In partial fulfillment for the course S-KAS 30: Development Studies
The role of agriculture in economic development
By Gerdien Meijerink and Pim Roza
Agro pessimism has been evident in the last decade. Asia was on its way to Green Revolution while Sub-Saharan Africa expects that agricultural development will bring them economic development. To their disappointment, Asia suffered from the negative effects of the Green Revolution while the later did not see any development they wanted. The liberalization of the economy in 1990 had negative effects on agriculture. Children of farmers moved out from farming and went ahead to cities leaving the industry deteriorating. The income falls despite the productivity increased. Also, the world has been busy reducing poverty and brings much attention to health and education. However, upon the start of the 21st century, agriculture was back in business. Based on the World Development Report in 2008, the growth in the agricultural sector contributes proportionally more to poverty reduction than growth in any other economic sector and that therefore alone, the focus should be on the agricultural sector when achieving to reach Millennium Development Goal 1.
The book addresses the following question:
- How can or does agriculture contribute to economic development, and in particular how does it relate to poverty?
- The agricultural sector has changed considerably in the past decades: what are the main drivers of this change?
- What is the relationship between economic or agricultural growth and pro-poor development?
- How does agriculture relate to other sectors in the economy?
- Who is included and who is excluded in agricultural development, specifically focusing on small farms?
- If agricultural development is indeed important to economic development, then why, despite all the efforts and investments, has this not led to more successes?
1. How can or does agriculture contribute to economic development, and in particular how does it relate to poverty?
The book argues that focusing on other sectors of the economy at the expense of agriculture is a recipe for economic growth. Of course, with the benefit of hindsight, most observers today now agree that the agricultural sector contributes to economic growth, but that economic growth reduces the role of agriculture in terms of GDP. It also argues that for poverty reduction, it is important to focus on rural areas where still the majority of the poor live in terms of share and number of poor.
Although progress has been made in some regions in raising productivity, many other regions have lagged behind. In most developing regions, agricultural productivity has increased considerably, except in Sub-Saharan Africa and South Asia, where labour productivity gains have hardly materialized, and land productivity only somewhat in South Asia. The Green Revolution and other technology changes that increase productivity seem to have bypassed these regions and the gains of the Green Revolution are diminishing. Annual agricultural growth decelerated in East Asia, but has been quite constant level in Sub-Saharan Africa.
2. The agricultural sector has changed considerably in the past decades: what are the main drivers of this change?
The following are the drivers of change in the agricultural sector:
Globalization and liberalization
Globalisation refers to the increasing integration of economies around the world, particularly through trade and financial flows. Liberalisation in this context refers to the policy reforms accompanied by privatization and domestic price reforms that specific countries have implemented. When a country liberalises its economy and trade policies, it can participate more easily in the international economy. Thus, globalisation and liberalisation go hand in hand. The dismantling of state-controlled vertical coordination (VCs) led to the decline of input and credit supply to farms. The liberalization of the investment regimes did induce foreign investments in agribusiness, food industry, and further down the chain, with major implications for farmers. Yet, the overall picture is quite patchy – some countries do well with FDI, others suffer from FDI, others are not able to attract FDI at all. Analysis of agricultural trade for developing countries now needs to focus on the new commodities, which together constitute almost 50 percent of the exports of developing countries. However, it is important to keep in mind that the traditional crops still play a role of importance for many countries. The food quality and safety demands are most pronounced in western and affect traders and producers in developing countries through international trade.
Vertical coordination in international value chains
Vertical coordination made possible by the liberalisation of the economy, in which governmental vertical coordination is replaced by private efforts, the integration of the economy in the global market, which enables the production of high value export crops and increased foreign investment – the private vertical coordination system is owned by international companies. Despite their increasing importance, these international value chains still cover a small share of total agricultural sectors in the world.
According to the book, while much of the attention today is on high value market chains and the challenges of linking farmers to those chains, we should not overlook the importance of food staples markets and their own particular support needs. In general the boundaries between rural and urban areas are disappearing in many areas, as rural and urban areas are becoming increasingly integrated, not only geographically (with urban sprawl into rural areas) but also economically.
AIDS used to be more prevalent in urban areas but AIDS is increasingly becoming a rural issue in many developing countries. AIDS is diminishing the agricultural labour force. AIDS has a greater chance affecting areas that are poor because the people living in these areas often do not have the resources or the knowledge to cope with AIDS. They may not know how it is transmitted, do not have the resources to go to hospitals; the medical infrastructure in those areas is usually inadequate as well. But AIDS also worsens the situation of the poor, killing the most productive members of the society and diverting scarce resources to medical care.
