmers may have to be educated to see land reform as a means of improving their productivity and incomes The agricultural benefits of land reform depend on much more than the mere redistribution of land ownership A complete agrarian reform is needed entailing redistribution plus a complete package of supporting ancillary services Although the possible economic benefits of land reform include a larger agricultural output and higher farm income and a great marketed surplus of agricultural products , the realization of these benefits depends upon numerous factors These include the form and content of government policies Due to its disruptive character, land reform is virtually bound to result in some short term loss of agricultural output

SUMMARY AND POLICY CONCLUSIONS

The empirical evidence of the agricultural benefits of land reform reveals a mixture of successes and failures. A general failing of virtually all reforms is that very few of the benefits have reached the very small scale farmers and landless laborers In very densely populated countries the agricultural area released by land reform may be insufficient to provide adequate sized farms for all rural families e.g. in RSA only 6% of land has been redistributed since the land reform began over ten years ago Thus rural unemployment and poverty cannot be eliminated by land reform alone Strong government direction and leadership are needed to enact land reform legislation, ensure its implementation and provide its beneficiaries with adequate services and ancillary services to induce higher investment, output and farm income as well as a larger marketed surplus of agricultural output

CAPITAL AND FINANCE IN UNDERDEVELOPED AGRICULTURE The problem of capita scarcity in underdeveloped agriculture is generally well known To this effect the role of financial and credit institutions in promoting capital accumulation in this context has received considerable attention in many countries in recent times The major function of rural money markets is to cater for demand for and supply of short loanable funds The money markets help allocate savings into investment and promote a more rational allocation of resources Without this it is acknowledged that the growth of the agrarian economy could be significantly retarded due to lack of savings and investment An efficient money market rises savings and investment by promoting liquidity and ensuring the safety of financial assets Rural money markets are not seldom homogeneous. They can be divided into organized and unorganized

IMPERFECTIONS OF AGRICULTURAL MARKETING IN LDCs Three major ones include the following: Infrastructural deficiencies The weak bargaining position of producers Producers lack of information (asymmetry of information)