Increasing limits to natural resource use
In many countries, the combination of population growth, a lack of technical development and ineffective allocation mechanisms have led to a rapidly decreasing availability of natural resources for many poor farmers. According to the Millennium Ecosystem Assessment, the degradation of ecosystem services poses a significant barrier to the achievement of the Millennium Development Goals and to the MDG targets for 2015. It is especially the people who live in ecologically and economically marginal and poor areas who suffer most by a decreasing availability of natural resources, as their livelihoods directly depend on them. Climate change, characterised by more extreme and unpredictable weather, such as prolonged droughts affects these people disproportional.
Climate change is not likely to dramatically reduce aggregate productivity in developing countries due to various mitigating factors and adaptations implemented by farmers. In addition, global warming is likely to increase productivity in industrial countries in the temperate and polar regions. Therefore, on a global scale, food production is not at risk. But as these cooler regions become more productive, the increased supply is likely to depress world prices, making farmers in developing countries even worse off.
3. What is the relationship between economic or agricultural growth and pro-poor development?
First, technological and institutional factors influence the rate of accumulation of capital and therefore they are more fundamental explanations for growth. Second, improving the quality of inputs as well as improving the organisation of production and distribution increases productivity to a large extent and thus are an important determinant of growth. Third, international trade does not necessarily lead to the convergence of growth rates between countries. Second, even when it does, it does not necessarily lead to faster growth for all countries. Finally, geography plays a major role in attaining economic growth, including factors such as climate or access to seaports. However, geographical traits of a country play a role; they have no direct impact on its income per capita once the effects of institutions are accounted for. Institutions therefore play a prime role.
The following are the studies about the relationship of economic growth and poverty reduction: (1) Policies usually considered as important in reducing poverty such as public spending on health and education, and improvements in labour productivity in agriculture had little marginal effect on the average income of the poorest. (2) Although economic growth raises the income of the poor on average, there are variations across countries. (3) Reducing poverty by enhancing asset ownership for the poor has emerged as important mechanisms to make growth ‘pro-poor’.
The following proves that agricultural growth does contribute to reducing the poverty of small-holder farmers: (1) The effect on farm economy is achieved through higher incomes for farmers, including smallholders who constitute a large share of the rural poor. (2) More employment as on-farm labour demand rises per hectare because the area cultivated increases or frequency of cropping increases. Positive effects on the rural economy are achieved by creation of more jobs in agriculture and the food chain. (3) An increase in agricultural output tends to decrease food prices and benefiting consumers and net purchasers of food.
The role of agricultural trade
Agricultural trade and trade reforms to facilitate trade influence economic growth substantially. However, not all agricultural production can be seen as tradables. Many (staple) crops are produced not for the market but for home consumption, some may be sold only in local markets that are quickly saturated. Stimulating agricultural production of crops in these areas will therefore not lead to economic growth. According to McCulloch, Winters and Irera, trade liberalization affects the (rural) poor through three pathways: price transmission (distribution); profits of enterprises, and thus employment and wages; and through its impact on the government’s fiscal position (taxes and spending). They see agriculture as ‘the key sector for nearly all poverty analysis’, since the majority of the poor live in rural areas. Furthermore food makes up an important share of all poor people’s expenditure. At the same time agriculture is often the major source of income for the poor and farm incomes and has a large spill over to others in the rural economy. According to (Dollar and Kraay, 2004) there is a certain consensus about the belief that openness to international trade accelerates development. The World Bank further argues that ‘openness to trade has been a central element of successful growth strategies’.
4. How does agriculture relate to other sectors in the economy?
Rural development programmes have traditionally tended to increase agricultural production but have often neglected (rural) non-farm activities such as the processing of raw agricultural materials and the manufacturing of agricultural equipment, tools and inputs, and this has resulted in the marginalization of some groups in rural areas. Many rural development policies often continue to ignore or fail to put sufficient emphasis on the role of the rural non-farm sector, and its synergies with agriculture.
Backward and forward linkages
The DFID policy paper “Growth and poverty reduction: the role of agriculture” sees a major role for agriculture in development through the linkages of the agricultural with the non-agricultural sector. Agricultural growth can lead to strong multiplier effects in the non-farm economy. Traditionally, the importance of agriculture in economic development is often reflected by its share in total GDP. After the groundbreaking work of Schultz and his “efficient farmer” hypothesis, a host of literature showed that not only was agriculture capable of productivity growth and responsive to technological change, but also that the agricultural sector can have significant multiplier effects and therefore growth in the agricultural sector could be spread to other sectors in the economy. The debate on the role of agriculture in economic growth is centuries old; yet, the realization that agriculture is central to the growth process in poor countries is relatively recent. The discussion in recent decades has been shaped by Johnston and Mellor’s classic article, in which they identify five types of inter-sectoral linkages that highlight agriculture’s role in economic growth. These forward and backward linkages, operating through both production and consumption, include:
1. Providing food for domestic consumption,
2. Releasing labour for industrial employment,
3. Enlarging the market for domestic industrial output,
4. Increasing the supply of domestic savings,
5. Earning foreign exchange.
Access to urban markets is a key to increase incomes for rural and peri-urban farmers. Three aspects determine the success of rural-urban linkages: physical infrastructure, including road networks, reliable and affordable transport, post-harvest storage facilities; relations between producers, traders and consumers; and information on how markets operate, including price fluctuations and consumer preferences. Also, spatial proximity to markets does not necessarily improve farmers’ access to the inputs and services required to increase agricultural productivity.
Agriculture is a source of both labour and capital for non-agricultural production. Factor markets are the markets where factors of production (labour, land or capital) are traded and the equilibrium price of the factor is determined. Factor markets are often missing or incomplete in rural areas. A land market may not be functioning because farmers do not have the right to sell their land, or incomplete because selling and buying of land is hardly taking place. Factor markets for labour are also often incomplete, for instance in peak periods (such as during weeding or harvesting), labour is scarce and cannot be hired in or out (as all family labour is tied up).
5. Who is included and who is excluded in agricultural development, specifically focusing on small farms?
Small farms can be drivers of change and play an important role in the rural economy, but at the same time may be left behind in the current rapid economic developments characterised by globalisation, vertical change integration etc. According to Dorward and Kydd the “new economy” (characterized by globalization of trade, financial flows and institutions) can both provide opportunities and threats to poor farmers in developing countries. Furthermore, the fact that poor households have access to local, national and international markets does not always mean that they can benefit from this access, since a number of institutional deficiencies limit smallholder areas from taking advantage of market opportunities: inadequate access to information, contractual enforcement and finance. It is argued that “policy trends (liberalization) and autonomous developments in technology and supply chains (globalization) may have made the achievement of broad-based smallholder development more difficult”.
Many small-scale farmers are diversifying their revenues by engaging in non-farm activities, and at the same time not investing in agriculture at a time when the demands on agricultural production in terms of technology and product quality are increasing. Because agriculture is no longer their main focus, farmers may not see the need to maximise the returns from farming.
There is also evidence that the current challenges in agriculture cannot be met by these small farms. New technology is often capital-based and requires certain skills that are beyond the scope of many small farmers. In general small farmers pay more for inputs and receive less for outputs than large farms, thus decreasing their rates of return. A second development in VC is the shift from contract farming (of large or small farms) to fully integrating production and agro-industrial holdings. This shift is often in response to increasingly stringent food standards. Small farms lose out in this shift, but employment opportunities are increased, which may benefit poor households or the landless.
Although much progress has been made in specific areas and countries, there have been uneven outcomes and high and rising local inequalities. Poverty is caused by a lack of assets and access to risk-coping instruments (health, education), but these factors also contribute to the fact that these poor households cannot seize the opportunities that rural development presents, inequalities are therefore produced and reproduced by these factors.
6. If agricultural development is indeed important to economic development, then why, despite all the efforts and investments, has this not led to more successes?
On the establishments of safety nets, (Valdés and Foster, 2005) stress that the point is not to maintain millions of small farmers, but to eliminate poverty – safety nets where agricultural and overall growth is not enough. On the other hand, as Hazell writes “but safety net programs should not be seen as a substitute for policy support for agricultural development”. The need for agricultural development is still very much acknowledged, although in a new form than a few decades ago. Finally, policy attention has long focused on agriculture’s traditional role to provide food, create jobs, earn export income, generate savings and funds for investment, and produce primary commodities for expanding industries. But the role of agriculture often goes beyond these direct, market-mediated contributions. Agriculture thus contributes to (i) environmental services such as soil conservation, watershed services, biodiversity, and carbon sequestration; (ii) poverty reduction; (iii) food security; (iv) agriculture as a social safety net or buffer in times of crisis, and (v) social viability. A review of 11 case-studies by FAO revealed that these indirect contributions are not well understood, seldom analyzed in the context of development, and rarely reflected in national and rural development policy formulation.
The book has a serious tone in it that can make the readers bored. The good thing is that the book is pretty brief so it can make it up to the seriousness without giving insufficient information. It is not recommendable to students like me who has a little knowledge about agriculture/business because there are terminologies that were explained, but not thorough explained. One of which is vertical coordination that was used a lot in the book. It was briefly described but lacking to give readers like me a full picture of it. There were a handful of terminologies of the same situation. Nonetheless, the message the book is supposed to convey is briefly but clearly discussed. I love how the book considers readers with little knowledge on agriculture/business by giving one to two examples of each idea he was trying to explain. It makes the ideas easier to understand and relate to.
-Angerica H. Jasmin
IV-18 BSE History